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Edited Transcript of DEC.PA earnings conference call or presentation 25-Jul-19 11:30am GMT

Half Year 2019 JCDecaux SA Earnings Call

Plaisir Cedex Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of JCDecaux SA earnings conference call or presentation Thursday, July 25, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Bourg

JCDecaux SA - Chief Financial & Administrative Officer and Member of the Executive Board

* Jean-Charles Decaux

JCDecaux SA - Co-CEO & Chairman of Executive Board

* Jean-François Decaux

JCDecaux SA - Co-CEO & Member of Executive Board

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Conference Call Participants

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* Annick Tonie Maas

Exane BNP Paribas, Research Division - Analyst

* Katharina Schell;Hauck & Aufhäuser Alternative Investment Services S.A.

* Nizla Naizer

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the JCDecaux 2019 half-year results conference call. I would like now to hand over to Jean-Francois Decaux, Chairman of the Executive Board and Co-CEO. Sir, please go ahead.

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Jean-François Decaux, JCDecaux SA - Co-CEO & Member of Executive Board [2]

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Thank you. Good afternoon, everyone. Good morning to those of you in the U.S. And welcome to our 2019 half-year results conference call, which is also being webcast. The speakers on this call will be Jean-Charles Decaux, Co-CEO; David Bourg, Chief Financial and Administrative Officer; and myself. Arnaud Courtial, Head of Investors Relations, is also attending today's conference call.

Let me first comment on our half-year results. Our H1 2019 revenue of EUR 1.842 billion was up 12.1% on a reported basis benefiting from the APN Outdoor acquisition and up 5.2% on an organic basis driven by better-than-expected Q2 with an organic growth rate of 5.1%, boosted by an acceleration in our street furniture division.

Our overall operating margin increased by 220 basis points to 16.6% at $306 million. All segments show a margin improvement over the period. Before an impairment charge, adjusted EBIT came in at EUR 136 million with net income group share of 80.0% at to EUR 93 million. Net income group share after impairment charge increased by 86.8% compared to last year, reaching EUR 96 million. Last but not least, we delivered a negative free cash flow of EUR 7.8 million, down 120.3% relative to H1 2018.

Looking at adjusted organic revenue growth by segment, we see different trends from one division to another. Street furniture adjusted organic revenue increased by 5.6% in H1 2019 driven by good performance in France, rest of Europe and North America as well as double-digit growth in Asia Pacific. U.K. was down, impacted by the advertising ban for HFSS products in London on TfL assets.

Transport adjusted organic revenue increased by 8.1% in H1 2019, thanks to a good performance in Asia Pacific, a double-digit growth in the rest of Europe, and North America. U.K. and France were up single digits.

Finally, billboard adjusted organic revenue were down 3.8%. Reported growth benefited from the contribution of APN Outdoor. Organically, Europe including France and U.K. and the rest of the world were down. North America was up double digits.

Moving to our revenue growth by region, we saw a strong performance in Asia Pacific. Asia Pacific reported a strong growth at plus 9.5% with street furniture and transport segments being fueled by new contracts in digital. The rest of Europe was up 6.1% in H1 2019. Street furniture delivered good performance. Transport was the double-digit growth, while billboard was slightly down.

France was up 4.5%, street furniture being up strongly. Transport was up while billboard was down. The rest of the world was down 1.7% with street furniture and transport being slightly up, billboard was down.

U.K. was down 1.5% with street furniture negatively impacted by the HFSS ban on TfL assets as already mentioned. Transport was up while billboard was impacted by our ongoing multi-year plan to reduce the traditional billboard portfolio.

North America was up double digit at plus 10.7% with a double-digit growth in transport and billboard. Street furniture was up mid-single-digits. In terms of revenue breakdown, our segment mix is broadly unchanged from last year at the same period. Street furniture slightly decreased to 42.9% and down 230 basis points. Transport was up to 42.2% of total revenue, an increase of 210 basis points. And billboard share was flat with 14.9%. Transport was boosted by the strong performance in airports as well as the integration of APN Outdoor.

In terms of geographic breakdown, the share of Europe being France, U.K. and the rest of Europe represented a bit more than 51% of group revenue. As a region, Asia Pacific is now our first geography at 29.3%, positively impacted by the integration of APN Outdoor. France mechanically decreased at 16.3% despite a good H1 organic growth at plus 4.5%.

The contribution generated by the rest of the world accounts for 11.3%. The U.K. and North America were below 10% at 9.3% and 8.1% respectively.

The next slide provides an update on our development in faster-growth markets. In H1 2019 we generated 35% of our revenue from faster growth markets below the 37% contribution from the same period last year. The share of faster-growth markets has been plateauing for the last 4 years, impacted by negative foreign exchange. The decrease experienced in this year is explained as the contribution of APN Outdoor where Australia and New Zealand are mature markets.

Another important focus for us is the development of digital. In H1 2019, digital revenue accounted for 23.9% of our total revenue compared to 18.6% for the same period last year. The significant boost of plus 44% thanks to the integration of APN Outdoor.

Comparing H1 2015 and H1 2019, it's quite impressive to see the changes in the group profile regarding the second contribution of digital in our top line. Street furniture moved from 20% to more than 35% of our group digital revenue while our overall digital revenue grew at 32% CAGR over the period.

Focusing now on our first business segment, street furniture, for the last couple of years we have seen digital moving outside. Digital revenue from street furniture increased from 4.4% in H1 2015 to 19.7% in H1 2019, multiplying revenue by more than 5 times, meaning a plus 52% CAGR over the period.

Digital revenue in street furniture increased by plus 27% between H1 2018 and H1 2019, thanks to the digital rollout of our investments of large contracts such as TfL in London which we won over the past years.

Having a look now at our second business segment, transport, which remained the most digitized. As you know, our biggest strategy has been mainly focused on our transport business to start with because it benefits from the captive audience and has less technical constraints than outside. As such, our transport digital revenue has been steadily growing and now accounts for 28.9%. Transport grew by 41% between H1 2018 and H1 2019, thanks to the contribution of APN Outdoor.

