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

Alexia S. Quadrani - JPMorgan Securities LLC Marci L. Ryvicker - Wells Fargo Securities LLC Jason Boisvert Bazinet - Citigroup Global Markets, Inc..

Please standby. Good day ladies and gentlemen and welcome to the OUTFRONT Media Fourth Quarter and Full Year 2017 Earnings Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Greg Lundberg. Please go ahead sir..

Good afternoon. Thank you for joining our 2017 fourth quarter and full year earnings call. On the call today as usual 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. After today's call has concluded, an audio archive will also be available. This conference 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 2016 Form 10-K. 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 on our website, outfrontmedia.com. With that, I'll turn it over to Jeremy..

Thanks, Greg and good afternoon everyone. Our fourth quarter reported revenue growth was up 1%. Our local business once again continued the solid growth we've seen in prior quarters across billboard and transit. This was offset by national advertising being a little weaker at the backend of the quarter than we anticipated.

On the expense side, cost discipline helped our controllable expenses decrease 1%. With these good expense levels and despite the pressure from national revenues, we generated OIBDA growth of 3.3% and AFFO growth of 6.7%.

Looking forward, we feel increasingly positive about the economy and our prospects in 2018, and I will as usual discuss our first quarter revenue outlook later on this call. I'll also give you some additional commentary on our trends and an update on our strategic initiatives.

Don will give you now a more detailed review of our quarterly results and our 2018 guidance on AFFO and its components..

Thank you, Jeremy. Good afternoon everyone and thank you for being on our call today. Please turn to slide 6 which shows a high level summary of the year-over-year performance of some of our key financial metrics. Please note that one quarter of Latin America is still on our 12 month 2016 results which will trend out in next quarter's reporting.

For the quarter, organic revenues were flat which is due primarily to lower national billboard revenues. However, good expense control helped drive 3.3% growth in OIBDA and 6.7% growth in AFFO. I'll now review our financials in more detail beginning with revenues on slide 7. Total reported revenues increased 1%, and organic revenues were flat. U.S.

Media increased 0.4% on both reported and organic basis. U.S. billboard organic revenues were down 1.3% compared to the fourth quarter of 2016. This billboard performance reflects growth in local advertising, offset by a decline in national advertising.

On the positive side, same board rates were up, as we continue to manage rates overall in anticipation of an increase in demand as we go forward in 2018. Demand wasn't quite there in the fourth quarter, however, and overall yields were down due to declines in occupancy. U.S. transit and other was up 4.5% during the quarter.

This was principally driven by the net impact of won and lost contracts, with primarily the addition of the MBTA in Boston. We also saw solid local growth, again offset by a national decline.

In other, reported revenues were up 8.8%, principally reflecting our acquisition of a digital billboard portfolio in Canada last June, partially offset by slight revenue decline in our sports marketing operating business. Slide 8 is a new view of some key revenue drivers.

Since we now break out digital revenues in our SEC filings, we're able to see the key components of our total revenue growth more clearly, due to the large size of the Van Wagner acquisition in the fourth quarter of 2014, we chose to begin this chart with 2015.

After the sale of Latin America, you can see that our revenues have been driven primarily from growth in our U.S. Media transit business and growth in U.S. Media digital billboards. Our static billboards declined over these two years due to conversions to digital as well as lost or disposed of sites. But our overall U.S.

Media billboard yield increased over this time period on an annual same board basis, with an increase in 2016 partially offset by decrease in 2017. Please turn to slide 9 for an overview of expenses.

This presentation isolates some drivers of change for the quarter and year-to-date, as well as the overall impact of new contract terms in our Sports Marketing segment and the net impact of the new terms on both the New York MTA transit contract and the renewal of the New York MTA billboard contract, which were both effective on November 1, 2017.

Our reported expenses excluding stock based comp were flat year-over-year for the quarter and up 1% for the year. There are several items I want to highlight here. First, the U.S. Media segment includes the franchise fees and other expenses of the new MBTA contract in Boston that was effective in January 2017. Secondly, the U.S.

