Gregory Lundberg - OUTFRONT Media, Inc. Jeremy John Male - OUTFRONT Media, Inc. Donald R. Shassian - OUTFRONT Media, Inc..

Marci L. Ryvicker - Wells Fargo Securities LLC Jason Boisvert Bazinet - Citigroup Global Markets, Inc. Alexia S. Quadrani - JPMorgan Securities LLC James G. Dix - Wedbush Securities, Inc. Drew Borst - Goldman Sachs & Co. James Charles Goss - Barrington Research Associates, Inc..

Please standby. We're about to begin. Good day, and welcome to the OUTFRONT Media Fourth Quarter 2016 Earnings Conference Call. At this time, I would like to turn the conference over to Gregory Lundberg. Please go ahead, sir..

Good afternoon. Thank you for joining our 2016 fourth quarter and full year earnings call. On the call today are Jeremy Male, Chairman and Chief Executive Officer; and Donald Shassian, Executive Vice President and Chief Financial Officer. After a discussion of our financial results, we'll open up the lines for a question-and-answer session.

You can find a slide presentation for today's call and the earnings release on the Investor Relations page of our website. 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 2015 Form 10-K and the 2016 Form 10-K, which is expected to be filed this week. We will 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 on our website, outfrontmedia.com. With that, I will turn the call over to Jeremy..

Thanks, Greg, and good afternoon, everyone. So revenues grew 2.8% organically in the fourth quarter in line with our expectation, and representing a pickup from our growth rate in the third quarter.

Our growth in the fourth quarter was led by billboard, which grew by 3.7% and we were pleased to see yields rising once again across static and digital, sequential improvement in national advertising and better results in Canada.

As we highlighted to you last call, transit growth was expected a bit lighter, although we were up against a pretty stiff comparison. For the year 2016, our revenues were up 3.1% organically and we were able to convert this into 2.6% EBITDA growth and 9.8% AFFO growth at the high end of the guidance range we gave you.

While growth in OIBDA and AFFO would have been higher, had we not made investments in strategic initiatives, our board remains committed to transforming our business to compete and succeed in the digital dominated media landscape. I'll comment in more detail on our first quarter outlook later on the call.

But I can say that while the first quarter is softer than expected for 2017, we are projecting low to mid single digit growth in AFFO for the year. Our board also recognizes that growing dividends per share is an important part of our thesis.

And this is balanced carefully with deleveraging and investing in our employees and our strategic growth initiatives. With this in mind, our board decided to increase our quarterly dividend to $0.36 per share.

Through good balance sheet management in 2016, we used internally generated cash and $82 million of proceeds from the sale of our Latin America business to pay down $90 million of debt, make $68 million worth of tuck-in acquisitions and invest $11 million in strategic business development.

I'll now hand the call over to Don for a more detailed review of our financial results before I come back with more color on Q1 2017, and some closing remarks..

Good afternoon, everyone. Thank you for being on our call today. Please turn to slide 6, which shows a summary of the year-over-year performance of some of our key financial metrics for the quarter. With the exception of organic revenues, this table is not comparable year-over-year since our Latin America business was sold on April 1, 2016.

However, we provide some historical figures for Latin America in our release and presentation to assist you in your analysis and modeling. Reported revenues for the quarter were flat due to the impact of the sale of Latin America at the end of Q1 2016. Organic revenues, which adjust for acquisitions and divestitures, grew 2.8%.

Adjusted OIBDA for the quarter was also flat year-over-year driven by the sale of Latin America, as well as one-time professional fees for cost and yield improvements. I will go into more detail on that topic in a moment. AFFO was up 2.4% in the fourth quarter, due largely to lower interest expense and cash taxes paid during the quarter.

For the year, AFFO was up 9.8% at the high end of our guidance. Please turn now to slide 7 where we'll start with our revenues for the quarter. For total revenues, the impact of Latin America is broken out for Q4 2015. Behind the total organic growth of 2.8% was growth in both U.S. Media and Other. U.S.

Media grew 3.3% for the quarter and 2.4% organically. Within this, billboard organic growth was up 3.7%, a pickup from the growth rate we saw last quarter in Q3 2016. Local revenues were up over 4%, and we saw national revenues trending positively for the quarter.

