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Edited Transcript of OML.AX earnings conference call or presentation 23-Feb-20 11:00pm GMT

Full Year 2019 Ooh!Media Ltd Earnings Call

NORTH SYDNEY Mar 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Ooh!Media Ltd earnings conference call or presentation Sunday, February 23, 2020 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendon Jon Cook

oOh!media Limited - CEO, MD & Executive Director

* Sheila A. Lines

oOh!media Limited - CFO

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Conference Call Participants

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* Brian Han

Morningstar Inc., Research Division - Senior Equity Analyst

* Eric Pan

JP Morgan Chase & Co, Research Division - Analyst

* Fraser Mcleish

MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst

* Ivor Ries

Morgans Financial Limited, Research Division - Senior Analyst

* Matthew Nicholas

Crédit Suisse AG, Research Division - Director

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the oOh!media Full Year Results to 31st of December 2019 Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Brendon Cook, MD and CEO. Please go ahead.

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [2]

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Good morning, everyone. Thank you for joining us today. I'm here with our Chief Financial Officer, Sheila Lines, and together we will present our final 2019 results.

Given that oOh! had already provided 2019 guidance on January 29, I appreciate that you may -- you are very interested in commentary regarding oOh!'s anticipated performance in 2020 and the direction of the company going forward following my announcement to step down as CEO. I will cover these, but we'll first touch on the highlights of 2019 before handing over to Sheila to walk you through the financials in more detail. After I've covered the strategic direction of the business and 2020 outlook, Sheila and I will take any questions which you have.

Please turn to Slide 3. oOh!media has held share in Out of Home and delivered a 1% growth in revenue on a pro forma basis in what has been a challenging media environment in 2019. As outlined at the beginning of the year, we knew that the first half was going to be tough with the federal election and soft macroeconomic environments impacting advertiser and big-brand campaigns in particular. What was not anticipated was the continuation of the challenging conditions into the second half, particularly July and August, which have been amongst the toughest I've ever seen. I'm pleased, however, that despite Out of Home experiencing its weakest growth since the GFC, it still continued to grow share within the overall media pie. Out of Home continues to benefit from structural changes in the media market, including the ability to make one-to-many advertising geographically and contextually relevant, further enabled by data and digitization. In particular, I would like to acknowledge Commute's contribution, which delivered a 5% increase on revenues versus the PCP, outperforming the broader Out of Home market.

Additionally, during the year, we achieved our integration objectives, delivering a unified client and operational workforce to the market and achieved $16 million in annual run rate savings across the cost base. CapEx came in at the low end of our guidance at $56 million, which reflected a mix of timing delays and continued prioritization of investments, given the short-term market challenges. The Board has declared a $0.075 fully franked final dividend with an activated DRP, which is fully underwritten.

Turning to Slide 4. We are presenting our full year results on a pro forma basis and excluding the impact of the new accounting standard AASB16. This is to allow a comparison on how we are tracking against the guidance provided at the beginning of the year and to allow you to understand how the business is really performing on a like-for-like basis against the prior year. The 1% uplift in revenue did not follow through into the gross profit line due to an increase in rents attached to retaining certain key strategic contracts. Quality assets are the lifeblood of our business, and 2019 saw concession renewals impacting rent attached to the Brisbane City Council and Brisbane Airport contracts. These contracts are keystone in our Commute and Fly businesses, respectively. And we anticipate that, as has been the case in the past with very large key contracts, we will generate improved profitability over time as these concessions are digitized and the associated revenue momentum builds. Importantly, when we make decisions about contracts, we assess the estimated profitability over the life of the contracts, which includes allowing for various economic cycles and bid on this basis.

Underlying pro forma EBITDA declined by 5% and underlying pro forma NPATA by 10% over the pcp as a result of the decline in gross profit with operating cost being flat with the prior year. Importantly, despite a challenging year and digesting a large acquisition, our balance sheet remains sound with gearing at 2.6x and at 2.4x when accounting for the full run rate synergies achieved. Sheila will speak more to this.

Turning to Slide 5. oOh!media has continued to demonstrate the power of a diversified revenue base through achieving growth and maintaining share despite the challenging market affecting individual formats. This year saw quite mixed performance across the 2 halves of the year, so we have included a split of H1 versus H2 on the following slide. This was evident across the market more generally with the OMA reporting a 5.1% gross revenue increase in H1 versus a decline of negative 1.7% in H2. I will refer to both of these slides when I outline the business revenue performance across the portfolio. So please turn to Slide 6.

