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

Okay. We'll get started with our next session. We are really excited to welcome OUTFRONT Media back to Communacopia this year. OUTFRONT is one of the leading outdoor advertising companies in the U.S. and Canada with a strong asset base across its billboard and transit platforms in some of the most attractive markets. I'm Jason Kim. I cover the cable, media and telecom sectors here at Goldman Sachs. And it is my pleasure to be joined by Jeremy Male, Chairman and CEO of OUTFRONT. And over the next 40 minutes or so, we will discuss the outlook for the outdoor advertising industry and how OUTFRONT is managing through the volatile macro environment. So Jeremy, thank you so much for joining us today.

Thanks, Jason. Good to be here. Appreciate the invitation, and good afternoon to everyone.

Great. So let's get -- set the stage with a broader question. OUTFRONT was coming off of a very strong year in 2019, really some of the best growth rates I've seen for the company in a very long time. And obviously the macro environment changed suddenly for all of us when COVID hit back in March. And since then, you and the management team have done a tremendous job of pivoting the shift of your focus to bolstering liquidity, cutting costs in a very short amount of time. And second quarter was a challenging quarter for all of us, but that is likely the trough. So what are your current priorities for the business as we move through the recovery phase?

Yes, challenging is a great word to use for the second quarter, that's for sure. And you're right. Look, we came off a great year in 2019. We're up sort of close to double digits on the top line and indeed sort of mid-single digits as we went into the first quarter of this year. Then COVID came along. Yes, it was absolutely the trough for us. And we took a number of actions in terms of both balance sheet and costs, which we think were very appropriate. And we come out of that trough looking at returning audiences, particularly some in our billboard business, growing audiences in transit, taking a little bit longer to come back and feeling in a much better place for Q3 and essentially expect to get sequential improvement into Q4 as we look into Q4 also. So for us outside of that, which kept us pretty busy, it's maintaining our dialogue and engaging with our clients. It's been about also turning the tap back on in terms of our investments because we switched off our digital build for a few weeks. That tap is now back on. So we're out pushing organic growth again, which is great to see. And I guess the other point, we're very focused on our liquidity, but from 2 points of view. One is we're never completely convinced that we've seen the back of COVID. There is still uncertainty out in the world. But we have a balance sheet strength now that whatever the world might throw at us, we think that we're in a very strong and solid position, but also with great upside opportunity should the worst were to happen. So we're evaluating opportunities that we think could give us some good incremental external growth also as over the coming weeks and months.

That's great. Thanks for the intro, and let's get down to some of the details of the business. Obviously, a lot of focus on the pace of recovery, so let's start with that billboard business first. I mean you generally don't comment on intra-quarter trends, but you did provide some outlook for third quarter when you reported second quarter results last month, which called for sequential improvement quarter-over-quarter. So broadly speaking when you look across your business, again in the billboard segment, what have you learned from your conversations with advertisers through the downturn? What do they need to see to continue to loosen up their advertising spending on your billboards to pre-COVID levels? Is that more of the advertisers themselves getting more visibility in their own business, or wanting to see more of an improvement in audience metrics from that front? What's been the conversation like?

Yes. I really don't think it's an audience metrics conversation. Look, out-of-home in the U.S. last year grew by around 7.5%, so almost twice the growth rate of all media, implying that the structural growth story of out-of-home was alive and well. And I absolutely believe that it remains alive and well today. So as we went through the last few months, you can imagine that advertisers were very focused on the wins because people literally would lock down. The audiences just went there. Now they're returning. They're not returning at the same rate in all markets. Certainly, we see a slower return in some of the major markets on the East Coast and a slower return generally in cities compared to more rural areas. But coming back, they are, and advertisers are keen to engage with those audiences as they have happened. But what you have to consider also is that there are categories that simply don't have -- so if you take the media, media and entertainment for example, essentially there hasn't been a film slate for the last few months. Films that we have had have tend to be pushed back. You then had issues for media and entertainment generally where there hasn't been the same degree of content production, so fall launches have changed. So there's a number of advertisers that quite simply have changed their media spend in the light of their specific circumstances. And then you have just the general macro environment. There is still -- we still have some uncertainty as we look forward. Is there a second wave? We all sincerely hope that isn't the case. But we have the election cycle coming up, which quite often also increases uncertainty and the social unrest. So there's an awful lot going on at a macro level. What we're saying to advertisers is that our audiences are back. We can give you the depth of data and insight about those audiences. We can give you at the ROI data, come back and put your -- we'll very happily accept your dollars into out-of-home. But as I said, there's 2 aspects to it. There's been the micro and the macro aspects.

