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OUTFRONT Media Inc (NYSE:OUT)
Q4 2019 Earnings Call
Feb 25, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the OUTFRONT Media Inc., Fourth Quarter and Full Year Earnings Conference Call. At this time, I would like to hand the conference over to Mr. Greg Lundberg, Investor Relations. Please go ahead, sir.

Gregory H. Lundberg -- Investor Relations

Hey, good afternoon, everyone. Thanks for joining our 2019 fourth quarter and full year earnings call.

On the call today, as usual, 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 up the lines for a Q&A session.

Our comments today will refer to the earnings release and the slide presentation that you can find on the Investor Relations section of our website, which is, outfrontmedia.com. And after today's call is concluded, an audio archive 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 2018 Form 10-K and our 2019 Form 10-K, which is expected to be file tomorrow morning.

We'll refer to certain non-GAAP financial measures on this call. Any references to OIBDA made today will be on an adjusted basis and reconciliations of OIBDA and other non-GAAP financial measures are in the appendix of the slide presentation, the earnings release and also on our website.

And with that, I will turn it over to Jeremy.

Jeremy J. Male -- Chairman and Chief Executive Officer

Thank you, Greg. And thanks, everyone again for joining us today. Before we get into the details on Q4, I thought it might be interesting to take a quick look at 2019 as a whole.

Slide three, shows the annual review of our three key financial metrics. While 2018 was a good year, 2019 was even better, with revenues up 11%, OIBDA up 9% and AFFO up over 11%. We think this growth reflects the inherent strengths of our industry and our position in it.

Let's turn now to our fourth quarter. Slide four gives you some highlights. Total revenues increased 8% in the quarter. This was on top of the 13% in last year's fourth quarter, and was slightly ahead of our guidance. Once again, this growth was broad, with good results in billboards and transit, as well as local and national across all of our key geographies. Our OIBDA grew 5% and AFFO grew 8%. Matt will talk about an unusual item that took a few points off OIBDA growth in the quarter. And looking forward, confidence in our business allowed our board of directors to raise the quarterly dividend to $0.38.

Let's take a look at our quarterly revenue in more detail beginning on slide five. US media was up 9% and actually drove all of our growth in the quarter, while our other segment, which is much smaller, was slightly off. On the US side, which you can see on slide six, billboard growth was 7% and transit was 14%. Our strong results were driven by a healthy exposure to both local and national revenues shown on slide seven.

Once again, local was up over 10% and national was up 7%. And this growth was distributed similarly, across both our billboard and transit assets. For both the quarter and the year, 56% of our US business was local, and 44% was national. We really like having this balanced mix of advertisers to draw from.

Market demand and sales execution help drive up total billboard yield which you can see on slide eight. This 8% increase was driven by same board yield increases in traditional and digital, as well as the addition of new digital inventory over the period. Digital is now 22% of our US billboard revenues.

Turning to slide nine, I'd like to spend a moment on our other segment. Billboard revenues were down and drove about half of the segment decline. While our Canadian business had a very healthy year as a whole, up around 6%. The fourth quarter decrease reflected strong comps from cannabis legalization in the back half of 2018. We've got great assets and a great sales team in Canada, and we're looking forward to a solid 2020.

The transit and other piece reflects good growth in sports marketing, offset by 3 million Digital Equipment sales that didn't recur this year. It's worth noting that without this impact, total other revenues would have been around flat.

Now let's look more closely at our fast growing area, Digital on slide 10. Total digital revenues were up 36%, with billboards up 16% and transit, again up over 100%. These growth rates accelerated nicely from the third quarter, driven by rising yields and more displays. Since the beginning of 2018, we've been picking up around three points of digital penetration each quarter year-over-year. But this quarter was actually a bigger jump of five points, bringing total digital to 23% of revenues.

We expect to cross the 25% threshold in the near future, putting us well on the way to the 50% that we see in some other international markets. I think this gives you a good sense that our business performance in Q4 and indeed the year was very strong across almost every part of our business. We're feeling good about 2020, but before I get into that, let me hand over the call to Matt to take you through the rest of the financials.

Matthew Siegel -- Executive Vice President and Chief Financial Officer

Thanks, Jeremy. And good afternoon. I want to highlight on slide 11 that not only was our expense growth the lowest level it's been all year, but then our total level of expenses as a percentage of revenue were fairly flat.

