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

Thank you very much. Hello, I am Ian Zaffino. I am the equity research analyst here at Oppenheimer that covers OUTFRONT Media. Thank you, everybody, for joining us. With me today is the company's CFO, Matt Siegel. Very pleased to have him here. Matt, maybe to start off, give us a brief overview of the business and the markets you operate in today.

Sure. OUTFRONT Media is an out-of-home advertising business. We have a combination of billboard and transit advertising assets. Company is about $1.8 billion of revenue. We have a national footprint primarily focused on the large markets on the NFL cities. We have a major presence really in all the large cities, focusing heavily on New York, Los Angeles and going in Miami. In Transit, we have operations in the trains, commuter rail, buses, bikes, also focusing on major cities. The billboard business has been super strong since pre-pandemic, with a strong recovery. And transit obviously still has its challenges with ridership not returning to its pre-pandemic patterns. But everything is going pretty well.

Okay. As far as the -- let's just say national advertising, describe the market, how things trended since the first quarter, second quarter, maybe what categories are performing well and which are underperforming.

[indiscernible] pre-pandemic. But a strong recovery, that obviously going to have these challenges with the [indiscernible] not returning to the pre-pandemic range. [indiscernible].

Okay. As far as the -- let's just stick to national advertising... [Technical Difficulty]

I think you're asking about national advertising and trends. For us, our portfolio is geared more towards national than many of our competitors. Again, large markets, a lot of big brands use our inventory to reach audiences all around the country. For us, national business has been a tale of 2 cities. The billboard business has been very strong. Second quarter national advertising on billboard up around 10% over last year. Billboard a little bit of a different story -- I'm sorry, transit a little bit of a different story. National is lower than it was last year, still in its recovery phase from the pandemic. So we're a little disappointed with where national has been performing on transit. Overall, toward the middle of the second quarter, we started to see some softness in the advertising space and especially in national and that's continued into the third quarter, perhaps exacerbated by strikes, the writers and actor strike slowing down TV advertising, which is normal to this time of year as we go into the usual fall launch season. I mean our national business, we think, is better than most, and we expect growth in billboard and in national advertising in the third quarter.

Okay. And any regions that are particularly facing a lot of weakness or some that are strong? Maybe help us understand the geographic mix.

Sure. Our large market focus, billboard doing pretty well. New York, Miami, Los Angeles, all up nicely from a strong year of 2022. Obviously, we have problems like others in San Francisco, which is showing some softness in both billboard and transit. But most of our large markets are doing very well versus '22 and clearly above their 2019 pre-pandemic levels. Transit a little different with ridership peaking at maybe 70% of where it was in 2019. Most of our franchises are under 2019 peaks and still struggling to get back to where they were in 2022.

Okay. And as we look at like the mix of national and local, remind us what it is currently and what's the path back to historical levels.

Historically, we're about 45% national, 55% local, which is a little heavier, national split than some others. Most recently, in the last quarter, we were 42% in national. In the first quarter, we were 40% national. So the national business is growing and local -- not giving up the lead so easily. Local has been very solid throughout the last few years. National is a little more volatile, showed good strength last year and has been slightly outperforming the first part of this year.

Okay. Turning to the billboard business, can you talk about yields a little bit, like how are yields in the past quarter and what are you seeing going forward? And then also maybe some discussion of static versus digital boards, and how they're each doing.

Sure. The last couple of years, our yield -- our billboard yield, and frankly, a lot of our billboard revenue growth was coming from rate. IT helped with a bit of a tailwind from inflation in the last couple of years, we've been able to increase rate really across the board, digital transit and digital static in most of our markets. Billboard historically has had relatively low CPM. So we think there's room to increase our rate, and it's demonstrated to be true. This year, our rating pieces have been a little tougher to achieve. Component roughly flat on rate and occupancy, we're getting some small growth -- revenue growth, yield growth by converting static into digital. So the digital product generally has a higher revenue than its equivalent static board. So they're changing a static board into digital and adding more inventory. I'm low in the price point, but I'm achieving higher revenue. That's aiding with our revenue growth. And generally, on the flip side, when I talk about -- you mentioned static versus digital. We're still seeing some modest growth in the static business, which we find very impressive. And every year, every quarter, we're taking some of our best static inventory and converting it to digital. So I'm taking it off the static team putting it on a digital team. And even last quarter, we showed a little bit of growth in static with that existing remaining inventory.

