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

Okay. Thank you for joining us for this year's Deutsche Bank Leveraged Finance Conference. I'm Aaron Watts. I cover the media, tech and business services sectors here at DB on the credit side. Pleased to have Outfront Media back with us again this year. From the company, I'm joined by CFO, Matt Siegel. Matt, hopefully, you can hear me, and you're doing well.

Aaron, I can hear you and I'm doing great. Thanks.

Okay. Great. Well, let's jump right in. Here we are hopefully getting closer to putting the pandemic in the rearview mirror are and looking forward to brighter days ahead. Kick us off with some broad strokes on how Outfront moved to adapt to the unprecedented challenges over the past 18 months. How do you feel the company is positioned today to continue to rebound from 2020 and return to growth?

Sure. We've been very busy during 18 months and it seems so long ago. We made sure we protected our people, our assets, our franchises and most of all our liquidity at the time. So you probably recall we effectively recapitalized the company boarding preferred investors, a new high-yield bond amended our credit facility to make sure our liquidity was enough to withstand what we probably -- none of us could imagine during a pandemic. We, unfortunately, needed to lay off about 4% of our staff. But we're doing we could to protect most. We furloughed a bunch of people when activity went down, and we were able to amend some of our -- many of our leases, but importantly, we didn't change our portfolio. We didn't give up any of our franchises, and we kept most of our core people. So we think we came through the pandemic. I guess we're still coming through the pandemic pretty well. Our billboard business, which, pre-pandemic, was about 2/3 of our revenue is pretty much, I would say, in great shape, almost recovered and transit across the country is getting better. I think ridership is slowly returning. It seems a bit of a melt-up in riders in New York and Boston and some other places. And we feel we're in a great shape for pretty exciting things, and great growth rest of this year into the future.

That's a good intro to the discussion. Let's talk about the operations a little bit more. You grew organic revenues 53% in the second quarter, which was comfortably ahead of your guidance calling for mid- to high 40s growth. And looking ahead, you've guided revenues to be up in the mid -- possibly high 30% range in third quarter while expressing confidence in the business recovery for the back half of the year. As we now sit in October, are you as confident today as you were even a month ago in the business outlook? And what are the drivers of your improving performance?

So first of all, we see no reason to change our outlook. So that must imply something. As I just mentioned, we've seen billboard recovery. Along with the revenue outlook, we said we expect our third quarter billboard revenue to equal or surpass 2019 third quarter. And I said, our business feels as good now as it did back then. So we'll see when we report in a few weeks. Our Transit business has a very high growth from the pandemic year, still has a ways to go. But I'm encouraged. I see more and more people on subways and commuter trains. You have -- from my background, I'm in the office coming in a couple of days a week and it's good to see all the neighborhoods in Manhattan and even Midtown starting to get a little busier again. So I think we're in we're in great shape. Our large markets are probably trailing some of our small markets. I'm sure we'll get into that. That gives us more future room for growth.

Yes. So ad industry forecast or MAG updated its U.S. outlook last week and is now calling for out-of-home grow just under 11% in 2022. Does that pass the smell test to you based on what you're currently seeing and out-of-home pre-pandemic have been growing at or above, but looking to the future, is that type of the plus outperformance sustainable?

The Magna number seems reasonable. We probably over-indexed the industry in transit. So while our business fell more in 2020 because of that transit coming off a low base transit should grow more than the nontransit. So we might outperform that, but that number seems fair. As far as longer term, when I joined the industry in 2018, it was always said we performed with GDP. And frankly, the numbers maybe -- said maybe a little less than that. From 2018 or '19, the out-of-home industry outperformed GDP growth. And I'd like to think, postpandemic, we can get back on that trend line.

Okay. Great. On the billboard side, you mentioned the healthy recovery you've seen there year-to-date. And in third quarter, I think you're set to be at or above 2019 levels just to check the box. Even today, Delta's impact on the discussions you're having with advertisers, if any? And then on the vertical side, maybe you can touch on which verticals are being in the charge and which are lagging them?

