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

Hello. This is David Joyce. I'm on the media and telecom team at Barclays. Very pleased to have with us today, Clear Channel Outdoor. We've got the new CEO, Scott Wells; CFO, Brian Coleman. Thank you very much for being with us today.

Thanks for having us, David.

Thanks, David.

So this is quite a unique period in time, thankfully that we are coming out of the pandemic, knock on wood. But at the same time, you also have been really progressing on the digital front. In the Americas, your digital revenue was up 68% in the third quarter, which is now about 1/3 of the Americas revenue. Could you parse out how much of this growth do you think is coming as a sort of a COVID catch up or a rebound? And how much is really fundamentally strong demand that we should continue seeing? And what should this comparison cadence look like over the next few quarters?

Sure. I'm happy to take a run at this and Brian can correct me if I get anything too far wrong. And it is a little bit of a different answer in Europe than it is in the U.S. I'm going to focus on the U.S. and we can come back and talk about Europe, and I definitely would look to Brian to help me on that one because it's a little bit of a different build proposition, how it works. But we've got a couple of COVID damaged quarters to work our way through it. Definitely Q1 and Q2 of next year, to a degree, are going to have distorted comps. And so we haven't provided guidance for 2022 at this point. But I'd say that you're going to see inflated digital comps just because digital had been hit differentially hard during COVID, it tended to be the type of asset that advertisers checked out of more since a lot of our printed assets or perms. A lot of people held their positions even though COVID was going on because they didn't want to give up locations, et cetera. But I think if you look at a long-term trend on digital, I want to say it's been a kind of mid to high double-digit grower pre pandemic. And that's on the back of a few things. First off, we're regularly converting signs. And each time we convert that sign, that's obviously new inventory. We're typically getting a 3 to 5x revenue multiple relative to the printed inventory that the digital sign replaces. The second big thing that we've been doing is we've been putting programmatic in the business is we're actually not just multiplexing the printed to digital going from one static ad to 8 second slots each minute. But now we're taking those slots and breaking them individual spots, so that you have an ability, and that's a premium product that people come in and buy. So you get a revenue multiple on that. We haven't yet, I think, reached a point where we're comfortable generalizing it, but the opportunity is very meaningful as you think about that division of the inventory. And then on top of it, you add data and give people more confidence that the ads are actually having an impact. That's going to -- we're a supply demand since we have finite inventory or a supply demand business. And as people have more confidence, demand goes up, you're going to see that reinforce. So I think we've got a couple of quarters that are going to be distorted by COVID ahead and be at the higher end. And then as we get to more of a run rate, I would think the pre-COVID direction would generally be about where I'd point it. I don't know, Brian, if there's anything you'd add on that? Or David, if you wanted us to talk about Europe at all.

Yes. If you could talk about the Europe side of things, how that's maybe at a different level of rollout than the U.S. has been? And maybe if there's a different cadence to be thinking about there?

Brian, do you want to talk a little bit about -- because we don't report as much detail. I think we've reported that the U.K. is very extreme digital, and I think we've talked about the aggregate picture. But do you want to give a little color on that? You're on mute.

Yes, that doesn't help.

Sure.

And again, with Europe, it's really country by country. And so what we have talked about on a consolidated level. And to give a little color, I think, on a consolidated level, you're seeing much of the same kind of recovery in Europe that you're seeing in the U.S., albeit perhaps for different reasons. And we do have strength in certain countries, in particular, we've talked about the U.K. that is a place where we have significant digital. We have very little transit and no underground exposure. And so not only are we benefiting from the return of digital, we're benefiting from investments we've made in that street-level digital portfolio that we have. And quite frankly, it's performing so well. It's almost certain that we're capturing some share probably from some of the transit that hasn't fully recovered yet. And that's probably our top-performing market as an example. But you have other top-performing markets, and they'll share some of those characteristics. A lot of digital that's rebounding, places where we've made digital investments. And then where you see markets that are lagging a little better those that have been slow to develop digital that I mean we do have some transit exposure, such as Scandinavia, although that is starting to come back a little bit. But I think on a consolidated level, you see the business recovering. And then I think, ultimately, the way to think about it is, as things start to normalize, they shouldn't be at, at least a 2019 level on a consolidated basis.

