Okay, we'll get started. My name is David Karnovsky. I cover media, entertainment, and advertising at J.P. Morgan. Happy to have back at the conference, Jeremy Male, OUTFRONT Media chairman and CEO. Thanks so much for being here.
Thank you very much indeed, David. Good to be here.
Sure. Okay, maybe just to level set, you know, it would be great to have you discuss key priorities for you and your team as you look out to the balance of the year.
Sure. Thanks for the question, and, good afternoon, everyone. So I guess as we, you know, as we look forward and think of, our key priorities, and we've, you know, we started, to see some decent growth in transit in, the first quarter, which is, good news. You know, off the back of, you know, a more difficult year last year. So we're certainly very focused on how we can, you know, keep that- keep that growth growing in a positive way. Right now, we're at, hopefully, the, you know, the final stages of, closing our deal for the sale of our Canadian business.
So, you know, we're hopeful that will close over the coming weeks, and that will be, you know, useful from a deleveraging point of view. So that's something we're, you know, I guess you could say we're focused on right now. Outside of that, we're, you know, looking very, you know, much at our automated processes. You know, we're getting some very good growth from automation right now. Our programmatic revenues were up 10% in the first quarter, and we'd like to see, you know, that growth continue. But also in addition to that, we're very focused on automation in general.
Maybe we'll get down into it later on in this conversation, but that gives us the ability to better utilize the space available that we have on our other digital assets by basically us deciding where to push, where to push ads out in order to achieve an advertiser's eyeball objectives. So that's something that's you know certainly you know right front and center of what we're thinking about doing and just generally continuing to execute. Our national revenues were a little bit a little bit softer than we would have liked in Q1, so you know always focused on how we can get incremental national dollars over to the outdoor media.
Great. Great overview to start. Maybe circling back to Q1, I think you had started the year expecting billboard and transit at similar growth rates. The end result, bit of a divergence. Maybe you could speak to what drove the performance there. Are you observing a kind of similar trend in Q2?
Yeah. I mean, there was a couple of points differential. I mean, the key reason for the difference was that, towards the back end of, you know, Q1, you know, national billboard was a little bit softer than we thought, and whereas transit continued to expand. So that was the main reason for the delta in Q1. I would expect that, you know, we will see similar sort of shape as we indicated in our guidance, with transit likely to outperform billboard again in Q2.
Okay, and then you mentioned, you know, a little bit of the performance of national in the quarter. Maybe just talk a little bit more about what that drove the result. Was there something specific to large markets? Anything you could say on the pacing of local versus national currently?
Yeah. I mean, national tends to... By definition, it tends to focus on those larger markets. So, you know, if you see weaker national, you see, you know, our performance in those larger markets a little bit weaker. So, you know, L.A. was a bit softer than we might have expected, and, and also New York. If you dig down into the categories, I think it was also restaurants, telecom, were, you know, down in, in the quarter. As we look towards the balance of this year, you know, A, our comps are a little bit softer on the national side because actually national was, you know, fast-growing in the first half of last year.
We also benefit from the not having the actors and writers strike this year, so that will be certainly helpful, and also, you know, on both our billboard and our transit business. Media tends to be overweight in transit, so you know, so that feels like it should set us up for what we think will be, you know, a good 2024.
You mentioned softness in L.A. on the national side. Is that not related to media, if you're kind of calling that out as a better comp? Is that some other category?
Well, you know, you can— You know, we've talked there about the categories that were down. I think it's fair to say that, you know, with the national business, it can be pretty lumpy.
Yeah.
So if you have one advertiser that comes in and spends a big chunk of change in a given month that doesn't repeat the following year, it can just, you know... It's always had a higher beta than local. You know, local's made up by a much larger number of advertisers, so it tends to have a much sort of smoother, you know, smoother curve. So, you know, if we look at the out-of-home medium as a whole, in the first quarter, I think it was up around 6%. I think numbers from the Out of Home Advertising Association of America were out just last week. So, you know, generally, I think, you know, you'd have to say that out-of-home is in, you know, good shape. It's positive.