Sure. We've really seen no material impact in our financials from Delta. There have been no municipal shutdowns. There's a couple of categories maybe impacted, maybe travel and tourism is down a little bit, although it's hard to prove that negative. It's rebounded some from the pandemic, so we see improvement. Some movies have shifted their opening from fourth quarter to 2021. So that business won't be happening in -- I'm sorry, to 2022, that business won't be happening in '21. But on the positive side, James Bond is finally here. And everyone is excited by that. We've rebooked that advertising 4 or 5x over the last 18 months. Disney's announced they're going to open all their movies in theaters this year. I think that's good for the advertising side. So again, if anything on Delta, we've had conversations with advertisers asking us what our plans are. We've seen no change in activity and we even see no reason to change what we're doing. On the categories, we're enjoying -- everyone's noticed Broadway is back. So Broadway has to advertise before they come back. So that's a small piece of our portfolio, but could go up from 0 is very nice. Entertainment, in general, which includes outdoor concerts and things. I assume most of the audience has enjoyed that return. So that's been great. Movies have picked up from pretty close to 0 last year and the tech and internet continue along with professional services continues to power our recovery. On the downside, never a big category for us. Political year-over-year, the almost 0 this year compared to last year, where we got a little bit in some of our larger markets. Telecom, I mentioned travel and tourism are down, but really, it's the positive categories, which are outstripping the negatives.

Okay. And you touched a bit on the bigger market versus smaller market differences you're seeing a moment ago, can you talk a little bit more about [indiscernible], specifically, just given you're waiting there? And also whether you see kind of the dynamic between your national advertising and [indiscernible] staying the way it is now or what's really changing there, because I know national [indiscernible] second quarter after local really being the more steady of the 2 throughout the pandemic.

Sure. Really local carried us through the pandemic much to another surprise. I was concerned that the restaurants, professional services would close their doors, pull out their phones and we'd have a hard time collecting. They wouldn't be advertising again. After some adjustment in the world, I guess, really solid. Our markets in the upper Midwest and some in the South in 2020 even achieved their budgets. So that's a pretty impressive demonstration of the power of local. And so we were very encouraged by that. Our national markets, you mentioned New York and L.A., our 2 largest markets skewed heavily towards national. So those are recovering now, as I mentioned, Broadway movies, entertainment are 2 out of 3, at least are big in L.A. and all 3 big in New York. So those are coming back. The national business, in general, has extra emphasis in New York, L.A. and in Transit. So National is really just catching up to local in its growth rate now. The good news is we see that helping power our future growth. So there's still plenty of growth for National to catch-up and hopefully pass our Local's growth, and New York and L.A. and Transit should benefit from all that.

Okay. Good. And your billboard yield basically back to 2019 levels in the second quarter. If you break that down a bit for us and discuss both occupancy and pricing? And what further upside do you see on those fronts?

Sure. We disclosed yield, but don't look into the details and public on occupancy and price. But interestingly, occupancy has recovered pretty well in static to pretty near 2019 levels. It's still a little under, but getting back there. Digital, a little slower to recover. Again, digital is a little higher, especially some of the high-profile New York and L.A. Digital can be a higher price point, so maybe the national advertisers will help that grow once they're fully back growing quicker than local. The ARPU, the price -- look, anyone in finance always thinks there's room and price. So I think digital is similar to occupancy, has more room to recover than static. And I think even beyond recovering with an inflationary environment and a medium that's probably ready to get back to 2018, '19, taking share. I don't see why digital pricing wouldn't catch up and pass 2019 levels or not necessarily this year, but over time.

Sure. Okay. So on the digital side, revenues are now up to approximately 25% of the total pie, as you pointed out, a real driver feel and should be for some time going forward. Do you think that outperformance can continue as a recovery gains momentum more broadly? And on average, the margins compare now on digital versus static boards?

