OUTFRONT Media Q2 2024 Earnings Call Transcript

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August 6, 2024

There are 10 speakers on the call.

Operator

Hello all, and welcome to Outfront Media's 2nd Quarter 2024 Earnings Call. My name is Lydia, and I'll be your operator today. After the prepared remarks, there'll be an opportunity to ask I'll now hand you over to Stephan Wiesen,

Speaker 1

Head

Operator

of Investor Relations to begin. Please go ahead.

Speaker 2

Good afternoon, and thank you for joining our 2024 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.

Speaker 2

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 2023 Form 10 ks and our June 30, 2024 10 Q, which we expect to file this week. We will refer to certain non GAAP financial measures on this call. Any references made to OIBDA 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.

Speaker 2

Also, please note that given the intra quarter sale of our Canadian business, our consolidated results include only 67 days of Canada results compared to 91 days in comparable prior year period. Detailed historical financial results of the divested Canadian business can be found on Page 23 of our slide presentation and detailed historical U. S. Media financial results can be found on Slide 22. Given the recent sale of our Canadian business, our remarks today will focus primarily on the results of our U.

Speaker 2

S. Media segment. Let me now turn the call over to Gerard.

Speaker 3

Thank you, Stefan, and thanks to everyone for joining us on our call this afternoon. We're pleased to be here today to discuss our Q2 during which we successfully completed the sale of our Canadian business and more importantly drove improving results in our U. S. Media business. As Stephane mentioned, our remarks today will focus primarily on our U.

Speaker 3

S. Media segment given this represents essentially the entire remaining company moving forward. As you can see on Slide 3, which summarizes our headline results, our U. S. Media business grew revenues a solid 4% driven by continued steady growth in billboard and impressive double digit growth in transit.

Speaker 3

U. S. Media adjusted OIBDA grew nearly 10% driven by the revenue growth I just described combined with the U. S. Media expense growth of under 2%.

Speaker 3

U. S. Media and Corporate adjusted OIBDA was up almost 8%. Consolidated AFFO grew a strong 9% to CAD85 1,000,000 and puts us well on our way to meeting the guidance we laid out earlier this year. This growth is even more impressive given Canada contributed only CAD1.7 million to our consolidated adjusted OIBDA in the 2nd quarter compared to CAD6.5 million last year.

Speaker 3

On Slide 4, you can see our U. S. Media revenues in more detail. Billboard revenues were up 2.3%. Local continues to be particularly strong with our more locally skewed markets leading our performance.

Speaker 3

Every region was up except the West where LA was down due to soft media spend. Transit revenue was up nearly 11% versus the prior year, driven by particularly impressive growth in the New York MTA. Similar to the Q1, our improved transit revenues were the result of solid performances from both local and national teams. The breakdown of local and national revenues in our U. S.

Speaker 3

Media business can be seen on Slide 5. Local was the primary driver of our revenue growth, up almost 7% during the quarter, while national grew slightly. On a consolidated basis, our best performing categories in the 2nd quarter were legal services, financial, utilities, CPG and retail. On the weaker side were entertainment, alcohol, restaurants, employment and auto. Slide 6 illustrates our solid U.

Speaker 3

S. Media billboard yield growth, up almost 4% year over year reaching just under $3,000 which is a fresh second quarter record for OUTFRONT. The largest drivers of this yield growth remain our digital conversions, rate, occupancy and higher automated transaction revenue. Slide 7 highlights our strong U. S.

Speaker 3

Media Digital performance with revenue growing 10% in the quarter, representing over 34% of our total revenues, up from 32% last year. U. S. Digital billboard was up nearly 6%, while transit was up almost 24%, fueled predominantly by the MTA. Automated revenues in the quarter represented 16% of our digital revenues, up from 14% during the Q1.

Speaker 3

With that, let me now hand it over to Matt to review the rest of our financials.

Speaker 4

Thanks, Jeremy, and good afternoon, everyone. As with Jeremy's remarks, many of my comments will focus on our U. S. Media segment as these are the primary operations going forward. For a deeper dive into our financial statements, please turn to Slide 8 for a more detailed look at our U.

