MDC Partners' (MDCA) CEO Miles Nadal on Q2 2014 Results - Earnings Call Transcript

Jul.24.14 | About: MDC Partners (MDCA)

Start Time: 16:30

End Time: 17:12

MDC Partners Inc. (NASDAQ:MDCA)

Q2 2014 Earnings Conference Call

July 24, 2014, 16:30 PM ET

Executives

Matt Chesler - VP, IR

Miles Nadal - Chairman and CEO

David Doft - CFO

Analysts

John Janedis - Jefferies

Tracy Young - Evercore Partners

David Bank - RBC Capital Markets

Ignatius Njoku - Wells Fargo Securities

Eugene Fox III - Cardinal Capital Management

Operator

Good day and welcome to the MDC Partners Second Quarter Results Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference call over to Mr. Matt Chesler, Vice President, Investor Relations. Sir, the floor is yours.

Matt Chesler

Good afternoon and thank you for joining the MDC Partners 2014 second quarter conference call. Joining me today on the call are Miles Nadal, Chairman and Chief Executive Officer; David Doft, Chief Financial Officer; and Mike Sabatino, Chief Accounting Officer.

During the call, we will refer to forward-looking statements and non-GAAP financial data. Forward-looking statements about the company are subject to uncertainties referenced in the cautionary statement, included in our earnings release and slide presentation and further detailed on the company's Form 10-K for its fiscal year ended December 31, 2013 and subsequent SEC filings.

We posted an investor presentation to our website and will refer to this presentation during our prepared remarks. We also refer you to this afternoon's press release and slide presentation for definitions, explanations and reconciliations of non-GAAP financial data.

I’d now like to turn the call over to Miles Nadal.

Miles Nadal

Thank you very much, Matt, and good afternoon, ladies and gentlemen. As you know, I usually start by sharing some of the strategic, operational and financial highlights of the quarter, but then I’ll touch on our plans to make the most of the rest of the year as we prepare to capitalize on the exciting new opportunities ahead. I will then turn the call over to our Chief Financial Officer, David Doft, to address some of the nuances about the quarter, the balance sheet and our increased guidance. So let’s begin.

We’ve been discussing our unique and proven business model and our competitive positioning and our ability to outperform our peers for many years. The simple truth is we believe that we are without rival. That’s an audacious thing for us to say but for years now, our financial results have proven our premise to be true as Bill Parcells says, “You are what your record says you are.” This second quarter is no different. The second quarter results are on track to set yet another record year of revenues and adjusted EBITDA for MDC Partners and well ahead of our initial expectations.

To share a few details from our quarter. First, our revenue increased 11% year-over-year to nearly 318 million with organic revenue growth of 7%. Secondly, our adjusted EBITDA increased 10% to $48.8 million with margins of 15.4%. Third, our adjusted EBITDA available for general capital purposes which was previously known as free cash flow increased 15% to $31 million from $27 million in Q2 of last year.

What’s more? Year-to-date trends are just as strong and impressive with revenues up 10.3%, organic revenues increasing 7.3% and our adjusted EBITDA increasing 13% while adjusted EBITDA available for general capital purposes increased 22%. It is noteworthy that a performance like this that even we did not anticipate and as a result we are once again raising our adjusted EBITDA and free cash flow guidance for the year.

In terms of the net new business, we won $54 million in the quarter making this the very best quarter that MDC Partners has ever had in our history, and our pipeline is extremely full and increasing with large global opportunities as our agencies continue to scale their capabilities and win more share of wallets and more share of markets.

Admittedly, this metric can be uneven from quarter-to-quarter but there is no denying that we are off to a fantastic start to this year with wins increasing 6% year-to-date on top of a superb year last year. Not only are we competing in a growing number of pitches, we’re winning more and more of them across more and more sectors, more and more industries and a broader geography. Our business model is working and thriving at an accelerated rate.

