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

Everyone, and thank you for joining us. My name is Marlane Pereiro. I'm the High Yield cable and media analyst at Bank of America. I'm happy to have with us this afternoon from OUTFRONT Media, Matt Siegel. Thank you for joining us.

Thanks for having me.

That's a pleasure.

I wanted to start with the advertising environment. What gives you confidence that ad strength will carry into '26?

So first, I can say we had a pretty good third quarter led by our transit business. And we gave guidance that the fourth quarter growth rate is going to be a little higher than the third quarter. So we feel pretty good going into next year. And sitting here December 2, I can say my visibility into 2026 looks stronger than my visibility a year ago, December 2, 2024, looking into 2025. So I feel more confident. We can see it. It's early days yet. Our perm business, which is the resetting of our 12-month contracts in advance of the year. Price growth is up from where it was last year. So a lot of our sales metrics are improved. And this is, again, with maybe 10 -- a little more than 10% of our revenue on books, but directionally really good.

Great. National ads have been strong. How has that momentum translated to local markets or at least local markets next year?

Switching for us, even though we're considered the leader in national out-of-home, we have a very big local business, which has much less volatility. So it's really just the last couple of quarters where national focus in transit has kind of overwhelmed local. So we have less volatility, but it's been chugging along. So we feel it's in good shape. Also, that does most of our perms come out of local, the old-fashioned turn left for this, turn right for that -- yes miss those. Again, doing well. So we feel good about local, both in billboard and transit. Most of our recent management changes have been focused on putting more talent, more digital talent focused on enterprise. And I think local will benefit from some of the extra marketing we're spending on right now.

Great. In terms of -- just one last question on local. In terms of categories that are driving that or that you expect to drive the momentum, what would you highlight?

So one of, if not our biggest categories is the legal profession, that's large and fast growing. So I think everyone has seen or heard the Morgan and Morgan and others, imitators, followers, competitors, that's been big, and we can expect to continue to see that growing across the country in almost all of our markets, plus the resurgence of retail and most fashion is in national, but there is some that's local. It was a pretty diverse portfolio. Auto, which has been down on the national side, is very steady when you look at it through a local lens. So the auto dealers, not necessarily Ford's new vehicle launches, but Bob Chevy and Joe's GM dealer, they don't give up their perms for anything, and that's been a good driver for us.

Great. And I think it was discussed on the call, the World Cup, Olympics, those type of revenue streams. How do you expect those types of events to impact outdoor and kind of drive revenue and innovation?

So without question, the big events are tailwinds for the industry. World Cup, in particular this year, we have all except one market. We're not in Seattle, but we're in Kansas City and obviously, New York, New Jersey, L.A. and the large markets. So we feel it's a pretty good tailwind for us. It gives us an opportunity to do more short-term permitting of experiences and things. We've been stepping out trying to do more than just sell rectangles -- nothing against sell rectangles. We have a lot of rectangles. But doing drone shows and experiences, the shorter duration nature of these high-profile events give an opportunity for that. So we're excited. We don't necessarily think it's going to be one-for-one ad, 1 plus 1 equals 2 type thing. But -- so when we add -- take in ads or increase pricing for FIFA in a certain market, something else might get squeezed out. So we're excited and enthused. It's a good tailwind for us and for others. We haven't quantified it yet. Other related -- Super Bowl, every year, we have the Super Bowl in one of our markets. We're all in the big markets in the rotation. Some years are better than others. Last year, this past year, New Orleans was a big market for us, again, as we did a lot of that short-term permitting. So that's something we're doing more and more of, whether it's in sports or unique experiences.

Great. And then turning to digital. It's about 35% of revenue. What is the long-term target for digital share?

Not necessarily a target, maybe it's a mile marker along the way. As 35% goes to 50% and beyond, we look at how quickly we get to 50% penetration of digital revenue. A lot of countries in Europe and Australia are north of 50%. So we know that's attainable. And that will likely drive our development and spend on more digital billboards. Most of our transit properties are digitized and a lot of spending still to do there. But we're basically growing our digital penetration about 1% per quarter on a sequential basis. So that 35% by the end of next year should be around 40%, and we think we can just grow it from there. I don't see any slowdown. In digital, our programmatic or automated revenue is growing even faster than our regular digital. So we think that helps lift that penetration.

