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

Good morning, everyone. My name is Avi Steiner, and I, along with my colleague, Don Yang, cover the High Yield Media sector here at JPMorgan. It is our pleasure to welcome Clear Channel Outdoor back to our conference this year, albeit virtually. Joining us from the company are William Eccleshare, CEO; Scott Wells, CEO of the Americas; and Brian Coleman, CFO. Today's session is going to be a fireside chat format, where I'll keep William, Scott and Brian on the proverbial hot seat for the next 30, 35 minutes. However, we do have the ability to ask questions or rather to take questions from the audience.

[Operator Instructions] With that, gentlemen, let's get started. And thank you for being here. So every management team in Outdoor this earnings season has talked about limited visibility, certainly at the start of the year. Obviously, the ongoing pandemic plays a role here. But I'm curious if you think something else is at play on the ad buyer or customer side.

The short answer is I don't really think anything else is at play. And I think this is just influenced by the pandemic. But just to expand on that a bit. I mean, I think we have seen visibility getting shorter over the last probably 10 years. I mean, ever since I've been involved in the business, we've talked about shortening visibility. And I think that is because we, as a business, have actually got better at offering greater flexibility to advertisers. So they have been able to book later. And digital has certainly accelerated that trend and that ability to book later. But I don't see anything in the pandemic that will have changed the nature of the booking cycle significantly in the long term. So short answer is no, I really don't think it's pandemic related.

Excellent. So if I can play that forward a little bit, as we come out of this pandemic, what do you think your core advertisers, the marketers are looking for in terms of metrics, to get comfortable jumping back in the pool proverbially? Is it traffic counts picking up? Is it more reopenings? Is it return to live sporting events, outdoor venues opening up or their own business outlook? What do you think are the main factors there?

Well, of course, all of the above, really. I mean the, the business climate and how the advertiser's business is performing and how the macro economic environment is performing are clearly going to be factors for each advertiser to consider. But fundamentally, for us, this is about traffic patterns. This is about our audiences being back on the street, back on the highways. And what we saw in the third quarter, particularly marked was a return to advertising as the restraints were lifted. I mean I think that's true right across our business. It was particularly marked in Q3, you'll recall, in Europe, whereas the tougher constraints we had in Europe were lifted, people went back on the streets, advertisers came back on to our boards and signs. And I think that is what advertisers will continue to look at. And I think all of the signs are pretty encouraging as we go into the second quarter and beyond. In the U.S., and I'll ask Scott just to pick up on this. In the U.S., we are already seeing traffic patterns return to pre-pandemic levels. And I think as that continues and as advertisers continue to observe the reality of that for themselves. So I think they will return to the out-of-home sector. Scott, do you want to add anything to that from the U.S.?

No. I think the only thing I'd add, William, is that we do have a substantial airports business and that business is challenged by the air traffic being down as much as it is, although we saw a good movement upward of that over the holidays, certainly saw some upward movement over President's Day, and I think we will see that business start to turn as confidence grows. I guess the only other thing I'd add is just the diversity of experience across the country. William's right. Traffic in aggregate is up above where it was this time last year, kind of pre COVID and January was up year-on-year traffic wise. But it is a very different experience on the coasts than it is in Texas and Florida and the Midwest is kind of in between. So we have a pretty different experience depending on what part of the country you're in.

But just to come back on your -- the kind of the fundamental part of your question, Avi, in the end, advertisers are buying eyeballs. And if those eyeballs are back on the street, they will come back to the medium, and I think we've shown that already over the course of the pandemic.

And this if I think about the shape of the recovery by region, and you talked about some traffic picking up here domestically. But given the different sets of assets, Europe versus the U.S., throw in the airports business, how should we think about the shape and speed of the recovery between your core regions?

