Q2 2023 OUTFRONT Media Inc Earnings Call
Excuse me, ladies and gentlemen. This is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
Yeah.
[music].
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 out front in the second quarter 2023 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad to withdraw your question Press Star one again.
I would now like to turn the conference over to Stfan Deason, 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 will open the lines for a question and answer session.
Our comments today will refer to the earnings release and a slide presentation that you can find on the Investor Relations section of our website <unk> Dot com.
After today's call has concluded a replay will be available there as well.
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 2020 to Form 10-K, and our June 32023 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 OIBDA made today will be on an adjusted basis.
Reconciliations of OIBDA and other non-GAAP financial measures in the appendix of the slide presentation. The earnings release and on our website, which also includes presentations with prior period reconciliations.
Now I'll turn the call over to Jeremy.
Yeah.
Stephane and thank you again, everyone for joining us today.
While not revenues.
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.
Softened towards the end, particularly in June .
We're much like booking revenue, we had experienced in recent quarters did not materialize to the same extent.
Okay.
As you can see on slide three which summarizes our headline numbers total consolidated revenue grew 4% during the quarter, reflecting about 3% growth in our core business and around our points of growth from various acquisitions over the prior 12 months.
Adjusted OIBDA declined slightly year over year due to trends.
Well <unk> was down primarily due to this lower OIBDA and higher interest expense.
Slide four shows our revenue results by segment.
Total U S meter media increased nearly 5% on a reported basis year over year.
Which consists mostly of Canada was down 7% versus the prior year on an as reported basis.
The stronger U S. Canadian dollar exchange rate.
On an organic constant dollar basis, although it was down 2%.
Okay.
Breaking this down further on slide five 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 Miami, 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 six.
As you can see national growth outpaced local this quarter.
Nearly 6% year over year compared to locals almost 4%.
The strength in national advertising, we've seen in the strong performances of our largest markets and our local and national split was 58%, 42% in the quarter moving us closer to a more typical 50 545 split.
Okay.
Slide seven illustrates our U S Billboard yield, which grew just over 5% year over year to over $2850.
This improvement was driven primarily by an increased number of digital faces, which typically generate more dollars per board on average.
Slide eight 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 your inventory.
We added 30 digital boards during the quarter.
Raising our total to 2048.
So just to in transit was up 9% also primarily due to additional inventory compared to last year.
On slide nine 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.
The growth in static Billboard revenues is notable given that we continue to convert many of our best static boards to digital.
Yeah.
Before handing the call over to Matt I want to come back to transit.
You'll see in our release that we booked in approximately $511 million non cash impairment charge on our transit reporting unit and our transit assets, particularly the digital build out of our New York MTA assets.
This noncash charge photos accounting guidelines.
Result of our revised valuation of our transit 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 and our revised financial model.
Matt will go into greater detail on the numbers here momentarily.
Clearly the COVID-19, pandemic massively disruptive 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 levels, coupled with new oven trends and some adverse public perception of the transit environment in major cities with.
We're 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 has stalled in 2023.
I would also mentioned 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 agreements in 2017.
We will update you on this in the coming months in any event, we considered it advisable prudent and timely to update the value of our investments in these transit franchises, leading to today's noncash charge.
Okay.
I would additionally mentioned this periods of transit weakness further impacted by changes to the full TV schedules caused by the writers and actors strikes when presented.
Prevent us from achieving our previously issued guidance for 2023.
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 your joining our call today.
Before discussing expenses I'd like to pick up where Jeremy engine with a noncash impairment charge, we recorded this quarter and our change in business.
I want to explain I'll do my best and also note that our 10-Q, which we expect to file early next week, we'll detail much of what I'm about to review.
After two strong years of growth the recovery in transit revenues seemingly stalled in the first half of 2023.
Because of this slowdown in our forecast is continued weakness in the back half of the year and based on our revised financial model, we do not expect to recoup the deployment spend.
You made on the MTA franchise to date before the end of the amended base churn in 2030.
Therefore, we are reducing the balance sheet value of that prepay 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 data available for transient and increasing targeted sales incentives will all contribute to enhancing our revenue growth.
We've now revised our expected revenue growth to an annual range of 5% to 10% after 2023 and throughout the remainder of the amended based turn both the contracts.
Of course revenue growth above this range could provide an opportunity to recoup some where possibly all of this perspective 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.
The $50 million to $60 million spend next year.
After 2024, and we expect replacement capital requirements is $30 million to $40 million per annum.
We will assess our equipment deployment cost for impairment quarterly in each case looking at impairment charge to the extent, we continue to project an aggregate negative cash flow throughout the remainder of the amended bass chairman of the MTA agreement.
As of today with most of the initial build and investments behind us along with our revenue estimates I. Just described our current projections predict that BMT at franchise will become cash flow neutral.