Great. And which markets offer the most upside for digital? And what kind of factors should we think about in terms of limiting conversion to digital in certain markets?

So limiting conversion, we're not there yet. So we think all of our markets, even the smaller ones have opportunity for more digital. So we have a 100-plus person real estate team that's always out there looking for opportunities. The digital opportunities across our portfolio, the bigger markets, New York or Los Angeles, obviously, you create digital, you create new inventory. There's more revenue opportunity. So therefore, generally more EBITDA opportunity. I would have more value in a new digital billboard in lower Manhattan than it would in Louisville. That being said, those in Louisville have higher margin. And to the extent we believe the market can handle new inventory, we're looking everywhere to do so.

Great. And the AWS partnership, how will that reshape planning, buying, measurement in the outdoor space in your view? And when will that integration start driving revenue growth?

It's interesting. It's the new arrangement for us, partnering with smart people who want to find solutions is one of the things our new management has really brought in that idea. No revenue this year and probably very little next year associated with this AWS contract. But we think our inventory with them can help us, our salespeople and our clients better see our inventory, what's available, what's not available, kind of 3-dimensional over time, space and location. So we're hopeful for that, but I don't have anything specific to say we're developing this. We think in addition, that can help us with post-transaction measurement. But again, a lot of it rides on continued development between us and AWS. Smart people, we use their cloud services, and we think there could potentially be something here.

And when we think about programmatic, that grew roughly 30%. How do you accelerate from here? And how do we think about outdoor closing the measurement gap versus other digital channels?

First, programmatic accelerating focus. So more inventory tied to programmatic. Right now, almost all of our inventory is connected to the programmatic and automated platforms that we use. The one that's not is rolling stock train cars, which we've been working on for most of this year, haven't kind of perfected that yet. And people ask me how can it take so long? I flippantly say we have -- the trains are moving. But it's hard. So we're working on that, and that will be helpful. But getting all of our inventory, all of our billboards connected and all the players connected was a challenge, and that's happened. So everything is there. Our salespeople are still receiving commission for their clients that generate programmatic sales. So they're not obstructing. They're pushing demand, which we think is helpful. We're covering now, we weren't a year ago, specifically covering the digital agencies, which are kind of spread throughout the country with both enterprise salespeople and commercial salespeople, they are a little smaller. So we're spending more time, more focus to generate programmatic. Over time, we think there's a number of channels, whether it's something automated for really small customers who want to take a digital billboard and they can send in their copy and get it up quickly, programmatic and automated. And still there's going to be a channel for direct selling and those who have big complex plans and proposals and want to reach varied audiences. We still expect to service that.

Great. And then turning to MTA and transit. Transit was up about 24% in 3Q. New York MTA up 37%. How sustainable is this into '26 and beyond?

For a few years, I hated taking questions on the MTA. So I thank you for asking it now. It's really doing well. And I don't want to say it just started. MTA itself grew 12% last year, still under the minimum guarantee. So it's got some ways to go and the incremental -- the rise is good incremental EBITDA. So MTA performance as a result of focus, execution and portfolio management. We used to have a large billboard portfolio in New York that we exited and wasn't part of our strategy, but we thought it would kind of help focus the sales team. So now they're selling more transit that has same commission structure for them, which is great. And for the company has a higher incremental EBITDA. So it's realigned the sales force. That's helped. We've put one of our top marketing people on top of nothing but transit. And obviously, if you're in transit for us, you're doing the MTA and they're focused on that. And our enterprise group is really focused on bringing their clients to this audience. I think the fears of the subways and safety and cleanliness and other things are mostly behind people. Customers, advertisers recognize that this is the biggest audience in the country, and this is how you reach them. So it's -- again, 37% don't come back in 3 months and tell us we're decelerating. The math might say so. But we think MTA is going to grow in the high teens in the fourth quarter as well. So we feel, again, great going into 2026 and no reason for the momentum to -- I'm not sure there's a 37% growth quarter in our future, but we feel really good about the MTA now, and that's been great for our EBITDA mix and frankly, great for internal morale. It's good to see stepchild come back and perform.

