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Edited Transcript of OML.AX earnings conference call or presentation 26-Aug-19 12:01am GMT

Half Year 2019 Ooh!Media Ltd Earnings Call

NORTH SYDNEY Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Ooh!Media Ltd earnings conference call or presentation Monday, August 26, 2019 at 12:01:00am 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

* Fraser Mcleish

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

* Ivor Ries

Morgans Financial Limited, Research Division - Senior Analyst

* Piers Bolger

Viridian Advisory Pty Ltd - CIO

* Russell J. Gill

JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand

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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 Half Year '19 Results Presentation Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Brendon Cook, 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, and thank you for joining us today. I'm here with our CFO, Sheila Lines. And together, we will present our interim 2019 H1 results. While I appreciate that you are very interested in our commentary on the second half given our recent trading update, I will start by providing an overview of our performance during the first half. I will then discuss the trading update provided on the 16th of August and our conviction in our strategy before handing over to Sheila to walk you through the first half financials in more detail. Prior to taking questions, I will outline the company's focus in the next 6 months and current outlook.

Please go to Slide 3. oOh!media has delivered 5% growth in revenue on a pro forma basis in what has been a challenging media environment. 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 environment impacting advertisers and big brand campaigns in particular. This broadly bore out as we were expecting, with the order on banking advertising sectors particularly weak. In particular, I would like to acknowledge Commute's contribution, which delivered a 13% increase on revenues versus the PCP, a performance that was ahead of expectations. When we announced the acquisition of Adshel, we did so on an estimated EBITDA of $48 million to $50 million for the 12-month period ending June 2019. Against this expectation, the business delivered $53 million pre-synergies. This outcome demonstrates the results of our strategy to diversify its revenue formats and the conviction which we had in making this acquisition.

Additionally during the half, we made solid progress on our integration objectives and on our technology platform, and importantly, we have vetted down our market-facing sales team to present a unified face to the market. We did this without incurring any extra operating cost. The Board has declared a $0.035 fully franked interim dividend with an activated DRP, which is fully underwritten.

Slide 4. We are presenting our H1 results on a pro forma basis and excluding the impact of the new standard, AASB 16. I think I'll refer to that as the standard from now on. 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 first half. The 5% of uplift in revenue did not follow through into gross profit line due to changes in revenue mix away from Road, which I will outline in the next slide as well as an increase in rents from key contract renewals. The business was, however, able to partially mitigate this impact through a very disciplined approach to commercial renewal negotiations and operating costs. Importantly, despite a challenging first half and adjusting a large acquisition, our balance sheet remains sound. Sheila will speak more to this.

Slide 5. oOh! has continued to demonstrate the power of our diversified revenue base. As outlined earlier, in challenging media market conditions, I'm particularly pleased with Commute's contribution in both Australia and New Zealand. During the half, Commute, which is now our biggest business unit, delivered a much improved performance for Melbourne market in particular, with rollouts across its Metro Trains Melbourne and Public Transport Victoria contracts. The Commute business in New Zealand has continued to innovate and lead the market. The Road division, however, experienced a very challenging first half and saw a decline in revenues on the prior half. This for the first time in the business history. Although this came off the back of a very strong 2018, which grew by 13%, and was heavily impacted by the weak brand-building awareness market conditions which I mentioned earlier, it was particularly disappointing. As you know, we experienced challenges in Fly and Locate business in 2017 and Retail in 2018. And through management actions and energy, we turned these formats to long-term growth. We will do the same with Road as oOh! has an unrivaled national road network and a leading team of expert road commercial and sales practitioners who are working to ensure the new structured sales team, improve their road new business strategies implementation and negotiating capabilities.

As just mentioned, Retail has improved from a decline in 2018 despite ongoing competitive pressures. Management worked tirelessly since H2 2018, resetting the value proposition of our market-leading retail network, which has, by far, the largest data and insights audience-led offer in the Australia and New Zealand retail environments. Fly and Locate continued to deliver solid growth in the first half of 2019, backing up their return to growth in 2018.

In summary, while 5% revenue growth is below the medium to long-term growth aspirations of oOh!, this performance demonstrates the resilience of the diversity of oOh!'s portfolio in challenging media conditions.

