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

All right. Thank you very much. Good morning, everybody. Welcome to the Oppenheimer Tech Conference. With me today is Outfront Media. Presenting from the company is Matt Siegel. We're going to have a fireside chat. I'll ask a few questions, and then I'll open it up to the audience. [Operator Instructions] For right now, I'm going to start off with a fireside chat. And I want to say, thank you, Matt, the company's CFO, Matt Siegel, for being a participant here. We really are thankful you're here. Thank you.

Thanks for having me, even virtually.

Yes. So I guess my question, what I'd like to start off with is, maybe tell us how you're recovering from the pandemic? You just reported numbers the other day, much better than expectations. What have you been doing? What have you been really seeing as far as the recovery and how you're operating in this recovery?

Sure. So first, we're doing well. Our employees are generally good. Everyone is in a good place. We saw some unique challenges early. We are the out-of-home industry, and when people were told not to go out of their homes, that's a little bit of a challenge. So we reacted pretty quickly, both on the cost side and the capital side. We raised some capital, we refortified our balance sheet. We took some costs out of the business. We negotiated with a lot of our franchise partners to change our cost structure at least for 2020, see as we go. But as we come through it, we are seeing improvement. We are seeing renewed traffic. And the audience, I'm sure, is going out now more than they were back in March and April. Our billboard business, the revenue is picking up, which we've seen. Our offices, let's say, 2/3 or 3 quarters of our offices are now open again. We recently, about a month ago, opened our New York City offices. Jeremy Male, our CEO, and a number of our sales management are in there 2, 3 times a week. I think just kind of getting back to some semblance of normalcy. It's funny as far as having a good quarter, we guided investors that we would be down 50%, it's 5-0. So that was tricky. You going through those numbers, it's a little wider on precision, you're not looking at 50.1% or 50% or 49.8%, it's 50-plus or minus. We came in very close to that, so kudos to our financial planning and accounting and finance team for putting together and getting a good visibility into the quarter. And I think we feel like we know where we are, it's not where we'd like to be but we're directionally in a good place.

Okay. Great. That's very informative. Maybe you could also tell us about what you're seeing on the audience trend side. How has that been versus February or pre-pandemic, both on billboards and also on transit side. If you could maybe break that down for us.

Sure. It's a very important split. So on billboards, we have proprietary metrics. We see industry metrics. We see Google and Apple and other things. [indiscernible] driving audiences, working and outside audiences are mostly recovered. On a national basis, if you look across the country, traffic, which we measure by cell phone data and some other data is pretty much back to where it was pre-pandemic. There are certain pockets that are higher. Chicago, for example, is over 100% of where it was in early March that would be a measure of -- it's nice for in Chicago in August than it is in February given when people were out and about. But people are still driving to work in February. So I think that's still somewhat comparable recovery. New York is up into the low 80% range, 83%, 84% to where it was in February, and New York was a very early market to lock down. Los Angeles is over 90% to where it was. So we think the issue in billboard of stay at home and lack of audience is pretty much behind us. Certainly, Midtown Manhattan isn't jumping. I don't think New York City business is back to where it was or where it will be, but generally in the broader markets on billboard, people are out and back. So we were less concerned with that. On transit, a little bit of a different story. I could sit here and tell you the New York MTA router ship has tripled. Wow, that's fantastic. Obviously, it was down at very low levels, tripling. It's somewhere over 1 million passengers on a daily basis, isn't where it was. At the peak before pre-pandemic, it was 5.5 million to 6 million people a day. Now it's 1.25 million, 1.5 million people a day. Directionally good. So people are going back on and it's probably not as extreme as some other transits. But the mass transportation in the country is down, and the audience hasn't really returned yet. They have been studied. We've seen in Asia and Europe that it takes lower for people to go back on. And I think even on the medical side, I'm no expert, but I think there have been studies that the subways, trains and other mass transportation didn't cause or spread pandemic. It's really more about where people are congregating. So again, directionally, we think good. But on transit, audience isn't back yet, and that's kind of causing, as we give guidance for as we look forward in our business, a bit of a split. Billboards recovering quicker, not recovered, but recovering. Transit is still slow to get back to where we like it to be.

