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

Please note that important holdings -- personal holdings disclosures and Morgan Stanley disclosures all appear as a handout available in the registration area and on the Morgan Stanley public website. Ben Swinburne, Morgan Stanley's media analyst. I'd like to introduce Jeremy Male, who is the CEO of OUTFRONT Media, which is one of the largest out-of-home companies in the U.S. with assets also in other parts of the Americas. Jeremy, thanks for being here.

Yes. Great to be in here, Ben. Thank you.

Absolutely. Why don't we start? Last year was a pretty impressive and eventful year for the company. And you guys have been ramping your digital project in New York, which for those of you who are New Yorkers have seen, I'm sure, and grew the business nicely. What's your assessment of sort of OUTFRONT today versus when you took the job, which wasn't that long ago and also the state of the industry over the course of this last few years?

Yes, absolutely. So I'm just thinking about last year. We were pleased with 2019 for sure. Revenues were up around about 11%, and we had a similar expansion of AFFO, but we also accomplished a lot last year. And then we had a significant digital build-out last year in terms of our billboard business, where we had a couple of hundred new locations, including assets that we took on marketing agreements for or acquired. We obviously had the huge build-outs on the MTA in terms of screens, and we outperformed our expectation last year there also. So the business of OUTFRONT doing well within an industry that also did incredibly well last year. I think the industry is going to end up around about 7% up. So that would be likely ahead of the media industry as a whole. So once again, out-of-home is gaining market share, which is great to see. And certainly, with our 11% growth, we were very much part of driving the industry last year. In terms of how the business has changed over the last few years, we were, I think, the -- one of the -- the sort of words that I would use to describe OUTFRONT has become, we've become far more digital by nature. We were slow out of the gate, in that our previous parent hadn't particularly invested in the business. So we were relatively late to the digital game, but we've been really catching up fast. And year-on-year, our percentage of digital within our business grew from around 17% to about 23% last year. So that's been very significant part of the change, I think.

That's great. No, that makes sense. You also provided your 2020 outlook, talked a bit about your -- both your AFFO guidance and also top line trends here early in or, I guess, middle way through Q1. Obviously, with what's happened in the market over the last couple weeks, people are pretty focused on the macro and the impact from the virus. Could you just talk about the strength in the business and sort of anything that you're thinking about virus related or macro related that might impact the company?

So yes, it's funny. I [ only saw them, whatever it was ], last Tuesday, it already feels like months ago now. So -- but yes, at that time, we were -- we guided to comfortably in the mid-single-digit range for Q1, and we feel great about that and also to high single digits for our AFFO growth for the year. So we are -- as we look at our business, we feel very positive about OUTFRONT, we feel very positive for the strengths of our assets, the strength of our people, and -- in an industry that continues to increase its market share. So on the Tuesday -- so we had our call on Tuesday. On the Wednesday morning, I was coming through Grand Central and I was looking at our fabulous new digitals that we've built out as I was walking through. And the advert was for a cruise line. I mean, I felt -- it just felt -- I was looking at this and I was thinking, well, I don't want to get on a ship right now. And I'm guessing that most other people do. So on that basis. So I mean -- and I'm not recognizing that. Obviously, that's an example of I'm guessing that advertiser will either want out or they want to going to defer or they [ ramp a bit ]. There's no reason why they don't want to come back in a bigger way later in the year because somebody is going to have to rebuild demand. And I'm rather hoping that they would be coming back in order to do that. But what that made us think was, okay, so will -- what advertiser categories might be impacted by some of the things we're seeing. And it's very hard, I think to -- I think for anyone to say they've got an absolute handle on where the macro is going to go and where the media market is going to go the next few months. I think it's hard to say with confidence exactly what's going to happen. But what we can say is that having drilled into our client base, sort of around 10% of our business is in areas that we think could be impacted. So those are obvious ones. There's travel and leisure and then we thought about maybe cinemas and then you look at sort of concert venues and maybe restaurants. Simply put, it's anywhere where people gather. And we reckon that's around 10% of our business. So within that 10%, could there be a bit of an impact? Yes, possibly. We're obviously hoping that we punch through this quickly. As I said, the core strengths of out-of-home and core strengths of OUTFRONT remain absolutely to the forefront. And we're hopeful that we'll be looking back on this in a few months' time from a much better place.

