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

All right. Good afternoon, everybody. I am Ben Swinburne, Morgan Stanley's Media Analyst for important disclosures. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. I'm excited to welcome to the conference back, Clear Channel Outdoor, and I think for the first time, if you remember first time on stage with us Scott Wells, now the CEO of Clear Channel. So Scott, thank you for being here.

It's my pleasure. Great to be here, Ben.

Yes, good to see you. So you kicked off your earnings presentation, which was not that long ago, with the comment that your plan is to transform the world's oldest medium into a tech-fueled visual media powerhouse, which I couldn't help but come back and start with that comment. But maybe on a serious note, talk about how you're driving that transformation, and then how that translates into the financial performance of the company that, obviously, investors care about?

I am glad you took notice, Ben. It's -- I appreciate that someone was listening. Look, the digital transformation in this business is one that I think a lot of people know the story really well, and it's kind of an old story from the sense of the signs. But it's still a pretty new story in terms of the analytics and the other elements of it. And so what we're talking about, is creating a mass reach visual medium, that is accessible and is accountable and is out in front of all of these great potential customers every day and has an ability to go in and be pretty targeted in terms of which of those customers you're getting in front of, and matching the use case of the advertiser to what the asset can perform. And it's not just about how many multiples of revenue we get on the side, it's about actually applying digital data to our printed inventory, and talking to our advertisers about the impact that our printed inventory is having. Talking about the impact that our printed inventory has, alongside the digital that they're doing. And as they start to get into programmatic, showing how the different parts of the puzzle can work together and create a powerful campaign. Only about half of the campaigns that get initiated in the U.S. use out-of-home. So the opportunity there and people talk all the time about what percentage of the media mix we are, that's interesting in its own right. But the fact that only a little more than half campaigns have outdoor in it at all, speaks to the opportunity that's ahead for us. And certainly, the people that do include us, don't all include out-of-home at the level that they could. So lots of opportunity.

And maybe just diving into that, Scott, a little bit more. I think most people when they think about digital, think about digital boards. But you guys have spent a lot of time over the years, investing in technology throughout the company in different aspects that drive revenue. Maybe you could talk a little bit about sort of the specific initiatives that you guys have to drive monetization and yield on your structures?

Yes. So I'll give you 2 angles on what we're doing. One is good old-fashioned marketing and the other one is digitization. The good old-fashioned marketing is customer segmentation, where we've launched 2 new sales forces since I've been enrolled in the U.S., not since I've been CEO globally, but since I took on the role in 2015. A programmatic sales force and a direct-to-client sales force. Programmatic was obviously, you had to have some people who were fluent in digital advertising, in order to crack that market and sort of evangelize that market. The client solutions, team to actually try to address that 50% problem, where with all of the layers between us and our customers, at the large customer space, we don't think that the agencies are best suited, to make sure that the money is getting put in out of home. So we've wanted to go talk to those big advertisers directly. Both of those groups have been very successful. Both of them are contributing in the 8-digit range at this point. The programmatic we've talked about is growing at triple digits, and what we found is that, by targeting those customers, we're able to bring in premium advertisers that are valuing our inventory very fairly. So I'll leave that at that, on the old-fashioned marketing one. On the digitization, the investment has been more in taking a very slow-moving system from kind of order all the way through placement, that was very paper-based and turning it into a digital flow. And it's not all the way there yet, but we're a lot closer, and I'm sure we'll talk a little bit more about this, when we talk about programmatic. But the goal here is to get to where we are transacting the way that our customers want to transact, which is generally not with a stack of paper and having to sign a bunch of copies and triplicate or whatever, the old kind of real estate way. And so that's where we've added technology in how we contract. We've added technology in how we order the printed materials. We actually get QR codes on our printed materials, that we use to help with setting up our schedules and deploying our force. Our installers take the pictures themselves because you always have to have a proof of performance picture, all of this stuff has been enabled by technology in various ways, and it has made a big difference in our efficiency and in our accountability.