Looking at the components on slide 12, gives you a view of where our costs come from. Billboard lease expense, the largest category, increased at a lower rate than our revenue growth, and also reflects much of our growth coming in larger markets. Transit franchise, as you would expect, grew in line with revenue. Combined, billboard lease and transit franchise expenses were at a six year historical average of 39% of revenue. Posting and maintenance expenses were essentially flat.

SG&A declined half a point as a percent of revenues with just 4% growth reflecting compensation largely to support our strong sales, and also our ongoing technology investment. And lastly, corporate expense although relatively small and absolute size saw an usually large increase in the quarter. The driver of this, as Jeremy referred to earlier, were strong fourth quarter performance in the equity markets, especially compared to 2018, and a corresponding mark to market and some equity linked retirement plan benefits. In total, this added about $4 million of non-cash expense to the quarter.

Now let's look at how these expenses look on our year-over-year OIBDA on slide 13. Total OIBDA was up 5.5%, excluding a one off expense I just mentioned, this growth rate would have been around 8%. Slide 14 shows you the healthy US Media OIBDA billboard growth of 9% and transit of 15%. You will notice that we expanded both billboard and transit margins in the quarter. Billboard increased by 80 basis points to 42.8%, and transit increased by 20 basis points to 20.4%.

Switching gears to cash flow. Slide 15 shows our capital expenditures. Year to date, we ended up at $90 million in total capex ahead of our $80 million guidance, but the variance was completely due to a nice bump up in growth capex with digital billboard conversions. We increased digital billboards by 203 units in 2019, considerably above our goal of 150. For 2020, we expect to spend around the same level with a similar split of growth and maintenance to help maintain this accelerated pace of conversions.

Moving on to AFFO, the year-over-year bridge on slide 16 shows that OIBDA was the driver with the other components netting out roughly flat. For the quarter, AFFO grew 8.2%. In 2020, we are currently expecting AFFO growth to be in the high single digit range. This incorporates lower interest expense assumptions, and cash taxes of approximately $14 million.

Slide 17 shows improving dividend coverage for both AFFO and adjusted free cash flow. On an LTM basis, we saw a continued decline in our AFFO dividend payout ratio to 62%. The adjusted free cash flow payout ratio was down significantly to 75%. It is these improved coverage levels and our business outlooks that enabled the board to increase our quarterly dividend by 5.6% or $0.02 per share to $0.38 payable in March. This step up reflects our intention to grow dividends over time as the business expands.

Now, let's turn to our balance sheet on slide 18. Last year at this time, we had a $550 million maturity in 2022 and another $450 million in 2025. Those are now gone, pushed out to 2027 and 2030, respectively. The next bond maturity we have is in 2024. It's also worth noting that our liquidity position last year was $432 million. As you can see here, we're now at $577 million, an increase of $145 million, or 33%. This excludes over $230 million of remaining capacity on our ATM equity program.

Our weighted average cost of debt is now 4.5%, compared to 5.1% last year, and our net leverage is 4.5 times down from five times in the second half of last year. So overall, I think you'll agree that our balance sheet has significantly improved and is in great shape.

Let's look at an update on New York MTA on slide 19. We installed over 800 displays, bring our total deployment as of December 31 to 4,500 displays, more than half of which carry advertising. Our total MTA project cost in the quarter was $50 million and $150 million year to date. We're right on our most recent guidance of $150 million.

As of December, our cumulative project costs were $248 million and our cumulative recoupment of these costs was $34 million. We expect our 2020 equipment deployment costs to be approximately $175 million on a gross basis before recoupment. An important updated for you as we highlighted on this call last year is the level of external financing we estimate will be necessary to complete the deployment.

Based on our current projections, we now expect the total incremental financing needed to complete the build out to be $300 million, down $50 million from our prior estimate. We have incurred $140 million of this as of December 31, 2019 and expect to reach the cumulative peak amount around the end of 2021. So with $160 million more to go and the current liquidity position of $577 million excluding our ATM, we feel very comfortable and are pleased to be halfway there.

In closing, our team continues to drive revenue growth that is allowing us to invest back into our business and still deliver ample cash flow and improving balance sheets and a growing dividend.

Let me now turn the call back over to Jeremy.

Jeremy J. Male -- Chairman and Chief Executive Officer

Thanks, Matt. So now let's turn to our outlook on slide 20. Looking at the first quarter, at this point in time, we expect total revenue growth to be comfortably in the mid-single digit range. You'll recall that this is on top of a double digit comp last year. In terms of mix, our billboard business is performing particularly well, while transit is currently a little slower in Q1. We view this as a timing issue, and we expect transit to have another great year with digital continuing its strong growth.

