Stagwell Inc. (STGW) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the MDC Partners’ First Quarter 2015 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I’d now like to turn the conference over to Matt Chesler, Head of Investor Relations. Please go ahead.

Good afternoon and thank you for joining the MDC Partners 2015 first quarter conference call. On the call today from MDC are Chairman and CEO, Miles Nadal; CFO, David Doft; and SVP, Accounting and Financial Reporting, Christine LaPlaca. During the call, we will refer to forward-looking statements and non-GAAP financial data. As you all know, 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 and subsequent SEC filings. Please note that as a reminder, again this quarter, the reported financials from continuing operations exclude ACCENT in the current and prior periods as the business is included in discontinued operations giving the pending divestiture. For your reference, we’ve posted an investor presentation to our website. We also refer you to this afternoon’s press release and slide presentation for definitions, explanations and reconciliations of non-GAAP financial data. And now to start the call, I’d like to turn it over to our Chairman and CEO, Miles Nadal.

Thank you very much, Matt, and good afternoon ladies and gentlemen. As usual, David and I will provide some brief remarks and then open it up to your questions. We’ve begun 2015 confident that we’ve laid a solid foundation for incrementally sustained growth, higher levels of profitability and improving cash conversion that investors should see is the form of a premium growth on a long term basis. As I said two years ago on this call, smart investments and commitment to talent and technology will pay off and that’s exactly what’s happening at MDC. So let’s just go straight to the numbers. While it’s just one quarter, you’ll see that MDC’s performance is consistent with the financial plan that we laid out for you two months ago. As a reminder, we told you that due to the timing of revenue recognition for certain new client wins that Q1 would be down from a profitability and cash flow standpoint and the year would be back half weighted. That’s certainly playing out to be the case. As David will articulate later on on the call, profitability should build meaningfully in the coming quarters and we are, most importantly, reaffirming all of our guidance for the full year 2015. In the quarter, we reported revenue of $302.2 million, up 10% year over year, with organic revenue increasing a very solid 7.4% on top of an 11% comp, excluding ACCENT last year. Our adjusted EBITDA was $31.2 million and adjusted EBITDA available for general corporate purposes was $10.3 million, both down year over year, but again due to timing of revenue recognition. And finally, net new business in the quarter was $28 million, after a record $163 million in fiscal 2014. Notable wins that we can disclose publicly include Unilever’s Axe at 72andSunny, Highmark Health at Donor, and Assembly, a Major League Baseball at Anomaly, and the pipeline of new business opportunities that continues to expand at a robust pace. We at MDC continue to be laser-focused against executing on our four key strategic priorities. One, extending our capabilities outside of North America by pursuing highly visible near-term client opportunities and leveraging our network resources in global markets with the greatest potential which include Europe, China and Brazil. Number two, scaling a progressive media planning and buying business that is in on par with our creative businesses and can tap its existing client base with technology, performance and transparency at the core of the offering to give us a unique selling proposition. Number three, bolstering our data science and technology capabilities to ensure we have the newest platforms and tools across our broader business to remain on the cutting edge and ahead of the competition. And four, supplementing and amplifying our organic growth efforts with targeted, highly accretive strategic M&A in key areas such as media, digital, analytics, consumer insight and strategic communications. As we begin our 36th year having celebrated our 35th anniversary on April 11, I'm once again thrilled by the tremendous possibilities that the future holds for us and all of our constituents. We're in a very strong competitive and financial position as good as we've ever had the prospects have never been brighter. With that, I'll now turn the call over to David to discuss of financial results and our outlook in more detail. David?

