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

Very pleased to have Matt Siegel, CFO of OUTFRONT Media, and thank you for everyone in the audience for joining us. Matt, thanks for coming.

Thanks for having me, and I apologize for those expecting Nick Brien, suffer through just with me. He's out sick today, had a tough weekend.

All right. No worries. No worries. We're just pleased to have you. So I want to start with a high-level industry question because I feel like following the outdoor industry for a number of years, it feels like something really good is happening right now and pretty different. And what I mean by that is, even if I back out the tailwinds from onetime or episodic things like political or World Cup, like the underlying growth that's happening for you guys in [indiscernible], that's happening at some of your peers is phenomenal. Like it's the best growth maybe -- I mean, I'm going to strip out the post-COVID quarters because that was sort of crazy. But just like normal economy, like the growth is really good. And so my question is, what has changed? What is happening?

We think it's a number of things, and we've observed the same thing. We are maybe not as surprised as you are. We think we're impacting some. Some of it is what we saw in the first quarter, kind of the market is coming towards out-of-home. You saw all 3 public companies report good numbers kind of comparable to each other, comparable to expectations. In the second quarter, we think we kind of outperformed and distinguished ourselves. There was some help from World Cup, certainly. But I think for us, I can't tell you what the other guys are doing. We're putting a lot more focus on how we sell, what we sell. We've talked about -- I think probably everyone in this room. We've changed over our management, so we have a lot more focus on the digital ecosystem. We're pushing price more both in transit and in billboard. We're spending more time focused on programmatic. I'm sure we'll talk about that in a little bit. The industry is getting more vocal about itself, kind of look at us. We're not just accepting the historical trend. We're talking about competing not just with each other, but outside of out-of-home. It's -- for years, it's been the cheapest CPM, which is an imperfect metric, but still a fact, and that gives us, I think, runway, which we're taking advantage of now and probably into the next few years to catch up on a good value. So a lot of things are happening all at once. We think we're contributing. And frankly, Nick's loud voice, both within the industry and outside, I think, is getting a lot of people to take notice.

But people have tried this before, right? I mean the fact that you're the lowest CPM out there, that imperfect metric, I mean, people have tried to sort of close the CPM gap, but it does feel like, I don't know, something is different. Is there anything around this, I think you've touched on this on some of the calls, it's hard to quantify that people just want the safety of something that's real in this highly digitized economy?

This kind of move toward IRL, in real life, maybe a backlash to AI and other online media that they want to take something. They want to see something that they can't always touch it because it's pretty high up, but they can take their picture in front of it, they can point to it. They can see it as a copy of something that they've seen some place else. So it's real, and we're benefiting from that. We're pushing that. In addition, we're spending more time on what we call experiential, some temporary things that we're bringing out. And again, you can touch them right now in Duffy Square, we have a kiosk that you can actually touch for Dancing with the Stars. We had something similar for Game of Thrones back in Times Square. So it's much more in real life than we've been in the past. And that's -- for us, that's not driving as much revenue or earnings as we'd like it, but it's driving a lot of discussion, a lot of marketing. People are taking notice again at our media and say, "Oh, we can do some interesting things." So I think people are coming back to that.

Is there a threat of this that is just a new category, meaning the AI companies like OpenAI and Anthropic that are out there trying to get people to download their app that's meaningful? Or is that more noise? I mean I'm sure it's...

It's certainly meaningful whether it's AI, retail media networks, anyone with audience, we've had calls from retailers and others, can you help us sell advertising and things like that. Everyone thinks they can take dollars out of the U.S. media market. Media inflation is about 5% a year every year for a while. So it can't feed everybody. But we think there's certainly opportunity for us to gain share, not just within out-of-home, out-of-home to gain share in media and us to gain share within that increased share.

Okay. Great. So one of the things that we do every year is we do this 10-year retrospective where we try and see where is the industry's growth coming from, not OUTFRONT specifically, just outdoor overall. And over the last decade, it always comes back about the same number where it's 1/3 of the growth comes from converting static to digital. 1/3 of it comes from tuck-in M&A and 1/3 of it comes from same-store static billboard growth. But you guys, when I look at your mix, you haven't really participated that much in M&A, right? I mean, even a few years ago. Pockets, but smaller relative to your peers. But now you're talking about now that your leverage is in a better position, maybe leaning into M&A a bit more than you have in the past. Is that fair?

