Get started. 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. You are stuck with just with me. He is out sick today. Had a tough weekend.
All right. No worries. We are just pleased to have you. 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. What I mean by that is, even if I back out the tailwinds from one time or episodic things like political or World Cup, the underlying growth that is happening for you guys at OUTFRONT, that is happening at some of your peers, is phenomenal. It is the best growth maybe. I am going to strip out the post-COVID quarters because that was sort of crazy, but just normal economy, the growth is really good.
Yes.
My question is, what has changed? What is happening?
I think it's a number of things, and we've observed the same thing. We've been not as surprised as you are. We think we're impacting some. Some of it is, we saw in the first quarter, the market is coming toward out-of-home. You saw all three public companies report good numbers, comparable to each other, comparable to our expectations. In the second quarter, we think we outperformed and distinguished ourselves. There was some help from World Cup, certainly. 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 it probably, I would 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. 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. For years it's been the cheapest CPM, which imperfect metric, but still a fact, and that gives us, I think, a runway which we're taking advantage of now and probably into the next few years, to catch up and on a good value. A lot of things are happening all at once. We think we're contributing and frankly, Nick Brien'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's 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 really 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 someplace else.
Right.
It is real, and we are benefiting from that. We are pushing that. In addition, we are spending more time on what we call experiential. Some temporary things that we are bringing out. 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 is much more in real life than we have been in the past. That, for us, that is not driving as much revenue or earnings as we would like it, but it is driving a lot of discussion, a lot of marketing. People taking notice again at our media and say, "Oh, we can do some interesting things." 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 is meaningful, or is that more noise? I mean, I am sure it is a little bit of both.
Look, it is certainly meaningful. Whether it is AI, retail media networks, anyone with audience. We have had calls from retailers and others. "Can you help us sell advertising?" 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 cannot feed everybody.
Okay.
But we think there is certainly opportunity for us to gain share, and not just within out-of-home.
Right.
Out of home to gain share in media and us to gain share within that increased share.
Okay, great. One of the things that we do every year is we do this 10-year retrospective where we try and see where the industry's growth coming from. Not OUTFRONT specifically, just outdoor overall. Over the last decade, it always comes back about the same number, where it's a third of the growth comes from converting static to digital. A third of it comes from tuck-in M&A, and a third of it comes from same-store static billboard growth. 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. Yeah.
Pockets, but smaller relative to your peers. 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, when we get on the M&A side
Sure
Our investment in the MTA over the years, especially since. We're not going to recoup all the spend. Could count as M&A militarily. It's investment.
Sure.
I wouldn't put them in the same line.
Yeah.
We've been investing in our business. 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. 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. Everyone's favorite organic EBITDA growth over the last year plus has really helped to bring our leverage down to pretty close to the low end of our range. We feel very comfortable in getting back into more material M&A. We've been doing tiny tuck-ins, twos and threes, that don't really move the needle much. They're just inventory. We're looking at a bunch of things.
We think there are some things that are not for sale yet, but that will be. We expect to participate prudently, but a little more aggressively than we have in the past.
I think I have $200 million-$300 million in my model for M&A.
It may be premature to say a number because the other guys put a number out, and they have been saying that number for a while. But we think we have very good financial capacity, financial flexibility, and the ability to stretch the lever 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? Do you think that is something that you may do or should do to open up the envelope of potential-
That boils down to the REIT inner workings. An UPREIT is as a REIT, who do not 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 is a one-year minimum, but it is negotiated. 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.
Okay.
Paperwork, some legal fees. Frankly, the first counterpart or the first target that we use will probably benefit from being the counterparty, get their specific terms that they want included.
Okay.
We would put together an UPREIT as soon as something material came along.
Okay. That is great. Can I shift to programmatic?
Sure.
You mentioned earlier that you guys are leaning a bit more into programmatic. What is it that when I look at the share of all advertising that is done programmatically, it feels like out-of-home still has a relatively small percentage that is 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 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.
Right.
A lot of the online and stuff grew up in the programmatic world. Out-of-home is more 20/80. I am not sure we will ever get to 80/20, but even want to go directionally toward that. First, a lot of our inventory and a lot of our revenue is still static.
Sure.
While it can be sold programmatically, not nearly as easy and not nearly as beneficial. A lot of programmatic depends on better measurement and metrics. Our industry is behind where it should be. It is slow to adopt and improve that. As we continue to improve that, I think that will get better. The percent of programmatic will go higher. For us, in particular, we hired, the middle of this year, a Head of Digital to kind of push programmatic. He is putting us on more platforms. He in turn is hiring two programmatic salespeople, which once in finance I complained, "Why do we need salespeople? Programmatic sells itself.
It doesn't. You need people to drive demand. They're specifically focusing on enterprise sales for programmatic. We're investing resources, time, money, technology to sell more programmatically. 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 a 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? Should investors think of more programmatic means a slight margin headwind, or is it something that's
Not so much. Actually, we're still paying commission to the salespeople. 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.
Okay.
You're helping your customer however they would 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. Can I shift to the changes to your guidance?