Can you remind us how that contract works, right? Because obviously, there's like a CapEx component.

It will need more time.

Okay.

But no, there's other...

Let's say, we had a breakeven point just...

Breakeven might be a stretch. The contract runs through 2030. If you recall, we are responsible for funding and construction and putting all those screens in, 30,000-plus screens that the initial deployment is completed. If you didn't see a couple of years ago, we took a $0.5 billion impairment for our Transit segment, but most of it was in the MTA. So if we hit a certain revenue benchmark, which is above the minimum guarantee, the MTA would start to reimburse us for that spend. We didn't reach it, post pandemic, it was really very depressed. And our internal modeling said we wouldn't reach it, so we took that impairment, and that was painful. That led us to some other steps to improve our balance sheet. But now once you're still below the minimum guarantee, as you grow your revenue higher than our model, you're getting closer to the minimum guarantee. The EBITDA impact is very high. So I know I'm paying a fixed amount for the franchisee and the revenue is all mine, except for the commission and bonuses I'm paying for the sales force. So the falling below is painful, but rising back toward and hopefully at some point above is very enjoyable. So again, at 2030, we have a 5-year option from there to extend. Obviously, it will be facts and circumstances at the time, but we think we can make a good case for renegotiating something mutually beneficial. We like the franchise. We like the audience. We just don't like the contract.

Thanks for that overview. And obviously, ridership is a factor, but what other metrics matter the most now in addition to ridership?

Ridership is a factor, but no longer critical. Back in the pandemic when ridership was down -- 90% down. I think it's now in the high 70% from 2019 comparison. And for those of you who don't go to the office on a Friday in New York, the natural limit is probably around 80%. So we're probably back to where it's going to be. Key metrics are CPMs, even though we don't sell transit on a screen-by-screen basis like we sell billboards, getting customers to pay us more for that same audience, even a slightly growing audience is important. And to do that, we need to create more tension, drive more demand on those assets. So bringing people underground or on the street level [indiscernible] we have is important. And again, going back to not just selling the rectangles there, but selling experiences, doing a big ESPN show on the E-Train, doing a match train with things outside the shuttle. Recently, I think Bath & Body Works, they had a scent in the shuttle, the [indiscernible] train. And so if you walked off the train or through that area, you could smell Christmas trees. Again, that's -- I'm not sure that's going to change the world, but it's something we can do and others can't just from our contract. So we're taking greater steps, more focus, trying to be more creative with the MTA and not just kicking ourselves for owning it, but trying to maximize it.

Great. And as we think about margins, cost savings, starting with the billboard margins, those improved to 39.5%. What's next for margin optimization?

I think margins grind higher and a couple of factors. First, on billboard, continue to manage our portfolio. For years, we would focus really on getting, winning, building more billboards, adding opportunities for revenue. We've inflected and we're focusing a lot more on EBITDA from the portfolio. We gave up 2 large contracts, one in New York, one in L.A. in the last 15 months. Both those, we give a pro forma update on revenue, but no pro forma update on EBITDA. EBITDA was pretty small. So we think we can do without them. And so far, that theory was proving correct. Smaller scale, we're empowering our real estate team to negotiate tougher and give up some static leases if they don't think it makes sense to keep them. Right now, we have 37,000 static billboards. I don't think anyone in this room would think less of us if we have 35,000 or 32,000 or whatever the number is, we have a lot that we think we can manage or the cost of our lease portfolio by being proactive. So I think that continues to grind higher. Transit, as the MTA comes up to its minimum, the total EBITDA margin on transit improves. So we think directionally, that's good. And I hope everyone painfully took a reduction in force in June. We lost about 6% of our headcount. And we think there's benefits from that going forward, and we continue to look, whether it's through AI or improved efficiency or just better operations, various ways to manage our overhead costs.

Got it. And how do you balance lease cost cuts with keeping premium locations?

