OUTFRONT Media Inc. — Q2 2017 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2017, compared with the same 2016 periods. OUTFRONT is a REIT selling out-of-home advertising across the U.S. and Canada, principally through billboards and transit franchises, with additional sports marketing activities.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $396.2M | $385.3M | $726.8M | $733.7M |
| Operating income | $65.0M | $59.0M | $91.0M | $83.2M |
| Net income | $37.1M | $28.5M | $39.6M | $26.2M |
| Diluted EPS | $0.27 | $0.21 | $0.28 | $0.19 |
| Adjusted OIBDA | $122.0M | $123.0M | $202.2M | $211.1M |
| FFO | $79.7M | $79.2M | $123.6M | $127.7M |
| AFFO | $78.1M | $87.0M | $116.6M | $133.2M |
| Operating cash flow | — | — | $79.1M | $104.7M |
Q2 revenue rose 3%, while first-half revenue fell 1%; organic revenue increased 3% in Q2 and 1% for the half. Q2 operating margin was approximately 16.4% versus 15.3%; Adjusted OIBDA margin was approximately 30.8% versus 31.9%. First-half Adjusted OIBDA margin was approximately 27.8% versus 28.8%. Adjusted OIBDA, FFO and AFFO are non-GAAP measures.
Q2 billboard revenue was nearly flat at $274.2M, while transit and other revenue increased 9% to $122.0M. For the first half, billboard revenue declined 3% to $510.2M and transit and other revenue increased 3% to $216.6M. Net income increased in both periods, but Adjusted OIBDA and AFFO declined for the first half.
At June 30, cash was $23.1M, current assets $350.2M and current liabilities $297.4M, leaving working capital of $52.8M. Cash decreased from $65.2M at year-end 2016. Long-term debt, net, was $2,143.6M, with a further $85.0M drawn on the revolving facility; reported total indebtedness was approximately $2.2B. Weighted average debt cost was 4.8%. The company reported covenant compliance, with secured leverage of 1.6x and total leverage of 5.0x.
Material changes and notable items
- U.S. Media Q2 revenue rose 3% to $367.1M and Adjusted OIBDA rose 4% to $128.3M. Other-segment Adjusted OIBDA fell 52% to $4.0M, reflecting weaker performance in Canada and sports marketing.
- First-half operating cash flow fell 24%, to $79.1M, mainly due to working-capital use, including higher receivables and lower payables and accrued expenses. Investing cash outflow was $99.9M, including $42.2M of capital expenditures and $57.8M of acquisition payments.
- On June 13, the company acquired substantially all of All Vision’s Canadian outdoor advertising assets for approximately $94.4M: $50.0M cash and $44.4M in redeemable subsidiary equity interests, subject to adjustments. The preliminary allocation included $44.1M goodwill.
- Q2 restructuring charges were $2.9M; first-half charges were $4.7M, including severance related to the transaction and an internal reorganization. Billboard property lease expense included a $1.5M one-time true-up.
- The credit agreement amendment extended revolving-credit maturity to March 2022 and term-loan maturity to March 2024, increased revolver capacity to $430M, and added a $10M term loan. A $100M accounts-receivable facility was established June 30; it had no borrowings at quarter-end.
Outlook, risks and contingencies
- Management expected 2017 capital expenditures of approximately $70M–$75M, primarily for maintenance, digital displays, LED upgrades and office renovations.
- The board approved a quarterly dividend of $0.36 per share, payable September 29, 2017. First-half cash dividends were $100.4M.
- The MTA contract represented 17% of U.S. Media revenue in Q2. Existing transit-advertising contracts were extended only through September 30, 2017, unless earlier terminated on 30 days’ notice; the new concession bidding process remained relevant.
- Management cited softer national advertising demand, particularly in automotive, telecom/utilities and travel/leisure, alongside yield pressure. Results are also exposed to advertising cycles, seasonality, competition, franchise renewals, regulation, variable interest rates and substantial indebtedness.
- Operating leases and guaranteed minimum payments are significant off-balance-sheet commitments. Letters of credit and surety bonds outstanding totaled approximately $125.1M and were not recorded as liabilities. Management did not expect current litigation to have a material adverse effect; no material risk-factor changes were reported.
- Management stated that the new lease accounting standard, effective for the company after December 15, 2018, is expected to significantly affect the financial statements through recognition of lease assets and liabilities. No specific earnings guidance was provided.
Investor verification priorities
- Track the outcome and economics of the MTA concession process and any contract renewal or transition risk after September 30, 2017.
- Assess whether national-advertising softness and lower yields persist, and whether transit growth and digital conversions offset billboard trends.
- Reconcile operating cash flow and AFFO declines with working-capital movements, capital spending and dividend funding.
- Monitor acquisition integration, final purchase-price allocation and potential redemption or dilution from the Canadian subsidiary equity interests.
- Review debt maturities, variable-rate exposure, leverage headroom, facility usage and the implications of the accounts-receivable financing structure.