Outfront Media - Q3 2024

Transcript

Operator (participant)

Hello everyone, and welcome to Outfront Media's third quarter 2024 earnings call. My name's Lydia, and I'll be your operator today. After the prepared remarks, there'll be an opportunity for you to ask questions. If you'd like to do so, you can ask a question by pressing star followed by one on your telephone keypad. I'll now hand you over to Stephan Bisson, Vice President of Investor Relations, to begin. Please go ahead.

Stephan Bisson (VP of Investor Relations)

Good morning, and thank you for joining our 2024 third quarter earnings call. With me on the call today are Jeremy Male, Chairman and Chief Executive Officer, and Matthew Siegel, Executive Vice President and Chief Financial Officer. After a discussion of our financial results, we'll open the lines for a question-and-answer session. Our comments today will refer to the earnings release and a slide presentation that you can find on the Investor Relations section of our website, outfront.com.

After today's call has concluded, a replay will be available there as well. This conference call may include forward-looking statements. Relevant factors that could cause actual results to differ materially from these forward-looking statements are listed in our earnings materials and in our SEC filings, including our 2023 Form 10-K and our September 30th, 2024 Form 10-Q, which will be filed later today.

We will refer to certain non-GAAP financial measures on this call. Any references to OIBDA made today will be on an adjusted basis. Reconciliations of OIBDA and other non-GAAP financial measures are in the appendix of the slide presentation, the earnings release, and on our website, which also includes presentations with prior period reconciliations. Also, please note that given the June sale of our Canadian business, our consolidated third quarter results do not include any Canada results compared to the comparable prior year period.

Detailed historical financial results of the divested Canadian business can be found on Slide 25 of our slide presentation, and detailed historical U.S. Media financial results can be found on Slide 24. Given the sale of our Canadian business, our remarks today will focus primarily on the results of our U.S. Media segment. Let me now turn the call over to Jeremy.

Jeremy Male (Chairman and CEO)

Thank you, Stephan, and thanks to everyone for joining us on our call this morning. It's a pleasure to report our third quarter results today, our first period as a fully domestic company. As Stephan just mentioned, and similar to last quarter, our remarks today will focus almost entirely on our U.S. Media segment. As you can see on slide three, which summarizes our headline results, our U.S. business grew revenues over 5%, driven by an acceleration in our billboard growth and high single-digit growth in transit. U.S. Media adjusted OIBDA grew just over 11%, driven by the revenue growth I just described, combined with U.S. Media expense growth of just 3%. Together, U.S. Media and corporate adjusted OIBDA was up 6%.

Consolidated AFFO grew nearly 7% to $81 million and puts us well on our way to achieving the high end of the growth target we laid out earlier this year. Our AFFO growth is impressive given that we are comparing against the seasonally strong quarter from last year that included our since-divested Canadian business. On Slide 4, you can see our U.S. Media revenues in more detail. Billboard revenues were up 4.8%. Our strongest markets continue to be those that are more locally skewed, such as those in New Jersey, Texas, and Michigan. Every region was up except the West, which improved sequentially but remained flat-ish due to some weakness in Los Angeles. Transit revenue was up 7.3% versus the prior year, driven by growth in all markets, including the New York MTA.

As has been the case all year, our improved transit revenues were the result of solid performances from both our local and national teams. The breakdown of local and national revenues in our U.S. Media business can be seen on slide five. Local remained the primary driver of our growth, up almost 7%. National revenues improved from Q2 levels and were up a little over 3%. On a consolidated basis, our best-performing categories in the third quarter were retail, tech, utilities, telecom, legal, and government political. On the weaker side were also health, medical, alcohol, and education. Slide six illustrates our solid U.S. Media billboard yield growth, up almost 7% year-over-year, reaching just under $3,000. The drivers of this yield growth remain our digital conversions, rates, occupancy, and higher automated transaction revenue. Slide seven highlights our strong U.S.

