Stagwell Inc. (STGW) Q3 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to your MDC Partners Third Quarter Results Conference Call. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Alexandra Delanghe. Ma'am, the floor is yours.

Thank you, operator, and good morning, everyone. Welcome to the MDC Partners Conference Call for the Third Quarter of 2020. Joining me today are 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 statements included in our earnings release and slide presentation and are further detailed in the company's Form 10-K and subsequent SEC filings. For your reference, we've 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.

Thank you, and good morning. I'm pleased to announce a strong performance this quarter despite the continued but reduced drag of the COVID-19 pandemic. We are in line to meet my prediction of a 10% to 15% decline in revenue this year, but now expect that we will meet or exceed last year's Covenant EBITDA. This is a result of continued success in bringing our partners together into networks, centralizing back office operations and real estate, while modernizing our services and offerings. Specifically, Covenant EBITDA improved 12% year-over-year in the quarter and 14% on an LTM basis to $56 million and $199 million, respectively. We reduced our cost base by 16% year-to-date, or $123 million as compared to the prior year, with nearly 40% of those cost reductions taking place in the third quarter. Improving fundamentals also led to the strong margin expansion. With pitch activity resuming in earnest in the quarter, revenue rebounded nicely off of the second quarter lows, increasing 9% on a sequential basis. This was driven by revenue growth in 3 of 4 reporting units, where only our All Other segment's seen continued contraction due to softness in our experiential business. Year-over-year, organic revenue declined 16% in Q3 and 14% year-to-date, consistent with our outlook and expectations. Net revenue, excluding pass-through costs, declined 15% in Q3 and 12% year-to-date on an organic basis. This quarter, we increased the financial strength of our balance sheet, adding $31 million in cash flow from operations. We ended the quarter with $37 million in cash and no borrowing on our revolver, even after having repurchased $30 million in bonds earlier in the year. We also brought our leverage ratio down to 4.4 from 5 a year ago. Looking more closely at our revenue trends in Q3, the overwhelming reason for the slowdown is paused or delayed revenue from a few specific COVID-impacted sectors. Nearly half the revenue decline is driven by a slowdown in both our experiential business and the transportation and travel sectors. Another third of the decline is from reduced spend within the technology sector, as those companies slowed down new product launches. We observed less-than-normal client turn and so the revenue loss was largely a temporary reduction from clients that we know will be back to advertising in the future. Importantly, we are seeing resumed new client activity and engagement, recorded significant new business wins in the quarter. Net new business totaled $32 million in the quarter, up from $20 million in Q2 and totaled just under $100 million over the last 12 months. Despite the challenges of the pandemic, we're conducting more collaborative and more global pitches than ever before, both in net new business is a clear demonstration of the power of our network model to the nod, to the success of our transformation over the last year as part of our strategic plan. What we're seeing is an urgency among clients to disrupt the traditional holding company model. We recently won Glyconic food and beverage brand, charged with reversing the fortunes of a $20 billion to $30 billion category. This client was specifically attracted to MDC's central premise for the superior integrated data and creative offering. The charge includes everything from strategy, data, media, digital, creative, social, public relations for both B2C and B2B. These amount between $60 million and $65 million in billing. Like many others, these clients are looking for a nimble and seamless solution across the entire customer journey, and we are delivering just that. Other notable wins in the quarter include Sony Vision and Sound, Lucky Charms at General Mills, Singleton at Diageo and OPPO, all with Anomaly. Additionally, we won Albertsons at Y Media Labs, Merck Animal Health at Concentric, Meals on Wheels at Mono, NetOnNet at F&B, Holiday Inn Vacation Club, Board Gaming and Constellation brands at Vitro. We've also expanded our relationships with clients including Diageo, Target, Abbott Labs and Samsung, among others. Our digital solutions continue to deliver extremely strong growth, increasing over 50% in the quarter, aided by a network model that now brings these services together with our major creative agencies to meet integrative client needs. Similar to last quarter, our PR and corporate communications verticals continue to deliver year-over-year growth. We are beginning to see improvement in our Media and Data segment, up 17% sequentially against Q2. Experiential remains soft, though. It has successfully introduced scaled virtual event production to its product offering for clients and we anticipate that being an advantage well into the future. Looking at our revenue, on a client sector basis. Retail and consumer product sector business rebounded strongly in Q3. Both sectors improved percentage points over Q2 as companies ramped spend and markets opened back up to consumers. Healthcare also continued to see solid sequential growth as did almost all of our client segments, with the exception of automotive which remained flat. Even as we battle the pandemic, the business is not standing still. We're implementing year two of our New World Marketing plan to make us the company of choice for the modern marketing. This means not just centralizing costs, but creating the right integration between data, technology and creativity that is possible with the exceptional partners here at MDC. These abilities have been expanded and extended with increased collaboration, together with the complementary offerings at Stagwell. I remain hopeful that we will be able to combine the companies, creating the eighth largest marketing company in the world. Having achieved the promised cost reductions and more as evident in today's results, we are focused on the 4 pillars of the new strategy to give us new DIGS, to be digital, integrated, global and strategic. We're operating on three levels when it comes to the digital world. First, we are creating new digital experiences for our customers. For example, we recently won the digital transformation work for a major consumer products chain to create the entire online experience for the customers. Second, we are modernizing the internal workings of our network, using technology to streamline operations. And third, we are developing proprietary SaaS products that combine our technology and client experience to create new kinds of revenue streams. We recently released PRophet. It's the first ever AI-driven platform for the PR community, designed to help predict media interest, sentiment and spread before a story is even pitched, similar to the way movie studios and book publishers are using AI to predict the commercial potential for a script. Leveraging data enables teams to more intelligently develop strategies around both positive news and emerging threats that has greater efficiency and effectiveness as PR professionals interact with journalists. We believe there is a significant market for this product in the order of tens of millions of dollars. On the integration front, we recently announced the formation of our global technology group, a bold new vision of technology infrastructure designed to unleash collaboration on a global scale, tapping a roster of seasoned Internet work technology leaders. The global technology group will drive global strategy across the network in areas including security, systems design and cloud architecture. This month marked the completion of the first phase of our real estate transformation with MDC's corporate team now operating out of our new 1 World Trade Center campus where by the end of the year, 13 of our agency brands will reside. In all, I feel very good about where the business stands today and how we have managed through the pandemic thus far. We delivered a solid quarter with year-over-year EBITDA growth and saw nice rebound in the underlying fundamentals. We expect to see continued improvements in Q4 and are executing on our year 2 strategic and operational priorities while continuing to reinforce our fundamentals and deliver exceptional work for all our clients across disciplines. With that, let me turn things over to Frank for a deeper look at our financial performance. Frank?

