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

All right. Okay. Good afternoon. My name is Cameron McVeigh. I cover advertising and media for Morgan Stanley. And I'd like to welcome Matt Siegel, EVP and CFO of OUTFRONT Media to the conference.

Thanks, Cameron.

Welcome. Before I get started, please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website.

And with that, to start, Matt, how would you describe the current growth strategy for OUTFRONT and your long-term growth perspective and maybe your long-term investment priorities?

So growth strategy continues to be driving digital, obviously, both national and local, developing, installing more digital -- we think that's driving our revenue, both in billboard and our transit business. Our philosophy really hasn't changed. We think there's good opportunity. We gave maybe underwhelming first quarter guidance with some headwinds from some lost portfolio. But we feel long term, that's in good shape as we continue to drive growth within the business.

Got it. And on the earnings call recently, you mentioned national advertising grew 7%, while national slowed to 70. Could you discuss your current conversations with advertisers, how they're going, the level of visibility you have into full year bookings?

Sure. Our national business, both fourth quarter and into the first quarter has been very solid. Really, generally, it's more volatile and local has been the driver -- until the fourth quarter, it was growing 4%, 5%, 6% every quarter annually for a while. Local has slowed down some. Most of our markets attribute that to some macroeconomic volatility and uncertainty, which obviously is an uncertain time for a lot of industries, a lot of businesses. But on national, fourth quarter, first quarter has been strong, especially in kind of happily in transit in New York. So that's really helped our EBITDA performance last year and helping our mix of business earlier this year. So the conversation with advertisers on national has been great. It's a little more focus from everybody, from management to salespeople to anyone who touches customers on New York. We're happy to see the New York MTA return to growth, a good solid double-digit growth last year. And hopefully, the trends continue into 2025.

Got it. And on that point, so you would expect those trends to continue. Is there a key driver of each on local versus national going forward?

I think the key driver for local is improving the dialogue, getting comfortable with the volatility. We've seen it before. We continue to train our salespeople in inflationary environments, which have may be coming back. On the national side, it's improving our contact, the top of our shop from our RFP response and what we call our business partnership team that talks directly to customers. So really improving that contact and trying to really drive demand, which hopefully we can turn into revenue.

Got it. Makes sense. Matt, let's switch about -- talk about the role of technology in the out-of-home business and OUTFRONT specifically. I think digital now accounts for 36% of revenue. What would you expect long-term digital share of revenue to bring about to represent?

So we look at this a lot. I look at some of the European countries when digital is more than 50% of revenue, some as high as 70%. So we figure our next kind of touch point is probably 50%. And it's not so much the inventory that's going to drive it. It's the percent of revenue that's digital. So we figure to get to 50%, it's probably in the high single digit, 8%, 9%, 10% of inventory -- billboard inventory will be digitized, maybe go a little higher. We think there's plenty of opportunity. We're a little under 5% now. So we think there's runway and growth, and we don't think we need to accelerate just kind of an organic process, still adding about 100 to 150 digital a year, and we think that's the right number to continue to drive the digital revenue.

Got it. That's helpful. When you think about the growth contribution from these digital boards, so we assume 150 ideal run rate going forward. How do you think about that, the contribution to growth?

I think it's very important. I think both for revenue. So our biggest growth area is automated sales. So whether it's a programmatic or ad server in both billboard and transit. So that's the more inventory we have that's connected to these platforms, we think the higher growth rate. And on the EBITDA and margin side, the more revenue that comes through digital, we think is higher margin. So again, it's good on top line and bottom line.

Great. Matt, how important is Geopath and some of these other industry initiatives to both expanding the share of budget for the national and the agency wallet?

So Geopath is a bit of a -- it's important. It's a challenge. I think more important is the industry finds a dynamic currency that we all can use, publishers, advertisers, agencies that's probably holding back the out-of-home space right now. Geopath is a little more static than I think we all would like. So maybe there's a new product or something better that can show audience measured attribution and become the currency as opposed to everyone looking at publishers' proprietary systems, which I think everyone has and everyone uses now and then comparing it to a Geopath number that might be a little stale. So I think the industry has an opportunity. Hopefully, you can find a better solution.

