Good afternoon, and welcome to the MDC Partners Third Quarter Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Matt Chesler, Vice President of Investor Relations. Please go ahead.

Thank you, and good afternoon everyone. I would like to welcome you all to the MDC Partners Third Quarter 2016 conference call. Joining me today 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 statements and non-GAAP financial data. As we all know, 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 afternoon’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 afternoon everyone. Let’s dive right in. Revenue was up 6%. Organic revenue was 2.7% in growth. Adjusted EBITDA declined 13.5%. Net new business was 1.3%, bringing year-to-date net new business to $58 million. Working capital generated positive cash of $52 million. We reduced our revolver draw by $37 million to $71 million, even with cash payments of $15 million for deferred acquisition consideration. This performance just isn’t good enough, and what you’re going to hear from me today are the actions we’re taking to fix it. So let’s get into the details. Revenue was better than the first half, but softer than we expected for a number of reasons. First, while our pipeline of new business remains robust and is positioning us nicely to be a continued share gainer, there were few meaningful actual new client decisions made that hit in Q3. In fact, the number of pitches that reached the decision this past quarter was the lowest in years. We also lost the remaining piece of business from a top account that had already started moving work away from us earlier in the year, as we discussed in the past. While the pipeline remained strong, you should expect that any additional new business contribution will benefit our financial results, beginning in 2017. Second, we saw continued softness in the financial services industry, which represents 6% to 7% of our revenue. And, as expected, a bit of the same from travel and leisure clients. Third, a number of currencies moved against us during the quarter, particularly the British pound, the Canadian dollar, and the Swedish Krona, and will continue to impact us in the fourth quarter. Now, let’s discuss earnings drivers. First, given the lower than expected revenue growth this year, we clearly needed to…

Thank you, Scott, and good afternoon. Scott has already covered all of the main drivers of our performance, so I’d like to spend my time discussing the change in our near-term outlook, as well as a handful of other items. As you can see in our earnings deck on page 13, we now expect revenue of $1.365 billion to $1.375 billion, or an increase of 2.9% to 3.7% over 2015. Adjusted EBITDA is now expected to be $170 million to $180 million or a decrease of 8.9% to 14%. The revised adjusted EBITDA guidance implies margins of 12.4% to 13.2%, or down 210 basis points from last year at the midpoint of the range. Now, what you’re seeing in the second half is the implementation of significant cost-cutting moves. Essentially, our investment to restore our cost ratios following a year of lower-than-anticipated revenue. We don’t take restructuring charges, so all of this is expensed through the P&L in normal course. I’ll run through the key components to help you bridge the change in our guidance, as well as to help provide an early bridge into how we were thinking about 2017. First is severance, we’ve already implemented cost actions across the network at many of our partner firms that have experienced revenue shortfalls. In aggregate, we are incurring $7 million of severance costs in the second half, incremental to our plan. Next, as Scott mentioned, we’re incurring roughly $3 million of real estate consolidation costs, including lease termination costs, and expect to realize $3 million of savings beginning next year. So a $6 million net benefit to 2017 versus this year. Next, the reality is that some of the cost is coming in is going to be implemented slower than expected. Unfortunately, that cost us from adjusted EBITDA this year,…

In the interest of time, let’s go right to questions. Operator?

[Operator Instructions] The first question comes from James Dix from Wedbush Securities. Please go ahead.

Good afternoon, and forgive me if I missed some of this in your opening remarks. But if you could just talk a little bit about the changes in growth that you’ve seen by vertical, any color on that, just to kind of bridge us kind of maybe more operationally or as operationally as possible, to the new outlook verses your prior outlook, that would be very helpful, thanks.

Sure, thanks James. So in the prepared remarks, we’ve talked about continued weakness in financial services in travel and leisure, and that’s something that began to emerge in the second quarter, and we talked about at that time. In terms of other categories, generally for use we’ve seen strength in communications in broader consumer package goods categories. We’ve seen some other weakness and largely related to kind of the ins and outs of wins and losses versus I think any underlying issues with other industries, but we could, for us in the technology sector and in retail.

