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

Good morning, and thank you, everybody, for joining us at JPMorgan's TMT conference. I'm Alexia Quadrani, the media analyst here, and I'm thrilled to welcome Jeremy Male, Chairman and CEO of Outfront Media to the conference today. Jeremy has been CEO since September 2013, and prior to that, he spent 13 years as CEO of U.K., Northern Europe and Australia for JCDecaux. Thank you so much for being here today.

Good to be here. Alexia. Thanks for the welcome.

I will start off with what we saw a little bit in 2019 then jump into the questions more closer to what's going on now. But definitely, in 2019, Outfront saw explosive growth, double-digit revenue growth in '19. What was the momentum, I guess, you saw late in '19? And sort of what was driving that in the beginning of this year as well? Was it really delivering on transit contracts, continued digitization or really just the appreciation by advertisers of the out-of-home market?

I guess it's all of the above. But maybe if we just go back -- it seems like a long time ago, doesn't it? But it was only just a few short weeks ago when, yes, we reported a terrific 2019. We were up 11% in national and local sales. So strong double digit performance. And when we sort of drill into that, our billboard business did terrifically well, but our transit business grew very strongly, best part of 20% for last year. And a lot of that was driven by our digital transformation, particularly, for example, with regards to the MTA. And that rolled into the first quarter of this year. In the first quarter, actually, our digital revenues were up strongly again. Even in transit, our digital revenues were up 66% in Q1. Our total billboard revenues were up 9% in Q1. So really strong performance that continued through until about the sort of first, second week in March when we really noticed business falling out. So I think if we look back to last year, I think it was certainly about national advertising, which was very strong. It was about cities, which was very strong. It was about -- we were growing at roughly double the rate of some of our competitors last year. And that digital conversion, growth in terms of the number of digital billboards that we have out there, growth in terms of digital in transit. And just generally, out-of-home grew by around about 7% last year. So it was beyond all media growth. So it is an example of the structural growth story of out-of-home continuing to play out. And that's a story that I believe will continue to play out, once again, when we're through this current crisis.

How do you think just being, obviously, in the thick of the crisis now, how do you think it differs from what happened in 2008, 2009? I know your company is quite different, but I'm curious how you think the whole -- how that process is different?

Yes, the business is very different. You're right. So if we look back and think of some -- maybe a couple of similarities. The first similarity, I guess, is that national advertisers typically are in a position to react more quickly. So what you tend to see with national advertisers that they can turn the tap off more quickly. And then they turn it back on more quickly. So within national, you get a much higher beta than you do, for example, within local, and we are very nationally disposed. So that remains the same. I guess the key difference between '08, '09 and today is that you're dealing with 2 things. In '08, you were principally just dealing with the falloff in macro that was impacting advertiser budgets. Here, we're dealing with the fall off in macro that is affecting budgets. But also in this particular crisis, it's affecting our ability to deliver an audience. So if you like, there's a double impact there because advertisers don't have the budgets, but also we don't have the audiences in quite the same way that we did in '08, '09 because there wasn't any audience impact. So that's something that we're having to navigate through in addition. Now the good news there is that those audiences, sort of, bottomed out in March and in a number of different parts -- well in all parts of the country are actually on the rise now. And in many parts of the country are actually getting back to where they were pre-crisis.

You mentioned that national reacts quicker and was faster to turn off this tap when this crisis happened -- started. Do you think they'll be faster to come back national?

Yes. I do think it will be faster. It certainly was last time. And I think there's absolutely no reason why it shouldn't be this time. What we've seen with quite a bit of national, actually, is it's just been about shift. Hasn't been -- it's not about cancellations. It's just literally moved from the second quarter into later quarters. So a simple example of that would be the bond move that was due to launch in April. And that's been pushed back to later months in the year. So I see absolutely no reason why that we won't see a similar bounce this time around. And I guess one other difference since last time is that we are also more digital as an industry. So the great thing about digital is that flexibility. So that's quite easy to turn off. But similarly, it's also very easy to turn back on. And I actually think that, that's something that's also going to help the rebound of out-of-home as people get out of their houses and advertising in general, turn those media taps back on.