As outlined earlier, in a challenging media market, Commute has performed ahead of the broader business and Out of Home more generally. During the year, Commute, which is now our biggest business unit, delivered a much improved performance from the Melbourne market and particularly the rollouts across its Metro Trains Melbourne and Public Transport Victoria contracts. The momentum, however, was impacted in the second half in what has been an unprecedented soft media market in Australia, particularly July and August. However, the business in New Zealand has continued to innovate and lead the strong market growth in that country.

The Road division experienced a very challenging first 3 quarters and saw a decline in revenues over this period for the first time in the business's history. Although this came off the back of a very strong 2018, which grew by 13% and was heavily impacted by the weaker advertising market conditions, which I mentioned earlier, it was particularly disappointing. However, the business responded, as foreshadowed with our interim results announcement, with a sharper focus made easier following the finalization of the new sales structure and operating processes. And we grew Road in the fourth quarter, resulting in the trading update, which we provided on December 3. The momentum in Road has continued into the first quarter of 2020.

Retail has improved from a decline in 2018, growing by 5% across the year with the performance across the halves broadly similar. Management worked tirelessly since H2 2018 resetting the value proposition of our market-leading retail network, which has, by far, the largest an audience data insight-led offer in the Australia and New Zealand retail environments.

Fly's strong first half performance of plus 12% growth was impacted in the second half by the reversion of the Sydney Qantas T3 contract back to the Sydney Airport Corporation and the broader soft media market, with its external billboards, in particular, being adversely impacted in the first quarter.

Locate similarly experienced a decline in H2 in the soft market after a very strong H1.

In summary, while our 1% revenue growth is below the medium to long-term growth aspirations of oOh!media and Out of Home generally, this performance demonstrates the resilience of the diversity of oOh!'s portfolio in challenging media conditions.

I will now hand over to Sheila, who will take you through the financial statements in more detail.

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Sheila A. Lines, oOh!media Limited - CFO [3]

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Thank you, Brendon, and good morning.

Moving to Slide 8. Before I make specific comments on the components of the financial statements, I would like to provide an overview of how we have presented our numbers, given significant changes to the composition of the business over pcp and the adoption of accounting standards AASB16 leases. From this point, I will be referring to this as the standard.

We have presented our primary full year results by including Adshel's 2018 first 3 quarter results while under HT&E ownership into the comparative column. Secondly, we have reversed out the impact of the new leasing standard from our 2019 results. This allows for a like-for-like comparison of both -- across both periods to allow a clear understanding of how the business performed. It also allows for an understanding of our performance versus guidance provided earlier during the year and excluded the impact of the standard. We refer to these as our pro forma results pre-AASB16.

The new standard came into effect on 1 January this year. It has had a significant impact on the way we report our statutory income statement and balance sheet, even though it does not impact the actual receipt or payment of cash. It also impacts the manner in which we report our statutory cash flows. The broad impact is to capitalize fixed rent commitments onto the balance sheet as a right-of-use lease asset and as a corresponding lease liability, both of which reduce over the remaining lease period. Adoption has, therefore, driven a significant increase in statutory EBITDA due to the removal of fixed rent as a cost and has also resulted in significantly increased depreciation and finance charges due to the right-of-use asset depreciation and the lease liability discount rate unwind in interest expense.

The net result of these movements is a $13.8 million decline in NPAT and underlying NPATA compared to what would have been reported for 2019 before adoption. This decrease in reported earnings is noncash and is a timing difference, which will reverse over the weighted average life of the lease portfolio, and thus has no impact on the full year dividend decision. The Board's dividend policy of 40% to 60% of underlying NPATA was established pre the standard and has been applied for the full year dividend on underlying NPATA on this basis. The Board has taken this approach as adoption of the standard has no cash impact. The full year dividend represents a 51% on this consistent basis.

Turning first to our income statement. I reiterate Brendon's opening comments. We have delivered 1% pro forma increase in revenues despite challenging media market conditions. The 1% increase in pro forma revenue translated to a gross profit of $283.3 million preapplication of the standard. This represents a decline of 2%, reflecting the concession renewal rent increases, which Brendon outlined earlier.

While adverse format mix impacted the first 3 quarters, the improved Road performance in the fourth quarter was favorable to mix. And across the full year, format mix impact was limited compared to our original expectations for 2019.

