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

Okay, we're going to get started. Next up at the conference, we have OUTFRONT Media. And from the company, CEO, Jeremy Male. I'm Aaron Watts. I cover the media space from the credit side at Deutsche Bank. Jeremy, it's great to be back in person again and appreciate you making the trip. Hopefully, this is symbolic of a return to normalcy and that we are putting the pandemic behind us.

Perhaps start us off with some of the broad strokes on what factors are driving OUTFRONT's recovery from the unprecedented challenges over the past 2 years and how you feel the company is positioned today to sustain the momentum you've shown us so far going forward.

Good. Well, thanks for the introduction, Aaron, and good morning, everyone. It's, as you say, good to be here, good to be here in person. I think to answer the question, you have to take sort of one step back and think how were we as we went into this through '19. And if we look back to 2019, out-of-home in general grew as a market by around 8%, and we were up just under 12% in 2019. So the sort of the fundamentals of out-of-home and indeed even more so for OUTFRONT were absolutely in place. So around about this time next year, we were just saying that it was almost exactly the same day 2 years ago when you canceled this entire event. And when suddenly everyone's at -- under stay-at-home orders, selling outdoor advertising was a pretty hard task. So we took quite a steep V on the way down, steeper than the rest of the industry. And we were -- we have a focus, some focus in transit. We're also more exposed to national advertising, which turns the tap on and off quicker than local. And we're also big-city focused. And we, for example, New York and L.A., as we may get on to our biggest markets and those markets were really tough. But as we sort of come back out, national advertising has returned with a vengeance. We're seeing growth in our digital portfolio. Transit is racing back -- not quite back to 2019 levels until next year, but it's racing back. And in general, I think that advertiser demand for out-of-home is as it was as we were going into the pandemic. When you look at some of the noise around digital with sort of brand safety issues, cookie issues, et cetera, you look at linear TV with declining audiences, increasing inflation, I think all of that has been a positive at the margin for out-of-home.

Yes. All right. Well, that's a great start and a lot to unpack there. You grew organic revenues almost 21% in 2021 and 38% in the fourth quarter. And looking ahead, you've called for first quarter revenues to be up in the low 40s range from last year, and for the full year 2022 AFFO growth of almost -- of around 60%. As we sit here today with all that's going on, both domestically with inflation and rates and internationally with some of the strikes there in Eastern Europe, are you as confident today as you were a few weeks ago even in the business outlook?

Yes. Maybe sort of to start that, you said so last year, we grew by around 20%. But what that masks is that in the first quarter of last year, we were down 28%. And in the last quarter, we were up 38%. So you look at the steepness of the V recovery and sort of continue that through. And it's that, that we guided to on our call a couple of weeks back, and yes, we guided to being up in the early 40s. Look, right now, we don't see any fallout with regards to the sort of the broader geopolitical situation. Undoubtedly, media as a whole is, to some extent, GDP-based. So if the geopolitical and inflation, whatever does have broader impact, then it would be it would be irresponsible to say that it wouldn't potentially have some sort of impact on the industry. But right now, we feel as good about the guidance we gave a couple of weeks ago as we could be.

All right. The first quarter that we're currently in will likely be the last pandemic impacted favorable comp for the advertising world and you just mentioned that challenge last year. Ad industry forecast of Magna has called for out-of-home to grow around 11% this year. Does that pass the smell test to you based on what you're currently seeing? And in the past, we've discussed industry growth over the medium to longer term trending towards GDP plus. Is that still the right steady state growth rate in your mind for the industry?

Yes, it feels right. Certainly, the 11%, I think, feels absolutely doable. Lamar, I think, guided to 7% for the year, something like that. Now they had a much lower beta due to the local advertising exposure. Our recovery will be stronger than that because of that national exposure that we have, for example, and also the fact that the billboard business, I think, because of our exposure in those big cities, once again, we will grow a little ahead of the market. And also our transit business will grow ahead of that. We guided to being roughly double last year's revenues in transit. So I think when you look at the analyst consensus at the moment, they have us in the high teens. And with round numbers, 20% of the market, that's certainly going to be a decent piece of that 11% growth.

Sure, okay. And just one follow-up on the inflationary environment we seem to be in at the moment. Remind us how the business has performed in the past. And I know you've got some checks and balances in terms of your long-term leases versus maybe some of the movement we might see on ad prices or on the revenue side. Can you just kind of clarify how the business has reacted to this type of environment historically?