Thank you, Miles, and good afternoon. I want to echo the comments that Miles made about our financial progress. We are very pleased that the year is starting out on track. Our top line momentum is consistently steady and strong, supported by our new business successes and a healthy underlying environment. But please remember, the ramping of revenue recognition for some of the larger and more complicated pieces of new business doesn't always line up with the quarters and so isn't yet fully reflected in our reported results. That is why we guide on an annual basis. In the first quarter, adjusted EBITDA was down on a year over year basis by no more than expected. Actually, a little bit better than expected and we continue to achieve profitability building from here. Accordingly, we are reaffirming our guidance for 2015. We continue to expect revenue to increase 6.5% to 8.5% to a range of $1.30 billion to $1.33 billion. Our revenue guidance implies 7% to 9% organic growth, plus about 1.5% growth from last year's acquisition, offset by about 2% negative impact from foreign currency headwinds. The overall foreign currency headwind is substantially the same as it was two months ago, as most of our exposure is to the Canadian dollar, which is roughly unchanged versus the US dollar during this time. Adjusted EBITDA is expected to increase 8.7% to 14.3% to a range of $195 million to $205 million. This implies adjusted EBITDA margins of 15.0% to 15.4%. Adjusted EBITDA available for the general capital purposes is expected to increase 10.3% to 20.4% to a range of $109 million to $119 million. I also want to reaffirm our commitment to deleveraging our balance sheet over time, notwithstanding the seasonal working capital needs of our business which is [indiscernible] temporarily on the line as of March 31. Given the strong free cash flow dynamics of our business and the favorable acquisition deal structure from a timing of cash standpoint, our ability to acquire incremental businesses and bring the net debt to EBITDA leverage of the company below 2.5 times over the next two to three 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 3 times. Before we take your questions, it's important that we discuss an issue that was disclosed today on our earnings release, 8-K and later tonight in our proxy filed with the SEC. In October, the company received a Subpoena from the Securities and Exchange Commission relating to CEO expenses, the company's goodwill and certain other accounting practices, as well as trading in the company's securities by third parties. Upon receiving this Subpoena, our Board of Directors formed a Special Committee of independent directors which conducted an extensive review of the items, most notably perquisites and payments made by the company to our CEO during period 2009 through 2014. The Special Committee of the Board received full cooperation from Miles, MDC management and the rest of the Board members. Miles has voluntarily agreed to reimburse the company in the aggregate amount of $8.6 million for reimbursed expenses for medical expenses, travel and commutation expenses, charitable donations and other expenses which lacked appropriate substantiation over that 6-year period from 2009 to 2014. As a result of the Special Committee’s review, the company incurred legal and other costs of $5.8 million in the first quarter, on top of the $1.2 million expense in our reported numbers for 4Q of 2014. We expect to recognize a one-time gain of $8.6 million in the second quarter, relating to the reimbursement of these amounts which has previously been expensed through the P&L. We do not expect there will be any impact on our previously issued financial statement. I want to be clear that we’re highly confident in the accuracy and integrity of our past and current financial statements. Our business remains strong and we are confident in our ability to achieve our overall growth prospects as well as our financial guidance for this year. We are committed to the highest standards of corporate governance and transparency in our reporting practices and we’ve used this situation as an opportunity to strengthen our procedures and internal controls to make us a stronger company. These actions include: adoption and implementation of a new Travel and Entertainment Policy and a new Private Aircraft Usage Policy; hiring two new senior executives, including a Senior Vice President, Internal Controls and Compliance. These new senior executives are responsible for managing internal controls, reviewing monthly expense reports and ensuring full compliance with the company's new and existing policies. Both senior executives report to the company's independent Audit Committee; third, quarterly review and reporting to the company's Audit Committee with respect to compliance by the company's executive officers with travel and expense reimbursement policies to address questions more efficiently and effectively. In addition, along with continuing my current duties as of April 23, I’ve assumed a role as the Principal Accounting Officer of the company. As I noted, we’re fully and actively cooperating with the SEC in this enquiry and due to the ongoing nature of the investigation, we’re restricted in what we can say beyond the disclosures in our SEC filings. And unfortunately, we’ll be unable to answer any questions on this topic, which you can imagine is difficult for us as the management team because we’ve always thought to be highly transparent with the financial community. So with that said, I want to thank you in advance for your patience as we work to resolve these matters. In the meantime, you should know that all of us remain highly focused on the proven strength of our business and on executing the strategic and financial framework that we have previously laid out, which we are confident will continue to drive increasing value to our shareholders and bondholders. We’d now like to take your questions.

[Operator Instructions] And our first question will come from Bill Bird of FBR.

Understanding you can’t talk about the SEC enquiry, we need to talk about just the core business, where are you in the process of onboarding revenues and expenses for Infiniti? And I don’t know if you gave it, what is the ex-ACCENT comp for organic for the second quarter?

