Outfront Media Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Good day and welcome to the Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Greg Lundberg. Please go ahead.

[Gregory Lundberg:]

Good afternoon, everyone. Thanks for joining our 2020 fourth quarter and full year earnings call. On the call today are Jeremy Male, Chairman and Chief Executive Officer; and Matthew Siegel, Executive Vice President and Chief Financial Officer. After a discussion of our financial results, we will open the lines as usual for a question-and-answer session. Our comments today will refer to the earnings release and the slide presentation that you can find in the Investor Relations section of our website, outfrontmedia.com. And after today’s call is concluded, an audio archive will be there as well.

[Jeremy Male:]

Thanks, Greg. Good afternoon, everyone and again thank you for joining us today. Let's begin with a quick look at some key figures on Slide 3. Total revenues were down 31% or 29% on an organic basis, slightly better than our guidance. U.S billboard improved more than we anticipated, driven in particular by positive growth in digital billboards. On the transit side were ridership is still lacking, our revenue declines were largely unchanged. Like you, we are very encouraged by developments surrounding vaccinations, the lifting of restrictions, sports coming back and a gradual return to normal. And we look forward to posting growth in the second quarter, and the rest of the year. Our cost initiatives help drive another contraction in the OIBDA loss rate to 41% and as opposed to 53%. Both of these were nicely ahead of expectations for the quarter due to our better billboard results. If you turn to Slide 4, the overall shape of our recovery out of the pandemic continues to improve on every metric in this table. Also notable here is that we generated improved free cash flow and increased our cash position once again. Now let's look at revenues in a little more detail on Slide 5. This is a new view of our U.S billboards business broken down into a couple of different pieces. Going into the pandemic, we saw digital revenues declined more quickly than static, when we told you that digital would likely recover more quickly on the other side. Well, they did, as you see here in the yellow line, which return to growth. It's a great 2020 trajectory, reflecting increasing confidence and some terrific new digital inventory. You may also recall that last quarter, we mentioned that our smaller markets were down just 14%. We thought it might be helpful to show graphically that this contracted to just 4% this quarter as you can see from the purple line.

[Matthew Siegel:]

Thanks, Jeremy, and thanks, everyone for joining our call today. For the third time this year, we were able to remove around $100 million from our expenses on a year-over-year basis as you can see on Slide 12. The largest contributor was a $50 million reduction in transit franchise expenses, which will lower to a combination of lower revenue shares, and our ability to convert some minimum annual guarantees into revenue shares. We also had a $50 million reduction from the sale of our sports marketing business, which drove the decline in post income maintenance and other. Most of the SG&A reduction which from our continued restrictions on discretionary expenses and other steps we took at the outset of the pandemic. Billboard lease expenses were lower due to lower revenues, and also due to our renegotiation with landlords. Lastly, corporate was down primarily on lower compensation rate of expenses. Before we turn to OIBDA, I want to explain an important presentation change this quarter. We are now classifying lease acquisition costs into our SG&A expenses instead of an amortization expense. These costs are commissions paid to our sales people for signing billboard leases with advertisers. We hope the time is right to move these into SG&A, and therefore above the OIBDA line, because this better reflects the digitization of our business. This has no impact on AFFO, free cash flow, nor debt covenants, which use a different definition of EBITDA. The appendix of our earnings deck includes eight quarters with this classification and in fact, across our segments. Collectively, our total expense improvement helped trim our OIBDA loss to 41% as you see on Slide 13. What remains noticeable in this year-over-year bridge is how significant revenues are to our OIBDA story given our fixed cost base. Slide 14 breaks OIBDA down into its components. Transit OIBDA remain slightly negative as it has since the pandemic began. Billboard's increased weight, including higher margin digital billboards also helped push total OIBDA margins up to nearly 25%. Capital expenditures on Slide 16, we're still down significantly from last year, driven by reduced growth spending. We added 31 digital billboards to our portfolio during the quarter. Our total CapEx came in just shy of a $55 million guidance. As we look at 2021, we expect total CapEx of around $85 million in total, including $55 million of growth CapEx, which will be back to our pre-pandemic levels. And we expect to add 150 to 200 digital billboards to our portfolio this year, similar to 2019.

