Clear Channel Outdoor Holdings, Inc. (CCO) Earnings Call Transcript & Summary

All right. We'll get started. We are happy to have back from Clear Channel Outdoor, Scott Wells, President and CEO, and David Sailer, EVP and CFO. Guys, thanks for being here.

Thanks for having us.

Thank you.

I'll start with this. Clear Channel is at a pivotal moment, having completed the sale of most of its international businesses with your now U.S.-exclusive footprint. Maybe you can discuss high level the strategy from here and where your focus is.

Sure. Well, we're really excited. It is great to finally not be talking about our divestitures. As you said, we're just about done. We still have Spain. But I think we've accomplished a lot of what we were setting out to do in terms of derisking the platform and creating that opportunity to focus. As you think about the focus, it's going to be ongoing digital transformation. We're going to be looking to routinely pay down debt as we become cash flow positive and work down that leverage level. And we're certainly going to be driving very hard on developing new verticals and driving organic growth, as I said, continuing the digital transformation and continuing to apply data and expand the number of verticals that we're able to service that way. So it will be great to have that focus as we work this, we'll also be bringing down our corporate expense further as we go through our zero-based budget process. So lots going on.

Got it. Maybe circling back to recent trends. So at Q1 earnings, you reiterated your full-year revenue guidance. You noted healthy demand across your markets. Can you refresh a bit on what you're seeing? How are conversations going with local marketers and your national agency leads?

Sure. So things are surprisingly normal. It's an interesting thing to say to folks with as volatile as the world is and as volatile as the stock and bond markets are, the dialogue that we're having with our advertising base is quite steady. If you look at it at the local level, we don't have a lot of businesses that are heavily exposed to the tariffs other than to the degree that there's a macro downturn, but no one has sort of jumped to that conclusion yet in their behavior. Things like business services, lawyers, health care, these businesses are pretty steady. You've seen a little bit of a slowdown in auto in the local market for sure. At the national market, we are seeing the emergence of a new vertical in AI. It's almost a local market because so much of it is in San Francisco, but the companies are having national ambition. We're seeing insurance coming back, which is incredibly welcome. Those of you who follow the company closely know that insurance had become a quite important vertical for us during COVID and really pulled back heavily, particularly the auto insurance portion of it. And we're seeing that come back, which is great. And for us, specifically, the kind of reinvigoration of San Francisco is going to be a tailwind throughout this year. So lots of positive things that we're seeing in the marketplace.

Okay. And just a reminder, can you -- how much visibility at this point of the year or at least when you guided, would you have into Q2 and the full year?

So yes, I mean, Q2 was more than 85% in at the time that we did the guide. So very, very far along. And we had the majority of the year. And it's similar to what we'd see in a normal year. We're not particularly ahead or particularly behind. And if anything, we're probably a little bit ahead of where relative to what our budget is, what we've seen.

Got it. And then within the billboard guidance, there's an implied acceleration in revenue growth from here. The MTA contract that you picked up at the end of last year is a piece of that. Maybe you can speak to kind of some of the other drivers. I mean, you touched upon it a second ago, but in terms of regions, verticals that you have visibility into kind of driving that acceleration through the year.

Yes. I touched on a few of them, but I will reiterate San Francisco because it is exciting and John Doug just walked in. So whenever I see him, I think of our San Francisco market because he always has a good local question for me about it. Good to see you, John. So that recovery is going to be really helpful to us. I talked about a couple of the verticals that have emerged and are coming back in AI and in insurance. I think media and entertainment, as you look to the second half, has just an outstanding release schedule that is with largely studios that are supporting their releases without a home in a scale way. So I think that's going to be a real positive as the year develops. And I think that just the general sense across a lot of our important verticals is that people view this as an important year to be winning and to be getting their message out and that is playing out in their purchases of our medium.

Follow-up on one category you said a second ago, auto insurance coming back to the market. It's been very touch-and-go for a few years now. Maybe just expand a bit on what's happening in that category.

