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

Good morning. My name is Jason Kim. I am the high yield media, cable and telecom analyst here at Goldman Sachs. And welcome to the fireside chat session with Clear Channel Outdoor. The Clear Channel is a leading outdoor advertising company with attractive assets and growth in the Americas and international markets. And over the next 40 minutes or so we hope to get insights into how the business has been performing during this volatile macro environment and the long term strategy for the company. And I am really excited to be joined by the senior management team from Clear Channel. William Eccleshare, Chief Executive officer; Brian Coleman, Chief Financial officer; and Scott Wells, CEO of Clear Channel Americas. Thank you all for joining us today.

Glad to be here.

So to start things up, William, I'll throw the first question to you and let start with a broad update on the business. It wasn't so long ago back in 2019, it was a very strong year for the Outdoor industry and CCO as well. And you're seeing some of the strongest growth rates that we have seen in quite a while. And obviously the COVID has brought sudden changes to the macro environment and everybody has had to adapt. You've done a great job of cutting costs and pivoting your strategy. What are you focused on at the moment, as you're going through the recovery phase in third quarter and beyond.

You say it wasn't that long ago in 2019, I have to say it feels like several decades ago. This is being -- this has felt like a very long year and we're only in September. But what am I focused on right now? I think I am focused on observing and driving the recovery as fast as we can, benefiting as markets come out of lockdown and ensuring that we learn the lessons across our business around Europe, Latin America and United States, and share that learning so that we make the most of the recoveries. I mean the good news insofar as there is any good news in 2020 is that once we had put the horrors of Q2 behind us, and as markets unlocked from their COVID confinements -- as those markets opened up, audiences went back out on the streets, and advertisers came back on to our boards to reach those audiences. So I think it is still an unpredictable world that we're operating in. I don't have huge visibility as to how this pandemic is going to play out, but what I am increasingly certain of is that as markets return to normal, people's behavior is returning to what it was before and advertisers will want to reach those people to sell their goods and services. So that's how I'm seeing it.

Any sort of major initiatives that you've undertaken as a result of this downturn? And any progress, updates you can share with us on those initiatives?

I think I would say -- I mean, there were clearly some very specific initiatives around cost that we've talked about. And I'm very proud of the way the team responded around the world to manage our cost base appropriately and make appropriate cuts as fast as it could be done. So that was a specific COVID reaction. In terms of other initiatives, we believe that the market will return in the way that it was pre-COVID and the kinds of things that we were doing to capitalize on those markets and build our business for growth, those will be as relevant post-COVID as they were before. So the digital transformation of our industry, the use of technology and the application of technology, particularly around data and programmatic, those continue a pace, and we will absolutely make sure that we continue in our leadership position with those kinds of initiatives like, for instance, we launched RADAR, which has been a huge success for us in the United States, our audience tracking application. We launched that into Europe, learning from what we've done in the U.S. We launched that in the U.K. and Spain earlier this summer. And it's been hugely valuable for us in tracking audiences as they've come back and demonstrating to advertisers that people are back on the street and out and about. So I would say, net-net, more of the same, but perhaps with greater intensity than ever before.

Thank you for that. Let's get into some of the specifics into the segments and start with the Americas segment first. So I'll ask this question to Scott. So anything you can talk about from a revenue recovery standpoint so far in third quarter? Obviously, second quarter was tough for a lot of companies, including Clear Channel. Just update us what you're seeing in the markets? Any broad trends or themes you can share with us as you look across your vast footprint in the Americas segment?

Sure. Thank you. I think there's a couple of things I'd call out. First of all, the diversity of the impact of COVID on markets in the U.S. has been really striking. The very largest markets that we're in, and we are primarily a top 20 DMA company. The very largest markets have been hit the hardest. So New York and San Francisco, Los Angeles, and they have been persistently challenged the longest. Whereas if you look at our smaller markets, places like El Paso or Jacksonville or Milwaukee, the impact has not been nearly as hard. And so a big driver of that is the amount of national business. I think you've heard us talk about national being down more than local national, turned off advertising faster, and we're more aggressive about pulling back budgets in the early days of COVID. That, coupled with the volume of business in those markets, you kind of need national dollars in order to fill up the asset base that you have, kind of all those things converge to make the large markets more challenged. You talked about -- or you asked about recovery, we are seeing recovery probably -- this is sort of the third recovery we've seen. There was recovery we saw in May that came to a grinding halt when George Floyd was killed. There was recovery we saw in June that came to a slowdown. It didn't grind to a halt in the same way when you saw the spiking in the South and the West of cases. But now that we're seeing sort of a more broad-based recovery build, probably the last 6 or 7 weeks, volume in the national space is getting better in terms of RFPs and in terms of activity. There's still not as much demand for the largest markets as there has been historically. They're definitely coming back slower, but we're seeing strength across other parts of the markets and even national advertisers are looking at those other DMAs beyond the top couple as they are looking to rebuild their businesses. There's a lot of different angles I could take with it, but I think for the high level, that's where I'll leave it for now.