Yes. I think the momentum is there and will continue. We all learned a lot during the pandemic. We learned a lot about our business, about our inventory. We kind of knew but didn't have evidence. Digital is very flexible, quick you can post and change easily, but probably work to our detriment in late March, early April 2020 as people are putting in changes in cancellations and our business reacted to that. We think it's working in the positive direction now as business is booking later on digital. So we're seeing our pacing pick up throughout the quarter. We just finished the third quarter. And we had bookings last year -- last week, I'm sorry, for the third quarter. So digital has proven to be a more flexible medium. And when we think there's a lot of runway advertisers like it, only 3% of our inventory is driving that as the high percentage of revenue. So we think there's room to go, and that's one of the core things we do for organic growth is add more digital.

Okay. This year, I believe you're expecting to add 150 to 200 new digital units. Is that an appropriate number to assume for a runway over the next couple of years?

I think so. The 150 to 200 will probably be closer to the lower end of that range this year, mostly because of supply chain issues. We've been -- the manufacturers have been able to build the screens that we need. And I think in most cases, they've left the factories and then put on both trade containers. We have like many people, we have logistics issue of getting the shipments in offloaded and where they belong. So we'll probably be, again, towards the lower end, which might skew our deployment next year toward the higher end. Our pipeline remains robust. So anything that doesn't get deployed in the fourth quarter is probably more of a timing issue when we have the screens in, they'll be going up. So I think going forward, that 150 to 200 seems right.

Anything -- Okay. Anything new you'd call out on how you're selling your digital inventory? We've heard from others in the industry talking about trying to make selling this inventory look more like digital sales, right? And just curious what you're seeing on that front without [indiscernible]?

So we're taking a lot of steps. We're investing with people, dollars and just resources and mind share programmatic. So making sure our digital inventory as much as possible is connected to various platforms where people can buy directly still small. It's gone from very small up to small. And we think that the growth is attractive. But it's going to be a couple of years until it's more meaningful and it warrants some slides in the earnings process. But for us, it's important that it adds flexibility. It enables the customer to buy however they want to buy, whether it's offensive and new incremental revenue or it's defensive, so when one prefers to go online to buy digital rather than talk to sales team. We want to make sure we're capable of accepting their business, however they want to deliver it. So we've added effort in sales. We've added people in sales. We've added IT support. I think we're moving in the right direction. Hopefully, it continues its high growth rate.

Okay. So on the other side of the coin, I wanted to ask you a question about the cost side. Remind us what quantum of cost came out of the business over the past year plus? And how much of that would be considered permanent in nature, including any rent concessions you were able to achieve? And maybe just asked another way, how should billboard margins look the business in the future compared to prepandemic levels?

So the biggest cost we took out, we're negotiating our transit contracts and getting them especially in 2020 into revenue share. So we were, again, at the beginning of the pandemic, looking at some minimum guarantees. And saying, this will be a problem if no one's on the trains without exception in 2020, all the revenue share. So we took -- I don't know the precise number, but hundreds of millions of dollars of costs out and help protect our -- some of our margins. On the billboard side, on the real estate side, it probably took out about $15 million, $18 million of lease expense in 2020, most of which goes back, we may be saved almost half, maybe 1/3 of that in '21 and a little less than that in '22. So nothing permanent on the real estate side. It's just we have the right to talk to our landlords about what was happening. And I think we came to some mutually agreeable concessions there. So that will go back as the world normalize, that will go back to the lease agreements we have in place. And then on the staffing side, we probably lost about 80 people, maybe 4% of our workforce and permanent reduction. We furloughed hundreds of people, mostly in operations based on reduced activity. Most of those furloughed people have already come back, again, based on activity in billboard and in transit. So that's a good problem to have. I'm glad to see that we have posting activity and business to take care of. So that's been great. So we don't think a material amount of the cost that came out of our business in 2020 will be permanently impacting our P&L. Going forward, the more we digitize our billboards, it's hard to see quarter-over-quarter or year-over-year, but the digital billboard has a better margin than a static billboard. We're adding a lot more revenue than costs that's been good. Over the course of a number of years, you can see hundreds of basis points of margin enhancement that could take, I don't know, 4, 5 years to show up. Some of that money is being reinvested in what you discussed on programmatic or technical or our ability to do business in other medium. But we think that digitization besides adding revenue at an attractive product can help our margin going forward.

