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

All right. Welcome to Citi's 26th Global Property CEO Conference. I'm Jason Bazinet with Citi Research. We're very pleased to have OUTFRONT CEO, Nick Brien here. If media or any other individuals are on the line, please disconnect. Disclosures are available on the webcast and at the AV desk. [Operator Instructions] And I guess, Nick, I'll turn it over to you. Maybe you can just introduce yourself, the team, give us a brief overview of your company.

All right. Hello, everybody. Thank you. Well, first of all, thank you for hosting me. It's always a pleasure to talk about our medium and OUTFRONT specifically is the industry leader and what we see and what we plan to do about it. And certainly, it continues to be after 1 year of being the CEO. As you know, I've been on the Board for a while, for quite a considerable period of time earlier. So it was a privilege to be asked by my colleagues on the Board and the Chairman to become the full-time CEO in September. And it's been a journey of transformation from a people side of the business to a technology side of the business to a process side of the business. And I shared a lot of those details on the recent earnings call. And I hope I also conveyed our continued enthusiasm for the business growth and the brand expansion that we see as a significant opportunity ahead.

That's great. Can I share with you one piece of color like in terms of our inbound. We get -- over time, more and more of our inbound calls are REIT investors. I'd say it's about 80% now. And most of them are just looking for pro-cyclical exposure. That's the #1 thing I hear is they sort of manage their REIT portfolio. I'd be curious, other than the cyclical nature of your business, what are some of the other key attributes that you think investors should be aware of as they're thinking about your firm vis-a-vis some of the other REIT investments that they could make?

Well, I think the ones that I'd like to highlight is that then it's a REIT investment, but it's going to be a high-growth REIT investment in the sense that we believe that the biggest trend affecting not just the water marketing and advertising, but business in general is AI and how does that manifest itself and how do we operate in an Agentic advertising environment. And we see tremendous opportunity for our medium to be real, authentic in real life connected with all communities and part of the culture and the fabric of being a public media that cannot be controlled and influenced by the algorithms. And we are going to see AI start to influence how people prioritize their pursuits, prioritize their choices, the categories they're interested in. And a lot of what they won't be interested in will be delegated or relegated to their agent or their buying agent. And the advertisers and the manufacturers and the marketers are going to be looking for those medium that are high -- have high trust, high reach, tremendous value and the opportunity not to be managed by the gatekeepers online. So we see the further digitization of our medium in combination with being in real life and with stronger measurement as a tremendous tailwind. And so I would say that's a major development that we're capitalizing on both from an industry vertical, we've now created our sixth industry vertical around AI and AI spending, and we're seeing tremendous growth, and that's going to be sustainable because, again, we're seeing the AI players that are advertising with us of both B2C and B2B. And they're also increasingly now on wearables. So we're excited about that. But I think that's one of the biggest -- when you are saying you have investors looking at other REIT investments, what sets us apart, I believe it's the fact that the AI revolution and everything that represents strengthens our hand and doesn't weaken it.

So that's helpful. When you say a sixth -- standing up a sixth vertical on AI, should investors think of ChatGPT and -- that's it as opposed to, I don't know, GM is going to do something in the AI space that would be under.

No. It's both, but more the former. This is Anthropic, it's cloud, it's profit. It's [ ARISE ] AI in the B2B space. It's the players we're going to go and see in Boston next week in the health care space, AI businesses that have now been created as a consequence of the AI technology that's allowing them to either create new industry categories or disrupt the existing ones. And they are spending both to engage directly with potential customers, whether it be B2B or B2C or for fundraising or for their own general name and brand visibility. We've got every stage of AI spender with us from the brands you wouldn't have heard of that are yet to become brands as well as some of the most powerful ones that you expect to hear and see.

That's great. And so you wouldn't say that there's any risk from AI then based on your answer? Because I can tell you, I mean, I've spoken with some investors and they're a little bit nervous about either AI causing consumer disruption via layoffs, therefore, less ad spend or they're nervous about AI just being able to put the right ad in front of the right person more effectively that may not be as applicable to outdoor and sort of shift dollars away from outdoor into other mediums.

