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

All right. Good afternoon, everybody. For those of you who don't know me, my name is Avi Steiner, and I, along with my associate, William O'Gorman, I cover the high-yield media sector here at JPMorgan. It's my pleasure to have today in the fireside chat format, management from Clear Channel Outdoor. To my immediate right, Scott Wells, Chief Executive Officer; to Scott's right, Brian Coleman, Chief Financial Officer. They will allow me to ask some questions and then at one point, we will open -- at some point, we'll open it up to the floor for any questions. We do not have a mic in the room. I apologize. So when you do ask questions when we get to the open part of the session, if you could speak loudly, I will repeat your question into the mic for the benefit of the webcast and with that, thank you, everyone, for being here. Scott, Brian, thank you for being here and great and if it's okay, I'm just going to launch right into it.

So we just finished up a fourth quarter earnings season that was not particularly easy for the advertising-dependent mediums. Television and radio names, in particular, were impacted by slowing advertising spend and tougher comps. Outdoor, while seeing some of the same factors, maybe more so at the margin, I would argue, has held in much better on a relative basis. So why does Clear Channel management think that is? And could the relative outperformance simply be a function of outdoor being a later cycle medium and that eventually some of these trends may catch up?

So it's a great question, Avi, and I do think there -- there are reasons that Outdoor might be a little slower to deal with challenges than other media. But I think the bigger thing relative to the media you're talking about is that our audience continues to grow, and we are continuing to find more effective ways to communicate the impact that audience to our advertisers. And that when I look at the parts of our business that are most responsive to macro impact, and I'm thinking particularly of our programmatic business and secondarily, our digital signs, which tend to have shorter contracts than the printed assets those were actually signaling more challenges in Q4 and even really in kind of Q4 than what we're seeing now. We're actually seeing pretty good improvement in things as we talked about in our earnings call, we talked about January not being a great month, and there being a number of verticals that have been a little slow out of the blocks this year. But when I look at some of the parts that are more responsive to the macro, they're actually responding pretty well. So you get away from the emerging tech vertical, you get away from crypto, you get away from companies that have announced layoffs in the last few months. The advertiser base is pretty constructive, and we did have our best upfront ever sort of defined as the period between October and February, when we lay in most of our long-term contracts. So we feel good about the business. February was better than January. March is looking like it's going to be better than February, and the upfront has given us a good lay in for the rest of the year. So we think it's going to be resilient. I think it's because fundamentally the audience piece and the fact that we're doing a better job of measuring that audience.

Terrific. And if I can dig a little deeper. I think everyone in the space, advertising dependent that is, is talking about some softness in the national channel at the end of last year and now the start of the year. Your mix, if I'm not mistaken, you guys will correct me if I'm wrong, a little more national maybe than Lamar, touch less in Outfront. What do you see as the reasons behind the national slowdown? I think you may have touched on it already, category-wise, but is it a function of macro? And is it likely to be temporary or prolonged in your view?

So we'll just comment on what we can see, and I'll give you my prognostication, I suppose. But the -- there's no question national is more volatile than local. And local has frankly been a star really since the onset of COVID. It kind of held up better than national through COVID, and it continued steady as National started to rebuild kind of post COVID. So our national is a little bit different than what radio or TV talks about in terms of national. There's not really the syndicated buy across all different types of inventory that goes on. It's really not how the outdoor business works. So it is a little bit of a definitional difference. I think all of us talk about national in terms of the large media agencies and the business that goes through the large media agencies. But yes, what we've seen coming out of the blocks in 2023 is it is definitely -- I mean, we had a very, very strong Q1 '22. We have definitely seen pullback in a couple of verticals that I mentioned, particularly crypto and emerging tech. We weren't exposed to that much to sports betting, but I know that, that is another vertical that has been a little bit softer. But we -- I do think when I look at the conversations we're having right now, People are still planning to promote their brands. People are still planning on product releases. The movie release schedule gets better as we get later into the year. There's a lot of reasons to think that the demand profile will be good. And then in our case, we also have -- I mean, we gave a pretty robust guide for the year. We do have inventory coming online that's going to help with that as we go. The Newark Airport terminal that we announced. We're going to get full year effect on some of the other Newark airports. So that's going to be a bit of a tailwind. And we've had some contractual puts and takes in Europe that should help there as well. So in addition to them, having countries that are still recovering from COVID. So those are all the things that are contributing to us having the guide like we did.

Terrific. And if I could flip around a little bit and just focus on some of the positive categories, what you're seeing on the plus side of the column. And then we often ask about automotive. How big is that? I know you smile and laugh but how big is it? I know it's more relevant maybe for other sectors and to your assets potentially lend itself to some good growth there this year if production comes back.