Speaker 4

S. Media expenses. Total U. S. Media expenses were up a little over $5,000,000 or less than 2% year over year.

Speaker 4

U. S. Media billboard lease expense declined by just over $5,000,000 or a little more than 4% year over year. This decline was driven primarily by lower revenues on the portion of our inventory operated on leases with revenue share arrangements, which are principally located in our largest markets such as New York and Los Angeles. U.

Speaker 4

S. Media transit franchise expense was flat versus the prior year with the non renewal of a loss making contract and a small benefit from amendments to existing transit agreements offsetting the higher maintenance of the MTA related to the annual CPI adjustments. U. S. Media posting maintenance and other expenses were up 7% versus the prior year, primarily due to higher compensation related expenses, higher posting and rotation costs driven by higher business activity and higher maintenance and utilities costs.

Speaker 4

U. S. Media SG and A expense was up 9% or just over $7,000,000 during the quarter due to higher compensation related expenses, provision for doubtful accounts, one time severance costs and rent related to transitions to new offices, partially offset by lower professional fees. Slide 9 provides additional detail on the sources of U. S.

Speaker 4

Media OIBDA. Total U. S. Media OIBDA was up nearly 10% to over 140,000,000 dollars U. S.

Speaker 4

Billboard OIBDA was up 3.5 percent to $136,000,000 representing a margin of 37.8 percent, up 50 basis points year over year. For the full year, we continue to believe that billboard margins will be up on an annual basis. Transit OIBDA improved by nearly $8,000,000 to just under $5,000,000 The improvement was primarily due to better revenues Jeremy described earlier in the call, particularly at the New York MTA. On Slide 10, you can see our combined U. S.

Speaker 4

Media and corporate OIBDA, which was up 7.7 percent to $124,000,000 Q2 corporate expense was up over $3,500,000 almost entirely due to higher consulting fees. Total cost of this project year to date were approximately $5,000,000 and we expect another $3,000,000 to be spent through the Q3. Turning to capital expenditures on Slide 11, Q2 consolidated CapEx spend was just under $24,000,000 including about $8,000,000 of maintenance spend. This maintenance spend was flat with last year, while growth was a little higher due to spend that was committed as part of the agreement to sell our Canadian business. Q2 U.

Speaker 4

S. Media CapEx spend was $18,500,000 including just under $7,000,000 of maintenance spend, each down about $1,000,000 For the full year, we believe we will spend approximately $75,000,000 to $85,000,000 of total CapEx. Over 300 of our digital billboards were divested as part of the Canadian transaction and we ended the quarter with around 1900 digital billboards, which represents just under 5% of our inventory. For the year, we continue to target 150 to 200 total digital billboard additions. In transit, we added nearly 1800 digital displays in the U.

Speaker 4

S. In the Q2. As in the Q1, the installations were mostly small format screens on subway and train cars in the New York MTA and we continue to expect to substantially complete our initial deployment commitment in 2024. We impaired the $8,800,000 of MTA deployment spend in the 2nd quarter. Looking forward, our MTA transit performance through the first half of the year was slightly better than the expectations and assumptions included in our year end 2023 financial model.

Speaker 4

We now expect to be at least cash flow neutral on an undiscounted basis from the Q3 of 2024 through to the end of the amended base term of the agreement. If our MTA cash flow performance continues to be in line with or better than our current model, we would not expect to incur additional impairments related to this contract in the future. Now turning to AFFO on Slide 12, you can see the bridge to our Q2 AFFO of nearly $85,000,000 The almost $7,000,000 year over year increase was due to improvements in OIBDA, cash taxes and other items, slightly offset by higher interest expense due to last year's Q4 senior note refinancing. For 2024, we continue to expect that reported consolidated AFFO growth will be in the high single digit range from 2023's AFFO of $271,000,000 This guide considers the 5 months we operated the Canadian business prior to its sale compared to 12 months last year. Please turn to Slide 13 for an update on our balance sheet.

