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

Good afternoon, everyone. Thanks for joining us. I'm Jason Kim. I cover the media, telecom, cable sectors as a high-yield analyst at Goldman Sachs. I'm very excited to welcome back the management team of Clear Channel to Communacopia, William Eccleshare, CEO; Scott Wells, CEO of the Americas segment; and Brian Coleman, CFO. Thanks, everyone, for joining us today.

Thanks for having us, Jason.

Thanks, Jason.

So let's get right to the -- start with the broader question. So although we are hosting you, again, virtually, this business environment is indeed very different from last year. So what are the key priorities you're focused on today as we navigate through the recovery and preparing Clear Channel for the future?

So I would say, first of all, Jason, that the recovery is well underway. As we said on our Q2 earnings call at the end of July, we are seeing solid revenue momentum into the second half of the year and several of our markets are performing at or ahead of 2019. So it's an encouraging picture that we were talking about back in the Q2. Strategically, we remain focused as we have been for the last few years on technology, expanding our digital platform, as we've talked about, but also using -- strengthening our data analytics capabilities, building our programmatic resources, and broadening our presence with a greater number of advertisers and increasing our market share. So that's the broad strategy. As I've said, the business is strongly rebounding and excited about the growth trends. We're carefully managing our costs and continue to do so as we go into the second half of the year. And then finally, I would say, from my own point of view, we announced the implementation of our succession plan, again, at the end of July on the time of our Q2 earnings call. And I will be transitioning from the operational leadership of the business at the end of the year, and handing over to Scott as our CEO. Scott, as you know, has a significant amount of experience in our business both running the U.S. business for the last 6, 7 years, and prior to that as an operating partner and Board member at Bain Capital. So it's a well-managed succession, which has been planned for some time. And Scott and I are together, managing that through to the end of the year, when I'll take on that new role as Executive Vice Chairman, focusing on managing the transition and on strategic M&A. So that's really the broad outline, Jason, of where we are and what our priorities are as we look at things today.

That's great. You are coming off a very strong second quarter when you beat the consensus expectations by pretty significant margin. And you also gave some positive comments about regarding the recovery in the second half of the year on the earnings call. So can you update us on business trends? And what are you seeing in your markets both in Americas and in Europe? And how has the Delta variant impacted to your discussions with advertisers and their willingness to engage with you in terms of their advertising campaigns?

Okay. So let me take that at a global level and then I'll ask Scott to talk in a bit more detail about the US. I mean specifically on Delta, I think the good news really is that we haven't seen governments impose new restrictions in terms of movement of people, for people. As a result, I think we've been seeing increasing vaccination rates across both the U.S. and Europe, and indeed Latin America where we operate. And as a result of that, I think, governments have been reluctant to impose any restrictions on movement. So given what we've said in the past about the fact that our business seems to respond very quickly once people are moving about the urban environments in which we operate, that's a pretty encouraging sign at a high level. Scott, do you want to talk more specifically about what we're seeing in the US?

Yes, sure. Thanks, William. I mean it's very consistent with what we say the fact that we haven't seen lockdowns and that you've seen vaccinations continue to improve. We really feel the trends are moving in the right direction. As we stated in our Q2 earnings call in late July, we were targeting revenues between $315 million to $325 million, with EBITDA margins close to Q3 of 2019. That would put us, performance-wise, in line within a few percentage points of our performance of Q3 of '19. The majority of our markets are showing considerable improvement. It's really on the back of the digital business. In Q2, you saw us up nearly 100% in our digital business. We're continuing to see good strength in that area. I think the things that have really stood out as the business has evolved here is that you're seeing broad-based. You'll recall that during COVID, we had this dynamic where our small markets were performing very well, but our large markets were not. That trend reversed in Q2, and looks like it's holding steady. We're also seeing airport travel come back and airport advertising come back. And the volume of inbound inquiries is very strong. So it's a solid environment. We have not seen continuous impact because of Delta, and we're feeling that there hasn't been a big change in advertiser sentiment.

That's very good to hear.

If I can just add one point in terms of the question on Europe is, in Europe, as we've said in the past 2/3 of our revenue in Europe comes from the street furniture products. And so we benefit in the current environment from the fact that we're not heavily exposed to transport inventory. And it's the transport sector that has been more severely affected by COVID and the kind of inventory that we have above ground.