And what's now the pace of conversions as far as -- how many boards are you targeting this year and next year? And what's really the gating factor there and why you convert that amount and not more or not less?

This year, we'll probably do in the neighborhood of 100 to 150 new digitals. Last year, 2022, with a heavy acquisition year, we did 325, 350. So a much larger year than we've had in recent times. So we feel comfortable doing a little slower pace this year as we focus on digesting that larger volume from last year and keep it going. Next year, probably a similar number in the 150 neighborhood. A few governing issues. One, we don't want to overtax our system. We don't want to drop too much new inventory, which is digital. And secondly new inventory that needs to be sold. I don't want to put too much into any one market, any one year or any one time period. So we want to spread that out among 40 different markets. And then it's capital. Well, I think this is -- the digital conversion is really the best investment of capital we do, relatively low risk, very high return and very consistent in its performance. You may have noticed our leverage is a little higher than we'd like. So if I can divert or slow down some discretionary spending and save a couple of dollars that way, we'll probably do that for this year and next year. So those are the 2 things. Kind of pace of business, making sure it's digested. Spending capital. And then, of course, the gestation period, the development. Apparently not everyone wants a digital billboard at the end of their block. So there's a fair amount of work our real estate team needs to do with both community boards and zoning and lobbying to get an approval pipeline. We keep a pretty good solid pipeline, but again, it could take between 2 and 9 months to get some approvals.

Got you. Okay. Maybe if we could turn to the transit business for a second. Maybe give us a kind of a state of the union of what's going on there because the first quarter, I guess, you had some issues that you called out as far as the online gambling, not repeating and facing tough comps from that. This quarter, you also sort of had some softness in the transit business for other reasons you pointed to. But you're back up a little bit and kind of maybe string those quarters together and string all kind of current events together, maybe even that look together, like what's happening and what's going on?

Sure. A lot of stuff going on. So transit is an important part of our portfolio, greatly impacted by the pandemic, during the pandemic and post pandemic, as people have changed their commuting and traveling habits. Ridership in most of our -- I mean, all of our transit franchises is down, in some cases, more than 50% like San Francisco. In some cases, down 30% like New York. So that reduced audience, and we've created challenges for generating advertising based on that audience measure. We started to recover from the pandemic in 2021, with transit in general growing north of 20% year-on-year. Continued in '22, with transit growing north of 30% year-on-year. The MTA, in particular, by far our largest franchise, growing 30-plus percent and 40-plus percent, respectively, in those 2 years. So we felt very much on the road to recovery back to and above our peak revenue years of 2019. We started in the first quarter of this year, transit -- the growth of transit stalled. First quarter was flat revenue growth year-on-year. We didn't think it was a cause for concern. Obviously, we're focused on it. But first quarter is the smallest quarter for us, a seasonal small quarter in advertising in general. Post holidays people spend a little less. Then we came into the second quarter, and we see transit still flat, and our forecast has been our pacing for the rest of the year isn't very robust. So clearly, the transit recovery has stalled, which caused us to take a hard to look at a number of our franchises in New York, being the largest in particular, that a flat first half and a slowing down in the second half, though it was a triggering event for us to reexamine our forecast model and see what it looks like over the remaining life of the or the base term of the transaction, which is from now until 2030. And with that, we concluded talking to salespeople, looking at data, looking at a forecast that we're not going to get -- likely not going to be reimbursed for the spend that we've made so far to date and in through 2023 in our MTA franchise. So in a similar conclusion, in BART in San Francisco with their performance. So we -- I assume all the listeners know is we took a write-down and impairment charge of a little over $500 million to our transit business in general, focusing on the MTA with a small piece in BART, so that was truly disappointing. I'm not sure surprising that we were having troubles with there and there's an adjustment in the valuation necessary, but I think the ultimate timing and the size is always a little surprising to those people know what's coming. In addition, the slow performance in transit this year with -- in the New York franchise, a growing minimum guarantee, has caused the transit EBITDA to be less than we expected and west at this point than last year. So we also felt a need to change our full year guidance. We reduced that notably as well. So just kind of the performance in our transit business has disappointed and caused us to make some public statements and adjust our financial statements accordingly.