We're feeling good about 2020 and slide 21 highlights several things supporting this view. While we're all keeping an eye on the coronavirus news, the economic environment here in the US currently feel somewhat benign, and we're still having great conversations with our clients.

Digital revenue should continue to grow as we push on digital billboard conversions, and deploy more digital transit screens in New York, and later this year in DC and San Francisco. And lastly, you can't escape the fact that this is an important political year. While we can't carry political advertising on our transit systems, the weight of money going into the media market as a whole should be a positive tailwind to our business. There are also some broader drivers of our strong performance that we would expect to continue.

Firstly, our 2019 revenues were generated from local and national advertisers in almost every category. The top growth on an LTM basis was from financial services, mostly national clients; professional services, mostly local clients; retail, a nice mix of both national and local; and Hollywood, all national. Interestingly, 10 years ago these categories all had around the same weight in our total revenues. And it's this consistency that's important to our business.

You've heard me talk before about customer retention. So let me give you an update. In 2019 94% of our top 100 clients had advertisers in each of the past three years with us. This is a very positive affirmation that our assets work for them. And importantly, I'm referring to all of our assets. Across these same top 100 clients, 96% purchase both billboard and transit, telling you that many brands are focused particularly on those attractive urban audiences that we can deliver.

In closing, we've got great assets, great teams and we're positioned well for rewarding 2024.

Operator, let's now operate -- open the line for questions.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] We'll take our first question from Alexia Quadrani, JP Morgan.

Anna Lizzul -- JP Morgan -- Analyst

Hi. This is Anna Lizzul on for Alexia. Thank you so much for the question. Just regarding the volatility that we have seen in the market recently due to the coronavirus news. Are you seeing any impact so far from the coronavirus?

Jeremy J. Male -- Chairman and Chief Executive Officer

So, thanks for the question. I mean, obviously, as we think about our business, all of our revenues are derived in North America which gives us a huge comfort. If we think about our supply chain, there are two main pieces to that. One is digital billboards that come out of Asia. And we actually are not seeing any supply issues there right now.

With regards to the light boards that we're putting out into -- principally into the MTA and other transit systems, we actually have significant stocks, which are going to take us through until summer for the platform inventory. Looking at the on-train inventory, which is, as you know, is part of our build out plans for this year, we think that there may be some delays there. We don't anticipate that having any marked impacts on our revenue or OIBDA forecasts for the year, because actually, it was a pretty slow build that we were anticipating from the mid part of the year.

So, look, the situation obviously changes on an almost daily basis, certainly, if you if you look at the market. But from our point of view, we're pretty comfortable that right now, as we see it, we'll be able to weather any coronavirus issues.

Anna Lizzul -- JP Morgan -- Analyst

All right. Great. Thank you so much.

Operator

Next up, we'll hear from Ben Swinburne, Morgan Stanley.

Grace Menk -- Morgan Stanley -- Analyst

Hi, thank you. This is Grace Menk on for Ben. You called out the slower transit growth in Q1 impacted kind of by some timing issues. Could you touch a little bit more on that? And what gives you confidence in the full year?

Jeremy J. Male -- Chairman and Chief Executive Officer

Yeah. Absolutely, Grace. So, when we look at our transit business last year, as you know, is sort of up 20-odd percent. So we had a major, major ramp in transit last year, and we continue to believe that we'll see some good growth in transit this year. It's fair to say transit is obviously the smaller part of our business, it can be quite lumpy depending on the timing of particular advertisers coming into the market or not within a given month. Certainly, as we look forward, there's nothing to indicate that it won't be another good year of growth. And importantly the billboard business is performing really very well.

Grace Menk -- Morgan Stanley -- Analyst

Okay. Thank you. That's helpful. And then if you could provide any update on the digitization of the San Francisco BART contract, if you have one?

Matthew Siegel -- Executive Vice President and Chief Financial Officer

Yeah, absolutely. It's fair to say that the digitalization there has been a little slower out of the gate than we originally expected. We've got two test stations that we're going to be building out, a little bit as we did with Brooklyn, you may remember. with the MTA here in New York. We're going to be building out those test stations at the back end of -- toward the back end of Q2. And based on that, we'll be sort of ramping development further in the back end of next year.

Worth mentioning also that in Washington, we're going to be putting in 150 screens this year. You might have seen the news that we recently renewed our footprint there for further 10 years with two five-year options, and a further 1,500 screens will be going into Washington over the next two or three years. So actually, that's going to be another very exciting digital development for the business.