Now, do you think the channel, these comments are specific to national, is perceived on the agency side? And what are some of the ways that you work with, you know, the major buying firms to increase the allocations towards outdoor?
Yeah, look, we, you know, we spend our lives, you know, trying to talk to as many advertisers directly as we can, and obviously, their media agency partners to promote the benefits of out-of-home. How do they perceive it? I think they, I think they perceive it as safe, reliable, brand safe. You know, it's what you see is what you get, which is not always the case with the digital ad market. If you look at out-of-home in the U.S., and particularly in the national side, you know, we have a relatively low bar in that the top 200 advertisers spend about 1.8% of their ad dollars outside of the home. And I do think that, you know, if you look to other markets across the world, that's disproportionately low.
So, sometimes it's hard with agencies to really get the message through. They kind of like doing what they've always done. It's one of the reasons that even though, you know, linear TV is in, you know, not having a great time, they still take disproportionately more ad dollars than, you know, they should do if you look at it, you know, on any sort of reasonable basis.
So what's the opportunity there, right? Linear TV, but, you know, you could look at something like radio and print. They're still drawing fairly large pools of money. A lot of that's going to digital, but is there an opportunity for outdoor even to, you know, take a few points of market share? It would be fairly substantial.
There's, there's always that opportunity. You know, if you look back over the last few years, out-of-home has, even in the face of, you know, a very rapidly changing, changing media market, when you look at the, the growth particularly of the wall- of the, walled gardens. I mean, the world of, you know, online internet advertising is not great outside of that, actually. If you look at, you know, radio, and TV, obviously losing share, we've maintained or grown share. I'd like to think that, you know, as we go forward with that, increased automation, with digital becoming a much larger part of, larger part of our footprint, I think that that...
You know, increased automation, I think that could certainly be a catalyst to at least continue to, you know, keep market share the same, if not grow. It feels like in the first quarter, we probably grew market share a little bit, which is a good sign.
So let's maybe take it on in automation. So I think it's automated revenue is about 14% of total right now. That's up from 8% last year.
Mm-hmm.
Should we assume, you know, that this is coming from outside the ecosystem, you know, kind of as you create a more flexible way to buy? Are you kind of bringing over some of your existing buyers? How do we think about that mix and the importance of programmatic in terms of growing share?
Look, I think it's, you know, for us, it, it's super important. Our programmatic revenues specifically grew about 10% in the first quarter. So, you know, that's, that's, you know, a chunk of change. When you drill into that, you know, some of their larger advertisers that we took may well have come through more traditional channels. So, for example, Ford were a big advertiser over the, you know, on the programmatic, on a programmatic basis over the, last few weeks. But also, yeah, we're certainly capturing dollars that we would have never have found with our classic sales force, that have just coming straight in, buying you know, much relatively smaller buys in a very sort of focused way. It's, it, it's...
As we see it, if it's sort of 14% of revenues now, I would expect that automation in general, I think as an exit rate at the back end of this year, you know, will be knocking on the door of 25%-30%.
And some of these,
Digital revenues.
Digital.
Yeah.
Right.
Mm-hmm.
And the marketers that are coming in, you know, you don't have to use Ford as an example, but what are they most attracted to? What is it? Is it the flexibility of the buy? You know, what are you offering them that's bringing them into the medium for the first time?
It's certainly flexibility. I mean, out-of-home was always inflexible in that, you know, as I've said before, you know, I exaggerate when I say it, but you know, you had to print a poster and then, you know, put it from one side of the country to another. And then, not quite a guy with a, with a bucket and paste, but almost. It was just seen as inflexible, and it tend to be bought well in a, well in advance. Whereas now, you know, we can take dollars. We'll be taking dollars on the, you know, on the automated platforms, that'll be literally going up within minutes and hours. So it's...
Yeah, that's very attractive for advertisers who, by preference, like to, you know, would lay down money later rather than earlier.