Got it. Okay. I want to ask you a few questions about the transit side of the house. You had a nice bouncing revenues in the second quarter, albeit off a low bar set during 2020. On the earnings call that you discussed how ridership was improving and that you expected a further step up after Labor Day. How has that played out? And how quickly do advertisers react to this and put their wallet to work its ridership?

That's a good question, key to our business. Historically, we've expected 60-day gaps between change in ridership or change in audience and monetization. And that was, okay, we need 60 days to demonstrate and then we can pitch what we've seen this year is advertisers seemingly anticipating the recovery in ridership as it's been happening. So I think there's no surprise in the New York market that schools are reopening after Labor Day, and some companies are bringing people back to work. People are starting to get out of their summer places and come back into the city. So the advertisers were anticipating that seemingly as ridership kind of went up from 2.5 million average daily to, I think, the way is reading out. So there's 3.1 million average daily riders. Revenue has just trended along with that. So we're pleased to see that we don't have to wait. And we're hoping that, that growth becomes more of a yawning divide as we hit a little more critical mass. And revenue starts to outpace -- revenue recovery to 2019 start to outpace ridership. There's a bit of a network effect in these large cities. If you want to reach millions of people who exist there, the best way to do that is on mass transit.

Yes. And are you seeing any variances of note between your properties in New York versus Boston versus San Francisco or similar cadence of recovery across those markets?

We're seeing some variance. It's interesting. So Boston is similar to New York. I think there's a return to school effects after Labor Day, and people have a similarly hard time driving into our intra-Boston proper. So that's been beneficial. Washington, D.C., WMATA, another big franchise for us. The federal government hasn't really returned to work and that's kind of a binary employer in that market. So that's a little slower in its recovery. And then Bart, we have San Francisco. Clearly, those people in the tech world are better at working remotely than the rest of us. So maybe they move to Idaho or Hawaii or something. So we haven't seen much movement there. Importantly, except for New York, all of those franchises are on revenue share. So the downside is somewhat protected. We're just anxious for people to get back on the train so we can reach, communicate and advertise to them.

Sure. You mentioned the new -- a lot of these transit deals being a driver improvements you felt over the past year guarantees, you amended your agreement with the MTA recently. Walk us through the main changes there and what those changes mean from a revenue and cash spend standpoint for you?

So it's 2 important changes. One, we added 3 years before the guarantee, before the option to extend. So we had a 10 plus 5 contract, 10 years plus 5 years at our option. Now it's a 13 plus 5. So that gives us 3 more years to generate revenue, generate EBITDA, recoup the capital that we've spent, really generate alpha. We think that's a great thing for us. It partially offsets the negative impact from '20 and '21. In addition, we've agreed to reduce the scope, the number of screens that we're putting on the system. Most of that reduction is on rolling stock in subways and commuter rail. We think that's not going to have an impact on revenue at all. We sell a transit in bulk in packages. We don't sell screen by screen, and we think the reach of getting someone on a train, I don't need to be ubiquitous in every train or every car, every platform, if you're commuting on a daily basis or a semi-regular basis. We don't see our screens over the course of your monthly commute.

And any transit contracts coming up for renewal of note, any opportunities or [indiscernible] on the radar that go out?

The major ones right now, we're working on renewal of WMATA Atlanta renewal. We feel optimistic about that. We've got a great relationship, and that's an important large market for us. In the process of renewing MBTA, Boston, that has been a 5 plus 5 plus 5, 5 years at a clip at the franchisors option. So we're negotiating something there, which hopefully we can talk about soon. L.A. Street Furniture by shelters. We have a joint venture with JCDecaux. That RFP for renewal is alive right now, putting our best foot forward. We'll see how that goes. WMATA has -- we're in a temporary extension. I'm guessing they want to hold off until there's some normalization post-pandemic. And obviously, we're the incumbent. We've been a long-time player there, and I'm sure there's something mutually beneficial for us and municipal agency there. So some renewals. I don't think there's anything big or major that we don't have that we'd like in the category, better be lucky than good. We didn't win CTA, Chicago Transit in December 2019. We wanted it. We pitched for it, and that would have been a tough few years with that one. But we like the portfolio and the franchise we have. We just like you know your friends to get back on the trains.