Okay. That's actually really helpful. Also, when you look at the transit side of it, I think you've been pretty aggressive in, I don't know, you call it renegotiations, but at least discussions with the transit authorities. Maybe walk us through how those discussions have been going? What you've covered and what you've been able to, call it, rearrange?

Yes. No. It's a good observation. I wouldn't say renegotiation, probably more of a negotiation or discussion. We have about 35 different transit franchise agreements, some big, some small. We went to all of them, and kudos to my transit team who got on this early. Again, we recognized what this might be. We sat down virtually in most cases, couple in person early, with the transit franchises and hey, there's an issue here. The audience that we expect to be on our systems isn't there. You're not providing the audience. It makes it hard for us to provide the revenue that subject to fixed payments or revenue share. So therefore, we have an issue. Trying to frame it, not so much of our issue, but it's a shared issue. And I think they all recognize that. And on a one-by-one basis, because each agreement is very much bespoke. There's no one agreement that we say this is the Outfront transit agreement and this is which we're going to use. Each one is different. And one could say that's what keeps it interesting. But every municipality has different needs or different wants, and we have different interest in different markets. So we have to go one by one. We say hand to hand, not necessarily combat, but this is really more of a partnership issue and say, hey, can we figure out a way to turn the fixed payments, which would cause us liquidity problems, liquidity concerns and have us paying a fixed price for something that's not being provided to us in return and change it to a revenue share. So we share the pain, we share the benefit. And first, we went, okay, let's do it for the second quarter, because I don't think anyone knew what this thing means and how long people are going to be at home, not working, not going out. Many of them we've turned into a full year 2020 look. And the MTA is our largest one. In particular, we increased the revenue share from 55% to 65% as part of that rebalancing, pay them a higher percentage of hopefully growing revenue amount and then we're able to generally defer the fixed MAG amount into later years. In some other franchises, we were able to have the fixed payments waived entirely, recognizing that there's no audience, and we shouldn't be paying for something that we're not getting. So I think we've been very successful. We've preserved a lot of liquidity. We've worked as partners, and we're excited for the revenue to pick up after the audience picks up and get back to the rev share that we like.

Okay. And then also, if we could turn to the other areas of expenses, where have you seen kind of the greatest gains in cost reduction? What are the other areas that you're maybe focusing on going forward?

The biggest one, really, in the second quarter, we guided people that we would take $100 million out of our expense base. We ended up taking $105 million, which was nice that we could do that. No reason for celebration. A lot of that was a decline in revenue, drove lower activity. And therefore, lower expenses. So I'd have to have my expenses in the third quarter go up from where the second quarter was. And we'll get to that in a bit, I'm sure. The biggest expense savings was transit franchise expenses. So even before our negotiations changed the shape of the payments, transit is primarily a revenue share business. So when revenue goes down, the expenses go down. That reduced cost by about $60 million, including the waiving of the MAG payments. So that was a big number. We made a number of headcount moves, whether it's salary reduction, permanent reduction of force or we furloughed hundreds of people based on lower activity. So had a fair amount of savings. We've talked to all our landlord -- not all, we have 17,000 leases -- or say, 20,000 leases, 17,000 landlords, it was a lot of work to do to talk to the landlords. We've reduced the costs in our real estate some by, again, the revenue share, some of our high-profile billboards or revenue share in Times Square and some others. So when revenue came down, those costs went down. But we've also mitigated the real estate costs. A lot of that will show up in AFS, not necessarily in OIBDA because of the relatively new lease accounting standard, the payments are amortized over the life of the lease, so then some cost savings there. And then also, just the kind of rounding up the usual suspects, no travel. Contractors, consultants, discretionary spend, conferences, we stopped all that. The good news, there's nowhere to go and no one wants anyone to visit companies. And so that wasn't a hard question on the sales force for now. So we've been successful, and we think over the rest of the year, we'll have continued success in a reduced cost base.

All right. That's actually good color there. If we could maybe switch to the digital strategy, I think pre-pandemic, that was a very big driver of growth. As far as what you're seeing there, maybe give us a description of what you're doing on the digital side as far as what are the returns on the digital business, what percent of revenues that is, the profitability of it? And then also in this new world or crazy world, what are you doing as far as deployments?