Yes. It's a little bit of a different curve just because the smaller format screens, they're much cheaper to install than the big digital road side signs that we do. But we have to do a lot of them as we digitize and as we get the ability to get the permits. But it's the same basic dynamic that you multiplex the location, you get a multiple of the revenue on it. And we're working to push digital out into our street furniture networks as we're able to do that legislatively.

So as digital becomes a greater proportion of your overall asset mix, programmatic makes really shrinks the lead times and therefore, also shrinks your visibility, although digital does -- or should help the margins. So could you help us understand how the lead times are trending now for a marketer to book a campaign? And how does it vary across your asset types?

Sure. It is quite different geographically and then also in asset types. I mean, I'll start with the U.S. thinking about the printed assets where the majority of our print signs, we actually sell on what we call perm basis, which perm can mean anything kind of 6 months plus. But a lot of the times, it's a kind of annual contract that people are renewing. And so obviously, once you get that booked, you've got quite a lot of visibility. Cancellations can happen, but it's not terribly common. And that was a key part that sustained our smaller markets, and I think you saw it in Lamar's results because they have a lot of that type of inventory across their smaller markets during COVID, that part of it probably held up the best of anything in the whole portfolio. And you saw some compression in people's committing to contracts, and that probably peaked the fall of 2020. And we were probably in the fall of 2020, 15%, 20% shorter than what our lead time had been just because people were waiting later to commit. But as the business started to come back and as you started to have more pressure on the inventory, again, this is focused on the printed space, you saw things start to move in the other direction. I think that if you just -- if you pull a camera back, we've been shortening our cycle time for as long as I've been associated with the business. So more than 10 years. And COVID really amplified it, but I think you're going to see it get back to a little bit of an equilibrium, and even it stays on kind of a -- it's shorter. People want to do things closer in period, no matter what it is that they're doing with kind of just-in-time thinking. On digital, that's where we saw dramatic pullbacks and again, kind of fall of 2020 was probably about as bad as it got. And again, it was probably in the 25%, 30% shorter. But people always bought those campaigns closer in. I mean, we make a point of telling our advertisers that they can be up the next day with digital. And we hope to god that they don't all try to do that because it can become a logistical hassle. But in certain things, like think about like political or think about advertisers that are promoting things that are news products or Twitter, things like that, people want to be able to be very agile and come in very quickly. So I guess what I'd tell you, David, is that we kind of saw everything get very last minute and that's going to stay with us to a degree in digital and certainly programmatic, that's kind of the proposition in programmatic. But we're working to strength the right balance of longer-term contracts and having people buy slots for a month at a time or stretches like that, along with us doing the literal spot market where we're selling things. But even in that situation, oftentimes, we're doing what's known as a private marketplace where we give an advertiser access to our inventory via our SSP partner, the supply side partner, they buy via their demand side partner, and we might have agreed that we're going to try to get 1 million impressions in a particular time frame. So it gives us a little bit of forecasting ability. It's not -- they don't commit until literally that last second, but we usually have a pretty good idea of what our demand curve looks like. And that's probably if you look at the business as a whole, you combine the digital with the printed, we probably have 4-ish months of decent visibility, which is probably a couple of months shorter than what it was a decade ago, where you would have maybe had 2 full quarters of visibility in 2010. Now we might have a quarter and a half of visibility at any given time in the U.S.. In Europe, in Latin America, it's entirely different. That market works differently. Postings are typically only a week or 2 weeks. That's with printed assets. And then obviously, with digital, they have the same kind of dynamic. We probably, in those markets saw an even greater -- even though it was already a short sort of cycle time, we might have seen a third less time at sort of the trough time. And I'm not sure that those markets, particularly Latin America, I'm not sure that they've gotten that they've kind of readjusted. People are definitely buying in a narrower window than they used to buy, both later and then it's kind of -- we're kind of jamming a lot of demand in a tight window. And so the curve is over a kind of, call it, a month period, that things are closing out. And so our visibility there is substantially less, maybe it's 6 weeks that you have something. Obviously, we do things with pipelines and we do things with sales forecasts to try to give ourselves a feel of where it's going to be. But in terms of the actual contract cycle that you're asking about, that's sort of roughly where we're at. I think I've got that mostly right, Brian, definitely weigh in if you think I missed anything.