Yes. So there are a couple of good green shoots that we're seeing there. One very large advertiser who had pulled out of out-of-home almost entirely over the course of 2024, they had some in 2023, is back in, and they're approaching it a little differently. They're buying programmatically. But that is something that, from what we're hearing, we've had some direct-to-the-client outreach. That's something we're going to see ramping and maybe ramp into direct. Another insurer that we had kept in good contact with for a couple of years just placed a very nice buy across the southern kind of half of the U.S. with us, which is something we're really excited about. So there are still a couple more players sitting on the sidelines, but we have dialogue with all the big ones going and are optimistic.

Maybe staying with the macro for a second. Can you discuss trends as it relates to kind of the airport side of your business? How much should we think of revenue here is kind of tied to leisure or passenger travel, and kind of what's assumed for your overall outlook from here?

I mean, the thing about airports is we have had a lot of moving pieces in them over the years. There is not a kind of one-to-one relationship between passenger traffic and revenue. We've grown revenue more than 10x what passenger traffic has grown over the last 5 or 6 years. So it is something that, obviously, we care a lot about there being healthy passenger traffic, but it's not the principal driver. The principal driver is how we're merchandising the airports, how we're monetizing the inventory that we build and we are increasingly, as we develop new airports, getting very good at developing assets that advertisers want to be associated with and that they want to own and that leads to people doing long-term contracts and even in some cases, helping to develop the locations in terms of helping with the -- getting the projects approved and things along those lines. So the stickiness is better than airports circa 2015. It's much more digital, a lot more spectacular oriented within the airport, and something where we're very sticky with a lot of those advertisers.

I'm thinking of LaGuardia, when you go through security at Terminal B, there's that giant Clear Channel digital board. Okay, for anyone when flew up this morning. All right. Looking longer term, you've made it a goal to organically accelerate growth by selling more direct to advertisers. Part of that is kind of offering in-house planning and attribution tools. Maybe we can talk to the strategy there. Where are you in that journey?

So we have always sold direct principally at the local level. So probably of our local book, which is roughly 2/3, probably half of that is with an advertiser themselves. So we have always had that kind of connection at that level. I think what you're referring to is more at the large advertiser level where we started probably 8 or 9 years ago, going to advertisers directly through what we call our client solutions team. And we still have that team, but what we learned is how important it is to really understand the key performance indicators that, that vertical uses. They are quite different. All of them may talk about ROI, but what they mean when they say ROI is really different if you're in pharmaceuticals versus automotive versus fast-moving consumer goods. So we have made a ton of progress in both point people into those industry verticals as well as finding the right metrics that we can do the analysis so that they're able to ingest our data and use it within their scorecards that they're using to evaluate all of their marketing. And that has been a complicated journey, but it's one that we are way further along now than we were. And pharma has been very important. Alcoholic beverages is one that we've been focused in this area. We've done a lot of direct client outreach to reinvigorate insurance. That's been less about the analytics and more about understanding what's going on in their different geographies and where they might have needs to promote things. But those are the sort of things that we're doing.

And point people, you're meaning experts, sort of in the vertical?

Salespeople who speak the language of that vertical. That's right.

Got it. Okay. Maybe let's dig in on the pharma side that you brought up alcoholic beverages as well. Talk to your recent history there, how you kind of -- I don't even know if you say expanded market share is the right term, so much as kind of bringing those marketers kind of into the fold of Outdoor.