I do think we could help automotive out quite a lot if any of the automotive CEOs are listening. My -- I'll give you my phone number offline. But automotive is not a big vertical for us. I do think that there's -- most of what we see in that sector is at the dealer level. And so as dealers restock on inventory and start to have challenges moving inventory, that probably will be an opportunity for us, but it's not a big vertical. So that's the automotive part. In terms of what's going well, really business services, which is our biggest vertical, and it's a very local driven vertical. There's national within business services too, but it's very local oriented. That's probably our strongest dollar grower that we're seeing right now. Travel, entertainment, lodging, things associated with people getting out and taking vacations are all doing really well right now. Fashion is doing well right now, and that's been a trend for a number of quarters at this point. So those are probably the verticals that are doing best. Did I miss anything in your question?

No. That's fantastic. All right. You teased us with the Newark airports contract. So I will admit, I've already been in the new terminal one several times. It looks fantastic. Can you walk us through how we should think about the evolution of that contract? I think you touched on more inventory coming online as we get through the year. I know you don't want to go into specifics, but anything you can help us with from the nerd perspective of modeling anything along those lines would be great.

Yes. I mean the contract is performing really well. We initiated that contract in Q1 of 2021. And in the time since you've had the new terminals come online at LaGuardia. So both Terminal B and C are new in LaGuardia, and we'll get some full year effect from that. I forget exactly when Terminal C came online. Terminal B was on most of last year. We've got some new build in JFK that has gone on. You mentioned the Newark terminal A or terminal one. I'm not 100. I think it's Terminal A.

You're right. My apologies.

That's okay. For the airport enthusiast, it is -- and it's a great look in terminal. I just flew the there last week myself. That just came online in January, this will be 2023 will be the last sort of big year in terms of CapEx. We will be -- because we're kind of beholden to how the development and redevelopment of some of the terminals goes, there will be a little bit of CapEx in the years subsequent to that. But by and large, the main initial investment will be done this year. And I would expect -- I mean, the team is nicely ahead of pro forma right now, which is great. We always love it when we're conservative in our bid preparation. But I think both we and the port authority feel really good about the progress that we've made. And probably it's a tailwind in terms of percent growth for us at least into the first half of next year, I would think.

Terrific. And then before I go to maybe some expense questions, so far, our focus has been largely domestic. And I think when people think about your other markets, particularly Europe, I think of asset sales, which we'll get into later, but maybe talk about what you're seeing in the European market from an advertising health, et cetera, perspective, that would be great.

Yes. I mean the European market has held up better than I think anybody expected. It was going to with all of the turmoil last year between war inflation and energy prices. There were certainly a lot of things that had people concerned about Europe. And as you saw in our Q4 report, the business came in very much in line ex-currency with the guidance that we've been giving. Coming out of the gates this year, it has been strong. We're seeing some of the countries that we're still lagging 2019. Most of the European portfolio -- well, more than half of the European portfolio is ahead of 2019. But the half that's not is coming out very strong, and we see things building back. I think one of the interesting things, looking at where the money is coming from, we are definitely getting more money from TV, people stepping back from TV in Europe than we are in the U.S. And that's a little bit of a function of the fast-moving consumer goods. CMOs seem to like street furniture a lot more than they like billboards, and that's what the inventory in Europe is. And so that's contributing to the growth there. But it's doing well.

Great. And then I'm going to go to the margin side, maybe we hear from Brian here, maybe not, I don't know. But don't worry, Brian, I'll get you eventually. So margins are set to decline in 2023. And if I think about it correctly, some of that is mix, given airport ramp. Some of it is lower abatements as the industry and the economies recover more importantly. But I think the company also called out a contract renegotiation. So am I right about the causal factors broadly, number one. And number 2, whatever context you can give us around that contract renegotiation would be great.

Thanks, Avi. The answer is yes. Those are 3 things that we cited on our earnings calls as potential headwinds heading into 2023. And none of them were a surprise, right? We talked about this a little bit last year. With the recovery abatements are cycling through. We'll continue to pursue every opportunity we have to get fair treatment under the contracts we have, but the reality is time has passed, and we've either gotten the majority of the abatements that we saw or it's -- there may be a few with the long tail, but they're pretty small that we'll have to continue to pursue. I think you cited mix. Our airports business has grown. That recovery is fully here. The Port Authority contract has helped grown that along with the recovery, that being airports as a percentage of the business, it's a lower-margin business. So in terms of margins, that's a bit of a headwind. And then the third thing, which we don't talk a lot about because we don't want to call out any particular contract, but we do have a large landlord. It had been under contract for 25 years. That contract expired. And so now it's kind of at market terms. It is currently in negotiations. So again, I don't want to talk a lot about it. We don't have a lot of contracts like this. We have landlords who have multiple sites, but this is a particularly large one that has our sites as well as others. So we'll have a bit of a headwind, I think, $3-plus million a quarter that began to impact us in fourth quarter last year. We think we have room for improvement, and we should be able to I think finalize negotiation on our long-term contract at or better terms. But what you're seeing is probably the worst case, and it should cycle through in terms of comparability after the third quarter this year.

