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

Well, good morning. My name is Jason Bazinet. I'm the media and entertainment analyst at Citi. Very happy to have Scott Wells, CEO of Clear Channel Outdoor. Scott, thank you for joining us.

Thanks for having me, Jason. It's great to be here and great to be joining everybody this morning.

Yes. So maybe I think you want to give a few prepared remarks just to get us started, sort of set the stage, and then we'll turn it over to Q&A.

I appreciate the opportunity to just make a couple of comments to start. And welcome to everybody in the room and anybody listening on the webcast, but thanks again for having us. It's great to have a chance to talk about our business. I think it's a really interesting time to be talking about our business given all the uncertainty in the world and all the questions that are on people's minds. So hopefully, we'll be able to address people's questions over the course of the session. For those of you who don't know Clear Channel, we're a global out-of-home player. We participate in billboards, street furniture, airports principally, some other asset classes around the world, but those are the principal assets we participate in. We're the only global player that is scale in both Europe and the U.S., which is a unique feature of our business. We were a division of iHeartMedia until 2019. And as part of their bankruptcy restructuring, we were spun to their creditors, and that actually is how we arrived at having the debt profile that we have today. Obviously, at that point, nobody had any idea COVID was coming, nobody had any of the intel of how the world was going to evolve over the next couple of years. And it took what was a heavy debt load and made it a little bit more concerning because of the dynamic in COVID, and I'm sure we'll talk a little bit more about that, but that's obviously one of the big things that we're working on as a company to address. In 2019, when we separated, we made a big point that we were going to focus on the U.S., and we actually announced at the end of 2021 that we were going to make an effort to divest our European assets. We chose at that time to look to move the whole platform so all of the countries that we were in, in Europe, and that process was moving along nicely until the Ukraine war broke out, it became considerably harder to look at a whole platform deal at that point. We kind of worked it for a few more months, but it became clear there wasn't a deal that was going to be advantageous to our shareholders. So we pivoted to look at individual market divestitures. And shortly before the end of last year, we announced our first one of those, for those of you who haven't seen that yet, but we divested Switzerland. We signed a deal to divest Switzerland for about $92 million, which is about 9.5x multiple of their EBITDA contribution. So it's a deal that we think will be the first of a few more to come. And what our goal here is to really put the European platform on a sustainable and frankly, more attractive footing than the business that we were looking to sell at the beginning of 2022. It should create more optionality. The business should be able to generate more operating cash flow for itself, which we can use to bring down debt in Europe and potentially downstream. When deal-making environments improve, we can divest it and actually use it to bring down, you know -- it may not be hugely deleveraging, but the business that will be, will be attractive to a degree that it should be a good transaction for us to do versus something that might have been able to be done in the midst of the Ukraine war. So that's what's going on in Europe, but we do have active dialogues going in multiple other countries and we'll be updating appropriately on that as things play out. So shifting to the U.S. with our focus and which is what we think our future is, we're at the forefront of the digital transformation of the out-of-home business in the U.S., and that's most obviously in the media itself. You know, the actual digital conversion of signs. But it's a lot more than that because what we're aiming to do is bring speed, insight, flexibility, more like what advertisers expect in a digital media. And so we're deep into that process. We actually spent a lot of time in September taking our investors through a pretty detailed run-through of the business and where we're headed. And if you haven't looked at that, I'd encourage you to take a look at that on our IR site. I'm not going to go deep in it here because I don't want to take the whole time, but it's an involved story. It really does touch every aspect of the business, and it is important. And I guess the last thing I'd like to do is just talk a little bit about how we