Yes, sure. I've been on the train, just so you know.

Thank you.

Your other segment, really mainly the Canadian business now. Trend seem to be mirroring the U.S. rebound to a certain degree, how would you describe the environment north of the border. And we saw you sell out of the same other unit, your sports marketing business. Is the Canadian billboard business core your overall portfolio? Or is it something that potentially you could be monetizing and put that money for them?

Look, I think Canada is core. It's a similar billboard market. For us, not a lot of transit. We have some street furniture there. So it's performing like the U.S. billboard business. They were probably locked down longer, but -- they performed very well during that time, and they seem like they're getting back to their 2019 levels in growth. But certainly, if there's a way to create value by trading or shuffling your portfolio of assets, hopefully, we'd respond to look at that. But we consider the Canadian operation core to our business. The sports business. Interesting business, I think it was a well-run business. We were probably subscale with not achieving all the benefits of being a larger player. And the synergies between that and the more standard billboard business were hard to identify. So for us, it was more of a put it with the right owner and free up some capacity and mind share in our place to do other things.

So maybe along those same themes, I'll ask you more broadly about M&A. If you can just give us a peek into what you're seeing with the environment right now, pipeline of assets might look to you in our made large-scale attractive assets. Are there any out there that stayed your higher mix?

There's always interesting things to look at. We're doing a bunch of tuck-ins. Now we're focused on some of our larger markets, which we think have been under inventory. So we think we can use the opportunity to bolt them up. Nothing too large. So we generally using cash in our local real estate teams to find opportunities and acquire. We've not done a lot of doors. The mid-2020, became the end of 2020. We thought we were an incredibly strong position of liquidity and flexibility wise. And our idea was get overcapitalized for defense coming in and for offense coming out of the pandemic. So we think we are ready to be on offense. We haven't found anything that's too large that meets our requirements, so that's mutually beneficial with us from the seller. But we're still looking. There's a number of digital portfolios with an emphasis in New York in L.A. on them. We have great large plants in those markets. So these are more nice to have rather than need to have. But at the right price and the right opportunity, we think that would be great for us.

Out of curiosity, are you finding you're bumping into the same all the usual suspects, your strategic peers out there? Or are you also seeing private equity money hunting around for assets as well?

I think the industry is seeing private equity money come in. I think as a reflection of -- they recognized a leverageable asset and value and opportunity. But I'm also seeing the usual suspects, at least the usual suspect and a couple of the smaller boutique firms with some private equity support. So I think we're seeing a number of players which I think is more of a testament to the value and the opportunity in out of home. And look, it's a competitive market. If we can do something better, whether it's cell developed by -- we're happy to put the money where our mouth is.

Got it. And you mentioned liquidity a moment, both that an opportunity to jump into your capital spend. You made some proactive moves over the past year to push out maturities with your debt, improve your cost of capital, boost your liquidity position, I believe your next maturity isn't until 2025. So how are you thinking about the state of your capital structure now? What are your near-term opportunities for further improvement?

Right. So we have, I don't know, about $500 million of cash. We had an unused $500 million revolver. Our leverage is higher than we'd like but I think that's a case of not enough EBITDA as opposed to too much debt. So we feel the liquidity gives us a lot of flexibility. I'd love to spend that on something interesting, smart and to drive growth in revenue, EBITDA and cash flow. But as you pointed out, there is a lot of flexibility. There is a call option in June '22. I'd rather, again, spend the money on something interesting. But if we had no better use, we use that cash to reduce our gross debt, keep our net debt where it is. And with the support of a view and a lot of the listeners here, the capital markets have been very receptive and good friends of the company. So I'd like to think I can go back and raise money if I need it again.

Right. And on the leverage side, your current leverage is elevated as you pointed out, it's just under 8x. Where do you see that trending over the next 12 to 24 months? And I know you said a lot of that hinges on recovery, but you expect that to -- you expect to see that as more [indiscernible].