Thanks, Mark. Good morning, everyone. We have made good progress this year, despite ongoing disruption from the pandemic. We took actions early and swiftly implemented comprehensive cost measures across the company that more than offset our revenue decline and helped us deliver higher year-over-year EBITDA in the third quarter and year-to-date. Margin surpassed previous high points and our balance sheet improved further from the prior year. For the quarter, organic revenue declined 16% to $283 million and on a year-to-date basis declined 14% to $870 million. Pandemic-related slowdowns in our experiential and technology clients accounted for approximately 70% and 50% of the organic declines for the quarter and year-to-date periods, respectively. Partially offsetting these declines, our digital business continued to grow rapidly, up 50% year-over-year in Q3 and up 19% sequentially. Specialist communications also grew in the third quarter, continuing the trend we've seen for several periods. Sequentially, revenue rebounded from the pandemic-driven lows of the second quarter, increasing by 9%. Revenue rose in 3 of the 4 reported segments, led by Integrated Networks B up 20%, Media and Data up 18% and Integrated Networks A up 5%. The All Other segment declined 8% from the second quarter, driven principally by continued softness in our experiential business. With respect to operating expenses, we continued to benefit from actions taken at the outset of the pandemic as well as those made in the latter part of 2019. For the third quarter controllable costs were lower by $46 million or 19% compared to prior year, with over 70% of the savings coming from staff costs. Through 9 months, costs were lower by $123 million or 16% from the prior year, with similar percentage savings coming from staff costs. We recorded $2 million in charges in Q3 and approximately $10 million year-to-date, primarily the severance to effect the aforementioned cost savings. We have taken a range of actions to generate these savings; some permanent, some temporary. And we'll continue to manage our costs carefully in line with the revenue recovery. Adjusted EBITDA in the quarter increased 10% at $54 million verse the prior year, and the related margin increased approximately 480 basis points to 19.1%. Excluding the impact of our Kingsdale and Sloane divestitures, adjusted EBITDA increased by 12%. On a year-to-date basis, adjusted EBITDA increased 11% to $130 million and margins rose by 360 basis points to 14.9%. Our trailing 12-month Covenant EBITDA increased to $199 million, up 14% from $175 million a year ago and sequentially higher from Q2 by 3% from $193 million. Moving to the balance sheet. Liquidity remains strong as we ended the quarter with net cash of $37 million and no borrowings under our revolver. Leverage at September improved to 4.4x, down from 5x a year ago and 4.6x at the end of the second quarter. With respect to acquisition-related liabilities, we have already funded $48 million through September and expect to fund approximately $6 million in Q4. Our remaining M&A obligations currently stand at $112 million as compared to $152 million at the end of 2019. With respect to CapEx, we continue to manage expenditures lower in 2020 verse prior year. Through the 9-month period, we had $11 million in CapEx down from $14 million a year ago. We have made significant progress with our New York City real estate transformation project in the quarter. Our full corporate team recently moved in and we expect to complete the project on time and on budget in Q4. Overall, for 2020, I expect our net CapEx will be in the range of $25 million for the full year. In closing, I want to thank all our employees and other stakeholders for their continued support. We remain on track with our plans to deliver long-term growth and profitability and are excited to take on the next phases of our plan. And now, I'd like to open the line for any questions you may have. Operator?