[Jeremy Male:]

Thanks, Matt. Now let's turn to our outlook on Slide 19. Right now as we look at the first quarter, our total revenue expectation is to be in a very similar range for the full quarter, down high 20% to 30% on a year-over-year basis, adjusting for the sports business sale. Not a lot had changed in the world as our business was being booked for the first quarter. But as you would expect, both our U.S billboard and transit businesses will be strongly in the black for the second quarter. And looking further ahead, while we don’t expect to recover our 2019 revenue level in '21. We do believe we'll make good progress, especially on billboard. As I mentioned earlier on the call, our larger markets will be very important to driving our recovery. You've heard us say many times that we remain firm in our strategic belief in urbanization in the future of big cities. Slide 20 share some anecdotal evidence that big cities are coming back. Interesting to the apartment leasing statistics for Manhattan. After a bleak year, they were up 94% in December. As cities and offices open up further, they may not be exactly as they used to be, but they're certainly going to be very different than they are today. You may have seen comments today from David Solomon of Goldman Sachs, saying that their post-pandemic operating mode isn't going to be vastly different. And he described today's work-from-home environment as an aberration. He wants everybody back at the office. And the Wall Street Journal has a story today about Facebook's big plans for their new Midtown Manhattan office. Sure, travel patterns may change, but we've been sharing data with you showing how fluid audiences are, especially above ground. The important thing is that our portfolio of assets in key markets means we can follow shifts in urban mobility from the highways to neighborhoods, to shopping and business districts. And as the year unfolds increasingly also on public transit. Slide 21 showed some recent industry research indicating that 68% of consumers are experiencing digital device turnout, while I for one have total sympathy. People are desperate to get out of their homes and 65% of them do so as much as possible. And nearly half of them noticed out-of-home media more than they used to.

[Operator:]

We'll go ahead and take our first question from Alexia Quadrani with JPMorgan.

[Alexia Quadrani:]

Thank you very much. Just a couple of questions. First on the amended agreement with the MTA. Curious why they didn't give you the same relief in '21, given ridership levels have sort of stayed down depressed on the MAG. And I'm wondering, I know you said talks are still ongoing, but wondering if we should assume this elevated level of payments this year will remain in effect in 2022? And then just the second question, if you can really just elaborate on your guidance for Q1, just sort of generally, not just transit in the full year. Thank you.

[Jeremy Male:]

Alexia, maybe, I'll take the Q1 guidance first. And I'll pass back to Matt on the MTA and let's work it that way. I guess, firstly for Q1, it's a little bit like I said, in the script, as our business was laying down for Q1, we really haven't seen I think some of the changes, but we're really now starting to fill in the world. Obviously, it's early days, but I think everyone now feels more positive as we look forward than we did back at the -- back end of last year. You may recall, we've said before that typically 70% of our business for Q1 actually talks prior to the end of the year before. So most of that is taken into account, I guess, in that guidance. I think it's also worth mentioning that Q1 2020 was pretty good. Our billboard business was up nearly 9% in Q1 of 2020. So, I think it's worth keeping that comp in mind. And look, I mentioned some of those categories, in entertainment, travel, tourism, retail, fitness, there's still not a round. But look, they love to before the pandemic, they'll love it again and they will come back. It's just -- I think it's just a question of timing. Matt, maybe some if that helps, Alexia.

[Matthew Siegel:]

Okay, sure. Alexia, thanks for the question on the MTA. First and I'm probably going to remind everybody, unprecedented time last year, in the second quarter as we were looking at a lot of things to improve and enhance our liquidity. And we haven't and we had done a really good working relationship with the MTA. And we reached what we thought was a mutually beneficial amendment and accommodation then. The contract we have, the pre-amendment contemplates ridership changes -- a low ridership. And that's what we're discussing now the constructive conversations we're having, or about things in that contract and how to deploy them, I mentioned in my prepared remarks, scope and tenor and we think we can find something that works out for both us and the MTA. So as far as going forward in '22, we anticipate this time that '22, we'd be back in a revenue share position. We think revenue in '21 will be higher than '20 and continue growing as vaccinations and ridership will help the big city get back to where it was in the past. So we think we're in a pretty good shape, again, short-term problem now. Long-term benefit as we work out some mutual beneficial solutions.