And now third, our third business segment, billboard. Less is more is the keyword, with a selective approach in our digital expansion and digital conversion. With an impressive CAGR growth of more than 55% since H1 2015, billboard digital revenue now accounts for 21.8% of billboard revenue. APN Outdoor, which is significantly digitized, boosted the digital contribution in this segment.

Let me now focus a moment on our digital penetration in our five largest markets. 71% of our digital revenue are generated in five countries which are U.K., U.S., Australia, Germany and China. The U.K. and the U.S. are highly penetrated with 61% and 48% respectively. Australia at 46% driven by the contribution from APN Outdoor. It shows that there are more, some more big opportunities in many other countries.

Now, let me give you an update on our recent contract win and renewals. We are happy to confirm that we were very successful in H1 2018 as far as new contracts are concerned on the street furniture side. We were pleased to win [Westfield Malls] in the U.K. On the transport side we won the new Beijing Daxing Airport in China, Kansai Airport in Japan and the Midfield Terminal in Abu Dhabi Airport. Finally, as always, we have renewed or extended several of our existing street furniture contracts including Paris columns and display flagpoles, Camden bus shelters in London and Rotterdam free-standing panels.

In transport, JCDecaux renewed Chengdu International Airport.

Australia is a market which has been involving significantly over the past decade. Out-of-home in Australia is a healthy medium with growing market share thanks to consolidation and digitization. The APN Outdoor acquisition goes in the right direction and we continue to invest in digital, significantly to increase our market share.

I would like to quote Charmaine Moldrich, CEO of the Outdoor Media Association in Australia, from their last latest release on July 5 stating in 2018, we saw the industry's market share grow to 6.2%. We were only one of two media channels to grow last year. We credit this growth to investment in technology and research coupled with our ability to reach large audiences.

Before handing over to David Bourg, and in line with the previous slide, I would like to show you two smaller countries where out-of-home market share continues to grow.

Sweden and Finland have seen significant growth in outdoor in their respective markets, reaching 4.9% in Sweden and 7.5% in Finland in 2018, and the trend continues.

Thank you for your attention. I will now hand over to David to comment on the financial results.

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David Bourg, JCDecaux SA - Chief Financial & Administrative Officer and Member of the Executive Board [3]

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Thank you, Jean-Francois. Hello, everyone. To begin this presentation the first slide, page 17, to clarify our adjusted operational indicators that we used for our management reporting as well as for our financial communication in the context of the new lease accounting model, IFRS 16, applicable from January 1, 2019.

Let me now remind you quickly that IFRS 16 leads to the recognition of the lease liability for contractual fixed lease payments in the balance sheet against right-of-use to be depreciated on a straight-line basis over the lease term. This implies low operating expenses above operating margin, higher depreciation expense above EBIT, and lease interest expenses on net financial result.

No impact on the net income over the life of the contract is expected but an unfavorable effect at the beginning of the contract due to the lease expenses interest which will be reversed over the lease term.

IFRS 16 has no effect on cash lease payments but prepayment of principal on the lease liability is classified in cash flow for financing activities without passing through the free cash flow. The mechanical effects of IFRS 16 on our key operating metrics for H1 2018 was a positive impact on operating margin and EBIT of respectively EUR 475 million and EUR 58 million as well as a positive impact on free cash flow of EUR 449 million corresponding to the lease payments while payments remain unchanged.

Consequently, to preserve the business reality of our operational performance and to keep it consistent with our historical data, our adjusted operational indicators continue to include our [entity and our joint control] on proportional basis and for now on will exclude the IFRS 16 impacts on our core business meaning on lease advertising agreement only.

On the P&L this means all that are down to EBIT and on the cash flow statement, all aggregates down to free cash flow.

The effect of IFRS 16 on our adjusted operational data is therefore limited to lease on our non-core business such as office, where (inaudible) lease contracts with the following impact on our H1 2018 reported figures.

Plus EUR 22.3 million on adjusted operating margin, plus EUR 3 million on adjusted EBIT which substantially equals the discounting expense recognized in net financial income and no impact on adjusted free cash flow since the payments are unchanged.

This impact will be reminding during my presentation when (inaudible) and when I will switch to IFRS data I will let you know. In any case, in line with the recommendations of the AMF, Autorité des marchés financiers, which has reviewed our approach, you will find in the appendix to this presentation a reconciliation of the adjusted data with the IFRS data.

Let's come back now a few moments on the summary of our financial results with all our key figures from the P&L in green reflecting rebound in our margins as expected. Reported revenue growth of plus 12% versus organic growth of 5.2% resulted from positive scope effect of EUR 90.7 million due mainly to the consolidation of APN and positive FX effect of EUR 22.5 million with no material impact on our margins.

Adjusted operating margin and EBIT are growing significantly more than the revenue growth by plus 29.4% and plus 58.6% respectively. This confirms on one hand our good operating leverage with a positive impact on cost structure, partly fixed of the solid adjusted organic revenue growth driven by the ongoing digitalization of our premium assets and the ramp-up of large contracts won over the past two years, and on the other hand, the accretive contribution from APN Outdoor.

As a result, the net income group share rose EUR 44.7 million, up 87% from H1 2018, benefitting as well from an IFRS 16 impact of EUR 24 million due to the renegotiation of some [advertising conditions] but I will come back on that on the slide where I will comment the net income.

Increasing cash from operations was limited to 12%, primarily due to tax paid. I will come back on that in the following slide as well. The decline in adjusted free cash flow was due to higher adjusted CapEx as expected, and higher net working capital requirements.

Net financial debt excluding IFRS lease liability was EUR 1.3 billion, up EUR 842 million from June 2018, which was attributed mainly to the APN acquisition less (inaudible).

Now let us turn to the variation in operating margin on page 19, which was at EUR 306 million at the end of June 2019, a solid increase of EUR 69.7 million from H1 2018 for an incremental revenue of almost EUR 200 million. The overall ratio of operating margin to revenue was 16.6% in H1, up 220 basis points from last year including the 30 basis points increase as you can see in this slide from the APN consolidation.

