Stagwell Inc. (STGW) Q1 2014 Earnings Report, Transcript and Summary

Good afternoon and welcome to the MDC Partners 2014 First Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Matt Chesler, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon, and thank you for joining the MDC Partners 2014 First Quarter Conference Call. Joining me today on the call are Miles Nadal, Chairman and Chief Executive Officer; David Doft, Chief Financial Officer; and Mike Sabatino, Chief Accounting Officer. During the call, we will refer to forward-looking statements and non-GAAP financial data. Forward-looking statements about the company are subject to uncertainties referenced in the cautionary statements included in our earnings release and slide presentation and further detailed on the company's Form 10-K for its fiscal year ended December 31, 2013, and subsequent SEC filings. We posted our investor presentation to our website and will refer to this presentation during our prepared remarks. We also refer you to this afternoon's press release and slide presentation for definitions, explanations and reconciliations of non-GAAP financial data. I would now like to turn the call over to Miles Nadal.

Thank you very much, Matt, and good afternoon, ladies and gentlemen. We believe that the best remarks are brief remarks. And because we think that our financial results speak for themselves, we will be brief but provide some quick but important thoughts on our business and our operations and our prospects and then open it up to your questions. If you remember 1 thing about today's remarks, let it be this, we are both proud and pleased and pleasantly surprised that we had an extraordinarily strong quarter across all financial metrics to begin fiscal 2014. And our prospects for our year are even more encouraging. Our investment in and commitment to great talent, leading-edge technology and impactful work continues to pay dividends and is converting into accelerated organic growth, expanding margins, higher returns on invested capital and strong free cash flow generation, which is resulting in deleveraging of our business at the same time. In short, we are continuing to achieve meaningful, measurable and sustainable growing profitable results. Our creative coalition of partner agencies are performing ahead of our expectations, and we are executing well against a number of our growth initiatives. As consumer confidence rebounds, our distinguished advertising and marketing service partner agencies have been aggressively tapping into and capitalizing on vast new brands and reputational campaign opportunities. With leading-edge and brilliant creative at our core, this bodes well for our premium growth model as companies are more eager than ever to partner with innovative firms that produce measurable results and drive higher returns on marketing investment. So let's take a look at the key facts. Our revenue grew over 10% for the quarter, with organic revenue increasing at an industry-leading 8.3%. EBITDA of $36.4 million showed an impressive growth of 18% year-over-year, with margins increasing 90 basis points during that same period. Our free cash flow of $20.6 million was an increase of 34% year-over-year, demonstrating the high conversion to the bottom line that we have expressed consistently. That is the benefit of our model. When we told you in February that our 2014 performance would be more back half-weighted, this was based upon our view at the time on the timing of net new business wins and their flow-through, as well as how we would perform against the tough comps from last year, where our EBITDA grew in 2012 from $8.4 million to $30.4 million in 2013. However, our performance across the core portfolio has been nothing short of stellar, and as such, we are raising our guidance for the year, which David will elaborate upon in a moment. In the quarter, we won $24 million of net annualized new business revenue, and the new business pipeline is exceptionally robust. An increasing number of global opportunities continue to come our way at an accelerated pace, both directly to our individual agencies and through the MDC new business funnel at our strategic resource group. In fact, international business is growing at 30% right now. In short, these opportunities are becoming clients. These clients are generating substantial incremental revenue, and that revenue is converting into profits beyond our expectations. Wins in the quarter include the American Legacy Foundation's Truth anti-tobacco smoking initiative, the NBA 2K video game franchise, Mayer [ph] and Timberland, to name a few. There are numerous other ones, but we are precluded from announcing them by name. Our ongoing strategic growth initiatives are also yielding measurable results. This has allowed us to sustain our organic growth rate even as we have scaled the company over the last few years. Our international expansion, as I said, continues to pay off at an accelerated rate as more and more clients are looking for our assistance in new, emerging and mature international markets. In the quarter, as I said, the international business grew at 30%. About 7% of our revenue now is outside of North America, and our business in all regions is growing rapidly and profitably. Our reach is expanding, our global footprint increasingly important, and we have done so on an intelligent, strategic and very sound profitable basis. During the quarter, we also put in place the next phase of our expansion into media buying with the new launch of a scaled media agency called Assembly. This is the next phase of maturation that we described of how we would be the insurgent in media. This is led by an acclaimed industry veteran, Martin Cass. Already, the new agency has landed the notable outdoor company Timberland. Assembly is in the next phase of our strategic approach to disrupting the traditional media buying world by leveraging technology and data to drive better performance for clients media, in addition to driving higher return on marketing investment. This is further illustrated in our programmatic capability at Varick Media Management and our emerging local search platform, LBN. As we have said before, we are uniquely positioned to reimagine the data and analytics part of the marketing business, just as we have done in the creative services industry, and the continued strong double-digit organic growth of our media business overall is further evidence of our growing success and indicative of how robust the future looks. As we've discussed on our last call, we invested in 2 strategic and established tuck-under communication firms during the first quarter. Luntz Global and Kingsdale Shareholder Services. There is likely to be more activity before the end of the year as we look to strategically and accretively allocate capital as we have done successfully in the past and take advantage of the moribund investment strategy of some of our competitors as they digest the uncertainty that their mergers have. Our proven track record is making strategic acquisitions in a proven, strategic and manageable way that will -- that has delivered over 44% pretax returns over the last 7 years. On average, we are committed to adding, as David expressed in our Investor Day, between 3% and 5% a year to revenue via smaller strategic growth -- strategic tuck-under acquisitions that are highly profitable with margins over 20% and growing at least double digits in our spaces of analytics, media, consumer insight, strategic communications and public relations. We are committing to the areas that are growing most rapidly, but also the ones that will raise the bar about our ability to assist our clients in innovating their marketing and communications activities. Remaining true to our mission, you should expect that anything that we do and we invest in will be consistent with our historical investment framework of looking at firms that have between $10 million and $30 million of revenue, growing faster than MDC overall, and with higher margins north of 20%, but in size -- not just its size, but highly accretive to our model from Day 1. As we've said, we have done very well over 34 years by hitting singles and doubles, and that strategy won't change. We believe that the organic growth of our business enables us to be confident to only deploy capital with exceptional returns that create immense and consistent value for our shareholders immediately and over the long term. Our balance sheet continues to be rock solid and improving on an ongoing basis. In April, we took advantage of another important opportunity to strategically access growth capital and continue to reduce our cost of capital by raising $75 million of incremental long-term financing, adding on to our senior notes. These were priced at 105.25%, yielding approximately 5.27%. That's down 55% from our cost of our offering in April 2009 and a further 50-basis-point improvement from that which we did in November. We believe that, as Bill Parcells says, "You are what your record says you are," and for us, results matter. We've come a long way over the last 4.5 years since we tapped the high-yield market in 2009, as I said, at a cost of capital of 12%. The significant progress we've made on all financial metrics reflects the strongly impressive financial performance of the company on a broad basis across our spectrum of company partners and our successful growth-driven strategic model. Importantly, the lower long-term cost of capital and flexibility is a benefit to our shareholders, especially as we continue our track record of strong returns. To conclude, our growth and competitive position remains markedly and measurably strong, probably better than ever in our history, despite our increased scale. Our unique and our proven approach to partnering with and fostering the very best entrepreneurial talent in the industry is working, and the momentum we have in the marketplace is accelerating even as we scale. We're extremely excited about what the remainder of 2014 holds, and we remain driven by and committed to our ability to deliver strong and consistent returns on investment. Indeed, good things lie ahead for this great company where great talent lives. I'll now turn the call over to David. David?

