OUTFRONT Media Inc (OUT) 2014 Q3 法說會逐字稿

Good day and welcome to today's CBS Outdoor Americas third-quarter 2014 earnings release teleconference. At this time it is my pleasure to turn the conference over to your host for today's call, Gregory Lundberg. Please go ahead.

Good afternoon, everyone. Thanks for joining our 2014 third-quarter call. On the call today are Jeremy Male, Chairman and Chief Executive Officer, and Donald Shassian, Executive Vice President and Chief Financial Officer. After the prepared remarks, we'll open up the lines for a question and answer session.

A slide presentation to accompany today's call can be found in the investor relations section of our website at cbsoutdoor.com, along with the earnings release and an audio webcast of this call.

This conference call may include forward-looking statements and relevant factors that could cause actual results to differ materially from those forward-looking statements that are listed in our earnings release and slide number 2 of the presentation, and in our SEC filings.

In addition, on this call, we will refer to certain non-GAAP financial measures. Please refer to the appendix of the slide presentation, our earnings release, and our Van Wagner acquisition slide presentation for the reconciliations of non-GAAP measures to GAAP financial measures, each of which can also be found in the investor relations section of our website at cbsoutdoor.com.

These documents provide reconciliations of results on a comparable basis, which we believe present a more meaningful view of our business performance and progress by making certain adjustments to our reported results. And with that, I will now turn the call over to Jeremy.

Thanks, Greg, and good afternoon, everyone. Let's begin on slide 4 of the presentation, which are the key highlights of the third quarter.

Back on September 10 we announced weakness in national advertising unfolding for the third quarter, and that our total revenue expectation was close to flat. As you can see here, that is exactly what we experienced. Once again, we saw a positive performance in our local business, but national was down year-over-year.

On the positive side, we are pleased to report that our international business added 2 points of revenue growth this quarter. Now, we are obviously not satisfied with this level of revenue growth especially with our relatively high fixed cost structure. As we said before, with natural cost increases we need to see revenue growth of around 1.5% to 2% to maintain our OIBDA. As such, this causes revenue growth translated into slightly weaker OIBDA and, accordingly, AFFO during the quarter.

In the context of these results, I would like to take a minute on our view of conditions in the advertising market. When we look at the source of all of our revenues, our advertising clients, there is a significant stability on an annual basis. But, there can be considerable variability quarter to quarter based on campaign timing.

As of the third quarter 2014, on a trailing 12-month basis, some of our better performing large verticals in terms of overall revenue contribution were healthcare and pharmaceutical, professional services and television. Conversely, at the bottom of our results were telecom, beer and liquor, and financial services.

There's been a lot of discussion about whether the results in the market, including ours that we are reporting to you today, are a result of a softer advertising climate or a media share shift to online. Let's address both of these.

On the ad market, there is definitely a disconnect between the recent economic news and what we are seeing companies spend on marketing and advertising. We know and can see that our clients are spending less. There was some third-party research published last week that looked at the quarterly financial reporting thus far of some top US advertisers.

In the first three quarters of this year, the median growth rate of these advertisers was zero to 1%. Last year it was 6% to 9%. Data like this supports what we have been seeing over the last few months.

This is also reflected in the spend of the major US telecom carriers, an important advertising category for out of home. According to Quintar, their year-to-date spending through August is down 5.2% from last year. Interestingly, they have actually cut their online allocation by around 5 percentage points. So, it is not all about the secular shift to online.

Later on this call, I am going to discuss some of our strategies for growth both for our Company and, indeed, for our industry. It is a very exciting time to be leading this change.

Looking ahead, I can say that we really are at a brand-new point of the Company, literally. We launched our new brand, Outfront Media, into the marketplace on October 20. I will talk to you more about that a little bit later on the call.

Our past year has been dominated by a corporate transformation and I am pleased to report that we have come a long way: the initial debt offering, IPO, split-off, REIT conversion, Van Wagner acquisition, and the launch of our new brand. We now have the ability to focus virtually all of our efforts on extending our leadership position in the out of home media market. We have the best assets, the best audiences, and the best people. And we are going to use them and invest in them to improve results for our clients and our shareholders.

So before I come back on, I would like to turn this call over to Don, who will now take you through our third-quarter financials.

Thank you, Jeremy, and good afternoon everyone. Before I get into our overall results for the quarter, I want to highlight two accounting matters that we addressed in the quarter.