And you guys -- we've talked with you and your colleagues over the years about RADAR, which should be probably a good time to talk about that suite of products. And I'd imagine during the pandemic, it continues to be an area of investment for the company, and is it continuing to bear fruit, as you had hoped?

Yes. So RADAR actually just turned 6. It's kind of unbelievable. We launched it in 2016, in February of 2016, and what RADAR is, for those of you who are not familiar with it, it is our behavioral measurement system, that lets us talk about all of our assets in terms of the audiences that they deliver. And so think of it in the lifecycle of planning. So I want to target people that are sports enthusiasts, and we can then put a heatmap out that shows which of our signs overindex to people that are sports enthusiasts. So planning, retargeting, so I want to make sure that I'm getting ads in front of people who have seen my big ad, when they're at a point of sale. And so you can accomplish that by having a mobile device serve an ad, when somebody is in a particular geofence. So that's retargeting. And then attribution, that's the accountability part. Did the people who saw the ad do what I wanted them to do, where we're able to go in and look at exposed versus unexposed audiences and compare the likelihood that they went to a store, downloaded an app. We can do an awful lot of things at this point. We have a prescription base. And that's where a lot of the innovation has been. It has been adding functionality. We've kind of -- partly in concert with our client solutions team, as we found people with different use cases, we've developed new tools within the RADAR suite. And then the final step with all that is, can you bring that all together and make it accessible for them to tie to their first-party data, which is what most advertisers are very focused on at this point. And that's the fourth part. We call those radar view as the planning tool, RADAR Connect is the retargeting tool, RADAR Proof is the attribution, and then RADAR Sync is what lets you connect it back to first party. So it has been a big focal point. It's something that has definitely brought us incremental business, and it's something that we're definitely constantly working to improve.

And if we tie RADAR and programmatic, I imagine, can you buy programmatically using the RADAR suite? Or are these not necessary usually...

They're not -- usually -- and we actually -- one of the things on RADAR is, it's equally applicable to our printed as well as to our digital...

Right, not in digital only...

But it is something that a lot of the programmatic buyers expect. It is not a transaction platform. So programmatic, you're usually buying through what's called the demand-side platform. The Trade Desk is one of the big ones that many of you probably are familiar with, but there's lots and lots of demand side platforms. And that would be the avenue to actually transact, but you might transact where you're getting RADAR data as part of the buy.

Makes sense. And then just maybe closing out this conversation on digital bit, I think it was about a third of your billboard revenue in the fourth quarter, and it's growing faster than the overall business. So it's growing as a percentage. So where do you long term see the digital display revenue contribution for the company? Maybe focusing on the U.S.?

Yes. I mean in the U.S., if you looked at all of our DMAs and you rank them from most digitally penetrated to least, at the high end, you're in the high 50% of revenue. At the low end you are at zero. There's not very -- thankfully, there's not very many that are at zero, but there are a few DMAs that are complete and utter holdouts on digital. I think for the business, we've demonstrated in the U.K. that we're actually north of 70% of revenue there. And in a couple of our markets where we're in the high 50s, we think there's still some headroom. I don't think it ever becomes everything, both from a regulatory perspective and also from a customer preference perspective, because there are -- every time we convert a digital sign, we're taking an advertiser off of that site, who owned that location, and their proposition is they can pay us 8x, maybe not 8x the price they were paying for one, to get all the slots on it. So you can imagine I get some nasty note from people at those conversions. But that's a real thing, and so we have to be constantly balancing what is doable regulatory-wise and what's sort of a good customer experience.

Yes. And when you say holdouts, I imagine that's a regulatory...

Yes, regulatory holdouts.

Not a customer holdout?

Yes. No, the customers, the ones -- I mean, the ones who don't want us to convert the signs, understand it's a business imperative for us to convert it. We can have the conversation and say, look, here are some other options. That's one of the reasons why we need to have [ them ] printed is, we can move them to someplace else that they can own.

Yes. And when you look at those markets with the high 50s, I don't know if you can isolate the variable, but do they generally grow faster because they're more digital, or is there just too many other variables to isolate the [ progress ]...?

