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

My name is Jason Kim. I cover the telecom, media sectors as a credit analyst. I'm joined by Scott Wells, CEO of Clear Channel Outdoor. Very excited to have you join the Communacopia + Technology Conference here in San Francisco to talk about the state of the out-of-home advertising market and CCO's position in it. Scott, thanks so much for joining us today.

Thanks for having me, Jason. Great to be here with you.

So you're just coming off the Investor Day in New York last week, we got to learn a lot about the company's strategy in detail. To start things off here, can you share with us some of the highlights? What are some of the key initiatives that you're most excited about as you position CCO for continued growth?

Sure. And thank you for coming to the Investor Day. It was great to see you there. It was great to see a lot of folks there. I think, first off, I'd just say part of what I'm so excited about is the who, not just the what. One of my big goals with Investor Day was to show off how great a team we have. And I think for those of you who are there who saw it, they showed up really well. And those of you who haven't seen it definitely go to our Investor Relations site and check out the tab because it's a great group of folks, and I'm excited to be transforming the business with them. In terms of the big initiatives that stand out, I'm really excited about what we're doing with sales channels. We have traction in direct-to-client, programmatic, our agency partnerships. We've just launched our inside sales initiative, which is targeted at small customers. And that's an area that I think has a lot of promise. Likewise, I think all of the work that we've done historically and continue to do on creating an end-to-end digital transaction and kind of workflow for our business is going to pay huge dividends in terms of enabling a lot of the technologies that are going to be next generation. So I think those are some of the big things in my mind.

So you reiterated third quarter guidance last week, which you originally gave during your second quarter earnings call. So obviously, no big changes to your performance that you're expecting at the moment. But the macro environment has become a lot more volatile. The markets are focused and potentially the slowing down in the economy. So from your seat, what are you seeing out there when you talk to advertisers, what's the tone like?

The tone with advertisers actually continues to be really strong. We are having good dialogs really heading into 2023 at this point. We're getting into the time of year where a lot of our renewals happen for the perms, which are an important part of our business. And the dialogs, the dialog is strong. We're certainly aware of the macro and paying close attention. There's not a week that goes by that I'm not talking with various members of our sales teams about what people are saying, what the tone is, but we're not seeing cancellations. We're not seeing downsizing, and we continue to have very constructive dialogs with people heading into 2023. So the environment looks strong. I think one thing I would just call out to our investors, we were distorted a lot by COVID, both in terms of what happened with our revenue during the tough times of COVID and then what's happened since with, as some of the rent abatements and things like that have flowed through. So we're going to see our growth rates come down. And again, we guided to this. I mean, part of our motivation in doing an Investor Day was to sort of talk about what steady state will look like when we get there. But it's going to be a few quarters before our numbers sort of clean up from all the COVID distortions and we're trying to disclose more information to make it easier to follow that. But that's probably also one other thing I didn't mention about Investor Day that I think is important is we are really expanding our disclosure and hopefully, that will make it much easier for those that follow us to track what's going on and have good visibility.

Absolutely. In terms of the macro environment, so out-of-home as a sector seems to be doing better than some of the other mediums that are out there. Why do you think that's the case? And to the extent to which the economy slows down even further, are there reasons to believe that the out-of-home sector should be more insulated in this downturn, if there is one than previous one?

It's a great question. And I do think that out-of-home is faring very well. I mean, again, I talked about the COVID distortion part of what's going on at this instant is just math in terms of coming out from that. But if you look at the world right before COVID kind of '18 and '19, out-of-home was on a very strong run. And it was on the back of greater measurement is a key factor. The emergence of programmatic in -- as a trading channel within our business was a factor. The fact that people have realized, I mean it's kind of interesting. People went into COVID. If you rolled the camera back and looked at the conversation with CMOs in 2019, one of the #1 things that you heard from them was I'm overexposed to digital, but I have these objectives that I have to hit, how can you help me hit those. And then we went into COVID, every media went way down, except digital. So their overexposure to digital went through the charts. And I think that actually explains a little bit of what's happening right now because the fact that people are out in the world, again, the fact that mobility is high, people are returning to offices, out-of-home is showing up big. And during COVID, you had things like the iOS changes and the Android changes around privacy that have caused some of the digital media not to work like they used to work. And that was sort of a whisper at one point and now it's kind of delivered wisdom that that's, in fact, what's going on. And so those things all are kind of combining to create an opportunity. I mean, we're the last mass visual medium. And we have got much, much better measurement than we had 5 years ago and marketers are hungry for things that cause their other media to work harder and that's one of the things that out-of-home does really well. So I think that would be the case that I'd make that there is, if you just look at the sheer volume of money that's gone into digital over the last decade, there's an awful lot that marketers can tweak and optimize and fund massive growth within out-of-home -- relative to that incremental growth.

