OUTFRONT Media Inc. (OUT) Earnings Call Transcript & Summary

We're very fortunate to have Jeremy Male, CEO of Outfront, with us today. For those of you that are in the audience, if you do want to ask a question, just let me know and just make sure you hit the button so your question will get picked up on the webcast. But your mic is live, so you're good. Don't have to hit a button or anything.

Okay.

But thank you for coming.

Pleasure to be here, Jason. Thank you for the invitation.

Yes, no. Absolutely. So 2019, it was a great year for you. Your stock performed incredibly well. How do you think the year went?

Yes. Stock obviously did well last year. Overall, the year was great, I think. Top line, as we indicated when we gave our Q3 results, is going to be double-digit for the year. We've seen a good increase in OIBDA and AFFO. We got -- we put a lot of effort into our digitization last year. So we were -- we put in more digital boards in 2019 than we have in any of the previous years that I've been with the business. And we also really start to develop the digital footprint on the MTA, which is obviously a big sort of -- big contract within mix. We -- I think we'll end up outperforming the outdoor industry by probably 3 or 4 points. We think the industry is likely to be up around 7%. And...

Sorry, you said the industry you think is going to be up 7%?

It's going to be close to that. I think for the previous 3 quarters, it was in that area. So we've done very well in an industry that at the moment has got a real tailwind behind it. So overall, if I had to characterize 2019, I'd say it's a great year.

So I always like -- speaking of digital, I always like the way -- and this goes back maybe to when you first went public, how you guys talked about digital because I felt like some of your peers in outdoor space sort of talked about it like digital is this technology or investment that could be made sort of across the footprint. And I always felt like you guys were sort of more straightforward or honest about it and sort of talked about it as an opportunity for a subset of our inventory, but the really most popular part of -- or most attractive part of the inventory where the market could absorb that incremental supply. Has anything sort of changed as the intervening years have gone by? And I only ask because you said, you did so much digital, and it was sort of a record year of digital. It almost implies as if the -- whatever that top echelon used to be, maybe it's getting a little bit bigger.

So yes, we used to -- and if I -- maybe you remember, we used to talk about the sort of pyramid of quality of billboards, and that ultimately where you had always started is the low-hanging fruit right at the top of that pyramid. They're really highly demanded boards in the best locations. And as time goes on, I think it has changed because there's really only -- there's only 2 pieces -- well, there's 3 pieces of digital. One is can you put them in from a regulatory point of view, and you can't digitize everybody you want to. And thereafter then, it's just the mechanic between likely demand for that board versus the cost of conversion. The cost of conversion has been flat or arguably maybe a little bit down. And as the out-of-home industry has started to grow, more boards become viable. We're still -- we're converting pretty much every opportunity we can develop right now. I sign off every board and we look to make a minimum threshold IRR of 20%. We can consistently do that. And we're still relatively underpenetrated in digital, certainly in terms of boards. We're sort of just less than 3%. And digital revenues as a percentage of our business are now around 20%. When you look at other markets across the world, digital revenues are sort of closer to 50%. So I still think that we've got a significant runway ahead of us.

Is part of that disparity between international and domestic a function of the U.S. just being more geographically dispersed? Or do you think it's really just all opportunities?

Look, I think the structural differences between the U.S. and other markets that go beyond just digital because out-of-home here in the U.S. is 4% and change, whereas the average worldwide is around about 7%. So I don't think we can wave a magic wand and get to that 7% because of some of those structural differences. So for example, we have here less transit generally, less public transit, which is obviously a great opportunity to -- for advertisers. And we also have less pedestrian traffic, which the example I always give is if you compare Atlanta or Amsterdam, for example, you can sort of -- you can get the feeling for the structural differences. So maybe the U.S. takes a while if ever getting to 7%, but we'd be very happy to keep increasing market share for out-of-home as, indeed, we did -- assuming the numbers come in as I expected around 7%, we will have increased market share for the medium last year.

Okay. That's great. What would you say the main priorities are for this year as you sort of look out over the next 12 months?