Media segment reflects lower net expenses from lower revenue share on new contracts with the New York MTA. We had two contracts renew with the MTA late last year that were both effective November 1, 2017.

First, with the New York MTA transit contract that concluded after many, many months of bidding and negotiation, our revenue share on the base revenues was reduced and incremental revenues will be retained by us to cover our spending on digital display equipment installation.

It is important to note that some incremental digital operations expenses are and will be incurred as we deploy these digital transit displays. The second contract was the renewal of the New York MTA billboard contract for the right to continue managing billboards in MTA property. This contract has revenues of approximately $30 million.

We increased the revenue share to the MTA. We are very excited about the opportunity to digitize many existing billboards and also develop new digital billboards in great locations across the metro area on MTA property.

The net effect of these two contracts that both went effective on the same day was a reduction in our franchise and lease costs of $2.9 million for the last two months of the year.

Third item I want to highlight, the other segment, reflects higher expenses in 2017 related to the recent renewals of several long term sports marketing contracts and the 2017 acquisition of 52 digital billboards in Canada.

Fourth, in the fourth quarter last – prior year, in 2016, we invested in a consultant to identify wage and non-wage cost savings across the organization. And lastly, Latin America was divested on April 1, 2016.

As you can see at the bottom of the two charts, we have isolated all of these expense items, so that on a more comparable basis, you can understand that our controllable expenses were down approximately 1% for the quarter and year-to-date, which has been our stated goal for the year.

We are also continuing to invest in future revenue growth with $3.4 million of strategic business development expenses during the quarter and $11.1 million for 2017 compared to $10.8 million in 2016.

Please note that these strategic business development expenses are likely to increase by $2 million to $3 million per quarter in 2018, as we make significant progress in the development of our location based audience selling program and other initiatives associated with incremental new revenue streams.

On slide 10, you can see that our adjusted OIBDA showed positive growth of 3.3% for the quarter. Turning to slide 11, capital expenditures were $12.2 million during the quarter or 3% of total revenues. Growth spending was 2.4% of total revenues and maintenance was 0.6%. Our total CapEx spending of $70.8 million was slightly below our previous guidance.

During the quarter, we built or converted 13 digital billboards in the U.S. and two in Canada and continued the expansion of small format Liveboards, primarily in Boston.

The internal rates of return we are achieving on these conversions continue to be at the attractive levels we have experienced over the years, and we expect a conversion pipeline in 2018 of approximately 100. If additional conversion opportunities become available due to regulatory approvals or other factors, we would certainly pursue them.

For 2018, our guidance for capital expenditures is approximately $75 million. There's no significant change in our mix of maintenance and growth CapEx with maintenance at $20 million to $25 million and growth at $50 million to $55 million.

I would also like to point out that this 2018 CapEx guidance does not include the deployment of digital displays under our new MTA transit agreement in New York. As communicated previously, cash outlays for digital display equipment and installation related to the MTA will not be recorded as capital expenditures.

These will be recorded on our balance sheet as prepaid assets and intangible assets. This reflects the economic structure of the agreement, which allows for recovery of these deployment outlays through the retention of incremental revenues over our base level.

As you can see on slide 12, for 2018, our current plans with the MTA call for over 3,000 displays to be deployed in 2018 across subway stations in New York City and commuter rail stations on both the Metro-North Commuter Railroad and Long Island Rail Road.

We currently expect that our digital display spending for deployment of these 3,000 displays and for down payments on the 2019 equipment being manufactured will be approximately $100 million. You should expect periodic updates from us on this deployment throughout the year as the build program evolves with the MTA.

Please turn now to slide 13 for look at AFFO, which was up 6.7% in the quarter. As you can see in the bottom chart, we've demonstrated sequential improvement in year-over-year AFFO performance in each quarter this year.

In Q4, the lift in AFFO was driven by higher OIBDA, lower maintenance CapEx and lower cash taxes, offset partially by higher interest expense. For the year, AFFO was down 5.7% which came in a bit better than the guidance we gave you in November.

