OUTFRONT Media Inc.

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.

Good afternoon, everyone. Thanks for joining our 2020 fourth quarter and full year earnings call. On the call today are Jeremy Mail, Chairman and Chief Executive Officer, and Matt Siegel, Executive Vice President and Chief Financial Officer. After a discussion of our financial results, we'll open the lines up 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. This conference call may include forward-looking statements, relevant factors that could cause actual results of different material from these forward-looking statements or listed in our earnings materials, and in our SEC filings, including Our 2019 Form 10-K, our 2020 quarterly reports, as well as our 2020 10-K, which will be filed tomorrow. We will refer to certain non-GAAP financial measures on this call. Any references to OIBDA made today will be on an adjusted basis, and reconciliations of OIBDA and other non-GAAP financial measures are in the appendix of the slide presentation, the earnings release, and also on our website. I will now turn the call over to Jeremy and Matt.

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 three. Total revenues were down 31% or 29% on an organic basis, slightly better than our guidance. US billboard improved more than we anticipated, driven in particular by positive growth in digital billboards. On the transit side, where ridership is still lagging, 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 helped drive another contraction in the EBITDA loss rate to 41%, and FFO to 53%. Both of these were nicely ahead of expectations for the quarter due to our better billboard results. If you turn to slide four, 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 five. This is a new view of our US billboard business, broken down into a couple of different pieces. Going into the pandemic, we saw digital revenues decline more quickly than static, and 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 returned 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. When you look at our larger markets, the blue line, The performance is lower, reflecting lockdowns and restrictions that have particularly impacted larger cities, including New York and Los Angeles. Clearly, the slope of all of these lines is very positive, and everything has been moving in the right direction. Moving on to slide six, we show a similar view of US transit. Obviously, it's not the same slope as Billboard, but it has been heading slowly in the right direction. So far, rail audiences have been stubborn to return, but with every week of low infection rates and increased vaccinations, the potential for meaningful ridership recovery increases. And it's worth noting on the top left of this chart just how strong the performance was in 2019 when we grew transit by 21%. I'll talk more about recovery later on this call, but first let's look at the rest of our revenue picture. Bringing a closer look at our U.S. numbers on slide seven, billboard was down just 13%, while transit lagged considerably, down 65%. Ridership was and remains the issue. You can see our national and local on slide eight, down 36% and 24% respectively. Obviously, transit weighs heavily on these, and the loss rate in local was considerably better on billboard than on transit. National was similar down on both, but again more in transit. There were certain important categories that simply weren't in the out-of-home market, entertainment and travel being the most obvious ones. Slide nine shows an 11% decline in our total billboard yield, which was another solid sequential improvement Driven by both static and digital. In fact, our digital yield decline was only in the single digits. Digital is hugely important to our growth strategy. Guide 10 shows that digital was over 25% of our total company revenues in the quarter, a record level for us. We built some new locations and are starting to see some early benefits from programmatic, which we are bullish on. Digital in transit remains a story of the low ridership levels. As audiences bounce back, we expect to monetize it as well as we have historically. Our full motion video screens were one of the most in-demand media products in the market before the pandemic, and there's every reason to believe they will be as audiences return. To complete our revenue picture for the quarter, slide 11 shows our other business. The key takeaway here is an 18% decline in Canadian billboards and their recovery has somewhat mirrored what we've seen here in the U.S. So let me now hand over to Matt.

