OUTFRONT Media Inc (OUT) 2019 Q3 法說會逐字稿

Good day, everyone, and welcome to the OUTFRONT Media Inc. Third Quarter Earnings Conference Call. At this time, I would like to turn the call over to Greg Lundberg. Please go ahead.

Good afternoon, everyone. Thanks for joining our 2019 Third Quarter Earnings Call. On the call today, as usual, are Jeremy Male, Chairman and Chief Executive Officer; and Matthew Siegel, 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.

Our comments today will refer to the earnings release and the slide presentation that you can find in the Investor Relations section of our website, outfrontmedia.com. And after today's call is concluded, an audio archive will be there as well.

This conference 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 2018 Form 10-K. We will also refer to certain non-GAAP financial measures on this call.

Any references to OIBDA made today will be on an adjusted basis, and reconciliations of OIBDA and other non-GAAP financial measures are in the appendix of the slide presentation, the earnings release and on our website.

And with that, I'll turn it over to Jeremy.

Thank you, Greg, and thank you again for joining us today to review our third quarter results and guidance for the fourth quarter. Please turn to the highlights on Slide 3. Total revenues increased over 11% in the quarter, which was our fourth straight quarter of double-digit growth. In U.S. Media, we saw this double-digit performance in both local and national. We were delighted to see these twin sources of demand drive continued strong growth in both billboard and transit. This top line strength helped drive OIBDA up over 8% and AFFO up 7%.

So overall, a very good quarter. And as I'll talk about later, we expect 2019 to be a double-digit revenue growth year. Our noteworthy performance is being driven by digitization, sales execution, and certainly the growing importance of out-of-home in advertisers' media mix.

Let's now turn to Slide 4 to go into more color on our revenue growth. As you'd expect, the vast majority of our overall growth came from U.S. Media, which was up 11%. Other revenues were up 15% on a reported basis, 1 point higher when removing the effects of foreign exchange.

Let's look at each of these components in more detail, beginning first with U.S. Media on Slide 5. Transit and Billboard contributed equally to our growth in the quarter. In Billboard, revenues grew 8% on both reported and organic basis. This is on top of the 6% growth in the third quarter of last year. Billboard saw a strong contribution from digital, and we're encouraged to also see static billboards performing well.

Transit revenues were up 20%, led by digital, both in terms of dollar and percentage growth. While the majority of this growth was from New York City, we had great performances in all of our key transit markets.

Slide 6 is our view of U.S. Media growth as derived from local and national advertising, which were 54% and 46% of total revenues, respectively. Once again, our local revenues were very strong, up 12%, and national revenue continues to trend extremely well, up 10% in the quarter.

Slide 7 shows U.S. yield was up 9%. Three things are driving this. First, we're getting a nice lift on static billboard yields, which are 80% of total billboard revenue. We're also growing our digital yields and converting more billboard inventory to digital.

Now please turn to Slide 8 for a look at our other segment, which was just under 9% of total revenues in the quarter. After a very strong 12 months, this quarter, the flatter billboard performance you can see in Canada was due to the exceptional contribution of cannabis in the second half of last year. The balance of the segment saw revenues up $5 million or 46%, primarily from third-party digital screen sales, which carried no margin. We'd like to call out that they contributed about 1 point of total revenue growth in the quarter.

Slide 9 shows one of our more exciting revenue drivers. Total digital revenue growth was 28% in the third quarter, with billboards up 15% and transit up 77%. Rising yield is driving this, as we talked about a moment ago, as is our expanding inventory of both digital billboards and digital transit displays.

Digital has been consistently increasing as a percentage of revenues each quarter at approximately 2 to 3 points year-over-year. MAGNET Global estimates that digital contributed 23% of U.S. revenues in 2018 and expects this to grow to 40% by 2023, implying that we've got a great future runway.

Well, I think you'll agree, it was another terrific performance for our business. We had strong growth in digital, static, billboard, transit, national and local. I'll now hand over the call to Matt for a closer look at expenses, cash flows and the balance sheet.