Speaker 4

Committed liquidity is nearly $665,000,000 including around $50,000,000 of cash, almost $500,000,000 available by our revolver and $120,000,000 available by accounts receivable securitization facility, which now matures in June of 2027. As of June 30, our total net leverage was 5 times flat, down from 5.4 times as of March 31, primarily due to the sale of our Canadian business. We continue to target a net leverage range of 4.425 times and we plan to continue delevering through growth and adjusted OIBDA. As of June 30, we paid down $200,000,000 of our term loan using Canadian proceeds and $90,000,000 on our accounts receivable facility using freed up capital. Turning to our dividend.

Speaker 4

We announced today that our Board of Directors approved another $0.30 cash dividend payable on September 27 to shareholders of record at the close of business on September 6. As a reminder, based on our current operational expectations and the taxable gain created with the sale of our Canadian business which closed on June 7, we believe we will need to pay a larger dividend later in the year for REIT compliance. To maximize the delevering goal of the sale of our Canadian business, the Board has the optionality to pay a portion of the larger dividend in common stock, which would be issued on a pro rata basis to current shareholders. There were no larger notable acquisitions made during the quarter and looking at our current acquisition pipeline, we continue to expect our 2024 deal activity will look like that of 2023. In closing, we accomplished a lot in the quarter and we continue to be enthusiastic about the remainder of the year to come.

Speaker 4

With that, let me turn the call back to Jeremy.

Speaker 3

Thanks, Matt. We were pleased with our Q2 performance, which we believe has set us up for a successful 2024. Looking forward to the Q3 and based on what we are seeing in the business as of today, we estimate that Q3 U. S. Media revenue growth will be comfortably in the mid single digit range with billboard accelerating from its Q level, Q2 level and transit growing in the high single digit range.

Speaker 3

This is a reflection of national trends picking up and local continuing to display solid growth. OUTFRONT is entering the 3rd quarter as a strictly domestic operation for the very first time and we remain incredibly excited about the many opportunities that lie ahead. U. S. Out of home is poised to continue its organic growth as it remains one of the few sources of unassailable viewership as other mediums continue to see audience declines.

Speaker 3

This organic growth will continue to be enhanced by further digitization, which will remain a key driver as we expand our digital footprint and continue to benefit from growth in automated revenues. And last but not least, we expect that our transit business will continue to recover very quickly and we'll seek to improve the economics of each of these agreements as they come up for renewal. And with that operator, let's now open the lines for questions.

Operator

Thank you. Our Our first question today comes from David Karnovsky with JPMorgan. Please go ahead. Your line is open.

Speaker 5

Hi, thank you. Sharon, just go back to your comments on the guide before you said Q3 Media Group, I think comfortably at mid single. Does that mean you think there's room to potentially do better? Should maybe macro trends break more favorably? And then digital transit looks like accelerated a bit in the quarter.

Speaker 5

I think maybe you had turned on programmatic and automated buying in New York and FDA. I just want to see what the reception to marketers has been to that so far. Thanks.

Speaker 3

Yes. Thanks for the question, David. Let's just hit the MTA Point 4 first. Yes, we did switch on programmatic to our live boards in the MTA. There are still some boards on train, for example, that still need to be connected, but certainly will connect on live boards.

Speaker 3

And we're starting to see some pickup and it will take a bit of time, but we're excited at what automated revenues will do for digital on the MTA. Looking at the guide, we said that we would be comfortably in the mid single digit range, and we pointed to 2 things really. 1 was the improving trend in billboard and secondly was the improving trends in national. So from that point of view, we'd expect numbers to be a little bit ahead of where we were in Q2.

Speaker 1

Thank you.

Operator

Our next question today comes from Kamran Luke Vai with Morgan Stanley. Please go ahead.

Speaker 6

Thanks. I was just curious, if you could discuss your view of the current macro environment and how advertiser demand has been trending. When you think about local versus national advertising, why do you think you're continuing to see this divergence? And has that continued to be the case in the Q3? Thanks.

Speaker 3

Thanks for the question. I must admit, I don't think the divergence we are seeing is particularly down to the macro trends that we've been seeing the last few weeks. When you drill into it, actually, the main down within our national business has really been entertainment and that's been sort of a combination of movies, streaming, a number of factors that still haven't quite repaired and recovered from the disruption to the whole sort of media slate and TV slate driven by the actors and writers strike at the back end of the year. I think the other thing I'd point to is that in total, it's not as own national is not growing, it's just not growing as fast as local is. So, I think that would be my comments there.

