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

Okay. We'll get started. My name is David Karnovsky, I cover media, entertainment and advertising at JPMorgan. Happy to have back at the conference, Jeremy Male, OUTFRONT Media, Chairman and CEO. Thanks so much for being here.

Thank you very much, indeed. Good to be here.

Sure. Okay. Maybe just to level set, it would be great to have you discuss key priorities for you and your team as you look out to the balance of the year.

Sure. Thanks for the question, and good afternoon, everyone. So I guess, as we look forward and think of our key priorities, and we started to see some decent growth in transit in the first quarter, which is good news, off the back of a more difficult year last year. So we're certainly very focused on how we can keep that growth growing in a positive way. Right now, we're at hopefully the final stages of closing our deal for the sale of our Canadian business. So we're hopeful that, that will close over the coming weeks, and that will be useful from a deleveraging point of view. So it's something where -- I guess you could say we're focused on right now. Outside of that, we're looking very much at our automated processes. We're getting some very good growth from automation right now. Our programmatic revenues were up 10% in the first quarter, and we'd like to see that growth continue. But also in addition to that, we're very focused on automation in general. Maybe we'll get into it later on in this conversation. But that gives us the ability to better utilize the space available that we have on our other digital assets by basically us deciding where to push outs out in order to achieve an advertisers eyeball objectives. So that's something that's certainly right front and center of what we think about doing. And just generally continuing to execute our national revenues were a little bit softer than we would have liked in Q1. So always focused on how we can get incremental national dollars over to the outdoor media.

Great overview to start. Maybe circling back to Q1. I think you had started the year expecting billboard and transit at similar growth rates. The end result, a bit of a divergence. Maybe you could speak to what drove the performance there you're observing a kind of similar trend in Q2?

Yes. I mean there's a couple of points differential. I mean the key reason for the difference was that, and towards the back end of Q1. National billboards was a little bit softer than we thought and whereas transit continuing to expand. So that was the main reason for the delta in Q1. And I would expect that we will see similar sort of shape as we indicated in our guidance, we've transit likely to outperform billboard again in Q2.

Okay. And then you mentioned a little bit of the performance of national in the quarter. Maybe just talk a little bit more about what that drove the results. Was there something specific to large markets? Anything you could say on the pacing of local versus national currently?

Yes. I mean national tends to, by definition, it tends to focus on those larger markets. So if you see weaker national, you see our performance in those larger markets, a little bit weaker. So, and L.A. was a bit softer than we might have expected and also New York. If you dig down into the categories. I think it was also restaurants, telecom were down in the quarter. As we look towards the balance of this year, a, our comps are a little bit softer on the national side because actually, national was fast growing in the first half of last year. And we also benefit from the -- not having the Actors & Writers strike this year. So that will be certainly helpful and on both our billboard and our transit business. Media tends to be overweight in transit. So that feels like it should set us up for what we think will be a good 2024.

You mentioned softness in L.A. on the national side. Is that not related to media, if you're kind of calling that out as a better comp? Is that some other category?

It was -- well, you can -- we talked there about the categories that were down, I think it's fair to say that with the national business, it can be pretty lumpy. So if you have one advertiser that comes in and spends a big chunk of change in a given month that doesn't repeat the following year, it can just -- it's always had a higher beta than local. Locals made up by a much, much larger number of advertisers. So it tends to have a much sort of smoother curve. So if we look at the out-of-home medium as a whole, in the first quarter, I think it's up around 6%. I think the numbers from the Outdoor Advertising Association were out just last week. So generally, I think you'd have to say that out-of-home is in good shape. So it's positive.

Now do you think the channel, and these comments are specific to national is perceived on the agency side? And what are some of the ways that you work with the major buying firms to increase the allocations towards outdoor?

Yes. Look, we spend our lives try and talk to as many advertisers directly as we can. And obviously, their media agency partners to promote the benefits of out-of-home. How do they perceive. And I think they I think they perceive it as safe, reliable, brand safe. It's what you see is what you get, which is not always the case with the digital ad market. If you look at out-of-home in the U.S. and particularly in the national side, we have a relatively low bar in the top 200 advertisers, spend about 1.8% of the ad dollars outside of the home. And I do think that if you look to other markets across the world, that's disproportionately low. So sometimes it's hard with agencies to really get the message through. They kind of like doing what they've always done. It's one of the reasons that even though linear TV is not having a great time, still tight to disproportionately more ad dollars than they should do. If you look at it on any sort of reasonable basis.

So what's the opportunity there, right, linear TV, but you could look at something like radio and print. They're still growing fairly large pools of money. A lot of that is going to digital, but is there an opportunity for outdoor even to take a few points of market share, it would be fairly substantial.

There's always that opportunity. And if you look back over the last few years, out-of-home has in the face of a very rapidly changing media market when you look at the growth, particularly of the walled gardens. I mean the world of online Internet advertising is not great outside of that actually. If you look at radio and TV, obviously losing share, we've maintained or grown share. I'd like to think that as we go forward with that, increased automation with digital becoming a much larger part of our footprint. I think that, that increased automation, I think that could certainly be a catalyst to at least continue to keep market share the same, if not grow. It feels like in the first quarter, we probably grew market share a little bit, which is a good sign.

So let's maybe take it on automation. So I think it's -- automated revenue is about 14% of total right now. That's up from 8% last year. Should we assume that this is coming from outside the ecosystem kind of as you create a more flexible way to buy or are you kind of bringing over some of your existing buyers? How do we think about that mix and the importance of programmatic in terms of growing share.