And you mentioned trends in general coming back and this sounds traffic is coming back. And I think even we heard from Sean yesterday at Lamar, saying that I think the stat was that New York City at one point was down 80% traffic and now it's down 60%. So even in the heart of the crisis, you're seeing signs of recovery, which is in agreement with what you're saying. I guess my question is, even with transportation coming back and cities becoming a bit more active, do -- when you look at your transit business, do the advertisers -- are they -- do they recognize that and therefore, further embrace the media? Or do they sort of want to wait to make sure it really is sustainable before they come back in?

So I think there's 2 pieces of that. Yes, the first is that, yes, audiences are coming back across the country. And yes, even in markets such as New York that have been particularly impacted by this crisis, we're seeing people back out in the streets and that's great. We do think that the growth of audience in transit will be probably a slower ramp back up to normal than generally out on the streets. If we look at our transit business, about 1/3 of our revenues are driven from things like bus shelters and buses that actually just enjoy the normal increase in audience, I mean, that our billboards would. But more specifically, within in carriage transit, we think that, that could take a little while to pick up. But as we sort of look at the advertisers that we've enjoyed and will continue to enjoy, for example, on the MTA or in Boston, on The T or indeed in Lamar, in Washington. Those audiences have always been very highly demanded. They're -- It's a highly priced audience. And it was never bought particularly on a CPM basis. There weren't many buyer discussions we had that were "oh, well look, maybe I'll go above ground if the CPMs don't work for me on the subway." Isn't like that, actually, it's a very discrete audience that advertisers were seeking to engage. And from that point of view, we actually -- we believe that even if audiences take a little bit more time to recover, what we might see is something as we're seeing in the TV market right now, where you've got audience decline. And actually, all that's doing is leading to media inflation -- so TV inflation. So we actually think that potentially out of this that we'll still see enough demand that we can see that sort of inflation in our subway properties.

Let's start maybe dissect the ad market a little bit, starting with the billboard business. Are you seeing any categories that are particularly outperforming versus underperforming in this environment? Maybe you can walk us through that? And any geographies in terms of where you're seeing your strength versus your weakness?

So in terms of geography. We -- at the moment, it's a tail of the coast, I would say. And in particular, the Northeast has been more difficult. And then we have very big billboard business in LA that's very entertainment displays and the number of sort of entertainment dollars have gone away. So it's really been the coast that have been geographically the most difficult. And in some of the smaller markets, where, as I said earlier, national has been more impacted than local. So in some of our smaller markets, where we have a predominance of local, actually, they're being very resilient. If we look back to those local markets in Q1, for example, I mean, we grew by around 4% in total. But those local markets were up 8% in Q1. So they were performing terrifically. They're not having the same sort of step back as the Northeast and California. So in terms of categories, right now, we're starting to have some good discussions about the bounce back. So we're having some good discussions with the beer category, good discussions with tech, good discussions with the insurance category also. So there's a number of advertisers out there that we feel just waiting to sort of -- well, about to lay down dollars. And also, we've had entire sort of sectors switched off. So the movie category as theaters open back up, the theater category with Broadway, for example, right now is just not happening. So those categories just aren't happening. But we believe as soon as they open back up, those dollars will come rushing back in.

I guess just on that point -- one side point, when you look at Broadway, which I think is supposed to open in September now, given that there will be limited capacity in the theaters and probably pent-up demand from folks that haven't been going for a while. Do you think there'll be sort of the need to advertise, given the demand might already be there and there's a limited supply in terms of seats? Or I guess, do you think the advertising will follow?

Yes. Well, I think it will follow. I think there's always brands -- whether or not it's a movie brand, if you like, or whether or not it's the brand of a particular show, I think there will always be the desire to differentiate and to put it out there in front. So yes, I do think that there's no reason why those ad dollars shouldn't come straight back.

And maybe -- and just looking at the second half of the year, I guess, if you can remind us how much visibility you have, how much of your business is so far booked in for Q3, Q4? And as Sean mentioned yesterday, there's a big difference between local and national. I'm curious if you see the same as you found some of the local advertisers were not canceling ads but more suspending them because they had the flexibility to do so. But the national ads, which went through the agencies and have more of a black and white contract, were more being canceled. And I'm curious if you saw that nuance as well?

