Thank you very much. Hello, I am Ian Zaffino. I am the equity research analyst here at Oppenheimer that covers OUTFRONT Media. Thank you, everybody, for joining us. With me today is the company's CFO, Matthew Siegel. Very pleased to have him here. Matt, thanks for joining us.
Hey, Ian, thanks for having me.
Y- you know, maybe we start off. For those who are not- I'm sorry, I think I have some feedback on my line. Thank you, everybody, for jo- Okay, sorry about that, everybody. Hello again, I'm Ian Zaffino. I'm the equity research analyst over here at Oppenheimer. With me today is the company's CFO, Matthew Siegel. Very pleased to have him here. Matt, for those who are not familiar with OUTFRONT, can you maybe give us a brief overview of the business and the markets that you operate in today? Thanks.
Sure, Ian. Hey.
Sorry about that, everybody. Hello again, I'm Ian Zaffino. I'm the equity research analyst here at- No, it, it's getting feedback again. About Matthew Siegel. Okay, thank you. Matt, sorry about all the technical difficulties. Matt, Matt, maybe start off, give us a brief overview of the business and the markets you operate in today. Thanks.
Sure. OUTFRONT Media is in the out-of-home advertising business. We have a combination of billboard and, and transit advertising assets. Company's about $1.8 billion of revenue. We have a national footprint, primarily focused on the large markets, one saying NFL cities. We have major presence really in all the in large cities, focusing heavily on New York, Los Angeles, and growing Miami. In transit, we have operations in trains, commuter rail, buses, bikes, also focusing on major cities. You know, the billboard business has been, you know, super strong since pre-pandemic, with a strong recovery. Transit obviously still has its challenges with ridership not returning to its usual pre-pandemic patterns. You know, everything's going pretty well.
Okay, thanks. You know, as far as the, the, let's just say national advertising.
You know.
Describe the market, how it's trended since first quarter, second quarter, maybe what categories are performing well, and which ones are underperforming.
Since pre-pandemic, but a strong recovery and, and that obviously still has its challenges with ridership, not returning to its pre-pandemic patterns. You know, everything's going pretty well.
Okay, thanks. You know, as far as the, let's just say national advertising-
... you know, I think you're asking about national advertising and trends. you know, for us, our portfolio is geared more toward national than m- many of our competitors. Again, large markets, a lot of big brands, use our, our inventory to reach audiences all around the country. you know, for us, national business has been a tale of two cities. The, the billboard business has been very strong. Second quarter, national advertising on billboard up around 10% over last year. Billboard, a little bit of a different story. I, I'm sorry, transit, a little bit of a different story. National is, you know, lower than it was last year, still in its recovery phase from, from the pandemic, so we're a little disappointed with where national's been performing on transit.
Overall, toward the middle of the second quarter, we started to see some softness in the advertising space and, and, especially in national, and that's continued into the third quarter, perhaps exacerbated by strikes. You know, the writers and actors strike, slowing down TV advertising, which is normal this time of year as we go into the usual fall launch season. Again, our national business, we think is better than most, and, you know, we expect, you know, growth in in billboard and our national advertising in the third quarter.
Okay. Any regions that are particularly, you know, facing a lot of weakness or, you know, some that are strong? Maybe help us understand the geographic mix.
Yeah, sure. Our, our large market focus, you know, billboard doing pretty well. New York, Miami, Los Angeles, all up nicely from a strong year of 2022. Obviously, we have problems like others in San Francisco, which is you know, showing some softness in both billboard and transit, but most of our large markets are doing very well versus 2022, and clearly above their 2019 pre-pandemic levels. Transit, a little different, with ridership peaking at maybe 70% of where it was in 2019. Most of our franchises are under the 2019 peaks and still struggling to get back to where they were in 2022.
Okay. You know, and as we look at, like, the mix of, of national and local, you know, remind us what it is currently and, and, you know, what's the path back to historical levels or the historical mix?
Historically, we're about 45% national, 55% local, which is a, a little heavier national split than some others. Most recently in the last quarter, we were 42% national. In the first quarter, we were 40% national. The national business is growing, and local, you know, not giving up the lead so easily. Local's been very solid throughout the last few years. National's a little more volatile, showed good strength last year and, you know, has been slightly outperforming the first part of this year.
Okay. you know, turning to the billboard business, can you talk about yields a little bit? Like, like, how, how are yields in the past quarter, and, and, and what are you seeing going forward? Also, maybe some discussion of static versus, digital boards and how they're each doing.