Excluding APN the operating margin ratio increased by 180 basis points reflecting the good H1 organic growth with our operating expenses, excluding rents and fees remaining flat over the period on an organic basis.

Note on the left-hand side, the impact of IFRS 16 from our non-core business, plus EUR 22.3 million in H1 2018 as indicated in my introduction, so restated H1 2018 operating margin ratio being at 14.4%, up 140 basis points on the H1 2018 ratio reported last year at the end of June 2018.

This impact was limited to EUR 1.5 million on the valuation in operating margin in the first half of 2019, plus 10 basis points contribution to operating margin ratio improvement in H1 2019.

Next slide, page 20, EBIT before impairment charges was EUR 136.1 million, up EUR 50.3 million from H1 2018, an increase of 220 basis points on the EBIT ratio in line with the change in operating margin ratio.

As you can see on this chart the incremental EUR 69.7 million in operating margin was partly absorbed for EUR 8 million from the integration of APN and for EUR 10 million from the CapEx invested in our new contracts and digital over the past 2 years.

The negative variation of EUR 0.5 million in the bar other of the chart consist of non-recurring items like acquisition cost, restructuring cost, changes in provisions for contingencies and a more favorable effect last year of capital gains on this (inaudible) of land and buildings especially in the U.K. and France.

As well operating margin on the left-hand side not the impact of IFRS 16 from our non-core business of minus EUR 3 million in H1 2018 with no significant impact on the variation in H1 2019 EBIT.

Note finally that the application of APN goodwill recognized at the end of December 2018 for EUR 606 million will be finalized in the (inaudible) and soon the effect of this allocation of acquisition price on our depreciable intangible assets will impact the (inaudible) for the full year.

On page 21, margins by business segment with on the left of the slide, the operating margin ratio first. For the street furniture the blue bar, the operating margin as a percentage of the revenue was up 30 basis points to 22.3%, but with mixed geographical contributions. On the positive side, we had margin improvement in France due to good revenue growth in Q2 2019, and some one-off costs on the CPI Paris contract in 2018.

The U.S. was up as well due to a good organic growth driven by digital.

On the negative side, we have to mention the impact of the revenue decline in the U.K. due to the advertising ban on HFSS products on TfL assets and the startup of new contracts such as Berlin in Germany and (inaudible).

Regarding the transport business segment, the red bar, the operating margin ratio was up 500 basis points to 13.8%. The significant improvement is due to the strong revenue growth, particularly on the airport business in China and in the U.S. where rents and fees are mainly fixed, as well as the ramp-up of new significant contracts such as [Guangzhou Airport] and [Solapur International Airport and metro.]

The APN contribution had a positive impact of 30 basis points on this business segment.

Lastly, the billboard operating margin ratio, the green bar, was 8.4% up 210 basis points due to the accretive effect of APN. The margin ratio excluding APN was down 90 basis points because of the overall revenue decline despite the margin improvements in France as well as in the U.K. due to the ongoing optimization plan of our traditional billboard inventory there.

On the right-hand side of this page, the EBIT ratio before impairment charges by business segment, in street furniture the ratio rose 60 basis points, a slightly more favorable variation than the 30 basis rise in operating margin mainly due to the higher [reversal] of provisions and capital gains on asset disposal than in H1 2018.

In transport, the ratio rose 470 basis points from H1 2018, slightly more unfavorable than the 500 basis points increase in the operating margin ratio. This is mainly attributable to an increase in the position due to CapEx invested in transport -- new transport contract over the past two years.

Lastly in billboard, the ratio improved by 10 basis points, [that variation] more unfavorable than the 210 points rise in operating margin, is mainly due to a decrease in capital gains on disposal of land particularly in the UK.

On the following slide, the impact of net impairment charges which represent net income of EUR 3.1 million in H1 2019 derived largely from the reversal of a provision for onerous contract on Spanish airport loss-making contract with AENA which ended mid-June. This led to an adjusted EBIT after impairment charges of EUR 139.2 million, up 62.4% and representing a margin ratio of 7.6% versus 5.2% in H1 2018.

Let's all now look to the net income on page 23 and to do this we need to restate the adjusted EBIT on the top of the table, from the EBIT contribution of the entities under joint control and then the fixed lease payments from our core business in accordance with IFRS 16.

Concerning the restatement of the contributions to EBIT of the companies under joint control in the second line of the table from the top, it was EUR 40.9 million in H1 2019, relatively stable versus 2018.

As for the IFRS 16 restatement of our fixed lease on our core business, this was EUR 107.7 million for H1 2019 versus EUR 58.5 million for the same period last year. This positive variation of EUR 49.2 million results largely from the net positive impact on the P&L of the reversal of the lease liability and the rights of use arriving from certain renegotiation of loss-making contracts.

Accordingly, this led to an IFRS EBIT of EUR 206 million, up EUR 103 million from the first half 2018. About 55% of this increase was due to our operating performance and the rest to IFRS 16 which leads to -- to the recognition in our financial statements of the impact of the contractual renegotiations of future lease payments.

All the aggregates below the IFRS EBIT are therefore now IFRS. Net financial income which would present a net expense of EUR 96 million in H1 2019 includes no interest charging on IFRS 16 lease liability for EUR 83.3 million, an increase of EUR 11.8 million year-on-year. This increase comes from APN Outdoor as well as the increase in lease liabilities from new contracts such as the renewal of Dubai and [Ishu] airports, network rail in the U.K. and the Berlin contracts.

Excluding this IFRS 16 effect, net financial expenses increased slightly by EUR 1.5 million, mainly due to the negative FX impacts as our interest charges decreased despite a change in our average financial debt of over EUR 800 million, thanks to our source of financing which allows us to benefit from the very good market conditions.

Income taxes amounted to EUR 35.2 million in H1 2019 versus EUR 4.8 million last year. H1 2018 benefited from the reversal of the provision for deferred-tax assets in Spain as a result of the positive outlook for our business in that country.

