oOh!media Limited (OML) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the oOh!media Limited Half Year '20 Results Investor Conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Brendon Cook, CEO. Please go ahead.

Good morning, everyone, and apologies for further delay in the technology. Thank you for joining us today. And I'm here today with Sheila Lines, our Chief Financial Officer. And together, we will present our first half 2020 results. After Sheila and I have presented, we will take any questions which you have. If you have access to the slides, please move to Slide 3. oOh!media, as has Out of Home globally, was significantly impacted by COVID-19 and the result of government response in limiting Out of Home audiences through the prevention of movement in normally high-traffic locations, such as CBDs, airports and train stations. This, coupled with the COVID-19-induced severe contraction of overall media spend, resulted in an unprecedented 62% decline in our second quarter revenues. The business responded early and decisively to address these severe revenue challenges by increasing our capital base with an equity raise in March, April, lifting our banking covenants, targeting cost and capital expenditure and focusing on cash flow management. These measures have jointly contributed to a more than halving of the company's gearing to 1.2x from 2.6x in December and a reduction in net debt by 67% over the same period. These measures significantly improve the financial resilience of the business to trade through these challenging times. Importantly, we did not lose sight of the main game, which is to fight for market share and right revenues. During the second quarter, we reinforced the strength of our primacy in the suburban metro and regional markets on a national basis to agencies and clients. This enabled the company to hold share across the half despite over-indexing in our share of out-of-home assets in the heavily audience impacted Airport and Rail segments. These efforts have started to show green shoots with significant improvements in monthly pacing from a low point in May as outlined later in the presentation. Our New Zealand business has also clearly established that the Australian market should bounce back strongly once audience restrictions are lifted. From a strategic positioning perspective, I would emphasize that although COVID-19 has appeared to have disrupted industry structures, including media, I see no evidence of structural tailwinds behind Out of Homes ascendancy being impacted over the medium to longer term. Thus, when audiences return and Out of Home returns to its position of taking share from the overall media pie, the initiatives which we have undertaken and are planning will improve the margins to deliver on shareholder expectations. Finally and most importantly, in my opening remarks, I would like to acknowledge the employees of oOh!, who during this difficult time, have brought their best selves to work under difficult circumstances. Their commitment to the business and each other has been simply outstanding, and I thank you for that. Turning to Slide 4. As outlined earlier, the impact of COVID-19 was severe and led to a 33% decline in revenues for half 1. While management sought to mitigate this through the initiatives I touched on earlier, underlying EBITDA fell by 81% and NPAT by over 350%. Please note that the financial outcomes on this slide are presented on a pre-AASB 16 basis, as was the case last year. Given the dividend suspension announced earlier in the year, no interim dividend was declared. As of 30th of June, gearing and net debt are at record lows, with over $125 million held in cash, therefore, providing a platform of financial resilience. Sheila will speak more to our financials later in the presentation. Moving to the next slide. This slide clearly outlines the impact of COVID-19 on our first half result, the flat quarter, followed by a 62% decline in the second quarter. Those formats, which are more exposed to travel or audiences in confined spaces, such as airports, trains and office towers, were more heavily impacted by the government restrictions of movements that were in placed -- that were phased in from April. Although oOh! from a market share perspective, over indexes versus our competitors in these commuter environments, our multiyear strategy of building a diverse portfolio buffered this impact somewhat. Road and Retail, in particular, with their strong suburban metro and regional networks, held up substantially better, enabling oOh! to take share in Out of Home in the majority of key advertising categories from the majority of agencies as reported by standard media index SMI and outlined in Slide 22. Moving to Slide 11. The key ingredients to a healthy Out of Home market are strong audiences and advertiser confidence. New Zealand is a case study for how the market should normalize when audience returns and when advertisers return to their priorities of building or defending market share versus near-term cost savings. As you can see from the orange dash line, New Zealand audience movements declined ahead of Australia due to the early lockdown. The consequent containment of COVID-19 resulted in a rapid audience return to circa 90%, pre the most reentry into stage 3. Advertisers responded strongly to this with oOh!'s New Zealand originated revenues, represented by the orange columns, returning to an excess of 80% of the pcp in August. Australia represented a more muted dip in recovery as the state government's initially adopted a less vigorous containment policy than New Zealand. As evidenced by the blue dash line, audiences were also on track to be above 90% in August before the second wave arrived in Melbourne in late June. Revenues in Australia more than doubled in percentage terms as the pcp for May to August as audiences improved and advertisers took a more measured approach than their initial near cessation of market activity in May. Another difference is that oOh!'s portfolio in Australia differs from New Zealand through the high commuter concentrations in airports, train stations and CBD office towers. But as explained later -- earlier, sorry, despite this, we retained share in Australia. New Zealand, principally, consist of bus shelters with road-facing audiences and retail centers. The overall media market performed stronger in New Zealand than Australia per SMI data with Q2 down minus 36% versus