[Alexia Quadrani:]

Right. Thank you.

[Operator:]

We'll take our next question from Ben Swinburne with Morgan Stanley.

[Ben Swinburne:]

Thank you. Jeremy, when you look out into the second quarter, I'm just curious how visibility is and maybe if you sort of look at the areas that are less impacted like billboard, maybe small or midsized markets, can you see a month of growth in the pacings? Or is it too uncertain today? And then, Matt, is there any way you can help us quantify the impact EBITDA from moving back to the MG? I don't know if maybe you can tell us what fourth quarter might have looked like? Anything you could tell us to help think about just sort of order of magnitude while we're in this sort of interim transition period would be helpful.

[Jeremy Male:]

Well, Ben, maybe just commenting on -- commenting a little bit on Q2. I guess the first thing is that business in general, I think in leader as a whole and out-of-home is laying down later in this environment. What we can say absolutely is that we are obviously against a very weak comp for last year. In fairness, we are undoubtedly going to see all of our business trending positively versus 2020. I think, we don't normally give any real guide post the quarter that we're announcing in. I did make some comments about the positivity generally, that we're feeling as we get into the back half of the year. And we'll be able to give, I think more color on Q2, specifically a little bit further down the road.

[Ben Swinburne:]

Fair enough.

[Matthew Siegel:]

And then, Ben on to your -- the MTA question, first, we will file the 10-K tomorrow morning, we will have more details. But our MTA, MAG, is it's about $10 million a month. That’s where it was last year and then it goes up in inflation. So in the same neighborhood. As I mentioned, we think revenue in '21 will be higher than '20. We call like the second quarter, everyone was flamed from a subway. So watership has increased and some advertisers have come back into the subway, and we think that'll continue during the year, that's why I think '21 will be higher than '20. Hopefully that helps a little bit. That will depend on what you think forecast for the MTA comes out to be as I mentioned earlier. The -- we think we'll be back in rev share in '22, not in '21. And we see where we were last year, so you’re going to extrapolate even '21 will be. That can then help -- I think help you back into what the impact of a MAG will be this year.

[Ben Swinburne:]

Okay. So in other words, you were paying them something last year on a rev share. So whatever we thought revenues were we can sort of get to what last year was and that's the delta? Out of curiosity, sorry, go ahead.

[Matthew Siegel:]

Yes, I remember from the amendment last year, we were paying them 65% revenue share on revenue in the U.S in the second, third and fourth quarter.

[Ben Swinburne:]

Right.

[Matthew Siegel:]

This year back -- all of the amendment we're back at 55% with the MAG.

[Ben Swinburne:]

Right. Understood. Have you been able to get to agreements with your other transit partners like, Boston and San Francisco? I think you had actually had some success getting keeping the rev share in '21. I didn’t know if you had any update there.

[Jeremy Male:]

Yes, the answer is, yes. We've had some really, really good negotiations with the vast majority of our other transit partners. And it's worth mentioning also that in some markets we're now starting to see some revenues come back. So actually, we're not in MAG. So that’s -- yes, that’s definitely a tick in the box. And final word, maybe on the MTA, this is a very long-term contract that can potentially -- that has the potential to get longer stock. As it is this contract goes out into the 30s. And we're talking here about, as Matt said, certainly a bit of a drag this year back to revenue share next year. It's terrific contract. We believe it will be a real growth driver for us in the future as indeed it was for us in 2019.

[Ben Swinburne:]

Thank you.

[Operator:]

We'll take our next question from Ian Zaffino with Oppenheimer.

[Ian Zaffino:]

Hi. Great. Thank you very much. I just wanted to like talk a little bit about the digital billboard business return to growth. What I would have thought is maybe it's more urban exposed, and maybe it would be a laggard, but we're actually seeing it outperform. Give us a little bit of color on what's happening there, and why it's actually doing so well? Thanks.

