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Edited Transcript of QMS.AX earnings conference call or presentation 23-Aug-19 10:59am GMT

Q2 2019 QMS Media Ltd Earnings Call

SOUTH MELBOURNE Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of QMS Media Ltd earnings conference call or presentation Friday, August 23, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Barclay David Nettlefold

QMS Media Limited - CEO, MD & Director

* Kate Solomon

QMS Media Limited - Group CFO

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Conference Call Participants

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* Conor James O’Prey

Canaccord Genuity Corp., Research Division - Senior Industrials Analyst

* Nicolas Burgess

Baillieu Holst Ltd, Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the QMS Media Limited First Half 2019 Results Conference Call. (Operator Instructions) Please be advised that this conference is being recorded today. I would now like to turn the conference over to your first speaker, Barclay Nettlefold, group CEO and Managing Director of QMS Media. Thank you. Please go ahead.

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Barclay David Nettlefold, QMS Media Limited - CEO, MD & Director [2]

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Good morning, and thank you for joining QMS Media's 2019 Half Year Financial Results Call. I'm Barclay Nettlefold, group CEO of QMS Media; and joining me today is our group CFO, Kate Solomon.

This morning, I will discuss some of the group's highlights for our 2019 half year results. This will be followed by a more in-depth financial and operational review of our 3 uniquely defined business segments: QMS Australia, QMS Sport and QMS New Zealand. And then I will hand over to Kate to talk through our financial performance for the half year in more detail. Finally, I will conclude the presentation with an update on our CY '19 priorities and outlook and then open up the call for questions.

Starting on Page 3. QMS adopted a clear vision from the beginning, one that differentiates us from our competitors and stands us apart from the rest of the sector, and that is a singular focus on quality digital assets and, more specifically, quality digital large-format billboards. This has proven to be a resilient strategy irrespective of market conditions.

The ability to reinforce strength with groundbreaking audience data and insights has vindicated the unique value of our digital assets based on the advertiser response and sales we have seen since its launch. Our diversification strategy by both category and geography not only differentiates us in market with our advertisers and clients but also diversifies our risk.

Maintaining a quality audience proposition through diversification into sport has enabled us to own sport across multiple assets and has already proven to be results-positive and has already outperformed.

QMS has sought global market diversity as well as category diversity. This was evident in our early New Zealand acquisition in 2015 and is now being realized more significantly in the global sport opportunity. Today, QMS is a global player in quality audience delivery through digital large format and sport.

We are also a leading technology player at the forefront of tech development that will apply to both sport and outdoors.

The immediate and ongoing positive returns are both possible and sustainable given the unparalleled expertise of our consistent executive management team in Australia and our new and expert sports team, both locally and internationally. We are genuinely excited for what the future holds.

And I would now like to step you through our results from both a group and key business segment perspective for the first half. For ease of like-for-like comparison, all financial results I will be referring to are pre-AASB 16 leases, with both the deck and statutory accounts containing all relevant post-AASB 16 leases information for your review.

Moving on to Page 5. As mentioned, our clear vision and singular focus on quality digital has led us to a strong group financial performance for the first half of 2019, delivering significant revenue and earnings growth. Revenue is up 24% to $130.5 million. Underlying EBITDA is up 47% to $33.9 million. NPAT is up 49% to $14.9 million. And net debt to underlying EBITDA now sits at 2.7x, which is down from 3.3x at 31 December 2018. Our interim dividend will be $0.02 (sic) [$.012] per share, fully franked.

And now we will take a more in-depth look at our 3 business segments. Now moving to Page 8 for the segment review. Our core Australian business continues to grow its reputation in the market characterized by our digital asset quality and deep understanding of our audiences and the impact and value of our assets for advertisers and the strength and stability of our sales team. During H1 CY '19, our data and insights program has focused on gaining a greater understanding of our quality large-format digital billboards, their unique characteristics, the audience they reach and their impact. Launching global first Neuro sites research and developing a dynamic audience measurement platform has positioned QMS as the thought leaders and experts in digital billboards.