And when we look at the transit slowdown, is it call just driven by national? Or are you seeing actually advertisers move away from the media?

I think generally, the slowdown is national. National is a little more volatile. Like I mentioned, New York was growing at 40% last year driven by national. This year, national was down year-over-year, and our local business in New York transit is up. So it's a bit of a large advertiser phenomenon. We're taking a number of steps this year and continuing into next year to hopefully improve that. We do expect to connect our transit -- our New York transit digital screens to programmatic platforms later this year. And hopefully, that generates increased demand starting in next year. We're working on connecting geo path orient data directly to our operating system to make it easier to transact with us and by us. We're doing a ton of work in marketing and outreach agencies, just to reaffirm, let them know that there's 4 million people on an average day -- not in the summer but in 3 seasons of the year in the subway. The weekends are pretty much back to the ridership they were in 2019, and there's the biggest pool of audience in the country still even with lower ridership, and we're hoping to gradually encourage national advertisers to step up their pace in transit.

Okay. And then on the MTA specifically, remind us how much of your transit revenues come from there? And then, I guess, if we look at the profitability of just the transit in general, it was relatively breakeven, call it. Where was the MTA in relation to that, the direction, I mean to be exact?

So say, the last 12 months, last year, the MTA revenue was more than half of our transit revenue overall. So it's very important. Last year, the MTA on its own was EBITDA positive. So the rest of transit was EBITDA-negative, which was allocated costs and things. MTA this year is going to be, I think, roughly flat in revenue. We would see minimum annual guarantee growing some inflation adjustment. It will be closer to breakeven. And we said on our earnings call last week that transit will have a $15 million to $20 million EBITDA loss. So that will come from the non-MTA franchises. The MTA revenue was again flat. Last year was around $200 million. The MAG this year is about $147 million, which is $135 million of regular contractual MAG level after adjusted for inflation, plus almost $12 million that we're carrying forward from an amendment in 2020. We had a minimum guarantee shortfall in 2020 that the -- our amendment with the MTA allowed us to push forward and spread over 22% to 26%. So we're paying 1/5 of that in 2023.

Okay. And so -- and then after that, you've been at the CapEx, I don't know if it comes down, but...

So this year we think the CapEx will be, in total, $60 million to $70 million. We've spent about $20 million so far, so maybe another $40 million or $50 million in the back half of the year. Next year, similar number, another $50 million or $60 million, which will bring us to the end of our initial deployment. So the good news there is it's mostly spent. If you go underground, you see the screens of the digital urban panels across the city. The inventory looks great and it's mostly spent, and we think a lot of the spend is behind us. Going forward, we expect to have $30 million or $40 million of annual replacement CapEx. Those screens don't last forever in some stations indoor, outdoors, some of the stations and areas are a little less hospitable. So the screens may need to be replaced, and that's capital that also as part of the project.

Okay. So given the state of the MTA, what are your alternatives? And maybe just not the MTA, just like it's the largest. But what are your alternatives here for maybe transit MTA? And any opportunity to actually just exit? And would you want to do something like that?