Slide 6. Turning to our recent trading update provided on 16th of August 2019. The business has seen an unprecedented decline in media revenues across Q3, which will be the first time in the company's history results in a negative quarter. Recent earnings outlooks from the vast majority of media companies' SMI results for July have confirmed that July and August in particular have been extremely tough, and in all likelihood, we'll witness significant declines across overall media spend for these months. While September is not as bad and seems to be improving, it will be a poor quarter for media overall. When we set the guidance at the beginning of the year, we anticipated a challenging first half due to the federal election and soft advertising outlook from March to May. We had, however, anticipated a recovery thereafter based on the expectation that certainty of government would lead advertisers to return with brand-led campaigns. When we reconfirmed our full year guidance at the AGM in May, we had seen a period of increased advertising booking activities in May and June as compared to March/April. We also expected that the early signs of improvement in the housing market in June and July stimulated by reduced interest rates and tax cuts to take effect in driving up advertising spend. However, in more recent weeks, we saw a deceleration of pacing into the third quarter and once it was clear the trend was not going to reverse, formed a view on the 16th of August with our Board that despite the fourth quarter pacing positively at plus 6%, that it was no longer likely we'd be able to meet our earlier guidance range. This was particularly disappointing given H1 result, which was on track for us to deliver within the original guidance.

Q4 continues to strengthen on Q3, in line with expectations from our broader client base. As outlined on the 16th, our new guidance is an underlying EBITDA range of $125 million to $135 million pre the standard or AASB 16. I acknowledge the impact that has -- that this unexpected announcement has had on the confidence in the market as reflected in the share price drop. Management and our broader teams are doing everything within our power to deliver as good an outcome in these conditions as possible. I will speak more to that -- on this later. I want to be clear that management and the Board carefully considered all likely scenarios, and we concluded there wasn't a requirement to raise additional capital. While noting that we have underwritten our DRP program for the dividend, our balance sheet remains sound, and Sheila will outline this in further detail shortly.

Slide 7. The Australian Out of Home industry is confident Out of Home can reach 10% from today's approximate 6% share of all media spending. This is not just an aspiration and strategy for Out of Home. Out of Home is benefiting both here and globally from structural changes in the media market. Globally, Out of Home companies are continuing the upward trend in revenue growth. For example, the OAAA U.S.A. reported revenue growth in Q2 of 7.9% on the PCP, the largest revenue growth for any quarter in 12 years. This is important as global headquarters clearly can influence local decisions -- decision-making on mediums of choice. While audiences are being fragmented for traditional media, they're becoming increasingly consolidated for Out of Home. The oldest form of advertising is digitized. The historically data-poor media format has become data-rich, and the ability to make one-to-many advertising geographically and contextually relevant is unparalleled. As a physical public space media, our audiences are growing as compared to other traditional media.

oOh! is recognized as an industry leader in Australia with respect to the use of data content in multiformat campaigns. We are attracting new advertisers and advertising categories, especially digital brands such as Google, Uber and Menulog and others who are seeking to build their brand out of their digital media environments. Digital company revenues are growing both in the U.S.A. and China as well. An Australian example is the quote in the presentation from the innovative mattress company, Koala. oOh! helped Koala to build its brand and more importantly sales as Steve Smith could testify based on the recent article in the AFR, although he might have preferred an Ashes win last night. When the media cycles improves, as it will, Out of Home and oOh! are well placed to deliver strong returns as we leverage our capabilities.

Slide 8. As you can see on the next 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 through Out of Home remains steady. Our strategy continues to build all elements to deliver our goal as the industry leader to achieve 10% of the media pie for Out of Home. It is clearly important to deliver large audiences, delivered to our clients and property partners, in a brand-safe and transparent way. Hence, our investment into cybersecurity and a technology platform that accommodates evolving client and property partner needs. We see our client base evolving, such as that SME and our 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 in our technology platform that facilitates the growth of this SME and direct client market. An example would be the Koala Mattress company, which I mentioned earlier. Our enlarged workforce, following the Adshel acquisition, has responded positively to change based on the results of the recent culture survey as well as agency NPS feedback provided by the independent media research company, Media I.

In summary, our strategy holds and will drive strong performance from the company in the evolving media landscape.

I will now hand over to Sheila to take you through the financial results from Slide 9. Thank you.

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

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Thank you, Brendon, and good morning. 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 AASB 16 Leases. Like Brendon, from this point, I will be referring to this as the standard.