Revenue for the QMS Australia group is up 8% to $64.4 million and is driven by significant growth in digital across both large-format billboards and street furniture. The growth in digital revenue has offset the weaker static and print production revenues. However, our ongoing focus on margin has resulted in significant growth in underlying EBITDA, up 16% year-on-year to $21.6 million.

During the half, our quality digital footprint has grown. We have switched on 9 new billboards, taking our total portfolio to 116 landmark digital billboards nationally, which is ahead of our operational guidance of 114.

Moving on to Page 9. Outdoor remains one of the only growth media alongside digital, and QMS continues to keep pace ahead of the market despite overall challenging advertising industry conditions. QMS Australia's media revenue continues to demonstrate an ability to grow in a very dynamic and shifting environment. Media [revenue] up 6.3% for the half compared to the industry at 5.5%. And our digital revenue now reflects 81% of our Australian media revenue compared to an industry average of 56%.

Our strategic focus on quality digital large-format billboards, supported by Neuro research and a dynamic data and insights platform, has been well received by advertisers and is delivering results. Our large-format billboard revenue is up 8.3%. And the key advertising categories to experience significant growth during the half included entertainment and media, retail and banking and finance grew an average by 34%. Off the back of this, our media revenue for Q3 is expected to finish 15% to 20% up year-on-year, maintaining our confidence for the second half of 2019.

Moving on to Page 11. The first half of 2019 has seen us reap the benefits from our investment in sport with significant revenue of $39.7 million, up 119%, and underlying EBITDA growth of 251% to $11.4 million. This strong financial performance is reflective of our significant investment in sports technology and rights ahead of revenue now being realized. The seasonality of sports rights and content skewed to the first half as well as the contribution from the TGI and TGIE acquisition.

QMS Sport is leading the development of virtual technology in sport globally, with implementation throughout real-time broadcast and streaming of in-venue advertising across multiple markets. Recent events employing the virtual technology include the A-League Grand Final, New Zealand Super Rugby Final Series and also the French Rugby LNR Final.

Moving on to Page 12. Our recent announcement to acquire TLA and Stride will provide QMS Sport with a unique integrated sports advertising platform. TLA and Stride's complementary strategic relationships with both domestic and international clubs, agencies and rights holders will broaden our group's offering and grow collective revenue streams. TLA and Stride are leaders in talent management, events, consultants, sponsorships, activations, merchandising and sports marketing. They have a diverse client base of sporting talent, major brand and sporting bodies across the AFL, Cricket, Netball, Olympic sports and media throughout Australia and the U.K.

QMS Sport will invest $32.7 million to acquire 100% of both TLA and Stride, funded through a combination of short-term debt and equity. The equity offering was oversubscribed by almost 2x recently.

On a 12-month pro forma basis, the acquisitions are expected again to contribute CY 2019 EBITDA of around $6 million presynergies. Expected synergies will be $1 million to $2 million per annum to be realized by the end of CY 2020, with both acquisitions expected to be EPS-accretive in CY 2019 at an EV/EBITDA multiple of 5.3x. The transaction is expected to complete early September 2019 and is subject to customary conditions.

Moving to Page 13. QMS Sport now represents a large-scale global business, spanning 21 offices worldwide, with over 225 employees, 155 of which are located in Australia; and deploying 16 kilometers of LED screens in stadia globally. Our multichannel strategy enables advertisers to capture the full value of the sport ecosystem leading up to, during and post in-stadia sporting events through our global integrated sports platform. We are leading the way in technology, infrastructure, sports software, fan engagement and the implementation of virtual and parallel advertising. QMS Sport delivers one major sports offering, providing advertisers with a unique and powerful platform to engage with this highly valued sports audience.

