OUTFRONT Media Inc (OUT) 2015 Q3 法說會逐字稿

Good day and welcome to the OUTFRONT Media third-quarter 2015 earnings conference call. At this time I would like to turn the conference over to Mr. Greg Lundberg, Investor Relations. Please go ahead, sir.

Good afternoon, everyone. Thanks for joining our 2015 third quarter earnings call. On the call today are Jeremy Male, Chairman and Chief Executive Officer; and Donald Shassian, Executive Vice President and Chief Financial Officer.

After a discussion of our financial results, we'll open up the lines for a question-and-answer session. A slide presentation to accompany the call can be found in the Investor Relations section of our website along with the earnings release and an audio webcast.

This conference call may include forward-looking statements. Relevant factors that could cause actual results to differ materially from these forward-looking statements are listed in our earnings materials and in our SEC filings, including our 2014 10-K. We'll refer to certain non-GAAP financial measures on this call; any references to OIBDA and AFFO made today will be on an adjusted and REIT-comparable basis respectively, both of which are reconciled along with other non-GAAP financial measures in the appendix of the slide presentation, the earnings release, and on our website which is OUTFRONTmedia.com.

With that I will now turn the call over to Jeremy.

Thanks, Greg. Good afternoon everyone and thank you for joining our call today. It's been a busy summer here at OUTFRONT Media, and I think we made some good progress since we last spoke. Slide 4 lays out some of the key highlights and I will begin with the most important item, our revenue growth.

Our third-quarter revenues were up 2.5% organically with continued robust growth in our transit business and our billboard business returning to positive growth. This is exactly what we described in our expectations back in August. It is important to note that transit strength was across the US and not confined to any particular market. Our dedicated transit sales teams are doing a great job.

Our billboards are also showing clear progress. The proactive measures we took in certain markets earlier this year are working and the billboard business overall is improving. We are also pleased to note growth in both our national and local business in the US.

Looking forward to Q4, both our transit and billboard businesses in the US are showing improved growth relative to the third-quarter levels that we are reporting to you today. I'll give you more details later on this call.

I was also pleased to report earlier this week that we've entered into an agreement to sell our Latin American business. This is an important strategic milestone. Our focus as a company is on markets where we have a leadership position.

For our Latin American business collectively, this was not the case. This decision allows us to streamline our operations and focus on our North American market comprised of the US and Canada.

Our technology platform was enhanced further during the quarter, and you may have seen details on this from our release earlier this week. We are now branding our digital initiatives under the ON Smart Media banner.

As you'll recall, we are investing in new technologies to change how we operate. This includes new smart hardware displays, a data management platform for dynamic audience-based targeting, and increased automation for our assets to connect, transact, and interact with our advertising clients. During the quarter we moved ahead on certain elements such as new display hardware, deployed at Hudson Yards.

As part of our ON Smart Media launch, we also introduced an exciting new product called OUTFRONT Mobile. Growth in the advertising market is being driven by mobile, which combines exceptionally well with out-of-home, almost by definition, because we match the advertisers' one-to-one message with the physical location of the customer.

Location is becoming increasingly important in media. At an industry conference in New York this week, the chief strategist at Publicist Group made a great comment that illustrates this, saying where you are is just as important as who you are.

What OUTFRONT Mobile means in practice is that we are now able to sell advertisers an integrated mobile campaign that delivers a mobile app while the user is within a geo-fence that contains, for example, our billboard. OUTFRONT Mobile is live in test markets. We think it's an interesting initiative and we will be watching this space closely.

Finally, before I pass it to Don, I'm pleased to report that our Board has declared the fourth quarter 2015 dividend of $0.34 a share payable December 31. A solid level of dividend income is central to our operating philosophy as a REIT, and we look forward to updating you on this next February. So I will now turn the call over to Don for a more in-depth look at our quarterly results.

Thank you Jeremy, and good afternoon everyone. Before we get into our third quarter results, I want to spend a moment on Monday's announcement regarding the sale of our Latin America business.

This was a competitive bidding process and we are very pleased to come to an agreement with JCDecaux. The purchase price is $82 million in cash subject to working capital and indebtedness adjustments. We do not currently anticipate any significant tax consequences from the sale, and we are still exploring our use of the sale proceeds.

As of December 31, 2014, this business represented 11,390 total displays across Mexico, Chile, Uruguay, Brazil, and Argentina. Revenues for the year ended December 31, 2014 were $72.5 million.