believe we're well positioned versus other media right now. Thinking about where we were before COVID, the dialogue we were having with marketers at that time, one of the things we were hearing a lot about was how people were overexposed to digital media. One of the big things that was happening in that window was actually taking companies that had invented their businesses entirely on the back of social media and taking them nationally, that was a huge trend during 2019 and into the early part of 2020. And we were getting a ton of credibility because we had a lot of great examples of how that was playing out. And COVID obviously came, people objected to the idea of out-of-home because while everybody is going to be in their houses. But outside of China, that was only true for a couple of weeks. And despite that, marketing being marketing, we all wrestled a long time until the vaccines came out and things came through. The industry was down in the high 30s, low 40s percent. It was a very, very tough stretch. But the good news is that we've recovered from that fully and are seeing growth. So this digital media overexposure, I think we're seeing the beginning of it right now as digital media wrestles with the marketplace, and we are not seeing the same sort of headwinds. But I'm sure we'll talk more about that as well. I think linear TV's challenges are well documented. We can deliver a lot of the things that linear TV can, particularly in terms of reach. And so that's a big tailwind for us. We have an opportunity where we had a lot of marketers who did pull out during COVID and then tried to come back. And what they discovered is that, A, they couldn't get the signs that they'd had before COVID because somebody else had bought them; and B, if they did want to get those signs and they were [ targeted ] in pursuing them, they had to pay quite a bit more than what they were paying before. And on top of that, they discovered -- a number of marketers have shared with us how their brand statistics suffered as a result of them pulling back from out-of-home. And so we have a very nice dynamic going on right now of a bunch of very committed customers who very much believe in what our medium does because they had an object lesson of what happened when they pulled back, and so that's a tailwind. And despite the rate increases that I referred to, we're still the most efficient medium for reaching people. And so that is a tailwind. And I think finally, the thing I'd just say is, at some level you have to look at the actual results as opposed to the theory. And the reality is we've been told since March that doom was on the horizon, and we have performed. And not every media can say that. And I guess I would just urge investors to think less about, is it an ad exposed business? Is it a heavily debt driven business? And look more at what the actual performance of the business is because that will be what ultimately creates value in the medium term. I'm not saying when, and I'm not at all saying there aren't challenges in the macro and that there's no trouble on the horizon. But I would just urge folks, because I reflect on some of the conversations I was having with people back in March and April of 2022. And at the time talking about, hey, the business is actually performing. We're actually seeing good customer activity. We actually have these tailwinds that I just described. And yet our stock has been punished terribly. It's a very difficult thing on a very personal level to explain to executives whose compensation is tied up in stocks when they're hitting their targets and their shares are down like what ours are. So I'll get off my personal side, but that is a very real thing. And it does not make a lot of sense to us when we look at how we're positioned. And that's where I'll leave it is, we're very optimistic about the future of this business. We think we have the right team. We think we have great assets. We're in the middle of this digital transformation that is only making the business more productive and more effective. I think one of the things I'm looking to do in 2023 is talk a lot more about how we're driving productivity in this business. You read everywhere about how productivity is down, productivity is down. Our productivity is up 30%, 40% since 2015. So I don't think there's a lot of businesses that can describe that. So what I'm describing to you is a business that is operating at a very high level and is defying all of the macro gloom in doom discussion, and we shouldn't be throwing it in a bucket with every troubled asset that there is out there because we lack imagination. So that's my -- so I'm a little scrappy this morning, Jason. So I'd love to dive in and talk a little bit about what questions you have on your mind.