So we've already talked about digitization in terms of boards. We're going to be keeping our foot on the gas there. We'll be digitizing further within the MTA, which is on platforms. We're also going to commence the digitization process in cars. That's on subway cars and also our Metro-North and Long Island Rail Road. We're going to be starting to digitize our transit footprint in BART in San Francisco. So more -- so digital, a big focus. We continue to really think about yield, how we can drive the yield on our assets, which obviously the way we think about, that's the combination between price and occupancy. And we saw some very healthy sort of mid- to high single-digit yield increases last year that will be sort of -- we'll be working on. And I think we executed very well last year. We went -- we had quite a sort of transformation across our business in terms of our local sales operation. I mean local sales are still north of 50% of our business. And I think we have a team of management and salespeople who have done a great job. So just maintaining that momentum as we go into 2020 will obviously be critically important.

Since you talked about yield, can I ask you a follow-up question on this? I -- and you can correct me if I'm wrong, if you think this is incorrect. I seem to remember at the bottom of the cycle, both the pricing and the occupancy are sort of at trough levels. And then as the economy gets better, the first lever that gets pulled is your occupancy tends to rise. And then you begin to pull the sort of the price lever. And we get to the top of the cycle, and both of them are quite high, both pricing and occupancy. Until we go into the next recession, the occupancy drops, then the price drops, and we sort of start the cycle again. When you talk about your yield improving, is that really sort of the price lever, sort of comporting to -- I think what the buy side's view would be that we're sort of at the tail end of this long expansion? Or is it more nuanced than that given...

Look, I think it is more nuanced when you get into it because the other thing is that we're always talking about averages. And when we look into some of our markets, we can get big swings in occupancy. We can be 90% occupied in a particular market and near 65%, 70% in another market. So when you sort of condense all that, actually, our occupancies have always been in that sort of early 80s range. So you're right in that the yield increase we've seen over the last couple of years, for the most part, have been about price.

Okay. All right. What -- let me ask about this in terms of the outdoor industry growth. So Magna, they've got out-of-home growth slowing from 6% in '19 down to 4% in 2020. GroupM has sort of the opposite. They've got 6% accelerating to 8%. And so we have sort of a divergent view among the 2 ad agencies that pencil out their forecast. Is there one that you, based on your long track record in this industry, feel like is more accurate? Would you put your money on the Magna forecast that has things decelerating next year as an industry or the GroupM guidance that say it's accelerating next year or this year, I should say?

I guess the first thing is you wouldn't have put your money on the '19 forecast. We do at 2% when it's coming at 7%.

That's true.

And so I must admit, I think when you get down to -- if you think about out-of-home in the U.S. being, let's say, 4% and change medium, actually, if you think about the pool that they're playing in, which is the top 200 advertisers for the most part, we're only 2% of spend. So the intricacies of whether or not it's going to be, from their point of view, 3%, 4%, 5%, 6% or 7%, I think all you can draw from the numbers is that both of the major forecasters are suggesting that out-of-home is going to be in a good place.

That's true.

Rather than -- it's very difficult to pick between which forecast is going to be on the now.

Okay. So the great thing about outdoors, I sort of look at all of the ad mediums, is it's the only non-digital medium that's still growing, right? You can't find anything in the print world or the television world or the radio world that's sort of growing. So you guys are in a good company, right? You're there with the Internet guys. The one thing, though, when I look at the out-of-home market share in the United States and even globally, but I'll just focus on the United States, it seems sort of stuck at that 4% level for quite a period of time, even though backward looking, there have been a lot of digital investments. There's been a lot of good work you guys have done. What is it that sort of gives you confidence that maybe we can eke out sort of more share and get back to some of these -- glide towards some of these international market share numbers that you're citing earlier? What's different now, in other words?

So I think I might rephrase the question a little bit because I think rather than saying out-of-homes only maintained its market share, the other way of looking at it is saying, wow, within the seismic change that the ad industry has seen in the last 10 or 15 years with the sort of flow of money to digital, and the impact that, that's had on all of the traditional media, you could say, wow, hasn't out-of-home been resilient to be able to maintain this market share while you've seen that change going on.

That's true.

