Good morning and welcome to the MDC Partners fourth quarter and year-end results conference call. 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 over to Matt Chesler, Vice President, Investor Relations.

Good morning, everyone. I’d like to thank you all for joining us today to discuss MDC Partners’ financial performance for the fourth quarter of 2016. Joining me from MDC are Chairman and CEO, Scott Kauffman, and CFO, David Doft. Before we begin our prepared remarks, I’d like to remind you all that the following discussion contains forward-looking statement and non-GAAP financial data. As we all know, forward-looking statements about the company are subject to uncertainties referenced in the cautionary statement included in our earnings release and slide presentation and are further detailed in the company’s Form 10-K and subsequent SEC filings. For your reference, we’ve posted an investor presentation to our website. We also refer you to this morning's press release and slide presentation for definitions, explanations, and reconciliations of non-GAAP financial data. And now to start the call, I’d like to turn it over to our Chairman and CEO, Scott Kauffman.

Thank you, Matt. And good morning, everyone. Although 2016 was a challenging year in many respects, we finished the year on very solid footing. Revenue for the fourth quarter increased 8.8%, above our expectations. Organic revenue growth was 3.8%. Adjusted EBITDA was in the upper end of our guidance range for the year and down 15% due to the severance and real estate actions we took to secure a leaner cost structure. Our financial results for the fourth quarter and the 2017 outlook that David will detail confirm that our business is turning a corner and is poised for growth in the years to come. And here's why. We’re seeing a re-acceleration of topline momentum. We've addressed cost and we now have the balance sheet we need to grow. Very importantly, I'm optimistic and energized by what I'm seeing across our world-class portfolio of creatively driven agencies. Through it all, our partners continue to attract and retain the most progressive talent in the business, producing innovative and effective work that leads the industry and they serve a growing roster of many of the world's most iconic brands. Our partners are punching far above their weight in terms of industry recognition, both domestically and around the world, recognition that validates the effectiveness of their work and makes phones ring. And we’re especially proud that Advertising Age recently named one of our own, Anomaly, as agency of the year. Multiple other MDC agencies also won prestigious awards from Advertising Age this year, including 72andSunny, Crispin Porter + Bogusky, and Redscout. Sister publication Creativity called out Crispin, Anomaly and 72andSunny for their creativity. And the Gunn Report identified Forsman & Bodenfors as the fifth most awarded agency in the world in addition to being the most awarded agency in Sweden for the last…

Thank you, Scott. And good morning. We had a solid finish to 2016 with a better-than-expected fourth quarter. Our business is demonstrating improved topline momentum. We finished the year in the top half of the revised adjusted EBITDA guidance range despite cost actions which position us for a recovery of profit in 2017. And the Goldman Sachs investment will provide us with the additional financial flexibility as we prioritize improving our credit profile. We are confident that this transaction will create the foundation to build long-term value for all of our stakeholders as our business reaccelerates. Let's first talk about the topline. Q4 revenue came in better-than-expected due to steady spend from existing clients as well as contribution from new business. Total revenue increased 8.8%. Organic revenue was plus 3.8%, still strong even after factoring in a 75 basis point benefit from past-throughs. A key driver was a pickup of organic growth in the United States to plus 4.3% as we saw broad-based underlying strength and continued outperformance in technology, mobile development and public relations. Our full-year organic revenue growth of 2.3% was clearly disappointing to us relative to the past and the potential of our agency portfolio. But I think it would be helpful to see how this broke down relative to our expectations going into 2016. It comes despite digesting 250 basis points from the unanticipated loss of large clients, most notably Samsung; another 200 basis points from timing and delayed starts on new accounts, most notably in our media business; 100 basis points from declines in certain categories such as financial services; and 30 basis points from a decline in billable pass-through costs. This should give you a sense of the stability of our underlying business. Adjusted EBITDA of $176.7 million for the year includes about $11…

[Operator Instructions] Our first question comes from John Janedis of Jefferies. Please go ahead.

Thank you. Two questions. First, David, with last week’s investment, is it fair to say the evaluation of your financial and capital structure strategy is complete? And then separately, on last quarter's call, I know you guys talked about the $30 million of run rate cost savings. And I guess knowing you’re shifting away from dollar guidance, I think it does imply about $25 million of EBITDA growth this year. So, I was hoping you can give us maybe the bridge and talk to any underlying cost pressures in the business away from $30 million. Thanks.