Among the most notable, we capture an ADT at Doner, Bellisio Foods at Colle & McVoy, Carrera eyewear at Anomaly, a global wireless carrier launch of their [telemetric] (ph) products at Crispin Porter & Bogusky, taking into activity in the global BMW 7 Series launch at KBS+ which is particularly exciting as it further thrusts KBS+ onto a global stage. These are just some of the successes that we can disclose and discuss publicly but it’s like the tip of the iceberg. It’s only a small amount of what successes we have achieved.

Even with these mounting accomplishments, we’re leaning in and looking for more and faster ways that are agencies can better serve our clients, and as a result grow in size and reputation by driving performance for our partner clients. We continue to aggressively execute on our long-term strategic growth plan which focuses on enhancing the competitive position of our core accretive agencies while at the same time in investing in new growth opportunities in areas like media and international that are accelerating our growth rate and enhancing our margin expansion.

Media is a significant growth opportunity for MDC as we’ve expressed. At assembly we’ve now integrated the RJ Palmer and Targetcast teams by the new talent and our offering a more progressive media offering that is distinguishing itself in the marketplace. This is opening more doors and leading to more pitches and more wins. These initiatives as well as our continued investment in leading edge state-of-the-art tools and technology has improved the effectiveness of the work we do and power us to compete strongly in a marketplace which is no longer just about scale but meaningful, measurable performance and has already been additive to our growth rate and we see that continuing and probably accelerating over the short medium long term.

Our international activities also continue to accelerate material growth opportunity for us more significant than we anticipated at the beginning of the year. Our revenues increased an astonishing 30% in this sector in Q2, a rate we’ve been able to sustain now or many quarters. Our success comes from existing clients but also with new capabilities in place and with the collaboration of multiple partners working together, we’re now able to open outlets previously closed to us and capitalize on client opportunities that were never available before.

As an example, CPB earlier launch in Brazil is progressing exceptionally well with multiple early wins and an impressive pipeline of potential gains. Two more examples. First, one of the agencies that I previously mentioned is worth drawing attention to is KBS+. Recent wins such as BMW globally and TE Connectivity highlight how the agencies (indiscernible) in competing and growing and winning on the global stage alongside CPB, Anomaly, 72andsunny and Doner.

Not to be outdone, our global PR platform Allison & Partners continues its aggressive and profitable expansion with the opening of two offices in France. This is enabling us to service our important clients that are Fortune 100 brands on a broader geographic basis. With our international build out being accomplished while still increasing our profitability, we’ve achieved scale that enables us to absorb incremental investments while delivering on our margin targets and in fact we’re exceeding our own internal numbers.

In terms of M&A activity, we are seeing a better pipeline than we had seen in the last five years. We recently closed on a partnership with the dynamically progressive global firm called The House Worldwide originally founded by the former Publicis Worldwide Chief Operating Officer, Richard Pinder. Richard has been a friend of our firm and a very close confidant of Andre Coste, our Chief Operating Officer of the MDC Partners network. Richard’s firm The House will significant augment our international capabilities specifically in the UK and will enhance CPB’s expertise and capability in London. This is our third acquisition this year after Kingsdale Shareholder Services and Luntz Global, which were investments we made in the first quarter.

What we’re excited about is these firms have superior economics with anything that we have done in the last period of time and are enhancing both our strategic advantage as well as the financial characteristics of our firm. I’ll limit myself to this brief snapshot of recent activity, but as you can hear from my remarks, I’m exceeding passioned about our mission and I believe that we are better positioned than ever to continue to grow our business to gain material share of wallet and market from our existing and potential clients, and drive superior shareholder value to our shareholders over the short medium and long term.

On a personal note, I bring this passion, enthusiasm and energy every single day when meeting our clients, managing our business, recruiting talent and dealing with our existing and potential partners. I am confident in our business and capable in growing a management team that is at its helm for the rest of this year and long beyond. Indeed great things lie ahead for this wonderful company and I couldn’t be prouder of what we have accomplished and what we will in the future.