Australia's minus 39%. Importantly, briefing activity continues at elevated levels versus the earlier Q2 period despite the lockdowns in Melbourne and New Zealand. In fact, New Zealand has, in the past 4 weeks, written more money into the year than the same time last year. This is a reflection, I believe, of the sentiment shared by Mark Lollback from GroupM on the slide, which is that advertisers have a far more balanced and optimistic view that COVID-19 flash points are containable and that people are continuing to spend, thus allowing marketing dollars to achieve their ever important ROI. Simply put, advertisers cannot afford to go dark without risking forfeiting market share, which is so critical in this environment. In summary, I remain confident that our society -- excuse me, as our society adjust to COVID-19, we will continue to see an uplift in audiences and advertisers engaging with Out of Home as has been demonstrated by this case study. Turning to Slide 8. As part of the capital raise, which took place as the impact of COVID-19 started to unfold, the business committed to achieving cost and cash savings across its COGS, OpEx and CapEx base. I'm pleased to outline, as per this slide, that the business is on track to exceed all 3 objectives with over $80 million of cost and cash savings locked in this year. Firstly, versus a fixed rent saving target of $10 million to $15 million, the business forecast at the capital raise, we achieved locked-in net fixed rent savings at the end of June of $31 million for 2020, of which $17 million benefited the rent cost in Q2 with the balance of $14 million to be accounted for in H2. Separately, $14 million of rent payments, which were otherwise due in 2020, have been deferred to the first half of 2021. These will represent a cash flow benefit but not impact the EBITDA outcome of 2020. We are very grateful to those commercial property partners who have demonstrated both understanding and sensibility in agreeing to rent abatements, where advertising dollars in the market and audiences have been so heavily impacted. Operating expenditure savings in excess of $15 million will be delivered this year, that is before accounting for JobKeeper. This principally consists of labor savings through a wide variety of measures in cost reductions. JobKeeper delivered circa $7 million in the second quarter and will deliver the same in the third quarter. At this stage, we expect that the bulk of the business will requalify in the fourth quarter based on an expectation of third quarter revenues meeting the criteria. Only $10 million of capital expenditure was spent during the first half, and we are on track to spend below $30 million for the full year. This represents a saving of in excess of $35 million versus the midpoint guidance of $65 million provided in February. Focus of the capital expenditure program over the remainder of the year will be the cost associated with moving into our new premises in Sydney and Melbourne as part of the Adshel integration, further progress in development of our operating platform and meeting commitments to [ counsels ] for street furniture and the digitization of key sites. The business will be prudent on new asset development, unless we are confident of the appropriate return based on the advertising market circumstances. The $80 million outlined today is the first stage of streamlining the business cost structure, and I'll touch on this later in the presentation. Turning to Slide 9. This slide outlines that management has complemented the existing natural stabilizer variable cost base with actions to introduce variability to what was previously considered fixed cost as outlined in previous slide. While the government's support from JobKeeper is much welcome, the vast bulk of the heavy lifting was undertaken by management and the natural variability that the business enjoys in its cost base. You will note that coming into 2020, we had through pre-existing contracts, a step-up of circa $9 billion in fixed rents, representing a circa 10% annualized increase of the financial year '19 fixed cost base. This is a function of existing annual step-ups in rents and contracts, new and important contracts, renewals and including those substituting previous variable rent components into fixed rent versus the pcp. Turning to the next slide. The business has announced to restructure to streamline the business and lower its operating cost. This will deliver run rate savings of circa $10 million per annum. Additionally, we will continue to tightly control our rent base and capital expenditure to align our overall cost and asset base as close as possible with the expected revenue environment. Given our belief in the structural growth of Out of Home, management is committed to ensuring that any short-term necessary actions do not diminish the long-term opportunity. In saying that, the business will continue to monitor the environment and take such actions that are necessary to ensure the financial resilience of the business in these volatile times. Moving to Slide 11. As outlined earlier, the company reduced its net debt from the beginning of the year by 67% to an all-time low gearing of 1.2x as of June 30. In addition to the capital raising, the business also generated a further circa $80 million in free cash flows during half 1. This is primarily a result of very tight focus on receivables collections, where we have experienced very few bad debts given the market circumstances. We have, however, as outlined earlier, actively reached agreement or remain in negotiations with our landlord business partners regarding rent abatements. This also contributing to an improved cash flow, in some instances, with typical upfront rent payments being converted into variable rent, which is paid following the end of the reporting quarter. The CapEx of less than $10 million also represent the lowest CapEx for first half since listing. As noted on the slide, we have total facilities of $520 million with $232 million available at 30th of June and remains the case now. To further support the business's liquidity, any short-term incentives for 2020 will not be paid in cash as is traditionally the case but rather as shares. It is also anticipated that dividend suspension will continue with respect of the full year earnings to preserve cash flows in early H1 '20. I'll now hand over to Sheila who will take you through the financial statements in more detail.

