JCDecaux SE (DEC) Earnings Call Transcript

Good afternoon, everyone, or good morning, wherever you are. Thank you very much for joining us today at our 29th Annual Communacopia Conference. I'm Lisa Yang. I cover the European media Internet space here at Goldman. And I'm very pleased to have with me today, Jean-François Decaux, Co-CEO of JCDecaux. Thank you very much again, Jean-François, for being with us again this year for this conference. Also, I just want to remind you that you can submit questions any time via the webcast and we'll make sure we take your questions at the end of this session.

So Jean-François, maybe my first question is about the sort of current trading that you're seeing. Obviously, I appreciate there's a lot of moving parts, things, the visibility is very limited. But since you've given the update at the H1 results about seeing the sequential improvement since April, could you maybe just give us a bit more color in terms of what you're seeing now so far in Q3, any sort of difference in trends by market, by segment. That will be really appreciated.

Thank you, Lisa. And I can confirm the sequential improvement that we mentioned when we presented our H1 results at the end of July, which is driven by the return of audiences mostly in Street Furniture and Billboard environments. Just to give you an example, in France, we are at about 95% of pre-COVID audience level, if you exclude airports. It's more or less the same in many European countries. Where it's different, it's in the U.S., where U.S. urban audiences are at about 60% of pre-COVID level, especially in central areas like in Manhattan or Chicago or San Francisco. And the same applies to London. Our mobility tracker index, which assesses the level of mobility and the audience recovery tells us that the Oxford Street, for instance, which is the main shopping street in London, is at 50% of pre-COVID audience level. And Australia is even worse, given that there was a second lockdown in Melbourne, which is still on. And as a result of that, we are seeing good recovery in France, where the audience is at, again, 95% of pre-COVID level, whereby we were above last year in July and August, and we're going to be slightly below last year in September, excluding -- once again, excluding airport advertising, which is still very affected by the lack of international travel. And Germany is also doing pretty well. And China is also doing much better than in the second quarter, with the subway audience being at about 70% of what it was pre-COVID. And domestic air travel is at about 95% of what it was pre-COVID. So that's the good news. And the bad news is that there is still almost no international travel into China. So airport advertising continues to be affected by the lack of international business travelers. And so in a nutshell, sequential improvement is happening. The best markets are France, Germany and China. The worst markets are U.S., U.K. and Australia.

That's very helpful color. Could you maybe talk about the lag you're seeing between the audience recovery and the revenue recovery? I think you previously talked about a 4-week lag. Is that still the case? Is that quite typical? And how should we think about the sort of evolution of that sort of lag in the future in terms of any pricing versus volume?

In France, the lockdown, which obviously affected very strongly the out-of-home media industry across the globe and given that we're selling eyeballs at street, airports, subways and train stations, people were locked at home. The audience -- the lockdown in France was lifted early May and we started to get some real improvement in our trading numbers in July and August. So it's a bit more than 4 weeks, bearing in mind we have a very low penetration of digital in France. So the lag time is obviously a bit longer given that digital can restart almost immediately. So a 4-week lag is what -- we're a bit longer than what we had in France. And Germany was a bit faster. So it varies from market to market. But having said that, when the audience is not back to almost pre-COVID level, whether you are digital or traditional, it does really help, i.e., digital was as much affected than traditional. And the good news is that France, which is mostly traditional out-of-home in Street Furniture and Billboard, is again doing better in July and August than last year, which means that advertisers are coming back when the eyeballs are back on the street level. And in terms of the dynamics, in terms of pricing and volumes. If I take France as an example, because it's a significant one, given it's our second largest market after China, we designed some welcome back packages in order to incentivize our clients to get back as soon as the lockdown was lifted, and it was very successful. We decreased our rates by about 5% mid-single digits, and we saw a volume increase of about 10% double-digit in July and August. And September is a bit more mixed. But overall, those welcome back packages have been quite successful and leading to more volume into our out-of-home media assets in France being Street Furniture and Billboard in July in the summer.

Jean-François, I just wanted to follow-up on your comments about July, August, September. It looks like September is maybe slightly not as good as July, August. Is anything specific to France? Or is anything specific to out-of-home? Or is it because advertisers in general are maybe a bit more cautious in general? How do you explain that?

It's too early to tell. First of all, September is not over yet, and we still have another 2 weeks to book revenues. I think that there's still a lot of uncertainty given that some new restriction measures are being implemented. For example, if you take Australia, for instance, we had a lot of green shoots and all of a sudden, those green shoots disappeared because of the second lockdown in Melbourne. Beijing was partly again in lockdown in June. Hence, the audience in the subway, which is only 70% of pre-COVID level. So this uncertainty mix, obviously, advertisers are very cautious about making commitments. And so is that the reason for the fact that September is going to be slightly below last year? At least, it's much better than -- obviously, than Q2. So it's not up versus last year as opposed to July and August for France, but it's still trading at a reasonable level compared to what we experienced in the back end of Q1 and in Q2, obviously, which was the worst quarter ever in our history.