As you know, we have never broken out adjusted OIBDA for Latin America since it is not material to the business and is not a separate segment for reporting purposes. However what I can tell you is that Canada represents the vast majority of our international adjusted OIBDA, and that on and LTM basis, the sales price for Latin America represents a higher multiple on EBITDA than our current public market trading level. In addition, I do want you to know that for accounting purposes Latin America does not qualify for discontinued operations treatment in our financial statements. However we will find ways within our MD&A to inform you of the impact that the disposition of Latin America has on our revenue growth.

Please turn to slide 6 which shows a summary of the year-over-year performance of some of our key financial metrics for the quarter and year to date. This table presents the results of the acquired Van Wagner assets only from the date of acquisition on October 1, 2014. While it is not a pro forma view, I will note that we lap the Van Wagner acquisition next quarter, and the results you will see in all of our financials going forward will be easier to compare on a year-over-year basis.

In addition to our acquisitions, the primary differences between the two periods in this table are that Q3 2015 reflects the addition of interest expense incurred on the acquisition debt and tack-on financing, Q3 2014 is adjusted on a tax line to show the level we would have paid had we been operating as a REIT in the second quarter of last year, and third, restructuring and standalone costs. While revenue and OIBDA are up, we experienced a decline in net income, FFO, and AFFO during the period, and I would like to go into the drivers of this beginning with revenues on slide 7.

Our total revenue growth was 14.9% on a reported basis and 2.5% on an organic basis. Please note that our definition of organic revenue excludes the acquisition of Van Wagner's billboard and transit assets.

In the US, total organic revenues were up 2.8%. Transit and other delivered strong 8.5% organic growth, driven by both local and national. As Jeremy mentioned, this growth was across our entire portfolio and is due to the combination of a dedicated transit sales force and advertisers continuing to target a mobile, urban audience.

It is also very important for you to understand that the franchises in the portfolio are virtually the same as last year, so the increase in revenues is driven by our managing the assets through growing incremental yield. US billboard organic revenues were up 0.3%, significantly improved from a decline of 1.7% last quarter. Static billboard yields were flat in the third quarter compared to a decline during the second quarter. Same board digital yields were down at a much lower level than the second quarter.

We were encouraged to see billboards improved during the third quarter. Continued improvements in sales performance have been supported by greater accountability within our markets, increased local and national marketing initiatives, process improvements, and enhanced creative solutions. In the future, our ON Smart Media initiatives should help us drive results even further.

An example of one of our marketing initiatives was the September launch of our OUTFRONT PRIME, a new brand of premium out-of-home assets. We took our most highly-trafficked and iconic billboard locations across the US and rebranded them under this new name that represents the absolute top of our asset pyramid. These displays are in spectacular locations and give advertisers an innovative tailored way to reach the best audiences. Initial advertisers on the PRIME assets include Jimmy Choo, Calvin Klein, BMW, Grey Goose, Tiffany, and David Yurman. Internationally, organic revenues were essentially flat in Canada and Latin America, where declines in certain markets offset strength in numbers.

Now let's turn to expenses on slide 8. On a year-over-year basis our total operating and SG&A expenses were up $44.2 million. A majority of this increase was driven by incremental costs associated with the Van Wagner acquisition. Looking at the trend of expenses as a percentage of revenues since the acquisition, we were flat or slightly improved on billboard lease costs, transit franchise expenses, and posting and maintenance. The two areas where we saw upward pressure in the quarter were SG&A and corporate.

Within SG&A we saw higher compensation and benefit expense, some of which is linked to our higher revenues, but also reflects increased sales headcount in selected US markets where we needed increased feet on the street, and where we believe we can grow even faster. However, the real driver of the expense pressure this quarter was increased corporate overhead which was up $5.9 million over last year. This included a $1.4 million increase in the standalone costs, increased strategic business development expenses of $600,000, and $3.2 million of legal expenses we incurred during the quarter.

The vast majority of these legal expenses were project-specific and are expected to be nonrecurring, while some of the legal expenses will continue in the fourth quarter before trending out in the first quarter of 2016. You can see how these expenses and our revenues translate into OIBDA on slide 9.

Our total OIBDA of $113.9 million was up $7 million over last year. The OIBDA margin for the quarter was 29.5%. The nonrecurring legal expenses that I just referred to represented 80 basis points of margin. Total OIBDA therefore up based on the addition of Van Wagner, and improved legacy performance partially offset by these increased corporate costs.