The effective tax rate before impairment of goodwill and share of net proceeds from equity affiliates remains at 32% in the first half of 2019.

Net profits from equity affiliates amounted to EUR 38.4 million, a negative variation of EUR 0.9 million coming largely from our joint venture share of net profit from associate being stable.

Finally, a significant increase in the contribution from our non-controlling interest for EUR 13.9 million adds the lease negotiations mentioned previously under IFRS 16 were mainly operated by (inaudible) with minority partners.

This resulted in a net income group share of EUR 96 million in H1 2019, up sharply 86.9% or EUR 44.6 million of which EUR 24 million come from the effects of renegotiated contracts.

As indicated in introduction, so when restated from those effects, net income group share would still have grown nearly 40% as compared to H1 2018.

Let's now look at adjusted free cash flow on page 24. Funds from operations rose EUR 20.9 million up to EUR 191 million during the period. This (inaudible) variation was due mainly to the improvement in operating margin of EUR 69.7 million, partly offset by the increasing tax paid of EUR 47.3 million. The increase in tax paid came mainly from France which had benefited in H1 2018 from tax refund related to the [combination] of the 3% tax from dividend and to the positive variation from the liquidation of the corporate income tax.

(inaudible) cash from operations, the change in net working capital had a negative effect of EUR 62.2 million on the group's cash position versus a negative effect of EUR 37.5 million in H1 2018. This means EUR 24.7 million negative variation despite an improvement from our trade receivables for EUR 21.9 million except in some geographies like in China, in the context of the strong revenue growth.

The unfavorable variation in trade liabilities for EUR 34.5 million came mainly from the payment of these liabilities in the context of the contract renegotiations, the negative variation in inventories of EUR 12 million respectively, resulted from installations in progress on new contracts, especially in France, Australia and Germany.

Combined with the net CapEx for the period of EUR 136.6 million, an increase of EUR 42 million, this leads to a slightly negative adjusted free cash flow of EUR 7.8 million for H1 2019 which is normally the case at this period of the year.

Regarding the detail of adjusted net CapEx on Page 25, please note the gross CapEx of EUR 71 million, up EUR 11 million from H1 2018, due to new contract wins and acceleration of the digitalization of street furniture assets. Renewal CapEx of EUR 41.4 million, up EUR 14.2 million over the first half of 2018, mainly in France with the kiosks in Paris and street furniture in Leon, and in Germany with the renewal of our Berlin contracts. And general CapEx of EUR 24 million, up EUR 16 million over the first half of 2018, which was positively affected by higher asset disposal in 2018, mainly in France and in the U.K.

Restated from [this disposal] general CapEx rose by EUR 6.6 million in the period, largely for IT due to our digital transformation.

Let's move on to the variation in our net financial debt over the period. To do that like for the EBIT, the first thing to do is to restate the adjusted free cash flow. On the top of the table from the free cash flow contribution of the entities under joint control, and then from the repayment of the fixed bill of our core business in accordance with IFRS 16.

The contribution of jointly controlled companies to the adjusted free cash flow we just discussed was EUR 1 million in H1 2019. The EUR 33.8 million reduction of this contribution compared to 2018 derived mainly from increased working capital requirements in our JVs especially in China, mainly due to a deterioration of cash collection although our DSO in this company remains good.

The line IFRS 16 lease liabilities reimbursement was EUR 554 million in the first half of 2019 versus EUR 449.7 million in the first half of 2018, an increase of EUR 104.4 million attributable to new contracts secured during the period.

However, as lease payments remained unchanged, the line IFRS 16 lease liabilities reimbursement is reclassified for the same amount below the free cash flow under IFRS as you can see on this table.

As far as the other lines below are concerned, no significant variations expect from dividend distribution for EUR 133 million which mainly explain with the negative adjusted free cash flow, the increased net debt during the period of EUR 136.3 million.

Regarding our balance sheet on the next page, the biggest impact is actually due to the IFRS 16 with the recognition in December 2018 of right of use for EUR 4.6 billion on the asset side, lease liability for EUR 5.2 billion on the liability side, and a negative variation on the net equity of EUR 0.4 billion due to the use of the full prospective method that will reverse in the future.

In H1 2019, rights of use increased by EUR 100 million due to EUR 686 million in new contracts secured during the period, partly offset by the straight-line depreciation and reversal related to contract renegotiation of right-of-use during this period.

IFRS 16 lease liabilities in H1 2019 was slightly up by EUR 31.1 million, also due to the 686 million in new contracts secured during the period, offset as well by the repayments and renegotiation of lease liabilities during the same period.

To conclude this presentation, before handing over to Jean-Charles, one point about our liquidity on slide 28, to let you know that we have continued to improve our financing structure during the period by renegotiating our EUR 825 million credit line, secured and undrawn, by extended the period to 2024 and put them (inaudible) to 2026. And by improving the financial terms and conditions. This enabled us to keep taking advantage of favorable market conditions on our short-term financing without affecting our liquidity with an average cost of financial debt during the period of 0.7% versus 1.4% in the first half of 2018.

I thank you for your attention, and now with Jean-Charles we continue with the strategic update. And as always, I will be available for questions at the end of the presentation.

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Jean-Charles Decaux, JCDecaux SA - Co-CEO & Chairman of Executive Board [4]

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Thanks David, and good morning or good afternoon to everyone.

What I will look to the -- what I would like to do now is to give you a full overview for JCDecaux's future and explain why we are convinced that we will continue to grow and outperform. Our conviction relies on three key areas. One, accelerating organization; second, digital transformation; and finally, our financial strength.

First of all, outdoor continues to enjoy strong fundamentals. The audience for outdoor advertising is increasing. Growing cities or urban areas are a powerful trend force as they provide a larger audience for out-of-home advertising. According to United Nations Organization, 6.7 billion people will live in urban areas in 2050 versus 4.2 billion today, which will represent 66% of the worldwide population versus 55% today.

We believe JCDecaux's footprint matches these urbanization trends and that we are in a strong position to fully benefit from this development.