Sure. The last couple of years, our, our yield, our billboard yield, and frankly, a lot of our billboard revenue growth was coming from rate. Helped with a, a bit of a tailwind from inflation the last couple of years, we've been able to, to increase rate really across the board, digital, transit, and digital static in, in most of our markets. You know, billboard historically has had a relatively low CPM, so we think there's room to increase our, our rate, and that's demonstrated to be, to be true. This year, our rating increases have been a little tougher to, to, to achieve. You know, withholding roughly flat on rate and occupancy, we're getting, you know, some small growth, revenue growth, yield growth, by converting static into digital.
The digital product generally has a, you know, higher revenue than its equivalent static board. Just changing a static board into digital, I'm adding more inventory, I'm lowering the price point, but I'm achieving higher revenue, so that's aiding with our revenue growth. Generally, you know, the flip side, when I talked about you mentioned static versus digital, we're still seeing modest growth in the static business, which we find is very impressive, and that every year and every quarter, we're taking some of our best static inventory and converting it to digital. I'm taking it off the static team, putting it on the digital team, and even the last quarter, you know, we showed a little bit of growth in static with that, you know, existing, you know, remaining inventory.
What's now the pace of conversions as far as, you know, how many boards are you targeting this year and next year? What's really the, the gating factor there, and why you convert, you know, that amount and not more or not less?
This year, we're probably doing in the neighborhood of 100 new digitals- 150 new digitals. Last year, 2022, with a heavy acquisition year, we did about 325 new digitals-350 new digitals. A much larger year than, than we've had in, in, in recent times. We feel comfortable doing a, a little slower pace this year as we focus on digesting that larger volume from last year and keep it going. Next year, probably similar number in the, in the 150 neighborhood. A few governing issues. One, we don't wanna overtax our system. I don't wanna drop too much new inventory, which the digital is effectively, you know, new, you know, new inventory that needs to be sold.
I don't wanna put too much into any one market, any one year, or any one time period, so we wanna spread that out among, you know, 40 different markets. Then it's capital, where I think this is the digital conversion is really the best investment of capital we do. Relatively low risk, very high return, and very consistent in its performance. You know, you may have noticed our leverage is a little higher than we'd like, so if I can divert or slow down some discretionary spending and save a couple of dollars that way, we'll probably do that for this year, you know, and next year.
Those are the two things, kind of pace of business, making sure it's digested, digested, spending capital and, of course, the gestation period, the development. Apparently, not everyone wants a digital billboard at the end of their block, so there's a fair amount of work our, our real estate team needs to do, with community boards and zoning and, you know, lobbying to, to get an approval pipeline. We keep a pretty good solid pipeline, again, it could take between, you know, two and nine months to get some approvals.
Gotcha. Okay. You know, maybe if we could turn to the transit business for, for a second. Maybe give us just kind of a state of the union of, of what's going on there, because, you know, the first quarter, I guess you had some, some issues that you called out as far as the online gambling not repeating and facing tough comps from that. This quarter, you also sort of had some softness in the transit business for, for other reasons you pointed to. If you're back up a little bit and kind of maybe string those quarters together and string all kind of current events together, and maybe even that look together, like, what's happening and what's going on?
Sure. A lot, a lot of stuff's going on. Transit an, an important part of our portfolio, greatly impacted by the pandemic, first during the pandemic and post-pandemic, as people have changed their commuting and traveling habits. Ridership in, in, in most of our-- in all of our transit franchises is down, some cases more than 50%, like San Francisco. Some cases, down 30% like New York. That be-- that is provided a reduced audience, and we've created challenges for generating advertising based on that audience measure. We started to recover from the pandemic in 2021, with transit in general growing north of 20% year-on-year, continued in 2022, with transit growing north of 30% year-on-year.
The MTA, in particular, are by far our largest franchise, growing 30%+ and 40%+ respectively in those two years. We felt very much on the road to recovery, back to and above our peak revenue years of 2019. We saw in the first quarter of this year, transit, the growth of transit stalled. You know, first quarter was pretty much flat, you know, revenue growth year-on-year. We didn't think it was a cause for concern. Obviously, we're focused on it. First quarter is the smallest quarter for us, a seasonal small quarter in advertising in general. Post-holidays, people spend a little less.
Then we came into the second quarter, and we see transit still flat, and our forecast and our pacing for the rest of the year isn't very robust. Clearly, the, the, the transit recovery has stalled, which caused us to take a hard look at a number of our franchises in New York being the largest in particular. That flat first half and the slowing down in the second half, we felt it was a triggering event for us to reexamine our forecast model and see what it looks like over the remaining life of the base term of the transaction, which is from now until 2030.