Great question. We're not giving up things on Houston Street or the West Side Highway. We have given up some things in Times Square, but there's a lot of stuff, and we have a lot of inventory in Times Square. It's a combination of art and science. So it's not just a metric, this doesn't make enough to get rid of it. Some of these high-profile ones, whether it's the iconic statics or the digital, we're not giving up any digital. We think the more digital is better, which they make sense to have the client wants them even if you're not making money off that. Our largest advertiser, probably every one's largest advertiser choose a static instead of digital. They're not flipping from an electronic device to a wizard. They're not sharing it. So we need to focus really on some of the expensive low-return static and we think even if you're not taking down the tool -- our real estate team has to negotiate tougher, we think it's a valuable tool for them to have.

Great. And turning to your capital structure, leverage is 4.7x. How are you thinking about and/or prioritizing some of your near-term debt?

Our next maturity is summer of 2027, still basking the refinance of our '26. So we probably wouldn't address that until the near going current, the '27s and probably the '28s seem to be historically low bonds. And if I can't put them in a museum, at least I can provide them as long as we can. Leverage-wise, we'd still like to reduce our leverage, maybe closer to 4, not necessarily to live there forever, but to regain or continue to build some financial flexibility. The high-yield market is very supportive of out-of-home in general and OUTFRONT specifically. So we want to be respectful and kind of keep a regular cadence. And just we think having a little less leverage is beneficial to all of our stakeholders.

Great. And what is your current secured capacity?

We're about 1.5x. It's 3 turns, so about $1.5 billion. We do have one unnatural secured bond, which we issued a little over a year ago when the secured, unsecured gap was unusually wide. At some point, when the rates line up within the call window, we'd probably take that out and replace that with unsecured, not that I dislike secured debt. I'd rather save it for necessary usage in M&A or distress or rainy day or something, but again, plenty of secured capacity even if we don't replace that. So we feel pretty good about that. I do want to have a balance. I mean term loan market, the bond market, secured, unsecured, so no one gets sent home hungry.

Great. And obviously, you have strong liquidity. We just talked about the balance sheet. Would you consider larger M&A and bringing kind of leverage a bit higher for the right opportunity?

I think for something smart, prudent and we would take leverage up with a path to delever. Just to go -- turn higher and live there without the ability to delever, I think, is not going to be rewarded by any of our stakeholders, but we do think we have some flexibility, some creativity. We've used other people's money and some off-balance sheet financing, I think, smartly. So I do think the industry probably has some strategic changes in the future, although people have been saying that for years. And as one of the 3 large public companies in the industry, we would expect to participate in some fashion.

Are acquisitions about footprint, digital capabilities or maybe a combination of both?

Great question. Probably more about footprint. I think I can deliver digital capabilities within a footprint if I added the footprint as opposed to if we've bought some digital capabilities or bought some digital operations, and I didn't have -- like went out in Charlotte, North Carolina. I'd rather spend money to get into Charlotte and then build from there. It's a good young market that's growing as opposed to just ignoring it and buying some cool stuff. It doesn't mean they're mutually exclusive. But I think the focus in our shop is more on tuck-ins to the locations we have and any new markets that we should have, top 25 that top 25 DNAs that were really not a big presence.

Great. And for a larger scale M&A, what are some of the tax implications that might be a hindrance or even a benefit that would be part of that thought process?

So we're a REIT. So some sellers would like REIT shares. I think everyone's heard about an UPREIT structure, something that we don't have, that we could put together in a month. We haven't spent the time or resources on the paperwork pending a need. But the tax implications, I'm guessing most of the industry is very low basis. So sales would create capital gain even for a REIT -- we had a capital gain distribution when we sold our Canadian business. That's something to consider. And frankly, if you took your leverage too high, it becomes even more challenging remaining a REIT, very difficult to pay down debt when you're paying a big dividend.

Great. And then just thinking of longer-term targets, you raised AFFO guide for '25. When we think about '26, how do you see that drifting?