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 were lower to a combination of lower revenue shares and our ability to convert some minimum annual guarantees into revenue shares. We also had a $15 million reduction from the sale of our sports marketing business, which drove the decline in posting, maintenance, and other. Most of the SG&A reduction was 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 renegotiations with landlords. Lastly, the corporate was down primarily on lower compensation-related 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 salespeople for signing billboard releases with advertisers. We felt the time was right to move these into SG&A and therefore above the Orbita line because this better reflects the digitization of our business. This has no impact on the FFO, free cash flow, nor our debt covenants, which use a different definition of EBITDA. The appendix of our earnings deck includes eight quarters of this classification and impact across our segments. Collectively, our total expense improvement helped trim our Orbita 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 Orbita story, given our fixed cost base. Slide 14 breaks Orbita down into its components. Transit Orbita remains slightly negative as it has since the pandemic began. Billboards increased weight, including higher margin digital billboards, also helped push total EBITDA margins up to nearly 25%. Capital expenditures on slide 15 were 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 our $55 million guidance. As we look at 2021, we expect total CapEx of around $85 million in total, including $55 million of growth CapEx This would 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. Slide 16 shows the bridge in ASFO, which is the biggest factor relative to last year. Most of the other key drivers were relatively flat. For 2021, while it's early days and there's still uncertainty, we're comfortable with you penciling in a 25% to 30% ASFO rebound driven by improved EBITDA, lower interest expense aided by our recent bond refinancing, and cash taxes of approximately $2 million. Incorporated into this forecast is the fact that as of January 1st, we are paying a minimum annual guarantee, or MAG, to the MTA in accordance with our contract. Let me take a moment on that. We have and will continue to engage in constructive conversations with the MTA regarding possible changes to the overall scope of equipment deployment and an extension of the term of the agreement in light of the impact of the pandemic. And considering all these factors, there's going to be a little bit of short-term pain for long-term gain for both us and the MTA, and we remain excited about the contract overall, and we hope to be in a position to share more details with you in the near future. While the low of ridership impacts our revenues and causes us to be paying the mag, There is a silver lining, and that's on equipment deployment. It's more efficient to add displays when there are fewer people in the system. As I just mentioned, there are a lot of discussions going on, and things could change. We will provide more information as appropriate. At the moment, you can model 2021 equipment deployment costs in the neighborhood of $125 to $150 million. You can see where we stood on the MTA project at year end on slide 17. Notable in this table is that we have commenced deployment of in-car displays on our rolling stock across the subway, Long Island Railroad, and Metro North. Now let's turn to our balance sheet on slide 18. With positive free cash flow generated in the fourth quarter, our liquidity improved again. It stands at $1.2 billion. Subsequent to year end, we refinanced $500 million of notes due in 2024 with an equal amount due in 2029. The new notes have our lowest coupon to date, 4.25%, and the refinancing saves almost $7 million of annual interest expense. Our next maturity is comfortably out in 2025. Obviously, there's still a little uncertainty, but we believe the current economic outlook is good, and over time, we would expect to deploy this cash strategically. Our capital allocation strategy has not changed. Investment in digital and technology Acquisitions and Paying Dividends. Although we paused dividends on our common stock in 2020 due to the pandemic, the level we paid in common and preferred dividends was in compliance with our REIT requirements. As we move forward in 2021, our board will evaluate our outlook with regards to reinstatement of common dividends. In closing, we are obviously happy to have 2020 behind us. The resilience and comeback of our billboards coupled with good cost control set this up well for the 2021 and 2022 recovery. Let me now turn the call back over to Jeremy.

Thanks, Matt. And 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 to the fourth quarter, down high 20s 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 and the future of big cities. Slide 20 shares some anecdotal evidence that big cities are coming back. Interesting to see the apartment leasing statistics from 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 at 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 Thank you for joining us. and others. Slide 21 shows some recent industry research indicating that 68% of consumers are experiencing digital device burnout, while I, for one, have total Zoom fatigue. People are desperate to get out of their homes and 65% of them do so as much as possible and nearly half of them notice out-of-home media more than they used to. Even if you're working away from the office for a day or two a week or whatever, you're still going to be in the out-of-home market. We'll just reach you in new places and with different frequencies than the old places. Outfront is right in the middle of all these changes in mobility. What's so encouraging about this right now is that people feel great when they're out of home, reconnecting with the real world. Brands that use us are therefore reaching people when they're more engaged and more optimistic. With Group M and Magna Global on average see 15% out of home growth in the US in 2021, and 9% in 2022. In addition to the pandemic rebound, our mass reach will become increasingly important. Some of today's most popular content platforms are ad-free. Linear TV is still a $50 billion business taking 23% advertising share despite its shrinking audience. If we as an industry pick up a small piece of that, we'll be showing great future growth and soon have an industry significantly ahead at pre-pandemic levels. As the former publicist strategist Richard Tabakawala said recently, what do brands want when they're choosing a medium? Two of the most important things are personalization at scale, mobility and digital. At Outfront, we do all of that. We break through the noise, We get people's attention and we drive people's digital behavior. So in closing, our outlook is positive with the whole world wanting to get out and stay out of their homes. And as a company, we believe we're uniquely placed for the post-pandemic rebound. So with that operator, let's now open the lines for questions.