With that, we concluded, talking to salespeople, looking at data, looking at forecast, that we're not gonna get, we're likely not gonna be reimbursed for the spend that we've made so far to date, through 2023 in our MTA franchise. A similar conclusion in BART, in San Francisco, with their performance. We, I assume all the listeners noticed we took a write-down and impairment charge of a little over $500 million to our transit business in general, focusing on the MTA with a small piece in BART, which that was truly disappointing.
I'm not sure surprising that we were having troubles with there. You know, there's an adjustment and evaluation necessary. You know, I think the ultimate timing and the size is always, you know, a little surprising to those. You know, people don't know what's coming. In addition, the slow performance in transit this year with in the New York franchise, a growing minimum guarantee, you know, has caused the transit EBITDA to be less than we expected and, you know, less at this point than last year. We also felt the need to change our full year guidance. We reduced that notably as well. Just, you know, kind of who we are.
The performance in our transit business has disappointed and caused us to make some public statements and adjust our financial statements accordingly.
When we look at the transit slowdown, is it purely just driven by national, or are you seeing actually advertisers move away from the media?
I think generally the slowdown is national. National is a little more volatile. Like I mentioned, New York was growing at 40% last year, which, you know, driven by, by national. This year, national was down year-over-year, and our local business in New York transit is up. You know, so it's, it's a bit of a large advertiser phenomenon. We're taking a number of steps this year and continuing into next year to hopefully improve that. We do expect to connect our transit, our New York Transit digital screens to programmatic platforms later this year, and hopefully that generates increased demand starting in next year. We're working on connecting Geopath audience data directly to our operating system to make it easier to transact with us and by us.
We're doing a ton of work in, in marketing and outreach to agencies. You know, just to, you know, reaffirm, let them know that there's four million people on an average day in the not in the summer, but in, in, you know, three seasons of the year. In, in the subway, the weekends are pretty much back to the ridership they were in, in 2019. There's a, the biggest pool of audience in the country still, even with lower, lower ridership. We're hoping to gradually encourage national advertisers to step up their pace in transit.
Okay. Then on the MTA specifically, remind us how much of your transit revenues come from there. Then I guess if we look at the profitability of just the transit in general, it was well, relatively break even, call it. Where was the MTA, you know, in relation to that? You know, directionally, I mean, exactly.
you know, say the last 12 months or, you know, last year, the MTA revenue was more than half of our transit revenue overall. It's very important. Last year, the MTA on its own was EBITDA positive, so the rest of transit was EBITDA negative, with allocated costs and things. MTA this year is gonna be, I think, roughly flattened revenue, with the minimum annual guarantee growing from an inflation adjustment. It'll be closer to break even. We said in our earnings call last week that transit will have a $15 million-$20 million EBITDA loss. That'll come from the non-MTA franchises. The MTA revenue was again, flat. Last year was around $200 million.
The MAG this year is about $147 million, which is $135 million of regular contractual MAG level after adjusted for inflation, plus almost $12 million that we're carrying forward from an amendment in 2020. We had a minimum guarantee shortfall in 2020 that the amendment of the MTA allowed us to push forward and spread over 2022-2026. We're paying 1/5 of that in 2023.
Okay. So, and then after that, you then have the CapEx. I, I know it comes down, but-
This year, we think the CapEx will be in total, you know, $60 million-$70 million. We've spent about $20 million so far, so maybe another $40 million or $50 million in the back half of the year. Next year, similar number, another, you know, $50 million or $60 million, which will bring us to the end of our initial deployment. You know, the good news there is it's, it's mostly spent. If you do go underground, you see the screens on the Digital Urban Panels, you know, across the city. You know, the inventory looks great, and it's mostly spent. You know, we think a lot of the spend is behind us. Going forward, we expect to have $30 million or $40 million of annual replacement CapEx.
you know, those screens don't last forever, and in some stations and, you know, indoor, outdoors, some of these stations and areas are a little less hospitable, so the screens, you know, may need to be replaced. That's, you know, capital that also is part of our, our, the project.
Given the state of the MTA, what are your alternatives? Maybe just not the MTA, just because it's the largest. What are your alternatives here for maybe Transit MTA? Any opportunity to actually just, you know, exit, and would you want to do something like that?
Look, the, the transit business is attractive at the right price. The problem we have right now is the, the contracts are generally pre-pandemic, and designed for a different audience and different obligations, and the audience now is, is lower. You know, immediately what we're doing, we're in discussions with the MTA on potential amendment, similar with BART, that's, that's smaller. You know, MTA, we, we, we, we have a contract and, the intent was all along for the MTA to pay for the screens and the revenue share with the mechanism we were using, we are using, to fund those screens. Obviously, the revenue has come up short of everyone's expectations for reasons I think beyond, you know, you know, beyond our control, beyond the MTA's control.