Thank you, Miles, and good afternoon. As Miles noted, we're increasing our outlook for the year. While we prefer not to update expectations on a quarterly basis and really want investors to look at our business over the long term, we believe you deserve, as a matter of prudence, updated targets given the much better start to the year that significantly exceeded our internal expectations. We are increasing our revenue guidance for the year to $1.245 billion to $1.270 billion, implying 8.4% to 10.5% year-over-year growth, up from the previous guidance of $1.23 billion to $1.255 billion or 7% to 9% growth. We are also increasing EBITDA guidance to $181 million to $185 million versus our prior guidance of $177 million to $181 million, implying year-over-year growth of 13.5% to 16.1%. This also implies EBITDA margins of 14.5% to 14.6%, slightly higher than the 14.4% in our initial guidance as we continue to manage our cost structure, benefit from the higher conversion of incremental revenue to EBITDA and favorable mix shift of our business. This bolsters our confidence even more regarding our drive, commitment and ability to achieve our target margins of 15% to 17% in the next 2 to 3 years. We are also increasing free cash flow guidance despite the incremental interest from our recent bond offering to $106 million to $110 million from the previous guidance of $104 million to $108 million, representing an increase of 15.8% to 20.2%. Importantly, our higher outlook is all organic and reflects the underlying strength of our existing partners as we had already factored Luntz and Kingsdale into our original guidance, and we are not including any potential acquisitions that are contemplated but that have not yet closed. I would now like to turn to our Performance Marketing Services segment. We were able to increase EBITDA materially in the quarter despite another quarter of slight organic revenue decline. This is part of the favorable mix shift of our business that we have been talking about and a material reduction in staff cost as a percent of revenue. While we would like to see this segment overall grow the top line, these trends are why we still feel very confident about the overall segment. We are nearing an inflection point where this dynamic becomes even more pronounced. Better performance from some of our partner agencies led to an $8 million increase in deferred acquisition consideration, which flowed through SG&A on the P&L. In addition, deferred acquisition consideration increased due to the successful completion of the acquisitions of Kingsdale and Luntz, as well as some step-up investments in incremental ownership of existing partner agencies. We expect to pay down roughly $65 million of deferred payments this year with about $50 million in the second quarter alone. This means that deferred acquisition consideration should end the year close to where it ended 2013 and lower as a percent of EBITDA. I also want to reaffirm our commitment to deleveraging our balance sheet over time, the recent add-on bond offering notwithstanding. Given the strong free cash flow dynamics of our business and its favorable acquisition deal structure from a timing of cash flow standpoint, our ability to acquire incremental businesses and bring the net-debt-to-EBITDA leverage of the company below 2.5x over the next 2 to 3 years are not mutually exclusive. We remain focused on and committed to this goal. At this point, we expect net-debt-to-EBITDA leverage to end this year at around 3x. With that, we would now like to take your questions.