So I guess I'd come at it from a more positive direction. And as I look forward, I believe that the rate of flow of money to digital has been a huge headwind. I don't think that headwind will be quite as strong as we go forward and within that environment. And I think an understanding from the agencies and the advertisers that, look, well, the bottom of the funnel is hugely important. Actually, you've still got to go out and build brands. Top of the funnel is still -- has to be an integral part of the marketing mix and marketing strategy. And that plays into the strengths of out-of-home really, which is still -- it's a one-to-many medium, it's a relatively inexpensive way of building brands. And I think that will play for us, particularly as we see the changes going on in network TV. When you look at the audiences that network TV, I mean, even if the audiences aren't declining at the rate we saw, when you drill into it and say, okay, well, who's watching, are they the people that advertisers typically want to reach? You can no longer -- in any real sense, if you sort of think about press and radio, both of them have been struggling to make a case. So I think all of that, as I say, plays into the hands of out-of-home. And I would expect -- I mean, out-of-home grew its market share last year. And time will tell, but I feel positive that we can continue to grow share over time.

Okay. One of the things that always surprises me when I look at sort of the exposure by vertical is we'll go through these periods where, let's say, pre 2008, housing is a big part of the economy and housing in some way, shape or form would be a big slice of the book of business for outdoor firms. And then housing sort of blows up and it disappears, but some other vertical shows up to sort of replace it. In other words, it seems like the sales force for any outdoor company has been pretty nimble in terms of adjusting to whatever happens to be -- whatever sort of subsegment of the broader economy happens to be willing to spend money on ads. You guys have made quite a lot recently about a lot of these tech companies like Facebook and Google and Apple sort of being -- sort of representing a larger portion of your book. So do you think that's something that is more indicative of those shifts in market share by vertical that happened historically? And what we're really seeing is, well, that's just because Apple and Facebook and Google have money to spend. Or is it something more profound than that, where they're sort of making an explicit statement about the importance of moving outside of the Internet to build awareness of their brands?

Yes. It's interesting, isn't it, that when you consider our largest client here in the U.S. is Apple, one of the brands of today, and we're certainly well supported by Google and Facebook. And from what I can see, out-of-home remains an integral part of their platform. And they do have brands to support. They have product launches to support. It's interesting that when you think of the streaming, we're already starting to see dollars coming from streaming. And you're right. We -- I think we have been fairly agile and while real estate may be down within that sort of tech category, maybe we've got Zillow or something like that, that have replaced them. So I guess the other point is that actually, when you drill into it, we've had, I think, reasonably consistent category spend over the last few years. Yes, sure, we've seen tech tick up, and we're delighted to see that. But a number of our other categories have been really fairly level, do you know what I mean, at that time.

Yes. Yes. Are there any questions from the audience? Yes, go ahead, [ Tom ].

Forgive my ignorance, but I know over time, there's been a lot of talk about better measurement outdoor. And yesterday, I noticed [ Jason ] from [ Avast ] also mentioned better measurement. Can you just give us an update on where we are on measurement? And how much of that -- of the difference is better measurement making in terms of stimulating demand?

So there's sort of 2 answers to that. The first is that we have an industry measurement system called Geopath. And all of the significant players have been investing in the industry measurement tool, and it is now significantly enhanced from where it was sort of 4 or 5 years ago. Ourselves and our competitors are also working hard in terms of our own data and insights. So we are buying carrier data. So we know exactly from -- but basically, the idea on mobile devices, we know exactly who's going past our boards at any one time right through the day. So I can say for that particular board, we know exactly who hour by hour is going -- who is going past that board. So we now have this sort of granularity of insight and data that we never had before. And I believe that over time, we'll be able to utilize that data even more in terms of attribution because if you know who's going past your board because this device is going past the board that says turn left for McDonald's, you can actually then say, well, did it turn left, and did it turn left and actually go to McDonald's. So I think that it will certainly assist out-of-home. But I mean, don't forget that the market itself is changing. A few years ago, when the first sort of reasonable audience measurement system in the U.S. was kind of unveiled and upgraded and everything else, everyone said, oh, this is the big white hope. Well, it wasn't actually because all that was, was out-of-home just getting round the table again because it then just had the better quality of information that all other media already had. So it's an element of the fact that we're all keeping up with a world that is becoming absolutely reliant on data and insight at a much more granular level than has ever been required before.

Anyone else?

Can I ask another question?

Yes.