Thanks, John. So, yes, I can confirm that our analysis of our capital structure strategy is complete with this transaction. Though, I’ll note, we will always look for opportunities to improve our capital structure and our balance sheet. As far as the run rate cost savings and our forward-looking guidance, the reality is at the end of the day, the business continues to move forward and there's areas where we continue to choose to invest in our business in order to drive growth rate and value creation over the long-term. At the same time, there is always areas where we look to find continued improvements in the operations of businesses, given the portfolio aspect of our company and how we manage the company. But at the end of the day, coming off of what was an exceedingly difficult year for us and given the substantial cost moves that we've made, we’re looking to set ourselves up for sharp bounce back in 2017 and we think the financial guidance that we've given indicates that.

Thanks, David.

The next question comes from James Dix of Wedbush Securities. Please go ahead.

Thanks very much. Good morning, gentlemen. A couple of things. I guess one piece of data which you still are providing is net new business wins. How should we be using that in forecasting or kind of crosschecking the outlook that you have? And then, is it right to say that if you stripped out the impact of one-time charges, including severance from 2016, is there kind of a cost base that we should assume that you're going into 2017 with versus 2016? Is it that $30 million delta or is it less than that? Do you have a sense of kind of what the net change is in terms of your cost base, anticipating certain reinvestments, which I presume you are planning? And then I have just a couple of follow-ups on operations.

Sure. Thank you, James. So, net new businesses, I think as we’ve long indicated is the annualized revenue of new business wins minus the annualized revenue of client losses. And it is a number that has never track nor what was intended to track specifically to a revenue number or growth rate in our business, given that there's lots of moving parts. And unfortunately, they can’t all be captured in a metric. Generally, the net new business number is retainer-based relationships or long-term reoccurring project relationships, but not short-term project, not volume-based relationship. It doesn't incorporate increases in fee or decreases in fee from individual clients. It only incorporates when we’re winning a new account, a new discipline with an existing client, a new geographic region maybe or losing a piece of business, losing a discipline, losing a region. So, it doesn't incorporate all of the changes. But what it does do is give an indication of trend. And I think, rightfully, as we move through 2016, we had a bit of a choppy net new business experience, given the ins and outs of the wins and losses, and that translated into a disappointing topline for us as we move through the year. Our hope is with a better 4Q than our 3Q, better 4Q than 4Q last year in 2015, and a pipeline that, as Scott indicated, we’re excited about, should give us greater visibility to better topline performance as we move through 2017. And that's what we’ve tried to indicate in the indications of organic revenue growth we expect for the coming year. In terms of cost base, as we indicated on the third quarter call, we took out about $30 million of run rate costs at the time. That is the reduction that we've indicated at the point in time and then the business moves on. I don't feel comfortable giving you a specific number about 2017 outside of the guidance that we just indicated, which is to expect our adjusted EBITDA margins to increase by approximately 100 basis points. And I would note that despite digesting the acquisition-related costs that historically we’ve added back to adjusted EBITDA and we’ve pledged to not add back any more going forward and that's worth a few basis points as well. So, overall, we feel very good about the cost structure that’s in place. But this is a business that lives and breathes and moves on as we win business, as we lose business, as we pitch new accounts, as we hire people, as we sometimes lose people, and that makes the cost structure over time actually quite fluid. So, what’s important to us is the ratio of cost to our revenue, and most notably staff costs to our revenue, which is the most variable of the costs in our cost structure as well as the largest costs in our cost structure. And if we can manage that effectively, then we should have a really strong year.

Great. And then just two others. Have there been any senior management changes at any of your top half a dozen agencies over the past three, six months? And if so, what are the drivers of those and any objectives either the agencies or your corporate might have for those changes? And then second, just looking at your all-in leverage now that you have the preferred investment, you said it takes things down by half a turn. But if you look at everything, including the deferred acquisition consideration, kind of how the rating agencies look at it, what would you say your leverage targets and timing are over the next few years? Thanks.

Thanks, James. With regard to staff changes, we placed a large emphasis on the importance of culture in this people-driven industry. You’ve heard me say that I don’t think there’s a business that is more singularly dependent on its people than ours other than maybe a professional sports franchise. So, culture and the landscape that we set that allows great entrepreneurs to innovate, and in our world it’s paramount for us, and so I’m happy to report that there have been no changes in the senior leadership either here at corporate or across our agency network.

