Aaron Watts – Deutsche Bank
Okay, alright. We are coming close to the end here, but before we finish up, we do have to cover MDC Partners and they have been a good test in coming out to the conference every year and we appreciate that, but going to run through the story. We have some time for Q&A at the end, but we have the team here, Michael Sabatino, Chief Accounting Officer on the far left, David Doft, to my direct left, Chief Financial Officer. So I am going to turn over to David and let him get us going.
David Doft – Chief Financial Officer
Great, thanks Aaron. Thank you all for being here. We really appreciate your time. Before we kick off the presentation, we brought a short video just to show you some of our recent work on behalf of our clients. So could you roll that please? Thank you.
(Video Presentation)
Okay. So just a little bit flavor of what we do, and we are a billion dollar platform built around training cutting-edge marketing strategies for our clients really try to solve their business problems and drive sales and profitability for them. We do that with some of the most powerful agency brands in the industry surely some of the fastest growing emerging companies in the space that are driving these transformational type marketing programs that are helping our clients increase the return on their marketing investment. So in a lot of ways, we are very similar to those of you in the room, where we are helping to allocate capital for our clients to drive returns except we are leveraging strategy and analytics and insights and creative execution and consulting in order to do that.
And while the real I showed before is all video product, television product, it’s not easier to show that in a room like this. We execute across every media, across all digital platforms in the integrated fashion in order to deliver on those results. And what we have been able to do is drive tremendous results on behalf of our clients on a more consistent basis we believe than our competition, which has led more and more clients to hire us. And so we have had the highest organic growth in the industry for several years. And in fact over the last five years, our organic growth is five times our competitive set.
With that, we have been able to produce strong financial results for MDC Partners and for our shareholders and our debt holders. We have compounded EBITDA at 15% growth since 2006. If you include our forecast for 2013, our guidance at the middle of the range it’s 17.5% growth and this year working at 28% to 32% EBITDA growth. Over the last five years, we have generated $ 241 million of free cash flow and the beauty of our model is that it’s not a very capital intensive business and so we tend to generate significant amount of free cash flow and it accelerates as we scale the company. And we will talk about that a little bit later in our financials.
Our positioning has led our new business wins to accelerate. Our new business pipeline has been quite robust now for several years, but in 2012, we had the single best new business win year in our history at $ 137 million of annualized revenue. And our first half of this year, we are following that up with exceedingly strong $ 73 million of new business wins including our single biggest quarter in our history in the first quarter of 2013. And so we continue to be excited about that. And it gives us very strong visibility into our financial performance going forward.
Our balance sheet has been a big focus of ours. Thankfully we are able to refinance our balance sheet in March of this year and significantly reduce our interest cost. We are focused on bringing down our leverage, which had risen during the period of investment in acquisition over 2010 and ‘11 and we are focused on bringing our net debt to EBITDA ratio down to below 2.5 times over the next couple of years. We are at 3.1 times at the end of June down from 4 times last year. And we believe we have a large capacity. We continue our growth and continue profitable growth in the coming years and we are very excited about that. And hopefully, we will take you through that now.
So our thesis is really simple, deliver transformational results for our clients, which will lead to strong financial results for MDC. We have strong relationships with more clients to want to hire us and hire us for more services, increase our revenue for existing clients as well as new ones, enable us to cross-sell our capabilities at an accelerated rate, and that will drive best-in-class revenue and earnings and cash flow growth for MDC. It’s not exactly rocket science, but in getting to that point, takes a lot of work and lot of focus in terms of bringing together the right capabilities and right approach and right talent importantly to deliver those results for our clients. But we very much have a fundamental belief that financial results for MDC, is a byproduct of excellence that we produce for our clients.
And our strategy is quite simple, but it’s very differentiated. And to put simply, we put together a group of firms that have been born although the internet exists, it’s called born modern, which is a phrase out of one of our firms in our portfolio. And that’s really important to understand, because in contrast, the people that we are going up against, the companies we compete against are companies that were born decades ago in a world before the digital age, in a world where there were only three choices, TV, radio and print. And those companies got very big during that time period. And unfortunately for them we will call left around those media, which is very difficult for them to evolve to the digital age.
And so we have been able to take advantage of a world where consumers have dozens of choices, infinite amount of choices in the way to interact with media and brands and we have been able to bring that to bear and our solutions to our clients in order to help them more efficiently and effectively drive results on a consistent basis. And it starts at having a strong digital capability at our core. And unlike a lot of our competition who had to add digital as just another silo next to their other media as they discovered the digital age, that is at the center of our businesses from their beginnings and it makes them much more nimble and much more willing to innovate and test new technologies and means of reaching consumers to drive that results. And so MDC over the last few years has delivered some of the most breakthrough and innovative campaigns in our industry with stunning results for our clients. And we have been able to set a lot of these trends and continued to this day to be early adopter of many of the new ways of interacting with consumers.
Over the last three years, we have focused intensely on building out our footprint globally. Historically, we have been a very North American centric business. Today, about 5.5% of our revenue is overseas, about 82% in the U.S., and the rest up in Canada. But that overseas business is growing very, very quickly and has enabled us to compete for bigger and more global capabilities and brands in order to provide our services. We have very much a global client base, but we have historically served them just here in North America and increasingly many of those brands are asking for our help in markets that they have trouble. And so we have opened up 10 offices across Europe and Asia over the last three years and are beginning to see tremendous progress in our ability to win new business in those markets.