I’ll start with your second question. The ex-ACCENT organic growth comp in the second quarter is 9.9% and as I said in the prepared remarks, or as Miles said, it was 11% in the first quarter last year ex-ACCENT. In terms of Infiniti, the revenues from that and other clients that we’ve been onboarding around the world began in 1Q, but will ramp up further as we move through 2Q and the rest of the year, everything continue to progress as we’ve laid out and that’s why we were able to reconfirm our guidance for the year.

Do you also have the third quarter ACCENT comp added and then on Q2, are there any puts and takes on margins [indiscernible]?

Third quarter comp organic growth ex-ACCENT 10.1% and as a reminder, as we reported in 4Q, it was 12.5%. And I’m sorry, your second question on that, Bill?

Just on Q2 margins [indiscernible] anything that maybe we should be aware of as we take [indiscernible] second quarter margins?

Remember, we guide annually because there is always lumpy revenues and expenses that flow through the numbers. And while the revenues are ramping as we move through 2Q, the full run rate is more in the back half. So as we indicated on the fourth quarter earnings call, our year will be a bit more back half weighted than the last couple of years, likely look more like 2012 in terms of the spread throughout the year than 2013 and 2014.

And the next question comes from Daniel Salmon of BMO Capital Markets.

David, I recognize you can’t get into a lot of details you noted about the subject around the SEC investigation. If maybe there’s just one comment just as we parse out what you noted earlier in your prepared remarks, are the internal reviews complete at this stage or are they ongoing? I wasn’t perfectly clear about that in the comments.

For the comments, the Special Committee review of perquisites and payments made by the company to Miles is complete. Other aspects of the enquiry are ongoing.

Then maybe let’s move on to the core business and just maybe take a step back and revisit the international opportunity, you obviously gave us a very detailed update about six months ago at the Investor Day, but as you continue to make progress towards this new and very big opportunity for the company, do you feel as if you’re moving along at the pace that you expected, are there certain maybe specific agencies that have come along a little bit better in that regards than you might have expected some that have been little behind, but just sort of your overall pace of expanding to bring in more international work?

Overall, we’re exceedingly pleased with the progress that we’ve made across the spectrum. This is like running a marathon, not a sprint, so at different points in time in the race, different firms are progressing at a faster rate, it depends on the clients they’ve got and the integration. But I would say to you that we’re getting more international opportunities from our existing clients than we anticipated. There is more cross-selling of opportunities from North American clients to international opportunities than we anticipated. There is definitely more collegiality where people are working together, so Anomaly is working together with Crispin in Asia and Crispin is now working with Anomaly in Brazil. Allison & Partners and KBS are working together in Shanghai. There is a number of opportunities also in Europe that are happening by people working together. So I’d say it’s progressing better than we anticipated. The momentum is accelerating. And as we said, we really believe that over the course of the next five years or so, our international business will be at least double as a percentage of what our total is and then some going forward. So we’re exceedingly pleased. And what’s great is because of the investment spending we did, the profit ramp up will be even more significant than the revenue growth ramp up.

And the next question is from James Marsh of Piper Jaffray.

A couple of questions. First, just circling back to the SEC enquiry and I understand you guys don’t want to talk about it, but just hoping to understand how you guys plan to disclose the balance of this SEC enquiry. You seemed a little odd that you’re disclosing part of it and then suggesting in your press release that it’s “an early stage,” so should we expect to have no news until the rest of it is resolved, completely resolved or you got to be disclosing it bit by bit as you resolve individual issues? And then as we talk about guidance, does that include some type of estimate for the remaining legal fees and is that covered by any insurance policy or anything like that?

So if there’s something material that comes up as this is ongoing, we will disclose it as appropriate. And so what's driving the communication is we felt that based on the findings of the Special Committee, it was our duty to disclose to our investors where we are at right now. And as it continues, and again we do believe that is in the early stages and it could take some time as other items come up that need to be disclosed, we will disclose it. Our goal is to be as transparent as we are allowed to be.

I guess just to change gears here, I guess Best Buy is talking about abandoning "creative agency of record model" and interested in working with various shops on by project basis. I was just wondering if they get your sense on how that impacts your business and the industry broadly.