Media digital performance, with revenue growing 10% in the quarter, representing over 32% of our total revenues, up from 31% last year. U.S. digital billboard was up over 11%, while transit was up just over 8%, again driven predominantly by the MTA. Automated revenues comprised nearly 17% of our total digital revenues in the quarter. About 7% of our digital transit revenue came from automated channels, up from just under 2% last year, reinforcing our belief that the MTA's digital network is well aligned for automated selling. With that, let me now hand it over to Matt to review the rest of the financials.

Matt Siegel (EVP and CFO)

Thanks, Jeremy, and good morning, everyone. As with Jeremy's remarks, most of my comments will focus on our U.S. Media segment, as these are the primary operations going forward. For a deeper dive into our financial statements, please turn to slide eight for a more detailed look at our U.S. Media expenses. Total U.S. Media expenses were up just under $10 million, or just over 3% year-over-year. U.S. Media billboard lease expense was up 1% versus last year. Small increases on a portion of our inventory on fixed rates were partially offset by lower revenues on a portion of our inventory operated on leases with revenue share arrangements primarily located in New York and Los Angeles. U.S.

Media transit franchise expense was up 2% versus the prior year, principally due to higher MAG payments to the MTA and higher revenues on contracts operated under revenue shares, partially offset by the non-renewal of a loss-making contract and small benefits from amendments to existing transit agreements. U.S. Media posting, maintenance, and other expenses were up about 10% versus the prior year, primarily due to higher compensation-related expenses and an increase in business activity driving higher posting and rotation costs. U.S. Media SG&A expense grew less than 3%, or just over $2 million during the quarter, due to higher compensation-related expenses, partially offset by lower professional fees and smaller provision for doubtful accounts. Slide 9 provides additional detail on the sources of U.S. Media OIBDA. Total U.S. Media OIBDA was up 11% to just over $133 million. U.S.

Billboard OIBDA was up 8% to $136 million, which represents a margin of 37.8%, up 110 basis points year-over-year. Transit OIBDA improved by about $3 million to a loss of just under $3 million. The improvement was primarily due to the better revenues Jeremy described earlier in the call. On Slide 10, you can see our combined U.S. Media and corporate OIBDA, which was up about 6% to approximately $117 million. Q3 corporate expense was up $6.7 million. The majority was due to consulting fees and the impact of market fluctuations on an unfunded equity-linked retirement plan. Turning to capital expenditures on Slide 11, Q3 U.S. Media CapEx spend was $17.6 million, including $5.5 million of maintenance spend. Growth CapEx was up slightly, while maintenance CapEx was down about $2 million.

For the full year, we believe we will spend approximately $85 million of total CapEx towards the higher end of our prior range, including some spent complete repairs related to Hurricane Milton. We ended the quarter with a little more than 1,900 digital billboards, up 17 from the end of the second quarter and representing under 5% of our total billboard inventory. In transit, we added nearly 1,400 digital displays in the U.S. in the third quarter. As has been the case thus far this year, the installations were mostly small-format screens on subway and train cars in the New York MTA, and we are happy to confirm that we have substantially completed our initial deployment commitment.

While speaking of the New York MTA, hopefully you noticed that we did not have an impairment charge this quarter, as we currently expect net positive cash flows through the end of the amended term of the MTA agreement. As such, we would not expect to incur additional impairment charges going forward on our MTA equipment deployment cost spending. Now, turning to consolidated AFFO on Slide 12, you can see the bridge on our Q3 AFFO of nearly $81 million.

The $5 million year-over-year increase was due to higher U.S. Media OIBDA, lower interest expense, lower U.S. Media maintenance CapEx, and lower other maintenance CapEx, partially offset by lower other OIBDA, principally related to the Canada sale and corporate expense. For 2024, we expect that reported consolidated AFFO will be between $295 million and $300 million. Please turn to slide 13 for an update on our balance sheet.