We also continued to benefit from the conversion of static billboards to digital and we saw digital and static yields rise once again. As we communicated on our last quarterly earnings call, transit and other in the U.S. was a bit softer during the quarter, posting a decline of just under 1%.

This compares to Q4 2015's very strong 12.8% organic increase as reported last year. Q4 2016 did reflect better National trends in transit offset by a bit of local deceleration. In Other, organic revenues grew 8.9% driven by our sports marketing business and solid performance in Canada. Please turn to slide 8 for an overview of expenses this quarter.

As you can see, our reported expenses including stock-based compensation were flat year-over-year. Excluding the $13.5 million of expenses from Latin America business we sold in Q1 2016 and excluding stock-based compensation, our expenses were up 4.8% in the quarter.

Looking at this increase more closely, again excluding Latin America, we're able to hold the increases for most categories close to or below or revenue growth. Transit expenses were up $1.2 million or 1.9% and represent 16.1% of revenues. Operations expenses increased slightly by under $1 million or 1.6% and represent 14.5% of revenues.

And SG&A expenses excluding corporate were up $1.7 million or 3.4% and represent 12.9% of revenues. The relatively modest increases in these expenses were offset by higher billboard lease costs and also from higher corporate expense. Billboard expenses were up $4.6 million or 5.2% and represent 23.6% of revenue.

Half of the increase was due to lease true-ups in Q4 2015 and Q4 2016. It's worth noting that for the year, billboard lease expenses were up just 3.2% excluding Latin America. Corporate expenses were up $4.4 million or 47% and represent 3.4% of revenues.

This increase reflects increased compensation related expenses and certain one-time professional fees in the quarter. Let me take a moment now on the one-time professional fees. As I mentioned on last quarter's earnings call, I pointed out that we would have the one-time expenses in Q4.

Late last year, we engaged a third-party to assist us in evaluating profit improvement opportunities across our organization, including both cost and revenue growth levers. As with any undertaking of the sort, the opportunities range in both savings and complexity of implementation.

The numerous opportunities we are pursuing across the company are principally cost driven and represent wage and non-wage initiatives across sales, field operations, procurement, and general administrative functions. There are also some revenue opportunities that have been identified to assist in yield optimization in the future.

Evaluation was completed in the fourth quarter and cost us $3.8 million in the quarter. Our fourth quarter results also reflect a restructuring charge of $2.1 million and we expect another modest restructuring charge in the first quarter of 2017.

The cost savings returns on this project will scale up throughout 2017 to achieve annual wage, and non-wage cost savings above $16 million with additional opportunities in 2018 and beyond.

On slide 9, you can see that our revenue flow through to adjusted OIBDA did not expand in Q4 2016, due primarily to the $3.8 million of one-time professional costs in the quarter. If you exclude Latin America in Q4 2015 and the one-time professional costs in Q4 2016, the margin would have expanded slightly.

Turning to slide 10, capital expenditures were $13.8 million during the quarter or 3.5% of total revenues. Growth spending was 2% of total revenues and maintenance was 1.5%. Maintenance CapEx principally represents spending on our billboards, but also on office facilities, information technology and safety for our operations employees.

For the year ended December 31, 2016, our total capital expenditures were $59.4 million below our original guidance range. This was driven primarily by lower maintenance CapEx and timing of cash payments.

For 2017, we currently expect capital expenditures to be in the $65 million to $70 million range including growth capital expenditures of $40 million to $45 million and maintenance of $25 million. During the quarter, we completed 18 digital board conversions in the U.S. and four in Canada.

Year-to-date, this brings out total to 76 new builds in the U.S. and Canada, which is below our broad guidance of approximately 100 new builds for the year. Similar to 2014 and 2015 when we built over 100 digital billboards in each of those years, the timing of these builds is dependent on numerous external factors.

We expect to build approximately 100 digital billboards in 2017 or more if conditions allow it, as we continue to see excellent returns on digital conversion opportunities and are continuing to allocate capital to this growth initiative. Please turn now to slide 11 for a look at AFFO. We were up 2.4% during the quarter and 9.8% for the year.

