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

It will lap itself. I think that it was very strong at the beginning of the year, pretty strong also for the third quarter, I think, because sports betting is very much associated with NFL. but there's no reason why we shouldn't get some NFL money in this quarter.

And did you have much crypto exposure? I assume that...

Look, yes, we had a bit. Certainly, yes, it was never that significant that we ever called it out as a category, but it was a nice tailwind when it was there. And obviously, there's not much of that around at the moment.

Can you talk a little bit about your mix of business? I guess, you're a little bit more even than like Lamar is at 60% local, 40% national. How does that kind of play out for you in terms of balancing that load? And is that where you expect to continue to be longer term?

Yes. I mean, you're absolutely right. We were 60%, 40% in Q1. Actually, typically, over the years, we've been 55% local and 45% national. And we like that balance. National advertisers typically want to be in the top 25 DMAs for the most part. And we are -- we have the best portfolio of assets in the top 25 DMAs here in the U.S. So there's a natural fit between us and national advertisers. And I think the other interesting point is that if you look at out-of-home market share in the U.S. is between 4% and 5%. But the majority of that is driven by local. And if you look at the share of spend of the top 200 advertisers, it's 1.8%. Now 1.8% is really low compared to just about every other out-of-home market in the world. So we take the view that with better measurement, better attribution metrics and increasing automation that actually that piece of the pie is likely to grow faster over time. So the fact that our assets are disposed to what we think will be the fastest-growing market, part of the market in the longer term makes us feel very, very comfortable about our portfolio. And that's not to say that the local advertising piece because it's a massive part of our business. And we feel absolutely sure that, that will continue to grow nicely as well. I think it's just maybe relative growth will be higher in national, we think.

No. And that's a good thing to point out. It seems like there's a lot of room for growth there since it's even just low relative to, I guess, the current book of business you're seeing. Can you talk a little bit about what you think it will take to get the top 200 advertisers to embrace out-of-home more? You mentioned a little on the data and measurement side, what are you doing, I guess, more specifically to convince them like to get off the sideline and add more budget.

Yes. Well, we've obviously talked about some of the pieces of it already. But we spend a lot of time directly trying to get higher up the food chain with the media agencies and also getting face-to-face time with clients to really put forward our proposition. We have what we call a brand partnerships team, which we've developed over the last couple of years, which is a team of guys that specifically go out to, if you like, to essentially be client only resource for us. And it's not going to be flicking a light switch. You've got agencies that have kind of vested interest in kind of keeping everything the same. And how that client spent $30 million on week worth TV last year. Let's just ignore the fact that because the audience is down, inflation's going through the damn roof let's stick them down for $30 million because then the brand manager in the organization where you don't get fired for doing what you did last year, so I'll just do that. So getting people to shake -- when you have to go and shake the tree and say, "Hey, guys, take $5 million out of that budget, put it over here and you're actually going to get -- it's going to make your TV work harder for you. It's going to come in a much better CPM. It's going to give a campaign extra legs. It's going to be great for cover. It's going to be great for frequency. They say, "Yes, we kind of hear that maybe next year." So as I say, it's not flicking a switch, but I do think that over time, we are going to see a drift of money over. And we have what nobody or very few other media have. We have absolutely no audience issues. Okay, the audience is still absolutely out there, and we have a much more effective and flexible way of communicating with that audience because of the digitization that we're going through. So We have an amazing story to tell.

Yes. No, I feel like those conversations should be getting a lot easier as not only as, I guess, more people are returning to work and traveling around and seeing the advertisements. But a lot of your, like you said, linear TV is on the decline, and it's harder to get that reach. And I think the brand advertisers probably recognize that. One of the things, I guess, we talked about last year was the ability to push price and having some pricing power. Where are you today with that? And are those conversations, I assume with inflation coming down a little bit, not as -- you're not trying to push it as much. But how should we think about pricing?

Yes. So last year, we had a double-digit increase in yield across pretty much all of our assets, static and digital, and that was predominantly driven by price. Obviously, yield is the combination of occupancy and price. But when you drill into it, that double digital digit increases were predominantly price. So I think as we look forward to this year, obviously, you've raised the comp, you've raised the bar. I think that's the first point. And in order to continue to have momentum in terms of rate, we're going to need to see some reasonable demand behind that. It's positive that in the first quarter of this year yields were up on our static boards and that came from rates. So we're still getting some will it be double digit again this year, I suspect not.

Margins were a little soft in the quarter. There was some latter period expense, some moving parts. I think some of the revenue came in on some higher percentage of revenue share. Can you talk a little bit about what happened with margins in the first quarter and how we should think about that playing out for the rest of the year?

So when you drill into Q1, yes, we touched on a piece of that a little bit earlier with regards to sort of where revenue falls as to how it can impact your rents. We also had in Q1 some apples to pears in that we made a bunch of acquisitions over the last 12 months. And that you're carrying some of those until they ramp up to absolute expectation. So that -- and then within our fixed lease boards, typically they will have, what we call it, fixed, but there will be -- maybe every 5 years, there's a 10% kick or maybe there's 2% or 2.5% a year. So all of that comes to pass. As we look forward, we expect that margins for the year are likely to be around about in the range as they were last year. Now with the growth -- with the growth we're achieving, yes, we would have liked to have seen some -- maybe some more operating leverage come through. We believe that, that operating leverage argument will yield positively for us as we go into '24 and '25 for 2 reasons, just natural leverage. But the other reason that we feel positive about our margins drifting up over time is that as the proportion of our revenues become digitized, we actually -- we make higher margins on digital revenues than on static revenues. So that's a nice positive for us. And it's also important to put current margins in the context of where we were pre-COVID. And even in Q1, in a quarter that maybe it was a little lighter than we would have hoped for still [indiscernible] 2019.

