Good day, and welcome to the MDC Partners Third Quarter Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Alex Delanghe. Please go ahead.

Thank you. Good morning, everyone. I'd like to thank you for taking the time to listen to the MDC Partners conference call for the third quarter of 2018. Joining me today from MDC are David Doft, Chief Financial Officer; David Ross, EVP of Strategy and Corporate Development and Stephanie Nerlich, EVP of Partner Development and Talent. Before we begin our prepared remarks, I'd like to remind you that the following discussion contains forward-looking statements and non-GAAP financial data. Forward-looking statements about the company are subject to uncertainties referenced in the cautionary statements included in our earnings release and slide presentation and are further detailed in the company's Form 10-K and subsequent SEC filings. For your reference, we've posted an investor presentation to our website. We also refer you to this morning’s press release and slide presentation for definitions, explanations and reconciliations of non-GAAP financial data. And now, to start the call, I'd like to turn it over to our Chief Financial Officer, David Doft.

Thank you, Alex and good morning, everyone. I'm going to keep my comments brief, focusing on three specific topics. A review of third quarter financial results, actions we are taking to address our cost structure and recent strategic announcements. Before I get to that, I want you to know that we are working diligently to improve our company's performance, particularly in cost reductions and renewed investment in new business acquisitions. Number one, we are focused on new business and have invested in senior business development and creative talent at several agencies, which is paying off with expanded new business prospects in the pipeline. Number two, it is important to note that our agency brands continue to be in demand in the marketplace and the under-performance of a few firms does not diminish our overall future opportunity. Number three, we have made significant progress in reducing the cost structure across several units, over $50 million annualized, which sets us up for an earnings recovery in 2019. Number four, we remain focused on creating shareholder value and have hired LionTree advisors in JP Morgan to advise us on a review of strategic alternatives. In addition, we have launched a search for a new CEO, led by Spencer Stuart. In summary, we have attained excellent cost reductions and have refocused on attaining new business wins. Third quarter results are as follows. Organic revenue growth in the quarter was up 1.5%. This growth was favorably impacted by a 190 basis point increase in billable pass-through costs in Q3, incurred on clients’ behalf from certain of our partner firms, acting as principal. This is an improving trend from the first half’s organic revenue decline, as we cycled past a more difficult year-over-year comparison in Q2, combined with net new business wins of $13 million in…

[Operator Instructions] Our first question comes from Dan Salmon of BMO Capital Markets.

David, just a couple of questions. Just first, I just want to clarify, in the release, you talked about an incremental 29 million of savings in 2019 from already actioned headcount reductions and real estate consolidation. In your comments a moment ago, you mentioned a 50 million figure as well. Can you just reconcile the two, I think, it's one from actions that have taken place already versus ones that are continuing to flow through the income statement, but if you could just help clarify that firstly. And then secondly, to the extent you can, if you could review your expectations for what deferred acquisition compensation for some of your agencies would be in 2019 at their current level of performance and maybe just to help refresh us, remind us sort of how that balance compares now to several years ago when you did take the incremental investment from Goldman would be interesting, just to remind everyone the difference in those figures? Thanks.

Sure. Thank you, Dan. So the $50 million, it’s actually in excess of $50 million and still underway, so hopefully that number will continue to move higher is the annual impact. But given that some of the moves have been taken throughout 2018, some of the savings are realized in 2018. The $29 million is the incremental in 2019, as we cycle through the full $50 million plus reduction. So I hope that’s clear? In terms of deferred acquisition consideration, in 2018, there's a little left this year. We funded about $10 million or $11 million in the third quarter. I think it's sub $1 million in the fourth quarter. So we're basically done for 2018 and there's a little that goes out in the first quarter of 2019, for the full year 2019, we're looking about -- at about $50 million of acquisition related payments. The vast majority is related to deferred acquisition consideration. There's a little bit that potentially could be there from step-up transactions of non-controlling interests. So that would be the aggregate amount. Historically, you're right, we've come down by quite a bit in terms of the deferred acquisition consideration levels. Just looking back a couple of years ago, we’re about $200 million lower in terms of the payments. And if you look back historically, we're near lows of seven, eight, nine years at this point, given the progress that we've made. And that's been a real focus of the company, as you know. The year-end 2015, the total between deferred acquisition consideration and non-controlling interest was almost $500 million and now we're sitting down towards $200 million. So, a lot of progress has been made.

Great. And then if I can just slide in one follow-up, maybe David, if you could just give us a bit of a review on performance by vertical. It sounds like the net new business record overall remains positive, we did see a little bit of news about some business coming out in CPG. So just interested particularly to hear the momentum there, likewise, I think healthcare is one that you've been highlighting recently as an area of strength, I would be interested to hear if that continues or any other notable movements across the major verticals?

Sure. So, we've seen some real solid strength this year in transportation, in travel, in communications, has begun to pick up of late. The financials category has been real solid for us as well as healthcare, has been solid for quite some time. We continue to be extremely upbeat about the potential to continue to gain share in healthcare over the next few years. We have a fantastic core specialist agency in concentric that is extremely well positioned and has been gaining some nice market share and was really helped be kind of the tip of the spear for us into the category to then when broader consumer work there as well. We also continue to make some real strong progress among the more disruptive companies, the FENG Group we've talked about before and there's a few more companies that are like those in the acronym in that category. But that group is now 7%, 8% of overall revenue for the company, continue to have high visibility of growth there based on recent activity and we're really pleased that the most disruptive companies in the broader business world are leveraging MDC agencies in order to build their business and build their brands.