Look, the transit business is attractive at the right price. The problem we have right now is the contracts are generally pre-pandemic and designed for a different audience and different obligations, and the audience now is lower. So immediately, what we're doing, we're in discussions with the MTA on potential amendment, similar with BART, that's smaller. MTA, we have a contract, and the attempt was all along for the MTA to pay for the screens. And the revenue share with the mechanism we were using -- we are using to fund those screens, obviously, the revenue has come up short of everyone's expectations for reasons, I think, beyond our control, beyond the MTA's control. It's just that something happened, and we're trying to figure out what the appropriate rebalancing might be. There's not a ton of leverage there, but we expect to talk to them about MAG-level revenue share capital and tenor and see if there's a mutually agreeable solution, which we're hinting at. Could we walk away? I'm not sure. We want to assume the current contract is not attractive and we can find an alternative we pursue it. We do have a -- with the MTA, we have a letter of credit posted in a guarantee, which would make walking away financially unattractive. There's probably other things we could consider in the corporate finance world, but probably premature for us to go down those paths or that path. They're not particularly attractive, but there's other things we could ponder. Again, the contracts are challenging. Over time, as each contract comes up for renewal, MTA is not until 2030, but we have a couple of material renewals coming up. One is [indiscernible] in the middle of 2024. We're going to make sure that we don't sign anything without improved economics, improved flexibility. Obviously, force majeure and some ridership language are very important to us. Or on a case-by-case basis, based on the taxes, circumstances, we may have to exit certain franchises that don't meet our updated revised -- return hurdles.

Right, right, right. And I guess with the MTA, does it make sense that they may be find a partner for that? Or is that really not an option or...

I think that's a long term, maybe right now it's a tough partnership. People don't necessarily want to stand in our shoes or what our stores are standing in. But I think you can envision a lot of these municipal franchises with a financing partner. Our core competency is generally selling audience, selling advertising and -- whether it's on billboard or transit. We think we're pretty good project managers, and we did a good job getting screens on walls and on trains on the MTA, but maybe there's someone better served with different capital structure, a different skill set who's core competency is project management and construction. But that's probably something for the future as these transit franchises and these new contracts come up for renewal and the world is probably a different place.

Got you. Okay. And just more broadly speaking, and maybe we'll move away from transit right now. Sure say, historically. On just the out-of-home market in general, what's sort of your projections as far as what you think it could grow? Where is it taking share from? And how long can it continue to do so?

Fair question. So since really 2018, the out-of-home market -- it has been taking share with an obvious disruption from the pandemic. It's a very low share of the U.S. advertising business, so small growth, I am not sure is causing some of the Internet giants to call emergency Board meetings. But without the ability to trace funds, it's probably clear we've been taking some share from the other old line media companies, TV, print and radio. I see no reason that wouldn't continue some of the audience problems that those media are having or some of the other technical changes that they're experiencing aren't really impacting the billboard business. So we think share gains can continue. And as I mentioned earlier, we're pretty much the lowest CPM on the block. So we could find some room for continued rate improvement. And then just for us, the revenue growth from continuing to convert from static to digital. That helps revenue and helps operating margin, because digital is a better margin product, I think all bode well for the continued health and growth in the global business.

Okay. That's very helpful. And if anyone has any questions that they want to put into the chat, please do so or you can send me an e-mail, and I'll get those questions asked for you guys. But if we were to turn our focus to M&A, what does the environment look like now? Where multiples has been heading? How is competition for bidding for some of those assets? And maybe what type of assets and what type of markets would you be interested in?

So a big year -- last year, we had a big year with Lamar, a big year with others. Did a lot of activity, both dollars and volume. Much smaller this year, we haven't entered into any new acquisition agreements. We're closing a few things that we're committed to in 2022. And frankly, I think that lower volume is likely to continue into '23 -- I'm sorry, into '24. You may have noticed that our multiple has declined. The public multiples, in my view, reflect investor view of value. And I think the multiples in the private market may be a little higher, and sometimes the bid-ask spreads don't match up for us in particular. Our leverage is higher than we're comfortable with, so we're likely not just for valuation, but also for financial allocation reasons, can be less active and focus on reducing our leverage for the next few quarters with organic growth and maybe some other steps.

Okay. And as far as -- I actually got a question online. So let me just ask this. Sorry, it's an MTA transit question. MTA transit revenues make up 50% of total transit revenues, how much revenues does San Francisco contribute to the total transit revenues on a percentage basis?

