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

I'm Jason Bazinet, Citi's Media and Entertainment analyst, and I'm super happy to have Jeremy Male, Chairman and CEO of OUTFRONT, Jeremy. Jeremy, how are you?

I'm very good. Thanks, Jason.

Great. Great. Good to see you as well. So I'm going to preface this with I've layered in a few CFO-ish questions, not CEO question. I hope you can handle them but if I'm off sides or it's too detailed, let me know. Let's move on. That's right.

So my first question is, when I think about the OUTFRONT narrative, so much of it is centered around the sale of Canada, getting the New York MTA contract to sort of breakeven EBITDA less CapEx. As you look to '25, what do you think are the main priorities now? Now that those two things are largely behind you?

Yes. I mean Canada is certainly behind us, and we'll talk a little bit more that later, I'm sure. In terms of the MTA, yes, it was -- it's good to see growth back in the transit business. And I think keeping that momentum through '25 will be super important. It's great now, we have a contract that we can definitely see it's going to be -- it's not going to be cash negative actually as we go forward. It's going to be OIBDA positive. So it's going to be a big but relatively low margin contract, but it's certainly settled down, but it's really important from our point of view that we maintain momentum there. And principally because of the flow-through we now get on that contract because we're still below the minimum guarantee, it means that we keep $0.90 on the dollar -- of incremental dollars until that point when we go through the guarantees. So that's obviously a key area of focus. We will continue to be very much focused on digital development. From our point of view, digital capital is probably the best deployment of capital in terms of bang for the buck that we can get. So we'll keep focus there. And we'll continue to be focused on leverage. I mean, the Canada sale was very much a part of that was about leverage and we'll continue be focused on our leverage as we go forward. And just, I think, general operating efficiency, just making sure that we keep all of our metrics in the right place. I think what we've seen over the last couple of quarters is quite nice flow-through between revenue and OIBDA growth. So we'd like to think that we can keep that operating leverage going through '25 as well.

Okay. How -- so as I've walked the halls here at the conference, I would characterize the level of investor anxiety regarding macro is elevated. But at the same time, haven't really seen this positive signals from any sort of media company or anything in the ad world that seems like it's rolling over. And so I guess, based on your conversations, do you think that's a fair characterization of what you're hearing from investors and what you're seeing on the ground?

Yes. I think it's a fair characterization. I mean to be honest, that when is the recession coming in, have you seen the cancellations yet, it's been coming for about 2.5 years.

That's true.

So -- and by the way, that's not to suggest that there may not be something around the corner. But I think all we can say is that from where we're sat right now, and we know things can change any time, that we're seeing our national business improving a little bit, local business seems solid. So we're not seeing it, but...

Yes. That's great. Cross your fingers. So I think there's two schools of thought on the sort of national weakness that we've seen in Outdoor the improvements you noted in 3Q notwithstanding. One group of investors I chat with says, this is something that's secular that's going on with the national ad buyers that are maybe tilting more of their ad dollars to social media or whatever it is. And the other camp says, no, this is very specific and can be explained just by specific verticals that might be weak on the national side that is really not emblematic of a longer-term trend. And they cite things like, I think, last year, maybe insurance, media and entertainment, right? You know the normal categories. What camp are you in?

I think, if you -- let's take one step back in this. So you should look at worldwide out-of-home last year, I think it was the highest share ever and the highest dollars ever in worldwide. So I think generally, the out-of-home industry on a worldwide basis, is in pretty good health. We're a relatively small business. So what that means is that when you have advertisers step in. So insurance is off quoted. Well, the reason insurance is currently quoted is that a couple of years back, we had a bunch of money from State Farm and a couple of other big insurance companies. And lapping those some of the insurance is down everyone saying, "Oh my God, this is an issue." Actually, it's been more about comps. Take one more step back and if you look at our business, and it's not directly comparable because we've obviously had a footprint here and there, and that changes the dynamic. But since 2019, our local business is up in the 30s and our national business is up around 20%. So it has slightly lagged overall.

So can you say those numbers one more time? I just missed that, you said...

So local business up 30-plus percent, 2019 and national business around 20%. So -- and then within that, last year, I think there was a very specific dynamic, which was the actors and writers strike, which did take a whole bunch of dollars out of the market because actually for the first half -- first part of last year, our national business was outperforming local and then we really tailed off with essentially no TV money, no movie money and, et cetera, et cetera. I think when you -- as we look forward, I believe that out-of-home will start to increase its share at those national dollars. But the great thing about out-of-home is that, and particularly here in the U.S., is that also we have this huge of breadth of advertising with 60% of our book local. I mean, in dollar terms, our largest category in Q2 was legal services. So we rarely spend much time to automate an event like this talking about lawyers on billboards.

