OUTFRONT Media Inc. quarterly report, Q2 FY2018

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OUTFRONT Media Inc. — Q2 2018 Form 10-Q

Reporting period: Three and six months ended June 30, 2018. OUTFRONT is a REIT providing billboard, transit and sports-marketing advertising across the U.S. and Canada.

Financial performance

  • Q2 revenue: $401.7 million, up 1% year over year. Billboard revenue rose 2% to $280.4 million; transit and other revenue declined 1% to $121.3 million. Organic revenue was essentially flat at $397.0 million.
  • First-half revenue: $739.6 million, up 2%; organic revenue was $731.0 million, also essentially flat year over year.
  • Profit: Q2 operating income was $32.9 million versus $65.0 million; net loss was $5.2 million versus net income of $37.1 million. First-half operating income was $64.6 million versus $91.0 million, and net income was $3.9 million versus $39.6 million. Results included a $42.9 million non-cash Canadian goodwill impairment.
  • Adjusted OIBDA: Q2 was $125.2 million, up 3%, with a 31% margin, unchanged year over year. First-half Adjusted OIBDA was $206.4 million, up 2%, with a 28% margin, unchanged. These are non-GAAP measures.
  • REIT cash earnings: Q2 FFO was $74.1 million, down 7%, and AFFO was $77.2 million, down 1%. First-half FFO was $119.4 million, down 3%, and AFFO was $115.3 million, down 1%.
  • Cash flow and investment: First-half operating cash flow was $68.2 million, down from $79.1 million, including $37.9 million of MTA deployment costs. Capital expenditures were $46.4 million; investing cash use was $53.4 million. Cash declined $6.6 million to $41.7 million.
  • Debt and liquidity: Debt, net, totaled $2.32 billion, up from $2.23 billion at year-end; weighted average debt cost was 5.0%. The company reported secured leverage of 1.5x and total leverage of 4.9x, and compliance with covenants. Working capital was $84.1 million.
  • Dividend: $0.36 per share declared for Q2; the board approved another $0.36 quarterly dividend in July, payable September 28, 2018.

Changes and operating developments

  • Digital billboard revenue grew, supporting billboard growth; digital billboards represented $95.2 million of first-half billboard revenue. Management cited digital conversions and improved billboard yield as growth drivers.
  • U.S. Media revenue was nearly flat in Q2; declining national-account advertising, particularly in food and beverages, movies and entertainment, weighed on transit and other revenue. The segment’s Q2 Adjusted OIBDA rose 2% to $131.2 million; first-half Adjusted OIBDA was nearly unchanged at $220.1 million.
  • Canada’s reporting unit underperformed revenue expectations, including weaker static poster assets and digital displays. OUTFRONT recorded a $42.9 million goodwill impairment; remaining Canadian goodwill was $21.7 million.
  • OUTFRONT adopted new revenue-recognition guidance in 2018; management said the consolidated impact was not material. It expects to adopt the new lease standard in 2019, which will significantly increase reported lease assets and liabilities.

Outlook, commitments and risks

  • Management estimated 2018 capital expenditures of approximately $75 million, excluding MTA equipment deployment costs, and MTA deployment costs of approximately $130 million for 2018.
  • The 10-year MTA concession, with an optional five-year extension, requires deployment of more than 50,000 digital displays. Estimated deployment costs are approximately $800 million over 15 years, including $600 million in the first eight years. OUTFRONT expects third-party financing; it warned that costs may not be recovered if incremental revenues are insufficient.
  • Transit and education agreements include guaranteed minimum payments totaling $1.61 billion across the disclosed schedule, including $183.9 million for 2019. Outstanding letters of credit were approximately $195.9 million, with additional surety bonds of $25.1 million.
  • No specific revenue or earnings guidance was provided. Key stated risks include advertising-market weakness, competition, seasonal fluctuations, municipal contract renewals, digital deployment execution, substantial debt and variable-rate exposure, Canadian performance, and REIT qualification and distribution requirements.
  • Management said current litigation was not expected to have a material adverse effect; the filing reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.

Important facts for investors to verify

  • Whether digital billboard and transit growth can offset weakness in national-account advertising and static Canadian assets.
  • Progress, financing, cost recovery and revenue-sharing economics of the MTA deployment, including the stated 2018 deployment estimate.
  • Canadian reporting-unit performance and valuation assumptions, given the recent impairment and limited prior-year fair-value cushion.
  • Debt, interest expense, covenant headroom and capacity to fund investment and dividends while operating cash flow is affected by deployment costs.
  • Whether the company’s non-GAAP FFO, AFFO and Adjusted OIBDA trends translate into sustainable cash available for distributions.