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

Good morning, and welcome back to JPMorgan's TMC Conference. I'm thrilled to be here with Jeremy Male, the CEO -- Chairman and CEO of Outfront Media, and welcoming him to the JPMorgan TMC Conference. Thank you so much, Jeremy, for joining us today.

Absolute pleasure, Alexia. Yes, looking forward to forward spending time with you, virtually, of course.

I just want to remind folks, if you have questions, please use the digital book and just take them in all, and I'll keep checking throughout our chat here and try to include as many as we can. But Jeremy, why don't I kick it off and talk about sort of jump into the Q&A here, and then we'll see what comes in.

Starting off with Outfront saw explosive growth with double-digit revenue growth in 2019 due to the momentum that you saw in national advertising and transit, and then obviously it was hard hit due to the exposure to COVID-19 OUT has lagged the recovery on a whole. I guess how is the billboard performing? Maybe you can give us an update on how billboard is performing? And how transit is performing as we emerge from COVID-19?

Yes, absolutely, Alexia. And again, great to be here. 2019 was a really great year for Outfront with record growth. And transit actually drove our growth in 2019 as absolute round numbers, 20%. But actually, billboard was also very, very strong at about 8% growth. So both parts of the business were performing extremely well. We then obviously walk into the pandemic and with lockdown orders, it goes without saying that, that's going to be pretty hard to sell outdoor eyeballs. But from, if you like, a trough of -- from Q2 last year, actually, we've pretty much seen progressive improvement for that. And while Q1 felt a little bit like Q4 and that maybe not much had change, Q2 we are now really seeing some very strong growth rates. And we've recently guided to being in the sort of mid- to high 40s for our second quarter. Now albeit off very common. So when we look a little bit further ahead, I think then it's important to really separate and dissect the 2 businesses. Because in our billboard business, what we are seeing is a number of markets already back to their '19 levels. And obviously, '19 was a record year. In fact, the way we break our markets down. We have 50 billboard markets. And right now, we've got 30 of those markets facing beyond 2019 at a higher level than 2019. And if you look at where the consensus has us, for example, and consensus has us ahead of 2019 billboard levels in the fourth quarter of this year. So what that implies is really a strong recovery across the board. Local always has a lower base than national. So national goes down further. And it will come back, if you like, in a rush with very high-growth rates versus local where local has been really pretty consistent throughout, due in part to longer term units and longer-term contracts, et cetera. So we're feeling very positive about all parts of our business, but that's billboard. So maybe some words then on transit. Transit is a little bit different because while the audience decline experienced during COVID, and billboard was actually reasonably temporary because it was a relatively short lockdown and audiences were sort of bouncing back by full time. Whereas our transit business, while passenger numbers are coming back, and anecdotally, certainly when I got on the subway, and when you do, I'm sure you're already feeling that. We had 2.3 million passengers, for example, on the New York subway last week. And that's a staggering number of people. I mean, on the same day, there was only 1.7 million airline passengers in the whole of the U.S. So it's still an awful lot of people. And it's still a very attractive audience. So what we expect is that our transit business will lag a bit while that audience repairs itself. Our national -- our transit business is also more disposed towards national. And it was national dollars, if you like, that as we said earlier, had that sort of that higher base that sort of decreased most throughout the pandemic period. So we feel very good that as passengers come back and that as those national categories come back that we've been missing, in it most obvious ones sort of movies, entertainment, outdoor events, travel, et cetera, as they come back, that's going to be a great growth driver for our transit business.

Okay. Great. Let's sort of dig in a bit more on the ad market, starting with your billboard business. I think you just mentioned that was it 30 of your markets, you're seeing kind of levels back to normal or better than normal. I'm curious if there is some distinction between what those markets look like versus the others that is driving kind of a faster return to growth versus the ones that are still lagging?