As we have discussed on prior calls, our 2017 annual AFFO performance was primarily impacted by soft national advertising on billboards, which continued in the fourth quarter. As we look forward, we expect fiscal year 2018 AFFO to grow in the low-to-mid single digit range.

Drivers included an improvement in adjusted OBIDA, maintenance capital expenditures of $20 million to $25 million, and cash taxes of approximately $10 million. I would also note that interest expense will be higher due to a tick up in rates and higher letter of credit fees in connection with the new commitments under the new MTA transit contract.

Slide 14 shows our annual 2017 AFFO of $277.6 million and a dividend payout ratio of 73%. Our 2017 free cash flow however was $178.5 million and our dividend payout ratio on this metric was 113% compared to 83% in 2016 and 80% in 2015. As we have discussed on previous earnings calls, 2017 free cash flow was impacted by increased working capital use.

For the year, $23.5 million of this use was due to a change in the timing of our payments to the MTA as we went through the contract extension process while waiting for the new RFP to be awarded.

Higher levels of revenue from billboard in 2018, the new MTA contract savings and continued expense control on all other areas of the business should drive our dividend free cash flow payout ratio back to its historic range.

On February 27, our Board of Directors approved a quarterly cash dividend of $0.36 per share payable on March 30, 2018 to shareholders of record at the close of business on March 9.

This dividend is unchanged from the prior level, as we see the most attractive returns currently from additional investment in growth opportunities, acquisitions and debt reduction. We are comfortably in excess of our required 90% REIT dividend payout.

As our business and profitability expands during 2018, our Board is committed to growing shareholder value through growth in both AFFO and dividend income. And we'll continue to review our capital allocation on a quarterly basis. Slide 15 shows an overview of our debt and liquidity.

As of the end of the quarter, our liquidity position was $389.7 million, including $48.3 million of cash and $341.4 million of availability on our $430 million revolving credit facility, net of outstanding letters of credit.

In addition, we currently have $35.9 million of availability under the accounts receivable securitization facility entered into on June 30. An additional source of liquidity is our $300 million at-the-market, or ATM, equity offering program we put in place in November.

This corporate financing vehicle is common among REITs, and is an efficient way to issue new shares in the open market, with cash proceeds for debt repayment, acquisitions or other corporate purposes. The ATM has no limit from time, there is no requirement to use it, and no shares have been issued to-date.

Our net leverage ratio at December 31 was 4.8 times, down slightly from last quarter. We remain focused on our goal to reduce this to our longstanding target range of 3.5 times to 4 times, which will be achieved through growth in OIBDA and debt paydown. Let me now turn it back over to Jeremy..

Thank you, Don, and moving on to slide 17. Let me now give you some color on our first quarter. We expect revenue growth to be up low single digits, stronger than we achieved in the fourth quarter. And importantly, this will reflect growth in both transit and billboard.

This outlook only represents our view at this point in time, and it's on a constant dollar basis. As you know, we've always been a little cautious looking at quarterly swings in our ad categories, so the fourth quarter is therefore an appropriate time to look back at 2017 and see what categories have had the greatest impact for the 12 months.

Our 10-K, which will be filed tomorrow, will also give you a three-year view of this. For 2017, the three U.S. advertising categories that had the biggest positive impact on our year-on-year revenue increase across both billboard and transit were technology, professional services, and health and pharma.

At the other end of the scale, our bottom three categories in year-over-year revenue change were auto, travel leisure, and retail. We talk frequently during the year about technology, and it continues to be an increasingly important category for us.

Although auto was the weakest category for the year overall, by the fourth quarter it had improved significantly. While it wasn't quite positive, it was certainly an improving trend throughout the year. Turning to slide 18, which was new last quarter, you can see an overview of our digital assets and revenues.