In terms of the leverage and target, so for several years, we’ve talked about a 2.5 times net debt to EBITDA leverage target and that remains our goal. And while we have gone on a more circuitous path towards that, it still remains our goal in terms of our debt minus cash divided by EBITDA. Given that at some point in the future, we’ll likely make a acquisition or two again and there’ll be some modest amount of deferred acquisition consideration or non-controlling interest related to that, I think you're probably looking at a target of about a half a turn incremental related to contingent acquisition-related payments that, over time, may be there if we find the right opportunities. So, we have some time to get there, but given the significant drop-off in our DAC liability from our continued paydown of those obligations, as well as the paydown that we expect in 2017, which should be $110 million, maybe as much as $115 million, we should then begin to generate substantial cash from operations of the business in excess of our acquisition liabilities or liabilities related to historical acquisitions, which then we expect will improve the balance sheet at a much faster rate.

Great. Thanks very much.

Thank you.

The next question comes from Dan Salmon of BMO Capital Markets. Please go ahead.

Good morning, everyone. Scott, in your prepared remarks, you highlighted media and international as growth opportunities. That’s not new. What I'm hoping you could just maybe expand on for color is, as you go into 2017, is your enthusiasm, conviction, whatever word we want to use around those opportunities, is it rising, is it steady, are there some areas where your expectations are coming in a little bit? Just on the margin view, if you can add a little bit, it would be great. And then, David, just on the similar topic of long-term targets. Back in December 2014, you put a long-term EBITDA margin target out there 17% to 19% and raised it. I assume that one still is out there and in place as well and with a bit more circuitous route as well. But could you maybe talk a little bit – I assume you won't put a timeline on it, but what some of the major variables, both internally for you executing the business plan as well as externally, could be – do determine the pace of getting to those targets potentially.

Thanks, Dan. So, as far as general enthusiasm goes, I’d say more rising than steady borne out of the accelerated patterns that we saw coming out of Q4. But let me talk specifically about media and then I’ll get into international. On the media front, 2016 was the year that we laid a lot of the foundation for our expect growth in media. This is the year that we consolidated our media operations under a single roof. It took our presence in the media landscape up a notch in terms of size of engagement with the win of 21st Century Fox, followed that with the E*TRADE win, built out our Los Angeles operations in that regard. And so, the investments that we’ve made there, we think we will start to see pronounced performance from in 2017 and beyond. We’re also looking for a higher degree of integration amongst the client roster that we have. So, we see a pendulum swinging back towards clients who are interested once again in having more of the work being done under a single roof. There was a period of time, over several decades, when media spun out and was a standalone entity. I think we saw maybe no more prominent in the way than the most recent presidential elections, the power of earned media and how the merger of earned media and content and strategy, also now driving the creative process, is becoming one cohesive whole in many respects. And so, media becomes a fulcrum. It’s a place where a lot of our data and technology repositories sits and we expect that our centralized media operations will start to have a more dramatic impact across the network of our creative agencies as well. So, I’d say rising optimism in that respect. On the international…

Dan, as for margins, you’re right. Our long-term target has not changed. It continues to be 17% to 19% for our adjusted EBITDA margin. And I think there's a couple of interesting things to note of what's different today versus when we initially gave that target at the end of 2014. And it's not just that our margins were a little bit lower in 2016. I’d say the most important thing is that our corporate costs are substantially lower than when we gave that target. Corporate costs are down, I think, over two years, about 50%. It’s one to two margin points just at corporate relative to all of MDC. There is nothing changed in terms of the operating profile of the agencies in our portfolio, in terms of their margin potential. As I think you know, covering this space for a long time, when you have a couple of losses at agencies, they may have lower margin that year. Severance is a big part of that as well as getting the cost structure right and the slight lag that always happens in that case for the revenue base you have. But once you make those adjustments, there’s no reason why you can't get a business back the margins that were before and nothing has changed in terms of the competitive nature of the businesses and their ability to earn a fair fee for their work and their ability to reach those sort of margins. We've also talked for a long time about a mix shift in our portfolio that we continue to believe will be a tailwind to margin over the long-term as well as the continued scaling of our international operation to more normalized margins. After spending several years building out categories around the world that, as Scott indicated, is clearly driving success for us in the new business marketplace. It now makes up 14% of our revenue overall and has some strong momentum that will continue to bring it towards more normalized margins. So, if you add all of those together, we continue to have, we believe, high visibility on a much better margin profile of the business in order to achieve the targets that we put forth in the past.

Great, thank you.

The next question comes from Steven Cahill of Royal Bank of Canada. Please go ahead.