Committed liquidity is over $600 million, including around $30 million of cash, almost $500 million available via our revolver, and $110 million available under our accounts receivable securitization facility. As of September 30th, our total net leverage was 5.0x, down from 5.4x year-end of 2023. We expect to continue to de-lever within our 4x-5x target range through adjusted OIBDA growth. Turning to our dividend, we announced today that our board of directors approved a $0.75 per-share special dividend, totaling about $125 million, payable on December 31st to shareholders of record at the close of business on November 15th. About $50 million, or $0.30 per share, will be paid in cash, the same per-share amount as the three common dividends paid earlier this year, and the remaining $0.45 per share, or about $75 million, will be paid in shares of our common stock.

Stockholders will have the option to elect to receive their special dividend in all cash or all stock. However, if the aggregate amount of stockholder cash selections exceeds the $49.8 million cash limit, then the payment of such cash selections will be made on a pro-rata basis to shareholders who made the cash selection, with the balance paid in shares of common stock. Please refer to our SEC filing for further information on the special dividend election process. The special dividend represents the projected excess remaining balance of 100% of the company's 2024 distributable REIT income beyond the cash dividends paid earlier this year. It has been sized to maximize the tax savings afforded to us by the REIT structure, as well as retain the de-leveraging effect of the Canada sale completed in June.

To offset the small dilutive impact of the common stock portion of the special dividend, our board of directors also approved a reverse stock split to return our aggregate share count to pre-stock dividend levels, which we expect to complete in January of 2025. There were no large or notable acquisitions made during the quarter. Looking at our current acquisition pipeline, we expect to complete about a total of $25 million of acquisitions this year. Before I pass the call back to Jeremy, I'll take a moment to explain some accounting revisions in our documents. In connection with finalizing our results for the third quarter, we identified an error related to the treatment of non-controlling interest on our balance sheet involving a few of our historical consolidated joint ventures.

As noted in our earnings release, we concluded that the error was not material to our previously issued financial statements but would require revisions to our current and comparative periods with respect to certain equity line items on our balance sheet and our consolidated statements of equity. There was no impact on our total assets and liabilities, income statement, statement of cash flows, OIBDA, or AFFO related to this matter.

As an administrative matter, we also decided to voluntarily revise our previously issued financial information to reflect the immaterial out-of-period adjustment related to variable billboard property lease costs that was already recorded and disclosed in the first quarter of 2023. Please refer to our SEC filings for further information on the revisions. In closing, it was a good quarter, and we look forward to running through the tape to the end of the year. With that, let me turn the call back to Jeremy.

Jeremy Male (Chairman and CEO)

Thanks very much, Matt. So before we jump into revenue guidance for the fourth quarter, I want to mention a couple of recent developments which will impact comparability for the prior year, particularly as it relates to our billboard business. First, as many of you may have seen last month, we recently exited a billboard contract with the New York MTA, creating a revenue headwind for Q4.

Importantly, and as implied by our full-year AFFO guidance, we expect a de minimis impact to our OIBDA and AFFO this year. For 2025, it will continue to be a revenue headwind, but it will also be very much margin enhancing. Secondly, the storms in the southeast will also present a small headwind as we proactively removed advertising copy for safety reasons, and it took some time to replace given some of the damage in the area.

We're immensely proud of the team in the region who responded to storms in such a safe and expeditious manner. So with that said, looking ahead to the fourth quarter, and based on what we are seeing in the business as of today, we estimate that reported Q4 U.S. Media revenue growth will be around 3%, with billboard in the low single digits and transit, again, growing high single digits led by the New York MTA.

Before turning it over to Q&A, I wanted to speak a little bit more about the billboard contract in New York that we exited, as it's illustrative of our broader strategy with regards to how we approach contracts and partnerships with any counterparty, municipal or private, or any property type, both billboard and transit. This particular contract exit reflects our focus on improving margins and the economic returns associated with these partnerships.

