Q2 2020 Omnicom Group Inc Earnings Call
And welcome to the Omnicom second quarter 2020 earnings release Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session to participate. Please press. One then zero in a few should require assistance during the call. Please press Star then zero as a reminder, this conference is being recorded at this time.
I'd like to introduce you to your host for todays conference Senior Vice President of Investor Relations Shub Mukherjee. Please go ahead.
Good morning, Thank you for taking the time to listen to our second quarter 2020 earnings call.
On the call with me today, John drain on Chairman and Chief Executive Officer, and Phil Angelastro show, our Chief Financial Officer.
We hope everyone has had a chance to review our earnings release.
We have posted two www dot Omnicom group Dot Com. This mornings press release, along with the presentation covering the information. We will review. This morning. This call is also being simulcast and will be archived on our website.
Before I start I've been asked you remind everyone to read the forward looking statements and other information that we have included at the end Devops investor presentation and to point out that sadness. The statements made today may constitute forward looking statements ended these statements are all present.
Dictation and that actual events or results may differ materially.
I would also like to remind you did during the course of the call. We will discuss some non-GAAP measures in talking about omnicom's performing.
You can find reconciliation of those measures to the nearest comparable GAAP measures in the presentation material.
We are now going to begin this morning's call with an overview of our business from John trend then Phil Angelastro will review our financial results for the quarter and then be will open the line three all questions.
Thank you shoot good morning.
I hope everyone on the call is staying safe and healthy.
I'm pleased to speak to you about our second quarter 2020 results.
The quarter posed extraordinary challenges and our management teams responded with a focus on our people our clients and our business.
The effective covered and related Lockdowns were unprecedented.
Additionally communities around the world felt the weight of the acts of racism in the United States and the protests that resulted from them.
During these difficult times, the health and safety of our people remains our top priority and we are committed to variety seamless support they need.
In the midst of these events and with the substantial majority of our staff continuing to work from home, we delivered outstanding work for our clients.
Had several key new business wins this speaks to the resiliency of our people and our clients more than ever or seeking how creativity partnership and support to develop responses for their recovery and growth plans as we operate in a new normal.
The financial impact of covered and stayed home orders was significant during the quarter with few exceptions. The effects were broad based across disciplines industries and geographies.
Negative organic growth reduced our revenue by 23%, which includes the decline in our third party service costs as you may or may not know our organic growth is based upon reported revenue and is therefore, not comparable to the organic growth or other financial calculations reported.
By our competitors, which are based upon net revenue.
The sub disciplines that will most negatively impacted by covered where events feel marketing and merchandising and media.
The majority of the revenue decline from these businesses is the result of the reduction in third party service costs incurred when performing services for our clients. When we act this principle.
Phil will discuss our second quarter revenue performance in more detail during his remarks.
In response to the decline in spend by our clients.
We took very difficult and permanent actions during the quarter to reduce our costs and preserve the strength of our business.
They included.
Aligning our staff levels agency by agency this client demand for our services, reducing our real estate in line with headcount and begin to prepare for changes in how we use space in the future.
In divesting several small noncore and underperforming businesses.
Regrettably, we had to reduce our employees by 6100 people.
We also shared over a million square feet of space.
These actions resulted in repositioning cost for the quarter of $278 million.
Which are expected to generate approximately $500 million in annualized savings.
In addition, we took numerous temporary actions to reduce our costs beginning late in the first quarter and in the second quarter.
To preserve jobs, where possible we participated in government wage subsidy programs across 35 markets.
We froze new hires and salary increases.
We significantly reduced or eliminated the use of freelancers.
We cut discretionary costs and capital expenditures wherever possible.
And took voluntary pay cuts across our corporate groups as well as our network and agencies.
Overall these costs will in part offset the decline in revenue. We expect will continue in second half a year.
Excluding the impact of the repositioning costs, our second quarter operating profit declined by approximately 40%.
To $340 million and our operating margin was 12.2%.
Net income for the quarter was 199 million and E. P. S was down 45.2% year over year to 92 cents per share.
Our free cash flow through the first half of the year was 724 million and we paid over 282 million in dividends to our shareholders.
As we stated last quarter, we've stopped our share repurchases.
Our liquidity and balance sheet remain extremely strong.
As of June Thirtyth, we had nearly 3.3 billion in cash.
I also have 2.9 billion in available revolving credit facilities and our nearest long term notes are not due until may 2022.
Importantly, the underlying fundamentals of our business is solid.
Covered as rapidly changing consumer behavior and many of our clients have been turned fast track their digital transformation initiatives.
We are very well prepared to advise in several clients in managing this change.
Over the past several years, we've made significant investments to enhance our capability in digital transformation services data driven solutions and customer centric offerings.
We have leveraged these investments did a little ever seamless solutions for our clients.
Across brand building CRM media E Commerce and performance marketing.
And it is resulted in several recent client wins.
Yes yesterday, we further expanded our capabilities in these areas through the acquisition of Dmw group in the UK.
MW will become part of CRE, Dara, which offers management consulting digital transformation and marketing technology implementation services.
