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

All right. Good morning, everyone. I'm Jason Bazinet. I cover Media and Entertainment here at Citi. I have Chairman and CEO, Jeremy Male, with me here this morning, Jeremy. Thank you so much for coming.

Jason, thank you very much. Good to be here.

Yes, yes, absolutely. So I want to start with a big picture question.

Okay.

Priorities for '24. If we're talking sort of a year from now, what are the things that you're focused on over the next 12 months and the things that you're most excited?

Well, I guess, really getting the top line moving again next year, I think, particularly within our transit business, which has been difficult for us this year. Actually, billboard business has been pretty good. By getting the transit business moving and we've got some plans to do that, particularly as we connect our digital transit assets to the programmatic platforms. We think that can make a significant difference. We are very focused in terms of our transit agreements and how we can improve some of those agreements. Obviously, the big dog there is the MTA. And I guess we'll be talking about that in more detail as we go through our questions. Even within Billboard, we're looking very hard at Billboard margins and our margins in general. So we're keeping a very close eye on our SG&A, and we'd like to be reducing our SG&A costs as a percentage of revenue as we go into 2024. And net-net, we'd like to achieve OIBDA growth that will allow us to delever because we're certainly focused on our leverage, and we believe that, that would be very positive messaging for our shareholder base.

Okay. That's a good list. What -- how would you characterize just the overall health of the ad market as we sit here today? And sort of what do you envision as we go forward over the next 12 months?

Look, I mean, you've -- we've all seen that the commentary out there, and I think it would be very hard to describe the ad market is robust. I do think that as we look forward, I hope some of the uncertainty goes out of the market. And I was looking at some numbers earlier on today, and it seems that next year, most people are plugging in growth of around 5%, plus political of another 4% or 5%, whatever.

You're talking overall ad...

Just talking, yes, overall ad dollars. In fact, when you drill in and you look at out-of-home, out-of-home is also forecast to be growing mid-single digits next year. So I guess I'd say it's not particularly robust. For us, it's -- you have to sort of dive into it a little bit. And so what's going on for us, if we look in ad business base, the writers-actors strike has had impacted us. So TV is down for us right now. The dollars will come back in a minute at some stage, but down for us right now. Tech dollars are certainly down, real estate dollars are down. Some of the other categories are mostly up. Legal, for example, is very strong, and health is pretty good. So it's a mixed bag, but I would say mildly positive, not robust.

Okay. What was it -- when one of your competitors also pointed that the sort of legal vertical was pretty strong. Does that mean anything? Is that like a harbinger of a recession if all of a sudden like lawyers are out there advertising 1-800, my back hurts or whatever they do? Like...

No, I think that's just a reflection of the margins that are made in that industry and the benefits of outdoor media in general as a great driver of response. So I believe I'm right in saying that legal was actually our largest category in Q1. As I say, it's been a good growth driver for us in Q2.

Okay. That's great. What about the national-local dichotomy? I assume that most of the sort of soft path that you talked about, all those examples you gave, television, maybe online sports betting, you didn't mention that one, but that all lands on the national side of the ledger?

It does. Yes, it does indeed. And in fact, when you look at it, local at the moment is a slightly higher proportion of our business than it was in the past because basically it's been sort of flatter throughout the sort of whole COVID cycle, to put it like that. And yes, I mean, look, that will impact national a little bit. I mean, we gave Q3 guidance of our Billboard business being up low single digit, and our transit business being down. And much of that down, if at all of that down, is because of national business that really isn't down there because we used to carry a lot of the full launches down there. So we used to every September, since the beginning of time, we've had those full launches that say will come back. So very much the same as we said on -- guided after our Q2 earnings call. So talked about that low-single digits transit down. Depending on that down, we could be more flattish for Q3. But yes, no significant change from...

So let me -- I'm going to just -- I'm going to focus a little bit on billboard and then I'm going to shift over to transit.

Okay.

So on the billboard business, that business seems to have done actually really well and held up better than some of the other verticals. Why do you think billboard has done well? Is it an inexpensive medium? Is it you're making traction on demonstrating the efficacy of the ad spend to marketers?