San Francisco is less than 5%.

Okay. Okay. And...

May be the MTA is the elephant in the room, in virtual rooms or real rooms. Let me answer pretty small.

Perfect. And now if we were just to go back to capital priorities, capital allocation. Walk us through the mechanics of the dividend right now. How much are you required to pay? How much are you actually paying? And why are you paying this amount versus what's acquired?

We're -- as you know, we're a REIT, so we have a requirement to pay 90% of our REIT taxable income. The billboard business is primarily in REIT subsidiary, the QRS qualified REIT subsidiary. A chunk of the transit business, maybe half of the transit business, is in the TRS, the taxable REIT subsidiary. So the billboard performance generally drives our REIT requirement. We have some carryforward from 2022, whereas we -- of the dividend we were paying for the full year '22 was a little less than our REIT requirement, but not low enough to hurt our requalification, but less than requirement to catch up. So we have some carryforward into '23. So that carryforward, plus our $0.30 a quarter dividend, drives the need for pretty close to $1.20 in the year. So that will probably leave us a few pennies above a required level. Not enough, I think, to change anything, but we'll clear out our carryforward and end the year with a clean slate going into 2024. The REIT structure is great in that you can minimize your tax regime and corporate finance balance sheet management, you lose some of your flexibility of what you can do with your free cash flow.

Right. And then so how do you now think about the dividend into next year? I mean would you want to keep it at that $1.20? Even though you didn't have to pay $1.20 million this year, you did. Would you want to keep it there or would you bring it back down to like what's just kind of minimum required?

We think our requirement for '23 is pretty close to $1.20.

For '23. Okay.

Yes. So we don't think we're overpaying based on our forecast more than a couple of pennies. Next year, I expect our billboard business to continue to grow, which will grow our EBITDA, which is a good proxy for earnings in our TRS. So it's likely we have a requirement to grow our dividend will depend on a number of factors, but billboard performance will be the driver. So I'm not sure we would increase the dividend early in the year before we get a better handle on the full year impact, full year performance, but it's likely we'll have to raise the dividend from $0.30 a quarter at some point next year.

Okay. Even though the $0.30 a quarter includes some catch-up from 2022?

Yes. Not a lot of catch-up, but yes.

Okay. Okay. And then how are we thinking about leverage here, is it just a matter of getting EBITDA back to where it should be? Is that really the right...

I think as I say, right, it's never too much debt, it's always not enough EBITDA. That's certainly the case with us. Again, somewhat disappointed and a little surprised by the pull of transit revenue, which led to a shortfall in our expectations of transit EBITDA. So we do think we'll get back on EBITDA -- a better EBITDA growth path in 2024, and then that will lead to some delevering. Our calculated -- our defined leverage is 5.3x, which is higher than we'd like. So I think as we got covenant concerns, we can see our coverage from here. I don't think we're that close. And the revolver covenant is an occurrence test, and so even if we were higher, we can still borrow under our revolver, which is unused and we can still refinance existing debt. So it's not as big a concern as some other covenants might be. So we feel somewhat comfortable. But again, I don't want anyone to think we're casualty sitting at 5.3x leverage and thinking we're fine, we'd like it to go down. And it's one of the reasons we're going to slow down some discretionary spend to help move that stuff.

Okay. Perfect. All right. Those are my questions. So Matt, is there anything you want to say to kind of wrap it up, and we only have couple of minutes left anyway.

So wrapping up, look, we feel great about our billboard business. Recognizing our transit business has challenges, we're probably spending more time addressing those challenges. Hopefully, with some of our initiatives, whether it's discussions with the franchise operator, the franchise in cities, or continued work to improve our execution and our technical capabilities, we look forward to 2024 and seeing improvement all around.

Matt, thanks again for attending. This is really great. I'll let get back to your one-on-ones.

Ian, thanks for having me. Speak to everyone very soon, I'm sure.

Yes, absolutely.

Bye.