This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: 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 second quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 Stephan Beeson, Vice President of Investor Relations. Please go ahead.
spk03: Good afternoon, and thank you for joining our 2023 second quarter earnings call. With me on the call today are Jeremy Mayles, 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 relief and a 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. 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 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 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 includes presentations with prior period reconciliations. Let me now turn the call over to Jeremy.
spk00: Thanks, Stefan, 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 late booking revenue we had experienced in recent quarters did not materialize to the same extent. 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 a point of growth from various acquisitions over the prior 12 months. Adjusted OEBDA declined slightly year-over-year due to transit and other, while AFFO was down primarily due to this lower OEBDA 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, hurt 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 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, 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 2048. 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 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 non-cash charge follows accounting guidelines and the 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 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, was 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 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 considered it advisable, prudent, and timely to update the value of our investment in these transit franchises, leading to today's non-cash charge. I would additionally mention this period of transit weakness, further impacted by changes to the full television schedules caused by the writers' and actors' strike, will present us prevent us from achieving our previously issued FFO 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.
spk01: 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 non-cash 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 10Q, which we expect to file early next week, will 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 and our forecast of 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 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 data 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 to $40 million to be spent in the second half of 2023, and $50 to $60 million spent next year. After 2024, we expect replacement capital requirements of $30 to $40 million per annum. We will assess our equipment deployment costs for impairment quarterly, in each case booking an 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 amended 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 to $60 million we expect to spend in 2024. As you can imagine, the model is highly sensitive to revenue growth assumptions and 100 basis point change from our assumed 6.6% revenue CAGR between 2024 and 2030 leads 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 billboard 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 is 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 a 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 MAG owed to the New York MTA from the contractually required inflation adjustment this year. Postage maintenance and other expense growth was less than 4%, given higher taxes and higher compensation related expenses. SG&A expense was up just 1.6% 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 methods to lower SG&A expense growth and believe that these expenses will represent the 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 EBITDA 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 EBITDA. U.S. billboard EBITDA was up 1.2% and billboard orbital margin was 7.3% 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 our projected revenue levels. We expect billboard 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 ramp to our expectations. Substantially, all of our consolidated total OEBDA comes from the U.S. billboard, demonstrating the driver of value continues to be our solid billboard performance. Transit OEBDA was down approximately $3 million versus the prior year due to higher expenses, largely driven by the increase in New York MTA MAG. Chairman's capital expenditures on slide 13, Q2 CapEx spend was $22 million, including $8 million of maintenance spent. 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 $85 million, down $5 to $10 million from our prior forecast. We expect maintenance CapEx to be approximately $25 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 and higher interest expense. As Jeremy mentioned earlier, we no longer expect that we will need 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 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. billboard OIBDA to be around $500 million. Second, we expect full-year U.S. transit-adjusted OIBDA to be a loss of $15 to $20 million, and our expectations for other items that impact AFFO remain mostly unchanged. We turn to slide 15 for an update on our balance sheet. Committee liquidity is approximately $550 million, including over $40 million of cash, almost $500 million available via our revolver, and about $15 million available via our accounts receivable securitization facility. As of June 30th, our total net leverage was 5.3 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 was 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 than we completed in 2022, in both quantity and dollar terms. This trend will likely continue in 2024. Lastly, we announced today that our board of directors has declared a 30 cent cash dividend payable on September 29th. Shareholders of record at the close of business on September 1st. Subject to board approval, we expect another 30 cent dividend in the fourth quarter, leading to a total of $1.20 being paid through the year. With that, let me turn the call back to Jeremy.
spk00: 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 ad climate that others have mentioned. National sales are somewhat challenged by the writers' and actors' 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 decline. We're taking many steps to improve our revenue performance within transit, which Matt touched upon earlier. We're particularly hopeful that connecting the New York MTH 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 EBITDA. In fact, as of the second quarter, billboard had grown both revenue and EBITDA 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 our front and the entire billboard 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 of digitization, improving data and insight, mobility, automation, and the outdoor value proposition remain as true today as they ever have been. And with that, operator, let's now open the line for questions.