We just -- yes, if we look at our billboard business in particular, if we look at the first half of this year, in the first half versus 2019, which is it's a comparison that I think is worth making. Our billboard revenues were up 26% and billboard OIBDA is up 27%. So if you think of that COVID cycle, I mean, that's a pretty strong performance. And look, that billboard performance is driven by the fact that just the efficacy of the medium in terms of its CPMs, it's a reflection of the fact that we've been investing in converting our boards to digital. It's still a great thing for us to do. We -- on average, we make 4x revenue and we have 2x costs. So it's OIBDA, it's margin positive as well. So we have more hardware out in the field and then we are better connected and more automated. So the fact that we can now and take programmatic dollars and allocate them on an LTV basis to our inventory across all of our digital boards has been a great driver also. So I mean, the health of the billboard medium is terrific to see. And certainly, when you compare to just about any other traditional medium, radio or TV, press, whatever, I mean it's been the true positive outlier over the last few years.

Yes. So there's one metric that I track, and it's interesting because some of the growth, of course, in the industry and for you guys has been those digital conversions. So one of the things I like to do is sort of -- I think it's the average revenue per digital board, you put that in the numerator. And then denominator, you do average revenue per static board.

Yes.

And what I would think would happen over time is as -- if the thesis is you convert the most valuable digital board first in your entire inventory. As the years go on, that ratio should begin to compress, right? Because you're going -- and I don't see that much compression across the industry. In other words, the marginal digital board you're converting is still many multiples of the average analog or static board that's left in the inventory. That's surprising, is it not, to you?

I think, it's reflective of the runway that is still out there in the industry. I think whenever you start looking at averages of leverages, it gets a little tricky because we can convert a board on the West Side Highway or put a digital sign up there, and well -- it's a $1 million in and convert a board in Louisville and it goes from being a, whatever it is, a $10,000 sign to a $40,000 sign. You know what I mean.

Yes.

So you -- but as I say, broadly, I think I wouldn't -- I think that is something we'd see is quite positive for the industry.

It is, yes, not a runway left. So I want to -- so how about going forward? I mean the main drivers of digital outperforming, do you think, will continue? Digital will be good, you'll continue to sort of take a little bit of share from some of the static mediums -- or legacy mediums, I should say.

I think right now when you look at the -- if you look at the flexibility that digital gives you versus analog in terms of your ability to literally change your creative in a split second, by in a split second, and you sort of think about that in comparison, I'm going to exaggerate now, but going back a few years with where you had to literally send a poster on a truck, get a guy with a ladder and a bucket of paste. It's not quite that bad. But yes, I'm painting it, as I say, I'm exaggerating to prove the point. Thing is that flexibility we have with this digital, and it's definitively going to keep commanding a greater share of dollars. And while we can keep the returns as they are, we literally don't sign off a digital conversion unless it's 20% plus IRR. So while we can make those IRRs and we stimulate in this incremental demand, we'll keep investing in digital for sure.

Okay. That's great. I'm going to shift over to transit. So you guys, I think, have a lot of transit contracts. I think you've said the MTA is about 50%-ish of the transit business.

Yes.

Next biggest one is San Francisco.

The next biggest after -- no, it wouldn't be San Francisco particularly now. It would be -- after that, the bigger contracts are L.A., D.C. and Boston.

Okay. I'm going to roll the clock back to the CBS days before OUTFRONT existed. I think there was a big transit contract in London. And if I remember correctly, you signed that, the Great Financial Crisis happened, and you guys just got out of London, I think. Is that correct?

Well, predates me. But obviously, I've been in the industry a while so I know the -- I can answer that question, I think. Yes, they had the contract or they have the contract for TFL, Transport for London, which was the subway and -- for the most part, it's the subway. And they had after GFC, there was a legal dispute, contractual dispute. The way that's resolved was that there were some concessions made and a new agreement was signed. But that was then just part of what was the European business of CBS Outdoor that was sold to Platinum Equity in September 2013. So that -- I mean, that's the story. But you're right, there was some noise around it because there was this contractual dispute, but it was resolved and, say, sold it, and part of that ended to Platinum. That business is now owned by Global in the U.K. And as far as I know, it's business as usual for them.