As of today, we have a portfolio of street furniture that is unique in the world and we have an established presence in emerging cities, traditionally through transport but increasingly through street furniture as those cities start their own beautification projects. On top of that, air traffic is set to double in the next two decades per [another] study. This is a fantastic opportunity for JCDecaux, since we currently manage more than 170 airports worldwide.

The next slide in the presentation shows you that a disproportionate share of economic output come from cities. It is fair to say that as far as GDP per capita is concerned, large cities tend to punch well above their national weight. The importance of being present in large urban centers is overriding to be able to reach mass audiences. Every year between now and 2050, the global urban population will increase twice the rate of global population. This will mechanically result in an outdoor audience which will continue to grow.

But I want to go one step further. I have spoken to you many times about urbanization and we will continue to do so, as it is important for us at JCDecaux. With the developing world continuing to organize at a rapid pace, we will see the emergence of new cities and clusters of growth.

Focusing now on our unique airport platform, we have contracts in more than 172 airports globally. Air traffic will grow on the middle single-digit pace over the next 10 years, a 4.8% CAGR. JCDecaux is well placed to benefit from this increasing air traffic with a strong presence across more than 35 countries which, combined with the quality of our patrimony and our capacity to innovate and bring new experiences to passengers, gives us a clear leadership position in this segment.

Our experience in marketing major hubs will be a key competitive advantage in the future. It will allow us to win new airports in fast-growing regions and at the end of the day we will reach a higher audience for our clients.

In addition, among the 10 biggest airports, JCDecaux covers 77% of passengers in these strategic airports for delivering brand communication. We have a great position within 7 of the top 10 largest airports in the world being Beijing, Dubai, Los Angeles, London, Hong Kong, Shanghai and Paris.

Knowing this information it is interesting to get in mind that the growth will be mainly driven by the Middle East and Asia Pacific. First consequence, China will be the world's largest air travel market within the next 3 years. China will be handling 25% of all the world's air passengers in around 450 airports by 2035 versus 235 as of today.

In less than 20 years for JCDecaux from the sole Hong Kong airport in 2000 to the extensive network which we run today, we have increased our reach to 370 million passengers annually. Today, China has 235 airports with 1.3 billion passengers annually of which 37 airports are handling more than 10 million passengers a year. As of today, our network includes 7 airports out of the top 10 Chinese airports which makes our platform a tremendous and valuable asset to commercialize.

For JCDecaux, winning Beijing Daxing Airport was some very good news knowing the high potential in the region.

Regarding the media landscape and media contribution, digital out-of-home will be the second growing media over time. Since it began in the mid-90s, internet advertising, both desktop as well as mobile, has principally risen at the expense of print, but with a totally different evolution for the coming years. Mobile internet being a double-digit while desktop internet would be slightly negative. Digital out-of-home advertising will be the second largest contributor, growing plus 9.3% between 2018 and 2021, just behind mobile internet advertising. We are as of today the only historical medium being able to create such a disruptive technology to renew our medium.

Overall, OOH will be growing at plus 4.5% showing the sustainability of our historical medium with goal number one, reach and frequency. It is very interesting to see that the list of the media's revised significant (inaudible) forecast regarding out-of-home. We are now growing faster than the overall industry.

Let's see how digital advertising will grow globally and more importantly how programmatic we grow over those three years to come. As you can see, it is pretty clear why the global advertising market will grow by plus 3.9% year-on-year, digital advertising will grow by more than 20% annually. DOOH and programmatic will grow at plus 10.1% and plus 8.1% respectively.

The key element of this slide is that programmatic is transforming the media landscape. Two-thirds of the advertising companies in 2021 will be sold programmatically. And we want to take our share of this new and gigantic part.

After focusing on programmatic in advertising let's move now to the specificity of the OOH industry where programmatic is now available for the DOOH.

VIOOH is not only a timely initiative for JCDecaux. It is a genuine industry opportunity for OOH ecosystem to differentiate effectively in the digital world. VIOOH is offering new solutions to current issues, connecting brands to real people in the GDPR-compliant transparent and now efficient way.

As you can see on this slide, it shows you the value chain from the advertisers on the left to the media owner on the right. VIOOH is now in the middle to facilitate trading and planning with our clients. In order to do so we have been working hard with demand-side platforms to integrate their technology in VIOOH's system.

This is what you can see on this slide with (inaudible) names of DSP and there is more to come. We are already live with [LVNDAC] with incremental programmatic demand. It shows that VIOOH is now the most-connected programmatic platform and we will keep you updated obviously with new DSP to come and to be connected. We should have around 15 DSPs connected by the end of the year.

I also would like to show you a VIOOH case study with Virgin Active. January and September are the most important sales periods of the year for Virgin Active. Their renewed membership discount and trying to attract people into joining the gym to fulfill their new year resolutions, or as the weather starts to get colder again later in the year they wanted to target people that are regularly seen in close proximity in order to maximize the relevance of their messaging and realize the demonstrable performance uplift from their brand activity.

They created a highly-targeted cross-channel strategy aimed at reaching commuters throughout the day. Similar creative was used across channels for unified messaging and brand experience for audiences. The beauty of digital enables you to adapt your visual network during a campaign. Virgin Active did so and analyzed the fruitful data mid-campaign to identify areas of optimization.

Thanks to all the elements, data, inventory, measurement, and after a one-month campaign Virgin Active had 7 million DOOH impressions and multiple by 2.35 times their footfall uplift. They also had 23% more newcomers into their [hub] sports clubs.

Now let's move on tenders, and let's have a quick look at the main ones which are about to happen or expected.

In the street furniture business, there is nothing major in Europe at the moment. In the U.S., the San Francisco Board of Supervisors voted unanimously on Tuesday to award the new street furniture contract to JCDecaux, which has been the incumbent for the last 20 years.

In Asia Pacific, we are expecting tenders and we are currently working on new tenders in Vietnam and Japan, while the City of Sydney council recently the tender process in which we have decided not to participate.