Thanks, Jeremy, and good afternoon. On Slide 10, you can see our 5 major expense categories at the same scale. In Billboard lease expense, the largest category, we saw around 1 point of efficiency as a percentage of total revenues, although the dollar level of expense did increase due to their geographic mix.

Transit franchise grew in line with revenue, as one would expect, and also now includes BART in San Francisco, which we did not enter in the third quarter of last year, and which we've been growing nicely. Combined, billboard lease and transit franchise expenses were fairly stable year-over-year at 37% or 38% of revenue. These 2 categories combined have been 39% of revenue, on average, since our IPO, so we are comfortable with the stability and predictability and our recent performance.

Moving down the income statement. Posting and maintenance expenses were up broadly in line with revenues, as expected, plus this quarter included approximately $5 million related to the equipment sale, as Jeremy mentioned.

SG&A levels were flat as a percentage of revenue, while expenses reflected and supported our sales success and also our continued investment into our business, primarily around digital enablement. And lastly, as in previous quarters, corporate was flat overall.

The sum of these expenses is on Slide 11, and in total, they increased around 1% of revenues. We like the operational investments that we're making because it helps drive the strong 8.5% OIBDA growth you see on Slide 12. This lift was driven overall by revenues, offset by the changes I just mentioned.

We remain focused on continuing to manage our billboard lease portfolio efficiently and reducing other operating and SG&A expenses where possible, without impacting our current and future growth rates.

Slide 13 is a view of our total OIBDA growth by component. Overall, U.S. Billboard grew 5%, was a 41% OIBDA margin and represented 86% of our total company OIBDA during the quarter. U.S. transit is a lower structural margin at 21%, and posted very strong growth of 24%, contributing roughly the same amount of OIBDA growth in dollars as Billboard.

Turning to Slide 14. Our capital expenditures as a percentage of revenues increased year-over-year as we accelerated our growth projects and as maintenance spending moved back in line with historical norms. Year-to-date, this puts us at $65 million in CapEx, and we expect to finish the year around our prior annual guidance of approximately $80 million.

Our growth CapEx reflected a further digitization of various transit systems and 29 digital billboard conversions. Year-to-date, we have built or converted 77 and including third-party marketing agreements and acquisitions, our total digital billboards have increased by 144.

Moving on to AFFO. Slide 15 shows a year-over-year bridge. The 7% growth in FFO was driven by the growth in OIBDA, partially offset by changes in other items. Back in February of this year, our original annual guidance for AFFO was mid-single-digit growth, which we raised and made a high single digit, and then again in August to reach double digits. And we are pleased to reaffirm this view.

Slide 16 shows dividend coverage for both AFFO and adjusted free cash flow. On an LTM basis, we saw a continued improvement in our AFFO dividend payout ratio to 63%. The adjusted free cash flow payout ratio was down significantly to 86%.

Now let's turn to our balance sheet on Slide 17. Both of these charts look a bit different than last quarter since we had issued $650 million of new 5% notes in June, but had not yet taken out $550 million of our 5.25s. As of September, the cash portion of our liquidity was reduced, but our liquidity remains strong at $476 million. Our maturity schedule shifted nicely to the right with $550 million previously due in 2022 gone, replaced by the $650 million due in 2027. We now have no significant maturities until 2024. Our leverage at September 30 was unchanged from June 30 at 4.6x, and is down from 5x at the end of the third quarter last year.

An additional source of liquidity is our at the market or ATM equity program. During the quarter, we did not use any of the ATM, and we still had over $230 million of remaining capacity.

Turning to the MTA. You can see our progress on Slide 18. Deployment accelerated once again. We have sold 900 displays, 62% of which were advertising and almost all of this deployment was in key Manhattan stations. We also began installing on the commuter rail platforms. Our total deployment as of September 30 approached 3,700 displays, and more than half of these now carry advertising, which will increase as a proportion over time to our stated goal of 85% of total screens.

Our total MTA project costs in the quarter were $30 million or $101 million year-to-date. We still expect our 2019 annual deployment cost to be closer to $150 million, with an increased spend in the fourth quarter as we build inventory ahead of 2020 deployments, including the commencement of in-car displays later in the year.

