Matt Chesler - Vice President-Investor Relations Scott L. Kauffman - Chairman & Chief Executive Officer David B. Doft - Chief Financial Officer.

Bill G. Bird - FBR Capital Markets & Co. John Janedis - Jefferies LLC James G. Dix - Wedbush Securities, Inc. Dan Salmon - BMO Capital Markets (United States) Peter C. Stabler - Wells Fargo Securities LLC Rich R. Tullo - Albert Fried & Co. LLC Tracy Beth Young - Evercore ISI Jack L.

Salzman - Kings Point Capital Management LLC Gene Fox - Cardinal Capital Management LLC.

Good afternoon, and welcome to the MDC Partners' Second Quarter Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Matt Chesler, Vice Present of Investor Relations.

Please go ahead sir..

Good afternoon, and thank you for joining the MDC Partners' 2015 second quarter conference call. On the call today from MDC are Chairman and CEO, Scott Kauffman and CFO, David Doft. During the call, we will refer to 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 statement included in our earnings release and slide presentation and further detailed on the company's Form 10-K and subsequent SEC filings. For your reference we posted an investor presentation to our website.

We also refer you to this afternoon's press release and slide presentations, 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..

Thanks Matt and good afternoon ladies and gentlemen. Thank your for taking the time to join us today. This is my first time speaking with you as MDC's new Chairman and CEO so before diving into the overview of the quarter and our growth strategy I wanted to take the opportunity to offer a few introductory remarks.

I'll 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 financial guidance as well as provide an update on development at MDC as we work through the ongoing SEC inquiry.

Let me begin by saying this, my time on the MDC Partners' Board of Directors and my experience in the industry have given me a unique perspective and a deep appreciation for what has been built here. Specifically, MDC's unique strategy and culture and the significant opportunities for growth that lay ahead of us.

For that reason I'm honored to be taken on the role of MDC Partners' CEO. I'm committed to staying true to MDC's core strategy, to building on our considerable strengths and to working with the impressive leaders of our industry leading partner firms.

I am confident that my background at the intersection of technology and data analytics will push us to continue to lead in the areas where the communications world is headed and I'm certain that MDC's entrepreneurial model of partnership is the right one for clients, for agencies and for shareholders.

In conversations with the leaders of our partner agencies, I've had the opportunity to reconnect with them in my new role and to start the process of mapping out our future together.

At the same time, while we build towards this future, I am looking forward to earning and maintaining your trust and demonstrating through our actions why this enthusiasm for our business is merited and deserved.

I intend to lead by example, I believe in the culture of transparency and I look forward to the opportunity to enhance our communications with the financial community and all of our stakeholders. So, let's discuss the quarter for a moment.

Our underlying financial performance was strong and is pacing consistent with the financial plan that we laid out for you at the beginning of the year. Accordingly, we're reaffirming our full year guidance as David will detail later in the call. We posted exceptional organic growth of 8.3% and total revenue growth of over 12%.

Adjusted EBITDA while down modestly year-over-year due as expected to revenue recognition associated with certain accounts is tracking to our annual growth forecast. On the operational front net new business in the quarter was $27 million and the pipeline continues to produce meaningful growth and visibility, it's strong.

Notable wins that we can disclose publically include PayPal, Hershey and Novartis. Importantly we completed multiple step-up transactions in which we increased our ownership and partners during and subsequent to the quarter.

Notably just this week, in fact just this morning the founders and leadership team at 72andSunny have reaffirmed their commitment to MDC and have extended their relationship with MDC for an additional five years and I couldn't be more proud of this expression of confidence in MDC and it management team.

As we look to the future we're committed to continuing to build our platform by taking strategic steps to ensure that MDC outpaces its competitors by better serving our clients and importantly creating long-term shareholder value and here is how. First our number one priority is and will continue to be bolstering our North American operations.

We'll do this by reinforcing our entrepreneurial culture and investing behind talent, by fostering collaboration across the network and adding strategic capabilities where it makes sense and by protecting the autonomy of our partners and supporting them in their growth objectives with needed resources and capital.

Second, we'll continue to scale our media buying and planning platform to take advantage of this emerging opportunity.