Operating expenditure, excluding depreciation, amortization and nonoperating items, was flat on a pro forma basis. After excluding the impact of synergy realization, operating costs increased by 6% as the business incurred the full year impact of increased headcount in the first half of the prior year, plus general increases broadly in line with CPI. Excluding the impact of synergy realization, headcount was kept flat across 2019.

While the business had added new capabilities in prior years, we entered 2019 with a full complement of capabilities required for our business strategy. We will continue to be disciplined and focused on cost while ensuring that we do not impede the business for its growth outlook. The business exited the year with $16 million in synergy run rate savings across the combined operating and cost of goods sold cost base with the majority being in operating costs. We are targeting a further $2 million in run rate savings in 2020 to achieve the upper end of our original $15 million to $18 million synergy savings target when we acquired Adshel. This run rate saving of $18 million across operating and nonrent cost of sales represents approximately a 9% reduction of these cost lines for the combined businesses.

Underlying EBITDA, excluding the impact of the standard, fell by 5% on a pro forma basis to $139 million as a direct result of the decline in pro forma gross profit. This result came in at the lower end of the $138 million to $143 million range provided on 3rd of December due to final December revenue outcome and final actual variable rent calculations for the full year. These factors were considered when providing the guidance range on 3rd of December.

Nonoperating items of $13.7 million pretax are excluded from underlying trading results, and the majority relate to integration costs resulting from the acquisition of Adshel, of which $6.8 million were cash expenses and $3.4 million, a noncash impairment of a technology platform that Adshel had been developing. We decided to accelerate our integration plans by bringing Adshel classic inventory onto our proprietary operating system in 2019. On acquisition, we had assumed systems integration in the second year of ownership. Nonoperating items also include a $3.5 million goodwill impairment on Junkee. This goodwill impairment is due to revised revenue expectations for 2020 for the Junkee business and is unrelated to our guidance downgrade in August of last year. Goodwill for our Out of Home units, which comprise the vast majority of our business, is not impaired.

Depreciation and amortization, preadoption of the standard, increased by 14% on a pro forma basis. The depreciation and amortization charge includes a full year's charge for the Commute depreciable assets, which were revalued outlined with the interim results and also the amortization charge against its identifiable intangible contracts, being the Adshel concessions acquired, as required by accounting standards on purchase price accounting.

Net finance costs before accounting for the adoption of the standard declined on a pro forma basis as a result of falling interest rates, assuming that the pro forma period had a similar capital structure.

The effective tax rate compared to the prior year increased by 6.4 percentage points to 36.5%. While the absolute level of nondeductible expenditure was not materially changed, with a lower NPAT as a result of the standard, that percentage impact increases.

Underlying NPATA on a pro forma basis declined by 10% to $52.4 million and declined by 24% when accounting for the new standard. Pro forma basis NPAT declined by 23% as a result of the NPATA decline, coupled with the amortization charge for the Adshel concessions acquired. As mentioned earlier, these concessions are valued and amortized from acquisition in accordance with accounting standard requirements for purchase price accounting.

The impact of the standard on statutory 2019 NPAT and NPATA is a decrease in profit after tax of $13.8 million due to the strength in the maturity profile of the company's leases. The business proactively seeks to maintain a mature leasing profile, ensuring the appropriate diversification of its revenue-generating asset base. This strength in our true economic business results in a negative accounting impact on an application of and transition to the standard. We will continue to approach our commercial negotiations on an economic and cash basis. Assuming no changes to the lease base, the accounting impact would reverse across the portfolio in future years. And again, there is no impact on either cash flows or debt covenant calculations from the standard.

On Slide 22, we provide a comparison of the impact of the standard on the profit and loss by account level, and more details of the statutory performance can be found in the operating and financial review as well as the financial statements.

Final dividend. As outlined by Brendon, the company declared a fully franked final dividend of $0.075 per share, unchanged from the final dividend for the prior year. The company's dividend reinvestment plan, DRP, will operate for the final dividend payable on 7th of April. We recognize many investors value dividends and also consider the continued application of the Board's dividend policy is the appropriate response to cyclical market conditions. We are pleased to note that participation of existing shareholders were circa 60% for the interim dividend in the DRP. The DRP will be fully underwritten, reflecting our determination to delever over the next 12 months, in line with our prior statements on leverage.