Great, and then just one follow-up. I mean, is the performance of the portfolio this year different in any way in terms of the number of agencies outperforming versus not? Or is it a kind of more broader, socialized shortfall? I know you don’t typically talk about particular agencies, but maybe just kind of assess the portfolio this year versus in a more may be a normal year of growth and anything you’re seeing there in terms of kind of the top tier versus the laggards might be helpful. Thanks, and that’s it for me.

So, every year there are firms that outperform and there are firms that underperform. That’s true and I think one of the things this year is absolutely there is a little bit more underperformance than outperformance, but there certainly are many firms in the portfolio that are having exceedingly strong years. It’s just being offset by some disappointing performance at other parts of the portfolio. I think, as we alluded to in the prepared remarks, the cost moves that we’ve made should enable us to go into 2017 with substantial strength and higher run rate of profitability for the company; however, those moves and a benefit of that are a little too late in the year or actually cost us money to benefit 2016.

Great, thank you.

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

Thanks, this is actually Chris Bourne, on for Tom. Of the new account wins, which ones contributed to the third quarter’s organic growth and what should we see contribute to the fourth quarter? And then I have just got one follow-up after that.

So we typically do not call out client by client in that way around specific revenue performance. I think we’ve indicated in the prepared remarks some recent wins that took place, some in the third quarter that have some modest benefit really to 4Q, and then some are ones in the early days of 4Q that will benefit 2017, but I think we’ve covered off on as we typically comment on individual clients.

Okay, thanks, and then I’m just sorry if I missed this in the release, but could you just confirm the fourth quarter implied organic growth?

I think that the guidance that we put forth is pretty clear it implies low single digit increase in revenues for the company in the fourth quarter.

Okay, thanks.

Again, if you have a question, please press star and then one. The next question comes from Avi Steiner from JP Morgan. Please go ahead.

Thanks, I’ve got a few here. First off, after several reductions in guidance this year, just maybe talk to, again, what gives you confidence that growth will return next year. And I know you’re not giving specific guidance, but maybe talk top and bottom line? Thanks.

Thanks, Avi. It really starts with a combination of two things, looking at the top line and looking at our pipeline and the new business activity that we’re in that the pipeline is as robust as we have seen. And so that gives us confidence that our brands still resonate in the marketplace, will continue to resonate in the marketplace, that marketers in some cases, large, traditional marketers are looking for new solutions, modern approaches to the challenge they’re facing in this cacophonous landscape. Then on the cost side, we’ve taken the hard steps, we’ve made the hard decisions, we’ve incurred the costs this year that really set us up for a much more efficient 2017. So we’re taking care of the top line with new growth opportunities and taking care of costs, many of them that are already in place that we will see the full benefit of in 2017, and that’s what gives us the confidence in our future forecasting.

I would add, Avi, that based on the moves we’ve made, we don’t need meaningful revenue growth next year to drive substantial improvement in EBITDA and cash flow. And so while we fully believe and expect that we will re-accelerate based on the dynamic that Scott talked about, we have surely set ourselves up from a cost standpoint that either way we will have strong improvement in our expectation of the bottom line.

Okay, and the goodwill impairment comments you made, was that related at all to maybe what’s going on with the SEC and can you give us an update there, if any?

So the impairment charge had nothing to do with the ongoing SEC inquiry, and entirely due to the factors that I talked about in the prepared remarks. There was a triggering event around the assets that led us to do an interim impairment testing, and write down to that 3% of goodwill. Scott, do you want to talk about the rest?

The only other thing I would say is that with regard to the SEC more broadly, the investigation is ongoing and we continue to cooperate and we don’t have any updates at this time.

Okay, and then just going back to the business side, your net new business wins came in at $1.3 million, I can’t recall a lower number, and I’m just trying to square that with comments around the pipeline and what’s been reported in the trade press.

Sure, and in my remarks I mentioned that while there was a lot of activity, there was very little that actually crossed the finish line in Q3, so what we’re seeing is a slowing of some of the decision making that we would like and then as we’ve said previously in some of the accounts that actually got started, it got started later than anticipated, so that added to the shortfall in expectations around the top line. But those reviews are ongoing and we hope to have announcements throughout the remainder of the year and into early next year about new business wins.

Okay, and on the balance sheet, could you, David, if possible, tell us where the revolver balance is today and do you have the ability under the revolver or maybe said differently, with the freed up cash, to buy back your bonds?

