OUTFRONT Media Inc

NYSE:OUT

Earnings Call Analysis

Revenue Slightly Up, AFFO Down Amid Headwinds

During the quarter, consolidated revenue nudged upward, while Adjusted OIBDA slid by 5%. Traditional and digital billboard sectors had divergent fortunes—billboard earnings grew 2.6%, driven by stronger yield and digital outperformance which now makes up over 31% of total revenue, even as static revenues fell 2%. Transit was weaker, with an 8.6% drop in revenues, notably affected by industry strikes and macroeconomic pressures on advertising budgets. AFFO declined owing to lower OIBDA and increased interest expenses. The sale of the Canadian business was a strategic move, projected to improve financial flexibility by reducing leverage by around a third. Dividend payments are ongoing, with $0.30 per share recently declared. Looking ahead, there's cautious optimism. Revenue growth in Q4 is expected to mirror Q3's, despite forecasts reflecting a continued dip in transit and low single-digit billboard growth.

Third Quarter Brings Modest Revenue Growth Amid Challenges

OUTFRONT Media, steered by Chairman and CEO Jeremy Male along with CFO Matthew Siegel, experienced a slight uptick in total consolidated revenue for the third quarter of 2023. This operational period reflected a persistence of revenue generation stability, chiefly anchored by U.S. Media revenues which showed a modest increase on a reported basis, juxtaposed with a mild 5% year-over-year decline in adjusted OIBDA primarily due to weaker transit sector performance.

Sale of Canadian Operations to Enhance Financial Flexibility

A pivotal corporate maneuver materialized through the share purchase agreement to offload the Canadian business to Bell Media for CAD 410 million. The planned divestiture, slated to culminate in the first half of 2024, heralds a strategic move for OUTFRONT. It promises enhanced financial leeway by shedding debt from the balance sheet, culminating in a bolstered fiscal positioning.

U.S. Billboard Revenue Grows, Transit Revenue Feels the Pinch

The U.S. billboard segment, comprising roughly 80% of OUTFRONT's revenues, marked a 2.6% growth. In contrast, transit revenues experienced an 8.6% downturn often attributed to dwindling national revenues. This dip was further exacerbated by industry-specific strikes detrimentally impacting national advertiser spend. However, local business resilience was depicted by a robust 6% year-over-year hike, helping to alleviate some of the revenue fluctuations posed by the national business tribulations.

Digital Surge Continues, Static Formats Fall Behind

Digital performance sparkled with a 5.3% increase in the quarter, marking over 31% of the company's total revenue. This accomplishment dovetailed the deployment of 57 new digital billboards, which now tally up to 2,105 strong. Despite this technological inflection point, static revenue formats faced a minor setback, receding 2% year-over-year, casting light on the market's evolving preference towards digital advertising terrain.

Cautious Expense Management Amid Rising Costs

Total expenses climbed by approximately $7 million, a 2% year-over-year escalation entirely attributable to increased billboard lease expenditures. Nevertheless, efficiency within the company's operational processes was evidenced through reduced posting, maintenance, and other expenses, painting a picture of prudent fiscal stewardship amid inflating cost pressures.

Anticipation of Margin Improvement Despite Present Downturn

Billboard OIBDA margin recorded a slight decline to 36.7%, though expectations are set for an improvement in 2024. Projections suggest that as new and acquired inventory mature towards their full revenue potential, margin recovery will follow suit, hinting at prospects for enhanced profitability on the horizon.

Transit Sector Suffers, Impacted by External Industry Strife

Transit OIBDA saw a $6 million decrement over the previous year, feeling the brunt of strife such as Hollywood writer and actor strikes more severely due to its reliance on the entertainment vertical. This specificity underscores the vulnerability of this segment to industry oscillations.