Turning to slide 10, capital expenditures were $15.3 million, including $7.4 million of maintenance CapEx and $7.9 million of growth CapEx. Maintenance CapEx increased slightly relative to 2014 due to acquisitions and work we've completed subsequent to our becoming a standalone company. During the quarter we added 22 digital billboards in total, including two internationally in Canada.

Our 2015 guidance for total capital expenditures is being reduced by $5 million. Our new guidance is $65 million, including $25 million of maintenance, it was $30 million previously, and $40 million of growth. I will remind you that our maintenance CapEx this year was targeted to be a bit higher than last year as we're refurbishing a number of our offices around the country and are making some investments in our IT applications. We have built 73 digital billboards to date this year and are still targeting approximately 100 by year-end.

Please turn now to slide 11 for our cash flow for the quarter. This slide shows AFFO on a REIT-comparable basis to equalize the number of items that you can see in the schedule in our press release, the largest of which are REIT taxes and interest expense on our formation borrowings.

Please note that Q3 2014 AFFO is not pro forma for the Van Wagner acquisition. The chart only includes Van Wagner as well as the interest expense related to the acquisition debt and tack-on financing as of Q4 2014.

AFFO declined $5.4 million year-over-year. As stated earlier, OIBDA was up $7 million year-over-year due to the addition of Van Wagner and stronger legacy results, partially offset by higher corporate expenses. Despite this overall list in OIBDA, year-over-year AFFO was negatively impacted by $9.9 million of incremental interest on the Van Wagner initial acquisition financing and our tack-on financing this past March, $2.3 million of higher maintenance capital expenditures, and $1.2 million of additional cash taxes.

As we have now lapped the one-year anniversary of the Van Wagner acquisition, it is an appropriate time to give you some color on the performance of the transaction. Revenues have come in slightly better than our expectations. And on an AFFO basis the transaction has been nicely accretive, as expected.

Therefore when you look at AFFO on the chart on this page, keep in mind that it includes the headwind of legal expenses and maintenance CapEx this quarter, which we view as temporary. Overall our AFFO was solid and provides good support of our dividends, which you can see on slide 12. Dividends were 69% AFFO and 88% of free cash flow on a trailing 12 month basis as of September 2015. Last week, as Jeremy mentioned, our Board declared another $0.34 per share dividend for Q4.

Slide 13 presents an overview of our balance sheet. At quarter end the weighted average cost of debt was 4.7%, our liquidity position was approximately $500 million at the end of the quarter, including $106 million of cash and an undrawn $394 million revolving credit facility net of $31 million of letters of credit outstanding. Our net leverage ratio was 4.9 times as of September 30, 2015.

Subsequent to the end of the quarter, we did repay $50 million of our term loan with cash on hand. Our target range for net leverage is unchanged and we are committed to drive our capital structure to 3.5 to 4 times, which we believe is the appropriate leverage for this business. We remain very comfortable with our balance sheet strength and liquidity, and expect to further delever to our target range through a combination growth of OIBDA and additional debt pay-down while maintaining a competitive dividend. I'll now turn it back to Jeremy.

Thanks Don, and please now turn to slide 15. Let's first talk about the fourth quarter outlook.

At this point we expect that revenue growth will continue to improve in the fourth quarter and we will be in the low, possibly mid, single-digit range. We expect continued outperformance in transit and also expect to see billboard once again to show solid improvement. As usual, this outlook only represents our view at this point in time and is on a constant dollar basis.

Please also note that it also includes revenues attributable to the Van Wagner billboard business and transit assets for both periods but excludes the phone kiosk business. Until we close on the Latin America sale, it also reflects our international reporting segment in its entirety.

As you heard this morning, the other large US out-of-home companies once again reported positive organic revenue growth; they're also pacing up in the fourth quarter. This continues the trend we've been speaking about for several quarters. Out-of-home is one of the only media segments that is growing.

Interestingly, according to [Cantar], in the first half of this year Netflix spent 9% of their media dollars on out-of-home, Google spent 11%, and Apple spent 13% of their total media budgets on out-of-home in the US. These are all today's brands and they are also the brands of the future.

So the out-of-home industry is in good shape and we think OUTFRONT Media is also in good shape for future growth. The work we're doing with cell site leasing, OUTFRONT Mobile, and most importantly our data and analytics through ON Smart Media will help to drive incremental growth in 2016 and beyond.