At this point in time, I’d now like to turn the call over to David Doft, our Chief Financial Officer. David?

David Doft

Thank you, Miles, and good afternoon. To start, I wanted to highlight an important change to the name of one of our non-GAAP financial metrics with no impact on our numbers. Due to the significance of our acquisition activity and the related impact on our financial reporting, our definition of what we have historically called free cash flow is somewhat unique. Based on feedback from the SEC, we have decided it would be more appropriate to change the term to adjusted EBITDA available for general capital purposes.

The definition remains exactly the same and the reconciliation of the metric can be found in our quarterly earnings release as it always has been. While the metric has a new label, we continue to believe that adjusted EBITDA available for general capital purposes represents an excellent way to understand what is available to pay for dividends, acquisitions, deferred acquisition considerations, debt reductions and other corporate initiatives.

With that administrative matter out of the way, I want to start-off by reminding everyone of our philosophy in creating shareholder value over the long term. It’s a philosophy that centers on attracting and retaining great talent and putting them in a position to produce the best work of their careers. The quality of the work produced by our partner agencies and the impact that were cast on our clients’ businesses in turn with the net new business wins, a record this quarter and accelerated organic revenue growth.

Our determined efforts to optimize our financial performance and improve productivity has led to a reduction in labor costs as a percent of revenues and strong absolute growth in adjusted EBITDA. Our commitment to and focus on blocking and tackling has driven consistent improvements in the management of our working capital and outstanding cash generation. It is the generation of increasing amounts of cash that we believe will drive our shares ever higher in the years to come.

The year is clearly coming in stronger than expected from a profitability standpoint. Adjusted EBITDA and adjusted EBITDA available for general capital purposes both came in ahead of forecast for Q1 and now Q2, leaving us to raise our full year 2014 guidance again this quarter. We are increasing adjusted EBITDA guidance to $184 million to $188 million versus our prior guidance of $181 million to $185 million, representing growth of 15.4% to 17.9%.

We are also increasing adjusted EBITDA available for general capital purposes guidance to $108 million to $112 million from the previous guidance of $106 million to $110 million, representing an increase of 18.0% to 22.3% despite the incremental interest this year from our debt financings. On top of this all, changes in working capital were also better-than-expected adding additional cash to our balance sheet through the second half of the year. This quarter’s acquisition while important strategically has an immaterial impact on our annual guidance.

I’d like to address a couple of nuances in our results. Organic growth in the quarter was 7.0%, another outstanding quarter even as we continue to be impacted by lagging performance from some of our businesses at high pass-through revenue, particularly concentrated in the PMS segment. In total, the pass-through trend reduced the organic growth rate that we report to you on a GAAP basis by about 1% year-to-date. But remember, not all revenue is created equal. Pass-through revenue often has a lower gross margin and therefore has little of any impact on net revenue or profits.

You continue to see this play out in our PMS segment. So even as PMS organic revenue remains choppy and not where we believe it should be or that it will be, profit growth in this segment actually accelerated again this quarter. More specifically, PMS adjusted EBITDA increased 81% from $8.1 million to $14.7 million and margins expended by 590 basis points to 15.2%, despite the modest organic revenue decline. So, the profitability inflection point at the PMS segment has already arrived aided by shift in the business mix from principle to agency even though the gross revenue inflection point has not yet.

That said, remember, we managed the portfolio just like you do and year-to-date organic growth for our aggregate portfolio is a very healthy 7.3%, very much in line with the 6.5% to 8.5% organic growth implied in our overall revenue guidance. Given the visibility we have on existing business and solid pipeline of new business activity, we feel incredibly optimistic about the top line momentum heading into the back half.