It's just that something happened, and we're trying to figure out what the, what the appropriate, you know, rebalancing might be. You know, there's not a lot, not a ton of leverage there, but, you know, we expect to talk to them about, you know, the MAG level revenue share, capital, and, and tenor, and see if there's a, a mutually agreeable solution. In which we're hinting like, could we walk away? You know, I'm not sure we, we want to. Certainly if, you know, the current contract is not attractive and we can find an alternative, we'd pursue it. We, we do have a, with the MTA, we have a letter of credit posted and a guarantee, which would make walking away financially unattractive.
There's probably other, you know, things we could consider in the, in the corporate finance world, but probably premature for us to, you know, go down those paths or that path. You know, they're not particularly attractive. You know, but there's things we, we could, that we could ponder. Again, the, the contracts are challenging. You know, over time, as, as each contract comes up for renewal, MTA is not till 2030, but we have a, a couple of, you know, material renewals coming up. One is, WMATA in the middle of 2024. We're gonna make sure that we don't sign anything without improved economics, improved flexibility, obviously force majeure and some mothership language, very important to us, or, you know, on a, on a case-by-case basis.
Based on the facts, facts, and circumstances, we may have to exit certain franchises that don't meet our updated, revised, return hurdles.
Right, right, right. And, and, I guess with the MTA, does it make sense to maybe find a partner for that, or is, is that really not an option, or?
I think it's an alternative. Maybe right now, it's a, it's a tough partnership. You know, people, you know, don't necessarily wanna stand in our shoes or what our shoes are standing in. I think you can envision a lot of these municipal franchises with a financing partner. You know, our core competency is generally selling audience, selling advertising, and, you know, you know, whether it's on billboard or transit. You know, we think we're pretty good project managers, and we did a good job getting screens on walls and on trains on the MTA, but maybe there's someone better served, different capital structure, different skill set, whose core competency is project management and construction.
That's probably something for the future, as, as these transit franchises and these new contracts come up for renewal and, you know, the world's probably a different place.
Gotcha. Okay. You know, just more broadly speaking, maybe we'll move away from transit for, for right now. Yeah, I'm sure it's a sore point. On, on just the out-of-home marketing in general, you know, what's sort of your projections as far as what you think it could grow? You know, where is it taking share from, how long can it continue to do so?
Fair question. Since really 2018, the out-of-home market, you know, has been taking share with an obvious disruption from the pandemic. It's, it's a very low share of the U.S. advertising business, so small growth, I'm not sure is causing some of the internet giants to, to, to call emergency board meetings. You know, without the ability to, to, you know, trace funds, it's probably clear we've been taking some share from the other old line media companies: TV, print, and, and, and radio. You know, and I, I see no reason that wouldn't continue. You know, some of the audience problems that those media are having or some of the other technical changes that they're experiencing aren't really impacting the billboard business. We think share gains can continue.
As I mentioned earlier, you know, we're, we're pretty much the lowest CPM on the block, so, you know, we could find some, some room with continued rate improvement. Then just, for us, the revenue growth from continuing to convert from static to digital, that helps revenue and helps, you know, operating, you know, margin. The digital is a, is a better, better margin product. I think all, all bode well for the continued health and growth of the billboard business.
Okay. That, that, that's very helpful. If anyone has any questions that they wanna put into the chat, you know, please do so, or you can send me an email. I'll get those questions asked for you guys. You know, if we were to turn our, our focus to M&A, you know, what does the environment look like now? Where have multiples been heading? How's competition for bidding for some of those assets? Maybe, you know, what type of assets and what type of markets would you be interested in?
It's a big year. Last year, we had a big year. Lamar had a big year. Some others, you know, you know, did, did a lot of activity, both dollars and, and volume. Much more this year, we haven't entered into any new acquisition agreements. We're closing a few things that we're committed to in 2022. Frankly, I think that low volume is likely to continue into 2023... I'm sorry, into 2024. You may have noticed that, you know, our multiple has declined. You know, the public multiples, in my view, reflect investor view of value. I think the multiples in the private market may be a little higher, and sometimes the bid-ask spreads don't match up.
For us, in particular, you know, our leverage is higher than we're comfortable with, so, you know, we're likely, not just for valuation, but also for financial allocation reasons, could be but less active and focused on reducing our leverage, you know, for the next few quarters with organic growth and maybe some other steps.