[Jeremy Male:]

Sure. Well, look, I think digital generally is seen as from an advertiser point of view, as generally a really good thing. You can buy space in a more flexible way. You can be more creative with your messaging, and you can book later. And we also now have a little bit of tailwind coming through on programmatic. Now while that's revenue piece is relatively small, it is just starting to nudge the needle a bit. Also fair to say that, we did put in some great new signs last year. So, that is also helping drive absolute growth. I think what it really -- what this is really showing is, yes, the flexibility allowed people at the -- as we went into the pandemic, obviously, to cancel and as we showed, it's the biggest falling part of our business. But as business generally improves with vaccinations, and herd immunity, et cetera and a great new signage, we believe it's going to be a real interesting growth driver not just this year, but for a number of years to come. And it's why once again, we've really turned our organic growth cap back on this year, and anticipate and fully intend to get back to that 150 to 200 level in terms of conversions or new installations.

[Ian Zaffino:]

And then, I guess, my follow-up to kind of dovetail into that. You're sitting on $700 million plus of cash, where should we anticipate that goes? And given how well digitals actually performed, this is make you more encouraged to invest greater in that, or there are other uses of cash, M&A, et cetera that we should be thinking about as a use of your proceeds? Thanks.

[Jeremy Male:]

So, yes, thanks, Ian. So maybe, I'll just say a couple of words, and then pass over to Matt. With regards to our digital conversions in particular, there's a couple of things at play here. The first is in terms of zoning and obtaining permits to sort of build out new digital. And the other point we've always stressed is that in certain markets, where there is already substantive digital goals, we just have to a little bit careful that you're not eating your own lunch by going out. And really vastly increasing signage opportunity in a particular given city or DNA. So, that's a couple of things that sort of if you like, make it less easy for us just to go out and say, let's go and put whatever, 250 or 300 signs in this year. Matt, other comments in terms of cash position.

[Matthew Siegel:]

Just adding some numbers to that color. We're using the cash to continue our return to offense. So you heard me, we increased our CapEx spend for 2021 from 65 to 85, hoping to drive more digital conversions than we did in the past years. We're turning the MTA deployment a little higher again to further our digital install base. And we've closed a couple of small acquisitions which we put on hold from the pandemic and we'd like to do more whether small, mid size or a little larger. And as I mentioned, our Board will continue to work at our business prospects taking into consideration our liquidity and our requirements and think about dividend at some point during the course of this year. So we think that the cash is a strategic asset, and we're happy we have it. And we think we'll put it to good use.

[Ian Zaffino:]

Thank you very much.

[Operator:]

We'll take our next question from Stefan Bisson with Wolfe Research.

[Stephan Bisson:]

Good afternoon. Just two quick ones for me. The first in the Q1 pacings, can you talk a little bit about how the month laid out? Did you kind of see sequential improvements starting in January, and perhaps how that's looking in Q2? And then secondly on the MAG. Matt, I think you mentioned it in terms of a monthly MAG. Is that the way it's structured in the contract, or is it an annual MAG test?

[Jeremy Male:]

So let me take Q1, and then another quick comment on Q1 -- on Q2. So in Q1, the pricings were broadly similar. And as I said because we were in a -- I think, broadly similar world, all the while that Q1 business was being booked. Q2, I mean, as you would expect, all of the pacings are positive right now. And as I said in an earlier question, a little bit too early to go into any more detail on Q2 right now.

[Matthew Siegel:]

And, Stefan, you're right, it's an annual MAG. We think about it monthly, partly the check goes out and where it goes out, the first of every month. But into annual MAG and calculate and trued up over the course of the year.

[Stephan Bisson:]

Okay. Thanks so much.

[Operator:]

That concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to our speakers for any additional or closing remarks.

[Jeremy Male:]

Thank you very much everyone for your questions and for your time today. And we look forward to speaking to you at many of the investor events coming up over the next few weeks. Thank you very much again.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.