Please note that we changed our methodology this quarter and for all periods to calculate AFFO using cash taxes instead of changes in current deferred book income taxes. The previous methodology included non-cash income tax provisions, which is not consistent with the other components of the calculation like commissions and straight-line rent.

This new methodology is consistent with the guidance we presented to you on cash taxes and is consistent with the performance metric methodology reported by many other REITs. We have recast prior year information and have included in our earnings release a chart that presents the historical and current methodology for the past eight quarters.

You will be able to see that the overall change is not significant. For 2017, we expect AFFO to grow in the low to mid-single digit range, led principally by improvement in adjusted OIBDA. In addition to the capital expenditure guidance I gave a moment ago of $65 million to $70 million, I also expect cash taxes for 2017 to be approximately $5 million.

Slide 12 shows our 12 month 2016 AFFO of $295 million, and a dividend payout ratio of 64% compared to 70% last year. Our free cash flow in 2016 was $228 million and our dividend payout ratio on this metric was 83%, slightly higher than last year's 80%.

These metrics are consistent with the ranges when we set the original dividend and we believe provide a sound cushion for our dividend policy.

Slide 13 shows the highlights of our balance sheet with a liquidity position of $458.5 million at the end of the quarter, including $65.2 million of cash and $393.3 million of availability on our revolving credit facility.

We received $82 million in proceeds from the sale of Latin America in 2016, and combined with cash generated in the business, made $68 million of tuck-in acquisitions and made $90 million of aggregate discretionary payments on our term loan.

Our net leverage ratio was 4.6 times, our goal is to reduce our leverage to our longstanding target range of 3.5 times to 4 times through further growth in OIBDA and further debt paydown.

Our financial and operating results in 2016 allowed us to make these debt paydowns, alongside smart and selective acquisitions and continued investment in strategic growth initiatives. Our balance sheet continues to give us the financial and operational flexibility to continue on this path going forward. Let me turn it back over to Jeremy..

Thanks, Don. And so looking forward on slide 15, at this point in time, we expect that first quarter revenue will be down low single-digits reflecting national weakness in the early months of the year. This outlook only represents our view at this point in time and is on a constant dollar basis for our international operations in Canada.

While it's fair to say that our Q1 2017 expectation is lower than we would have liked, we foresee an improving revenue trend throughout the year and this, combined with our attentiveness to cost, will support our 2017 AFFO guidance.

As you know, we're putting a lot of time, attention and resource into enhancing our growth beyond today's traditional out-of-home advertising market. Our board is committed to the framework for value creation that we've been communicating to you regarding our strategic growth initiatives.

During 2016, we made good progress on them and we'll be continuing to invest in these initiatives during 2017. For example, the continued deployment of our advanced ON Smart digital displays will accelerate, particularly with the transit system win in Boston.

OUTFRONT Mobile, which launched in the fourth quarter 2015, while this only generated a couple of million dollars of revenues in 2016, it's resonating well with our local billboard sales force, and we expect to see good growth in 2017 on this also.

With regards to cell site leasing, we've made significant progress with master lease agreements now in place with the major wireless and cable companies. All the news regarding unlimited data price wars and new content distribution models gives us confidence that this will be an additive stream of revenue going forward.

And lastly, we're making good progress with our propriety technology platform. This will give us the ability to integrate with ad buying platforms, allow real time audience buying by geo-location and give advertisers new tools to measure out-of-home ROI.

We are moving forward with our design and the software development portion of the project and plan to test it live later this year. Our clients have seen where we're going with this and they are as excited as we are. We think these initiatives will be critical to our growth and outperformance of the broader media market in the future.

Collectively, these initiatives will position OUTFRONT as the leader in a rapidly evolving industry. And we're undertaking these initiatives while delivering increasing returns for our shareholders. Before I turn this over to questions, let me spend a minute giving you an update on the New York City transit renewal.

Currently, the review process is underway for new 10-year contracts on all of the three contracts with an additional potential five-year renewal thereafter. After our initial submission in May of last year, the MTA issued a follow-up request in mid-October and we submitted our response on December 12, 2016.

In November of last year, the MTA extended all of our contracts to the end of June 2017, unless earlier terminated by the MTA on 90 days notice. Right now, we have no further updates with regards to the MTA process and we continue to work hard to maximize the value of these assets for both the benefit of the MTA and our shareholders.