Yes, that makes sense. The digital transformation has been a focus of yours for quite a while. At the same time, you and the rest of the management team talk a lot about the changing demand and needs from marketers during our Investor Day last week. So can you elaborate on that last point, the changing needs of your clients? Like what exactly are they doing? And how does CCO becoming a more digital-centric business to help you meet those demands?

Sure. Sure. So I mean, first off, our whole digital transformation is entirely informed by what our clients need. So the 2 are inextricably linked period. That is a fundamental tenet of how we're approaching things. But in terms of what those needs are, it does vary and the advertising universe, just like the consumer universe is very diverse. You've got everything from your very largest to very smallest advertisers, but I think I'd boil it down to, they're looking for responsiveness and speed. So they want to have fast responses and turnarounds. They're looking for confidence that their money is being deployed well, call it ROI for lack of any other, any other definition. And they want to have the ability to be agile and to optimize. And so when I think about what we're doing, all of the things that we talked about around streamlining our orders process, getting it online and getting to where you've got an end-to-end electronic workflow is about speed. And the investments that we've made in our rapid team, the investments that we've made with our sort of configurators, all that stuff is all about responsiveness and speed, and we've seen dividends on that. Looking at the other 2 areas that ROI and at optimization, RADAR has been central to that to being able to demonstrate ROI. And I think in terms of optimization, we're just scratching the surface with sort of real-time insights in some pockets of our RADAR. That's a big development area for us to go further on. And again, in terms of ROI and in terms of optimization, many of our advertisers actually feel the impact of our campaigns. I mean one of the things we heard from people in COVID, who pulled back is that they noticed that they had pulled back because their deal flow slowed down, their brand statistics degraded, and it's caused people to come back to our medium with conviction that they need to have out-of-home in the mix, which I think is a great variable. Hopefully, that gives you a flavor.

Yes, it does. That's helpful. One of the areas that you touched on is programmatic and scaling up the business is an important driver to increase your wallet share with large advertisers. How big is this business today for CCO? And how [ decided ] the growth opportunity here over the long term for the company?

So I think it's a very big growth opportunity for the business. Currently, the business is small. It's growing double digits. It's a business that I would expect in time we're going to start disclosing how big it is, but it is growing very, very fast. And I would take it one level above pure programmatic to just automation in general. Automation is a huge opportunity in this business. This is a business that has been predicated on spreadsheets going back and forth and a lot of manual dialog for years, much of which you can automate, much of which you can streamline and deal with electronically. And as that automation plays out, that would be where we would be connected to our biggest advertisers directly, whether that's to a brand or to an agency and that wouldn't be programmatic, but it would be automated. Programmatic is kind of a subset of that, a kind of specialized subset where we make it available via the DSP players, the demand-side platforms that are out there. People like the Trade Desk or DV360 or Vistar or such. And with programmatic, I think that, first of all, we've seen that other media have adopted programmatic very broadly because it's very flexible. You can be very agile with it. You can come in and out of the marketplace. It tends to come attached to data. So that's where a lot of the kind of optimization type work we're doing is going on. And programmatic, I think, is something buyers have shown that they like. The thing we don't know for sure is in out-of-home, how much is going to play out automated versus programmatic. But I think those 2 things together are just a really big opportunity for the business.

Is there a function of out-of-home budget in a separate bucket versus automation or programmatic that you're able to tap more deeply into?

There definitely is. People manage their programmatic budgets. Many advertisers have actually taken their programmatic budgets in-house and they actually manage them directly. They have their own programmatic buying desk, if you will. And they do tend to manage those. Those tend to be managed with their true national budgets, which we only scratch the surface of in out-of-home. So yes, that's an incremental budget area for us to get after and it's a big one.