So we do not typically update on where the revolver is intra-day or intra-quarter. It was $71 million at the end of September and as I indicated in my prepared remarks, we expect to be out of the revolver at year end and in between is a lot of volatility. And so that’s the expectation. While I think we have the wherewithal based on the covenants and baskets to do what you asked, it’s not our intention to do that. But right now, based on the comment we made, we’re looking at lots of potential alternatives to accelerate the deleveraging of the company and allow us to continue on our way.

Okay, and maybe I’ll end it here. So the financial and capital structure optimization that you’ve hired an advisor for, non-typical at least from my seat, could that involve other things? Would you potentially or could you potentially look at selling pieces of your portfolio?

There are a lot of levers that could be pulled, but it doesn’t make sense to go into the details at this time.

Thanks for taking the questions.

The next question comes from Peter Stabler from Wells Fargo Securities. Please go ahead.

Thanks, I’ve got a bunch. First, let’s start on the media business. Is it growing? If so, how fast? And what kind of margin profile does it have compared to the rest of the business? Then I’ll keep going, thanks.

So the media business has absolutely been a growth story for us throughout the second half of the year, as they’ve been ramping up new business, has seen acceleration broadly in the growth of that platform. Surely as part of building that business there has been investment in that, and so while it’s not an optimal margin broadly right now, we fully expect that as it continues to scale and realizes the opportunity to be a strong contributor to the overall margin of the company.

Okay, great, and then maybe it’s just me but I’m a little confused by the terminology around the adjusted EBITDA guidance bridge, so the incremental severance has already been taken, the $7 million. What is the delayed cost cut line? It’s implied that it’s in the quarter, is that in Q4 or can you help me? Is that a Q4 $10 million anticipated expense?

So the bridge is meant to be for second half, relative to prior expectations, and generally it’s a view that the cost moves did not happen as quickly to benefit this year as they needed to, so there is still some expense that shouldn’t be here in a way, but that’s been attacked and addressed for the run rate going into next year.

I’m sorry, I’m still not following. So delayed cost cuts, are those actions to be taken between now or the end of Q3 and the end of the year?

It’s across the entire second half – Peter, it’s across the entire second half. It’s not severance, because we’ve broken out the severance. It is when we’re talking about relative to prior expectations, where there was an assumption of improved cost in a certain areas that we didn’t get the improvement fast enough.

Okay.

And so carried cost that impacted this year, longer than we had anticipated, but those moves have largely been made and we’ve largely set up the business to be a higher run rate business going into next year. But it costs a lot of money to do that, so it’s not enough to offset the cost of making those moves and so I as I said, it was $10 million of costs in our number that are related to the cost-saving moves that we’ve taken.

Okay, great. I guess the next one for me would be around your philosophy on guidance. Maybe it’s too early to ask the question, but as you contemplate Q4 and offering a view into 2017, do you think you’ll take a similar approach or maybe given the volatility of the business that you’ve seen this year and the capriciousness of client relationships maybe take a different stance, closer to that of your peers who are reluctant to offer firm ranges?

I think that’s an excellent question. I think our goal is to try to give as much insight into what’s going on in our business as we possibly can in order to help investors. For now, it’s been to sort of give the guidance that we give. I think as we hear from investors that they think it’s more helpful to talk about the business in a different way or try to get insight into other areas of our financials we would absolutely be open to considering that.

Okay, last one from me. The bullet around the client decisions on incremental new assignments, is that new business? Is this an issue of you were banking on kind of speculative assignments from current clients that didn’t happen? Any more color there would be helpful, and that’s it, thanks.

Yes, these are new business pitches, typically competitive situations where you’re up against other agencies and this will be incremental new business to the family.

So should we read that to mean you are banking on winning certain businesses ahead of those being announced?

I think, Peter, the way we look at it is we evaluate our pipeline and the schedule around when those pitches are taking place or how long they typically play out for and our comfort with certain pitches or our historical win rate around pitches, and we make an assumption that historically is an assumption that we have been fairly accurate at if you look at prior years before this one. This year there was a confluence of factors that led pitch activity to play out a little slower. Decisions, as you know from your experience in the industry, sometimes they’re made, sometimes they delay the pitch, sometimes they’re made at later dates, and it can be a little unpredictable at times. So what we’re saying is that while there are many pitches that we’re involved in going on right now, not as many came to the end of the process where they chose a winner, any winner, in the third quarter. So it impacted the growth win component of our net new business wins. It’s hard to predict whether that changes the pace of other pitches with other clients at other times. I would imagine probably not is the reality, but wins and losses always has been an extremely lumpy thing based on decisions made at each individual client over time.

