MDC Partners (MDCA) Scott L. Kauffman on Q4 2015 Results - Earnings Call Transcript

| About: MDC Partners (MDCA)

MDC Partners, Inc. (NASDAQ:MDCA)

Q4 2015 Earnings Call

February 18, 2016 4:30 pm ET

Executives

Matt Chesler - Vice President-Investor Relations

Scott L. Kauffman - Chairman & Chief Executive Officer

David B. Doft - CFO, CAO & Head-Investor Relations

Analysts

Bill G. Bird - FBR Capital Markets & Co.

Thomas William Eagan - Telsey Advisory Group LLC

Peter C. Stabler - Wells Fargo Securities LLC

James G. Dix - Wedbush Securities, Inc.

Daniel Salmon - BMO Capital Markets (United States)

Barry L. Lucas - Gabelli & Company

Rich R. Tullo - Albert Fried & Co. LLC

Tracy Young - Evercore ISI

Operator

Good afternoon, everyone, and welcome to the MDC Partners Fourth Quarter and Year-End Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note that today's event is being recorded.

I would now like to turn the conference call over to Mr. Matt Chesler, Vice President of Investor Relations. Sir, please go ahead.

Matt Chesler - Vice President-Investor Relations

Good afternoon and thank you for joining the MDC Partners 2015 fourth quarter and year-end conference call. On the call today from MDC are Chairman and CEO, Scott Kauffman; and CFO, David Doft.

During the call, we'll 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 are further detailed in 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 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.

Scott L. Kauffman - Chairman & Chief Executive Officer

Thank you, Matt, and good afternoon, everyone. We appreciate you taking the time to join us today.

Before reviewing our results for the quarter and the year and previewing our goals for 2016, which we're excited to share with you today, I want to offer a few personal insights about my first month as CEO of MDC, and I'll state this as plainly as I can. We emerged from a tumultuous summer, firing on all cylinders and we didn't miss a beat. Now, I'm a huge believer in the power of grace under pressure, and I'm so proud of what our team achieved this past year, dedicated people who stayed focused, worked hard and always kept our mission top of mind. And because we have the right people in the right roles, we're well positioned to grow our business, win market share and increase shareholder value.

The first thing you need to know is that we achieved our financial guidance for 2015. We have solid and, in some cases, industry-leading performance to report across all key metrics. We delivered organic revenue growth of 7.1% for the year, outpacing the rest of the industry. Reported revenue was up 8.4% for the year, and adjusted EBITDA grew by 10%. Margins were strong at 14.9% for the year and have increased by over 450 basis points over the past four years. We're well on our way to achieving our target of 17% to 19% margins over the next two years to four years. Adjusted EBITDA Available for General Capital Purposes was $113 million. In the fourth quarter, we paid off the revolver and ended in a strong cash position with $61 million on the balance sheet at 12/31/2015. And despite significant SEC-related expenses, we exhibited strong cash generation.

Second, we continued to win new business, the lifeblood of our industry. Net new business was a healthy $117 million this year. Notable wins in Q4 include many iconic brands such as New York Life, Hershey's, American Airlines and Nestlé's coffee brands. Momentum has continued in Q1 with early wins for Monster Worldwide, Vera Bradley, Four Seasons Hotel and Polycom. On top of that, we've broken through to another blue-chip consumer packaged goods company whose prior agency relationship is among the longest in the industry, and we'll have more to say about this significant win in the coming quarters.

What's especially compelling about these wins is that many of them are global in nature corresponding to our overall international growth strategy. Over 9% of our revenue in Q4 came from outside North America where we've sustained roughly 30% organic growth rates over the last couple of years even as we've materially scaled the business. American Airlines, Infinity, Unilever's Axe, Johnny Walker, Smirnoff, adidas, Viber, Samsung, Google, PayPal, Hershey's, TE Connectivity, and Budweiser, these are all brands we are working with on an international basis now and almost all are new relationships over the past two years.

Third, we continue to build our media business which grew double digits in 2015 and is now over 10% of revenue, up from just 4% four years ago. Our strategy to build a centralized technology and data-centric media agency at MDC Media Partners sets us up to more effectively compete for the next wave of media reviews.

Fourth, we added core capabilities to our business through modest-sized focused and deliberate strategic acquisitions. Y Media Labs in Redwood City, California and Bangalore, India is a great example, a phenomenal mobile development agency that's building digital applications for a host of prominent companies. They've raised the bar for the level of business-specific integration that a creative agency can deliver. Unique Influence in Austin, Texas is another example, a small, fast-growing firm that significantly bolsters our social and mobile media buying expertise. And thanks to these smart targeted acquisitions, we continue to grow our capabilities, while staying dedicated to our core commitments to our clients.

Fifth, I'm thrilled to announce that we're adding two talented and experienced independent directors to our board. Effective March 1, we welcome both Anne Marie O'Donovan and Larry Kramer to the MDC Partners Board of Directors. Anne Marie O'Donovan is the past Executive Vice President of Scotiabank, and a long-time partner at Ernst & Young and one of Canada's most accomplished executives. With over 30 years of experience in financial services, governance and risk management, she'll bring in valuable experience and expertise to the board, including to the audit committee. Larry Kramer has been a pioneer in digital media since the dawn of the Internet. Many of you know Larry as the founder of CBS MarketWatch and recent President and Publisher of USA Today, and has been recently announced Chairman of TheStreet.com. With decades of leadership experience as an executive and board member of both private and public companies, he'll be a great strategic asset to the board.

