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

Gentlemen, you may begin your presentation.

Hi, everyone. This is Aaron Watts at Deutsche Bank. I hope everyone is doing well. Next up, we have OUTFRONT Media. Pleased to have CFO, Matt Siegel, with us today. Matt, thank you for joining us here and for being flexible on the pivot to a virtual conference from maybe the more attractive side of being down in Palm Beach.

No, I'm happy to be here. If it helps, I'm wearing sunglasses.

Perfect. So Matt, we just wrapped up the best year for OUTFRONT, in the out-of-home sector really broadly that I can recall, really positive growth themes across the board. You personally, I think, are nearing the 2-year mark since you joined the company. How do you feel OUTFRONT is positioned today to continue to build on that recent momentum? And what are the strategic priorities for you over the next few years?

Good start. Thanks, Aaron. First, I think our large market focus is really paying off, both national and even -- we don't get enough credit for our local business, which is in the large markets. That's where a lot of people are and does very well. We're executing well in an industry that happens to be doing very well. We're enjoying the tailwinds of digitization, both billboard, a lot of conversions, we had a lot of new signs this year; and transit deployment and a lot of high-profile transit franchises. And frankly, our assets are located in the right places to capture growth from other media. Going forward, priority is really somewhat simple, more digital. We want to continue our pace in digital conversion and development on the billboard side. And obviously, we have a few key contracts in transit, which will give us more digital in all those for years to come and continue to upgrade our tech capabilities and within there, kind of improve our back office, improve our ability with data and analytics and get a little more traction on the programmatic side.

Okay. That's a good overview, and we'll dive into a lot of those topics throughout our discussion. Maybe I'll shift to kind of the operating side here. In 2019, you grew revenues and EBITDA, 11% and 9%, respectively, over what was already a strong base in 2018. I think we in the market have gotten used to the out-of-home sector growing at around GDP. So can you tell us about the drivers of that accelerated growth and maybe more importantly, for this audience, is that growth sustainable?

Sure. As you mentioned, I'm here almost 2 years. When I joined, I asked Greg Lundberg about this GDP grower, and he pointed out, there have been a couple of years or at least a few quarters where we're under GDP, so a little more volatile than people expected. But we see the -- it is sustainable. The strength of out-of-home as a medium, its effectiveness, its enhanced targeting, it's gotten better and kind of back in favor among a lot of large advertisers and agencies. We see the strengths in the larger markets, as I mentioned, both local and national, really, we like our portfolio and where we focus. And I would say, the upgraded capabilities, we've really improved our game in training sales analytics and how we pay salespeople and managers to motivate them to do what we think is value-enhancing.

Okay. So after growing revenues 8% in fourth quarter, you provided a first quarter outlook. Revenue guidance of up mid-single digits despite more challenging comparisons, are you still confident in the first quarter outlook and perhaps even your 2020 forecast, given some of the growing concerns around coronavirus?

Sure. So we had the earnings call a couple of weeks ago, we said mid-single-digit increase. And I think someone asked Jeremy right on the call to clarify and he said, we were comfortably mid-single digits, just to say we're comfortable there. Last week, Jeremy spoke at a different conference, reiterated we're comfortable there, and I can reiterate today, we're comfortable with our first quarter guidance. A lot of our business comes into the year on the books, especially as you get into the quarter. So a lot of it booked in advance, and any coronavirus impact is really, at least for our company or our industry probably, later in the quarter. So we're good with the first quarter. For the year, we don't update guidance intra-quarter. We formally guide revenues each quarter for the next quarter. Obviously, we just had the earnings call 2 weeks ago. So we'll give a second quarter revenue guidance with our first quarter earnings early May. As far as AFFO, it's, I think, for everybody, us included, really premature to discuss annual AFFO or any impact. I think the key is going to be the duration and the depth of this event or whatever it is. And frankly, the clients we have, the clients we've had in our last, I would say, 2-year successful run, seem to like us and no reason to think they're going to abandon us after there's some sort of dislocation.

Okay. As we think about your diversity across verticals, maybe you can remind us kind of what your largest vertical accounts for as a total of your revenue. Are any of your verticals particularly exposed to coronavirus concerns? And maybe on a more positive note, you can talk about any categories that have been really driving strength for you at the moment.