Yes. I mean this started probably 4, 4.5 years ago with a particular partner where we spent a lot of time with them learning what their measures of success were and figuring out how we could participate in that measurement. That led to a trial, probably 6 months in, that they were thrilled with the results. We were thrilled with the results. And the way this works is we measure the exposure data and give the advertiser a data set that gives them information that's aggregated and anonymous, but is able to talk about an exposed universe versus an unexposed universe. And then they take that to their data analytics house. So this is something where we are not doing the analysis. They are doing the analysis, and then they report back, and we collectively interpret it and talk about what we learned from it and how we build from there. And that partnership has turned into a regular renewing cadence with them, and that has then led to dialogue. Now I want to say we've got 7 different active pharma advertisers with us. It's not yet at a point that -- we definitely track it, but it's not something that we're reporting on, but I think stay tuned as we get going. It is very chunky, the money. It tends to come in campaign chunks that often have gaps between them. And so we're trying to figure out how we smooth those gaps and how we make it just a steady income stream. But as we get to a point where we have a handful of drugs on regular renewals, that should be something that is a really nice new revenue stream for us. And if it really takes off, there's a lot of potential in that vertical. Out-of-home is less than 1% of the total pharma spending. And I think we've demonstrated that we are a very effective partner for certain kinds of drugs. It's not going to be appropriate for everything, but we're very excited about that space.

Curious what you think dictates that chunkiness of spend? Is it something unique to the pharma group or that they're new and they're kind of...

It's pretty typical with marketers. It's particularly noted with pharma folks. Part of why it has been chunky is because there is a lag in the data analytics. We're striving to close the gap. But basically, it's the kind of thing that they're not doing in the next campaign until they see that the prior campaign had really paid out. And because of a lot of the steps that have to happen, that is something that we're working our way through to kind of close that cycle time. And I think we've got some tools in place to address it. But it is also just the nature of developing a new category that every time that there is a change in CMO or that there is a change in agency, both of which happen with quite a bit of frequency in a lot of companies, you kind of have to go through the whole curve again, unfortunately.

When you think about the data and analytics and attribution side, what kind of some things in your control that you focus on some things that maybe have to happen at the industry level?

So the things that we focus on and that we control is all about looking at the characteristics, the demographics, if you will, of the audience. And we have a very robust data set around that. We have always left accounts to the industry standard. That's kind of -- it's the way a lot of media work is that there's an industry, like in television, Nielsen, a TV advertiser will supplement that with data that they pull on their audience. So it's kind of the same thing. What needs to happen at the agency or at the industry level is that we need to get our data to be more robust by integrating with other data sets. So, probably the obvious example of that is media mix models. So most big advertisers use a media mix model, and that tool is something that they put in data from online, from TV, from radio, whatever media they're using. And they will run a kind of efficacy analysis on that and try to optimize their spend to get the right mix of reach and call to action, all the things that they're trying to do with their ad campaigns. Out-of-home data straight out of the box doesn't fit well with other media data. This is something we can fix, but it is something that the industry has not prioritized until fairly recently. We are working on it as an industry now. I am optimistic that we'll see progress on that. But that's probably one of the biggest things we can do as an industry to unlock more spend is to have data that's easily integrated with the models that advertisers are using.

Maybe that response touches on this next question. But what role do the kind of ad agencies play in your long-term growth vision when you talk about direct sold, is the goal to kind of increase that, that kind of naturally reduces the agency exposure over time? Or do you want to kind of come up with ways to go to the holding companies and get them to increase their allocation?

No, we work. The way I'd characterize it is that the agencies are busy with their own things. They're not going to advocate for growing out-of-home spend. They're going to look to win more accounts. They're going to win accounts using whatever techniques they need to use to win accounts. So very few large advertisers are going to do a deal with any media company by themselves. Even the big walled gardens, they likely will have an agency that's implementing it, and that's doing the kind of accumulating of all the information. So the ad agencies are incredibly important partners to us. And we do, do things to try to win more. But most of what we see when we're going through an agency is just the division between us, Lamar, OUTFRONT, and the independents. By the time it's at the level that our agency contacts, the out-of-home budget has been made. What we are striving to do is we're striving to get to that strategy level so that the out-of-home budget is bigger. And you can do that either by coming with the advertiser, which is the most effective way to do it, or you can do it by calling on those strategy teams and reminding them about out-of-home and the efficacy, sharing case studies, all that kind of stuff. But the agencies remain an important partner, and us going direct to the advertiser is not in any way meant to undermine the importance that they have.