The pace of change in our industry is rapid, the call for greater accountability and transparency is growing louder and success is increasingly more about efficiency and performance then it is about scale which is why we feel our media business with modern architecture, one that centers on data, analytics, technology and most importantly transparency.

So we're very well positioned to win in the marketplace and our media businesses are performing very well growing organically at double-digit rates as we continue to gain incremental assignments. Third, we will grow through strategic highly accretive M&A that adds to our capabilities and supports our partners in their growth objective.

We like our strategy and our structure of buying less than 100% of the equity up front as it has proven over time to be an effective way to align and incent agency talent for value creation over the long term and to manage downside risk. We firmly believe this is the right deal model for a talent driven business.

But there has been some confusion in the marketplace for how we account for these transactions so David will provide you with some specifics in his remarks. Our recent partnership with Y Media Lab is the latest example of our M&A efforts.

They are an industry leading mobile interactive agency bringing deeper end to end capabilities in mobile strategy, design and development. We're already leveraging their unique capabilities across the network.

And finally we'll continue to look for opportunities to scale and leverage our presence outside of North America with existing resources as much as possible and to selectively extend our reach further in support of our partners.

International is 9% of our revenue and grew organically over 30% in the quarter and it's worth knowing that we entered India via the recent investment in Y Media Labs and subsequently leveraged their infrastructure to expand our GALE Partners' unit into that important market.

We're confident that all of this will translate into strong revenue growth, higher margins and solid cash generation which we'll reinvest into the business, return to shareholders and use to de-lever our balance sheet.

And on this subject we are dedicated to de-levering the balance sheet on a net basis to below 2.5 times and continuing to look for ways to do so even while maintaining an opportunistic M&A strategy. Overall, I'm very pleased with how the year is shaping up from a strategic, operational and financial perspective.

Smart investments and a commitment to talent and technology are paying off with industry leading top line growth and with a long runway to sustain premium growth for the future. Now before I conclude my portion of the call, I want to assure you of the continuity of our exceptional leadership team.

I continue to be impressed by the dedication and commitment of those around me to MDC's ideals, its values and long-term vision.

I couldn't imagine a better team to help the company realize its potential and I'd like to specifically thank David and our General Counsel, Mitch Gendel as well as their teams for their stewardship during this transition period.

David and Mitch's leadership over the past several months has been critical to the ongoing success of the company as well as to my transition into the CEO role. As you know, the Board has given David additional responsibilities, which underscores just how much the Board and I believe in him, his capabilities and his effectiveness as a CFO.

Together, we're committed to the company's continuous improvement and the future of our business is big, bold and bright. And now, it's my pleasure to turn the call over to our CFO, David Doft. [05L47V-E David Doft] Thank you, Scott and good afternoon. Our second quarter performance keeps MDC right on track for another solid year.

We have not missed a step. First, revenue increased 12% over last year to nearly $337 million with organic growth of 8.3% on top of a 10% comp excluding Accent from last year.

Business momentum is solid as our agencies continue to gain share plus we were able to recognize some though not all of the revenue for certain larger new clients recently brought on board. Second, adjusted EBITDA of $47.5 million nearly matched last year with margins of 14.1%.

But for revenue recognition for certain new clients and timing of incremental severance expense, we'd have been above last year's mark which give us great confidence on the year.

And third, adjusted EBITDA available for general capital purposes was $27.7 million compared to $31.8 million in Q2 of last year, again comparatively down due to revenue recognition. Our financial performance is tracking inline with our expectations for the year.

This was the clear message we wanted to send by reaffirming guidance when we announced the CEO transition on July 20 and I wanted to reiterate this message to you again today. We're on pace and on mark for a very successful 2015 and hopefully an even better 2016.

We continue to expect revenue to increase 6.5% to 8.5% to a range of $1.3 billion to $1.33 billion. Our revenue guidance implies 7% to 9% organic growth.

We are running toward the high end or above the range on total revenue owing to higher pass-through revenue and contribution from the recent Y Media acquisition partly offset by continued weakness in foreign exchange rates, particularly the Canadian dollar. We ended the quarter with nearly $35 million of cash on the balance sheet.

We're particularly pleased with how we performed from a cash standpoint despite $96 million of combined deferred acquisition consideration and step-up closing payments made in the quarter, so our cash generation and balance sheet are strong. The ratings agencies have also spoken over the last couple of weeks.