Got it. So OUTFRONT's target for digital billboard ads this year is 150-200. Can you discuss a bit what governs long-term growth here? How much of this is driven by capital constraint, regulatory, or just you needing to be kind of sensitive about supply in any given market?
Well, it's certainly not capital constraints. You know, when we, when we look at our allocation of capital, actually, you know, allocating towards, digital billboards, particularly through conversions, is the best, you know, allocation we can make. We, we don't convert a board unless we can see 20% IRR, out of the gate, which is what we, regularly achieve, so certainly not capital. The principal, the principal, governing factor is zoning. So not everyone wants a digital billboard at the end of their, end of their street. And, you know, we have to find very creative ways of, of, you know, getting those, zoning permit, zoning, permits through. So that's, that's the main consideration. And then, you know, secondary to that, yeah, will be supply.
Because, you know, you need to you know, you don't want to oversupply a market. I mean, if you, if you had one ad, and then you have eight ads, that, you know, you only need to convert whatever that is, 12.5% of your inventory in a given market to double, double your amount of supply. So we always keep one eye on supply as well.
Got it. And, you know, where do you think you are in the, the digital conversion journey, right? Do you see ample room to kind of continue at that 150-200 pace? And is there any shift you've seen in, in kind of the returns you're doing on, on conversions, or is it steady as she goes?
Steady as she goes in terms of what we can achieve. So we on that IRR metric, it's essentially the same metric that we've that we've had right the way through. Where are we? I would say something like bottom of the fourth or something like that. We, you know, we, we've converted 4% of our digital billboard inventory, and it's now round numbers, you know, 30, 30% of revenues. And the U.S. as a whole at the moment is about 30% digital revenues. If you look to other sort of developed markets, and I'm not drawing a straight line between the two, but if you look to the U.K., it's north of 65%. So, you know, that, that, that I think gives some indication directionally of where we're gonna go.
Because of structural differences between the two markets, I don't suppose that we will get to 60, but could we... If 4% is generating 30%, you know, as we continue to increase, could we get to sort of 10% that's sort of then gonna be maybe driving 45%-50%? That's certainly feasible over the, you know, coming years.
The structural difference you were referring to, U.K., more of a transit market, right?
Um-
Or-
Yeah. I mean, transit is one piece of it-
Yeah
B ecause there you don't have any zoning restrictions. I think the other piece is that there's far more pedestrian-facing digital, and in JFK there's also kind of big sort of retail mall digital emphasis in some of the other markets that we don't see quite the same of here. But, you know, if anyone's been through some of the airports, you know, lately, and you've seen the digitization there, I mean, that's a sign of the opportunity in transit.
If we'll probably talk about the MTA, but if you go down to the MTA now, you can see this incredible digital footprint that we think will, you know, attract, you know, advertising dollars as we go forward.
All right, so let's jump into transit. Growth nicely inflected in Q1. Maybe you can discuss a bit the shape of that demand by kind of region or vertical. And you touched upon this earlier, but when we think about the balance of the year, given the easy comps, what is there to consider, you know, especially with the Hollywood strike impact?
Well, I think, so the thing with the, you know, with that, we, you know, there was no fall season at all for, you know, in the TV market last year. So, you know, we certainly felt the backdraft of that. And, without that, you know, this year, our expectation is that that will, you know, be a revenue driver. One of the other pieces that's quite important for us is that we've literally just linked our digital footprint in New York on the MTA to the programmatic pipes. We're starting to get some traction there.
And we're also in a test at the moment to open up those same boards to what we call our Digital Direct platform, which is where we basically, rather than selling location by location, where we how we tend to sell at the moment, you're essentially selling baskets of eyeballs, where you can just distribute those campaigns to, you know, right the way across your digital platform, to deliver eyeballs that advertisers are, you know, requesting, but as I say, but not necessarily location by location. So gives us great flexibility to maximize, you know, the utilization of our inventory, and also gives us some flexibility in terms of, you know, how we allocate those revenues in terms of, you know, making sure it's good for, you know, our profitability.