Got it. So digital conversions and programmatic are another growth driver you've highlighted in the past. Interested to know how you think about the progression of your boards and static to digital, and then within that, digital allocation moving more to programmatic. And then, Scott, how do you kind of weigh, I guess, the incremental growth against sort of the inherent volatility, right, that might come from having more programmatic exposure?

Yes. No, it's a good question. So first off, we remain incredibly bullish on digital conversions, and they continue to deliver really good economics. IRR is in the low 30s typically on the conversions that we run. So digital remains an important growth driver for the business. Programmatic, the thing about our assets, and this is true of kind of everything within our portfolio is you have a very strong Pareto of the best assets driving most of the revenue. And so one of the real key things is figuring out how important -- and usually that's driven by location. That's driven by something being in a particularly attractive location, whether it's near a commercial area or near a particular community that people want to reach. And so the trick in our business is striking that balance of making sure that you're getting demand across all tranches of the inventory. And I think where programmatic plays an important role is helping that happen. If you think about programmatic, it is happening at the last possible incident. If you don't have a programmatic ad hit a spot, that spot is going to go wasted. Maybe you'll put something that is a low range, a lower price contract on it. Maybe it will be a public service announcement. We do generally have to do things for the cities that we're in. All those kind of things could be what goes into that spot instead of the paid ad. So programmatic is a helpful and accretive thing for the business. I think to your point, we wouldn't necessarily want it to be 100% programmatic, but we are, as an industry, a long way from anything remotely like that. And I think that you're right on the volatility that it does have more volatility, but that can cut both ways. Volatility isn't entirely bad. Volatility can be to the good, and we've observed it in both directions. And so I think the important thing is just striking a balance and taking advantage of the fact we've had advertisers who were direct buyers that became programmatic buyers that went back to direct buying because they weren't able to get the locations. Like that's one of the trade-offs is that if they really want those locations that are at these particularly attractive spots, the only way to get that might be doing a direct deal. Because programmatically, you go and you look for availability and there's no availability there. And so it's striking that dialogue with the advertiser, helping them understand the trade-offs and striking a balance. It feels like something that's manageable.

Got it. So within your outlook, you reiterated EBITDA and margins for the year. Q1 margins were a bit below Street expectations, but we think can be explained by the new MTA contract. David, I don't know if maybe you could walk us through the dynamic there, and how we should think about that revenue ramp versus the MAG through the year.

Yes. No, absolutely. I can definitely go into that. But before I go into the margins of that contract. The MTA, it's a great contract for us. It's roadside billboards. I know people kind of get confused if they're roadside, aboveground billboards and it's going to be very profitable. It's going to be a good contract for us, and it's a long-term contract, which is great. It's a 15-year deal. And really, what that MTA contract does for us is it really opens the door. So we'll have both national and local sales on it. But before we had the MTA in New York, we had coverage across the boroughs, but we weren't as strong as we would like to be. So when national RFPs came out, we could participate, but not as much we would want in New York. With having these 300-plus billboards, it really gives us that coverage in the New York DMA, which obviously is a very important DMA for our company. So it's going to be a really good contract, really excited about it. From a margin standpoint, yes, it's definitely a lower-margin contract. There's a high rev share on it. The first quarter is going to be a little bit different than as we get into the fourth quarter, and there are really 2 reasons for that. One, the day you sign that contract, and we picked up that contract in November of last year and negotiations went right down to when we got it. The site lease, what you're paying the MTA starts on day 1. And obviously, your revenue is going to start on day 1, but it's going to ramp. So when you look at it in the first quarter, the site lease you're going to have in the first quarter is the same amount you're going to have in the fourth quarter, you straight line it, it's the accounting rules. But from a revenue standpoint, it's going to take a little bit of time to ramp that up, probably gets fully ramp into the second into the third quarter. So it's going to have a little bit more of an impact on the margin in the first quarter than in the fourth quarter. And overall, it's going to be profitable for the business. And I will say, as we get into '25, we have this contract, which will be a little bit margin negative to the Americas business. But if you look at our business, we get to the end of the year for 2025 and you look at our margins consolidated and you take out the airport rent abatements that we got last year, so kind of more of a like-for-like, including the MTA, I think slightly, our margins will increase year-over-year. And I think that's an important point.