Right. I agree. So just to put a finer point on it, the revenue growth outlook of comfortably mid-single digits, you said you feel great about that.

Sure.

Okay. Great. Anything on the supply chain front that we should be thinking about, with digital boards, that might be a factor, particularly with the New York City build-out, which is obviously significant?

Yes. That's -- so there's 2 parts to our digital build-out. One is in terms of billboards and the other is in our transit environment where we're looking at the small format digital displays. Billboards, actually, we feel very comfortable. At the moment, the supply chain there is looking fine well into the future. They come out of Asia, but at the moment -- they come out of Taiwan at the moment. There's no impact there. So I think that's fine. On the small format screens that we're putting into the transit environment, we have good stock of products that are going up on the platform walls for predominantly the MTA, but seem to be here in San Francisco on the BART system, which we're building out our first stations here in the second quarter. We'll be increasing our build-out in Washington as we go forward. We have stock there that will take us through happily into summer. And the factory where the screens are manufactured is now back up and running, and it's not at full capacity, but it's up and running. And notwithstanding maybe some freight issues as we go forward, which I think the world is going to have to face, we're hopeful that we'll go through. What may be delayed, specifically, is we were intending to, and still will, commence our build-out of screens in subway cars and in railcars this year. And those -- that may be deferred or pushed more towards the back end of the year. That will do 2 things really. One is it will have an impact on our anticipated MTA spend this year, so likely be lower than we flagged on the call, and there would be minimal revenue increase. Yes. As you build these products out, you need to have some critical mass before you start to get real revenues from them. So it wouldn't actually have much revenue impact this year, certainly not something that we'd ever call out, but that would be the impact. So as we see it, that's the supply chain issues of the moment.

Got you. Let's maybe just back up and talk about the MTA contract at a higher level. You guys are a couple of years in. I think it's been a stronger performer than maybe the original base case. What do you think is driving that? And what do you take from this experience that you can apply in markets like San Francisco, which are obviously coming on soon?

Yes. The first market we built out was Boston. And as we were looking at the revenue increases that we were getting in Boston, it was making us feel increasingly positive about the MTA and that proved to be the case. So last year, we overachieved in terms of our expectation on the MTA. And that had the -- as you know, the MTA contract is based around us spending the [ in a way, the commerce ] capital on behalf of the MTA and then recouping that back out of foregone revenue share. We recouped more back against our contract last year than we had budgeted. That's been part of the reason that we've taken down the peak borrowing requirements for this capital that we're putting into the MTA. It was $350 million. We brought that down to $300 million. That's part of it. The other reason is that some of the build-out has been smaller. We haven't had the space because it's been a little slower than anticipated. As we look at that contract over the 15-year term that we have, we feel great about it. It's -- to have the opportunity to digitize one of the key transport systems in the world and have that term of contract. So we feel very good.

Yes. The New York City project is just enormous compared to other digital build-out that we've seen anyway, and we were a little anxious about just adding that much supply to a market. And you guys have, obviously, tapped into demand. Where do you think that money is coming from? And is having this sort of state-of-the-art significant digital footprint bringing in either newer advertisers, allowing you to sell differently or changing the business and relation with agencies?

I think it's done 2 things really. One, we've had our clients that have been with us forever have been spending increasing sums of money and has also definitively brought in advertisers that are new to out-of-home. Worth noting that 96% or 96 out of our top 100 advertisers buy both billboards and transit from us. So they do slightly different things. So to have the breadth and quality of assets that we have in those key DNAs is certainly appealing to advertisers. If you think about that advertiser demand, what we're really looking to do from an asset, let's say, a couple million bucks, 10 years later, we're expecting that to be $400 million in near term. So it's $200 million of incremental revenue that we're looking for. But in the overall scheme of the New York ad market, honestly, it's relatively small. And when you consider that as a medium, we're still only, in total, taking sort of around about 4% of total ad market. I think there's every opportunity that we can achieve that. And that -- and it implies a growth rate in the contract to about 8% per annum. And last year -- we don't separate out the MTA, but as you saw, our transit business grew by 20%. We're feeling fine.