In the rest of the world, we hope to continue to leverage our acquisition in Latin America to expand our footprint to other cities across the continent.

We also see a lot of new opportunities in the transport business in Europe, Budapest with the metro in Hungary, and Helsinki Airport are currently ongoing. In North America, New York airport tenders have been released and as usual we are also expecting several tenders to happen in the Asian metros and airports. In the rest of the world, we are expecting the tender for Greater Sao Paulo right away, regional contract.

Finally, in the billboard business we are working on the tender for the port authority in New York City.

The next topic I would like to cover today is the importance of financial flexibility in the uncertain world, which we believe is a key competitive advantage for JCDecaux.

In an industry where a number of competitors are heavily leveraged, our deleveraged balance sheet provides us with unrivaled flexibility. In the context of tense market conditions history shows that some of our competitors run into financial difficulty and who are not able to manage the high leverage creating unique opportunities for us in the market.

Furthermore, our strong balance sheet provides cities with the security of our ability to deliver on tenders.

Last but not least, let's have a look at the competitive landscape after talking about our current M&A activities.

With all the bolt-on acquisitions we have made since 2004, mainly in Latin America and in Africa, it is fair to say that we are playing our part in market consolidation. Nevertheless, the outdoor market is fragmented by nature. One question remains: will we see further consolidation happening? In the short term, Clear Channel Outdoor is now independent with new shareholders, but the company remains as you know, highly leveraged as shown in the previous slide. And it is our view which we have been repeating for some years now, is that there is still bound to some consolidation in the industry in the outdoor industry. And look and remind you what happened in Australia last year.

As we have always said, we want to be very opportunistic and pragmatic in terms of acquisitions and we will continue to monitor closely the competitive situation, bearing in mind there is no must-do deal for us and we still have a lot of organic growth opportunities ahead, as you know.

In conclusion, I just would like to come back to our main financial achievement in H1 2019. We not only posted a strong H1 2019 organic growth, mainly driven by digital and new contracts, but our margins as we anticipated rebounded, benefiting from good review growth, ramp-up in new contracts won over the past two years, and the APN Outdoor positive contribution.

Net income group share, IFRS stand out at plus 86.8% benefited from margin expansion and renegotiation of IFRS 16 lease commitments as it has been explained by David earlier.

Our CapEx program focused on strengthening our position in major cities and airports around the world and on the digital transformation of our medium. Our solid balance sheet allows us to pursue further excellent growth opportunities.

Our investment for future growth is to pursue the digitalization in premium locations, to take advantage of the ongoing organic growth thanks to our contract wins, to continue and further consolidate depending on opportunities, and to establish this new automated and programmatic trading platform rollout through our VIOOH initiative.

Finally, our well-diversified geographical exposure in faster-growth countries and our focus on products on digital innovation, are two of our major strengths that should help us to increase our leadership position in the outdoor advertising industry.

Regarding now the guidance for the third quarter 2019 and bearing in mind the high comparable from last year as well as the non-renewal of the AENA Spanish national airport loss-making contract, we expect our adjusted organic revenue to be flat to Q3 2018 due to a revenue decline in China and now in Hong Kong, despite a growing airport business. Our well-diversified geographic footprint, which is quite unique in the media industry, enables our advertising revenue to be more resilient to a slowdown in the world economy.

Thank you very much for your attention, and we can now move on into the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a first question from Katharina Schell from Hauck & Aufhäuser.

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Katharina Schell;Hauck & Aufhäuser Alternative Investment Services S.A., [2]

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Yes, thank you very much. I'd like to know a bit more on your business in Germany. Could you give me an overview of the revenues over there and maybe also the segmental split, and what EBITDA you have seen in that area, on H1 and maybe also on a quarterly basis? Thank you.

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Jean-François Decaux, JCDecaux SA - Co-CEO & Member of Executive Board [3]

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As you know, we are not reporting specifically on the German market, and the German market numbers are embedded into the geographic segment called, Rest of Europe. Having said that I can give you a bit of a flavor on the German business, which was performing well in the first six months, i.e., performance in Germany helped the rest of Europe to deliver good growth, high-single-digit. And the German margins are above group margins generally speaking. And we are, with the exception of the Frankfurt Airport which is a joint venture with [Fraport] we are 100% exposed or nearly 100% exposed to the street financial segment in Germany where we have a leading position, i.e., we generate more revenues in Germany than Stroer in street furniture. And given that Stroer gives a breakdown of revenues by segment, you can more or less figure out our German revenues in street furniture looking at the Stroer numbers for that division.

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Operator [4]

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We have a next question from Annick Maas from Exane BNP Paribas.

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Annick Tonie Maas, Exane BNP Paribas, Research Division - Analyst [5]

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Hi. My first question is in the U.K. You mentioned that 66% of your revenues were coming from digital in Q2. How far can that go, and is it a landmark for other countries? The second one is on your slide 19, the operating profit margin bridge. In the segment, Other, can you maybe give us a little bit more detail how much is due to extra synergies in Australia, how much is due to digital, and so on? And then thirdly, if you could just tell us which tenders you did not regain in the first half of this year, that would be great. Thank you.

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Jean-François Decaux, JCDecaux SA - Co-CEO & Member of Executive Board [6]