We've heard from some other advertisers or other operators who commented that, as you said, the national advertisers were first to pull back. And as they look to reengage with the market perhaps just given the differences in the different regions in terms of the local recoveries that instead of having one broad message, maybe the national advertisers will look to sort of micro manage the messaging at a more local level. Is that a fair characterization or are you seeing a similar theme play out?

So there's some of that, particularly with our digital assets, national advertisers will look to get their message customized to the local market there are a couple of companies right now running campaigns, highlighting small business partners. And in those cases, they're highlighting companies that are in the local market, and we're able to do that with a lot of agility with our digital assets. We're able to do that with a variety of companies, where they're flowing those through. So yes, we are seeing some of that. A lot of the messages, though, are messages about big picture, product launches or big picture priorities that the companies are trying to drive as well.

Okay. That makes sense. Again, you touched upon the local outperforming national. At the same time, when we go back to the financial crisis, the last time we had a recession here in the U.S. and also globally, when you look at the advertising market, in the recovery phase, national did outperform local for quite a long time. And I attribute that to the fact that larger companies were just better able to withstand the economic shock better than small businesses. So as we move past the immediate shock of COVID in the past couple of quarters, as you look out into -- over the medium term, do you see a similar phenomenon happening in your markets in the Americas in terms of national outperforming local on a sustained basis. What's your take on that?

Yes. I mean, I guess a couple of thoughts on that. First off, this is going to be an entirely different recovery from '08, '09 in the ad markets because the ad market going in was so different. It was so much more digital. For us as well as for ad markets more broadly, we were probably 5% digital heading into the '08, '09 crisis, and we were 30% heading into this crisis. And so that creates a velocity in the business that's different than the legacy of the business. I think the other thing that's really different from '08, '09 is that there are a lot of companies that are having what I call good COVIDs, where things have actually broken their way, whether it's the over-the-top players, the communication players like what we're using to have this conference, whether it's e-commerce and delivery-oriented. And so you've seen a number of those companies sustain their investment and even increase their investment during the crisis. I do think you're right that the large advertisers, when whatever the end of COVID is, happens, I think you will see the large advertisers able to be aggressive sooner. It's too early to declare that that's happening, and I don't think that we see evidence of that happening right now, but I fully would expect it. What we are seeing evidence of is that it's really important for our sales teams to be smart about who's having a good COVID. So whether that's particular verticals that have held up well or whether that's large advertisers that have performed a lot of the momentum that we're seeing building as the business comes back, are from those types of companies and by being very astute as to who's benefiting and spending your differential sales time on them as opposed to trying to get people who've had tough times, back advertising is definitely a great one in the resources.

And just as a clarification, the reason for digital to have a bigger impact in terms of velocity, that just comes from the fact that it's a lot easier to turn on and off a digital board than it is with an analog board. Is that the right way to think about it?

That's right. And it's particularly important at a time like this, where you've had a significant chunk of time where people weren't buying. And again, this dynamic is somewhat different in the U.S. than it is internationally. And William might want to weigh in a little bit on how it looks over there, but a material part of our business are contracts longer than 3 months, not so much on the digital, but in the printed world. Digital, it's more likely that people are coming in and out of the market, but what ends up happening is you're able to put advertisers up much more quickly. We're able to close a deal on Monday and have it on a screen on Tuesday, and as such, at a time like this, it's critically important because we're still booking Q3 aggressively right now. That wouldn't have been the case in the '08, '09 crisis because we just wouldn't have much inventory that was able to be posted in the final 2 weeks of a quarter. I don't know, William, if there's anything that you want to add.

Let me just pick up on a couple of points there, Jason, because I think they are important. I mean I do think the volume of digital inventory that we now have does make us significantly more flexible and means our reaction times are much quicker. And we've got significantly more digital in Europe than we have in the United States. And that, together with the fact that our inventory is -- tends to be much more kind of high street and city center in Europe than in the U.S., those factors were significant in ensuring that Europe was significantly harder hit by COVID in Q2 than our U.S. business. The flip side of that is that the recovery in Europe in Q3 has been significantly faster in Europe than in the U.S., and we mentioned this on our last earnings call that the sequential improvement in Europe is significantly greater as we look at Q3. So I do think that's an important point to note and a lot of that is driven by that flexibility in digital that we've talked about. And overall, to your earlier question, I do think we need to be very, very careful about not trying to learn lessons from 2008, '09 because it was a completely different set of circumstances driven by completely different factors than we're seeing in this pandemic and this is really new territory. I mean, I think if you really want to try and find some benchmarks, you have to go back to 1919 and the post first war pandemic. I'm not sure that data is very robust. So I'd probably caution against doing that. So this is new territory. It's why I say one of the things we're doing is learning from market to market and watching how they come out, and how we can best capitalize on the emergence from lockdowns.

