OUTFRONT Media Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in millions, except per-share data. OUTFRONT is a REIT that sells out-of-home advertising space, primarily on billboards and transit systems in the U.S. and Canada.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $385.3 | $384.7 | $733.7 | $728.6 |
| Operating income | $59.0 | $54.6 | $83.2 | $81.2 |
| Net income | $28.5 | $22.2 | $26.2 | $23.3 |
| Diluted EPS | $0.21 | $0.16 | $0.19 | $0.17 |
| Adjusted OIBDA | $123.0 | $119.1 | $211.1 | $206.1 |
| FFO / AFFO | $79.2 / $81.0 | $71.9 / $71.4 | $127.7 / $130.0 | $121.8 / $120.9 |
- Q2 revenue was essentially flat; organic revenue rose 4%. For the first half, reported revenue increased 1% and organic revenue rose 4%.
- Adjusted OIBDA margin was approximately 31.9% in Q2 versus 31.0% a year earlier, and 28.8% for the first half versus 28.3%. U.S. Media’s Adjusted OIBDA margin was 35% in Q2 and 33% for the first half, unchanged year over year.
- Q2 net income increased 28%; first-half net income increased 12%. Management attributed FFO and AFFO growth mainly to higher net income, with lower maintenance capital expenditures also contributing to first-half AFFO growth.
- Operating cash flow was $104.7 for the first half, up from $74.1. Capital expenditures were $30.0; investing cash flow was a $3.4 outflow after $87.9 of disposition proceeds and $61.3 of acquisitions. Financing cash flow was a $142.1 outflow, including $94.7 of dividends and $40.0 of term-loan repayments. Cash declined to $61.0 from $101.6 at year-end.
- At June 30, cash was $61.0, current assets $369.2, and current liabilities $225.4. Long-term debt, net, was $2,184.3; total indebtedness was approximately $2.2 billion. The weighted average debt cost was 4.7%; no revolver borrowings were outstanding on the quarter-end date.
Changes, transactions, and management commentary
- U.S. Media revenue grew 6% in Q2 and 4% in the first half; organic growth was 5% and 4%, respectively. Growth reflected stronger local advertising, higher billboard yield, digital conversions, and transit demand.
- Billboard revenue overall fell 2% in Q2, partly because of the Latin American sale, weaker Canada performance, and currency effects. Transit and other revenue rose 7% in Q2.
- On April 1, the company sold its Latin American outdoor advertising business for $82.0 in cash plus working capital, subject to post-closing adjustments. The sale generated $87.9 of net disposition proceeds in first-half cash flows and a $1.3 loss on assets held for sale. The transaction also resulted in recognition of $99.9 of foreign-currency translation losses in other comprehensive income; this materially boosted reported comprehensive income but was not operating income.
- The company completed several acquisitions for approximately $61.3 during the first half and changed its segment reporting effective April 1, 2016. Prior-period segment information was recast.
- The board approved a $0.34-per-share quarterly dividend payable September 30, 2016. Dividends declared were $0.34 per share in Q2 and $0.68 for the first half, versus $0.74 for the first half of 2015.
Outlook, risks, and contingencies
- No revenue or earnings forecast was provided. Management expected 2016 capital expenditures of approximately $65–$70, primarily for billboard maintenance, digital display growth, LED upgrades, and office renovations.
- A major near-term uncertainty is the New York MTA transit concession process. Existing subway, bus, and commuter-rail arrangements had expiration or termination provisions; OUTFRONT submitted a proposal for the new concessions, with an MTA decision expected in Q4 2016. The MTA contract accounted for 17% of U.S. Media revenue in Q2 and 18% for the first half.
- Advertising demand is exposed to economic and seasonal fluctuations and competition from other media. The company also cites dependence on municipal contract renewals, digital-display execution, substantial debt, variable interest rates, foreign operations and currency, REIT qualification and distribution requirements, regulation, and acquisition risks.
- The $425.0 revolving facility matures in 2019 and had no borrowings at June 30; approximately $31.2 of letters of credit were issued against it. Separate letters of credit and surety bonds totaled approximately $113.4 and were not recorded as balance-sheet liabilities. The company reported compliance with debt covenants; secured and total leverage ratios were 1.4x and 4.9x, respectively.
- Management said ongoing litigation was not expected to have a material adverse effect. It reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Key facts for investors to verify
- Progress and final outcome of the MTA bidding process, including renewal terms and any potential revenue impact.
- Whether U.S. Media organic growth, digital billboard conversions, and yield improvements continue to offset softness in Canada and the effects of the Latin American exit.
- Cash generation after dividends, acquisitions, and planned capital spending; confirm how the company funds its $0.34 quarterly dividend.
- Debt maturity and interest-rate exposure: the $710.0 variable-rate term loan carried a 3.0% rate; a 1/8 percentage-point rate change would affect annualized interest expense by about $0.9.
- Interpretation of reported growth and comprehensive income: distinguish organic performance from acquisitions, dispositions, currency effects, and the $99.9 translation adjustment; FFO, AFFO, and Adjusted OIBDA are non-GAAP measures.