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

All right. Well, good afternoon, everyone. Welcome to Citi's Global TMT West Conference. I'm Jason Bazinet. I cover U.S. internet and media here at Citi. We have disclosures available on the conference registration site, IPB notes. And it is my pleasure this afternoon to welcome Jeremy Male, CEO of OUTFRONT. Jeremy, thank you so much for joining us.

Thanks, Jason. Great to be here. It'd be preferable to be chatting to you in Vegas, but there you go. It's good to be chatting you today anyway.

Well, you're kind enough to be flexible to do this with us virtually, so thank you. So maybe, I guess, for investors that are dialed into this webcast. If you do have questions, you can just e-mail me at [email protected]. And if we get your email, I'll be sure to ask that question to Mr. Male.

But in the interim, maybe I can just start off with a few questions until those client questions come in. Have there been any surprises or insights that you've developed about your business as you sort of navigate in this challenging COVID period over the last year?

I think it's fair to say that if you take one step back and just sort of think about the last year, I think that the entire year has been a surprise in so many different ways that we couldn't have envisioned when we were sat together in Vegas last year. But if we sort of come in and think more specifically about out-of-home -- by the way, maybe just a few sort of general comments before we get into that, we continue to feel great about out-of-home. Out-of-home was the strongest medium there is, as you remember in 2019 as we went into this pandemic. And we believe that with the vaccine, herd immunity, et cetera, that out-of-home will emerge once again as a strong medium that is continuing to grow its market share. The sort of structural growth story of out-of-home, we believe, is absolutely firmly in place. Going back to your question in terms of what were the big surprises, one thing that was terrific to see was that the big users of out-of-home remain big users of out-of-home right away through the pandemic. When we consider the sort of the ridership issues that we have within transit, it was not surprising to see, obviously, that our revenues were significantly impacted there, but we're delighted to see the recovery as we went forward in the latter part of last year and certainly as we look into '21 in terms of the billboard business. And as you know, we've got a couple of forecasts out there right now that are really very, very bullish for out-of-home with Magna, I think, around 11% and GroupM sort of 17% for this year, and those numbers are 6% and 11% for 2022. So no huge surprises other than, as I say, that the general surprise that we all felt, I think, when we look back at the last 12 months and feeling good as we look forward.

I'm glad that you express confidence because the investor community, I think prior to COVID, was very onboard with sort of outdoor taking share. And only recently have I started to get questions about, do we really think that, that will endure post-COVID because everyone is so animated about this shift to all things digital. I think it's causing people to sort of wonder where are those dollars sort of coming from, but it sounds like based on what you're seeing, you feel pretty good about it.

Yes. I mean we continue to -- we do feel good about it. And by the way, look, I think circulation of people in general will look a little bit different. The way [ hubs ] and highways, if we think about our billboard business, maybe increasingly important rather than those absolute [ inadvertent ] commerce Times Square -- Time locations for the next few months because I think some of those city center locations may take time to recover. But look -- and thinking about all things digital, one change, I think, for our business is it will probably increase our digitization. I've talked a lot in the past about there being 2 sides to digital within out-of-home. One is that number of locations in terms of hardware that you have out, and we're increasing our digital billboard portfolio every year, and we'll do so again this year. And that is the same in transit. We're building out some amazing digital transport assets. And I said that, that's 1/2 of the growth story, but the other half is actually how we communicate with that digital hardware in terms of automization and programmatic. And I think the last few months is actually -- that has speeded up that process. And I think that's going to be a really interesting tailwind for the industry as we go forward. And we've always talked about ourselves more generally about we are the glue, in a way, that holds together that virtual world. And I still believe that out-of-home is well placed to perform that role into a more digital future.

On that programmatic point in terms of how you utilize this digital assets, is that acceleration driven by decisions you're making internally? Or is it driven more by, on the demand side, the marketers and advertisers that's causing the change?