On the other side of the spectrum, one of the areas that is relatively untapped for [indiscernible] why has that served historically and what initiatives do you have in place to grow your presence there?

Sure. So I mean, first off, we do have a lot of small and medium business, particularly medium, but we do -- about 60% of our business would be small and medium business of some sort. We tend to call it local when we're doing our calls. But that's what our sales force that's embedded in our local markets is selling. But I think what you're getting at is the thing we talked about at Investor Day where we were talking about a small market opportunity, and that's really the S in SMB. That part of the market is very hard to access. It's a very dynamic area, and it's an area that our account executive model that's sort of at our core is not very efficient or effective reach. So one of the things we've done over the last year or so we've been doing lead generation activities to sort of see what demand is sort of latent out there in that space. And we've seen enough to cause us to decide that we want to stimulate it a little bit. And so we're putting together an inside sales operation. And the distinction of this is this would not be an accounting executive for us. This would be people working online and on the phone to sell out-of-home with an electronic marketing wrapper around them, selling packages, ultimately, potentially enabling us to get into self-serve. That's sort of where we think this goes because we know in the small and medium business market that a lot of small businesses buy their digital media through those sort of direct self-serve sort of channels. So we're not to that stage yet. We have a lot of work to do to get our back end to where it could deal with that. But we think that, that opportunity is probably nearly as big as the opportunity with the really big advertisers. So those are 2 areas that our model was not set to go after. 4 or 5 years ago, we've established some things that have traction that are doing well going after the large end. We're now working on that small end and we're excited about the potential there.

Any color on when we can expect some of the tangible benefits from these initiatives to show up?

So you're already seeing them in the large end. I mean our programmatic business is growing rapidly, our direct-to-client is [indiscernible] nicely. In terms of the inside sales, I would think it probably would be the better part of the year because of the work we have to do to build that has to do with getting -- we've kind of got the lead generation engine, but we need to completely tune that. We've got some work on our website that we need to do. We obviously need to hire and develop the team. We've got the leader, but we -- it's very new. And then there's some tech in the background because of the tool set needs to be -- it needs to be a very high throughput operation for it to make sense. But I've seen inside sales work in a lot of industries, including media and I expect that this is going to be an exciting one. And we'll definitely, as we always do, report out on it periodically as we have milestones.

The digital board conversions have always been a key priority for the company. At the Investor Day, you noted that you're still getting low 30% IRRs, which is very impressive. Can you talk a little bit about the details of the returns in terms of revenue uptick that you see once you convert an analog board into digital? And what's the trend been like for the cost to convert?

Sure. So digital conversion is a key strategy for us. It's a key growth opportunity. What we typically see is at a location, we aim for locations where we have a long-term lease or an easement in terms of the -- managing the cost structure part of it. And it's usually a high-profile location. When we do the conversion, we typically see 4x to 5x the revenue at the location. Most of ours are 8 slots. So sort of the way you reconcile the math on that is that if you take a single piece of inventory, turn it into 8 pieces of inventory, but people don't see all ads as they're going by. And so as you price it out and work out the value equation on it, it gets you that 4x or 5x uplift. In terms of the cost, the digital part of it, the actual screen rides the electronics e-curve and it has been steadily with COVID disrupting the decline a bit, it sort of flattened out a little bit here during COVID and right now. But I would expect we'll get back on a declining cost on the sign. And the actual physical build-out varies a lot depending on the local code. But we typically are going to see payback in a year or 2 on one of these, the IRRs or like what you said. And one of the things we're doing right now, I think an opportunity for us is going deeper into our base where we're able to convert because I think many of you know, but I'll just say it out loud, the #1 constraint for us is regulation on this. The cities have rules and states have rules that make it difficult to convert to digital. One of the things we're trying to do is create a cost point. We've actually worked with a manufacturer on a lightweight kind of low-cost digital screen that we're just in beta testing on. This is brand new, but it's something that we think could let us push digital conversion into some of our less premium inventory because there's opportunity there. People want the use case of digital in those things, but you have to have economics that pencil on it. And so we've got a solution we think we're going to see how that goes.

In terms of the 4x to 5x revenue uptick, how quickly are you able to capture that? And then are there any impact from calendarization with nearby analog boards make a conversion?