And also I wanted to get your sense of how do you think advertisers are reacting in terms of their marketing strategies right now? I guess if you think about the choice between brand building versus direct response, do you think they are -- they prefer to choose direct response right now, which means potentially that outdoor is more penalized because of that as well, because of the lack of recovery in audience, but also because there's a sort of shift away from brand building at the moment? Or how do you think about that?

Outdoor can do both. We can -- we are a very good medium for brand building. And given the large audience that we are able to deliver in a short period of time, assuming, obviously, that there is no lockdown anymore. And we are also pretty good in what we call activation campaigns, especially in countries where we have a lot of digital advertising. And that's why I think that in the countries which I mentioned earlier, being France and Germany, we are almost back to pre-COVID revenue levels, at least in Q3, excluding airport advertising, which is, I think, very good news. Now having said that, many other markets, which are big markets for us, are still way behind 2019 revenue levels in Q3 given that nearly half of the eyeballs are missing in downtown Manhattan, downtown New York, in Central London. And you work and live in London, and you can you can judge by yourself that Central London is -- looks very empty. And a lot of people are still not back in the office and still working from home. Some of them are afraid of using public transport. Subway audiences are also very low compared to where they used to be. So back to your question, I think that activation is something that we can provide given that in many countries where we are heavily digitized. But in the U.K., for instance, where we have 60-plus percent of our revenues coming from digital, the fact that we are lacking audiences in Central London, where we are very -- we have a very strong digital network is obviously the reason why we are not doing so well for the moment in this marketplace.

Understood. And I guess beyond the sort of near-term impact we are seeing from COVID-19, obviously. Do you think there's any structural changes that you foresee for outdoor going forward? And how does that -- are you rethinking your strategies in terms of how you're going to be bidding for contracts or whether you're going to be preferring Street Furniture or Billboard over Transport, for instance? How do you see the sort of longer-term outlook in terms of the impact of COVID-19 on your business and strategy?

Crises, generally speaking, tend to accelerate structural shifts. If you take a look at what was happening pre-COVID, outdoor advertising was the only form of traditional media that wasn't losing share and was gaining share in markets where we were able to digitize our assets. So if that trend is accelerating, it means that we will continue to accelerate our digital deployment in markets where we can digitize our assets, both in Street Furniture, Billboard and Transport across the sector. We will probably slow down, most likely slow down digital deployments in airport advertising given the lack of international travel and the fact that it's probably the sector which will be the last to recover. A lot of people in the aviation industry talks about 4 to 5 years' time before it can recover. But having said that, the good news in terms of our airport as we platform, which is the biggest one in the world, is that the China and airport domestic air travel is, as I said earlier, at 90-plus percent of pre-COVID audience level. And if you look at the luxury market, which is obviously a very big market for West European companies like L'Oreal, LVMH, it's mainly driven by the Chinese consumer. And 60% of the Chinese luxury purchases pre-COVID were done abroad when the Chinese were going to Hong Kong, Paris, New York, you name it. And we were obviously, as the main advertising partner in the largest hubs around the world, benefiting from that Chinese consumer, which we call the global spender. And it looks like now that the Chinese global spender is staying at home and is traveling domestically, hence, the very good audience in the domestic terminals, which we also have in our portfolio. The name of the game is to basically shift the advertising dollars from -- to reach this global spender into the local budget in order to reach the same person who has become a local consumer because this person is likely to spend maybe not all of his previous purchases domestically, but a major part of these luxury products at home in China, where we have a significant portfolio. So it's a question of shifting the advertising dollars, which we have spent centrally as part of the, what we call the travel retail advertising budget, to a domestic advertising budget. But we can deliver the eyeballs. So that's the good news as far as China is concerned, which is our biggest market around the world. So -- and for the rest, as you know, we launched a programmatic trading platform about 2 years ago, which is now live in about 16 countries around the world, connected to more than 20 DSPs, Verizon Media been -- was the latest DSP to be connected to view. And we had our best programmatic trading month in August this year led by programmatic campaigns in Germany, Netherlands and the U.K., which means that this incremental revenue, which is still small, but it's increasing. And there is a lot of interest for our programmatic trading platform, which we feel could be a game changer because it could serve the interest of SMEs as well, which we have some local businesses in, mainly in France and in some other countries like Germany, but not that much. And we could have many more local clients who are mainly investing in online advertising and online advertising and off-line and out-of-home is a very good combination, as we demonstrated recently, with social media being combined with out-of-home or mobile advertising being combined with out-of-home as part of the new initiative that we launched with this DSP called S4M, which basically is bridging the digital and the physical world in order to enhance what we call the drive to store. And we had recently a campaign from Nespresso in France, combining mobile advertising and out-of-home, not digital but traditional because we don't have digital Street Furniture right now in many French cities. And the footfall in the Nespresso stores following that campaign went up by 14%. So that's quite a significant increase in the footfall. And the global media manager of Nespresso said that this mobile advertising combination with out-of-home media is the perfect online and off-line combination. So more case studies like this one, and which obviously will help us to recover to pre-COVID revenues and probably gain market share, which is the name of the game for the out-of-home media industry which is only 7.5% of advertising spend worldwide.

