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

Okay. We'll get started. I'm Jason Kim. Thanks, everybody, for being here. We're pleased to welcome Clear Channel Outdoor to our conference. And joining me today from the company is Brian Coleman, Chief Financial Officer. So Brian, thanks so much for being here.

Thanks, Jason. It's good to see you again.

So you are just coming off of first quarter earnings. So can you set the stage for us with a quick recap of the performance in the first quarter and the broad outlook for the rest of the year?

Sure. I guess I would characterize it as a good quarter for the company. Our first quarter is not traditionally one of our stronger quarters, particularly in Europe. But in terms of how we performed during the quarter versus the past quarters, which are COVID quarters, but even going back to a pre-COVID quarter, I feel like we're performing strongly. We were up high percentage from both Americas and in Europe over prior quarters. In Americas, we are at or above pre-COVID levels. In Europe, look, a strong performance in the business, reflective of really the advertising market coming back and those advertisers making investments in outdoor advertising. So we feel pretty good about that. I think for the rest of the year, we did provide some guidance. I'll let you guys look at the guidance we provided, but I think it shows continued strength into Q2, not really seeing or hearing a weakening of that despite kind of the overall macro climate. Our European CEO talked a little bit about his expectation to return to positive EBITDA in Q2, and continue the trajectory to return to 2019 levels in Europe, which they're all close, but they're a little bit behind. So overall, strong quarter, strong outlook.

So inflation, supply chain and now geopolitical risks have made the macro environment much more volatile and a concern today. You just touched upon the strong quarter you had and this outlook for the company. But as you talk to your advertising partners, what are they concerned about? Are there any hesitation on their part in terms of starting a new campaign when thinking about their campaign messaging? Any signs of slow -- slowing of demand or just like delaying in putting an ad at the moment?

So we talked about this a little bit on the earnings call and Scott hit it head on, I think, in one of his questions, and I'll repeat that here is, we're really not, either in the Americas or in Europe, hearing or seeing any signs of -- it's not impacting our numbers. It's not in our pacing and the tone of conversations with advertisers is very strong. Now we don't want to be naive and ignore macro environment. So definitely, we want to keep our eyes and ears open. But with respect to our conversations with advertisers, what we're really hearing is, by and large, a desire to get in front of kind of this post-COVID customer base that they feel, among a lot of different categories, there's a lot of pent-up demand, and they want to be there and out in front of it.

So focusing on the Americas segment. So what's the current split between local and national? And has there been any notable differences in performance between the 2 groups?

So we are 60-40 national-local, and that is about where we were pre-COVID. I'm sorry, can I get that backwards, Eileen? I'm sorry, a 60-40 local-national. All right. Thank you. And that is where we were pre-COVID. I think what we've seen in terms of how it's moved back and forth is the big national buyers are -- they move a lot more quickly. Going into COVID and during COVID, it had gone back. So national had fallen in terms of percent but they're back now. And I think that's part of what's driving the recovery, particularly for us, given our asset base and our geographies in Americas. And as I said, the split is now back to pre-COVID levels.

Any notable geographical differences, large markets, smaller markets that you can share?

Well, look, everybody is coming back fairly strong. I think we did mention California and the East Coast had driven some of the recovery. You do, sometimes, with the national advertisers. As they come back, there is kind of that coastal emphasis. So not particularly surprising. But I would tell you is it's strong across the board. And I think with the national advertisers coming back, that really benefits us because of our footprint. And while that 60-40 local-national split is kind of back to pre-COVID norms, if we continue down this trajectory, national can actually be a bigger percentage. That could bode well for the company.

Very well. In terms of some of the specific verticals that are doing well, so what are some of the areas that are now back to pre-COVID levels, above where businesses used to be pre-pandemic? And what are some of the categories that are still below? And what are you doing to sort of reinvestment in this area to get back to where things used to be?