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Okay. So I will take the first question. David will take the second one and Jean-Charles will take the third one, Annick. Regarding the U.K., I can see that you were on the French call this morning listening carefully to what was said, and that's nice to -- to see that you are picking up all the information that we're giving on the French call this morning. Yes. We -- we reached 66% of revenues coming from digital in the U.K. in the second quarter of this year. How far can it go? In the U.K. we believe that we will very soon be at around 70% of revenues coming from digital. And whether this is a benchmark for other countries, it very much depends on the -- on the mix of businesses in the different markets. So if you take street furniture, the street furniture market, the penetration is I think moving towards the count of the 35%, 40% mark. Meaning that 60% of the street furniture business will remain classic for I think a couple of years, still a couple of years to come. And we can see that that -- as I highlighted this morning on the French call, that using the example of TfL where we nearly doubled the revenue on the [Bachelder Estate] which was previously operated by Clear Channel, it means that the paper, the classic panels have been quite resilient although they are obviously generating less revenues today than three years ago. Because we have dismantled classic panels on Oxford Street, King's Road and these prime locations to replace them with digital. And in transport, I think we will be above 50% in the very near future, given that every single tender which comes out both in airports and the rail sector is based upon deploying a network which is more than 50% digital. And finally in the billboard business, it will take longer given that we have a legacy business with thousands of billboards. I used the example of the UK this morning, where we had 10,000 billboards 10 years ago. We are now down to a bit more than 2,000. And we are converting the best locations to digital. And that's why it's very hard to give you a precise figure and also an answer regarding whether the U.K. will be a benchmark because the U.K. has a specific mix of billboard, transport and street furniture which -- which is not the same business mix everywhere. So it depends on the business mix. And based on the breakdown of -- on the split of businesses by geography, by country, then the penetration of digital will be different.

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David Bourg, JCDecaux SA - Chief Financial & Administrative Officer and Member of the Executive Board [7]

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Regarding your question on margins and especially coming from -- on the contribution of APN, what it is coming from synergies and the recurring business. As you know we have not disclosed the expected synergies on APN so it is not a breakdown that I can provide you with currently. What I can say is the integration is on track. On the cost side, we have already put all the team under the same roof. We have already extracted our synergies on the cost, remaining obviously to extract the synergies on the sales side. As you know, we have recently announced a new sales strategy in Australia. It was beginning of July so it's a little bit too early to say what would be the impact on our top line, but the answer in short to your question is to say that remaining to reflect or to factor into our revenue growth in Australia the same synergy that we could extract because we have just implemented our new sales policy. Regarding, let's say, the increase of the operating margin on an organic basis, and the speed that you would like to get from digital, new contract and same-store basis, as you basically know this is not something that we are reporting on. And but as I say, the -- during the presentation this margin improvement is clearly coming from the digital where we are delivering multiplying and keeping the cost under control. And the ramp-up of the new significant contract that we sign over the past two years are starting to pay off.

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Jean-Charles Decaux, JCDecaux SA - Co-CEO & Chairman of Executive Board [8]

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Regarding the contracts that were not renewed in the first half of this year. As you know because we disclose them, the Paris street furniture contracts for city information panels was the one, and also the Spanish National Airport contract was also basically not renewed for basically the reason we gave you on the guidance, as well as the loss making -- the recurrent loss-making contract that this -- this contract was carry on. So those are the two basically major non-renewed contracts in the -- in the first half of this year, bearing in mind that as you know we basically win most of our contracts, but obviously not all of them. And sometimes we have a sequential effect where you remember that last year we -- we also didn't renew or extended some contracts such as the Santiago metro in Chile, or Leipzig in Germany, or the Berlin traditional [comps] that basically that was lost last year. But taking obviously the profile, our gross profile in the first half of this year we have also been tracking all of them. But those -- those were known at that time. So those are the two major ones, Paris city information panel and AENA in Spain.

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Operator [9]

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Thank you. We have a following question from Sarah Simon from Berenberg.

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Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [10]

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Yes, hi. I've got two more, please. Firstly on the billboard margin, (inaudible) took from the French call about the fact that the analog panels are loss-making and you're taking them out. But I see in there some sort of one-off costs associated with this. So are we seeing margin improvement from the analog takedown yet, or is that going to kind of lag the actual dismantling? And then the second question was, on slide 20, the APN Outdoor impact, I think you said that was the integration costs. So is the APN -- I mean, obviously there's APN consolidation in the prior slide. But where did the integration costs come? Do they come between operating margin and EBIT, or is the 18.7 in operating margin already net the integration, if that's clear?

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Jean-François Decaux, JCDecaux SA - Co-CEO & Member of Executive Board [11]

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Okay. Thanks, Sarah. I will take the first, and David will answer the second question. Regarding the dismantling costs in the U.K. of hundreds of billboards, traditional billboards, they are obviously one-off. And if I look at the billboard P&L in the U.K. which obviously isn't -- we're not disclosing, it's embedded in the total billboard business. Basically the traditional business is still loss-making with negative operating margin. And the digital billboard business is positive, has healthy margins. So we need to cut more which is what we are doing now. And we want to reach a point where we have a traditional billboard business which is sufficient in order to serve certain clients who are still keen on the buying coverage and -- of the U.K. market which is more difficult to achieve with digital. And that's the purpose of the exercise. We started about 10 years ago with about 10,000 traditional billboards. That's what I call the legacy business. And we are down now to about a bit more than 2,000 and we will end up between 1,000 and 2,000. The final number hasn't been -- hasn't been decided yet. And when this exercise is finished according to our business plan, both the paper billboard business as well as the digital billboard business will be, as a combined business, a profitable business. A smaller business revenue-wise but a profitable business as opposed to being affected by this paper billboard business, which is currently still, despite the dismantling -- and even if you neutralize the dismantling cost, still a drag on our billboard operating margin in the U.K.

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Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [12]

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And can you put any kind of codification on how big the dismantling costs are every year?

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Jean-François Decaux, JCDecaux SA - Co-CEO & Member of Executive Board [13]

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It's not that meaningful.

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Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [14]

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So it'll be single-digit millions?

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Jean-François Decaux, JCDecaux SA - Co-CEO & Member of Executive Board [15]

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Yes.

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Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [16]

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Okay. Thanks.

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David Bourg, JCDecaux SA - Chief Financial & Administrative Officer and Member of the Executive Board [17]

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Sarah, regarding your question on slide 20 and the contribution of APN, actually if you look at -- at the variation of tour depreciation and amortization there is an increase of almost EUR 19 million and the purpose of the slide was to break down the EUR 19 million coming from the consolidation of APN Outdoor and the part coming from our same-store business.

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Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [18]

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Oh, sorry. I was thinking it was integration costs. So it's the integration of the APN depreciation?