Sure.
Okay. 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.
Yeah.
What are some of the other drivers that caused such a big shift in the guidance, if there are any other issues?
The strength of the business is really the driver. As I mentioned, the double-digit revenue growth first quarter, second quarter, we're guiding to high single-digit revenue growth in the third quarter. Revenue is a key driver. I confess, our revenue growth so far is above our 2026 budget, and so ahead of our expectations. We've used that excess revenue partially. We're enjoying 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 are training. We're accelerating some of our tech investments. The added revenue ahead of budget, partially offset by slightly higher spend in our SGA line. Then we modified our interpretation of our MTA expense. It's an incredibly complicated issue.
We've had, in the MTA world or in the MTA accounting world, maybe 200-year storms in three years. I'm sure everyone remembers in 2023, in the spring, we impaired our investments. Came out of the pandemic, all the businesses recovered, the MTA kind of flat-lined, 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 were making to install the great digital network. So we wrote off that spend. Three years later, obviously a surprise, especially in the accounting world, updated model based on performance and focus and some other factors, because 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, since I wrote off the balance?
With the support and help and input from our external advisors and their advisors, 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 had to clarify that as we got later in the year and look at the impact in the fourth quarter. Back to your original question, the benefit from the guide is mostly revenue growth, higher than expected revenue growth, slightly offset by higher SG&A expense, 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 under-investing in the past? Or is there really some new opportunity that you see now that the business is on better footing?
I think a little bit of both, mostly better footing, better visibility. So we're hiring and training and recruiting other things to make our employees, both in sales and sales support, better at what they do.
Okay.
So that could be a catch-up. We hadn't spent 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. I would say those are investments to continue our growth. As we mentioned, we get programmatic now at least 80%, but programmatic growing faster than our other digital or non-programmatic digital business and certainly faster than our static business. Then in tech, I've been here 8+ years.
Yep.
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, availability, and responding to proposals, eventually moving into a self-serve model. Those are all things that we're doing to help us in the future, and I would say sitting here with my eight years of history, maybe things we've under-invested in 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. 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.
Okay.
It's all frames. It's not huge.
Okay.
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, closer as opposed to us cold calling 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 if it wasn't the Jets.
Right.
We got calls from other teams in the NFL. We're working with two NBA teams, a hockey team, and I think our World Cup performance could raise visibility on sports. No one team deal is going to move the needle.
Right.
If we can stamp those out all over the place, it helps drive more demand. Frankly, whether you're a Jets fan or a Giants fan or in between, it kind of gives you a positive vibe when you're listed as a name sponsor for any of the local teams.
Do people think about this Jets inventory as the inventory that is around and getting to the Jets stadium, or it is broader than that?
Probably more of that, and broader than they have their stores in Manhattan.
Okay.
We had the kickoff of this agreement in Transit.
Okay.
You will see more Jets advertising, whether it is earned media or purchased.
Okay
within our properties. We are very big in New Jersey, especially northern New Jersey. I am sure you will see some benefits for both of us in and around Meadowlands, and I would not be surprised if you see some similar stuff eventually with red and blue, not just green and white.
Okay. Shifting to digitization. You guys talk about converting maybe 100, 150 boards a year or something like that. I always do the calculation. Here is my question. How far can this digital conversion go? Because it feels like when did you first start converting boards to digital? 2009 or something? Is that?
Yes.
Okay.
We are 16 years in.
Okay. How far can this go? Whether that is 100, 150 boards a year. Are we in the second inning? Eighth inning?
Probably in the fourth or fifth inning.
Okay.
The issue as a governor I look at is really percent of revenue. We have 36,000 static signs. We are not going to convert them all. Some of our biggest advertisers prefer static signs. We are always going to have some, and static is going to barbell. We have the iconic locations on the West Side Highway and Soho, the Flatiron Building, and turn left, turn right, near Joey's Diner and Bob's Chevy.
Yeah.
Those are going to stay, and there is all kinds in between. Our Digital revenue is about 30%-35% of our overall revenue. Probably next big milestone might be 50%.
Yep.
Which is what we see in Europe and Australia, and maybe more advanced digital. I look at the governor as how much Digital revenue we can put on. I would see our inventory maybe going 10% Digital. Right now, we have about 2,000 digital signs out of that 36,000. The 36,000 of them coming down, which we trade when we do a new digital, we often trade more than one for one.
Sure.
The municipality might say, "Take down three statics and I'll give you permitting for one digital," or you take down a bunch of smaller ones, smaller posters. So the denominator goes down, the numerator goes up. So I would think maybe something more like 10% overall. Whether it's 12% or 9%-
Yeah
I'm not sure.
Okay.
But still plenty of room. You mentioned on the Digital, and we started pointing out in our AFFO guide, and I'm sure all the others do it since 2009, not all these digital screens are designed to last forever. As a matter of fact, none of them are.
Right.
We started proactively replacing, taking some down. Not because they are old, I am not a young man myself. But just over time, keeping them fresh, keeping them looking better technology, they shine better. That is going to be an ongoing part of it. We are not going to grow that in our maintenance CapEx, have an ongoing cost of our AFFO measure to basically keep our plans looking great.