Thank you, Brendon, and good morning. Before I make specific comments on the components of the financial statements, I would like to highlight Brendon's earlier statement that these financial statements are presented principally on a pre-AASB 16 basis, which is consistent with the prior year. We believe this is the appropriate approach, particularly as most analysts and shareholders analyze the company on this basis. Our statutory reported results, including AASB 16 are provided in the half year report and a reconciliation of the key profit and loss items between our statutory results and these pre-AASB 16 results is provided in the appendix to this presentation as well as in the operating and financial review. Turning to Slide 13 and our income statement. While our first quarter revenues were in line with prior period, as Brendon spoke to earlier, in the second quarter, revenues were significantly reduced following the onset of the COVID-19 pandemic. The $100 million or 33% decline in revenues for the half translated to a gross profit decline of $58 million or 45% to $69 million. The decline in gross profit was partially mitigated by recognition in Q2 of $17 million as of the total $31 million fixed rent reductions we have negotiated so far in response to the COVID-19 impact. Gross profit margin declined 7.8 percentage points to 33.7% compared to the pcp. Our first half typically has lower gross margin than the second half due to the seasonality of revenues. Operating expenditure, excluding depreciation, amortization and nonoperating items, declined by $5 million compared to the prior period before including a further $7 million of JobKeeper and New Zealand wage subsidy benefits received in the quarter. This underlying $5 million decrease in operating expenditure of the prior period includes a $4.5 million increase in realization of synergy savings from the Adshel acquisition compared to the prior period of $3 million. In total, Adshel synergy savings realized in the half was $7.5 million in operating expenses and $1 million in cost of goods sold. While we have experienced very strong receivable collections in the half, in light of the external environment, we increased our bad debt provision, resulting in a noncash operating expense of $1 million. Excluding the impact of JobKeeper, increased as sharp synergy realization and the noncash increase to the bad debt provision, operating expenses decreased compared to the prior period. As actions we initiated from March in relation -- in response to the COVID-19 pandemic, more than offset annual wage increases from 1 January, directors and officers insurance increases, and increased investment in cyber risk mitigation and well-being safety and environment resources. Our investment in cyber and employee well-being served us well through our highly effective change across the group, to remote working in the second quarter. Employee benefits expense represents the majority of our operating expenditure, excluding depreciation and amortization expense. Employee benefits expense is $11.5 million lower than the prior period, JobKeeper in New Zealand -- in Australia and New Zealand, wage subsidies totaled $7 million of the decrease. We implemented a range of initiatives to respond swiftly to the impact of the pandemic including hiring freezes from March, utilization of annual and long service leave, and 80% of our workforce volunteered for a 4-day paid week from mid-May to mid-August, which contributed $1.8 million of savings in the quarter and will do so again in the third quarter. We are grateful to the support of our people in helping oOh! navigate through a very challenging second quarter. We also instituted measures to CECL nonessential spend in nonlabor expenses, including very significant reductions in travel, entertainment and marketing. These restrictions will continue, except where expenditure has an immediate positive impact on revenue in 2020. While our workflows across many of the areas of the business are at pre COVID levels, after considering the most likely scenarios that full economic recovery will not be until 2022 or possibly 2023. We have taken the decision to permanently discontinue a number of roles in the business. While the majority of these roles were vacant due to the hiring freeze instituted in March, in August, we took the difficult decision to discontinue a further 22 roles filled by employees. Following the August restructure, full-time equivalent head count will be reduced circa 50 from the start of the year. In total, 7 -- $10 million of structural savings costs have been timely removed from our pre-COVID operating expenditure, and we continue to seek other structural savings. Underlying EBITDA fell by 81% to $11 million for the half. Nonoperating items of $2.9 million pretax are excluded from underlying trading results and the majority relate to a $1.9 million impairment in Junkee, which represents the entirety of its goodwill and intangible assets. A further nonoperating expense of $0.9 million relates to residual Adshel synergy realization and IT integration costs. The impact of COVID-19 on our 2020 earnings and economic forecast for subsequent years, significantly reduced the excess of the value in use for our Australian and New Zealand Out of Home businesses over the carrying value of those assets at December 2019. However, this did not result in an impairment below carrying values in the first half other than for Junkee. Depreciation and amortization increased during the period following the upgrades of Brisbane airport last year and further digitization of key sites in 2019 and the first half of 2020. Net finance costs increased $1.8 million due to $4.4 million noncash expense, being the mark-to-market on interest rate hedges no longer deemed effective following the significant rent debt reduction in the half. $3 million of this $4.4 million ineffective hedge expense is a reclassification from December balance sheet reserves. Excluding this impact, cash net finance cost decreased due to the debt reductions over the first half. The NPAT loss of $23 million for the half compared to a $9 million profit in the prior period, underlying NPATA loss was $16.9 million compared to an underlying NPATA profit of $18.2 million in the prior period. In the appendix to this presentation, we provide a reconciliation of NPAT to underlying NPATA. Moving to our cash flow on Slide 14. Our strong focus on cash management delivered significantly increased operating cash flow result for the half. First half operating cash flows were $86.2 million an increase of $69.1 million compared to the prior period. Trade and other receivables reduced $95.7 million in the half compared to $8.2 million in the prior half. We have increased focus on credit and collections activities and have not experienced a deterioration in customer credit. However, as mentioned earlier, we have taken the prudent step of increasing our bad debt provision, given the challenged economic environment. Cash flow from operations also benefited from agreements reached with commercial partners to defer $5.3 million of the first half rent expense until 2021. Income tax paid of $1.5 million for the half compares to income tax paid of $24.7 million in the prior half. Due to NPAT losses, our current income tax installment rate has been varied to nil for the remainder of 2020. Capital expenditure below $10 million represents the lowest first half CapEx investment since the company listed in 2014 and is focused on the digitization of key sights and bus shelters in high-value metropolitan areas and our corporate requirements, including technology. We have continued to dispose of immaterial business units to focus on our business activities that meaningfully contribute to our financial returns, $1.3 million was received in the half for disposal of assets. Finally, financing cash flows included the $162 million net proceeds from the March equity raise. We had strong support from our shareholders for the raise and the proceeds were applied to reduce borrowings. Turning to our balance sheet on Slide 15. As outlined earlier by Brendon, the business is currently at a record low gearing ratio of 1.2x and is holding record high cash holdings at June 30, 2020, of $125 million, an increase of $64 million from December. This has been achieved through a combination of the March equity raise net proceeds of $162 million and free cash flow generated by the business of $77.8 million. Net debt is $115 million, reduced from $355 million at December 2019 and current undrawn borrowings to proceeds of $232 million. We have quickly taken strong and decisive action across a range of measures to position oOh! to face the current uncertain times and make the right long-term decisions to capture the benefits of continued structural Out of Home growth in the years ahead. I will now hand back to Brendon.