First of all, as you know, the exchange offer occurred in July. And effective July 17, we began operating in a manner that will allow us to qualify as a REIT for US federal income tax purposes for the tax year commencing July 17, 2014. We also announced on October 29 that we will be paying the required earnings and profits purge in the fourth quarter.

In connection with being a REIT, the deferred tax assets and liabilities that are on our books due to the historical differences between book and tax, like tax depreciation versus book depreciation, need to be written off as those assets and liabilities related to our REIT assets will no longer reverse themselves over time. Therefore, as required by GAAP, we have reversed those net deferred tax liabilities into income, via a benefit of $232.3 million reflected on the income tax expense line of our income statement.

I would like to be clear: this benefit of $232.3 million or $1.92 per share is nonrecurring, is non-cash, and therefore should be factored into your understanding of our quarterly and year to date results.

The second accounting item I want to point out is that we have revised our classification of capital expenditures on our interim statements of cash flows. Non-cash purchases of property and equipment were previously included within capital expenditures in prior periods. This revision is not material to previously reported interim or annual financial statements. It also has no impact on net income, the balance sheet, or the stockholders' equity invested capital previously reported.

Since the change is to capital expenditures, and therefore does impact maintenance capital expenditures, the revision did result in a minor change to previously reported AFFO amounts.

Now please turn to slide 6. This slide shows you the impact of the tax benefit I described on net income, EPS, FFO and AFFO for the quarter. It also shows other one-time expenses such as a restructuring charge and Van Wagner acquisition costs, as well as what the taxes would have been during the year if we were a REIT for the entire year.

As you can see, our REIT comparable results were net income of $25.9 million, diluted EPS of $0.21, FFO of $70.5 million and AFFO of $75.5 million. Those metrics are then compared to 2013 on a comparable basis.

Now let's turn to slide 7 for our consolidated revenue and adjusted OIBDA. Our revenues were essentially flat year-over-year with Billboard flat, and transit and other up slightly. Breaking this down geographically, the US was flat and international was up 2%.

On an adjusted same site basis, which removes non-comparable revenues of $3.9 million, our constant dollar revenues were up 1.4%. $3.3 million of the non-comparable revenues are related to the Los Angeles street furniture business that we sold in the fourth quarter last year and a Game Stop, which is a business that we exited in the second quarter of this year.

With 70% of our costs fixed and some increases during the quarter, our adjusted OIBDA decreased 3.6% and margins were down slightly to 31.8%. These adjusted OIBDA amounts adjust for $5.2 million of incremental standalone costs that did not occur last year. Our total standalone costs for the quarter were $7 million.

Our US segment results, which were 88% of our revenues during the quarter, are on slide 8. As I mentioned, total US revenues were flat. And Billboards on a same board basis, year to date yields on both static and digital are up. During the quarter, however, they are down slightly. Positive yield growth remains an important driver for us. We are working to maximize the revenue of each display and make sure that the displays delivering the best audiences are marketed accordingly.

In terms of revenue mix, local advertising performed well but was offset by softness in national.

Transit and other grew just under 1%, which was a better performance relative to the 2% decline in the second quarter. The year-over-year increase in third-quarter revenue of $0.5 million is after absorbing the $3.3 million revenue decrease for our Los Angeles street furniture and Game Stop businesses that I mentioned earlier.

As we have stated before, once our revenue grows in excess of 1.5% to 2%, we are able to leverage our fixed cost structure through driving multiple growth on adjusted OIBDA. We are continuing to analyze board by board profitability as well as pursuing process improvements on our order to cash cycle to improve our overall cost structure. We expect our operating lever to improve shortly as we grow revenues in the future and achieve various cost savings.

Turning to international revenues shown on slide 9, revenues were up 2% on a constant dollar basis in the quarter, with billboards up 1.6% and transit and other up 3.5%. Looking at the regions in detail, Canada, which is just over half of the revenue, was down approximately 1% due in part to certain advertisers in the packaged goods category. South America, however, was again up strongly, and Mexico came back during the quarter as expected.

While the international revenue improvement was good, OIBDA was pressured by the geographic mix of one country versus another, and by increased operating costs for billboard and transit leases, and higher compensation and bad debt provisions.