The remaining amended base term of the MTA agreement beginning at some point during 2024.
Currently the entire remaining amended base term of the MTA contract is expected to have an aggregate.
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 to $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 assumed six 6% revenue CAGR between 2024 and 2030.
It leads to about a $70 million change in estimated cash flows from the contract.
Now please turn to slide 10 for more detailed look at our expenses.
Total expenses were up approximately $22 million or 7% year over year, principally driven by Uber 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 and large markets, which are frequently operated under a revenue share agreements.
Looking at the remainder of the year, we expected year over year growth rate for Billboard lease expense to moderate from here and also continue moderating into 2024.
Transit franchise expense was up 3% primarily due to the increased may go to the New York MTA when they can.
Actually required inflation adjustment this year.
Posting maintenance and other expense growth was less than 4% given higher taxes and higher compensation related expenses.
Okay.
SG&A expense was up just one 6% versus last year, reflecting 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 message to lower SG&A expense growth and believe that these expenses 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 in 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 impacts of higher costs from increased Billboard lease expense and higher transit franchise expenses.
Slide 12 provides additional detail on the sources and growth of OIBDA.
U S Global OIBDA was up one 2%.
In Billboard OIBDA margin was seven 3% down versus a year ago, but flat versus the comparable period in 2019.
The margin decline versus 22 was driven by new and acquired inventory as acquired inventory is still ramping to a projected revenue levels.
We expect Billboard margins in the second half of 2023 will get returned to levels above those achieved in 2019.
Looking forward to 2024, we expect global margins will continue their upward trajectory as revenues on acquired inventory will ramp 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 Copeland performance.
Trends in OIBDA was down approximately $3 million versus the prior year due to higher expenses largely driven by the increase in New York MTA Nick.
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 to fewer investments in new digital billboards.
For the year, we expect total capex of $80 million to $85 million.
$5 million to $10 million from our prior forecast.
We expect maintenance capex to be approximately $25 million to $30 million.
Looking at <unk> on Slide 14, you can see our Q2 <unk> of approximately $78 million is down year over year, primarily given this lower OIBDA and higher interest expense.
As Jeremy mentioned earlier, we no longer expect that we will meet our previous mid single digit <unk> annual growth guidance, primarily given the continued weakness we are seeing in transit.
Currently we believe 2023 <unk> may decline by high single digits, possibly low double digits versus 2022.
We thought it might be helpful to provide some additional information on some of the inputs within the <unk> guide.
First we expect full year U S Billboard 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 in there.
Our expectations for other items that impact <unk> remained mostly unchanged.
Please turn to slide 15 for an update on our balance sheet.
Liquidity is approximately $550 million, including a $40 million of cash almost $500 million available via our revolver and about $15 million available via accounts receivable securitization facility.
As of June 30, our total net leverage was five three times.
Up slightly from our Q1 level.
We remain comfortable with our debt portfolio with our next maturity not being until mid 2025.
And approximately a quarter of total debt subject to floating rates.
It is also worth noting that we amended and extended our revolving credit facility during the quarter pushing the maturity out to June 2028.
We closed approximately $22 million of tuck in acquisitions in the quarter completing a number of small deals we committed to last year.
Given our current pipeline and the activity in the marketplace. We will have a much lower volume of deals in 2023 that we completed in 2022 in both quantity in dollar terms.
This trend will likely continue in 2024.
Lastly, we announced today that our board of directors has declared a <unk> 30, <unk> cash dividend payable on September 29th to shareholders of record at the close of business on September 1st.
Subject to board approval, we expect another <unk> <unk> dividend in the fourth quarter, including.
Leading to a total of $1 20 being paid through the year.
With that let me turn the call back to Jim.
Thanks, Matt.
As you May have noted from much of our commentary on todays call. Our Billboard business is doing pretty well, especially in the current uncertain that climate that others have mentioned.
National sales is somewhat challenged by the writers and actors strikes in Hollywood as many as the typical fall and winter TV launches have either been put on hold or postpone Opus fund.
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 the Q3 total revenues will grow slightly with Billboard continuing to grow in low single digits and transit.
Actually to decline.
We're taking many steps to improve our revenue performance within transit.
Touched upon earlier.
But particularly hopeful that connect in 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 a great and growing billable business.
This represents approximately 80% of total revenues and as of today essentially 100% of total OIBDA.
In fact as of the second quarter.
Billboard with growing 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 upfront and the entire Billboard in industry.
At the end of the day, we believe in the long term success of both our Billboard and transit assets.
The growth drivers that we have outlined at length in the past digitization improving data and insight.
<unk> automation and the outdoor value proposition remain as true today as they ever happen.
And without a price, let's now open the line for questions.
At this time I would like to remind everyone that in order to asking question simply press Star then the number one Andre telephone keypad.