Yeah, thank you. Good morning. I was wondering if you could speak a little bit about the organic growth guidance for the year. Last year, you did end up underperforming some of your earlier expectations in the year. So, when you thought about the guidance for this year, how did you look at it a little bit differently in order to de-risk it for those of us sitting sort of outside the fence? And relatedly, you talked a little bit market share gains. And I was just wondering if you could comment – because some of your peers that are a bit larger are sort of growing at similar rates this year. So, do you expect to gain share during the year? And if so, in what areas? And I’ve got a quick follow-up.

Thanks, Steve. Going into a year, we look at the business we have in hand. We look at the pipeline of opportunities and we look at the risks that we have in the portfolio based on various items that might put a client [indiscernible] is a client speculated to be a takeover candidate, has there been change in the leadership at the CEO or CMO level or senior marketer level within the client, is their business not performing as they or we had hoped. We look at all of those things in order to determine risk about what might leak out of the bucket, so to speak, in terms of the revenue base that we have. And we come up with a reasonable target for the current year. It’s the method we've always done. Immediately, maybe we’re trying to incorporate more risk given the last year and the surprises that happened to us during that year. But believe we put forth a reasonable number, an achievable number for us going forward. In terms of the market share gains, overall, we do have a drag going into the year from, in particular, one large loss that was more media, which was Samsung which has been widely reported publicly. And we need to cycle through that before we would expect to have a more clear view of the market share gains of MDC relative to our peers. And so, on a full-year basis, we’re looking at an organic growth number that we think is likely modestly above overall industry growth, which we tend to look at as kind of 3% to 4% in the coming year. But our hope and expectation is, as we cycle some of the things that impacted us in 2016, the outperformance of MDC will become more clear in our reported numbers going forward.

Great. That’s very helpful. And then maybe just on experiential marketing, I was wondering if you could talk about the contribution to that in the quarter and how are you looking at that business and thinking about whether or not that's a core business that you want to be in in the coming years.

So, I’ll start and then I’ll hand off to Scott. So, we don't break out individual disciplines in terms of their specific financial performance. That’s not the segments which we report our numbers within. Overall, though, we did indicate in our comments and in the press release that there was a benefit from pass-through costs in the quarter to revenue. A lot of that benefit tends to be in experiential marketing businesses and can be used as a nice indicator, I would say, of our exposure to that business on a year-over-year basis. As far as its strategic positioning, Scott?

I think if you look at – think of experiential, particularly for the lifestyle category brands, it’s the last mile of consumer engagement and we’re in a period now where you’ve got the most enlightened consumer in the world who will tell you anything and everything about him or her and is seeking that immersive brand experience. So, empowered marketers are taking advantage of the information and insights that we can draw from all the different sources of insight. And experiential is part of the mix. We talk about everything coming back under one roof in a soup to nuts experience for the brand, for the for the marketer. And so, we view experiential as strategic. And the recent announcement of the MillerCoors engagement – we do other work for that parent company – is an important manifestation of the growing footprint that we enjoy with brands once one of our portfolio companies is working with the company. And so, it continues to be, I think, an important part of the end all experience for the marketer, for the consumer, and we like about this being an enlightened era of marketing with all the data exchange that goes on.

Maybe just a quick follow-up on that, if you don’t mind. One of your peers talked about field marketing as potentially being a business it would look at divesting. Is it a conclusion to suggest that that is something you would be interested in adding if it was on the market?

We don't comment on any specific M&A activity. We’d take a look at the entire panoply of marketing and advertising services. When I hear the term field marketing versus experiential marketing, maybe there’s a nuance there, but we don't comment on specific opportunities.

Okay. Thanks very much. Great quarter.

The next question comes from Tom Eagan of Telsey Advisory Group. Please go ahead.

Great, thank you. Just a follow up on the media business. I gather you don't break out discipline, but I guess looking back at 2016, if you could provide us a little bit of color on what caused the delay. And I have a couple of follow-ups. Thanks.

Tom, I think we’ve long discussed this throughout 2016. We had a couple of substantial new business wins that ended up beginning later than we hoped by several months. That impacted our revenue versus what we had expected when we gave our initial guidance. What’s the reason for the delay, ultimately, it’s up to the clients on determining the timing of moving a piece of business over to us. Ultimately, the business did come over to us. It is in our run rate revenue in the latter part of the year and going forward into 2017.

Okay, thanks. And then, I’m looking at 2017 guidance, I guess what is the implied range, if you could kind of provide that, for the expectations for the media business in your guidance? Thanks.

Again, we do not report media as a standalone segment. We only report two segments. And historically, we have not given guidance broken out by our segments, but by the overall company. And so, unfortunately, I can't give more specifics than the guidance we’ve already given.