S&P just raised our credit rating and Moody's reaffirmed it. I'd like to point out two line items in our balance sheet that have not been broken out previously as it had been immaterial in the past, and that might be confusing.

In the normal course of its business, our partner Kingsdale often acts as a depository agent in various transactions and due to timing differences there can be transitory cash, potentially large sums, on its books in segregated account at period end.

This is shown as cash held in trust and is offset by a corresponding trust liability on the balance sheet. This should not be considered cash that MDC is free to use for other business purposes.

Now, let me spend a moment to discuss the financial impact to MDC as a result of the work of the special committee of MDC's Board of Directors and the CEO transition. To be clear, these are cash items, but our aim here is to isolate for you the amounts related to these matters so that you can see the trends of the underlying business.

This is reflected in our adjusted EBITDA calculation in the press release and its supporting schedules. First, let's talk about the second quarter.

As a result of the special committee's review, the company incurred legal and other cost of $3.9 million offset by a one-time gain of $8.6 million in the quarter related to the previously announced repayment of expenses by our former CEO, which had previously been expensed through the P&L.

Both of these items have been pulled out of our adjusted non-GAAP numbers. In the third quarter, we expect to record a one-time gain of $1.9 million related to the repayment of additional monies that were improperly paid to an affiliate of our former CEO.

In addition, we expect to book an expense of approximately $6 million in the third quarter relating to the portion of un-accrued bonuses not being reclaimed as part of the bonus callback per his separation agreement. Overall though, this is all money that is coming back to the company.

To-date the company will have recovered $8.6 million plus commitments to repay an additional $12.7 million. Apart from these discrete items, we are in the process of evaluating the impact to our P&L that our leadership change will have on an ongoing basis.

Certainly we expect it will have less direct compensation expense and other spending related to the CEO position. This will set us up for an opportunity to deliver incremental margins in 2016 and beyond.

At our Investor Day we upped our long term margin target to 17% to 19% and I'm confident that this development gives us higher visibility to achieve it. Next in the wake of the SEC disclosure it is has become clear to us that there is some confusion about our model. So let's address some of the more common queries we've been getting.

First, let's talk about accounting for acquisitions and whether our accounting methods are unusual. Let me be clear, there is nothing unusual for how we account for acquisitions. In terms of organic growth our definition of organic revenue growth is the same as our U.S. peers, period.

Next, is our estimated future obligations for acquisitions booked on the balance sheet as either the deferred acquisition consideration or non-controlling interest, whether redeemable or not.

While we tend to take less than 100% ownership of an agency upfront in order to align and incent management with our and shareholders' interest, from an accounting treatment standpoint we generally account for acquisitions similar to how others in our industry do. However, each deal has unique elements associated with it.

I would strongly encourage you to look at the acquisition and step-up disclosure in our competitor's financial filings so you can see for yourself. Earnout payments are estimated and fully put on the balance sheet in deferred acquisition considerations.

The value of minority equity owned by the management teams of the agencies is put on the balance sheet as either redeemable non-controlling interest or non-controlling interest depending on the nature of the arrangement. All forecasted liabilities related to acquiring 100% ownership of the agency over time are on the balance sheet.

Liquidity, our balance sheet is strong and our capital structure has been crafted to align with our acquisition and operating activities. We have been asked if we're facing liquidity problems. The answer is a hard no, full-stop.

Our obligations are clear on our balance sheet and we generate sufficient cash to fund them with a revolving bank facility to help us manage the seasonality of our cash flows. Our financial health is strong, certainly the rating agencies think so. We have no issues with any financial covenants.

Our goal remains to maintain an opportunistic M&A strategy while at the same time de-levering the balance sheet on a net basis through internally generated cash flow to below 2.5 times. Tax shelter, some investors have asked us whether our tax shield may be in jeopardy as a result of the SEC inquiry. The answer again is a hard no.

There is nothing about our tax structure that is being questioned. Legal fee obligation, we have been asked about the company's obligation for our prior CEO's legal fees.