Look, I think it's -- for us, it's super important. Our programmatic revenues specifically grew about 10% in the first quarter. So that's a big chunk of change. When you drill into that. Some of the larger advertisers that we took may well have come through more traditional channels. So for example, Ford, we're a big advertiser over the -- on the pragmatic, and pragmatic basis over the last few weeks. But also, yes, we're certainly capturing dollars that we would have never have found with our classic sales force that are just coming straight in buying much relatively smaller buys in a very sort of focused way. And it's -- as we see it, if it's sort of 14% of revenues now, I would expect that automation in general, I think, as an exit rate at the back end of this year, we'll be knocking on the door of 25%, 30%.

And some of these...

Digital revenues. On digital.

Right. And the marketers that are coming in, you don't have to use foreign example, but what are they most attracted to? What's -- is it the flexibility of the buy? What are you offering them that's bringing them into the medium for the first time?

It's certainly flexibility. I mean out-of-home is always inflexible and that as I said before, I exaggerate when I say it, but you almost have to print a poster and then put it from one side of the country to another and then not quite a guy with a bucket and post, but almost, it was just seen as inflexible, and it tends to be bought well when in advance, whereas now we can take dollars. We'll be taking dollars on the automated platforms that will be literally going up within minutes and hours. So it's, yes, that's very attractive for advertisers who, by preference, like to lay down money later rather than earlier.

Got it. So OUTFRONT target for digital billboard ads this year is 150 to 200. Can you discuss a bit what governs long-term growth here? How much of this is driven by capital constrained regulatory or just you needing to be kind of sensitive about supply in any given market?

Well, it's certainly not capital constraints. When we look at our allocation of capital, actually allocating towards digital billboards, particularly through conversions is the best allocation we can make. We don't convert a board and thus we can see 20% IRR out of the gate, which is what we regularly achieve. So certainly not capital. The principal governing factor is earning. So not everyone is a digital billboard at the end of the street. And we have to find very creative ways of getting those zoning permits through. So that's the main consideration. And then secondary to that, yes, will be supply. Because you need to build -- you don't want to oversupply a market. I mean if you had one ad and then you have 8 ads that you only need to convert whatever that is 12.5% of your inventory in a given market to double your amount of supply. So we always keep one on supply as well.

Got it. And where do you think you are in the digital conversion journey, right? Do you see ample room to kind of continue at that 150 to 200 pace? And is there any shift you've seen in kind of the returns you're doing on conversions? Or is it steady as you goes.

Steady as you goes in terms of what we can achieve. So on that IRR metric, it's essentially the same metric that we've had right the way through. Where are we? I would say something like bottom of the fourth or something like that. We've converted 4% of our billboard inventory, and it's now brown numbers, 30% to 30% of revenues. And the U.S. as a whole at the moment is about 30% digital revenues. If you look to other sort of developed markets and I'm not drawing a straight line between the 2. But if you look to the U.K., it's north of 65%. So that, I think, gives some indication directionally of where we're going to go because of structural differences between the 2 markets, I don't suppose that we will get to 60%, but could we -- if 4% is generating 30%, as we continue to increase, could we get to sort of 10% that's sort of then going to be maybe driving 45%, 50%. That's certainly feasible over the coming years.

And the structural issuance you were referring to U.K. more of a transit market right?

Yes. I mean, transit is one piece of it because there you don't have any zoning restrictions. I think the other piece is that there's far more pedestrian facing digital. And there's also kind of a big sort of retail law digital emphasis in some of the other markets that we don't see quite the same off here. But if anyone has been through some of the airports lately and you've seen the digitization there, I mean that's a sign of the opportunity in transit. And if we -- we'll really talk about the MTA. But if you go down the MTA now, you can see this incredible digital footprint that we think will attract advertising dollars as we go forward.

All right. So let's jump into transit. So growth nicely inflected in Q1. Maybe you can discuss a bit the shape of that demand by kind of region or vertical. And you touched upon this earlier, but when we think about the balance of the year, given the easy comps, what is there to consider, especially with the Hollywood strike impact?

We think with that, we really -- there was no -- there was no fall season at all for -- in the TV market last year. So we certainly felt the backdraft of that. And without that, this year, our expectation is that, that will be a revenue driver. One of the other pieces that's quite important for us that we've just -- we've literally just linked our digital footprint in New York on the MTA to the programmatic pipes, starting to get some traction there. And we're also in a test at the moment to open up those same boards to what we call our digital direct platform, which is where we basically rather than selling location by location, how is [indiscernible] at the moment. You're essentially selling baskets of eyeballs where you can distribute those campaigns to right the way across the digital platform, and to deliver right eyeballs that advertisers are requesting, but say, but not necessarily location by location. So it gives us great flexibility to maximize the utilization of our inventory and also it gives us some flexibility in terms of how we allocate those revenues in terms of making sure it's good for our profitability.

I mean before jumping into the automated conversation, just it seems like it was a broad-based kind of rebound in transit, right, just overall demand has improved.

Yes, it was -- yes, it was a fairly broad based. There was no specific category. And it's -- if you think about in absolute terms, it's a relatively small quarter, so you don't need, I think it's $75 million worth of transit in quarter 1. So you don't need many millions of dollars to another, I mean to make quite a big percentage increase.