Okay. So when we look at the business across the board, let's say, our local business has been the strongest throughout, and is now relative to 2019, really starting to look absolutely fine. So the first thing is that it's the markets that are less disciplined towards national advertisers, I mean, that have done the best. Those typically bigger markets so the New York's of this world, the LA's of this world. It's really those markets that -- so for example, every movie that has been released just about since the beginning of time, will always advertise in New York and LA. They don't necessarily advertise. They don't necessarily take the top 5 DMAs or the top 10 DMAs. So it's ripe. And until those categories come back, generally, it will be those markets that feel most of the pain. But come back, they will. We're already starting to see some entertainment film money coming into it. When we look into Q3, generally, there's, I guess, the whole of the market feels pretty good, but we're seeing good growth there already or leading the way a sort of legal category. Beer is looking pretty good as we look into Q3. The sports marketing is a new category for us that is already laying down money into Q3. And auto actually, which is relatively a smaller category for us than it was in the past also feeling good. So we think that as these other categories that have been out of the market return, I think we can feel very positive looking down the road.

Are there some categories that are surprising you with their outperformance on the upside?

Well, I think what we're starting to see now is some of the DTC money coming back. And I mean, I guess, some of the most obvious within that would be the kind of whole delivery services really starting to come back with interest. Maybe not too surprising because in one way or other, actually, they enjoyed their time in the sun, I guess, when everyone now need to probably go out and shop a little bit harder than they were over the previous few months. But it's certainly great to see some of those DTCs coming back.

And the film slate looks actually quite robust, maybe not quite so until sort of you get into July or August. But would it be fair to assume, and you mentioned you see the entertainment companies coming back in Q3. Would it be fair to assume that by year-end, that category could normalize as well?

Yes. We absolutely believe that right now. I mean, I think what we've all learned over the last 15 months is that it's wrong to absolutely assume anything. But providing that there's nothing that disrupts I mean, the theater business, I mean, one of the other great yardstick for our business in New York is the opening of a Broadway in September. I think September 17, something like that. So with Broadway coming back, that's great for us with thumbs on the seat back in theaters, that's great too. I think another interesting point in terms of New York was the announcement, I think it was yesterday that there's going to be no in-home virtual schooling from September. So that means, suddenly, everyone's once again back out of their homes. And I think when you look at all of these sort of these 3 points, it sort of makes you think, yes, there's absolutely no reason why the film category won't be back and won't be choosing out-of-home as a great way of getting their message out. Out-of-home has always been a spectacular branding mechanism. It's big, it's bold, it's creative. It gives stature. And that every film that comes out in a way, it's like a new brand, it has to be built in a matter of days and weeks. And there's no reason to assume that in the future, the movie category won't wish to be partners with us.

Can you remind us how much visibility you have in the billboard business? If we look at the back half of the year, how much is sort of committed?

Yes, I'll give you a couple of touch points there. So if I look now at my billboard business for the third quarter, I have a round number, 70% of the money that I would expect to write in the whole of Q3, okay? So I've already got 70% of it in the bag, but I like that. So what -- that's only an important number for me, sort of relative to -- so if I look at 2019, what percentage then did I have in the bag compared with where we ended up, and it was actually 70%. So obviously then this is slightly different. That absolute value is slightly different. But what it means to me is that we're in exactly the right place in the third quarter. And we're in a very similar place for Q4. There's less. Obviously, it's more -- somewhere between 40% and 50%. But the -- what we're seeing from that visibility was why we were able to raise our AFFO guidance on our last call to above the range that we had previously guided. So yes, that's driven by that good visibility.

And then moving to transit, as we spoke before starting this live chat, it feels like ridership is improving, at least in New York City. Is there any -- is there demand for transit advertising? I mean, typically, transit durations, I think, are shorter about 4 weeks. I guess, how quickly can this improve in terms of the advertising demand with ridership levels increasing?

