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

Thank you for standing by, and welcome to the oOh!media Limited HY '26 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. James Taylor, Managing Director and CEO. Please go ahead.

Thank you, and good morning, everyone. Appreciate you joining us for oOh!media's 2026 Half Year Results. It's clearly been a significant period for oOh!, following last week's announcement that we entered into a binding Scheme Implementation Agreement with I Squared Capital, under which shareholders will receive total cash consideration of $1.70 per share, including the $0.02 fully franked interim dividend. The transaction represents a significant outcome for shareholders at a 100% premium to the undisturbed closing price of $0.85 per share on the 28th of April 2026. It's also a strong vote of confidence in oOh!, our market-leading out-of-home network, our people and the opportunities ahead. oOh! has built an impressive portfolio of out-of-home media assets in a structurally growing market. I Squared clearly sees the strength of the business today, the infrastructure-like qualities of our network and the opportunity to create further value from it. There's still a formal process ahead, including shareholder, regulatory and court approvals. Throughout that process, our job remains unchanged, keep executing, keep delivering for our customers and partners and keep improving the performance of the business. I'll start with a short overview of the half, the broader out-of-home market and the operational progress we've made. Chris will then take you through the financial results. I'll return to cover the outlook, including the strong momentum we're seeing into the second half before we move to questions. There are 4 key points I want to draw out upfront to provide important context for our first half results. Firstly, the structural story for out-of-home remains very strong. The sector grew 6.3% in the first half and has now reached a record 16.9% of agency media spend on a last 12-month basis. Secondly, our own first half financial results were below our expectations. While group revenue increased 1.4% to $340.9 million, the mix of that revenue and the timing of our investment in new contracts put significant pressure on earnings. We traded through a difficult macro environment, particularly through the second quarter. The Middle East conflict, 3 RBA rate increases and extremely weak consumer sentiment, all affected advertiser confidence, particularly across Billboards and Airports, both for us and the industry. Thirdly, we've been deliberate about controlling what we can control and continued our focus on execution. Since I joined oOh! 8 months ago, we've sharpened the strategy, delivered the first tranche of our operational excellence program, exited the reo retail media business and implemented the new MOVE audience measurement system. These actions have unlocked more than $12 million in annualized savings, including approximately $3 million of CapEx. Fourthly and importantly, the momentum going into the second half is fundamentally stronger than the first, as evidenced by a strong Q3 pacing at around plus 14% in Australia, with bookings well ahead of prior years and the fixed cost leverage of the business starting to work more positively. We acknowledge the first half for what it was and firmly believe the principal drivers were timing and operational leverage rather than a deterioration in the structural opportunity. The reason we remain confident is due to the continued power of out-of-home. The sector remains one of the strongest structural growth stories in media. It's taking share from other media channels because it offers something increasingly scarce, large-scale audience reach in real-world environments. And the category continues to become more sophisticated through digitization, data and audience measurement. As you can see on this chart, Out of Home's share of agency media spend has risen again to 16.9% today. oOh! is uniquely positioned within that growth and the new audience measurement system, MOVE, is now making the quality and reach of our multi-format assets substantially more visible to advertisers. That's the structural opportunity we're focused on converting into stronger returns. With that context, let me turn to what we delivered operationally through the first half before Chris takes you through the numbers. There's been a considerable amount of execution behind these results, with the team delivering on the commitments we made at our full-year results in February and again at our AGM in May. We're already seeing the benefit of major net additions. Sydney Metro continues to build. Melbourne Metro Tunnel is now onboarded, and we've expanded our digital footprint across retail. The retail format is particularly encouraging. Australian Retail grew 4% in the half and returned to growth for the first time in 6 halves. That reflects improved audience measurement, additional digital inventory and the targeted new go-to-market approach. On strategic execution, the operational excellence program, which I spoke to you about in May, has now delivered more than $10 million of annualized benefits, and we're confident that we will deliver a further $1 million to $2 million of annualized benefits. As promised in May, we have also deployed cross-network planning capability across our major formats. We've integrated industry audience measurement directly into our enterprise systems. We have implemented a new sales incentive program effective from 1 July this year. These changes taken together, shorten the time and cost of getting assets in the ground and the cost to operate and maintain them. They make us faster to respond to client briefs. They allow us to better deploy revenue across our asset base and they align sales activity to desirable commercial outcomes. Finally, we've commenced reshaping the portfolios. In the first half, this included the decision to exit our retail media business, reo. We completed the shuttering of that business in the half, creating $2 million of annualized savings by 30th of June. Following the Auckland Transport transition, the New Zealand cost base is now being reset. These were commitments we made earlier in the year. We updated you at our AGM in May, and we've delivered on them. I'll now hand over to Chris to take you through the financial results in more detail.