Our revised full year adjusted EBITDA guidance now implies margins of 14.8% versus prior guidance of 14.5% to 14.6% and versus last year’s 13.9%. This is right on the doorstep of our target margins of 15% to 17%, ahead of schedule. We’re continuing to efficiently and effectively manage the cost structure, optimize the portfolio and benefit from a favorable mix shift of the business, thus leading the higher conversion of incremental revenue to adjusted EBITDA. We’re obviously pleased and exceptionally confident in our future potential.

From a risk management standpoint, we’re strong as we’ve ever been. Our top 10 clients now constitute less than 25% of our revenues. Our largest client is now less than 4% of total revenues. We’ve come a long way in ensuring reduced volatility in our financial performance through the diversification of our business while still executing on our growth plan which continues to deliver industry best revenue, adjusted EBITDA and adjusted EBITDA available for general capital purposes growth.

In terms of the balance sheet during the quarter, we paid down $50 million of deferred acquisition consideration with another $15 million expected to be paid in the second half of the year. In short, we have a rock-solid balance sheet. From a leverage standpoint, we remain on track for yearend net debt to adjusted EBITDA leverage of about three times on our way to our two and a half times target in the next couple of years.

One final note on the M&A pipeline. There are a number of promising opportunities that we are working on, as Miles alluded to, and hopefully we’ll close on one or more of them in the weeks and months to come. Our guidance currently includes an incremental 3% contribution to revenue which is unchanged as we only included acquired revenues in our guidance once the deal is closed.

Before we move on to your questions, I just want to highlight a new publication for investors that we are producing this quarter, an investor newsletter. You should see the link along with our press release and slide presentation on our website. In the spirit of full disclosure, the newsletter highlights partner agency work, new client wins and various other MDC initiatives that took place during the quarter in addition to summarizing some of our financial results. We’d be delighted to receive any feedback you may have so we can continue to improve our communications moving forward. We want to serve our clients and shareholders as well as we can and we also want to serve our analysts as well.

With that, we would now like to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). The first question we have comes from John Janedis of Jefferies. Please go ahead.

John Janedis - Jefferies

Thank you. Miles, on the new business wins, 2Q obviously a big number. As the wins get larger and/or more global, is there any notable upside to the margin opportunity? And maybe sticking with the margins, to what extent is the upside for the year driven by international business scaling faster?

Miles Nadal

Look, I think overall as we get larger pieces of business, margins invariably grow because if we get a $3 million piece of business versus a $15 million piece of business, the margin’s percentages are higher as you scale larger pieces of business, because the overhead allocation is smaller and you invariably have some scalability to labor. As it relates to international, we are not forecasting for the margin expansion of international beyond the pace at which we are growing today. We do have an extraordinary pipeline, some of which is international, we’re not factoring that into our expectations. If a greater percentage of those do fall in place that would be a win for us. But we’ve always had a dedication to under promise and over deliver and this in the spirit of what we are doing right now that we are giving guidance as David articulated.

David Doft

John, I would add, longer term – as you know, our medium-term margin targets in 15% to 17% and we’ve put that in place I think about three or four years ago now and so we’re going to reach that a bit faster than expected is what it looks like. That being said, we are pushing as much as we can until we get to the upper end of that range and we’re not ruling out to be able to get higher than that over time. And so I think one of the takeaways about our success over the last couple of years is that not only are we leveraging investments we’ve made in order to scale back into margins at this levels, we’ve also been very focused on the efficiency of our operations, the optimization of our portfolio as well as investing behind higher margin initiatives that hopefully over time will change the margin profile of the company to the better and maybe – we’re not going to promise that now, but maybe allows us to achieve margins above that range over the long term.

Miles Nadal

I’d add one more thing. We gave guidance over a period of time that we could take 500 basis points out of labor costs. Over the last three years we’ve actually taken 300 basis points out of the labor. So there is another 200 basis points of margin improvement to be achieved by leveraging the infrastructure of what we have and lowering labor to still what will be the highest labor investment of any in the industry but lower by another 200 basis points in relation to what we’re currently utilizing.