Yes, absolutely. Transit, in general, once again, as we go back to 2019 was the highest growth part of our portfolio. And you can get -- achieve audiences on transit, but you just can't -- that you can't get above ground. What you do need, obviously, is audience. But we firmly believe that we don't need to get back to 100% audience to get back to 100% of advertising. And that's really for advertising dollars. And that's really for 2 main reasons. The first is that you and I will be -- I'm sure, subway riders every week, sort of pretty much from here on, certainly was before. But maybe I won't do 5 days a week. Maybe -- we all know that there is a world where there are some days when it may not be absolutely necessary to be in that office environment. So I think that's one reason. I think the other reason is that I think just, in particular, when we think of systems like the New York subway, I just think the environment for consumption of those ads will be better with slightly less people on the train. So that's the second reason. The third reason is that we've been digitizing our transit properties in general, but New York, in particular. And what's that done is it's -- we now have this amazing creative landscape. I mean, for people to just fill with ads, it's so much more engaging than it was in formal times and increasingly so as we digitize. So for all of those reasons, we think that we can get back to great transit revenues, great transit growth without necessarily being back to that 100% audience level that we saw post pre-COVID.

Jeremy, is there a magic number? Is it 70%, 80%? I mean, I guess it's hard to tell you over crystal ball to where you have to get to in terms of ridership to get back to historical ad revenue.

Yes. I think when you look at that -- I mean, it's a great question. I'm not certain that -- I'm thankful to say none of us have been through a pandemic before. So this is all a bit first time for us. But certainly, when I talk to our managers who are closest to the business, closest to the environment, closest to the clients, I think we think it's probably in the 80-ish percent, maybe 85, something of that order. But that, as I said, that is a number that requires a health warning because just because we haven't done it before.

Right. Right. I've got a few questions from the audience. One you just actually answered. So we're good there. But the other one is, can you talk about the propensity of the streaming services, right, like Netflix, Amazon Prime, et cetera, to advertise their movies or television shows on the billboards versus the traditional studios?

Yes. I mean, the streaming services for us has been a pretty much a big category -- is one of the categories that really drove 2019 for us. And they continue to be extremely supportive of our medium. I think when you look at -- if you then, from Matt, take one step back and say what's going on in the media market in general. With the -- essentially decimation of audiences on linear TV, which is driving huge inflation in terms of CPMs, and indeed just an increasingly fragmented humane landscape, audience landscape when you look out there with a bunch of your audience in essentially an ad-free environment. I believe that, that is going to be a positive for out-of-home as we move forward, that maybe we haven't really started to fully benefit from right now. So I think streaming service, I think, great for us in 2 ways. Great dollars when they're advertisers. Great content and therefore attractive audiences, which I think makes the dollar flow from linear TV to us incrementally improved.

Just sort of jumping over to digital billboard conversions. You've enjoyed some great growth and transition from traditional billboards to digital, how has digital recovered post COVID? Do you have a sense that you're starting to capture more of the digital advertising pie?

Yes. Well, when you look at the growth of digital advertising over the last sort of 2-year or I think last year and including projections of this year, they're going to grow by something like 25% to 30%, but it's over that time out-of-home because of how its impact last year, will still won't be back to where it was. So I think it would be a hard argument to say that we're generally -- we're taking share from them right now. But I do think that as we look forward, a couple of things are going on. Firstly, ourselves and the industry are continuing to invest in hardware, in product. There are more digital boards going up. We are investing in our transit system and so to make these sort of magnificent digital light-boards upon which we can show wonderful content that could otherwise go into a digital environment. I think that, combined with now the ability of out-of-home to be able to react to short-term money and be flexible through a more automated platform, including the ability to trade our inventory programmatically, I think that will be a significant growth driver for digital -- our digital business. I think that some of that money will, say, come from maybe TVs, maybe some of it will come from digital. But actually, what we know we do is that as a medium -- most media budgets require -- and products require a media mix. We work very, very well with digital in terms of driving online behavior. So I think for the most part, we're going to be in a supplementary to the rest of the digital ad environment. And right now, digital revenues in the U.S. are round numbers, so 28% to 30%, something like that of the market. And I happen to be in the U.K. for the first time since last February right now. And right in this market, and this is our home market, then north of 50%. So we're only going to go one way. And I think in terms of percentage in the U.S., and I think digital is going to be a driver of growth and a real tailwind to the industry from here and really for a number of years.