As of September, our cumulative project costs were $198 million, and our cumulative recoupment of these costs is $21 million. In closing, our revenues are performing well, and we continue to invest in our business, both in terms of people and product while still delivering healthy cash flow growth, keeping our leverage in a stable place and delivering an attractive dividend.

Let me now turn the call back over to Jeremy.

Thanks, Matt. And moving onto Slide 19 and looking at our outlook for the fourth quarter. At this point in time, we expect total revenues to grow in the mid- to high single-digit range. Billboard growth is likely to be similar to year-to-date results, with transit growth normalizing as we lap the BART win in October of last year.

So our expected growth is still strong, even more so in the context of the 12.7% we grew in the fourth quarter of last year. We were always confident that we'd be able to continue our momentum on top of our sharply improved business performance, and indeed we are. And more importantly, this takes us into double-digit revenue growth for the year.

Slide 20 gives you some insight into the drivers of this terrific growth. Firstly, our sales force. On both a local and national level, our sales force is our competitive advantage. We have been investing heavily in our teams, training, compensation, brand marketing and operations.

Another key growth driver is transit digitization. This is already giving us a significant accelerations in our revenues, and we expect growth to continue from additional displays, including railcars in New York later next year.

Digital billboards are another key growth area, where we want to increase our exposure through conversions, marketing agreements and acquisitions. We're seeing great returns, and we also believe that there's incremental revenue potential as the industry begins to trade its inventory in a more automated way.

Traditional static billboards are also hugely important to us, as they represent half of our revenue and are delivering rising yields. There's no doubt at all that they're becoming more important in the media mix, both from the growth rates we're seeing and the attention they're garnering in the industry. This fall, Facebook published a study that showed that Facebook and out-of-home complement each other, allowing advertisers to reach audiences at all stages of the sales funnel and how specifically out-of-home drives discovery with Gen Z and millennials.

Another key focus is our acquisition pipeline. Around 35% of the U.S. industry revenues are from independent operators. A good portion of these are in markets where we already operate and want to add some weight. We've been active in this tuck-in market and expect to continue adding to our portfolio in the future.

Lastly, an important driver of future growth is technology. We and the industry are far more able to provide data and insight into the audience that are interfacing with our media, and this, combined with increased trading automation, will provide a significant tailwind as we look forward.

In closing, we've got a lot going on. As an industry, out-of-home will likely increase its share of all media in 2019. As a company, our front is at the heart of this acceleration, and we are confident of maintaining our momentum.

With that, operator, let's now open the line for questions.

(Operator Instructions) We'll take our first question from Marci Ryvicker with Wolfe Research.

I have a couple. First, Jeremy, since you were just talking about the future, can we dig a little deeper into the fourth quarter guide and maybe talk about local versus national? Are they still performing relatively the same? And can you give us maybe what the BART contribution was in terms of growth for the past couple quarters, so we can just figure out an apples-to-apples basis?

Yes, absolutely. Thanks, Marci. So as we look into Q4, answering the specific question on BART, this quarter it was around $5 million to $6 million of revenue. So you can sort of take that into account as we think about Q4. If you take BART out, what that means is that our transit business has been growing sort of in the teens.

With regards to Q4, yes, we expect both local and national to be up nicely. Billboard is still growing well. As I said, we expect in that sort of mid- to high single-digit range. Digital and static, once again contributing. So broadly similar to the 9 months that we've just seen in 2019.

In other, I mentioned Canada, it was -- if you remember, it was legalization of cannabis mid-October last year, and we took a couple of big hits from the cannabis market. And that will similarly impact our other business. So we're expecting our other business to perform in line with that which we achieved in Q3, obviously, without that special one-off piece from the equipment sales.

Okay. And my second question, can you tell us your exposure to the high-growth, venture-backed consumer service companies like DoorDash, Postmates, Uber, Lyft, et cetera. Is that driving a lot of your growth?

I guess the first point is that we're absolutely delighted that these sort of DTC companies are thinking about out-of-home, in general, and indeed out front as being a great way to build their brands. We've always said that out-of-home is a spectacular launch medium. You can get across your branding message at amazing CPMs, great reach, low cost. So we're delighted that out-of-home is a good part of their media mix.