Sure. So we have a pretty diverse portfolio. There's no one vertical that's -- I think 9% is our biggest -- some of the large cap tech, if you put them all together, it's about 9%. There are years when telecom is big, there are years when entertainment is always -- was one of our bigger ones. The last year -- end of last year and coming into this year, we expected and we still expect video streaming. There's a lot of competing names in the streaming space. And they use out-of-home to get the word out and so many movies is -- has been and still big for us. Jeremy mentioned about 10% of our advertisers are in kind of verticals we might expect would have some sort of pullback based on travel or congregating in groups. We look at hotel, motel, tourism, airlines, casinos, restaurants, show -- Broadway shows, that's about 10% of last year's book. So -- and the idea of kind of sizing what we think is the obvious first derivative issue. So that's something we keep an eye on. On the flip side, no reason to think health and pharma and consumer products, more TV, food, beverage, financial wouldn't benefit from some change in people's habits. And one of the interesting ones, movie releases. You don't see really any large movie releases without a very healthy out-of-home campaign. James Bond, I think, relatively recently moved the release date of their new franchise from sometime in April to sometime around Thanksgiving. So no reason to think that that advertising isn't going to follow them into the new release date.

Okay. That's helpful. If you do end up seeing reductions in ad spend, what flexibility do you have to negotiate rent concessions from municipalities on the transit side or perhaps landlords on the billboard side?

Again, it really depends on the depth and the length. But in the billboard side, most of our leases have what we call advertising demolition clauses. We used -- some of those are used then to negotiate with our landlords during the Great Recession of 2008, 2009. It takes a fair amount of time. It's not just triggered by a move in the stock market or our stock price, and frankly, we do, hopefully -- when we do as well, take into effect -- into account the relationships. So we're not looking to just take some value from our landlords, we want to make sure that there's something mutually beneficial or sharing the economic impact for a good, long relationship and hopefully, what we think is a short whatever this is. On transit, a little different. Our business is really -- it's a rev share business. The payout is linked to the cost and when -- the amount we pay to the franchise is linked to revenue. So it's -- as revenues go down, costs go down, just like when revenues go up, costs go up, which we saw last year. And at a certain point, there is a guarantee, a minimum annual guarantee, or a MAG. Right now, we feel we are further away from our MAGs as a -- on a collective basis than our total company revenues fell in that recession of 2009. So we feel we're in a good place with -- in relation to our franchises and our landlords.

Okay. Great. So if I think about your mix of business between local and national, both sides seem to be working pretty well right now. And that wasn't true for some period of time when national was lagging behind. What's changed? Why is -- has national picked back up to kind of run even with your national -- with your local business, sorry?

Well, first, you mentioned local, so I want to give them a shout-out, great local sales execution that's been going on for years. I don't want to say peaking, but 2019 was just the best of a bunch of years in a row. National, it seems national brands, the large agencies, the holding companies are realizing more and more that out-of-home works. It can't be skipped. They can target audience in new ways. They don't have risk of ending up on a website next to something they'd rather not be next to. So we think it's, I don't want to say, a rejuvenation but a new appreciation of the medium that -- and we're probably more exposed to national than some others in the space, so benefiting us on a disproportionate basis.

Okay. If I focus in on your billboard specifically, around 2/3 of revenues, again, seeing nice growth there of late, can you talk about the drivers there and maybe specifically touch on occupancy and pricing trends as well?

Sure. For us, we've had a great surge in yield, which is kind of, as you know, a combination of occupancy and price. Most of the benefit has been -- we've experienced in price or, me as a former cable guy, referred to as ARPU, reflects really rate with pretty high occupancy. So as people are coming more and more to us, we can raise rates, both in our permanent locations where people have a 12-month resident -- where advertisers have 12-month residences and also on more and more spot orders. Yields are up overall for both static and for digital. And digital, very importantly, it's a higher-yielding product, it's driven by both Same board increases so we can raise prices on the same board year after year, quarter after quarter. But more importantly, it's new inventory. So the key is conversions. If I get something from a relatively lower-yielding static to a much higher-yielding digital, that drives a lot of growth for us.

And thinking about the kind of digital versus static stories, we hear a lot about digital, that's obviously a big driver of the growth now. But you're also seeing stability on the static side. What do you think is behind that? And are you still seeing healthy demand looking ahead for the static boards?