Grace Menk -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Our next question is from David Miller, Imperial Capital.

David Miller -- Imperial Capital -- Analyst

Hey, guys. Great quarter. Jeremy, can you talk about some of the geographies out there? What did you see over the quarter in terms of geographic strengths and/or weaknesses, kind of segmented by the country? And then, were there any new categories that kind of entered the fray that had not embraced outdoor prior that surprise you at all during the quarter? And then I have a follow-up. Thanks.

Jeremy J. Male -- Chairman and Chief Executive Officer

Okay. Thanks, David. So I think in the prepared remarks we talked about the growth being fairly broad. Obviously, transit was pretty strong, so that -- a lot of that is focused around our footprint on the East Coast, including Boston, New York and Washington. If we think about the billboard business, the West Coast was really on fire for us during 2019 as a whole, and that continued through in the fourth quarter. So pretty broadly spread, but as I say, it was really West Coast that outperformed, if we look at it over the 12-month basis.

David Miller -- Imperial Capital -- Analyst

Okay. And then forgive my naivety on this because I live in Los Angeles. But the last time we spoke about deployments on the Long Island Railroad, I believe you said that the LIRR was way ahead of the Metro North in terms of just the number of displays on both the trains and the platforms. When do you think that evens out in terms of your deployments on the Metro North Side? Thanks.

Jeremy J. Male -- Chairman and Chief Executive Officer

Thanks. In fact if we sort of think about our developments with the MTA in total, it's really been the subway where we've been cracking on, and that's where the vast, vast majorities of the screens have been going. In line -- pretty much in line with our expectation. Metro North and LIRR are sort of much smaller and they're sort of following. But when we look -- where we look at the principal driver of revenues for our business last year is really the subway, David, that made the difference.

David Miller -- Imperial Capital -- Analyst

Okay. Thank you.

Operator

Our next question..

Jeremy J. Male -- Chairman and Chief Executive Officer

David, maybe just going back -- sorry, maybe just going back to categories, because I probably didn't nail that one particularly. As some of the numbers that I gave in our remarks earlier, we really are very consistent over time. It's not like we have sort of huge sort of new categories sort of just coming and going. But one thing that we have seen is streaming that became important for us at the back end of last year. On our boards, we've certainly seen Disney Plus, and Hulu, and Netflix, and others. And we hope that that will continue to be a tailwind for us as we go into 2020.

David Miller -- Imperial Capital -- Analyst

Okay. Wonderful. Thank you.

Operator

Up next, we'll hear from Ian Zaffino, Oppenheimer.

Ian Zaffino -- Oppenheimer -- Analyst

Hi. Great. Thanks. Interesting comments on your expectations for political this year. Can you just remind us what political maybe was in 2016? And are you actually seeing maybe more appetite for political advertising this time around versus 2016? Or how would you kind of gauge that? Thanks.

Jeremy J. Male -- Chairman and Chief Executive Officer

Yeah. Sure. So, if we go back to 2016 and we've been pretty consistent in saying that actually political for us has been relatively small, and indeed smaller for us than some of our equated credit competitors that have a slightly different footprint.

So if we go back to '16, it would have been relatively small. I think this year, just with the weight of money, I think what we expect to feel is a pretty tight media market. And in that environment, we feel that's likely to be good for pricing generally, and we think there may well be some advertisers that don't want to get involved in the political noise on traditional TV, and may well think how can I cut through, and we think that they may well come to out of home. It's interesting that actually as of now, we do have some advertising up for one of the presidential contenders in a number of markets across our digital board.

So, we're hopeful that that might be the sign of actually increasing political advertising interest in our boards. I think particularly digital, because, obviously, with political, the issues change very rapidly. And now, we have a product, obviously, that we can change in a much more fast and efficient way compared to traditional out of home. So this could actually something that helps the out of home industry in general and garner more dollars for this election cycle rather than the last.

Ian Zaffino -- Oppenheimer -- Analyst

Okay. And I just want to drill down a little bit further. I think that's interesting that there's kind of a new revenue stream here. Now you have digital media to go after the direct political dollars. But the question would be is, what is the impact sort of by market because you're much larger weighted market, they tend to be arguably not competitive markets. But if you look at kind of the landscape now, what markets do you kind of expect to have the best strength in? Or will you really see it just across all of the markets? Thanks.

