OUTFRONT Media Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. OUTFRONT is a REIT operating out-of-home advertising businesses in the U.S. and Canada, primarily billboards and transit advertising, with sports marketing and other activities.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $392.4m | $382.8m | $1,119.2m | $1,116.5m |
| Operating income | $80.3m | $63.5m | $171.3m | $146.7m |
| Net income | $50.7m | $38.1m | $90.3m | $64.3m |
| Diluted EPS | $0.36 | $0.28 | $0.65 | $0.46 |
| Adjusted OIBDA | $120.8m | $120.7m | $323.0m | $331.8m |
| FFO / AFFO | $78.2m / $78.2m | $81.9m / $83.7m | $201.8m / $194.8m | $209.6m / $216.9m |
Q3 revenue increased 3% (organic growth 1%); nine-month revenue was essentially flat, with organic growth of 1%. Q3 operating income rose 26% and net income rose 33%, while Adjusted OIBDA was flat. The operating-income comparison benefited from a $14.1m net disposition gain, including a $13.2m non-cash gain on a billboard asset swap, and lower depreciation and amortization. Nine-month Adjusted OIBDA declined 3%; FFO fell 4% and AFFO fell 10%.
Q3 Adjusted OIBDA margin was approximately 30.8%, versus 31.5% a year earlier; nine-month margin was approximately 28.9%, versus 29.7%. U.S. Media Q3 revenue grew 2%, but segment Adjusted OIBDA was essentially unchanged at $129.2m. Other segment Adjusted OIBDA was $1.9m in Q3 and $4.8m year to date, down from $12.8m in the prior-year nine-month period.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $182.6m, down from $200.7m. Capital expenditures were $58.6m and acquisitions used $62.8m; investing cash outflow totaled $119.8m. Dividends paid were $151.0m.
- Cash was $42.0m at September 30, 2017, versus $65.2m at December 31, 2016. Working capital was $67.0m, down from $126.7m; the company attributed the decline mainly to short-term borrowing used for the All Vision transaction and timing of MTA franchise payments.
- Total debt, net of issuance costs, was $2,217.7m, including $73.0m under a new accounts-receivable facility; long-term debt was $2,144.7m. Weighted-average debt cost was 4.8%. The term loan rate was 3.5%, and the AR facility rate was approximately 2.2%.
- Credit-agreement leverage ratios were 1.4x secured and 4.8x total, against limits of 4.0x and 6.0x, respectively. The company reported compliance with debt covenants. The $430m revolving credit facility had no borrowings outstanding.
Material changes, outlook and risks
- Billboard revenue was pressured by lower average revenue per display, particularly from national advertising, lost/new inventory effects and hurricanes in Florida and Texas. Transit revenue grew, primarily from franchise wins, but yield also softened. Management reported weaker national-account advertising, including automotive, financial services, telecom/utilities and travel/leisure.
- In June, the company acquired All Vision’s Canadian outdoor advertising assets for approximately $94.4m, funded with $50m cash and redeemable subsidiary equity interests valued at approximately $44.4m. The purchase-price allocation remained preliminary.
- The MTA board awarded OUTFRONT a 10-year transit advertising and communications concession, with a five-year extension option, subject to execution of a definitive agreement. Beginning in 2018, deployment is expected to include more than 50,000 digital displays. Estimated deployment costs are approximately $800m over 15 years, including $600m in the first eight years; costs may not be fully recovered if incremental revenues are insufficient. The company expects third-party financing and higher MTA-related letters of credit.
- Management estimated 2017 capital expenditures of approximately $75m, excluding MTA deployment costs. No specific earnings or revenue guidance was provided in the filing.
- Other notable items include $6.3m of nine-month restructuring charges, primarily associated with the All Vision transaction and sales-management reorganization, and approximately $129.4m of off-balance-sheet letters of credit and surety bonds. Management did not expect current litigation to materially affect results or financial position.
- Key risks include advertising-market weakness, competition, renewals and bidding for municipal contracts, execution and cost recovery of the MTA digital rollout, substantial indebtedness and variable-rate exposure, and maintaining REIT qualification. Management said the new lease standard, effective for the company in 2019, is expected to significantly affect its balance sheet through recognition of operating-lease assets and liabilities.
Important facts for investors to verify
- Whether the definitive MTA concession agreement was executed on terms consistent with the board award, and the financing, deployment schedule and expected economics of the digital-display commitment.
- Whether national advertising demand and billboard yields recover, including effects of hurricanes and local versus national sales trends.
- How much of reported operating-income growth reflects recurring operations versus the non-cash asset-swap gain and reduced depreciation and amortization; also monitor Adjusted OIBDA, FFO and AFFO trends.
- Debt, covenant headroom, cash generation and dividend coverage, especially as capital spending and MTA-related commitments rise.
- Final purchase accounting and any earnout or redemption obligations associated with the All Vision transaction.
Adjusted OIBDA, FFO and AFFO are non-GAAP measures; the filing cautions that they should not be viewed as substitutes for GAAP results or as necessarily available cash.