That makes sense. And a lot of details there to dive into. But staying with the Americas segment for a little bit, so maybe this is for you, Scott. And in terms of the -- what kind of verticals are doing well versus those that are not? Can you touch on that a little bit? I know you cited some broad-based geographic recovery and sort of a reversion of these -- the big market versus small market dynamic we have seen earlier during the pandemic. But in terms of verticals, what are some of the areas that are doing well, those that are still sort of struggling to recover? And then over the longer term, like how do you think about the revenue composition of Clear Channel coming out of the pandemic? Maybe another way to ask that question is, are there some permanent shifts in your business mix, whether it's types of verticals, the mix between billboard versus transit, et cetera., that you think will occur at -- in your Americas business?

Sure. So as I alluded to, it is -- the recovery is broad-based. The thing that's encouraging is we're seeing traditionally strong outdoor advertising verticals, things like theatrical and amusements, restaurants to a degree, retail, have come back and have come back strong and have been rewarded for that as well. I mean I think you probably saw the openings over Memorial Day weekend. Theaters were very strong and that creates a virtuous cycle for us as it gives the producers more encouragement to advertise, develop and stick with their launch schedule, which is very robust, which is a good thing for us. In terms of your question about revenue composition over time, I do think you'll see airports become a bigger part of our mix to a degree. You'll recall that we picked up the New York airports right as COVID was breaking. That's obviously a large contract. And as everything kind of picks back up in air travel, I would expect that will become a stronger part of our mix. But we are doing pretty extensive conversions and development of our digital footprint in the rest of the business. So it's not going to be a massive shift, but probably get us back more to that 17% to 20% of the mix in airports in the U.S. when we get to a run rate on this downstream. I think in terms of verticals, the good thing coming out of COVID is we did develop a number of verticals and have built some relationships and some track record in verticals that had not historically been big out-of-home users, things like home improvement. Real estate is an area that was historically a very big out-of-home user, had not been that big for a while, and has really risen and have seen real impact in the real estate environment that we've had. So I think those will be a couple of verticals that you see added to our mix. Business services, insurance, cars, those will all remain important to us as its technology clearly emerging, growth companies are definitely an area that has come back strong as well.

Thanks for that. You touched on the airport business and, obviously, you won that important contract in the Americas. As you think about your conversations with the advertisers for the airport business, like how are they thinking about this outlet for advertising? Obviously, travel is coming back, but certainly not back to where things used to be in 2019 levels. As you think about some of the longer-term discussions with advertisers, specifically as it relates to airports, what are you guys talking about?

Yes. I mean I think the thing -- as we've seen, air travel is -- the segment for out-of-home is a premium segment. The advertisers going after it typically are premium consumer brands and then premium business-to-business brands. Those are the strongest verticals sort of segments that we pursue there. And with air travel recovering, the dialog has been really good. We've actually brought a number of advertisers back that had stepped back. The 2 big things that are questions on people's mind are business travel, just period and then business travel and general travel internationally. And clearly, the international travel is an area that is inhibited right now. We had some good news yesterday where it's been announced that we're going to be welcoming travelers from international locations that are vaccinated starting in November. So that will be good a data point there. And the business travel, we're just going to -- we're going to have to see. But I think the thing that we're able to deal with data now is we're able to demonstrate that, that air audience that airport audience is a very attractive audience even when it's people on leisure travel. And we do have a pretty extensive presence in the private air travel space as well. That's been quite high for us during this. It's not a very large. There's not a lot of advertising you could do in FBOs. But what we have, we have been able to monetize very effectively.

After the financial crisis, one of the phenomenons that we saw was the small business, and the local advertising market lagged national pretty meaningfully for a prolonged period of time. And with the benefit of hindsight, I think a lot of it could be attributable to many of the smaller businesses that are simply going out of business, unfortunately. And this time around, during the COVID-driven downturn, what have you seen from your small business owners and your local advertising market in general? Like how do you think about the health of your local advertising segment right now, and as we go through the recovery?