Okay. You know, and as far as... You know what? Ashley's got a question online, so just let me just ask this. Sorry, it's a MTA transit question.
That's all right.
MTA transit revenues make up 50% of total transit revenues. How much revenues does San Francisco contribute to the total transit revenues on a percentage basis?
San Francisco is, you know, less, less than 5%.
Okay. Okay, and,
The MTA is the elephant in the room, virtual rooms or real rooms.
Okay.
Everything else is pretty small.
Perfect. Now if we were to just to go back to, capital priorities, capital allocation, w- walk us through the mechanics of the dividend right now. You know, how much are you required to pay? How much are you, are you actually paying, and why are you paying this amount versus what's required?
That's where, as, as you know, we're, we're a REIT, so we have a requirement to pay 90% of our REIT taxable income. The billboard business is primarily in the, in the REIT subsidiary, the QRS Qualified REIT subsidiary. You know, a chunk of the transit business, maybe half of the transit business is in the TRS, the taxable REIT subsidiary. So the, the billboard performance generally drives our REIT requirement. We have some carry forward from, from 2022, whereas we, the dividend we were paying, you know, for the full year of 2022, was a little less than our, our REIT requirement. Not, not low enough to hurt our REIT qualification, but, you know, less than required, and we have a requirement to catch up, so we have some carry forward into 2023.
That carry forward, plus our $0.30 a quarter dividend, you know, drives a need for pretty close to $1.20 in the year. That'll probably leave us a few pennies above a required level. Not enough, I think, to, to, to change anything, but we'll clear out our, our carry forward and end the year with a, a clean slate going to 2024. The REIT structure is, is great, and that, you know, you can minimize your, your taxation and a corporate finance balance sheet management, you lose some of your flexibility of what you can do with your, your free cash flow.
Right. How do you now think about, you know, the dividend into next year? I mean, would you wanna keep it at that $1.20, even though you didn't have to pay $1.20 this year, you did? Would you wanna keep it there, or would you bring it back down to, like, what's just kind of minimum required?
We think our requirement for 2023 is pretty close to the $120. You know.
2023, okay.
Yeah, I, we, we don't think we're overpaying, based on our forecast, more than $0.02. Next year, I, I expect our billboard business to continue to grow, which will grow our EBITDA, which is a good proxy for earnings in our TRS. It's, it's likely we'd have a requirement to grow our, our dividend. You know, it'll, it'll depend on a number of factors, but billboard performance will be the driver. You know, I'm not sure we would, you know, increase the dividend early in the year before we, we get a, a better handle on the full year impact, the full year performance. It's likely we'll have to raise the dividend from $0.30 a quarter at some point next year.
Okay, even though the $0.30 a quarter includes some catch-up from 2022?
Yes, it did. Not a lot of catch-up, but, you know, yeah.
Okay. Okay, how are we thinking about leverage here? Is it just a matter of getting EBITDA back to where it should be? Is that really the right?
I think, as they say, right, it's never too much debt, it's always not enough EBITDA. That's certainly the case with us. Again, somewhat disappointed and a little surprised by the stall of transit revenue, which led to a shortfall in our expectations of transit EBITDA. We do think we'll get back on EBITDA a better EBITDA growth path in 2024, and that'll lead to some, you know, de-levering. You know, our, our calculated, our, our defined, you know, leverage is 5.3x, which is higher than we'd like. You know, I think we're less worried about covenant concerns. We can, we can see our covenant from here.
I don't think we're that close. The revolver covenant, it's an incurrence test, so even if we, we were higher, we could still borrow under our revolver, which is unused, and we could still refinance existing debt. You know, it's, it's not as not as big a concern as some other covenants might be, so we feel somewhat comfortable. Again, I don't want anyone to think we're casually sitting at 5.3x leverage and, and thinking we're fine. We'd like it to go down, and it's one of the reasons we're gonna, you know, slow down some discretionary spend to help move that south.
Okay, perfect. All right, those were my questions. Matt, if there's anything you wanna say, to kind of wrap it up and, you know, we only have a couple of minutes left anyway.
Wrapping up, and, you know, we feel great about our, our, our billboard business, recognizing our transit business has challenges. We're, we're, we're probably spending more time addressing those challenges. Hopefully, some of our initiatives, whether it's discussions with the franchise, operator, the franchise, in cities, or continued work to improve our execution and our technical capabilities. We look forward to 2024 and seeing improvement all around.
All right, Matt, thanks again for, for attending. This is really great. I'll let you get back to your one-on-ones.
Ian, thanks for having me. Speak to everyone-
Thank you.
... very soon, I'm sure.
Yes, absolutely.
All right.