Turning to Slide 9 and moving to our cash flow. Second half cash flows were significantly stronger than the first half as a result of both technical seasonality as well as tax refunds and a change in our installment rate, as foreshadowed at our interim results. On a full year, the company's net operating cash flow was impacted by a nonrecurring first half $7 million payment made under the previously reported termination deed to exit the loss-making 7-Eleven sites acquired from Adshel.

Capital expenditure of $56 million was up very modestly with the prior year on a pro forma basis and came in at the lower end of our guidance range. On a reported basis, the increase was $15.4 million. Capital expenditure included the digitization of the Commute network, which was acquired in the second half of '18; the rollout of new assets in Brisbane Airport; and continued investment in digitization of the group's assets, including premium road locations in Sydney.

We also continue to invest in systems capability to complete functionality of our operating platform, which is an integral element of our business strategy. This operating platform replaces our previous proprietary operating systems, which are now over 10 years old and cannot support the future increased digital volumes or our future product ambitions. This investment also included cost to move Commute classic signs to oOh!'s proprietary technology platform ahead of our original target. This accelerated integration outcome resulted in the noncash integration cost outlined earlier with respect to a system Adshel had been implementing prior to acquisition.

We challenge all our CapEx decisions to ensure CapEx is deployed on sites with attractive economic return metrics as well as flex investment, where possible, in light of changing market circumstances. A significant variant in our CapEx on an annual basis is the timing of rollouts, which were impacted by regulatory approvals as well as finalization of commercial lease negotiations. In FY '19, a combination of planning approval timing and contract negotiations resulted in a number of targeted asset deployments being carried forward into 2020, and Brendon will comment further on this in his outlook statements. Free cash flows improved by 11%, which facilitated the reduction in net debt, which I will touch on shortly.

Moving to Slide 10 and turning to the balance sheet. Excluding the impact of the standard, the company held gearing flat at 2.6x versus December '18 and improved it from 2.7x at June '19. Cash outflows for the year included distribution of the final dividend from FY '18 and nonrecurring payments for the exit of the unprofitable 7-Eleven contract and cash integration costs of $6.8 million during the year. Notwithstanding these cash outflows, net debt declined by $17.9 million over the 2019 year. Our gearing is well within the company's banking covenants, and we will reduce net debt and gearing further over 2020. The Board's decision to activate the DRP and underwrite the final FY '19 dividend reflects our commitment. Taking account of the full achieved synergy exit run rate of $16 million for 2019, the current gearing would be lower at 2.4x.

I will now hand back to Brendon, who will take you through an update of oOh!'s achievements for the year and the strategic focus of the group and outlook for 2020.

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [4]

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Thank you, Sheila. If you could turn to Slide 12.

The business delivered on the 2 key objectives in what has been a challenging year. First, we maintained our focus on achieving our integration targets for the business, including relocating all of our staff to colocated, permanent and temporary offices and unifying our sales team, both in structure and in their market approach. Importantly, we delivered the $16 million exit run rate synergies, which we committed to.

Second, after a very dispiriting third quarter where we lost share on the key Road format, we bounced back in the fourth quarter. This was achieved through a unified postintegration sales structure, renewed focus and energy. Pleasingly, as touched on earlier, Road has continued to perform well in Q1 2020.

Despite the short-term challenges we have faced, I'm very pleased with these 2 outcomes, and we achieved these without -- sorry, we have achieved these without taking our eye off the longer-term strategy, which I'll cover next.

Please turn to Slide 13. Out of Home has continued to benefit from the structural tailwinds, which has prevailed since we listed in 2014 with the industry growing at a CAGR of 9%. The 2 key structural changes to the media industry over the past 10 years have been disruption of technology and associated fragmentation of audiences. Unlike other traditional media format, technology has benefited Out of Home. It has significantly accelerated the speed at which Out of Home can respond as a reach and tactical medium, and we increasingly are contextually relevant and offer significantly improved analytics of our audiences.

Unlike other traditional media, Out of Home audiences have continued to grow. It cannot be blocked, skipped or fast-forwarded and is increasingly providing publicly utility through, for example, providing transport information and emergency response information, et cetera. This results in Out of Home being simply unmissable. This power of Out of Home is supported by independent major studies paid by clients that prove the Out of Home multiplier effect on return of investment for clients. Out of Home is now a priority media. This is why major agency groups have increased their share of media spend on Out of Home to 14% versus 10% in 2014. This is also why I'm confident that Out of Home can increase its share of media overall to 10% in the next few years.

PwC also share this belief in the increasing primacy of Out of Home and in their 2019 media outlook have Out of Home continuing to take share beyond 2020.