I mean, before jumping into the automated, conversation, just it seems like it was a broad-based kind of rebound in transit, right? Just overall demand, has improved.
Yeah, it was fairly broad-based, so there was no, you know, no specific category. You know, it is, if you, you know, if you think about in absolute terms, you know, it's a relatively, relatively small quarter, so you don't need, you know, I think it's $75 million worth of transit in quarter one, so you don't need many millions of dollars, you know what I mean, to make quite a big percentage increase.
Okay. And then, as you just noted, you've now turned on programmatic and automated-
Mm-hmm
F or your digital inventory, and this is below ground, or is it everywhere? Early traction so far, what kind of uplift do you think this could potentially generate?
Well, I think, you know, time will tell, but as well, you know, I would say that, you know, it's gonna be more than a handful of $ million for us in 2024 that we believe we would not have otherwise received. So it's definitely a tailwind and definitely incremental.
Got it. At earnings, you commented on increasing focus on the transit business with advertisers, and I wanted to see if you could expand on that a bit. Is there kind of an internal push on your part to allocate more resources toward this space? You know, just kind of given maybe the relative incremental margin around, you know, transit versus a billboard?
Yeah, look, we're- I mean, we're, we're absolutely focused on growing all parts of our business, but certainly, some above average growth in transit would be, you know, very beneficial in margin terms. As you know, on the MTA in particular, we're below the minimum guarantee, so any growth of revenues on that platform essentially, you know, 90% of it falls to the bottom line. So, because, you know, we don't share any of those revenues with the MTA. So, you know, we've got some small operational costs, but outside of that, it's any dollar on the MTA is gonna be a very good dollar until we sort of, you know, pass through that minimum guarantee threshold.
Yeah, it's fair to say we're, we're highly focused on it.
Over the long- term, I think there was a forecast you gave last summer, you talked about revenue growth in the MTA model of top line 6%. Maybe you could talk a little bit about, you know, what underpins that, those assumptions in terms of ridership. Talked through programmatic before-
Mm-hmm.
Other factors to consider.
Programmatic's certainly part of it. In terms of ridership, look, I suspect that ridership will, it will just generally, you know, continue to creep up, as it has been doing. You know, will the road pricing in New York make any difference? Little, you know, it's a little hard to say, but, I mean, that could, that could swing some, some, if you like, typical drivers onto, onto public transit. But the model that we have now isn't based on, any, you know, stratospheric ridership increase. And in fact, as time goes on, we're talking less and less and less about ridership. I mean, it...
Yeah, it's still down on 2019, in terms of absolute numbers, but, you know, you're still reaching 5 million New Yorkers a day, you know, when you advertise on the subway. And we also have, you know, a much improved product offer now because of that, you know, because of the digital investments we've made over those years. So, I, you know, I say it's not, it's not ridership based. And, you know, yes, you're right, embedded in our model is, yeah, CAGR around about 6% for the balance 5 years of the contract. And, you know, we were on pace in Q1, and, you know, ready to go from here.
You mentioned the airports before. Certainly, when you think about, transit advertising, there's a lot more room you could argue for innovation, right?
Yep.
In terms of the way you set up the right signage within the airports-
Mm-hmm
T aking over specific sections. Can you speak to the opportunity there versus what you'd normally do in the, you know, you know, billboard business?
Well, a billboard business, so you have the zoning constraints, but also outside of particular sign areas like Times Square, you know, you can't have any movement at all. You know, you're effectively all you're doing is rotating a static ad.
Yeah.
Okay? Whereas in transit, I mean, you can do whatever you want. If you, you know, if you go through—you know, if you're going in JFK, you know, when you... In Terminal 8, where you go out to the other pier, and you're surrounded by sound and-
Right
V ision and everything else, and you have, you know, that opportunity. It's—it can be a very exciting medium. You know, we can now—we're now showing, you know, movie trailers on the subway that we were never able to, you know, do before. So yeah, it's very creative. The other thing with transit is that you tend to have a, you know, a longer interface with that ad. So, you know, you can achieve more impact rather than driving past a highway billboard, where you have a, whatever it is, typically an 8-second. You know, if you're on a subway platform, you're typically there for 4 minutes, so you have a different relationship with the ads.