Right. That's great. I know you don't typically highlight political, but we had Super Tuesday yesterday. It's obviously on everybody's minds. How might political spending impact you guys this year, if at all?

So political spending for us is 0.1% of our revenue. And it's always in that zone.

As you can't sell transit?

We can't put this rule on transit absolutely, Ben. And when you look at where most of our billboards are, they're kind either red or blue, so that we're just not really picking up those dollars. We did have one of the Democratic candidates who...

Former now, I think.

Former. I said -- I was about to say former Democratic candidate, actually, buy a bunch of billboards, I think, in something like 17 markets. So that was actually a reasonable amount of political spend. But as we look forward, I'm not banking on it. We're not budgeting on it. What we do think is that the weight of political money could do 2 things. One, it could just be generally benign for the rate environment across media as a whole, which we would get a mild benefit from. And two, there may well be advertisers that don't want to be involved in a political mishmash, and might just think, "You know what, I want to get off network TV. I don't like the political clutter there. Let's go on out-of-home where I can get the cut through that my brand deserves. So I would hope that we see some benefit from that.

As you guys continue to grow your digital footprint, and it's getting, obviously, more and more significant every year, is that bringing in new categories of advertisers? I mean I look at some of your top advertisers like an Apple. I mean they've been there for some time. But the streamers are sort of huge spenders on your platform. I mean would you chalk some of that up to the ability to sell, I don't know, day parts or shorter buys or things like that, that digital enables?

I think when we look at digital, I mean, we do have an ability to be increasingly flexible with digital in terms of day parting, et cetera, and in terms of copy chain. Say, for example, the political campaign that we were talking about would have been much harder to execute in a nondigital world because there we can at least go to the political category and say, "Look, we know you're issue based. We know you're going to be wanting to change your messaging, do you know what I mean, potentially buy that hour or buy whatever [ the answer be ] and we can now do that as a medium." So that is positive. But when we sort of drill into it and say, is digital -- is it really about new categories? No. I mean, as you know, we have this -- out-of-home strength is the fact that we have made -- we're not reliant on any one particular category. We have a very sort of broad category base. And you're right, the likes of the streamers have certainly been beneficial to us. I think we'll get a tailwind from 5G as that comes online later in the year. And -- but that -- they're likely to buy our analog assets [ from America -- ] as they are our digital assets. It's really just the inherent strength of out-of-home that they're buying rather than this -- the increased flexibility of the digital.

How about, Jeremy, the use of technology on the sales side? I think about audience-based selling and targeting is something that maybe out-of-home hasn't historically been known for. But you guys have invested a bunch of money, you've got this ON Smart Media product. What are you doing on the digital selling front, measurement front? And when does that become, if at all, meaningful to the business in your mind?