Yes. I mean I think the first thing I'd say on this is just that nothing about COVID has behaved the way the Great Financial crisis did. So it's very different. The amount of economic stimulus that came into the marketplace, I think, is one of the things that caused the dynamic where you saw in our competitor, Lamar, that is primarily in small markets, didn't suffer nearly the declines that we and Outfront, which are more urban markets did during COVID. And in terms of recovery, and that's certainly is the dynamic we saw in our smaller markets. Our smaller markets behaved much better. So I don't know that the local business landscape -- it took it quite as hard. It was just very different because there was so much stimulus. Certainly, a lot of businesses suffered. Restaurants, local retail, those areas certainly suffered. But as we see the recovery happen and as we did see things build back, we actually think that this recovery has the potential to be quite a bit more V-shaped than what we saw coming out of it. I think the other dynamic that you have in the Great Financial crisis is that was also the emerging growth periods for digital advertising between 2011 and 2019 or so, digital just massively gained share in advertising, at least in the United States, and I guess, globally as well. The magnitude may be a little bit different depending on what country. But we're in a position now where, if anything, advertisers feel overexposed to digital, and that is something that I think is going to help us have a better shape to this recovery as well. So a few different observations there would hopefully help, Jason.

Yes. That was helpful. Maybe moving on to the international segment. So for you, maybe, William. So we saw some big divergence in recovery between the European markets and the Americas segment during COVID. Now when we think about the vaccination rates, many of the countries in Europe is now ahead of the U.S. on that front. So can you update us on the business environment in Europe? What are you seeing out there? And what sort of opportunities do you see in the region going forward?

Yes. I mean I think it's -- it was certainly the case that as the vaccination programs accelerated, governments felt more confident lifting restrictions. And I think -- so, I think I touched on earlier, there was concern around Delta and the impact of the variant given it's a highly transmissible variant. But it was rapidly clear that the vaccines were significantly reducing hospitalization. And as a result of that, governments didn't impose those restrictions on movements, those lockdowns that we've seen earlier in the pandemic. And so business confidence remains or grew, I would say, pretty strongly during the summer and into the fall, and through I think to what we can now see, and as far as one has visibility on it towards the all-important year-end period for advertising. What you've seen across advertising as a sector across Europe is that it has rebounded very strongly, and that bookings have been coming very late. So there's been a lot of late money in both in TV, in outdoor, in radio, a lot of late money coming into the market as advertiser confidence has grown, and I guess, also, as they have seen consumer spending come back. So I think the -- without wanting to sound in any way complacent about it, I do think the shape of the recovery, as Scott touched on earlier, has been a sharper V than anybody had dared to hope for. You'll recall, earlier in the year, we were talking about every possible letter of the alphabet in terms the shape of the recovery. And in the end, I think it has been a pretty steep V. I think the uncertain factor remains, could there be another variant that doesn't respond to or the vaccines don't protect against. But in most European countries now, we're also looking at booster vaccines in the fall and other protective measures. So I think it's a -- it feels like a pretty encouraging environment in which to do business at the moment, Jason.

Great. You -- both you and Scott touched upon digital and how it's been a big contributor to growth for Clear Channel, and for the industry for that matter. Talk about the conversations you're having with clients and the importance of having this digital capability. Again, when -- back in 2007, 2008, digital was at a very early stage of taking significant share from other mediums, but now it's become a lot bigger, obviously, in terms of the share of the pie. So how are you thinking about the transition to digital coming out of the COVID downturn, and your capabilities in asset base to advantage of the growth going forward?

So I think at a high level, we would say, digital in terms of digital screens remains an important part of our strategy, and we will still continue to invest in the conversion to digital. In the United States, really the only constraint is the ability to get the permits to make those conversions. And as we get those permits, we will continue to convert as fast as we can for all of the reasons that we previously discussed that makes great economic sense. And similarly in Europe, although the planning constraints aren't as tight in most markets, it's really about getting the opportunities from the municipalities to put in the screens and create the networks of screens that enable us to develop the business. So digital remains, looking forward, an important growth driver, and will increasingly help us take share. More importantly, or increasingly, I would say, more importantly is the way in which we use technology right across our platform, not just in terms of the screens, but in terms of making the buying process, simplifying the buying process, investing in programmatic, which Scott's talked about a number of times, and we can talk a bit more about in a moment. And also, using technology to help us plan effectively for our clients and demonstrate ROI for our clients, which are very important drivers of ensuring that. As a sector, out-of-home increases its share of the advertising pie. So I would say, short answer, digital remains an increasingly important part of -- continually important part of our investment strategy, but it's more than just digital screens, it's about the total technology platform that is going to drive our growth in the coming years.