CapEx and AFFO: Controlled Spending and Steady Forecast

Reflective of a judicious capital expenditure approach, third-quarter spending was reported at $19 million. While total CapEx for the year is projected to linger between $80 million to $85 million, maintenance projections appear slightly elevated. AFFO guidance for the year remains steadfastly unchanged, reinforcing a narrative of fiscal consistency despite market variables.

Robust Liquidity and Leverage Positioning

OUTFRONT's balance sheet portrays a liquidity pool nearing $540 million, complemented by a manageable total net leverage ratio of 5.4x. This strategic financial state offers comfort in the face of future debt maturities, positioning the company to address its obligations when they surface.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by, and welcome to the OUTFRONT Third Quarter 2023 Earnings Conference Call. My name is Sam, and I will be your moderator for today's call. [Operator Instructions]I'd now like to turn the call over to Stephan Bisson with OUTFRONT. Stephan, please go ahead.

[Stephan Bisson, executive]

Thank you, Sam. Good afternoon, and thank you for joining our 2023 third 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 can be found 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, relevant factors that could cause actual results to differ materially from these forward-looking statements that are listed in our earnings materials and in our SEC filings, including, but not limited to, our 2022 Form 10-K and our September 30, 2023 Form 10-Q, which we expect to file tomorrow.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 are in the appendix of the slide presentation, the earnings release and on our website, which also concludes presentations for prior period reconciliation.Let me now turn the call over to Jeremy.

[Jeremy Male, executive]

Thanks, Stephan, and thank you everyone for joining us today. We're pleased to be here today reporting our third quarter results, which came in pretty much as we indicated when we spoke 3 months ago.As you can see on Slide 3, which summarizes our headline numbers, total consolidated revenue was slightly up during the quarter. Adjusted OIBDA declined 5% year-over-year, principally due to weaker transit and other results, and AFFO was down primarily due to higher interest and lower OIBDA.Slide 4 shows our revenue results by segments. Total U.S. Media revenues were slightly up on a reported basis year-over-year. Other, which consists mostly of Canada, was up 2% on an as-reported basis and 4% on an organic constant dollar basis.While we're speaking of Canada, I want to briefly discuss the pending sale of our Canadian business, which you may have read about in our press release last week.On October 23, we announced that we entered into a share purchase agreement for the sale of our Canadian business with Bell Media. As previously disclosed in our K, the purchase price is CAD 410 million, subject to adjustments, and we expect to close the transaction in the first half of 2024.This strategic transaction will provide OUTFRONT with additional financial flexibility through the deleveraging of our balance sheet. We look forward to continuing to work with our Canadian colleagues on the great business we've built together until the deal closes.So turning back to the quarter. You can see the components of our U.S. Media revenues in more detail on Slide 5. We billboard, which remains about 80% of revenues, grew 2.6% with solid performance in most of our markets. Transit revenues were down 8.6% year-over-year, given lower national revenues, which I'll discuss in a bit more detail on Slide 6.Here, you can see our local and national revenue performance. Our local business was strong, up 6% year-over-year, but this was largely offset by our national business. As we noted on the last call, national faced some headwinds during the quarter with the writers' and actors' strikes curtailing entertainment out spend and technologies' year of efficiency, pushing some advertisers to scale back their ad campaigns.As a result of the weaker national revenues, our local/national split was 58% to 42% in the quarter, more locally skewed than our typical 55-45 split.Slide 7 illustrates our U.S. billboard yield, which grew nearly 3% year-over-year to $2,800. This improvement was driven primarily by an increased number of digital places, which typically generate more dollars per board than our static inventory.Slide 8 highlights our digital performance with digital revenues growing 5.3% in the quarter and representing over 31% of our total revenue, up 150 basis points from last year. Digital billboard revenues were up nearly 7% versus the prior year, primarily because of new inventory. We added 57 digital billboards during the quarter, raising our total to 2,105. Digital transit was up 1%, again due to an additional inventory compared to last year.On Slide 9, you can see the results of our static revenues, which were down 2% year-over-year, with slight growth in billboard being offset by a decline in transit, which was largely driven by lower bus revenues, a result of the national headwinds we previously discussed.Though static billboard growth remains modest, the fact it continues to grow is notable given the challenging environment and the fact that we continue to convert many of our best static boards to digital.With that, let me now hand it over to Matt.