If you like -- having got our internal plumbing organized so that we could actually connect with DSPs, thereafter, for the most part, it's being made by advertisers. So if we look at our numbers, for example, I mean, we went from relatively small to back end of last year, trading at a run rate in the $20 millions. And it wouldn't surprise me if that didn't double over the next 12 months in terms of run rate. So that's becoming an important piece of our business. What we don't quite understand yet is net-net, how much of that is incremental, or would you have got it anyway but just in a more normal way. So we'll see. Time will tell, but I do believe it's going to be a great tailwind for the industry over the coming years.

Do they -- as investors sort of think about the economics of the dollar throwing in -- flowing in traditionally versus programmatic, are you relatively agnostic about that? Or is there a slice that, that sort of the technical back end ecosystem has to take to facilitate that transaction that makes it worse?

Yes. So as we stand right now, when we look at the dollars that are coming in, the CPMs, even allowing for any -- a slice that may go to the DSP, are very similar to the CPMs that we would have expected anyway. So at the moment, there's kind of no trade-off there too.

That's great. That's great. What about your priorities for '21 other than sort of now that you have that -- the programmatic plumbing in place and digital is going to continue at pace. Are there any other key priorities for you?

You know what, as we look at '21, I don't think that the priorities are that dissimilar from where they would have been in 2019, that is that we want to keep digitizing our estate. So we'd like to get back up to that, having had a -- we turned off growth CapEx for a few months last year. We turned it back on for the back few months, and we would like to get back to that sort of 200 digital board runway. We've got a balance sheet that is poised for growth in terms of taking advantage of any interesting M&A that will -- we would like to concentrate on. So that's sort of, I think, how we think about this year. So I wouldn't say greatly different from our previous objectives, Jason.

Okay, okay. Now in terms of most investors that I chat with on companies outside the advertising space, the rule of thumb that the buy side was using was, we will get back to 2019 revenues and the debate was by 2022 or 2023, that was sort of the debate. And when the vaccine came out, the buy side sort of shifted where the expectation became, okay, 2022 is the year where we sort of claw our way back. Just for even outside the advertising space, that seems to be the general rule of thumb. As you sort of think about -- when I think about your business in the context of the vaccine and the economy getting better, it feels like you could have sort of a more rapid recovery, but that doesn't feel totally crazy to me that by 2022, things sort of get back to where they were. Does that seem like a reasonable bogey in terms of buy side expectations?

I think you have to look at -- I think you have to look at our business in 2 ways. We have the vast, vast majority of our cash flows are driven by our billboard business. And the audience of billboards is back, as I say, might be in slightly different places, but it's back, and we believe that our billboard business will continue. And by the way, everything that I say, this is anticipating that there isn't significant change in treating COVID or from the administration, change of administration, or whatever. But as we look forward, we feel great that, that can continue for our business because of our higher exposure to national and the fact that we did have a more city center orientation, where the city centers got -- where, if you like, more difficult than a more rural part, we will have a higher beta. So as we come out of this, we would expect. So I feel very positive there. And look, our transit business, it's certainly going to lag over the coming months because after a slightly increasing audience for the most part of last year, that very much stalled in November and December with the increase in COVID cases in a number of our key transit markets. But with vaccination, herd immunity, et cetera, we'd really like to think that, that could start rebuilding certainly in the latter part of this year. Yes, very positive looking forward. And you're right, that sort of '22, '23 time scale, hard to pinpoint the quarter when it completely breaks through back to '19 levels. But yes, we're on the same page.

Okay. That's super helpful. What about -- and I'm guessing on the transit side, because so many of those assets are digital, that the snapback, when it comes, will occur quite quickly, right? I mean because that...

Yes. I mean it's increasingly digital. And one thing the next few months will allow us to do at the moment are our digital transit assets. We haven't got on the same DSP platforms as our billboards just for kind of internal plumbing reasons. So as that fixes itself as it will over the next few months, we feel very good about how transit can return, similar when we get the eyeballs back.

Okay. What about sort of as you're negotiating with the MTA sort of counterparty on these contracts, and I'm going to focus on MTA just because it's the biggest. How should investors sort of frame sort of the bull-bear case in terms of how this sort of plays out in terms of sort of making up for past minimum payments or renegotiating the contract in terms of splits? Can you just sort of -- maybe sort of remind us what you've already -- where you are today with the MTA? And then just sort of frame that bull-bear case in terms of plausible scenarios?