And we continue to strengthen our capabilities across different verticals and disciplines. And one of the I think key to the MDC story over the last few years is around the core integrated creative agency, the bread and butter of our business that creates ads like the ones I showed before, we have built strong public relations platform, experiential marketing platform, broader digital and social media analytics and insight businesses that allow us to surround our clients with multiple services and continue to drive cross-selling and organic growth over the long-term.
This slide shows the different agency brands that we go to market with under our portfolio. Clients don’t hire MDC Partners. They hire the agencies that are in our portfolio. And as you can see down the left, we provide services from core advertising through every discipline in advertising and marketing services. And it’s been a strong approach for us as I said to continue to drive market share gains and continue to entrench ourselves within our client base. And importantly, that digital capabilities at the core of each of those agency offerings and the services they provide in a world where everything is becoming digital that puts us in a very strong competitive state.
This is an example of some of our key clients in the portfolio. We have a world class client base, over 1,200 clients across our portfolio. And it’s fairly diversified client base. Our largest client is 5% of revenue. It drops off fairly materially from there. Our top 10 clients has got 27% of revenue and really there is no one client that could hurt us in any material way from a risk management standpoint of our business. We have exposure across every vertical market that’s out there and had tended to attract brands that have accelerated innovation cycles constantly putting out new products, constantly looking to ring the cash register. So we are very strong in the retail space, very strong in the technology space and have growing strength in the consumer product space, which has been one of the fastest growing areas for us over the last couple of years. And the auto space has been also an emerging space for us as well. That being said, despite our growth in our out performance over the last few years, we still have only 3% market share in the U.S. and given our early presence and emerging presence overseas, our market share overseas is essentially (rounding however) at this point. So, we have substantial room to run to continue to grow this business at an accelerated rate, which is very exciting for us.
For 2013 as an example, per our guidance, we are looking for strong 8% to 10% revenue growth. It’s almost entirely organic growth and 28% to 32% EBITDA growth. We have a lot of room to drive margin expansion. The investments that I referred to before including the international expansion depressed our margins over the last couple of years. We are now leveraging those investments. It’s driving accelerated growth and we are able to drive significant incremental flow-through of EBITDA from incremental revenue given the ability to leverage those investments. And so we are looking to expand margins north of 200 basis points this year, which is just the beginning of our plan to drive margins up to the 15% to 17% range in the next three years. And with the levers that we have and with the refinancing and reduced interest burden on our income statement, we are able to drive 61% to 71% free cash flow growth this year into $ 80 million to $ 85 million range.
I have talked a couple of times already about our ability to outperform our competitors, but I think it’s important to understand and see in a picture how that’s played out over the last two years. And what I really like about this slide is the fact that it shows that MDC is able to outperform on a consistent basis. We are able to outperform our competitors in good times and bad and you could see the financial crisis here and its impact on our industry in 2009. And we are able to outperform whether we have easy comparisons or tough comparisons and we just outperformed. And that’s a testament to the strong work that we are delivering for our clients at our agencies and our ability to win new business. And even during the financial crisis and an important aspect of our business, we are able to protect the bottom line. 75% of our cost is variable, is labor-based business. And as we saw contraction in some of our revenues during what was the worst year in the history of our industry, we are able to grow EBITDA. I want to say that again. As revenues went down in the worst year in the history of our industry, we are able to grow EBITDA, because we are able to protect our margins by reducing our cost base. And that’s important aspect to our credit story as we are able to delivering good times and bad.
And so just an illustration of that is our longer term revenue and EBITDA performance, and so as I said earlier, we have compounded at over 15% revenue growth since 2006 up until through our guidance for 2013. We have been able to compound EBITDA at 17.5%. And that acceleration of margins that’s taking place now as we leverage the investment should actually leave an acceleration of that EBITDA growth over the next couple of years, which is very exciting for us. And you could see in the 2009 period, how we are able to grow EBITDA even as the world was having its issues in the financial crisis.
Just to put the details around our 2013 guidance that we have given. We increased it following our second quarter results, but looking for that 8% to 10% revenue growth, 28% to 32% EBITDA growth, and 61% to 71% free cash flow growth on the back of 200 and 220 basis points of margin expansion. So when it comes down to it, I think we have a very simple investment story as well. At the end of the day we believe we should continue to be able to outperform our industry. Our industry has been essentially a 2%, 3%, 4% grower year-in, year-out. We think we should be able to double industry growth. We have done more than that over the last several years. As i said, we have compounded close to 10% organic growth over the last few years, but 5% to 7% we think is quite an achievable number. With the margin expansion opportunity that I alluded to, we think we should be able to drive double-digit EBITDA growth on an organic basis over the next few years. And with material tack shelter we have due to the structure of the acquisitions we made historically about $ 0.80 of every incremental dollar of EBITDA should flow down to free cash flow and that should leave the 20% plus free cash flow growth on an organic basis.
And so if we just do that, if we just do that, we will be able to materially de-lever our balance sheet, continue to actually have free cash flow available to make continued tuck under acquisitions without getting in the way of the balance sheet leverage over time and drive both improvements in our credit as well as improvements in our share price. With select tuck under acquisitions, which we do from time-to-time, we should be able to actually build on this and drive revenue growth that’s more 10% EBITDA growth, that’s more mid-to-high teens and free cash flow growth that’s more 30% a year under a modest M&A scenario. And again, all the while continuing to bring the leverage down below 2.5 times and live in that kind of 2 times, 2.5 times net debt to EBITDA range, which we think makes sense for a business cycle arts that allows us to minimize our cost of capital, have access to the capital markets, as well as drive equity returns.