Thank you, Sheila. Just turning to Slide 17. As you can see on Slide 17, our strategy remains consistent with what we presented earlier this year. This is because we firmly believe that the tailwinds that have propelled Out of Home since our listing are structurally set to continue. While COVID-19 has clearly reduced Out of Home audiences for the first time in our history, we believe that the long-term trends of continued population growth in ANZ, urbanization, suitability of Out of Home to digitization and enhanced audience targeting abilities, driving stronger advertiser ROI, will continue. I believe without any doubt that Out of Home is the broadcast rich medium of the future, as traditional media outside of Out of Home will continue to be disrupted by audience fragmentation and technology. Our good strategy stands the test of time and the retention of share in the Out of Home market through the diversity of our network and reliance of -- and resilience of our people has proved that. In summary, our strategy positions oOh! to drive and capitalize on the structural growth of Out of Home that will continue through the medium and longer term. Turning to the outlook on Slide 19. Media bookings for August year-to-date have continued to improve. However, the market is shorter with bookings estimated circa 2 weeks close to the display periods than previous years. This momentum over the past 4 weeks has seen us book 75% of the revenue we achieved over the same period in 2019 into Q3. Despite the lockdowns implemented in Melbourne and New Zealand over this period, oOh! is continuing to get traction in the Australian markets with a position of the strength of its metropolitan suburban and regional asset base, and we believe that this will position the business strongly over the remainder of the year. oOh! will continue to focus on managing its cost and cash flow in a disciplined approach as we have done in the first half. Given the uncertainty in the short-term around the exact timing and quantum of audience uplift, we will not be providing earnings guidance at this point for the second half. As outlined earlier, we will be spending less than $30 million in CapEx for the full year and it is unlikely that a dividend will be announced in respect of the final result. Thank you. Sheila and I are happy to take your questions.