Now moving on to Page 15. QMS New Zealand group has delivered a solid underlying performance ahead of the merger completion. QMS New Zealand group revenue was up 3% to $28.1 million, underpinned by strong digital media growth and offset by slower static transport and print production revenues.

Our focus on quality digital assets continues to drive strong underlying EBITDA performance, up 21% at $5 million, with QMS New Zealand digital media revenue now representing 63% of total media revenue, which is up from 56% in the prior year.

QMS New Zealand media review growth of 16% is in line with the market for the first half of 2019. And we have seen positive momentum into Q3, with July achieving a record market share of 36.2% off the back of our strongest -- a stronger static and transport performance.

With OIO approval received, the strategic merger with MediaWorks is progressing as planned, and we are now working towards completion in September 2019, including the return of $35 million.

I will now hand over to Kate, who will take you through the group financial results in more detail.

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Kate Solomon, QMS Media Limited - Group CFO [3]

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Thanks, Barclay. Now on to Slide 17, I will take you through the financials. The new leasing standard, AASB 16, was effective from 1 January 2019 and has been applied for the first time. The group elected to apply the modified retrospective transition approach and, therefore, comparative information has not been restated. For ease of comparison purposes, I will refer to pre-AASB 16 financial information. A reconciliation of the impact of this standard on each segment is provided in the appendix.

In summary, we had an outstanding headline result in all key areas for the 6-month period ended 30 June 2019. Our result was underpinned by above-average industry growth in our core business and the TGI acquisition. Total statutory and other income for the 6-month period ended 30 June 2019 was $130.5 million, representing growth of 24% in comparison to the 6-month period last year. The growth achieved was driven by a combination of the execution on our strategy to roll out quality digital sites in key strategic locations as well as contribution from the TGI acquisition which has exceeded expectations.

The market appetite for digital remains strong, which is reflected in our forward booking profile, with over 50% of revenue committed for H2 across both Australia and New Zealand. On average, 18% of media revenue is booked in the month for the month, up from 14% in the prior year. This reinforces the power of our digital portfolio and establishes QMS as the #1 digital media company in the industry.

TGI outperformed expectations due to additional contract wins such as the Gold Cup, in addition to expanded services on current contracts, such as Major League Soccer in the U.S. The group continues to maintain industry-leading gross margins. This is a testament to the continued digital revenue growth across our quality asset portfolio in both Australia and New Zealand and high-margin LED system sales in QMS Sport.

Excluding acquisitions, operating expenses are up $3.6 million. This increase reflects the investment in new people, infrastructure and our data platform, which will provide the foundation for future growth. The nonunderlying items relate to a $3 million profit on sale of noncore land and buildings, less transaction costs primarily associated with the merger of our New Zealand business with MediaWorks.

Underlying EBITDA of $33.9 million is up 47%, with each segment contributing double-digit growth. EBITDA margins are up 4%, with the benefits from technology and sport investments made in prior periods now being realized.

NPAT is up 49% to $14.9 million, reflecting the superb performance of the group and the profit on sale of noncore land and buildings.

Depreciation and amortization increased due to the expanded asset base from developments and acquisitions during the period.

Additional finance costs were incurred as a result of our investment in future growth.

Our effective tax rate is 31%, reflecting the group's expansion into new countries which have varying corporate tax rates.

Moving on to Slide 18. The increased receivables, goodwill and PP&E balances are primarily driven from the TGI acquisition. Goodwill of $30.2 million and property, plant and equipment of $18.3 million were acquired through these acquisitions.

The right-of-use asset and lease liabilities were recognized on adoption of AASB 16. Under AASB 16, all leases are brought on to the balance sheet and are effectively treated as finance leases. The impact of this standard is significant and is reflective of the long tenure of our asset base, with an average remaining digital tenure of over 13 years in Australia and over 11 years in New Zealand.

The reduction in other assets is due to the international sport acquisition, which was acquired through a debt-to-equity swap.