No, I think you're on it.

And with the digital capability of your assets now, it opens up some new opportunities for you. What's the status of being able to convert some faces to geolocation based targeted advertising? And how can that feed into your offerings for your clients' campaigns?

So we actually can do that on all of our assets right now. So the geolocation is actually not an upgrade that we do to the sign. It's just us leveraging the mobile data ecosystem. What we literally do is we have an industry standard around a viewshed based on the location of the asset, the orientation of it to the Street, whether they're pedestrians or vehicular or both. And we do what -- we put what's called a viewshed on a virtual map. And as we see mobile devices moving through it, that's how we are able to get the behavioral statistics that we use as an underpinning for radar. And so it's something that's relevant for our printed assets as well as our digital assets. And we have about 1,500 segments that people can tap into all sorts of different mixes of age and interests and behaviors. So you want people that are heavy Dunkin' Donut visitors, you can identify that subsegment. You want people that are auto intenders, that's something that we can provide a segment on. And we can give the advertiser visibility across our portfolio of assets, printed and digital, where our signs are that over-indexed to those advertisers and they kind of optimize their mix, where you put some permanent or semi-permanent printed displays where you're going for high-frequency and a lot of reinforcement, and you couple that with some digital displays where you're doing a call to action or some sort of in the moment type of message, that's what we're seeing our kind of most aggressive advertisers doing at this point. And it's on the back of all of that data.

And with this programmatic capability, I think you continue to attract national advertisers, and maybe it's -- is the mix increasing from national advertisers here in the U.S.? And where should we expect the proportion of national advertisers to get to? And how much should digital get to your overall new product mix looking out the next few years?

So national advertisers were definitely impacted the most with COVID. They were definitely the hot money in COVID in terms of pulling out. And so you saw our proportion of national advertisers drop during COVID, they definitely shrank more than the kind of local advertisers did, and they've been a big part. You've seen the resurgence. I think we were around 37% in Q3, which would have put us just a little bit below where we probably were at peak, which was probably right around 40% for national advertisers. There's no question that there's a real opportunity in that space. Our footprint skews to the largest DMAs in the country. And so our ability to go and have a conversation with a large advertiser, we're able to deliver 18 of the top 20 in a roadside basis. And I think we get all of them when you factor in airports, which gives us an ability to connect that not many of our competitors have a similar footprint. And I do think that pre-COVID, the trends were definitely in favor of national advertisers putting out-of-home in their mix, all the things that we're doing with data, the things that we're doing with programmatic are creating opportunities to do that. So look, I don't have a good number to give you, I think we certainly can get back up into that 40% range that we were at pre-COVID. And is it possible that we could move beyond that. I think if we see programmatic really take off, you could see a larger point, but I don't think we're at a point to give people guidance on that. And I guess your last question was how much penetration of digital, we see what I think we talk about this kind of at a market level around the world. The U.K. is our most digital market. It's actually pushing 70% of the revenue, there is digital. And that is probably a little bit exacerbated by COVID, and it's a little bit driven by the choices that we've made with our footprint because we've seen so much demand for it. We've been aggressive in converting. And that's something that I think you'll see us roll out to other European markets. In the U.S., we have markets that have no digital sales because digital is forbidden, and we have markets that are north of 50%. And I do think that the advertisers really like the product. They like the flexibility of it. They like the ability to change the creative. They like the ability to go in and out. We're seeing more and more advertisers doing combinations of the printed assets with the digital assets where they buy printed to build familiarity and then they buy digital to heavy-up when they're trying to really support a launch or maybe it's a movie release or something like that. And so I don't think that we're anywhere close to the digital penetration that we could get to. And it's not going to require us to convert the majority of our assets to digital to get that because we tend to convert the best assets, which then you get the multiplicative effect I was talking about. And you end up with a pareto where maybe 5% of your locations are driving 30% of your revenue. You roll that out over time. Maybe you get to 10% of your locations and it's 60% of your revenue. We don't really have a locked in number on that, but we do think that you're going to see that trend continue, and that's a big part of our growth story.