John Janedis - Jefferies

Okay. Thanks, Miles. David, one quick one. You talked about the PMS segment and the revenue inflection point. And I get the margin commentary, but at what point do you expect the revenue to turn?

David Doft

Our expectation is that at some point this year you should see the revenue growth rate on a reported basis turn positive organically.

Miles Nadal

And when it does, we believe that it will accelerate at a very significant pace.

John Janedis - Jefferies

Thank you very much.

Miles Nadal

Thank you.

Operator

The next question we have comes from Tracy Young with Evercore.

Tracy Young - Evercore Partners

Hi. Just a follow up to that question in terms of the inflection point. Is any of that in your current guidance? I noticed you haven’t changed your top line expectation. And can you talk a little bit about the percentage of U.S. versus international? You mentioned Brazil as being strong. Could you give us any more color on that? Thanks.

David Doft

Absolutely. So, our guidance has an assumption for the overall portfolio revenue growth and one of the things that led us to not raise guidance is the impact on the pass-through revenue dynamic that I alluded to in my prepared remarks. The reality is, is it does tend to be a little bit more choppy and so we’re just making sure that we’re putting forth an expectation on revenues that we know we can achieve. That being said, in the totality of our forecast, we’re very comfortable with the revenue range, we’re very comfortable with the adjusted EBITDA and margin expectations as well as how that flows down to adjusted EBITDA available for general capital purposes. In terms of the mix of the business, international was a bit north of 6% in the quarter. It’s been consistent in the last couple of quarters at that level. As Miles alluded to in his prepared remarks, it grew about 30% in the quarter. So we continue to have very strong momentum there. Brazil is early days. We opened up our operation there just about three months ago, maybe four months ago and so while there’s early wins there has been very little revenue to date. And so as that ramps up and as we continue to build our capabilities and ramp those clients, it should be a more meaningful contributor as we move through this year and then more so next year.

Tracy Young - Evercore Partners

Okay. Thank you.

Miles Nadal

Thank you.

Operator

Next, we have James Morris with Piper Jaffray.

Unidentified Analyst

Hi, guys. This is [Stan] (ph) in for James. I have two questions. One, I guess it’s been a few months since Omnicom and Publicis called off their merger. Have you guys seen any impact to your business? And then secondly, obviously you guys have a great track record here winning business in the first half. Do you see any meaningful business up for review in the second half? Thanks.

Miles Nadal

So two things. We have been a very large beneficiary of both the proposed merger and now the bailed merger of Publicis and Omnicom. Yes, we’ve benefited in three ways. One, we are picking up talent at an accelerated rate from both of those organizations, probably more from Publicis than Omnicom but still a lot from both. We’re winning significant amounts of new business at an accelerated rate from all of them, but those two have been a pool by which few business has come to us. And the third thing is during the period by which they were preoccupied, there was no real competition for M&A. So our M&A view is that the field of opportunity is pretty clear without much competition. As it relates to new business, our new business pipeline of opportunity is about 200 million of revenue, more significant than we have ever seen before. It is stronger than in any second half that we’re going into. Now, we’re at various phases of that new business process. Some of it is public. There are four agencies on the shortlist for indemnity. We are privileged to have two of those four; Anomaly and CPB, both extraordinary firms. There are many others as well. So there is no question that our new business in the first half is exceptional and way ahead of our expectation. It usually is frontend loaded. We do believe we’ll have a very strong second half but it is not forecasted to be as robust as it was in the first half, but stronger than it was last year.

Unidentified Analyst

All right, great. Thank you guys.

Miles Nadal

Thank you.

Operator

The next question we have comes from David Bank with RBC Capital Markets. Please go ahead.