Yes. Well, I'm pleased to say that we haven't really seen this kind of environment, kind of forever in terms of inflation up in the high single digits. But -- so hard to say exactly, but what I can say about our business is, you alluded to it, we have on average, 9-year terms on our asset base. So very, very constant level of pricing on our assets in. And we have, in the national sales environment, average contracts of sort of 8 to 10 weeks. So we have the ability to reprice on the sellout. And we're very well guarded, if you like, in terms of assets in. So look, I'd say, on balance, if we're reasonably canny, actually, a bit of inflation will be a good thing for our business rather than bad.

Okay. So let's focus a bit in on the billboard side of the house. In the third quarter, I believe it was, you turned the corner in terms of surpassing 2019 revenue levels. And then you grew on that in the fourth quarter. I think you were up 11% versus 2019. What markets are leading the charge back for you? And you hinted at this in your opening remarks, but are the bigger markets that were harder hit during the pandemic and lagging previously poised to be the outperformer now?

Yes. And I think that's definitely the case. If we look back to last year, and we look across some of the middle markets, so in the Midwest and the South, we were ahead of '19 pretty much right the way through. It was really the L.A.s, the San Franciscos, the New Yorks. So both sides of the coast were where we really took the pain. So yes, they're coming back, and they're coming back very, very strongly. The markets that were already up are continuing strong. And implicit within our guidance of in the 40s, we were, as you said, 11% up in '21 on '19 in the last quarter, implicit within that was a further expansion of the delta between billboard revenues of 2019. So pretty much every single geography for us right now in billboard is strong.

And then looking at it from a category standpoint, what would you say are some of the categories that are pushing to the positive end and then what's still lagging?

Well, pretty much everything is up. But what was great in Q4 is that you saw tech come back very strongly, media coming back strongly and within that, movies and streaming. And that -- when you look at those categories, actually, they are always big spenders, if you like, in New York and L.A. So that's part of what's starting to really improve those markets for us. What else was strong? We've -- in addition to -- those are the categories that, if you like, [ no one loved ] out-of-home, they've always spent a significant percentage of their dollars out-of-home. On top of that, we've seen some great new categories come in, sports betting is one of them, where we took around $4 million in Q4. I think it's going to be north of that in Q1 this year, and that could be a $15 million to $20 million category for us this year. So it's all of the old categories coming back and new ones coming in. In terms of weaker categories, as you would expect in Q4, political just because for obvious reasons. And insurance, but that was more related to the strength of that category actually based on a couple of big buys the previous year. So nothing going on there, but that's the only categories that were down.

We've heard -- on sports betting, we've heard about that as a burgeoning category with a lot of potential for the future from radio broadcast or TV broadcasters, from yourself. Yet some of the players in that space have already talked about pulling back on media spend or at least marketing spend. How do you think about that as a category going forward? Do you think it will have a base level that it will be prominent for you? Or will it be ebbs and flows as new markets start up? How are you looking at that?

Yes. I've got to be honest, I'm not surprised there's a little bit of pullback in general in terms of the ad spend. It seemed to me that over the first few weeks of this year, every time you put on the TV, I mean, you saw 3 sports betting ads in a row. I mean it was just potentially overkill. As we look going forward, I think there may be a little bit of pullback maybe sort of Q2-ish. But I suspect that the sports betting market is going to be driven by football. And I believe that as football comes back later in the year, we'll see a return of those dollars. So as I say, we think it's in that $15 million to $20 million range.

Okay. Your billboard yields and the growth there has also been really healthy. Can you break that down a little and talk to us about what you're seeing on the pricing and the occupancy fronts?

Yes. Yields were strongly up in the fourth quarter, and will be strongly up in Q1. When we drill into it, we saw in Q4 a sort of 5- or 6-point improvement in our occupancy on our static assets and around a 10-point improvement on our digital assets. So the balance of that [ 20%-odd ] growth you just referred to is essentially rate, essentially rates. So certainly skewed towards pricing, but quantum increases in occupancy rate. When we look at our occupancy rates now -- and we don't spend a lot of time looking at occupancy rate. We do think more in terms of yield, the combination of rate and occupancy. But they're nudging back towards -- if we think about our static business, we were typically in the 84%, 85% range, something like that. Last quarter of last year, we were nudging 80%. So there's still some good growth to be had in occupancy. But I believe the real opportunity for the industry and for OUTFRONT is in pricing. We're still a very low CPM business when you compare us to just about any other medium. And I think that's starting to be understood.

Yes. And digital revenues are now up to around 31% of the total pie and have been clearly a real driver of growth for you. Do you think that outperformance can continue? And where do you see digital display revenue contribution ultimately landing as a percentage of the whole?