[Matthew Siegel, executive]

Thanks, Jeremy, and good afternoon, everyone, I appreciate you joining our call today. Please turn to Slide 10 for a more detailed look at our expenses.Total expenses were up approximately $7 million or 2% year-over-year, entirely driven by billboard lease expenses, which were up $10 million. Excluding lease expenses, costs were even lower versus the prior year period.As we've previously discussed, much of the lease expense growth continues to be associated with the new inventory we have built over the prior 12 months. This growth rate has moderated as we have moved through the year and will continue to do so in the fourth quarter and into 2024.Transit franchise expense was down slightly, as the increased [ snag ] over to the New York MTA from the inflation adjusted this year was offset by lower revenue share payments to our other transit franchises.Posting, maintenance and other expenses was down 4%, principally driven by lower production expense and a property tax refund. SG&A expense was up less than 2% versus the last year, driven primarily by a higher allowance for doubtful accounts, professional fees and office rents, offset partially by lower total compensation expenses. We remain focused on SG&A and expect these expenses to continue to be a lower percentage of revenue in 2024.Corporate expense was down just over $1 million versus last year. This decrease was driven by lower compensation-related expenses, offset slightly by the impact of market fluctuations on unfunded equity index-linked retirement fund.Slide 11 provides additional detail on the sources of OIBDA. U.S. billboard OIBDA was down about 1% and billboard OIBDA margin was 36.7%, down versus a year ago, but slightly better versus the comparable period in 2019.As we've described in prior periods this year, the margin decline versus 22% was driven by new and acquired inventory and this inventory is still ramping to our projected revenue levels. Looking forward to 2024, we expect billboard margins will improve versus 2023 as revenues on acquired inventory continue to grow.Transit OIBDA was down approximately $6 million versus the prior year due to lower revenue. While the Hollywood writer and actors strikes had an impact on all parts of our business, transit was disproportionately hurt given its greater exposure to the entertainment vertical and the fall television warrant season in particular.Turning to capital expenditures on Slide 12. Q3 CapEx spend was $19 million, including $8 million of maintenance. The $6 million decline in total CapEx versus the prior year was primarily due to lower investments in new digital billboards. For the year, we continue to expect total CapEx of $80 million to $85 million.We believe 2023 maintenance CapEx will be approximately $25 million to $30 million, higher than usual, having completed office moves in New York, Los Angeles and San Francisco.We spent about $12 million on MTA deployment costs in the quarter. As we mentioned on our last earnings call and as a result of our continued expectation of negative aggregate cash flows related to the MTA, we recorded an impairment charge for this amount in the third quarter of 2023.Looking ahead, as I follow on Slide 13, you can see our Q3 AFFO of approximately $76 million, which is down year-over-year, primarily given this lower OIBDA and higher interest expense. For the year, our AFFO guidance is unchanged from our last update.Please turn to Slide 14 for an update on our balance sheet. Liquidity is nearly $540 million, including over $40 million of cash and almost $500 million available by our revolver.As of September 30, our total net leverage was 5.4x, up slightly from our Q2 level. We remain comfortable with our debt portfolio with our next maturity not being until mid-2025, and approximately 1/4 of total debt subject to our floating rates.I'd like to spend briefly on the sale of our Canadian business that Jeremy previously mentioned. CAD 410 million sale price currently equates to approximately USD 300 million at today's exchange rate, and we currently expect its tax proceeds to be approximately $290 million. Our intention is to utilize these funds in a manner so that we may pay down debt and delever.We closed just $3 million of tuck-in acquisitions in the quarter, again, completing a number of small deals we committed to in 2022. Given our current commitments, we expect to spend less than $10 million in the fourth quarter.And lastly, we also announced today that our Board of Directors has declared a $0.30 cash dividend payable on December 29 to shareholders of record at close of business on December 1. This dividend fulfills our estimated re-obligation for 2023. The $60 million of dividend requirements carried forward from [ longer ] payments from 2022 and represents a small return of capital during the year.With that, let me turn the call back to Jeremy.