So with that, operator, let's open the line for any questions.

(Operator Instructions)

Marci Ryvicker, Wells Fargo.

Good afternoon. This is Stephan Bisson for Marci. You guys are looking for some nice acceleration based on the guidance in Q4. Can we get a little bit of color around that?

Thanks, Stephan. We've got very good visibility now, it will obviously improve, we've still got quite a bit of business left to right. It's not an exact science, but we are calling it pretty much as we see it right now.

I can tell you that billboards are certainly going to improve its growth rate from Q3, transit is still strong, and I can also say that the US is doing better than our international business. So that's kind of where we are right now, Stephan.

Great. Is there any local outperforming national, vice versa, or any segments that are coming back? I know [telco sounded strong] at some other outdoor players this morning.

To be honest as we look at it right now I think we're likely to see growth across both local and national. When we're thinking about categories at the moment for Q3, the largest changes for us on a positive way were food and I'll call it beverages, computers, Internet was strong, entertainment was also top three for us.

Also good to see that autos was up in the quarter, and indeed some positive momentum in telecom. Overall pretty good, not doing so well, casinos and lottery still difficult for us, retail was a little bit off in Q3, and education was also down. But yes, if that helps, Stephan.

Definitely helps, thanks so much.

Ben Swinburne of Morgan Stanley.

Thanks; good afternoon. Jeremy, can you talk about your remaining international business? I don't know if you could help us think about the organic growth rate historically for Canada versus Latin America. Any color there would be interesting.

But are you considering selling that business if you can get it sold at an accretive multiple as well? And related to the transaction you've announced, maybe for Don, what are the tax complications if any about repatriating the proceeds back to the US? What can you do with the cash if you have any restrictions at all? I would be interested in some color there. Thanks.

Okay, so maybe if I take the first part of the question. I think just another couple of comments on LatAm: we think it's a very good deal for us, we think it's a very good deal for our clients down there and also our teams down there. And you know what, I think it's a good deal for JCDecaux as well, they have obviously got a decent-sized business down there and I'm sure that they will be up to generate some cost and marketing synergies. So I think all around, we feel very satisfied with the outcome of that process and I'm sure that it wasn't a great surprise to any of you when we announced the deal.

So as we look to our business in Canada, if we go back three or four years, the business took a step back with the loss of a couple of transit contracts out there but since then the growth rates have been pretty consistent with the US. We have had the headwind on ForEx. Right now we like our business in Canada a lot; we have got a very good market position there. We think we can be one of the drivers of future growth in Canada and we'll be looking at smart ways that we can develop that business as we go forward.

Then, in my prepared comments where we don't expect any significant tax consequences on this transaction is both local taxes as well as being able to bring it back into the States. We do believe we can get it back in. Our tax structure as a REIT does give us some opportunity to do so. It will probably happen over a couple of years, not all at once, but we do think it will be minimal tax leakage to make that happen.

Great. Just one follow-up, Don, on cost. There has been some volatility to your fixed cost base as you guys have made some adjustments. You mentioned some salespeople, et cetera. Any way to tell us as we look into next year what the right expectation is for your SG&A or corporate growth as we think about 2016 or maybe it's too early.

There's no growth in corporate, we've had a couple of items, there are some nonrecurring, hopefully we're not going to see that growing. The piece of corporate and SG&A that is a little bit variable is the salespeople. We've talked about past couple of quarters enhancing our salespeople, getting the right people in the right markets. We also believe that we have got the right people in the right markets, they can pay back themselves pretty quickly, and it doesn't bring a big drag because we think they can cover the costs and grow the business pretty quickly if you get the right people in the right markets.

And the other one, we're investing for a future. This world and this industry is changing. Digital data analytics is changing the way we are living today and it will continue to change, and we're making some investments in this business and the strategic business development costs that's averaging about $2 million a quarter helping us drive a lot of things in the future.

I don't want to make any perspective of where that's going to go in the future but we are really trying to lead this industry and not be a follower in these different areas. So corporate I think hopefully will be flattish, SG&A I think hopefully the only increase you're going to see in the sales side of this thing is going to demonstrate with increased revenues, and on the leasing and transit, leasing would be on the billboard side, will be minor increases and the transit will be a percentage of revenue growth at revenue.

