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

I am high-yield cable and media analyst at Bank of America Securities. Today, we have with us Brian Coleman, CFO; and Jason Menzel, Senior Vice President and Treasurer of Clear Channel Outdoor. Thank you for joining us this morning.

Thank you.

So to get started, obviously, there's a lot of discussion around the macro outlook potential softening as we head into next year. So how do you feel the company is positioned for a slower growth in inflationary environment?

Well, I think we're well positioned, and I'm going to reiterate some of the things we talked about in our earnings call earlier this month. But first, I want to talk about the business, as we talked about on our earnings call, really isn't seeing a pullback. Now we're not being pollyannaish ignoring the kind of the macro headlines that are out there. But in terms of what we're seeing and indeed, what a lot of our domestic outdoor counterparts are seeing, things look pretty good. There can be a number of reasons for that. I think we'll touch upon some of those later as we talk through it. But I think we feel pretty good. We feel pretty good about the tone from customers, the spending that we're seeing, we feel good about our liquidity position going forward. Should there be some headwinds. We -- during COVID, we put liquidity on our balance sheet. We did not utilize all of it. The COVID recovery has kind of come back. And we made the deliberate decision not to reinvest the business or to buy back debt or do other things. And I've kept our liquidity balance fairly high, and it's over $500 million at the end of the year. So we feel like we've got a bit of a war chest should headwinds increase. The other thing I'd point out in terms of being prepared for any kind of economic slowdown, is the things that we've been able to effectively do in the past with respect to our cost base. whether that be rent renegotiations. And I'm not talking about the type you saw during COVID, that was a bit unique, but it's something we always focus on, and that is adjusting and aligning our cost base to the current economic environment. So we're always very focused on our rent costs. That is our single largest cost category. And we're effective at doing that, particularly during times when we need to. We've also shown a great deal of flexibility in adjusting discretionary costs, compensation costs during COVID and during other times of economic slowdown, we've pulled back on CapEx. That's a big lever that's available to us. So I think we're well positioned. I think we are currently not seeing things in the business that would indicate a slowdown. Are there other macroeconomic headlines and should things start to slow down. I think we can reposition the business and we have adequate liquidity to do so should we need to.

And how do you think the business is positioned or better positioned now versus over the last 2 or 3 cycles that we've seen?

Yes, that's a great question because I think the business has changed. But before I talk about those changes, let me first kind of point out that at the outdoor as an industry has typically been pretty resilient during your normal recessions. Now we have to go back a bit to find a normal recession. It wasn't COVID, and it wasn't a great recession either. That recession occurred or started to unwind at the same time that digital advertising came online. So the recovery period for other advertising mediums, including outdoor, it took a while. But historically, during recessions, outdoor goes down a couple of percent and then recapture that pretty quickly. But those recessions are long enough ago that the business has changed quite a bit. Our business has changed quite a bit. And I think it's a function of investments that the industry has made, and we in particularly have made digital conversion. We're a much higher percentage of revenues come from digital since the last recession. And we think overall, that's more attractive to businesses and could provide a tailwind or support during an economic downturn. We've invested in technology, including data and analytics, our whole radar suite of tools has helped us and outdoor become a more attractive buy to advertisers and investment in different kind of sales channels, programmatic, for example, have made it easier for us to buy and attracted new and different and investors to the medium. So I think if you think of outdoor in general and us in that space, we look a lot different, and I think that is an advantage going into a recession in today's environment versus in the past.

Great. And then moving on to the European business, which is obviously very topical, how has the strategy shifted from when you first announced a strategic review of that segment given the macro backdrop? And how should we think about that going forward in terms of parts of the business, all of the business eventually and any timing?

