Stagwell Inc. (STGW) Q1 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the MDC Partners First Quarter Results Conference Call. [Operator Instructions] Please note this event is being recorded. At this time I'd like to turn the conference over to Alexandra Delanghe, Chief Communications Officer. Please go ahead.

Thank you, Alison. Good morning, everyone. I'd like to thank you for taking the time to listen to the MDC Partners conference call for the first quarter of 2020. Joining me today from MDC Partners is Mark Penn, Chairman and Chief Executive Officer; and Frank Lanuto, Chief Financial Officer. 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 statement included in our earnings release and slide presentation, and are further detailed in this Company's Form 10-K and subsequent SEC filings. For your reference, we posted an investor presentation to our website. We also refer you to this morning'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 Chief Executive Officer, Mark Penn.

Alex, thank you, and good morning. Throughout this pandemic, I have been clear with all our employees and partners, safety first, business second. And they worked tirelessly to adapt to the changing needs of our clients in this time of great crisis, perhaps the greatest crisis in our lifetimes. One major factor in our ability to manage through this challenging period, is the plan we have been implementing for the last year to reshape and reform the Company, the results of which are reflected in our fourth quarter results and to an even greater extent in the first quarter results here today. First, and perhaps foremost, we had a return to organic growth of 2%, the first time there's been a net organic growth since the third quarter of 2018. We are the only major advertising and major marketing company to show organic growth at this level globally in Q1. As outlined in our last earnings call, the Partners achieved significant wins in Q4 that propelled us into a strong first quarter. More importantly, we achieved this growth despite pull back that started to manifest themselves in mid-March. Growth was achieved both at the integrated agencies and in particular in our PR agencies. The growth was also spread across major client segments. Second, the combination of cost cutting, our reorganization into new networks and greater corporate efficiency led us to our 110% year-over-year growth in adjusted EBITDA, excluding the divestitures of Kingsdale and Sloane from $19 million to $39 million. Covenant EBITDA increased to $42 million, up 93% from a year ago, and exceeded $200 million on a trailing 12 months basis. The growth in revenue and earnings also drove a significant improvement in our year-over-year cash position. At the end of Q1 we had total cash of $95 million, not including $125 million precautionary draw on our revolver, better than the $30 million at the end of Q1 last year. The operating cash performance in the quarter significantly improved from typical first quarter seasonal trends. Our leverage ratio also continued to improve to 4.3 in the quarter as compared to 5 a year ago, and 4.5 in Q4 2019. New business wins were at a net $8 million, on fourth quarter in a row of positive net new business, for a total of $114 million of net new business wins over the last year. Our wins were down from the pace of the last two quarters. They continued to be positive, even if some new business pitches were being put on hold in mid-March in response to the virus. Notable wins in the quarter, including new lines of business with existing clients, including Uber Eats, Molson Coors, Nike, Samsung Home Electronics and Facebook. In addition, we won Chubb Insurance and AB InBev and 72andSunny, Take-Two Interactive, NBA 2K with Anomaly, the Truth Initiative at Mono, Constellation Brands and Boyd Gaming at Vitro, Prevention by Concentric and a combined win for Mono, Gale and MDC Media with Old Dominion. The coronavirus outbreak has been a tragedy for all of us, but fortunately for MDC Partners we were far enough along in our plan to put the Company in an excellent position to come through the crisis and regain momentum when we go into recovery. We trimmed about $35 million in run rate expenses as promised by the end of 2019. We created five scaled networks, led by our most entrepreneurial leaders to enable faster and more direct response to the crisis by business leaders on the front lines, and we reorganized our CRM and media buying companies to work more closely together in a world powered by data plus creativity. We expect that moves to centralized back office functions like IT will be accelerated, not delayed. And the cost savings will by both plan and necessity increase both as part of the crisis management and permanently as part of being a better organization. Our real estate consolidation in New York slated to save at least $10 million to $12 million a year remains on schedule for later in 2020, and will be enhanced to offer employees the safest possible atmosphere with additional distancing and air filtration measures. As I said, we put safety first and business second. As this crisis developed, we quickly moved to reduce travel and put in place work at home protocols. Almost all of the functions of the Company outside of live events and big productions were able to transition over to work from home. In general, I put clients in three bins, those who face higher demand for their products such as, those making orange juice and pizza, those that face a collapse in demand such as airlines and cruise ships, and those that are not directly affected by changes in behavior as a result of the virus but are affected by the economic slowdown. Most of our clients fall into the third bucket of those affected in line with the economy. We expect the impact on MDC will be somewhat less than the overall impact on the economy, given our tilt towards large tech and other big cap companies, clients who may delay or cut back, but who will participate strongly in the recovery when it occurs. In general, the services we provide also fall into three bins. Some services such as digital platform creation and public relations have equal or even higher demand as companies move more business online and as communications during the crisis require new strategies and messaging. Advertising on media will rise and fall with the economy overall. And services like experiential events will fall dramatically. Today experiential events are only about 2% of our net revenue. We do have significant presence in Sweden where the government has so far not closed up to the same degree as the US, and our China operations report a strong bounce back from