When bidding on new or legacy contracts, particularly those with revenue shares and minimum annual guarantees, we strive to submit proposals that reflect the value brought to such a partnership by Outfront, requiring an attractive return to the company and its shareholders. So with that, operator, let's now open the line up for any questions.

Operator (participant)

Thank you, Jeremy. Please press star followed by the number one if you'd like to ask a question, and ensure your device is unmuted locally when it's your turn to speak. Our first question today comes from David Karnovsky with J.P. Morgan. Please go ahead. Your line is open.

Cameron McVeigh (VP and Equity Research Analyst)

Hey, thank you. Jeremy, just following up on the Q4 guide, I don't know if you can size the impact of the MTA versus the storms you called out in the southeast, and then I think the company that had won the MTA contract or bid for the MTA contract had flagged some strategic benefit as a result of that. Was there any consideration on that front from your side? Just would like to hear more on that.

Jeremy Male (Chairman and CEO)

Yeah, thanks, Dave, for the question. So as to sort of scale, around about a point and a half of growth in that sort of range. And as I say, then there's a small piece for the storms that we mentioned. Look, with regards to strategic benefit, every company has to make their own decision when they bid these contracts. I wouldn't want to comment on competitors' bidding strategy. But what I can say is that from our point of view, on the contract, we bid it on the basis that would work for us. And that's kind of all you can say on these situations.

Cameron McVeigh (VP and Equity Research Analyst)

Okay. And then just on the property lease expense down, we would have thought maybe this would have firmed up a bit with a better result in national. So I'm curious if you could walk through national by market, what you're seeing in places like LA and New York relative to the other regions? And you mentioned the West, Flattish. I don't know if you can kind of walk through that and what you're seeing with the media vertical? Thanks.

Jeremy Male (Chairman and CEO)

Yeah, sorry, Matt. You go.

Matt Siegel (EVP and CFO)

I'm sorry. Matt, as Jeremy mentioned in his prepared remarks, we're still seeing a little bit of weakness in LA and a little bit in New York. National is not back to where we'd like it. Still stronger right now in transit. So our billboard lease expense, not up as much as we've said in past years. It's flipped around. When New York and LA overperform their peers, you see a little higher lease expense. We're seeing the opposite throughout most of this year.

Cameron McVeigh (VP and Equity Research Analyst)

Thank you.

Operator (participant)

Our next question comes from Cameron McVeigh with Morgan Stanley. Please go ahead.

Cameron McVeigh (VP and Equity Research Analyst)

Hi, thanks. Just maybe an update on the MTA integration of some of the programmatic ad tech capabilities down there, how the timing's shaping up and potential impact to transit results going forward?

Jeremy Male (Chairman and CEO)

So thanks for the question, Cameron. You heard the call out there that 7% of the revenues generated in Q3 on the MTA came through automated channels. Basically, we've now hooked up our Liveboards, which are all of the screens that you see on platforms. We've also hooked up the Urban Panels that are the panels that you see above the subway entrances. What we haven't yet done is hook up on the Mobile Panels, which are on train, on the subway, and also Metro-North and Long Island Rail Road. So we'll get that benefit as we go down the track, and that's going to be over the coming months.

We're also in the process of hooking up our assets in Boston and D.C. and San Francisco. So we'll get a bit of benefit also there in 2025. We've been growing transit very nicely this year. It was good for Matt to be able to talk about the MTA in terms of the whole sort of being net cash positive as we go forward, so that's a great milestone for the business, and we are excited, I think, by the growth opportunity that the transit business will give us as we go through 2025.

Cameron McVeigh (VP and Equity Research Analyst)

Got it. Thank you. And then just secondly, are you able to size the political ad spend and impact, maybe how that had trended over for Q? Thanks.

Matt Siegel (EVP and CFO)

I can take that. For the year in 2024, we got about $15 million of political. I can compare that to 2020 when we had about 10, so a little more effort, a little more involvement of our government affairs team, I think, led to a big increase. About half of that amount is in the fourth quarter, obviously primarily October.