Per our bylaws MDC will continue to indemnify him for legal fees until such time as there has been a formal determination that he is not entitled to indemnity under the bylaws at which time pursuant to a customary undertaking agreement that he signed, he will be required to repay all legal fees advanced on his behalf and in the meantime we will be pursuing a claim under our D&O coverage.

So, we hope that we will be able to recoup at least some of the legal costs related to recent events. In conclusion, strong execution this quarter, trending toward annual guidance, making strong progress against the growth strategies we have in place. With that, I'll turn the call back over to Scott. [062GC0-E Scott Kauffman] Thanks, David.

Before we move on to questions, I want to emphasize that my enthusiasm about our future stems in part from my nine years on the Board including my time as a member of the special committee. All of us at MDC continue to corporate fully with the SEC and are eager for the time when we can address all of your questions directly and fully.

Until then, I'd like to thank you for your continued understanding and patience when we indicate that we're unable to address a particular issue because of the ongoing SEC inquiry. And now I'd like to open the floor to your questions. Operator, please remind our guests to how to ask the questions..

Yes, thank you. And the first question comes from Bill Bird with FBR..

Good evening. Scott, could you characterize just how you see the second half shaping up and has there been any noticeable business impact from recent holding company issues? Thank you..

Hi, Bill, thank you. As we've indicated we have reaffirmed our guidance for the second half of the year and I've had call arounds with the lot of the CEO leadership of our partner agencies.

And to-date, I can say that we have not lost any business and our pipeline is as robust as I have ever seen it, new business activity and you'll probably be hearing more about that in the days and weeks ahead as its looks like there is a lot of really attractive accounts that are in the review process now and we've got many of our partner agencies well positioned in them.

So, we're reaffirming our guidance. We think the second half is on track and as we said all along it's business as usual..

And then separately in your comments you mentioned that you extended the relationship with 72andSunny, does that mean you own 100% and can you help us understand how that flows through the financials?.

It doesn't mean we own 100% but not that's really where we're focused. We're focused given – this is a talent drive industry. We're focused on the fact that three primary partners of that agency have essentially doubled down and extended their relationship with us for the next five years and that's the most important news we could bring to the table.

And it also clearly aligned the agency's financial interest with ours, so we're very excited about that..

And from a accounting treatment there will be a down payment as well as deferred acquisition consideration and what you'll see is amounts move out of redeemable non-controlling interest and shift up into deferred acquisition consideration on the third quarter and balance sheet?.

And David I guess along those lines, maybe you could quantify just what your earnout obligations are for the remainder of the year?.

For the rest of this year, we're looking at somewhere between $15 million and $20 million of remaining deferred acquisition consideration to be paid out.

And as you could see on the balance sheet over the next year in the current bucket north of $100 million and as you know it tends to be largely paid in the first quarter of any fiscal year?.

Great. Thank you very much..

Thank you. And the next question comes from John Janedis from Jefferies..

Thank you.

Maybe two questions, first Scott, you talked about your commitment to talent and continuity now given the issues over the past few months it's easy for employees to get nervous and distracted, have you seen any changes in employer retention or challenges in recruitment and then separately given the issues, can you update us on international expansion or acquisitions, I'm just wondering if the issues have slowed the pace of expansion to new markets or M&A? Thanks..

Thanks, John, I can give you a very quick answer with regard to retention of employees we've seen none, no issues of anyone leaving. We will continue to – we're not naïve and we're going to continue monitor things very closely.

But I'm happy to say that I'm surrounded by a team that is as excited as it is ever been and I think that translates out to our partner agencies who are not as directly affected by a lot of the issues that we're dealing with at the parent company level.

And as for international expansion we really take our lead from our partner agencies and we're looking for ways to support them and look at strategic acquisitions that help bring them into new markets typically when a client asks us to move into a new trading area with us.

But as we indicated below or earlier it's a relatively small portion of our revenue mix today and we think there is enormous upside..

But based on say earlier in the year I think there are some new markets maybe you're going to enter.

Has that changed or no?.

It's really a clear cut case of, the strategy hasn't changed, the vision hasn't changed, the mission hasn't changed, none of the directives have changed and our agency partners didn't shift their strategies because of what's happening here at the headquarters..

And to be clear John we did indicate in the prepared remarks that we entered India in the second quarter. YML, Y Media Labs has a substantial presence in that market which we are able to leverage on behalf of GALE Partners in order to extend their capabilities into that market as well.