So, operator, with that, let's open the line for questions..

Certainly, thank you. At this time, we'll take our first question. This will be from Marci Ryvicker with Wells Fargo. Please go ahead..

Thanks. I just wanted to ask about the Q1 pace.

Jeremy you said or you called out national specifically, so should we assume that the rest of the business is up or is just national pulling it down further? And then, can you comment if you're seeing this improving, how the rest of the year looks? And I'm assuming that's why, that's what's basically driving the low-single-digit part of your AFFO guide?.

I guess there's a couple of points there, Marci. First is that, we've still got a little while to go in the quarter. And so just remind that or sort of posting guidance is at a moment in time. And I can certainly tell you that, really for the most part, this is very much a national issue.

If we go back to the last couple of weeks of last year and first couple of weeks of this year, there's no doubt at all that we didn't see national business laying down at the pace that we expected.

We had a couple of big programs in the first quarter of last year that didn't repeat, and we weren't able to get all of those programs away their entirety to other national type advertisers. So it is a national issue.

As we look forward, we've always been very cautious as you know, Marci, with regards to sort of any guidance beyond the quarter that we are in. But I think it's fair to say that, as we look forward from here, local trends are improving and there are early indications of an improvement in that national trend also..

Okay.

So is it just a macro driven, is it certain categories? Is there anything for us to be looking for?.

When we drill into it actually it's interesting because it's really specifically down to two or three major pieces of business that didn't – as I say didn't repeat year-on-year. Actually, let me drill into it. We're seeing some really positive signs from some of the other national advertisers that are continuing to support the medium.

And here I'm referring to some of the high-tech brands that were also supporters of the medium in the second half of last year..

Got it, thank you..

At this time, we'll take a question from Jason Bazinet with Citi..

I just had one follow-up on some of the restructuring and subsequent savings that you talked about in your prepared remarks. Maybe I wrote it down wrong.

But did you say the restructuring was a few million dollars, but the recurring savings were going to be $16 million? Did I write that down correctly?.

There's two components. The annualized savings we're looking at are north of $16 million and we have a number of items we're still implementing. There were two numbers I gave in terms of costs. There is a one line item in our income statement, a restructuring charge of $2.1 million booked for the quarter.

And there was also, as you may recall, last quarter I talked about we were going to have some professional fees in the quarter that assisted us in going through this process. That was a $3.8 million charge that hit our OIBDA during the quarter that enabled us to analyze the business and help us implement these initiatives..

So that, I mean that's....

Does that help?.

Yeah, it does. And that $16 million is a savings that you expect in 2017, it just seems like an incredibly large number actually..

Well, it's a phased in number, Jason. It's going to be ramping up through the year. It's both wage and non-wage. But it is – this was an important initiative that we undertook to look at our business in all the areas I mentioned, in sales, in operations, in procurement and the like and there were opportunities.

I mean it really was an opportunity a couple of years post the spin and posting up ourselves, it was sort of time to look at the business and – with a fresh pair of eyes and see if there's ways we can do things differently, smarter, more effectively and efficiently.

And that was the genesis of the initiative and it's identified some good opportunities for us going forward. But it is not starting at day one of $16 million. It's an annualized number and it will phase in throughout this year..

By the time we get to fourth quarter of this year maybe it's $4 million a quarter or something like that or it's sort of annualized by the time we get to the back end, is that fair?.

Okay, okay. Thank you very much..

Thanks, Jason..

And now we'll move to Alexia Quadrani with JPMorgan..

Thank you.

Just first just a follow-up to Marci's question, when you talk about, I guess, higher conviction on better results, better revenue results within the year after first quarter, I guess, can you talk a bit about how much visibility you have in that? And should we start seeing an improvement beginning in Q2, is it more in the back half of the year?.

As I said Alexia, we really do try to avoid giving too much individual quarterly guidance as we go forward. What I can tell you is that, we have over half of our revenues now laid down for the year. So, from that, you can anticipate that we do have visibility on a good portion of our business.

It's fair to say that, when you look at how that business lays down, the business that lays down earlier is our local business, so that's where we have the maximum visibility, national always lays down a little bit later.