Okay. Switching gears to the transit business, which is obviously being hit hard during the downturn. When you look at the drive traffic, it's actually recovered quite a bit from the trough in many parts of the country, but the ridership in some ways is still down a lot. So the first question is how are you managing the business while audience levels are still artificially depressed?

Well, as you saw from our Q2 results, in terms of managing the business commercially, we were very focused on our relationships with our partners. And first and foremost, ensuring that we sort of reset the contractual nature of a number of our different contracts to reflect the audience levels that we were seeing. And I'm very pleased to say that the closeness of our relationship with our transit partners ensure that, for the most part, we had terms -- we instituted terms that reflected the fact that audiences were so low and that revenues wouldn't be there. And the most obvious way that was demonstrated was in terms of essentially extinguishing minimum guarantees, which was the key piece. So that was the key commercial piece that we sought to achieve. Now as we look at it, there's no doubt that internal environments generally are considered difficult places to be. They've only just opened up restaurants in New York and at a very low capacity. Consumers generally are trying to keep in open spaces rather than in closed spaces. So maybe it's not too surprising when we look to our transit business, those pieces that are internal. So in train car or in subway car are going to take a little longer to come back than otherwise. But there's a couple of aspects to it. The first is that we absolutely believe that cities are here to stay and that mass transit will continue to be a very important part. So those audiences will come back. They may take a little bit longer. But while coming back, there's a couple of things. We think that people's commuting behavior will change. So for example, Jason, you may choose to go into the office, but you may choose to go in twice a week. So rather than taking the subway 5x a week, you may take it twice a week. So we'll -- even though our audience numbers might be down in total, we'll still have the reach because we're still going to get you twice a week. We just might not get you 5x in that week. The other point is that actually we think that it's going to be a much longer commuting time. Because people will -- the kind of drive times peaks will flatten out. So actually your traveling experience is going to be, we think, an improved traveling experience. And we believe that revenues get back to 100, if you like, certainly before audience gets back to 100.

You called out some of the modifications to the New York MTA contract in the second quarter call. Can you remind us of the details of the key changes, and if you have any success with other transit authorities to gain more flexibility for OUTFRONT?

Yes. There were 2 or 3 main pieces to the MTA. The first was that the MTA agreed to fund directly some CapEx this year. That means that it's capital or it's investments that we haven't had to make on their behalf that we would recoup from later revenue streams. We also agreed to pay the MTA higher revenue share this year, but to extinguish the minimum guarantee for this year. And the delta between our revenue share and what the minimum guarantee would have been is effectively added to guarantees between -- on a pro rata basis between '22 and '27, so over that 5-year period. So there you are, they were the key pieces of the change in the arrangements with the MTA. And we have 60-odd contracts with different size transit authorities. And it's fair to say that the detail of all of those is too complex to talk to individually. But generally, I mean, we were looking to have terms that reflected the fact that there had been a significant drop in audience and fast advertising revenues and working in partnership with them in a reasonable way to modify our financial terms to reflect that.