Yes. I think our EBITDA goes back to where it was and in 2019 as our revenue goes back to where it was in 2019. And with that, our leverage should get back to that same range and continue the delevering trend we had in a couple of years. Our NTA project deployment slows down and the recruitment outstrip spends or delevering from that will pick up the pace. So we feel there's great financial flexibility, good, solid balance sheet with liquidity and opportunity to do -- to participate in anything that the industry changes.

And your cash -- just on liquidity, your cash balance is a little above $500 million and your revolver available [indiscernible], is it your plan to kind of keep that level of cash or think about that pipeline that we discussed and other opportunities.

I'd like to think we can find ways to spend that. We reinitiated our dividend. In the third quarter, that dividend will grow as our revenue and AFFO grows. So that will use some of the cash acquisitions. We'll -- tuck-ins will use some and we'll pick up the pace of the NPA deployment in 2022. So I don't think I'm going to spend it all in one fell swoop, but we do think over time with -- mostly growth initiatives be chipping into that spend as we go.

Okay. And just in terms of capital allocation, how are you approaching the REIT distribution requirement this year. I know last year was a bit of an [indiscernible]. So how should investors think about your approach to that for this year?

So historically, we've -- before last year, even last year, we paid a little bit above our REIT requirement. We think the $0.10 initiation in reinitiation in September and what's likely to be approved by the Board in the fourth quarter should be ample to cover our REIT requirement this year. We think as our business grows, you'll see attractive, aggressive growth. We intend for the foreseeable future to be a big grower as opposed to a high yielder.

Right. Okay. And with your resumed dividends that you mentioned that started in August, how do you think about that growing over time? Will that be based on where leverage is landing? Will it be based on revenue trends you're seeing? How should we think about that level of spend?

So I guess the short answer is yes. There is both art and science to it. I wouldn't intend to get our yield back to the 5%, 6%, 7% range. I think we separated from CBS with too high a dividend or a yield target. And while the company doesn't control the yield, we can influence it. And I'd like to think that our fast-growing dividend will encourage people to look at the business and see it's rapidly improving. And maybe the dividend growth chases the stock up. I guess we'll see about that. But we'll take into effect the dividend, the REIT requirement, the communication, the messaging, we'd like to send with our dividend or leverage and other opportunities for capital deployment. And hopefully, we can manage people expectations, so they know what to expect and they like what they see.

Sure. Okay. And one last box I want to check with you on the cash side and free cash flow is CapEx. And you mentioned here what you were seeing in terms of digital board rollouts earlier in our discussion. So partly CapEx runs on your revenues. And I think a couple of percent of that is maintenance. And 2021 CapEx was down 41% for obvious reasons. But how are you kind of budgeting for the future? Is our historical norm kind of the right goalpost to put around future spend?

I think future historical norm should be about there. This year, I think our guidance was $85 million. I wouldn't be surprised that we're a little short of that on the growth CapEx side. Because of the supply chain, some of the screens are not being delivered. So therefore, we're not paying and putting them up and then it will shift some of the spend next year. So if I was going to -- maybe my growth CapEx will be a little higher next year, a little lower this year. But going forward, you stay in the 150 to 200 digital signed range. The $85 million seems in the right neighborhood.

Okay. Well, Matt, we're almost out of time here. I do want to give you a chance if you had any kind of closing remark with us here today, hear that.

Yes. I'm having a great day for the [indiscernible] more people tomorrow. Our business really feels it's still recovering. The billboard business feels as good as it ever has. Transit has a lot of runway, which is encouraging, and we feel great about the portfolio in the future of the industry. So hoping that comes through in all my conversations today and with you and look forward to chatting with everyone in the future.

All right. Great. Well, I hope next year, we can be under fluorescent lights in Arizona as opposed to fluorescent lights here. But I appreciate you taking the time to join us today.

Thanks, Aaron. I look forward to seeing you anywhere in the country.

All right, Matt, thank you.

Thanks a lot.