Turning to slide 10, capital expenditures, our spending in the quarter was $14.3 million including $5.1 million of maintenance CapEx and $9.2 million of growth CapEx. During the quarter we added 30 digital boards in total, including 20 in the US and 10 internationally, seven in Canada and three in Mexico. This brings us to 113 for the year putting us well on pace for our guidance of approximately 120 for the year.

Our 2014 guidance for total capital expenditures remains $65 million. Please note that this includes approximately $3.5 million in the fourth quarter CapEx to implement our new brand on substantially all of our structures and signs.

Please turn now to slide 11 for an analysis of our FFO and AFFO. This slide shows both FFO and AFFO on a REIT comparable basis to equalize a number of items. The impact of our non-cash deferred tax reversal; the impact of incremental stand-alone costs for both years; the impact of interest expense related for our January 2014 debt offerings; the impact of taxes that we would not have incurred if we had been operating as a REIT for all periods presented; the impact of Van Wagner acquisition costs in the quarter; and restructuring charges related to severance.

When adjusting for these items, REIT comparable FFO was down 7.5% compared to last year's third quarter, and REIT comparable AFFO was down 9.7% for the same period. Like FFO, AFFO captures our maintenance capital spending, and in this way is very similar to the free cash flow metric you may use to look at other media companies.

With a high flow to -- of OIBDA to AFFO, we expect improvement in AFFO per-share as our revenue initiatives drive topline results.

Slide 12 shows our historical dividend as well as our announcement last week regarding our recurring dividend and our special dividend that represents our earnings and profits or E&P purging distribution. Our recent announcement of a $44.4 million dividend payment for the fourth quarter, or $0.37 per share, is payable on December 15 to shareholders of record as of November 18. This dividend payment of $44.4 million, when annualized for three quarters, represents a payout ratio of 64% of our year-to-date REIT comparable AFFO.

This level does not yet include our expected top-up dividend for 2014 to be paid in early 2015. The dividend dates I just mentioned are a bit different from our historical timing due to our announcement of a special dividend for the E&P purging distribution of $547.7 million, which will be payable on December 31 to shareholders of record as of November 20. Shareholders will have the option to elect all cash or all stock, subject to a proration based on a cash limit with approximately 80% of the dividend paid in stock and 20% paid in cash.

The cash portion of the E&P purge is approximately $109.5 million. CBS left us $100 million from the IPO to fund the cash purge, and the balance of $9.5 million will similarly be transferred to us from CBS prior to December 31 to fund the balance of the cash purge.

One area I would like to point out to you as a more thorough explanation of the implication of the purge on our shares in dividend going forward. The stock portion of the E&P purge will result in additional shares being distributed to our existing shareholders. This increase in shares outstanding on December 31 will not impact the absolute dollar amount of our dividends that are expected to be paid in 2015 and beyond.

However, due to more shares outstanding, a denominator, the number of shares does change, as will, therefore, the per-share amount. We intend to continue paying a healthy REIT dividend that can grow as our business grows, while also deleveraging to our target of 3.5 to 4 times.

You can see our balance sheet profile on slide 13 as of September 30. We are very comfortable with our balance sheet strength and liquidity, which enabled us to pursue and acquire the selected assets of Van Wagner.

At quarter end, the weighted average cost of debt was 4.2% and our consolidated total leverage ratio was 3.9 times. Including $172 million of cash on hand, the net leverage ratio was 3.5 times. The liquidity position was $597 million including an undrawn $425 million revolving credit facility and the $172 million of cash on hand.

You will also see on this slide the additional $100 million in cash from the net IPO proceeds which will be used for the cash portion of the E&P purge.

I would also like to point out that subsequent to quarter end, we completed the financing for and closed our acquisition of selected assets from Van Wagner on October 1. This added $150 million to the 5.25% new notes due 2022 and $450 million of new 5.625% notes due 2025.

Our pro forma gross leverage for the Van Wagner acquisition when we announced the transaction back in July was 4.9 times, based on the combined pro forma adjusted OIBDA as of December 31 on an LTM basis. As we indicated at that announcement, given OIBDA increases and also due to the $40 million of lower indebtedness than originally contemplated, our leverage including the acquisition will be lower than this original 4.9 times estimate.

Our goal is to grow OIBDA, maintain the high dividend payment representing 100% of the QRS tax return taxable income, and use residual free cash flow to deliberate the balance sheet back down into the 3.5 to 4 times range.

