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

Okay. We'll get started. Thanks, everyone, for joining us today. My name is Jason Kim. I cover the telecom, media, cable sectors here at Goldman Sachs as a credit analyst. I'm really excited to welcome Jeremy Male, Chairman and CEO of Outfront Media and look forward to discussing the state of the out-of-home advertising market and Outfront's position in it. So, Jeremy, thanks so much for being here with us.

Good to be here. Thanks, Jason.

So opening question, let's start with the big picture question. Outfront has rebounded very strongly from the COVID downturn, particularly in the U.S. media segment. And as the comparisons become more normalized, what are your long-term strategic priorities to position the company for continued success.

Great. Thanks for the question, and good morning, everyone. Yes, you're right. We're now back to 2019 levels and beyond, which is great to see, particularly in the billboard business. As we look forward and think of the priorities, I don't think they're too different coming out of what we've just been through, so we're going in. We're very, very focused on digitization. What that's about is 2 pieces really: one, it's the hardware out in the field, so whether be it on -- I don't know how much time you spend in New York. But if you go down the MTA, there are digital screens [indiscernible] digitizing in our billboard business. That's the hardware side. The other side of that is how we -- our connectivity with those boards, and I'm sure we'll talk more about automation and programmatic as we go through. So that remains one of our key priorities. Selective smart M&A is definitely part of what we spend a lot of time thinking about. And then, if you like, the other key driver within our business generally is yield, which is all about stimulating demand in terms of occupancy. And then being smart about how we can leverage [ rate ] against that demand. And I would say that in today's environment, as a general -- as a general principle, I think for the most part, inflation is our friend. When you look at the long-term nature of our leases versus the short-term nature of -- relatively short-term nature of our ad contract, we believe that will be something that we'll be able to leverage over the coming months. And well, let's see how long inflation last, but certainly in the coming months and probably years.

Makes sense. So with that as a backdrop, with rates rising pretty rapidly earlier this year, investors have been focused on a slowing macroeconomic environment. And that said, Outfront's numbers have been very strong. And the third quarter guidance that you gave as part of your second quarter earnings call that suggests continued momentum in your overall business. So what are you hearing from advertisers today as you talk to your customers? Are you seeing any sense of caution, especially from national advertisers who tend to be a bit more economically sensitive? If not, what do you think are the factors that's contributing to out-of-home as an industry faring much better than some of the other mediums?

So there's quite a lot of questions in all that which I'll try and get to. By the way, I just sat with our national sales team in Los Angeles yesterday, and I read that question to them. So I said, look, you guys are talking to the guys whole time. So that's the question, what do you guys think? And I'll tell you what they said in a sec. But yes, our Q3 guidance was up in the early teens. We continue to feel good about that. We don't guide outside of the next quarter before we get there. But what I can absolutely say is there's nothing strange going on in Q4. So we'll get there when we get there. But we continue to feel good about our trajectory. So I said to the sales guys yesterday, how do you -- when you're talking to advertisers, are you getting those feelings of caution? And pretty much to a man, they said, no. They said, no, we feel good. We're having great conversations. We're having great conversations for the back end of this year. We're having great conversations for next year. Now obviously, no company and no industries in a vacuum. But it does feel as though out-of-home is actually replicating what we saw pre-COVID. And out-of-home pre-COVID was gaining market share. It was the second fastest-growing advertising medium to digital as we went into COVID. It seems that we are back into that, as I say, environment of increasing market shares. Why is that, I think, was part of the question. I guess the first thing is that as a medium, we don't have audience issues. In fact, quite the reverse. When you look at the amount of time people are relatively spending out-of-home and traffic circulation, et cetera, we have increasing audiences versus, if you like, the decimation of some audiences that are being experienced by some of the other media, linear TV at the moment is one of them. So lower audiences, higher inflation, which is not helping them. I think some of the issues that we've seen around IDFA, privacy concerns, brand safety. I think all of that is at the margin helping out-of-home as well. And then, additionally, the fact that the investments that the industry has been making in out-of-home, we talked a little bit about digital, the product just looks better. It's a much better product that the industry is marketing today than in the past. So we have a better product with much improved knowledge around that product. The old, 50% of my advertising works, we just don't know which 50% it's a little bit different now where we can have digital displays which we can switch around the creative or the location of dependent on social listening, so we can depend on what's driving the higher social listening in terms of creative or in terms of location. You can have conversations with advertisers today that you could never have before that just show, I think, how fast out-of-home has come on in the last few years.