Your first question is from the line of Ben Swinburne with Morgan Stanley . Please go ahead.
Thanks, Good afternoon.
I guess.
One kind of clarification question on the MTA and then maybe a bigger picture question I think Matt I think you mentioned.
You expect to turn free cash flow positive on that contract sometime during 'twenty four but then I think you also mentioned a cumulative free.
Free cash flow loss of $50 million sort of beyond 'twenty. Fortunately sure I heard you right and if that's just a.
This sort of Mg growing faster than revenue as wanted make sure I understood the moving pieces there.
And then.
Jeremy you made the point I think quite clearly you know your company now EBITDA is all Billboard.
And so.
What are the other options you're thinking about as it relates to transit.
Obviously, you have a contract but you know what what can you what's on the table for you guys in terms of trying to navigate this situation given it's really not that material to the cash flow of the business anymore.
Maybe I'll take the second piece first and then on the.
Matt can we go back to your first question.
So I think fundamentally.
There is isn't it.
Transit advertising has been.
And a part of the wall, Nevada for.
Many decades and.
A fast important.
And growing piece of the out of home market. What we unfortunately have now is we have a.
A number of contracts that were effectively set.
Pre pandemic and walls at the time they were written.
Ballard.
Difficulties in transit, particularly led by.
Audience, which is for the most part down around 30% in New York and unit are higher than that in a couple of other of our translate trumpf.
Transit markets.
Essentially what we need to do is look to how we can.
Now, we can reset expectations of the transit all prices, but most of the discussions that we're having.
We're having right now with a number of Trumpf and advertising partners.
In particular.
With the MTA, so it's not actually that business that.
As.
And Theres nothing wrong with transit advertising remains extremely effective.
Remember that the vast vast majority of our clients buy boats.
<unk> and transit from us, but what we need to do and we're working very hard on our behalf to have.
Some.
More positive information on that as we go forward is resetting those transit company expectations.
Okay.
Okay.
Hang on just to clarify any numbers from the first part of your question.
We'll be cash flow negative 50 from the second from the start of the third quarter ended the second quarter.
In 2003, so now.
Through 2030 at the end of the.
The base term.
We think will burn off that 50.
By sometime in 2024, so from there forward will be cash flow neutral.
Got it okay.
With the 5% to 10% top line assumption.
Yes.
Got it. Thank you guys. Thanks, thanks, so much.
Thanks Pat.
Your next question is from the line of Richard Choe with Jpmorgan. Please go ahead.
Hi, I just wanted to follow up a little bit on the MTA I appreciate that you are.
Discussing the contract with them, but is there something that can be done within the company to right size the business given the new outlook.
Yeah.
There are always things to do and we're considering a pretty wide variety of.
Things both.
Within the business within the portfolio.
Not just the MGA other transit renewals as they come up.
Nothing we can.
Highlighted go into detail now but.
I think the Alberta is a series of conversations and efforts.
But nothing to report on success just yet.
I think Richard maybe just following up on that if we look back to 2019.
We had in round numbers, a $500 million transit advertising business, making a 100.
$100 million.
OIBDA.
On the MTA contracts.
Particularly in 2019 is actually working exactly as we had assumed and we will recouping part of our investment in 2019.
So when when.
When we look at the business today, I mean, it's still a big business for you still have to sell it we still have to operate it we still have to manage it.
What we need to modify.
Is the way revenues are essentially split between us and our transit partners that is the key to this and that is why we will be.
Putting what we are putting up time and effort right now.
Great and then following up on the Billboard side, I mean, the digital and static or doing well.
If there is no concern that national advertising might be a little bit soft.
Can you give any kind of color on what you expect out of national advertising.
Maybe even some local and regional comments.
Excluding maybe the entertainment.
The Hollywood Writers' strike.
Okay.
So you know.
Whats really.
<unk>.
The main impacts of the <unk>.
Actions and writers strike.
As.
As I mentioned in our prepared remarks, it's really the sort of full launches.
<unk> have really been really been pushed back.
There is some movement in movies, but at the moment.
So that's.
Not.
Of particular concern, but we're obviously keeping an eye on it because depending on how long that.
Long this continues that could be that could be further.
Doug or impact I think as we look at our look at our business in Q3.
We're expecting.
Modest growth.
And Ah.
National Billboard business.
In Q3.
We believe our national transit business will be down reflecting reflecting nuts.
The strikes that we just talked about and our local business will be up in the likelihood of a low single digit range.
Great. Thank you.
Yeah.
Your next question from the line of Jim Goss with Barrington Research. Please go ahead.
Alright. Thanks.
In terms of the.
Yes.
The strike.
Well the.
Well the bill your.
Albert presence impacted just one.
And then I assume there's going to be a promotion of the movies that are out there right now there's only been a couple that have been pushed off and there tend to be later in the year.