So I don't know that I have off the top of my head kind of pre- and post-COVID comparison, but I'll give you kind of a general view. I mean verticals are back pretty much across the board, and you see strength everywhere. And then those -- the ones that lag like amusements, media, entertainment, theatrical, they're all coming back. And that's good because those are the ones, like travel, took the biggest dips. And so a lot of the strength is there. Others like business services have been strong. They weren't as severely impacted. I think the only vertical that Scott even mentioned in a negative sense was I believe it was auto insurance. And that's kind of something unique to them, and they're starting to see claims. And they've gone through a period without claims, and so there's probably a little bit of catch-up. And so maybe they've cut some of their promotional spending. Other than that, it's -- you've got some advertisers that may be impacted by supply chain issues, and you've seen some kind of year-over-year cutbacks in specific advertisers. By and large, as a category and advertisers at large have come back, and everything seems to be performing quite well.

Can you discuss your yield management in today's environment? And I'm particularly interested in your ability to extract higher pricing given the focus on inflation, how to manage costs. But I guess, at the side of that, you can extract higher pricing that can offset some of those cost pressures. So how are you thinking about that?

Yes. We think about it a lot because in an inflationary environment, we've got a relatively fixed cost base, at least for a period of time. And to the extent you can improve yield, that can fall to the bottom line pretty quickly and certainly can act as a hedge against cost inflation in other parts of your expense base. Look, we've got strong demand that's led to strong occupancy. Our yield that we're seeing today is a function of both occupancy and rate. And I think as long as we continue to have this strong demand, we'll have the ability to continue to improve rate for a business like ours, with a largely fixed cost base. An incremental dollar of revenue that you bring in drops disproportionately to the bottom line, and again, I think bodes well for the outlook as long as everything continues on the trajectory that we're seeing.

So in terms of any resistance from the advertiser base from pricing increases, you haven't seen anything from them yet?

Not really. I mean, you have to be disciplined about it. And to the extent that you're introducing pricing increases and it doesn't fit for the advertiser, you need to work with them. And a lot of times, maybe they'll move off a certain premium board or panel that they like, and they'll want to kind of replace that at a lower cost and maybe you can put together a package. And at the same time, you're putting together a package that uses different locations. You then can resell that premium location to someone else at a higher price. I think the key thing is work your relationships, provide them with what they want, but also keep your pricing integrity throughout the process.

So the transit business for CCO in the Americas segment is mostly airports, and air travel seems to be coming back very strongly. Can you talk about how big your presence is to their airport business, the margin structure and capital intensity of the business? And maybe touch on your competitive positioning to grow this business going forward.

All right. So there are several questions, I'll try to go through them, but remind me if I miss one. Yes. So transit for us is largely airports. That was negatively impacted, obviously, by COVID. It has maybe rolled back is too strong. But when you start talking about 150% increases, that both goes to the improvement, but also how far it has fallen. And I think I want to say air passenger traffic is about 90% of what it was pre-COVID. That's supported a lot of improvement that we've seen in airports. We also have won some contracts, including the port authority contracts of the New York airports. We are putting CapEx in those airports and so still building out a lot of the -- what will eventually, over the next couple of years, I think, be a pretty dramatic and impressive set of outdoor advertising assets. But it has attracted a lot of interest. We've been able to monetize some of that. That's all supported, I think, the recovery in airports. We're excited about it. I mean, you probably flew here. Planes are full. There was one missing seat on my plane, and they couldn't explain it. They were looking for that body. And so we're seeing that. We had missed business traveler, international traveler, that's starting to come back. We're all business people, we traveled here. We see improvement there. Other than Asia, I think the international travelers coming back. And advertisers, this is a highly desired demographic that they want to get in front of. And from our perspective, I think we manage our airports in a pretty smart way. In places like New York, where we may be are under underrepresented outside of the airport space, we're able to do not only your traditional airport advertising, luxury goods, business services, but you can work with the local team, the New York sales team kind of helped cross-sell the various advertisers. And that's -- I think that's played out well for us. I think in places like Denver, where we don't have a presence at all in the city, it's a beachhead, and we can show representation in the city to advertisers that want to have a broader package. So I think we manage it. I think we manage it in a way that's unique to us and serves us well. It is -- it's an attractive business for us because of the way it fits, but it's also something you can't overly fall in love with. These are relatively low-margin contracts compared to your billboard space. You have to be disciplined about the process. You go through a competitive process. You bid for the ones you want because of how they complement your set of assets. But you can't overspend because that puts you in a bad place, and you can't be afraid to lose the contract. So I think we manage it in the right way. I touched about margin profile there being less in the billboard space, more like a typical transit contract. So what you would see in Europe are in transit in the U.S. Did I miss any of your...