You are saying investors should not be increasing maintenance CapEx demonstrably, even though you are swapping out older digital boards?
Correct. We have been spending now, we are going to keep spending that.
Okay.
If the other guys are saying they are not-
Okay
I am not sure they are truthful.
I cannot remember the number we used to use for a digital conversion. $200,000, I think was the number.
People use that $250,000. It has not really materially changed much. If anything, the cost of the steel cost went up with tariffs. We got tariff refunds. The screens are similar price, better screens with technology, steel, and employee-
Okay
contract costs.
Still, is it 20% IRRs? Is that what you guys sort of targeted?
Yeah.
Okay.
We started with you getting revenue lift of 12 x. The first digital is very exciting, from the second one, the third one, you have that kind of a quality pyramid.
Sure.
Since I've been here, it's pretty much been 4x revenue lift. I'm adding seven flips. Instead of adding one static, I'm going eight. So it's a different, slightly lower price point.
Yep.
Still very attractive. What I like most about it, in fact, it's the least risky thing we do. We take the location that we know. We know where there's demand, we know where there's interest, and we're just putting more inventory on. With the push and the growth in programmatic, it should make it even more attractive. We can package it more easily with other types of media.
Is the only risk with Digital just that the contract lengths are shorter, so it could inject more cyclical volatility in the business? Is that the only sort of downside?
Yeah, I am not even sure that is a downside. The flip side of that argument is I do not have as much frictional emptiness. So when I am static, if I put something up for a month January 1st and it ends January 31st, and my next order is for February 15th, I have two weeks I have not sold.
I see.
That same flight schedule, I can do four weeks of digital. I can squeeze in two weeks of digital and then start something else.
Okay.
I think it's much more flexible.
Okay.
We haven't really seen the volatility related to Digital, but we did see in the pandemic, on short notice, people were able to cancel.
Right.
Technically, we could hold them and say, "Hey, you have a 60-day notice period." We thought long term it didn't make sense to do that. It's both beneficial. They can call out Friday and say, "I want to get this up on Monday." Great. Or they can call up on Friday and say, "I changed my mind. My video game is ready for publication on Monday. I want to hold this off.
Okay.
Flexibility, I think for us, net, is good. We have to monitor it.
Okay. Any questions from the audience? Happy to take them if you have one, just raise your hand. We'll get you a microphone. Can I ask one question about Transit contracts? This is-
Sure.
I know your Transit business is doing well right now, but I think if I polled everyone in this room, 95% of investors would say, "Yeah, we don't really like Transit." Right? Like, Transit has these minimum guarantees and it's a lot of CapEx investment.
You could have done that poll.
And you'd be in that poll. Okay. So when we get to the- I remember when I think you guys ran into some trouble with the, this is before you guys, I think, were public, but when you were a part of CBS. Some problem with the London Underground. Why? Because the great financial crisis happened, and then this time it was because of COVID. And when I've asked in the past, it's sort of like, yeah, but it's integral to our messaging to advertisers. It's where the young people are. It's where the advertisers want to be, therefore, we're going to keep doing this. Is that still true, or do you think there's been sort of a shift either for your company or for the industry overall, that these Transit contracts just aren't that attractive?
For us, a bit of a shift in that we are embracing Transit now. The marketing people tell me maybe it is a bad visual that, the sexism in the subway. I am not sure you want to picture that. You can do more things creatively underground than you can up on a billboard.
Oh.
I think what investors look at, they look at the finite tenor, whereas billboard, we have often renewable rights, not forever, but for a very long time. Transit is finite. It is competitive, so you are rebidding against others who want it. In addition, it is accepting of a lower margin. As you are pointing out, it is more volatile. Recessions, with the pandemics and crises behind, hopefully that does not recur too often. In a recession, Transit gets hurt more than Billboard. To me, again, I am critical of Transit, but I see right now we are enjoying the positive side of that volatility.
Yeah.
If the audience is great, the franchises are good, the ability to be creative is great, and you can tie it into your other inventory. The problem is the contracts.
Right.
What we ran into the MTA with the construction and the write-off, we are generally out of the construction business. We are happy to screw signs in. We are happy to purchase signs. We just do not want to be financially responsible for that. We think that should be a different part of the business. We sell advertising. We sell it very well. We sell creative opportunities. For us, audience great, franchise is great. The contracts need to be improved to reflect something mutually beneficial for us and the municipality.
Okay. In the future, if you do another MTA contract, the structure could be different.
Sure.
Okay. Than it is now.
With something that everyone in this room can understand.
Yeah. Understood.
It's incredibly complicated. It's something where we're happy to sell the advertising.
Right.
We're happy to give them a return.
Yeah.
If they want more screen, we'll make it happen. We just don't want to be that levered to boom or bust based on construction.
Okay. That's great. Those are all my questions. One last check for the audience. Any questions from the audience? All right.
Yeah.
Thank you so much.
Thank you.
It is great.