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

Thank you, everybody. Welcome. Sorry about the late start here. We have some technical difficulties. I am Ian Zaffino, I am the equity research analyst over here at Oppenheimer that covers OUTFRONT media. With me today from the company will be Matthew Siegel. And we'll do a fireside chat, followed by any audience questions that there are. If the audience has any questions, please put them in the chat, and I'll check it and make sure the question gets asked. And then also, you could just directly email me at [email protected], I'll get the questions asked. With that, Matt, thanks for joining us. Thank you for being here.

Can you maybe just start with maybe a little bit of an overview of the business in the U.S., maybe how it's evolved over the past few years, meaning static awards versus digital billboards, national versus local mix, et cetera.

Sure. So for me is, [indiscernible] the advertising company. We have billboards and transit advertising -- billboards is these days about 75% or 80% of our total revenue, that pre-pandemic that was moving [indiscernible] was about 67% in transit about 33%. So billboards are both the legacy stack time they see around the country and railways in cities and towns, and we are steadily digitizing our inventory, since that's about at less than 5% of all of our billboards are digital. You have generally 8 slips are based on that. Revenue breakdown of our billboard business, a little bit 30% of our revenue comes from digital, from early days and the rest is static on transit, just a little larger, a little more digital on transit and billboard. Billboard business, both businesses are really sold by local -- two local advertisers and two national advertisers. The national advertisers are only those that are, with advertising agencies. In the last few years, the growth of the local business has been very steady and solid mid-single-digit, consistent growth in both static. I'm sorry, both billboard and transit. The national side is a little more volatility. We covered national billboard recovered very quickly from the depths of the pandemic in 2020, and we recently have from slow down in their growth, across our platform, in fact we probably of course most out of home and other media platforms as well. So there's been some change there. Revenue growth this year so far has been low to mid-single digits with transit outpacing billboard from our second quarter, we just [canceled] last week. Very strong transit numbers led by national, with really a lot of focus in transit and in the MTA particularly our largest transit franchise, outperform the franchises in the transit space. Or is there any questions so far?

Okay. Now I know you've been doing a little bit of portfolio rationalization, the Canadian business you sold. Why did you do it? And then what happens with the proceeds of this [deal]?

Sure. So not even rationalization. We like the business. It was in OUTFRONT Canadian business or mostly big billboard, we invest a lot in digital as a REIT is often challenging to delever and pay down debt, because we're distributing most of our net income as a dividend. And we sell, and I think many of our investors felt our leverage was too high. And we thought, Canada was a viable division to sell, and it didn't have a lot of synergies with the U.S. market. It's not often so [indiscernible] request geographies of New York, Miami and Toronto, for example. So we think we could sell in Canada, without an impact on the rest of our national business. We knew there was an interested buyer from some conversations we had in the middle of the depths of the pandemic. We fired up those conversations again, we're able to -- from the first conversation in '23, reached an agreement within months, where you have some regulatory review in Canada, closed the deal in early June. CAD 110 million, about $300 million, all of those proceeds -- substantially all those proceeds to pay down debt in delever, so we pay down and surely after closing $200 million of our existing term loan and almost $100 million of other accounts receivable facility, other operations in fronts in end of the second quarter, where we are stocking from 5.4x to 5x flat. So we think very effective delevering on [indiscernible]. We missed our playing friends, think it puts our balance sheet in a much more comfortable place and we continue to delever second half year with the continued EBITDA growth.

Okay. Great. And so as you kind of -- this were almost on with the summer here. So what's sort of the key areas of focus for the balance of the year and heading into 2025?