Capital intensity?

Capital intensity, yes, it's a good point. So transit agreements typically do have a level of capital that's required on the onset of the contracts. New York, of course, being a great example of that, but it's not atypical. Every time you do a new contract, there's a capital component. I think that's important as you think about your portfolio transit contracts, particularly in Europe, where that's most of the business and that there's a level of CapEx that's required just to kind of sustain your current level of business. I mean, you've got to keep winning contracts to either maintain the ones that are coming up for bid or new ones to replace the ones you're losing. And that -- there's -- I will call it, we call it sustainable CapEx, the substance CapEx that you got to put in just to maintain status quo. And that's an important consideration if you're in the transit business. And so it's there.

Understood. So digital transformation has been ongoing for a while for the company. First, there's the digital billboard conversion, which are obviously very high ROI projects for the company. How much more opportunity is there to expand your digital footprint from what you have today?

So I would -- digital transformation for us is broader. There's the conversion, there's kind of the radar suite of products, there's sales channel, specifically with respect to conversion, I think that's the easy one for folks to understand when you take a premium static site that you had one advertiser on for a long period of time and had an EBITDA stream come off that, our revenue stream come off that. When you're able to convert that to digital, you have an upfront investment, which has continued to go down over time as digital panels have gotten cheaper and cheaper and better and better. It's kind of like your TV set. But now you can have 6 flips or 8 flips per minute. Now you're not going to get as much per flip as you did on the static board. But when you add it all together, it's a pretty significant uplift and pretty rapid payback. So they're very attractive. And what I guess I would say is it kind of depends market by market or country by country, what the saturation level is. But I do think there's plenty of room for opportunity. I think there are markets in Central L.A., Houston, other cities that have -- that really don't have much of a digital presence. I think there's desires in these cities to increase the digital presence, particularly if they can get a revenue stream off of it. And if they can't get rid of a multiple of static panels that are less attractive to us and maybe in parts of the city that there are blight concerns and replace that with nice digital panels in the central city, it's a win-win. So I think there's a lot of opportunity to continue to grow digital. Some markets don't have any. Some have a high percentage, but still -- I still think there's room. So a lot of opportunity, and I'll kind of leave it at that. We're not done yet.

Okay. And as a follow-up to that, as you alluded to, there's other parts of the digitalization of the business that you guys have been working on making the business more data-driven, making the buying experience more -- smoother for your customers. So where are you in that journey? And what are some additional investments that you want to make in your digital capabilities?

So we're not in the first inning, but we're not in the ninth either. I think we're somewhere along that trajectory, and it's probably one that's a little dynamic. But I think we're still -- let's say, we're still not halfway there. And some of the things we're talking about, like our radar suite of products, which started off as an attribution tool, a planning tool, has evolved. And now it does include the collection of and sharing of data that we think is helpful to plan campaigns, are useful to advertisers and their agencies. We even have developed kind of a new tool that enables us to take that data and directly load it into the agencies' analytical software, so that they can run their own scenarios and campaign planning. So I think that's something that's important. I think it's a differentiator for us. It's something that the industry, I think, is all adopting in one way or the other. And I think that's a positive and a good thing for the outdoor industry because it attracts -- and not only further develops outdoor advertisers, it attracts new advertisers to the space, and it taps into new advertising budgets that maybe aren't traditional outdoor advertising budgets. And I'll touch quickly upon -- I'll kind of call it the digital element of customer centricity. Being able to make outdoor advertising, which historically has been pretty old school, pretty paper-intensive, making it digital interactive, easy to buy, easy for our customers to buy, easy for their agencies to buy can only be helpful. And I think that's starting to take root. And we'll continue to invest in conversions and making sure RADAR's cutting edge and making sure that we are close to our customer and making our product easier to buy through different sales channels such as programmatic as we can because that's good for us.