It's interesting. The comment about the changing nature of the workforce and the implication if you talk about AI efficiency in terms of job losses. That's more of a societal and a general business issue that doesn't -- that I think impacts all business. When I'm talking about the AI, we're talking about the implications for AI to do all of our business processes better, faster, cheaper. And of course, we're looking at that as much as anyone else's. So all the leverage around AI tools and automation. I'm talking here about them as a spending category and the implications of AI collapsing the bottom of the funnel performance. A lot of those advertisers who are there are now looking to where else they go. If you're a content creator, I mean, I would be concerned if I were running one of the open web platforms, I'd be concerned if I was running a streaming TV service. I'd be concerned in a number of different media platforms. But we don't have the content that is now questioning the variability about what's real and what's not. We don't have AI swap. There is no opportunity. More importantly, not only is our medium real and it's in the culture and in the environment, it is universal. As I said, it's a public medium, and it's not restricted. Now there are nuances around like with FIFA, which is obviously going to be a great tailwind for us. We're going to have -- we're partnering with 6 of our host cities, and we will have episodic advertising environment that won't be on a permanent nature that's going to be surrounding those host cities and what we can do with that. But still, at the same time, these are universal canvasses for universal audience engagement, and it has high reach and high trust. The other thing we're going to be doing is spending some more of our own money on measurement to prove not just the efficacy of our medium in the context of market mix modeling and attribution incrementality, but also for the very trusted nature of our medium relative to online. I'm not talking digital because, obviously, we have digital out-of-home. And we want to be able to actively sell and represent our digital inventory either direct or through the programmatic channels. I'm talking here more about the medium itself, whether it be static or digital, it's real.

Can I just build off of one of the things you said when you said you're looking to spend more of your money to prove the efficacy of the ads that are placed on outdoor. Are you talking about sort of a replacement for Geopath? Or are you talking about some other sort of investment?

Two aspects to that. One is at an industry standard level where, yes, a replacement for Geopath is industry measurement. And there's an executive work party that's been working as part -- it started before I arrived as the CEO with the AAA. And now that's down to 2 key partners. One is Ipsos and the other is StreetMetrics, and we're working through -- and again, a big brand name, in my opinion, like a Nielsen, like a Kantar, like an Ipsos is exactly what the big brand sophisticated marketers want to believe in, right? So we're going through that process. So that's an industry standard measurement. So for frequency, for accuracy, for the ability to integrate. And then there's our own bespoke research that we're going to be wanting to commission about our medium, about our inventory and our medium that you could say is probably more qualitative than quantitative. We also have new measurement capabilities that come with our AdQuick partnership. We announced on our last earnings call, our strategic investment with AdQuick, one of the leading independent planning and buying platform capabilities. We're taking a significant stake in them, a significant minority stake, and they're going to be developing that as an internal capability for our inventory and our planning and buying needs. They also have sophisticated measurement. So the way to be thinking about measurement this medium needs is both qual and quant. It needs to be subjective and objective. And it needs to do its job right now that the changing face of marketing in an AI world is significant and profound and what role and opportunity [Audio Gap]

Anyone has a question in the room, feel free to hit the microphone. You're more than welcome to ask a question if there are any.

Is there -- do you see -- I'm not aware of your global ambitions. Do you see a fit in terms of global expansion in the future for you?

It's -- thank you for the question. It's a logical one because you can imagine with the strength in the medium and some things we're talking about, that has a universal opportunity. We are -- we were in Latin America and Canada. We came out of those markets. Canada, Matt, we sold last year that year, 1.5 years ago. So we're very excited about our footprint. We're a pure-play U.S. We're the third biggest ad market in the world. We've got key representation. We're the premium brand. We're in the key DMAs where we're the people, the business, the culture is shaped. We are very happy with what we have. We want to strengthen the hand we have. The international expansion, not on our radar at this stage.

Anyone else have a question?

Second question. Are malls a big venue in terms of your footprint?

The best malls are, and we're very selective about that because the mall environment is tightly controlled by those mall operators. And usually, like anything, and this -- a lot of it is match, the way we have sort of a center of gravity is a lot of the operational supply side really rolls up to Matt, and I focus a lot on demand on the demand side of the business. And I think on the supply side, I mean, when I talk to Matt, we've recently -- we haven't announced it yet, but we've just agreed some really exciting inventory in a previous -- in a Southern California mall operator. But in general, it's not a particular area of focus. We look at all the inventory sources that come our way. And as long as they're premium and the price is right, then we're going to engage.

Did you want to add? All right. So I'm going to ask you to take -- this is sort of an odd question, but I was telling Matt and Stephan after your last earnings that I think these are probably the best 2 quarters that you've put up since you've been a stand-alone public company. And my question is, it's a little hard for me -- I mean, I think the first time we met was last September, and I was struck by your energy and your enthusiasm for this ad medium. And all of a sudden, a few quarters in, all of a sudden, the results sort of take off. And it's hard for me to separate is this the enthusiasm that you're bringing to the organization to sort of sell in a different way, which you talked about last year? Or is this just sort of more coincidence and that the MTA is sort of finally in sort of the self-healing mode and the bull case that investors had back in '22 or '23 post-COVID is now just manifesting itself, and it would have done it whether you were the new CEO or not. That's a little bit of an unfair question, but I'd love your take on that. It's just you.