Got it. Matt, how have programmatic and some of these automated buying strategies been contributing to revenue for OUTFRONT?

For us, a big growth driver. So the automated revenue is now 16% of our overall digital revenue and growing faster than digital, which is growing faster than static. So that's important for us. In 2024, we connected at the end of the first quarter, we connected our MTA transit screens, not rolling stock. I'll come back to that, but the subway platform and subway station to the programmatic platform. So now we have, except for rolling stock, all of our screens connected. So we expect outsized growth from those connections. And that's, again, relatively high-margin growth. Rolling stock on subway and on railcars, it's a different operating system. We haven't connected that yet. A bit of a challenge so far, but still working on that. And I think what's important, all of our digital billboards are connected. They all participate, and that's, again, a big part of our growth. So we're very focused on that.

Great. Curious what your thoughts are on the purchase of Vistar Media by T-Mobile. Is this a growth driver long term for the industry for programmatic and out-of-home? And why do you think T-Mobile made the acquisition?

So I hope it's a growth driver. I'm somewhat excited by it. So T-Mobile is, I think, considered a smart creative marketing company, very large. So anytime someone puts in, $600 million into a somewhat modest sized industry, it should be a good signal. They have primary data. So your earlier question on Geopath, maybe T-Mobile and Vistar together can help create a new currency or an improved currency. So I think it's exciting. We do work with Vistar now on our programmatic. We're, I think, one of their biggest and one of our biggest platforms. So it's, I think, a great relationship. And we're excited to see, hopefully, T-Mobile push ahead. I think on their recent earnings call, they made a comment, they're excited about what they can do. So I think it's hopefully mutually beneficial. And to your earlier comment about Geopath, maybe that's the push the industry needs.

Yes, definitely. OUTFRONT exited from a billboard contract with the MTA in October. And on the earnings call, you said it created a 2-point headwind to billboard growth. Can you discuss why it made sense to exit this contract? And are there any potential interesting contracts to exit or renew?

There's always interesting contracts. I'll get to a second. So this contract was a very high revenue share contract we had that we've had for a long time. It was up for renewal. in October at the end of the summer, we had many, and I stress many internal discussions on where we're going to go. We lowered the revenue share that we were willing to pay. Just we want to be a little more fluid with our inventory, not just retain everything we have, but look a little more closely at EBITDA and growing EBITDA, not necessarily at revenue and maintaining all our billboards. So we lowered our revenue share bid. One of our competitors bid more than we were paying before. And they won. We wish them well, and it was a very thin margin contract for us. So it's a revenue headwind for the first 3 quarters of this year, about [ 0.5 point ] a quarter; overall, 2% on billboard. But we don't think it's going to impact our EBITDA very much. On other contracts, there's probably 1 or 2 others that are relatively large, similar size of this one that are very high revenue share and the landlord would like maybe a little more, a little improved terms. And we're pointing them to this engagement, we think we do a great job on sales. So we don't want to just win or retain things by paying more for it. We think in both these contracts, we've helped grow them. We'd like to be rewarded for our sales prowess, not just our ability to make payments. So if the other one needs more money and needs to shift more of the profit potential away from us to the landlord, we might exit that as well.

Got it. That's helpful. Let's shift to transit. Transit revenues were up 9% for the year, led by the New York City MTA, which is up 12%. Yes, this is arguably a welcome change compared to a decline in '23. What -- in your view, what's driving the transit recovery? And how much of an impact does return to office have versus the congestion pricing versus just general ad budget shift?

So I think a lot of the benefit is coming from renewed and emphasized focus, senior management, management of the company, getting the sales team, not just the local New York team to focus, but getting the national team to focus on selling New York. We've changed the compensation plans. So you can't meet your full year bonus target without selling x dollars of transit. You can't just sell billboard, not that either one is easy, but we -- New York MTA being under the minimum guarantee level, it's very high incremental margin revenue for us. So it's mutually beneficial for the sales force, for management, for the shareholders that we focus on selling that. And I think it's really come through in 2024 and it seems to be happening in early '25. So we're enthused by the progress. As you said, it's overdue. It's an important contract for us. It's, I would say, not back to where it was, back to where we'd like it to be. But we think that's the main driver. As far as congestion pricing or even return to office, I think they're all accretive. It's nice to have kind of a melt up of people on the subway or more people around the city, hard to measure, but I think everything is helpful. And even having fewer newspaper cover stories about crime and cleanliness in the subway has been a welcome relief. Maybe distractions from other parts of the country is good for everybody.