Please go to Slide 14. As you can see on this slide, our strategy remains consistent with what we presented earlier this year. We believe that the current conditions are cyclical. And as outlined earlier, the structural story driving advertising dollars to Out of Home remains. Our strategy to redefine Out of Home in Australia and New Zealand as a public space media captivating, connecting and informing citizens is founded on 5 pillars. These 5 pillars, as outlined on the slide, are centered around providing advertisers with the broadest and most audience-targeted Out of Home network in Australia and New Zealand. This is achieved not only through being market leader in data and insights in Out of Home and having the biggest network but also the strength of our relationships with key agencies, clients and property partners. And all of this is built on the incredibly strong culture we have at oOh!.

During the year, we continued to advance these 5 pillars with continued digitization of Commute assets and selected road sites that have added both quality and capacity to our network, for example, in the regulatory-restrained Sydney market.

Our appetite to further develop our digital portfolio is dependent on securing high audience value locations. When we make decisions on the rent commitments and commercial terms, we always factor in the value of the lease over its cycle, which can cause short-term earning fluctuations.

The network is being offered to advertisers through our new SMART Reach planning tool, which we launched in October 2019, that allows advertisers to enhance their return on investment through reaching the right audience at the right place at the right time. Consequently, advertisers and agencies have continued to recognize oOh!media as the Out of Home leader with the highest Net Promoter Score and the strongest understanding of data based on surveys from the independent market research company, Media i.

Our continued investment in technology and cybersecurity also facilitates delivering to large audience in a brand-safe and transparent way, which is becoming increasingly important to accommodate evolving client and property partner needs. We see our client base evolving such that SME and direct clients increasingly use Out of Home to cost effectively reach audience in locally focused campaigns in greater numbers than in the past. The geographic diversity of our inventory will benefit from the investment into our direct sales structure and our operating platform that facilitates the growth of SME and direct client market. In 2019, our direct business grew by 6.5%. I will provide further details of the progress on the operating platform later in the presentation.

Our large workforce following the Adshel acquisition has responded positively to the change based on the results of our recent culture survey. We look forward to moving into a single office in each of the Melbourne and Sydney markets later this year.

In summary, our strategy positions oOh! well to drive and capitalize on the structural growth of Out of Home.

Turning to our lease profile on Slide 15. The business has continued to manage its diverse lease base such that in excess of 60% of concessions, as measured by our financial year '19 revenue base, have a residual expiry profile beyond a 3-year time horizon. 2020 however does a step-up in the traditional circa 14% to 18% expiry cycle due to 2 key concessions being Sydney Trains and Melbourne Airport. Both of these tenders are currently in progress and we expect will be actively competed for. Subsequent to 2020, I see the business returning to traditional range of expiry leases in any given year.

As outlined in the prior slide, a successful Out of Home business must look through the short-term cycle to make a well-judged investment decision on what it thinks it can earn during the life cycle of the lease, and this is how we are approaching both of these tenders. I will also remind you of what I've often said previously, an Out of Home business can go broke from winning a tender and not from losing one. This mindset is how we approach all lease decisions. These decisions are also made in the context of our scaled and diversified portfolio, which is a benefit of the acquisition strategy, which we have implemented over the past number of years.

Please turn to Slide 16. As you can see, we have made significant progress during the second half of 2019 with the adoption of our operating platform. We achieved a key milestone in the last weeks of 2019, achieving 50% of all media bookings being end-to-end processed through the platform. And this progress has continued into the new year, as outlined in the chart. End-to-end process means from the proposal to booking, campaign delivery, campaign verification and ultimately, invoicing, et cetera. We continue to make progress in the new year, and I expect that we will have our final 2 products, Fly and Locate, operational in H1. While this has taken more dollars and time than we have planned for, we are firmly of the belief that this platform is integral to our strategy of delivering better services for our customers and grow revenue without adding to the headcount traditionally required in the Out of Home business to serve a new revenue growth and expanding digital creative needs.

Please turn to Slide 17. Next, I would like to turn to my decision to step down as CEO, as announced on 29th of January. The successful integration of Adshel and the strength of our team now has given me the opportunity to be able to step back from what has been my life for the past 30-odd years. As is the case with building any successful business, it has been tremendously rewarding. I remain absolutely committed to oOh!, and I guarantee that my blood will always run orange. Hence, I will stay on as CEO until replacement steps in, and thereafter, I'm contracted under a consultancy arrangement at the request of the Board to assist with not only a smooth transition and any other matters as requested by the Board or the new CEO, I'll also be around to support oOh! and its people for a long time thereafter.