What's interesting, though, is that when you look into it, while we're obviously carrying those brands. In terms of our Q3 revenues, they're only a little over 2%. And actually, the vast, vast majority of the growth that we saw in Q3 was actually from our sort of classic, more classic advertisers.

What's interesting is that if you look at Q3 in dollar terms, in terms of dollar growth, our 3 top categories were financial services, professional services, which is, for the most part, actually locally driven, and retail. So maybe not the sort of growth drivers that you would think.

Interesting also that #4 in terms of dollar change, and this is the first time we've seen sort of a really positive move in this category for a while was telephone utilities. So actually, the growth -- our growth sort of belies, if you like, the -- some of the interest that we're seeing from the DTC brands.

I think the other important point is to make that as we look forward, as I said, we're pleased to see this DTC because there are going to be disruptors, we believe, in pretty much every segment of industry. And while some of the names may change over time, I think the fact that they love out-of-home to build their brands [win].

We'll take our next question from Ian Zaffino from Oppenheimer.

Great. Would you be able to give us an update on the Chicago bid, and then I have a follow-up.

Sure. So we put a bid in for Chicago transit, the CTA, round about a couple of months ago now. It's in process. Sometimes these bids can take a while to reach any resolution. And frankly, outside of that, Ian, I can't really add much more at this point in time. We just (inaudible) and we'll see how it goes.

Okay. And then just on the MTA. Help us understand what maybe the revenue-generating boards or the advertising boards versus the non-revenue-generating informational boards, what would be the mix in the fourth quarter to expect? And how quickly does that ramp up towards your goal of steady-state advertising boards?

Okay. So as we look forward, I guess the first point is that almost all of the in-car screens or the vast, vast majority of in-car screens are advertising rather than information screens. So that's when you're really going to start to see the percentages swing. But suffice to say that in Q4, advertising screens will be ahead of information screens, and we'll continue to see the percent of screens earmarked solely for advertising increase as we go forward. But as I say, the big swing will start with our build-out in 2020 of in-car screens.

We'll go next to David Miller with Imperial Capital.

Great print. A couple questions. Matt, on the debt extinguishment charge, can you just remind us what got exchanged? Did this have to do with the repurchase facility? Or was there -- was that another maturity that got pushed out to the right? If you could just clarify that for me, I'd appreciate it. And then, Jeremy, were there any categories in the quarter that did not come in to your expectations or outperformed relative to your expectations relative to 90 days ago? And/or 90 days ago when you gave us the guidance, any regions that kind of outperformed or underperformed in your view? And then I have another follow-up.

Sure. Thanks, David. In June, we issued the new $650 million 5% bonds due 2027. We had $550 million bonds due in 2022, which we called shortly after we issued the new ones, and that bridged the quarter. That's why kind of the funky liquidity. So for us, we lowered the coupon, increased the size and pushed out the maturities, all good. Jeremy?

And on the follow-up question you had, David. In terms of geographies, to be honest, we've been enjoying pretty broad growth across all of our markets, which is great to see actually. And I don't really think any particular surprises in the third quarter in terms of categories, bottom 3 categories in terms -- were for us, were auto, government, food and beverage. Auto and government have actually been in the bottom 2 for -- on an LTM basis also. So I guess the answer is, no real surprise.

Okay. And then just a follow-up, just a general philosophical question, if I might. When Lamar switched over to a REIT status and got that approval from the IRS. I remember, and I guess that was maybe late 2014, early 2015. I remember that the REIT community was exceptionally slow to embrace out-of-home as a REIT-like financial structure. And I'm wondering if, in your opinion, that's finally changed? Or has the REIT community still been kind of slow to embrace you guys as a real REIT?

Hard to say, David. For us, I can't say about Lamar. But for us, we have about 15% of our holders are REIT, based REIT identified, and it's hard for the REIT analyst, the REIT investors to understand the ins and outs of our business. We do a fair amount of work. Greg does a great job communicating with them and getting out there. But we're fighting a good fight, and hopefully, they appreciate our business going forward.

We'll go next to Alexia Quadrani with JP Morgan.

