OUTFRONT Media Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. OUTFRONT is a REIT providing billboard, transit and sports-marketing advertising across the U.S. and Canada. Results are unaudited and compared with the corresponding 2017 periods.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $414.2M | $392.4M | $1,153.8M | $1,119.2M |
| Operating income | $78.9M | $80.3M | $143.5M | $171.3M |
| Net income | $46.8M | $50.7M | $50.7M | $90.3M |
| Diluted EPS | $0.33 | $0.36 | $0.35 | $0.65 |
| Adjusted OIBDA / margin | $129.3M / 31% | $120.8M / 31% | $335.7M / 29% | $323.0M / 29% |
| FFO / AFFO | $85.2M / $86.4M | $78.2M / $78.2M | $204.6M / $201.7M | $201.8M / $194.8M |
- Revenue mix and growth: Q3 billboard revenue rose 7% to $290.6M; transit and other revenue rose 3% to $123.6M. For the nine months, billboard revenue increased 4% and transit and other increased 2%. Management cited digital-display conversions and higher billboard yield as key drivers; national-account advertising was weaker.
- Cash flow: Nine-month operating cash flow was $137.4M, down from $182.6M. Investing used $71.1M and financing used $56.3M. Cash, cash equivalents and restricted cash totaled $58.1M at period end. The operating cash flow decline chiefly reflected MTA deployment spending and higher receivables, partly offset by timing of MTA percentage-rent payments.
- Debt and liquidity: Net debt was $2,333.5M, versus $2,225.3M at December 31, 2017; weighted average debt cost was 5.0%. Current assets were $430.0M and current liabilities $398.4M, leaving $31.6M working capital. The $100M accounts-receivable facility and $75M repurchase facility were fully drawn at quarter end. The company reported covenant compliance; secured and total leverage ratios were 1.5x and 4.9x, respectively.
- Dividends: $152.9M was paid in the first nine months. The board approved a $0.36-per-share quarterly dividend payable December 31, 2018.
Material changes versus prior year
- Q3 revenue increased 6%, while operating income declined 2% and net income declined 8%. Adjusted OIBDA rose 7%, with margin unchanged at 31%.
- Nine-month revenue increased 3% and Adjusted OIBDA rose 4%, but operating income fell 16% and net income fell 44%. The principal unusual item was a $42.9M goodwill impairment in the Canadian reporting unit, recorded in Q2 after underperformance in static posters and digital displays.
- Interest expense increased to $93.0M for the nine months from $85.9M, reflecting higher rates, a higher average debt balance and MTA-related letter-of-credit fees. SG&A rose 8% for the nine months, mainly on employee-related and strategic-development costs.
- Operating cash flow fell 25%; cash used for investing decreased year over year, primarily because prior-year acquisition spending was higher.
Outlook, commentary and risks
- Management expects 2018 capital expenditures of approximately $75M, excluding MTA deployment costs, and approximately $130M of MTA equipment deployment costs for the full year. It had incurred $58.2M of MTA deployment costs during the first nine months.
- The MTA concession requires deployment of more than 50,000 digital displays. Estimated deployment costs are approximately $800M over the full 15-year term, including approximately $600M in the first eight years. Management expects third-party financing; it warns costs may not be recovered if incremental revenues are insufficient.
- Management expects the MTA agreement’s revenue-share terms to reduce transit franchise expenses in year one versus historical periods, with expenses potentially rising in later years as revenues increase. Fourth quarter is typically the strongest seasonal period and first quarter the weakest; no specific earnings or revenue guidance was provided.
- Management expects adoption of the new lease standard in 2019 to have a significant effect on the balance sheet, including recognition of operating-lease right-of-use assets and liabilities.
- Key risks include advertising-market and economic weakness, competition, renewal and bidding risk for municipal transit contracts, digital deployment execution, substantial debt and variable-rate exposure, and Canadian business performance. A further Canadian goodwill impairment is possible if estimates or assumptions weaken. Litigation was not expected by management to have a material adverse effect; the filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether Canadian revenue and digital-display performance improve relative to forecasts and whether further goodwill impairment is required.
- MTA deployment spending, financing availability, timetable, revenue generation and recovery of deployment costs.
- Operating cash flow and receivables collection trends, given the year-over-year cash flow decline.
- Debt maturities, variable-rate exposure, facility availability and covenant headroom; the AR securitization facilities had no remaining capacity at quarter end.
- Progress against the disclosed 2018 capital-expenditure estimate and the company’s ability to sustain dividends alongside investment and debt obligations.