As you know, we've been actively looking to revamp our Board of Directors with expanded strategic vision, financial and operational expertise and stronger independence. Anne Marie and Larry bring us two steps closer to all of the above. We'll be stronger, smarter and just plain better with them. In the coming months, we will continue to identify and partner with exceptional people to further strengthen our board. For me, all of these meaningful financial and operational achievements demonstrate that there's no one in our industry that can match our talent, entrepreneurism and innovation. And I know for certain that no one can match the results we deliver for our clients, and it always starts with talent.

Our Perpetual Partnership model attracts, empowers, and cultivates great talent. This approach has become well-known in the industry, and as a result, we appeal to multiple generations. We attract the brilliant young creative minds who seek a platform for innovation and opportunity, and we team with the seasoned entrepreneur with an established presence who seeks a partner who will help to get their business to the next level.

Because we attract entrepreneurs who aspire to bigger things, our corporate model complements and cultivates growth. While we have a majority controlling stake in our partners, we protect the delicate balance between collaboration and autonomy, the cornerstone of our partnership model. This model is unmatched in the industry. Others pay lip service to it, but we deliver on it. It's what sets us apart, and it's what will deliver continued strong performance going forward.

We're likewise continuing to grow our international capabilities. We're now operating across Europe, Asia and South America. We've taken our revenues from outside of North America from essentially 0% to 9% in a very short period of time. So, let's put these results in context.

Our competitors, on average, generate just shy of 60% of their revenue outside of North America. So, we have a tremendous runway of market share to gain and clients are increasingly asking for our leadership overseas. We're just getting started here.

Next, we'll continue to build our emerging media buying and platform planning by employing modern solutions that leverage technology and data analytics. New business momentum in this area is robust. Now, it's early days and we're particularly encouraged by the collaboration amongst our media agencies and the rest of our network on both pitches and work including with 72andSunny, Crispin Porter + Bogusky, KBS, Anomaly, Colle & McVoy, Mono, Doner, Allison & Partners and others. This is all about incremental revenue and we're just getting started here too.

Let's not forget that on top of these growth initiatives, there's another wave of promising agencies in our portfolio where we see a lot of the characteristics that we saw in our largest agencies before they scaled. Firms such as Mono, Colle+McVoy, Vitro, Concentric in healthcare, Allison & Partners in public relations, Y Media Labs in mobile, GALE Partners in analytics and Redscout in strategy, among others, look for us to add fuel to the fire of these and others because we see a lot of upside opportunity.

Finally, M&A is still an important component of our growth strategy and will continue to be going forward. Broadly, we remain focused on modest-sized strategic investments that help to build our repertoire of capabilities with the goal of adding 3% to 5% to growth per year over the long term. The M&A pipeline is robust and prospects often let us know that we're the only holding company they would consider for a partnership. Running parallel to all of these strategies is responsible capital management. And I remain committed to deleveraging the balance sheet on a net basis to 2.5 times or below within two years to three years. Our balance sheet and liquidity position are both strong which provides a solid foundation to continue to build value.

Looking into 2016, we as a management team are enthusiastic about the sustained momentum in our business. We're leveraging our past investments, reducing corporate costs, and spending more efficiently to ensure long term financial strength. We see accelerated fundamentals and greater financial strength just ahead. As David will detail, this should be plainly evident to you in the strong guidance for 2016 that we are issuing today.

I'd like to provide you with some news regarding the work of the special committee of MDC's Board of Directors. The company has continued to cooperate fully with the SEC in connection with its ongoing review of historical goodwill and related accounting matters. Specifically, the company engaged an outside accounting firm to review and assess the company's historical goodwill accounting. Management believes that its historical goodwill impairment and related accounting analysis is appropriate and has been applied in accordance with GAAP in all material respects. David will update you on the financial impact of the special committee's work momentarily.

In summary, I'm so proud of our team and the progress we've made and I'm excited for what's still to come. We've positioned ourselves at the intersection of technology, creativity and a corporate culture of empowerment. We're dedicated to continuing to enhance and expand our strategic offering to serve the growing needs of today's global CMO, and we continue to be the growth story in our industry, a disciplined but disruptive alternative to the established players for both entrepreneurial talent and ambitious clients. Thank you for your trust and commitment.

And now, it's my pleasure to turn the call over to our CFO, David Doft.

David B. Doft - CFO, CAO & Head-Investor Relations

Thank you, Scott, and good afternoon. I'd like to speak to our 2015 results and discuss our outlook in more detail. As Scott noted, 2015 was a great year for MDC. The checklist of actions taken this year includes tightening policies and procedures to bolster our internal controls, improving corporate governance, reducing unproductive spending, and committing to deleveraging. These concrete steps ensure that we remain the premium growth story in the industry while precluding what we just went through from ever happening again. Let's get into our results.

Reported revenue for the full year increased 8.4% from last year, with organic growth of 7.1%, acquisition growth of 3.8%, offset by a big foreign currency exchange headwind of 2.5%, primarily due to the weaker Canadian dollar. The contribution was broad-based by partner and by discipline, with particular strength in our core creative agencies, public relations, media, and technology and data science, while experiential and promotions slightly lagged.