We acquired could air in 2018, and since then it is rapidly expanded its client relationships and integrated with many omnicom teams.
The company will now further expand its capabilities into Europe.
We look forward to continuing to investing grow the company into a top tier consulting and marketing technology arm for Omnicam.
Most critical investment are in our people and I'm pleased to report the last week, we named two exceptional internal candidates to lead DDB worldwide.
Marty O'halloran was named global Chief Executor DDB worldwide. Most recently Marty served as chairman and CEO of DDB, Australia, and New Zealand.
Marty will be partnering with just didn't Thomas Copel.
Who was promoted to CEO DDB North America region.
Justin is widely regarded as a disruptive leader in data and analytics with a passion for creativity and is a pioneering connecting creative ideas with insights in customer experiences that effectively drive outcomes for clients.
Both Marty and Justin are well known within Omnicom has transformative leaders and I'm confident that DDB is well positioned for success with them at the helm.
Chuck Primer did an exceptional job as the interim CEO in the midst of this crisis. He will now returned to his role as chairman of DDB worldwide and will support Marty and Justin in their new roles.
These changes once again demonstrate we have a deep bench of capable leaders within omnicom.
Which is a direct result of our focus on developing exceptional and diverse talent.
As we move forward into the second half of the year, we will continue to navigate through the impact of covered across markets.
Throughout the quarter and into July as many markets around the world ended Lockdowns and we reopened in several of our offices in parts of Asia Pacific Europe in the Middle East.
And the U.S. following a carefully planned process and phase three entry approach.
While we are pleased with these reopenings, we recognize that some of our staff will continue to work for home for considerable longer period of time.
We are fortunate that we have the capabilities and technology that allow our people to service clients from home, while doing our part to stop the spread of coding.
Our people's ability to work effectively from anywhere demonstrated by our recent new business success and the industry accolades, we received over the past few months.
In July Peugeot chose Omnicom's open.
Which is an acronym for Omnicam for Peugeot engine has its new agency of record.
Following a successful virtual pitch creative decision marketing and strategy teams from across 17 different markets put together the winning proposal.
It was an outstanding team effort and demonstrated our ability in this new virtual world to bring together the best marketing intelligent communication strategy creativity and technology for our clients.
In June Air, France selected Omnicom's dedicated agency called Aura has its creative and media agency of record.
The win was also the result of a collaborative effort of agencies, including KBW way Omnicom Media group precision marketing and EG plus.
In addition, Playstation assigned EG plus its global production account and Clorox consolidated its U.S. media business with our MD. These are just a handful of the wins during the quarter.
We've also seen our agencies collaboration and ingenuity recognized industry Awards.
Campaign named Antimony DDB agency of the year after the 60 or in a row amending got leave our indeed, one media agency or the year.
During 2020, a D.C. awards TB W.A. was Dame network or the year for the second year in a row.
The video was named Cannes Lions first ever network over the decade for agency of the decade, Allomap BBD out to the title in Latin America, Adam and Eve, one it for Europe, and Collins I'll be video in the Pacific region.
Finally, Marina Mark Communications, whose name agency of the decade by provoke.
I want to congratulate and thank our teams for their new business wins and the industry recognition.
As I mentioned when I opened we are grappling with the recent acts of racism environments that have call to light the inequalities and injustices experienced by black and diverse communities around the world.
Since the formation of Omnicom diversity equity and inclusion have been a part of our core values, we do not tolerate racism or discrimination in any form against any person.
Our de he and I strategy aims to create supportive environment and is led by the Omnicom people engagement network or open.
Open provide structure council and visibility to our deep he and I initiatives and policies throughout our organization.
Over the last decade, our chief diversity officer, and they opened leadership teams have made tremendous progress and brought significant changes to omnicom and our agencies. During these difficult times. They have also led discussions on what more we can do to support our black colleagues and people of color.
These discussions played a key role in the development of opened 2.0, a strategic framework that will strengthen and expand our D E Eni initiatives and advance the open tenants have culture collaboration clients and community.
Opened 2.0, we'll be launching in third quarter and will establish specific action items across our group to drive increased representation and retention of all people of color.
The degree of success of opened 2.0 will be measured in the aggregate across all omnicom agencies and will be an important factor in the compensation of the executive offices around the calm and the Ceos of our network and practice areas.
Opened 2.0 will build upon the base, we've already created at Omnicom accelerate our progress and groundless and accountability.
We look forward to updating you on these efforts and sharing additional details moving forward.
Before turning the call over to fill for a more in depth look at the numbers. Let me provide some context of our expectations for the second half of the year.
Overall visibility has improved in the past couple of months, but remains low as we and our clients consider that continuing effects of covered across markets, including the possibility of second ways the effects and timing of government stimulus programs changes in consumer habits in spending and.
Overall rate of economic recovery.
With that in mine our agencies have develop their second half plans based upon these and other important factors such as the health and safety of our people the services they provide and the client industries they serve.
A key part of their plans is having contingency actions that are dependent on how the situation evolves in their local markets.