[Operator Instructions] Your first question comes from Matthew Nicholas from Crédit Suisse.

Just the first one on the outlook. It's obviously not surprising in you giving a firm outlook, but just in terms of August tracking at 60% versus effectively where it was last year, can we get a sense on, to the extent you can delineate it, what the rest of Australia is doing as opposed to what Melbourne is doing, which might give us a better idea as to what the world looks like in a few months?

Sure. To be fair, the clients are much better prepared for these sorts of things than they were back in April and May, like all of us in understanding which assets and where have particular roles to play. So we have seen less than $1 million in people shifting money out of Melbourne, specifically under the assets in Melbourne, which is the real point. In terms of the briefing from major clients out of Melbourne, whilst there was a slowdown in the first week as they probably adjusted physically to the changes, we're seeing that come back to the same ratios that we may have expected between the markets in terms of the national [ buyers ]. Certainly, clients have also been prepared to accept if they needed and wanted to advertise through those lockdowns, that some of the money that would have gone under Melbourne assets, they've found other areas which our data was able to be highlight where audiences are and remembering that regional New South Wales and the rest of Australia and also across the metro areas of South Australia, West Australia and Queensland materially up -- materially close to pre-COVID type traffic conditions. So all in all, I won't say it was like the May impact, rather it's more subdued at this point.

Right. Right. And just 1 on the rent, which have -- Sheila has done a very good job on today. Just cognizant of your comments on the call thinking on we're not going to see a full recovery until, say, '22 or '23, the rental abatements you've got at the moment is short term. Can we get a sense on any progress you might have made as to potentially extending some of that support into '21?

Obviously, there's material areas of the business that have bigger impacts, e.g., airports and rail, as an example, and our office buildings and many of them have natural hedges now to audiences come back or lack of come back, if I can put it that way. So that is a significant pool where we have a fair amount of variability over the coming periods into '20 -- rest of '20 and '21, et cetera. Obviously, we're in negotiations in multiple areas around where those impacts. Clearly, we're seeing less impact in the road environments. So they will be back to normal faster and quite rightly so. And in retail, you're seeing less of an impact in the smaller and medium-sized centers than you are in the larger centers, where clearly, there are areas, particularly if you have lockdowns. But again, the traffic was significantly back pre some of those lockdowns in Melbourne and some subdued behavior sense in the other, and particularly in New South Wales. So with the variabilities we have in place and some ongoing negotiations, we expect to continue to be able to deliver certain benefits throughout '20 and some of those benefits will clearly fall into 2021 as well.