Thank you. And then maybe this is you. But beginning this quarter, the company is resegmenting how it reports on its business, obviously led to a lot of questions. Is this tipping your hand to what may be for sale, what may not be for sale. My own view is it's auditor accounting, how you manage the business driven, but perhaps talk about [ debt ], talk about what drove the split and if it portends anything at all to what you may be looking at?

Yes. So I'll respond first, and then Scott can obviously come over the top. I want to be clear, we changed our segments because of the way management views, the way we manage the business, the way we allocate capital, we had discussions with our auditors. It's not auditor driven as much as it is. This is a management decision, the auditors looked at how we manage the business agreed and so we changed segmentation. It wasn't just the division of Europe North and Europe South. We also separated in the Americas. We separated the airports business out of what is now Americas. So it's America, which is the domestic U.S. operations, less airports and then airports, which is our U.S. and Caribbean airport operations. We do have some airports in Europe, but those are parts of those markets, not part of our airports division. We also have another nonreportable segment that now has Singapore, which previously used to be in Europe. But the way it is managed, it also made sense to move it into other. So those were the changes. What does that mean? Does that signal anything? I think it means kind of what we've talked about, but you can draw kind of a corollary to if we manage the business differently, allocate capital differently, what does that mean in terms of what disclosures we've made. And you can clearly look at Northern Europe and Southern Europe disclosures and see that there's one segment that has strong performance, historically strong performance, EBITDA minus CapEx, and strength free cash flow generation, stability. And then you have another part of Europe that has more opportunity to recover and room for improvement in terms of free cash flow generation. And so I think a lot of people read into that, that's the separation when we talk about the focus on sales. It is not directly. We've made the segment change for the reasons I talked about. And the rest is -- I don't want to say speculation, but it's just -- it's being -- people being thoughtful but may not be exactly right.

Yes. And I think the only thing I'd just add there is that we've not changed our viewpoint that we're long term, not going to be in Europe. So we remain committed to simplifying the portfolio. This is truly indicative of how we're managing the business, though, in terms of the real emphasis of free cash flow generation. And in the operating world that really is looking at EBITDA minus CapEx. That's the proxy for how we're looking at it, and that's driving the dialogue with who's going to get the investment capital because we're looking for places that are going to generate return and return in timely ways.

Okay. Perfect. Before I get to the European process, then I know everyone wants to ask about a couple of questions maybe around domestic M&A and use of capital. So the company noted it was going to be a little more selective on the M&A front this year. I think you completed $60 million worth in '23, you'll correct me if I'm wrong, -- but given that you're being more selective, and it sounds like your peers as well are dialing it back a little bit. I'm wondering, are you seeing any signs of seller expectations, resetting lower because everybody is a little less involved in the market? And if there was something that you thought was very accretive, any reason you wouldn't pursue it despite looking to be a little more selective this year.

So I think it's probably premature to see -- to note any real changes in the dynamic. And a lot of these transactions are very, very small. And you're talking about 3, 4 signs. You're talking about somebody who maybe is looking to retire. It is -- this is not -- this is not a bunch of large transactions. I think our competitors maybe had some that were a little bit bigger, maybe as big as a market sort of thing. But our acquisitions are all tuck-in. They're all places that we currently have footprint. And we have not seen a big shift in expectations, but I think it's probably a little premature on that one. And a lot of times, these are deals where you have a relationship with the seller where maybe you've been marketing the asset for them beforehand. In terms of our willingness to pursue something, if an opportunity arose, we saw something that we thought was a great fit with what we're doing. I think we'd be able to figure out a way to finance it. So I'm not saying that we're going out and chasing that, but I'm also not going to say that no, no, we're not going to do any deal under any circumstance. I think we're very bullish on the U.S. roadside business. And if something were to avail itself that was an important part of the puzzle for us, we'd want to figure that out. I'm not going to speculate as to how we might figure that out, but I think there's a lot of different ways to fund things if you need to.