And I'd like to discuss our digital trajectory in a bit more detail. Our digital billboard inventory was up over 25% during the year through both conversions and acquisitions, with 982 boards at the year-end and revenue growth of 11.5%. Small format digital in-transit displays were up 20%, with 934 ending units and revenue growth of approaching 18%.

This growth came from the deployment of video Liveboards in Boston and Washington. As Don mentioned earlier, our plans with the MTA currently call for over 3,000 Liveboard units to be deployed during the latter part of 2018. And we also continue to invest in digital billboards across the country and in Canada.

So our digital story is really gaining traction. The combination of revenue from both digital billboards and small format was up 12.7% in 2017 and accounted for 14.4% of our total company revenues.

Based on what we see in other markets around the world, where the percentage of digital revenue is significantly higher, we expect it all to be the underlying revenue driver for future growth and for digital to be an increasing percentage of total revenues.

In total, we're going to be doubling our digital displays in 2018, and as Don mentioned, investing in our content management, insights and increasingly automated trading platform. As we increase the pace of investment in 2018, it's important for you to understand the benefits of these initiatives that we're already generating for our business.

Our Liveboard display deployments were critical in helping us retain the New York MTA contract. Winning the MTA and a 15 year contract was a huge win for us in 2017 and Liveboards were a big part of that. These screens also position us for significant revenue growth in the future in both New York and other urban markets.

Two other strategic initiatives are now generating revenues, OUTFRONT Mobile and cellular leasing revenues. While still less than $10 million combined, together they were up over 75% in 2017 and will continue to grow. In this quarter, we are launching an alpha of our new audience data with selected clients.

We're continuing to work on sales and client tools, data sources and automated sales processes, and we look forward to showing you our progress throughout this year. We believe these technological transformations are an absolute necessity for OUTFRONT to maintain and improve its competitive position in an increasingly digital age.

And I'll close by saying that while new technology is important, it's worth remembering that the billboard and transit assets we operate today are already an exceptional choice for our customers in a very fragmented and fast changing media market.

We can deliver mass audiences across the country or hyper local targeted advertising to young mobile affluent audiences in urban centers across the top 25 DMAs.

At a time when our advertisers are rightfully concerned about brand safety, ad blockers and fraud, we are in a strong and improving position to give them exceptional returns on their advertising investments. So with that, operator, let's open the line for questions..

Our first question will come from Alexia Quadrani with JPMorgan..

Thank you. Just a couple of questions.

First is just on the sort of the mix in the growth you saw in the fourth quarter, with national being the area strengthened and local being different, I mean how do you compare that to what we saw with Lamar and the relative strength you've seen there? And I guess you talked about the categories a little bit but what would you say was the main reason for your performance you've seen in the fourth quarter versus what you've seen for some of your peers?.

Thanks Alexia. And yes, I can obviously understand why you asked that question. I think there's a couple of different pieces here. I guess most importantly we have different assets. We have a major transit business that is obviously different from that of our major peer who reported this morning. We're in different geographies. We have different clients.

For example, Lamar have said previously their largest national client is Cracker Barrel and we have said before that our largest client is Apple. So, thus you can sort of feel the difference there, I think, in that example. And I think also as importantly from what we can understand, we think we actually have a sort of different reporting methodology.

So that sort of further complicates what is differences between the two companies. But I guess the important point is I think we shouldn't draw a line between – it's difficult to draw a line between the two businesses each and every quarter. I think there's one other thing I'd like to comment on with regards to our local performance.

We talk quite a bit going back over the last year or two about the reorganization – reorganizing within our sales force, getting the right people into our business. We've made a lot of effort in terms of training, in terms of motivation, in terms of accountability.

And I believe that actually we've been starting to sort of capture the benefits of that over the last sort of 12 months..

And so also this morning, Lamar mentioned that political is becoming more of a meaningful contributor to their business.

I guess would you see political more of a potential tailwind for you guys as well? Or not necessarily, given what you just said about the differences between your regions and your client base and such?.

Yeah, if we look back over the past, political has always had an incremental – or a larger incremental benefit to Lamar than to ourselves, just based on their footprint. So we won't be highlighting any expectation of significant tailwind from political..