Our next question comes from Steven Cahall of RBC.

David, maybe first. I think you trimmed guidance for organic growth to the lower end of the range. I think previously, in the year, you had talked about just some slipping out of some of the timing to convert the pipeline into new business. So maybe just any color you can provide on what resulted in the trimming of guidance for organic growth. And then also, I think you said the leverage would be at around 5 times as your target for the end of the year. Maybe just an update on whether or not that includes DAC payments and what your expectations are for working capital in the fourth quarter, since that's usually a positive quarter for your cash?

Sure. Thanks, Steve. So, the organic growth, we're pointing to the low end, that's correct. And I think that's pretty much where everyone had set their models ahead of this quarter. Anyway, ultimately, the first half was a bit more difficult as you know and the new business environment, at least from our pipeline, has seen things stretch out a little bit and to get to the mid or higher end of the prior range just doesn't seem reasonable, based on the pace of how things are coming in. That being said, the reality is the pipeline is substantial. And one of the things that makes us feel particularly optimistic about heading into next year is that some of the firms that were underperformers this year where we not only restructured costs, but we also refocused around go to market talent, have in particular seen pick-ups in their pipelines and that is a great sign that not only do those brands continue to resonate in the marketplace, but also should they continue to succeed in converting on that new business, we should get fairly high flow through of incremental revenue in the bottom line based on the cost moves that have already been made at those agencies. In terms of the year-end leverage, just to clarify, what I said was below five times in terms of our total leverage ratio and that’s as defined by our credit agreement. That does not include DAC, because that is not in the formula for our credit agreement. Given that we do not expect to pay down much incremental DAC in the fourth quarter, it should end around where it is now. There is a little bit of time value accretion, because it's a fair value number, which means it's present valued and so there is probably a couple of million dollars of tick up from the fair value time accretion, but generally, we're looking at a similar number at year end. And as you know, that is a number we have to recalculate every quarter, based on expected future performance. So it's possible it could go up or down based on changes in expectations of those agencies that are still in the deferred acquisition consideration mode.

And then maybe just a quick follow-up, so I appreciate that you're moving to covenant EBITDA and I understand why that makes sense, but just as -- for those of us still kind of thinking about adjusted EBITDA too, what are your costs to achieve your run rate savings this year and do you think you'll have any cost to achieve the 50 million that you talked about for 2019?

So, just to be clear, the 50 million is already done. The 29 million is a piece of the 50 million and it’s the part that is not being recognized in the 2018 year and thus continues to get cycled through, as we go into next year. So that cost is done. In the press release and maybe I had in the script too, I mentioned it was overall $19 million of pro-forma adjustments to get to the covenant EBITDA, about 17 million of that are one-time costs and the other 2 million is pro forma for full year of acquisitions, which is one of the terms of the formula for covenant EBITDA.

[Operator Instructions] Our next question comes from Avi Steiner of JPMorgan.

Just the balance sheet one here really. Your revolver balance still a little bit above 100 and although it came down sequentially, can you talk about where you think you'll end the year and how do you feel about covenant compliance comfort in the first half of ’19?

Sure. So we do expect the revolver to come down in the fourth quarter. Historically, the fourth quarter has been a very strong cash quarter for us on a seasonal basis and we continue to expect that. At this point in the year, I think it's unreasonable to think that we’ll be out of the revolver at year end. The shifts around of media budgets has made it clear that we're not going to be able to get there, but ultimately we should see a substantial reduction in the revolver for year end from where we sit right now and I think you could do the math on getting to below five times, what that would look like. In terms of covenant compliance, we are comfortable that we will be able to be in compliance with our covenants. While we did see obviously a period of stress, given the under performance in the first half of the year, we successfully managed through it. We expect the leverage ratio to come down substantially for year-end and one of the byproducts of the volatility of the working capital is that it will -- given that the nature of the timing of the media flows, we should not have as much outflow in the first half as we've seen in past years and we remain comfortable that we should be able to be in compliance and combine that with the cost reductions, which drives a nice pick up in underlying EBITDA. One of the nuances of our covenant formula and covenant EBITDA is, while we get the benefit of adding back the one-time costs related to restructuring, we do not get the benefit of the run rate savings of that restructuring. We have to earn that and so we are in the beginning of the earning phase of that. That should roll through the first half of next year and lead to a nice lift in EBITDA that gives us more than enough room from a covenant standpoint.

And just a follow up on the earlier question on deferred acquisition consideration and the point you made about working capital shifts maybe less going out in H1, less coming in in Q4 on the media buying side. So is DACs, I guess, the largest move out in the first half to think about and just can you refresh a number, you may have said earlier and I apologize if I missed it. Thank you.

So the number I gave earlier was, we expect about 50 million of DAC in 2019. The majority of that to be paid in 2Q, although some in the second half. And that is one of the biggest outflows that we have. It's possible that there are points of time intra-quarter where working capital outflows are more than that and I would expect that, but again leaves more than enough room for covenant compliance, even at what we expect the peak draw would be during the quarters, but the covenant test is only at quarter end and around those periods, it's not as bad as peak and so should give us even more room.

This concludes our question-and-answer session. I would like to turn the conference back over to David Doft for any closing remarks.

Thank you. I want to thank everyone for joining this morning and I want to particularly thank the people in the room, the members, our executive team, our corporate team and everyone employed across the MDC Partners network. I know everyone's working extremely hard in order to drive improved performance going forward and we look forward to a better fourth quarter and 2019. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.