The -- I guess on the advertiser side, I think around this time of year, at least the agencies start thinking about budgets for 2020. Do you have any early read in terms of how your sort of traditional advertise that you said are still the bulk of your spend here, how they're thinking about next year? Are they more nervous given the volatility of the markets and the economic data? Or are they still sort of just business as usual?

Well, it's interesting, when you drill into the ad forecasts of the world, [wide out] forecasts actually over the next couple of years, the forecasts are trending up rather than down for all media. And I believe within that, out-of-home can, I would hope, continue to increase its market share.

For us specifically, we're having some great conversations with our larger advertisers, where we believe that we may see some benefit, obviously, from the streaming [walls] that are going on. We think that could be a positive for out-of-home because most of those -- most of the streaming services are big friends of out-of-home. We think that 5G could be interesting as we move forward.

And I guess the other point is that we're still really driving some solid local advertising growth. It's 55% or whatever it was of revenues in Q3. And when you drill in there, we think a lot of that is actually seriously just about our execution. It's going out with a message that's really resonating with local advertisers, which is about out-of-home, it's about mobile, it's about social. In other words, how out-of-home can really sort of boost their business.

So overall, we feel good about national, and we feel also pretty good about local from where it's at today.

And just a follow-up, I think you mentioned you want -- you're likely to increase the digital conversions in the coming quarter. I guess any more color on maybe on what we should expect?

So we've been saying for this year that, in terms of digital billboards, we'll be more around 150 mark, rather than the kind of sub-100 that we achieved for the last couple of years or so. And we're very confident with that new range. And obviously, those are in addition to the digital screen build-out in transit, which is continuing at pace, particularly on the MTA as we speak.

We'll go next to Ben Swinburne with Morgan Stanley.

Jeremy, you had that nice growth driver slide at the end of the deck, and I wanted to ask you specifically about the technology box on the right and just get a sense for where you guys are from an audience analytics and automation perspective. I could be wrong, I don't think those are yet a material part of your revenue base, but I could be wrong. I'd love to just get a sense for where that -- those platforms are from a build-out perspective, whether it's actually impacting the business yet or if that's something all on the come?

So there's 2 pieces to that, Ben. The first is in terms of our inventory that is currently on programmatic exchanges. At the moment, that's -- for us, relative to the $450 million of revenue in the quarter, it's a handful of dollars, but it's starting to grow, and that's terrific. Then in terms of our own platform. As you know, we've been investing in a product called SMARTSCOUT, which is a planning and buying tool. At the moment, the planning piece of that is currently in use. It's in use with -- in beta form by our national sales team, and we're testing in a couple of local markets. And what that's about is, basically, we can get much more granular detail in terms of the audience delivery of each of our boards.

Now we haven't yet, but we will be, plugging on the buy button, if you like, onto that planning tool as we go forward. And that's something we haven't done yet, but we're utilizing SMARTSCALE as a real provider of data and insight when we're going out and having discussions with our advertisers today.

Got it. That makes sense. And just staying on technology around digital boards. You report -- you guys didn't report a digital yield, but your overall U.S. billboard yield is up 9.5%. So you seem to be -- you tell me, but you seem to be selling your digital inventory well as you add more of it, add more inventory. I guess that's sort of a question, is that accurate? And if it is, how do you think about meaningfully ramping your conversions in 2020? How much of that is a, I don't know, a balance sheet, sort of balance versus what you think you can sell? Or where is your head at on digital, given what seems to be some pretty strong demand for that product?

Yes, there's a couple of things that I'd say. The first is that not every digital board is equal. So when we build a digital board on the Westside highway, we're going to get a much different yield to building a digital billboard in Tampa, for example. So part of it is where we're building the boards out. And if you've been around New York City lately, you'll see that we've been building some great boards. So that's obviously -- that impacts slightly.

It's not a balance sheet issue for us, Ben. It's really more about how can we create those opportunities. Because zoning is still a gating factor. So we keep one eye on zoning, and we also just keep one eye on give -- demand in a particular market. Because we obviously don't want to develop boards where there wouldn't be sufficient demand. And essentially, we may be eating our own lunch.