Q4 organic revenue growth was 7.2%. As in the third quarter, a decline in billable pass-through costs reduced our organic revenue growth rate for the overall company by roughly 230 basis points for the fourth quarter and 190 basis points for the year. The reason for this is important though, we saw a different mix of programs this year, largely in our experiential and promotions businesses, which consisted of less pass-through costs. But these pass-through costs are generally without mark-up and, thus, have zero impact on profitability but sometimes can impact the overall GAAP revenue recorded.

By geography, our international expansion continues to be a key driver of overall growth for the company with organic revenue up 31.9% outside of North America for the year and a nice acceleration to 40% in Q4, reflecting the strong international wins we have had this year. Admittedly, given its emerging nature and smaller revenue base, growth here can be lumpy quarter to quarter. Our U.S. business increased 6.4% this year led by creative and media which each grew double digits and partially offset by a 1.4% decline in Canada where we were impacted both by a difficult economy and by the loss of our largest client in the market with the exit of Target from Canada at the beginning of 2015.

On profitability, adjusted EBITDA of $197.7 million increased 10.2% over last year with margins up 20 basis points to 14.9%. Excluding the foreign currency impact, margins would have been 10 basis points to 15 basis points higher. The clean-up costs that we incurred in the second half, such as consolidating our Toronto real estate and streamlining staff, more than offset some of the initial savings from the leadership transition. This was best illustrated by the $6 million increase in severance in 2015 versus 2014.

But importantly, while these initiatives had near-term cost, they will provide a solid long-term financial benefit as we set ourselves up for superior financial performance in 2016 and beyond. Additionally, we saw progress in improving the profitability of our overseas offerings which we expect to continue towards more normalized levels in the coming years.

As the headlines have suggested, it was an incredibly strong year for new business activity for MDC. Our net new business was just under $117 million for the year. That, along with the tremendous amount of activity in January and February and a strong pipeline, gives us high visibility. And we expect another solid year of organic growth. This came despite a number of losses in Q4 that pulled down the overall net new business metric a bit, meaning that gross wins was even stronger. But lumpiness is inherent to the business and nothing new.

We finished the year as expected with strong cash generation, allowing us to repay the $85 million revolver balance from September 30, and to end the year with $61 million in cash on the balance sheet. This was consistent with the expected seasonality of the business. For the year, we generated $46 million in working capital, a strong result leading to $164 million of cash flow from continuing operations.

Next, you will notice that beginning with this period, our financial statements now reflect one operating segment, which in turn equals one reportable segment. The accounting standards dictate that companies segment the business consistent with how the chief operating decision maker looks at and evaluates the business for resource allocation purposes. In our case, the chief operating decision maker is our CEO. And since our leadership change in 2015, we have moved towards a more holistic view of the business, where we look at and evaluate the company as a whole portfolio. So, we filed a detailed process, and the result of that process is that we have moved to a single reportable segment.

Now, while we will no longer be reporting results for Strategic Marketing Services and Performance Marketing Services as those segments no longer exist, we will continue to provide color as appropriate, and we are now providing incremental revenue detail such as organic growth rates on a geographic basis. The other change to note regards corporate costs, which previously included allocations to the segments as appropriate, but is now substantially isolated into its own line item to give you a more comprehensive view of the full corporate and shared services expense. This is also due to how our chief operating decision maker views the business.

So, you have a sense of the prior segment's performance to align with your models. Today, we'll share SMS and PMS organic growth numbers. Organic revenue growth for our SMS segment would have been 9.3% for the quarter and 11.0% for the year while the Performance Marketing Services segment would have been a decline of 1.4% for the quarter and a decline of 3.6% for the year, but would have actually been positive were it not for the decline in billable pass-through costs that I discussed earlier which is concentrated in the PMS segment.

I'd now like to update you on the work of the Special Committee of MDC's Board of Directors as it relates to its financial impact. From a financial perspective during 2015, the company incurred legal and other costs of $13.7 million, including $1.3 million in the fourth quarter as a result of the Special Committee's review and SEC investigation. We have recovered $1 million of this amount so far from our D&O insurance coverage for a net legal fee cost of $12.7 million for the year and $300,000 in the quarter. We are still pursuing additional D&O insurance proceeds, and we hope to ultimately recoup a more significant portion of legal fees incurred. With approximately $800,000 repaid to the company in the fourth quarter, we actually had a net gain of $500,000 in the quarter related to this issue.

There is a total of $8.1 million remaining to be repaid to the company between now and the end of 2017, pursuant to the separation agreement with our prior CEO. The next payment of $2 million is due by December 31, 2016. The net of all the amounts for the year is $8.3 million and has been excluded from our adjusted EBITDA calculation so you can see the trends in our underlying business as well as the impact of the special committee's actions. We are proud of the progress we have made and are excited about the future before us. 2016 is already off to a strong start in terms of net new business and the pipeline is very promising. While international volatility may be an issue for others in our industry, it is less so for us. We have minimal exposure outside of North America, and our growth is largely a function of our ability to gain market share. We have the added benefit of net savings from last year's leadership transition that has provided an incremental bottom line tailwind, leading to accelerating fundamentals.

As for 2016 guidance, we expect revenue to increase 6.3% to 8.6% to a range of $1.41 billion to $1.44 billion. Our revenue guidance implies 7% to 9% organic growth, plus 1% growth from last year's acquisitions, offset by about 1.5% negative impact from foreign currency headwinds. Adjusted EBITDA is expected to increase 13.8% to 18.9% to a range of $225 million to $235 million. This implies adjusted EBITDA margins of 15.8% to 16.4%, which is very healthy expansion relative to 2015's margin of 14.9%, and this is despite a roughly 2% negative impact to EBITDA, assuming FX rates stay where they are.

