Ladies and gentlemen, good day and thank you all for joining this MDC Partners Second Quarter 2020 Results Conference Call. All lines are in a listen-only mode. But after today's prepared remarks, instructions on how to share a question will be given to our questions.

To get us started with opening remarks and introductions, I am pleased to turn the floor to Mr. David Kirby. Welcome, David..

Thank you, operator, and good morning, everyone. Welcome to the MDC Partners conference call for the second 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 relating 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 Chief Executive Officer, Mark Penn..

Thank you and good morning. The second quarter brought the full economic, social and political force of COVID-19 upon our clients, the economy and the marketing service industry. The results affirmed the basic strength and resilience of MDC Partners in the face of a more than 30% contraction in GDP.

While we had to take significant cost reduction measures, we continue to implement the key elements of the New World marketing plan that I announced a year ago to position us for a strong rebound as the economy recovers and to continue to operate in a positive net cash position, even as the virus extends economic shutdown.

The underlying economics of the business have been preserved and extended, adjusted EBITDA margins have expanded and we have ample liquidity. As we anticipated, revenue declined 15% in the first 6 months of the year.

Organic revenue was down 12.9%, fueled by a strong first quarter, which was followed by a softer Q2 performance as organic revenue declined 26%. Excluding direct pass-through costs our net revenue was down 10% in the first half and down 22% in the second quarter, significantly stronger than the recent GDP decline of 32%.

After 3 months of clients paring budgets, delaying projects and extending contracts, as expected, we are seeing clients again look to restore funding and new pitches are restarting. Our client relations remain strong, since the revenue loss was driven heavily by client postponement, not client losses.

In anticipation of the softer top line, we were extremely diligent in protecting the bottom line through our cost management efforts. In the first 6 months we reduced costs by 16%, or $82 million, as compared to the prior year. 75% of those cost actions, or over $60 million, were taken in the second quarter.

Notably, we were able to offset 86% of the year-over-year net revenue decline in the second quarter with cost reductions and 110% of the decline across the half year.

This translated into a covenant EBITDA improvement of 18% in the first half, despite the revenue decline, and LTM covenant EBITDA of $193 million, ahead of the $188 million we reported a year ago. Adjusted EBITDA totaled $76 million in the first half, 17% ahead of last year excluding the impact of our divested businesses, Sloane and Kingsdale.

And on a recorded basis our margins increased from 9.8% a year ago to 12.9% in the first half of 2020.

We continued to operate with significant financial flexibility during the quarter, paying down nearly $90 million in liabilities, including M&A payments, the interest on our bonds and the partial bond repurchase, and still maintained a positive net cash balance of $23 million at quarter end.

At the same time, we continued to record solid new business wins across the network in Q2. On an LTM basis, new business totaled $97 million, including $20 million generated in Q2. In the first half of 2020 we delivered $29 million of net new business, up 10% from a year ago, despite the pandemic.

Notable wins in the quarter include Budweiser for Allison + Partners, Consumers Energy, TCF Bank, Love's Furniture, Pilgrim's Pride at Doner, Merck at Concentric, Skye Vodka at MONO, Nestle Waters at Legend, [indiscernible] Care at Hunter, and assignments from Welch Foods, Baby [indiscernible] and Fannie Mae at YML, and MINI, L'Occitane, as well as Coca-Cola's new global foodie platform at Anomaly.

And, as we saw only yesterday, Anomaly has now been awarded Coca-Cola brand in North America. We've also expanded our relationships with clients including Salesforce, Google, Diageo, Molson Coors and Nike, among others.

Our digital experience and technology solutions continued to show strong growth in this environment, growing 29% in the quarter and 24% in the first half, as companies move business online and consumers require richer online experiences. Our PR and corporate communications team also continue to be in high demand, as has been the case in recent years.

Meanwhile, though our experiential events business remained soft in the second quarter, I'm proud of the pivots and innovation we've seen from this discipline and we're beginning to see noticeable positive progress.

Our colleagues at experiential agency teams have been hard at work for months creating remarkably engaging online platforms for brands that continue to need large corporate gatherings, personalized communications and consumer-facing experiences.

And just this weekend, experiential agency relevant unveiled a new socially distanced destination for New Yorkers at Pier 17 in South Street Seaport, proving that creativity in this sector is alive and well, even under seemingly impossible circumstances.

In general, we're observing a notable evolution in client requests since the start of the pandemic.

While each client and sector is unique, we are driving less crisis and reactive communications than in March, April and May, as more brands focus on brand building and proactive business building and optimistic campaigns going into the fall and the fourth quarter.