We have presented our primary first half results by including Adshel's 2018 first half results while under HT&E's ownership into the comparative column. Secondly, we have reversed out the impact of the new leasing standard from our first half 2019 results. This allows for a like-for-like comparison across both periods to allow for a clear understanding of how the business has performed. It also allows for an understanding of our performance versus guidance for 2019 provided in February, which excluded the impact of the standard. Our updated guidance in the 16th of August trading update similarly excluded the impact of the standard. We refer to these as our pro forma results pre-AASB 16.

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 Board impact of this standard is to capitalize fixed rent commitments onto the balance sheet as a right-of-use asset and a corresponding discounted lease liability, both of which reduce over the remaining lease period. Adopting the standard has therefore driven a significant increase in EBITDA due to the removal of fixed rent as a cost and also significant increases in depreciation and finance charges due to the right-of-use asset depreciation and the lease liability discount rate unwind. The net result of these movements is an $8.5 million decline in NPAT and underlying NPATA. This decrease in reported earnings is noncash and is a temporary timing difference which will reverse over the weighted average life of the lease portfolio and thus has no impact -- not impacted on the dividend declared for the interim result. The Board's policy of 40% to 60% of underlying NPATA was established pre the standard and has been applied for the interim dividend on underlying NPATA pre the standard of $18.2 million. This is appropriate as the adoption of the standard has no cash impact. Our interim dividend represents a 46% payout on this basis.

Turning first to our income statement. I reiterate Brendon's opening comments. We have delivered 5% pro forma increase in revenues despite challenging media market conditions. This 5% increase in pro forma revenue translated to a gross profit of $126.6 million pre-application of the standard. This represents a margin decline of 2%, reflecting the impact of an adverse revenue mix change and concession renewal rent increases. Road constituted 22% of the first half '19 revenue mix versus 26% in the prior corresponding period, a 4% decrease. Conversely, both Fly and Commute, which have lower structural gross margins than Road, increased their mixed contribution by 1% and 3%, respectively. Commute's contribution in the half helped offset the impact of Road on overall revenue performance.

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 4% on a pro forma basis, which is below the guidance given in February.

The business exited the half with $10 million in annualized synergy run rate savings, and the business remains on track to meet its commitment of $16 million run rate synergy savings by the end of 2019 and expects further savings in 2020. As Brendon said, we have made significant efforts over the first half to mitigate the drop-through of EBITDA of softer revenues by both our commercial stance on lease renewals and by control of operating expenditure while also delivering synergy cost savings. As a result, first half EBITDA performance was broadly in line with our expectations. And we will continue to make every effort in both these areas.

Underlying EBITDA excluding the impact of the standard fell by 4% on a pro forma basis to $56 million as a direct result of the decline in pro forma gross profit.

Nonoperating items of $6.9 million pretax are excluded from underlying trading results and relate to integration costs resulting from the acquisition of Adshel. These reflect mostly termination expenses and a noncash impairment of a third-party technology platform that was in development by Adshel.

We took the decision in the first half to accelerate consolidating Commute onto our new operating platform ahead of our original acquisition assumption of 2020. This accelerated integration outcome resulted in a noncash $3.4 million impairment, which we have reported in integration costs and which relates to a system Adshel had been developing prior to acquisition. We expect final cash integration cost to be marginally higher than the $7 million originally stated. We also expect final synergy savings in 2020 will exceed the $16 million exit run rate for 2019.

Depreciation and amortization pre-adoption of the standard fell by 10% on a pro forma basis. This is as a result of purchase price accounting for PP&E acquired with Adshel in the first half. This is a necessary first step before finalizing the purchase price accounting for the intangible customer contracts, and we are on track to complete this by 30 September within the required 12-month post-acquisition period. This means the adjustment from underlying NPAT pre the standard to underlying NPATA pre the standard does not yet reflect intangible customer contract amortization. However, our key metric of NPATA used for both business performance and our dividend policy is unaffected.

Net finance costs before accounting for the adoption of the standard were flat on a pro forma basis. As for consistency, we have assumed the interest expense on debt financing for the acquisition would have existed in the pro forma scenario also. Pro forma NPAT prior to applying the standard was impacted by softer revenue environment impacting gross margin and the $6.9 million in integration costs. Underlying NPATA prior to applying the standard on a pro forma basis increased by 3% to $18.2 million, and decreased by 35% when accounting for the new standard.