Included in our forecast is roughly $10 million of net savings from the leadership transition that are incremental to 2015. The transition has opened up a unique opportunity for us to accelerate certain cost that we think will generate strong returns for shareholders by enabling the company to sustain premium growth rates for long time to come, while still allowing a meaningful amount of savings to drop to the bottom line. This is why we're communicating a net number. Some of these priorities include adding more fuel to our new business development capability, multiple talent initiatives, IT and infrastructure, as well as other growth initiatives. We expect these efforts to yield attractive benefits in 2016 and beyond.

I would next like to talk about our cash flow expectations. Adjusted EBITDA available for general capital purposes is expected to increase 19.0% to 27.9% to a range of $135 million to $145 million. While we continue to feel that this metric is useful for investors to understand the cash generation from the underlying operations, separate and apart from the media float and other working capital swings, bear in mind that it typically understates our total cash generation, in part because it excludes the benefit from working capital that we typically have. For example, over the past three years, we have generated $46 million, $23 million, and $52 million, respectively, from working capital.

Next, and I'll tell you we're very excited about this as a management team. We have an opportunity to significantly clean up the balance sheet as we move through the life cycle of our deals. We expect to pay roughly $250 million of deferred acquisition payments and minority interest over the next two years. This will make a meaningful dent in the contingent obligations currently on the balance sheet. 18 months from now we should emerge a cleaner and leaner company from a balance sheet perspective.

At this same time, we also expect to deleverage the balance sheet. We ended 2015 with 3.4 times net debt-to-EBITDA, down from 3.5 times last year, and we're on pace to achieve our 2.5 times target or below within the next two years to three years. As Scott mentioned earlier, we are highly committed to achieving this target and believe that along with the meaningful reduction in contingent obligations over the next couple of years that we're poised to generate significant value for our stakeholders. Lastly, we expect to file our audited annual 10-K before the end of the month and for it to have no qualifications of opinion from our auditors.

With that, Scott and I will take your questions before offering some closing remarks. Operator, please remind our guests of how to ask a question.

Question-and-Answer Session

Operator

And our first question today comes from Bill Bird from FBR. Please go ahead with your question.

Bill G. Bird - FBR Capital Markets & Co.

Great, thanks. I was wondering if you could just elaborate a little more on your organic growth outlook and whether you're seeing the volatility in financial markets translate to business on the ground at all? Thank you.

David B. Doft - CFO, CAO & Head-Investor Relations

Sure. Thank you, Bill. So we're not blind to the headlines that are out there and the red screens that are often being seen on a daily basis with the financial markets. But you really need to separate that from what's going on both, I think, with the U.S. consumer and thus with it the opportunity for marketers to continue to grow and build market share. So we continue to see a commitment from our clients to invest behind their brands. We continue to see companies that are frustrated with their performance in the market, looking for new agencies, which is leading to our very strong new business pipeline. And that gives us confidence in our ability to deliver the organic growth rates that we put forth in our guidance.

Bill G. Bird - FBR Capital Markets & Co.

Just to follow on, and appreciating that the lower pass-through revenues have no economic impact, do you expect lower pass-through revenue to persist again in 2016?

David B. Doft - CFO, CAO & Head-Investor Relations

So it really started to kick-in in 3Q and 4Q, so our expectation is we cycle through a little bit of it in 1Q and 2Q just as we go through kind of the annualized impact of it. But on an annual basis, we don't think it will be as material in 2016.

Bill G. Bird - FBR Capital Markets & Co.

And just final question. Just at a high level, what services are you finding are currently in greatest demand by really the clients that tend to lead the ad market? Thank you.

David B. Doft - CFO, CAO & Head-Investor Relations

We couldn't hear the last part of your question. Can you repeat that? It's a little fuzzy, your connection.

Bill G. Bird - FBR Capital Markets & Co.

Sure. Sure. I was asking which services are in greatest demand by the clients that you have that tend to lead the ad market?

David B. Doft - CFO, CAO & Head-Investor Relations

The reality is is our bread and butter continues to be our core creative ad agencies where we see significant demand for their services to drive the overall strategy and brand execution, creative execution for clients, which is leading to significant impact in the marketplace on behalf of our clients. Even after all these years, when clients look out in the market at the case studies of success that others are having that they're not, or let's say other people's clients are looking in the market. They're more often than not looking at MDC agencies' work and that's leading them to come to us. So it does always start at the top with the overall core creative offering. But that being said, we're seeing significant growth from many of the other disciplines that we've added to our suite of offering. We've talked a lot about the media business and the opportunity there and many clients are looking for a new and progressive approach to that.

We've had a lot of success with our PR agencies that we believe have been able to incorporate digital and social media capabilities to really enhance their offering and make them more effective in the marketplace. And so we are seeing the growth coming from a number of different places. But it still does begin with that core creative offering.

Scott L. Kauffman - Chairman & Chief Executive Officer

And we're also seeing a blurring, Bill, of a lot of the functionality, which is why we've moved to this single reporting segment because the labels make less and less sense now as the technology becomes a great equalizer. As David says, it starts with the great creative strategy and thought and execution, and then the question is what are the channels of distribution. And it typically doesn't fall into any one bucket, and a lot of our upside is about selling additional services into the existing clientele. And we'd like to think that all of our clients are leading advertisers.