Yes, it's a fair question. It's been nearly a year since we announced the strategic review. So clearly, things have changed. And I go back and give a little bit of a history because the macro environment is probably more recent than some of the early changes we saw at the beginning of the year, but it's all interrelated. When we first began the strategic review, the process encompassed all of Europe. And let me take a step back, and I think what led to this is the realization and desire of management to focus on the Americas business. That's our core business. So I would say anything that's international is probably not core. What was under strategic review was our European assets. When we went through that process, the simplest and what appeared to be the simplest and easiest to execute was a platform sale, so a sale of all or materially all of the businesses. It also had the benefit of capturing a storyline of how there is a relationship amongst these businesses, how the whole is greater than the sum of the parts and support the story. As it turns out with the kind of the headwinds, the changes in the business, the invasion of Ukraine, the capital markets weakening, particularly in Europe, that -- we soon learned that, that probably was not the best path forward. So I think it was in May, we announced that we were taking a different position and looking how best to optimize, rationalize the European business and we made a shift. And that shift was let's take a look at the lower margin or the businesses that had less to contribute to the European or pan-European platform and take a look at selling those. And by doing that market by market or region by region, you open it up to a different group of buyers. There were a few strategic buyers that could buy the whole platform, but all of a sudden, if you go market by market, region by region, you pick up strategics, you pick up people at a different perspective and kind of a new buyer base. That has gotten some traction. We continue to move down that road. It's more complicated instead of having kind of 1 process. Now you have bunches of mini processes, but the work is still pretty much the same. So it has taken a while and in this environment, anything like this is -- can be expected to take a while. That all being said, I think we continue to make progress. I think we have good conversations going on with respect to those assets. And hopefully, if we are successful, we will end up with a European group of assets remaining that will be free cash flow positive. They will source their own liquidity. And in fact, right now, Europe pays its own bills. But even in a recessionary climate would be more insulated from needing assistance from other parts of the business would have a higher EBITDA or less CapEx base. So again, not that we would hold on to European assets forever. But if you can market and optimize a lower margin and kind of the noncore markets, and you're left with the markets that are performing well, and by the way, all of Europe on a consolidated basis is performing well right now. Then the business looks better. And then when once you kind of get to the other side, of the macro climate that we're in, then you can complete kind of the whole European process based on the facts and circumstances at that point in time. Now that was a lot, but I think that brings us kind of up to date on where we are and have been with the European process.

Great. And just more quick follow-up on that as well as any thoughts in terms of how proceeds would be used if any of the assets are monetized?

We have a series of bonds that sit at the CCIBV level. What it was about? $365 million?

$375 million.

$375 million at CCIBV. And so we're going to be limited in our degrees of freedom with respect to use of proceeds. There is a restricted payment basket. I think it's about $25 million. It hasn't been utilized. But other than that, any kind of proceeds would need to stay within that kind of ring-fence. They could be -- depending on the size and the timing, those proceeds could be used to reinvest in the business using the reinvestment basket or could be used to pay down debt. But ultimately, the use of proceeds is going to remain within that perimeter until those notes are paid off, the $375 million.

Great. And then as we move to a focus on advertising, can you talk about the tone of conversations you're having with local and national advertisers?

Yes. I mean, things have been good. We talked about this on the earnings call, really not hearing any material change or pushback or negativity from advertisers. We reaffirmed our guidance on the earnings call, reflecting those conversations. If you're looking for any kind of signs of weakness, we did talk a little bit about programmatic. I think others have but it really feels like that is less about any kind of pullback from advertisers because of the macro climate and more about just a lot of inventory rolling into the space. And as we saw in kind of the advent of digital advertising programmatic, that's going to have to sort itself out, the good inventory and bad inventory or quality into inventory, I should say, will have to sort itself out. They're not all the same. We think we have premium inventory. And ultimately, we think we'll get value for that. But right now, there's the whole kind of glut may not be the right order, but excess of inventory in the space, but we think it will work itself out over time.

And then what are the competitive advantages that give you some confidence that perhaps you'll be able to sustain or even continue to grow yields on a billboard basis?

Well, going back to what I talked about earlier about the investments we've made. We think we have premium locations, we think we have digitized and continue to digitize those premium locations, making them even more attractive. We've made a lot of investments in the data analytics side of the business or radar suite of tools, whether it's attribution, whether it's gathering data that helps buyers understand the value they're getting from outdoor advertising, whether it's gathering that data and directly linking it into their systems or their -- the agency systems to help come up with a more comprehensive intelligent buying decision. These are all things we've invested in and we think gives us an advantage. One of the core tenets of our business is getting close to the customer. And we've created new sales channels, whether that be programmatic or other things that we've done or looking into to help provide the buying experience that advertisers want, which is a big change from the old outdoor, which is here -- this is what we've got, what do you want, and here's like pages and faxes to do it. We've automated that process. We've built sales channels to reach new customers and existing customers in a different way. We're supplying the data that customers want and continue to want. So it's an ongoing process. It's a dynamic process. But I think these are the things that provide us the competitive advantage or outdoor the competitive advantage because a lot of these are things that the industry is doing. But I think we, in particular, are focused on digital conversion, the development of digital analytics information and the creation of customer segmentation channels.