I don't -- no, it's never me because it teams win, not individuals, right? Every team needs a leader. Every team needs a leader, but the team. The team is an amazing team. It's a team that I put together with real thought and care to keep the very best of the legacy leaders and those with heritage and knowledge of our business as well as attracting in remarkably talented non-out-of-home leaders who really understand marketing, measurement, technology and sales. And they're coming together and they're buying into, yes, the vision and the enthusiasm I have. But more than that, it's about focus and it's about belief. I've set very tough expectations because I refuse to be the only medium that is going to accept low single-digit growth rates. Why? What? And all the tech companies can keep taking double digit every year and streaming TV can walk up and retail media and all these others keep showing up and they keep wanting to take the money from analog media, the dumb analog media. Okay, time to wake up, right, and start to go on offense. And if anyone doesn't sign up for that, they can find another job. But it's about the focus. The focus, transit just didn't happen, the ridership levels are relatively the same. We changed the entire leadership, found a brilliant leader in Victoria Mottesheard to become basically the internal CEO, changed commission structures. She's responsible for sales, marketing and product marketing. And that TVT, that transformation, that transit velocity team meet with me and Matt on a biweekly basis. And the goals and the targets are significant. And guess what, they're meeting them. Why? Because they're focused, they're not distracted by other things. All the salespeople in all of the regions, all those regional leaders, they had all the other functions. They had HR, they had marketing. They had real estate, all of those were stripped away. They are now dedicated focusing on growth, right? So there's no ambiguity. It's not a complicated business. There's supply and there's demand. We don't even have the bit in the middle, that's the content and all the craziness that goes with a high creative. We have a great creative team. We have great measurement. We have new skill sets and new capabilities, but more importantly, we have alignment. So we have a much bigger ambition. We've raised our altitude in the industry. Not that wasn't difficult for me to do because I've operated at that level. But more importantly, we have alignment now between our organization, between enterprise and commercial, between the supply side and the sales side, between the tech. That's all we've done is just get everyone aligned, focus in the same direction, but they all have to sign up for very significant growth and brand expansion, not just growth through exactly what we have, more occupancy, high yield, but through the brand expansion as well. So I don't know, it's not the Nick Brien effect because it's Nick Brien and the team, are part of the team.

Of course. I'll take that as a yes, it's you. All right. I'm going to shift over here to the question from the web here. And bear with me, I'm going to read this as -- I'm going to...

Are these coming -- are these live questions?

This is a live question. Unlike my questions I might love it up here. Transit and digital are clearly growth engines. How should we think about the sustainability of the current transit growth and the runway for further digitization over the next 3 to 5 years?

I think that is a very profound question, and I think about it with tremendous enthusiasm and belief that are what we've already shared on double digit, we're not giving any projections for the year, but we gave out in the last -- we gave the first quarter right? And we gave high teens, and we continue to be very enthusiastic that transit, all things -- not just the New York MTA, but all things transit will continue to be a very attractive part of our portfolio. And with this dedicated focus and dedicated sales and now integrated product marketing, I have no reason why that should slow down. Now when it comes to digital, the digitization is only going to strengthen. We're introducing a new programmatic capability across our rolling stock. We haven't announced when that's happened. It's a complicated one, but we're looking to add digital and programmatic capabilities in more of our transit. And digital overall, listen, 75% of all ad spend, 72%, 73% of all ad spend is digital. It is -- 80% of that is traded programmatically. So we aren't even 20% programmatically traded. And our digital is less than 40% of our overall revenue. We have nothing but upside here when we do a better job converting and developing our digital capabilities and then generating the demand by making sure we're selling it to the buyers and directly integrated. That's another reason why on the enterprise side, we did our partnership with AWS. And that partnership because they are the ones connecting the pipes and the data sets of all the big holding companies. They're the ones working to develop the Agentic Optimium in planning and buying systems. Those are digitally native centralized trading desk. And if our inventory isn't in it, if we're not trading with the big SSPs, if we're not even trading directly with the big DSPs like Amazon or the Trade Desk or Google, DV360 and our option button there when a particular programmatic buyer wants to reach, I don't know, single moms who drive a mini and love football, they're going to -- we need to be but -- digital out-of-home needs to be there to be clicked and see what it can offer. If we're not even there, we're not even represented how we're going to access that massive pool of spending power. And by the way, our digital is better than their digital because our digital is digital and it's IOL. It's real. It's not just more millions of digital impressions that are flying around the web, 60% is generated by bots and watch AI, watch what AI does to the open web even more. Now our digital is real digital because it's there, it's on that billboard, it's on that transit, you can go and touch it. So we believe that we have huge strengths. We just got to show up at the party.