Very well. Switching gears to Europe now. So you announced a strategic review of the European business back in December. Can you elaborate on what you think the benefits will be with the company from divesting your European business? Is it financial? Is it operational or both?

So I don't want to talk specifically about the process because -- I'm not but supposed to until -- if and until the Board comes back and have something to say. But I do think it's important to understand as we think about that strategic review and the European assets that it's -- it would be a broad analysis. And certainly, financial is important. And if you did go down a path or you were looking at a sale or divestiture or whatever, you want to make sure you did so in a way that optimizes it as anybody would, but it's more than that. There are considerations, such as, ultimately, if we wanted to read the U.S. business, how would the international assets fit in or do they fit in? And how would a potential transaction impact that? The capital intensity you referred to, we talked about it in terms of transit, well, if you think of most of the international business kind of being transit, even their billboard business has kind of got the same lower -- it's country by country, but kind of the same lower margin issues. In whatever case, they wouldn't likely be readable and they are capital intensive. All of these things, the lower margin and higher volatility in the European business given our balance sheet and that risk profile. So I think there's a whole host of things. I've named 3, but a whole host of things you would look at in addition to the pure financial issues that would help inform us as to what the appropriate decision would be as we go through a strategic review. Hopefully that answered your question?

It does, yes.

That's -- those are the things that we think about.

Yes, that's helpful. The business European segment has always had a lower margin profile than your Americas segment. And most of that is structural and then revenue mix driven.

That's right.

So that said, how do you think about your opportunity to improve the margin profile of the European business? I mean, you put on some restructuring efforts several years ago that showed comparison, both down the line. But if it help us think about some of the opportunities set to, again, enhance the profitability of the European segment.

So I think you asked the question in the right way, it is to enhance that business that is lower margin. And there's structurally not a lot, you're going to change about it being lower margin. They're going to become the 40% margin business we have in the U.S. But there are ways to improve it. And I think one of those is what has worked successfully in the U.K. and, to a lesser extent, Scandinavia and what we continue to work on in other parts of Europe, and that is our digital network that we have. The idea of having a large amount of panels and being able to sell advertising kind of across a lot of different impressions and a lot of different places. And that served us well in the U.K. We continue to grow it -- grow that digital network, but we largely have it in place. And it doesn't matter that people were shut down and not coming to work because they still were out and around going grocery shopping or whatever. And we are in the neighborhoods in London, as well as the suburbs, as well as the city center. So we could rotate the advertising buys because we had that kind of coverage. We don't have that in every country. In fact, digital advertising isn't as prolific as it is in the U.K. in a lot of places. But barriers are coming down. And if we can emulate that digital networking that we have in the U.K. and other places in our other countries, I think that will be a big growth driver. We talked about RADAR, and we talked about programmatic, other sales channels. We are ahead of the game here in the U.S. We are starting to do some of this in Europe. We've launched a RADAR in a number of countries. We have programmatic capabilities. It's still small, but these are starting to scratch the surface, and that will also kind of drive growth. And then I think the other thing is, whether it's Europe when they're back to EBITDA, positive EBITDA, or it's in the hands of somebody else with a stronger balance sheet, Europe's long suffered from a lack of liquidity to kind of fund some of these growth initiatives. And that's led to the use of less optimal financing tools, such as operating leases, to help fund the rollout of these digital networks, and that's compressed margins. If indeed, they have used CapEx and had liquidity available to do that, their margins would be higher than they already do. So I actually think that there is opportunities in Europe to grow revenue despite kind of the structural differences, and those are a few.

Okay. That's helpful. Beyond the European segment, the M&A environment still looks to be robust despite the macro environment within the outdoor space. So can you describe the level of engagement that you're seeing in the marketplace? And what role do you see Clear Channel Outdoor playing in the M&A space as we think about the medium to long term, both as an acquirer or/and seller of assets?