Yes. Well, it will certainly vary market-by-market. And when I say market, I do -- within every market in the U.S. I mean, I think we see different reactions from different states and different countries. And as a result of that [indiscernible] patterns. I think transport, Scott mentioned airports, we have a significant transport contract in Sweden as well. Those contracts will be slower to recover because we know that people are still avoiding using public transportation. And so that will be a slower sector to recover. I think if I think about Europe, we see in the U.K., our digital assets recovering more quickly because advertisers can come back into that digital inventory very quickly. So in the fourth quarter, 70% of our revenues in the U.K. were from digital, and that was -- that's the highest share that digital has ever taken in the U.K. and we expect that to continue over the short term. I think if I touch on Europe, and then Scott can go into a bit more detail on the U.S. Again, we see different levels of restriction in the major European markets. We have certainly -- as we said on our earnings call last week, we've seen some pretty tough restrictions imposed towards the very back-end of 2020, which have been dured into Q1 2021. Tougher restrictions as a result of mutations of the virus in France, in the U.K., in Spain. So all of our major markets. But there's also a pretty clear indication that there is now a road map out of that in those markets. The vaccine rollout is gathering pace, as I'm sure you know, and as indeed it is in the U.S. and the more that takes effect, then again, I believe the more confidence there will be from advertisers. Scott, do you want to give any more detail on the U.S. recovery and the kind of the shape of that, as you see it?

Yes. I mean, I think the interesting thing back to Williams, it depends comment. I mean, we had a couple of markets make budget last year, and they weren't easy budgets. And we had markets that were down 40% or 50%. So the recovery, when you think about the fat of the bat for our business, the thing that we're lacking right now are a couple of those key verticals that are really important to us, like theatrical, amusements, restaurants, retail. Not that they're gone entirely, but they are much lower than they would be in a typical year. We actually have a number of advertisers and categories like beverages and liquor and QSR that were up in Q4 year-on-year, Q4 '20 versus Q4 '19. So we are seeing recovery in important verticals. Business services held up well throughout and so I think it's -- for us, from a U.S. perspective, it's getting a couple of those big cities back a little closer to online, and it's getting a couple of those verticals back in the mix, along with, obviously, air travel recovery.

Scott, if I can just ask a question on that response. Is there a way to size for us natural amusement, I think you mentioned restaurant and retail. And I don't know if movies is the big enough category, but just a sense of maybe historically, what's on the sidelines or some way for investors to think about those more dormant categories, would be my word?

I mean we've never really disclosed details on those. I mean, I'd characterize it as sort of directionally, it's more than 10%, less than 20%, probably would be a set of guardrails that I can at least live with. I'm not sure if my IR people will like that one. But it's meaningful, but not -- it's not the majority of the business by any means.

I think Eileen would be perfectly happy with that. I'll speak on her behalf. No, I appreciate that answer. So I think we've always thought about this ongoing shift to digital. We talked about it. And I'm wondering a couple of things. One, if you can update us on your digital plant, whatever you can tell us by geography? And maybe given that digital is just an increasingly important part of the business, overall, trends you don't have to be specific between kind of your static and digital boards would be helpful.

Okay. Do you want to cover that for the U.S., Scott, and then I'll talk about Europe and the Middle East?

Yes. I mean, so we are continuing digital conversion. Our pace was somewhat slower last year just because we did throttle back on capital, but we still did 50 or 60 units across the country. I think we will see that ratchet up as we build out the New York airports, there'll be a lot of digital in there. So we're about 1/3 revenue, digital right now. And I think we're expecting that trend to continue. Within our portfolio in the U.S., we have cities that are north of 50% digital revenue, and we have cities that are basically 0. I mean, setting aside the ones where it's entirely regulated out, the lower end of our cities are probably 10% or 15% digital. So we still got a lot of room to run on this. I mean, William will talk in a second about how the U.K. is up at 70% digital. That's not an unreasonable number from my mind of where some of our locations would get to. So we've done a lot in digital conversion, but I think there's a lot more to do. And I think the other part that's exciting about digital right now is that we are continually getting better at monetizing it. And so that will be something we'll want to talk about too. But let me have William talk about the footprint in the rest of the world if...