The cannibalization question is a really, really tough one to answer definitively because what we found is that many of our advertisers actually advertise on both printed and digital. When you convert, it's actually a bit of a tense moment with whoever the advertiser on that sign is because think about it from their perspective, they have a location that they're paying the 1x revenue on. And if we convert as digital and they want to maintain the status quo, they are going to have to pay us 4x or 5x more for it. That doesn't work for people. And so that can be a -- but that's not really cannibalization. That's just the transition in managing it, and we work to make it client-friendly as we can. So I don't have a good answer. We've definitely studied the cannibalization one. We've never been able to pin it down as like a big -- as a big problem. We've typically seen the market grow as a result of, as a result of doing that. And there was another part...

How quickly are you able to, particularly the ramp...

The ramp to the 4x to 5x. So that typically within the first probably 6 months, certainly within the first year, the ramp. It depends a little bit on -- I was relating to this one of the groups earlier today. We did have an experiment and people ask about saturation all the time, and we did have kind of a real-life experiment in this in one of our markets.

That's my next question. So thank you.

Well, we -- yes, so we had kind of a window open in one of our markets in the early 2010s, where the ordinance was very broad and basically enabled digital in the entire city, but had a lot of rules around spacing out and like how many signs you could actually convert. And so we went very, very aggressive at that and we converted more than 100 units in this one particular city in less than 18 months. And there was a brief period of time where we were concerned because it was -- that's a lot of capacity to throw into one city at one time. But by 2 years after, we had achieved more than the 4x to 5x multiple and it played out. So if your question was about saturation more broadly, we really have not seen that. And we've talked about on our earnings calls, the U.K. for us is in the high-60s, low-70s in terms of percent of revenue that's digital. We have markets in the U.S. where you have it now in the table that we provided at the -- in Investor Day, our highest markets are around 50%, and we really don't think that there's -- we don't think that there's a cap necessarily on what percentage is going to be digital, we do think that we have a lot of markets where we have headroom between where we are today and at least that 50%, if not higher. The thing just to be clear on, a lot of customers do like printed assets. We have advertisers who that's what they prefer. And so I think that there's going to be a coexistence of these things, even regulation aside, there's going to be a coexistence of printed and digital for the foreseeable future, I think.

And just from a pure digital hardware perspective in terms of number of [ boards ] you can convert, you feel like you have a lot of headroom to grow from here?

Yes. I mean there are definitely cities that are harder than others in terms of being able to do broad-based conversion. But one thing we've seen is that if you compare the kind of regulatory mindset on this now versus the regulatory mindset on it when we first started back in 2007, it's night and day. People are much more supportive of having digital signs, a lot more cities have enabled them. And so I think that, that trend line -- the product has become pretty normalized. So it's just a question of there are more than 3,000 municipal groups in the United States and getting all of them -- I mean, our relevant universe is a subset of that, but getting them all to get an ordinance that is friendly that can -- it takes a lot of work.

Last week, you laid out long-term growth targets, assuming a more normal operating environment of 4% to 6% revenue growth CAGR, 7% to 10% EBITDA growth and 10% to 20% AFFO growth between 2022 and 2025. So that shows the inherent operating leverage in the model as you grow revenue. That said, inflation has made cost management a bit more challenging for all of us in today's environment. So how is Clear Channel dealing with the inflation issue as you look to protect and expand your margin?

Sure. So we've never, in recent history, gone through inflation like this for any period of time. So in terms of like precedents and then, oh, we say like yes, this is exactly the playbook, but there's not a lot to say, but you look at it, the reality is that we have relatively short-term ad contracts, and we have relatively long-term or even perpetual leases. And so your ability to raise your revenue side while holding your cost side in abatement is pretty decent and site lease is far away, our biggest cost. That comes in a few flavors. If it's a private landlord, those tend to be 7- to 15-year contracts, sometimes with escalators sometimes not, there's all manner of them, we have thousands of them. But we tend to manage those very strategically. We have a process of protecting our most important inventory. And I don't think inflation is going to be a huge driver on that for a little while. We go through a couple of years, like what the past year has been, those landlords will be [ walking ] and we're going to have to do something. But that gives us a good platform to start from. Our next biggest cost would be our people cost and we have had inflation, as I think most organization has, and we're working to make our place a good place to work in an environment where people are not feeling squeezed. So we have had to take some action there. But I feel very good that we have been able to work the revenue side of it to cover that, particularly in the U.S. I think when you look in Europe, it gets more complicated because there's more -- most of our inventory there is on a revenue share type of model. So as rates go up, our margin dollars increase, but our margin percent doesn't increase as it plays. But there, you're more likely to have guaranteed cost of living improvements and things like that, that are regimented and happened routinely. So it plays out a little bit different in the different geographies. But I think in aggregate, when you look at the whole impact, we're positioned reasonably favorably for it.