Okay. So essentially, if we look back to last year, which kind of gets us back up today, what we did then was we deferred MAG payments, okay, that come back into play. You're testing my memory here, but I think it's from like '23 or '24 onwards. We gave a slightly higher revenue share, and we had a different approach to capital investment for that time. So that takes us up to the 31st of December last year. So look, we're back in discussion with the MTA. There's a number of different pieces to those discussions. Obviously, there's minimum guarantees and there's revenue shares, there's capital investment. There's tenure of contract that are sort of -- or potentially there to be discussed. And as soon as we have something more specific that we're able to say, we will -- as usual, we'll be open and transparent and give further detail when we can. That's obviously difficult discussions. MTA has -- for those who is based in New York now, it has been very financially challenged and will continue to be financially challenged in the future. So any discussion about dollars right now is a tough discussion, as you would expect.

Yes. Is it fair to -- I haven't heard anything about this, but with the political election sort of behind us and the Democrats sort of in control, is there a political angle that investors should sort of think about? Or maybe there may be some sort of relief from the federal government to the states that would sort of help you get through COVID that could have some second derivative positive implications for you or have you heard anything on those?

I think it's a little bit early to talk in any sort of specifics because we're not even at the 20th of January yet. But the signaling is that transit in general and infrastructure in general will benefit from the new administration. And I think generically, that's got to be good for us, the transit environments. It's going to be good for us. And over the medium term, I'm sure we'll be able to merchandise that. And we've said before that as the audience returns, we actually think it will be a more benign environment actually to consume our ads. We don't necessarily need to get back to 100% of ridership to get back to 100% of revenues, particularly with the digital investments that we're putting in place. And -- but the other point is that even if people's lifestyles change in terms of some sort of work-from-home aspect, we still think that maybe people don't go out 5 times a week, but they're probably -- 3 times a week. So actually, we believe that we're going to have the same reach in the future as we have before. Yes, maybe frequency will be down, but okay, so you don't see the ad 10 times a week. You're seeing it in morning and evening commute. You're seeing it 6 times a week. But that's still -- as I say, we're still going to be hitting an awful lot of consumers, as I say, in what we believe will be a more user-friendly environment.

Okay. That's super helpful. What about capital allocation priorities? Is there sort of -- for 2021, is there any sort of change or highlights we know of?

I think -- look, I think capital allocation is -- we -- I don't suppose there's going to be any particular change to our general CapEx this year. We'll give more definitive guidance when we come out with our Q4 numbers, but we've been kind of in the $80 million range in normalized environment for the last few years, so I would expect that to continue. Look, and as we come out of this, obviously, we will be looking at our dividend again. I mean it goes without saying that we would -- we will and obviously, the -- within the [ week ] required dividend area. But as we go forward and as we get more certainty of our recovery, that's going to be another area that we'll be thinking about as we go through the year.

That's super helpful. And what -- it seems like most in the industry, at least that I've spoken with, still feel like it's a bit too early to sort of focus on M&A, that the bid-ask spread is still a little bit too wide in terms of what is the right EBITDA that a particular billboard asset might generate. Do you sort of concur with that, that it's premature to sort of focus on M&A for '21?

Yes. I think it's a little premature. I mean for any seller of assets right now, the default position is, well, I did that in 2019, so therefore, my business is worth X. And we're not entirely on the same page as them in that regard. So look, I think they'll be -- yes, it may take a little bit of time for some of those assets to shake out. But look, we're very focused on some smart M&A at prices that will make sense and we hope that we'll be able to achieve over the coming 12 months.

Are there some assets in your portfolio that are sort of traditional billboard assets and maybe skew more rural in your broader portfolio that are sort of close to '19 numbers? In other words, if we have sort of visibility into the -- into all of the details?