Yes. I mean, I think Scott has covered the key points. Digital remains absolutely at the heart of our strategy. I'm very proud of the fact that in 2020 through the pandemic, we continue to invest in digital. We continue to run digital conversions in the U.S. We continue to expand our digital footprint in the U.K., in Spain, in Sweden. So major markets where digital continues to grow and will continue to be part of that growth. So the final point that I'd make, I guess, just overall, is that I think what the pandemic has done has enabled us to demonstrate to advertisers the flexibility that digital offers and the quality that digital offers. So it's kind of forced trial for a number of advertisers who might have not used digital in the past. And I think that has been a positive and enduring positive for us that will take us into the coming years. But the headline really here is our commitment remains absolutely as it was to digital. We've continued to invest, and we will continue to invest as opportunities for conversion continue to arise.

Excellent. And staying on the digital topic, if I could, I think we've always thought of digital as margin accretive over time, certainly. And as the company's digital footprint grows, and we move past the impact of the pandemic. Is there any reason to think that the company's margins can't be higher in the future than they were in 2019 ex Clear Media? I'm not asking for guidance, but just as your plant grows, would seem to be moving in that direction. I want to make sure I understand it.

I'll let my CFO handle that one.

Well, I think that's a logical conclusion. I do think there's a number of factors that you have to mix in. And some things could be what does your business mix look like in the future? Scott talked about the recent airport win, that's a big contract. We have a big airports business. If airport or transport lower margin compared to our billboard plant or digital street furniture plant. If that becomes more of a business mix, that could change margins. On the other hand, as part of the efforts that we went through as a result of the pandemic, we went through a number of restructurings throughout the organization and it took out some costs on a more permanent basis. Much -- many of the costs will come back with revenue, but not the restructuring costs. Those are more permanent, and that would put positive pressure on margin expansion. So I think it's a mix of different things. It is -- the more you invest in digital, the larger that becomes as a percent of your revenue base, your business mix, your cost initiatives. But overall, as the business starts to come back, I would expect margin expansion. And it's just operating leverage in our business, Avi.

Appreciate it. Data analytics, key focus. I -- you can take that also, if you'd like. It's a key focus of the company. Can you help the audience understand how the company brings RADAR, other capabilities to bear the better target audiences? And I ask this because I think it's helpful, but a real-world example, perhaps on both sides of the pond and how you use data to target would be great. And if I could throw one more thing in here, not to overcomplicate a question, but with other names we cover in a digital space, privacy concerns are increasingly becoming a focus. How does that interweave into any of this?

So Scott's leading the way on this for the business. So I'm going to ask him to pick it up for the U.S. and then I'll talk about a couple of European examples. But Scott, why don't you answer the bulk of this?