Yes. I absolutely believe that digital will be a key growth driver for us as we go forward. Our digital revenues were up around 70% in Q4, in our business as a whole, and that theme will sort of continue through Q1. That's being driven by a couple of things. One, the fact that we continue to build new digital assets, both in our billboard business, but also we've been converting to digital and our transit assets, the MTA being the best example of that. So basically, you've got more hardware in the field. And then the way that we're communicating with those assets is becoming increasingly automated and increasingly programmatic. So that's the sort of 2 key drivers. From an advertiser point of view, you can just be far more reactive, you can be far more creative. So it's -- I think from the 31% of revenue that we were in Q4, I'd be slightly surprised if we weren't in the 35% range by the time we get to the back end of this year. If we look to the market that -- obviously, I'm very at home with the U.K., U.K. is north of 50%. We will be, I think, north of 50% within the medium term being 3 to 5 years.

Okay. And within that trajectory, I know you've spoken to adding around 150 to 200 boards a year. Is that the right flight path to get you towards that goal?

We think so. Yes. I guess there's 2 governing factors in terms of digital billboards. One is zoning, because not everyone wants one at the end of their street. So we have that aspect to it. And then the other aspect to it is just in certain markets, you have to be aware of the demand. Because essentially, with digital, you're increasing suppliers so you just have to take that into account. But we have said for a while that we can make IRRs of north of 20% on each digital asset we put in. I sign off every digital conversion personally that we do. And I can assure you that we're still absolutely and always in that zone. And typically, yes, that 150 to 200 feels right in our wheelhouse. If we can also add on a little bit of incremental digital through acquisition, then we'll maybe get a little bit north of that.

Okay. Let's shift gears over to the transit side. It's good to see that transit revenues have been doubling the past couple of quarters, albeit below bar. Talk to us about how ridership is trending, where we're at relative to 2019 levels, and are those themes relatively even across your properties?

So if we sort of -- if we think just back to the back end of last year, the world seemed like a great place. Ridership was increasing nicely. And then something that nobody could pronounce for the first few days, as in Omicron, came out. And everything then took a step back. So pleased to say now -- and I can't see some wood there to touch, that we seem to be well out of that now, and with mask mandates going everywhere, et cetera, et cetera. Ridership has now started to increase everywhere. Leading the pack is New York, I'm pleased to say. It was -- it never had the same decline here in the south. We have the transit in Miami, for example. Markets that are still, if you like, behind New York that's now back to around 60% of ridership are San Francisco, where bar rapid transit, is behind that, but I'm pleased to say going north now and at the highest it's been for 2 years; and D.C. which is largely driven by government employees and the government hasn't really had employees back yet. So that's a little bit behind. But look, in general, if we think about our transit business, in Q4 we achieved around 70% of '19 of sort of 55%, 60% of revenues, so -- passengers rather. So our revenues are trending beyond passenger growth, and we expect that to continue. We've always said that we don't need 100% of passenger rides over '19 to get back to 2019 revenues. And part of that is driven by the reach question, because -- I'm a transit -- I'm a subway user, right? But if I'm in the city now 4 days a week rather than 5, you're still going to -- you're still going to get me 8 times, just not 10 times, okay? So the reach of our transit assets will come back far, far quicker than absolute daily ridership numbers. The other point is that, as we touched on earlier, we've been transforming the asset. It's now this amazing digital environment when you go down into the subway. We're digitizing all of the rolling stock on Metro-North Long Island Rail Road and on the subway trains themselves. So actually, it's just quite simply, it's a better product. So we're very confident of a return to 2019 levels. Just -- it will happen as we go through this year, and we think that '23 will be the time when we punch through that.

Yes, I was going to ask, with hybrid work models now seemingly a part of the way life will be, can ridership recover to historic levels? And how does that impact you on an advertising front? But it sounds like your point on whether you're going in 6x -- you're on the train 6x or 8x, the advertiser is still getting that reach. Is that the right way to think about it?