That’s helpful, thank you, David.

The next question comes from Rich Tullo from Albert Fried and Company. Please go ahead.

Yes, hi, I’ve got a couple of questions. Is it fair to say that the improvement in working capital in a quarter with about $44 million from AR, accounts payable and accruals, is that about right?

Our balance sheet is published in the press release, you can see what the numbers are. Overall that did contribute $52 million from the changes in working capital.

52?

You can see the components in the press release.

Okay, fair enough. Is that ahead or behind where you thought you’d be during the quarter?

Our cash generation for the quarter was almost spot on to our forecast and so we’re feeling very comfortable about the dynamic of the cash flow from that standpoint in the second half.

Okay. Getting rid of the former CEO should have saved you about $20 million. We’re talking about spending an additional $20 million, above and beyond the $20 million you spent that you should have saved from getting rid of the former CEO. That’s $40 million. How is that possible? I mean, it just seems like there are costs, scale, and negative leverage, that’s really beyond a reasonable person’s comprehension.

I’m not sure I quite understand what numbers you’re referring to, Rich.

Okay, so we were told as investors and as analysts that getting rid of Miles would save about $20 million a year. You’re telling us today that you’re spending $20 million to lower your costs in 2017. At this point in time, you said that you saved the $20 million, but you didn’t save the $20 million, you actually spent it. So now that’s $40 million that should have – that we’re spending and it’s coming out of cash, it’s coming out of EBITDA, and that’s a pretty big scale on that kind of what was expected to be a $200 million EBITDA company. So what is going on in terms of culture, in terms of technology, in terms of staff, that is leading us to believe that you had to spend $40 million more than is necessary to run this company in 2017?

Forgive me, Rich, but I have to totally disagree with the premise of your question. One, you’re mixing two concepts around corporate and then around what’s going on at the agencies. So let me take you through it and how we see it and hopefully that will clarify things for you. Coming into the year we said that we would be able to recognize a net savings of $10 million from the changeover in leadership of MDC and that’s some gross savings that’s a little bit more than that. I don’t think we ever used the number $20 million, but gross savings is a little bit more than that, offset by some infrastructure investments. As I indicated in the prepared remarks and you can see in the numbers, corporate cost year-to-date is down $8 million, and that’s even with an incremental $2 million of severance. So on that run rate, we’ve already realized $10 million of savings through September 30. We have a whole other quarter to go, so we are on track to exceed the savings targets at corporate materially versus the expectations we have set out for you. The cost of the cost savings that we’re referring to when I said $10 million to $15 million, not $20 million, relates to in the agencies. It’s very different than here and it’s a combination of severance expense relative to right sizing staff costs and getting staff cost ratios back in line for the revenue base we have, as well as real estate consolidation costs where we’ve been able to increase utilization of the existing real estate, sublease out excess real estate, take some losses on that, but in aggregate save up to material amount of money on an annual basis going forward and all of that to benefit next year. So that’s how we see it it’s two separate things. We think we’ve made tremendous progress on the cost side. The revenue shortfall this year has offset. We’ve seen that in this year’s numbers but we’re very excited that we now have the building blocks to substantially higher cash flow going into next year, bringing margins back to what people are used to from us and return to the path of margin expansion going forward.

Okay. Has your balance sheet created any issues in winning pitches with the Fortune 100 scale counts?

No.

Okay. Is the Media Assembly accretive or dilutive to cash?

I’m not sure what you mean by that.

Media Assembly is growing, right? So ad spend on Media Assembly over the years has gone from $1 million to maybe over $3 million by now. Has that been a cash generator or a use of cash in 2016? Trying to figure out…

In general we don’t make it a practice to go into that level of detailed financials of individual agencies.

Right.

So I’m not sure it makes sense to go into the weeds on that.

Will you have to pay any penalties on your bonds or your revolver, given the state of the balance sheet right now?