So I would call that a substantial new market entry for us that we're very, very excited about..

Very good. Thank you..

Thank you. And the next question comes from James Dix of Wedbush..

Good afternoon gentlemen. I guess two things. You gave some helpful color on the international growth which seems to be pretty healthy organically. Any update on the media business.

There's been a lot of reviews and I know you don't necessarily plan on playing at the size of account, which is necessarily involved in a lot of those reviews, but just wondering if you have any update on that business, the pace of growth, what you're seeing in terms of availability there? And then I guess my second one, probably is for Scott, but maybe for both you and David.

I had some questions on just how you're M&A strategy or execution might be affected with the CEO transition, given the CEO's typical role and capital allocation. So any color you could give on that and maybe just how you would, might look at deals differently or how you think there might be some change there? Thanks..

So, I'll take the question on the media business and then Scott obviously will answer the M&A question. The media business continues to perform exceeding well. Organic revenue growth was again double digits in the quarter, as the media business is outperforming other aspects of the company.

As you know, the media business competes domestically so that's not part of the international expansion to-date, though it's something we're considering for in the future. Unfortunately, there were no – none of their wins that were announced – that we're allowed to announce publicly. But there were wins and some very nice wins.

And what's exciting is that that business in particular has a pipeline that's probably the best we've ever seen; now we need them to convert and hopefully they will. In terms of the very large media reviews that you're referring to, I think as we talked about before, we are not at the scale where we can compete for the largest of the media accounts.

So we are not playing in those big headline grabbers and at the same time; we are not at risk on any of the big headline grabbers, because we're not the incumbent. But for sure, we are competing for larger and larger pieces of business that will be very meaningful to us should we succeed in winning them..

And on the capital allocation as it relates to M&A, we indicated on two fronts both in North America as strategic acquisitions that are accretive to our existing partners as well as expansion into international markets. So again, there is no change in the strategy there..

Great, thanks very much..

Thank you. The next question comes from Dan Salmon from BMO Capital Markets..

Hey, guys, good afternoon. Just returning to the international question a little bit, there has been a little bit of turbulence in some markets on a macro level; I am thinking mostly China and Brazil. And just hoping for a bit of an update on your activities there.

And then, Scott it sounds like the message here is no change in the strategy, steady as she goes and with your sort of almost 10-year history involved with the company almost as back far as when David joined. I know you've got a long perspective on the uniqueness of how the company operates.

But with that being said, are there from a very high level some things that you'd like to bring from your own vision a little bit, particularly at the holding company level, some broad strokes at least that you'd like to apply?.

So, I'll start the international and then Scott can handle the obviously the strategy question there. We said this a lot before, right. We're just not large enough for economic activity in some of these countries to impact us in any meaningful way.

Our business in China, in Brazil is growing very, very quickly because we're winning new business and we're coming from such a small base. We've talked about over the last 12 months, 18 months some of the large name-brand global accounts we've won and those are ramping up in those markets for us and really helping us.

And so we haven't seen any impact in our business from that standpoint. But I would be remiss to not mention that we're watching very closely the slowing economy in Canada, 10% of our revenue. To-date our business continues to perform well there, though the organic growth of Canada does lag the organic growth of the U.S.

and we're appropriately watching that business, but our agencies continue to compete effectively for new business and they continue to be growth businesses despite some of the softness that's in the Canadian economy. But the rest of the world, we're just not big enough. And so our business continues to perform quite well..

And then maybe the subtle shift in strategy if the question is more about do I intend to put my thumbprint somehow on this company. I still defer to our partner agencies in large measure. They drive a lot of the discussion around where we head next. But I do hale from the world of Silicon Valley....

Great..

...I am on a bunch of different companies in the ad-tech arena, third party ad server data analytics company, I sit on the board of a data management platform company.

So I'm reasonably well versed in the data driven side of the business and I think that is exciting to some of the folks here that felt that maybe it wasn't as well understood at the senior levels of the company. So I'm hopeful that I can be helpful there as we continue to set our strategy.