Other liabilities have increased due to the TGI acquisition; increased deferred revenue, which is timing-related; accrued interest on the group's loan facility; and a put option to acquire an additional 5% shareholding in TGI.

Net debt has remained consistent with prior periods. However, there is an 18% reduction in the net debt to underlying EBITDA ratio of 2.7x, down from 3.3x. This improved ratio reflects strong earnings growth. We continue to monitor our debt levels and assess the appropriate capital structure. We are on track to achieve a target net debt to underlying EBITDA ratio of less than 2.5x by 31 December 2019. The proceeds of $35 million from the New Zealand transaction are expected to be received in September, which will further reduce this ratio.

Moving on to Slide 19. Operating cash flow remains strong, which was driven from increased earnings across the business.

Our operating cash conversion is lower due to the impact of QMS Sport. In sport, generally the upfront rights payments are made at the start of the sporting season in H1. However, the majority of the associated revenue from the April to June pay period is received in H2. This timing-related impact is expected to normalize by the end of the calendar year, where we expect the operating cash conversion to revert back to the 90% range. The operating cash conversion for the QMS Australia and QMS New Zealand segments are consistent with prior year.

Capital expenditure and acquisitions of $21.3 million reflects the continued rollout of the digital development pipeline and additional LED equipment purchased for QMS Sport.

During the period, the group's operations were funded from cash generated from operating activities and the sale of the noncore land and buildings. It is important to note that no additional utilization of the loan facility was required.

The reduction in income tax paid is as a result of the change in tax year-end.

That concludes my review of our 6-month financial performance, which was another strong period of growth, with all 3 business segments well positioned for future growth.

I will now hand back to Barclay to talk about our key priorities and the outlook for the remainder of CY '19.

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Barclay David Nettlefold, QMS Media Limited - CEO, MD & Director [4]

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Thank you, Kate. And to reiterate, our interim dividend will be $0.012 per share, fully franked.

I would like now to update you on the progress of our key CY '19 priorities highlighted earlier this year on Page 21. We are well advanced in achieving a net debt/underlying EBITDA ratio of less than 2.5x, currently at 2.7x for the first half.

Our approval has been received for the strategic merger with MediaWorks, and we expect to complete in September. We continue to grow our quality digital footprint in Australia and New Zealand, successfully launched our global first Neuro research with strong advertiser support. We are in the process of finalizing our dynamic audience insights platform using location mobility data, expected in market Q4 2019. The acquisition of TLA and Stride is an example of our ability to recognize the value-add opportunities that exist across sport, and we will continue to identify future prospects to create further shareholder value. I am genuinely excited by the advances in global sport technology and the capabilities and opportunities it present for this business.

And finally, moving on to outlook on Page 22. QMS' differentiated portfolio of digital outdoor and sports media delivers geographic and category diversity and presents a unique proposition and a strong growth outlook.

Quality landmark digital billboards remain the primary focus of -- for QMS Australia. Supported by proprietary data and insights, this provides advertisers with a greater understanding of the unique value of our assets and the impact they have on their target audiences and, ultimately, their return on investment.

QMS Sport is transforming into a global integrated platform, underpinned by new technology, providing further consolidation opportunities in a fragmented market.

We have a positive momentum into H2 CY '19, with good forward visibility on Q3 CY '19.

The Board reaffirms CY '19 EBITDA guidance of $60 million to $62 million.

That concludes our presentation. We are very pleased to have announced strong half year financial result this morning. Thank you for your attention. I'd like to now hand back to the operator for 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 the line of Nick Burgess from Baillieu.

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Nicolas Burgess, Baillieu Holst Ltd, Research Division - Equity Research Analyst [2]

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Just a couple of questions on the operating environment in the Australian business. Obviously, there's been a lot of industry feedback. So just interested in any comments whether you witnessed in the second or third quarter, so far, any weakness at all. And I guess particularly a couple of categories have made headlines in terms of financial services and the automotive category. So just wondering if there's been any hits and misses across your bookings at the moment.