As outlined earlier, the first half '19 -- statutory first half '19 NPAT and NPATA impact of the standard is a decrease in profit after tax of $8.5 million, which is a function of 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 initial application of the standard. We will continue to approach our commercial negotiations on an economic and cash basis. This accounting impact will reverse across the portfolio in future years. There was no impact on either cash flows or debt covenant calculations from this standard.

Slide 20 provides a visual comparison of the impact of the standard on the profit/loss by account level, and more details of the statutory performance can be found in the operating and financial review as well as the interim financial statements.

Moving to the dividend. As outlined by Brendon, the company declared a fully franked interim dividend of $0.035 per share, unchanged from the dividend declared for the prior corresponding half. The company's dividend reinvestment plan will operate for the interim dividend payable on 30 September 2019. 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. However, the dividend reinvestment plan will be fully underwritten, reflecting our commitment to delever over the next 18 months, notwithstanding the difficult current media conditions.

On Slide 11, moving to our cash flow. The company's net operating cash flow for the half was impacted by 2 nonrecurring items. These were the $7 million payment made under the previously reported termination deed to exit the loss-making 7-Eleven sites and the integration cash payments of $3.5 million. Additionally, tax paid exceeded tax expense in excess of $20 million. Differences between tax paid and tax expenses are a normal part of our business and typically reverse in subsequent periods. Absent these items, first half cash flow before payment of our FY '18 final dividend would have been in excess of $15 million.

Capital expenditure of $28.3 million increased by 14% on a pro forma basis from $24.9 million in the prior corresponding period. On a reported basis, the increase was $13.8 million and was driven by the digitization of the Commute network, which was acquired in second half of 2018, the rollout of new assets in Brisbane Airport and continued digitization of the group's assets. We also continue to invest in system's capability to create an operating platform built on advanced machine learning capability. For the full year, the company is targeting the lower to mid-range of its stated CapEx guidance of between $55 million and $70 million. We robustly challenge all CapEx decisions to ensure CapEx is deployed on sites with attractive economic return metrics.

Moving now to the balance sheet on Slide 12. Excluding the impact of the standard, the company increased its gearing from 2.6x in December to 2.7x in June. This was in line with the company's expectations and was driven by the 2 nonrecurring items and the tax payment timing differences I referred to under cash flow and also the payment of the FY '18 final dividend. This level of gearing is well within the company's banking covenants, and oOh! will reduce its net debt over the second half of '19. Second half cash generation is stronger than the first half given seasonality of earnings. After adjusting for the 2019 exit run rate of $16 million in synergy cost savings compared to the actual synergy realization reflected in the last 12-month EBITDA, current gearing would revise down to 2.5x. Our bank covenant is 3.5x.

We anticipate strong cash generation over the second half of '19. And notwithstanding the revised guidance range, we will remain significantly within our bank covenants. Over 2020, we fully expect on a range of scenarios tested that we will continue to retire debt and delever.

In summary, our balance sheet remains sound, and as Brendon outlined, we do not see a situation where the company is compelled to raise additional capital beyond our dividend reinvestment plan, notwithstanding our disappointing guidance update.

I will now hand you back to Brendon, who will take you through an update of oOh!'s operating achievements in the first half.

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

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Thank you, Sheila. Slide 14, please. The business delivered a number of operational accomplishments this half. First, we are on track with our integration of the Commute business, including having relocated all of our staff to a cohabitated offices in late January and unifying our sales teams, both in structure and in their market approach. This was completed in April. Importantly, we're on track to deliver the $16 million exit run rate synergies as outlined by Sheila. Second, we are on track to deliver lower underlying cost growth, excluding synergy savings, than the 5% to 7% outlined at the beginning of the year. We were circa 4% for the first half, excluding the benefit of synergies, and expect to continue to be below 5% for the second half. Third, we have made continued progress in data and technology platform, with all products, including Commute, on the platform by the end of 2019. Already over 70% of Road and large-format retail are processed end-to-end throughout the system.

In summary, we have achieved all that we set out to do in the first half from an operational perspective.