No, we’re in compliance with all covenants. We have no issues whatsoever with any of our debt, our revolver or our senior notes.

How come it’s taken two years to cut the dividend??

I think that’s a really good question, Rich. I think it is with the strategy – we just depend on the strategy put into place by our prior leadership of this company. I think that was something that became important to many investors and makes it a very difficult decision to consider doing what we did. We recognize that it’s going to make many people extremely unhappy about that. And in the short term we’ll pay the price for it but over the medium to long term, it’s absolutely the right thing to do for the company, per the tone of your question. It makes sense. A company like ours should not be paying a dividend. A company like ours should have lower leverage than we have and so we’re trying to accelerate that, so we can take the balance sheet question off the table, right? We’re tired of that question. And allow us to continue to build our business because there is a substantial business here to continue to build that has huge upsides, and we’re excited to realize it.

How confident are you in your guidance? Last two quarters’ guidance has been missed. We’re talking about a very important fourth quarter for you to hit on guidance and to position yourself to do your things that you need to do in 2017. I don’t view this as something that is not very, very serious. So how confident are you that you actually have the guidance right? Are there any large accounts like BMW that are not generating any revenues at this time? And do we have a handle on what’s going on at the agency level to provide us, the investors, to make reasonable and rational decisions about MDC Partners?

Thanks, Rich. We’re confident of the guidance or we wouldn’t have given it.

That’s what you said last quarter. I said how confident are you guys? Are you 90% confident? Are you 100% confident?

We believe these numbers Rich. Rich, we believe these are the numbers.

Okay, thank you.

Thank you.

The next question comes from Mike McCaffrey from Shenkman Capital. Please go ahead.

Thanks. I was hoping, can you just clarify with the restructuring charges that were outlined in the bridge, in the slide deck, how much of that is impacting this quarter and how much of that is expected to impact fourth quarter?

I’m not sure I have that schedule in front of me, Mike, but I think what might be helpful is, and I assume bridging the gap between reported numbers and covenant numbers. But covenant EBITDA on a trailing 12-month basis this quarter is over $201 million.

Okay, and that’s…

That related to the revolver. And related to revolver, as you know for the senior notes, it’s even higher than that given certain provisions in there.

And of that $20 million, is that $20 million, is that comprehensive in terms of the cash spend that you think is required in order to achieve the $30 million in cost savings?

That is an indication of the spend that’s taken place, and a large portion of that has already taken place in order to realize the cost savings.

And of the $30 million run rate savings you’re expecting next year, how do we think about how that’s going to flow through over the course of 2017? It’s probably not going to be linear. Is it mostly going to be 3Q, 4Q? Or how should we think about the impact?

The reality is we expect most of it to begin to accrue day one of the new year. So it’s annualized, it’s a lot of salary, it’s rent and those are things that are pretty straight line through the year.

Then just finally, on the deferred acquisition consideration, can you just update us on what you plan to spend in the balance of this year, and if $125-ish million is still about the run rate that you expect to pay next year?

In the fourth quarter we expect to pay about $5 million of deferred acquisition consideration. I think as you can see on the balance sheet, the current portion of deferred acquisition consideration right now is $119.5 million. I should point out $26 million, $27 million of that is potentially stock-based payments. And there are potentially a few million dollars more of some non-controlling interests that might be taken out. So in aggregate, the cash component is likely a little over $100 million.

Okay, thank you.

The next question comes from John Janedis from Jeffries. Please go ahead.

This is actually Brian Paturzo filling in for John. Can you clarify what you mean when you say you’ve hired an advisor to evaluate your capital structure? I think skeptics will say that you are preparing for heavy dilutive CIP financing, or even a bankruptcy or restructuring. If there is any additional clarity you can provide on what they’ll be doing, that would be helpful, thanks.

That is not what we’re talking about. We are evaluating the capital structure on ways that we can lower the debt or lower our leverage on a faster basis than just having the cash flow from the operations do that over time. And as Scott said, there are many levers we can look at there but we are not talking about what you asked.

Okay, thank you.

The next question comes from Lee Cooperman from Omega Advisors. Please go ahead.