Okay. So first, I appreciate the split between pre-pandemic and during and post. So pre-pandemic, big digital push, mutually beneficial for the publisher, the billboard company, the out-of-home company and for the customer. We've been converting as many digital signs -- existing static signs into digital as we can. We've increased our pace from, say, about 100 new signs a year in 2017, '18 to whereas to close to 200. And so we get back to 200 again in 2020. And that's a combination of conversions, new development and acquisitions. So really pushing on adding more digital inventory. At the end of last year, we had about 3% of our inventory -- our faces were digitized. That spend on billboard. And a 21% of our revenue was digital. So obviously, the digital drives a lot of revenue. We did a lot of our better screens, better signs earlier, so it has a great return. Now we're in the very good return category still. So generally, we get a 4x lift in revenue by changing from static to digital and our cost go up 2x to 4x lift in revenue as we now can show 8 flips, whereas before we only had effectively 1 flip. It didn't flip. It was just static. So we can divide it into 8s and people pay more than 1/8 for it. So instead of paying $1,000, they'll pay $500 on a flip and still get their visibility, they get a lower price point, which is good for them and we get to sell it multiple times over. That's good. The costs go up because generally, we want to extend the lease when we do these conversions. We don't want to spend any capital on a 2-year lease. So we'd like to push it back out to 8, 10, 12 years. And we're paying for more electricity. There's more actions, not just lights at night, it's digital and flipping all day long. So that's a good economic trade, happy to do it. And one of the things we did in the last couple of years is it's why we're pushing -- if some digitization is good, more is better. As long as we're not eating our own lunch. As long as I'm not putting digital on top of digital and getting things every mile that's -- make sure I space that. We have a national footprint, so I can put these 200 new spaces across the country where we think it's wise. So that's been very successful for us. On the transit side, also pre-pandemic, whether you're in New York, Boston, Washington D.C., coming in San Francisco and others, we've been deploying digital screens, better communication for the franchise, a better look for the customer. The consumer has a better engagement. And when people aren't driving if you're underground, you can now show video. So we can show a little short movie clip as you're walking out of the Grand Central Station tunnel. And you're saying, "Oh, what's that, that's Godzilla, that's much more engaging than a static sign of a monster. We can show travel. You show a boat cruising. You can show someone skiing down a mountain. So the possibilities are very attractive to the customers, and we were getting great feedback in 2019, our transit business revenue grew by 20%. A lot of it's driven by this digitalization. So really pushing digital. First quarter, similar story. I think we did 45 new digital billboards in the quarter and continued our deployment in a lot of the transit markets. As the pandemic hit and we stopped working in the office, we pulled all of our deployment people from transit. It was -- at the time, it was deemed not safe. No one knew where this was spreading, and we didn't want to have our employees, our contractors working when they're uncertain when they shouldn't necessarily be. So that's -- we paused that. And on the billboard side, we stopped building there primarily to preserve our liquidity. Again, the uncertainty we didn't know, and we didn't want to have people flying around the country deploying things. We put our pipeline on hold. Now as part of our -- that we think the pandemic is over, that we feel much better about our balance sheet and our liquidity. So we have gone back into digital conversion mode. We've put in 4, 5 new signs at the end of the second quarter, early third quarter. We restarted our MTA deployment in conjunction with the MTA. So we're back on our offense and reengaging and reinstalling more and growing our digital services.

Okay. Good. That sounds like a very profitable and good ROI. You have some other initiatives. Maybe we haven't really heard about recently because of pandemic, but maybe walk us through some of the audience metering that you're able to do now or maybe some agreements you have with some of the wireless carriers to kind of find the attribution and going about selling it based on attribution, which is, I guess, something you never really had in the past. And now you have the systems or at least you're building out the systems. Just bring us up the date on what's going on there.

