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

Good afternoon, at least on the East Coast. Good morning on the West Coast. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Really happy to have with us this afternoon, Jeremy Male, the Chairman and CEO of Outfront Media. Jeremy, thank you for being with us, and it's great to see you, virtually.

Good to see you too, Ben. Yes. Good to be here. And yes, looking forward to our fireside.

Great. Why don't we start -- I always enjoy the slides that you guys provide on your earnings call and always steer investors to the -- I think it's a 60-slide deck that is on your IR website. But one that was really interesting this quarter was you guys showed us a recovery chart, a couple of slides, really breaking down different parts of the Outfront portfolio and where they are in the recovery. Why did you think that was important? And what do you take away from that slide? Or what should we take away from that as we think about the rest of the year and beyond?

I guess what we wanted to point out was actually the difference in our portfolio, very much dependent on large cities that really have borne the brunt of the pandemic really in terms of lockdowns, et cetera. And also the delta between national and local. So in our smaller markets that have been less impacted generally by those lockdowns and are, by definition, more local by nature. So in those markets, sort of 16-plus that we sort of showed, in other words, the 16-plus markets, we're sort of 80% local and 20% national. And in those markets, as you saw, in Q4, we were only down 4%. And in the markets that are more disposed towards national and have been the top 15 markets in particular, where all the national dollars tend to go, where we've really felt the impact of a number of different verticals that just aren't there like entertainment and leisure and [Audio Gap], et cetera. And we've obviously been far more impacted. So there's just a big delta there, and we thought it was worth pointing out. If you look at it, those larger markets, it was close to -- it was up in the teens in terms of down and then small markets that are, say, 4%. So interesting to see. And I guess, not too surprising. If we go back to the '08/'09 global financial crisis, we saw something very similar, really, which was the national beta was much greater. So it was a lower down and then a higher up when it came back. And I guess that's playing out, again, as we thought it was likely to do.

It was interesting to see how well digital performed in the fourth quarter. I was chatting with Sean Reilly about that this morning. Why do you think digital has come back so much quicker? Is that just because it's easier to put money to work quickly? Or is it the nature of the advertiser base? What would you -- because that's a lot better than the overall portfolio to see digital back to basically flat.

Yes. I guess the -- one of the virtues of digital is the flexibility. And we saw it fall out quickest. If you go back to Q2, actually, that was our biggest down. And we suggested then it would likely be quickest to come back. And yes, we're certainly seeing that. I guess with digital, you have the ability to be incredibly timely. You're also able to buy smaller pieces because with our static business, you're typically sort of committing to a 30-day period or whatever. And you're -- and typically, that books 2 to 3 months ahead. Whereas digital, you could be in the market tomorrow for a digital buy on our assets. And it's also because you're sharing the board. You also have a lower entry cost as well because the absolute price of being on one of our boards in dollar terms is lower than static. So I think it's those reasons. I think increasingly also -- with digital, you obviously have that ability to be more timely, you have that ability to be more creative. And we're just starting to really see that programmatic is playing a larger part of the role as we go forward. In -- when we announced our Q3 results, we said [Audio Gap] at that stage, we were trading at sort of $20 million run rate on programmatic. And so not -- still not huge on overall terms, but a definite tailwind to our digital portfolio. And 25% of our revenues in Q4 were digital, which is the highest percentage that we've achieved to date.

Did you say 25%, Jeremy?

25%. Yes. Exactly.

Got you. I want to talk more about technology and programmatic. [Operator Instructions]. I know there's -- no one has a crystal ball. I'm sitting here in New York at this virtual conference by myself in a conference room. But Jeremy, when you talk to agencies and talk to your larger clients who -- this is the biggest media market -- these are the biggest media markets. You guys benefit from that in a growing economy. What's your expectation for what the recovery looks like in the New York, L.A., San Francisco, based on what you know today? What's your best guess? You get better information than we do.

Well, I guess the -- as we look at it, and as we were just talking about earlier on, we're starting to seeing the recovery in local and smaller markets first. We do think that the larger markets start coming back, headlines such as this morning with all adult Americans having availability of vaccine come May is obviously hugely positive for -- across our business. And if you look at consensus, consensus has our billboard business back at 2019 levels in the fourth quarter of this year. Now obviously, our portfolio, in total, skews very much to larger markets. So implicit within that recovery is that by Q4, those larger markets are really starting to improve.