Jeremy J. Male -- Chairman and Chief Executive Officer

Yeah. Look, it's -- Ian, it's a fair question. And typically, we've said before that we tend to be in the larger markets, and the larger markets do tend to be either sort of red or blue. In other words, they're not those sort of classic sort of markets where there's maybe some of the media dollars would necessarily flock to. But as I said, the candidate that is up at the moment has actually bought 23 markets from us, which is pretty substantive.

Ian Zaffino -- Oppenheimer -- Analyst

Okay. Thank you very much.

Operator

Stephan Bisson, Wolfe Research, has the next question.

Stephan Bisson -- Wolfe Research -- Analyst

Good afternoon. Just a couple of quick ones. First, the improvement in the MTA financing, is that more driven by lower costs, faster revenue recruitment?

Matthew Siegel -- Executive Vice President and Chief Financial Officer

Thanks, Stephan. It's Matt. The answer is yes, both. Our cost curve is a little flatter than we had expected, partially because of a little slower deployment of rolling stock. But more importantly, our revenue has been higher, recruitment's been better. It enabled us to self fund a little more than we expected.

Stephan Bisson -- Wolfe Research -- Analyst

Great. And then on the Q1 guide, I think the phrase was comfortably in the mid-single digits. Would it be fair to translate that as like 5% to 6%, rather than 4%?

Matthew Siegel -- Executive Vice President and Chief Financial Officer

We prefer not to get too granular, Stephan. We will -- the mid single digits is 4% to 6% in our book, and I guess comfortably within, you can maybe just draw your own conclusions from that.

Stephan Bisson -- Wolfe Research -- Analyst

Great. Thanks so much.

Operator

Our next question comes from Jim Goss, Barrington Research.

Jim Goss -- Barrington Research -- Analyst

Thanks. Within the digital objective, ultimately of getting into that 50% area that you said some other countries had. What would that target require in terms of share of your display base to generate that sort of revenue. Would it be 15%, 20%, or would it be higher than that?

Jeremy J. Male -- Chairman and Chief Executive Officer

Jim, if you think about where we are at the moment, and just think -- let's maybe sort of think about our billboard revenues. At the moment, we've got around 3% of our billboard assets generating 22% of our billboard revenues. And while it's fair to say that we wouldn't necessarily get that same ratio as we continue to digitize our billboards, because you tend to do the best ones first, we're still saying four times revenues on our digital boards, where we -- on our boards where we convert to digital. So, it's going be likely as we sort of double or triple our boards, which we see is quite possible, we'll start sort of nudging up toward that goal. In transit, we're having a significant digital evolution also, and that will similarly contribute.

Jim Goss -- Barrington Research -- Analyst

Okay. And Jeremy, does the -- within the MTA, you mentioned you have over half of the displays of advertising. Does the next wave of introductions include a higher share of boards that include advertising? And also, maybe you could talk about the nature of the ads and the commuter rail, and the valuation of those ads to the extent that full motion video is enabled.

Jeremy J. Male -- Chairman and Chief Executive Officer

So, a couple of of things there. Yes, as time goes on, certainly the proportion of advertising screens increases. When we look at the on-train assets, for example, I mean, they're pretty much only media, rather than information. And I think by the end of the build out, we're something like 80% advertising and 20% information displays. So that will move over time.

And when we look at the pricing, when you -- if you sort of go down to the subway and see the creativity of some of these sort of full video displays, you can probably -- you can see for yourself the sort of added value that that creates for us. And it also allows us just to tap out the dollars. It allows us to tap into the video market. So it's not just about the rate. It's just about the opportunity, the number of advertisers we are -- that are certainly able to utilize this exciting format.

Jim Goss -- Barrington Research -- Analyst

Okay. All right. Well, that'll be it for the moment. Thank you.

Jeremy J. Male -- Chairman and Chief Executive Officer

Thanks very much, Jim.

Operator

At this time, there are no further questions. I'll hand back to the company for any additional or closing remarks.

Jeremy J. Male -- Chairman and Chief Executive Officer

Thanks, operator. And thanks, everyone for your questions and your time today. And we look forward seeing many of you at investor events over the coming weeks. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Gregory H. Lundberg -- Investor Relations

Jeremy J. Male -- Chairman and Chief Executive Officer

Matthew Siegel -- Executive Vice President and Chief Financial Officer

Anna Lizzul -- JP Morgan -- Analyst

Grace Menk -- Morgan Stanley -- Analyst

David Miller -- Imperial Capital -- Analyst

Ian Zaffino -- Oppenheimer -- Analyst

Stephan Bisson -- Wolfe Research -- Analyst

Jim Goss -- Barrington Research -- Analyst

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