That's great. We'll get back to the technology topic in a moment. But I do want to ask Brian some questions as well. So you've made some aggressive cost cuts since COVID. There's a lot of investor focus on how much of the cuts will be permanent versus variable. So can you help us think through some of the big buckets of cost cuts? How the management team is thinking about the overall margin structure of the business coming out of the pandemic? Or, said another way, can you get back to pre-COVID EBITDA levels with lower levels of revenue?

Well, I think a lot in that question, but let me start with this. The operation teams were very successful in producing costs at the onset of the pandemic. And they've done a great job. And you continue to see the results of significant rent abatements and deferrals and adjustments that we've made. And there is a lot of things like, furloughs and employee reductions, staff reductions, T&E reductions that were all part of that mix. But by and large, those are things that over time will come back as revenue comes back. I think that the right way to think about what is the permanent cost reductions, really is alignment with our restructuring activity. And we announced restructuring activity in the U.S. that would save around $7 million a year. Those activities are completed. At the corporate level, we announced restructuring activities about $5 million in annualized savings per year. Those activities are complete. And in internationally, particularly in Europe, a more robust plan to save about $28 million in annualized savings. That will take longer to implement, and may not be complete until Q1 of 2023, but we are working on it and we'll start to see the benefits of that next year. So I think that's the way to think about the cost reduction impact, what is permanent, what is temporary. But obviously, as the recovery comes back, we'll have to be very diligent about ensuring that the cost that we've taken out remain out, but also don't want to miss on opportunities to fully experience the recovery. So there's a balance there. In terms of where does that put us, if we get back to 2019 levels and where we'll be with margins? Our goal is, if we get back to 2019 revenue levels, we should be getting back to 2019 margins. And then we've got the tailwinds of the -- excuse me, the restructuring we talked about. We've also got some headwinds. Scott mentioned some portfolio mix changes in the US, as airports becomes a bigger part of the portfolio, it has a lower margin than our traditional U.S. business. Still a good business, still a good margin business. But if it becomes a larger part of the portfolio, then that can affect your consolidated margins. And in the US, we enjoy margins of about 40%. It's low double-digit in Europe. So as the business mix changes between U.S. and international, particularly Europe, that can also change the consolidated margin profile. But to answer your question in short, as revenues come back, that's what -- that has to happen first, we should experience margin. It may not be exactly where we were. But if we get back to 2019 revenue levels, we should get close to 2019 margins. But I think the thing I'd point out is, there's nothing magic about 2019 revenue levels other than that was a benchmark pre-pandemic. We have tremendous operating leverage in this business, and we are investing in things to drive that incremental dollar of revenue. And as we experienced that as we get on the other side of the pandemic, we hope to go beyond the 2019 revenue levels. And each additional incremental dollar will contribute more to the bottom line because of the operating leverage and the pull-through that we'll see. So I think we're very encouraged about the nature of the assets that we have, the investments that we're making, the position that we've put ourselves in to capitalize on the recovery, and what we're seeing in terms of that recovery.

Makes sense. One of the key topics that we've been asking management teams here at the conference, is supply chain and cost inflation. Recently, we heard from one of your peers regarding delays in procuring equipment for digital boards. What are some of the areas that you're paying attention to as far as inflation and supply chain issues are concerned?

Scott, do you want to take that?

Sure, yes. From a U.S. perspective, we took a lot of steps to make sure we had adequate digital screens available for our conversion plans. So we're in a good place on that one. From a installation perspective, the 2 primary places you'd see inflation hit us would be in our wages. So for our staff that's hanging the signs as well as for our salespeople and the broader corporate staff, you'll see pressure on that over time, but it hasn't been particularly acute. But we're definitely in a very hot market for talent. And so that's a place that we're keeping an eye on closely and managing it tightly. The other place you see inflation pressure is from landlords and we tend to have relatively long-term contracts that have relatively predictable increases associated with them, but it's thousands of contracts that are constantly rolling over, and we actually touched many of them during COVID to get concessions. So that will be an area that we need to manage tightly. There are -- we do, obviously, see inflation in some of the other ancillary things, but those are the 2 big areas. And it's not flashing bright red, but we're definitely concerned and we're definitely paying attention and protecting ourselves as best as we can.

