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

Thank you for standing by, and welcome to the oOh!media Limited or OML HY '25 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Ms. Cathy O'Connor, MD and CEO. Please go ahead.

Good morning, everyone, and thank you for joining us for oOh!media's half year results for the 6 months ended the 30th of June 2025. I'm Cathy O'Connor, Chief Executive Officer, and I'm joined today by our Chief Financial Officer, Chris Roberts. We appreciate your time and look forward to walking you through today's results and speaking to the progress that we've made as we continue to execute on our strategy for growth. I would like to start today by acknowledging the traditional owners of the land on which we meet, the Gadigal people of the Eora Nation, and we pay our respects to elders past and present and recognize their enduring connection to this land. Before we get to the results, over on Slide 4, I want to recap the reasons underpinning oOh!media's strong investment proposition. Out of Home continues to be the standout performer in the Australian media sector, again, increasing its share of agency media spend in the half to 16.5%. Now this is a record high. In that context, oOh! continues to lead the market. We operate the largest and most diverse Out of Home network across Australia and New Zealand, with over 35,000 assets reaching 98% of metropolitan Australians every week. That scale, combined with our deep capabilities and a disciplined approach to cost and contract execution continues to differentiate us. We are #1 in revenue, in margin, in network footprint and in format diversity. And our experienced team is focused on maximizing shareholder returns and capturing our share of this structural growth opportunity. Over to Slide 5. From an operational perspective, it was a very busy first half, and I'd like to cover just some of the highlights. As we spoke about in February, we've strengthened our senior sales team, refocused our marketing activity and realigned our sales, product and marketing teams to accelerate our speed to market. The early success of our refreshed go-to-market approach is visible in our first half numbers. We've made excellent progress rolling out our new assets, particularly across Sydney Metro, where early performance has exceeded our expectations. Woollahra is now largely complete, and we've commenced the rollout of the Waverley Council assets, further strengthening our footprint in the high-value Eastern Sydney corridor. In addition, our successful bid for Transurban's large-format contracts in Melbourne and Brisbane has added 42 premium motorway sites to our network. Now this is a landmark win that solidifies oOh!’s leadership position in road across all 5 capital cities. Operationally, the cost-out program executed earlier this year is delivering tangible benefits. These savings are being reinvested into capabilities that support our growth ambitions, including sales execution, reo and digital enablement. These initiatives are already contributing to stronger client engagement and sales conversion, and will continue to underpin our performance in the second half. Now moving to an overview of our interim year result on Slide 6. We delivered record underlying results, building on the momentum from the second half of '24. Group revenue grew 17% to $336.2 million, supported by solid growth across road, street, rail and fly. Importantly, this growth was driven by both our existing portfolio with circa 80% of the growth generated organically, as well as new contract wins, which contributed circa 20% of revenue growth for the half. Adjusted underlying EBITDA was up 27% to $62.2 million, and adjusted underlying NPAT increased 46% to $26.5 million. Our statutory result was impacted by a $30 million impairment we took on our New Zealand business following the Auckland Transport tender outcome, and Chris will cover this in more detail later. On this contract, we are confident that we bid to our disciplined thresholds, and I'd like to acknowledge the fantastic contribution that our New Zealand team has made to Auckland Transport over many years. Reflecting this strong underlying performance, the strength of our balance sheet and our confidence in the outlook, the Board has declared a fully franked interim dividend of $0.0225 per share, up 29% on the prior year. Now looking at revenue by format over on Slide 7, where you can see that the business delivered broad-based revenue growth in the half. Road grew 19% year-on-year, predominantly from a much better performance on existing assets. Street Furniture and Rail also grew 19%, with contributions from the continued rollout of the Sydney Metro and Woollahra Council assets. Retail increased modestly by 1% as strong 33% growth in New Zealand was offset by some softness in Australia, where we are taking action to improve competitiveness, including strengthening retail expertise. Fly delivered a standout result, growing 43%, reflecting continuing growth from focused sales strategies and improved sales execution. And City & Youth declined by 3%. Our share of the Australia/New Zealand Out Of Home market was 35.4% in a sector that continues to grow at pace. And in July, our share was closer to the market versus the average share over the first half. So, I'll now hand you to Chris, and he's going to take you through an update on our lease expiry profile. Chris?