They grow faster. They are a little bit more volatile, a little bit more seasonal. So as you -- the more digital is in your mix, the more you're going to get the really extreme seasonality of Q4 being like super-duper heavy, Q1 being a little quieter and Q2 being a little bit of a micro peak in Q3 being -- you just -- it exaggerates the seasonality of the business...

Because advertisers can come in and out...

As they come in and out and they do.

Yes. Great. Let's talk about the business sort of for 2022 and kind of sitting here today. I think the first quarter of '22 is the last kind of pandemic favorable comp, is the way we would describe it for most of the ad market, including your business. A lot of investors ask me sort of, what is the -- what do you think the growth of this business is, once we get to normal, [ let's hope that ] if we ever get to normal. Certainly, from a comp point of view, we'll start to look at more normal trends, as we get out beyond this quarter. So how do you think about that, relative to what we saw in the years prior to the pandemic?

Yes. I mean we talked pretty confidently on our earnings call, that we believe we're a real GDP plus business, and we think that that's the case, because of the scarcity of our asset, the value of our asset, the fact that we have all of this digital -- tailwind, excuse me, there are other headwinds, but digital is a tailwind for the business, as we convert. And we think that bringing data in and getting more marketers comfortable with the actual impact of our medium, all will serve to get us to that kind of growth. And then you layer on top of that acquisitions and other things that we can do, to maybe pick it up beyond that. We were seeing that kind of growth in the 6 or 7 quarters, right, before COVID, and frankly, as you saw in our Q4 numbers and our full year numbers last year, it really has picked back up. And the dynamics that were in place before COVID remain true, that advertisers are overexposed on the sort of social-digital space and linear TV is struggling, and while CTV is growing like crazy, there's a lot of questions about efficacy there. I think we're going to have some similar efficacy challenges with CTV that we have with our medium. So that's a level playing field. We can work with that.

Sure. And when you look at the big categories driving your business, what would you call out today? And are there categories that haven't recovered yet because of the pandemic, that will matter over the course of the next several quarters and years?

Yes. At this point, it's not particularly category driven. When you look, theatrical has come back all the way and even a little bit better, they have a fantastic release schedule in the next few quarters, and they've always been a big user of our medium, and I think we see a lot of impact from it. Amusements have come back, that's an area that had really suffered in COVID. Restaurants are coming back, there's probably some more headroom to that one, same thing with retail. But we really haven't had -- there's not really any that are still in kind of the COVID doldrums. The only thing that we have been impacted by to the negative, have been some of the things constrained by supply chains. Automotive isn't a big category for us as an industry or as a company, but automotive has certainly been a little more slow. Some of the more recreational type vehicles, not literally RVs, but like the entertaining things, snowmobiles, things like that are -- it's -- you smile, but like during COVID, those kind of products were like red hot for us, and now that they're having a hard time sourcing parts, like boats became a category during COVID, boats were not ever a category that we would have thought about. So there's been some movement on those things. And then insurance, the auto insurers have pulled back a little bit, because it's gotten -- more accidents are happening and it's gotten more expensive to repair things. And so they're all pushing rate increases through their state regulators, and until those get passed through, I think their ad budgets are going to be a little bit down. But overall, it's a very vibrant marketplace right now. It's a -- touchwood, we'll be able to keep this vibrant marketplace going.

A couple of categories that I get asked a lot about, are people worrying maybe it's not sustainable, that are sort of new-ish or sports betting, that streaming is new, but we see we've talked all day today about streaming and all the investments there. Do you see those as meaningfully larger than they were, say, pre-pandemic and any help in thinking about kind of exposure or contribution from those?

Well, streaming really grew during the pandemic, as you would expect. Some of that was repositioning money from the same content producers, from movies or other things like that to their streaming platform, and I think that's stabilizing over time. They're going to figure out what mix they're going to -- I think it actually is a category that will have legs, in a category that certainly was great during COVID, and that was kind of when the streaming wars actually were launching anyway, and a lot of the products got launched. Sports betting really has not been huge for us. We've seen all the ads that they've taken in TV. I was just in Las Vegas over the weekend, and there is a lot of it there, although it's not necessarily on our signs, it's on the actual casino signs for the sports betting. So I can't really comment on the durability of it, but it's not a big threat to us.