Right. Do you think there's been a share shift from some trans advertisers into New York City billboard assets? Would that -- would you expect that to reverse a bit? Or is that less of -- less of an impact to growth?

I think there's always a little bit of a share shift. In the pandemic, we saw it more pronounced that people didn't want to be on the subway and people didn't want to advertise there. And our New York billboard business had a couple of good years there. Generally, I think we find above ground and below ground complementary that we're the only company in the New York market at least, who can provide that dual approach. There are certainly, I'm sure, certain RFPs where they compete, if someone was looking for 2 client relationships. For us, it's a good audience. For a while, the concern was the demographic was more essential workers and not pardon the expression, the suits or people work in offices. We've been stressing to our sales force that is not wearing suits anymore, the people in offices are mostly back to work. I appreciate the banks going to 5 days a week. Sorry for you maybe, but -- it's good for us. And even congestion pricing, I'm not sure the numbers yet, but having people talk about a little more audience on transit has been good.

Great. And on the MTA, Matt, could you give us the latest on board deployments and integration of some of the programmatic capabilities into the MTA assets? And maybe just general expectations on programmatic driving transit growth going forward?

So we connected our -- it's a different operating system than our billboard business. And like I mentioned, the rolling stock is a different operating system again. So we connected the platforms and stations. The platform is one that's next to the train coming in. The station is usually a level above. Those screens and if you've been on the New York subway recently, there's a lot of screens. It's ubiquitous, great inventory. It looks great. All connected to our 3 programmatic platforms. So they're all getting serviced. They were connected at the end of March. So we saw up from almost 0 to something in the single-digit millions. We expect continued strong growth in 2025. They're also connected to our ad server. So we're able to really sell the digital network on a more customized basis. So we think both those connections, the automated revenue, small software for transit, but we saw a very strong growth for digital over the last few years, and we expect kind of that same growth curve for transit this year.

Got it. Okay. And Matt, can you remind us, and do transit assets and I guess, programmatic ad spend, does that skew more to a specific vertical?

It's more national in general. Historically, it's led media and entertainment. You see a lot of movies and TV there as a media. It can show moving image. So coming out of a train station, you can see a little bit of a preview of something. So it's very attractive for that. Generally, a diversified portfolio. We're seeing a little more retail and fashion. It was there in 2019. I think the pandemic kind of scared that away, but that's starting to come back. So we're encouraged by that, especially in New York. But generally, it's kind of the similar national audience -- in national verticals that appear above ground.

Got it. Maybe just on that point, do you think there are any other key verticals to mention as growth broadly into 2025? And then any potential sources of opportunity to increase the out-of-home ad share generally?

Always opportunities to increase share. Interesting vertical for us, I'm guessing for many in media, not just out-of-home is a legal category. So it's big. It's growing quickly. I mean it's probably in every market we serve. I think everyone has now heard of Morgan and Morgan. So it's effective for them. And if you travel the country, you see there's others who are kind of imitating that, and we're happy to be the arms merchant in that process. For us, we're starting to look at finding some new verticals, not new, but not big out-of-home players, CPG and pharma come to mind that historically haven't been. If probably Kenny is going to throw pharma off TV, maybe they can come on to the subway. You can put all that small print on whatever they need. So we think there's always opportunity with a lot of changes that are going on out there, just it takes a little more focus. I think we're getting our marketing and sales better aligned to selling full verticals. And I think that will be helpful as we look at some new things.

Got it. Yes, it seems like pharma and law services have been 2 ones that have seemingly grown recent out-of-home ad share. But yes, no, it's interesting data.

I think medical and health picked up with the pandemic going forward and specific pharma, it's hard to have all that's fine print when you're driving 75 miles down the highway. But on more local in traffic and transit, it's certainly good opportunities.

Yes. That's great. Matt, beyond the MTA contract, how are the other transit contracts performing? And should we expect this to be a source of margin expansion this year?