And regarding advertising category, there's been a lot of discussion in the ad space about that. Can you talk about any major advertising categories that have surprise to the upside, remained weak, haven't recovered as much? And any commentary that you think in terms of what we could see next year? Obviously, auto has been very topical.

Yes. Generally, I think we feel pretty good about the categories. A lot of the ones that were impacted by COVID and we're big advertisers, whether that be amusements or television or travel, not television amusements, travel, entertainment, movies, that kind of stuff. They've all largely come back. I think the only category that we've kind of referenced is not having come back, which was a major category for us or maybe been a little soft was auto insurance. And that really was a function of there weren't a whole lot of claims during COVID. There was extra money, spend it on advertising, brand building. And then COVID recovery, people back on the streets now you've got claims to pay. So advertising spend comes down. So that's something that will work its way through the system. I think maybe more interesting is with the investments that we've made, what are kind of new categories or new ways to reach advertising and are we seeing a lot of traction. And I won't necessarily break it down by category, but in terms of advertisers, we have seen both the attraction of new advertisers to the space, those that didn't buy traditional that buy programmatic. And maybe by buying programmatic, they've realized that not all inventory is the same and maybe they like that sign and want that sign. And so now those guys that bought programmatically had never bought traditional before. Now they're coming to us and doing direct buys because they like a particular location. So the whole idea of being able to reach a potential customer or a customer in many different ways, I think, has really brought both new customers to the table, but even existing customers that buy in different ways. And we have customers that have -- they have different wallets. And a lot of what comes through programmatically is in a digital wallet as opposed to an outdoor wallet. And so if maybe they've never bought outdoor before or outdoor was a kind of -- outdoor capital was a small percentage of the advertising buy. Now they've -- now they're buying a different way, and that has incrementally increased the value that we're bringing in. So I think the investment in the technologies that we've made has done a lot to bring in new advertisers and bring in existing advertisers in different ways. That's all a good thing because we do have quite a bit of churn in the business. And so you need to continue to attract new advertisers in any way you can. And I think we have been successful at doing that.

Great. And on digital, a 2-part question. So one, can you give us a sense of what ad demand looks like now versus 6 months to a year ago? And two, how much of that demand is new versus existing customers?

So demand itself versus 6 months ago, I think demand is healthy and robust and in a great spot. Again, besides programmatic, which is digital and some softness we see there, but that's not a huge piece of the business. It's a growing piece. And we think it will be a contributor -- a large contributor in the future. And we think it will continue to grow, maybe just not at the pace that we had hoped over the next quarter or 2. But other than that, digital advertising is healthy and is robust and it's -- it just -- it gives advertisers so much flexibility. I mean, you will always have your top-tier premium iconic static signs that people would want, no, want that location. But the flexibility in terms of I can be here or there, I can be in or out. I have degrees of freedom with respect to my copy. I can put together a plan that reaches different parts of the cities and by market -- by target market in many different ways. I can reach different advertisers in many different ways. That's given us a lot of flexibility. And we think while there is perhaps more volatility because of the ease and moving in and out of the space. We think over the long run, this is an advantage that people like that -- advertisers like digital. And in fact, I think we and others in the business are seeing that. Your second part of the question was what percentage is new clients. I don't know that I have that off the top of my head. I think there's a certain degree because of churn, there's a certain percentage 10%, 20% that you continue to have that are new to the space, but I don't know if that's purely because it's digital or that's just natural churn or what accounts for that. So I'm not sure that's a direct answer to your question, but maybe it gives you directionally what we see.

Great. And then in terms of airport advertising, can you just remind us, overall, the percent of revenue and EBITDA that, that accounts for? And how you expect that to trend next year, especially if we head into a recession?