I have been doing this for many, many years. I had to ask about miles traveled during the pandemic, and now I have to ask about gas prices. So questions I never thought I'd have to ask, but I have been getting questions from investors on whether gas prices going up this dramatically, which may continue, unfortunately, could actually impact driving enough to impact your business. I'm just wondering, I know you don't sell on an impression basis, but I'm sure you think about it?

Yes, so we haven't seen any impacts like that so far. And certainly, out here in California, where we are, gas is always really expensive, and now it's like ungodly expensive.

Yes. $6 a gallon.

We're going to see it -- we will probably see it here first, and that's not a conversation we're having with advertisers right now. But you're absolutely right. It's something that, at some point, people may curtail. It's one of the good things about having as much measurement as we have now, is that we can have very data-driven conversations about what's actually happening versus hypothetically. But we're not seeing it yet, but that doesn't mean that it might not be an issue.

It's sort of happening, while people are returning to the office and community again. So good to see...

There's a lot of moving pieces, because the thing we really found during COVID, is that even though the offices weren't very full, traffic was as heavy or heavier than what it was before, after the first couple of months, I mean, obviously, during the lockdowns, it was kind of different. And so it just was at different times of the day, different routes -- so we'll be keeping a post eye on that one, but it has not been a dialogue point so far.

Yes, part of that was because people were not using public trends, which I actually wanted to ask you about next. So maybe talk a little bit about the transit businesses that you guys manage here in the U.S., and sort of how those have been trending? You took on everyone's favorite airport system and the Port Authority and how that business is going. I had a lovely flight here from Kennedy. So I've started to enjoy some of your ads...

All right. All right.

It was packed by the way...

You are exactly the customer we're looking for Ben. As you anticipate, our transit business is basically all airports. We don't have a lot of [ performed ] a little bit here and there, but it's mostly airports. And in Q4, they tripled their revenue year-on-year. So certainly, the advertisers have been embracing them, that's compared to Q4 of '20, which was a tough quarter for the airports. I think they are well on their way to normalizing traffic in -- certainly, domestic traffic is running routinely in the 90% range of 2019 and spiking more than that, certainly over the holidays. We saw some days and weeks that were better than that. I think the biggest gap right now is in international travel. So there's some of the airports that are more internationally focused, the one right here in San Francisco, JFK, as you referenced, those are still light, relative to the kind of traffic and that has had some impact -- but I do think that the premiumness of that audience has really helped in terms of getting advertisers focused on, let's get back in front of these travelers. And again, data, we've had a lot of success being able to communicate, even if they're not on business travel, the people that are in the airport, are business decision makers, many of them are. And so there is still opportunity in that area. So I feel good about where that's trending.

Yes, that makes sense. And how are you thinking about the broader impacts, good and bad of inflation on the business, we talked like gas prices. But maybe generally speaking, it's hard to look at the end market and sort of understand if it's all just being driven by this reopening and all this demand we're seeing in the market, or if inflation is starting to have an impact, and there's probably cost implications for you guys as well?

Yes. I mean we are a supply-demand business for sure. And so, many of the news publications were very helpfully publishing a couple of the agency folks during COVID, talking about, oh, there's no demand for this, and so prices are down here. So you could -- you'll find those references. You're not seeing those now. Pricing has recovered. And certainly, we've been very aware of the inflationary pressure. So we've been working to get rate increases. And I feel good about where we are on the top line, particularly in the U.S. I think inflation is a different story in the U.S. versus internationally. So I'm going to talk about the U.S. first. So I think we're doing well in terms of managing yield and managing the revenue side of it. From a cost base perspective, we do tend to have long-term leases. So the leases generally are not going up, even as the yield is going up. And so our gross margin should be keeping up with the inflationary pressure. Certainly, with our people costs, which is our second biggest category, we're going to have to take action, and we're going to have to be doing things in order to stay competitive and to retain our staff. But as a percent of our costs, it's not such that it should be a huge challenge, if we're doing the yield part of it right. And again, keep in mind, part of what sustained us through COVID was, we do have long-term contracts. So some of the long-term contracts also apply in the revenue. So it's not like everything is getting repriced in the inflationary environment. With Europe, I think we're probably doing similar on the yield side, although there are more countries that are earlier and recovering from COVID, and so it's a little bit more of a mixed bag on that front. A lot of the costs are more tied to revenue, and so you get less of the ability to see uplift. So we probably won't see the -- it will be a more -- we will have to be even more aggressive on costs, to keep our margins at a good level. But as you know, our European business has lower margins to begin with. And so we're going to be working very hard to keep that at a good [ pace ], but it will be more challenging because they don't have the benefit of the kind of long-term fixed-price contracts.