I'll now turn the call back over to Jeremy on slide 15.

Thanks very much, Don. Let me just take a moment now to look at our business outlook for the fourth quarter. At this point, national trends in the fourth quarter look similar to the performance in the third quarter. Overall, our current revenue expectation for the fourth quarter including the acquired Van Wagner assets is flat to slightly down.

There are three important things to mention on this outlook. Firstly, this is at a point in time. Secondly, it is on a constant dollar basis. And thirdly, it also includes around $3 million that Don mentioned relating to businesses that are no longer in our financials.

Now let's talk about how we are going to improve these results as we look forward to the new year. The first key element is our new brand, Outfront Media. This brand name will guide everything we do. It is not just a sign on our boards.

It is who we are and what we stand for: leadership and innovation. A definition of out-front is leading or ahead of the competition. It also means candid, frank, and honest. This is where and what we want to be.

And the word media instead of outdoor is an intentional and conscious choice about the increasing importance and impact of out of home in the broader media ecosystem. It is also a statement of where we are headed with technology. And I don't just mean continued investment in digital billboards. We are exploring and developing plans for new technology platforms to connect, transact, and interact with our advertising clients and their consumers.

Another key element of our growth will be our people, who were recently expanded with some great new talent and leadership through our Van Wagner acquisition. We are investing in training to raise the knowledge and effectiveness of our sales team in a competitive and increasingly digital marketplace.

An important aspect of this sales effort is elevating our national advertising strategy. While we have seen weakness in national advertising this year, we continue to believe that national advertising will be a key future source of growth for our industry. The Van Wagner acquisition is certainly an important enhancement of our platform for national advertisers and is a big step forward.

We think there is increased value in the marketplace for these assets and we are going to be particular focused on this at buyer, agency and CMO level. We have an incredible premium suite of assets that can boost advertiser ROIs, build brands and generate sales.

And while we will be focusing extensively on national, our local sales team will continue to excel in their local markets. We had good growth this year. Local remains very solid and we continue to believe that there are opportunities for both increased yields on our static boards and additional digital conversions.

As I mentioned in my opening comments, we are really at the starting point of our new Company. It has been a busy year and we have accomplished many things, not just the corporate activities I mentioned, but also on the sales, operations, and strategy side. We really are a new Company.

We are going to keep up this pace of activity to aggressively drive the industry forward. We will be out front in technology, out front in thought leadership, and out front in innovation for our clients. As many of you have probably seen, the new logo imprints are going up on the boards and the Company is 100% focused with presenting our clients with great solutions that will ultimately benefit them, and indeed, all of us on this call.

We are going to be out front (technical difficulty). So with that, operator, let's open the lines for Q&A.

(Operator Instructions). Marci Ryvicker, Wells Fargo.

I have a couple. I want to clarify the flat to slightly down commentary. Is that just a pacing data point or is that guidance for the fourth quarter?

It's -- as we said on the call, given the free comments I made regarding it, it is a point in time, and at the moment as we look forward, that is our expectation, Marci.

Okay. And do you have any political in the fourth quarter, or is that a non-event for you?

To be honest, it is somewhat of a nonevent for us in terms of any real ad dollars, Marci.

Okay. And looking at the quarter and backing out the $3.3 million negative impact from selling the transit shelters and then the nonprofitable contract, organic growth was up 1.3%, better than flat. You spoke a little bit on what you can do longer-term, but is there anything nearer-term that you can do to push this further, that 1.3%-ish, closer to 2%?

Look, we are working very hard, Marci. We worked hard in Q3 and we are working very hard in Q4. We continue to look at yields and how we can push pricing on our boards. It is fair to say that in our local markets, that we still see considerable opportunity there for more closely aligning revenues that we achieve on each board to audience.

There's a lot of legacy pricing in some of these markets, and we think that with training and development, we will be able to push that forward. And we -- it is fair to say, we have had that general, sort of more macro trend this year. Unfortunately, national advertising generally has not been as strong as we might have expected.

And as that disconnect between GDP growth and the general economy and ad dollars sort of rights itself as we go forward, I would like to think that we can really be pushing those growth numbers up as we head into 2015.

Got it. Thank you.

Tracy Young, Evercore.