I'm changing -- obviously, every time you give one of your former employers a chance to talk about consolidation, I'm talking about JCDecaux, they will say the U.S. is a big -- sort of big target area for them. What difference, if any, would sort of consolidation in the U.S. market make to the -- that sort of -- industry-level sort of -- the industry-level prospects? Would it help increase penetration of outdoor and the sort of broader ad market? Or would it hinder it?

Well, I think in any market, having solid players with good brands who understand the medium and are prepared to invest, I think that's good for any market. But as it is at the moment, I mean, we have a reasonably well consolidated market anyway, you have the top 3 players who round numbers have 65% of the market between them. JCD, as you mentioned, sort of -- more in the sort of 4%, 5% range. And then we have the sort of 30% that is still relatively fragmented. So I guess, the short answer is, would it have a significant difference? Probably not in the short term. But in -- over the longer term, I think having a well-funded, well-branded competitor in the market is a positive thing rather than negative.

What about programmatic ad buying and out-of-home? I think one of your sister companies has made quite a bit of noise about programmatic being this panacea for 2020 and beyond. I mean look at it -- maybe I'm naïve, but I remember going through this programmatic television being a big deal that never really took off, right? So I don't know as a sell-side analyst whether to look at that and say that's a throw away or actually if there is something that's different about programmatic as it relates to outdoor that would make this more meaningful.

I think as you look forward and just sort of -- and let's just sort of think about the sort of digital ecosystem. So at the moment, we've been, for the most part, investing in, if you like, the -- by putting a digital platform, investing in digital platform out in the field, so be it in transit and billboards, and that's been fine. It's been a great growth driver for the industry. But I think -- as then being able to layer on top of all of that digital inventory a more automated way of trading with that inventory. As I say, fueled by that data and insight that I just talked about, so you can say, right, this is the audience that I want to buy. Okay, which boards deliver that audience in the most effective way? Are they available? Can I buy? And then if they're available, being able to push in that straight to it and then automate, programmatic typically implies some sort of real-time video mechanism within it, which you may or may not decide to employ, depending on what type of industry -- inventory you're dealing with. But I do believe that it can certainly be a great tailwind for the industry. I think we're all taking sort of relatively baby steps at the moment. We will be very happy to have our inventory on DSPs out in the marketplace. And we also want to have our own platform to trade our own inventory because we've got some very specific things that we need to do when you look at the difference between our business and some of our competitors. So for example, with the MTA, with what will eventually be 50,000 locations -- digital locations that we want to generate content to, we're likely to have the sales in our own platform, but we're very happy to be part of any other industry initiatives as we go forward. So panacea is a big word, but is it definitively going to be positive for out-of-home? I would say, absolutely, yes.

It will be, yes. Okay. What about -- so CPMs, you said earlier that CPMs in the outdoor space are generally lower than a lot of other traditional mediums. And I've always sort of looked at that and said, well, what does a marketer primarily want what they want, either big reach like the Super Bowl or they want incredible targetability and they're going to go on Facebook? And outdoor doesn't really give you reach, it doesn't really give you targetability, unless you own a McDonald's or Motel 6 franchise. But it does give you the potential to have frequency of impressions, right, and help build your brand. So do you think -- if your CPMs are low today, do you think the market is rational in terms of the pricing that you're getting for these boards given that building a brand is getting more and more difficult? And you do have a pretty unique proposition that you can't skip a billboard. And do you feel like it's an opportunity? Or it just is what it is? Low CPMs are always going to be what the outdoor industry has vis-à-vis these other mediums?

A couple of things. Firstly, out-of-home is a reach medium. I mean we reach 90% of the U.S. population as a medium. And I think Facebook is only like 55% or 60%. So we have a bigger potential reach in out-of-home. And we also have incredible ability to target because you can buy the one board by the one store at the end of that particular street. So I do think that we cover all ends of that spectrum. With regard to CPMs, the first thing is that some advertisers and clients get quite excited about CPM. And when you start saying yes -- and out-of-home, CPM is $5 and whatever and all that else. TV is $20, something like that. And I'd say, yes, but it's different. One is, if you like, essentially an appointment to view one has sound. Do you know what I mean? So you can't -- I think it's a little bit unwise just to -- do you know what I mean?

Yes, yes.