Right. That's fair, certainly fair. So what if I depend you then you would be in the camp, just to go back to the question, you would be in the camp that there is nothing big in secular going on. Do you think this is more a function of verticals, but acknowledge that national has underperformed.

We can't ignore the fact that we talk about social, et cetera. I mean, just a few years ago, TikTok didn't exist. How many -- what dollars are they taking out of the U.S. ad market right now? I mean, so to that extent, you're always swimming against the tide a bit.

Understood. Okay. I'm going to shift gears and talk a little bit, if you don't mind, about transit. You've suggested that you -- as your non-New York MTA transit contracts come up for renewal. Your hope is that you can sort of tweak some of the terms around those contracts. Is that right? Can you just -- can we just start by just reminding investors of the smaller transit contracts that exist outside the New York MTA, better off-size, I mean.

Yes, sure. So within the top half dozen because after that, there's quite a long tail would be Boston, D.C., L.A. buses, Miami and BART in San Francisco.

Okay. And should investors sort of think about like one of those coming up for renewal each year? Is that sort of the right thing? Or is it more clustered than that?

Well, actually, there's really not too much coming up in the next couple of years. But that doesn't alter the fact that we've just had a renewal of a D.C. contract. So the sort of focus on that at least sort of gives the frame of reference how we would approach when they do come up. And in D.C., we took the revenue share down. Part of the -- we've obviously got pre-COVID contracts. So if the revenues have taken a step down, we need to retain a higher share of the reduced revenue in order to pay our cost at a fixed or of increase with inflation. So that's the first point. The second point is that we would seek to derisk any guaranteed payments as we go forward by making sure the appropriate protections and/or a floating guarantee, which we -- it sounds like a bit of a dichotomy, but it is something that we have used. And we would be extremely resent about us putting in capital, on committing to any capital commitments. From here, it's really saying the capital in one way or other has to be in your dime. So we're happy to put it in for you and service it, but on your dime. So that's how we would look at reshaping some of these contracts.

And what is the net of all of that, if we sort of did a pre-COVID MTA contract versus the ones you're negotiating now, is the right way to think about it that the upside isn't as much under these new contracts, if things go swimmingly well, but the downside isn't as bad. And so it's still a good IRR, but it just has less amplitude. Is that the right way to think about it?

To be honest, up until the rebid of the MTA very -- we have very few contracts where we had any capital commitments. We just had a business, transit business. It was growing nicely, and it was typically a 20% OIBDA business. And that's what we would like to get back, I would like get back to a 20% OIBDA margin business, it take a little bit of time but that's the shape of contract we'll be driving for.

Okay. I'm going to shift back to the MTA in New York. You mentioned earlier that you're very focused on keeping that momentum going. How much of that momentum is predicated on ridership numbers continuing to improve as opposed to ridership hangs out. I don't know where we are now, 70%? Yes. hangs out at 70% for the next couple of years, and you can just do things with your sales force with programmatic to sort of keep that momentum going? Like how should investors think about the potential mix? In other words, are you optimistic about ridership going up? Or are you sort of assuming that ridership doesn't move, but we can still keep the momentum going with other tools in our toolkit.

So relative to ridership 2029, we -- which is around 70%. Our revenues are north of that. So we've already sort of -- already realizing that. And part of that is because we have a much better product. I mean I don't know how many people spending on the subway, but the digital down there looks terrific on platform or indeed in the subway cars themselves. So we have a great product, we have a reach that is much closer to 2019 levels. We have those digitals, except the ones on train now hooked into the programmatic platforms. So that's a fairly recent event. So that will initial observation and take-up is good, but we see that being growing. So all of that is -- and we have a lot of focus on transit. So we feel good that we can continue to get growth even if it stayed at that kind of 71%, 70-ish percent level, whatever it is. I suspect that it will grind upwards. I don't think it's going to be overnight. I read a really good quote the other day, I think it's in the Wall Street Journal. And it was Ken Griffin from Citadel, saying right after COVID, got all those people back in the office. And his quote was you know that the best thing was competing against people in their pajamas. And I thought it was a really good quote. And I don't -- I think we've -- basically, it's kind of moved on for that. We realized that actually you can work in a really efficient way from all sorts of different places. But I do fundamentally believe that more companies as we go forward were realize that we're better together. And then actually, there will be an increasing trend towards, let's call it, smart flexibility. But I think -- and I think as time goes on, we will see that creep up.