[Operator Instructions]. Mr. Penn, it appears at this time we have no signals for questions or comments.

Sure. I will give people another minute if anybody has a question.

And we do have a signal from Matt Swope with Baird.

Very nice quarter. Just a couple, if I could. Mark, could you guys talk about, you bought some bonds back in April, I know, and, obviously, they're at much higher price levels now, but whether you'd be interested in buying any more back. And any update you could give us on the timing from the special committee and how you think things might play out next there?

I think in terms of bonds, we, at the time, bought the allowable basket that we had. So now, and we looked at those and thought at the prices they were then trading, they were a considerable bargain. Wish I had been able to buy more. So right now they're in an entirely different price level and so presumably we have other uses for capital at this kind of price level that they're at now. In terms of the special committee, I have to let the special committee speak for itself. Obviously, like Stagwell, we announced an agreement in principle. And so the next steps obviously are to go into the next level of agreement. And beyond the fact that I think I remain hopeful that - optimistic that we'll be able to bring the companies together. And their specific requests should go to the special committee.

Could I just ask, is this taking longer than expected or sort of on the time line as expected?

In the modern world, complex combinations simply just have a lot of evaluative and legal steps. So I won't comment directly. But there is nothing unusual in the process that I've seen so far. It's just, in some sense, an education in just how one has to dot every I and T in a very significant transaction such as this.

And Mr. Penn, there are no further signals. Would you like to go on to closing remarks?

Sure. I just want to I guess thank everyone for continued faith and interest in MDC Partners. As you can see, how the reorganization of the firm positioned it to come through kind of the worst of the pandemic in strong financial shape. You'll remember that at the beginning, before the pandemic, we actually had reversed revenue declines, had actually industry-setting growth and that we hope to be able to resume growth once, again, as these client sectors that have pulled back come back here eventually over time as the pandemic recedes. It may take a little longer than everybody wanted, but it will happen and it will then bring back both us and the marketing sector into, I think, a strong and vibrant way coming out of that. Thank you all very much.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.