Bill G. Bird - FBR Capital Markets & Co.

Thank you very much.

Operator

Our next question comes from Tom Eagan from Telsey Advisory Group. Please go ahead with your question.

Thomas William Eagan - Telsey Advisory Group LLC

Great. Thank you very much. A question on the media buying technology. To grow the media buying operations, is there any specific software that you need to license or buy? Any specific hit to the P&L or free cash flow? And then I have a follow-up. Thanks.

David B. Doft - CFO, CAO & Head-Investor Relations

Our philosophy on technology is that we're a renter, not an owner, of tech. And there's a really, I think, good reason for that is that the innovation in the technology spaces that's happening so fast that as soon as you build something on a propriety basis, it's probably already obsolete given how much venture capital money is being invested in the space and all the businesses that are being launched with new solutions and more progressive solutions. And it's quickly commoditizing a lot of what was invented and developed a year ago, two years ago. And so as a renter it allows us to be a lot more nimble in terms of providing the best solution that's out there in the marketplace today.

So we don't expect any investment in terms of proprietary technology from the media business in terms of what we're building. Our focus is very much on the front end in terms of strategy, on the back end in terms of analytics that will then reinforce or maybe change that strategy going forward. That's where the value is created and that's where we're going to make our living.

Thomas William Eagan - Telsey Advisory Group LLC

Right. Okay. In terms of – secondly about the leverage you may have in growing global services, I realize it may depend on the country location. But given your hub structure, how much could you grow the global business in dollar amounts without having to add any kind of office space?

David B. Doft - CFO, CAO & Head-Investor Relations

Well, the reality is we're a people business. So if we're growing and we're going to need to add people to service it and we're going to need to add space. So I want to be clear about that. Where our hub structure benefits us and it's something we call brands without borders, is that we don't need to open offices in every country around the world. And as our competitors historically built their global footprints, you had to do that, because you didn't have the benefit of technology, you didn't have the benefit of a globalized workforce where you could tap into people from many countries in some of the major cities around the world like New York, like Amsterdam, like London, which we can do. And so, sure, in those markets we'll expand and we'll add real estate as business comes in and as it warrants, but we don't need to have the inefficiency of real estate in every market. And the more time goes on and the more that we are able to compete for and win the sort of brands that Scott mentioned in his prepared remarks, the more confident we are that our approach and our strategy not only works but that it scales.

Thomas William Eagan - Telsey Advisory Group LLC

Right. David, is there any way that you could quantify the margin of the overseas business versus the margin of the business at home?

David B. Doft - CFO, CAO & Head-Investor Relations

So last year we talked about overseas being essentially breakeven, making a few pennies. This year overseas has moved towards kind of high single-digit sort of margins, so we made really good progress this year on that front. And we continue to believe that over the next few years, as we scale into it, the margins will rise towards the high-teens, 20% range that we see in the operating businesses in our more established markets.

Thomas William Eagan - Telsey Advisory Group LLC

Great. Thank you.

David B. Doft - CFO, CAO & Head-Investor Relations

You're welcome. Thank you.

Operator

Our next question comes from Peter Stabler from Wells Fargo Securities. Please go ahead with your question.

Peter C. Stabler - Wells Fargo Securities LLC

Good afternoon. Thanks for taking the questions. A couple for David. I'm wondering if you could help us in the forecast, 90 bps to 150 bps of leverage through the year. Where primarily are you guys going to see that coming from, O&G or in the salary line? And then I got a couple of quick follow-ups. Thanks.

David B. Doft - CFO, CAO & Head-Investor Relations

Sure. I know we've talked about this before. We don't materially differentiate in that way, because depending on the client contract, salary could fall in O&G or it could fall in cost of goods. But we do look at staff cost versus our other overhead cost. And this year, you will find in the 10-K actually a more detailed breakout of those sort of expense line items in table form as we continue to try to enhance our disclosures and transparency about the drivers of the business.

That being said, we're a people business and the primary driver of our margin will be around leveraging our people or in corporate reducing some of our people with some of the moves we made last year. There is incremental leverage from other overhead items such as T&E spending, but the reality is that you'll see a big chunk of it in the people cost. And given the amount that will be from corporate, a lot of that will be in G&A.

Peter C. Stabler - Wells Fargo Securities LLC

Okay, great. And then regarding the resegmentation or the removal of the segments, you offered us some color on SMS and PMS this quarter. Are you going to offer the same kind of color going forward or is that kind of the last look? And then lastly, I'm wondering of the $250 million that you guys are going to pay down in obligation payments, what is the sum for this year? And that's it for me. Thanks.

David B. Doft - CFO, CAO & Head-Investor Relations

Sure. So that's the last look. Now that we have a different segment which is called the advertising and communications segment, we're obligated now to report with that segment going forward, but we just wanted to give you a sense. And as I said in my prepared remarks, we'll continue to give color of differentiated performance between disciplines, geography, et cetera, to help you understand the different moving parts of the business. So, by no means, are we looking to reduce transparency. We actually think this will help enhance transparency, especially with a more cleaner breakout of corporate as an isolated item versus before where services that work directly with our agencies were allocated into the segments, where now we're isolating them out so people can see the true aspect of the overall support function here at MDC.

What was your second question? I'm sorry.

Peter C. Stabler - Wells Fargo Securities LLC

Of the $250 million.