I agree with you, whatever it's worth. I think that's cogent hypothesis. So you talked about programmatic on the MTA contract. Can we just broaden the conversation out and just talk about programmatic across the entire footprint?

Yes, yes, for sure. So programmatic for us now is becoming increasingly meaningful. Within -- our digital revenues are around about 1/3 of our business now. And of those in Q2, 16% were what we call automated. And the majority of that 16% was programmatic. So we've now got 16% of our digital revenues, which equates to about 5% of our total revenue coming to us in an automotive way. So yes, growing fast, expect it to be a tailwind for -- it's difficult to say how long, but certainly, years, not months. And yes, we're all in. So it's good to see.

This is my own ignorance. Can you describe what an example is of an automatic ad that is not programmatic, what would that be?

On the programmatic platforms, everyone's inventory is on the -- so ours and our competitors' inventory is all there. And when a buyer comes in it will be distributed based on if it's a private marketplace deal with one particular company or if it's real-time bidding, it will go to the board that is demonstrating the best CPM at that moment in time. So that's kind of like a polymer that our own is like a private market. And so what that is, is the way boards typically have been bought in the U.S. as say, I want that board on the corner of Main and Fifth. The way we are we are starting to move the market to say, sell by eyeballs rather than that particular board. So we'll say, look, we'll distribute you whatever it happens to be, 100 million eyeballs, $6 a thousand on CPM. And we then -- so we signed a contract for the total, the audience, and then we distribute that algorithm or the -- to our boards. And that then allows us to give weight where we have space, for example. So it allows us to be more efficient in terms of utilization. So that's the other side. So one is a private marketplace, if you like, and the other one is a public platform across...

I was unaware that this was going on. How long have you been doing automatic but not programmatic?

we are in about 18 months, something like that.

Okay. And is your sense that there's advertiser receptivity to this?

Yes. for sure. I mean, increasingly, it's -- look, because we are a location-based medium, it is extremely base powerful, and we'll never lose that. The person will want to be on the corner of Main and Fifth because for some very specific reasons. But there's also a number of advertisers that just need -- they won't reach more frequency. And yes, I think it's going to be a really interesting driver of the medium in the future.

And how -- I mean when you think about the 16% that is automated, is the rate limiter something where you don't want to move the mix in that direction because it has adverse margin implications or something like that? Or is it more like you're willing to give as much leash to that automated side of the business as there is demand.

When you look at the net dollars we make on a programmatic dollar compared to one of our own dollar sales, so there's nothing between them. So from that point of view, we would be very -- yes, but some are agnostic.

Okay. That's interesting. So this is just a function of whatever the advertiser demand is. That's the right way to think about it. Okay. That's interesting. One of the things that I have observed, I guess, over the years is -- it seems to be that the markets or even the companies that are a bit less urban just seem to do a bit better, either because their site lease costs are fixed and they're not on rev share or maybe it's that they have a little bit more local relative to national? Maybe there are other variables that are sort of conferring advantages to those not super urban, not super rural part of the market. If there are other advantages, you can please elucidate them if you want to. But is that does that seem like a durable trend? And does that influence the way you think about doing M&A going forward if you were going to alter your domestic footprint to not be as urban, right? Does my question make sense? Where am I at...

Yes. No. Yes. Look, yes, I think so. As we are at the moment, we are very dominant in the top 25 DMAs, I mean that's where our footprint is. And that is a different business to the more rural businesses. It's a different margin profile. Because you have a higher rent structure. But in my view, going back or thinking look into the future, and thinking about where dollars are going to be spent. I still think that we've got a long way to go with those national dollars and ultimately that they will -- those markets can potentially grow faster than more local markets. Now to be fair, that hasn't been reflected over the last few years. Local has grown very well, and national has been a, high, b, they were not growing as fast. And I believe wholeheartedly being an Outdoor guy that every stick is a great stick. It has -- that will have different advertiser and margin profile and different way of selling it and et cetera, which is a long way of saying that we would not be only focused on those major markets. We are interested in other markets, where it makes sense for us. We do like markets where we're already operating, so we can leverage our sales force and ops operations and everything else. So that's always a criteria. But yes, we like all the market.

Okay. So this is where I'm going to weigh-in to the CFO-ish questions where you can sort of define -- that's right, exactly. And I'm going to actually have to read some of these because there are so many numbers in here. All right. So the Canadian sale brought in, I think, about $300 million. Okay, my rough math is 13.3x trailing EBITDA. Is that about right?

It was 13.3 trailing, by the time we closed because the business maybe not surprising in these last few months or going through a sales sort of went off a bit. It was about 15x at close.

