OUTFRONT Media Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context
OUTFRONT is a REIT operating out-of-home advertising businesses in the U.S. and Canada, including billboard, transit, and sports-marketing inventory. Its reportable segment is U.S. Media; International and Sports Marketing are included in “Other.” The company highlighted digital-display expansion and the new 10-year MTA advertising and communications concession, with an optional five-year extension.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $337.9 | $330.6; up 2% |
| Organic revenue (non-GAAP) | $334.0 | $331.2; up 1% |
| Operating income | $31.7 | $26.0; up 22% |
| Net income | $9.1; diluted EPS $0.06 | $2.5; diluted EPS $0.02 |
| Adjusted OIBDA (non-GAAP) | $81.2; 24% margin | $80.2; 24% margin |
| FFO / AFFO (non-GAAP) | $45.3 / $38.1 | $43.9 / $38.5 |
| Cash from operations | $62.1 | $32.2 |
Billboard revenue rose 1% and transit and other revenue rose 4%. Digital billboard revenue increased to $41.9 from $33.3; digital transit revenue was $10.7 versus $8.4. U.S. Media Adjusted OIBDA declined 4% to $88.9, with margin down to 29% from 30%, despite 1% revenue growth. The company cited higher billboard lease costs and strategic-development SG&A.
At March 31, cash was $52.5, current assets $354.4, and current liabilities $304.7, leaving working capital of $49.7 (versus $76.4 at year-end). Total debt, net, was $2,248.4, up from $2,225.3 at December 31; weighted-average debt cost was 4.9%. The AR facility was drawn $92.0 of its $100.0 capacity, with no borrowing capacity remaining at quarter-end. Total leverage ratio was 4.8x and secured leverage 1.4x; the company reported compliance with covenants. Dividends paid were $51.1; $0.36 per common share was declared for the quarter.
Investing cash outflow was $22.1, including $16.8 of capital expenditures and $4.1 of acquisitions. Financing cash outflow was $35.6. Operating cash flow increased mainly due to timing of MTA percentage-rent payments and higher adjusted net income; it should not be assumed to represent a recurring run rate.
Changes, outlook, risks and unusual items
- Revenue growth included $3.9 of non-organic revenue, including acquisition effects and adoption of the new revenue standard. Adoption added $1.8 of Sports Marketing revenue and corresponding operating and SG&A expenses; management said the consolidated impact was not material.
- Net income improvement reflected higher operating income and a larger income-tax benefit ($6.7 versus $3.7). Interest expense rose to $30.0 from $28.1, principally on higher average debt and MTA-related letter-of-credit fees.
- Management expected 2018 capital expenditures of approximately $75 and MTA equipment deployment costs of approximately $100. MTA deployment is estimated at approximately $800 over the full 15-year term, including approximately $600 in the first eight years; management expects third-party financing. Costs may not be recovered if incremental MTA revenues are insufficient.
- Guaranteed minimum annual payments under transit and other franchise agreements totaled $1,760.8, including $174.2 for 2018. Outstanding letters of credit were approximately $208.1, in addition to surety bonds of $24.5.
- The company noted the usual seasonal pattern of weaker first-quarter advertising, sensitivity to economic and advertising conditions, competitive bidding and renewal risk for municipal contracts, and execution and funding risks around digital deployment. Management also reported softening national-account advertising in several categories.
- Canadian reporting-unit goodwill had only a 2.9% estimated fair-value cushion at year-end. Management said an inability to achieve projected growth and digital development, or a discount rate of 9.0% or higher with other assumptions unchanged, could trigger impairment.
- The filing gives no specific revenue or earnings guidance. Current litigation was not expected by management to have a material adverse effect; previously disclosed risk factors were reported as unchanged. Management described the planned 2018 spending estimates and forward-looking expectations as subject to risks and uncertainty.
Important facts for investors to verify
- Whether digital-display growth and MTA deployment produce sufficient incremental revenue and cash flow to justify the planned investment.
- How the company will fund MTA costs and manage debt, especially with the AR facility nearly fully drawn at quarter-end and substantial contractual and franchise commitments.
- Whether U.S. Media margins recover after the quarterly decline, and whether national-account advertising softness persists.
- Whether Canadian operating projections are achieved, given the narrow goodwill valuation cushion and stated impairment sensitivities.
- The sustainability of cash conversion, AFFO, and the $0.36 quarterly dividend amid capital needs and seasonal cash flows.