I saw -- I guess we saw all of the above, Alexia. We have -- we had our team sort of 400 salespeople, which 350 are working towards local and 50 towards national, all working really hard to make the smartest decisions with our advertisers. Now in some cases, that was a pause. In other cases, it was a shift. In other times, it was an outright cancellation. Whereby quite reasonably, we as the media owner, would work with the advertiser sort of in their interest. But eventually, that will be in our mutual interest because we're working with them as partners. And as we've said before, 94% of our top 100 advertisers have been with us for the last 3 years. And we want it to remain that way. So we work with the agencies and advertisers very, very closely. So right now, as we look forward in our business, we would expect to have in the region of 50% to 60% of revenues already booked for Q3 and something like 40% for Q4. So as we look forward now, we've got enough visibility to be able to really make some key assumptions. So we said on our call last week. We thought it was important to give the clearest guidance we possibly could on that call, which is why we were probably more specific than a number of other reporting companies have been over the last couple of weeks. But we said then that we see a definite trough in July and an improving trend thereafter. The interesting thing about that is that the July trough has been there since this first kind of started happening. Since the middle of March, if you like. And it hasn't shifted, and that's a really good news. So on the assumption that states keep opening up, that I get out of my bedroom in the next couple of weeks, and we will start getting back into the city, I absolutely think that will hold. And when we look forward into Q3 and Q4, we're seeing a definite step-up in pacings that we'd hopefully be enjoying as we get through this process.

Just to clarify that trough in July, which you did mention on your earnings call, that's for both transit and for the billboard business or across the company?

Yes, that is both. The shape of the curve actually is although at different levels, the shape is somewhat similar for billboard and transit.

Okay. You've seen -- you saw a real benefit from tech and entertainment and financial services, I believe, coming into this crisis, particularly technology. Did you -- do you think that momentum in terms of getting a larger portion of those advertising dollars will continue post crisis?

Yes. I think there's absolutely no reason why it shouldn't. I mean, when you look at some of the tech brands, as you know, the average allocation of media dollars for the top 100 advertisers to out-of-home is about 2%. But then you had some of the media and tech brands, the Netflix of this world allocating over 10% of their dollars to out-of-home. And the reason that -- all of the reasons that advertisers choose out-of-home in terms of -- the fact that it's a growing audience. The fact that their message is ubiquitous, the fact that they can get down to sort of micro location level. The fact that those -- that you can't turn out-of-home off. All of the reasons of -- that were there before will absolutely, we believe, be there in the future. And the increasing -- the connectivity between out-of-home and digital continues to increase. We've now done something like 5,000 campaigns across the country with a mobile overlay to our out-of-home assets. This is the mobile consumer, which is what we now have and out-of-home, go together extremely well.

So the digital -- digital in general, I think, has been a big part of your growth story into this crisis. Is that a -- has that hurt you a bit more during the crisis, the percentage of clients that have used the digital board just because they can -- I believe the contract lengths are a little bit shorter, so they probably have more flexibility just to spend or cancel? Or is it still a relatively stronger part of your business because the message is changing so much?

Well, the great thing about digital is it gives us that flexibility. So as messages change, we can keep up with that change. And we've certainly done that for a huge number of advertisers. And also, we work together with local communities to get community messaging out, which I think has really kept out-of-home very relevant on a local basis. So with that -- with the ability to take later money, it has brought money into the medium and with the ability to chunk up space into smaller pieces so that it becomes more affordable at a local level, it also generated for us a much broader advertising base. Now yes, people can get out of it quicker, but similarly, they can get straight back into it as well. So I actually believe that digital will be leading the way for the medium out of the -- sort of the issues that we're seeing over these few weeks.

And how much more of a runway do you think we have with digital? Do you think there's still a lot more demand and therefore, a lot more opportunity to continue to convert some of your boards to digital?