Great. And moving to, I guess, the transit business. Can you give us kind of an update on how things are going? And I'm sure you talk about the MTA a little bit more, but just -- why don't we start with the overall transit business and then we can delve into MTA a little bit.

Yes. The MTA has become a kind of proxy for transit. So we'll get on to that. But interestingly, if you go down here on the tail or we have we have all the transit here in Boston, and they had a really pretty good first quarter. So our key transit markets are Boston, New York, D.C. San Francisco and L.A. But prepandemic, the MTA used to make up around half of transit business. And now actually, it's greater than that. So let's dive in there. So having been down to, I think, in the pandemic sort of 30%, 35% of revenues, 2019 revenues in the second and third quarters of 2020, transit rebounded very nicely. It was pretty much sort of straight-line growth. It also -- and this is the MTA I'm talking about. Our revenue growth versus '19 was outpacing passenger growth over that time. And we felt that we could see -- very clearly see that path towards achieving the MAG because once you achieve the MAG, we then start paying ourselves back from the capital that we invested in that contract. Last couple of quarters, the growth has flattened off. We don't think that there's anything particularly going on there that will have long-term impact. But it sort of pushes out the curve somewhat, we still believe that at around about 80% of ridership, but we still believe that achieving pre-pandemic revenues of 100% is absolutely possible. At the moment, it's about 70%. And we still love the transit business. Remember that 90-odd percent of our top 100 clients buy both from us. So it's a great product. If you go down on the subway now, you look at the digital we have in, they've been still building out digital in the carriages now. I mean it's a fabulous product, and we think will be a real growth driver for our business in the future. Obviously, there's a lot of focus on it right now because with the step-up in the MAG and flattish revenue growth, that you obviously got a step back in margin. We expect to some growth in the second half of this year. We certainly hope to see some growth in the second part of this year. And if we take 1 step back and think about the MTA contract, which we obviously spend a bunch of time talking to investors about, it's going to be [ over ] positive this year. Next year, we expect it to be kind of cash flow positive because we're decreasing substantively the amount of investment that we need to put in. And the following year, it's likely to be cash flow positive. And importantly, as I say, being able to sort of pay off some of the CapEx or the -- it's not CapEx as such, but the investments that we put into the MTA before, which is not treated as a REIT income. So it will be great for the business in terms of whatever we want to do, be it delevering or M&A or whatever...

A lot more financial flexibility. I guess -- we are seeing, I guess, people returning to the office more in the city. It seems like there were some maybe safety issues early in the year. But every time, I ride it now, there's a lot more of a police presence and you feel more comfortable. How long will it take maybe increases in ridership to translate into, I guess, potential revenue? Is there...

Well, yes, as I said, we were ahead of that curve generally for like a couple of years. And then now perhaps we're kind of in line with the curve which we need to get ahead of that curve, again, I say, I would hope that we can do that as we go through the coming months.

Got it. And are those conversations with advertisers getting easier because the ridership is getting better and stuff or too granular...?

Yes, it does get very granular. I mean what was interesting, I also made the comment on our first quarter call that actually the subway, we were up year-on-year. Where we were down was in a different part of our transit business, the bus advertising business that was, for the most part, driven by a film slate because the films are a big user of bus advertising and the slate was down. So it does get very granular when you go into it.

You mentioned earlier in circling back to a little bit on M&A. There's a lot of, I guess, billboard business to apply here and there. What level of M&A are you expecting for this year? And what type of properties are you looking for? Are you looking for smaller deals or once in a while like something to become available, that's a little bit more than just the one-off?

Yes. So last year was our biggest year of M&A since 2014 at $300 plus million and with one relatively significant purchase of the $180 million range, which was a completely new market for us in Portland, which we love, and that's going to be a great investment for years to come. We think just based on what's in the pipe at the moment, there's going to be lower than that this year. There's some deals that was -- from last year that were still wrapping up. There's a couple of smaller ones out there, but we think it's -- and interestingly, other market commentators have said the same thing. We think there's probably a little bit of less deal activity this year in terms of tuck-ins. That's not to say that generally in the space there's not a lot -- there's a lot of interest from the PEs right now. There's a bunch of rumors about some of the larger, independent players going through processes. So we'll see. I'll say, it's an exciting space right now.

And then in terms of your leverage, it's about 5x. Are you comfortable with that? And just kind of, I guess, you can wait a little bit for the MTA contract to kind of flip on a cash flow basis and the EBITDA growth there? Or do you feel like you have to be a little bit more aggressive in bringing leverage down right now?

When we look at the leverage in the business, we typically -- we said that, look, we'd prefer to be around 4x. So we're a turn over that. That doesn't make us fill in any way nervous. We've got great liquidity right now. We don't have any bond refis until 2025. We have levers within the business if we -- in terms of how we deploy our capital. So yes, look, we'd like it to naturally come down, and it will do over the next 18 months, 2 years.

But it seems like you have enough flexibility to do the investments that you want to help grow the business at this point?

Absolutely.

All right. I think with that, we'll end it.

Thank you, Richard. Thanks, everyone, for listening.