During the quarter, you highlighted a small benefit on the transit side from a contract amendment. Any read-through here to other contracts in that you think you can negotiate, you know, reasonable adjustments, or should we be careful about drawing, you know, conclusions from one amendment to the rest of your transit deals?
Look, it's fair to say that, you know, we, by almost by definition, we inherited a set of sort of pre-COVID contracts. So, you know, they were, they were set at a different time. So as these contracts roll off, it gives us the opportunity to reset terms of the contract to better reflect the, you know, the economics of today. So if transit revenues are, doesn't matter, call it a, you know, 80 rather than a 100, you know, we, we, we will need a higher share of that 80 than we needed of than we needed of the 100, in order, you know, to have enough dollars to make, you know, because our core pricing in terms of sales force, et cetera, et cetera, it still costs the same to run the system.
So it's. We're getting that message through as contracts come up for renegotiation. And, yeah, we've had seen a couple of successes, and we'll, you know, continue to look for those opportunities.
You mentioned before, congestion pricing that could be a benefit to public transit. I'm a vehicle commuter from New Jersey, so I hope you're right. But, from another perspective, you know, assuming this plan goes through, and it does put the MTA on a much stronger financial footing, at least for the near term, does that create any flexibility in that, agreement in terms of the, the way you approach it?
W hat, so they do better so they can - they'll let us do better? You never know.
That would be the win-win, right?
That would-
Yeah.
That would be the win-win.
Aspirative, yeah.
Yeah, look, a number of our transit advertising partners have been very cognizant of, you know, some of the pressures that the transit ad market went through over the last two or three years, and have worked closely with us to, you know, to give us some benefit from improved terms. You know, we continue to, you know, discuss with the MTA, but, you know, they're, they tend to stick by their guns, so we are, you know, we'll see how we go.
Got it. We've got about 10 minutes left. I wanna see if there's any questions in the room. If there are, feel free to raise your hand. No? Okay.
Sorry.
Yeah, right here.
Just a quick one. What do you think the reasons are that outdoor advertising been able to maintain their share versus, like, radios and linear TV been declining?
I think it's one word. It comes down to audience. You know, we don't have audience issues. You know, our audience, actually, you know, continues to grow because, you know, more and more, activities, leisure activities in particular, are outside of the home. So if you look at, you know, radio, you know, that hasn't been the case. Obviously, you look at TV now, you know, eyeballs are falling, and they're becoming increasingly fragmented. So the fact that, you know, well, we're the only traditional medium that doesn't have an audience from it. So I think it's, you know, mainly about that. Plus, you know, the whole sort of digital thing has been, yeah, it was an opportunity rather than a threat for us.
Do you know what I mean? Because as we continue to invest in our digital hardware footprint, and then continue to have the ability to communicate with that hardware platform in a way that is very advertiser-friendly. I think that they're the two principal reasons, I think.
Can we get the mic here?
Can I just ask in terms of renewal risk, particularly with the digitization CapEx that you've spent, does that change when you come up to... 'cause this is, you know, renewal, new generation of renewals. Does it change the dynamics? Because given that you spent on that digital, conversions.
Well, I guess there's two things. If we look, so for example, if we look—we've recently just renewed a contract with WMATA in D.C. And, so if you look at the main differences between that renewal and the contract that we actually... The first thing is it's at a lower revenue share. The second thing is it has a floating minimum guarantee that can go up and down, and is absolutely have, you know, has, you know, a link to service and audience levels. And the third point is that, you know, we will not carry, you know, we won't carry the capital burden. Do you know what I mean? And, you know, typically in a contract. So we, you know, that's...
We modified those terms, and, you know, we can only assume that in the competitive set that we're bidding for that contract, I guess others must have as well, because we renewed it, successfully, so.