I have a question just in terms of the FX for international, how much of that might have affected OIBDA. And then in terms of your guidance, again, how much have you -- how much visibility do you feel like you have when you give the guidance? And, Jeremy, you have been in the business for a while. How has visibility changed in the industry? Thanks.

Okay, I will take the second part of that question then pass over to Don on the first part. I think it is fair to say that, right the way across the media landscape, that the ad market has become shorter-term. Unless there is a requirement to lay down advertising dollars early, then in a way, why would advertisers make those commitments? So I would say that the general, and this is very much a worldwide comment, that actually outdoor dollars come in later than they did if you look back sort of four or five years.

As we make our comments now, we are well sold for the fourth quarter. We would have 90% of revenues already laid down at this point for the quarter. But obviously there's still a way to go and it's -- that is why at this stage, I would certainly make the comment that any expectation is at this point in time.

And your comment about international impact from the OIBDA, it is about $2 million.

Okay. Thank you.

Davis Hebert, Wells Fargo Securities.

Good afternoon, everyone. When you provided your updated guidance in last -- or I think it was September on the flat year-over-year revenue trends, you also mentioned that Van Wagner was pacing positive for the second half. Just curious if that has changed for the acquired Van Wagner assets.

No, I mean, obviously, they come in there, Davis, with for the second half, rather than make any comments for any particular quarter. And we haven't seen any unit in particular change for Q4 than we saw on September 10.

Okay. And it has been a month since you closed that acquisition; wonder if you can give us an update on your integration activities since that point.

Well, as you can imagine, we have been working hard at it. Business came over to us on you are right, right at the beginning of October. There have been some of the usual little niggles of systems and software, et cetera, but overall I think it is fair to say that we are very pleased with the integration. We are very pleased with be comments we are getting back from the marketplace and we just feel great about it, to be honest.

And then just to add to that, all the systems integration is done. As you know this -- the closing of the transaction was moved up a little bit earlier than we originally anticipated. All of our people jump through hoops to get a lot of activities done so we can be operating out of the gate. And a little bit of things to clean up for the first month, but it is complete, the integration is completed from a systems standpoint and we are trying to get all of the processes running really smooth and really go to market real hard. So it is done and it is now off to the races and do the best things for our clients.

Okay. That's helpful. And (technical difficulty) your static portfolio at all?

Well, we have said right the way along that our rollout of digital would be measured. That is a term we have used, and we consistently said that we believe that we can build out 100-ish boards per year and smartly, and in areas where we believe that we can minimize any attrition on our static boards.

So when we are looking at making that digital investment, we will estimate revenues for the digital board. We will also take into account, dependent upon the individual circumstances and location of that board, any attrition. Assuming we are then making the right returns, and we are looking to make returns, IRRs of around about 20% on this new investment, assuming that in total we can make those IRRs, that is when will put the new board in.

And if I may add to that, when we look at same board static yields Q3 of 2014 on Q3 of 2013, this actually was flat. It was up a little bit in second quarter, but essentially was flat in Q3. So we are really not seeing that. We are trying to be very judicious about our selection of where to do it. So I think we are managing that quite well, as maybe compared to what is happening with some other operators.

Okay. Very helpful, thank you. And last question for me, Don, did you give any sort of estimate what the top-up dividends may look like? And then a follow-up to that would be -- any sort of target for debt reduction in 2015?

Davis, we have not given any guidance on that. I really would like to get through this first year and the tax return calculations and to be able to -- and once we have the year completed, we will announce that. Hopefully with running the business a little bit more and getting a little more comfortable with the process, maybe we will give a little more guidance ahead of time. But right now we are not.

I do believe a number of the equity analysts have models out there and they have got estimates what the top up is. We do expect there will be top up, but I think I would like to finish out the year, how strong Q4 is and then really go through the tax return mechanics enough to really come up with that firm number.

Target on debt reduction, we have not. I want to, again, let me go through the year. I think we will be able to give perspectives on that when we talk about year-end numbers and give a better perspective going forward for 2015.

Great. Thank you very much for the time.

At this time we have no further questions in the question queue, so I would like to turn the call back over to management for any additional or closing remarks.

Well, just to say, thank you, operator. And thank you all for your attendance on this call and for the questions today. We look forward to seeing many of you over the coming weeks. In December we have two investor conferences in New York, so I look forward to seeing you then and thanks very much again to all.

This does conclude today's conference. Thank you for your participation.