Continued execution. As I mentioned, our transit business has returned to growth in 2024, with growth in the first quarter and very good growth in the second quarter, so continue that. Hopefully with both national and local performance, continued digitization so whether it's digital inventory, converting existing static science to digital or maybe acquiring some digital inventory from outside the company or continuing the growth of our automated channels. We have two channels aside from direct calling customers and account execs on programmatic, which has grown nicely. We've been on [indiscernible] for a few years. We will be just on a demand from a platform and people can access our digital inventory in something more recent digital direct ad server, where we can sell inventory, not by space and time, but by audience metrics. So some [indiscernible] says they want a certain demographic, a certain period of time and a certain number of people, we can provide that now with one billboard in one location, with potentially multiple global boards in various time frames. Those are now combined with second quarter about 16% of our digital billboard revenue, and growing sequentially very quickly. So that's -- it's part of execution that digital focus and then, continue to pay attention to our national business. The national , the agency business is changing somewhat, and that few dollars are flowing through the agency holding companies, a little more going through regional and there's truck and [ motor ] regional agencies and some local and digital-focused agencies and hopefully have more conversations directly with the advertisers themselves. So again, operating our business as well as we've been doing and keeping the momentum on throughout the segment.

Okay. And then, can you maybe just talk about the billboard business and what are you seeing from national versus local advertising, kind of count of the sources maybe of growth that you've been enjoying, how has that been, I guess, versus your expectations?

So growth has been great, really didn't go down as much in the pandemic, a pretty steady business. The auto business is a great example. Local's the auto business is dealer networks. And if they pull back or didn't renew their annual billboards, maybe the diner next to [indiscernible] retail store down the block might take it. So they're pretty reliable, steady customers who [has been the] same as the diner who has been the advertising. So that's been growing at mid-single digits for a number of years now, very steady. [indiscernible] associated Outfront media to the local [indiscernible] because our portfolio is more skewed towards national, even the big cities have global components in New York, LA and they all have local components. We're all growing very nicely. National business provides a little more volatility, has higher highs and sometimes lower lows. Certain categories -- have challenges in certain categories, have big booms, for example, the TV business was way down in 2023 with rider strikes and the postponement of the full schedules that we [indiscernible] non-live [indiscernible] scheduled shows, new business was notably down in '24, we're seeing the third quarter of new businesses is a big category that's dramatically up for us. It's a lot more category driven in the last 18 months, and have seen some softness, as I mentioned some structural change in some general softness, again, having a balanced portfolio, with both local national service pretty well.

Okay. And then can you maybe point to some regions that are either strong or soft? I know you had called out L.A. a little bit. What's going on there? And then, also maybe from a category perspective, like what's been really strong versus...

Regions will be driven by their biggest markets and frankly, the biggest category. So this year, contrary to our LA and New York, have had some challenges on the billboard side, mostly driven by media spend in the first half of the year, they were -- you were more recent third quarter even fewer movies. L.A. gets impacted by that even more than New York, they advertise not just to consumers, but they advertise trade to the industry. So that's slowed down our LA business, New York similar, some slower spend in media and entertainment picking up in the third quarter now with television. So those two markets, a bit of a drag on their regions, but we got four regions, East between New York or South, Midwest and the West, everything up for the year, except the West, which is where drag down a little bit by LA, Mid-West and South, outperforming East, again from New York category softness. Transit in the New York, I mentioned earnings were way up in New York as a market overall, had a positive second quarter billboard [indiscernible] down with it on the national side.

Okay. And then on the billboard side, you're staying on billboard side, can you maybe just touch on static yields. We'll take digital next, but let's just focus on statics for right now. How has that been trending? And what kind of -- what's the outlook for that part of the market?

That's interesting. Static, it's putting more plan, maybe notice of statics that was premature. Static yield have been growing, low single digits, but we're growing. Reason I pull that out, we're quite pleased with that real growth. Every year, we're taking some of the best players of the static team and moving them to digital, and taking a lot of the high-yielding inventory and taking away from static, the rest of the inventory continues to grow, and we're pleased with a lot of our focus with automated channels or other marketing efforts, really driving digital and getting greater digital adoption and performance. Static is hanging in there, so we're quite pleased with that. Really the challenge in the conversion into conversion that's [pulling the] industry, keep the yield growing -- getting the perform, getting that car that's moving in the -- right handling and maybe in the service lane, kind of a lower yielding and billboard slow-moving car. Moving to the West right maybe a little faster in our case, a lot faster. So the shift from stack to digital, shifts to a higher yielding product. The growth within that part is less important and actually turning more static into digital and performing, I think there's a portfolio that [indiscernible].