David Bank - RBC Capital Markets

Okay. Thanks very much. I guess coming back to the margin question, when you think about the margin targets – I guess first off, has the business mix itself for you change since you set those original targets, maybe things – as well as international things like the kind of media business as a part of the business mix? And I guess bigger picture, when we look out at the peer universe, you’re all basically in the same sort of the business but there are varying margins across the peer universe and one has to believe that business mix kind of has something to do with that. What should your mature – I guess which of the peers is your business mix most like? What should your mature operating margins look like? Because there’s no real obvious answer when you look across the peers. Thank you very much for trying to give an answer to that one.

Miles Nadal

Thank you. So, please don’t take this in the wrong way but we don’t think that any of our peers has a model that’s similar to ours. First of all, we have very little legacy activity. As a result of that, we have way fewer offices most of which are unprofitable internationally that are dragging down margins of some of the other legacy holding companies. Second of all, the average age of our employee base is between five and eight years younger and as a result of that, we have a lower labor per employee in general which is also contributing to margin upside.

Third, we have built all of our business in a digital universe. As a result of that, the Internet has leveled the playing field, so we have acquired less physical infrastructure to service our clients. For instance, Luntz Global, which is one of our great success stories, works – 100% of their employees work virtually. There is no physical plant or infrastructure. So their margins are way higher. They don’t have rent and overhead and as a result they would have probably 1,000 to 1,500 base points of margin higher than anyone else who would have that infrastructure.

Fourth thing is we have focused on areas where we have the most value-added and if you can differentiate yourself and show a sustainable point of differentiation through doing work that drives tangible, measurable return on our key investment and you have a compensation system that will award you for the value you create not just the time you put in, your compensation from clients or revenue is far greater per dollar of employee. So our revenue per employee is much higher and that is way more scalable long term. It would be our expectations that over the next five to ten years that that number won’t be 15% to 17% but could be anywhere from 18% to 20% over the next ten years. All of the businesses that we are building have north of 20% margin. All of the companies we are acquiring are anywhere from 20% to 35% margin.

So our existing businesses as they scale get greater margin. That stacking concept of merging in businesses that are under-scaled into our more scaled platform which we have been very successful at doing allows us to eliminate duplicate overheads, accelerate new business wins which is critical to margin expansion. So we think because we are far less invested in traditional or legacy activities and even areas like media where we have a lot less of the legacy media but much more digital media, social media, analytics and consumer insight media, we think our positioning enables us to go way beyond the margins of our competitors. We were at 6% EBITDA margin about five years ago. We have gotten to a 15% level far faster than we anticipated.

I think, David, you bring up a very good point. There is no question that the cost position has changed over those five years. A higher concentration of the media gives us margin upside. A much more scalable opportunity building scale of our businesses gives us margin upside. The compensation model of being paid for performance not just for time put in gives us margin upside. The big presence and growing presence that is accelerating our public relations and social media and analytics which is very scalable also gives us margin upside. And also in relation to what we originally thought, the average size of clients is giving us also margin upside. So that’s why we think 18%, 19%, 20% kind of margin over a ten-year-period is definitely something that is achievable.

And the first 200 basis points of appreciation simply come from the labor scalability that we talked about where we said we could take 500 basis points out of labor. We’ve taken 300 out. We see low hanging fruit to take the next 200 basis points which would put us right at 17% assuming all the other opportunities for margin enhancement that would come to fruition. We’re also doing so and this is critically important to have balanced the opportunity to invest in growth at the same time. So we’re not sacrificing growth to benefit margin and we’re not sacrificing margin to benefit growth.

We actually feel that we’ve got a very good balance between the accelerator and the break and being able to deliver the very best thought leadership, the most impactful work which is driving severe revenue growth and giving us growth but also margin expansion. As you know, the faster you grow your revenue, the easier it is to scale margin because you end up in a position where the infrastructure you have gets deployed much more efficiently and much more rapidly than it would otherwise. That’s our point of view.

David Bank - RBC Capital Markets

Okay, thank you for such a thoughtful answer.

Miles Nadal

Thank you.

Operator

(Operator Instructions). The next question we have comes from Peter Stable with Wells Fargo Securities.