Okay.
I think the key thing is that, look, we're very happy to, if you like, undertake those capital improvements, but not be responsible for the dollars associated with it.
Okay. And then in terms of historically, scale was the... Scale was something that the outdoor companies would quote. We have more access to more advertisers, more boards, so therefore, you as an advertiser, you have... Does that still matter now, especially with digital, where it's even a small one, even a small firm with a low number of boards, more number of ads they can show? Does that change the way that advertisers think, does it change the way that you think in terms of what scale, how scale matters?
That's a good question. I mean, if you, if you've got one board and, you know, you're connected to whatever it is, the automated pipes, you can, you can... you know, you don't need a sales force or whatever-
Yeah
A t the scale that we have to get ad dollars. But I think, I think that size and scale will continue to matter. You know, I don't think it's any surprise that, you know, we have the highest national revenues in the business, and our biggest client is Apple. You know, there's a reason why Apple are spending money with us that I think will continue to be there for many years to come.
Thank you.
Go ahead.
Hi, I'm just wondering what your balance sheet strategy is, and, are you gonna cut the dividend perhaps or, or do anything to reduce leverage?
In terms of reducing leverage, you know, we mentioned Canada in terms of that sale. So that's 400 and change of Canadian, so the $300 million US, and that will be used for de-leveraging. The growth that we're anticipating or if you, you know, if you look at the consensus, the growth that, you know, is in consensus, is further de-leveraging opportunity for us this year. We have no intention of cutting the dividend. We, you know, we're a REIT, and our dividend is prescribed in terms of 90% of net operating income, so we will continue at that level. With Canada, there is the opportunity for...
There's no opportunity, there will be a requirement to pay out a capital gain of around $80 million-$90 million, something like that. And when you look, and that's $0.50 a share, round numbers. So if you look at that, within that, we have the option, optionality of paying that in stock or in cash. As we go through the year, you know, our board will consider the options pertaining to that particular, you know, special dividend, to put it like that. But, you know, outside of that, as I say, I think we're going to be naturally deleveraging this year to a point whereby the balance sheet leverage will look pretty different 12 months from now.
This may be one related to capital allocation on M&A. 2024, you're guiding to a similar pace as 2023. That was a bit reduced in the elevated activity in the years prior. What are you seeing in terms of the pipeline at the moment, and, and how do you think that could change as you move into 2025?
Yeah, sure. Yeah, acquisitions are a little bit like buses. They all come along at the same time, and we had that in 2022, in particular. In 2023, yeah, there wasn't that much activity. There are, you know, still some sellers out there, but, you know, maybe a mismatch of, you know, expectations, because, you know, most of the public company multiples have, you know, changed somewhat, and private company expectations haven't maybe totally reflected that. So it's hard to say. You know, something could come out of the woodwork, but where we're sat right now, we anticipate that 2024 will look much like 2023. You know, there's talk of some more activity in 2025.
We'll, you know, wait and see how that plays out.
Last one for me. On margins, you guided your billboard to be up slightly for the year. I would think just given some of the variable real estate costs, much of this, or some of that operating leverage has to come from SG&A. Maybe you could talk through some of the efficiencies to your operating there.
Yeah. So, you know, we think that SG&A will be slightly down as a percentage of revenues from 2023 and 2024. And, you know, the balance will come from our gross margins with, you know, top line increasing beyond... You know, we have, you know, a bunch of what we call fixed leases, but they often have kickers in, 2%, something like that. So, we sort of budget for, without any new assets for, you know, a general sort of creep of a couple of points in our boards. So, but net net, yeah, we think that, you know, margins will drift up.
I think, you know, particularly with incremental ad dollars coming from, let's say, from the automated side, where we can also allocate those dollars more efficiently across our plant. So yeah, all of that helps.
Got it. All right. Less than a minute to go. Jeremy, thanks so much for being here.
Thanks, David.
Yep.
Cheers. Thanks, all.