That said and based upon current market conditions, we think the worst is behind us with Q2 being the low point per year over year revenue declines in 2020.
Over the second half, we expect our performance to vary by geography, depending on how effective local governments have responded to covered and in turn in reopening their economies.
Additionally, we expect some industries that have been hit the hardest such as travel and entertainment as well as our event businesses will likely continue to be challenged well other industries, such as retail food beverage orders as well as our media buying business, we'll likely see improvements.
As a result of the repositioning actions we took in Q2.
And with continuing but lower benefit from our temporary cost actions, we expect our margins in Q3 in Q4.
To be approximately in line with those in the prior year.
In closing we remain confident that we were whether this period and emerge a stronger organization.
I want to thank our people for their tireless efforts dedication and commitment and our clients for their partnership and confidence during these truly unprecedented times I.
Let me now turn the call over to fill for a closer look at our results though.
Thanks, John and good morning.
As John said since the outside of the pandemic, our leadership teams across our networks practice areas and agencies haven't focused on aligning our cost structure and business model with the changes impacting us and our clients around the globe.
This required our agencies and their client service teams to focus their efforts on delivering meaningful insights and solutions to help our clients prepare for and respond to a rapidly changing consumer landscape.
Although we faced an unprecedented business environment this quarter.
And the near term outlook continues to include quite a bit of uncertainty.
We believe the actions our agencies have taken to date.
Well allow us to whether the current environment and emerge as a stronger organization.
Throughout the second quarter, we took numerous actions to align our operations in response to changes and client demand.
They included severance actions to reduce employee head count.
Which resulted in incremental charge of $150 million.
Real estate lease impairments.
Terminations and related fixed asset charges of 103 million.
That will allow us more flexibility to match, our head count and anticipated changes in the use of space.
As well as the disposition of several small non core underperforming agencies, which resulted in a loss of approximately $25 million.
In the quarter.
Is repositioning charges totaled $278 million.
Which reduced our net income by $233 million and diluted earnings per share.
The dollar three.
We presented our 2020 results to also separately show the impact of the repositioning charges and disposition actions.
The non-GAAP adjusted results on slide five through eight.
Show, how our underlying business performance year on year on a more comparable basis.
I will detail the impact of the projected future benefits of these actions in a few minutes.
During the second quarter. We also continued to take proactive steps to strengthen our liquidity and financial position.
These actions serve to provide additional liquidity insurance as we move forward.
On April 1st we issued 600 million, a 10 year, 4.2% senior notes.
Which will mature in June 2030.
Also in April we entered into a 400 million dollar 364 day revolving credit facility.
364 day facility is in addition to our existing $2.5 billion revolving credit facility.
That we renewed in the first quarter 2020 for an additional five years.
We have not drawn down on either facility in 2020.
We closed the quarter with $3.28 billion in cash and during Q2 and a difficult operating environment.
We generated over $330 million of positive working capital.
The actions we've taken throughout the year as well as the fact that we have no long term debt maturing until may of 2022.
We believe leaves us well positioned to manage our liquidity and ongoing capital requirements.
Turning to the actual results slide for the second quarter organic revenue performance was negative 855 million or 23% for the quarter.
The decrease was unprecedented and we experienced declines across all markets and disciplines, except for our specialty healthcare businesses.
The impact of foreign exchange rates reduced our revenue by 1.7% in the quarter.
A little less negative than we estimated on our February earnings call.
And since almost all of our Q2 2020 disposition activity took place towards the end of the quarter.
The net impact from dispositions and acquisitions was only slightly negative in the quarter.
As a result, our reported revenue in the second quarter decreased 24.7% to.
2.8 billion when compared to Q2 2019.
I will discuss the components of the changes in revenue.
In further detail and a few minutes.
Turning to slide six our reported operating profit for the quarter, including the impact of the $278 million of repositioning charges.
And a loss on dispositions was 62.5 million.
Excluding the impact of those charges.
Our non-GAAP adjusted operating profit or EBIT.
Was $340.4 million.
That resulted in an operating margin for the quarter of 12.2%.
Down from our Q2 2019 operating margin of 15.4%.
We estimate that the severance and real estate actions taken in the second quarter will generate approximately $230 million in savings over the second half of 2020.
We also expect to generate additional savings in excess of $75 million and the second half of 2020.
Compared to the second after 2019.
From reductions in discretionary costs.
On slide three of our Investor presentation, we presented the details of our operating expenses.
Our salary and service costs are variable and fluctuate with revenue.
Salaries and related service costs declined by $235 million in the quarter.
Third party service costs, which include expenses incurred with third party vendors when we act as a principal when performing services for our clients.
Primarily related to our events.
Field marketing and merchandising.
And media businesses.
They declined by almost $400 million in the quarter.
Occupancy and other costs, which are less linked to changes in revenue declined by approximately $25 million.
And ask GNS expenses also declined by approximately $25 million in the quarter.
As we move forward for the second half of 2020.
We will continue to actively manage our costs to ensure they align with our revenues.
Net interest expense for the quarter was $47.2 million.