Is it a matter of the timing we are facing in the day.
<unk> the strike or are there some other issues.
And will it be localized in certain areas or.
Is it pretty much the same across your markets.
Okay. Thanks, Thanks for the question, Jim actually on movies at the moment.
As I had mentioned that that's actually not an issue I think movies are likely to be fine fine in Q3 is really more T V actually where we've been impacted where typically in September we take good dollars.
From.
From the networks to promote that.
The full schedule is so not an issue on Moody's has said there might be a little bit of movement, but that's not that's not a huge concern for us right now in terms of wet.
Media in general is very much skewed.
Towards New York and L. A so.
They would be the markets, where we would notice that impact most.
Okay.
And with regard to the dividend statement declines of 30 now and the expectation is for another one in the fourth quarter is a reasonable interpretation that.
Despite the fact that you are projecting <unk> to pay down debt.
And play a lower dividend that it's a noncash charge and you want to get.
We have confidence that you'll make it through this and.
Hopefully you have an opportunity for next year, even though you'd be paying more than you would be dictated too.
Pay your general terms of agreement with <unk>.
I think based on our forecast, we could end up paying slightly more than we were required to we had a.
Carryforward from last year, but just wanted recalculations complicated.
As we had anticipated.
Sometime in 2023, it need to increase our dividend.
We no longer feel thats going to be necessary, but we think we're pretty close to our REIT requirements.
Four quarters of 30 cents each.
Okay.
So basically we're being somewhat conservative earlier on and that's okay.
To do that.
Simply said.
Yes.
And finally with regard to the.
The write down are there any accounting applications since some of these 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.
From the extra $50 million. So you think you will be paying.
In the future for these products projects.
Projects that will also wind up being written down.
Our plan is to use the same accounting we've been using for the MTA.
<unk>.
From from the inception.
Obviously review that with our.
Outside advisors or experts.
Google will continue with that we gave a heads up.
Just to expect that we think will continue the impairment.
And the third and fourth quarter, which is really a continuation of this impairment were doing now.
And probably last a little bit into the.
The first part of 2024.
Alright, Thank you very much.
Sure.
Okay.
Once again, if you would like to ask a question simply press Star then the number one on your telephone keypad.
Your next question is from the line of Ian Zaffino with Oppenheimer. Please go ahead.
Thank you very much.
Good morning.
After that.
<unk> TV is being a little bit weak, but maybe give us some kind of around the world.
What youre seeing in this category.
Maybe a notable strength and then I think you're right.
Launching now, but weakness, but any other color you can give there would be helpful. Thanks.
So yeah I mean, that's it.
Looking at Q2.
We saw strength in legal.
<unk> alcohol.
Entertainment was strong in Q2, I mean, there was some.
Up 10%.
And in dollar terms it was actually our largest growth category up over $8 million.
Categories.
While weak for us.
In the.
In the second quarter.
Financial.
The weak real estate counter.
<unk> essentially was down.
Insurance and health and medical they were awesome.
Weaker.
Categories in the second quarter.
Okay. Thanks, and then.
Just one more if I can squeeze it in would be I'm, a breakdown between static and digital.
Related tell us maybe what the apples to apples was what did you say what it is static actually grow if you'd consider from the Billboard conversions to gauge at all and.
In the banking at maybe small parts that you added.
Is it Directionally can you maybe just directionally I mean, I know you may not be.
The exact answer bot.
Any color you can kind of get their procedures.
How the static business is performing.
Net.
Called the conversions et cetera.
Yeah.
Alright.
I can give you a trial.
Numbers are very hard to calculate that way since we are.
Converting.
Relatively fluid basis, Jeremy had in his.
Prepared remarks static is up.
1% and at very notable because we arent taking.
Most of their good players on an annual basis and put them on to the digital team So theyre performing.
They are the 1% growth.
On a same store basis.
We would likely look much not much higher but notably higher.
If we kept all those players back in static since but not it's very hard to get comparable same store calculation.
I think yes.
Yes.
Adding on to that and is that when you have.
Our portfolio of 40000, Billboards, obviously, theres a lot of ins and outs.
All the way through.
Cross sell so I think I think the way. We just described it probably gives you the best field.
Yeah.
How we how we believe the aesthetic business is performing slightly ahead of about 1%.
Understood. Okay. Thank you very much.
Thanks Keith.
And at this time there are no further questions I will turn the call back to Jeremy for closing remarks.
Yeah.
Thanks, operator.
Thanks, everyone for joining our call today.
I look forward to meeting with many of you at various conferences over the coming months.
Those who enjoy the rest of the summer.
We look forward to presenting.
Q3 results to you in November .
Again.
This includes the upfront second quarter 2023 earnings conference call. Thank you for your participation you may now disconnect.
Yeah.
Uh huh.
Yeah.