As you can see from the slide, the leadership team of oOh! has extensive media and broad industry and functional experience, and I'm confident in their kind of combined ability and the level of management below the ELT to lead the business to the next stage of its growth. Regarding an update on the search process, as you can appreciate, these are highly confidential matters. An update will follow in due course at the appropriate time.

Now turning to the outlook for 2020 on Slide 19. Media bookings for February year-to-date are flat with last year, noting that February year-to-date in 2019 grew by 11% versus the pcp. Given the announcements recently made by SMI in reporting free-to-air and radio companies, this demonstrates the resilience of Out of Home and oOh!media. Whilst bookings continue to remain short, pleasingly, the sales pipeline of client plans for use of Out of Home is higher than the same time last year. The challenge is visibility as to when campaigns will run. And at this point, we don't have enough data to speculate on any coronavirus impact.

I'm nevertheless confident that Out of Home and oOh!media will continue to grow the top line. The company has thus provided an underlying EBITDA pre-AASB16 guidance range from $140 million to $155 million and a CapEx range of $60 million to $70 million. This CapEx range exceeds the $56 million that we spent in financial year '19 as a number of key projects, which we had anticipated in financial year '19, were delayed as outlined earlier. This, coupled with a significant renewal cycle over 2020, underpins this range.

Also outlined earlier, oOh! generates revenue off long-term key contracts, and the retention or winning of new contracts results in the business investing in public infrastructure bus shelters, digital and classic signs through the economic cycle. An appendix has been provided in Slide 26 that outlines the split between growth investment, renewal investment and the investment in the technology and corporate costs.

As Sheila outlined earlier, the company is committed to continue to reduce its net debt and gearing during the year and continues to target 2x or approaching 2x by the end of the year.

Thank you, and Sheila and I now would love to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Eric Pan from JPMorgan.

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Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [2]

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Three for me. In your guidance, are you assuming that the ad markets remain flat or growing slightly for the year? And then secondly, you mentioned February year-to-date has been flat. Is that across all segments of your business? Or are you seeing some segments outperforming others? And then lastly, for Brendon, as you exit this industry, what do you think is the biggest challenge facing the Out of Home industry in the near -- medium term?

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [3]

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Thanks very much. Firstly, I'll start on the market. I still -- I think Out of Home will continue to grow share from the traditional media. And obviously, the guidance range we have provided provides for a number of scenarios from flat through to increases. In terms of the February, segments we -- across portfolio, it's too early at this stage. But one of the benefits of our diversified portfolio, you can have some up and some down. What's pleasing that Road is doing really well. And we've got various mix throughout that period, which is all dependent upon how advertisers are looking to spend their money and some different objectives across each of the different portfolios as to what they deliver.

In terms of the challenge into the medium term or longer term, medium term, I think the adoption of technology is critical. Clients are only using about 10% of the digital capacity in terms of the creative that they're applying, and we have seen what that has meant in growth in work requirements. And I think if you don't have an advanced technology platform, you will have problems as that becomes omnipresent in terms of the way clients can use the medium, and that will help grow the medium anyway when they can use it creatively, possibly the right way. At the end of the day, the surge to only thinking about data connections has been at the resulting loss of creativity across all media, and that is critical if you want to grow ROI for clients that need to get back to investing in creativity.

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Operator [4]

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Your next question comes from Matthew Nicholas from Crédit Suisse.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [5]

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If you could just delve into the outlook in a touch more detail. I think, Brendon, you made the comment there, your range sort of focuses from a flat revenue outcome to something, I mean, it sounds like would be at best mid-single digits are at the lower end of that. Maybe just a bit of color on Adshel synergies. Just doing the quick math, it sounds like you recognized $8 million in the P&L last year, which gives you an $8 million tailwind into this year. And I think with that, what sort of assumptions are you expecting on OpEx growth?