David B. Doft - CFO, CAO & Head-Investor Relations

The $250 million, yes. So the $250 million, it's about half and half this year and next year is the reality. We're still finalizing some of the expectations for this year. As you know, a lot of it goes out in 2Q. But, for example, in 1Q we've already paid out $30 million of things that have come up and come due and 2Q should be about another $75 million or so from what we're looking at right now and the rest in the second half of the year.

Peter C. Stabler - Wells Fargo Securities LLC

Thanks, David.

David B. Doft - CFO, CAO & Head-Investor Relations

You're welcome.

Operator

Our next question comes from James Dix from Wedbush Securities. Please go ahead with your question.

James G. Dix - Wedbush Securities, Inc.

Thanks. Good afternoon, gentlemen. A couple financial geek-type questions and then maybe one or two more fundamental to the business. Just as you look to 2016, is there any particular phasing on the margin expansion that you would highlight? I know last year there was just because there was some build-out of infrastructure for some big client wins and you flagged that for us. I'm assuming there's nothing big in terms of seasonality. But if there's anything you'd highlight, I'd be interested in it.

And then just one other financial one, I mean maybe this is for you, David. Maybe it's for both of you and Scott. I mean as your business grows larger, does your full year outlook and guide become something that's maybe a little bit less subject to quarterly revisions than when it was a smaller business? Or I'm just wondering how you might be thinking about that in terms of your full-year outlook, and then I have two follow-ups.

David B. Doft - CFO, CAO & Head-Investor Relations

Okay. That second one was a little less geeky, James.

James G. Dix - Wedbush Securities, Inc.

Okay. Yes. I'm trying to provide a segue.

David B. Doft - CFO, CAO & Head-Investor Relations

Okay. So, in terms of margin phasing, you know we don't guide quarters. They're very lumpy, stuff moves around, and so I just want to get that out of the way. That being said, last year, our margin expansion was more prevalent in the second half as we began to move around some of the cost items and really – well, actually, more from the timing of revenue recognition where we had some delays into 3Q and 4Q and a little bit of catch-up, right.

So that will reverse a little bit in 2016. But even with that 1Q is always the most lumpy quarter, the most volatile quarter just because it's the smallest and very small moves of revenue recognition or expense timing has a more abnormal impact on it. And so we're always going to hedge a little bit on 1Q. It's just our nature in terms of the margin expansion. But I surely would think that 2Q, 3Q will then begin to have a more meaningful pickup.

In quarterly revisions, are you speaking to quarterly revisions of our guidance?

James G. Dix - Wedbush Securities, Inc.

Yes. Exactly. As the business gets bigger, does it become something which maybe is a little bit last – should we be expecting that it maybe a little bit less subject to revision every quarter?

David B. Doft - CFO, CAO & Head-Investor Relations

Our goal, frankly, is to give guidance once and that's it. We want to give as realistic a view as we can. We give you a number that we strongly believe we're going to make. But we also give a number that we have work to do to make. By no means should anyone think that we put out a lay-up in any way in terms of our guidance, but it's numbers we feel very strongly about.

It's true there was a period of time for a year, maybe two years, where we raised guidance a couple of times during the year. I wouldn't expect that to be the norm, but I can't really predict. We're giving you a view of what we think our year is going to look like. If there's a material change to that, we'll come back to you.

James G. Dix - Wedbush Securities, Inc.

Fair enough. And then my two others were – just any color you can give on the tone of new business and pitch activity. I know some in the industry had speculated that maybe after the big wave of attention to media pitches that there might be maybe a little bit more marketer focus on pitches outside the media discipline as we moved into 2016. Just wondering if you're seeing any of that.

And then just on leverage, I think you might have first been talking about getting to 2.5 times or less within two years or three years, starting last year. So, I mean, is that something which we should be thinking about in terms of a 2017-2018 horizon? Just any other fine-tuning you can give on that because I know I get a bunch of questions especially in this environment from investors on just pathways to lower leverage, so it might be helpful. Thanks.

Scott L. Kauffman - Chairman & Chief Executive Officer

Sure. So, James, I'll lead this off around the volume of activity on the new business front. It's as robust a January and February as I have ever seen, and we're firing on all cylinders. We've also substantially increased the corporate development function within MDC Partners. So we've got more tentacles out there in order to meet this increased capacity. But sometimes it's not even a pitch; sometimes it's a conversation that leads to incremental business. And we've got several instances now where one agency will pick up a piece of business of a multi-brand company, and the next thing we're back in there talking to other of their brands. It's a wonderful way to grow.

We've got a situation right now where there are three agencies in a pitch for a piece of business. They happen to all be our agencies. So one of them – we're going to win one way or another. And there's just an enormous amount of what I'd call iconic business up for grabs right now. And as you know with 1% share of the market globally, it's an iconic piece of business, it's up for grabs. In all likelihood, it's not ours. So it just represents an opportunity for market share expansion on our part.

David B. Doft - CFO, CAO & Head-Investor Relations

In terms of leverage, so our goal and hope is it's within two years, but we always leave a little room when we talk about it because there's other dynamics at play. There's decisions we may make around a particular acquisition, and while we buy small things and we think we can continue to digest the sort of acquisitions we bought over the last couple of years and still progress towards that leverage, we try to just give ourselves a little room. But our hope is within the two years, which would still be the two years to three years from last year that's for sure. But we are looking at all means in order to get there sooner rather than later.

James G. Dix - Wedbush Securities, Inc.

Great. Thanks very much.

David B. Doft - CFO, CAO & Head-Investor Relations

Thank you.