Okay. The after-tax income lift that you're going to get from the sale is $80 million sort of in the right ZIP code?

But yes. Yes, the taxable gain is $80 million, right.

Okay. And so the higher dividend, is that simply $80 million x 90% or 72 million is sort of the...

As a REIT, to maintain status you have -- we'd have to distribute 90%, but we'll be far more likely to distribute 100% and not get the tax leakage. So we can just about assume that it would be the full $80 million be 100% rather than 90% that we distribute.

Okay. And the options for this is as simple as 20% cash, 80% stock up to 100% cash? Is that the right decision the Board estimate or the right...

That's the right framework. The minimum that we could pay is 20%, and if you do the math and take the $80 million, divide it by 165 million shares, you get to, around number is $0.50 per share. So the serious and the minimum of that 50% would need to be in cash would be 20% of that.

Okay. And the Board, is it fair to say we'll make a decision on how to pay before year-end?

Yes, before year-end, yes, 100%.

Okay. You answered all the CFO questions. That's great. All right. That was easy. All right. So you mentioned leverage at the very beginning of our discussion that was one of your main priorities. I think the Canadian sale got your net debt-to-EBITDA down to about 5%.

Yes.

Okay. Your target leverage, I think, is 4 to 4.25?

We've set the targets for the 5 actually, rather than 4 to 4.25, that would be a pretty narrow range. It would be good if you could get that on a quarterly basis. So yes, between it's between 4 and 5.

Okay. And I think you said you don't anticipate selling any more assets. That's not on the table right after in Canada. So this is all organic growth.

Pretty much so. As a REIT, as you know, obviously, the amount of cash available for debt paydown is almost by definition, small. So we see it -- yes, we do see it through expansion.

Okay. All right. And so my last question is your average cost of debt, 5.6%. And as I look out at your maturities, there's not going to be any real change here, right? Like the maturities, nothing really comes up, I think, until term loan '26 or at least -- '27. So at least for '25 and part of '26, everything is locked down.

Everything is lock down. We see the floating over time here it get to decrease, but -- that's about it.

That's great. Well, thank you very much. I would like to ask if there are any questions in the audience, by the way, if there are any questions. Do you mind just giving us one second, just to give the mic.

Is there any reason to try to go back to the rating agencies and say, if we get to 4x and will our rating go up to BB on the unsecured basis, is there -- I mean you guys -- your spreads are really good right now, but...

Yes, I guess we're not -- we don't want to get down to 4, for the rating. What we want to do is we want to reduce to really then give us flexibility to think about how we manage the balance sheet going forward. I think what we're saying is that if we get down to 4, the like -- we're going to want to do something to make sure we stay in that range.

So no advantage in having a higher rating at this point for you guys? It doesn't seem like it, market is saying the same thing. I'm just going to think in longer term.

Yes. Yes. No, you're right. That's...

Yes. I'm interested in where you think the percentage of digital can go over time. And also, I mean, I'm presuming that, that is -- I mean, you talked earlier about sort of attracting and sort of new base of advertisers. Do you find that, that is the case with digital out-of-home that you're suddenly sort of reaching parts of the advertiser base here the two have been more difficult.

Yes. I mean, very much so. I think it's sort of interesting because if you look just over the last few days, something we can take programmatic dollars from the Harris campaign in a particular market, before, we have such inflexibility of the medium was such that you could never [indiscernible] those dollars. And on a -- each week, we get a list of all of our programmatic advertisers. And while there's very much the 80-20 rule. So most of the revenue is coming from a relatively small number of -- or relatively small number of advertisers, we can have like 1,000 different advertisers, in a week. And there's advertisers that are spending, seriously, like $50 or $100. Our typical sales force would never have uncovered. So I do think that, yes, we -- digital gives us that broader opportunity. And in terms of where does it get to? Look, markets are different and the U.S. market is structurally different for both the markets, I'm going to mention. But in the U.K., now it's close to 60% digital. And in Australia, it's 70%, I think, now. So -- and the U.S. is about the same as upfront, around about 1/3. So where does it get to? So a little bit hard to say, but I'd be surprised if we weren't knocking on the door of 50% within 3 to 5.

And what would be the reason for the structural difference in terms of digital in the U.K. or Australia versus the U.S., are because it's less urban...

I think the way I could best describe that is, compared Amsterdam to Atlanta. Just in terms of pedestrian interface, public infrastructure, transit infrastructure that's probably the best way I can describe it in a sentence.

Understood. Any other questions for Jeremy? Well, this is great. Thank you so much, always. It's always good to see you.

Thank you very much, Jason.

Yes, absolutely.