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.

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.

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…

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…

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.

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?

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.

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.

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.

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?

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

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

Thank you very much.

Thank you.

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

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.

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.

Okay. Thank you.

Thank you.

Next, we have James Morris with Piper Jaffray.

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.

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.

All right, great. Thank you guys.

Thank you.

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

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.

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…

Okay, thank you for such a thoughtful answer.

Thank you.

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

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.

Thank you.

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

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

Thank you.

Thank you.

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?

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.

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.

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

Got it.

I’m not sure what you’re looking at.

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?

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

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

Thanks.

Thanks, Eugene. Thanks for the support.

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?

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.

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.