OUTFRONT Media Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. OUTFRONT sells out-of-home advertising space across the U.S., Canada and Latin America through U.S. and International segments. It began operating in a manner intended to qualify as a REIT in July 2014. Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $343.9 | $287.9 | +19%; +21% in constant dollars |
| Organic revenue | $297.0 | $283.2 | +5% |
| Operating income | $26.6 | $26.7 | Nearly unchanged |
| Net income | $1.1 | $8.4 | −87% |
| Diluted EPS | $0.01 | $0.09 | Down |
| Adjusted OIBDA | $87.0 | $75.6 | +15% |
| FFO / AFFO | $49.9 / $49.5 | $50.3 / $38.2 | FFO −1%; AFFO +30% |
| Operating cash flow | $5.8 | $7.8 | −26% |
- Revenue growth was primarily acquisition-driven: the Van Wagner acquisition contributed $46.6 of Q1 2015 revenue. Organic revenue rose 5%; billboard organic revenue grew 2% and transit/other organic revenue grew 13%.
- U.S. revenue was $313.9, up 23%, and U.S. Adjusted OIBDA was $94.4, up 18%; its margin declined to 30% from 31%. International revenue was $30.0, down 9% reported but up 3% in constant dollars; Adjusted OIBDA fell to $0.1 from $1.1.
- Operating expenses increased 22% to $198.8 and SG&A rose 22% to $61.7. Higher lease costs, the acquisition, standalone-company costs and strategic business-development expenses contributed. Net interest expense more than doubled to $27.8, while amortization increased 27% to $27.8.
- Operating margin was approximately 7.7% versus 9.3%; net margin was approximately 0.3% versus 2.9%. Adjusted OIBDA margin was approximately 25.3% versus 26.3%.
- Reported FFO was nearly flat, while REIT-comparable FFO increased 4% to $50.4 and REIT-comparable AFFO increased 14% to $49.5. These are non-GAAP measures; the company cautions they should not be viewed as substitutes for GAAP results or cash available for discretionary use.
Financial position, cash flow and debt
- At March 31, cash was $56.0, current assets $425.9 and current liabilities $249.3, for working capital of $176.6. Cash increased from $28.5 at year-end 2014.
- Total assets were $4,057.2; total liabilities were $2,669.2; stockholders’ equity was $1,388.0.
- Operating cash flow of $5.8 was below capital expenditures of $13.1; investing cash outflow was $22.3, including $9.9 for tuck-in acquisitions. Financing provided $45.3, including $103.8 of new note proceeds; the company paid $54.9 in dividends during the quarter. Cash increased by $27.5 overall.
- Long-term debt was $2,301.7, up from $2,198.3 at year-end; weighted-average debt cost was 4.7%. The company issued $100 of additional 5.625% notes due 2024 and used part of the proceeds to repay revolving borrowings. No revolver borrowings remained at quarter-end.
- The revolving facility is $425, with $30.5 of letters of credit issued against it. Covenant leverage ratios, pro forma for the acquisition, were 1.6x net secured and 5.0x total, against limits of 4.0x and 6.0x, respectively. The company reported approximately $113.2 of outstanding letters of credit and surety bonds, not recorded as balance-sheet liabilities.
Changes, outlook and risks
- Compared with Q1 2014, revenue and Adjusted OIBDA increased, but operating income was flat and GAAP net income declined sharply, principally due to higher interest and SG&A expense. The acquisition materially affects comparability; Q1 2015 included acquisition revenue, while Q1 2014 preceded it.
- Management described Q1 as seasonally the weakest quarter, with advertising revenue and profits typically highest in Q4. It expected approximately $70 of full-year 2015 capital expenditures, primarily for digital billboards, billboard improvements and office renovations. No specific revenue or earnings guidance was provided.
- Digital billboard conversions are a stated organic-growth priority. Management said digital displays generate approximately three to four times the average revenue per display of traditional billboards.
- The company lost the New York City phone kiosk contract and ceased operations during Q1; those operations generated $1.6 of Q1 2015 revenue. MTA transit contracts representing 55% of U.S. transit and other revenue (18% of U.S. revenue) were scheduled to expire or be terminable in 2015; an RFP was expected midyear.
- Key exposures include advertising-market and seasonal fluctuations, competition, municipal contract renewals, substantial indebtedness and covenant restrictions, variable interest rates, foreign currency movements, REIT qualification and distribution requirements, and acquisition execution. International revenue was affected by currency translation.
- Management said ongoing litigation was not expected to have a material adverse effect. Previously disclosed risk factors were reported as having no material changes. A $0.6 restructuring charge was recorded in Q1; $2.7 of restructuring reserves remained at quarter-end.
- The company revised the Q1 2014 cash-flow presentation for a $7.5 classification of non-cash property and equipment purchases between operating and investing activities, stating the prior misclassification was not material and did not affect earnings or balance sheets.
Investor verification points
- Assess how much revenue and profit growth is sustainable organically versus attributable to the Van Wagner acquisition, and monitor acquisition-related costs and purchase-price allocation revisions.
- Track renewal or replacement terms for MTA contracts, the impact of the lost kiosk business, and the associated revenue and margin exposure.
- Review debt-service capacity and leverage, including the 5.0x total leverage ratio, interest expense, covenant headroom and the availability of revolving liquidity after letters of credit.
- Reconcile reported cash generation with capital spending, dividends and the company’s non-GAAP AFFO/FFO measures; confirm the full-year capital-spending outlook.
- Monitor organic billboard yield, digital-display investment returns, International currency impacts, REIT qualification and distribution requirements, and any material developments in litigation or contingencies.