And do you think you'd track to normalized levels in terms of conversion from static to digital in this year? Or is that going to be next year?

I think it will be this year. We didn't have a particularly high conversion rate in Q1, but that was more -- more about chance rather than anything else. And right now, we don't think we're going to have any supply issues because that's the other thing we're keeping on arm. But assuming those supply issues of digital boards, then we will be right back in that 150 to 200 range that we were targeting pre-pandemic.

Just jumping to integrated campaigns. Are you seeing more integrated mobile and digital campaigns? Do you expect these campaigns to increase going forward? And I guess, which verticals are more interested in the appeal of these integrated campaigns?

Well, rather than sort of think about verticals, I think it's important to think about it between national and local. National advertisers typically will be looking at this is the out-of-home budget, and this is their mobile budget, and that's sort of embedded within their digital budgets. So we tend not to take many campaigns if you like, from national advertisers for our digital -- for our digital product. Our digital product is more about local advertisers. And we continue to talk a lot about local. We talk about it as a "would you like fries with that?" Geo-fencing a billboard with a number of sort of mobile impressions. And we still write a lot of campaigns. And what it gets us right in the conversation because occasionally, out-of-home may have been seen as somewhat sort of, if you like, history rather than the future. For us to go in and talk to local advertisers about how we can integrate with mobile, how we can drive online behavior, attribution modeling associated with analyzing how we're going to drive online behavior. Suddenly, we're right in the picture. So in terms of absolute dollars, mobile for us, it's not going to be a big driver, whatever it is, $10 million a year, something like that, which on an absolute size is obviously a relatively small percent. But it opens the door to so many conversations that we wouldn't have if we didn't have this as part of our armory.

And you touched on programmatic buying earlier. I guess, how big of an opportunity do you see kind of automated or programmatic buying being for your company in the future?

I think there's two pieces to that. One is how much buying will become more automated on the one hand, and then maybe let's talk about -- then let's talk about programmatic. I think on an automated basis, I think we're going to have what we -- an automated, open direct platform to the majority of the large out-of-home buyers in the U.S. in the not-too-distant future. And as time goes on, an increasing proportion of all the business we write will be done in that more automated way. There will then be a piece of that, that will be traded in a programmatic way. And what that typically means is that there is -- they have much more flexibility. So they can switch one creative off in one part of a city and to another creative that they've been using elsewhere that they see -- that they're seeing drive more hits on their website. They can do that at almost at the touch of the button. Now part of that business, part of that programmatic business may also have a real-time bidding piece to it, or it may be, I mean, just at rates previously agreed in what we call a private marketplace deal. But all of those different pieces are all going to be important in, if you like, being that growth driver for out-of-home that I discussed earlier.

Can you talk a bit about your competitive positioning actually in both businesses in the billboard side and the transit side? Do you find one -- they're very different, but do you find one more competitive than the other? Do you think they're -- specific to the billboard side? Do you think there needs to be more consolidation in the industry?