We're seeing this in work by Forsman & Bodenfors for Haagen Dazs globally and its new brand campaign for Gojek in Asia. This is also apparent in Anomaly's new global platform for Coke and food and the brand's optimistic take on shared experience, celebrating some of the silver linings of the time we've spent together over meals and around the table.

Filmed remotely during the quarantine, the film showcases 13 real families, couples, housemates and households from 8 different cities around the world. All in all, brands that might have paused their efforts this spring are coming back to the market with new messages and positive, ambitious programs.

On the new business front as well, the last 6 weeks have brought a significant increase in pitch activity. We see this both in resumed pitches and new ones in every area from digital experiences and transformation to mass personalization, creative pictures, PR and even some experiential.

Though it's still early days, one thing to note is that in many cases we're actually seeing shorter pitch times than usual, as marketers are eager to get going again with their efforts.

Our success in managing our business throughout the first half of the year and our ability to lead clients through this disruption are a testament to the work we put behind our New World plan, begun in earnest over a year ago.

Through enhanced agency cooperation, focus on digital-first thinking and smart actions aimed at protecting our balance sheet, we made marked improvements over key metrics.

On an LTM basis we have expanded covenant EBITDA to $193 million and net new business, which was in negative territory when I joined, has steadily increased during my tenure, now at $97 million over the last 12 months.

At the same time, we've consistently lowered our leverage ratio and delivered increasing cash flow from operations during the last year, with both metrics improved from a year ago. We also prioritized the need for smart actions around cost savings.

Following the $35 million in run rate reductions in 2019, we established a network structure that allowed us to rapidly reduce costs in 2020 in response to the challenging marketing conditions from the pandemic. Through the first half of 2020 we reduced our structure by $82 million, or 16% from a year ago.

Our alliance structure allows for a better, more collaborative and comprehensive response to client needs.

In all, I'm pleased with our execution and the performance in one year in an environment where the inevitable industry shifts and disruption of legacy structures have accelerated, with both a stronger backbone of operations and financial rigor setting us up for greater central innovation for the benefit of our clients.

As we move into year 2, we will continue building on the progress, focusing around 4 key priorities. First, digital. Leveraging our digital focus, we are creating data-powered media offerings that combine CRM, offline media and performance marketing into a world-class digitally focused platform.

We plan to roll out our first internally incubated technology product in the next few months related to core marketing fields, and it will be offered as a SaaS-type product. More on that in the coming weeks. Second, we'll continue to integrate and centralize our back-office services.

Our move to World Trade Center this year will tie the MDC network around one centralized MDC New York campus, utilizing the talents of all disciplines, improving nimbleness, and driving efficiency. The move is on schedule and we would expect to deliver additional cost savings of $10 million to $12 million a year.

Our third priority is focusing on the global network, with partnerships, with affiliations in order to make sure that the network as a whole can compete for larger and larger contracts. Fourth, we are increasingly going to market as a single entity, with more scaled and integrated assignments.

To move this forward we recently hired Julia Hammond as President of a new division at MDC focused exclusively on servicing larger integrated accounts. The new group will build on last year's formation of networks within MDC.

Based on current client trends, cost actions and our operational objectives, we continue to expect 2020 organic revenue decline of approximately 10% to 15% from the prior year, in line with my comments last quarter. Covenant EBITDA should be down in a similar range for the year.

We plan to continue to provide a high level of transparency on what we see for the remainder of the year across our business on each quarterly call. No matter what the actual changes in the economy turn out to be, we will be vigilant in modulating the company to respond to these changes quickly and efficiently.

Overall, our actions to establish our strategic networks, reduce costs and improve cash flows have positioned MDC well to navigate the downturn. We remain a trusted partner and advisor to our clients amid a challenging environment, while continuing to deliver excellent work across disciplines.

In short, I feel good about where the business stands today and we'll continue to slog through COVID-19 and its effects and be ready for a very strong rebound as the economy picks up. With that, let me turn things over to Frank..

Thanks, Mark. Good morning, everyone. Our business performed in line with expectations in the second quarter and first half of the year. The COVID-19 pandemic has presented many challenges to our business, clients and team members globally.

I believe we have executed well during the crisis, responding quickly in positioning the business to weather this storm and ultimately emerging from this period as a stronger and nimbler organization. Looking at our financial results, in the first half of 2020 we delivered revenue of $587 million, down 12.9% on an organic basis.

In the second quarter organic revenue declined 26.4% to $260 million. Excluding the disproportionate impact on direct billable costs during the pandemic, our net revenue declined 10.5% organically in the first half and 21.8% in the second quarter.

Looking at our agencies by discipline, our digital business continues to grow rapidly, despite current conditions, followed by our specialist communications business, which remains in strong demand.