Slide 15. Turning to our focus on the second half of 2019. As acknowledged earlier, I am clearly disappointed we needed to revise guidance. This would be the first year since listing that we'll miss our original guidance. Clearly, the market has been tough and even more so in the third quarter. However, it would be wrong of me not to acknowledge that we could have done better in winning client dollars than we have. The management team and the broader team is energized to address this disappointing blemish on oOh!'s performance history. As a team, our quality experience executives are clearly taking significant actions on Road to ensure the quality and breadth of our network will win high-value business. We will continue to invest in building out the best and broadest Out of Home network in Australia and New Zealand but in a balanced fashion and optimizing our portfolio of leases where appropriate. This continued investment in high-quality digital assets will assist in driving Out of Home to the 10% of media revenue, which it can attain. Personally, I've never been as motivated to tackle a challenge as I am today, and look forward to continuing to drive the company's growth forward for many years to come.

I will now provide an update on our outlook for the second half. Slide 17. Given we provided an updated guidance very recently and the market environment behind that revised guidance, I would rather touch on what we have seen since then. Q3 has improved as a result of stronger bookings into September, although we are still pacing negatively for both the month and quarter overall. Q4 remains positively at plus 6%. Within our revised guidance of $125 million to $135 million underlying EBITDA pre the standard, we will reduce debt due to strong seasonality of H2 cash flow and the underlying cash-generative nature of our business. We remain committed to achieving gearing below or approaching 2 by the end of 2020, well below our bank covenants. This commitment reflects our understanding of the views of many investors on gearing. Importantly, we remain committed to our strategy as that we believe it will deliver the returns that shareholders expect.

Thank you, and I'm happy 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 Brian Han, Morningstar.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [2]

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Brendon, you mentioned that somewhere, the conditions have firmed since the recent trading update. I was just wondering, does that give you more or less confidence? Because it just seems like conditions are so volatile. Visibility could swing either way on any given week.

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

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Well, I think, certainly, we know -- we all know the ad market is shorter term. But obviously, bookings is one of those measures we use, clearly important one, but so is pipeline and other activities. And at this point, they are all strengthening.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [4]

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Right. So you are more confident with the recent indications.

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [5]

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We're confident we'll be within our guidance, yes.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [6]

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Okay. Can you shed some light on the gross margin differential between Road and Retail?

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Sheila A. Lines, oOh!media Limited - CFO [7]

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It's actually the product mix.

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

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So it's not the -- we don't go into that level on each product, but it's the product mix clearly, as we've outlined further previously. Road is a highly profitable business. And the guidance we've always given in terms of when we digitize sites, in terms of the base case of 3 to 5x revenue uplift, still holds true today. Clearly, any decline in revenue does have a larger impact on margin given the fixed rent nature of the business. Retail is performing strongly and has continued to grow as some of our other lower-margin products which we've always talked about, being Fly in particular.

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Operator [9]

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

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [10]

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I wonder if you could help shed some light on the accounting treatment things. So you've spelt out, well, how the new accounting standard will affect this year. I'm just wondering, Sheila, if you can share with us when the negative impact will wash out. I mean how many years will it take?

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Sheila A. Lines, oOh!media Limited - CFO [11]

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I'm not able to give you on this exact year. I would say, again, the strength of our business, being the lease maturity profile, will mean it will be a low number of years. But you must -- would recognize we have a very, very broad set of lease assets, and we are continually renewing leases. And therefore, it's not a static portfolio, which is why I can't say exactly when it would get to a more normalized state. But you should expect it will be a low number of years given the depth and breadth and maturity of our lease portfolio.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [12]

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Right. And just a second question on the downturn in roadside that we saw. It's -- obviously, that's been the worst sector. Was the downturn in demand equally mixed across digital and static? Or was it worse in static?

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

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Digital obviously in a shorter market, clearly can attain later business. So classic would have been -- is slightly more than digital. It's a combination of clearly being very long in our business with strong big brand campaigns given the breadth and diversity of our portfolio. And I think it would be fair to say that we're disappointed now that we're getting a few more data points that maybe there was some minor share losses across the board as well, which we obviously will address. That's the easy part, really, but it's fairly broad-based in terms of the sector.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [14]

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All right. And you mentioned in there -- in the presentation that motor and finance were -- motoring and banking were 2 of the big negatives. Just wondering -- I mean there's obviously specific reasons in those industries why those categories might be weak. I'm just wondering whether you expect banking and motors to recover. Or do you think the revenue gains we can see in the fourth quarter will have to come from other sectors?

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

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We're already starting to see some changes in both of those sectors. To what strength -- to what degree they come back compared to PCP would still be to be determined. But there has been an uplift in bookings and also an uplift in briefing occurring.