Thanks, Cathy, and good morning all. I'll begin by looking at our current lease expiry and performance profile on Slide 9. Following the conclusion of the Auckland Transport contract later this half, oOh! will enter a period with no major medium-term revenue expiry contracts due. That provides a stable foundation to support our future growth. Importantly, no single contract represents more than 5% of our group revenue. Our lease portfolio remains highly diversified across geographies, formats and tenures and more than 50% of our revenue base now extends to 2029 and beyond. Importantly, since the beginning of 2023, we've secured over $90 million in annualized revenue expected through new contracts, such as Transurban, Sydney Metro, Woollahra and others, which further derisks our position. This profile delivers a more predictable revenue stream and gives us the confidence to continue investing in innovation and network expansion. Slide 10 outlines the circa 20% contribution to our first half revenue growth from some of the new contracts that oOh! has commenced rolling out, predominantly Sydney Metro. These assets will continue to scale through the remainder of the year and into 2026 and beyond. So, this is not a one-off spike. It's a step change in the quality of our revenue base, built on the combination of disciplined investments in premium locations and improving go-to-market effectiveness. However, the biggest story is that circa 80% of our first half revenue growth came from our existing business. This indicates that we're growing because we're executing better in meeting our customer demands. Taking a look now at our record underlying first half results on Slide 11. Our financial performance for the first half highlights the strength of the underlying business and the momentum we've built. Revenue grew 17% and adjusted gross profit grew 13%. The gross margin saw a decline of 1.3 percentage points versus the pcp and 0.4 percentage points against the average of the prior 2 first halves. This was a function of adverse revenue channel mix, rents associated with the new contracts recently won and higher performance-linked partnership incentives. These incentives were set on an expectation coming into the year of mid- to high single-digit revenue growth and the 17% first half revenue performance resulted in escalators being triggered. Our underlying EBITDA margin increased by 150 basis points over the pcp and NPATA lifted 46% despite the decline in gross margin. This reflects our continued focus on cost discipline while also absorbing some investments to support growth. Operating costs increased by 4%, driven mainly by performance-linked incentives and some inflation impact. That said, our cost-out program executed in early 2025 is delivering and sets us up well for the operating leverage for the second half of '25 and into CY '26. Bridges to both cost of goods sold and operating costs are provided in the appendices. Following the expiry of the Auckland Transport contract in October, we have assessed the projected cash flows from the New Zealand CGU and have taken a $30 million noncash impairment charge. There will also be some restructuring costs incurred in the second half, which Cathy will outline later in the trading update. The next slide clearly illustrates the operating leverage in our business. As you can see, our 17% revenue growth translated into a 27% uplift in adjusted underlying EBITDA and a 46% increase in adjusted underlying NPATA. This demonstrates how incremental revenue growth flows strongly through to earnings when underpinned by a largely fixed cost base. What's particularly encouraging is that, this result was achieved even as we absorbed higher performance-linked incentives and continued investing capabilities to support reo and future growth. As Cathy mentioned earlier, we are now seeing the benefits of the strategic actions taken last year in both cost discipline and stronger sales execution. And as our recent contract wins ramp up through the second half of '25 and into 2026, we expect further operating leverage to emerge in future years. Moving to our cash flow performance on Slide 13. You will see that as expected and outlined in February this year, we have returned to a normalized greater than 70% operating cash flow to EBITDA conversion ratio. Capital expenditure of $25 million for the half is in line with the guidance provided at the beginning of the year. But based on more positive DA outcomes than expected and new asset wins, we are now anticipating that the full year CapEx will be in the range of $53 million to $63 million. As noted in the balance sheet on Slide 14, during the half, the business renegotiated the debt facilities last financed in 2022. The new facility on a committed funds basis has decreased to $265 million on a 5-year tenor ending in June 2030 versus the prior $350 million, and is on better interest margin terms. However, the business also has access to further noncommitted lines of over $170 million should it need to from syndicate members. Overall, this is expected to reduce bank interest costs at current borrowing levels by up to circa $2 million per annum from July onwards. Also, the business simultaneously took our new interest rate hedges. Gearing remains below our target of 1.0x and is expected to continue declining. And as Cathy said earlier, the dividend of $0.0225 per share was up 29% on the prior year. I'll now hand back to Cathy.

