OUTFRONT Media Inc (OUT) 2023 Q2 法說會逐字稿

Good afternoon. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the OUTFRONT Second Quarter 2023 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Stephan Bisson, Vice President of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining our 2023 second quarter earnings call. With me on the call today 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 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 on the Investor Relations section of our website, outfront.com. After today's call is concluded, a replay will be available there as well.

This conference call may include forward-looking statements. Relative 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 2022 Form 10-K and our June 30, 2023, Form 10-Q, which we expect to file in the coming days. We will refer to certain non-GAAP financial measures on this call. Any references to point a made today will be on an adjusted basis. Reconciliations of OIBDA and other non-GAAP financial measures are in the appendix of the slide presentation, the earnings release and on our website, which also includes presentations with prior period reconciliations. Let me now turn the call over to Jeremy.

Thanks, Stephan, and thank you again, everyone, for joining us today. While our revenues reached our mid-single-digit guidance provided in May, they were a little below our original expectations and budget. The quarter got off to a good start, but business softened towards the end, particularly in June, where much of the booking revenue we had experienced in recent quarters did not materialize to the same extent. As you can see on Slide 3, which summarizes our headline numbers, total consolidated revenue grew 4% during the quarter, reflecting about 3% growth in our core business and around 1 point of growth from various acquisitions over the prior 12 months. Adjusted OIBDA declined slightly year-over-year due to transit and other, while AFFO was down primarily due to this lower OIBDA and higher interest expense.

Slide 4 shows our revenue results by segment. Total U.S. media increased nearly 5% on a reported basis year-over-year. Other, which consists mostly of Canada, was down 7% versus the prior year on an as-reported basis, put by the stronger U.S. Canadian dollar exchange rate. On an organic constant dollar basis, other was down 2%. Breaking this down further on Slide 5, you can see the components of our U.S. media revenues. Billboard, which is about 80% of our revenues, grew 6%, with good performance in most of our markets, led by New York and Mali, which continue to be particularly strong. As we had anticipated, our transit revenue was again essentially flat versus last year.

The details behind our local and national revenues in our U.S. business can be seen on Slide 6. As you can see, national growth outpaced local this quarter, up nearly 6% year-over-year compared to locals almost 4%. The strength in national advertising was seen in the strong performances of our largest markets, and our local national split was 58%, 42% in the quarter, moving us closer to our more typical 55-45 split. Slide 7 illustrates our U.S. billboard yield, which grew just over 5% year-over-year to over $2,850. This improvement was driven primarily by an increased number of digital faces, which typically generate more dollars per board than average.

Slide 8 highlights our positive digital performance with digital revenues growing almost 13% in the quarter and representing nearly 32% of our total revenue, up 250 basis points from last year. Digital billboard revenues were up approximately 14% versus the prior year, primarily because of new inventory. We added 38 digital boards during the quarter, raising our total to 2,048. Digital transit was up 9%, also primarily due to additional inventory compared to last year. On Slide 9, you can see the results of our static revenues, which were essentially flat year-over-year with 1% growth in billboard being offset by a 6% decline in transit. Though modest, the growth in static billboard revenues is notable given that we continue to convert many of our best static boards to digital.

Before handing the call over to Matt, I want to come back to Transit. You'll see in our release that we booked an approximately $511 million noncash impairment charge on our transit reporting unit and our transit assets, particularly the digital buildup of our New York MTA assets. This noncash charge follows accounting guidelines and the result of our revised valuation of our franchises in our financial statements. This change reflects the impact of the disappointing performance we've seen thus far this year and subsequently lowered future expectations in our revised financial model. Matt will go into greater detail on the numbers here momentarily.

Clearly, the COVID-19 pandemic massively disrupted how people work and commute adversely impacting transit ridership and in turn, our ability to generate advertising revenue on these assets. The ongoing lower ridership level, coupled with new urban trends and some adverse public perception of the transit environment in major cities, but certainly not what anyone expected when we entered into these contracts. And while we still absolutely believe our transit business will continue to recover, the pace of recovery is stalled in 2023. I would also mention that given the current challenges posed by the MTA contracts, in particular, we are currently engaged in conversations with the MTA and hoping to find a mutually agreeable approach to address the significant changes in the New York City transit environment since the signing of the agreement in 2017. We'll update you on this in the coming months. In any event, we consider it advisable, prudent and timely to update the value of our investment in these transit franchises, leading to today's noncash charge.