Down $3 million versus Q2 of last year and up $1.4 million compared to Q1 of 2020.
When compared to Q2 of 29 team.
Our gross interest expense was down $12.9 million.
Resulting from several debt refinancing actions over the past 12 months.
These actions included.
The issuance in July of 2019 of 1 billion Euro aggregate.
Of euro bonds due in 2027 and 2031.
Which resulted in net proceeds of $1.1 billion at an average rate of 1.23%.
The retirement of our 500 million Dollarss.
6.25% 2019 senior notes also in Q3 of 2019.
Early redemption of our 1 billion dollar 4.4, or 5% 2020, senior notes, which was down in two steps.
Part in Q3 of 2019 and the remained during the first quarter 2020.
The issuance of $600 million of 10 year, 2.4, or 5% senior notes during the first quarter of 2020.
Used to redeem the balance of our 2020 notes, which were deal in Q3.
And.
The issuance of an additional $600 million of 10 year, 4.2% senior notes in early April.
As a result of these actions are long term debt is comprised of $4.6 billion in dollar denominated debt and 1 billion euro in euro denominated debt.
These actions have decreased the fact of interest rate on our senior debt by over 100 basis points for Q2, 2020, when compared to Q2 of 29 team.
They have also allowed us to reduce our commercial paper and other short term financing activities.
Further reducing our interest expense when compared to last year.
This reduction was offset by a decrease in interest income of $9.9 million versus Q2 2019.
Well, our average cash on hand balanced during the quarter was higher than it was last year.
Interest rates were lower resulting in a decrease in interest income.
When compared to the first quarter of 2020.
Interest expense decreased $4.8 million driven by the incremental charges day interest expense incurred in Q1 for the early redemption of the 2020 notes and interest income was down 6.2 million again, primarily due to decrease in rates.
For the remainder of the year, we expected our refinancing activity in 2019, and 2020 or more than offset the increase in interest expense from the issuance of the 4.2% notes in April of 2020.
We believe adding this additional liquidity, while maintaining our interest expense levels was a prudent step to take.
We expect net interest expense in Q3 2020.
To be approximately flat with Q3 of 29 team.
We expect net interest expense to increase in Q4, 2020 by approximately $10 million compared to Q4 2019.
Primarily due to an estimated reduction in interest income.
Our effective tax rate for the six months ended June Thirtyth 2020 increased to 30.6% from 25.7% for the comparable period in 2019.
The increase was primarily attributable to the nondeductibility in certain jurisdictions.
Both a portion of the repositioning costs.
And a loss on dispositions.
Excluding the impact of these items the effective rate for the six months ended June Thirtyth 2020.
It was approximately 26%.
Which was in line with our expectations.
Reference purposes. The prior periods income tax expense included a reduction of $10.8 million from the net favorable settlements of uncertain tax positions in certain jurisdictions.
At this time, excluding the impact of the nondeductible expenses.
And before considering the impact of the tax effect from our share based compensation, which is subject to changes in the value of omnicom stock price.
We are forecasting that our effective tax rate will be approximately 26.5% for the rest of the year.
We recognize the loss of $7.8 million from our equity and affiliates in the quarter.
The allocation of earnings to the minority shareholders and are less than fully owned subsidiaries.
Decreased $13.6 million to $9.8 million reflective of the decrease performance during the quarter.
So for the quarter, including the impact of the repositioning actions and the loss on dispositions described earlier.
Which totaled $223.1 million during the period.
We reported a net loss of $24.2 million.
Excluding these items are non-GAAP net income for the second quarter was $198.9 million.
Our diluted share count for the quarter decreased 2.5%.
Versus Q2 of last year.
To 215.4 million shares.
Resulting from share repurchases over the past 12 months prior to the suspension of share repurchases in mid March.
Our reported EPS for the quarter.
Reflecting the net impact of our repositioning actions and the loss on our disposition activity.
Was an 11 cents loss per share.
The impact of the repositioning items and the loss from dispositions reduced our diluted EPS by a dollar three per share.
As a result, our non-GAAP diluted EPS for the quarter.
Excluding the impact of those items.
I would have been 92 cents per share.
On slide two we provide the summary TNL.
S and other information for the year to date period.
We've also provided the non-GAAP adjusted presentation.
For the six month results on slide seven and eight.
Which excludes the second quarter items that we identified.
Since the changes in the year to date results.
Versus the prior period are almost entirely driven by the activities that we discussed from the second quarter.
I will review the year to date slides in detail.
Returning to the details of our revenue performance on slide nine.
Overall, while we have a diversified portfolio of clients disciplines and service offerings as well as geography is that we operate in.
Demand for our services declined as marketers reduced expenditures in the short term.
Due to the impact of the pandemic and related Lockdowns.
Our reported revenue for the second quarter was 2.8 billion down 854 million organically or 23% from Q2 2019.
Certain client sectors were affected more significantly than others as you can see on slide 14.
Our clients in industries, such as travel lodging and entertainment.
Energy.
Non essential retail and the auto industry sought to cut their costs quickly in Q2.