So those are the 2 things we take into account. But we feel good about our prospect for continued billboard, digital billboard development in 2020.

Okay. And then just one last one for Matt on the margins this quarter. You guys have had a little bit of compression in the first half of the year in U.S. billboard, I think that went up to like 100 basis points or so in Q3. Is that all just geographic mix around your lease payments? Or anything else you'd call out, seasonality or anything that might be impacting margins in Billboard in the U.S.?

Specific to billboard, the new lease accounting standard that came in at the beginning of the year added a couple of dollars to the cost -- noncash cost of billboards in the third quarter. And we allocate costs between billboard and transit. Billboard is obviously a bigger part of our business. So they have higher compensation and professional fees in billboard as well.

We'll go next to Jason Bazinet with Citi.

Maybe if you could indulge me with sort of a longer-term model. I know you guys didn't use the ATM this quarter, and I guess I wouldn't expect that you would. But in my model, I've got you sort of hitting that as a source of liquidity, at least through 2021. Do you think that's a reasonable assumption based on your own internal forecast that the ATM will continue to be used?

This is Matt. Generally, we were trying to use the ATM just to fund tuck-in acquisitions. We've improved our liquidity on the balance sheet from a number of steps to make us feel better. The MTA is performing even better than we expected. So we think our liquidity is in a better place. We don't feel a need to use the ATM. But as we look at tuck-in acquisitions rather than have the balance sheet be a limitation, we think the ATM has added benefit of extra liquidity if we need it.

Okay. So at this point...

No plans, but watch our acquisition pipeline.

Okay. So if there's no acquisitions, no ATM, that's...

That would be the plan. We would like to see what the future holds.

We'll go next to Jim Goss with Barrington Research.

I think you started to get into this a little bit, a couple of questions ago, but you laid out in the growth drivers slide, some good things about traditional billboard and some better things maybe about digital billboards. I'm wondering about the whole digital billboard transformation process. Is it -- is the decision largely yours? Or is it determined by local policies, the zoning you mentioned, in terms of deciding whether you should stay static or try to fill in with specific digital? And how does that process work so that you can do it in an efficient way?

Yes. Thank you, Jim. I guess the first thing to say is that all of our markets are different. Zoning regulations are different, some markets it's relatively straightforward to convert to digital; others, hell has to freeze over before you can convert. But what I can say is that it's very much driven by our general managers in each market, supported by a real estate team. And for the most part, as I say, once -- assuming you can obtain a zoning permit, they would then put a recommendation forward to us here centrally. We review every single recommendation in terms of does it achieve the respective IRRs that we're looking for, and we haven't really changed our IRR view over time. That's in the 20% to 25% range.

And as I say, as we look forward, we've always got a pipeline of activities that we're working on. So we have a 3-year plan that -- so we can already see a likely number of boards that will convert in 2020.

Okay. And then you have an overlay of that, say, $150 million that you might do in a year, and you'll see what makes the returns up to that point as sort of the selection process?

Yes, absolutely. And as I say, we're going to be in the 150 range this year. And we would hope that with conversions, but also as I said, important to think of sort of marketing agreements and where we can acquire attractive digital billboards, then we will do that also. But I would hope we can get back up into that range next year.

Okay. And then the other question I had, in the New York transit project. I think you're moving from, say, 50% of the screens with ads available up to about 85% over the next couple of years. Do I have that right? And does that imply, say, an upward bias to your rate of profitability in that system above and beyond just the normal growth over that period of time because that's where the -- it would be fueled?

Yes. As I said, once we've completed the build-out, and let's remember that this is a 7-year build, okay. At that point in time, 85% of the screens that we have up will be carrying advertising.

So from where we are today, at the kind of 50-50, we'll be going north on a quarterly basis, and say that -- the percentage of advertising will increase as we start building out in subway. But it'll be a slow process, so it's a 7-year build, Jim.

And with no further questions in the queue, I would like to turn the call back over to the company for any additional or closing remarks.

Thanks, operator, and thanks to all of you for your time, attention and questions today. We look forward to seeing many of you at our investor events in the coming weeks. Thanks very much, indeed.

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