Yes, thanks. I tend to want to be supportive when companies have a difficult time, but I got to say I think there has been a long history now of missing targets that you have given out, your debt reduction targets, your EBITDA margin targets, et cetera, and I think it’s fair to say I told you in 2010, when the dividend was initiated by the prior management, that it was a mistake. I think you’d acknowledge that. So my question is really leverage off the last person’s question, I have never seen the kind of wording that when you hire an advisor – I understand about exploring strategic alternatives, stuff like that, but could you tell me who LionTree is, what their credentials are, and whether the board would be willing to consider broadening their assignment to include seeking strategic alternatives for the company? Because basically you say you see huge upside; this is a tight industry. If you show your budgets to people on a confidentiality basis, it is highly improbable you will get a stock market evaluation that you can get in a private market transaction. I think the shareholders have suffered long enough here and that the time has come for the management and the board to seek a private market solution, if one exists. I don’t know if it exists or not. But you say you see huge upside, you’re very optimistic, the prior questioner was right when you talk about financial and capital structure strategy, I didn’t think about bankruptcy, but talk about equity dilution. But are you willing to consider the alternative of a strategic buyer of the entire company if the price was fair? Would you voluntarily add to the assignment of LionTree, whoever they are, of seeking that as a possible scenario as well?

Thank you, Lee, and look it’s been a difficult five months for us. And we appreciate that there is concern and a lack of confidence in some of the statements that we’ve made, the guidance that we’ve given, and we own that. Five bad months does not necessarily challenge the underlying value of what we have built, and so we have taken these difficult decisions, we’ve made hard decisions, they actually exacerbate the situation in the short run, but they are the best decisions for the long-term health of the company. And historical precedents being what they are, I think it’s widely acknowledged that despite the fact that many of our investors in part because of the dividend, that a company of our size and our stage and our growth potential should not be paying a dividend. It’s one more hard decision that we have made today for the long-term health of the company.

Excuse me, Scott, I’m not questioning the action of dividend. What I’m asking is can you broaden the assignment of your financial advisor to include exploring strategic alternatives if they exist? In other words, the only way you’re going to deleverage a company is if you sell off properties or you sell equity to reduce the debt in the terms of a shorter-term solution. Obviously you could deleverage if you really earned what you say you’re going to earn and you don’t pay a dividend and you retain the earnings. What I’m saying is rather than go down a path of possibly re-capitalizing the company, whether you add to that alternative seeking a possible strategic alternative if one exists. I’m not talking about your dividend, I understand the dividend. You never should have been paying the dividend to begin with, and I said that five years ago. So we’ve now arrived in the scene.

So we’re aligned in that respect and we said there are a lot of levers to be pulled, and right now the scope is to explore and evaluate our capital structure. We’re a publically traded company, so we will always do what’s in the best long-term interest of shareholders.

Well, that’s a standard answer and I say this, the comment you put out should be broadened, because people are reading the comment as exclusively equity dilution and this other gentleman talking about financial insolvency, which I don’t think is the issue. I think that you should voluntarily put out there that if the price is right, the enterprise is for sale. That’s what I’m saying and I think it’s too limiting, what you put out. And can you tell me a little bit about LionTree? Who are they? I have never heard of them.

LionTree is a boutique advisory firm that has extremely strong credentials and experience, especially in the broader media space. It’s their specialty. And I think if you did a quick Google search you will see many of the recent high-profile transactions and other initiatives in the media space they have been in the middle of.

So it would seem to me, from what you just said, that they would be ideally positioned to determine whether there is an acceptable strategic alternative available to us.

[Indiscernible] mandate.

No, I’m arguing that the mandate should be broadened, that’s what I’m saying right here, very clearly. The mandate should be broadened, okay, whether it’s your predecessor or the current management, there has been a series now three to four years of missed objectives on profit margins, missed objectives on deleveraging, you gave guidance three months ago, the guidance has been substantially revised, and I think you owe it to the shareholders to – and I understand now is not the best time to sell a business, you’re supposed to sell a business when the ducks are quacking and the stocks are at their new high, I understand. But it would seem to me that you should broaden the assignment and make a determination as to whether that might be the better alternative. That’s all I’m suggesting. And to dismiss it, okay – and to dismiss it, is wrong.

Thank you, I hear you, and I certainly understand your point of view.

Thank you.