Operator

Our next question comes from Dan Salmon from BMO Capital Markets. Please go ahead with your question.

Daniel Salmon - BMO Capital Markets (United States)

Hey. Good afternoon, guys. Two questions, one for Scott and maybe a quick one for David. Scott, could you just expand a little bit more on the process and the decision-making for your two new board directors? Just some obvious digital expertise and accounting expertise here, but maybe other things that we should be looking for where you think that they will be particularly beneficial to the board. And then just, David, a quick one, the new CPG client that Scott mentioned earlier, I'd assume that will be in the first quarter net new business number, and it's not in the fourth quarter one?

David B. Doft - CFO, CAO & Head-Investor Relations

I'll take the second one first. That's the correct. It's a first quarter win.

Scott L. Kauffman - Chairman & Chief Executive Officer

And I'll take the first question, second. We announced last year that we would work with Spencer Stuart to materially enhance the diversity and expertise of our board. And these are the first two announcements with more to come as we indicated in our earlier remarks throughout the year.

And Anne Marie as you know, we are a Canadian company and therefore 25% of our board members must be both residents and citizens of Canada. So that was a criteria. But where we're looking for financial expertise under Mike Kirby, who is in our board, and will be rolling off at the next proxy statement, is the current audit committee chair. So we wanted someone who could step into the audit committee in a very pronounced way. So financial expertise, governance and risk management were very important to us there and the fact that she's Canadian didn't hurt either.

Larry Kramer, one of the pioneers of the Internet industry and digital marketing and media has a very strong background in content as well, which you'll hear a whole lot more about it in our industry going forward. This is a lot about narrative and storytelling and content development and creation and dissemination and having that entrepreneurial backbone as well is something that, I think, serves the DNA of this company extremely well.

And then we still have our tentacles out for additional board members on corporate and management and organization and operations. So we've got a few more boxes to check, but we've been working with what I believe is the best search firm in the world for board work in Spencer Stuart and we will be making some additional announcements in the coming months.

Daniel Salmon - BMO Capital Markets (United States)

Great. Thanks very much, Scott. And as a side note, yes, always good to have more Canadians around.

Scott L. Kauffman - Chairman & Chief Executive Officer

Duly noted. Thanks, Dan.

Operator

Our next question comes from Barry Lucas from Gabelli & Co. Please go ahead with your question.

Barry L. Lucas - Gabelli & Company

Thank you and good afternoon. Got a couple and I'd like to come back to the media buying topic because in the past, I think especially in 2015, you indicated that with some of the really big pitches out there, you weren't – or MDC did not have the scale to really go after some of that business aggressively. So, where are we in that continuum at this point? When do you reach the inflection point for that to become a much more meaningful part of the business above 10%.

Scott L. Kauffman - Chairman & Chief Executive Officer

Great question, Barry. And then given by background and first job ever in the world was in media planning, it was frustrating for me to see us sitting on the sidelines with $25 billion of business up for grabs this past summer, but at a scale that we couldn't effectively compete at.

But with the combination now of the seven different disciplines within the MDC Partners family network that touch media in one form or another under the stewardship of Steve Farella and Martin Cass, we're pulling together all of those entities that will be physically located in a single place in New York City, and we think that's going to go a long way towards creating both the collaboration and the pooling of resources and the combining of disciplines, so that we can be much more effective going out to market. I don't think we're going to be competing for multi-billion dollar business right out of the gate, but we'll certainly be more in the hunt for some of this new business.

I've been asked, and it's pure speculation at this point, but I think a lot of pundits in the industry are wondering if we're going to see a repeat of that same phenomenon this coming summer. If we do, we've got another couple of months to get ourselves configured properly. We'll be more involved than we have been historically.

It's a very important growth initiative for me personally, and we're getting very good buy-in from all of the participants at the seven different disciplines around the importance of making sure that we are able to go out as a group. But at the same time, each one of these businesses can still compete individually in their respective fields, whether it's social, digital, outdoor display, programmatic, traditional media buying and planning. So we've got the complete soup to nuts offering.

Barry L. Lucas - Gabelli & Company

Great. Thanks for that, Scott. If I can ask another one, you touched – I think, David touched on a couple of points of growth coming from M&A. Maybe you can just expand a little bit about, A, the pipeline; and, B, the dollar amounts that you might be targeting in terms of M&A. And then what kind of valuations are you seeing there, particularly since you deal primarily with younger companies?

Scott L. Kauffman - Chairman & Chief Executive Officer

Well, the pipeline is – it's just an exciting time right now. And as I said in my prepared remarks, what we hear more and more is that the companies that we're talking to really aren't interested in partnering with anyone else, and that almost becomes a self-fulfilling prophecy. We wouldn't really be interested in talking to a company that was simply setting itself up for a bidding war with other prospects that are out there.

So, I won't get into the specifics of any one valuation range or the like. But needless to say, our track record speaks for itself, and when we do consummate a deal, it's a fair price with partners that are willing to roll up their sleeves, partner with us and get back to work, that's not looking for a quick sale, not looking for a quick cash-out. But one of the best advantages we have is that any prospect that we talk to, can talk to dozens of other partner CEOs that have been down this perpetual partnership model with us, and to a person, they will tell the prospect exactly what the experience has been like. And as I said at the outset, we have a plan and we're sticking to it. Others pay lip service to it; we deliver on it.

