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

Hi. My name is Richard Choe. I'm part of the communications services and media team here at JPMorgan. I'd like to welcome Jeremy Male, Chairman and CEO of Outfront Media. Thank you for being with us in person today.

Thanks, Rich. It's good to be here.

Just wanted to start with the, I guess, strong trends that you're seeing at the beginning of this year that have flowed through from last year. Can you kind of review how the year started? And then what you are seeing kind of over the last few weeks because so much has potentially changed and people are worried about where things are going?

So yes, thanks for the question. And I guess I have to say that my comments would pretty much echo the comments of Sean Riles from just 45 minutes ago. Look, there's robust advertiser demand out there right now. We -- if you sort of think back, as we went into the pandemic, out of whom was increasing its market share, 2019 was a spectacular year. The market was up close to double digits. And I think that the snapback from the pandemic could surprise everyone. And I really believe that we're now in a situation where out-of-home is again taking share. I think it's taking share from traditional media. I think to some extent or rather, we're going to get some sort of some benefit from the whole IDFA issues that digital is having. So we're seeing very strong advertiser demand, that's translating to significant strength in our billboard business. In the first quarter, we were up around 20% on 2019, that reflects some new inventory. But for the most part, it's about pricing power within the business increasing yield. And the digital side of our business is undoubtedly driving growth for the industry. With digital, you can be more timely, you can be more creative in terms of your messaging. So the -- you can also be much later in out-of-home was known in the past for being somewhat inflexible. Whereas now with digital, if you give us a buy this afternoon, we can have it up on the board later that day or the following morning. So that means the selling window has widened. And I think all of that is just leading to, yes, very strong industry trends right now and certainly reflected in out numbers in Q1 and, I guess, guidance for Q2.

Great. It seems like technology kind of has this creative destruction and times additive. And it seems like a lot of, I would consider hyper local -- physical local advertising is under pressure a little bit with, I guess, John mentioned local affiliates, but also radio stations. People are in front of local new stations anymore or newspapers in general, and this provides an outlet. But it also seems like the digital part you've innovated the medium to be more responsive to advertisers. Is this a process that you've had to teach your customers or educate your customers on? Or are they coming to you? What's been the dynamic there in getting more market share?

I really think that for the most part, they're coming to us just -- it played into exactly what advertisers were looking for, which was, let's say, that increased flexibility. I mean we're spending a lot of time putting digital screens out into the field. So with 150 to 200 million this year or something like that. But actually, it's the connectivity piece that we've been investing in as well in terms of how those -- how we connect with those screens. And just the fact that you can now buy the vast majority of our screens, not in transit yet, but that will come pretty soon. The vast majority of our screens programmatically. And for example, is just going to generate incremental dollars to be a tailwind for the industry. It's still relatively small now. But I think as advertisers get increasing used to, if you like, being able to buy in a programmatic way. Like I said, it's a very positive tailwind.

Great. And I guess part of that has been the physical infrastructure and digitizing it. But on the back end, it is getting that enabling that programmatic sale. Can you walk through the efforts of what you've gone through to enable programmatic advertising for your billboards?

Well, the Boards themselves have always had much more tech in them than has been sort of utilized in the past. So essentially, it was just getting the sort of the internal plumbing in our business. So that programmatic exchanges can essentially join their pipes to our inventory management system and go from there. From a sales force point of view, we still -- even though the dollar has come programmatically, we still -- we call them PMDs or private marketplace deals. Where for the most part, if you like, they're not being bought in a real-time bid sense, I mean, for the most the pricing is, if you like, a negotiated pricing. And what's interesting, if you look at our programmatic business, while it's relatively small getting about a back extra CPM on bookings that we get programmatically than we do direct, which is kind of interesting.

Interesting. In terms of, I guess, your mix of business national, local or regional. Have you seen 1 recovery faster than the other? And how is it trending right now?

So If you look into the local business, the local business generally has always been stickier than national. We have much more long-term business in local in other words, business that is just sort of 12-month duration, relatively much smaller buyers. I don't know. I mean it's smaller buyers and a vast number of local clients, whereas national business has always -- they've always had the ability to turn the tap on and off pretty damn quickly. So if you look back to the GFC and look back at the pandemic, the local business has a much smaller beta than national. So national is a real roller coaster. And exactly the -- that played out exactly, if you like, over the last 12 months or so. But for the last 2 quarters, National has been driving our growth. So part of our 44% growth in Q1 was a significant part of it was national, which was up in the 50s versus local, which is still strong, but it's now national that's driving our recovery. So we're really on that upswing right now.

No, that's nice to see. And then in terms of the national, are all the verticals kind of outperforming and that's driving the strength growing at the same level? Or are there some ones that have room to kind of come back to previous like '19 levels?