So, that's why we're just sort of caveating our comments slightly rather than being absolute on Q2 at this really very early stage..

And then just a follow-up on the transit side of the business, you benefited from two recent transit contract wins.

Can you talk about what investments you're making on the digital transit side and how much you think that's benefiting the business in terms of both contract wins as well as sort of advertiser interest?.

For sure. There's no doubt at all that the win in Boston was very much to do with our digital strategy. And we would hope that as other contracts come up, over the next couple of years across the country, that that will be an important lever for us hopefully to win an increasing number of contracts that we decide to go for.

When we look at the investments that we're making in that digital product, all of the investments are encapsulated within the growth CapEx guidance that we gave.

And for the most part, the Boston build out which actually in terms of numeric number of screens and I say this, ex MTA because obviously we don't know where we're going with that exactly at this moment in time. But ex MTA that would be one of the bigger screen rollouts and that is a second half event..

Thank you very much..

At this time we'll move to James Dix with Wedbush..

Good afternoon, gentlemen. Just a couple of things, I guess, maybe following up, Jeremy, on the point you made about how much you have laid down for the full year.

Just curious as to how much do you have sold going into a typical month and is the monthly variability of growth that you're seeing kind of in line with your historical experience or is it greater or less.

And then just one other thing on the national advertisers, have you heard any feedback either directly from them or their agencies about changes they might be making in their priorities as they roll into a new budget season? It just seems to me like every once in a while we can get this – I think Clear Channel might have had an issue with this a few years ago when they started a new year kind of down and they talked about changes in priorities among national advertisers.

Just want to make sure we're not really securing anything like that and then I have one follow-up..

So, okay. To the first point, in terms of as we come into a month how much lays down within the month. It's fair to say that is an increasing proportion of business as we go forward, and – but that's in a way it's a good and a bad.

The good is that we're able to take much later dollars because of the amount of digital advertising that we have whereas in the past, we are a bit of a clunky medium because you have to print the poster and ship it to where it's going. All of that takes time. With digital, you can decide to put a campaign up and be up with a matter of hours.

So that's something that we were expecting rather than necessarily being a bad thing. But I think it does also reflect the fact that advertisers, I believe, are increasingly of a mind that unless they have to lay money down early for whatever benefits they would prefer to retain increased flexibility.

Going into a given month, we would expect to be in the 90s of where we're going to end up in terms of percent. In terms of priorities of advertisers, I don't think it's sort of broader than that, James.

I think if you – if we think about out-of-home and its position over the last few years, we're talking about a medium that has continued to effectively maintain its share of the media pie in the light of seismic change across the rest of the media landscape, obviously not least the huge growth in digital and the transformation that that has had on some other traditional media.

As we go forward, I believe that in terms of advertiser priorities, they are undoubtedly looking to certain media to deliver certain things. And with digital, you can get that one-on-one interaction, you can get a much more, if you like, easily measured ROI. But you can't do what you can do with out-of-home.

Out-of-home continues to be the brand builder. And it's interesting that some of the Internet advertising companies or online companies are actually some of the biggest users of out-of-home right now for just that reason.

So, from my point of view, I'm certainly not getting any feedback at all in terms of advertiser priorities and from either client or agency..

Great.

And then just my follow-up, just kind of your thoughts on M&A here, in terms of your interest in applying capital to it given where your leverage is and given Don's noted goal to try to get the leverage down to that 3.5 to 4 times range? And then any particular expectations that sort of – that this might be a year of more assets shaking loose or more of an average year in terms of supply?.

James I think that our philosophy has been for a number of quarters here is, smart and selective. If we continue to look at assets that are small and to medium size, and we're really trying to evaluate if they're really "must haves". And if they're things that really are must haves then we'll look at it.

But there's a lot of things that are out there today that are "nice to have" and are not critical to us. So we've got a certain set of criteria both qualitative and quantitative, and I think we're trying to be judicious about where we pick up assets, the right assets, the right locations. And we'll be smart in using our balance sheet..

Great. Thanks very much..

Thank you..

At this time we'll move to Drew Borst with Goldman Sachs..

Thank you. I wanted to ask a question, I guess this is probably for Don, on your strategic initiative spending. I think, if we have the numbers right, you probably spent around $11 million on those initiatives in 2016. I was wondering, what's the outlook for that spending this year..