spk02: At this time, I would like to remind everyone, in order to ask a question, simply press star, then the number one on your telephone keypad. Your first question is from the line of Ben Swinburne with Morgan Stanley. Please go ahead.
spk04: 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 24, but then I think you also mentioned a cumul of free cash flow loss of 50 million sort of beyond 24. I just want to make sure I heard you right and if that's just the sort of MG growing faster than revenue. I just want to make sure I understood the moving pieces there. And then, you know, Jeremy, you made the point, I think, quite clearly, you know, your company now, the EBITDA is all billboard. And so, you know, what are the other options you're thinking about as it relates to transit? You know, obviously you have a contract, but, you know, 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? Thank you.
spk00: Maybe I'll take the second piece first, and then Matt can go back to your first question. I think fundamentally, transit advertising has been you know, part of the world of out-of-home for many decades and, you know, a fast, important and growing piece of the out-of-home market. What we unfortunately have now is we have a number of contracts that were effectively set pre-pandemic. And while, you know, at the time they were written, they were absolutely valid, you know, difficulties in transit, particularly led by, audience, which is for the most part down around 30% in New York and higher than a couple of other of our transit markets. Essentially, what we need to do is look to how we can reset expectations of the transit operators. And those are the discussions that we're having we're having right now with a number of our transit advertising partners and, you know, in particular with the MTA. So it's not actually the business that is, there's nothing wrong with transit advertising. It remains extremely effective. And, you know, remember that the vast, vast majority of our clients buy both, you know, 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, is resetting those transit company expectations.
spk01: And Ben, I'm just going to clarify the numbers from the first part of your question. We'll be cash flow negative 50 from the start of the third quarter into the second quarter. in 23. So now through 2030, the end of the base term, we think we'll burn off that 50 by sometime in 2024. So from there forward, we'll be cash flow neutral.
spk04: I see. That's with the 5% to 10% top line assumption?
spk01: Yes.
spk04: Got it. Thank you guys. Thanks so much.
spk02: Thanks, Ben. Your next question is from the line of Richard Cho with JP Morgan. Please go ahead. Hi.
spk07: I just wanted to follow up a little bit on the MTA. I appreciate that you're discussing the contract with them, but is there something that can be done within the company to kind of right-size the business given the new outlook?
spk01: 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 MTA and other transit renewals as they come up. You know, nothing we can highlight or go into detail now, but I think, you know, there's a series of conversations and efforts, but, you know, nothing to report on success just yet.
spk00: 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 $100 million of OEBDA. And the MTA contract in particular in 2019 was actually working exactly as we had assumed. And we were recouping part of our investment in 2019. 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 to modify is the way 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 right now.
spk07: Great. And then following up on the billboard side, I mean, both the digital and static were 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 national advertising and maybe even some local and regional comments, excluding maybe the entertainment and the Hollywood writer's strike?
spk00: So, you know, what's really the main impact of the actors and writers' strike is, as I mentioned in our prepared remarks, it's really the sort of TV fall launches that have really been pushed back. There's some movement in movies, but at the moment, you know, that's not... a particular concern, but we're obviously keeping an eye on it because depending on how long that, you know, how long this continues, you know, there could be further impact. I think as we look at our business in Q3, we're expecting modest growth in our national billboard business in Q3. We believe our national transit business will be down, you know, reflecting that, the strikes that we just talked about. And our local business will be, you know, up in the likely low single-digit range.
spk06: Great. Thank you.
spk02: Your next question is from the line of Jim Goss with Barrington Research. Please go ahead.
spk06: All right, thanks. In terms of the strike, will your billboard presence be impacted just when – 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? you're facing and the duration of 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?
spk00: Okay, thanks for the question, Jim. Actually, on movies at the moment, as I mentioned, that's actually not an issue. I think movies are likely to be fine in Q3. It's really more TV, actually, where we've been impacted, where typically in September we take good dollars 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 for us right now. In terms of where the media in general is very much skewed towards New York and LA. So they would be the markets where we would notice that impact most.