Right. We've got about 5 minutes left. So if there are questions in the audience, please raise your hand, and we'll get you a microphone. Scott, you guys guided to CapEx, I think, $190 million to $210 million for 2022. Maybe just talk a little bit about where you're investing and kind of what is normal, as we come back out of this pandemic for the company?

Yes. So that level would still be a bit behind, probably 20% behind where we were heading into COVID, although our portfolio is different back then. We still had China, so there's been -- if you're trying to compare it to 2019, just recognize, there's a geography we no longer have that's in 2019. I think the number is a pretty good number for where we're going to be, separating out any acquisitions. We talked about acquisitions separately. We'd like to see the acquisition bucket continue to expand. From a where is it going, a good 60%, 2/3 of it is going to be digitally oriented, in terms of conversions. We're getting to a point where we need to replace some of the signs we converted years ago. So there's some of that that's in there. There's digital related to the infrastructure that we're doing, to enable programmatic and some of the technology associated with it. But it's heavily digital and it is heavily overweighed to the U.S. in the mix -- in the proportion. So hopefully, that gives you a feel for it.

So how is the supply chain, as it relates to getting what you need for digital ads this year?

You know, we didn't have almost any trouble with it in 2021. We're a pretty procurement-oriented company, and so we had really laid in our supply, and I think we've continued to manage the lead times. We also do source a fair bit of it domestically, which helps -- so not -- always touchwood, not something that's keeping me up at night at this moment.

Got it. And then we should talk about the balance sheet, and then I want to also come back to your M&A question, but what are you guys thinking in terms of opportunities to drive down leverage from here?

So I mean, I think for us, those of you who are not familiar with us, our leverage was a parting gift from the company we separated from in 2019. We did not...

Little bit of sarcasm in there.

Well, I might have -- he might note that barely. And look, they were highly levered as well. They went through bankruptcy. It was difficult. We came out with a large amount of leverage at that time. So it's not like we said, hey, 10x is like...

The sweet spot.

The sweet spot. That's where we want to be. And so we recognized that it's not a level that we'd like to keep. At the same time, we also feel great about having gone through the toughest stress test that probably, I bet almost none of the modelers in the room would say they would have come up with a stress test tougher than COVID, and we're still standing and we service the debt. So I think that's the important thing as you think about our debt, is that we can service what we have. We need to grow, and we need to do things like acquisitions, and we need to do things, like getting rerated and getting the virtuous credit cycle going, where we're bringing that down. And the good news is we have a lot of runway because we basically did the whole debt stack right before COVID. So we don't really have material deadlines until at least '27 in the debt stack. So – we are focused on it. We're going to be taking action. You know about the strategic review we've got going in Europe. We announced that in December. That's going to be a part of it, tactically going in and refinancing chunks, as we get some ratings tailwinds, that sort of thing will be part of it. And growing is going to be a big part of it because -- but we can service it. That's the part that I want to make sure everybody is very clear on it.

And it sounds like you can fit M&A into that mix, as you think about the balance...

We expect we can. Yes. Yes. And obviously, depending on how the strategic review in Europe goes, the magnitude of it could be one way or another. But we do believe, we can do that, yes.

Okay. Well, we're out of time, Scott. Thank you so much for being here. Good to see you, and thank you for...

Good to see you. Thanks, Ben.

All right.