Yes. First on the M&A side, our investment in the MTA over the years, especially since we're not going to recoup all the spend could count as M&A new inventory. It's an investment, but I wouldn't put it on the same line. So we've been investing in our business. But now we have proactively improved our balance sheet. A few years ago, we had some leverage challenges. If you remember, we sold our Canadian business. As a REIT, it's sometimes difficult to pay down debt. So we thought we should do that in a big chunk. We sold the Canadian business and paid off some debt. We've refinanced all of our near-term maturities. We have nothing maturing until 2029. And then everyone's favorite organic EBITDA growth over the last year plus has really helped bring our leverage down to pretty close to the low end of our range. So we feel very comfortable in getting back into more material M&A. I mean we've been doing tiny tuck-ins, 2s and 3s that don't really move the needle much, but they just add to inventory. So we're looking at a bunch of things. We think there are some things that aren't for sale yet, but that will be. So we expect to participate prudently, but a little more aggressively than we have in the past.

So I think I've got $200 million to $300 million in my model for M&A.

Maybe premature to say a number. I mean the other guys put a number out and they've been saying that number for a while, but we think we have very good financial capacity, financial flexibility and the ability to stretch and delever with the right acquisition.

Okay. Can I ask you one sort of related M&A question, which is, for the audience, can you explain what an UPREIT structure is and do you think that is something that you may do or should do to open up the envelope of potential...

So [indiscernible] down in the REIT workings. An UPREIT is as a REIT who don't pay corporate income tax is our ability to give someone shares in our REIT or in a REIT-like structure so they can defer their capital gain and be part of the REIT and they commit to hold it for x number of months. I think it's a 1-year minimum, but it's negotiated. So as a REIT, you can set up an UPREIT. If we were looking at someone to acquire and they suggested a preference for the UPREIT, we would put it together within a month, paperwork, some legal fees. And frankly, the first counterparty, the first target that we used would probably benefit from being the counterparty and get their specific terms that they weren't included. We would put together an UPREIT as soon as something material came along.

Okay. That's great. Can I shift to programmatic. So you mentioned earlier that you guys are leaning a bit more into programmatic. What is it that -- when I look at sort of the share of all advertising that's done programmatically, it feels like outdoor still has a relatively small percentage that's sold programmatically. Why is that? Is it still a person-to-person sale that requires a salesman? Is it a function of the mix of national and local advertisers? What is it that has sort of held back programmatic?

I think the out-of-home industry has just been slow to adopt. For context, overall media is what, 80-20 in favor of programmatic and a lot of the -- obviously, online and stuff grew up in the programmatic world. Out-of-home is more 20-80. I'm not sure we'll ever get to 80-20, but we want to go directionally toward that. First, a lot of our inventory and a lot of our revenue is still static. So it can be sold programmatically, not nearly as easy and not nearly as beneficial. A lot of programmatic depends on better measurement and metrics. So our industry is behind where it should be. It's slow to adopt and improve that. So as we continue to improve that, I think that will get better. So the percent of programmatic will go higher. For us, in particular, we've hired the middle of this year, a Head of Digital to kind of push programmatic. He's putting us on more platforms. He in turn is hiring 2 programmatic salespeople which once after in finance, I complained why do we need salespeople, programmatic sells itself. Explained it doesn't. You need people to drive demand. So they're specifically focusing on enterprise sales for programmatic. So we're investing resources, time, money, technology to sell more programmatically. And the attraction isn't so I can beat up my out-of-home peer and take more programmatic from him. We think we can take money from outside out-of-home that's in the non -- just the digital media budget that we're not attracting right now.

I remember early in this programmatic push, there was a little bit of anxiety around the sort of ad tech tax being larger than the sales commission that you would have with a direct sale. Is that still an issue? Like should investors think of more programmatic means a slight margin headwind? Or is it something that...

Not too much actually, and we're still paying commission to the salespeople. So if you're covering Coke and they want to buy something programmatically, we're encouraging you to help them drive demand and not talk against our programmatic offering. So you're helping your customer, however they want to meet them wherever they want to be. To avoid the ad tech tax, we just set a CPM minimum a little higher to cover that.

I see. Okay. That's great. So can I shift to the changes to your guidance? Okay. So I think your AFFO guidance was double digit in the fourth quarter. You went to mid-teens AFFO growth in the first quarter and then low 20s in the quarter you just wrapped up. Presumably, a lot of that had to do with just the strength of the business that we talked about earlier. But what are some of the other drivers that caused such a big shift in the guidance, if there are any other issues?