Just to compare CPMs like that. I think take one step back and say that, look, with the -- with our ability to better target audiences, better deliver audiences and then through attribution metrics prove the ability of our medium to do whatever it happens to be, increased footfall, increased tune in, increased brand awareness, I think we've got the ability to -- and potential to increase CPMs. Now we're not going to be able to flick a switch and suddenly get from $5 to $20. But I think what we've seen over time, if we think about where we -- what we were talking about a little bit earlier in terms of yield increase, that's all CPM. That's all CPM.

That's helpful. Any questions from the audience? Yes, please.

For sort of the long-term like health of the business in a recessionary environment, is it more important to sort of hold on pricing at the expense of occupancy or vice versa?

I would answer that, and I would answer that from an Outfront point of view. I think others may differ. But I believe that it's crucial actually to try and maintain rates as you go forward. So in other words, still allow occupancy fall off in times of lower demand rather than allow price to change. But we don't work in a perfect economic world, if you like, and that's in an intensely competitive environment. You may also decide that, actually, you've got to take some money on to your board. So you may have to lower rate in -- at a particular time in a particular market. But -- so generally, I'd like occupancy to fall rather than rate.

I'm not sure what the status is in the U.S., but I know in Europe, there's still quite a lot of excitement about things like small cell deployment, i.e., other ways of monetizing sort of physical asset base that you have. Is that an opportunity over here?

Yes, it is an opportunity. We work with a third-party called Diamond Communications who operate more in that field. We have master license agreements with all of the major carriers and are actively marketing our locations to the carriers. As we are right now, it's sub-$10 million in terms of revenue streams, so it's relatively small. With 5G comes with demand for greater intensity, particularly in bigger cities. And there's one thing about out-of-home, you don't find an out-of-home location when there's no people, and where you have people, you have a requirement for connectivity. So I do think it's an opportunity as we go forward. I think it's a gentle tailwind rather than a business changer to put that line up.

So one of the metrics that investors focus on for all of the outdoor companies that are -- that have converted to REITs is AFFO per share. And one of the things that's always struck me is, I don't know, disingenuous is maybe too strong of a word but made my antenna go up in terms of the truth of the number is the maintenance CapEx number that goes into that. And when I look at your firm, there's something like $2 billion of gross PP&E. It's not land related, okay? So it's something that does require CapEx. And your maintenance CapEx, I think, is something like, what is it over the last 7 years, $20 million a year or something like that. So it implies a very, very long life, 100 years, something like that, life maintenance CapEx, if you will. So is that right? I mean do you think that's the right maintenance number to be -- the buy side should be putting in their models for -- as they model AFFO? Or do you think it's a little bit sort of lick your finger and feels like that's about the maintenance, but we're not really sure?

No. I mean, yes, I think it is a little disingenuous. Our maintenance CapEx covers things like health and safety. It covers all of the attention to our structures to maintain them in a safe manner. But once you've got a pull in the ground, they kind of go on forever. We maintain those -- so those structures in terms of we plan and we ensure gentlemen that they are of good quality and standing. And all of that's above the line, all of that's in our EBITDA. So -- and when you actually sort of work it through, actually, that it implies that I think that we -- the way we work at that is that it implies that the structure has a 20-year life, and they have indeed proven to be significantly longer than 20 years.

Interesting. What's the mix of your structures that are more steel-based as opposed to wooden structures that -- because I would think 20 years is too low for a steel structure.

I mean arguably, there's 20 years. I'm just saying that's how it maths out. And the vast, vast majority of our structures are steel structures.

Okay. All right. So Clear Channel, I sort of look at their capital structure, and it seems like they seem like candidates to me to at least peel off some assets, right, to help them delever and get their cap structure sort of more normalized. Is that something that's theoretically interesting to you, like to pick up assets and maybe it's not Clear Channel but Lamar and maybe one of the other fragmented players? Is that sort of always in your consideration set for what you might do with your free cash flow, bring on a few other assets in an adjacent market or end market that could round out your portfolio?

Yes, very much so. I mean we've spent over the last 6 years getting on $1 billion in terms of external growth rather than organic. The vast majority of that was in 2014 when we acquired Van Wagner, and we've been working on a number of tuck-ins since then. So if Clear Channel did decide that there are any markets that they wanted to divest for any reason, be it their capital structure or indeed any other strategic reason, yes, we have put our hands up and definitively be interested, absolutely.