I would additionally mention this period of transit weakness further impacted by changes to the fall television schedules caused by the rites endecto strike will prevent us from achieving our previously issued FFO guidance for 2023. We Again, Matt will provide more detail on our revised expectations later on the call. And with that, let me now hand over to Matt.

Thanks, Jeremy, and good afternoon, everyone. We appreciate you joining our call today. Before discussing expenses, I'd like to pick up where Jeremy ended with the noncash impairment charge we recorded this quarter in our transit business. There's a lot to explain, I'll do my best and also note that our 10-Q, which we expect to file early next week will detail much of what I'm about to review. That's 2 strong years of growth, the recovery in transit revenues seemingly installed in the first half of 2023. Because of this slowdown and our forecasted continued weakness in the back half of the year and based on our revised financial model, we do not expect to recoup the deployments that made on the MTA franchise to date before the end of the amended base term in 2030.

Therefore, we are reducing the balance sheet value of the prepaid deployment costs and intangible assets on the MTA franchise. This reporting action does not change the economics of the contract, and we anticipate some of the many steps we are currently taking to improve performance, such as connecting our MTA digital operating system to demand platforms, enhancing the audience they are available for transit and increasing targeted sales incentives will all contribute to enhancing our revenue growth. We have now revised our expected revenue growth to an annual range of 5% to 10% after 2023 and throughout the remainder of the amended base term of the contract.

Of course, revenue growth above this range could provide an opportunity to recoup some or possibly all of this prospective continued investment over the base term. In addition, we are also reducing the balance sheet amount of smaller transit franchises, including BART in San Francisco, which is also experiencing a reduction in ridership, public perception and revenue generation. Before moving on, I'd like to discuss our contractual commitments for the MTA franchise going forward. We are currently committed to finishing the initial deployment, which we expect to do next year. To complete the build, we expect to spend a total of approximately $95 million over the next 18 months, with $30 million to $40 million to be spent in the second half of 2023, and $50 million to $60 million spend next year.

After 2024, we expect replacement capital requirements of $30 million to $40 million per annum. We will assess our equipment deployment costs for impairment quarterly. In each case, booking and impairment charge to the extent we continue to project an aggregate negative cash flow throughout the remainder of the amended base term of the MTA agreement. As of today, with most of the initial build and investments behind us, along with the revenue estimates I just described, our current projections predict that the MTA franchise will become cash flow neutral over the remaining amended base term of the MTA agreement beginning at some point during 2024.

Currently, the entire remaining unrented base term of the MTA contract is expected to have an aggregate cumulative cash outflow of approximately $50 million. Given these estimates and based on our current model, we expect to incur additional impairment charges on our MTA deployment costs until we become cash flow neutral, including the remaining $40 million we expect to spend in 2023 and at least $10 million of the $50 million to $60 million we expect to spend in 2024. As you can imagine, the model is highly sensitive to revenue growth assumptions and a 100 basis point change from our assuming 6.6% revenue CAGR between 2024 and 2030. Led to about a $70 million change in estimated cash flows from the contract.

Now please turn to Slide 10 for a more detailed look at our expenses. Total expenses were up approximately $22 million or 7% year-over-year, principally driven by global lease expense growth of 14% versus last year's comparable period. Much of this lease expense growth is associated with new inventory we have added over the prior 12 months, also contributing to the exceptional performance on many of our prime assets in large markets, which are frequently operated under revenue share agreements. Looking at the remainder of the year, we expect the year-over-year growth rate for global lease expense to moderate from here and also continue moderating into 2024. Transit franchise expense was up 3%, primarily due to the increased Melco to the New York MTA from the contractually required inflation adjustment this year.

Post maintenance and other expense growth was less than 4%, given higher taxes and higher compensation rate expenses. SG&A expense was up just 1.6% versus last year, reflecting a modest increase in headcount versus a year ago, partially offset by lower incentive compensation and the impact of certain cost initiatives undertaken during the quarter. We continue to evaluate methods to lower SG&A expense growth and believe that these expenses will represent a lower percentage of revenues in the second half of the year when compared to comparable periods in 2022. Corporate expense was up just under $1 million versus last year. This increase was entirely driven by the adverse impact of market fluctuations on an unfunded equity index linked retirement plan, which moves an opposite direction to the S&P 500, slightly offset by reduced compensation-related expenses.