Including postponing and or reducing their marketing communication expenditures.
While clients and certain other industries, such as health care and pharmaceuticals.
Technology, and telecommunications have fared somewhat better to date.
The disciplines that will most negatively impacted where CRM consumer experience, primarily due to our events businesses.
Advertising, primarily due to some of our media businesses.
And CRM execution and support primarily due to our field marketing and merchandising business.
The majority of the revenue decline in these businesses.
As the result of reductions and third party service costs incurred when providing services for our clients when we act as a principle.
These third party service costs, which fluctuate directly with changes in revenue.
Declined by approximately 400 million in Q2 2020.
Versus Q2 of 29 team.
Turning to the FX impact.
On a year over year basis, the U.S dollars continuing strength again created a headwind in our reported revenue.
The impact of changes in exchange rates decreased reported revenue by 1.7%.
Or $62 million and revenue for the quarter.
And continuing with the recent pattern the strengthening was widespread.
Dollar strengthened against practically every major foreign currency.
In the quarter only the Japanese yen strengthened against the dollar.
The largest FX movements in the quarter were from the UK pound and the Brazilian Ray.
As for our projection of the FX impact for the remainder of the year.
Currencies stay where they currently are for the balance of 2020.
The negative impact of FX may moderate during the final two quarters of the year.
To be flat year on year in Q3.
And slightly negative by less than 50 basis points in Q4.
Resulting in a negative impact of around 1% for the full year.
The impact of our recent acquisitions net of dispositions decreased revenue by 110th of 1%.
Which was inline with the estimate we made entering the quarter.
Since our Q2 2020 disposition activity took place towards the end of the quarter.
There was little impact from that activity on our Q2 revenues.
Inclusive of the disposition activity through June Thirtyth.
And not including any acquisitions or dispositions, we may complete later this year.
We estimate the projected net impact of our acquisition and disposition activity will reduce reported revenue by approximately 50 basis points in the second half of 2020.
And finally, our organic revenue decreased approximately $850 million.
Or 23% in the second quarter when compared to the prior year.
As I previously mentioned, our revenue was down across all major geographic markets.
With the percentage decreases inorganic revenue in the U.S. and in Asia Pacific.
A little less negative than the rest of our regions.
Within our service disciplines, our health care agencies continued to see an increase in activity.
Primarily here in the U.S. and in Asia.
Resulting inorganic revenue growth within the discipline.
While our CRM disciplines, particularly our events and field marketing businesses and our advertising discipline, particularly in some of our media businesses.
So a significant declines primarily from reductions in third party service costs.
Turning to our mix of business by discipline for the second quarter. The split was 54% for advertising and 46% for marketing services.
As for the organic change by discipline, our advertising CRM consumer experience and CRM execution and support disciplines.
Were all down between 25.
The 30%.
PR was down about 14% and our health care businesses were up 3.2% organically.
Both of these disciplines were positively impacted by continued spend by our pharma clients.
And negatively impacted by the reduction in client events that they help execute.
PR also benefited from demand for crisis management, and communications and public Affairs services.
Now turning to the details of our regional mix of business.
You can see during the quarter split was 57% in the us.
3% for the rest of North America.
9% in the UK.
16% for the rest of Europe.
11% for Asia Pacific.
2% for Latin America, and the remainder for our smallest region the middle Eastern Africa.
That makes is in line with what we saw by region in Q1 of 2020.
In reviewing the details of our performance by region.
Organic revenue in the second quarter in the U.S. was down $414 million.
Or 20.7%.
With the largest decreases coming from our advertising media and events businesses.
As previously mentioned.
Domestic healthcare businesses are positive organically for the quarter.
While our precision marketing agencies, though negative organically performed reasonably well considering the circumstances.
Outside the U.S., our other north American agencies were down just under 30% or $35 million.
Our UK agencies were down $85 million or 23.7%.
The disciplines that had led the growth over the past several quarters in the market, including advertising in health care performed relatively well.
With events media and feel marketing lagging.
The rest of Europe was down nearly $200 million or 30% organically in the quarter.
And the Eurozone most of our major markets, including Germany, the Netherlands, and Spain were down in excess of 20%.
And France was down over 40% as our events feel marketing and other CRM execution businesses was significantly impacted by the pandemic.
Our performance outside the Euro zone was somewhat better with organic revenue down about 23%.
Organic revenue in Asia Pacific for the quarter was down about 18%.
Our greater China agencies were down just over 20% in the quarter.
While our agencies in Australia, Japan, and India that a bit better.
Latin America was down 24% or $25 million organically in the quarter.
With weakness once again in Brazil.
And lastly, the middle Eastern Africa was negative again for the quarter, primarily resulting from the continued cancellation of events as well as other reductions in client spend.
Turning to our cash flow performance on slide 16.
You can see that in the first six months of 2020, we generated almost $725 million of free cash flow excluding changes in working capital.
Down versus last year, but a solid performance under the circumstances.
As for our primary uses of cash on slide 17.
Dividends paid to our common shareholders were $283 million up slightly versus last year due to the impact of the five cent per share increase in our quarterly dividend payment effective in April of last year.