Well, let me just -- I want to touch off what you said about sort of the different cadence that we're seeing across digital media and linear TV and outdoor and I'd even though in the ad agencies that have done remarkably well. I mean this is -- at least -- maybe I'm just the dumbest guy in the room, but like the most confusing ad environment that I've ever seen. So I mean, can you just put a few more words around what is it that's allowing outdoor to outperform some of these others? Or what's causing the strength in the ad agencies? I mean, is this like a national versus local? Is it [ Apple ] dynamics? Like what is the -- maybe it's a complicated narrative and it is not as simple.

We're seeing a fundamental shift and all the things that you named are adding to it. So I think the agencies at least partly are benefiting from the data and analytic acquisitions that they made years before COVID because they used the time during COVID to integrate those. And let's be honest, where the world was trending right as we were going into COVID is a lot of big platforms. I won't name names, but they were taking their customers direct, and that was a bad, bad thing for the agencies. And I think with the rise of some other alternatives in the digital space, and also with -- the reality is that the [ Apple ] dynamic has contributed greatly to cost of acquisition going through the roof using the social media play. You couldn't build those businesses that I was talking about we were helping get mainstream in 2019. You couldn't build those businesses today because the cost of acquisition is so high relative to where it was on digital. And so as that cost of acquisition gets higher, the agency's role in helping identify how to get to your audience gets more important. And I think that's what's going on. And I think out-of-home is benefiting partly from that. And I think partly out-of-home is benefiting just from the snapback from COVID. I mean you've been watching this industry long enough. You know how long it took for the business to recover from the great financial crisis. Now in the great financial crisis, you had the rise of Facebook and Google that dampened the recovery of every other media, including out-of-home. But what you saw with COVID is we went down really dramatically as an industry, but then we rebounded just as dramatically. And it's partly from the lessons that we learned during the great financial crisis. I mean we have a lot of people on the team who were here during that time, and there was a lot of stuff people tried during the great financial crisis that didn't work. And then you throw on top of it, you've got all these other confounding factors of liquidity sloshing around the world, low interest rates for a long time, inflation up. Like there's a lot of things that are contributing. And in the grand scheme, inflation probably helps out-of-home more than it hurts because we tend to be on long-term contracts for the bulk of our costs, and we tend to be on shorter contracts for our revenue. And so that's a dynamic that plays in. But I wish I could explain to you why the market is behaving the way it is, but there are a lot of factors and a lot of distortions contributing to it.

So you mentioned earlier since March of last year, people were talking about doom and gloom and a recession. And I think one of the challenges for anyone here that lived through the COVID recession and go back and look at their model or go back to the GFC and look at their model, you almost have to go back 2 decades plus to have just a plain vanilla recession, okay? And even my model for the guys I've covered [ driver ] doesn't go back that far. So we just lean on Magna or some sort of top down. But I would love your perspective if we go into just a plain vanilla recession, how would you expect the top line to fare for your firm?

Yes. Yes, I mean it's interesting. I do think, first and foremost, it will not be remotely like what happened in COVID. And the reason that it won't be remotely like it is that the people who will drive the revenue learned things and they're still fresh in their memories, because we're still having conversations with people about what happened to their brand statistics. I mean we have some scale advertisers coming back to us in 2023 who had been gone since then, and it's been because of those specific things that are coming into play. So you should not have your baseline macro turmoil be 2020 because that was truly a black swan from an out-of-home perspective, not to mention all the other things that I'm not qualified to opine on. If you look back at those recessions, if you look back at the early '80s, if you look back at 1991, if you look back at 2000, 2001, 2002, out-of-home typically pauses during downturns, it doesn't typically regress a lot. Obviously, that was different in the great financial crisis, and it was very different during COVID. The reason for that is that we do tend to have a decent part of our business on a long-term contract, and we tend to be parts of campaigns that advertisers don't necessarily cut first. They tend to be baseline elements of the campaigns. That's somewhat different now than during those earlier recessions because with the advent of so much digital, we're almost 40% digital in our digital and the medium, not in the digital media sense, but in the digital signs. Those tend to have shorter contracts and those will be more volatile. We saw it with Programmatic, which is our newest channel to market, but that was very volatile during COVID. So Programmatic will be volatile, digital will be volatile. But the longer-term campaigns tend to be stickier. And so to the degree that we have a macro downturn, our expectation would be that it will be one where it will be a modest dip or a pause in growth as opposed to a big step back. But we have the tools in the toolkit. If things look worse than that, we certainly have the tools in the toolkit to adapt pretty swiftly as it goes. But I would think our top line, we're not going to see anything remotely like we saw in COVID, and the great financial crisis is -- at the time, it was extraordinary in its magnitude. It was very small relative to COVID for us, but I would expect that we won't see anything like that either. Pause.