So in the first quarter, our digital revenues grew from 17% of our total revenues in Q1 last year to 23% of our revenues in Q1 this year, which is obviously a massive, massive, massive growth. Now if we think 23%, we're a little bit behind the U.S. in total, which is sort of in the high 20s. If you then compare that to other markets such as the U.K., where digital is sort of between 55% and 60%, I think that gives you some idea that there's significant room and further runway for growth in U.S. digital. I'm not certain that we get to 50% or 60% because structurally, there's a different -- the U.S. market is different from Europe. We don't have quite as much indoor out-of-home. We don't have quite as much transit out-of-home. We don't have quite as much pedestrian facing out-of-home, which is sort of structural differences that may hold digital back a bit. But I wouldn't be surprised at all if we're between 40% and 50% within the next 3 to 5 years.

Okay. I've got a ton more questions and obviously I want to get to the transit business as well, but I did want to ask the participants that if they do have questions to either obviously put it in the Q&A or they can also write it into the chat, and I can read it out to Jeremy. So go ahead and put in those questions if you have them. If not, I will move on and just continue away. Just -- I guess, before we jump into transit on the programmatic buying. Do you see automated programmatic buying becoming larger for Outfront in the future?

Yes. I absolutely do. I think there's a couple of things. There's one is -- and maybe to just first separating out the 2. One is automation and then the other is programmatic. In terms of automation, as you know, we're working on our own platform, which is a sort of end-to-end platform with a user interface accessing our media by audience and then accessing availability and pricing and then being able to complete that purchase in an automated way. So that's one piece of it. The other piece of it is some of our inventory sitting on other platforms and us making that available to be brought -- preferred to be bought in a programmatic way. And it -- also within programmatic, it doesn't necessarily imply a real-time bidding aspect to it. We can always put our own gatepost around pricing within that. But I do see that, that programmatic piece of out-of-home media will certainly be a growth area for the medium over the next sort of -- next few years. I think, and I hope, it will be really quite a nice tailwind because I think as the agencies consider digital and programmatic audiences to be able to include out-of-home within that, as they compare different media options, I actually think it will be a nice extra little growth opportunity for out-of-home.

Great. I would love it if we move to transit for a bit. I don't want to -- it's an important part of your business, I don't want to run out of time before that. Maybe, Jeremy, if you could sort of give us an update on what you have been seeing in your transit business. And we know it's been hit very, very hard by the COVID crisis. But as -- like you mentioned earlier, as transportation picks up a bit and activity picks up again, we should see some easing there. I think you've done a great job in terms of negotiating your [indiscernible] and sort of not having to pay those guarantees at this point. I guess, maybe just a few minutes on how much -- how you're doing your transit business?

Yes, absolutely. So and once again, we have to remember that transit has been a terrific growth story for us for the last couple of years, both in terms of, let's say, the audiences that it can deliver and the opportunity for digitization that we've enjoyed. So we have numerous transit contracts across the U.S., we probably have 20 significant ones. And the most important within those -- within that 20 would be Boston, New York, Washington, Atlanta, Miami, Los Angeles and San Francisco. So they're the sort of -- they're the ones that make up the majority of the revenue. And the biggest of those is obviously the MTA. So we've been -- as transit authorities have been essentially unable to provide -- I mean, an audience for us to be able to provide advertising dollars, we've obviously had quite reasonable conversations with all of those about how we reflect that in the financial arrangements between us. And as you heard from the results call, we've been working in partnership with those transit authorities, it's quite reasonably extinguished some minimum guarantees that were in place. So effectively now, it's essentially a revenue share arrangement with most of those transit authorities that makes it a variable cost rather than a fixed cost, which is what max become. We also mentioned that with regards to the MTA, in agreement with the MTAs that we didn't pay the minimum guarantee in April. There's a number of different moving parts with the MTA because it's a complex contract. It obviously involves investments that we're making on their behalf, if you like, over time and various other pieces. So we're working with them to formalize a definitive agreement with them over the coming days and weeks to memorialize a new arrangement. And we'll keep talking to our transit authorities and work with them in the most flexible way. We've been a terrific partner for them. We've been growing their revenue base. Every dollar that we make, the lion's share of it goes to these transit authorities. We work together well, and we'll continue to work together with them as partners to get to -- as we get through this.