A lot more dynamic I imagine in terms of what you guys can offer. You talked about the strength that you continue to see or just any lack of negative caution that you're seeing in the marketplace. What are some of the verticals that are doing well versus those that are lagging? At the beginning of the pandemic, obviously, Outfront was more exposed to some of the larger markets that went down a lot more than some of the smaller markets. But as the markets are rebounding, do you see any differentiation in terms of your geographical exposure? If you can give us color on that in terms of verticals as well as any market differences, that'll be helpful.

So in terms of verticals that are driving our business right now, the first thing to say is that just about every vertical is up, and we've got 2 categories now. One is insurance and I think the other was alcohol. But the ones that are really driving that recovery would be entertainment, retail, tech, travel, all very strong for us and, maybe, somewhat against the trend, autos. It's a relatively small category for us. It's like a 5% of our book, but order is nicely up at the moment. So that's the categories that are really driving the growth.

That's interesting about the autos, again, relatively small part of the business, but the fact that it's actually up nicely is that attributable to the fact that billboard advertising is less about call to action per se but more about establishing a brand and getting your message out there. Do you think that's part of the reason why autos is doing well for out-of-home?

Yes. I think, again, one word of caution. Out-of-home is roundabout 1.8% of the top 200 advertisers book, so it's 1.8%. And then auto in out-of-home is like 5% to 6%. So by the time you got 5% to 6% of 1.8%, you only really need relatively small shifts to your domain from 2 or 3 advertisers to make a difference. But you're right, out-of-home can operate a number of different ways and one way in which auto user is just in terms of that general branding message. And, yes, it's good to see that growth.

And then as you look at the composition of your revenue base and of your customer base today through the recovery, is that a function of the revenues coming back from relatively same sets of customers? Are you attracting new customers that are new to out-of-home that want to experiment with the new medium? How does that split look like?

Yes, what you find is that you have a bank of advertisers that are, if you're looking, somewhat low out-of-home and will always be there. I guess the entertainment sector is the best example of that. And if you look at our footprint, which is very New York and LA heavy, we'll always I guess be a benefactor from entertainment. What you do see is that at the edge that you do have new categories coming in. The most obvious one that we've seen is sports betting and I guess everyone -- all media have benefited there. Cannabis has been big for us over the last 2 to 3 years in certain states and has been a good boost to revenues. And then right at the margin, some of the DTC brands, the DTC piece was particularly big for us in 2019, but we'd still see new advertisers coming into out-of-home to go and build that brand. You take couple of signs in Times Square, and the strength, you know what I mean, and the image that it gives that brand is well beyond the cost. You look at out-of-home as a relatively low CPM medium. And if you like newer brands who use that to their benefit a lot.

So we hear a lot about the importance of digital capabilities in today's advertising marketplace. You touched on some of the important stuff for Outfront as well. So can you talk about the investments that you have made over the years in this regard, not only your digital boards or hardware side of the business, but also digitizing your operations to make the buying experience better for your advertisers? And yes, let's start with that.

So roundabout 30% or just under 30% of our business is now digital, and we have a much more automated approach to digital. If you have a campaign that you want to get away tomorrow, that's fine. Just give us your [ JPEG ] and bang, we can get that up on the boards in a very sophisticated way. And we're going to talk about programmatic within that. We have the ability to trade that programmatically, which implies some real-time bidding mechanism. The number of dollars that we actually trade programmatically, per se, is relatively small now, but it's growing and will continue to be a great headwind for us as we go forward. So that automation is allowing much later advertising dollars. As a medium, used to be very inflexible. Now we have almost complete flexibility. So that's undoubtedly one of the growth drivers. The other areas that we've invested in, in terms of a much more digital approach has been in terms of audience. So we have a tool called SMARTSCOUT which is effectively, through carrier data, we know exactly who is going -- well, I say who because not who in terms of individuals, but we know who in baskets of numbers of types of people are going past our boards every hour of the day. So we can be much more dynamic and specific in terms of how we do the, once again, the conversations that we're having with advertisers. So an advertiser might say, well, look, I want that board because it's near my store, and we can actually say, well, actually, who's your audience, and we can say, well, actually you'd be better off not taking the board by your store because actually all of your customers are coming out of the area right over there, so you'd be much better driving demand for your store by taking boards that aren't necessarily close to store. So we're suddenly having completely different conversations with advertisers now that I think will continue to be a significant growth driver for out-of-home.