That's really interesting, especially about the European recovery, because initially, we would have thought that a lot of the impact was just given that it was exposed to larger markets, large city centers that were more hit from COVID from lockdowns than some of the smaller and rural markets, but there's also a digital penetration element to the velocity of the business going down first, but coming back up as well.

You can count so much more quickly, and you can come again much more quickly. So yes, that is a factor. The other factor is that the majority of the European cities with the notable exception of Stockholm, they were in lockdown very quickly and pretty tightly enforced. And what's interesting as well, I think, is that the more tightly enforced those lockdowns were and the earlier they took place in the cycle, the quicker the recovery. So Switzerland is my kind of leading example of that, where they went in early, they lockdown very thoroughly. When they came out, people went back to work, went back out to the streets. Our audiences effectively returned to our billboards and our street furniture and the advertisers came back. And we've had 7, 8 straight weeks in Switzerland, where our revenues have been higher than the same period last year. Now I'm not so foolish as to say we should extrapolate directly from Switzerland to everywhere else in the world, but I do take some comfort and some positive energy from those examples.

That's really helpful. So with all that said, when we think about the international markets, do you see any structural changes you see in the business, whether it's the composition of the verticals that will advertise with you on your properties in Europe? Any sort of margin changes are you thinking you should strive for as we go through the recovery? Any changes to the business pre-COVID versus post-COVID, if you will?

Well, I mean we always strive for margin improvement. We're always looking for cost reduction, and there are always opportunities there. So that's the kind of an -- ongoing part of our business, and I guess, COVID forces us to focus more strongly on that. I think it is way too early to look for structural changes in the market. I don't know -- I don't know how far through COVID we are, but we're not out of it yet by any means. And so I think I would be very cautious about looking for structural changes. In terms of verticals, the biggest growth vertical we've seen in the European markets is probably government and health awareness advertising, advising people about local lockdowns, advising people about how to manage themselves through the pandemic. So I suspect that's not an enduring change in terms of verticals. The one other observation, though, that I would make, in general, about COVID is I think it has been almost universally, it has been an accelerator of trends that were already happening. So whether that's the acceleration of the trend towards streaming movies or online shopping, you've just seen an accentuation of things that are already happening, and that is absolutely true for our medium, I believe. And I see no reason why the growth in Outdoor that was happening over the last 5, 6 years as we were taking increasing share of traditional advertising because of our ability to provide mass reach in a way that TV no longer can, radio no longer can or print no longer can, that will continue. There is nothing that COVID has done that will change that significant structural shift towards Outdoor. And that is why we do we remain resolutely optimistic in the face of some pretty tough trading over the last months.

That is good segue into my next question. And you touched upon this a little bit before, but again, 2008 served to be a significant catalyst for major shift in ad dollars from traditional media to digital. Most of the share shift came from print to digital until more recently. And all throughout that time, Outdoor has been able to defend its market share at a remarkably consistent level. And in fact, in the past year or so before COVID, the share was actually increasing. So what are you doing as you reengaged with your advertisers first to come back to advertising in general, but as you reengage with them, what are you talking to them about to make sure that the momentum that you're seeing is -- remains with the company and out-of-home space in general. And in terms of any hesitancy from advertisers as far as out-of-home demand is concerned, what are you telling them about that aspect?

I think the biggest thing we're telling them is how incredibly powerful Outdoor is in the mix with digital and online. So we are an accelerator of digital online advertising, and we work -- we have case after case where we show that we increase the effectiveness of online with Outdoor as a powerful mass reach medium that will drive traffic online. That was happening significantly in the last few years. That is the leading conversation, I would say, that we're having with advertisers. The other point that we make consistently is the increasing flexibility of Outdoor. To my earlier point, there are still advertisers who don't recognize that this is a medium, which can be very dynamic, very location specific, very audience specific, if you want to use it in that way and using it -- using it as a tactical medium as well as a long-term strategic brand building medium is another part of our story to advertisers. So I feel we have some very strong messages to land. And the good news is we are finding advertisers being very receptive to those messages.

And has that conversation been consistent thematically between your Americas segment and the international market?

Yes, that dynamic. The dynamic with online is very consistent. The flexibility point is probably more acute in the European market because of the higher penetration of digital, but it's an increasing part of the American story as well.