Okay. And then, there’s one last question on that, I guess, you mentioned investing in the business, what kind of increase should we expect the margins – you’re going to be able to enjoy the margin increased in 2017 and 2018? Thanks.

In what business? I apologize.

Sorry, in the media business. What kind of order of magnitude should we expect to be able to increase the margin?

Tom, I apologize, but it’s the same answer as before. We don't report media or guide media as a separate segment, so I cannot give any specifics to our margin expectations, specifically around those businesses.

Okay, thank you.

The next question comes from Barry Lucas of Gabelli & Company. Please go ahead.

Thank you and good morning, I just have two and one centers around the variability in performance quarter to quarter, 3Q to 4Q, so look at organic growth, US, Canada and the rest of the world kind of thing. So, I just wonder if you could provide a little bit more color on some of the drivers that either provided the improvement in performance or were the drags that tailed you back in certain geographic regions and were they category related etc.

Thank you, Barry. So, the fourth quarter definitely saw an improvement of organic revenue growth in the United States and a deceleration in Canada. The net was North America was better overall, but it was very much I’d say a tale of two countries, where the US has begun to re-accelerate for us. The Canadian market has definitely for the last couple of years been a bit more inconsistent, given the economy there and is reliance on commodities has been a bit more choppy. We do feel very comfortable with our position in the marketplace and that as the economy stabilizes we’re in strong position to grow. And in fact, some of the new business and pipeline momentum that Scott indicated before very much is in the Canadian marketplace and we’re excited about the prospect for better performance there going forward overall.

Okay. Thanks, David. Just, I wouldn’t say it’s a housekeeping question, but it's not been an infrequent occurrence that single client losses have impacted performance at MDC disproportionately, primarily a function of size of the company, maybe you could just provide some sizing, if you will, of single largest client or top five or top 10 as a percentage of total revenues.

Sure. So, our top 10 client is 23% of revenue. It’s, I believe, the lowest exposure to our top ten clients we've ever had. For those of who’ve been around for a long time, if you go back to 2009, 2010, our top ten clients I believe was 46% of our revenue. So, we’ve come a long way. Our largest client is less than 4% of revenue.

Thanks very much for that, David.

Thanks

[Operator Instructions] Our next question comes from Peter Stabler of Wells Fargo Securities. Please go ahead.

Good morning. I guess couple of quick ones from me. David, you talked about the drag on working capital in 2016. Can you give us a sense of the improvement you're expecting in 2017? Do you expect a contribution from working cap? And if so, can you help us a little bit on the saving? You said that it will become a little less seasonal, but I assume that you’d still see the typical seasonality we see in the agency groups. Thanks very much.

Thanks, Peter. So, you’re right, 2016 was a disappointing year from a working capital standpoint. Again, another topic I think we’ve discussed extensively as we’ve moved job throughout the year. In 2017, we look for a more normalized annual working capital behavior where we tend to target a neutral working capital year. Hopefully, if all goes well, it will return to contributor to cash. And if you look from 2013 to 2015, we averaged generating cash from working capital of between $40 million and $50 million in each year. But we do not forecast that or model that. We tend to look at kind of a neutral expectation as we are entering this coming year. In terms of the seasonality, you're right. It is still the normal seasonality. It's just not as exacerbated, I guess, as we've seen in the last couple of years. So, we do expect an outflow of working capital in the first quarter. That is normal. It happens every year. It’s around the timing of medium production flows of the business. We would expect a better performance in the second quarter of the year. The third quarter tends to be plus or minus, kind of neutral-ish sort of quarter. It could contribute a little bit. It could use a little bit depending on the year and timing of client behavior. And in the fourth quarter it tends to be a generator of cash, working capital to bring it back to a more neutral or hopefully positive cash position.

Thanks, David. But at this point, neutral would be kind of a target. You're not expecting a further drain at this point?

We're not expecting a further drain. As we indicated on the 2Q call, there was a one-time shift in the client base based on the repositioning of our media business, and now is the impact in 2016 since then, and our expectation going forward is a more normal behavior of working capital as per historical trends.

Thanks, David.

And this concludes our question and answer session. I would like to turn the conference back over to Scott Kauffman for any closing remarks.

Thank you, operator. In closing, I want to take a moment to thank the 6000-plus dedicated members of the MDC family for making MDC Partners the group with the most exciting prospects in the industry. All of us at MDC and across our partner network are more committed than ever to the bold actions that will drive measurable results for clients. And as we do this, we’re committed to building long-term value for all of our stakeholders. Thank you and good morning from New York City.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.