Okay. Thank you very much..

Our next question will come from Marci Ryvicker with Wells Fargo..

Thanks.

Can you talk a little bit more on Q1 billboard up, and your total pace of up low single digits? Did national turn? And then for the full year AFFO guide of low-single digit to mid-single digit growth, are you assuming a positive national business?.

So when we look at the guide for Q1, we can certainly see that national is improving. Local is looking exactly where it should be. So we're fine on that. When we look forward at our – when we look at our business on a going forward basis, national is always the latest money to book.

And over the last sort of two years or three years, it's becoming increasingly late in terms of that booking, in line with the rest of the media marketplace. So as we look forward, I think we can have an expectation that we will see some growth in national this year.

But we can certainly have an expectation of some what we hope will be solid growth in local throughout the year..

Okay. And then a follow up on the strategic business investment, you spent I think $11 million. You're going to spend more this year.

Are you already seeing conversion into revenue growth? Is that what's driving revenue, which we would still consider a little bit anemic? Or is there going to be a point where you've gotten through the strategic business development and revenue will actually start to truly accelerate?.

I think when you – we pointed to a couple of areas where we've started to see a little bit of revenue growth. But in the overall scheme of the $1.5 billion, it's relatively de mini mis right now. And that's within the mobile and cellular piece.

I think the biggest benefit we will get is when we have comparable data and insight within our current billboard and transit assets that advertisers and agencies are used to when they're looking at how they're deploying other media, particularly within the digital world. And when we can start to trade that media in a much more automated way.

I think that's when we're really going to see the bump. And where we're looking – what we're looking to do is to, if you like, marry, if you like, the significantly increased digital hardware in the field that we're going to achieve over the next 18 months or so with the buildout of the MTA and the other investments we're putting in digital.

Marrying that to a much more automated back-end with data and insight I believe is where we'll start to capture that enhanced growth rate..

Great, thank you..

We'll hear from Jason Bazinet with Citi..

Yes, I just had one quick question on the new MTA contract in New York. You reminded us and I appreciate it that the capital expenditures won't flow through CapEx.

But I had a question, if there are cost overruns of some sort as you're sort of spending all this cash to upgrade it to digital, is there a simple way you can sort of frame sort of what risks if any are borne by OUTFRONT as opposed to the MTA?.

I think that the – there is a risk on the cost of the equipment and we think that we've bounded that pretty well. There is risks on the installation and if the risk of the installation is due to something that we've done wrong, then we're going to probably have to bear some of that, but I think we're pretty well organized.

I think that the bigger challenge on a logistical project like this is the ability of the MTA to stay up with us in terms of approval of designs, making sure we got all the people that are in locations when they got to be on locations.

And to the extent that that is something that – where they do not need and we incur some cost, and that enables us to extend the period of time to be able to recover the dollars on this contract. So if something is due to them, then we get more time to be able to recover the dollars from them. If it's our issue, then we've got to eat it.

But I think the -- our risk has been bounded pretty well by what we've managed and estimated on estimating this project..

Okay.

Would you – is the largest sort of digital deployment that you've ever done, is that a fair characterization at least the most complex?.

I think this is probably the largest digital deployment in a transit environment in the world. And we are taking it very seriously and we are trying to get the right resources to be working and managing this for us as we work with them and do this in a very smart thoughtful way, in a very multi-year way.

It's not something that's going to get done in one year or two years.

It going to take five years, six years to get this done and done correctly, smartly with great quality and that we can then therefore sell these screens in an advantageous way to make more revenue and help the MTA with improved communications and experience they want to give to their ridership..

Understood. Okay. Thank you very much..

Thank you. With no additional questions in the queue, I'll turn the floor back over to our speakers for any additional or closing remarks..

Thank you for your questions and for your time today. We look forward to seeing many of you at investor events in the coming weeks. Thank you. Good afternoon..

Thank you ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation. You may now disconnect..