When you look at the billboard business, there are some locations that you have that somebody else doesn't have. And if people want a particular sign, then either you've got it or you haven't got it. When you look at the sort of footprint of us and our competitors, on the face of it, our principal competitor is Clear Channel because they have a similar -- they have a footprint that looks a little bit like ours in certain markets. And in certain markets, there's a competitive element, depending on how much money is in the market at any particular time. But for the most part, our competition is not the other billboard companies. It's all about Facebook and Google and Amazon. That's where the true competition is. I think the perception that out-of-home is, if you like, as I say, particularly as a 4% medium, out-of-home is a market that should be restricted in its ability to consolidate frankly, I think is nuts. Going back to the sort of smaller question in terms of -- or the other part of the question in terms of just general acquisitions. But we are actively engaged in a number of sort of tuck-in acquisition conversations at any one time. And this year will be no different. We announced a couple in first quarter. I mean it wasn't significant in terms of absolute spending, is around $20 million. But we would anticipate continuing to down that path as the year progresses. And typically in markets where we already have sales and operations teams because that makes most sense. We can just get most cost synergy in those markets.

I have a question that came in. I think about our previous conversation, how much of an impact could this shift to automated buying or programmatic hub on revenues billboard and/or margins?

Well, I think all positive. I think anything that is putting tension on our assets in terms of occupancy. So anything that's sort of increasing demand and flexibility, I think, will be increasing demand. We are a relatively fixed supply inventory. Sure when you go and digitize a board, you obviously generate more inventory. But for the most part, we're relatively fixed supply. So anything that increases tension on those assets is going to be generically good for growth because growth is all -- is about yield growth. And yield is that combination between rate and occupancy. If we go back to 2019, we grew by 8%, which was not so much to -- in our billboard business, 20% in transit, but now billboard was 8%. And that wasn't really about new inventory, a small piece of it was but the majority of that was just yield growth. And then when you go into the yield growth, the majority of that actually was rate rather than occupancy. And when we look right now at our same board pricing in our billboard business and we look back and we look at what we're achieving in 2021 versus 2019, we're actually achieving slightly better rates on the same board basis this year than we were in 2019, which is obviously a good sign for us to get back to those 29 levels by the back end of this year.

Just looking longer term, how do you expect or do you expect any changes longer-term to result from COVID-19 in terms of how it impacts the industry? I guess, put another way, when do you expect you can get back to momentum that we're seeing late in 2019 for out-of-home? And do you think advertisers have a newfound appreciation for the outdoor industry post COVID?

Well, if you look at Magna and the other forecasters, they've all got out-of-home increasing double digits this year, high single digits next year, implying that we're really getting back to '19 levels quickly. As I look at it, there's nothing in their forecast. I think that are absolutely reasonable. And some of what we were talking about before, I think, is also right. I think that some of the shifts we've seen since the pandemic in the rest of the media market, I think are generally going to be positive for out-of-home. I think they already work. Don't forget that out-of-home had been slightly increasing its share in 2018 and 2019. So -- on a worldwide basis. And there's absolutely no reason why out-of-home won't be one of those share growers for the future. I think the structural growth story for out-of-home is absolutely intact and possibly even more so post-pandemic and pre-pandemic.

And then just sort of jumping into liquidity, we only got time for one last question. You have grown your capital structure. You took several steps to improve your liquidity position during the pandemic, including drawing down on your revolver, raising preferred equity and suspending the dividend. But you expect to reevaluate, I believe, later this year. Could you talk about your efforts generally here, your thoughts here on the capital structure and your efforts here to maintain the strong cash position?

Well, yes, you're right, we did take a number of actions that we really felt were prudent at the time. And we said at the time that would enable us to -- that will put us in a strong position. I mean, as we come out of pandemic, which is absolutely right. As we look at it now, our capital essentially is for converting to digital tuck-in acquisitions. And then the other piece that is referencing is, obviously, our dividend. We have -- as a REIT we have a required dividend, and we have the dividend that we might decide to pay. Prior to COVID, we were actually paying a higher amount than the required dividend. And as we go throughout this year, we'll be thinking about the dividend we have to pay as a REIT, or the dividend we may decide to pay to demonstrate, I mean the confidence that we have in the future of our business as we go forward.

All right. We are out of time. But thank you so much, Jeremy. I appreciate it. This has been great. I really appreciate your time and your insights here.

Thanks, Alexia. I enjoy talking to you.