Thanks, Chris. We'll now move to Slide 16. We continue to execute against our 3 strategic pillars. Firstly, energizing our go-to-market by improving responsiveness, aligning structure to customer needs and preparing for MOVE 2.0. During the half, we strengthened our senior sales team, refocused our marketing activity and realigned our sales, product and marketing teams to accelerate our speed to market. We rolled out several data and product initiatives that make us easier to access, plan and buy, and we reset relationships with our key trading partners. Secondly, unlocking network potential through disciplined pursuit of high-impact contract wins, which extend our leadership in key metro markets. This half, we secured the landmark Melbourne large-format Transurban contract and commenced the Waverley asset rollout. Pleasingly, our Sydney Metro contract is also performing ahead of expectations. And thirdly, leading in retail media with reo continuing to build. We see a clear opportunity to create a recurring revenue stream through long-term retail partnerships. We've hired experienced retail media sales specialists, launched Petbarn's omnichannel program and have continued interest from a variety of big box retailers with several in advanced discussions. And this takes us to the outlook for the year ahead on Slide 18. Q3 media revenue pacing is at 5% with August and September improving after a softer July and Australia stronger at 6%. Market share growth, excluding retail and New Zealand, is expected for the remainder of calendar year '25 as new assets from contracts announced in '23 and '24 come online. Our second half '25 adjusted gross margin performance is expected to improve on the first half with the full year to be circa 44.0% and full year operating costs expected to be $159 million to $161 million, with higher variable incentives based on stronger revenue and EBITDA performance than expected earlier in the year as well as additional investment in reo and supporting our sales execution. There is an additional $1 million expected in restructuring costs for the New Zealand business in the second half. Calendar year '25 CapEx is expected to be between $53 million and $63 million, largely funding our new assets, and this is contingent, as always, on development approvals. Gearing is expected to remain within target below 1x adjusted underlying EBITDA. And we expect Out of Home will continue taking revenue share from other media sectors and that Out of Home will achieve mid- to high single-digit growth for the second half of '25. We are resetting our New Zealand cost base with a circa $6 million to $7 million annualized reduction from Q4 with full run rate from Q2 of 2026. And of course, as we announced recently, James Taylor is expected to commence as CEO either late in 2025 or early 2026. So, today's results reinforce that oOh! Media's network reach, execution and discipline are driving strong performance and positioning us for further growth. We remain focused on continuing to execute effectively on our strategic priorities to sustain this momentum into the second half and beyond. So, with that, I'll now open the line for questions. Thank you.

[Operator Instructions] Today's first question comes from David Fabris with Macquarie.

I've got a few questions. So, I think I'll start off on revenues. Look, just with the outlook commentary, I think for me, trading looks a little bit soft at the start of the second half if we think about the first half sequentially. So, color there would be helpful. I mean, we've had the Federal Election in May. We've now had 3 rate cuts. And then kind of rolling into that question, thanks for splitting out the revenue contributions on Slide 10. Are you able to just walk through the ramping and expected contributions for the new contracts through the second half? Just to help us understand what's underlying growth versus potential organic growth?

Sure. Thanks. I'll take the outlook question. And yes, we have seen growth moderate in Q3, just marginally. I think the first half was very buoyant for Out of Home. And certainly, the structural shift was very, very pronounced. It was a slower start in January, although we did see modest growth, but we've seen the strengthening through to August and September. So, we're feeling confident in our business. Certainly, the assets we've got coming online, clearly, we're executing in sales in a very much improved way and the structural shift is well and truly intact. I didn't hear much by way of growth statements from the first of the free-to-air TV networks that reported last week. So, we are certainly poised. And as we said earlier in the presentation, we think the half will be probably mid- to high single digits for Out of Home. I think also we know that interest rates generally, when they reduce play into confidence and confidence helps advertising, which helps media. So, all those things should continue to play out in the second half.

And David, just in terms of the ramping into the second half. So, as you noted, we did about $11 million from the new contract in H1. I expect that should -- contribution in the second half should be broadly double that, i.e., call it, around $22 million or so on the pcp. In terms of the specific performance, so in the third quarter, Sydney Metro is clearly continuing to track really, really well, so has retail mart in place. But once we hit late September and into the fourth quarter, it starts comping against its contribution from the fourth quarter last year. Waverley is really feeding through in terms of asset delivery. So that's going to start contributing, and we'd expect more from East Link, and then there's a smattering of other contracts.

Got it. And then just my next question, just on gross margins. So that first half at 41.8%. I don't know if my math is right, but does that kind of suggest 45.5% in the second half to get to 44%? I guess it depends on mix and whatnot coming through there. But can you just talk about, whether or not there was any impacts in that first half, 41.8% margin, any one-offs in there? And how we should think about seasonality? And then, I know it's a long-winded question, but how do we think about the margin into '26 because you've fully lost the Auckland contract at that point?

Sure. In terms of the first part of that question, there's always seasonality in the second half, and that has been the case for a number of years. So, you're in the ballpark in terms of getting to that 44%. In terms of thinking through into 2026, and what it means for gross margins, remember, the contribution from Auckland Transport in this year was highly favorable. The legacy contract was sitting at gross margins significantly above our group average. So that in terms of a stand-alone comp is going to cause a lowering of gross margin going into CY '26. But then I expect that to be then countervailed by really 2 things. The adverse channel mix that we had into Street Furniture and flash start improving into 2026. And then also it's just a function of our fixed cost base and provides our revenues keep on growing by rent escalators, that should provide tailwinds to our gross margin going forward.

Okay. So just for summary, margins in '26 could be above where we land in '25?

Yes.

And our next question today comes from Entcho Raykovski with E&P.