Are there any areas in the organization, whether it's technology or people, that you feel like you need to invest more in, or do you feel good about the asset base you have to continue to pursue this opportunity in digital?

I think the thing about technology is it never stops. I think you're always investing in that future because, as I say, it's a continuous process. But in general, I think we still have more work that we can do in terms of automation in general in our business because, at the moment, for the most part it's about the digital side of our business, which is 30% of revenues. I think we've got incremental automation that we can do to improve trading on the other 70% of our business from here.

Understood. You touched on programmatic a little bit earlier. So how big is the business today for Outfront and how would you size up the growth opportunity going forward in programmatic?

I'll say, relatively small for us, at the moment. It would be -- our programmatic business would be about the size of one of our smaller markets, so maybe like a Louisville or something like that. So as we go forward, I think it's hard to say exactly what proportion of our book it will be in the future, but it's definitively a tailwind.

Okay. Moving on to the digital board conversions, again, continues to be very attractive return opportunities for Outfront. How does the backlog look in terms of conversion opportunities going forward and what's a realistic goal in terms of the number of conversions per year to drive the unit growth in digital?

So round numbers, we're getting towards 2,000 digital boards in total. That's not including our transit business. That's just digital billboards. And we're targeting to do a 200 boards each year so we're adding roundabout 10% of capacity onto that on an annual basis. And as I said, those boards are now driving just under -- even though it's still only, whatever, around 3% of our total boards, it's driving closer to 30% of our revenues. So we continue to be I think very smart in terms of how we allocate -- where we put those digital boards in. We are typically still making around 4x revenue on a converted board versus about 2x cost. So that's driving IRRs all beyond 20%. We basically don't convert a board unless it's making a minimum of 20% IRR. So you get the double benefit of incremental revenue but also because of that revenue-to-cost profile, actually it's incremental to margins as we go forward. So if we look at margins generally in the billboard business, they're pretty nicely ahead of 2019 right now. And part of that is just the natural operating leverage within the business because the majority of our billboard rental costs are fixed. But it's also the increased proportion of digital within that that's also driving our margins.

How far are we from a potential saturation point in terms of digital boards for Outfront? And then as a follow-up to that, we have seen a lot of supply chain and inflation hitting all sorts of market. Are you seeing any impact on the conversion costs or shortages in parts to delaying the digital deployment?

So let's just take the how far away from saturation. Honestly, I think a long way. As I just said, we're just south of 30% digital revenues. The U.K. market for out-of-home is 60% digital now. And then, yes, a number of other markets around the world and I think Australia is now closer to 60% as well, for example. So, yes, I think we've got a lot of runway left. In terms of supply chain, yes, we've seen some increase in costs, but if you look at the -- and we've also had some supply chain issues, which have deferred some boards from last year into this year and may differ some boards from this year into next. But in terms of, if you like, the returns profile that we can achieve on digital boards, those increases have been such that that it's not going to change our lives.

And also from a digital actual conversion perspective, you see the saturation point still pretty far ahead, the number of opportunities you see.

Yes. I think we've still got a lot of runway.

Okay. So pricing has been an important driver of your top line growth, and as you mentioned, inflation I think could be a friend for a business like yours. Out-of-home also has had a low CPM and I imagine that helps your messaging in terms of getting a bit more pricing historically. How do you balance the opportunity set to extract higher pricing from your customers demanding that versus maintaining long-term relationships with the client base in an environment where the economic environment can be a bit more challenging?