So the strength of the business is really the driver. The mentioned double-digit revenue growth first quarter, second quarter. We're guiding to high single-digit revenue growth in the third quarter. So revenue is a key driver. I confess. It's -- our revenue growth so far is above our 2026 budget, but ahead of our expectations. We've used that excess revenue partially to join it, driving higher EBITDA. We're investing some of that to help drive future continued growth into 2027 and 2028. As I mentioned, Head of Digital, Head of Data, some other people, some more training. We're accelerating some of our tech investment. So the added revenue ahead of budget, partially offset by slightly higher spend in our SG&A line. And then we kind of modified our interpretation of our MTA expense. It's an incredibly complicated issue. This is -- we've had in the MTA world or MTA accounting world, maybe two 100-year storms in 3 years. I'm sure everyone remembers in 2023 in the spring, we impaired our investment, came out of the pandemic, all our businesses recovered. The MTA kind of flatlined. And looking at our models, we thought there's a very good chance, a high likelihood, we wouldn't recover the spend. We wouldn't get repaid by the MTA for the spend we're making to install the great digital network. So we wrote off that spend. 3 years later, obviously, a surprise, especially in the accounting world, updated model based on performance and focus and some other factors. We're not going to recoup it all, but we're going to recoup some. How do I account for that? What am I recouping against? I wrote off the balance. So with the support and help and input from our external advisers and their advisers, we came to this approach, we're still accounting for the MTA on a franchise cost basis on the minimum guarantee and everything above that breakeven is EBITDA. So our MTA EBITDA is a little higher than we expected. So we never accounted for it differently. We just -- we had to clarify that as we got later in the year and look at the impact in the fourth quarter. So back to your question, the benefit from the guide is mostly revenue growth, higher-than-expected revenue growth, slightly offset by higher SG&A spend and helped by the improvement in MTA EBITDA.

Okay. That's great. The SG&A investments that you talked about that are sort of an offset to the good revenue growth. How should investors frame that? Is that more just like catch-up investment because you felt like you were underinvesting in the past? Or is there really some new opportunity that you see now that the business is on better footing?

So I think a little bit of both, mostly better footing, better visibility. So we're hiring in training, in recruiting, other things to make our employees, both in sales and sales support better at what they do. So that could be a catch-up. We hadn't been spending a lot on training before. We're hiring new skills and capabilities. We have people selling digital. We have a lot of digital inventory, a lot of digital revenue, but now we have a Chief Digital Officer. We have a Chief Data Officer. As I mentioned, the digital is going to hire more digital sellers. So I would say those are investments to continue our growth. We mentioned get programmatic not necessarily to 80%, but programmatic growing faster than our other digital -- our non-programmatic digital business and certainly faster than our static business. And then in tech, I've been here 8-plus years. We're always trying to fix our technologies, whether that's new investment or catch-up. The tech we had last year wasn't working for us. We've signed up for a new CRM. We invested in AdQuick, which came with an operating agreement, and we're developing along with them capabilities from what they can do for inventory visibility and availability and responding to proposals, eventually moving into a self-serve model. So those are all things that we're doing to help us in the future. And I would say, sitting here with my 8 years of history, maybe things we've underinvested in the past.

Okay. That's great. On the last earnings call, you announced this New York Jets partnership. And I didn't know if that was something that was like a throwaway comment because I'm sure it's not big enough to be that needle moving or if it's emblematic of something that you could do with other teams and other markets that is sort of a new frontier. So can you just explain what's in that Jets partnership? And how much should investors think about?

It's a lot of what you just said. It's all things. So it's not huge, but it's great. It's great for visibility. Basically, we're going to sell some of their inventory on and near their stadium, and they're going to sell some of ours to their clients, their existing clients. They're going to introduce us to their clients, [indiscernible] as opposed to us cold calling and saying, "Hey, I got billboards and transit for you," they're going to make a warm introduction. So we'll work closely with them. I think it raises our visibility in the advertising world. You wouldn't have asked me about a random deal for the Jets. We got calls from other teams in the NFL. We're working with 2 NBA teams, a hockey team and I think our World Cup performance raised visibility on sports. So no one team deal is going to move the needle. But if we can stamp those out all over the place, it helps drive more demand. And frankly, whether you're a Jet fan or a Giant fan or in between, it kind of gives you a positive vibe when you're listed as a name sponsor for the local teams.