Yes. That makes sense. So let's talk a little bit more about technology, maybe starting with your digital displays. It feels like you and your competitors, peers feel confident enough now to start kind of turning that back on again in terms of capital, et cetera. What's the outlook for adding digital in the Outfront portfolio sitting here today?

Well, at the moment, in terms of absolute number of boards, where 3% of our boards are digitized, and that's generating, as we said, sort of mid-20s in revenue. And yes, we feel completely confident in terms of switching the organic growth capital back on in terms of going out and building new locations or converting digital locations. So we think we're going to be in the $150 million to $200 million range again this year. What's interesting is that the IRRs that we're able to achieve -- even though we're coming -- by definition, you tend to digitize your best boards first, even as we come down that sort of pyramid, we're still making great returns, typically well over 20% when we digitize a board. So the only thing that really holds us back is, are we able to digitize the board from a zoning point of view? Do we have any concerns about increasing substantially the amount of available inventory in a particular region because we don't want to retail at lunch either. So we need new dollars, you know what I mean, coming into the market.

Sure.

[indiscernible] a digital board. But yes, steady as you go. If you look to other markets. And I've often quoted the U.K. for obvious reasons. It's a market I know very well. Their digital is now over 50% of the out-of-home market. And we fully expect that the U.S. is now kind of 30-ish, and we expect it to go north, and obviously, the conversions. And then the ability to interact with those boards in a different way, automation, programmatic, et cetera, we feel very confident about the dollars we're putting into conversion right now.

Is there any concern or any caution that you have when I think about Lamar adding 300, you guys doing 150 to 200, sort of clear channel over time, we'll be adding more particularly where we are in a recovery where I'm sure your yield and your occupancy is not what you'd like it to be, I'm guessing, just given where we are. Any hesitation about adding this much supply or seeing the industry add supply at this point?

I don't think so. In terms of -- I mean you mentioned yields. In Q4, our yields were down, yes, just into double digits. And if you drill into that, actually, the majority of that was occupancy rather than rate. We've been quite tenacious in terms of maintaining rates. But if you think about the industry. The industry grew, I think, between 7% and 8% in 2019. And Outfront grew double digits in double digits in 2019. And what that was reflecting was, in part, you know what I mean, the digital inventory build out and the desire of advertisers to be on inventory. But in a more general sense, just the structural strength of out of home. And as we look forward, we don't really think much has changed in that. In fact, if anything, we think that the table has tilted slightly in our favor. When you look at media opportunities now to reach eyeballs at scale, particularly with dwindling audiences in linear TV, we think that plays very well for out of home. The structural growth story is still absolutely intact. And as I said, maybe on a market-by-market basis, you can think, well, you know what, I might make the decision not to build digital right now in a particular market. But in general, if you think about 40,000 boards and to convert between 150, 200 of those for us, no concerns that we won't still be able to make great returns for the foreseeable future.

Okay. Let me ask you about a couple of other areas of technology that you guys are bringing to the market. You mentioned programmatic automation. You have your ON Smart platform you've been investing in for a while. And then there's also sort of the discussion on measurement and Geopath. And maybe just stepping back, what are the things that you think Outfront is doing or the industry is doing or should do that can get the industry growing faster on the other side of this that hasn't been there in the past or at least hasn't been there at scale?

Yes. I think what's interesting, I mean, we utilize Geopath. We also have our own proprietary data sources and our own proprietary solutions in terms of planning. We have our SMARTSCOUT product. And yes, we will certainly want to have our own self-served platform within Outfront, but we are -- our inventory is -- our digital inventory is also exposed to a number of programmatic trading platforms also. So I don't think it's one or the other. Our strategy is to have our own proprietary tools and also -- and platform and then to very much be part of any other industry platforms that are out there. And I think as we go forward, I think the efficacy of our data will continue to improve. We believe that in the future, what will change for us is that dollars that were just put into the digital bucket were now going to be -- have our inventory exposed on the same platform that those digital dollars have been just sort of allocated to. And we'll be able to take a share of those dollars as we go forward that we wouldn't even have seen in previous times because, as I said, they just didn't -- they weren't "allocated" to out of home. They were just allocated digital. We'll pick up a slice of that as automation and, as I say, efficacy of data improves in the industry.