If you would like to ask a question, Please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question. We'll go ahead and take our first question from Alexia Quadrani with JP Morgan.

Thank you very much. Just a couple of questions. First, on the amended agreement with the MTA, I'm curious why they didn't give you the same relief in 21, you know, 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 and your guidance for Q1, just sort of generally, not just transit, in the full year. Thank you.

Alexia, maybe I'll take the Q1's 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. Thank you very much. and many more. Thank you. and some of those categories, entertainment, travel, tourism, retail, fitness, they're still not around. But look, they loved us before the pandemic, they'll love us again, and they will come back. I think it's just a question of timing. Matt, maybe some, if that helps, Alexia?

Oh, yeah, sure. Alexia, thanks for the question. I'm the MTA. First, I'm probably going to have 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 have and we had then a really good working relationship with the MTA, and we reached what we thought was a mutually beneficial amendment or accommodation then. The contract we have, the pre-amendment, contemplates Thank you very much. We anticipate at this time, at 22, we'd be back in a revenue share position. We think revenue in 21 would be higher than 20 and continue growing as vaccinations and ridership will help the city get back to where it was in the past. So we think we're in pretty good shape. Again, a short-term problem now, a long-term benefit as we work out some mutually beneficial solutions.

Okay, thank you. We'll take our next question from Ben Frinburn with Morgan Stanley.

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 smaller, mid-sized 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 that? Thank you very much.

Business in general, I think, in media as a whole and crowd at 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. We'll be able to give more color on Q2 specifically a little bit further down the road.

Fair enough.

and Ben on the MTA question. First, we'll follow the 10K tomorrow morning. We'll have more details. But our MTA mag is about $10 billion a month. That's what it was last year and it goes up in inflation. So in the same neighborhood, as I mentioned, we think revenue in 21 will be higher than 20. If you recall, back in the second quarter, everyone was fleeing from the subway. So Writership has 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. It'll depend on what you think forecast for the MTA comes out to be. As I mentioned earlier, we think we'll be back in rev share in 22, not in 21, and you'll see where we were Last year, Steve, I'm going to extrapolate what you think 21 will be. That can, I think, help you back into what the impact of the MAG will be this year.

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. Remember from the amendment last year, we were paying them 65% revenue share on revenue in the second, third, and fourth quarter. We're back at 55% with the MAG.

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 keeping the rev share in 21. I don't know if you had any update there.

Yeah. The answer is yeah. We've had some really, really good negotiations with... and the vast, vast majority of our other transit partners. And it's worth mentioning also that, you know, in some markets we're now, you know, starting to see some revenues come back. So actually we're not, you know, we're not in mags. So, you know, that's definitely a tick in the box. And, you know, final word, you know, maybe on the MTA. This is a very long-term contract. and many more.

Thank you.

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

Hi, Grace. 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.

Sure. Well, I think digital generally is seen as, from an advertiser's 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 look later and we also now have, you know, a little bit of tailwind coming through on programmatic. Now, while that's, you know, revenue piece is relatively small, you know, it is just starting to nudge the needle a bit. Also fair to say that, you know, we did, you know, put in some great new signs last year. So, you know, that is also helping drive absolute growth I think what this is really showing is, yes, the flexibility allowed people 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 our 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.

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

Yeah, 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 visual bubbles. We just have to be 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, Matt, other comments in terms of cash position? Adding some numbers to that color, we're using the cash to continue our return to offense. We increased our tap-back spend for 2021 from $55 to $85 million.

and many more. We're hoping to drive more digital conversions than we did in past years. We're turning the MTA deployment a little higher again to further our digital installed 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, midsize or a little larger. And as I mentioned, our board will continue to look at our business prospects, taking into consideration our liquidity and our requirements and think about dividends at some point during the course of this year. So we think the cash is a strategic asset and we're happy we have it and we think we'll put it to good use.

All right. Thank you very much.

As a reminder, if you would like to ask a question, please press star one. We'll take our next question from Stephan Bisson with Wolf Research.

Good afternoon. Just two quick ones from me. The first, in the Q1 pacings, can you talk a little bit about how the months 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 in terms of a monthly mag. Is that the way it's structured in the contract, or is it an annual mag test?

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

And, Stephan, you're right. It's an annual MEG. We think about it monthly, you know, and others. Thank you.

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 that are coming up over the next few weeks. Thank you very much again.

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