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Operator [16]

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Your next question comes from Piers Bolger, Viridian Advisory.

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Piers Bolger, Viridian Advisory Pty Ltd - CIO [17]

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Just a couple of quick ones from me. Firstly, could you just run through the type of stress testing that you did in relation to ascertaining that you don't require to raise any capital? And just given where your debt-to-EBITDA position is at the moment, where would you think that the exchange rate would need to trend to before that became a likelihood from a business point of view?

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Sheila A. Lines, oOh!media Limited - CFO [18]

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So first, I won't run through the sort of details of the range of scenarios we stress tested. Obviously, they're not situations we expect to occur. It was a number of scenarios we run through.

So in terms of where -- our EBITDA, you would have to see a significant decline in 2019, well below the bottom of the new guidance, for us to get any close to an issue with our December covenant. And that would be before any actions to mitigate such a decline. So we are not anticipating that scenario. It is extremely unlikely. It is well below the bottom of our guidance. And as Brendon has talked about, we are very comfortable with our new guidance range, remembering that we have just issued it in the second half, so there's a high degree of certainty in it.

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Piers Bolger, Viridian Advisory Pty Ltd - CIO [19]

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And Brendon, just quickly on the bookings in the pipeline that you sort of said they've been improving. Your base case for that is what -- so where I'm going to is that we'd continue to see increased market volatility and possibility of a recession either globally or certainly see for Australians here. What's your baseline in regards to what the -- those bookings would look like? And are they locked in irrespective of whether or not the economy continues to deteriorate again?

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

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So firstly, obviously the guidance range covers multiple scenarios, hence, why it's a range. Our percentage of bookings locked in is comparative to the finished position of last year. So well within the range. And clearly, the teams are very active in ensuring they're not only competitive as a market leader, in a market-leading approach, but we know that Out of Home is in a very strong position. And we're launching a whole lot of new data initiatives and understanding of the medium's ROI performance in September to the market. So we're relatively confident that we have the resilience in a downturn market. It's about, for us, making sure we get the mix right in terms of across our products.

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Operator [21]

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Your next question comes from Fraser Mcleish, MST Marquee.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [22]

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Just 3 from me. Just the first one, Brendon, obviously the outdoor held up much better than the overall advertising, which has been weak for a while. Outdoor held up right to the middle of this year. Then suddenly, all changed in Q3. Just trying to understand why that has changed so much in such a short period of time. That's the first one. Second one, if you are just able to talk about the kind of volume versus rates or CPM dynamic going on in roadside category. Are you seeing pressure on your digital rates? That would be the main question. Finally, just on the guidance into Q -- into the second half, what you're seeing in the Commute division. Obviously, really strong in the first half, but your guidance would suggest that's changed a fair bit in the second half.

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [23]

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Firstly, all products are affected by Q3, otherwise, we wouldn't have been making the guidance change that we did do. So Commute, clearly, is feeling the lack of volume that appeared in briefs through that period. The big drop-off is -- I'd just use one, at the guidance time, SMI, for example, measures 41 product categories, and only 6 of those were up in spending throughout the early part of the July period versus historical trends, more like in the 30s. That obviously has an impact across in any media section.

In terms of share of the media or agency dollars, which is the best way I can look at, at the moment, we generally, based on SMI, Out of Home ranges between 12% to 14% of the volume of revenue these days. That's up over the last 2 years. That is in any given month, and it still seems to be trending in those sorts of range areas. We are certainly seeing an improvement -- strong improvement in our direct-to-customer businesses, as indicated by the examples given in the speech. That part of the business is up double digit. And certainly, the investments there. We also see the Commute probably underindexed in that area as more a larger client sale. And we're certainly strengthening our opportunities in that area as well. So there are green shoots. Direct, in particular, is working. And we're seeing, of course, businesses that have -- particularly online digital economy-type businesses are continuing to increase their spends with Out of Home to give them broader reaches than -- broader and other audiences than they can reach in terms of just using their digital-only platforms.

So the combination of those things give us the confidence. And we don't expect -- we expect Commute to track in line with -- at worst, in line with the general performance of Out of Home once -- as we see briefings come back at this point. Bookings into the Q4 are trending where we expected them to trend, which is an upward trajectory, given we've got a plus 6% general pacing uplift at the moment on PCP.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [24]

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And just a question on sort of reach you're seeing for roadside, for Road category and digital?