Thank you, James, and good morning, everyone. Turning to Slide 10. I will now walk you through the revenue composition as revenue mix was a key contributor to our first half earnings. Australian revenue increased 6% to $340.9 million, with group revenue growing at 1% as we comped against the weaker New Zealand results without the Auckland Transport contribution. Within Australia, all formats grew other than Billboards, which largely has a fixed rent base. Billboards was the format most exposed to the deterioration in advertiser confidence through the first half, particularly in brand-led category, and it was cycling a strong prior period. As mentioned, all other formats grew across the half within Australia, reflecting the introduction of new premium assets, including the Melbourne Metro Tunnel and Waverley Council, and a renewed advertiser interest in our Office and Study portfolio. Importantly, our Australian market share was flat during the first half at 36% as well on a rolling 12-month basis. On Slide 11, our gross profit waterfall outlines that there was a decline in gross profit and gross margin declined by 4.3 percentage points versus the corresponding first half. This below expectations performance was largely a function of the combination of adverse revenue mix, with the decline in largely fixed rental board revenues and continued growth in Airports, which carries a high variable rent. Additionally, a step-up in rents attached to the high-profile new contracts such as Transurban did not have the initial overall portfolio benefit as quickly as we would have expected. Lastly, as mentioned earlier, the business is comping against a legacy highly profitable Auckland Transport contract, noting that this headwind will ameliorate in the fourth quarter of this year. As James touched on earlier and will return to in the outlook statement, we are seeing a substantially stronger top line performance in the third quarter, including mix improvements. This and the slowing down in fixed rent growth will contribute to a significantly better drop-through and gross margins in the second half as the business benefits from its fixed cost leverage. Turning to our profit and loss statement on Slide 12. The underlying adjusted EBITDA decline of $14 million versus the prior first half was predominantly driven by the gross profit decline addressed on an earlier slide. The half included $7.4 million of non-operating items. These primarily related to the implementation costs attached to our operational excellence programs, including redundancy and consultancy costs. Additionally, we incurred one-off costs in completing the reo exit, retiring legacy technology systems and the private equity bidding process transaction-related costs. Adjusted underlying NPAT was $15.4 million. As mentioned in the prior slide, an improved gross profit and margin outlook in the second half is expected to compound at the EBITDA and EBITDA margin level, especially when considering the cost-out actions taken late in the first half, which James outlined earlier. Now, turning to the cash flow on Slide 13. Cash conversion was strong in the first half, with operating cash flows of $40 million, representing 98% of adjusted EBITDA. Capital expenditure was broadly stable at $24.8 million, and reflects the continued investment in digitization, new contracts and network growth. As noted in the appendices, gearing was at 1.0x at 30 June, consistent with our target. I'll now hand back to James to take you through the outlook.

Thanks, Chris. The trading environment we're seeing in H2 is materially different to the first half. Australian Q3 media revenue is currently pacing at approximately 14%. At group level, that equates to 9%, reflecting the continued year-on-year impact of Auckland Transport in New Zealand. And the forward indicators are particularly encouraging. Importantly, the strength is broad-based rather than being driven by 1 or 2 customers or categories. There's a network component to this as well. The new assets we've invested in the building contribution, including Transurban and additional premium inventory comes into market later in the year. At the same time, the rate of fixed rent growth begins to normalize. That combination is important for operating leverage. Our current expectation is for CY '26 CapEx of between $40 million and $50 million, largely funding new advertising assets and subject to development approvals. And we expect gearing to remain within our target range. So, our confidence for half 2 is based on what we can actually see in the forward book. We expect a materially stronger second half. That concludes our formal presentation for today. Chris and I are now happy to take any questions.

[Operator Instructions] Your first question comes from Entcho Raykovski with E&P.

So, my first question is just around the special divi that you've proposed as part of the transaction. I'm just curious why that's been limited to $0.10 per share. I mean, obviously, it releases $0.04 per share franking credits. But I think you've got over $0.16 of credits accrued on your balance sheet. And so arguably, you've got scope to release more. So, my question is, why have you elected not to go a bit harder on that special divi? Was it funding constraints, which prevented you or something else? And I've got a couple of others. But do you want them now or maybe wait for the answer to this one?

Sure, Entcho. So the $0.10 special divi was an outcome that was agreed with the bidder.

Okay. Got it. Was that -- I suppose, are you able to say whether there was -- because it feels like you've got maybe some comfort -- sorry, some control rather over what you can do and the quantum of that dividend. Was it something that was explored as being a little bit higher than that number given that franking credits balance?

Yes. So, Entcho, franking credits is part of the component you touched another, which is impact on debtors. And it's also about available distributable profits around the various entities. So, all those 3 things went into the mix to arrive at that outcome, which we jointly agreed with I Squared.

Okay. Got it. Second question, I mean, also related to the bid, but also today's result. I think you've got a material adverse change definition in the Scheme Implementation Agreement that includes an EBITDA threshold of $115 million. So, looks like you've got to be above that number for FY '26. And I'm just conscious that we've just seen the first half EBITDA decline. It's down by over 22%, and that sort of trajectory would take you below the $115 million number for the full year. I mean, granted second half has started much better, but I suppose, can you talk about what the gross margin profile looks like in the second half, just the level of comfort that you can deliver second half earnings growth given the much better revenue trajectory?

Yes, sure. Entcho, thank you for that. So, we're very comfortable in terms of that MAC clause. As you well know, we are very much a fixed cost top line-driven business. And so we've got stronger pacing going into third quarter. We're halfway through the quarter now. And also don't ignore the cost-out that we took in the first half. To give you an idea of what that momentum does to our business, our July EBITDA is actually more than double last July. And so as we -- in fact, we said on this call, there's significant favorable fixed cost leverage coming into our second half results, with July already behind us and August is going to be the same.

Okay. Got it. I mean, clearly, you signed the agreement knowing what the first half numbers were going to look like. Were I Squared also aware of, I mean, subject to confidentiality arrangements, what 1H looked like when they committed to the bid?