Yes, sure, of course. Let me start with the privacy one just because I think it is a very timely topic. We do acquire our data from partners and largely from the mobile data ecosystem. So from both things like apps as well as things like carriers and we have our partnerships with our Geopath, which requires data from similar sources. So we have been very focused on being compliant with the relevant privacy rules. And it's something that our partners are very committed to. One of our partners is really leading the charge on this. And as the data availability market evolves, the depth and quality of the data will evolve, but we don't expect that we're going to be in a situation where it becomes a data desert. Just the rules will evolve, and we're working very diligently to evolve with them. So that's sort of the compliance, privacy part of it. It's something we're definitely very focused on. In terms of the use case because I think that, that could be helpful. I'll just remind you all that we have sort of 4 core products in our suite. We have RADARView, which is a planning tool. We have RADARConnect, which is a tool that lets you buy other media to retarget folks. We have RADARProof, which is a set of attribution tools that you can use to look at things like football or television viewing or things like that. And then we have RADARSync, which lets us actually integrate and onboard first-party data from advertisers or have them onboard our stuff, all in a private way using tools like LiveRamp. So those are the 4 things that we do. And an example I'd give you, we -- I think we got some press on this as well. We partnered with GameDay Vodka around -- well, we've had a few campaigns with them, but we had a very prominent campaign with them around the Super Bowl. And in that particular case, they used RADARView and the tools that there were for planning to target communities that over-indexed on spirits. There was some looking at other vodka brands and things like that. And so you could use the tool to actually target areas that were relevant for their particular audience. And then on top of it, they used RADARConnect to do retargeting so that folks who had been exposed to the signs were then served up ads online or through their mobile devices. And the thing that's fascinating about that, I always talk to advertisers about it as it's basically free money at some level for them because what we found consistently when people use our large-format signs in conjunction with digital campaigns, they get 3x or 4x the ROI in terms of whatever action they're trying to get person filling out a form, clicking on a link, whatever it is, as a result of that integration. And so that's a real-world example of how somebody has recently used it. I'll hand it back to William.

Yes. I mean, I think there's another nice example from Spain where we ran a campaign for Disney+, who specifically wanted to reach 15 to 45-year old's. And one of the things we should never forget about our medium is it is a mass reach medium. But if you can more accurately target within that mass reach concept, I think that gives us added value. So with that Disney+ campaign, they wanted that age demographic. They wanted people who were interested in comics and cinema and video games. And so using that anonymized RADAR data, we were able to choose the signs that were most accurately going to match with that demo. And I think that's the point. It just improves the efficiency of the medium. And gives an additional reassurance to advertisers of the value they're going to get. And so as you know, we've taken RADAR, the basic technology of RADAR from the U.S., rolled it out into the U.K. and to Spain, and we'll be taking other European markets this year as well.

I love when you can drill it down to something that's really happened. So that's fantastic. I want to switch gears to the Airports business. [Operator Instructions] So this is maybe a good segue. So Airports, I believe, stood at 13% of your business in '20, it was '17 and '19. I was struck on the call by the comment that the business held in well, I think, until May of last year, I think you guys said that, you'll correct me if I'm wrong, turning lower later than expected. And so a couple of questions. One, from the audience, I guess, is there a way to get a sense of airport's performance in this first quarter versus traditional billboards, given that dynamic? And then secondly, is the kind of the performance into May, a function of longer contracts in the airports business relative to your other plan and I think you touched on this earlier, should we expect a similar longer lead time coming out of the pandemic and heading into the reopening. So I know there's a lot in there. I'll stop and...

Well, I assume William's going to want me to take this one since I've got 99% of the airports in the...

They're your Airports, Scott.

Yes. I don't have alligator arms. I will lovingly catch our airports, William. The -- so a few things. Let me start with your contract length part of it. They do tend to have longer contracts, and they also tend to have -- all of our businesses are very dependent on iconic locations. And the thing about iconic locations are that advertisers are very loathed to give them up. So even if there weren't contract terms, the key locations like at security choke points or at key intersections within the airport complex, are things that people held until -- I mean, you might not remember this, but there was a time that it wasn't clear how long COVID was going to be with us. And there were people that were taking an optimistic stance, thinking it would be gone by the summer. And I think part of what happened in airports is that a lot of those iconic locations people held on to until they became convinced that the COVID was going to be with us a long time and that air travel was going to be down for a while. And so I think those are all dynamics that contributed to it. Certainly, contract length is part of it, although the contracts are not particularly longer than other parts of the business. I think it's that role of iconic inventory probably more than held up because I think airports tend to have more iconic locations than your typical transit installs, again, recognizing there's huge diversity in those as well. Just in terms of the relative performance to it, we have reached a point where it's bumping along at what I think the trough of it will be here in Q1. Again, we don't yet give that level of information, I think we will be expanding that disclosure in the future. But it's a multiple of the challenge that we're having in the traditional business. In terms of the degree to which it's currently down. And as you think about -- as you think about recovery, a lot of the dialogue, it goes back to these iconic locations, people tend to want to lock them in. And so you can imagine a lot of the dialogues with people right now of where the ask is. Well, the bid from the customer is, I'd like to lock in that iconic location at LaGuardia for the next 10 years at current rates. All of what people are trying to do with their office space. And the ask from us is, well, we'll give you that rate for the next 2 months, and then we can talk about what the ratchets are and that is happening in real-time across our whole portfolio, and it is something we're quite disciplined about. But it's something that is very real in terms of that dynamic and how that plays out and how skillfully we manage it will drive a lot of how the recovery works, along with how quickly air traffic resumes. So hopefully, that gives you some stuff to work with on airports.