So I'm going to address Americas because really when you think about Europe, it's kind of contract kind of a not as relevant. But I agree with you. I think there are a lot of opportunities. They're fully priced. That's reflective of, I think, the way people feel about the outdoor business. So we get it, but I think there are opportunities. In fact, you saw the company in fourth quarter actually break out kind of their acquisition spend, $20 million. That's not huge when you compare it to our peers in the Americas outdoor space. But it did show that the company, if and when there are attractive opportunities, are willing to go after these tuck-in acquisitions, if they make sense to us. And I think that will continue. Not a lot to announce in Q1, but we do have kind of a potential pipeline that could show that we're out there and bringing in these tuck-in acquisitions. I think, kind of given where we are, the business is coming back. We're encouraged, and I think we'll -- I don't see any reason to kind of reduce our optimism around this stuff. But you get to a certain point where, if it's much bigger than that, it really -- you really have to think about it because we have liquidity, we feel comfortable. We have the right growth trajectory. But I would still characterize these as tuck-in, not ruling out a potential for something that's particularly accretive. We just have to think very carefully about it. We're not sitting on a ton of cash, and we do have the overhang of the macro environment. But I like where we are, and I like what we've been doing. I think we're going to continue to see that until something changes.

Moving to costs. What kind of inflationary pressures are you seeing? And how are you looking to mitigate some of the impact?

So we aren't seeing a lot of material impact. But again, not being naive, we have to kind of have to look at what little things we're seeing and assume that those things are going to be bigger than the things we aren't seeing, but you're about to be aware of. What we are seeing is some pressure on wage inflation. And I think that we've done things like bring back merit increases, which will increase cost. But we've frozen them during COVID, and we need to make sure that we retain the employees that we have. It's a lot harder to pay to bring somebody new in, in this environment and train them up and do all those things. So we need to be thoughtful about that, and that's one of the moves that we've done. There are certain jobs, IT jobs, tax accounting jobs that are very much in focus. And we need to make sure that we manage those costs effectively, that we preserve those employees, how we work out a way where we can outsource some of that work, and we can in a cost-effective manner. We did increase our CapEx budget a little bit, our guidance. And that's a function of continuing to focus on digital in the U.S. and reflects our current view, but it also reflected some third-party, I guess, I would say, wage inflation is actually is going to cost more than we budgeted on some of the CapEx that we bid on, and we're now obligated in such as New York airports. Awesome. I'm just going to hold it in. Commodity prices have gone up to steal on, or it's gone up. But I wouldn't say that's overall material because we still plan to roll out around 90 towards this summer this year. But its impact, but it's not.

Understood. So we are just about out of time, but let's end the session with a question on your balance sheet. So you have a relatively clean maturity schedule, but you do have some floating rate debt exposure. So as we sit here today, what are your priorities for the balance sheet at the moment?

Well, we have the luxury of not having any near-term maturities. And that was by design kind of pre in on the front end of COVID. And upon reflection, I'm glad we did, not only because we did it in the front end of COVID and it kind of insulated us from a lot of concern and worry, but we did lock in term financing at the low and attractive rates, still higher than our floating rate cost even today. And so we did want to keep a certain percentage of our portfolio floating. We wanted prepayable debt. We wanted floating-rate debt. And we're, again, not being naive, we see rates going up and think that, that will likely continue. But our business in an inflationary environment also reacts positively at least based on history. And as long as we're able to maintain some rate power, we think that it flows nicely with having a certain percentage floating rate debt. Now if there are opportunities to fix or take out and pay some of that floating rate debt, that also -- will need to be in consideration given, again, the macro. But I think we're in a good place right now. We also are sitting on about $430 million-ish of floating rate asset cash that we have available to us. I don't see that changing, but we do have it available. So I think, all in all, we're keeping our eyes open. We're open to doing different things, but I think we feel good about our fixed floating mix. We're 2/3 fixed and fixed at low rates, and as you said, fixed for a while. So that's a good place to be.

Understood. And that's a good place to end.

All right.

Thank you very much for your time.

Jason, thank you.