So we, for a number of years, have been collating our data from a variety of data services. Primary one, as you pointed out, is a cell phone data and that's anonymized aggregated data. So we'd like to know what type of person, what demographic, what marketing category is working or driving by our inventory, not necessarily who. I don't want to know, Ian, that Ian Zaffino was walking by, I want to know where your family shops and what you do -- what you're doing with no names. So we've been using that data recently, especially in the pandemic, which probably it's peak of value for us, demonstrating to our customers that there are people driving by. Even when there's orders to stay home, there are people. There's audience going by these billboards. People are seeing your -- the customer signs. So that was a great help to preserve some revenue. In general, we think, some data solution and the data world is evolving right before our eyes and everyone's eyes and changing views on privacy and what you can share and what people are going to share with their website. So we'll take the lead from the industry and where that's going. We've been using that and the industry is using various things, geopath is the industry currency. So ours is a little bit different, but we use both. The industry currency and our proprietary data to help drive traffic and demonstrate to customers the efficiency, the benefit of using various billboards, where it used to be a decade ago, multi decades ago, people knew. They're going to say, hey, 52nd and 7 is a great spot. This is what you can see there. It was more about experience and by touch and feel. Now there's a lot more data going into it. Same billboard, maybe the audience data is correct on the assumption. But more often than not, we can drill down and get more specific and demonstrate the desirous nature of the audience that the customers are looking to reach.

Okay. Can we now turn to maybe the balance sheet and liquidity. What have you been doing to preserve liquidity, to increase liquidity? And where do you stand now?

Let me go backwards. We stand in a great place. We think coming out of this, we will be among the tallest short people and feel very good about the steps we've taken. So we -- going back to the start the pandemic, we recognized right away, tons of uncertainty. We didn't know if we could negotiate some of our fixed payments into revenue share. We didn't know what our lease portfolio was going to be. And we didn't know how our collections were going to be. So right away, we reached out and within a number of weeks, sold a convertible preferred 2 large media investors to shore up our balance sheet. We took in gross $400 million of new preferred convertible security with Providence Equity and Ares Management. Two great partners, we're really happy to have them. We follow that up with a high-yield bond offering, 5-year non-call 2 to maximize flexibility in case things do change. We had drawn down our revolving credit facility of $500 million with the new cash. At the end of the quarter, we repaid that. So we still have access to our full revolver and a little over $600 million of cash on the balance sheet. So we feel it's over $1 billion of cash and committed liquidity. We really feel we're in great share. I mentioned collections. Pleasantly surprised by the success of our collections team. Kudos to them. Very tricky when your smaller customers aren't there or some broadway closes down. Studios stop their releases. But still, I think we've overperformed what our expectations or maybe fears were on the collection side. So our balance sheet is really in very good shape and we feel good. When I mentioned before returning to offense, that's one of the things that have kind of enabled us to think about what can we be doing here? What we would be doing differently? So we're trying to be thoughtful in the post-pandemic or co -- whatever era we're in now, what we can do offensively to prepare us better for the future. So we feel we're in good shape.

Okay. And then can you also discuss the dividend as far as your requirements, the minimum requirements? And how much flexibility you have in that payment?

Thank you for bringing that up. I neglected to mention, we paused our dividend. We didn't make a payment in the second quarter. We did make a cash payment of $0.38 a share in the first quarter. And I'd say pause rather than stopped because we are a REIT. We like being a REIT. We think it gives us an attractive cost of capital, the REIT rules where we need to pay out 90% of net taxable -- net REIT taxable income. No surprise, this will be a down year. So our net taxable income [ will be lower ] without getting new guidance or anything. But I'm surprised that our taxable income will be lower this year than past years. So we can pause and wait to see what our number is going to be, what our requirement is going to be at the end of the year. The REIT requirement is not a quarterly requirement. It's a full year requirement. You can make a true-up payment. You can make a payment early January to clean up the year. We think pausing our dividend is better for all our stakeholders, including our equity holders. And that's the appropriate time when we have a better visibility on what our taxable income is going to be, we'll pick that back up again.

Okay. And just going a little bit deeper into the capital structure and cash flow. Right now, I guess, you're kind of in liquidity preservation mode. But I would imagine some of the smaller guys out there are struggling a lot more. Have you seen multiples for M&A come down? Have you seen any small place willing to sell? Will this accelerate consolidation in the industry? Just a little color there.