Yes. It's great demand. It's still a great product, and we use static to focus on rate. We still develop new static periodically. We think we have great locations and a great place for iconic brands. Our largest advertiser, I won't share the name, but they prefer generally static to digital. They don't necessarily like to flip from their product or their message to another company's message. There's nothing wrong with the other company, they'd just rather have a focus on them. So it's -- for us, it's nice to have some static product, some digital product and locations in billboard and in transit.

Okay. So maybe we'll transition to digital on that note. So digital revenues, up 36% in the fourth quarter, now account for around 23% of your revenues. That's up from 18% a year ago. How should we think about the growth potential going forward for digital? I believe Jeremy said on your last call, digital potentially crosses the 25% threshold near-term on the way towards the 50% bogey we see in some international markets. Bridge us on how we get there.

Sure. So we've been growing our digital percentage, say, 1% to 2% sequentially. It's organic growth. So digital is growing. It's new inventory in both billboard and transit. In billboard, it's conversions from our existing static. It's some tuck-in acquisitions. It's some marketing agreements. So really picking up more and more digital where we can. And in transit, we've won quite a number of franchise engagements in recent years. So we're adding digital. And obviously, in New York, if anyone's here, we're finishing up Boston. We're starting in Barton, San Francisco. We've installed a lot in D.C. and WMATA, and then we won a renewal, so we'll push on and do another 1,500 or so. So it's really -- the new inventory is great, and we can see a good long runway on that. Plus, with that new inventory, it doesn't just sell itself. We're bringing in new advertisers as we increase this addressable market. For those of you who are in New York City and are in -- on the subway, the fashion has returned to the subway. So from the back of magazines and some TV, I think people are returning with their fashion brands on the new Liveboards we have, it looks great, and it's becoming a good company there. And again, which is why I mentioned earlier our focus on yield on ARPU remains.

Yes. No, those boards really do look great. So thinking about the expansion of your footprint. In 2019, you added a little over 200 digital units, which is above your previously stated goal of around 150. How should we think about additions for 2020? And is that the right run rate to think about for 2021 and beyond?

A couple of years ago, we were doing 100 a year, then we said, "Hey, if 100 is good, more is better." And we set a target of let's do around 150. There is a little bit of uncertainty in some of the development and what things close and the timing. We had a good, healthy pipeline and ended up with a shade over 200. I think this year, the same kind of pipeline has been formed, same strategy, same work with the zoning and local authorities. Our goal is to do -- it's only more than 150, would love to get back around the same number of 200. And so no reason to think that pace would slow, looking into the future.

All right. And just to kind of check a box and thinking about the current economics for the digital boards, is 4x revenue, kind of 2x rent, cost to convert a board around $250,000. Are those still the right kind of frameworks in terms of the metrics there?

Yes, and we test that at least annually for our 10-K and our disclosure, it's kind of a -- if you look at the second year forecasted rent -- second year forecasted revenue, I'm sorry, it just takes a little time to fill up the inventory. The cost roughly doubles partially for electricity because you're digitizing and flipping constantly and partially because the landlord wants either -- we're looking for more terms. We can -- to justify the capital, we don't want to do it on a 2-year remaining lease. We want an 8- or 10- or 12-year lease. So the landlord gets a little more money there. But for us, it's really one of the best things, if not the best thing, we do. So we'd like to do more. One of the tricks is it takes time. There's a kind of a gestation period. You don't just go to the local town hall and say, "I'd like to turn this sign into digital." Zoning approval, town meetings, trying to judge our supply and demand around our markets. So that's why I give you a range between north of 150 and hopefully, around 200. You never really know what closes in the fourth quarter.

Okay. And last question on this topic. As I think about the IRR or the return on your investment in digital, as you've pushed out your footprint, are you still seeing kind of in the 20% area in terms of return?

Yes. That's really our threshold. And we've incentivized our local managers to go and find more. So I think, historically, maybe they're a little casual about it because if you added new inventory, we would increase your budget, and you'd be accountable for that budget in year. Starting early last year -- at the beginning of last year, I think, we gave them a free year. So if you can develop some new digital, you get that extra revenue free to your budget metric for 12 months. And I think that's really incentivized them to go and find and be a little more aggressive.