Super helpful. So can I confess -- one of the things that I've always struggled with and maybe you can bring some clarity to this. Most of the outdoor companies when they talk about the returns on their digital conversions would say, hey, our IRRs are 20% plus. And that hasn't changed for many, many years. The returns are still great. Maybe the CapEx has come down a little bit. It's all selling in really well. Somewhat naive, but I say, well, then let's convert more faster, right? And the answer I get back from the industry is, well, there's -- it's slow from a regulatory standpoint. We can't just get through the regulatory machine to which I say, we'll then put more stuff in the beginning of the machine, and it will all come out the back end of the machine at some point, but that's not -- that's a near-term answer why you can't accelerate, why not a long term. So I've come to this tentative conclusion, which may be wrong, which is the reason that digital conversions don't happen more quickly is there is always the risk of flooding the zone with too much supply. And so that's the real -- that's my hypothesis for the real constraint that you can't add 8x more inventory on a board and do a bunch of boards without crashing prices in a local market. Is that wrong? And if it's not the answer, can we do more digital faster?

Well, the question you've just asked me is a question I ask Matt on a very frequent basis. So I'd like Matt to go first, and then I'll jump on this with a point of view on crashing prices because I have a strong point of view. But with regard to the complexity of digital conversions and therefore, the slowness, Matt.

That's a great question. It's a great observation. So I've been here almost 8 years, the IRR and the payback periods have been about the same. We're still getting roughly 4x lift on revenue and 2x lift on cost. So it's still great to do. Part of it is we don't want to flood the zone. However, we're not at risk of flooding the zone. It takes more boots on the ground. So it will take more upfront CapEx to put more people, get more development, more training. And then the pipeline, just to build that pipeline takes a couple of years. So it would have to be probably a longer-term view with some short-term cost to it. But since we're still -- we're not filling all our digital, both above ground and below ground. We don't feel there's a real urgency to do it. As Nick has said, we are stepping on the accelerator a little bit and getting more and pushing our markets for more, but your observations are correct. And still the gestation period is long. Not everybody wants a digital billboard outside their window.

Right. I'll add to that and just say, okay, so we are stepping on the accelerator a little bit more, pedal to the metal. Matt and I, we will get into this tug of war. It's got to be accelerated because we can sell it. It's not going to crush and depreciate prices. And I look at the market for that. I don't make the rules. The market makes the rules. 75% of all media spend is traded digitally, right? So that $320 billion, $430 billion is spent in the U.S. paid media market this year, over $325 billion will be spent and 70% of that will be gobbled up by 4 tech giants. Go bigger. Where are we? So is it -- we just need to be in the places where they're buying it. I mean you're saying to me, no, well, don't grow more apple trees because we can only sell 10 apples a day. No, well, let's go to the marketplaces where they're buying lots of apples. They're out there. It will not depress prices. We just need to be active. That's why we've just hired and announcing here, Jeff Hackett, one of the most senior leaders from the Trade Desk to lead our programmatic sales and strategy effort. And it's not just sales and getting our inventory and our data sets into the holdcos and the programmatic trading desk. You got to have the right pipes and the right connectivity. That's why I'm also very pleased on our Board, we've strengthened our Board, Nicolle Pangis, who's one of the industry's leading lights on strategy, programmatic tech to 24/7, Xaxis, Group M, and we've got Michael Barrett, the CEO of Magnite, one of the most -- I mean, between them and PubMatic, they're the leader in SSP. We're going to get this right. The industry hasn't prioritized that, simple as that. So they've been left behind. So as far as I'm concerned, Matt, convert as fast as you can. I'll generate the demand.

That's great. Any questions? So can I talk a little bit about industry verticals?

Yes.

So there's 2 questions that I have. One is, it's still a bit of a head scratcher to me why legal has shown up sort of out of -- I don't want to say out of nowhere. It's always been there, but it feels more prominent than it's been in the past, and I can't trace that down to a reason why. That's my first question on industry verticals. And my second is on pharma. It seems like pharma is sort of percolating and potentially becoming a -- maybe a new source of strength for you all given some of the changes on the TV side and the regulations. So I'd love for you to comment on both of those.