the virus. To deal with the financial impact of the crisis, we undertook significant stress tests. We forecast based on incoming information and took appropriate actions tailored to the specific situations of each partner. Immediate actions included salary and hiring freezes, temporary compensation reductions of agents and leadership, significant cut back of discretionary spending across agencies, reducing freelance spend as well as T&E and some furloughs and headcount reductions. We believe we have offset nearly 75% of the expected revenue declines and expect to reduce costs this year by over $100 million. While we have, like every other marketing company removed our revenue and covenant EBITDA guidance in light of the disruption in the broader economy due to the pandemic, I still want to provide some insight to investors of what we are expecting as of now. As of now, we're planning against organic revenue declines in 2020 of approximately 10% to 15% from the prior year. This is based on a soft second quarter with some modest recovery occurring during the second half of 2020. I expect covenant EBITDA to be down by similar range from the prior year. I believe in transparency, particularly in times of crisis. As such, we will continue to closely monitor industry dynamics, client activity and our own financial performance to commit to providing you with updates each quarter through the year and year-end, given that the economy and the situation is in a constant state of change. However, the actual changes in the economy turn out to be, we will continue to deploy measures in response to meet the challenges based on our cost structure that is highly variable in nature, whether the recovery turns out to be softer than expected or turns out to be better than currently expected. In addition, our cost saving initiatives - through our cost saving initiatives I mentioned a moment ago, we are taking prudent steps to optimize liquidity. We delivered excellent cash flow from operations over the last four quarters. And in Q1 with more cash, better liquidity and lower leverage than we've reported in years. In April, we were able to retire $30 million of our bonds and $2 million of annual interest expense at a cost of $22 million and increasing our shareholder equity value. As of last Friday, even after significant earn-out payments earlier in the months, we continue to be in a net cash position with our $250 million revolver untouched with the exception of a pre-emptive drug. We are not eligible nor are we are applying for any US government loans that will be forgiven. We are eligible for the payroll tax deferral, which will provide us with an additional $16 million of liquidity in 2020. Based on the excellent progress we made in our cash flow goal over the last four quarters, I'm even more confident today in our ability to generate cash flow, following the crisis. We have clearly demonstrated that my target of generating $50 million or more of free cash flow per year is very achievable for this business, a level I know we will return to or better after this crisis subsides. The financial actions we've taken in responses to the crisis are only one part of the story. Our agencies have done a tremendous job working on behalf of their clients to produce new messages, platforms and advertising that helps our clients to communicate to their customers during this unprecedented time, a collection of these efforts can be found at hub.mdc-partners.com. That's hub.mdc-partnres.com In the first few days of the crisis agencies like 72andSunny, Doner, Hecho Studios, CPB, Anomaly and others bootstrapped ingenious solutions to ensure that video production continued in part by creating new content to license found and user-generated content alone with animation and motion graphics. Our recent investment in Catch & Release, the company devoted to making online content available for advertising proved timely. By way of just a few examples, the Doner team created a powerful film to encourage Metro Detroit to stay home and stay safe, all written, shot, edited and finished remotely in 48 hours, are launching new work for [indiscernible]. 72andSunny created a PSA for the NFL using footage from players in their own homes, encouraging people to hashtag stay home, stay strong. The work went from concepts to on air in 10 days with no film crews, post production via Google Hangouts and all agency staffs, clients and athletes working entirely from home. CPB created fantastic work for Dominos, which just a few days ago, publicly attested to its attention to lean in even further to get its messages to customers during this period. CPB is also a dramatic pivot for clients in the hard hit travel and tourism sector including launching new American Airlines brand messaging produced in under a week aimed at commending their staff. And our agencies have led immensely meaningful business initiatives around the world. In Sweden, Forsman & Bodenfors partnered with the telecom brand Telia to help family and friends stay connected with their loved ones by providing free unlimited data to customers older than 70. And together with its long-term client, Volvo Cars, Forsman spearheaded initiative to offer its demo cars to healthcare workers who need a safe way to get to work as they combat the virus. Our digital product and design agency YML designed the interface of a testing device that received emergency FDA approval to test COVID-19 in just four to five minutes. Our company has also partnered with the Harris Poll over at Stagwell, to keep corporate marketers and managers up to date. Our public attitudes and consumer habits have change during the crisis. These examples are just a glimpse of the remarkable work being brought to life across the network and does not begin to explore the types of crisis influencer and new brand communications platforms being developed by our PR agencies. As we look ahead, our strategic plan remains focused on becoming a modern marketing company of choice, and it is built on the credible creativity of our agencies combined with turning what was a loose confederation of companies into a nimble set of talented networks, who is on the verge of turning the corner against much larger competitors that were mostly on decline when the virus hit the world. We acted to protect our employees, our business. When this crisis is over, we believe our competitive advantages have been nimbler, more creative combined with our reorganized media and data operations will put us in an even greater advantage against a slow cumbersome giants of yesteryear. With that I will turn things over to Frank Lanuto, our CFO to discuss our financials.