Okay. Good. And then we maybe don't have the same discussion on digital, but then also, how much conversions should we expect this year? Yes, and then, what's the ability to kind of keep pushing rate?

We still will add 150, a little more digitals in 2024. Obviously, with the sale of Canada, the total numbers step back. So we're about 1,900 now way to per pace in the second half. And we think that rate will continue next year and maybe at some point, step on the gas, a little bit, to accelerate, our digital inventory is at less than 5% or more total driving a little more than 3% of revenue. So it's -- outperforms [indiscernible] digital yield, [indiscernible] yield is going up slightly on a same more basis, a little better. We like to do a static conversion discussion, we're adding new digitals every year. And just by definition, assuming we can do our bestest, bestest stat conversions earlier in the process, that would be still very good ones and the ones that make economic sense. Not as on a portfolio basis, on a population basis, they might be averaging down the total on an incremental basis. They're outperforming the static counterparts. So we're quite pleased getting more cars into that less lane driving faster, performing at our entire yield and do our best to drive year-over-year growth on that digital. Just the math and the equation shifting from mild-yielding static to higher-yielding digital is really clearly overall portfolio [indiscernible].

Okay. And then, what portion of the business now is programmatic. And what does that do to the business?

There's a bunch of things about automated. So [indiscernible] programmatic and new [indiscernible] service about 60% of the digital billboard revenue. Digital is about 30%, 31% of our billboard revenues, 16% of 30%, somewhere about [indiscernible] our billboard revenue is coming from the automated channels, growing sequentially. So that's next quarter will be a bigger number year noticeably bigger number, doing a bunch of things. First, we're meeting the customers where they want to transact. So if they want to use programmatic, they want to use an ad server -- and you accomplish those channels, we're making sure we're there for them to do that. They're more flexible, for the digital is more flexible than static in general, it can take later business. You can call me through the digital end, and you're talking about finding we can get it close to the [indiscernible]. So if we can go later in the cycle, and we do more issues. If you want to talk about political and [indiscernible] I'm sure you want to do a political and to the weekend. You can do it with digital. I don't have to send a truck out in [indiscernible] top [indiscernible] in the shutdown and change the properties look much easier, much more flexible. Programmatic and digital direct can bring you, shorter buyer choice, what inspires their own reasons if they can, and we compare that to what I need some others [indiscernible] inventory. The ad server has to sell things by audience metrics and someone was going to reach x number of people with this demographic characteristic, then I timed, just one location or one thing that can serve can say I'll call coverage [indiscernible] and [indiscernible] I'll make sure you reach your 500,000 people over the next 2 weeks, to give you a proof of performance sector effect. So they're more flexible. And again, these are probably the channels of the future. We're then never going to do without our sales force covering clients, generating demand and giving service with the industry is evolving, and I think you need to be in all three of these channels [indiscernible].

And then, I guess, leaving billboard behind, let's move out the transit. As you pointed out, kind of really good results. What's interesting though is, especially in New York is that ridership really has changed. So is it just advertisers returning? What do you think is actually happening there?

So New York is still around 70% of ridership where it was in 2018. We think if people are not in the office 5 days a week, maybe some 3 to 4 days, that seems about right, recently, we have been over indexing our revenue growth is slowly outpacing, change in ridership. And I'd like to thank to my sales team with [indiscernible] its effort and focus and some clever communication and encouragement. You are just coming back there, [in part] to explain the merits of transit, now, at New York in particular. A pool of 4 million people is people largest orients within a country. In fact the demographic, we reach them to reach them effectively going on in different ways. So I think we're refocusing, especially our national team directly ask them to focus more on transit, you see the international performance of the work reflects that. I think we're just doing a better job and further away you are from negative press helps. And for those of you who are listening have been on the subway, you've been on a relatively credit. It's not his unpleasant experience as it was made in 2018 and 2019. [indiscernible] people and see to really way to reach those people. And the other major markets, we have D.C., Boston and San Francisco ridership is not back as fully outperforming as been outperforming as well as we work, but they're also showing seeing growth in returning to a growth environment, which is very, very encouraging.