Got it. That makes sense. And then maybe taking a step back, you've alluded to this a little bit earlier as well. But what's your long-term outlook for the transit business? And how are you preparing the company for fairly wide range of scenarios, as you said today in terms of how the ridership may look like, or how the transit business will ultimately look like in 5, 6 years down the road? Just curious how we think about the various scenarios that could be out there, and how are you preparing the company for that.

Yes, you're right, I touched earlier on. Look, there's been a huge discussion on there about is there going to be this flock of people from cities. I believe that while there may be a blip, cities will -- major cities will continue to take an incremental share of GDP as we go forward. And so I'm a firm believer in big cities. I'm also a firm believer that big cities don't work without mass transit. So while it may take a little bit of time, I actually think that ridership will continue to develop at that time. And we feel as positive today about transit as we did going into this, given that there is going to be this time for audiences to catch back up. So we're looking at our transit business. We continue to consider other transit opportunities as it is at the moment. Most of the big transit contracts we're particularly interested in the top 10 markets, frankly we don't see much change there in the sort of coming few years. So we also then think, okay, what will we be doing with our transit franchises? Well, as audiences return, they're going to be returning to an even more improved environment because we're enhancing our media offer through digitalization. So as audiences return, we're going to have sensational media product for them to interact with. Those digital offerings will be advertising, they're potentially going to have other content which will, we think, be very engaging for consumers. And increasingly, we'll have the ability through tech, to be able to be very, very specific in the messages for audience, those audiences in very discrete environments. So it's very exciting for us, we're firm believers in transit. And we're very pleased when you look at our platform with Boston, New York, Washington, San Francisco and LA, we have the, if you like, transit offering in the U.S. and we're very proud of it.

There are categories that may never recover to pre-COVID levels. But as we have seen in the past as the economy changes, advertisers adapt and there will be different categories that emerge as relative winners post-COVID. So from your perspective, how do you size up the portion of your book that you think is exposed to the categories facing some long-term challenges? And conversely, what are the opportunities and categories that you think is attractive and can emerge as winners in a post-COVID environment? And how do you make sure that OUTFRONT gets its fair share from these new advertisers that could be a bigger force in the economy going forward?

So out-of-home has always benefited from the fact that it's never been over-reliant own 1 particular category. We take dollars from pretty much across the board. And we also benefit from the fact that as an industry, we're very disposed to local advertisers and local advertising, and if you what I mean, that behaves very differently from national advertising. So I think when you're thinking about categories, you're sort of tended to focus on those national advertisers. Now over time, we've seen significant changes in the advertiser in our categories, but most of it's about migration. So for example, we were, as an industry or as OUTFRONT, we used to take 5% to 6% of our revenues from real estate. That's actually decreased over time. But actually if you look at sort of online and you then drill into sort of online and digital in there, you will see names like Zillow, et cetera. So what do I mean? So they've gone from one category and they pop up in another. And we expect that that's going to continue to be the case. Big tech has been a significant supporter of out-of-home and OUTFRONT over the last number of years. Apple had been our largest client for a while, and Amazon and Facebook and Netflix and indeed the DTCs. So if you -- last year, we were taking significant money from food delivery for example and it was an explosion. And the great thing about out-of-home, and you say, how we're going to convince advertisers? Well, if you're looking to build a brand quickly, okay, you do it from out-of-home. The reason the movie category loves out-of-home so much is the fact every couple of weeks, they've got a new brand. They've got to go and build that brand from nothing, quickly in a mass way. And that is exactly what out-of-home can do. It can do it at a very attractive CPM. And increasingly you can with, say, the granularity of data and insight that we can provide advertisers with out-of-home is well beyond that which they have in the past. And that's another factor that's ensuring, that the structural growth story that out-of-home is alive and well right now.

Thank you for that. It's been a while since we had a recession in the U.S. The last time we had a downturn, that was in 2008. And that served as a big catalyst for advertisers to shift their ad budgets away from traditional media to digital when digital was still nascent. Most of the share shift came from print media, and OUTFRONT actually was able to hold their share pretty constant all throughout the cycle. Now this time around once the dust settles in this downturn, and there's many unique aspects of this cycle compared to 2008, but how do you see the ad budgets shifting, if at all, going forward? What are your thoughts about OUTFRONT's ability or competitive position today versus 2008?