Thanks, Mark. Good morning, everyone. Before I dive into our results, I want to underscore Mark's comments and reiterate that we are well positioned to weather this crisis. The actions we took over the last 12 months to realign our agencies, improve our go-to-market strategy and cut costs are bearing fruit in our results, as evidenced by our Q1 performance. They also place in a stronger position to quickly and nimbly respond to changing client needs and industry dynamics, giving us great confidence that we will emerge from this crisis an even stronger organization. Turning to our results, I want to begin by pointing out that our press release and our management presentation include new segment reporting to reflect how we are now managing the business. Going forward, we will report our results in three segments, including the integrated agencies network, the media and data network and all other. We've recast revenue and EBITDA results for the last five quarters to conform the historicals to our new segment presentation. I'll talk more about these segments in a moment. Looking at our financial results, in the first quarter, we delivered revenue of $328 million, representing organic growth of 2% and less than a 1% decline on a reported basis. This was driven by solid performances at our large creative agencies in particular. Excluding the impact of our Kingsdale and Sloane divestitures, adjusted EBITDA increased 110% in the first quarter. As reported adjusted EBITDA increased 84% to $40 million in the quarter aided by the cost reduction initiatives, we've executed over the last 12 months. Covenant EBITDA in the first quarter totaled $42 million, up 93% from $22 million a year ago. And on a trailing 12 month basis, we delivered covenant EBITDA of $201 million, up by more than 11% from Q4, driven by the strong year-over-year Q1 results. Breaking down results by our new segments. The All Other and integrated agency segments grew organic revenue by 7% and 1.3% respectively, partially offset by a 4.5% decline in our media and data group. Our adjusted EBITDA growth in the quarter was driven by a 74% increase in the integrated agencies network segment and 46% in the All Other segment, while media and data was up by $2 million from breakeven in the first quarter last year. As Mark mentioned, we have been highly focused on managing costs and identifying opportunities for additional cost savings. As discussed on previous calls, we removed $35 million of annualized cost last year, with approximately half the savings realized in 2019 and the remainder being recognized in 2020 and contributing to our strong Q1 results. Overall, our expenses were $19 million lower this quarter compared to a year ago, inclusive of a $2.1 million restructuring severance charge, which is expected to yield an additional $10 million in savings on an annualized basis. As Mark noted, our evaluation of the impact of COVID-19 has led to over $100 million in additional targeted cost reductions across our agencies over the remainder of the year. As conditions evolve, we will continue to take actions as needed, working hard to protect the profit margins. Moving to the balance sheet, as Mark noted, we ended the first quarter with $221 million of cash including $125 million of a preemptive draw on our revolver. Excluding the draw, we finished the quarter with approximately $95 million in cash, the highest Q1 amount in a number of years. This was driven by the strong performance during the period, which also reduced leverage at quarter-end to 4.3 times, down from 4.5 times at year-end and 5.05 times a year ago. We remain very confident in the strength of our business and the changes we have implemented over the last year. This led us in April to repurchase approximately $30 million of our bonds at a discount, paying $22 million, reducing our net debt by $8 million and overall future interest obligations by approximately $2 million annually. With respect to acquisition-related liabilities, we currently expect to fund approximately $55 million in 2020. Through April to-date we have funded approximately $28 million or a little more than half as our largest outflow is in the second quarter, consistent with historical trends. In addition, we will continue to manage our CapEx lower in 2020 as we have in recent quarters. In Q1, we had under $2 million in CapEx, less than half the amount from a year ago. And while we will continue with our New York real estate transformation project, we'll have tight limits on any other CapEx spending. Overall for 2020, I expect our net CapEx will now be in the range of $25 million to $30 million for the full year. Now I want to take a moment to thank our employees around the country and around the world for their commitment and excellent work during these challenging conditions. Over the past six weeks, they have worked tirelessly, serving our clients, delivering innovative ideas and transformative creative work as well as supporting their colleagues throughout the company. Now I'd like to open the line for any questions you may have. Operator?