My first question also on the gross margin. I mean -- and also, just looking at the current year, I just presume the guidance for improving gross margin performance in the second half takes into account the loss of the Auckland Transport contract post September. I mean, I'm conscious that it's a high-margin contract. So, are there other contracts which provide an offset specifically in 2H to get to that 44% number for the full year?

So yes, that estimate of gross margin in the second half improving is factoring in the exit of IT. I don't know, Chris, if you want to add anything to that?

Nope.

So you -- I mean, so you -- are you assuming specific GM improvement relative to 1H then? Because obviously, 1H, you saw the dynamic of lower gross margin relative to the pcp?

Yes. So as mentioned, what we're expecting is a start -- partial better revenue mix than we had in the first half. And the other thing, and it touched on Dave's question earlier is because it's about the seasonality. Historically, our revenue has been 55% weighted in the second half versus 45% weighted in the first half. And not to say that, will be exactly the shape in terms of this year, but that always provides quite a significant boost to our gross margins because our rents are broadly equal across the 2 halves.

Okay. Got it. No, that's useful. And then you obviously spoke about gross margins into FY '26. But if we look specifically at the new contract commencements, do you think they can offset the impact of the Auckland Transport contract next year? I mean, it seems like the revenue offset will be there, or be there even more so. But do you think specifically from new contracts, you can offset the gross profit impact of that contract loss? Or do you need that assumption of growth in the existing asset base as well?

Yes. So, there's 2 components. So, at a gross profit level, I'll start with that first. The new contracts, we believe, can offset the gross profit impact from Auckland Transport. When you go on a gross margin perspective, then we would need existing continued execution on our existing contracts, which is what we would otherwise expect. And in fact, and as noted on Slide 10, you can see we saw that in the first half where 80% of our revenue growth came from existing assets.

And is there -- you might not be able to give us this. Is there sort of a rule of thumb of how much revenue you need from new contracts to offset the gross profit impact of the Auckland Transport contract? Is it sort of double, 2.5x, 3x? I'm just conscious that Auckland Transport was a high-margin contract.

I wouldn't say it's necessarily a rule of thumb. It depends which contract. They all have quite different profiles. But yes, we'll need substantially more revenue on a dollar-for-dollar basis than what was driven out of Auckland Transport. But we've got a clear pathway there, but we're comfortable with that.

And is sort of is 2x to 3x the right ballpark revenue range without giving specific guidance?

It will very much vary by the individual contracts Entcho.

Okay. No worries. And just -- sorry, a couple of other quick ones. The New Zealand cost base reset of $6 million to $7 million, just to clarify, is that an OpEx reset into '26, so we should see a step down run rating from Q2 '26 lower OpEx at that stage?

So, the $67 million is the bigger component of it is OpEx. There's also an element in non-rent cost of goods sold. So, the people who are, for example, cleaning, maintaining the bus shelters, et cetera. The cost savings will start for that midway during the fourth quarter this year. But then there are some additional costs, for example, the rent of our head office in Auckland, which only starts coming off in the second quarter next year. So, it's going to be graduated and we hit full run rate from the second quarter of next year.

Okay. Great. And sorry, just a very last one. I noticed you've got -- you've obviously got a slide in the appendix on the New Zealand network post Auckland Transport. But just more broadly, how do you think about the network impact from the loss of that contract? It's obviously the biggest New Zealand contract by far. Do you think there's a risk that you get a knock-on impact on to the rest of the portfolio and the revenue loss ends up being greater than just the loss of Auckland Transport alone?

So I think there's a couple of things about New Zealand. We have a very strong footprint in retail, which is a national footprint. And as we've sort of seen from the broader results today, retail is its own discrete marketplace, and we've performed very well there in New Zealand. So, we're confident in the retail side of the business. And then we do have quite a strong small format footprint across the rest of New Zealand. And as I think we've spoken about in prior calls, we're always looking for new opportunities to develop other forms of asset in Auckland and even beyond. So, we're still comfortable that it drives a good return on capital as a marketplace and a contributor to the broader group. And certainly, from a retail perspective, having such a strong and dominant position there, we think it will continue to drive good growth as the retail channel has more generally in Australia and New Zealand.

And our next question today comes from Kane Hannan at Goldman.

Just a couple of ones on the reo investment. So, I think it was a $2 million incremental investment in the first half. I mean, just given those guidance commentaries on the OpEx base, are we expecting that sort of $2 million incremental to pick up in the second half? And just could you give us a sense, I suppose, of the net earnings impact from the reo business is having this year, next year, when it might go positive if it's not already?

Yes, sure. So, the uplift in reo and 2H be ballpark no more than what we've got in the first half because we had a larger component of our people base there in the pcp. In terms of our expectation for reo going positive based on the current contract pipeline and revenue forecast coming through, we're expecting 2026 in the first half at some point.