Okay. Great. Let me segue over to the transit side of the business, around 1/3 of your business. I feel like I'm being repetitive here, but good growth here in transit as revenues grew 14% in the fourth quarter. That was a little bit of a deceleration, though sequentially, and you said in the current quarter, transit was off to a slower start, walk us through the drivers of that and what your outlook is for the year for the transit segment.

Okay. First, just to complete the backslapping for the fourth quarter, that was off a high-teens growth rate in the fourth quarter of 2018 in transit, so our transit surge really started going into 2019 and really had a great year overall in transit. In the first quarter, correct, we mentioned on our earnings call, it's off to a slower start, had a very big Q1 2019. So a difficult comp. We saw no real reason. The static product, as you know, our long-term goal is to remove static in the MTA and put in all digital. We decided -- as we were starting up, the static products are still selling pretty well. And those platforms in the walls are pretty long, and there's plenty of room. So we kept it up. But as we get a little more digitized in New York and other places, the static seems to be seeing a little bit of pressure. So our Q1 transit overall is off to a slower start than we would like and slowing -- slower than last year.

All right. Helpful framework. On the New York MTA, can you give us an update on the rollout? Where are we relative to your targets? And what's left to achieve?

Sure. No, it's still early. We're about 1.5 years in. Our first platform station was mid-2018. So far, we're doing just platforms and stations. We're on a run rate of about, say, 10 to 12 a month, which is a little higher than when we started. We have slowed out of the gate in 2018. We're trying to catch up to our model. But I don't know, 4,500 screens at the end of the year. There's certainly more now. Maybe 1/3 of the way complete with the platform business, mostly in the subways; New York City; the commuter lines along our main road; Metro-North, a little slower. We need a little more cooperation with them. They have a lot of priorities going on. But the good news is pretty good coverage in Manhattan. There's a lot in Brooklyn from 2018. So we are able to achieve some good solid revenue, plus there's a pretty good long runway. So we still see a lot more deployment, a lot more new inventory coming in, and we're still excited about it.

All right. And as I think about the SKU or mix of boards that carry advertising versus informational type display, how is that mix right now? And where do you expect that trending towards as we move forward?

Right now, it's a little over 50-50 advertising, about 50% -- I don't know, 52%, 53% advertising. I remember, when we started, MTA was really pushing and excited about getting more communication screens in. They were going to shut down the L Train between New York, Manhattan and Brooklyn. And they wanted to get a lot of messaging out there. So that's -- we're partners, we need to work together. In 2019, we did a lot more of the big Manhattan stations. So we got that skewed a little more toward advertising. As we start doing rolling stock, that's a large volume of screens. That's -- I don't know, 40,000 screens, most of those advertising. So eventually, we'll be more of an 85%, 15% skewed toward advertising.

And as that additional supply comes online, can you talk to what the demand has been from your advertisers or what their reaction has been to this inventory?

So far, so good. You see digital transit grew 100-plus percent, 103% in the fourth quarter. Obviously, if digital or anything in transit is growing, it's really going to be in New York City, and that's our biggest franchise by far. We've brought in new advertisers that either never or didn't recently use the medium. I mentioned fashion, I would say, periodically, you see a movie trailer or something streaming or whether you're coming out of Grand Central or you're on a platform that's incredibly eye-catching and I think most importantly, the long-standing advertisers who are doing either billboard or billboard and transit are expanding their use.

Okay. So the last thing I wanted to touched on with the MTA was some of the deployment costs that have been incurred to date, what you've been able to recoup and how that recoupment schedule will trend going forward, but also kind of your total funding expectation for the build-out, which I know you took down recently. So if you could maybe touch on those 3 factors, that would be really helpful.