Yes, it's interesting because I think in the first quarter, I think just about -- well, every vertical was in the black, and we had some that were like 2x. So entertainment was up to. If you look back to last year, our sort of big growth because if you remember, last year was we've still had on pandemic quarter really in Q1. And then if you like, strength from there, if you look back last year, we had strong government political. We had strong professional services, which for us is essentially the sort of growing category, very strong in health care. So they were the sort of key sort of growing categories for us. This year, what we've seen and increasing at the back end of last year, what we've seen is the return of, if you like, that the verticals sort of no one Loved out-of-home, which is metering Entertainment on a great movie slate right now. So we're seeing sort of good movie money coming in. We're seeing return of tech. tech is very strong for us. And then laid on top of those, the return of those verticals, you've got the new as sports betting is the most obvious one. And cannabis actually is a huge category for us. So -- and all of that, as I said, it's driving our yields. Our yields were up again, sort of 20-ish percent. And when you go into that for Q1, when you drill into that, the majority of that yield increase is about price.

I assume the Maverick movie is a big hit.

Absolutely, well, reviews are great. It's Wednesday, it's...

I think so. It seems like the advertising around it has been big the numbers will be big. In terms of -- you talked about pricing, it seems like your capacities, your utilization is pretty high and a lot of this is pricing driven. Is there that much more on price that you can push? Or is it there's going to be a limit? Or is this more just recovering to a more, call it, reasonable level. But it seems like there's still that value gap between other ways to advertise.

Yes. I mean the fact of the matter is that we still have relatively low CPM's comp pretty much every other media out there. And so I still think there is significant opportunity to drive rate. It's quite interesting with our sales force. We have a sales force of about 400 people. The vast majority of them haven't ever been through an inflationary environment before. So we're almost having to do inflation 101. Just like to look what it's like. And this is how you can approach clients and agencies. Because I mean, the fact of the matter is that I'm guessing that when you look at our clients, there won't be one input cost for any of has gone down, right? They're all have gone out and trying to get. And our sales guys mentality is it's finally going off at 7% or 8%. It's fine to do that. They won't be surprised, I assure you. So we'll see. But we still got a few points that we can make up in terms of occupancy rate as well. So we've got we have that, and we have rate, and we feel it's confident we could looking forward.

And it seems like as -- while there's kind of shorter contract lives. And I guess a lot of the digital ones are very short, but it seems like there is some tailwind to both negotiating and getting the deals implemented over time that it's going to be a tailwind a while? Or do you think Or do you think you're mostly there? Or is there kind of further layering in of this price increases.

Yes. No, I think that's further lowering in. And that's on the billboard business. Then in our transit business, we also have a return of eyeball. So that will be a real driver of growth our transit business, we think, as we go through the balance of this year and into 2023.

And talking about the transit business. I guess in tracking the MTA data, it's rebounded nicely, but kind of leveled off at the $2.5 million to, call it, $3 million for the MTA in New York. I guess this data I was tracking has peaked at like 4.5. Do you need to get back to that level to a ridership to get the revenue -- advertising revenue? Or are there different ways to get there or to get there?

Look, I don't think we need to get back there. If we think about the subway in New York Yes, you're right. Whichever way you look at it, you're around 60% of prepandemic levels. Our revenues are around 70% of prepandemic. So we're already pacing between 15% and 20% north of eyeballs to put it like that. And we suspect that at around -- somewhere around 80% maybe get back to 100% of revenues and that's because there's 2 arguments here. There's the daily number of rides, which is [indiscernible] and there's reach. And actually, reach comes back you'll be almost at peak reach when 80% because you're getting me but you're only going to get me 4 days a week rather than 5. So if you layer that on top of the inventory that we've built out in New York fabulous new digital screens right the way across the platform. We're just starting to build out screens on the rolling stock. It's just a much better product. We've created much more value opportunity through that product. So we feel great about that contract looking forward. We just -- we weren't exactly banking on COVID intervening for a couple of years.

That makes sense. And then it's finding because like I've been writing some way more back at peak. It was too crowded. You couldn't see anything. Now you can actually notice a lot of the signs of when not and you're not packed like sardines.

Very true.

What other, I guess, of the transit franchises should we know about in terms of, I guess, either L.A. or other ones that you're expecting to kind of rebound over the next 6 to 12 months?

So our big transit systems here in Boston, the MBTA Mamata in D.C. is another big one, LA buses is big for us and BART in San Francisco. They're all in various stages of coming back. As you can imagine, bus advertising bus advertising is pretty much back because it's about the people that join me that it's about the people who are on the streets rather than in the subways, whereas BART, for example, is one of the laggards. It's still got a way to come.

Okay. And then I guess, without going through each of the deals, but more as a kind of overall strategy, do you think when these contracts come up for renegotiation or get bid out again, there might be less or more competition for them given what you've gone through with COVID? Or how might that impact the next round of negotiations?