Partially offset by a reduction in our outstanding common shares did repurchase activity over the past year.
Dividends paid to our non controlling interest shareholders totaled $35 million.
Capital expenditures were $34 million.
Down versus the first six months of 2019, as we mentioned on the Q1 call. We're limiting our capital projects in the near term to only those deemed essential to our ongoing operations.
Acquisitions, including earn out payments totaled just under $26 million.
On stock repurchases net of the proceeds received from stock issuances under our employee share plans totaled just over $200 million.
And again reflect the suspension of our share repurchase program in mid March.
As a result of our heightened efforts to prudently manage the use of our cash we were able to generate $143 million and free cash flow. During the first six months of 20 Twond.
Turning to our capital structure as of June Thirtyth, our total debt was 5.72 billion.
Up 187 million since this time last year.
And reflecting the debt restructuring activities, we've completed over the past year.
Over the past year, we retired $1.5 billion of dollar denominated senior notes.
Replacing those borrowings was $1.2 billion 10 year senior notes due in 2030.
And 1 billion euro of Euro denominated notes.
Doing 2027 in 2031.
Additionally.
As you May remember the Q2 2019 debt balance included 520 million euros of short term noninterest bearing senior notes from a private placement to an investor outside the U.S.
We repaid those notes in the third quarter last year.
First the December 31 2019.
Gross debt at the end of the quarter was up $576 million, primarily due to the issuance of the 600 million and senior notes in April of this year.
Our net debt position at the end of the quarter was $2.44 billion.
Up about $1.6 billion compared to yearend December 31 2019.
The increase in net debt was the result of the use of working capital of about 1.6 billion.
Which is typical of our working capital requirements. During the first half of the year plus the negative impact of exchange rates on our cash and debt balances of $130 million, partially offsetting those increases was the free cash flow we generated in the first half of the year of 143.
Million dollars.
Over the past 12 months, our net debt is down $190 million.
Primarily driven by our excess free cash flow of approximately 500 million.
Offsetting this was the reduction in operating capital.
In the past 12 months of approximately $150 million.
And the negative impact of FX on our cash balances.
Which totaled around $90 million.
As for our debt ratios, our total debt to EBITDA ratio was 3.1 times and our net debt to EBITDA ratio was 1.3 times.
As you will recall this past February we amended and extended our five year credit facility.
In line with market standards. The credit facility was modified to increase the leverage ratio to 3.5 times.
And provide for add backs for noncash charges.
For covenant purposes at the end of Q2, our leverage ratio was approximately 2.9 times.
As a reminder, our leverage calculation also reflects the incremental 600 million of senior notes. We issued in early April this year for the purpose of providing additional standby liquidity during the pandemic.
And finally moving to our historical returns.
The last 12 months, our return on invested capital ratio is 17.8%, while our return on equity was 38.9%.
Both reflecting the decline in operating results.
Driven by the economic effects of the pandemic.
As well as the repositioning charges, we took this quarter.
And that concludes our prepared remarks please.
Please note that we've included several other supplemental slides in the presentation materials for your review.
But at this point.
We're going to ask the operator to open the call for questions.
Thank you.
Thank you, ladies and gentleman and if you'd like to ask a question. Please press. One then zero once again for questions. Please press one then zero.
Your first question comes from the line of Michael Nathanson from Moffettnathanson. Please go ahead.
Thanks, So much well can you hear me I appreciate your disclosure on up on the Adage third party service costs.
And I guess I've a couple of questions for you there one is.
Are those essentially is pass through cost, where there's no profits generated by it and when you show that as a revenue item and the netted against the gross to net revenue and then can you help me I understand the third party service to Austin CRM experiences that makes sense, but what type of third party service costs would there be we advertised.
Hi, Thanks.
Sure.
So in the context, the covert given given the size of our overall.
Cost decline and paying now.
We thought it was meaningful meaningful to provide some additional.
Details.
Other components of that cost.
So so we added third party service costs line.
Because they are directly linked to reductions in our revenue.
And for changes in client spend.
That that drove the additional.
Information.
But from from our perspective.
We don't we don't pick and choose what cost to include or exclude from.
Hybrid or or net revenue number.
Or an EBIT number for that matter so.
While some of those costs might be directly.
Pass through without.
Any potential margin on them.
Yes, there are components of those costs.
That ultimately are part of our overall business. So so any events business as an example.
If we negotiate a bundle deal or bundled package for delivering an event.
And we act as a principal on that event all those costs going arpino.
And.
By definition, there some margin.
On the overall project. So it's built into the estimates of what those costs are going to be when we negotiate what the fee is going to be.
We also think.
Horton that our managers are accountable for managing a full pinedale.
And the cost base, rather than only the net numbers.
And if you managed to a net number.
Ultimately it can lead to some some bad habits or or bad decisions.
For example.
You know if certain costs are going to be excluded are netted out.
And the managers of the business our aren't accountable for them.
Yes, there's a risk that those costs ultimately our managed.
And what you get over the long term is more of those costs.