Got it. So with the close of international, you've spoken to eliminating $35 million of annual run rate corporate expense. Maybe you could talk about the incremental opportunity from here, some of those TSAs roll off and eventually, I think you go to zero-based budgeting.

Yes, that's definitely actually in progress. And I feel like we're a little bit ahead of the game, it's actually nice, as Scott mentioned before, like to get through some of these transactions, that's why we've been talking about them for a long time. So it's nice that we're through them and now kind of the fun part, and we'll talk about the proceeds as well. From a cost out, we were kind of targeting a little $30 million, $31 million. We're up to $35 million, and a lot of that is directly a result of the operations, the corporate expenses that were in Europe, also Latin America, and some of that is here in the U.S. But there will be more savings to come. Right now, we still have the TSAs. So we're still doing the work from an accounting standpoint, a legal standpoint, compliance, even a little bit from a technology standpoint. So as those TSAs roll off, we'll see more expenses kind of trickle in, in 2025. But really what the business is doing and the accounting and finance teams is our business is going to be different in 2026 than it was in 2024. And that obviously is we're going to be a focused U.S. business as opposed to an international business. So the structure of our business should be different. So we'll be going through all our corporate budgets and really saying, "What do we really need to run that department as opposed to what we have?" So that's going to be the zero-based process. And I will expect additional expenses to come out above the $35 million as we get into the full year 2026.

Scott, before moving to some balance sheet questions, I want to circle back to the overall strategy for Clear Channel from here and getting the equity to a more sanguine place kind of as you termed it. You indicated that with Europe gone, you're in a position to pursue more creative structures for the company, for your assets. I know you don't want to front-run anything, but what should an equity investor know at this point?

Yes. I always speak to our creditors, too, because we love all of our constituents.

Direct towards equity to the whole room.

No, we love the equity investors as well. Look, the things we're aiming to do are win-win-win things. And there are 2 basic assets that we're looking at. One is our asset of being able to run an Outdoor business well and do a good job selling it and running it efficiently. And so think of that as finding ways to use other people's money to bring more assets into our perimeter. And at the simplest form, it would be a sidecar where we're just managing it for someone and taking a revenue share or something like that. At the most complex level, it would be an actual joint venture where maybe we're contributing assets at a valuation, a sponsor is contributing cash, and we're going out and buying something that will get synergies in both revenue and expense synergies and consolidate. So these are complicated transactions to work through. Don't know if we're going to have success, but that's one set of assets we'll be leveraging. The other set of assets we'll be leveraging would be our inventory. And we are thinking of things that would allow us to partner with someone and there's a lot of structuring. And so my more structuring-oriented friends in the room don't get overexcited. But think of it as like almost a preferred equity kind of a vehicle that would be the coupon of the preferred equity would be paid partly or fully in inventory. And you could imagine a variety of different ways of constructing it. But those are the 2 things we're doing. So managing a broader pool of assets using other people's money, finding ways to bring more liquidity into our perimeter, leveraging our inventory in some sort of scale way with someone. Think of the target market of that as people who are a good fit with out-of-home with good balance sheets. And I think you can imagine a variety of people who might be interested in that proposition. So more to come.

Got it. Maybe moving to some balance sheet questions. So Clear Channel ended the quarter with, I think, around $300 million of cash that's pro forma for the post-quarter debt repayments. What is the kind of minimum cash balance the company feels comfortable running the business with? And should we expect more excess cash to be applied to further debt repayment?