On Slide 11, you can see our OIBDA for the quarter has declined $4 million from last year, primarily due to the impact of higher costs and increased over lease expense and higher trend at franchise expenses. Slide 12 provides additional detail on the sources and growth of OIBDA. U.S. OIBDA was up 1.2% and billboard OIBDA margin was 7.3%, down versus a year ago was flat versus the comparable period in 2019. The margin declined versus '22 was driven by new and acquired inventory has acquired inventory is still renting to our projected revenue levels. We expect build-on margins in the second half of 2023, will again return to levels above those achieved in 2019. Looking forward to 2024, we expect billboard margins will continue their upward trajectory as revenues on acquired inventory will run to our expectations.

Substantially all of our consolidated total OIBDA comes from U.S. billboard, demonstrating the driver of value continues to be our solid global performance. Transit OIBDA was down approximately $3 million versus the prior year due to higher expenses, largely driven by the increase in New York MTA mega. Turning to capital expenditures on Slide 13. Q2 CapEx spend was $22 million, including $8 million of maintenance spend. The $2.6 million decline in total CapEx versus the prior year was primarily due fewer investments in new digital billboards. For the year, we expect total CapEx of $80 million to $85 million, down $5 million to $10 million from our prior forecast. We expect maintenance CapEx to be approximately $25 million to $30 million.

Looking at AFFO on Slide 14, you can see our Q2 AFFO of approximately $78 million is down year-over-year, primarily given this lower OIBDA and higher interest expense. As Jeremy mentioned earlier, we know or expect that we will meet our previous mid-single-digit AFFO annual growth guidance primarily given the continued weakness we are seeing in transit. Currently, we believe 2023 AFFO may decline by high single digits to possibly low double digits versus 2022. We thought it might be helpful to provide some additional information on some of the inputs within the AFFO guide. First, we expect full year U.S. notebook OIBDA to be around $500 million. Second, we expect full year U.S. transit adjusted OIBDA to be a loss of $15 million to $20 million and our expectations for other items that impact AFFO remain mostly unchanged.

Please turn to Slide 15 for an update on our balance sheet. Committed liquidity is approximately $550 million, including over $40 million of cash, almost $500 million available via our revolver. We've about $50 million available by accounts receivable securitization facility. As of June 30, are in dollar terms. This trend will likely continue in 2024. And lastly, we announced today that our Board of Directors had to create a $0.30 cash dividend payable on September 29 to shareholders of record at the close of business on September 1. Subject to Board approval, we expect another $0.30 dividend in the fourth quarter, leading to a total $1.20 being paid through the year.

Thanks, Matt. As you may have noted from much of our commentary on today's call, our billboard business is doing pretty well, especially in the current uncertain climate that others have mentioned. National sales is somewhat challenged by the writers and active strikes in Hollywood as many of the typical fall and winter television launches have either been put on hold or postponed. While this launch delay impacts both parts of the business, it disproportionately impacts transit, which is more skewed towards media. Based on our visibility as of today, we estimate that Q3 total revenues will grow slightly with billboard continuing to grow in low single digits and transit likely to prove our revenue performance within Transit with which Matt touched upon earlier. We're particularly hopeful of connecting the New York MTA to programmatic and digital direct selling will improve trends beginning at the start of 2024.

We also continue to be focused on our great and growing billboard business, which represents approximately 80% of total revenues and as of today, essentially 100% of total OBIDA. In fact, as of the second quarter, billboards have grown both revenue and OIBDA by nearly 26% when compared to the first half of 2019. This represents a CAGR of around 6% despite the 18-month interruption posed by the pandemic. This growth is evidence of the strength of both OUTFRONT and the entire billboard industry. At the end of the day, we believe in the long-term success of both our billboard and transit as digitization, improving data and insight, mobility, automation and the outdoor value proposition remain as true today as they ever happen.

(Operator Instructions) Your first question is from the line of Ben Swinburne with Morgan Stanley.

Occasion question on the MTA and then maybe a bigger picture question. I think you mentioned you expect to turn free cash flow positive on that contract sometime during '24 the sort of MG growing faster than revenue. I just want to make sure I understood the moving pieces there. And then Jeremy, you made the point, I think, quite clearly, Erazo, what are the other options you're thinking about as it relates to transit. Obviously, you have a contract, but what can you -- what's on the table for you guys in terms of trying to navigate low the business anymore?