Yes, very much so. In fact, we actually split that out a bit in our Q3 numbers, which is our last reported numbers. And what that showed was that our top 15 markets were significantly further down at that stage than our sort of 15-plus markets, if you like, and that continues to be the case. Look, we had a bunch of markets that, in Q4, actually hit their original budget for the year. And those were mainly markets that -- whereas our total business skews more like -- or in a normalized year, sort of 55% local, 45% national. Yes, we've got some markets that are 80% local and 20% national. So markets that were smaller and more disposed towards local, which, as we know, throughout these kind of times, has a much lower beta than national, which has faster outs and faster back-ends, if you like. So yes, those -- a number of those local markets are really looking pretty good right now.

That's interesting. And is there -- when the time does come for M&A, is there sort of rough sizing in terms of the quantum of capital that you're looking to do? Or is it really just more a spend? Or is it more a function of just if the right assets come up and they fit inside your overall portfolio, you'll find...

Yes. That's more how we think about it rather than having kind of an amount of, say, X that we want to deploy in terms of M&A this year. It's more opportunistic than that. It's what assets become available at the right price in markets for us where it makes sense, and those tend to be markets where we currently operate, where we can utilize our local and national sales operations to good effect, where we can take out a little bit of operating costs along the way. That's the sort of -- for us, that's kind of in the sweet spot for us.

Okay. Okay. What about -- I remember this goes all the way back to the time when you did the IPO, you used to talk about sort of digital being at the sort of very top of the pyramid, right? It wasn't really applicable everywhere. And since your IPO, you continue to digitize more and more of your boards. Is there anything -- has anything happened in terms of advertiser demand or the cost of the equipment that has sort of caused your thinking to gradually shift over time where that -- the top of that pyramid gets bigger and bigger each year? Or do you think it's just it is what it is, and we're just operating within a certain CapEx environment, we're just going to keep plugging away, but the size of that wedge at the top of our portfolio is the same? How would you characterize?

Look, I still think we've got huge opportunity because, you're right, we used to talk about the very top of the pyramid, and in a way, we still do. But don't forget that the top of the pyramid for us is, so far, we've digitized around 3% of our estate, still a significant opportunity -- I mean with -- as we go further down the pyramid. In terms of cost of the equipment, yes, come down a bit, but you know what, actually, what's really happened is we're probably now paying kind of the same price we're a few years ago for a much better quality board, which is a good thing. One gating factor is and will remain zoning. You can't digitize every board that you want to. But notwithstanding that, look, demand, we think, particularly over the next 2 or 3 years, will come racing back. And that demand is also, particularly with our digital boards which are now connected to that automated platform, even more so, we think they will benefit than the rest of the medium. So there's -- I sign off every digital billboard proposal that we decide -- project that we decide to invest in. They all cross my desk. And we continue to be able to make 20%, 25%, and indeed, in some cases, more than that, internal rate of return on these projects. So we'll keep doing it. And we feel very, very positive about digital in general as a key growth driver for the medium going forward.

And what -- do you mind just taking a second and just elaborating on what it is that causes marketers to be drawn towards your digital properties? I mean I know it's sort of new and interesting, but if you unpack it, what is it? Is it data that says that consumers' propensity to look at the billboard goes up because it actually the image changes? Is it?

Well, it's -- that is certainly part of it. Research that we've done suggest that you're about -- your eyes are roundabout 3x more likely to be drawn to a moving image than a static image. You can be more creative. You can change your creative and almost at whim. You're going to have different messaging for different days. You can chunk space up into shorter amounts of time With a static board, it's pretty much 4 weeks, and that's it. With a digital board, I can sell it to an advertiser for a long weekend. So you can be more timely. And now as I say, you can actually buy the board in a much more automated pace. So there's a number of reasons why digital billboards appeal. That being said, we still have a huge number of static locations. And people want them for all the reason that some people don't want to share space. Our largest advertiser, actually, prefers key center locations. They want to dominate them and they want to dominate them exclusively without sharing those locations. We have a number of ads in our local markets that are more like signage, where they just want to be there 24/7 and 365 days a year. So both parts of our business have relevance in today's world.

Super helpful. I've got a question here from a client. So I'm just going to read it, if you'll bear with me. Can you please ask about the 10% of the leisure entertainment ad vertical that was under pressure from COVID, things like movies, hotels, cruise lines and airlines? Specifically, any sequential improvement trend from this vertical Q2 to Q3 to Q4 and into '21?