That's really helpful. Maybe switching gears a little bit to the red reduction, which obviously is a big focus for investors. I mean at the first half results, you sort of surprised positively the market. Obviously, you over-delivered on cost savings. So I think you also benefited from rent reduction, which probably was a little bit earlier than we expected. So how should we -- the positive surprise from the first half results, is that a good bit across for the second half? Like, maybe can you give us an update in terms of where you are with all those renegotiations?

Yes. As you said in your question, we were able to basically offset more than 50% of our revenue decline with cost reductions. We managed to reduce our rent costs by about 28% and the other operating costs by 22%. So in terms of rent reduction, we did well in Q2, given the lockdown, which was almost affecting all markets except a very small number like Sweden, which didn't impose a lockdown on their people. Going to Q3 and Q4, we are obviously in ongoing negotiations. And given that the, for example, in airport advertising, the international travel numbers are almost inexistent, are very, very low. People are no longer traveling internationally. It is easier for us to continue to have further rent relief across the airport division. So we are doing pretty well in getting more relief from airport operators, especially when they get relief as well, when they get bailed out, which happens a lot around the world because whether it's airports or subway or railway operators, if they don't get bailed out, they could go bankrupt and have to stop servicing the customers, which obviously it would be a major issue for the whole world if public transport all of a sudden couldn't work anymore. So it's quite clear that when those companies, whether their private or state-owned, are being bailed out by their respective local governments, it's easier to get rent relief from them. And given that most of them are being bailed out, we are quite successful in getting further rent relief. It takes longer with local authorities because the process is quite -- is more complex. You first try to get a reasonable rent relief package with the civil servants, which then has to be sanctioned and confirmed by the local council, and it's always a political decision. And they are obviously trying to protect their revenues, and it's not always easy to get this relief. Very often local authorities are trying to just postpone the payments. They are sometimes offering extension as well, which is not what we're seeking. We are seeking rent relief, true rent relief, and not deferred payments into 2021 because of the lockdown, which was, again, imposed by government. In the case of Melbourne in Australia, it's a local decision. And our contract is a local contract with the city of Melbourne. And therefore, when the city itself, as a contracting partner, is basically canceling the audience that we're selling, then obviously there is what we call the frustration of purpose for our business. We can't run our business anymore because the eyeballs have to stay at home. So we are optimistic about getting further rent relief. It's impossible to give you the extent of the rent relief that we will be able to achieve in Q3 and Q4. And sometimes, an extension could be an attractive way for us to offset the rent that we could pay if the extension is attractive enough. But it varies from one contractor and other. But the goal across all markets is to get a rent decline for 2020, which would be in line with the revenue decline. So in other words, for example, in H1, we achieved 40% -- 28% rent decline versus an organic revenue decline of 40%. So the goal was to achieve 40% rent decline. And we are successful in achieving this in some markets. It also depends on the mix of assets because, again, in airports, it's -- we got those rent relief faster than with local authorities where there is a bit of delay, given the complexity of the discussions that I mentioned earlier.

And at the sound of it, would you say that maybe the discussions have been a bit tougher than you thought when you announced the first half results, especially with the local authorities or basically in line with what you were expecting at the time? And is it possible to have maybe some comment on what percentage of your contracts or revenues are with local authorities?

Street Furniture is about 45% of our revenues and more than 90% of our Street Furniture contracts are with local authorities. The minority of them are with transport authorities, like, for example, TfL in London. So the majority of the Street Furniture contracts are with local authorities. The majority of the Transport contracts are obviously with transport operators. And so it's -- are we facing more resistance in renegotiating with local authorities? No. We knew that it wasn't going to be an easy conversation, also because we have a strong balance sheet. So the local authorities are arguing that if we have a 15- or 20-year contract, which has done well, that we can easily begin -- being a strong company, we can easily absorb 1 bad year. So this is the counterargument which we are facing in many parts of the world. Saying, "Look, you've done very well. Last year was your best year ever in terms of profitability. And you're asking us to waive the minimum guarantee, but we believe that you can sustain 1 bad year, given that we've done very well on -- with this business in our city." So that's the counterargument that we are facing. But having said that, the lockdown measure that was implemented, both either nationally or locally, gives us a good legal reason to go and ask for this rent reduction, and we feel entitled to it. Because it's not like it was like a downturn of the economy, a recession, which is a risk that, obviously, we always assume when we sign a long-term deal. And we always assess this risk by building a business plan when we take the risk, when we assume that we will not have an ongoing growth for 20 years. So we modeled our business plan in such a way that we take into account the risk of having a recession, but not a recession driven by lockdown where the revenues are down like 60-plus percent like it was in Q2. That's nothing -- you can't compare this with a recession. It's mainly driven by lockdowns, which, again, were decided by the local authorities or the local governments, which is why we feel that we have a good reason to push for this rent renegotiation.