Okay. So last year, we spent about $150 million on the MTA. Our initial guidance have been $175 million, and we took that down when we realized we weren't going to start doing railcars in 2019. So when we came to 2020, our anticipation was starting railcars sometime in the first quarter. And we actually -- we did a pilot subway train. So we thought we'd spend $175 million again. And we'll see when the supply chain cranks back up again. And I'll touch on that at the end. So we're spending really what we intend to spend. Our revenue has been higher than we had anticipated, showing in 2019 and we'll see how 2020 goes with a slow start and then it allowed us to recoup more, have a little bit higher EBITDA than we expected. And the slower spend, not necessarily lower, but slower, the spend curve will be -- maybe a little shallower ramp will enable us to spend a little less over our first 4 years, which is really our peak incremental borrowing need, kind of at the -- by the end of 2021, the curve -- the spending curve of MTA spend will have crushed under the recoupment and EBITDA line -- the recoupment and EBITDA combination line. So we'll start paying down debt. So we feel pretty good about the risk profile of the deployment.

Okay. Perfect. One other thing I wanted to -- I'd be remiss if I didn't ask you about was if you could give us a progress report on how some of your other transit platforms are going. Can you talk about the progress you're seeing in Boston, San Francisco, and I think more recently, Washington?

Sure. Boston is wrapping up. It's been a couple of years running. It's -- you're working with the city and with the Transit Authority to coordinate, I think we're still going to put in a few dozen more digital urban panels, which for those of you in New York, those are the horizontal panels you see above the steps going into many subways. And so we're going to put a bunch of those in Boston. At San Fran, we're launching test stations late in the second quarter, just like New York did in the summer of 2018. Once we see those and the BART authorities see them, we'll start full deployment. And Washington, D.C., we just won at the end of the year a new 20-year contract, 10 plus 5 plus 5, putting in 1,500 screens, starting midyear. And that's -- we'll do roughly 300 new screens each year.

Okay. Perfect. Let me shift gears and ask you a question about the cost side, expenses were up around 9% in the fourth quarter but as a percentage of total revenues were pretty steady year-over-year. Presumably, that means a lot of the increases were due to the top line growth. How should we think about your cost expectations going forward? And perhaps you can focus on some of the larger components such as SG&A, transit and lease expenses.

Sure. And you're right. Our top line growth drove a lot of our expense increase. As I mentioned earlier, transit is a rev share model. So as transit business grows, the cost grow, and transit clearly outgrew billboard last year. In addition, on the mix side, our larger markets, New York, Los Angeles, have a little more rev share billboard exposure than probably the rest of our portfolio. So we see some extra cost there. But generally, especially in SG&A, we've been -- and we continue to invest in our business, sales, our sales capability, our hiring, our training, our analytics, we've added a fair amount of people to do a bunch of those things. We continue to invest in technology, chasing after programmatic capabilities and audience measures. And just deployment, if we're putting -- as we just mentioned, Boston, San Fran, D.C., New York deployment, we add people to manage those operations. So again, we're investing in growth. We're investing in maintaining our growth. And we think that's a smart business to do.

Okay. One line of questioning that I get is people start asking questions about the health of the economy. And if the economy was to take a breather at some point, the flexibility that you have to absorb maybe some top line softness. And I wanted to specifically ask about capital spending. Right now, it's running at around 5% of revenues, but I know not all of that is maintenance. Can you just touch on the mix of maintenance versus growth that you're spending in capital? And should we -- what should we assume as the appropriate level of spend over the next few years?

Sure. And first, I want to thank you for waiting 30 minutes to ask me that question. We've had a few investor questions -- calls this morning. And it's nice to have a little bit of a delay. So CapEx, I think we guided to around the same spend as last year, which is about $90 million. Say, maybe 3 quarters of it is growth, which is primarily digital billboard conversions, which are close to 100% discretionary. I'd say close because, at some point, you make a commitment and you're going to do it. The rest is transit deployment. So we have -- we control the joystick on how many digital billboard conversions we do. Like I said before, we'd like to do a lot. But if there's a real need in the economy or in the company to slow that down, we absolutely can. In addition, the transit deployment, like I said, we can speed up and catch up to our deployment pace that we have in the MTA, we can moderate that as well in all our franchises. Again, it's a partnership with us in the local franchise.

Okay. Great. Let me jump over to your 2020 outlook. AFFO growth, you were calling for high single-digit ups on that for the year, what revenue assumptions are baked into that? And remind us how much of the business is already on the books for the remainder of 2020.