[Operator Instructions] And our first question comes from Stan Meyers of Piper Jaffray.

So you guys obviously report a very strong organic growth here, 8.3%. When you look at the wins this quarter, is it mostly new business or kind of expansion of those contracts internationally? And also the second question I have for you guys, last quarter the pass-through revenue had sort of a negative impact in the quarter. And what was the impact in this quarter?

So we only look at organic growth of new business, new client, new business. We don't look at growth from existing clients. So all of the organic growth was from new business wins. David wants to address the issue of pass-through.

Sure. Thanks, Stan. So pass-through revenue was modestly a drag again this quarter but not as material as last quarter. So I think tens of basis points not percentage points. So the revenue growth continues to be exceedingly strong on a fee basis.

Our next question comes from Dan Salmon of BMO Capital Markets.

I just had a question more around the international expansion, just a little bit of color and updating there. It sounds as if it's been moving along ahead of schedule. But maybe if you could just sort of walk us a bit more through the individual regions and how you're expanding your footprint in each of them at the moment.

So it's all been through hiring of talent, really. Brazil has gotten off to an extraordinary start. Our presence in London is growing at double digits. Our Sweden business is doing exceptionally well and so is our presence in Amsterdam. This is really a byproduct of the growth that we have from our existing clients that expand their business. Most of our clients are Fortune 100 clients. 70% to 80% of their business is international, so on the backs of that, they are giving us broader assignments. The other area that had a very big impact for us is China is growing much more rapidly than we originally budgeted. And we see further opportunity and further expansion and leveraging of our existing infrastructure as more of our agencies actually leverage the existing infrastructure, really, of offices and technology that exists there to service clients. So I would say Asia probably has had the most significant surprising positive impact relative to our results.

Our next question comes from David Bank of RBC Capital Markets.

So I guess my question is kind of following up from the big news prior to last quarterly earnings. And one of the acquisitions you made, Kingsdale, really leveraged off, I think, your kind of core competency in the corporate communications area. But it seemed slightly off center from the typical businesses we've seen you in. So working with Kingsdale now, what -- has that addition into the portfolio -- like, how have you done with the cross-selling across that platform? And what -- how have 1 and 1 made 3 with Kingsdale?