But the focus is really going to continue to be on how we can add additional services and capabilities within our existing network as the world continues to evolve. I'm very excited about the shifts in consumer consumption, the way media is accessed today and processed and with that comes all kinds of disruption and new opportunities.

And I think this company is as well positioned as any, always has been. And we use the term digital a lot but I've sort of played past that in the past decade.

To me, everything is sort of digital but if you look at the trends in video, and mobile in particular where more than 50% of the searches come from today, clearly those fundamental shifts in consumer consumption of media pose new opportunities for those who are seeking to put commercial messages into those channels and that's we want to help our clients and our agencies do..

Great. Thank you..

Thank you. The next question comes from Peter Stabler from Wells Fargo Securities..

Thanks, good afternoon. Couple for David, just getting down into the segments, wondering if you could give us a little color on PMS, it's kind of weak this quarter and I noticed that O&G line kind of bumped down really substantially.

So, is this an issue of pass-through cost? And then, wondering if you could help us think about the OpEx lines going forward over the remainder of the year. And then one final one if I could, just want you to revisit the revenue recognition issue.

Is this completely separate from organic growth, so the 8.3% organic growth is a number that is separated and the revenue isn't catching up or I guess I am just a little confused here. Thanks very much..

Sure. So, in terms of the segments, we've long talked about that, we have a portfolio of agencies and not everything is perfect, we do the best we can to manage and optimize performance over time and I think we've done a good job with that.

We do some of the areas that happened to be in the performance marketing services segment that aren't performing as well and because that segment is substantially smaller than the strategic marketing services segment has an oversize impact on that and that's essentially experiential and promotions broadly.

We have some agencies in that realm doing nicely but others not as nicely and it's pulling down that performance. Now those businesses do happen to be businesses that have a little bit more pass-through revenue.

So it's not as impactful on the bottom line as say if that weakness were in a more retainer based business that's based on fee revenue, it what'll pass through, but it is an area of opportunity for us to continue to improve and hopefully we'll do so going forward.

In terms of the office and general expense line, that's where you can get the offset from the change in deferred acquisition consideration.

So, you'll also notice in our schedule on segment reporting that the change in deferred acquisition consideration this quarter was down and that means that we had one or more businesses underperform relative to our expectation so we had to reduce the forecast of what we expect to pay them in deferred payments.

And the way that's treated on the P&L is it's an offset to expense so it's income that flows through. Now we add that income back just like we add back the expense related to increases in deferred acquisition consideration and back it out of our adjusted EBITDA number but that is what drives the lower office and general amount in that segment.

From a revenue standpoint, I think you're mixing apples and oranges a little bit here.

Organic revenue calculation is based on actual reported revenue and the revenue recognition issue we're talking about really refers back to in the beginning of the year on the year end 2014 conference call where we talked about some of the timing issues that would impact profitability in 2015 and if you recall, we had given transparency that we expected adjusted EBITDA in the first half of the year to be down year-over-year.

We expected to be a back half weighted year, because the timing of when some of these larger global relationships ramped up and when we were actually able to recognize the revenue. That's all we're referring to here is we're just confirming something that we've been talking about for six months already.

It's playing out exactly as we had thought it would and it gives us continued visibility into acceleration of the bottom line in the second half.

Does that make sense?.

It does.

So the organic growth is based on recognized revenue and this implies that you could see some organic growth acceleration?.

There is some potential for that if everything else continued to perform as it does..

All things being equal..

But it is something that would benefit us in the second half both top and bottom line..

Great. Thanks, David..

Thank you. And the next question comes from Rich Tullo with AFCO..

Hey, how are you doing guys. Just a couple. One statement.

I think you guys should be commended on keeping it all together between the anomalies 72andSunny, Kirshenbaum Bond + Partners (sic) [Kirshenbaum Bond Senecal + Partners] (35:04) I think the execution both financially on the earnings report you presented today and also in some of these awards that have been going around the industry over the last couple of months have been exceptional and I'd also like to point out to investors that your awards are generally gained from accounts that pay money and not charities and such and to me that places it a little higher in the rankings because it's harder for a commercial award to be given than some other kinds of awards?.

Thank you, Rich..

Okay, so having said that, as we look at the media landscape today, it really seems like there is a huge transition from TV to digital video. You know at the first stage I guess, a lot of advertisers were basically reformatting their TV content and putting on the video and they, it gets repetitive over time.