I think that is the model that a number of clients are going to, which is to have more of a jump-ball environment with select firms. We believe in the ability that our firms have to do brilliant work that drives higher return on marketing investment. And we will continue to win more than our fair share of business across the board. As it related to Best Buy, you know, that relationship is between CPB and Best Buy. We're very proud of the work they've done, the results that they delivered. And we would hope that although there has been significant management changes, we do believe that we will continue our relationship with them and continue to demonstrate the ability to do great work that will drive tangible and measurable performance for them in the marketplace. And when we do, we will continue to win more than our fair share of work.

And our next question comes from Avi Steiner of JPMorgan.

Two questions. One, just related to the disclosure today, I'm curious why it was disclosed now and not back in October, back in the 10-K? And then I have one business follow up.

Since October, the company has been actively cooperating with the production of documents for review by the SEC, formed a Special Committee of Independent Directors to review certain matters. That review was just concluded in time with this earnings report and given the findings, we felt that it was appropriate to disclose at this time.

And then on the business side, somewhat similar to last question, maybe, maybe not, Procter & Gamble announced it wanted to cut fees, cut the number of agencies it would work with and I'm curious how you think, A, the company could potentially be impacted and do think this as start of maybe a broader trend with respect to [CPG and other interests]?

So we actually see these kind of changes being very beneficial to MDC. Being the entrepreneur on that work with far less investment in infrastructure, legacy overheads, et cetera, our ability to be more nimble, more agile and drive transformational programs and campaigns on a more cost-effective basis really positions us very, very well. We have a very small and modest position with Procter & Gamble, it's only with Duracell. We see enormous opportunity to expand our roaster of agencies with Procter & Gamble and to grow our business overall. So we see that movement of driving greater accountability for clients like Procter & Gamble as a big opportunity for MDC and our partner agencies to increase share of market and share of wallet.

The next question comes from Tom Eagan of Telsey Advisors.

I have a question about – back on international, could you remind us with the overseas account wins, were those for creative media or for service? And then secondly, I remember Miles saying last quarter that the international operations were mildly profitable in 2014, what kind of margin do you think that they'll generate this year?

So two parts. One is we don't do media internationally currently, so it's either creative or integrated campaigns on our international business and more of it is becoming integrated. And so obviously we are very happy about that. As it relates to margins, we don't disclose them individually, but we are at the point now where for the year we expect that our international business will be profitable on its way to becoming highly profitable over the next 24 months.

The next question is from Barry Lucas of Gabelli & Company.

Just a little housekeeping question, David, coming back to the legal fees, I don't think you quite responded to what that would mean for either Q2 or the balance of the year. And as I look at the segment data, if I were to strip out the legal, what would the core to the extent there is a core corporate was, what would that be?

To your second question, in our adjusted EBITDA number, we did back out the legal cost related to the enquiry as you will see in the segment reporting tables in the press release. In terms of legal expense going forward, it's difficult to predict the amount that it would be, hopefully it becomes lower given the heavy lifting of the initial work of the Special Committee, but it'd be hard for us to put a number on it.

And then next is from Tracy Young of Evercore ISI.

Maybe just a follow-up on Avi's question, in your PowerPoint information, you gave consumer products is up 10% for the quarter, is that organic or is that new business wins, what's really driving that?

It's a bit of a mix, Tracy. We continue to have tremendous success in the consumer products category, some of the wins that have come out in 1Q like Axe from Unilever is substantial consumer products brand. I think it may have come out in early second quarter, maybe in the late first quarter, Adidas as well and other consumer products brand. So our agencies continue to have momentum, especially as they build out their global capabilities with substantial new opportunities in the consumer product space. But at the same time, we're also leveraging our position with some of the major consumer products companies that have many brands underneath their umbrella and we've been able to successfully expand our relationships with them as well.

And that will conclude our question-and-answer session for today. I would like to turn the conference back over to Miles Nadal for any closing remarks.

Thank you very much. In conclusion, I just wanted to reaffirm management's confidence and belief in the strength of our competitive positioning, the focus of our team on continuing to pursue our strategic and financial objectives and our ongoing mandate of increasing sustainable profitable growth and our never-ending go to maximize performance for all constituents, including our employees, our clients, our shareholders and our bondholders and our fundamental belief that we will continue to drive increasing shareholder value both in the short, medium and long-term. Thank you very much for your time and we look forward to speaking with you soon. Have a nice evening.

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