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David Bourg, JCDecaux SA - Chief Financial & Administrative Officer and Member of the Executive Board [19]

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Yes. Clearly, clearly, and that's why I realized I should have maybe used consolidation instead of integration.

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Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [20]

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It's lost in translation.

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David Bourg, JCDecaux SA - Chief Financial & Administrative Officer and Member of the Executive Board [21]

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That's how you call that. So this is apart from APN Outdoor on the depreciation and amortization. Now, to come back to your question on where are the integration costs of APN Outdoor, it is mainly recorded in the operating margin and the major part which was recorded in 2018, at the end of 2018, in November and December was of course predated to the acquisition and which was booked between the operating margin and the EBIT.

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Operator [22]

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You have a following question from Nizla Naizer from Deutsche Bank.

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Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [23]

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I just have a couple, if I may. The first one is on your outlook for Q3. You mention that Hong Kong is also now a drag on the Q3 organic growth. Just wanted to understand if you would give us some color, if the Hong Kong situation hadn't arisen what would have been your sort of organic growth outlook for Q3, just to get some color on that magnitude if that's possible? And my second question, we've been hearing a lot about the macro headwinds out there in global markets. And just wanted to understand if you are seeing anything in some of your other key end markets, or if there are certain sectors that are maybe spending less than others that compensate for it by spending more on outdoor advertising, if you could give us some idea of how, for example, on a sector exposure things are changing in your end markets that would be great. Thank you.

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Jean-Charles Decaux, JCDecaux SA - Co-CEO & Chairman of Executive Board [24]

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So regarding Hong Kong, it is clear to say that the situation remains obviously difficult recently. We had a very good start of the year, good Q1 basically, relatively good Q2 but July has been very difficult in Hong Kong. It's on behalf of the, let's say, difficult social situation at the moment. It is (inaudible) retail for the first time in the year, where we've seen the retail number plunging in June by minus 10%. So this is impacting especially the metro, our metro business. This is not impacting our airport business so far. This is I think important to remind you. So the situation in Hong Kong at the moment is clearly much more driven by a metro difficult situation rather than in the airport. And so this is what we can say. Now, we think that the situation in Hong Kong in some point should clarify in the next coming weeks, but who knows, no. So it's quite sudden. It certainly turn around very rapidly end of June, beginning of July unexpectedly as you can imagine, because the business was going very well. And we have seen that in Hong Kong. Hong Kong is always a place where things can turn rapidly in both ways. But overall when we look at the profile of our business in Hong Kong, it always rebound at some point, no. So -- but the situation is unclear at the moment. That's why we can't basically make a very clear call on the -- on how long this can last. I think finally that for the airport, the business remains robust and because of the magnitude of the -- and the way that the Hong Kong airport is commercialized, airport is always much more protected when there is some hiccup on the market because it's long-term contracts. It's normally a 3-month or 6-month contract. Some of them it's a yearly contract. So it's a different, basically, sales portfolio in our business. But that's what we can say in the moment in Hong Kong.

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Jean-François Decaux, JCDecaux SA - Co-CEO & Member of Executive Board [25]

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Regarding your second question, Nizla, first of all I mean, the first six months were very strong. I mean, that -- both 5% organic growth. There are not many media companies from the traditional business or even advertising agencies which can report such a performance without dropping names. So across all geographies, business was very buoyant in the first six months. Now, we've given you the reasons why we have a flat -- expected a flat revenue for Q3. It's a bit early to -- to give you some flavor about whether there is some significant revenue shift in the different categories which invest in out-of-home at JCDecaux. If I take the U.K. as an example, the reason why we went down in the first six months is because of -- mainly because of HFSS which is affecting, unfortunately, only the TfL assets because the decision was made by the Mayor of London. And he could only take a decision for what TfL controls, i.e., the bus shelters which is our asset, the buses and all the subway which are operated by a company called Global. And but if I look at Q3 pacing in the UK, they are mid-single digits for the time being. We have a very strong July. So that's why mid-year it's always difficult to take conclusions about how the advertising categories are changing there, and spent towards out-of-home and more particular and more -- more precisely with JCDecaux. So that's why I cannot really give you any -- any more information on -- on your question regarding shift of advertising spent and explaining the guidance. And again, the guidance of Q3 takes also into account the very strong revenue growth last year, 7.5%, as well as the non-renewal of the last major contract in AENA. So for the time being we don't see, if you isolate the Chinese-Hong Kong issues which Jean-Charles explained in depth, and the AENA, business elsewhere is still good. Not as good as in the first half, but it's still good. And we have some geographies like Middle East for example, or Latin America, which are performing even better than the first six months which is why we put that last sentence in our guidance highlighting that we are -- we're very well diversified, geographically-speaking. And that's a real plus when it comes to basically delivering growth, even when a major region like Asia Pacific which is more than 20% of our revenues, and it's mostly China, is slowing down significantly. And obviously this is offset by the fact that Decaux is a very strong operator in many, many regions around the world which are still growing. And that's why we are confident that we will continue to outperform the advertising market as we've done in the past.

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Jean-Charles Decaux, JCDecaux SA - Co-CEO & Chairman of Executive Board [26]

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And just to add one thing, it is also I think fair to say that even within the region like Asia Pacific you see now the countries outside of China that bring basically good and slash strong growth, in (inaudible) from Japan, Thailand, Singapore. So it is as Jean-Francois just pointed out, we can't really claim for global basically slowdown across the countries, across the globe, as we could went through before in the cycle. So this is -- this is I think a major point to be made to you today.

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Operator [27]

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(Operator Instructions) We have no other questions for the moment.

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Jean-François Decaux, JCDecaux SA - Co-CEO & Member of Executive Board [28]

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Okay, good. If there are no more questions, on behalf of the JCDecaux Executive Board I would like to wish you a good summer, which already started, because it's 41 degrees in Paris today. Fortunately the board is in an air conditioning meeting room today. So have a nice summer everyone, and see you again soon.

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Operator [29]

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Thank you. Thank you, ladies and gentlemen. This concludes today's web conference. Thank you all for your participation. You may now disconnect.