Okay. What about -- maybe do you mind refreshing us on the MTA contract in New York? I know it's -- I know the market was very, very relieved when you won that contract. And I can see in the ground as a New Yorker that you guys are making incredible progress and some beautiful ads on there. But anything you can do to sort of just remind investors how long is the term? When do you think that the MTA transit contract will actually begin to contribute to your AFFO per share would be helpful.

Well, it's producing significant EBITDA. It's already produced -- it's already contributing to AFFO. So...

Sorry, let me recap, by free cash flow is what I meant, in terms of contributing to free cash flow.

So when we look at that contract and just to refresh, it was a 15-year term from around about a couple of years ago, something like that. And so we're a couple of years in. We are building out inventory over the next sort of 5 years, really 5, 6 years. And then after that, we'll be maintaining that inventory and replacing as required and refreshing -- we'll be refreshing as required. So right now, we tend to put in around sort of 14,000, 15,000 displays on platforms between the MTA, Metro North and Long Island Rail Road, and we're getting on 4,000 into that. So we have another sort of 3-year buildout there. We're just starting to build out in car, so this is going to be very exciting. We haven't had a digital proposition in subway cars or indeed on Metro North. I travel in from Greenwich every day for 40 minutes. And I myself can just understand, I mean, the value of that captive audience, if you like, with these wonderful digital displays. And the ability to, if you like, go from pure ads to a more infotainment sort of proposition as we go forward is, I think, very exciting for us as now the out-of-home player. In terms of the financial metrics, the way that we get paid back our capital is effectively through a higher revenue share and a revenue shareholder, and then the revenue share moves back to what it would have been, if you like, once the capital has all been deployed, which is close to 70%. At the moment, we're at about 55%. We expect to be at peak borrowing on that contract within the next couple of years. So we've got about $200 million to go, which we'll finance through our own sources, revolver, for example, that we could utilize or -- and maybe some other capital structure we determine. But -- and then -- so we peaked around about $350 million outlined in a couple of years' time, and then that starts decreasing over time.

Okay. And I think in terms of the free cash flow generation, I think we -- at least in our -- sort of our best attempt to model this contract, we have a generating free cash in 2021. Does that seem reasonable to you?

We don't sort of [ comment it ] from exactly that point of business. So we're concentrating more on at what point in time do we reach that peak and then start get a declining balance over time. That's the way we tend to look at it.

Understood. What about leverage? Can you talk a little bit about your philosophy on leverage? I know there's more anxiety, I would say, in general on the buy side about levered companies than there has been in the past

Yes. I mean we -- our leverage has come down a few ticks over the last 12 months. And as we look forward with -- we've obviously got the incremental spend on the MTA, but we believe that with the EBITDA growth, we're likely to achieve over the next couple of years that actually our leverage is likely to stay actually around the same level as it is now, and that's depending on how you calculate sort of 4.6, 4.7x. It may start coming down slightly. We've also been pushing out our tech stacks. We have some 20 floors that still -- we still have the opportunity for those to push out. And if we do that, then the first time that any bond would be coming out would be 2007. So we feel -- actually, we've got a very flexible balance sheet. We feel completely comfortable with leverage and where it is today. And we're also starting to get our stake and how is dividends going to fit into that as we go forward because once the MTA is done, actually, you do start to delever sort of really fairly quickly. So that's something we'll be considering as we go forward.

Am I right, when you did the Van Wagner acquisition, I think there was an original -- because I think you levered up to do that deal, wasn't the target leverage sort of 4 to 4.5? Am I right? Is that -- I could be misremembering.

No, that's right. Originally, we were sort of talking in the sort of 4 range, something like that, and at the moment, we're in the mid-4s. And -- but we don't have an absolute target on it now. And as I say, with -- when you look at the structure of our balance sheet and the work we've done over the last 6 months, we feel very comfortable where we are.

Okay. So you're saying by sort of pushing out the maturity profile, it sort of gives you a little bit more flexibility to maybe run leverage higher than you would have told the Street a few years ago. Is that the right synthesis of what you just said?

Yes. I don't think that's completely wrong, yes.

Okay. All right. Any other questions from the audience? All right. Well, this has been a fantastic discussion. I really appreciate your time.

Thank you, Jason.

Thank you, Jeremy. Yes, thank you.