In terms of OUTFRONT's competitive position, we have grown substantively in those top 25 DMAs. If advertisers want to hit top DMAs, then they are going to first and foremost and from an out-of-home point of view we believe, will be spending their dollars with us. If we then sort of think about what else has changed, you're right. Just about every other traditional medium has been decreasing market share since the global financial crisis, whereas out-of-home has been increasing its market share. And I believe that the trends that we were seeing then in terms of people's online behavior, the fragmentation of audiences in network TV, the inability to deliver mass audiences, and except for very, very small periods of programming. And the whole piece of ad avoidance that I watch very little -- there's very little of my screen-based activity where I have to endure, to put it like that, some of the ads that might be thrown at me if I'm watching network TV. So I think all of those trends remain the same. I talked about some of the reasons that advertisers would choose out-of-home just as I was answering the previous question. And I would fully expect that out-of-home will continue to increase its market share as we go forward.

It feels such a long time ago. But again as I mentioned in the beginning of the session, that you guys were coming off of just an exceptional year in 2019, firing on all cylinders. Take us back to the year that you had in 2019. What were the real drivers of the broad-based growth that you were seeing, not just in transit but also in billboards? And how do you regain the momentum that you had to reengage with advertisers, when their business may have changed for a long time as well?

So if we look back to 2019, and you're right, sometimes it does, it feels a lifetime ago. But the fact is that if you drill into our numbers, we were -- our revenue increase was pretty similar in national as against local. And then when you drill further into those numbers, our digital business grew very, very strongly. So our digital growth was up in the 20s. And as we look forward, I think that digital will continue to be a significant growth driver for out-of-home. Part of that is just about the physical number of screens that are out in the market. And there I'm talking about in billboard and transit. And the other -- so if there's just more opportunity for advertisers with digital. But then that other piece of that is how we interact and trade with those screens. So increasingly, advertisers are going to be able to buy those screens in an automated way. I'll use the programmatic word with a small p because that automation doesn't necessarily include a real-time bidding facility, but can do. Part of it will be private marketplace. So what I think is that we're going to be able to really go out and tackle some of those digital budgets. Digital is more than half of the ad market now, something like $60 billion or something in the U.S. And we believe that having that degree of automation with out-of-home being able to sit on similar platforms, and similar platforms that out-of-home will be in contention for digital buys because you can essentially just make the same decision and you can deploy your media dollars in much the same way as you can in any other online environment. So I think that will be very exciting for the industry and another real catalyst for future growth of market share.

You mentioned briefly the difference between large markets and some of the smaller markets -- or rural markets, I should say. What are you seeing in terms of national versus local advertisers during this recovery phase?

So if we look back to the GFC and look at some of the learnings in '08,'09, what we saw was that national had a much higher beta. So it's much faster on the way down and with a lower low point than local. And we're seeing pretty much the same thing again. So we would expect that national, as we're more disposed to national, do you know what I mean, we're seeing that now. But we believe that our ramp will be quicker as national advertisers return post, if you like, post crisis. And also, we're seeing that if you -- the lockdowns in city, in the larger cities were much more prevalent and longer. And in fact in some cities, I mean we still don't have any return to work, say for example in California. So what you've seen is that in those smaller markets that are more reliant on local advertisers that haven't had the same -- quite the same effective lockdown, have been the most resilient over the last few months.

Okay. That makes sense. Moving on to pricing. Historically, you prefer to maintain your price discipline even when the environment gets tough. And I think that was indeed the case in second quarter. So the question is are you seeing any competitive responses in terms of pricing in your markets, not only from your peers in outdoor space, but also from other mediums as they look to gain some share as we move through the trough?