So transit for us, which in the U.S. is nearly all airports. In fact, I think overall, even though we have transit in Europe, it's largely airports, it's about 19%. And that's as high as it's ever been. And it's a function of, I think, airport contracts that we have won, including the Port Authority contract of the major New York airports, but also the large kind of digital development of airports. I mean, if you can remember historically 5, 10 years ago, maybe even a couple of years ago, going through an airport and what the sign edge look like, what the advertising look like versus an airport that's been newly developed, you'll see a tremendous difference. And you'll continue to see that as airports come up with new RFPs wanting to monetize space and the creativity that outdoor advertisers can bring to the table. And I think our Airports division is a leader in this space. And I encourage -- I don't know what you do when you guys go through an airport when I'm with my kids and I see a Clear Channel sign and I say yes, that's what daddy does, and it's good stuff. And I think as more airports re-up their contracts, you'll see more and more development of these sites. And so I think the sophistication, the digitization has grown revenues, made it more attractive. The ability, at least in our case, of being able to have a market presence or supplement a market presence, where maybe our local assets are not as much as we want, being able to capitalize often not just the airport sales team, but the local sales team, being able to diversify the advertising base or all things that make airports pretty attractive and has enabled them to grow to where they are today. I think the second part of the question, or at least part of it was where do we see that going? I don't know that we would deliberately grow it more by going out and trying to get more contracts than we currently have today. It kind of depends on the nature of the contracts and the economics involved. We still have some development under the existing contracts. Port Authority, for example, is a multiyear development over multi airports as terminals get built and refurbished. So there could be some growth there. But I think 19% or 20% probably is the right level to think about it. But again, the caveat is always if there's a great opportunity that comes up or maybe there's contracts that will allow to roll off because they aren't particularly attractive. Do I get all the questions? Okay.

Great. And then moving to capital allocation. You did touch on this, but can you just remind us what your capital allocation priorities are? And then depending on the broader environment, how that could shift and also just how the higher cost of capital also plays into your priorities for allocation?

So I'll touch upon this, Jason, and then you can kind of hop in. I think I'd start with the realization. And believe me, we all at the company understand this. We inherited a challenging capital structure. We have a lot of leverage. And as a result, we need to be very mindful of how we think about liquidity and how we think about our maturity stack. And I think we've done a good job of addressing that indeed don't have any material near-term maturities. And so quite a bit of runway, which was fortunate given COVID and the current macroeconomic overhang. What you'll hear as we talk about the focus on liquidity. And that is always in the top of our minds for sure, but you're really in the current environment on top of everybody's minds. And that informs us as we think about capital allocation. And again, our core business, the U.S., one of our core strategic tenants is digital development, whether that be digital conversion, growth of digital assets, investment in data and analytics kind of in the digital space, those kind of things are always going to be top of mind. I think secondarily, there are parts of the business that are contractual in orientation that's a large part of the European business. It's a large part of the transit business that you kind of continually have to invest in contracts, either renewals or new ones or if you lose ones. Otherwise, your portfolio will decay over time. And so that's another area we have to look at. So that's investment focus we've done over $50 million of M&A, largely in the U.S., largely digital over the past year. We've got some stuff in the pipeline. That probably is likely to tail off a little bit given the current micro -- macro environment. Obviously, if visibility improves and it's positive, we could gear that back up. But I think the overriding theme right now is a focus on liquidity and cautiousness as it goes to capital allocation. But what I would communicate to this group is even during COVID, we continue to invest in what we thought were the key areas that would grow the business, the digital conversion, the digital growth the investment in radar and data analytics, the things that drive revenue, and we'll continue to do that as long as we can. I kind of took a little longer than I thought. So I don't know if you have anything to add.

I don't. I was just making sure that we're going to make the point. Look, I think with regards to capital allocation, as Brian said, liquidity is first and foremost. And as we look at CapEx, I think we just have a higher level of scrutiny on what those return thresholds should be in order for us to make that investment. So I think with the additional lens of the macro environment, I think it's a key concept there with liquidity being first and foremost, let's say.

Great. And what would you say in terms of a percent of revenue or just as a percent of existing CapEx is maintenance CapEx? I don't know what we've quoted in the past with regards to maintenance CapEx.