Okay. That's good. So at some level, when I think about your business or just the industry, outdoor business, it's simple, and then you scratch beneath the surface and it suddenly gets really complicated, right? There's national, local, and there's different mix of traditional billboard versus transit and there's different digital -- rates of digital conversion of your assets. If an investor is sort of looking at a number of outdoor stocks that they could buy and they're just trying to pick the attributes that are probably going to perform better or outperform, what would be the things that you would point to that say where Clear Channel sort of is ahead of the pack? And where are there potential risks when you sort of look at your mix on those 3...

Yes. I mean it's a great question because there really are just the 4 of us, right? And you have JCD, which is a completely diversified global player, but not very exposed to the U.S. You have Lamar and OUTFRONT, which are essentially U.S.-only companies, and then you have the differences between large market, small market. I mean I think I'd boil it down to while we have Europe, and while we have that part of the exposure, we have a broader base and broader investment opportunity. I think the #1 differentiator for us is how far ahead in the game we are on, particularly the use of data. I think our understanding and utilization of data and the degree we're working with advertisers and their first-party data is a differentiator. That's an opportunity. An opportunity that is also a threat is, we are truly a public LBO. So it's not for the faint of heart. But when you have capital structure like we have, as we grow and as we evolve, we're going to deliver massive returns to the equity holders, but that obviously comes with the risk if you worry on the other hand. And to that, I'd say the flip side of that, and this is true of all the U.S. players that have billboards, we do have a very ready source of cash available in the event that we have to break glass to work through it. And so if your strategy is like a loan-to-own strategy, it's probably not the best play in this industry because we have very -- the assets we have are not replaceable they are not -- you can't just build them starting today. This is particularly true of U.S. billboards, and they are very valuable in the open market. So to the degree that you're inclined to the loan-to-own path, I'd urge you to think about looking somewhere else because that's not likely to work here.

Okay. Can you talk about...

I think that clock might be the -- not the clock we were...

Yes, I think that clock is off.

Okay. So we still have time?

I think so.

Okay. It's like the red light is flashing. Somebody did -- somebody doesn't like the loan-to-own comments there, anyway.

So you touched on liquidity and breaking the glass. Can you just touch a little bit on the liquidity that you have today and how you sort of think about it if the downturn were...

We have robust liquidity as it is. I think our last report was at the end of the third quarter of '22. And we had a little more than $320 million of cash and then another couple hundred million of revolver capacity available to us, about $500 million liquidity. What I'm referring to in the whole loan-to-own strategy is that even today, if we wanted to -- if you look at the multiples that people are paying for U.S. out-of-home billboard businesses, that's where there would be liquidity that would be available if we needed it. That's the emergency break glass. I'm not in any place -- nothing is off the table. But the last thing that I want to do is go sell more U.S. businesses. We went through that with iHeart in 2015. You saw how effective we were at raising liquidity in a very short period of time with a clearly distressed parent, and yet the prices we got were very good. And it's a shame that, that got used the way it got used, but that wasn't my call and it is what it is, and it didn't end up helping us. But if we'd held on to those assets, they'd probably be generating about $80 million of EBITDA for us today, and that would be awfully helpful. That would be like another turn of debt almost that we would have down. And so like the idea of accessing liquidity in the U.S. markets is not particularly attractive, especially when you think about likely tax leakage because part of how we did that deal in -- we did those deals in 2015, part of why they were so good from a cash perspective as we had a lot of NOLs that we used. Those NOLs got eaten up in the iHeart restructuring. And so we don't have a big pool of NOLs that we'd be able to cover those, and those businesses have been around a long time, so the basis -- again, I don't want to get into because it's different in every market, and it will confound everyone. But the point to take is that they are businesses that have inherent value that is not easy to reproduce. And so we would be able to access that in a crisis situation, we could do that.