Speaking of the topic of inflation, so you are in a favorable position in terms of having the ability to extract higher pricing in this environment. And the out-of-home historically has been a low CPM sector. But I imagine that asking for higher prices is a bit of an easier discussion than what perhaps some of the other mediums may face with declining audiences. That being said, in a market like this, where there is some uncertainty in terms of macro environment, how do you balance the desire to get higher pricing while protecting the long-term relationship with your customers?

So I'd love to have you come in and speak with my sales force about the ease of raising rates. I think that would go over -- I think that would go over really well. And I could put you forward as an expert. But kidding aside, you have to be respectful. You have to be thoughtful about how you approach it. The thing about our business and it's really interesting because coming out of COVID some ways, first of all, you had these advertisers who had the experience of walking away from out-of-home. And then when they came back, prices had gone up a lot for them because they tended to be on some of our very premium assets and they tended to be on things that we had resold basically instantly. The very top tier of our inventory doesn't stay vacant. It moves. And so that then leads to a dialog with that customer where you're saying, hey, look, you walked away from your position, there's somebody else on it right now, they have the right of first refusal, sorry, let's talk about what else we can do for you. Let's talk about that next tier of inventory. Let's talk about other strategies. And that's what's interesting coming out of COVID is that a number of marketers have come out with a very keen eye on telling their story on marquee assets. And so we're in a bit of a distorted time. If you went and you asked all of the people and agencies who work on out-of-home, their biggest problem right now, they would say there's not enough premium inventory in the country. And that is a problem for them. It's a problem for the advertisers and it's an enormous opportunity for us. And so the way that this works in our business is that, that top tier gets locked up, people sign up long-term contracts and so forth. When people are then looking to tell their story, you take them to the next tier, which is still really good. You might be talking about the difference of being over the Lincoln Tunnel versus being on a New Jersey Turnpike sign or something. Just should I need to have a West Coast example I can pull out, but I don't have one at the tip of my tongue. But you move them to that next tier of inventory. And what ends up happening is that, that drives rate across the whole portfolio. It is truly a supply and demand business. And as you have tranches of inventory lockup and there are people that like focus on the low-end inventory, too, right? So that comes into play, too. But that creates a pricing environment that you can actually have a very practical discussion with a client on where you're just saying, look, we don't have anything available in this tranche. Here are some examples of things that we think could accomplish your goal that are in the next tranche. They're not as expensive as the things in that, and that's -- you can create a win out of it. And it's a matter of managing that dialog. And with most of our big advertisers there's a long relationship of give and take on these types of things. And so yes, you can't just be going into everybody and saying, hey, you're taking a 12% increase, and that's just the way it's going to be we're going to give it to company X. We need to deal with it thoughtfully. But because of the scarcity in our inventory, it actually kind of enables that conversation.

That makes a lot of sense. Let's talk about Europe. So you reiterated your comments regarding the strategic review of the European segment last week, focusing on certain lower-margin assets in the market as divestiture candidates. Historically, the European markets traded at lower multiples than the U.S. assets in out-of-home space. So a sale of these lower-margin businesses may not be that deleveraging for the company but there may be other benefits to Clear Channel from exiting some of these markets. Can you elaborate on what those could be?