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

Hi guys, good afternoon. I’ve got a few questions as well. I’m going to try to follow-up on the hiring of LionTree. It seems clear in your comments so far that examining the capital structure and the balance sheet is a part of the mandate. We’re not going to obviously get into strategic options and go that far, but maybe just a little bit in between. Would the examination of the financial and capital structure strategy, would that include re-evaluating what has been traditionally a unique way to execute M&A, in particular?

It’s going to look at everything, Dan, absolutely.

Okay, and then just want to follow-up on your point, Scott, amongst the restructuring moves.

Yes.

I think the way you noted it was that portfolio optimization is already underway and we’ve had a 6% reduction in standalone agency partners. Can you expand on that a little bit? Is that some businesses being brought together? Are there some outright wind downs there?

Both are the case. So a combination of agencies, a wind down, and a parting of the ways with another.

Okay, and then Scott, the last one – I’ll try to put this as best as I can. I think everyone listening understands why restructuring and strategic actions are being taken in light of the near-term trends, but in your opening remarks you also noted that you continue to expect MDC to be a share-winning organization. So as I think about the stepdown in the cost structure here and with the portfolio being pruned a little bit, are we talking about stepping down to a new level of profitability and simply resuming a prior track? Or is there a portfolio here that can generate a faster revenue growth, the same revenue growth as before? Or maybe even slightly less on an organic basis as you look at the moves that you’ve taken already and the ones that you look to take in the near term?

Well, as David was saying, even on a flat revenue growth, given the cost consideration that is already in place, we would expect to see improved performance, but I think I wouldn’t call it a streamlining in any sense, I would call it, in some cases, a right sizing of aligning cost structures with revenue ramps more effectively, as we’ve seen a slowdown in some of the new business wins and the costs associated with those pitches. It’s taking more prudent action around cutting costs sooner when revenue doesn’t appear, it is just a prudent step to take. We’ve got a broad view and a broad purview of our portfolio and so we can see those trends. We talked about 190 basis point increase in staff costs year-over-year. That’s essentially what our business is built on, people and to a lesser extent, real estate. So that’s where we have been focused, every time you make a change in either case it has a potential consequence of costing you in the current period, but we continue to try to make decisions that are in the best long-term interests of the company and of this portfolio.

And Dan, I’d add I think you should keep in mind that a business that we’re exiting, whether it’s a wind down or a sale, in this instance it is not a business that’s a contributor to growth or a contributor generally to profits. So we’re removing declining, unprofitable companies. And when we decide to merge, it’s because there is a very strong capability that maybe is not reaching its full potential that would benefit from aligning with a larger organization where they can share in greater resources and new business development capabilities, but at the same time, we’re able to get out of real estate, get rid of the back office and administrative functions and realize higher profitability and our expectation is more growth out of those assets. So those are the things we think about when we pursue the portfolio optimization initiatives.

Okay, thank you.

The next question comes from Leo Kulp from RBC Capital Markets. Please go ahead.

Hey guys, I just had two minor ones. First, when you look at the organic growth results for the quarter, international accelerated pretty well. Would you say that, the weakness that you saw maybe more on the U.S. side? And then my second question is – I’m sorry, go ahead.

Let’s just cover them one at a time if that’s okay. So in the quarter, the U.S. business did better than the second quarter, but certainly not good enough. So there was some modest growth there and an acceleration from Q2 unlike, I think, what we’ve seen from a lot of others in the industry, but surely not meaningful acceleration.

Okay, got it. Then just another housekeeping question, can you get the breakouts for the office and general in G&A expenses on the advertising and communications side?

One moment, I’ve got to dig that out. Can we follow-up on that after?

Yes.

Thank you, just in the spirit of time, because we’re running out of our hour.

Thanks.

The next question comes from Jack Salzman from Kings Point. Please go ahead.

Yes, thanks. A couple of questions. One is do you plan on freezing acquisition strategy?

Jack, I don’t think we’ll be highly active in the M&A markets until we continue with our efficiency initiatives here. We continue to look. There is a robust marketplace of opportunities. I’ve said it’s never been easier to start an agency and it’s never been harder to scale one. But I don’t think you’ll see anything along the lines of the size of the Forsman and Bodenfors deal, for instance. But we’ll continue to keep our toe in the water and make sure that we’re aware of what’s out there. And if we do some deals, they are likely to be very small deals.