[Operator Instructions] Our first question today will come from Avi Steiner of JPMorgan. Please go ahead.

Thank you and good morning and hope everyone is staying healthy. I'm going to start out with somewhat of a backward looking question as I move forward here. But maybe talk about how the business progressed in the first quarter, if you can hear me? And were there, I guess more cancellations or pulled ads in March and really what I'm trying to get out of business was pulled or canceled, any sense as to whether that is being deferred to later in the year or simply being canceled, and then I've got a few more. Thank you.

Well, I think as I kind of gave the said during the script, think of three different kinds of companies, right. And there are some clients, if you look at some categories that are just pressing forward and/or finding increased demand and they'll be working with how to keep their new customers. Your typical companies, a lot of our clients hit the pause button what's going on here. That meant a bunch of delay is back. There'll be some product cancellations or moves that some of them made, if they were planning to launch a new product during this period and they'll push back. So the psychology on this was all push back, pause, cut and then we expect and I expect them having managed through a number of crisis over time and having that as large WPP assets in 2008. In this crisis, in particular, I think you also see things tilt the other way when people say, look, we've got to get our customers, it's a fight for market share, there's the recovery going on here. We looked at the numbers as a modest recovery, though Secretary Luchan would put us higher and some people on TV would put it lower. But principally people hit the pause button and then they're going to reevaluate those budgets and that's started to happen in basically early to really mid of March and so I think [technical difficulty] from growing during the quarter.

Great. And your guidance suggests like many others that the second quarter will be the worst of the year, and again, I think that's fairly consistent, but you've clearly worked on some NFL and other business, and I'm just curious if you could drill down to give us a sense of, and I know you probably don't want to go here. But maybe how bad I should be thinking about this quarter and relatively to your earlier comments, what do you think gets the advertisers kind of confident again to, I guess to resume spending. Is it simply folks getting back to work or do you think there needs to be other factors? And I've got a couple more. Thanks.

Well, look, when hurricanes come through, right, if Hurricanes come through, you build your house strong enough, you stand hurricanes, you lost the shutters, there’s holes in the roof, we fix up everything and then you go through a process of recovery, right. And so this second quarter here, everybody knows is basically kind of the hike of hurricane. And then the expectation are - that we will then emerge in that. I do think that marketing is, it's easy to cut back initially on marketing, but then because of the unique nature of this, as there’s a recovery, you can expect a much faster bounce back and a much faster, I believe switching psychology to from how do I stop spending on marketing to, how do I get my customers, I want to make sure I don't lose market share to those big cap companies that have in fact continue to spend quite strongly to do this. And there were number of big cap companies, who said I’ve been through this crisis before, I'm going to stand right through this because I'm going to emerge with a larger market share. So I do think that there is - there are these mass switches in psychology that start kind of at the top. And I do think you're beginning to see we track two times a week over Stagwell with the Harris Poll and in cooperation with the MDC agencies and you began to see the maximum consumer fear start to come down. Ironically, people are more afraid to go out of the house, less afraid of the virus. And I think that we'll begin to see people saying, okay, I think I can start to go back to work and I think when people go back to work that we’re making huge difference in terms of consumer demand, the outlook and marketing.

Great. And you mentioned higher demand for PR, as folks do more things online, et cetera, but can you remind us how big that business is for you?

I don't think we break it out. I don't think I have a percentage off the top of my head, I don't know, Frank, if you want to, but it is a significant and growing business.

Yes, it's included in our all other segment, we don't really disclose the revenues per agency like that.

All right.

If you check the PR trades.

Okay. Frank, a couple to bother you with and then I'll turn it over. You mentioned, and it's evident at least by the slimmed down cash flow statement, your Q1 cash balances was highest in years even ex-revolver draw. If you look at cash flow from operations, it's a much better usage number than historically we've historically seen in this first quarter. Can you help us with what's behind that improvement, please?

Well, I think number one is you've got a strong performance, the EBITDA performance, which is the principal driver, but we also have improved working capital performance that's helping to drive that as well. I think it's those two in combination and we've had reduced CapEx. It's been a very small number, approximately $1.5 million for the quarter, so a little bit less outflows on that front as well.