Because their net it away and people aren't accountable portal so.
We don't believe the right approaches to kind of net those numbers.
Take a portion of the Pinedale set it aside and say yeah, you can ignore these costs.
So that's why that's why we've approached it that way.
And.
We've laid out the fact that has impacted.
Three of our disciplined CRM executions sport sure on consumer experience and and.
Some of the media business any advertising discipline also has.
Some of those proprietary third party service costs.
And then Phil just in media with that could be more.
On the trading line and media, we're basically youre, you're taking a position.
And in principle media then.
I'm trying to figure out I understand the event side of it both traffic and let me just side Whats third party is there anything to help us with there.
Yes, Sophie if you take which we've talked about a number at times the the.
Programmatic business there, there's there's two alternatives in terms of how we approach programmatic business those programmatic in the traditional sense handled.
As a traditional agency or for the bulk of our medium business and then as a bundle solution. If a client is focused on achieving.
A particular ROI or a particular a metric.
And this is true a lot of performance marketers.
They know what theyre comfortable paying our.
Or whatever that metric might be.
And they want to fix that cost so if they fix that cost they choose.
The bundled product they opt into our bundled approach, we deliver that bundles and media up for fixed price and the risk of delivering.
At that price better or worse, we there so.
Those costs end up in arpino.
On a gross basis as opposed to and that basis, when we act as an agent.
Okay. Thanks, Phil I appreciate it sure.
Your next question comes from the line of Alexia Quadrani from JP Morgan. Please go ahead.
Thank you Bye mountains.
A couple of question for you.
Roughly what sounds like a business that.
Marketing.
The segment.
During the quarter I'm going to hit very hard I should say I'll, just going to get a rough idea of.
While comparable performance this year appear on our team. Thanks.
They can recall on both with concurrently.
In summary, either by the end Lydia.
Could you could you say that last part again.
Well clearly if you're on clip needing any of that any of the event business are likely that growth.
Going back at least some higher earning completely nickel and by the end there.
I think when it comes to events that I don't I don't think we.
We anticipate any any meaningful turnaround in the second half with that business in particular I think.
There is still an awful lot of uncertainty.
Even with respect to live sports.
As to.
What is going to come back and and how long, it's going to stay back and what is going to look like.
So you know events is tied into live sports a lot of times.
How the.
Yeah, the pandemics kind of play down or play out and when.
You know governments are going to open up to the point that large gatherings, we'll be back again.
We just don't we just don't know and we're not anticipating in the second half.
That does is going to be a meaningful rebound.
I guess I'd describe it that way.
With respect to.
The feel marketing business and and.
The events business feel marketing and merchandising is probably.
Yes, half or or a little more probably more than half of the CRM execution and support.
Disciplined.
And the events business you know it it really depends on.
You know, which year in particular, you're looking at in the current environment events is probably.
In the neighborhood of Yeah, I'd say broadly 20% to 30% of.
Of the CRM consumer experience just.
Early carrier, but at a legacy.
Is.
Indication of the Olympics, which was postponed.
Clients a major responses.
Wait stop work when the <unk> got moved will start commencing planning and doing some other work.
Have you ended the third quarter, the beginning in the fourth quarter.
And in very only a couple of instances.
We have clients that have.
People who've been trained on those clients or is it on an extensive period of time and that count is very hard to find in the clients continue to pay us.
To make sure that those people staying on employee and working on projects for them.
But to fills point that that's most negatively affected.
Other examples or we have people that are dedicated so big number to the theater business, that's not coming back this year.
Hi, Thank you.
Thank you guys also figure out how that revenue in your opening comments, but I was hoping you could give us a little.
More information in terms, how how much organic revenue growth you know improved it if at all and Jerry on the quarter I know Youve got less I'd like to dissect it Mike that just here just.
Going back a little bit at that.
Transacting on better performance quarter paragraph that would be helpful and when you Benson hopefully getting flattish marks on the back half a year I guess, what what sort of organic growth assumption are you sort of looking to achieve.
The most drastic change we saw actually occurred in the.
And.
March January February fine marches, where we saw.
First real decline.
It hasn't been.
A discernible.
Marked difference in what happened in April May and June there was some differences, but not enough to.
For me to declare trend at the moment.
What we've been doing and.
We probably greater accuracy, then when people were in the office.
Is working with our folks who are in really doing an excellent job in terms of forecasting.
In terms of.
Month by month.
What they see based upon what we know.
The I'm not prepared to say much more than what I said in the right in my prepared remarks.
Yes.
No you tell me as America's Gonna stay open is going to open further as you're going to close for you know, it's we're working on working pretty hard we're doing whatever weekend from wherever we can save a lot's going to have to do with our clients. So I can't.
I will give you more color as to your goes on as we know it but.
But I'm not going to sit and try to be more specific than it was well you can.
Just in terms of the second half and and.
Outlook and in terms on margins I mean, I'm you know, we're going to continue to focus on operating profit dollars not necessarily margins, but.
We have done an awful lot of work in our agencies have done a lot of we're trying to get the cost base in line with current you know revenue.