My theory is that this is going to be a big driver for creative over the next couple of years. So, Scott would you concur with that and is there anything that MDC Partners does or will do in the future, A, to take advantage of that disruption I outlined.

And B, create some kind of efficiency there where you would have a competitive advantage over IPG, Omnicom, and Publicis and like that.

And then my second question is it sounds like you're buyer in the M&A market and after everything is said and done, at these prices I mean I would think, given all these media reviews that any large holding company would really appreciate $1.3 billion worth of revenue, $200 million worth of EBITDA and $100 million worth of free cash flow coming with about $100 million maybe a little less, or a little more of operating and financial synergies and you know is that something that's attractive to MDC Partners right now or do think there is a higher return on invested capital for the investors to stick with you guys for a little while or longer?.

Well, Rich let me start me the discussion on traditional television which often times its death is reported prematurely. It's still alive and well and still drives a lot of revenue and a lot of creative energy, but this isn't necessarily a topic for the parent company. This is where our agencies excel.

They understand as I said before the shifting patterns of media consumption and one in particular say they were born modern. It is a truly a brave new world and it's very much a young person's industry too because things change so quickly. You almost have to be in the trenches and experiencing those shifts as they happen.

And so part of our success is that our agencies on behalf of their clients have always been able to take leadership roles in figuring out where things are headed and getting commercial messaging to align with those shifting patterns.

I've no media plan for a play in digital television, but we've got such a fat pipeline that I wouldn't be surprised if there is a company or two sitting in there that has that as a specialty. It's a good observation but many people have bet against television for a very long time then have come up short.

In fact there are a bunch of articles floating around the industry right now, that talk about how inaccurate it is to say that television, traditional television is dead. With all the – over the top and cord cutting and everything else it still one of the few ways you can aggregate a large audience today.

Even though the audiences are shrinking, the CPMs are going up and there's still a lot of money to be gained there. As it relates to the question of being a seller in our previously stated buyers market we think we have a huge opportunity to build value there. We are solely focused on 2016 and beyond.

And there's lots of value that can be created as a standalone. I mean at the end of the day we are a publicly traded company and market will speak for itself. But we're focused on building for today and the future..

Okay. Thank you..

Yeah..

Thank you. The next question comes from Tracy Young with Evercore ISI..

Yeah, hi and just a question on obviously as you mentioned you have a strong financial position, has there been any change or any update to your capital allocation strategy and also when can we expect an update to your Board obviously with the change announced, you're down one person on the Board on any color you could give in terms of changes that will happen there would be helpful?.

No change in our strategy and on the Board composition issue when we announced our desire for a shift in compensation of the Board it's back in early June with our enhanced corporate governance initiative. And at the time we were not necessarily contemplating a change in the CEO.

So, once that was in motion we decided to let that run its course and as we indicated back then and it's true today we've retain Spencer Stuart and to find us between two and four new directors and that is an active campaign and we're on target to deliver at least two by the end of the calendar year..

Okay. Thank you..

Thank you. And the next question comes from Jack Salzman with Kings Point..

Yes, thank you. Just a little bit more specificity if we can on a few of the numbers.

Where for example are legal expenses of $3.9 million you cited, David, where is that? Is that in other net or office and general expense and also can you tell us where Miles' $8.6 million ended up in the P&L?.

They're both in office and general expense..

So they were netted out and can you give me an idea of what the run rate would be for legal expenses going forward.

Can we use the $3.9 million or is it very variable?.

I don't think it's appropriate for us to forecast a number. It's a bit uncertain, but we're doing our best we can to manage that number as reasonably as we can.

But I do want to remind you what I said in the prepared remarks is that our hope is that we'll be able to seek coverage of that under our D&O insurance policy where we can at least get a portion of that money back..

Very quickly on the second half of the year, how should we look at gross margin versus operating margin? Is the gross margin going to start to recover, with the brand new recognition now be accelerating into the second half of the year.

Can you give us little bit of guidance on that kind of a trend?.

You know Jack, and we've talked about this on calls before. We don't really distinguish between the direct cost and G&A because depending on the contract, labor can show up in direct or it can show up in G&A, and so gross margin in the reporting is not how we manage the business.