So I think it's pretty easy to model, but also recognizing that we are making some investments for the future at that $2 million a quarter at least right now for future development. And coming out of those buckets you see the cellular initiative Jeremy mentioned, the mobile initiative that Jeremy mentioned, and the data analytics which we are really putting some attention to right now is the start of really trying to move that dime.

Thank you.

Tracy Young of Evercore ISI.

I just wanted to follow up on your organic growth, obviously you had a nice little uptick on the billboard business. Is there anything that you could particularly highlight as [to debt] growth, and also is there any way you can provide some same-store billboard growth for the digital business?

I'll take the first part of that, Tracy. When we look into the business, just to give a little bit more color, we've had some pretty good revenue growth in two of our key markets which is New York and LA. When we go into some of the other markets, as you know, we have a basket of markets and we did call out the fact that we were making some changes in a number of those markets, and so far I think the prior two changes that we've made are starting to bear fruit. Those markets that were sort of underperforming were either left underperforming in Q3 or indeed some of them returned to growth, so that's all positive.

On same-store digital, Tracy, much better, it was a decline. Not nearly as big as it was last quarter, third quarter was slightly negative, very low single digits, a nice improvement over prior quarter.

Okay, thank you.

Jim Goss of Barrington Research.

Thanks. The 8.5% organic transit growth jumped out at me and I know in prior quarters you mentioned that it's a lower margin business so that growing could actually have compressed somewhat your overall margins. But I was wondering to the extent that those are truly being successful, is there some solution to the margin pressure through pricing upside that you might be able to push into that area to the extent that they are having results?

I think as I mentioned in my prepared remarks, our number of displays in the third quarter of this year are pretty comparable to the third quarter of last year. And when we look at it, it is incremental yield. It is a significant demand and improved pricing and people are trying to sell these for the value we think they deserve, and it's a supply demand.

People are really pushing for access to major metropolitan urban audiences, and our folks are doing a nice job demonstrating the value by selling them for what they believe they're worth. So I think we are presently doing that and will continue to do so.

Okay, and are there other categories either existing or some of the new ones you're describing that you think are going to be pretty important to the growth you're going to be developing, whether it be getting into airports or street furniture more than you have, or these other areas in mobile and digital? How should we look at the evolution of OUTFRONT?

As we look at our business going forward we obviously have a very strong presence in the billboard market and we'll continue to develop that and we'll continue to digitize that. We are the leader in transit in the US, we don't currently operate in the airport advertising market, never say never, but it's not something that is immediately on the cards right now, and we continue to bid on bus shelter and street furniture franchises as and when they come up.

I think as we look forward, we're certainly going to be thinking about the screens business. As you know, we announced around this time last year the rights to the [pitary] products which is sort of low-cost screens and cloud content, app distribution, we think that there is some opportunity potentially in the screens business that may lead us into slightly different sectors if that helps.

One other thing, in terms of digital boards, have you seen some evolution in how they were intended to be used when they began to be implemented a decade or so ago, and what they are involving into today in terms of just how you are dividing up the number of participants [in boards], the time allocation, whether it's become more of a local advertising business than just a national brand-building business, that sort of thing. Are there changes that you think are worth noticing and pointing out?

Digital it certainly appeals to both local and national, that's for sure. I still think that in certain ways we probably don't harness all of the benefits creatively that digital has to offer. Too often we still see copy where effectively it could equally as well be on one of our analog boards.

I think as we go forward we're looking to eventually upgrade the way that we reach out boards and it will also give us the ability to potentially load apps onto our billboards, and this is where it gets to be very interesting because the apps then reach out for information, so they can do things like display a particular message dependent upon whether or not the Dow Jones has hit a particular mark or whether or not the temperature in a particular area hits a particular point. So I think as we go forward, as we change the way that we are addressing our digital billboards I think we will be able to capture that creativity in a much more dynamic way.

Enabling the advertisers to get their message out quicker, more timely, to give them more flexibility to do things. I think both we are provided better technology to do that, and the advertisers are starting to realize how they can use these boards to really get their message out much more timely and focused to target to their customers, so it's evolving.

And your measurement efforts should be able to tie into that really well too, then, I would imagine.

That's correct. Absolutely correct.

Alright, thanks very much.

Thanks, Jim.

(Multiple speakers) I believe there are no further questions right now so I'd like to thank you for your questions and your time today, and we look forward to seeing many of you at investor conferences over the next several weeks. Thank you very much indeed.

And this does conclude today's conference. We thank you for your participation. You may now disconnect.