[Jeremy Male, executive]

Thanks, Matt. The world has grown increasingly complicated over the last 3 months with various industry strikes, macroeconomic and geopolitical uncertainties permeating through the ad market.Despite these headwinds, we expect the Q4 revenue growth will be broadly in same range as Q3, with billboard again up low single-digits and transit likely to decline.Before turning the call over for questions, I'd like to briefly reaffirm some of the strategic actions we've taken and continue to pursue.First, as we've discussed, we reached agreement to divest the Canadian business, the proceeds from the sale will allow us to delever the company by around 1/3 of a turn.Second, we continue to focus on our SG&A expenses and are evaluating various initiatives to increase efficiency across business lines.And third, we remain engaged in conversations with some of our transit partners, including the MTA, and are open to find mutually agreeable approaches that reflect today's transit environment.At the same time, we remain fully focused on operating our business, which continues to grow despite the environment. In our view, and that of many ad industry forecasts, out-of-home remains in the best position of all traditional media for long-term growth given its increasing audience, increasing digitization and improving data and analytics.We also believe that our growing automated selling channels provide an excellent opportunity to increase the pool of advertisers that utilize the medium.And with that, operator, let's now open the lines for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Ian Zaffino with Oppenheimer.

[Ian Zaffino, analyst]

Can you guys just give us a sense of -- I know you pointed to some pockets of weakness. Maybe also help us understand some of the stronger categories and some of the other categories that maybe came in a surprise one way or the other.

[Jeremy Male, executive]

Thanks for question, Ian. Yes. In some ways, Q3 was a sort of an interesting -- frustrating quarter for us. Our local business performed extremely well, and you saw that up 6%. And it's really our national business where we saw those categories that I mentioned.In fact, if you just look at the TV category and tech, just between those 2 categories, our national revenues were down about $16 million, which equates to about 8 points of revenue growth in our national business. So you can see the impact of those headwinds.But if we take a step back from that and just assume now the difficult color we gave you with tech and TV. Outside of that, real estate was a little bit down, probably worth calling out. Then on the positive side, we had a good dollar step-up and percentage step-up in legal. We had a good step-up in alcohol also, CPG up and also education. So actually fairly broadly based on the upside and really skewed towards those categories I mentioned on the downside.

[Ian Zaffino, analyst]

And then as a follow-up, can you just give us a philosophical discussion on the REIT status that you guys have? It just certainly doesn't seem like you're being valued in the market, being a REIT either it's a dividend. You're not being valued for -- you're sitting here with some debt. So does it make sense or is it possible or is it feasible to maybe switch structure, then you could take your free cash flow and maybe delever with it, pursue some M&A. Maybe help us understand a little bit from that perspective.

[Matthew Siegel, executive]

So, Ian, its Matt, I will try to take that. Firstly, obviously, REIT, we don't control the dividend yield, we control payout. I appreciate you pointing out that the market is not appreciating our current status.We think being in REIT has a lot of value in avoiding or minimizing our tax liability. We're glad the structure we think it works for us. As far as the balance sheet, clearly the [ B2 ] sale with Canada and other issues that we’re working on will help improve that over the course of the next few months, as it closes and as our EBITDA performance in some of the things pick in. We feel pretty good about where the balance sheet is. And with that, we think the REIT makes sense for us in our current situation.

[Operator]

Our next question comes from the line of Cameron McVeigh with Morgan Stanley.