The issue is saving money now and generating more cash flow to help you delever the balance sheet and get your footing again? I’m not sure why you would want to make any acquisitions considering all the things that are going on right now. But that’s a separate issue. Let me see if I can tackle the missed forecasts a little bit differently, if I may. Clearly you have a process for making forecasts, in revenue, in expense and cost structure, and clearly it hasn’t been working, at least certainly in the last 12 months or so. What have you changed in the financial process to ensure that the expectations you’re giving us today are more likely to be achieved than what you have accomplished in the past in terms of those forecasts? Meaning, have you done anything differently internally to strengthen and improve your ability to forecast expectations in a more accurate way?

Sure Jack, yes, earlier this year we did remove a layer and that included our Chief Operating Officer, the managing directors who now manage our portfolio across four different people now report directly to me, so that allows me to get closer to the agencies and closer to the information on a real-time basis, and that has informed the decisions that we’ve made, the hard decisions, that have resulted in some actions that, again, have been detrimental to our short-term reporting, but will serve us well for the long-term.

So you’re saying you actually changed the process itself or just the reporting to you? If there are changes in the financial discipline of making forecasts?

We’ve absolutely changed the process based on lessons learned. I’m not sure it makes sense to go into the details of the minutia of that on this call, but we have made some significant changes on that front, yes.

All right, if I may ask just one more question, if you have an expectation that you can give us in terms of interest expense next year and stock-based compensation, do you still plan on doing stock-based compensation? Would you also consider diluting shareholders again through an equity offering if your investment advisor suggests that’s one way to delever?

So from a stock-based compensation standpoint, next year would expect to be likely similar to this year at this point in time. A big function of that relates to historical M&A, so it doesn’t really change year-to-year as we amortize through those deals. The component related to MDC employees is typically less than half of the total and so not a hugely meaningful number, but there is a little bit there and obviously we’ll see how that plays out and have a better view at year end about next year. I don’t think we’re prepared at this time to comment on the different levers that may or may not come out of the process with our advisor, and I think we can just leave it at that.

And interest expense, do you have an expectation?

Excuse me, I’m sorry about that. So our senior notes have 6.5% interest on $900 million. So you can easily do the math and model that out. In terms of revolver interest, from a seasonality standpoint, we’re in that from time to time. Probably I think you could add $2 million, maybe $2.5 million, of interest throughout the year from that.

But I assume that…

You’re basically coming up in the low 60s.

In the normal course of events though, you’re expecting to pay down some of this debt next year?

Our intention is to reduce use of the revolver over time. And surely the moves on the dividend alone help us to do that substantially. But there is seasonality to working capital, and there are some deferred acquisition consideration payments to be made that I think you should assume that for parts of the first half of the year, at a minimum, we’ll be in the revolver for some time.

Okay.

The next question comes from Peter Stabler from Wells Fargo Securities. Please go ahead.

What the severance expense in the quarter was?

Severance expense in the quarter was about $3 million.

Thank you.

The next question comes from Jeremy Kahan from North Peak Capital. Please go ahead.

I was wondering if you could talk a little bit about the bridge to 2017. Is it fair to take the $175 million, add $30 million of cost cut, and then assume a little bit for growth?

I think it’s premature for us to speak specifically about 2017. Our formal budgeting process is about to kick off on that front. I think as a general framework, I think you’re thinking about it in the right way, so I think from a starting point it’s very similar to how we’re thinking about it, but now we have to go through the formal process and the other ins and outs and what that might look like.

And then I know there’s been a number of delays on the new business win decisions, would you, given the enthusiasm around the pipeline, would you say it kind of looks like a typical quarter as opposed to what happened in Q3?

I think typical, I might even go so far as to say it’s better than typical. There’s a lot of activity right now and we certainly win our fair share.

Great, and then lastly is there – nope, that’s it. Thank you very much, guys.

Thank you.

Thank you.

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

Thanks, Dino. Well, as you heard David and me say, we’re making the hard decisions and taking the steps necessary to get to better performance. And we’re redoubling our efforts to ensure that we return to a level of growth that’s more reflective of the inherent underlying strengths of the business. We look forward to updating our progress in the days ahead. Thanks for listening, and good evening from New York City.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.