Yes. I think if you look back to last year, I think all of the categories that you mentioned were pretty -- I think any sequential improvement was pretty hard to read. And as we come into this year, I would expect that we will continue to have difficulty with venue-based entertainment, so concerts, for example. Movies, to some extent, are within that category. Travel is certainly, I think, in that category. I did notice that we had Air France on some of our boards right now, which is great to see. And it's -- I guess it's those categories that, when that bounce comes very much in the back half of the year, I suspect, when the vaccine's really starting to cut through or herd immunity or whatever, I mean those that we start to see some rebound. In the meantime, I think we can feel good about some of the other categories. So the streaming category, I think we feel very good about for this year. I think it could be a good year for auto this year. Auto has been going backwards a little bit for us. It's the category over the last few years. I think that could be good for us this year. I think telecom with 5G could be a category that actually improves for us this year. So I think there's -- yes, a number of things to feel great about. And I think those -- the COVID categories, if you like, they will come back, but probably not, we believe, until the second half. And another one for us, I mean, with the largest portfolio in New York, is Broadway. That's -- when Broadway comes back, that for us is a good boost as well.

So the buy side right now is pretty bullish on all sort of technical disruption, technical change that's going on. That sort of elevated multiples that, in turn, has cost a lot of private companies to go public. And you guys have spoken in the past about a lot of the tech-centric internet companies being big spenders inside your overall portfolio. As more of these private companies go public and try and get their name out there, is that a potential tailwind for you as well in '21?

Yes, I think it is. I mean if you look at the -- some of the key tech listings over the last few years, we've done great adding them in, and Airbnb is the latest example, where we certainly we took more than our fair share. I think tech IPOs, yes, this year, it seems that we're going to be seeing a lot of them. And the reason they come to out-of-home is that, for brands -- and particularly, some of these are -- they're not that well-known brands, it's a great way to get cut through, it's a great way to get brand stature at relatively low CPM. So we look forward to some of that money coming our way as we go through '21.

That's great. So I just have one last question for you. So as you have spent time sort of listening to buy side investors ask their questions, are there one or two things that come up over and over again that you sort of say, well, there is that misperception again that it just keeps coming up that you'd like to address or counter with some facts?

Well, I guess one very sort of broad point, with everything, if you like, going towards digital, one question we do get is they're relevance on out-of-home going forward. And as we touched on earlier on this call, I fundamentally believe that the structural growth story of out-of-home is as valid looking forward as it is looking backwards. Out-of-home has been gaining market share, all while when digital went from kind of nothing to 50% of the ad market, out-of-home was slightly growing its market share. And I believe that we fundamentally will continue to do so. When we think more specifically about OUTFRONT, that -- reasonably, there's quite a bit of focus on our transit business. Let's remember how strong transit was going into the pandemic. It was a key driver of our growth and will be again. But also, let's not forget that the vast, vast majorities of our revenue, of our -- and cash flow, are driven by our billboard business. And it's really the billboard business and its growth that are going to be the key driver of our -- the recovery as we go forward. We spent quite a lot of time looking at the sort of valuation, the way investors sort of think about our business in terms of valuation metrics. And as we see it right now, in a way, you're almost getting our transit business for nothing in the valuation now. I know it's up to you guys and our investors to make their own decisions about our valuations, but that's as we see it. So I think another key point is that, look, the way cities operate may look a little bit different over the coming months and who knows that may be years, but urbanization is a trend that has been going on forever and will continue. And we continue to feel great about cities and how our medium will interact with those -- with people as time goes on. So let's say, we're very confident about the medium and very confident for our bounce back.

That's fantastic. Great summary, Jeremy. Thank you so much for taking the time with us today. And I hope you had a good holiday. And hope you get back in the office soon.

Absolutely. Twice a week, I'm there, Jason. I'm [indiscernible] and I'm doing it. Anyway, good to see you. Thanks for the questions.

Yes, absolutely. Thank you for the time. Have a good day.