spk06: Okay. And with regard to the dividend statement declaring the 30 cent now and expectations for another one in the fourth quarter, there's a reasonable interpretation that despite the fact that you're projecting AFFO to be down, and it would imply a lower dividend, that it's a non-cash charge and you want to give confidence that you'll make it through this and hopefully have an opportunity for the next year, even though you'd be paying more than you would be dictated to by your general terms of agreement with EZREIT?
spk01: Yeah, I think based on our forecast, you know, we could end up paying slightly more than we're required to. carry forward from last year. I mean, some of the recalculations are complicated. So we had anticipated sometime in 2023 a need to increase our dividend. We no longer feel that's going to be necessary. We think we're pretty close to our requirement with four quarters of 30 cents each.
spk06: Okay. So basically, you were being somewhat conservative earlier on, and it's great to do that. Yes. And finally, with regard to the write-down, are there any accounting implications 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, aside from the extra $50 million that you think you will be paying in the future for these projects that will also wind up being written down.
spk01: Our plan is to use the same accounting we've been using for the MTA activity from the inception. We've obviously reviewed that with our outside advisors, our experts. We'll continue with that. just to expect that we think we'll continue the impairment in the third and fourth quarter, which is really a continuation of this impairment we're doing now and probably last a little bit into the first part of 2024. All right.
spk06: Thank you very much.
spk02: 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 Cefino with Oppenheimer. Please go ahead.
spk05: Hi, Grace. Thank you very much. I know you talked about movies, TV being a little bit weak, but can you maybe give us kind of an around the world of what you're seeing in each category, maybe the notable strengths, and then I think you've already mentioned the notable weakness, but any other color you can give there would be helpful. Thanks.
spk00: So, yeah, I mean, you know, looking at Q2, we saw strength in legal, travel, alcohol, and entertainment was strong in Q2. I mean, it was up 10%, and in dollar terms, it was actually our largest great category, up over $8 million. um categories that you know were weak for us um in the um in the second quarter um financial um was weak real estate um cannabis actually uh was down um uh insurance and health and medical they were us sort of um uh five weaker uh weaker categories in the second quarter okay thanks and then um
spk05: Just one more, if I could squeeze it in, would be, you know, on the breakdown between static and digital, is there any way you could tell us maybe what the apples to apples was? Let's just say, what did static actually grow? If you consider, you know, some of the billboard conversions to digital and the backing out, maybe some of the billboards that you added, you know, is it directionally, you know, can maybe give us directionally, I mean, I know you may not have the exact answer, but. any color you could kind of give there to see just how the static business is performing net of, you know, call it the conversions, et cetera. Thanks.
spk01: All right. It's Matt. I can give a try. You know, the numbers are very hard to calculate that way since we are converting on a relatively fluid basis. What Jeremy had in his prepared remarks, you know, static is up 1% and very notable because we are taking most of their good players on an annual basis and putting them onto the digital team. So they're performing, you know, their 1% growth on a same store basis would likely look much, not much higher, but notably higher if we kept all those players back and static. But since we're not, it's very hard to get comparable same store calculation.
spk00: I think the other point, just adding on to that, Ian, is that when you have a portfolio of 40,000 billboards, obviously there's a lot of ins and outs, do you know what I mean, all the way through across that. So as I say, I think the way we've just described it probably gives you the best feel for how we believe the static business is performing, like slightly ahead of that 1%. Understood.
spk05: Okay. Thank you very much. Thanks, Ian.
spk02: And at this time, there are no further questions. I will turn the call back to Jeremy for closing remarks.
spk00: Thanks, operator, and thanks, everyone, for joining our call today. I look forward to meeting with many of you at various conferences over the coming months, but for those who I don't, enjoy the rest of summer, and we look forward to presenting our Q3 results to you in November. Thank you again.
spk02: This concludes the out front second quarter 2023 earnings conference call. Thank you for your participation. You may now disconnect.
Disclaimer