I expect it would consolidate -- it would accelerate consolidation. The industry has a long tail of nonaffiliated entities, whether they're regional or family offices or just solo developers. There 3 main [indiscernible] channel have about 65% of the revenue of the industry. There's a couple of other larger players and then there's a bunch of regionals. So I think there's opportunity for consolidation and I do think some financial distress would accelerate that. We haven't seen any comparable assets change hands yet. I think people are waiting. We've made some outgoing calls. I would say we're probably past our liquidity preservation. That we've firmed up our balance sheet. So we think we're in a position -- we can do an attractive acquisition. I'd like to think the multiple I would pay today is lower than the multiple I would pay -- I would have paid in January. And once there's a motivated seller and the multiple they would accept today would be lower than what they would have insisted on in January. I don't think the bid-ask has matched up just yet. We've made a few outgoing phonecalls to some regional players that we know and in areas we like to get bigger in, having conversation, but nothing to talk about. Nothing being discussed just yet. We did reengage with someone we had to walk away from in March and we didn't have a contractual commitment. Attractive portfolio of assets. We told them we can't close again, liquidity preservation and uncertainty. Once we shore up our balance sheet, they reached out and we're discussing a larger deal right now. Same neighborhood, same market, but more signs. And we think, for us, a more attractive multiple. But I'm sure for the seller, a bigger opportunity to enhance their liquidity. So I think there'll be opportunities just here in August, nothing big just yet.

Okay. If we could just turn back to the business a little bit. Can you give us an idea of what categories are doing the best, which ones are struggling the most? And if you could maybe give us a discussion of how urban versus nonurban is doing as well?

Sure. We're primarily a large city urban provider. That's our philosophy. That's our portfolio. It's -- even if it wasn't our philosophy, it would be hard to change our portfolio in just a quarter. We have a lot of the large transit franchises and we matched that up with one of the large cities. So we have MTA and we're big in New York City. We have MBTA. We're good sized in Boston, but we'd like to get bigger. So we see our larger markets where -- especially in our East Coast, early lockdown, heavy transit markets, kind of that Amtrak Northeast quarter, where we're hurt the worst for us and probably recovering a little slower than the Midwestern markets or the Northwest. We kind of combined as the 2 New York is combined, the Northwest part of the country into 1 market, which we're not very big there, but Chicago, Kansas City, Colorado, Denver and surroundings, middle of California, Fresno, doing better than New York, Boston, Washington. And that's not a surprise to us, shouldn't be a surprise to people who know our portfolio. As far as categories, probably when people paused, I think movies stopped, new network releases, all the fall schedules canceled, broadway canceled. So really enter -- the entertainment category broadly. So we break it up into a bunch of categories, entertainment, TV and some others. About 20% of our business all went very close to 0. So that was a big hit and that was the famine of our cancellations. That was a new phenomenon for us. We've never seen -- we never really tracked cancellations before because it didn't happen. And suddenly, it happened in the end of first quarter, early second quarter and continued throughout the second quarter. It's one of the things we feel bad about our business. Most of this can be either cleaned out, cleared out or really slowed down to a much slower pace now. So we feel good about new business because it is new business. The positive categories, certainly, health care, anything related to health care, whether it's pharma or hospitals and some others, professional services, which is generally local doctors, lawyers and some others. And then anything that really didn't get down -- travel hurt badly and some others. And these are long-term customers. We waived a lot of our cancellation terms. Usually, you have -- you can't cancel inside 60 days. We expect -- we want to do business with all the studios and all the networks and all the travel companies when they're back and healthy and we want to have good relationships with them. We thought that was prudent. But we don't think the movies are really a lost business. It's more of a delayed business. These movies are in the can. They're making movies. They're going to bring them out. When they bring them out, they're going to come to New York and L.A. and take out large out-of-home advertising to let people know. When they leave the theaters and they go into streaming, we expect them to take out new ads to let people know that now they're on, well, your favorite streaming service, you go find that. So we feel we're in a good place with that business, just we're not seeing it. We didn't see it in the second quarter, and we don't think we're going to see it in the third quarter as well.