Our experiential businesses, though small, have been particularly impacted right now and are working on alternate strategies with our clients to offset the decline. Much of our media and advertising business experienced COVID-driven softness in the second quarter, as many clients reduced or delayed a portion of their spending programs.

With respect to operating expenses, we acted swiftly at the beginning of the pandemic to further reduce costs beyond the reductions we made previously in 2019. In the first half, we reduced controllable costs by $82 million, or 16%, from the prior year. Over 75% of the savings were in staff costs and just under 10% were from reduced T&E expense.

For the second quarter, controllable costs were lower by $62 million, or 24%, compared to prior year, with over 80% of the savings in staff costs. In terms of restructuring actions, we have taken $8 million of charges in the first half, over $5 million of which were in the second quarter and related primarily to severance expense.

We have employed a host of actions to generate these savings, some permanent, some temporary. But we'll continue to manage our costs carefully and adjust them gradually in line with the speed of the revenue recovery. We expect the combination of prior and recent actions to drive higher sustainable margins going forward.

Adjusted EBITDA in the first half increased 11.5% to $76 million and the related margin increased approximately 310 basis points to 12.9% versus prior year. Excluding the impact of our Kingsdale and Sloane divestitures, adjusted EBITDA increased by 17%.

In the second quarter adjusted EBITDA was $36 million, down 22% from a year ago, though margins were higher by 110 basis points versus the prior period, at 13.9%. Covenant EBITDA in the first half increased to $83.5 million, up 18.1% from $71 million a year ago.

On a trailing-12-month basis, we delivered covenant EBITDA of $193 million, up from $188 million reported in the year-ago period.

Moving to the balance sheet, we made notable progress in a few key areas in the second quarter, as we extended our credit facility, repurchased approximately $30 million of our bond at a discount, funded over $30 million in M&A obligations and paid the semi-annual interest on our notes.

After funding just under $90 million of obligations in the quarter, we ended Q2 with net cash of $23 million as compared to a small net borrowing position a year ago. We reduced our pre-emptive revolver draw by half to $62.5 million and reported $85 million in cash on the balance sheet at quarter-end.

Our leverage at June 30 was 4.6x, down from 4.9x a year ago, though up slightly from 4.3x at the end of the first quarter. With respect to our acquisition-related liabilities, we currently expect to fund approximately $55 million in 2020, with about 70% of that already funded in the first half of the year.

Our remaining M&A obligations currently stand at $116 million as compared to $152 million at the end of 2019. We will continue to manage our CapEx lower in 2020, as we have in recent quarters. During the first half of 2020 we had just under $4 million in CapEx, less than half the amount from a year ago.

And while we will still 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 be in the range of $25 million for the full year.

In closing, I want to thank all our team members for their continued hard work and commitment over the past several months, delivering exceptional work and innovative ideas to our clients globally amidst an extremely challenging environment.

Our ability to succeed as a company is a direct result of their continued execution and dedication to our clients and we appreciate all they do and their ongoing commitment to our business. We are looking forward to the opportunities ahead and continued progress with our initiatives. And now, I'd like to open the lines for any questions you may have.

Operator?.

Mr. Lanuto, thank you and thank you to the rest of the leadership team for their remarks today. [Operator Instructions]. We'll hear first from Sean Mickle with Northwest [ph]..

My question revolves around your the proposal with Stagwell, about the potential takeover. Can you speak to that? What are some of the challenges you're facing in reaching a decision? A just shed some light on that, please.

Hello?.

Think we have a connection problem..

Are you -- can you hear us?.

Sorry. I can't, I got it. Sorry. I can't give you any information beyond what's publicly available, other than that there's a special committee that's been formed by the board. That special committee has retained Bob Mullis [ph] and DLA Piper. Stagwell has on its side JPMorgan and Freshfields.

And the process is continuing along and they will make announcements from the special committee as appropriate and as developments occur..

Do you have a sense of the timeframe associated with that decision?.

I can't really comment anything specifically. Irwin Simon is head of the special committee. I know that each side is working as quickly as possible. There's no hesitation or delay. I think that this is being organized and evaluated on all sides in a relatively speedy and diligent manner. Yes..

[Operator Instructions] Mr. Penn, Mr. Lanuto, we have no signals from the audience. I'll turn it back to you for any additional or closing remarks that you have. Or actually, gentlemen, I apologize. I spoke too soon. We do have a signal coming from Mr. Brian Hirschfeld at Bain Capital..

Can you please give us a little bit more clarity around the 2 different groups of integrated networks that you break out on Pages 11 and 12 of the presentation?.

Frank?.

Certainly, quickly in order to preserve the basic economics of the business, to put us in a position for renewed growth when the economy comes back and we get past the pandemic that troubles both us all emotionally, personally and this economy..

Thank you very much. Be safe. Be well..