Switching gears to the spending of your clients. Could you talk about the client categories? What are you seeing from digitally native companies that are coming to Outdoor, maybe for the first time, possibly enabled by digital? And then what are some of the other traditional categories looking like in terms of their spending trends here into the fourth quarter, and to the extent that you have a sense into next year?

It's interesting. The biggest categories for us have actually been pretty stable. Business services, media, health care, medical, retail, banking and financial services. Those are the kind of anchor top 5 categories that we have. And that's held pretty consistent. There were probably a little shuffling of the health care went up, some financial services went up, some business services held steady and actually bounced back probably before a lot of the other categories. And what you're talking about is a really important part of what we do, but it tends to be categories that kind of take off over time, and it's a big part of what the story pre-COVID was. Pre-COVID, we had food delivery, we had streaming. We had some new insurance avenues. Those were some of the categories that were driving growth then. Now you've got in the places it's been legalized. You've got Sportsbook, betting apps, you've got a variety of tech companies that are looking to establish themselves and use out-of-home really effectively. I think one -- that it's an old story at this point, but it's one of the most effective use of out-of-home is how Brex establish themselves in some of the creative ways that they drove ROI and they're marketing their business-to-business marketing on out-of-home both in road side and in airports. So the digitally native companies, a lot of times where there's kind of 2 paths where we meet them. Path one is where they're venture funded and they're looking to do a national rollout. Oftentimes, we have people that watch the funding flows and we're in constant outreach to companies that are getting funded. And so if you're a funded company that's looking to build a reputation, we're a fantastic fit. We're so efficient, helping those brands punch above their weight à la what the Brex story is. I think the other avenue that we've gotten, and this was really taking off before COVID, I'm not 100% sure that we've seen it as much recently, but I think it will probably be something we see more of. There were a bunch of D2C companies that had built their brands on social media, and they had reached a point where they were kind of tapping out. They had kind of saturated the social media, and they were coming to us to broaden out and get that broader. And so that was more coming from their agencies or from the brands themselves as opposed to our outreach. But both of those, they don't end up being a massive percentage of our total revenue in any given year, but they end up being a meaningful part of our growth in any given year, if that makes sense.

Maybe we could switch to the cost side of the equation now. With the strong revenue growth you had in the third quarter, the site lease expenses in the U.S. are only up 15%. But there were some rent abatements and maybe some other renegotiations during COVID. What is the timing mismatch impact that we should be thinking about going forward? And how should we be thinking of the variable and fixed expense mix in the U.S. and in Europe?