Yes. Look, I think most businesses that are out there right now understand that for all sorts of different reasons the majority of their input costs are rising. So I don't think it's a surprising conversation to be having with an advertiser when you say, look, the costs are going up because probably just about every other cost in their business is also going up. I think always you're respectful of long-term relationships with advertisers, and we would also always seek to be respectful of that. But by the same token, as you said, out-of-home relatively has a low CPM. I do think that we've got the potential to push CPMs up over time. I think the fact that we can point to, as I say, that incremental demand driven by some of the pieces that we were talking about earlier, I think people also understand that it's essentially a fixed supply medium, so where you do get increases in demand that is going to drive right. So you put all that together, and we're certainly saying to all of our sales force that we have 60 national sellers and, round numbers, 400 local sellers, we're saying, guys, we've got to go out and have those serious conversations about where rates go from here.

Switching gears to transit, which has been one area where revenue is still below pre-COVID levels. That being said, the revenue recovery for Outfront has outpaced ridership recovery. How sustainable is that over time and what value proposition are you providing to advertisers such that they will continue to increase their spending with transit, with Outfront without ridership necessarily going back to pre-pandemic levels?

Yes. Great question. I think the first thing is about the client base in our transit business versus our billboard business, 94 of our top 100 clients buy both billboard and transit, do you know what I mean. So they're very integral to each other. And I think when we talk about transit now, that's kind of a proxy for the MTA. You know everyone wants to talk about the MTA, and it's our most obvious reference point in terms of ridership. Riderships were a little slower to come back I think at the beginning of this year than we expected, but we now seem to be in that time where post Labor Day both anecdotally where I was sitting next to someone on the train the other day for the first time on Metro North coming from Greenwich to the fact that we can see those numbers rising on a daily basis. So on the subway we're now up towards the mid-60s versus '19 and on Metro North Long Island Rail Road it's closer to 70%. So, definitely, moving in the right direction. What I would say is that if you look back to 2019, the product that we're selling is completely different now. We've digitized the entire subway. It's just a fabulous product. So we believe that with that product and the innovation, combined with the argument of reach, because if someone that's going 3 days a week you're still going to be hit 16 times rather than 5 times. So we're still -- our reach is much greater as a percentage than our audience. So great product, great reach, still huge numbers. On the subway, there are 3.5 million people a day. There aren't that many places in the U.S. that you can have that audience reach those sort of CPMs every single day. So we feel very positive for the future of our transit business. Sure, there's going to be some and there has been some challenges if we look back over the last couple of years, but for the most part, we were able to modify our contracts to take account of that. So with the MTA, we were able to extend the terms of the contract by 3 years, which we believe will adequately compensate for some of the difficulties that we've seen through the pandemic.

Let's talk about the cost structure. So much of your cost basis and rent expense, which is relatively fixed, but how much of that is variable within the rent expense we have and how long the contracts last? I know it varies, but in general, how long do these contracts last before you have to renegotiate?

So about 10% -- on the billboard business, about 10% of our revenue -- of our expense is variable. So, for example, in Times Square, it would be highly unlikely that you'd have a fixed cost lease. It's far more likely to be a revenue share lease, whereas typical highway billboard it's far more likely to be fixed. And that ratio is about, as I say, about 10% variable. And in terms of tenure, our average lease length at the moment is just below 10 years, something like that. Now when I say fixed, we may have some sort of kicker in there, maybe there's a CPI kicker or maybe it's 2% increase each year or whatever happens to be, but essentially far more fixed than our media that we're selling in much shorter chunks. So that's why, again, I think inflation can be our friend. And the transit side of our business, it's essentially all a revenue share business.

Right. And then on the SG&A and other operating expenses, can you talk about your ability to manage these expenses in this inflationary environment and your ability to expand margins going forward?

Well, as I said, margins are expanding, at the moment, on the billboard side of our business, in particular. But that's to say more about digital and more about leverage. When we get into other costs within the business, I would say that this is, as an organization, I think we're very disciplined and judicious in terms of how we manage our costs. There are some costs that will go up. So we have discussions with the guys in our sign hangers, we have a great team of people who go and put our billboards up and down every day, and a number of those are unionized in terms of that labor force. And you can imagine in this inflationary environment, you're going to have a different discussion than you did 2 years ago. But when you look at those expenses generally as part of -- again, as part of our total, it's unlikely to have a significant impact in terms of that SG&A.