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Barclay David Nettlefold, QMS Media Limited - CEO, MD & Director [3]

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Nick, the operating environment, I think everyone's signaled it's been a challenge, but outdoor is still growing. And if you look at it across -- and compared to other forms of media, we're circling a 5.5% growth. So with that, you're going to have to -- you can be certain -- certain sectors are up more so than the average being down. The automotive is slightly off, I think we're down 20% in that category. But we're well up in the other major categories that we represent. Q3, we've got good visibility. We've stated 15% to 20%. We believe we're going to be up year-on-year. And Q4, we're building well into the Q4.

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Nicolas Burgess, Baillieu Holst Ltd, Research Division - Equity Research Analyst [4]

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Okay. That is helpful. Just on the guidance, just to confirm. So the guidance of $60 million to $62 million, that is before New Zealand, before Sport, sort of as a business-as-usual basis, as you sit here today before those transactions complete. Is that correct?

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Barclay David Nettlefold, QMS Media Limited - CEO, MD & Director [5]

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That is correct.

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Operator [6]

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Your next question comes from the line of [Samea Ilibay] from the Age.

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Unidentified Participant, [7]

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I just had a question about the TLA acquisition and what a new ownership would mean for the company.

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Barclay David Nettlefold, QMS Media Limited - CEO, MD & Director [8]

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(inaudible) new ownership [unusual for TLA]. We're going to have integrated [already in] anticipation of closing early next week -- in early September. And so it's business as usual. There's not a lot of integration issues.

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Unidentified Participant, [9]

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Okay. So no -- the structure of the business won't be changing or there won't be any redundancies or changes, I guess, the environment?

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Barclay David Nettlefold, QMS Media Limited - CEO, MD & Director [10]

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No.

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Unidentified Participant, [11]

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No. Yes. And will that go to a shareholder meeting? Or if TLA shareholders approve of the acquisition, will you sort of just acquire it? Yes. No worries.

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Barclay David Nettlefold, QMS Media Limited - CEO, MD & Director [12]

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(inaudible) that's one of the conditions that is happening. And I believe it's going this next week. Waiting for the final vote into -- in the U.K.

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Operator [13]

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(Operator Instructions) Your next question comes from the line of Conor O’Prey from Canaccord Genuity.

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Conor James O’Prey, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [14]

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Barclay, you sort of have probably addressed this with some of your comments a second ago, but I guess a number of the media companies have talked somewhat optimistically about improvements in the fourth quarter. And I just wondered if you've got any other comments on there or whether you would support what they've been saying.

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Kate Solomon, QMS Media Limited - Group CFO [15]

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As Barclay mentioned that the Australian business, we're expecting to be 15% to 20% up on Q3. And New Zealand is already 22% up on Q3. In terms of Q4, we don't -- on a like-for-like basis, compared to last year, our Q4 bookings are up 47% in Australia and 48% in New Zealand. There's obviously still a bit of work to go, but given that we [write] approximately 18% of the revenue in the month for the month, it gives us confidence in achieving our Q4 numbers.

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Conor James O’Prey, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [16]

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And maybe just very quickly, a comment on CapEx for the second half maybe?

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Kate Solomon, QMS Media Limited - Group CFO [17]

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Sure. We expect CapEx to be at a group level consistent with H1. Australia is about 50-50, New Zealand will drop off a little bit and so will Sport.

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Operator [18]

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(Operator Instructions) There are no further questions from the telephone lines. I would now like to hand the conference back to your presenters. Thank you.

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Barclay David Nettlefold, QMS Media Limited - CEO, MD & Director [19]

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Thank you, everybody, for attending today. And this concludes our presentation. We're very pleased to announce a strong half results this morning. Thank you.

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Operator [20]

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Ladies and gentlemen, that does conclude our conference for today. Thank you for your attendance. You may all disconnect.