So we can answer, we'll be in the high single-digit growth rate in '25. And without giving too much forward guidance, I would expect to be at least there, if not continue to improve. We do think there's some tailwinds in costs, and we talked about some revenue opportunities in '26. So we feel pretty good about it. Again, we feel pretty good with the changes we've made, portfolio we have, performance. I think that will be reflected in the AFFO.

Great. And how will the mix of billboards and transit continue to evolve in terms of share?

Great question. So we recently in the last few years have been focusing on growing or adding billboard. And frankly, none of our big transit contracts come up until 2030. So we've shed a couple of the smaller ones. So our -- back in 2019, we were 2/3 billboard, 1/3 transit. We don't necessarily like the risk reward or the financial profile of transit. So we're not looking to add until these renewals come up and we can reprice them. So we've given up some transit, and I would expect the emphasis on the billboard, emphasis on large market billboard to remain and grow. That being said, the [indiscernible], Columbus, Georgia and others have high margin, lower volatility and perform very nice function as balanced or ballast to our overall portfolio. So we like what we have. I would expect to increase our performance and our investment in large billboard markets. And if we can reprice and frankly, as the industry leader in transit, maybe it's up to us to reprice and demonstrate what we intend or comfortable paying. We like the transit properties, again, but we just want to improve the contracts.

Great. And then if we think about free cash flow items, first of all, you've mentioned kind of getting closer to the 4x leverage over time. So is that being part of it, how do we think about your capital allocation priorities evolving, right, as we think about leverage, potential M&A, what are the priorities? And how could we see them evolve as your leverage comes?

First priority, as a REIT, we have a big dividend obligation, and happy to say that our dividend yield has gone down. I remind all equity investors and everyone who asks that we don't control the yield, we control the payout. They control the yield. So that comes out from our EBITDA. We do think we'll pick up modestly our M&A activity on the tuck-ins. We haven't seen a lot of things in the last couple of years that have been interesting. I don't think we've missed things, but if the industry -- as I mentioned, if the industry is going to have some strategic moves or have some more consolidation, we would look at that. Then otherwise, we would continue to delever organically. We're getting closer to post-dividend free cash flow neutral, which is for a REIT nice to have with funding the MTA and other things, I don't think we're going to be free cash flow positive post dividend, but pre-dividend, which is, I guess, a metric we would be, but the dividend is about $200 million. That shows up a lot of free cash.

Great. And from a CapEx perspective, should we expect it to be similar to this year or...

I think similar. We try to spend about 5% of our revenue. So this year, $85 million -- $85 million to $90 million range. Next year, probably in that same $90 million range. Of that, about $30 million, $35 million is maintenance CapEx, and we increased that because we start proactively replacing digital screens. So apparently, nothing lasts forever. And we have many screens that are older than 10 years. And rather than have the local salespeople and general managers complain, we want to take control of our digital operations group and identify those that should be replaced, not just the squeaky wheels. So we'll continue to do that, and that's -- probably lasts forever. And I assume the others, not just in out of home, but anyone who has digital screens out there, they don't last forever. We're seeing a similar thing that's in our CapEx in the MTA. If you've been down to the bottom of the 7 train in the summer, it's pretty inhospitable. We've started installing these screens in 2018. So we're discovering how long they last in the elements.

Great. And as we think about '26, whether it's digitization, programmatic, experimental campaigns, what do you think will be a little -- more of the focus? And what are you most excited about when we think about those areas of the business?

Our focus on digital. So anything digital, more digital inventory, selling digital better. We're now directly covering the digital agencies, which we hadn't done before, increasing our focus on programmatic within the digital space. Historically, we've sold digital like it's [Audio Gap] there were a bunch of new hires, we can sell them more integrated with some others, the retail media networks that are within stores. We have digital screens outside those stores. Why can't we link those? Same thing with stadiums for the sports teams. They now have on-premise or in-premise advertisements. So we can partner better with more people with digital. We're never going to exit static. There's all kinds of iconic statics, but greater focus on selling digital better will help our margin. You don't have to roll trucks and other things. And I think it will help grow our revenue higher than historical rates.

Great. Well, that's all the time we have. Matt, thank you so much for joining us today.

Thanks, everyone, for coming.