Right. So the revenue is the primary driver of your margin expansion...

Definitely.

The pace of it, as opposed to the cost management per se.

Yes.

So M&A has been fairly robust in the sector, especially on the tuck-in side of things. And Outfront has been active this year spending just south of USD 250 million in the first 2 quarters. How is the pipeline looking today and what assets are you looking to acquire?

So if we think just back over the last 6 months, the biggest purchase that we made was a company based in Portland, which was where we didn't actually -- we think it's going to be a great market. We think we can leverage our national sales force to sell incremental revenues in into Portland. And for us, it really filled the gap. That is slightly unusual. Typically, we're not looking at brand new markets for us. Typically, we're looking at smaller tuck-ins where we can, again, leverage our national sales force but also get some cost energy as well. The market has been pretty -- quite robust, I would say, for M&A and continues to be. A few months ago it was probably a little frothy. I think that as we've seen multiples compress in the public markets, I think we're starting to see that flow through into the private markets. But yes, there's a lot going on and that tuck-in approach is a definitive part of our strategy where we think we can make great returns for investors over time.

So you talked about the valuation environment a little bit. Now how much cost savings can you typically extract from these acquisitions to bring down the multiple on a post-synergy basis?

So it depends. On the tuck-ins, you may be talking 1 or 2 turns, something like that. Portland, as I say, which is different because there we didn't have anything. So we're essentially maintaining that cost base there. But the other piece is the synergy that you can get on revenue. So you can get cost synergy and revenue synergies.

Understood, right. So switching gears to the balance sheet. So you've delevered rapidly over the past 2 years as EBITDA recovered nicely from COVID. Can you talk about your balance sheet strategy and how you think about capital allocation priorities in general?

Yes, for sure. So in terms of balance sheet, yes, right now roundabout 5x levered. And that's come down as you said very, very quickly. Our target range is 4x to 5x. I think we'd be, if you like, in the medium term we'd probably like to be closer to 4x than closer to 5x, but we will achieve somewhat naturally. In terms of capital allocation, we want to be going out and converting boards. So we'll continue to be investing in growth CapEx to around [ $8 million ] a year. We want to continue to invest in terms of M&A. In terms of our dividend, we're obviously a REIT and we have our REIT requirements and, at some point, there's a choice point to pay beyond the REIT requirement in terms of dividend. We were paying slightly beyond the REIT requirement as we went into COVID. Right now we're paying the REIT required. And I guess after that, who knows, the topic of share repurchase has come up as well. But for the most part right now, we think we can deliver the best returns for our shareholders through, let's say, organic investment in terms of digital and M&A is where we're going to be most focused. I think one thing that maybe is a little misunderstood about us and our balance sheet is, as you know, with the MTA contract, we've been investing significantly. We've got a lot of sunk costs in MTA, and over the next 2 years it goes from being a user of cash flow to being -- because essentially we built it out and then we start recouping those investments that we previously made. Once we hit our minimum guarantee, we start recouping monies above that we would have paid in revenue shared back to us. And that's actually, over the next couple of years, that's a big swing from our balance sheet. That's a big swing. So we feel very comfortable with our leverage, with our balance sheet outlook, and that's where we are.

Great. We have a few minutes left, so the closing question. You have been leading Outfront since 2013, and during that time a lot has changed in the media, the advertising landscape. So how do you think the markets will evolve over the next 5 to 10 years, and how does Outfront's business and organization look like in the future?

Well, I guess my first comment would be that I absolutely believe that out-of-home will grow its market share in the next 5 to 10 years. I think that market share growth will come from, as I say, principally some of the questions of audience that we've talked about before, the fragmented audiences we serve everywhere else, our improving audience, the improvement of our interface with that audience in terms of a more digitized environment, more exciting and creative ads, the investments that the industry has made, and the continued, if you like, transformation in our connectivity with our medium. So as I look forward, I really hope that the U.S. out-of-home industry, which is now roundabout 5%, can start emulating and get closer to the world average, which is around 7%. If we can just start moving that needle from 5% towards 7%, then I think we'll be very happy, and I think we'd have a, let's say, happy set of shareholders.

That was good. That's a good place to end. Jeremy, thanks so much for your time today.

Thank you.