Okay. But when you run into sort of a COVID situation like we had that sort of impact sort of transit revenues, we shouldn't think of you sort of disposing of assets or getting out of contract. It's more tweak around the edges. I think you referred to one of your priorities for '24 is to try and nudge these contracts maybe to make them a bit more favorable for shareholders. Is that right?

During COVID, we had a number of contractual negotiations including with the MTA. So the outcome of that was a change in the level of investment and a change to the contractual term. So we had a number of contract negotiations that gave some relief, to put it like that, for the COVID period. I think what's become very clear since then is that having -- in our business, we then had 20% growth in our transit business in '21, 20% in '22. But '23, it's very much sort of flattened out. And all of the assumptions that we were talking about when we were making those original contractual changes, many of them haven't come right in terms of return of audiences and the general perception of transit in major cities across the U.S. So we are now in a situation, where we are in discussions with the majority of our principal transit partners, including the MTA, as to how we can better reflect the reality of 2023 and transit advertising going forward. And obviously, it's very difficult and when we wouldn't wish to comment early on any of those discussions. But net-net, we're hopeful that it will be positive to our shareholders.

What can -- without getting into the specifics, maybe can you describe what it is you're trying to solve for? In other words, is it just to make sure that the IRRs are positive? And so maybe extending duration, is it more about making sure that you're generating cash flow? Is that the most important thing? Like what are the things that...

Yes. Look, there's really only -- there's sort of 4 main pieces to a transit contract. You've got capital investment, who makes it, okay, whether or not it falls to the media partner or whether or not it remains with the transit operator. You've got what guaranteed revenues, revenue stream to the transit company you might be prepared to make or were prepared to make and whether or not that's still reasonable given the change in the market shift. You've then got the revenue share, okay? And if you think about revenue shares, maybe it made sense to work on 60% shares if revenues were 100%. But if revenues are now 70%, our cost of operating in that business is still the same. So you need to look at revenue share. And then duration would be the final piece particularly if capital is involved.

Understood. Okay. I think you've said you expect the MTA to become free cash flow positive next year.

Yes.

Still true, even if there's no contract changes or tweaks or anything with the MTA?

Any comments we made on that basis -- yes, we certainly haven't built in any contractual change into that statement. Look, we think over the next 18 months. So from when we put that number out, in other words, these 2 quarters and the 4 quarters next year, over those 6 quarters, they will spend around $95 million of CapEx. Sometime in the middle of next year, we believe that we go cash flow neutral. And then the current term goes out to 2030. And after that spend, we see about $30-ish million, $30 million, $35 million, maybe $40 million max, it depends on the lifetime of the screens, et cetera. dollars to maintain to remain that the network going forward. So pretty much then we're done. And yes, it's going cash free neutral, and that assumes no change.

Okay. So I was looking to do my old notes, and I could never find -- was it 2018 the MTA contract when you announced it?

'17, I think.

I was going through my old notes. I don't think you guys ever disclosed the original CapEx commitment for the MTA. I think it changed when you went through that renewal during COVID. But I personally was surprised when you said you only had $95 million left on the MTA contract. Because my model had more CapEx, but it was just my assumption. But is that -- that's like in the contract or whatever the renegotiated contracts, only $95 million left of capital to deploy? I just think well pretty low now.

Well, the contract is based around a number of signs and so we're going to -- rather than absolute dollar values. So in order to complete the number of contracted signs, that's [ $94 million ] that we've said. And yes, that does, in part, reflect some of the -- we just, what I would call, smarter deployments. I mean, we originally thought we had put X screen somewhere. And we said, no, we're unbalanced. We think we can put Y, achieve the same, create impact on our audiences without -- you end up with slightly less screens.

Okay. That's super helpful. I hate to believe with the MTA point, but I know investors care about it so much. These fare hikes that just went through. Is that meaningful to you or you don't think really impacts much in terms of...

SP-5 because the -- well, sort of fair hike, ridership goes down?

Yes.