That's terrific. And I'd be remiss if I didn't ask about the Port Authority contract. I don't know what you can tell us, I know it's still early days. You get asked about it a fair bit, but a fairly big win, it would seem and...

We're excited about it. I mean it's a set of airports that are real crown jewels within our portfolio. We negotiated the contract during COVID. So we were able to build a lot of protections in, and it was a very great partnership with the Port Authority, working things through to make that all work. I think as I look at the transition, we took it over at basically the last day of last year. We've got our logos out on the signs. We've got the team largely hired. We're in the midst of securing some office space here in New York for that expanded team. Things are progressing well. The airports are challenged on traffic. But I mean, I was just in JFK last week, and it was -- terminal 4 was pretty busy. I was struck that -- and I go into LaGuardia every week and LaGuardia is still relatively quiet, but I think we're going to see these airports come back strong once the confidence in the vaccine and everything else plays out.

Yes. Just as soon as your country lets me back in, I'll be giving it a look around, but I'm just waiting for that to happen.

It's nothing personal, William.

I just want to say, William, everyone has asked me in live chat where you're sitting. I don't know if you want to reveal the location, but you're certainly catching everybody's eyes. You might as well let people know.

Worried about that. I'm just in an old barn about an hour north of London, which is where I spent most of lockdown.

It's a great look, and you've answered a bunch of people's questions. So thank you. If I could ask one more...

All of these was that, then it's fine.

If I could squeeze one more in here. And I'm sure I know the answer before I ask it. But any other large contracts that we should be attuned to, whether you're managing it for others out there that may be of interest? I have to say the Port Authority one came out of left field for me, but maybe I'm a bad analyst. But anything you can help us with, just we should be aware of either direction would be great.

Well, I just -- I'll say a couple of things, and then we'll give you a more specific answer. I mean in the, the official -- the true answer is there is nothing material that's coming up for renewal that we have. So there's nothing of any kind of great significance on the horizon in that sense. I think it's also true, as you probably would expect, that there have been a number of potential tenders and contracts that have been moved out because of COVID. So particularly in Europe, some municipal contracts have been pushed out by a year or more because it wasn't perhaps the greatest time to be running a tender process. Is there anything more we want to say in the U.S., Scott?

No. I mean, I think the only one that's public that's out there is the city of Houston digital contract, which is a new to the world contract that I'm sure there'll be broad interest in. There's not within our Airport portfolio, there's not anything that's sort of imminent and certainly nothing that is material.

That's actually helpful. And I have something to track to. So I'm going to switch gears entirely because we've ignored Brian. Looking cool and casual in my middle square anyways. Brian, a couple of questions here, if I can, and one of them actually came in from the audience. So rent abatements versus rent deferrals. If you can kind of walk us through the differences there. Your feeling or ability to perhaps achieve further concessions as the year progresses. And I know these negotiations take time. And the specific client question I have here is given the deferred rent in '20, what should be our expectations? I ask a lot, I can do it again. What should be our expectations for '21 on deferral side and how much would be due this year? So there's a lot in there. I can break them up. But you've been relatively quiet.