Yes. Absolutely. And you're absolutely right that it's not -- whatever transactions we do may well not be deleveraging. But there are benefits to doing what we're going through. So when we said we were going to do a strategic review, we did a very extensive strategic review and we talked to everybody. And we had very far-reaching conversations and we covered lots of different ideas. There were a lot of different ideas that people brought the process. It turned out our timing wasn't great with inflation, Putin and energy crisis for Europe all kind of hitting 3 months into our effort. And that puts some constraints on being able to do something for the platform as a whole. But through the learning that we had in our extensive process, it gave us a really good road map of what we could do to potentially divest some pieces in a way that was going to leave us with a higher growth, higher margin easier to digitize more focused portfolio and it's a much longer path. The reason that we didn't start down that path is because it will take longer to do it this way. But I think what emerges on the other side, and it's obviously -- until we've done it, it's not done, but the vision that I put forward to you is that we could exit this with a more focused, more profitable, more attractive entity plus liquidity focus, all of the other ancillary benefits. And I think it's important, it's important for us to change the story of our European business. And so I think this is the right time for us to take those steps. And to help that team emerge with something that is an inherently more attractive business that then gives you more options with what to do with the downstream.

So we have seen M&A activity pick up in the sector, mainly in tuck-in acquisitions by some of your peers, but also Clear Channel has purchased some assets. Certainly, valuations are important. But what characteristics are you looking for when you go look for these tuck-in acquisition candidates?

So for us, our balance sheet does constrain us. And so tuck-ins are the primary thing. We're not generally looking to enter new markets or buy whole company type size transaction. So it comes down to geographic fit. It comes down to what does it do for distribution? Are there opportunities for digital conversion that haven't been pursued for whatever reason? Are there opportunities to add revenue synergies because we're better at selling to the national advertisers? Are there opportunities for us to monetize it better at the local level because we have a bigger sales force. Those are all sort of the considerations. And we've got a pretty robust kind of checklist that we work on that. And the acquisitions we've done this year, I think, are going to be really good for the business in term.

So we have a couple minutes left. So a final question to you, Scott. You joined the company in 2015 as CEO of the Americas division and now the CEO of the overall company since start of this year. So how has the out-of-home industry changed since you joined the company 7 years ago and where do you see Clear Channel -- how do you see Clear Channel changing over the next 5 to 7 years?

It's hard to believe it's been 7 years. It's been the snap of a finger. I think the industry has changed in a number of ways. It's also stayed the same in a number of ways. But I think in the big changes, we have made real progress in getting more advertisers to include out-of-home and to have a reason to include out-of-home. And in the end, that's going to be what tilts this business into bigger shares is having more campaigns include out-of-home. It's a very rudimentary topic, but we've made real progress on it. It's the core of what we're trying to do with our direct client outreach. It's the core of what we're trying to do with our agency partnerships team. And I -- we've seen progress on it. And so I think that's an area that's going to continue to expand. Probably, the biggest visible change from where you all sit is that everybody in out-of-home is talking about programmatic and data now. We were first with the RADAR platform, we had the first dedicated programmatic sales team 6 years ago in both cases. And that's now -- it's great to see that everybody has embraced it. And I think that, that -- part of the reason why our Investor Day was a paint for numbers on how to operate an out-of-home company in a modern media is that we really want our competitors to see what is possible and to embrace because as an industry, we need to -- the industry reputation, it can't be done by just one company. There are things that the industry has to do. And so I think that's an important piece of it. In terms of the next 5 to 7 years, I do think you're going to see a lot of advertisers embrace the medium. Marketers as innovative as they are, actually move their budgets very slowly. And there are a lot of people involved in the actual moving of those budgets. And what we were seeing immediately pre-COVID and what we're seeing right now is people are moving money into out-of-home. And with our programmatic offer, that is going to increasingly be something that people can choose very easily to just turn on and turn off and including campaigns in a way that was never possible with out-of-home. And I think that's going to be all -- that's going to be all for the good. I think you're going to continue to see enhancements in automation. I think you're going to continue to see the measurement expand. And I think you're going to see more sophistication in the industry about how to go after the customer base because it is a very broad and diverse customer base with very different ways of wanting to work and it's important for you to have an offer for every customer segment that matters and that is not where this industry was and I think it's where you're going to increasingly see it go. But I see us as a real growth medium and I think we're going to take more share. And we're a $9 billion industry in the U.S. and point of share is $3.5 billion, $4 billion. Awful lot could happen if you bring even just 1 more point. So I'm excited.

That's for sure. We're out of time. That's a good place to end. Scott, thanks so much for joining us.

Thanks, Jason. Appreciate it.