I suspect that won't really be the case. I think people use the subway because it's the best way of getting from A to B. And I think people will continue to do so. I mean, the other thing that when we look forward, we've built in our current model, we've got about a 6% CAGR in our numbers going through to 2030. And we don't...

6% top line CAGR.

6% top line CAGR. For example, we don't build anything into that either for potential benefits, public transit if we see a congestion charge in New York. It is what it is. We just, you don't mind, we just broadly expect some sort of continued increase ridership. So 6% CAGR on the top line, the 3% CAGR in our cost base.

Okay. Can I shift gears and talk about acquisitions?

Absolutely.

Okay. So I think you guys are on track to spend a lot less on acquisitions this year than you did in the prior 2 years?

Yes.

Is that sort of -- should we think of '21 and '22 is sort of the aberration and '23 is sort of more typical? Or could it even be less?

I think there's 2 or 3 things. Acquisitions were a bit like buses and 2 always come along at the same time. So there were a number of businesses out in the market over the past couple of years, more so than would be the norm. So I think that was one piece of it, just not the same number of deals out in the market. I think that public multiples have gone down, private multiples or private expectations haven't necessarily followed. So I think that is part of it as well. And from our point of view, it's fair to say that we're keeping one on our balance sheet also. We believe that what we have some great opportunity just to sweat some of the assets that we've either acquired or built over the last 18 months, and that's where we're going to focus most of our intention. By the way, that doesn't mean if a great opportunity comes along with wouldn't pursue it. But just generally, we're just taking probably a more balanced approach.

And in terms of focusing on leverage, do you have sort of a goal or target in terms of where you'd like your leverage to go and over what period of time?

Look, at the moment, we're between 5 and 5.5. First objective is to get back down below 5 and we'd like to then drift down towards 4. I mean, that's essentially where we think.

Okay. Any questions from the audience? No questions -- yes, there is one. Wait. Can you just wait for the mic just for the webcast?

Jeremy, can you just talk quickly about how the business may change in terms of historically, it's all been the ad -- the outdoor business has been very stable relative to other medium ad areas. Does that change if we look out 3 to 5 years as you switch to more digital, which gives more flexibility and so then you wind up being a bit more cyclical?

Yes. Look, I think that's a good question. I mean, when you look at out-of-home, particularly local out-of-home, where you've had this sort of major sway of the business that is just bought on a permanent basis, that sort of signage, turn left for then next went down the slope, whatever happens to be. And I guess as the share of revenues become digital, it does gives the ability to turn the tap on and off quicker. So potentially, there's a little bit more volatility. But I believe that the benefits of the fact that you have an entirely potential new user base because whereas before, the minimum you could get into a board for was like 4 weeks at X. Now if you're a local advertiser, you can buy a board for an hour, if you want. But have been typically you could buy a board for like 2 or 3 days over a weekend. I mean, there's so much more, we think, potential demand that it will more than outweigh the sort of the mild discomfort of that incremental volatility.

Do you see the industry ever moving, where there will be sort of longer term -- like maybe you can give us a little bit of history in terms of what was it that caused a customer to have to sign a contract on a static board for a specific period of time? Was that just because of the pace and the truck roll and the fixed cost associated with switching it out? Or was there another reason for that? And will the industry, do you think, move to longer-term contracts on the digital side?

It's interesting. I mean, it's different across the world. In the U.S., the minimum period is a 4-week cycle. In the U.K., it's a 2-week cycle and in France, it's 1 week. So -- but so a lot of it...

Sort of your neighbor's flexibility. Can I have free -- get billboards flexibility...

So a lot of it is, which we'll do in Times Square where you can buy all of our boards and other people's boards. So you essentially by the entire Time Square for like 15 minutes. So you have this incredible [indiscernible] visual for your brand. And typically, you would then have, if it's a movie [indiscernible] you'd have the actors there and everything else. So it then gets shared on social and everything else. So that moment in time, even though the -- when you got bought 15 minutes, goes viral within a heartbeat. And the value that you can -- people achieve through that is huge. And that just shows, I think, the value of digital.

Super helpful. Jeremy, thank you for the time.

Thanks, Jason.

All right.