Ignatius Njoku - Wells Fargo Securities

Hi. This is Ignatius Njoku for Peter. Just had a quick question on the media operations. It has been cited as a strong driver across your competitive sect. Can you provide additional color in terms of performance and your view on how important scale is for the growth driver? Thank you.

Miles Nadal

Well, when they (indiscernible) is to gain scales expertise where we can take on larger and larger client relationships but still be able to do so while driving tangible superior customer acquisition costs performance and lifetime value on the customer superior results. What we’ve been able to do is bring together businesses where we had duplicate overhead but more importantly invest in superior talent. Where we had duplications not only could we take cost up but more importantly we could redeploy those savings into better people with more digital expertise, more social expertise and superior knowledge and understanding of the changing media landscape of how consumers consume influence at a digital economy.

In addition to that, we’ve invested significantly in a new business development methodology, process technology and infrastructure on a broader geographic basis which is having significant benefits but will have more significant benefits on the accelerated rate going forward. Our media business has certainly exceeded our expectations of 20% margin, 15% kind of organic growth. But more importantly we think of a scale of one to ten, we’re at two out of ten relative to our potential. I think you’re going to see a lot more significant impact from our media success and more significant tuck-under acquisitions if possible that will expand our sustainable point of differentiation going forward and differentiate us from other competitors who are very much invested in legacy media.

Ignatius Njoku - Wells Fargo Securities

Thank you.

Operator

The next question we have comes from Eugene Fox with Cardinal Capital Management.

Eugene Fox III - Cardinal Capital Management

Hello, gentlemen, and congratulations on a very nice quarter.

Miles Nadal

Thank you.

David Doft

Thank you.

Eugene Fox III - Cardinal Capital Management

David, you have a line item in the income statement called other net of $7.3 million. Can you explain to us what’s in there?

David Doft

Sure. As we’ve spoken about many times before, as you know, that is a foreign exchange gain. It’s non-cash. It’s related to the intercompany loans between the U.S. entity and the Canadian entity. It’s [$1 million fronted] (ph) in the quarter and so we had a benefit from that. If you look at the first quarter, the Canadian dollar weakened and there was an expense from that and the net for the six months is actually pretty close to neutral, about $300,000 or $400,000 of a gain overall six months to date. That number is pretty volatile. It does tend to throw our net income and EPS numbers into disarray because of the volatility of it but it’s non-cash. It’s a loan to ourselves that never has to be settled and so it’s an item that we tend to not focus that much on.

Eugene Fox III - Cardinal Capital Management

Got it. Just two other questions, David. How much in the way of deferred acquisition costs did you pay in the quarter? My analysis seems to be somewhere little less than 40. I’d expect it about 50.

David Doft

No. We paid about $50 million in the quarter.

Eugene Fox III - Cardinal Capital Management

Got it.

David Doft

I’m not sure what you’re looking at.

Eugene Fox III - Cardinal Capital Management

I’m just looking at the changes between the pieces in the balance sheet, but there’s obviously other things that happened against your quarter that can impact. Last question, David, M&A, how much would you expect during the quarter for M&A?

David Doft

There was a minor acquisition in the quarter. The total paid was only a couple of million dollars or so.

Eugene Fox III - Cardinal Capital Management

Got it. Okay. Really nice and clean quarter. Thank you gentlemen.

David Doft

Thanks.

Miles Nadal

Thanks, Eugene. Thanks for the support.

Operator

At this time, we have no further questions. We’ll go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Miles Nadal for any closing remarks. Sir?

Miles Nadal

Thank you very much. Ladies and gentlemen, thank you very much for your time and your interest. We are very much appreciative. We look forward to talking to you again on our third quarter call and sharing our continued momentum with you. We do sincerely hope you and families enjoy the summer season and we will speak to you towards the end of October. Thank you again and have a nice evening.

Operator

We thank you sir and to the rest of the management team for your time also. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and take care everyone.

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