Okay. Can -- I guess dovetailing off of that, can you maybe walk us through what your visibility looks like now maybe into August, September? And what does that visibility look like versus, let's just say, this time last year?

My [indiscernible].

Obviously.

People shouldn't expect because we guided down 50%. We came in down 49%. We have -- we fixed the visibility issue. It's cloudy. We do think we have a little more now than we had 3 months ago because we are seeing the billboard business firm up and the cancellations slowdown. So when I have new business coming on, I see it. And I can assume it's going to stay. The optionality is as blatant. Last year, at this time, we were guiding, whether it's mid-single digit, high single digits, I'm distinguishing between up 5% or 7% or 8%, and there was a lot of debate and a lot of analysis. For this third quarter, we guarded down 35% to 40%. And frankly, we probably give more precision than most. Some others pulled guidance or don't give guidance, we think it's important to not exactly tell people where we're going, but tell people what we think we know. So it's still murky, not nearly as precise as we like or as we've been in the past. But we think we have a good view of where it is in broader ranges.

Okay. And then just going back to the original -- not the original, but the question before this about movies, does -- with theaters now obviously, very lowly occupied or small occupancies of the theaters. Does that hurt you? Does direct to video hurt you? Or is it really doesn't matter? Give us some color there.

We don't think it hurts. It's premature to declare hurt or victory. My theory is studios are going to advertise the movie. A huge part of making a movie is your marketing budget and out-of-home over indexes new movies, especially our markets, New York and L.A. are where you open these movies. So I think even if you're opening a movie for a short run or a small occupied theater, they're still going to advertise that. Then when it shifts to take your streaming service, I'm not here to advertise any of those, but they're all customers. But when you want to bring it to that streaming service, you're going to readvertise and let people know or your advertisement is going to stay up for a second cycle. So we think it creates a second wave of advertising communication. So maybe it's better for us, probably premature to see where that industry is going.

Okay. And I don't think I asked you this yet, but can you give us a breakout of what you're seeing on the local versus the national side as far as right now? And then how you think it plays out in a recovery?

Sure. So we lost a big decline in both, almost equal declines in the second quarter on a percentage basis. National, a little more. But neither one was doing particularly well. We expect national to come back a little quicker based on our experience from 2008 to 2010. National kind of reacts quicker with, okay, let's get back in the game. They're probably bigger users of some of our digital platforms. So you can get a campaign up and out on digital quicker. It's probably also where our digital inventory declined more than our static -- on a percentage basis on our static inventory, which can pull those advertisements quicker. So we think the things that decline quicker can also come back quicker. But both still challenged.

Okay. Okay. And also, you mentioned the Great Recession, are there any kind of parallels that you could draw between today and the Great Recession? And how the business should fare going forward?

So a couple, first, the second quarter, not really the Great Recession was a recession, people knew what caused it and there was more knowledge. I mean it's -- a recession does strange things to populations. In this case, there was no real precedent for how to handle a pandemic when people can go out [indiscernible] when people after a few months were able to go out of their homes, they came out in the sort of recession. So we had a work stoppage now coming into recession. So the recession we know in 2008 to '10, it took probably 3 or 4 years to recover to where our revenue was pre-recession. It was a bit of a grind if you remember, you can see the hair I still have is mostly gray my wife tells me. So I remember back that far. There was a lot of disagreement in Congress, a lot of the fiscal stimulus took months and quarters to address. So there wasn't a lot of money coming into the system. So the recovery took a little longer, certainly stock market and economic recovery. This seems no political commentary that there has been a lot of fiscal stimulus early. I'm not sure what's happening right now, but it's early. So you can see the economy when there is -- a health issue is addressed or people can go back to work or can go back to whatever their new normal life is. The recession will run its course. We think both with our digital inventory and a lot of money in the system, we're in a better place than we were back then.

Okay. Great. Matt, I think we're out of time now. Yes. It's already 9:30. So we appreciate this. This is very helpful. Thanks for all the color. And I'll let you guys get to your one-on-ones now.

Ian, my pleasure. Thanks for having me, we'll speak soon.

Okay. Thank you.