Operator (participant)

Our next question comes from Lance Vitanza with TD Cowen. Please go ahead.

Lance Vitanza (Managing Director and Senior Equity Research Analyst)

Thanks. Thanks for taking the question. I wonder if you could talk in a little bit more detail about the increased spend at corporate, and I'm just trying to get a sense for how much of that can we think of as being one-time or non-recurring, and the higher professional fees, was that just for the Canada sale? That's easily dismissed if that's the case, but the management consulting project and higher comp sound a little bit more nebulous and/or recurring, and then particularly, I'm not clear on exactly what happened with the benefit plan, I think you mentioned, that is unfunded but yet required some incremental expense as well, so I appreciate your help there.

Matt Siegel (EVP and CFO)

Oh, sure. It's Matt again. I'll break it down. The benefit plan is an unfunded deferred comp plan, I think, tied to the S&P 500 or another equity index. So basically, when stock markets go up in a quarter, it's a higher expense. When they go down, it's a good thing. So almost all in the line item is relatively small, so it sticks out. So there's always going to be some volatility from that.

And we just try to make people aware of up or down or order of magnitude. The professional fees in corporate is a nationally recognized management consulting firm we've been working with most of the year, helping us really look at our assets and generating more revenue and more OIBDA off the assets that we have. We think the investment this year will add some benefit this year, but a lot more in the future.

So we're learning some new techniques and improving our already strong performance around our markets. I think those are the two big ones we called out. Comp in 2024, it's mostly we were a little bit off last year in our numbers. We're accruing closer. As we mentioned, we're at the high end of our AFFO guide. I think we're accruing closer to 100% of our short-term compensation plans versus last year. We were a little bit under our 100% targets. Hopefully, that's helpful.

Lance Vitanza (Managing Director and Senior Equity Research Analyst)

Very helpful. And if I could just squeeze in one more, I was actually, if anything, it seems like national came in a little bit better than I might have thought. And I'm wondering if you're seeing that continue in the fourth quarter, or was it kind of a flash in the pan and maybe we see softer performance going forward?

Jeremy Male (Chairman and CEO)

Yeah, national, thanks, Lance. National was certainly better in Q3 than we'd seen for the first two quarters, and as we look at it, as we look at it now, we'd expect national to be up in Q4.

Lance Vitanza (Managing Director and Senior Equity Research Analyst)

Thanks very much.

Operator (participant)

Our next question today comes from Ian Zaffino with Oppenheimer. Your line's open.

Ian Zaffino (Managing Director and Senior Equity Research Analyst)

Hi, Great. You guys maybe give us an idea of what conversions look like for the remainder of the year and how you're thinking about it into 2025?

Matt Siegel (EVP and CFO)

Sure, Ian. I think we'll get our conversions. We usually target a little higher number. Probably digital is about 100-150, maybe on the low end of that. Fewer acquisitions this year, fewer management agreements, and around the same number of conversions. So we'll be adding fewer digitals this year. I think the number in 2025, I'm not prepared to give a precise guidance range, but we're pretty confident it's going to be higher in 2025 than in 2024.

Ian Zaffino (Managing Director and Senior Equity Research Analyst)

Okay, thanks. And then also, if I could sneak in one more on the MTA, and I don't know if you could per se answer this, but as far as the rates going up, I guess ridership is still kind of well below where it was pre-COVID. Are you seeing either advertisers returning, or kind of what's driving that rate, just given that a lot of the ridership is just sort of stalled? And any kind of view on what ridership might be doing going forward? I guess a lot of companies are kind of calling people back five days a week, but any thoughts there would be helpful. Thanks.

Jeremy Male (Chairman and CEO)

Yeah, thanks, Ian. I mean, we said right the way along that we anticipated we'd be able to get our revenues back up to pre-COVID levels without the audience growing back to or ridership growing to pre-COVID levels. And that's basically because we just have a much better product. We've undertaken this sort of huge digitization program. So now you can be more timely, you can be more creative, and it's just a very exciting product. And I think that's really what's drawing advertisers back. And as we look at it, I think we really feel very positive from the question that we had earlier with regards to automated revenues, that that will keep driving a pretty solid digital growth story on our transit assets, and particularly on the MTA.