So coming into the year, we generally have about 50% of the year on the books. And as the year grows, as you get to each quarter, it's somewhere between 65% and 70% on the books. I'm guessing, coming into the second quarter when we get to April 1, it might be a little bit different because there's a peak of uncertainty. But for guidance, we provide -- really, we just provide full year AFFO guidance. We give a full year CapEx number, both maintenance and growth. We give a full year tax number. So we think we give you enough pieces to work back up to OIBDA. And then based on our margin assumption, which 30% makes for easier math, depending on the margin assumption, you can probably back into a revenue number.

Okay. Okay. Jumping again here, M&A activity. It feels like the current environment, there's been some chatter about assets being for sale. Can you talk about how the pipeline looks right now? What types of assets are sort of in your -- on your radar? And maybe also would you consider assets that are not in the U.S. or Canada?

So I think in this industry, things are always for sale. There's a -- you mentioned, I've been here less than 2 years. There's always opportunities for small tuck-ins, some regional things whether something is not formally for sale. If you poke around, you can find something. So we're mostly interested in smaller tuck-ins. We think we're closing one, hopefully, Friday; if not Friday, Monday, in one of our large markets that we'd like to be bigger in. So that's always interesting to us. And we think it's good long-term to do it. So as far as outside the country, not really. We're mostly U.S., I would say, North America, because we have a very solid, strong presence in Canada, but we think there's plenty of runway for growth and opportunity in the U.S., and we're not looking to get distracted looking in Europe, Asia or Latin America.

Okay. Got it. And maybe that's a good kind of transition to my next line of questions around your capital structure and liquidity and capital priorities. When I think about your comment you just made of making a tuck-in acquisition, how are you funding those types of acquisitions?

So the last year or so we've used our ATM program to fund those. And we've found that's a nice balance between our existing shareholders who were getting a new asset and our new shareholders who are helping our balance sheet. And so we don't necessarily go dollar for dollar, but we try to trace something. So if I was going to buy something for $20 million, we have historically or recent history used our ATM to fund that. And obviously, we have great liquidity. We've expanded our liquidity over the last 18 months. So if we didn't want to use the ATM program, we have other sources of funds.

Yes, that was exactly what I was going to bring up. You do have cash, you have your revolver, you have your repurchase facility, so plenty of leverage you can pull on that front. One other thing I wanted to highlight was you did take some proactive moves over the past year to push out your debt maturities and improve your cost of capital. Are you comfortable with how your cap stack shapes up now?

Yes, very comfortable. We have -- our next bond maturity is 2024. Our term loan is at the same time. We've pushed things out to 2027, 2030. I would still be interested in an opportunistic refinancing of that 2024. You'd certainly want calmer waters in the market. And it seems like we're going to be in a low interest rate environment for a long time. So I'm sure there'll be an opportunity at some point in the not-too-distant future.

Okay. And we have your net leverage ex cap commissions at around 5x, which was down a couple of hundred basis points from a year ago. Where would you like to see that trend over the long run?

The trend, I'd like it to be lower, mostly for financial flexibility. The business can handle a fair amount of leverage as the market seems incredibly comfortable with our company and our industry's ability to handle leverage. We look at the MTA when -- so when we talk about the peak funding at the end of 2021, when I'm paying down debt by taking -- getting full recoupment out of the MTA and growing my EBITDA, we think we're going to delever very quickly.

Okay. And maybe I'll wrap on this question on your dividend. You recently increased your dividend, what gave you the comfort level to do that? And do you continue to be comfortable with your dividend and your ability to service your debt despite some of the noise that's in the marketplace right now?

Yes, to answer the second question first, absolutely. It had been 3 years in between our last dividend increase. We looked at our performance, our comfort with our balance sheet and what have been the perceived risk of the MTA deployment. If you think when we sign up the MTA, people were concerned about deployment and revenue and how is this going to work and how we're going to fund it, we've increased liquidity, we've increased our performance and we really have the confidence going forward that we're in the right place. So really, the extra dividend is roughly $11.5 million a year, and that's not going to have an impact on our balance sheet, our ability to service our debt or our business plan.

All right. Matt, well, this has been a really helpful conversation. Again, I appreciate your time and flexibility. And I hope next year, we can do this in Palm Beach and that you're wearing sunglasses inside there, too.

Absolutely, Aaron. Thanks for accommodating. I look forward to getting together with you and others.

All right. Thanks, Matt.

Thanks.