Well, one of the good things about the contracts is they tend to be pretty long term. So the MTA -- we have another, I think, 13 or 14 years to run near before that comes up. So -- and that's typically the case. So very often. And when they do, it's interesting if you think last time the MTA came up, a few people kicked the tires, but they're actually only ended up being 2 serious bit of -- and typically, there's ourselves and one other private company that would be there for most of these, bids...

Okay. And with cost of capital going up, they might be less likely to have private bidders. In terms of, I guess, a big cost of yours is ground leases and rent, what kind of exposure do you have there? And it seems like most aren't based on kind of CPI higher inflation. But can you talk about how those negotiations are going or...

So the vast majority of our -- if you look into our billboard business, around 90% of the leases are just -- if you like, fixed with potentially all sorts of different genome kickers in them and then around 10% are revenue share. Okay. So if we look at the kind of fixed leases, we budget for sort of fixed lease cost to go up by a couple of percent a year, something like that. So that's typically -- I mean, you've got 10% of your leases have become an average 10-year lease life. So that means you've got 10% of your leases coming up each year that need renegotiations. So that will put a little bit of rent increase because typically, they go north rather than south. And the classic kicker might be 2% a year, something like that. So that's about where we end up.

Is there an opportunity to reduce that revenue share portion? Or is that kind of a fixed number at this point?

It really depends on the landlord that you're dealing with. If -- in our more rural areas and we may have a lease cost of 15% to 20% of revenue, something like that. In Times Square, we may have a lease cost that's 80% of revenue because you're dealing with whatever it happens to be. The other big REITs to all those. And so it's a little hard to generalize. But that's why we typically pay the revenue shares is with the larger more sophisticated landlord.

And I guess, can we touched on it a little bit, but can you go through, I guess, your digital conversion strategy, kind of what -- and what has, I guess, the supply chain look like in getting that done?

Sure. So from a supply chain point of view, yes, we hope we've got ahead of it. We sort of preordered a bunch of screens last year. Which I think will enable us to build out $150 million to $200 million this year, which is what we want to achieve. The typical -- a typical conversion for us -- we want to make a minimum of 20% IRR. The shape typically is about 4x of revenue of what the Board did prior to that and about 2x of cost. So you put that into the mix. And what it means is that as we increasingly digitize our portfolio, and we're now up to, I think, 27% of revenues in the last quarter of that order. As we increasingly digitize our portfolio, actually, it's a positive to -- It's a positive OIBDA. Because it simply put -- has that profile. So if you look back -- if you look at our billboard OIBDA margin, Q1 '22 on '19. It was about 300 basis points up on '19. Some of that is some of that is just pure leverage, operating leverage with obviously great growth, good growth in yield, et cetera. So that's just a natural operating leverage coming through. But part of that, as I say, because actually the percent of digital has expanded quite considerably. So we expect our margins to drift positively upwards over time.

Got it. And you said about 27% is digital. Are you expecting a few percentage points a year for that to grow because of pricing and...

I would expect so. Yes, pricing, obviously, a number of boards. We have around 1,500 boards. So if we're putting in 150, 200 a year that should -- that's going to be one of the growth drivers. For comparison, the U.S. digital percentage in the out-of-home industry at the moment is about 30%. In the U.K., for example, it's near at 60%, it's 57%, I think, now. So there's -- we think there's a great roadway ahead for us to keep investing in digital and digital remain a very solid growth driver for the industry.

Great. And then can you talk a little bit about, I guess, breaking out the margins between the transit side and the billboard side? Biggest transit like say the MTA kind of support kind of fading even though maybe he'll continue. But on the billboard side, what can the margins go to there as revenue expands? Is there significant leverage there? Or are you kind of running at a good rate right now?

Look, as I said, we're now running -- well, in Q1, we were we were fairly significantly up on 2019. I think that we can continue to grow margins. I don't want to set a target put a -- have a specific number put out there. But as I said, we feel good about where margins may be able to go. In the transit business, transit's a little different EBITDA margin business as in '19. And as we go north of the TA MAG next year, we'll start getting towards those sort of margins over the next couple of years.

Got it. And then I guess, can you talk a little bit about growth inorganically outside of digital portion? How active do you plan on being in terms of M&A in the space?