I'm not.
Based on.
A bunch of assumptions around when the when certain markets is going to open up and assuming that they're going to get back to revenue growth mode. We've tried to be very realistic and somewhat conservative in the forecast for the second half a year. So to the extent we had to take cost out.
Actions, we took them.
Now that doesn't mean that there's certainty that when I can have to take more actions in the second half.
Because we'll continue to aggressively monitor that.
But we certainly.
Juan.
And expect our people will be realistic about their forecasts and you know I think we we have some confidence although there's there's quite a bit of this that's out of our hands in terms of what's going to happen with client spend any overall economic environment, but we are confident that are people.
I've done a good job.
Managing the cost base.
Okay I guess.
We understand the ability to forecast given how much changes daily, but maybe you put a different way in the markets like you had seen reopening maybe outside the United States have you seen a pickup in business there.
Yes.
Yes is the answer but.
We know China open first.
She did open and close partially in open and close partially.
For a straley assume for Australia, so so not to the point that on this call I can predict with any confidence.
Well, it's going to happen told me all they're going to happen to have more comfort.
Okay all right.
Sure maybe a last question.
Next question comes from the line of Ben Swinburn from Morgan Stanley. Please go ahead.
Thanks.
Good morning, everybody.
Just on the on the cost action, which was obviously substantial and taking quickly I think back in April John you were talking about you know trying to balance reducing cost reducing head to the also keeping.
You know the right people and resources in place for the business to recover. So can you help us think about maybe both the 6000 heads and also the real estate.
Savings that you guys outlined today or at least real estate charges, you took and how we should think about those as the business comes back whenever it comes back.
So obviously you took those actions as you know in reaction to the co vid crisis, but maybe some of those are permanent structural reductions. So if we if we think 21 is a rebound you have some magnitude.
How should we think about expenses coming back in the business as far as the as you rebound off of 2020, well just quick answer is I think we said.
The annualized impact of the actions that we took is about 500 million Bucks that 500 million won't come back into our system unless the revenues coming back.
So were pretty deliberate about that and met the the only thing that altered the way we took actions around the world.
The government programs that were in place.
Europe had more furlough possibilities, we have employees tended to the company in U.S.
Simply because the only way people to get the benefits. The government is offering was to actually make them redundant. That's what did that so that's what motivated.
A lot of the actions.
In many instances.
Across.
Almost all our company's people to voluntarily because.
In order to present jobs, so there's a lot of moving parts and.
As Phil mentioned, I think I might have.
For the second half are each one of our individual offices is created contingency plans that flex up and flex down dependent on what they see with declines.
But but there will be some you know as the revenue grows.
Some of the costs that are indirect or sorry, some of the costs that are direct they're going to come back and we'll be happy.
But having back right.
And then just quickly follow up on their point of I think John you said the organic declines you think has peaked or any organic pressure as you see the second half topline improving from Q2 I am just want to make sure that's accurate and and I think you said there was no real discernible trend for the month for the second quarter. So as the improvement based on sort of what.
Your your agency Ceos are telling you to your point about forecasting is that sort of how we should interpret those comments, yes and based upon the most recent forecast that are or.
Individual companies have done.
Okay bottoms up so it's all bottoms.
Got it thank you very much.
I think given up but the market is just about opening here I think we have time for us for one more call operator.
Once again, if you'd like to ask your question. Please press one then zero.
Your next question.
Comes from the line of Julian Rose from Barclays. Please go ahead.
Yes, hi, there. Thank you bye.
Much for taking my question.
The first one is just a follow up.
On the 500 million.
Of cost saving it if in say 2022 revenues is back to 2900 level.
While much of the 500 million, we'll go back in.
That's my first question and then the second question is are the set thought this service go.
As a guide was very helpful.
And if you use that.
He.
Turning to calculate that net sales went down 70 to 72 through but some color on on net sales in Q2.
Because we live in extra day times, then that is usually not that much difference between revenue and a net sale.
And then lastly.
Working capital.
Well, it's by 280 million in their first that any color on the full year.
Thank you.
Phil covers some of these we don't believing that sales so as a concept. So we're not going to comment on that.
Not being difficult it's just true.
Yeah, so on and on the working capital front Julian I think.
The the expectation is that our our performance.
From the second quarter will continue.
And you know as a day to day grind.
Three yards in the cloud.
We're happy with the performance in the second quarter for sure it's been a challenge in this environment.
What we're going to do our vast to continue or those trends as far as the first part of your question with respect to you know if revenue got back to normalized situation in say up in the future 2022 or whatever appeared in the future.
I think I think the probably the majority of those cost savings, our salaries and related driven and majority of those costs are going to come back.
No question, the real estate piece, we expect to sustain.
But the real estate piece of the annualized savings is is I'm much more smaller portion of that a hole.
Okay very Kevin maybe.
Just a real estate fitted what 50 million saving 800 million savings on on real estate front, I'm little little less than yes, probably less than 50.
On an annualized turning Claire.
Sure. Thank you guys. Thank you all think from time to join us.
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