So I guess just like you said, revenues and the recovery in the business has outpaced ridership. What do you actually think is the right transit number to kind of get back to full potential? Obviously, it's not 100, and I think you might have through out like 80% before. Is that kind of how you feel still just given how the business has performed? Or is it going to be lower?

So we were speculating the 80% in the pandemic really, we would need to get back to 100. I'm not sure over 20% aren't come back, but I think we can get back to where...

Yes. so -- thank you, everybody, again. We're having a little bit of technical difficulties. So we're going to go to audio only. [Operator Instructions] So Matt, I think we're going back and forth about what you think you could hit your potential max revenues at as far as ridership, and it used to be 80%, and how are you feeling today?

I think 80% is probably still a good target. I'm hopeful we could do that at a lower level. I think I was pointing out there's a lot of new inventory on the MTA, rolling stock, which in 2019, pre-pandemic hasn't been digitized is pretty well digitized now by the end of the year. That deployment will be completed. So that's a new start to sell the programmatic and digital direct channels, we were just talking about for billboard, have just been connected to the MTA. So that's an extra demand that's going to be there, which going to help us continue to hopefully over-index the ridership recovery. So 80% could be aspirational, perhaps we could get there at a lower level, but it only do, we don't need to be 100% ridership to get back to where our revenue has been pre-pandemic.

Okay. And then how was -- or how should we think about this MTA contract now? And as far as potential options that are on the table, can you rework the contract that we kind of just stuck with what we had?

Probably not a lot of options. We've had a series of conversations really throughout since the pandemic, we talked to the MTA on a bunch of different levels. We don't have a lot of options. They don't have a lot of financial flexibility in any kind of amendment, would likely be a zero-sum game or your transfer of value from the MTA to OUTFRONT Media. We've investigated a few outside the box turns, I'm going to go into the details here, but things about tenor and maybe some of the capital investments, maybe there's some things to do on the margin on how many screens are actually deployed. But I think the contract that we have in the situation there is what we're dealing with going forward. The good news on that is, as I mentioned, we were near the end of our initial deployment, so the heaviest capital is behind us, kind of had some cost both financially and maybe emotionally for some of us. Starting next year we'll move into a refresh cycle where the capital is wider. And as we said as we speak on our earnings call, we think from June 30 forward, our expected EBITDA and EBITDA growth over the remainder of the base trend in the next 5 years of the contract will outshine or outweigh the expected capital costs. So it will be an adverse cash flow neutral, possibly cash flow positive. So I think the boat anchor that the MTA contract was considered for many years with potential damage, further damage of the balance sheet -- probably behind us, and this is now just a in a margin or performing the contract from here forward, which is -- doesn't sound good news. I think it was a pin on the performance of the MTA and hopefully, we can outperform that forecast. But I think the downside is dramatic downside is limited from the year forward.

Okay. Great. And then I know we touched about capital allocation earlier today, but how are you thinking about what the right leverage target is, where do you think you'll be by the end of the year? And then maybe just touch upon dividends and central pay dividend as a mix of, I guess, cash and stock.