Maybe I'll take the second piece first, and then on the -- Matt, can you go back to your first question. So I think fundamentum for many decades and a fast, important and growing piece of the out-of-home market. What we unfortunately have now is we -- at the time they were written, they were absolutely valid. The difficulties in transit, particularly led by audience, which is, for the most part, down around transit market. Essentially, what we need to do is look to how we can reset expectations of the pillar with the MTA. So it's not actually the business that is -- there's nothing wrong with transit advertising. It remains extremely effective. And reman by both billboards and transit from us. But what we need to do, and we're working very hard on and we hope to have some more positive information on that as we go forward.

Just like to clarify the numbers from the first point of your question, will be cash flow negative $50 million from the start of the third quarter, end of the second quarter. It will be cash flow neutral.

I see. That's with the 5% to 10% top line assumption?

Yes.

Line of Richard Choe with JPMorgan.

I just wanted to follow up a little bit on the MTA. I appreciate that you're discussing the contract with them.

There are always things to do and we're considering a pretty wide variety of things, both within the business but in the portfolio, highlight go into detail now, but I think there's a series of conversations and efforts. But nothing to repoint on.

We had in round numbers, a $500 million transit-advertising business, making $100 million of OIBDA and the MTA contracts in 2019. So when we look at the business today, I mean, it's still a big business, we still have to sell it. We still have to operate it. We still have to manage it. What we need revenues are essentially split between us and our transit partners. That is the key to this, and that is where we'll be putting or where we are putting our time and effort.

Got it. We're doing well. I guess there's some concern that national advertising might be a little bit soft. Can you give any kind of color on what you expect out of the comments, excluding maybe the entertainment and the Hollywood rider strike.

So the pain impact of the actors in Modesto is -- as I mentioned in our prepared remarks, it's really the sort of TV fall launches that some not a particular concern, but we're obviously keeping an eye on it because depending on how long this continues, there could be further modest growth in our national billboard business in Q3. We believe our national transit business will be down, and this will be up in the likely low single-digit range.

Your next question.

In terms of the -- the price. Will the -- your billboard product, I mean, I assume there's going to be a promotion of the movies that are out there right now. There have only been a couple that have been pushed off and there tend to be later in the year. So is it a matter of the timing here for you? Or is it they're pretty much the same across your markets?

Okay. Thanks for your question, Choe. Actually, at the moment, as I mentioned, that's actually from the networks to promote their full schedules. So not an issue on movies, as I said there may be a little bit of movement, but that's not a huge concern towards New York and LA. So they would be the markets where we would notice that impact most.

Okay. And with petition that despite the fact that you're projecting AFFO to be down that and it would imply a lower dividend that it's a noncash charge. I know you'd be paying more than you would be dictated to your general terms of agreement with as a REIT?

Yes. I think based on our fins are complicated. So we had anticipated sometime in 2023 and need to increase our dividend. We no longer feel that's going to be necessary.

So basically, you were being somewhat conservative earlier on and it's for you to do that.

Anything. Since we settled.

Locations since some of these assets have been written down to a great extent. Are there things we should look at in terms of how things are recorded going forward will be paying in the future for these projects that will also wind up being written down.

No, our plan is to use the same with our outside advisers, our experts. We'll continue with that. We gave a head up just to expect that we think we'll continue the impairment first part of 2024.

Once again, if you would like to ask in with Oppenheimer.

I know you talked about TV being a little bit weak. But can you maybe give us kind of around the world of you've already mentioned able weakness, but any other color you can give there would be helpful.

So yes, I mean, looking at Q2 alone, and entertainment was strong in Q2. I mean it was up 10%. And in dollar terms, it was actually our largest growth category up over a more week for us in the second quarter. Financial was weak in real estate, weaker categories in the second quarter.

Okay. And then just one more if I could squeeze it in. Would be -- on the breakdown with the sales to apples was, let's just say, what is static actually grow if you consider some of the billboard conversions to digital and the backing out maybe some ports -- any color you could kind of give there to see just how the static business is performing net of, call it, the conversions, et cetera.

Relatively slowed basis. I think what Jeremy had in his prepared remarks, static is up 1% and very notable because we are taking an growth on a same-store basis would likely look much -- do much higher, but notably higher if we kept all those players back and static. But not.

Gone to that, is that when you have a portfolio of 40,000 billboards, obviously, there's a lot of ins and outs, do know all the way through across that. So I say, I think the best feel that how we believe the study business is performing like slightly ahead of about 1%.

Back to Jeremy for closing remarks.

Thanks, operator, and thanks, everyone, for joining our call today. I look forward to meeting with many of you at various conferences calls. Thank you again.

This concludes the OUTFRONT Second Quarter 2023 Earnings Conference Call. Thank you for your participation. You may now disconnect.