Yes. I mean, ON Smart, if you like, there's a brand that we put across all of our -- the tech part of our business. And ON Smart has already been hugely successful in that. It was our own ON Smart products that won Boston and won the MTA. It was that tech platform that we presented that was bought by the transit authority. So it's very much part of our business. Now one piece of that is a product called smartSCOUT. smartSCOUT is -- it's a planning tool, whereby based on data and insight that essentially comes from carriers, so in other words, from phone IDs, how they pass our boards, we can now market our boards on the basis of which boards are, do you know what I mean, indexed highest for a particular audience. So you can plan, do you know what I mean, you can say that's the audience I want, present me the boards that do that most effectively. Or indeed, these are the boards I want, what are the audiences that they're giving me. So we -- that product is being used by our sales force as we speak, we then want to -- we then add it on, okay, so are those boards available and what is the price of those boards, okay? We can do that. And what we're now working on is the buy button. So the kind of add to basket and buy. And that's the piece that we're working on now. So it's a fundamental part of how we think about that business. And I -- as we look forward, we will have our own platform. We think it's going to be very necessary for our -- the products that we're going to have. So we would like to have this self-serve platform for local advertisers to be able to buy digital for those short periods that we talked about on the MTA, for example. And we will also, and have also, got some boards, some of our digital boards in particular, exposed to DSPs in the market. So programmatic is becoming an increasing part of the out-of-home market. It's relatively small right now. It's probably like a point something of that order. But we will expose our digital boards increasingly to the programmatic environment as well and expect to see some growth there. So if you put together the growth that we're able to achieve from converting our signs to digital, just in terms of the -- some of the things we talked about before, the creative opportunity, the opportunity to day part, and just the pure fact that where you had one, you now have 6 or 7. So you have that -- this opportunity. I think when you overlay the tech trading piece on top of that, whatever -- an automated approach that may or may not be programmatic, I think that all goes well for the industry growth in total as we look forward.

Jeremy, do you think that the industry needs an industry-wide approach to this? I think about ON Smart and then Clear Channel has a radar product. Lamar is doing some of their own programmatic stuff. I guess 2 questions. One, do you think there needs to be a common approach to some of these tool sets? And secondly, if not, how do you think your offering compares to the competition?

Well, there's 2 things. There will be a number of different demand-side platforms for out-of-home. And it's -- that's a fact. And there's going to be a number of different SSPs for out-of-home as well. We all utilize Geopath. Geopath, which is the industry audience measurement tool, but that's a planning tool. It's not a buying tool, right? Planning tool. So Geopath will be one of the inputs into our smartSCOUT product. It's -- but I think to suggest that everyone within an industry is not going, do you know what I mean, is just going to use the same platform, I just...

Don't realize?

Don't think that's going to happen. And I think that would be good for the industry, either.

Yes. Let's look -- move sort of down the income statement, talk a little bit about margins. You guys had some margin expansion in the fourth quarter in the U.S., especially if you strip out some of the onetime costs. But where are you guys looking for opportunities on the cost front to be more efficient? And do you see more operating leverage coming into the business over the longer term?

So when you look at our margins over the last 4 or 5 years, they've been incredibly consistent where they are pretty much flat throughout. And it's reasonable -- might have been reasonable to say, okay, well, so -- when does margin expansion come. Well, I guess the first point is that we've been delivering superior growth. And associated with that growth has been investments that we've been making, and some of the things that we're -- we've just been talking about in terms of data and insight and tech. And every time we go and build a digital screen on the subway, it doesn't sell itself. We have this sort of significant inventory uplift. And we've been investing in sales -- in our sales force to do that. We've been investing in sales force to go upstream, to go away from the out-of-home buyers, spend more time with the strategic planning agencies and more time with clients. We're seeing the benefit of that because the out-of-home industry and ourselves are growing at a faster rate. If we wanted to -- if we were dressing our business for a sale, could we chop out a bunch of costs? Yes, of course, we could.

Right.

But we're not. We're investing for our future right now. And it's that that's delivering the incremental growth. And it's that incremental growth that's delivering extra dollars that allow for dividend increases or getting leverage down or whatever happens to be. So we feel very good about where we are right now in terms of our margins. I think this year, I think, most -- I think the consensus has margins sort of flattish. Over the next couple of years, I think, they'll start expanding again. But I'd be very happy to deliver some great growth at constant margins this year.

Sure. Of course. I've got one more I want ask you -- I've got a bunch more, but I'll ask you one more then we'll see if anyone in the audience has a question. If you could just raise your hand and wait for the microphone. You mentioned the dividend. So you guys raised -- announced the dividend increase, the first one in several years. It's nice to see. What led you guys decide to make that decision now? And should we assume that there's -- dividend growth is sort of part of the longer-term financial plan for the company and for shareholders?