Okay. Well, the first -- the first one is an industry vertical, but it was not one that was necessarily targeted by us or the industry. As you said, it emerged and evolved. But the answer to why it's become the most significant spending category, I asked myself when I met the Chief Marketing Officer for Morgan & Morgan, our largest spending client after Apple, right? They're so significant. They love the medium, and they're not the only ones, all the lawyers do. And they measure traffic. They measure. They know -- they track everything. I was amazed, and she shared with me confidentially that not just the calls, but the quality of the calls, where they come, when they come. 90% of so many -- 80% to 90% of the calls are to do with sort of traffic and crash related. So the proximity, that name memorability, which is why so much of it is just the volume, name recognition, name -- I'm there, I'm there. I'm there. And the amount that they spend in our medium because the medium works, it has proximity to where people are likely to remember when did that happen and [ now ] they're on the side of the road. So they are -- they have encouraged and Morgan & Morgan for us is great. They're now taking on -- they're coming to California. They're taking on. They're spending big. And a lot of the existing players, they love it. So it's emerged that way because the medium works for them. It's very cheap. It's probably too cheap on a relative basis to broadcast or to search in social, you're not doing that in the moment. No. So that's evolved in its way. Pharma is one of our industry verticals we've targeted. When we look at finance, CPG, we're looking at entertainment, we're looking at technology, pharma. We're seeing more of the bigger pharma brands, both on -- and so certainly Rx as well as general health and wellness. When we put into pharma, it's not just pharmaceutical, it's also the trends around GLPs, the trends around life. It's growing so fast. So we are -- we decided that it was important to develop a dedicated head of industry and an industry vertical team to go and pursue them and have those conversations with Johnson & Johnson, with Novo Nordisk, with Pfizer and try and get more upstream and understanding what they're doing. So we're bullish. They continue to be and whether you look at an aging population of wellness, you can look at whatever the statistics, health care spending is very interested in digital, but a lot of the health care players believe they have not modernized their advertising and their marketing stack enough. So we are looking to put ourselves front and center and talk about the trust level of advertising and building their brands in real life. A lot of that around pharma has to do with trust and familiarity. So we are dialing that up and it seems to be working.

That's great. Any other questions? Okay. So I'm going to -- so we got sort of AI, you're a winner, not a lot of risk. Big focus on digital conversions and programmatic. Is there any sort of potential fly in the win as it relates to programmatic, given the sort of tax that you have to pay to get through the ad tech machine vis-a-vis a direct sale where you might pay a salesperson a commission. Like do people need -- as investors are doing their EBITDA bridge of good guys and bad guys, do they need to be worried that if you are successful in digital and programmatic as a subset of digital that there's an EBITDA headwind?

That's a very good question. Two reasons we don't concern ourselves about that is because we have the opportunity with our digital inventory to obviously develop more custom audiences around it if it's more sophisticated. And a lot of those taxes, the high excessive tax that was always there with ad tech is on the way down. We know that if you look at the SSPs and the big DSPs, they announced their earnings, they're making more money on data overlays than they are on, let's say, the traditional tax that was applied. But as far as we're concerned, if you're selling it programmatically, you're basically from a manpower and a labor point of view, you're not selling it, they're buying it. We're there. We're showing up. So a lot of the cost of sales, packaging, marketing on our side comes way down. We see the programmatic side of our digital, not only unlocking new dollars, but it needs to be a less expensive way to trade, to plan and buy. That's why we did the AdQuick deal on the commercial -- essentially for the commercial side of the business. So it can be a much more automated, simple tech streamlined kind of planning, buying and measurement process. And then when it comes to partnering with AWS and agency to get connected into the big agency holdcos and we've already started with one major account, and now we've got another one we're signing up right now. Our theory, our hypothesis is that we're going to be able to push a lot more digital volume through those pipes with very little handholding involvement. So we should see the profitability. What you're saying is the -- Yes, there are higher going direct, but there's a lot of labor. There's a lot of involvement, a lot of manual overlay that we have to provide when it's a direct buy.

When I asked Lamar this question, they also brought up, and I don't know if you would concur with this, that it's possible that the CPM, the pricing could actually be better on a programmatic buy than their average. Would you say that's also a factor that could -- yes?

Yes. We see it on how we trade it today. We see it on how -- and we're only selling [indiscernible] to the major industry SSPs. When you think about Vistar & Place Exchange, okay, now you start to connect. We get connected to the big industry SSPs and direct with the big DSPs. As far as I'm concerned, they all pay. I look at the prices for Snapchat. I look at the prices for retail media. I look at all the prices for CTV. I have my people run the number. They don't want to bring me those numbers. It's too shameful. As far as I'm concerned, the only way is up.

That's great. I have time maybe for one more question, if anyone wants to squeeze one in. Okay. Well, that was great.

Well, thank you for the opportunity to talk to you guys. Thank you all for being here to listen as well. Appreciate it. Thank you very much.