Where is the bigger opportunity? Maybe the answer is both, but between your sort of small and medium business customers on the local side, Jeremy? Or the national clients that -- you guys have a big business in national and the agencies you deal with, where does technology fit in terms of driving those 2 sides of the business?

If you look at our business at the moment, we are 55% local and 45% national in a normalized year. Those percentages have moved around a bit over the last 12 months. And I've said for a while that I would love to be in a position to go to a restaurant near Grand Central, to be able to go and buy a digital board for -- on a self-service basis for a couple of hours and to promote a buy one, get one free, if he hasn't gotten enough covers reserved, do you know what I mean, at some point during the day. So I do think that, that will stimulate dollars from there. But I also think that actually, in terms of the surge of programmatic, I think that's more likely to come from national advertisers as we go forward.

Got it. Just shifting back to last week's earnings call. You guys guided to Q1, more or less, some more kind of year-on-year declines as Q4. Obviously, we are rooting for a linear recovery. World doesn't work that way a lot of times. But just spend a minute on what's going on with the first quarter, why it's not accelerating or improving from the fourth quarter. And then what gives you confidence that the second quarter and beyond are going to see substantial improvement beyond the comp?

Beyond the comp? Yes, I think that's a point well made. Well, I think when you look at our business, typically, it's booking 2 to 3 months out. So if you go back to October, November, December, when our first quarter revenue [Audio Gap] down, didn't feel a lot different, frankly. And not much had changed over that time. So I don't think we should be overly surprised, having made quite a quantum leap between Q4 and Q3 that actually Q1 is feeling similar to Q4. I think that right now, every day is a day and every week is a week in this world. We certainly feel and see far more positivity out there. We had a financial advertiser come in with a significant buy for New York Transit with the September laydown in their expectation that by then, we're going to obviously see audiences increasing and dollars will follow. And right now, we -- there's nothing to suggest that -- as I said, we can't get back to that kind of Q4 2019 revenue in our billboard business by Q4, again, so Q4 this year. And that I think [Audio Gap]. But when you look at the vaccination process and then people's mentality change that is then required to start effectively doing all the things they were doing before, there will be a lag there. But similarly, we do see that line likely to improve over the coming months.

Great. That's super helpful. And you set up my next question nicely on the MTA and sort of the advertiser side of that discussion before we get to the MTA side. So we can look at the subway traffic. That data is available publicly. I've been taking the subway. It's -- there's not a lot of people on it, but there's not nobody on it. Do you have a sense from talking with advertisers, kind of what the level of ridership needs to get to before they start, more seriously, considering putting money to work? And maybe the answer is they see it in September, but I'm sure it's not a linear thing where it's got to get to 100% before people reengage. I'm sure it's much more of a gradual thing.

Yes. Look, I think it will be very much a gradual thing. I mean we've got a couple of million riders, for example, on the MTA right now. And it's not like they're in advertise [Audio Gap] up right now, and it looks terrific. And $2 million is -- it's still a big number. I mean, that's more than the ridership on London underground in a good year. So it's a lot of people. But we do think that we need to see some sort of reasonable step up. And then the -- when we follow whether or not, that's kind of like another 1 million or whatever. It's a little bit difficult for me to say -- sat here today because we, frankly, haven't been there before. I think we'll start to see passenger numbers increase. I think there may be a little lag, and then I think the money will start flowing. I then think that line will cross. So I then think at a certain point in time, we'll actually relatively have more ad dollars than people. And we certainly will need, in my view, 100% of previous ridership to get to 100% of previous dollars, certainly in terms of reach. We'll get back to reach far quicker than we'll get back to frequency. But reach is very important. And we believe that the advertising environment, actually, while some passenger numbers are lower, will actually be better for us. So just because it's going to be, as I say, an improved environment, certainly at peak time. So it's a little difficult to forecast because it's new territory for us, but there's going to be some correlation. And at some point, we believe advertising revenue growth will outpace passenger growth.

Yes. And I mean, my understanding is you don't really sell that on an impression basis, right? So it's not like a -- it's not a CPM, make-good situation. I would imagine these are all just negotiations at the end of the day.

Yes, totally right. Absolutely, Ben.

Okay. So you guys talked about this on the call last week, but just on the relationship with the MTA and that contract, I think when you guys first finally secured that renewal, you had an 8% revenue CAGR that you guys had expected for the contract. Obviously, nothing would have considered a pandemic. But when you step back and look at this agreement, how do you think about the returns and the value creation opportunity from the New York City MTA contract as sitting here today, March 3, 2021 and looking forward?