Drew, good question. We – Jeremy talked about some of the initiatives we're undergoing right now. There will be a slight increase. I don't expect it to be in the beginning part of the year.

It'll be more towards the middle or the backend and could go up about $1 million – $1 million or so a quarter, but more towards the middle of the backend of the year..

It's maybe like – a for the year it's maybe like a mid-teens kind of number..

Yes..

In terms of dollars. Yeah..

Yeah probably low, yeah mid-teens..

Okay..

Yeah. Fair..

And then in terms of – sorry if this is sort of belaboring a previous question, but on these – the cost saving initiatives that you mentioned from that project. I mean....

Yeah..

...do you – should we model those to even occur at all in the first part of the year? Like I'm just trying to get a sense for maybe the quarterly cadence of when we might see those savings kind of filtering through..

The – very, very little in the first quarter and it will start to get savings second quarter, third and fourth quarter it will build. It was both wage and non-wage. We took some actions with regarding people in the first quarter. And there's a number of other initiatives and activities continue to progress.

So, it really would be ramping, but very, very little in the first quarter, Drew..

Okay. And then sorry, just one last question on sort of category spending, I was wondering if you could comment on what you were sort of seeing from kind of the auto vertical anything kind of unique. There's been a lot of attention and focus on what's been happening with auto advertising at large..

As we look at it right now and as you know, Drew, we've consistently said that when we look at categories, we prefer to look at it over a 12-month period rather than a quarterly snapshot. And, we tend to sort of look – we tend to look backwards rather than forwards.

So, just before I answer the question specifically on sort of what we're seeing right now, if we sort of look at that in terms of the positive change during quarter for Q4, okay, retail were top then computers, Internet, then beer and then auto. So, auto, firmly in our camp, if you like in Q4.

If we look at the categories that were our lowest performing for the quarter, they were food and beverage, financing services, and telephone and utilities. If we think about sort of where we are right now, I think it is likely if I'm making a comment about Q1, that auto will be down as a category within out-of-home in Q1.

But, as I said, it's very early days. We've always said that national advertising can be very lumpy. It can swing around for month-to-month, quarter-to-quarter. And, let's see – let's sort of review that probably in 12 months time rather than sitting here on the 22nd of February..

And also, Jeremy, to add to your comments about fourth quarter category, for the year, auto was very strong for the year. Just reaffirming the gist of your question, Drew, so auto was very strong and we'll see how that plays out for 2017, but certainly a very critical category for us in 2017..

Could you remind us, if you have it handy, what percentage of the total is auto?.

6%, Drew..

Okay. Great. I'll leave it there. Thanks so much for the responses..

Thank you..

We'll now move to Jim Goss from Barrington Research..

Thanks. Couple of them, one I was wondering you were talking about the flexibility of digital that we all know about and the additions you have been making to the digital platform.

Are you seeing any shift in seasonality to your business reflecting the flexibility you get with digital, because the brand building has traditionally kept signs up forever, but now with the ability to shift around maybe it's different now..

Yeah. I wouldn't say that digital is having any particular – I don't think it's a seasonal impact, Jim. With our digital signs we're still seeing that we can – we're achieving for the most part that 3x to 4x in terms of incremental revenue when we switch out a board. But I don't think that there's much specific change in terms of season by season..

Okay. And the one other thing lease renewal cycles, I wonder if you might comment on that and the 2017 exposure.

Are there any regular renewals that are in a certain percentage of the signs or are the properties varied in how they're coming due to term?.

There's nothing abnormal in 2017. We renew about 1,500 to 1,700 leases a year and 2017 on our billboard leases looks to be very consistent. Every renewal, however, is its own story if you would. I'm responding because I'm assuming you're referring to billboard specifically.

Were you inquiring about transit at all, Jim?.

I really meant the billboard side..

Okay..

So, all right. That will help do it..

Thank you..

At this time, I'll turn the call back over to management for additional or closing remarks..

So, once again, thank you for your time, attention, and questions today. And, I'm very much looking forward to seeing many of you at investor conferences over the coming weeks. Thank you..

Ladies and gentlemen, this does conclude today's conference call. Thank you all for your participation..