Absolutely. So advertising is still getting that reach. And I think it's -- if you think -- we've just stepped out of the pandemic world really. And so I think trying to understand where the world will be in 2 years' time, right, and if you think of how quickly it changed. And actually, I think I can already start to feel the fact that it's changing back the other way where, I mean, a number of organizations, particularly in the financial world are saying, "Look, guys, you've kind of got to be back in 5 days." We're not at the moment. We're saying, look, you've got to be more out than in. But we know that as time goes on, we're going to be pushing that and maybe that then goes to one flex there. Who knows? Really, really hard to say. But look, I think in general, when you look at public transit, you think about the environmental friendliness of public transit, you think about the fact that cities just don't work without public transit being a significant piece of the absolute transit infrastructure. I feel totally confident and -- in us being big in transit. I think the other thing is that when you look at transit as part of the out-of-home market, it's just a piece of the out-of-market. In 90 -- I'm sorry, in 2019, of our top 100 advertisers, 94 of them use transit advertising and billboard advertising. They're kind of one and the same. And it's a great piece of our asset base and means that if people want to dominate in New York, just -- you can do that just through out-of-home, just through our below- and above-ground assets.

Okay. I probably wouldn't have asked this question a month ago. But since I just filled up my car with gas last week and it costs almost $100, I'm going to ask this question. Does that -- does the shock of the increase in fuel prices, do you think that can influence mass transit ridership here over the next, let's call it, the near term? And could that help drive ridership back faster?

I don't know that -- I'm not sure that the increase we've seen so far would absolutely make someone switch from one to the other, I guess, maybe right at the margin. Certainly, the times that I'm sitting in my car in wherever it happens to be on the GWR or something, it doesn't seem to be having much impact generally in terms of traffic.

Okay. And one last question with transit related to the New York MTA deal, which is obviously a big one for you. Your agreement has evolved over the last couple of years. Have your recent experiences and learnings, not just with the MTA but with other transit authorities you partner with, changed your view on the transit business holistically? Do you continue to see this as a part of the growth story for OUTFRONT and an area you would pursue further opportunities as they arise?

Yes, 100%. I think we sort of touched on that with my last answer, I guess. Yes, it's absolutely -- it's part of our DNA. It's a great piece of the out-of-home market. It has a different margin structure in that it's a 20% EBITDA margin rather than a 40% EBITDA margin. But it's certainly something that we will continue to invest in. Right now, as we look forward, most of the significant transit contracts are put to bed for a while. So there's nothing -- there's no particular change we expect to see in terms of the breadth of our transit assets in the near term. But yes, it's coming back nicely, and it will continue to be a strong part of OUTFRONT.

Okay. I wanted to ask one question on the margin side of the business. Everyone had to make tough decisions through the pandemic. But as you think about the margin profile of the business going forward, is it materially different from where it was pre-pandemic? And what are some of the factors that play in that?

So during the pandemic, people were saying, look, the margins are obviously reducing fast. People were saying that -- where do you see margins going? And we were saying at that stage, look, we think that post-pandemic margins will be the same as pre-pandemic. We're slightly modifying our view there, in that our transit business is a 20% margin business and will, we think, continue to be a 20% margin business. We think billboard margins are likely to slightly enhance over time, and that's being driven by a couple of things. One is just the increase in yield and the fact that 90% of our billboard lease costs are fixed. So just inherently there, as our revenues increase, that will drive margin. And the other is growth of digital as a percentage of our business because -- in digital, we sort of, at the moment, when we look to make a digital conversion, we're making around 4x in terms of revenue on that converted board versus 2x of cost. So that is also margin enhancing. So as we go forward, we're expecting that our billboard margins could -- will see some gradual increment over time. So that's a positive.

Okay. I wanted to ask a few questions on M&A and kind of the environment there. You spent $136 million on acquisitions last year, the largest of which I think was around $30 million in all-in existing OUTFRONT markets. Can you talk about the current environment and how the pipeline looks? And do you expect to continue to focus exclusively kind of on more tuck-in nature acquisitions and in your existing markets? Or can you see something more material in broadening your footprint?

Yes. So last year was an active year, particularly in Q4. The largest acquisition in Q4 was around $30 million, and that was actually in Grand Rapids, in the northern part of Michigan. And typically, we talk about us being top 25 market focus, and we absolutely are. But that certainly doesn't preclude us adding on weight in some of the smaller markets where we are strongly represented in terms of asset base and management strength. So we will continue to look for tuck-ins. The pipeline as we see it right now is healthy, without a doubt. We would expect that we'll be making some sort of tuck-in announcements over the next sort of 2 to 3 months, which we think will be well received. And in a way, there aren't many places that were not. So in terms of the -- in terms of other geographies, there may be some, but it's unlikely. Most of them, for the most part, will be enhancing to our current asset base. If you take a step back and say, what about the broader landscape, who knows. Right now, it seems that all parts of the industry are doing well, and we'll see how that develops.