I don't know what we've quoted in the past with regards to maintenance CapEx, but I want to say it's in the 25% to 30% range.

25%.

I want to say 25%, 30%, I'm going to look at Eileen for double check, yes.

And then what is the ideal leverage to run the business? And are there any maintenance covenants that we should think about or that you're managing around?

Do you want me to take the target leverage and you take the covenant?

That works for me.

Last, look, I think as we look at the time line of the company and into the future, there's an inflection point where [indiscernible] business grows and you start to become a material taxpayer. I think as most of you know, we're not a material taxpayer. The elections that we've made have enabled us to kind of lift the cap on interest deductibility to the extent that, that interest expense is related to property. And property as defined in this case, is your U.S. businesses. So kind of REIT like and its logic. And because we made that election, we're able to deduct interest expense to a greater extent -- interest expense ratably to the real property assets. And that's given us some benefit with respect to paying several income taxes. Taxes you see are going to be international or they're going to be state and local and they're not particularly material. But over time, as the company grows, as income grows as debt reduces and interest expense reduces you could become a material taxpayer. And at that point in time, I think the company would want to be either in a position or very close to be in a position to consider REIT convertibility so that we don't have a competitive disadvantage [ and then started messy ]. That's a few years off. But some of the stuff you need to do to get there have pretty long tails. And I think that to biggest or you need to reduce debt, reduce leverage and you've got to take a look at what your set of readable assets are. And so a lot of your international assets, you either would need to not own or you would need to have to structure in some kind of a taxable REIT subsidiary. Now with respect to the latter, we've got strategic review going on, and so that will likely sort itself out over time or at least we'll be better informed. With regard to deleveraging, is it 4x, is it 6x, some kind of using competitive leverage levels or somewhere in between, but that's the ZIP code. So there's a lot of work to be done on that front. But again, I think we have time. And again, if there's a takeaway here, it's not like because we're not in that position, We're paying out a lot of cash in the form of federal taxes because we're not, but when we get to that point where we would, we want to have options and that would be one of them. I don't know if you have anything to add on that, but I'll turn it over to you for the covenant question.

No, I think that was a great response. I think with regards to the maintenance covenants, we only have 1 maintenance covenant that's on our term loan B facility. And that is a springing covenant, right? So as long as they're -- and we have some LCs written against that facility, so it forces us to have to report out on that leverage metric and it is tied to our secured leverage at CCOH. In the threshold for that leverage target is 7.1%, as of September 30, we're at around 5:1. So we have lots of leeway within that covenant. We don't feel like it's something that would constrain us going forward. Although during COVID, we did have to seek a few amendments to waive that, and we replaced it with a minimum liquidity covenant that has now expired and we're back to reporting. That ratio did step down in September of this year. So we are still meeting that covenant by quite a big margin. So we're comfortable with where we are at today with the maintenance covenants.

Great. And our final question to close this out. What do you think are some of the biggest opportunities for Clear Channel over the next few years?

Yes, great question. And I think we've spent a lot of time talking about the supply side, digital conversion, getting new contract wins. I'd say the biggest opportunities maybe that we haven't discussed is the demand side. And talking a little bit about off of what we talked about and the investments we've made that's where the opportunity is. Whether it's growth in programmatic and over time, as the quality assets sort themselves out and that becomes a more robust channel or it's that slow shift of advertising agencies and advertisers really buying into the analytics that you're seeing. We are getting traction. We have case studies, but it's still scratching the service of what could be. And anything we can do, which is while we're making the investments and being there in a way that our advertising customers want to buy, any kind of development or improvement that we can make and that's why we're making these investments in those areas, bringing in new advertisers, increasing the buy from existing advertisers. This all creates demand. And when you have a fairly limited supply and you're increasing demand, the economics are good for you. And so that's what I would leave here with today instead of focusing on the supply, focusing on the demand kind of ties into the investments we're making. We are having success. But in order really to get a big movement in the business, we want to continue to push on those levers. It may take some time. But in our business, when you have a high degree of fixed cost, that incremental dollar of revenue you can bring in from new customers from increased spend will follow disproportionately to the bottom line. And that, at the end of the day is top priority for us.

Well, Brian, Jason, thank you for joining us today.

Thank you very much.

Thanks for having us. Thank you, everyone.