So we've always said that our Board would consider that when the time is right, and we were looking at -- in particular, at our percentage of AFFO payouts on dividend. And it was that, that sort of came into play. Also, when we look at other demands on cash, such as the MTA, and that's sort of been benign, more -- very benign outlook for the MTA, gives us a lot of comfort and, of course, reducing leverage. So yes, we're pleased to take the dividend up by, whatever it was, 5.6%, a couple of cents a share. And I think in the messaging that Matt used, there was a definite implication that we want to become a dividend grower. So all things being equal, this would be -- would reinstate OUTFRONT as being a dividend-growing company for the coming years.

Great. Got some time left. Why don't we start right there and work our way around.

When you think about the sort of growth in your digitization, you said you've grown to 17% to 23%. Can you just talk us through the key factors under consideration for the pace of that growth and where that growth occurs, and within that sort of a discussion on the CapEx involved and the ability to continue funding that going forward?

Okay. So within a year, we're at 23%. If we think about the 2 pieces to our business, in our transit environment, it's pretty much -- it's down to us and the transit authority, there's nobody else, what we think likely demand will be. So we're very focused on our build-out in New York. But increasingly, this year, as I said, it will be BART and Washington. In our billboard business, there are a couple of gating factors. One is zoning because you can't get digital billboards where -- absolutely wherever you want them. And the other is we also think about supply and demand within a given market because we want to make sure that by building out a digital billboard, we're going to be getting incremental dollars into that market rather than maybe eating our own lunch because we've got a bunch of other inventory in that market. So we've been -- typically, for the last few years, we were putting around about 100 new boards in a year. We did 200 last year through conversions, marketing agreements and acquisition. But we'd like to think we could get close to that again this year. We're sort of ramping that up. In terms of the capital associated with that, our CapEx guidance is broadly similar for this year as last year, which is about $80 million, of which the majority of that is growth CapEx and the majority of that is associated with digital. So if you said digital is maybe $50 million a year, when you look at our balance sheet and our cash flow, I mean, that's -- we can't do more than that, well -- or if we can, we haven't quite found the way. We've got from $100 million to $200 million and we'd like to think we can increase that further, but the capital on our balance sheet isn't one of the gating factors.

We touched on it a bit, but I was hoping you could talk about how you think about the resilience of the category through downturns? Do you think that if we were to enter a recession or kind of choppy economic environment as we're talking about increasingly, do you think the category will be as susceptible as it has been in the past? Or do you think that advertisers have really embraced the medium in a different way now?

If you look at the out-of-home medium, it's been very strong for a number of years in local. And what has been -- what's really changed the growth rate up has been the strength and -- with national advertisers over the last couple of years. And I think when you look at what out-of-home is delivering to those national advertisers, I actually think that -- even if we saw a downturn, I actually think that out-of-home can grow ahead of all media. That would be my expectation. When I think about OUTFRONT, I would like to think we'll be at the forefront of that above all media growth, largely because of our assets, the amount of digital conversion that we're doing and our execution, which has been, I think, pretty good over the last few years.

Where are we going to see the first digital display in San Francisco?

Well, we're -- we have actually build -- we've got a few in. But I would say, end of Q2, something like that.

All right. Any last questions for Jeremy? We've got a couple of seconds left if there is one underway. Okay. Go Ahead.

How's the pricing of the digital billboards trending as there's more demand sort of...

We'll just repeat the question so they get on the webcast.

Yes. So the question was what's going on with digital pricing. So is it increasing over time?

No, the cost of the...

The cost of digital billboards. So cost of digital billboards have declined over time. They came down about 40%, and now they started to stabilize a little bit. But the way I'd describe it is that, even though the price has gone down, what tends to happen is a little bit like, if you're going to upgrade your TV at home, pricing has definitely gone down for the TV that you're likely to replace. But actually what you go is for the bright, new, shiny HD version. So as we look at it, the quality -- our quality is increasing, but we're probably replacing, you know what I mean, old or the old technology at the same price, but with higher-quality boards.

All right. We're out of time. Jeremy, thanks for coming.

Thanks, Ben.

Thanks, everybody.

Thank you.