So the margin expansion will come from the MTA. So the MTA minimum guarantee went up by 4%. We feel MTA revenue can grow more than that. It's doing that in the first quarter now. Most of the other transit franchises are revenue share, so there wouldn't be so much margin expansion. And then generally doing okay. I would confess I would sell my transit sole for MTA performance, so maybe I have. The L.A. bus is a little softer, probably it's been challenged for a number of years, but the other ones are doing okay, not great, not poor.

You guided to $85 million of CapEx in '25. Where are you investing? Where do you see opportunities? And is this a normal run rate we should expect going forward?

I think going forward, it seems right. So it's about $50 million of growth CapEx, again, continuing our digitization, whether it's conversions, some construction of new digital, a little bit of building or getting reimbursed for some shelter construction, mostly on digitization of billboards. What's changed in that number. We called out about $10 million of maintenance CapEx for replacing older digital screens. So we started digitizing, I think, in 2007, I'm guessing 2006, '07, '08, everyone is kind of starting around the same time. I don't know if the originals are still there. We have hundreds of billboards -- digital billboard signs that are over 10 years old. We don't replace any on their birthdays. We just want to call we'll be spending some on replacement. It's not a 2025 event. It's just from here forward, the industry is probably going to be -- has reached critical mass and probably just need to continually replace older digital screens. We do think even though we're calling it maintenance CapEx, it's going to help drive some revenue growth as the newer state-of-the-art, shinier, more pixels, looks better. Every now and then, we get a complaint from a manager that we lost an RFP because their screens look poor. They'll get the first screen. So hello Phoenix. But I think it's going to be good for growth and also the right thing to do.

Got it. And so it sounds like that elevated maintenance CapEx, you would expect a similar run rate now?

Yes.

Yes. Okay. I guess switching over to tariffs have been in the headlines recently. Is OUTFRONT exposed here at all? And how are you thinking about that potential risk?

Nothing really material. We buy the digital screens overseas. I think we -- back in 2018, we prepaid for a lot of screens, but it wasn't a material increase. We buy steel for constructing billboard poles. Again, not a big number in the CapEx number. If I have any concerns on tariffs, it's more what it does to our advertisers. If the price of an automobile is going up by $5,000, maybe they have a little less to spend or there's less volume to justify some of the advertising. So it remains to be seen what happens to the profitability of various industries and look at how long the tariffs stay and where they come, where they go. But I think once they're on, I think people get adjusted to it. So we're watching it as I'm sure everyone is, it's a macro environment, but it's something I think we can absorb in our business.

Got it. Makes sense. Nick Brien was named as the Interim CEO at the start of the month. Why did the Board choose Nick? And what impact do you expect to have him going forward?

So a bunch of things. Obviously, we've had a number of management changes. I think the Board realized shortly after Jeremy Male, the outgoing CEO, announced his retirement in mid-December. The plan was for him to stay, and we started a search for a new CEO. And I think they realized nothing against Jeremy's executive skill, his humanity, his citizenship, just being a lame duck, anything isn't ideal. They wanted to drive change. They really want a renewed sense of urgency in improving our business, our sales performance. And they thought an interim CEO would better drive that than Jeremy on kind of waiting. And I think that makes sense. And Nick Brien is a -- has been a Board member for a while. He comes from the digital advertising space. He's been -- he's led U.S. agencies. He has a very high energy, shares the Board's vision on urgency and change. This is his fourth week in the seat. He's made people -- internal people uncomfortable in a good way. So he's bringing in more accountability. He described himself as an external CEO. So he's calling on agencies and customers already. So I think in our case, change is good, accountability alignment, all good, and we're excited for the future. It is -- I'd stress this isn't a casual search with someone's system law, not the system law is bad. But a big national search firm has been hired. I paid 2 bills, one for the CEO, one for a Director, Jeremy was both. We're going to replace both roles. I'm excited to see who they find.

Great. We too. Okay. As we're reaching the end of the question list, we can open up to the audience Q&A in case anyone does have questions they want to bring up. If not, I can keep going. Any takers?