David B. Doft - CFO, CAO & Head-Investor Relations

Barry, I'll just add from a valuation standpoint in terms of multiple, we buy companies where there's a range of multiples that could be earned based on future growth of the business. So it's not so simple in terms of what the exact multiple is. Our target return continues to be a minimum of 20% cash-on-cash. We continue to believe that there's substantial opportunities out there for us to acquire with that framework and that any deal we do would be accretive to our valuation.

Barry L. Lucas - Gabelli & Company

Great. Thank you very much.

David B. Doft - CFO, CAO & Head-Investor Relations

You're welcome.

Operator

Our next question comes from Rich Tullo from Albert Fried & Co. Please go ahead with your question.

Rich R. Tullo - Albert Fried & Co. LLC

Hey, guys. Congratulations, a very fine quarter, and thank you for taking my question. As we look at this deleverage, how should we be thinking about the parameters of the deleverage? I mean, is this going to be more of a factor of the growth in EBITDA or are you going to divert more of the cash generated from working capital as well as the free cash flow of the company? Is that more going to be directed at paying down actual debt? And then as an aside, is the dividend policy going to be reflected anywhere, influenced anywhere in all that?

David B. Doft - CFO, CAO & Head-Investor Relations

Thank you, Rich. So the deleveraging will come – our expectation is from growing EBITDA, not from paying down debt. We're big believers on maintaining maximum liquidity especially in terms of potential volatile economic cycles and we've been in this economic expansion now for a few years. So we surely don't want to be looking to reduce our liquidity now. And so we're looking to EBITDA growth.

And I just want to remind people that, the contingent obligations we talk about from deferred acquisition consideration are contingent on certain performance. And so, our expectation is that those businesses will generate the cash based on their performance to fund those earnouts. At the same time, if they underperform, those earnouts will come down and those businesses will still generate the cash to fund those earnouts.

So from our standpoint, we like to keep the liquidity. It allows us to fund the growth of the business as well as the obligations going forward. And the underlying deleveraging will come as the EBITDA grows and the assumption with the estimated earnout is that EBITDA grows.

Rich R. Tullo - Albert Fried & Co. LLC

A second question, if I might, we've been contemplating FX headwinds under certain circumstances as being flat to actually a tailwind in 2016. If that were the case, how would you deploy the 150 bps to 200 bps of incremental revenue and possible incremental cash flow generated by a more favorable FX environment?

David B. Doft - CFO, CAO & Head-Investor Relations

Well, that's not a huge amount of money at the end of the day, so I don't think there'll be any special deployment we keep in mind. Hopefully, it'll lead us to beat expectations if that were the case. I hope you're correct on the FX environment. I think surely that'll be good for our numbers. But personally, I'd be a little surprised given that our FX exposure is predominantly Canada which continues to, I think, suffer from an economic standpoint from low oil prices and, thus, less demand for its currency.

Rich R. Tullo - Albert Fried & Co. LLC

Thank you very much.

Operator

Our next question comes from Tracy Young from Evercore ISI. Please go ahead with your question.

Tracy Young - Evercore ISI

Yeah. Hi. Most of my questions have been answered. Just you gave some guidance or you gave some clarity on the legal fees. I realize you're not giving guidance for Q1, but should we expect some more legal fees running through Q1 as well?

David B. Doft - CFO, CAO & Head-Investor Relations

Yes. We expect to continue to have legal fees, and hopefully it will stay at the lower levels that you saw in Q4.

Tracy Young - Evercore ISI

Okay. Thanks.

Operator

Our next question comes from Peter Stabler from Wells Fargo Securities. Please go ahead with your question.

Peter C. Stabler - Wells Fargo Securities LLC

Hey. Thanks for letting me take another one. David, CapEx guidance for 2016, can you offer us a view there? And then, just as a reminder, I'm sorry I missed this, what are you expecting revenue contribution from acquisition to be and if you offered a range on that?

David B. Doft - CFO, CAO & Head-Investor Relations

Sure. So, CapEx, we're looking at $23 million to $25 million in 2016 at this point. We do have a couple of decent-sized office moves/expansion that are driving some of that on top of just normal maintenance CapEx. Still well within our normal 1.7% to 2.0% of revenue range that we've talked about, I think, for a number of years as a reasonable CapEx expectation. In the guidance for 2016, we included 1% incremental growth from acquisitions, and that's related to the acquisitions completed in 2015, but that we did not get the full-year benefit of. It does not include any estimated future acquisitions that have not happened.

Peter C. Stabler - Wells Fargo Securities LLC

Thank you.

Scott L. Kauffman - Chairman & Chief Executive Officer

You're welcome.

Operator

And, ladies and gentlemen, we've reached the end of the allotted time for today's question-and-answer session. At this time, I'd like to turn the conference call back over to management for any closing remarks.

Scott L. Kauffman - Chairman & Chief Executive Officer

Thank you. So just a couple of final thoughts. We had a great year amid the noise. We hit our numbers, we won a lot of new business, and our pipeline is robust. We continue to extend our capabilities overseas and to advance our emerging media business.

We added two new partners to the network, smart M&A, in areas of key strategic focus to the company. We added two new board members, making us better and more independent, and all the while, we maintained a disciplined financial stewardship. This is the formula for success that we'll continue to apply throughout 2016.

So thanks again for your time today, and I look forward to speaking with you in the coming days and weeks. And in the meantime, we'll get back to work on building a prosperous 2016. Good evening from New York City.

Operator

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

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