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Sheila A. Lines, oOh!media Limited - CFO [6]

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Yes. So first of all, Matt, in terms of the synergies, that's correct. We would expect the kind of split year-over-year in terms of realization you just outlined. And then the further $2 million that we're targeting won't be for a full year impact, obviously, but will also have an impact. We are -- in terms of our OpEx cost base underlying, ignoring those synergies, as mentioned, we entered this year just gone with some tailwinds in terms of full year run rate. And above that, we managed a whole range of OpEx decisions within the $150-odd million -- sorry, $145 million to keep to our target. We haven't given guidance for OpEx for the year coming, but I think we have provided enough commentary regarding the fact that we do have the capabilities in the business, our discipline and focus and the componentry of what drove that 6%. And we don't have that same run rate tailwind to give you an idea that we are looking to continue to manage OpEx very carefully indeed.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [7]

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Great. And just in terms of the 2 problem contracts you had last year, Brisbane City Council, Brisbane Airport. I think when you guided this time last year, I think you implicated a broad number of about $7 million or $8 million as a one-off impact last year. Just in terms of how those contracts work this year, as you digitize these assets and you gain revenue on those assets, did the lease costs follow in that respect or the lease costs have effectively flatlined in year-on-year since?

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [8]

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Firstly, I don't think we gave 100% guidance on all the numbers. But well, as with any big audience play, and if you remember that Brisbane Airport, of course, is the only airport in Brisbane, and Brisbane City Council is like 20 to 30 councils, in some way like Sydney, so it takes -- from our point of view, we're obviously in the process where the rents did step up, remembering that both those contracts were contracts that had been around for a long time. And if you think about the growth of Out of Home in the last 5 years, there was a lot of investment that you only make post entering into a new long-term contract. So over the next number of years, we expect to see -- as planned, we expect to see those contracts continue to grow. Obviously, what you are often doing is you're transferring fixed rent -- I'm sorry, variable rent to some fixed rent as you go through the negotiation cycle. So I can't comment any further for commercial sensitivity reasons other than that, other than we expect as we invest into those contracts prudently, that given the nature and length of those contracts, that we will continue to grow the revenue and the performance of them.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [9]

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Great. And just last one for me. The 2 major contracts you've got up for renewal this year, I think you mentioned Sydney Trains and Melbourne Airport. I think, firstly, when would you expect a resolution on these? And I think, secondly, when was the last time each of these contracts was renegotiated from your end?

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [10]

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Yes. I won't go into the commercials fully, but the resolution is uncertain as to what dates they will be, and we're not allowed to comment on that anyway. That's still in the hands of those parties. So we'll leave that as is. Obviously, our guidance reflects any sorts of outcomes.

In terms of Melbourne Airport, oOh!media has had that airport for 14 to 20 years, I think it is now, somewhere in that vicinity. It's had various negotiated renewals throughout that process. So it's now a tender process. In terms of Sydney Trains, which was an Adshel contract, it's been, I think, 6 years or 7 years since it had its last investment cycle, and there's been a lot of changes in that opportunity in that period in technology that can work within that environment since that period.

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Operator [11]

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(Operator Instructions) Your next question comes from Adam Cleish (sic) [Fraser Mcleish] from MST Marquee.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [12]

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I think it might be Fraser Mcleish from MST Marquee, but I'll assume that's the case. And just a couple of quick ones from me. Just on gross margins, Brendon, you called out the impact of a couple of the larger contracts you had in the year. What are you seeing in some of the sort of smaller contracts when you're going through renewal? Are you seeing any gross margin pressure there? Are they holding up quite well?

And then just on CapEx, that CapEx you're guiding for 2020, is that reflective of a sort of normal year of CapEx going forward, do you think?

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [13]

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Sure. In answer to your first question, obviously, having a large diverse portfolio with thousands and thousands of leases, there are contracts that clearly become less valuable to us and, therefore, can go in the opposite direction. And there are some that can, I think, go a little bit more as they enter a cycle that they can have investment. There's still a lot of high-quality locations, and we have been focused very heavily on the quality locations that could be digitized at appropriate times and appropriate structures. So we'll keep managing that base. The real movement occurs when you have these big audience ones. And you've got to look at the 10-year cycle and make some decisions of how they will perform over that 10 years, and you do at that same time allow -- whilst we're not perfect economists, we can't predict which year is going to be down or up, we can predict that there's usually a number of cycles throughout a contract where economic performance of the country changes. And you factor that into your long-term plan, so you can have a situation where you enter into a new agreement, factoring on a longer-term basis. If it happens to in the early part of the cycle coincide with an economic impact, it obviously can have some of the challenges we saw in 2019, but it doesn't take away from the ultimate value of the contract. That's the nature of the business.