Okay, great. And then on the bond buyback. I want to make sure I heard 30 million faces retired and then can you talk about flexibility to do anymore if you wanted to?

So right now we exercise, but we thought it was the prudent amount to buyback at this point at the prices that we saw in the marketplace. We still have flexibility and we have the ability to purchase back more opportunistically, if we see the prices continue to stay out in the press level. So I'll leave it at that, that we have additional flexibility right now.

Perfect. Almost done. Just on the working capital comment you made previously, is that something that may come back later on and be an outflow or it's this, I just want to make sure, there was nothing unusual in this first quarter and there wasn't a delay?

No, I mean you understand the seasonality of our business. So we did do better this Q1 than we had perhaps in the last several Q1s. But I think you should expect the normal seasonal flows, no extraordinary ins or outs stuff.

Okay, and lastly from me and I appreciate all the time. I assume the revolver draw it was based on prudent but curious as to the rationale drawing only half that revolver and then you always provide helpful covenant summary, it's back at the presentation. But looking through that, how do you feel about your comfort vis-à-vis the total leverage ratio and that's it from me. Thank you all.

Mark, would you like me to answer that or did you want that?

Go right ahead, Frank.

Okay, look, we took - we forecasted what our cash needs would be throughout the year to fund our capital projects, to fund our acquisition-related payments and to also sort of take into consideration the seasonal cash flows, as you know, Q2 seasonally get softer. We took enough money that helped us balance the need to test the banking system at the moment when we were taking the money to make sure that the money would be there, but we didn't want to take so much that would just draw unnecessary interest expense for us. So we try to find a balance there and that led us to half as a good approximation.

And then the comment on the revolver and again thank you all for the time. I'm sorry, a comment on the covenant. Apologies, covenant.

I'm sorry, with the actual or with...

Just your comfort around, go ahead.

Yes, look, we have headroom around our covenants and we believe that based on the scenarios. We've looked at that, we will continue to have ample headroom on all our covenants.

[Operator Instructions] Our next question today will come from Todd Morgan of Jefferies. Please go ahead.

Good morning and I hope everyone is doing well. Thank you and thank you for all the color information. I know you're trying to be as transparent as possible. Could I ask you just sort of perhaps try to generalize about the sort of general revenue cycle that you see or you could anticipate. In other words from the first conversations you might have with the Marketing Officer about repositioning the brand, some of the project work to some of the production work to finally the ads placements and so on. The revenue cycle that might be and how quickly does that come back as those kind of conversations you kicked off?

Well, I mean I think the best answer to your question is that people need to plan marketing or advertising, let's call it in the pre-COVID environment, probably six to eight months in advance, right. But what I think you're going to see here is the shortening of the, I got to get back on the air cycle to more like a one to three months kind of cycle. And so I do think that people are going to be looking for agencies, such as we have in MDC who can run a shorter cycle because when things pivot, people are going to have to get back, if you assume that the product marketing and selling season, it is the - is Black Friday to Christmas or is in that period and you assume that things are moving towards for that kind of probably there are a lot of marketers who are going to have to work on shorter cycle because they're not, they're going to want to get into the holiday and may have paused work and may, they may have cut back and they may have slowed their cycle and they may have then have to adopt. But remember, the great bulk of our clients are just proceeding as usual and then as I said, you've got the two groups, some most clients are proceeding as usual with cutbacks with prudence, some are completely in situations that are directly tied to the virus and they will require an entirely different kind of program involving consumer safety, it doesn't exist if you have a product that's affected by the slowdown but isn't directly tied to the potential spread of the virus. And then others as I said are just planning ahead of moving and there is a lot more digital work at the moment because people are saying, well, I think I may wind up selling more online than I expected, faster than I expected in the cycle and we see a fair amount of rush towards that as well, but the principal answer to your question is the normal marketing cycles. I think could be a lot shorter and faster, if things begin to turn and the economy starts to open up by the end of the - by the July period.

Ladies and gentlemen, this will conclude our question-and-answer session. And at this time, I would like to turn the conference back over to Mark Penn for any closing remarks.

Thank you. I hope everyone is safe and I really hope that we see things improve here in the United States and the rest of the world and I hope we've given you a good picture of the tremendous progress we made with this company overall, the tremendous path we were on and the task itself has put us in the position where we can effectively manage through this crisis and emerge, I think nimbler and better organized than most of the competitors here in this industry. Thank you very much for your time.

The conference has now concluded. We thank you for attending today's presentation and you may now disconnect your lines.