Speaker 6

Great. Thanks. And then just secondly, good strong growth in the digital transit segment. Curious how much of that is comp related versus maybe specific vertical recovery or more supply coming in with the programmatic ad tech integration you spoke to earlier? Thanks.

Speaker 3

Yes. Thanks, Kevin. I mean the answer is we have seen a definitive increase across the hurdles, but we also do have in total more screens in the transit environment in the MTA as we built out last year. And we're really looking forward to benefiting from that digital as we go forward. I'm not certain how much time you guys spend down on the subway right now, but I mean the product has never looked better.

Speaker 3

And the fact that we can have the opportunity to be such brilliant creative and now also that the delivery of programmatic, which means that it can be incredibly, incredibly timely. I think we're going to really benefit from those investments that we've made over the last couple of years as we go forward from here.

Speaker 1

Great. Thank you.

Operator

Our next question comes from Ian Zaffino with Oppenheimer. Please go ahead.

Speaker 7

Hi, great.

Speaker 8

Thank you very much. I just wanted to ask a little bit more on the transit side, because it looks like ridership has not really moved a whole lot over the past year or so. Can you maybe help us understand, are you at a kind of a ridership level that you are happy with? I mean, you're growing 10% or so, But what else can you potentially do to maybe get revenues higher in the absence of some ridership growth? And if you do see ridership growth, is that kind of like a one to 1?

Speaker 8

And then if we get back to, let's just say, 80% of pre COVID, that would be 15% higher revenues. Is that the way to think about it or maybe a little bit more of a deeper discussion there? Thanks.

Speaker 3

Okay. So thanks for the question here. I guess first thing is that actually NTA revenues were well ahead of that double digit growth rate that we gave in total. And also over indexing on ridership. So that's a very good news.

Speaker 3

I think we said right the way along from if we go back to the dark days of early 2020 that we expected that at 80% to 85% of ridership that we would be able to generate 100% of revenue. But we continue to believe that that to be the case. And what's great is that actually, the ridership's been bumping along at at somewhat similar levels for the last few months. And this expansion has really come from, as I say, it's come from just having a great product there. And also I think an acceptance advertisers are really starting to, once again see the huge benefits of advertising in the transit medium.

Speaker 8

Okay. Thank you. And then I think you guys mentioned something about paying some of the dividend in stock. How would that work as far as the mechanics of that, the timing of that and just maybe a little bit of a deeper discussion? Thanks.

Speaker 4

Thanks, Yi. It's Matt. I'll take that one. As a REIT, we have some flexibility as to how and what form we pay our dividend. Obviously, also as a REIT, we're required to distribute most of capital gain and most of our income.

Speaker 4

So we're able to pay up to 80 5 percent I'm sorry, 80 percent of a declared dividend in stock. If the Board so chose, we would like any split currency opportunity, shareholders will get the choice of if they want cash or stock. And then after those choices are made, the would be allocated pro rata. So you could picture it's possibly something similar to a rights like offering, so no one gets diluted, everyone gets kind of the same percentage of shares. I know it's been done by other REITs and often accompanied by a reverse split to standardize the number of shares, but again those decisions haven't been made here at this time.

Speaker 8

Okay. Thank you very much. Thanks.

Operator

The next question comes from Jason Bazinet with Citi. Please go ahead. Your line is open.

Speaker 1

Thanks. I just had a quick question on the Canadian disposition. I think we were all modeling it as a June 30 close and since it closed on the 7th June, is the right math to take the Slide 23 in your presentation and just do the proportional math of the 23 days that we're missing? In other words, the column that you're showing, is that a full quarter through June 30? Or does that column represent the 60 some odd days, 67 days that you owned it?

Speaker 1

Does that make sense?

Speaker 4

It's the full quarter, but it's also 67 days that we owned it. So, obviously, as we were preparing for sale, not causal, but maybe coincidental, you can see performance over the 1st 67 days was probably less than it was last year. And then just shorter number of days, so the Canada comparison is a tough

Speaker 1

Okay. That's great. I understand. Thank you.

Speaker 8

Thanks.