We manage on labor costs versus travel and entertainment costs, versus other costs in that way down to an EBITDA margin. And so surely our indication is that we expect the second half margin to be substantially higher on an adjusted EBITDA basis relative to the first half given how back-half weighted we expect the year to be.

And so the point is that we'll have higher flow-through of incremental revenue to the bottom line in the second half than we did in the first half..

Okay. One more question.

I don't know if you can give us any additional information on the SEC investigation, but can you tell us for example if they stopped requesting additional documents or if you have an estimate in terms of the timeline at all?.

You know, as we've said previously it's an ongoing inquiry. There is no material update to give at this time and so it's inappropriate to really comment any further on it..

Okay, guys, thanks very much..

Thank you. And our next question comes from Eugene Fox III of Cardinal Capital Management..

Just a couple of questions.

First as it relates to your comments about 72andSunny so just want to make sure I understand how much did you own prior to this last transaction?.

We owned 51% prior to this..

Okay, so this transaction is really buying the balance of it, David, is that still the best way to understand it, the remaining 49%?.

As we indicated before, we now own 100%..

Okay, and they have agreed to stay on for five years..

That's correct..

Okay, perfect, that's what I wanted to understand. Okay, of the number I think you gave us was $96 million between acquisitions and earnouts.

Can you – do you have the detail, David, as to which is which?.

I do, just give me a moment..

Sure..

The deferred acquisition payments was about $71 million in the quarter which was right as we expected and the step-up closing payments in the quarter was about $25 million..

Okay.

And you said you got another call it $10 million plus, $10 million to $15 million of deferred acquisition cost this year?.

No, I said $15 million to $20 million..

$15 million to $20 million, I apologize. Okay, and the comment that you just made relative to the impact of Miles, looking at schedule two, it's part of the $4.718 million in other items. David, how does that relate to the other income line item of $4.3 million of income? Because you said that it went through O&G. Is that correct and if it is.......

It's unrelated. The other income line, as you recall Gene, is where we have to recognize the foreign exchange impact of our inter-company receivable between our Canadian entity and our U.S. entity.

So, when the Canadian dollar weakens as it has, we recognize expense, when the Canadian dollar strengthens which hopefully one day it will again, we'll recognize income. But it's non-cash, it's a loan between ourselves that we never have to settle and so internally we don't pay too much attention to it but it does lead to some volatility on our P&L..

Okay.

Is that $4.348 million that looks like income not expense, right?.

This quarter it's income yes, I'm sorry. Last quarter it was expense as it goes from quarter end to quarter end not year-over-year. So, thank you, Gene from March 31 to June 30, the Canadian strengthens a little bit. In the first quarter, it has weakened quite substantially so the year-to-date number is in expense.

Quarter-to-date, in 3Q, it's weakened again so things end at the end of the September where they're today will be in expense again but you're correct in this quarter, it was income I misspoke a little bit. Thank you..

No problem.

My last question so, should we expect you to update us in Q3 as to what the ongoing impact is going to be of the CEO change in terms of sort of long-term impact on both cash and stock compensation?.

We'll do our best to do that. We are continuing to plan around what that impact is and we'll give as much transparency on its impact on our model longer term as we can when we can..

Good stuff. Thank you..

Thank you. And we have a follow-up question from Tracy Young with Evercore ISI..

Yeah, hi. Is it possible for you to give us the information of the 49% stake that you took in 72andSunny.

How much of that was cash and how much of that is future payments?.

It's premature to disclose that, but at some point in our filings there'll be more information..

Okay. Thank you..

Thank you. And there are no more questions at the present time. So I would like to turn the call back over to management for any closing comments..

Thank you, operator. In closing I'd like to say that while we have work to do to ensure that we recapture your trust. I intend to demonstrate to all of you that our best days are ahead. When I look objectively at MDC, I see a diverse and impressive portfolio of agencies doing the best work in the industry.

I see a culture that provides continuous and unparalleled support for talent and innovation. I see substantial areas for continued growth. And I see ambition and conviction that will enable us to perform against the expectations we have set and to deliver on all of our commitments. Thank you again for your time.

And I look forward to meeting many of you in person in the coming days. Good evening..

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