Right. And just the last 1 for me. On the cash flow, there's obviously a couple of abnormal items there in terms of no tax. And you have had some delay in payments of fixed rate. But that aside, should we expect some normalization of the working capital benefit that you got in the second quarter? Or given how subdued the media market is at the moment, it's fair to say cash conversion in the current half should be relatively decent?

Yes. I'll take that one. So dealing with tax, first of all, yes, we certainly have paid a lot lower tax in the first half. And as I mentioned, I referred to our installment rate to nil for the remainder of the year, but that's a function, obviously, of a lot lower revenues. So it is a function of the environment rather than a one-off, and that will continue for the rest of the year. Clearly, we don't expect the same benefit of the unwind of receivables that we've received in the second quarter. And in terms of deferred rent payments, as I mentioned, at June, it's $5.3 million. And as Brendon, and we mentioned earlier on the slide, at December, that will be more like $14 million. So the bulk of the savings that are mitigating the revenue drops are the OpEx and the rent reductions, which are not deferrals as well as the government benefits. But clearly, we won't get the same level of cash inflow from receivables.

Next question comes from Fraser McLeish from MST Marquee.

A great job on cash controls. And my question is just on that, Sheila, because we've obviously got to go a little bit forensic to understand on a quarterly basis when we're looking at your -- and banking covenants from here. So just in answer to Matthew's question, were you kind of saying we shouldn't expect any working capital reversal in the next couple of quarters? Because you're obviously not going to get the benefit, but will we see a negative or positive working capital in the next 2 quarters?

Well, as sales, as I'm sure, when you run your models, so sales increase, you would get a slight, but it is -- it will only be small because it really depends on that recovery in sales. And also, as mentioned, we do have those deferral benefits with the agreement of our partners on the out payment side and 0, we're not expecting any income tax installments for the balance of the year. So nothing like the inflow we've had. Really quite small from a working capital impact expectation for the rest of the year. Again, noting that the $31 million for the year in rent or lease and the JobKeeper and the other OpEx savings are not deferred payments. They are in-year savings. So that's where we would think in terms of the second half. Clearly, the very significant inflows in the second quarter set us up very well, looking ahead for the next 6 months.

[Operator Instructions] Your next question comes from Brian Han from Morningstar.

Brendon, I know it's early days, but are there any already advertisers having conversations with you about the November, December period looking to -- I don't know if [ we can see ] some attractive rates?

Yes. What's been pleasing for us is that a number of major, major advertisers representing the bigger end of our client base have entered into deals relative to volume deals going into their spend for the new financial year, which clearly includes the back end of the year. And they are starting to unwind that by placing them into the various times that suit their different campaigns. And that's been pretty broad-based across some of the categories that were a bit more subdued during the quarter 2, example, media and content consumption type products, FMCG, alcohol to name but a few. So we're certainly seeing that there's not a reluctance to spending Out of Home. It all comes back to, I think, people are more conscious of when they're releasing their own cash rather than anything structurally to do with the medium.

And Brendon, on your internal analysis, has there been much correlation between, say, a toll road traffic recovery and demand for your billboards and Adshel inventories?

We have -- obviously, we have some advanced mobile data that we track movements with relative to the volumes of locations that we have across the country in all precincts and all areas. And we report that now on a weekly basis have been for some time to the market. So that they can see the trends by market and significantly by some of the areas which we have divided in cities to be in suburban and CBDs. And clearly, you are seeing your suburban areas traffic hold back and come back quicker than the CBD. So specifically to toll roads, it would be dependent on their activity. If they have a strong commute to a CBD, they would be slower to come back, but still improving versus, say, localized roads that are in and around very suburban precincts. The exception to that, of course, is regional traffic, which materially from, say, using markets like Sydney as an example, moving from Sydney to regional areas is very high over the weekend periods.

There are no further questions at this time. I'll now hand back to Mr. Cook for any closing remarks.

Thank you all for providing the time and sorry for the technology. We look forward to chatting with you at any time. Goodbye.