I know you guys delevered. Can you talk a little bit about the balance sheet? I know you guys reduced leverage last year with some of the proceeds from the Canada asset sale. Are there more opportunities for similar transactions? How are you thinking about the capital structure?

So the Canada sale, we were very happy to execute and execute relatively quickly. We had identified a buyer, the ultimate buyer back in the pandemic. We had a bunch of work streams. We decided not to pursue that at that time, but knew we can get that done quickly. We wanted to demonstrate proactive decision-making on addressing the balance sheet, not just waiting for organic delevering. So that was, I think, very successful. And I think we paid down debt with most -- almost all the proceeds -- that's why we paid a partial share dividend for our REIT obligation. So we didn't step on our own strategy of paying down debt and then paying out some of that dividend with cash. Going forward, nothing -- the beauty of Canada was there was no real synergy with the rest of our U.S. business. So no one called and said, I want New York, Miami and Toronto. Do you think they would? Toronto is a big global city. Everyone loves Canadian, so we didn't sell it rightly. But as far as the rest of the portfolio, it all kind of fits in with our national strategy, and we generally like what we have. We think the balance sheet is in a much better place now than it was. We had 3 things in our list, if any 2 of those 3 things, we felt good about. We achieved EBITDA growth, so organic delevering and the sale of Canada. What we didn't achieve is amending the MTA contract and improving that, but we didn't have high hopes there. So our leverage is now on a covenant calculation basis within our 4x to 5x range. I'd like to get closer to 4x than 5x. So there's still a little -- I wouldn't say necessarily work to do, but a little more focus on EBITDA growth to bring that down. I don't think we'd want to go down below 4 anytime soon, but maybe directionally good.

Great. Matt, how would you characterize the out-of-home M&A market broadly? And do you see yourself in a position to participate in some domestic M&A?

Yes. I think we're in a position to participate, although not in a big way, not in a big check writing way. We've demonstrated some creativity in using other people's money or other things and kind of controlling some other assets we've added. The market hasn't been particularly active the last few years. We've been focusing mostly on very small opportunistic tuck-ins. We had a big acquisition year in 2022. And since then, we've been 1s and 2s and things that are all synergistic on very short -- short-dated accretive transactions. We figure we're going to spend the same this year we spent the last couple of years, somewhere in the $30 million to $50 million range, so something that still allows us, I think, to delever with some EBITDA growth. One of our competitors who often talks about potential M&A. I think they reduced their expected spend in 2025. So it doesn't sound like we're missing anything. But if anything bigger comes up, we would certainly take a look, kick the tires and see if there's something we can do. But it sounds like 2026 is going to be a more active year based on their comments and kind of investment banking incomings the last couple of months.

Yes. How is the regulatory environment generally in out-of-home? Is that a lot of scrutiny?

So recently untested. Historically, there's been a lot of scrutiny. As you know, regulators often protect the last bug you at manufacturer and not necessarily a new approach, especially in media. I think the last time we did a large acquisition predated me, but there was investigation kind of not just market by market, but neighborhood by neighborhood. What do you have in the West Village? What do you have here? I like to think and what we're reading is regulatory environment now is a little looser, but hasn't been tested on a large acquisition in a while. But I'd be optimistic if something happened in the next few years, it would be maybe a little easier to get something through than it was in the last few years.

Yes. Okay. That's great. And then how should we -- how would you suggest we think about AFFO growth and dividend growth beyond 2025?

AFFO growth, I expect would grow alongside EBITDA. So even in 2025, we expect AFFO growth around the same as EBITDA growth or vice versa EBITDA growth around the same as AFFO growth. In terms of dollars, obviously, percentage will be a little different because the AFFO is smaller. This year, AFFO will have EBITDA growth, some improvement in interest expense because we sold the Canadian business midyear last year, offset by that maintenance CapEx increase we talked about. Going forward, I think the maintenance -- the delta in maintenance CapEx will be neutralized because we'll be doing it on an annual basis. I don't think there'll be a big change in interest expense, except for any rate movement, up or down, remains to be seen. So I think if we can grow EBITDA by growing our revenue, I think you'll see that in AFFO growth.

Awesome. I think that's a good place to end it. Matt, thank you so much.

Cameron, thanks for having me. Thanks, everybody.