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [25]

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Look, at the end of day, all media companies become competitive in softer environments. As a market leader, our challenge is to try and find that balance between revenue and not destroying the market in the long term. To date, we played that balance very well. And maybe we probably should have been a little bit more aggressive. If we wanted to chase the revenue only, we probably have to continually reviewing that. But at the moment, we're trying to get that balance right.

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Operator [26]

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(Operator Instructions) Your next question comes from Russell Gill, JPMorgan.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [27]

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Just 2 questions. Just coming back to, Sheila, your comment on potentially mitigating or making changes in your business if there was a significant downturn. Given you're now guiding to OpEx being below and CapEx low to middle part of the guidance, given the decline in the third quarter, have you guys made changes to your plans in terms of roll out growth projects or deferral of projects or the economics of certain rollouts have now changed in the business? Just wanted to get a feel for whether you've actually changed, I guess, the internal growth plans for the business given what's happened in the third Q?

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Sheila A. Lines, oOh!media Limited - CFO [28]

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Absolutely. So first of all, our strategy hasn't changed. It is the right strategy, and we're executing against it. I would also say, as I said in my speech, the work we have been doing around commercial renewals in this environment and also operating cost and synergy cost realization, we have been doing throughout the first half. So it's not a reaction to what's happened in the third quarter. We've been doing that throughout the first half, and that has supported our EBITDA in a lower margin mix environment for us. So we will continue to do both of those things. We look -- we're constantly renewing commercial leases. And obviously, we go in to those negotiations, trying to seek the best outcome we can achieve in the circumstances and obviously an outcome that's acceptable for our commercial partners. We will -- for CapEx, what we do is some of our CapEx is, one, part of that negotiation. So Brisbane Airport would be one example where our partners want the new assets. And it's part of a renegotiation strategy, and they are revenue-generating assets. The vast majority of our CapEx -- the vast majority is digitizing sites that are not digital currently. So the revenue flows through in future years, and we are very, very disciplined on which sites we digitize. So we are not going to just suddenly stop digitizing sites. That is part of our business, and they will perform and support growth in future areas -- future years. But as I said, we are now guiding to the mid-range to lower range of our CapEx guidance because clearly we are looking even harder at every CapEx decision across our portfolio. But we will continue to invest in quality sites.

In terms of OpEx, we've done a lot of OpEx removal to achieve our synergy run rate. To give you an example, that's 12% labor cost from a combined business and a significant number of nonlabor items. And it -- we will continue -- as we outlined at the equity raise, we continue to expect further nonlabor savings to be identified through 2020. Against that environment, we have, as Brendon said, continued to maintain or, in some areas, reduce our operating costs, recognizing that our first half operating underlying comped off last year's one half where we had an OpEx increase. So we don't have a full 6 month in the comparator. So I would expect that 4% to improve over the second half. So we have certainly made efforts to come in under our 5% to 7% efforts on the CapEx and efforts on renewals but all of that within the context of our conviction of our strategy. And we will not make short-term decisions that damage the business long term.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [29]

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Great. And then just a second question. I do apologize if you did say this earlier in the presentation. But in the acquisition of Adshel, you've got a bit more changes to the acquired business. And there's been a significant write-up in the PP&E on acquisition, looks about a $65 million or $66 million write-up. Can you just talk through what has driven that?

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Sheila A. Lines, oOh!media Limited - CFO [30]

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Yes. So with Adshel, unlike many of our other prior acquisitions, we acquired a large physical asset of bus shelters, very large. And like it's standard for companies when they acquire a business, you have the option of valuing the PP&E at acquisition, and the bus shelter assets was a very typical asset where you would, in fact, fair value in related -- compared to depreciation book. So we have undertaken a lengthy exercise by using 2 of the large 4 accounting firms, and we have fair valued the PP&E of the Adshel bus shelters.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [31]

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And then from a -- I guess, from a tax perspective, is that the new tax base -- cost base for the depreciation on those assets as well?

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Sheila A. Lines, oOh!media Limited - CFO [32]

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That is correct.

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Operator [33]

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

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Brendon Jon Cook, oOh!media Limited - CEO, MD & Executive Director [34]

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Thank you all for joining us today, and we look forward to catching up with you over the next couple of weeks. Thank you.