Sorry, the second question, I just forgot what that was.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [14]

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That's just on CapEx for 2020, if that's kind of representative of a normal year CapEx going forward.

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [15]

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Yes. Look, CapEx will probably -- can -- has been ranging or will range, I suppose, somewhere between the 8% to 10% of revenues in due course once you get through the full digitization cycle. It does depend on the size of the contracts coming up. '19 and '20 are abnormal in terms of the size of the 2 -- of the tenders, not just with us but across the industry. So they tend to be outliers. But I would have thought that we'll be prudently managing capital.

We did provide a slide to try to explain the CapEx better. So this slide goes in the appendix. And as you'll see, a large portion of the CapEx is what we'd call renewal CapEx. That is where you're refurbishing existing infrastructure, and that becomes more of a trend once you get through the growth cycle of just applying new assets. It will grow. The growth will reduce. It doesn't mean growth in revenue will reduce from it. It just means that the profile of how you're reinventing your inventory as you sign up all the new contracts will occur.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [16]

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Great. And sorry, just a quick follow-up on that, actually. Can I assume that the CapEx you've given for '20 assumes you retain the 2 contracts that are up this year but doesn't include anything from any new contracts you might win? Is that fair?

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [17]

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We take assumptions along those lines as we move through the cycle, yes.

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Operator [18]

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Your next question comes from Brian Han from Morningstar.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [19]

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Brendon, do you have any concerns that the current net market weakness could be more structural than we think or that the eventual recovery, perhaps, will not be as good as previously?

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [20]

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Brian, a very good question. I think the real answer there is clients and Boards realizing the value that by not branding that you will go backwards. And I think that's -- the data is starting to be stronger. Factual data is starting to be stronger that you need to create the scale and size of your brand. It's no coincidence that some of them, let's call them, new-age businesses are very heavily building their brands on other media, including strongly on Out of Home. There will be structural change but -- because it will come to audience, and where we are lucky is that our audiences are declining and their engagement with us, if anything, is growing. And we've got a technology piece going out with the program we're doing to promote the National Gallery Association's first -- in Canberra's first all-female art display, which Google have worked with us to develop, which effectively will allow people to create a whole lot of data or get a whole lot of content by just scanning the copy of the art in a way that hasn't been previously done.

So there's a lot of positives in the way that Out of Home can operate, and there'll be more things that we're doing as we move forward to continue to ensure that. In fact, our audiences are stronger. If this declines in other areas, that we have the advantage of being able to truly shift some of that money into Out of Home.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [21]

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Okay, Brendon. And also, just a general question. When you try to renew concessions, does an advertising market downturn make the renegotiation easier or harder with landlords?

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [22]

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Nothing is ever easy, Brian. It don't matter what are these negotiating any for you, it’d all be -- all that game. I think at the end of the day, what it comes down to is you’ve got to look at the total cycle. And you value in if there's a downturn for a period of time, I think, clearly, you've got to value that into the breadth of the cycle just as you value in the -- any upside you see and work through the negotiation. So from our point of view, we've been through them before. And even though Australia's not had a recession for a long time, there has been advertising slowdowns different to the economy, and we've been able to negotiate our way through them appropriately. And that's what we'll continue to do.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [23]

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Maybe can I throw in a last cheeky one? Brendon, were there any thoughts to perhaps staying on the Board as a non-exec?

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [24]

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Look, I think in the first instance, I think it's far more valuable to help the new CEO when they eventually are found and the teams without any rules or other criteria. There is a director that may be in place. So I haven't given thought to it at this point, but that would be the decision of the Chairman and the Board. But I do think, at any rate, being able to more closely help them in a hands-on way is far more valuable at this point than being a director.

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Operator [25]

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Your next question comes from Ivor Ries from Morgans Financial Limited.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [26]

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Brendon, I wonder if you could share with us in the Road side business, the number of large-format digital screens you had in operation at the end of FY '19 and what the planned rollout of new large-format screens is for this year.

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [27]

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We had about 105, I think it was. And we're disciplined in our rollout. So subject to council approvals and various negotiations, we wouldn't see much more than 20 to 30. We're very conscious of only generating ones that offer significant improvements to our audience profile. Hence, for example, we're building some in Mosman here in Sydney, which has got not many locations.

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Operator [28]

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

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [29]

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Look, thank you all for making the time. I know it was a fairly lengthy one today, a lot to get through on the AASB16 issues. And I do really thank you for your time. We look forward to chatting to you more fully when we see you. Thank you very much.