Perfect. And then just dovetailing off of that incremental investment dollars, how do you think about the opportunity or the preference perhaps between converting existing static boards to digital and what that return provides you versus maybe an adjacency for board tuck-in type acquisition that we talked about earlier, which is if you had your preference that you do all day.

Well, there's no question that the highest return things we do are board conversions or even organic. If you're building in market and you have the permit, an organic structure might not be that much more incremental capital versus a conversion because the header is the most expensive thing followed by the poll, which oftentimes you have to reinforce if you're putting digital depending on where you are and what the dynamic is. But those are always going to pay out better than an acquisition from a payback period or anything, anything along those lines.

Europe. On the process, it's great to see Switzerland, the announcement at the end of last year, maybe a little delayed reaction, but I think everybody agreed it was certainly positive and welcome sign. To the extent possible, can you talk about how the process is going, what barriers you may or may not be seeing to disposing of some of these smaller, lower-margin European markets?

Yes. I mean I think it's just slow. And some of you who've been in group sessions with us or at dinner last night, have heard me talk about how long Switzerland actually took that we kind of had the outline of the deal done in July of last year, and it took us until December to paper it. Each transaction, this is the perverse thing about having to go to the individual country level dialogue is that the amount of work required, whether it's diligence, regulatory, tax, et cetera, is kind of almost the same as if you were doing the whole platform. And so it's just not a fast -- it's not a terribly fast process. We've been very clear about the process being ongoing. We will absolutely tell you when the process is over. And that time has not arisen. And I think with the dynamics that there are in Europe right now, I mean, look, the people who looked at the whole platform in January of last year, January of '22, have seen us exceed the number that we had in our memorandum at that time with the results that we actually just published last week. So I think we have a lot of credibility. At the time we started that transaction, we had one good quarter. Now we've had 5. And as time passes and you see the businesses recover and you see the businesses grow I think the ability to actually get these things done is there, but it remains true that you have to navigate all of the different elements of the contract to get the deals done and get them signed.

Just a follow-up on that one. Now that you've had 5 quarters of pretty solid performance, and you've proven out what you had in the memorandum as you put it or exceeded. I'm just trying to think of from a prospective buyer's point of view, the numbers are there. The assets still look like they're delivering, obviously, is there a financing issue? Is there anything along those lines that may be a hindrance to those buyers in those markets prospectively.

I think if we were working on the platform as a whole that, that would probably still be an issue. When you're working on individual countries, you're not talking about huge checks and you're talking with entities that have their own financing mechanisms and other things available to them. So I do not think -- I think everyone we've talked to and we've gotten this question in every one of our group sessions is looking for us to say something like, yes, we're just holding that for too high of a multiple and if we just would relax our multiple expectations, this would all go faster. That actually is the least of our problems. The thing is that you have to address all those elements in the contract in order to get to a place where you're able to consummate a deal, and it's just not particularly fast. And so we are moving as fast as we can. We do have a great deal of urgency on it, but it does require the other party to have similar urgency, and they're just inherently are not -- they're not fast processes.

We'll keep waiting. Excellent. Okay. One more for me before I open it up to the floor. Brian, I'm going to pick on you a little bit again. So on the last earnings call, you noted the company is and now I'm quoting you evaluating all options to reduce its debt. I know you don't want to discuss specifics per se, but at a high level, does the company think of actions beyond noncore European asset sales. And to the extent you want to discuss those, please feel free.