Yes, for sure. On the call the other week, I think Matt referred to the sort of M&A pieces, being robust and interesting. There's quite a lot of activity out there right now. We announced what we think is going to be a great deal for us in Portland, a couple of weeks back. So we don't really have that much in Northwest. So for us, it's like a new market. And unusually, normally, we just kind of take the leases. But this time, we actually we have people come with us 25 people with the business as well. And it's great. And just as 1 example, I mean, our national sales on average are around, what, 40%, 45% in portland, they are 10%. So I mean the opportunity there for us to leverage our national sales force over those assets is playing, I guess. So that's really positive. Two or 3 other deals that around at the moment that we're certainly having a very good look at. I don't know if they'll come off, but this -- it's quite a lot going on. I tend to agree, I just as Sean it's presentation a little bit earlier and Sean used the term frothy. It is a little bit frothy, or it was certainly in the back end of last year. And it's possible that the private market multiples may start decreasing to reflect the public market multiples. So we'll have to see.

It's amazing how resilient they are, even though people should be a little bit more nervous than they seem to be. I guess to that is it -- are there other I want to say, second tier or third tier markets that you might be interested where you can go into like Portland to bring the national advertising up in a significant way. Because I think we've seen with COVID, a lot of shifting demographics and where people work and then outside of that just quality of life, people tend to be looking for lower cost, less congested areas.

Yes. It's interesting. If you go back 3 or 4 years, I'd have probably said look, we're kind of interested in those top 25 DMS's, that would have been my ingoing position. I don't think we feel like that anymore. I think where we can add value bid in a secondary tertiary market versus -- we're actually pretty comfortable doing that now. And we do anticipate quite a high number of relatively small deals as classic tuck-in where you're buying whatever it is, half a dozen digital faces and one of our smaller markets, we'd be very happy to do that.

Great. And then I guess, something that I guess we talked about or should talk about given the margin recovery, given the revenue growth, kind of how are you looking at your kind of uses of cash kind of from the EBITDA to, I guess, M&A and CapEx.

Sure. Well, so from a CapEx point of view, I mean, we have relatively low maintenance CapEx, about $20 million a year. Total CapEx of about $80 million, and that is almost all focused on converting digital conversion. And that is out and out the best investment that we have ever made, the more we can do that, of that, the better. So I guess that's number one. We're interested in the, say, accretive M&A, number two. We obviously have to re dividend, which to some extent or rather, is sort of somewhat led by performance in terms of 90% of operating income. And when you look at our business, we will get back -- or we expect to get back down into the high 4s in terms of EBITDA to net debt ratio this year. Over time, we'd like that to drift back down to 4-ish. We want like we said we target to be 4 and 5. And if we ever got anywhere below that, I guess we might consider stock buybacks, but it's not something that would make a lot of sense right now.

No, that makes sense. And then it seems like most of the deleveraging would come from EBITDA growth more than really meaning pay down debt.

Yes. It is -- yes, exactly. It's all about EBITDA growth. And one of the other interesting points is that we've been investing in the MTA to build out the digital. In a couple of years' time, we essentially finished that investment and we start recouping the investments that we have previously made. So from a kind of cash coming in point of view, the delevering gets pretty rapid.

When is that kind of step down going to happen around?

Around 25 -- 24, 25.

Okay. Just to kind of finish up, I feel like because of your, I guess, urban top market focus, larger national advertising mix, people do worry that you might be more impacted by a consumer recession leading to a recession for businesses and advertising in general. How exposed do you really feel the business, given it almost seems so polar opposite to the current trends you're seeing. I think people are worried about the Walmart or Target that things kind of shift on a dime a little bit, which I don't expect for your business, but there's that general fear.

Yes, it's certainly a very general fear I don't think I've ever seen quite such a significant sea change of sentiment people over the last 3 or 4 weeks. Look, I think some of the trends that we're seeing in out-of-home right now are very positive and certainly for out. Look, I don't think anybody quite knows what we're seeing down the road, but everyone seems -- there seems to be some sort of unifying around a couple of quarters of maybe flattish, maybe slightly negative real GDP. But as I say, it's hard to say, but because we don't have absolute knowledge, but I would hope that in that instance, the strength of our local business, the investments that we've put into our digital plant the quality of our assets that we can still grow through something like that.

No, makes sense. I guess if anyone wants to ask a question, we do have a microphone . For me, going back to, I guess, the pricing power and the growth there, when did you feel like that shifted? Was it beginning to middle of last year more at the end of last year into this year? And when did that become more of a concerted effort? Or we're just you put it out and customers are willing to pay?

Yes. I mean we -- the way our sort of business lays down the period between September and December is always very important because we have a lot of that renews for the following year. So it was really last September when we started becoming very exacting with our sales force in terms of obtaining rate. And as I said earlier on, we'll be going through much the same sort of exercise over the coming weeks to make sure that hit the gram running in September and once again, hopefully ensure that we're getting incremental yields on our Board.

Just so I make sure I understand it seems like you kind of put through some rate last September through November, if things stay the way they are, that -- is it an increase from there to where we are now.

That's what I'll be looking for.

Great. I think that's about it.

Rich, thanks very much.

Yes.

Thanks and listening everyone.