Operator

The next question today comes from Lance Vitanza with TD Cowen. Please go ahead. Your line is open.

Speaker 9

Hi. Thanks guys and nice quarter. Back on the West Coast, Southern California, Los Angeles, I was a bit surprised to see LA or to hear that LA is still struggling given the end of the writers' strike. And I know that there's a ramp, but how is that region trending into the Q3 and the back half? And when do you expect to see us in that region back above kind of pre writer strike levels?

Speaker 9

Is that possible in the back half or is that a 2025 event? Thanks.

Speaker 3

Yes. It's a little bit hard to say exactly. What we can see as we look into Q3 is that, some of the TV money has come back. So that's looking positive. But actually the movie slate, if you look at it, there are just fewer movies and fewer tentpole movies in Q2 versus in Q3 versus last year.

Speaker 3

So that's see the delta. In terms of MovieSlave, I don't think we're going to really start it doesn't look like that completely repairs itself in 2024. But hopefully, as I say, with TV coming back in and maybe an improvement coming through from some of the streamers, maybe we'll see entertainment not being quite a drag in the latter half of the year as it was for the last few months.

Speaker 9

Well, that's super helpful. And then just sort of a follow-up on that. So is it the case that as we think about the kind of media spend in LA, is it sort of heavily weighted? Is it like 80% of that movies, 20% television? Or is it something closer to fifty-fifty or?

Speaker 3

Yes. I mean, if you look at it for the Q2 and we sort of look at the numbers there and not sort of thinking L. A. Specifically. But there was reasonable waiting between TV and there's reasonable waiting between TV and film.

Speaker 3

So we'll still notice it as we go into Q3, as I say, it's just likely to not be quite as obvious.

Speaker 8

Thanks.

Operator

The next question comes from Jim Goss with Barrington Research. Please go ahead.

Speaker 7

All right. Thank you. A couple of things. One, I was wondering, we talk a lot about the impact on transit and the reduced ridership, that sort of thing. I was wondering, are there any lingering impacts from the shifts to greater share of work at home in terms of ad exposure or pricing or anything, any other metrics we ought to be thinking about between your city and suburban areas, especially the urban locations?

Speaker 3

Thanks for the question, Jim. The answer is not so much so. The interesting thing about work from home, as we said throughout is that obviously it impacts absolute total number of eyeballs, but it doesn't actually it still has very, very similar reach to that which we had pre COVID. So typically people have been doing 7 or 8 journeys rather than 10, but it's the it says that the same number of individual peoples in the same region. So, no, I don't think we're going to we're not really seeing any lingering impacts of that.

Speaker 3

And as I said broadly, I think most models show that there will be a gradual increase in ridership. So we look forward to any benefit that, that might bring as well as we look into the future combined with the digital investments that we've been making.

Speaker 7

Okay. And you've always talked about the reach versus impressions issue regarding transit ridership. Has it been borne out to be true that maybe fewer impressions, but the same reach has really been to your benefit in terms of coming back more quickly?

Speaker 3

Well, if you look at the gradual improvement that we have, we've continued to over index pretty much throughout against ridership. So that I think shows the value, it needs to be like the incremental value we're getting out of that delta, if you like, of reach versus frequency. So I think all points in a very positive direction.

Speaker 7

Okay. Last thing, with the sale of Canada bringing in considerable cash, will it have any implications in terms of any of your other capital plans, perhaps more intense M and A focus or anything of that nature?

Speaker 4

Jim, it's Matt. Probably nothing immediate, but it certainly gets us back in a more comfortable leverage range. And as we continue to delever, it would probably bring us back to material M and A opportunities quicker than we would have done without the sale of Canada. So we think it gives us a lot more flexibility and a lot more balance sheet strength.

Speaker 7

All right. Thanks very much. Appreciate

Speaker 4

it. Thanks, Jim.

Operator

We have no further questions in the queue. So I'll turn the call back over to Jeremy Mael for any closing comments.

Speaker 3

Thanks, Lydia, and thanks to everyone joining us today. I look forward to seeing many of you at various conferences and events as we move through summer. But first, I don't look forward to presenting our Q3 results to you in November. Thank you very much.

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