Yes. This is I mean, now that we're past the acquisition, seeing that cash actually flow into the balance sheet, I think, is definitely the fun part. We finished the quarter with $400 million. And David, as you said, we utilized $100 million to buy back about $120 million of debt. And I think we'll continue that process. I don't think we need $300 million on the balance sheet. So we'll opportunistically look to buy debt down. As far as the optimal amount of cash, I think we're still working that out. But when you look at it, it's probably going to be some combination of cash and liquidity. And when I say liquidity, looking at our revolvers and our ABLs, historically, we probably had $150 million plus of cash on the balance sheet. We'll need probably less than half of that from a cash standpoint. We're still working out what that is. But I guess the message I'd say to the group is we have $300 million of cash on the balance sheet, there still is Spain that's still out there that we're in the process of selling. So as that proceeds come in, the proceeds that we have today, we do want to look to pay down debt. I mean, when I think about our business, obviously, we want to lower leverage as we're getting to free cash flow generation in 2025, as we paid down debt, and we paid down the BV notes, which $375 million plus the $120 million, we lowered our interest expense roughly $50 million. As we're paying down debt, that's going to lower our interest expense even more. That will -- free cash flow generation, we can utilize that cash flow in the future to pay down debt. So that's really the goal we want to get to. As far as going back to your original question, it's a lot less than what we've historically had on the balance sheet, probably less than half and maybe even a little bit less than that, but I'd more look at it as amount of cash that we're going to have plus our liquidity and really utilize that like a normal operating business as opposed to just having it there because in the past, we had an international business. And by selling that, we really derisked the business. We needed to have that amount of cash on the balance sheet in the past because of that. But now we're a much less volatile business, which is the reason why we're talking about less cash to have, but actually using our liquidity more in a normal sense that you would do.

Got it. And can you speak to the right debt level that the company sees as necessary for REIT conversion, assuming that was -- or that would still be the goal?

We definitely have the optionality to do that to become a REIT. I mean, really, for those in the audience, really, the main benefit of being a REIT is really from a tax standpoint. And right now, with where we are, we pay taxes in the U.S., but it's an immaterial amount. And really for it to make sense for us to be a REIT, your leverage -- I mean, I look at the players in our space, and you probably need to be in the 5 range, maybe somewhere between 4x and 6x, and we're not there yet. But as we get into paying down debt and in the future, and we're not there yet as a taxpaying entity, that is definitely an option that's out there. But right now, from a tax standpoint, it's not really necessary, and I don't think it's necessary from where we are from a -- or possible from where we are from a leverage standpoint.

Okay. And then just following up on some of what Scott touched upon partnerships that could be pursued. I guess, how would the company's existing debt indentures be impacted or play a role in any kind of structure?

I mean, like Scott mentioned this earlier, I mean, the options we're looking at are really a win for the equity, a win for the creditors and a win from a shareholders' standpoint. So as we're going through these options and we're looking at them internally, this is something that would be -- the debt agreements are not -- cannot enable us to do the things that we're looking at. So I think we're there from -- either from our indentures or from the credit agreements.

Got it. And then just last one from us. Just with the debt maturities between '27 and '29, when you might think about attacking that debt stack and what kind of nontraditional paths could you have for that?

Sure. I mean, look, we're always looking at the capital markets. I mean that's something we're always aware of. And right now, the markets are actually pretty good from a high-yield standpoint. The debt that comes due in 2027 is actually a very attractive piece of debt. It's 5x and a 8x. It's due in the second half of 2027. So we do have time to attack that debt. And again, we will have maturities in '28 and '29. So we're actively monitoring the capital markets. The thing that we need to be ready for is to be ready to come out when the markets are open, when it's right, and we'll absolutely be ready to do that. As far as from a nontraditional standpoint, yes, we're having conversations. There are a few folks within the out-of-home space that have used ABS type of financing. We have looked at that. Could you look at something a little bit as nontraditional as the capital markets as far as a pipe into our business? Yes. Look, we'd be very flexible to look at really any option. It's going to help us from a leverage standpoint to lower our interest. But the capital markets have been very good to us. They've been open to us. We have great assets for that. So I think our options are available as we get forward for it.

Okay. Scott, David, thanks so much for being here.

Thanks, David.

Thank you.