Understood. So William, you recently announced your transition from CEO to Executive Vice Chairman, effective January 1, 2022, passing on the baton to Scott. So one of the things that you are going to be focused on, William, is leading the strategic M&A activities for Clear Channel. What are some of the criteria that you'd be considering as you begin to focus in this area? Like in the past, management team mentioned that it wants to focus on higher margin assets, we should imply the Americas segment. Does that mean that the -- potentially looking to divest the international business is a primary objective? Or are there other elements or strategy as you think about your M&A outlook going forward?

I mean I think the summary that you gave in terms of what we said back in February of last year, just before the pandemic kind of became such a huge challenge for us all. That summary you gave is pretty fair. We talked about that focus on the high margin assets and by kind of implication, potentially divesting of some of the international assets. And that remains very much the strategy. So I think the question really is one of timing. And during the last months, I think we've seen the valuation gap close. We've seen M&A activity increase. And so when we feel that the timing is right, we will start to execute on that strategy that we've described. And my role, as we go into next year, will be to kind of oversee those processes. But I think I wouldn't want to be any more specific about timing than that because it depends on so many things that are frankly outside of my or our control, not least really the pace and continued pace of recovery. Because, I think, for M&A activity to sustain, there is going to need to be a sustained recovery in the business, and we will need to have evidence of that sustained recovery. That would be my broad answer to that question, Jason.

Sounds good. So we're about out of time. So I'll ask the final question. So let's look out the next 5 years to 10 years, and what's your long-term vision for Clear Channel? And how do you see the out-of-home market evolving over the long term?

Let me take a high level stab at it, and then since Scott is going to be in the driving seat during those years, I'll ask him to talk a bit more about it. But I mean, I remain hugely optimistic about our medium. I mean I have been in love with this medium for more than 40 years, starting in -- with my career in ad agencies. It remains a fantastic mass reach medium. As a way of building emotional connections between brands and consumers, there is no medium that can touch it. And I think increasingly, with the advent of digital and with our increasingly sophisticated management tools, advertisers are absolutely recognizing that and recognizing the real value of the medium, the last mass reach medium as we call it. So I continue to be enthusiastic and optimistic about the medium. And I think the trends that we're seeing, and the way in which the business is bouncing back post-COVID, absolutely endorse that phase and that conviction. But let me hand to Scott to add a few more thoughts on that.

Thanks, William. I mean I share the enthusiasm for the medium. And I think that if you reflect on the trends that we're working in our favor right before COVID, around brands being overexposed to digital and looking for alternatives, and also looking at the challenges with linear TV, if anything, COVID accelerated both of those trends, and those are going to provide us a good early stage runway in your 5-year to 10-year horizon. When I think about this business over the medium term, the thing that gets me very excited is, we're still in the early innings of modernizing how we do business with our partners, whether that's how we work with the very biggest agencies, or how we interact with very small SMBs. We do not have as agile a set of cost models, touching those different segments by size as we should. And that's going to be an area of opportunity for us to evolve the channels to market. And from a technology perspective, our ability to provide a really high quality experience with data and analytics, as well as with flexibility is something that we're again still in the early stages of delivering, but we're seeing fantastic market response to those things. And that's something that marketers take a while to embrace new ways of looking at media, but they tend to then move pretty quickly once that's been mainstreamed. And I think that can be something that is a very exciting opportunity for us over the next bunch of years of people actually including out-of-home, their multi-touch attribution models in their different tools that they're using for assessing ROI. And I think that's a big opportunity, along with the things that we're very familiar with, like our digital conversions and continuing to transact programmatically. So there is a lot of things that I think point to opportunity in this business. The big part of it is that meeting customers where they are, getting them the right data and analytics, and packaging it in the way, and that's easy for them to transact. So I'm very excited about the opportunity ahead.

That's a good place to wind, William, Scott and Brian. Thank you very much for joining us today.

Thanks so much.

Thank you, Jason.