How competitive is the marketplace right now as you look for assets that you would consider attractive? I think about your peers who have said they're all looking for acquisition opportunities. Decaux, I think, pulled back on their dividend to maybe focus on M&A opportunities. The Adams transaction, from what I can gather, was done at a fairly robust multiple. So do you feel like pricing is going to be at a point where it's going to work for OUTFRONT?

Yes, absolutely. I do think it will work. That's not to say that it's not more competitive. You're seeing a lot of PE money out there in the market, which is interesting. So that is tending to push up pricing. But I think important to remember that as we look at assets, we have the ability to take out a bit of cost. We can leverage our national sales force over those assets, so that brings those multiples down for us. And I believe that the growth that we're going to be seeing in the industry over the next, sort of, 12, 24 months, actually, I believe that the multiples of the industry will be increasing also. And so that will, in some ways, sort of also takes north the price -- the multiple prices of acquisition opportunities that are out there.

Okay. So how do we think about funding those opportunities? And maybe you can speak to where your leverage is and where liquidity currently stands and your financial flexibility to pursue deals.

So we have around $400 million of cash on the balance sheet. We have an undrawn revolver of $500 million. So we've got best part of $1 billion of firepower there. When we went out and raised the convertible, we said, look, this will protect us on the downside for the pandemic or indeed allow us to be opportunistic on the upside. And that's exactly where we see ourselves now. So depending on how you math out our leverage, we're at just south of 6x. We were around 4.4 I think as we went into the -- as we went into the pandemic. As -- you mentioned our FFO growing, we're projecting 60% this year. And obviously, that's a kind of proxy for -- or it indicates where EBITDA growth is likely to be. So that 6 is going to come down really pretty sharply. And we would expect to be back in the pre-pandemic range in the sort of short to medium term. And look, if anything of real substance came along, there are many ways of financing, if that $1 billion was not -- did not suffice.

Sure. Okay. One last strategic kind of question around the business. You have a Canadian platform that compared to your U.S. platform is small, but similar in nature and that it's billboards. Do you view that Canada -- do you view Canada as a platform that you continue to build on? Or are there likely more attractive opportunities domestically?

I think as we look at our business right now, we are very much focused on, if you like, North America in general. So if assets are being shaken loose right now in Europe, which they are, it's not something that where we see would wish to deploy capital right now. But we are very happy to deploy in Canada. We've got a great business there. We've got 20% of the market, good management team. So if there's a good opportunity there, yes, totally happy to invest in it.

Okay. And your remark just a moment ago was a good segue to my next question around capital allocation, you resumed your cash dividend last August at $0.10. You just recently raised it to $0.30. How are you thinking about your policy going forward and capital allocation more broadly?

So first and foremost, we want to invest organically in our business. We're getting such good returns from the capital investments that we're making in our business. So that will be number one. We're very much focused on the M&A opportunities that we were just talking about. We want to be absolutely a dividend grower. So we're now at $0.30 a share, and we would like to think that in line with the growth in our business, we'll be able to grow that dividend as we move forward. We obviously have -- we have the required dividend, but prior to the pandemic, that was a reference point for us. But we -- often, we're paying ahead of that. So -- and thereafter, who knows in terms of share buybacks or whatever. But I mean, those are the principal 3 piece of capital allocation areas that we'll be focusing on.

Okay. And just thinking about the capital structure, Providence recently elected to convert their preferred shares back into common. Can you talk about the motivation for that move? And how does that benefit the company?

The motivation for that move, I think, was pure math because it's really just -- by converting into common, they're getting a better return than they were with a $0.30 dividend than they were on their preferred. Michael Dominguez from Providence, who joined our Board, will continue to remain on the Board. He's been, I think, very positive for us as a team. I think they are desirous of being a longer term shareholder with OUTFRONT. I think they love the industry. I think they like the management team. It's been a really good association.

Okay. And then finally, just thinking about, again, capital being allocated, we spoke about your digital board ambitions over the next several years. How should we think about capital spending? Is it returning to more normalized levels now as we look forward? Any reason to think there should be a spike in CapEx that needs to be spent?

Yes. Pre-pandemic, we were kind of in the $80 million range per annum. And I suspect that this year, we're going to be in that range and probably the same for the next 2 or 3 years. There's no particular reason why it should spike up or indeed come off that. And that is reflective of the kind of -- the majority of that goes into digital billboards at the rate that we discussed earlier on in this discussion.

Okay. Well, Jeremy, we're about out of time. It's nice to be back in person and good to hear that there's things to look forward to with the business. Thank you very much for being here.

Thanks for the questions, Aaron. Thanks, everyone, for listening.