Yes. Please.

I mean, I sense your frustration. You're like, wait, we're executing with [indiscernible], the stock is not working, the managers are getting frustrated like...

Yes. It's a good summary.

And I believe everyone gets that same frustration in their own [ home ].

Of course.

What can you -- what is in your control -- basically, you're doing what you can and in the sense of, okay, people may worry, well, we're worried about recession, then you kind of [indiscernible]. So what -- as you sit around with your management team to think about 2023, it's not like you say, well, we did everything wrong last year, let's do it better. So what do you do in '23 that you think changes the narrative [indiscernible]?

Well, I think -- I mean, so that's -- I appreciate that question. It's a great question. And I think the key is that we continue to perform. So first and foremost, we continue doing the digital conversions that we say we're going to do. We continue to drive productivity. We continue to bring our yields up. And this is true globally. Not all these things are just U.S. only. And a lot of it is just running a good business. I mean, I feel like if you -- when we report our 10-K, I feel like that's going to be a very good statement of a company that had a ton of external distractions, but actually just performed. We were in the midst of trying to divest half of our revenue, and yet the division that was up for being divested brought its EBITDA back within the [ nat's ] eyelash of 2019. That's not too bad. And I think that there are things to build on from that and you compound. So continue to execute is the first thing. I think the second thing, and this is probably the biggest thing in my perspective is I need to help our investors understand Europe the way I understand Europe. Europe is not a big bad amorphous thing. There are some wonderful businesses in Europe. And by doing what we're doing with the portfolio, we're going to end up in a position where we can produce financial statements that you all are going to be able to understand and see that alongside me. And so that is something that I'm very tangibly going to work on now. Is it all going to be done in the first half of the year? No, probably not. But will the road map be more clear? Absolutely. And then I think the last piece of the puzzle is we have to figure out how to message to folks our conviction that we need to bring our debt multiple down. I feel like we talk about it all the time. But people don't believe us. They think because we've been thwarted by things that we've gotten distracted and we've gotten more excited about our digital transformation story than our debt reduction story. It's not true. Debt reduction is unquestionably the biggest value driver that we've got. But to get to that, we have to be where we're producing free cash flow over and above. And I think the way that ends up playing out is, I mean, you already -- and this is one of the reasons why we started producing AFFO, which I know is a question that's on your mind, is that as an entity the U.S. creates a lot of cash, that cash just gets taken in to pay interest. And so as we grow that base and as we start to have people believe that there is a growth story that we're going to be able to continue to be a GDP-plus grower, we can make progress on that. Now is the Street going to be patient enough for us to get to that with the raised interest rates? That's a big question, and that's something that every business that has a lot of debt has to deal with. Because at some point, if you think about the lines we're trying to deal with, there's a line about being a U.S. taxpayer. At point, we become a U.S. taxpayer because we run out of net operating losses and how things play out. It is critical that we be a REIT by the time that line plays out. For that to happen, we can't have the big exposure to Europe. And so Europe needs to be resolved in, call it, a 3- or 4-year time horizon to where it's at least in a state that we could -- I mean, the thing about the way we're approaching Europe is it creates optionality for us to do a lot more than just sell it to a private equity fund. And I'll just leave it at that without getting too far over my skis. So that is something -- that's a line that has to be resolved. And then the biggest line is the line around when debt renewals have to happen because we have a good window of time right now, but every year that passes, we get closer to where we're going to have to refinance that debt or do something with that debt. And so all of those things are working in consideration as we work our way through this. And what I can tell you is that in 2023, we're going to make progress against all 3 of those story lines, if you will. Does that answer your question?

Can I just ask one follow-up on that?

Please.

You said when the 10-K comes out, that's going to sort of advance the ball in terms of the Street's understanding. Was that just code for Q4 results? Or is there something in the K that you think will sort of help elucidate what...