Well, let me take a shot at it. And obviously, if I miss anything, I'm sure you won't hesitate to remind me. And I think there has been some confusion about abatement and deferral. And so I think the way to think about it is when the pandemic hit and things became clear that the environment was going to be challenged. The team did a good job of taking a look at all the contracts and said, "Hey, all right, let's slow. Let's defer payments, let's create a conversation with a lot of our counterparties about what we're seeing and what we can do." And then to a great extent, a lot of those deferrals have played through to today. You obviously, you may reach a longer-term agreement with the counterparty that agreement may provide permanent relief, and I'll use the word abatement, but I think the way to think about it is this is permanent relief. This is no longer rent expense. And through 2020, I think we had about $74 million, with $24 million just in the fourth quarter of permanent relief. So that is payments we won't make. That is agreements we've reached with our counterparty. A lot of it is governmental or quasi-governmental counterparty to a lot of our municipal contracts. So the team was very successful there. By the way, this is something that we do all the time, not to the scale of COVID environment, but we have lease renegotiation teams that look through our portfolio and look for the thousands of leases, leases that are not attractive that need to be reworked. And so you'll see those rework. So this is not a brand-new concept. It's just the order of magnitude that's changed. Deferrals, on the other hand, that is rent expense. That is something that we accrue as rent expense. It affects working capital, and we have deferred the payment of that. And eventually, we will make that payment. I think the way to look at that order of magnitude is, okay, we'll take a look at what our normal level of accrued rent expense is. How much did that increase in 2020? It's about $50 million. And is it reasonable to assume that on the other side of COVID, you'd reach a more normalized kind of historical level? And I think the answer is yes. So I do think that this will start to unwind. As the business comes back, as revenue increases, as the business environment changes, we will make those deferred rent payments. That will be a use of working capital. And our accrued rent expense will approach normalized levels. As far as the abatements goes, we continue to work very diligently at that. And as long as the environment is depressed, and there's still an argument to be made and a discussion to be had with our counterparties, I think we will continue to see abatements in the first and the second quarter. But like the deferrals, as the business starts to come back, that argument about, okay, the environment's changed. It's beyond our control. Can we talk about relief? I think those will get smaller. And I think eventually, those will normalize and go away. So deferrals, temporary in nature, will unwind as things come back. Abatements or relief permanent, and they're not coming back. That was not a rent expense, it's reduced rent expense. Is that -- is that a good explanation or okay?

That was very helpful. So we're actually in our last minute here. I can't believe how quickly this went. But thank you all. Let me end it here, if I can. We've successfully executed M&A in the past. Most recently selling Clear Media, at the start of the pandemic, which is pretty good timing, all things considered. I recognize the environment is difficult on a variety of fronts. But are you seeing any interest or activity picking up in your market because even if you have no interest in selling now? And then would asset sales ultimately be part of growing back into this cap stack?

So I mean the short answer is I'm not seeing anything very significant in terms of M&A activity in our sector that would make me think that now would be a great time to start at any kind of a process. We have talked in the past about focusing on our higher-margin U.S. business. And when the time is right, then I think that is -- some kind of a process for other assets within the portfolio would be appropriate. But I don't think it's happening right now. That's the best answer I can give you.

And Avi, just the last piece of your question, it's probably part of the road map to deleveraging. How deleveraging asset sales were -- it kind of depends on, ultimately, the multiples and the price that you get. Some of the assets that we're talking about may be marginally deleveraging, but it's part of the course of action, I think, that ultimately can't help the company deleverage when we get to that point.

Yes.

Gentleman, this was terrific. I end every one of these sessions by saying next year, we should all be in Miami together. William, when you're back. So good. Maybe we figure out some hybrid approach. But really I...

Anytime.

I appreciate it very much, gentlemen. Thank you for the time. It's great to hear from you, and we'll talk to you soon.

All right. Thanks, Avi.

Thank you.