So I'll kind of give you the high level guidelines on our single largest category expense, which is rent expense, and that is 50% of our operating expenses, our site lease expense and the majority of those, both in the U.S. and in Europe are fixed. So that's kind of a general guideline that we provide. I don't know that there's a common formula to really think about how the [ renovatements ] come in. There's not a 30-day delay or 60-day delay. There are delays, and they are lumpy. And then I think what you saw in the third quarter is we did close a couple of significant [ renovatement ] transactions that related to prior periods. But that is not predictable quarter-to-quarter. What we've told our teams are being no stone unturned. If there was a contract and we were impaired, let's go after [ renovatements ], so it gets as much as we get for the period that we were impaired. In some cases, government aid falls in that category as well, primarily in Europe, go after that government aid. And maybe you're not successful on abatements or government aids, you defer and maybe you changed some of the terms in the underlying contract getting extension. So there's a whole host of things that our teams have worked through during the COVID period to kind of equalize to the extent you can improve the [ certain areas ] under these contracts. I do think as we experienced the recovery, we're going to see a lot of that unwind. Certainly, deferrals have largely unwind. And by the end of the year, we would expect those to all material extents have worked their way through the system. Because of delays in how you seek and obtain and ultimately get paid for abatements or government aid, that may take a little while. We made a pretty small number. But for renovatements, it could leak over into Q1 and maybe even a little bit in Q2. I think that will reduce over time and become less material. But I do think that you could start to see some of that -- or you can see some of that kind of flow over into the new year. And again, that's a good thing. We want that. We want to pursue that as much as we can. Order of magnitude. I think in 2020, we saw about $74 million of renovatements. We've seen more than that, probably around $79 million, $80 million through the first 3 quarters of the year. But as I said, as things start to normalize, and as you would expect, this will start to dwindle and reduce. And Q2, Q3 of next year largely have worked its way through the system.

Okay. Great. On the capital expenditure front, you recently talked about your rough guidelines or rough expectations for next year of CapEx in a kind of a normal $200 million to $225 million kind of a range. Kind of which -- because it brings you back to the pre-COVID levels, how should we think about that return on investment? What's the -- in terms of breaking out how much you would be spending on digital face conversions versus how much you would be spending on new technical capabilities, maybe it's related to radar. What are some payback periods we should think about for these different CapEx buckets?

Well, we don't really break it out to that level of detail. And quite frankly, a lot of it is -- depends on which contracts you win in Europe and what digital components are there. I think I would provide perhaps some level of comfort to say that if we get legislation, and we're able to do whether it's digital conversion in the U.S. city or it's a contract that has a digital component that we win in Europe, we're going to have the capital to do that. We've budgeted for we think -- what we think could hit. And a lot of times, that is, what are your commitments on the existing contracts, renewing contracts that you have, but you don't necessarily budget for contracts that you don't currently have that you may or may not win because they're up for tenders. I think Scott mentioned earlier, we do 80, maybe a little more on average of annual conversions in the U.S. and we have line of sight perhaps into some of that for the next year, and we will budget for that, and we will do those. But it is contingent upon actually getting the permits to do that. So we won't be capital constrained on digital conversions. There is some maintenance Capex. I don't think we break it out, but we are coming on end-of-life for some of our early digital signs, and we'll want to maintain those. The good news there is they continue to get cheaper. I kind of liken it to digital televisions. What I have hanging on the wall today, I could not have afforded a decade ago. And so that continues to improve over time. You mentioned some of the technological investments. And Scott's talked about programmatic. He's talked about radar. These are key growth drivers for the company, and we'll want to continue to invest with those to the extent we needed to, but these really aren't -- at least they aren't material right now, and I don't expect them to be material in terms of proportion of CapEx. So I think at the end of the day, you've hit upon some of the key areas. I want to assure you that when there are digital opportunities, the ROI is so attractive that we will make sure that we have the capital to invest in those opportunities. We're going to make sure that we're investing in the technical side of the business to the extent we needed to. We're going to keep our plant refurbished and looking nice. And we can do that within the buckets that we've kind of shown in the historical kind of pre-COVID levels, now something could change that. We could indeed have a market -- new market open up to us. So we could win a new big contract. That's not currently in the forecast. But we do think to keep the business kind of running as we have and keep the investments that we have been making and the things that we think are important. It's certainly with the recovery, it's certainly appropriate to think about our capital investment in the same ZIP code as where we were at pre-COVID.

Okay. That's very helpful. And with that, we're out of time, but thank you very much, Scott and Brian, for participating. This has been very helpful.

You bet. Thank you, David.

Thanks so much, David. Appreciate the time.