We're actually pleasantly surprised. We've now introduced them to 50 of our clients. The cross-selling to Luntz, Kwittken, Elliott (sic) [Ellis] Sloane, Northstar Research, Veritas and HL Group has been tremendous. We see their business as very similar to our other strategic consulting and financial PR businesses, just that they get a chance to get higher value-added services with more of a pay-per-performance model than just full-time -- for full-time equivalents. Although it's only been a few months, we're exceedingly thrilled about the receptivity that our clients have, that our partners have in the value-added introductions that we are making to expand their businesses to the U.S., both in terms of corporate clients, as well as active shareholders that we have relationships with. I think you'll see Kingsdale expand its platform geographically into the U.S. during 2014. And we have identified some other tuck-under acquisitions that will increase their market share on a broader geographic basis. But so far, we are thrilled that 1 and 1 will be 3 or 4 for that matter.

[Operator Instructions] Our next question comes from Richard Tullo of Albert Fried & Company.

My first question, are you getting any inbound interest, specifically because accounts are not buying into the Omni, Pub pitch, which is based on scale? And I guess, you guys are basing your performance on performance.

Well, nobody blatantly says, "We are unhappy, therefore, we're calling you." We just know that our phone rings more and more, both from a client perspective, from a consultant perspective, as intermediaries with clients, but more importantly, from a talent perspective. We will be announcing several new, attractive, senior executive recruitments that are at the senior-most levels of our -- the bigger firms in our industry. Those kinds of opportunities were never available to MDC before the recent situation. So you never know why things are going to come about, but we are pleasantly surprised about the amount of inbound traffic from both a client perspective, from a talent perspective. But also from an M&A perspective, we really see a very open playing field at this point in time with no real competition for the things that we are going after.

Okay. Can you talk about Luntz a little bit? It seems to me we're in a political year, so you can get a lift there. And is it possible you can translate that success that he's most certainly to have in the political sphere with your clients? Because, it seems to me, he applies a lot of technology to focus groups and applies a lot of thought and effort into talking about things and ways people could understand and appreciate, and that's a skill set that I think works well with creative. And...

So -- I'm sorry. Do you want to go ahead? Continue on.

That's a skill set that works well with creative. So is it possible that you can kind of see a lift, what he's doing provides a good test case for other things?

So just so you know, about 98% of his business is corporate, it is not political. Political is his -- it's part of his passion, but it's not part of his business. It's a great access for his business. In fact, in the last 2 weeks, I have been with CEOs and CMOs where I've made 4 introductions that they requested Frank to come and address their senior executive team about how they position themselves in the marketplace to evaluate the impact of their advertising and to analyze their overall messaging from a strategic perspective. I would say of all the new businesses that we've been privileged to partner with, his is probably -- we had a CMO summit 2 weeks ago. He got more response and requests to meet the marketing and strategy groups of corporations than any one of our other partners. I would say that he has probably got more cross-selling opportunities within the group of MDC than any other firm we've ever been privileged to partner with. And so far, he's been an extraordinary value add, and his business is performing exceptionally well. But he's a remarkable person. He's got a remarkable organization and talent pool, and we see the leveragability, and that's giving us a sustainable point of differentiation because nobody else has that of any of the other networks.

Okay. And then one little question. How great is it winning NBA Y2K for Crispin Porter + Bogusky? Should investors be more confident in Crispin Porter? And does that set the stage at that agency to bring on more and more clients that can maybe produce better margin?

Well, look, every piece of business is important. Winning begets winning. We were privileged by the association. It is not material financially to MDC, but no business is anymore because of the diversification and the fact that we no longer have statistical significance of any one client. But it's a huge win from a quality of opportunity and creative opportunity and for growing the business with them. CPB was awarded the Agency of the Decade. They've been the most awarded digital firm over the last 20 years. We see the opportunity for them to continue to grow their business in a significant way. I mean their international business is the fastest growing. I mean their business in Sweden has taken off, their business in Brazil is huge, their business in London is fabulous. And so they're actually capitalizing on the North American clients. So we see that with the momentum they've got, we'll continue going forward. They are scrolling through the reduction in spend from one of their big clients. Despite that, though, with the new business team we have put in place and with the quality of work and the organic growth that they experienced from their existing clients, they are well positioned to enjoy record years in the future.

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

Well, I just wanted to say, if there are no more questions, we appreciate everyone's time. And I wanted to compliment our management team and our partners for their dedication to the MDC mission. Having just celebrated our 34th anniversary, we feel very proud of what we've accomplished. But more importantly, we're more enthusiastic about what the future brings. We look forward to speaking to you on our next call, and we thank you very much for your time.

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