So yes, you're right. We estimated an 8% CAGR over time. And what that essentially did was that we said advertising revenues would essentially double between the first year or the last year of the old contract and the -- last year, the new contract, if you like. And thinking back, remember that our revenues, for example, in 2019, the MTA grew by 20% plus. So we were seeing some sort of big steps and a positive direction before we came into pandemic. So now our discussions with the MTA, and I think we've been very transparent on this, are that in order to address some of the issues you're sort of pointing to in terms of the contract, are to think about some of the [Audio Gap] smarter ways to invest dollars that will improve returns for us and actually for the MTA because it means they return to a higher revenue share earlier. And the other point is term. Term is obviously hugely important when you're looking at a project of this side -- of this size. So we're talking to the MTA right now. And that's a process and it then has to go through their Board. And I guess this is a little bit like sort of being in the midst of an acquisition. There's only so much we can say right now. But as soon as we have something more definitive that we can share, we will do so. And just to say that we have, I think, a good strong partnership with the MTA, and we're trying to make decisions between us that will work for both.

My sense in listening to you guys is that while you're obviously taking a hit to 2021 because you're back with the minimum guarantee that -- you sound reasonably confident that at the end of the day, you can balance that out with value on the other side. I don't want to put words in your mouth. That's at least what's coming across.

Yes. And that's the way we see it. That's what we're looking to achieve. And as I say, once we're there, and without wanting to jump the gun, then we'll be able to describe what that looks like in greater detail.

Okay. You guys have also decided to start adding displays back into New York. Any comment around that decision to why you're in the midst of these discussions? To start, I think you guys announced a relatively substantial resumption of display installations here in New York.

Yes. And look, it's a good time to build-out. When passenger numbers are low, actually, we can be more efficient in terms of our spend. And also, it's a little bit like a factory. You don't want to shut it all off, actually, then you look at the cost of starting it all back up again. Do you know what I mean? And actually, it's better to be -- to have a little bit more consistency in terms of deployment. And we're able to achieve that also through what we're doing today.

Okay. Just broadening out on expenses. You guys -- you and Matt and the team did a really nice job last year dealing with all the pressure. How do we think of beyond the New York City situation? You gave guidance around AFFO. So we can sort of work backwards into the cost. But what are the expensive items that you guys were able to save last year that are going to stick longer term versus those that are going to come back in '21 and beyond?

Yes. As you know, when you look back to last year, a significant piece of the cost savings were in terms of transit-related dollars going back to municipalities. And they come back with revenue because for -- the vast majority of our contracts are revenue share, and we've talked about the MTA enough, we know where we are with that. A number of our other cost savings last year were somewhat one-off in terms of [Audio Gap] step backs, et cetera, and other sort of savings in corporate that won't be repeated. There will be some benefit this year in terms of billboard rents, where we made savings that [Audio Gap] for the next couple of years. But remember, we also have a bunch of leases that have CPI step-ups, et cetera, and that will, to some extent, offset that. So I think the best way to think about Outfront in terms of margins is that we were a 29% OIBDA coming into the pandemic. And at the back end of the pandemic in a normalized world, we'll probably be in the same range.

Okay. Maybe last topic here in our last couple of minutes. I wanted to ask you about M&A consolidation. You guys have been acquisitive in the past. It's all -- it's an industry that clearly benefits from consolidation for all the reasons we've been talking about. What's your posture around acquisition activity in 2021, given what we're looking at right now?

If you think about '21 and think about our balance sheet. First, we'll switch the tap back on in terms of organic development. We're certainly actively pursuing a number of smaller tuck-ins. I think we had hoped that there would be more opportunity there. But right now, it's -- there's maybe not as much as we would have hoped. Now I guess, the third thing that our Board will be considering going forward is at what point to reinstate some common dividend. So those are the 3 things that we're thinking about as we review our balance sheet right now.

Okay. Great. Well, we're at 1:00. Jeremy, it was great to see you. And hopefully, we'll be able to get together in New York City or somewhere else sometime soon. But thank you for your time.

I certainly hope so, Ben. Thanks for the questions. Enjoyed it.

Thanks, everybody, for joining us. Have a great rest of the conference today, and we'll see you soon.