Yes. It's probably not constructive to get into anything specific. But to answer your question, yes, I think everything is on the table, and we should be open-minded. I think there's a sequence that needs to occur. And part of that -- part of that is visibility in the European strategic review because what you may or may not do can be informed by the progress you're making and ultimately, the level of success. So I think that's important. But in no case, is it likely that the European strategic review will result in a material deleveraging event. It all kind of ultimately depends on the price that you get the net proceeds, how you apply those net proceeds. But we're not counting on a material deleveraging from that event. Now it will simplify the business, clarify the business. It will be U.S.-centric. You may be able to cut back and you should be able to cut back on corporate expense. Our capital commitments change, but those are largely self-funded by Europe in a normalized environment anyway. So -- but I do think you need to see how that process plays out. But in the meantime, you know that you still have a leverage issue that if you want to preserve the option to convert to a REIT over time because in the future, we do anticipate becoming a federal income taxpayer. We are not today, and we won't be over the next few years. But if we continue to grow and execute on the European strategic plan, we envision that we will be. And so we at least want to be in a position to have the option to convert to a REIT over that time period. And the 2 barriers really to doing that is, one, the proportion of non-readable assets, which is solved by the European strategic review, we wouldn't have to sell everything, but the more you sell, the greater proportion of readable assets you have, the easier it is to convert because you have less to put in a TRS. And then the big issue is that of leverage. And we provided some long-term guidance at our Investor Day and confirmed that at our last earnings call. So you can figure out organically what we -- how we feel about leverage reducing over time. But if we want to be, let's call it, between 4x and 5x using those leverage multiples of the readable domestic peers who are REITs, we want to be in that range. We've still got 1.5 turns, 2 turns, whatever it is to solve for. And so something will need to happen. It doesn't have to be today. And in fact, I wouldn't rush into anything prematurely. But it does give us time to take a look at what options are out there and I think there's a whole toolbox, a whole array of options. We are approached all the time by people who are interested in the business. There's a great deal of interest in the outdoor business in general and us, specifically, whether that be from the M&A standpoint, whether that be from financial sponsors who have a lot of money and looking to put that money to work. So I don't want to triangulate on anything today. And in fact, I think it would be premature to do so. But we are wide open and would look at all kinds of different options, but I think we have time, both in terms of we're not going to be a taxpayer in the near term. And we have runway. There's no catalyst, no significant material debt maturity that we have to worry about in the near term. We have the CCIBV notes which is $375 million, but likely also gets resolved as part of the strategic review. So I'll pause there. That was a mouthful, Scott, I don't know if you had anything you want to.

I think you covered it.

It would actually be a great place to stop. But we're going to take a couple of questions from the audience because that was fantastic. Does anyone have questions, please don't be shy. Just have to speak loudly so I can repeat it. Go ahead, sir.

[indiscernible].

Well, that's it's a great follow-on question from what we were talking about. And the question, I think, in summary, is if Europe isn't going to be material deleveraging like you talked about, there still is a big gap between where you are today in terms of leverage and where the domestic peers out front in Lamar are. We talked about that. and before the gentleman asked his question, we talked about organically, we thought we could recover some of that, but not all of it. How do you solve for that difference? And it was mentioned in the question, equity, equity-like preferred, some array of financial solutions issuing equity. And I think those are all in the toolkit. I don't think that's all that's in the toolkit. But when we talk about financial assistance to get there, I think those are all reasonable things to look at. It is precedent in our environment. I know I think Outfront had done a pipe a couple of years ago. So I think those are things to look at. I think there are other things to look at. But yes, we would consider those at the appropriate time if it made sense and if it was the best solution. Some of those when you're issuing equity, I think you're right, you need to solve for a win-win that was embedded in the question. That may lend itself to something closer to the actual conversion of the REIT, where you can talk about if I'm going to issue equity and potentially dilute indirectly or directly the equity holders, I know that I'm going to be a REIT on the other side, and that has this kind of impact, maybe a little more challenging to do something now with our equity price. So I think we want to be very thoughtful about it. And I think we have time. But I think, like I said previously, I think all options are on the table. We're not ruling anything out at this point. I just think we need to be flexible because there are still some things that we don't know about. What is the ultimate resolution of Europe? What is the macro environment over the next 12 to 18 months? Because I think we'll -- whatever we -- whatever direction we go will be informed by these things. I don't know, Scott, if you want to add.

Yes. I mean I think the it's a very rich question because there's probably 50 different streams of things that could close that gap. And the good news is that the gap, presuming that we're in the ballpark of the guidance that we've given, the gap isn't something where we have to double EBITDA to be a plausible player in this whole thing. We need to add 100, 150-ish to the pot when you get to the time that you're starting to talk about refinancing. And there are a lot of people very interested in this business. And so one of the win-wins that might be out there is maybe you take a partner who buys something in conjunction with you and you have an earn-out concept and you take it on over time. But you get to consolidated at the beginning. -- maybe you don't actually get out of Europe entirely in the short term, maybe you bring in a partner there and bring in some liquidity, whether through more leverage or through equity from the new partner coming in, you use that to pay down debt in the holding company and you take the cash flow that's being generated out of that business to help delever and then ultimately deconsolidate it and have somebody take the rest of it. Like there's so many structuring things. We have an enormous number of options. And so what we're doing and what we're striving to communicate is we're having a lot of discipline on the sequencing because the sequencing is what's going to create the value here. And the first thing in the sequence is getting clarity on Europe. And then the next thing on the sequence, we'll talk about when we're in that shot. Hopefully, that helps.

[indiscernible].

And if we had a choice about it, we would love to have less, but we don't. And so we're working with it in the sequence that we can.

All right. I think we're out of time. I want to thank you, Scott. I want to thank you, Brian, the Clear Channel Outdoor management team. This was terrific. Thank you very much.