Ian Zaffino (Managing Director and Senior Equity Research Analyst)

Okay, thank you very much.

Operator (participant)

Our next question comes from Daniel Osley with Wells Fargo. Please go ahead.

Daniel Osley (VP and Equity Research Analyst)

Thank you. Good morning. Maybe just one on national. You've talked in the past about the headwind from the media and entertainment vertical. So just wondering how that vertical specifically has trended early in Q4, and do you expect the strong film play later in the quarter to give you a further boost? Thank you.

Jeremy Male (Chairman and CEO)

Yeah, thanks for the question. I think it's fair to say that this year we did expect that the media and entertainment category would sort of bounce back more strongly than we saw. It certainly seems to have taken, I mean, not just for us, but I mean for the industry as a whole, longer, I think, to get over the impacts of both strikes last year. Where we stand right now, I think we feel okay about the movie category as we look into the fourth quarter. There are other areas of entertainment that are doing well for us, and well, for us, miscellaneous entertainment looks like it's going to be up for us in Q4. I'm pleased to say also that it looks like tech's going to be up.

So listen, we have a basket of advertisers, and the great thing about our portfolio is that if you're seeing a little bit of weakness in one place, you typically may make up for it with some strength in some of the other verticals. I think as we look into 2025, I think that we feel much better as we look at some of the tentpole films that are coming through in 2025. So I guess we'll get the comp benefit then.

Daniel Osley (VP and Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. And our next question comes from Patrick Sholl with Barrington Research. Your line is open.

Patrick Sholl (VP and Research Analyst)

Hi, good morning. Thank you. I just had another question about the MTA. To the extent that you do get some recovery in ridership, I guess, is there any sort of concern you have in the baskets of out-of-home spending for advertisers and that maybe being reallocated from kind of the billboard side to the transit side?

Jeremy Male (Chairman and CEO)

Typically, when you look at, well, we do have a good crossover between people that use on the billboard side of the business and the transit business. We also have some very specific advertisers in transit who are buying transit for different reasons. The commuting audience on Metro-North is not necessarily the same audience as you get on the Cross Bronx Expressway. So that, I think, has always been the case. We have sort of very high-end audiences, say, in various parts of the MTA system.

And I think most commentators believe that ridership continues to creep up in cities. I think we do. But what we're kind of doing just fine without it because whichever way you look at it, four million sets of eyeballs every single day or more than that is a huge, huge audience for advertisers. I think people are just beginning to reappreciate that.

Patrick Sholl (VP and Research Analyst)

Okay. And then maybe on the automated buying side, I guess you said that that's helped bring in new advertisers. What sort of impact has that had on pricing?

Jeremy Male (Chairman and CEO)

So when we look at the pricing that we achieve on a CPM basis through our programmatic channels, they're about $1 higher than the CPMs that we achieve through our direct sales force. So in general, do you know what I mean? Programmatic is a very sort of positive part of our business right now. Not all of the dollars that we get on programmatic are necessarily absolutely new. Some of them might have come through a different channel, so there may, so I should make that point. But also, I mean, we take getting revenues from a bunch of advertisers that, frankly, we never would have expected or, in some cases, haven't even heard of. So it really is extending the number of different advertisers on a weekly basis on our digital platforms.

Patrick Sholl (VP and Research Analyst)

Okay, thank you.

Operator (participant)

Thank you. We have no further questions, so I'd like to turn the call back to Jeremy now for any closing comments.

Jeremy Male (Chairman and CEO)

Thanks, Lydia. And thanks to everyone for joining us today. I'm sure I'll be seeing many of you at the various conferences and events this winter, but for those that I don't, looking forward to presenting our full year results to you in February. Thank you very much indeed.