[Cameron McVeigh, analyst]

I had a couple. I was wondering if you could give just a little more color on what's driving the elevated billboard lease expense growth recently? And what's your expectation for normal long-term growth rate?

[Matthew Siegel, executive]

On the lease expense, as you know, we put a lot on the inventory in 2022. We look at things we buy in the second year EBITDA performance. So we're kind of in the middle, maybe towards the latter half of the ramp-up.The lease expense comes on immediately. So it's fully expensed and the revenue ramps up a little slower. So especially a since large acquisition year in '22, we see the impact still in '23. And again, as I mentioned, it should moderate over the course into next quarter and certainly in 2024.

[Cameron McVeigh, analyst]

And then secondly, last quarter, you had mentioned a baseline assumption of around mid-single digits. I think it was 6.5% growth for the MTA contract revenue long term. Has your long-term growth rate assumption for the MTA changed at all, just given what we've seen with transit?

[Jeremy Male, executive]

No. As we mentioned on the last call, we've moderated our performance expectation at the MTA and there's nothing to suggest that our current forecasts are anything other than absolutely achievable. So we remain confident there. It's interesting because if you just think of the categories that we just talked about, I mean both of those are very sort of disposed towards transit. So while they are a headwind for us this year, next year we would absolutely expect that they could -- it could become the tailwind. In fact, well, just this week it looks like there a quite a strong expectation. We're keeping our fingers crossed that there will be resolutions in the actors' strike. So that I think is good news.And I just wanted to come back just talking about lease expenses. This year is absolutely a one-off. If you look back historically, lease expense growth was probably more in the 2% to 3% range for the year, something like that.

[Operator]

Our next question is from the line of Jim Goss with Barrington Research.

[James Goss, analyst]

A couple of questions. First, just to clarify, did you say the after-tax proceeds were $20 million -- USD 290 million in terms of that sale at Canada?

[Matthew Siegel, executive]

Yes, Jim, the profit -- approximately the gross CAD 410 million, USD 300 million, a little bit of tax leakage in Canada.

[James Goss, analyst]

Yes, I was surprised there wouldn't have been a little more leakage since you've owned that property for a long time. But that's –

[Matthew Siegel, executive]

Jim, going back to Ian's question, that's one of the benefits of being a REIT is good capital gain as part of debt restructuring.

[James Goss, analyst]

Okay. And on the entertainment side, I think you also indicated transit had a bigger impact of somewhat softer entertainment dollars than the other area. What is the share of revenue that is assigned to transit or you're achieving in Transit in the entertainment space?

[Matthew Siegel, executive]

It's really the focus of TV and entertainment, generally, movies were up for us in quarter. TV is down. And I don't know if we gave you the exact number. But more than half of the decline, almost 2/3 of the decline is in transit, about 1/3 of decline in billboards.

[James Goss, analyst]

And entertainment and the film side, are you actually perhaps getting a little more revenue in that? I think some -- one of the things that's been pointed out is, the actor participation in promoting their films is absent when they're on strike. And I thought that some of that might have accrued to you, but maybe not so or at least not sufficiently so?

[Jeremy Male, executive]

Yes. The number we called out is specifically on TV. That's why we really -- in the third quarter, really noticed it, because there was essentially no launch. But right now -- I mean, the film category for us has been fine. No problems at all.

[Operator]

We have no additional questions waiting at this time. [Operator Instructions] With that, I'd like to hand the call back over to Jeremy for any closing or additional remarks.

[Jeremy Male, executive]

Thanks, Sam, and thanks, everyone, again for joining our call today. I'm sure we'll be seeing many of you at various conferences over the next few months, but in case I don't, please enjoy the upcoming -- all those seasons, and look to presenting earlier results to you in February. Thanks very much.

[Operator]

That concludes the OUTFRONT third quarter 2023 earnings conference call. Thank you all for your participation. You may now disconnect your lines.