Do you see any possibility of a shift to -- I think you mentioned bus shelters and buses were about 1/3, I think you said of your transit business. Do you see potentially a shift to more demand maybe above ground in the intermediate term as maybe subways are a little slower to get back? Or is that a misinterpretation?

Well, I mean, I guess there's a couple of things there. One, above ground, we have an amazing billboard presence as well. So anything that's above ground, we've got assets in all of the top 25 DMAs for any audience shift there. And in addition to that, yes, we have buses and bus shelters. And for example, in New York, urban panels, the digital panels. So as you walk down into a subway, we have all of those that are on the streets. I think that the -- as you look at the subway audience, one thing you have there, and particularly if you think about being on the subway and the messaging that you're interacting with, you have an amount of time to really consumer a message. It's different than just walking by a poster on the street. You can take on, as I say, much more information. And I think there will continue to be demand for that type of advertising. You look at some of the brands that pretty much built their business on the subway, brands like Seamless and Casper, for example, that were just kind of always on in the subway. And I don't see that going away fast at all. Sure, it may take a little bit longer for audiences to build. But New York as a city won't work as a city unless people use public transit. It just won't, there isn't the parking. And I mean, it's just -- it won't work. And for a huge number of people, public transit is the option. And I can tell you that personally speaking, I'm going to be going as soon as I can. I'll be down to Granite Station and hopping on Metro-North and getting into Grand Central. And I must say I'm really looking forward to it.

And we have a few questions that came in. So I want to jump into those. One, in regards to the digital expansion, are there -- I guess, where are the technological components of the digital billboards made? For example, are they coming from Asia? And do you have multiple suppliers? I guess, any -- I think the gut of the question is getting at, is there any potentially supply chain issues?

Yes. So it's interesting. And while talking about Asia, interestingly over the last few weeks, looking at their transit numbers, they're now climbing back up considerably. And interesting also that in the U.K., they opened up today. And the first news article I read was that there was too many people on the tube in London, we call them the subway. So it's not like -- these audiences are going to come back, and we believe that they're going to come right back and more quickly than some people may expect right now. But just to go back to the supply chain questions. We actually -- we produce -- our small screens that are going into the transit are produced in Mainland China, just close by. That factory shut for about 6 weeks, but is now up and running again. For the most part, we've poised deployment of transit screens anyway. So that's neither here nor there right now, but they're in full production mode, so we can call off screens as we desire. And in digital billboards, similarly, we actually got well ahead of that. We had a number of boards on the high seas, if you like, as we went into this. And their factory remains open. So short answer, no supply chain issues, and we also have digital billboard screen stock. So as soon as we start feeling that we're just coming out the other side, and we want some incremental inventory. We've got the stock, we've got the permits, and we can go and build those boards.

And then a question on M&A, I guess, in terms of M&A, what are your thoughts on consolidation and the industry as a whole? And then more specifically, with the industry having been somewhat consolidated and clearly very well professionally run, is there -- how is -- how are assets attractive at this point to buy them in to your portfolio?

So yes, the industry is reasonably consolidated. So right now, you've got best part of 70% of the industry between Outfront, Lamar, Clear Channel and JCDecaux. So that -- there's a 30% tail there. It's fair to say that given some of the revenue step backs in certain markets, there may be opportunities within that tail to acquire assets. We remain focused on the markets that we currently -- or we have been focused on, which is top 25 DMAs. That's -- those have driven above-industry growth for us over the last few years. We believe they will continue to in the future. So where assets become available in those sort of top 25 DMAs, we will be interested in looking and taking those assets on, where we can leverage our national sales force, where we can leverage our operational infrastructure within those markets. So yes, we'll keep looking there. As to broader industry consolidation, maybe the events of the last few weeks will drive quicker sort of industry consolidation in all sorts of different sectors, and we'll watch that with interest.

All right. Well, I keep getting warning that we're out of time here. Thank you so much, Jeremy, for joining us today. We really appreciate it, and thank you, everybody, for listening.

Thanks very much Alexia.