As I mentioned, [indiscernible] we saw we were over levered and organic delevering just our EBITDA growth in take too long [indiscernible] with limited flexibility. Or our leverage the way we can't get it on covenant down to 5x. And we're going to continue to delever into the 4x to 5x range. But at the end of the year, I'd like to think it's -- I don't know for the quarters neighborhood will continue that trend into next year. So I'd like to get closer to 4x, rather than 5x and that's probably in the neighborhood, we would expect to live it in the quarter 4 to 5x. As far as your dividend as a REIT, we mentioned, we're obligated to distribute 80% of our REIT-taxable income. So we think the $0.30 a share that we've been paying this year, is it appropriate to cover that? And then mentioned there will be a capital gain distribution associated with the sale of Canada, again, part of net income is capital gains. We're considering different forms or currencies in which to do that and therefore, we make that decision sometime in the fourth quarter. Now that the logic there is, we sold Canada to delever and pay down $300 million of debt. The turnaround and pay out, I don't know, $80 million of that you made the form of a dividend, would be kind of counter to the strategy of delevering. So as a REIT, you're able to pay 80% of your announced dividend in stock as you so choose. And our thinking is we're giving everyone pro shares of stock, there would be no dilution. Everyone had the same ownership before and after a relatively common occurrence in the REIT world. Again that's a board decision to be made, probably over the next couple of months.

Okay. Good. And then just longer term, what do we think about the M&A landscape? Are you looking at anything? Where are multiples? And how are your other competitors bidding for those assets?

So right now, not a lot of activity. We've been focused internally in our delevering, but I'm pretty confident we haven't really missed anything. We've kicked the tires on a couple of things that are not in of interest to us, but it's -- I think it's prudent to be smart about what's changing hands. But seen our other public company hasn't or anything material that we've missed. The third public company, obviously, some sense of stress and [indiscernible] some acquisitions. Modest [indiscernible] company was sold within the last year. So that was a private equity buyer and private equity is likely to buy another regional that founder is just [indiscernible] cash way likely a smooth transition there. So we haven't missed any live auctions that there are balance sheet or our internal focus has kept us from, so we're still doing very small tuck-ins. We actually spent about $35 million is on tuck-ins, [indiscernible] ones and [indiscernible] market filings at very attractive multiple prices. We completed to do that this year. Pretty small first half. We'll probably get back to that same $35 million level by the end of the year. I don't see anything on the horizon. There's a few high-profile names that always get kicked around, and if and when those do come, for sale. And I like to think that would be a position to look at that given our capital situation, some creative kind of ways to finance that, otherwise, the [indiscernible] public multiples of better than they were. I think we trade depending on use of estimates and things that are around 11x EBITDA, or competitor in more trades at a much higher multiple. So I'm guessing private sellers would want something in that neighborhood, frankly, at this time, we're not that excited about paying [indiscernible] or billboard inventory, but actual circumstances at the time of big taper again, market is pretty slow, we expect it to pick up next year and the year after.

Okay. And then just one final question, kind of something else against the end of this. Maybe give us like a longer-term outlook on, just out-of-home in general, how do we think about it longer term? Was it just technology changing, but then also allow the traditional media continuing to lose share. So how do we think about that? Or how do you think about that?

Good question. I think long term out-of-home continues what's been doing recently, taking share from some of the other legacy media companies, who sits our audience hasn't gone away or decline. And perhaps the digital and social and mobile are taking share from all of us. So that's slow grind. I think technology helps us right now we're, as an industry, trailing. We don't have very solid methods of providing attribution except in private one-off studies. That's something that customers would like. So I think as, we as an industry get better at that, it becomes easier to buy and convince buyers to participate in that out-of-homes. I think that's a good thing. I think the margins in out-of-home, when we continue to grind higher as people get a little more going to say prudently to just have the right word by various franchises. Some of the challenges in transit now initially about the underlying transit business, but we did the shape of financial characteristics of the contracts. And I think we've all learned some of the remaining couple -- last couple of years, is a little more wisely and try to make a little more margin, and with a little less risk in transit. So I think you'll see that trend pick up pace and continue. And then on billboard, I think the digitization of the billboard landscape will continue, and we think the ability to sell that digital to digital skills and digital sellers, will continue as well.

Okay. This is great. Thanks Matt, very helpful. And hello, everybody...

Thanks a lot for your time and patience, and we'll speak soon. Thanks, everybody.