MDC Partners Inc.
Q4 2020 Earnings Call Transcript

Published: 2 Mar 2021

[Operator:]

Good day, and welcome to the MDC Partners Fourth Quarter and Year-End Results Conference Call. All participants will be in a listen-only mode. After today’s presentation there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Alexandra Ewing. Please go ahead.

[Alexandra Ewing:]

Thank you, and good morning, everyone. Welcome to the MDC Partners conference call for the fourth quarter and full year 2020. Joining me today are Mark Penn, Chairman and Chief Executive Officer; Frank Lanuto, Chief Financial Officer; and David Ross, General Counsel. Before we begin our prepared remarks, I'd like to remind you that the following discussion contains forward-looking statements and non-GAAP financial data. Forward-looking statements about the company, including those related to earnings guidance, are subject to uncertainties referenced in the cautionary statements included in our earnings release and slide presentation and are further detailed in the company's Form 10-K and subsequent SEC filings.

[Mark Penn:]

Thank you, Alex. Good morning, and thank you for joining us. We'll cover a few important topics in the call today. First, we'll review MDC's progress in Q4 in 2020 against the backdrop of uniquely challenging global conditions. I'll discuss our planned combination with Stagwell and the opportunities we see ahead. Frank Lanuto will give further detail on MDC's operating results and balance sheet. Then we'll be happy to answer any questions you may have. Separately, we understand that Stagwell will shortly announce a date and time to release its financial results for 2020 and that they will hold a call to review those results. Let me first review MDC's performance in 2020. Just as MDC Partners achieved renewed industry pacesetting growth in Q1 of 2020, the pandemic hit and changed everything. Our industry came to a virtual halt. Stock and bond values of the company plummeted. Experiential and travel-related businesses ground to a complete stop. Tech companies cut back, pitches dried up, and most marketing budgets were cut significantly reducing this year's revenue. We responded to these challenges on all fronts. We extended our revolver, purchased $30 million of our bonds at a steep discount and cut $168 million of expenses and lowered staff cost margins by 200 basis points. We said we expected revenue declines for the year to be in the 10% to 15% range, and we gained the cooperation of all our agency partners to serve margins and employment for our talented teams through these difficult times. Meanwhile, in contrast to the general industry, our digital and tech offerings saw more than 50% growth in their businesses as more clients acknowledged the shift to e-commerce and digital performance marketing. Our PR companies also showed growth as companies pivoted to new messages. Today, I can report that we closed out the year meeting the expectations of a revenue loss in the 10% to 15% range, yet achieving adjusted and covenant EBITDA above 2019 levels. At the same time, business is being rebuilt quarter-by-quarter as the pandemic begins to recede and marketers get back to business. We are delivering consistent net new business. While it will take in 2022 to get back to pre-pandemic revenue levels, our execution of the new world plan provided the backbone for a quick response to the crisis and the cost savings implemented in 2019 continue to benefit us.

[Frank Lanuto:]

Thanks, Mark. Good morning, everyone. We have made good progress during 2020 despite significant ongoing disruption from the pandemic. We took actions early and swiftly and implemented comprehensive cost measures across the company that more than offset our revenue decline and helped us deliver higher year-over-year EBITDA in 2020. Adjusted EBITDA margins improved by 250 basis points over prior year, and our balance sheet remained flexible at year-end with $61 million in cash and no borrowings under our revolver.

[Operator:]

The first question is from Avi Steiner with JPMorgan. Please go ahead.

[Avi Steiner:]

I want to start maybe big picture, if we can. What is the tone from CMOs the company is talking to? Are they itching to get out there and spend in market as the world gets better? Or is it still more of a cautious tone?

[Mark Penn:]

I think the CMOs are in a get back to business tone there. We've been in hibernation for a period of time, and so we're seeing a relative flood of RFPs and business coming up for bid. So I would call it a time to get back to business kind of mode. I think they're a little uncertain about whether that back to business is in the summer or in the fall, but nevertheless, that -- in marketing, you really need to start preparing three months out.

[Avi Steiner:]

And then if I could dovetail that last answer with the company's guidance, which I assume is MDC only. Sitting here today, March 2, what sort of visibility do you have into the year or going forward at all?

[Mark Penn:]

Well, I think we've given clear guidance just as I gave clear guidance at the beginning of the pandemic. I think obviously, travel, tourism and experiential are the laggards here because they require a high degree of safety. But the rest of the industry; automotive, packaged goods, services, those seem to be, I think, coming along nicely. And as I said, we've had nice net new business wins moving forward. So based on the kind of extensive budgeting process that we go through each year, we believe that the 7% to 9% growth is achievable and represents kind of a good leg back. As I said, I don't think we can recover revenue entirely in a year. But after the year, then we're down 12% or 13% in organic net revenue and, at the same time, up in EBITDA. So we can keep building on that base too as revenue gets restored and won.

[Avi Steiner:]

Terrific. And one more big picture one, if I can. Clearly, during the pandemic, it seems there's been this greater shift to digital from linear platforms. And you noted digital and tech offering, I think in your opening, grew more than 50%. I don't want to misquote you. But my question really is, is this a permanent shift in your view? And if so, how do you see MDC positioned going forward?

[Mark Penn:]

Well, it is a permanent shift, I think most clearly. So it has been a permanent shift for the last decade. It got accelerated as people realized that they had been too slow to, I think, transfer to kind of a creative performance marketing. I think MDC, about 9% of the companies are in that high-growth digital areas. And so we saw a lot of growth in that, and some of them are in earn-out, which also meant that our earn-out obligations went up. But that's a good thing in the sense that we're getting a much higher value because they're being appreciated and have a really solid book of business. Part of the point of the combination is that will greatly increase to 32%, the combined level of high-growth digital services and a much bigger number of digitally based services. And I think that's one of the key underpinnings of the combination is to greatly increase that number to take advantage of the transformation under -- happening in the marketplace.

[Avi Steiner:]

Terrific. And I will leave it here on this last one. The early February announcement of the Global Affiliate Program, if you could just spend a little more time walking through what that means for the company and maybe how we can think about it from an economic perspective, whether it's investments or anything else, that would be terrific?

[Mark Penn:]

Great. The affiliate program, I think, is the fastest way to close gaps that we were discovering in particularly emerging and certain marketplaces around the world. So by bringing on global affiliates within these areas, we -- it really is a win-win for the affiliates in those areas. They will get pieces of global contracts. They will also -- they may also have business that they may refer to us. And they also put us in a stronger position, competing against bigger holding companies that have an agency in every single location because we -- oftentimes, I see us winning on the creative, winning on the application of technology but not having global-enough wings. And this is a low-cost way to extend those wings in a very effective basis. And it turned out that there were a lot of really up and coming terrific companies in these markets looking for affiliation with companies like us to get access into those markets. And then these affiliates will serve as a farm team for potential acquisitions. And I think that will give us experience working in the network, and there will be resources available to the entire network to compete more effectively globally. So you can look at it as giving us a better position, enhancing our marketing, filling in and enhancing our position in global pitches and serving as a farm team for acquisitions to permanently enhance the footprint of the network.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Penn for any closing remarks.

[Mark Penn:]

Thank you. I think -- thank you. I hope this has given you an overview of the progress that we continue to make during the difficult and trying year. I think this company, all the partners, all the people, the employees, we're looking at a dire situation in March and April. They responded incredibly well. This company emerges from this with higher EBITDA, with a stronger financial position, great cash position and look forward to the possibilities of a combination with Stagwell. And Stagwell will shortly announce the call in which it will detail its year-end and full year financials so that people can get all the information they need. Thank you very much.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.