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

Okay. Good afternoon. Please note that important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear in the handout available in the registration area and the Morgan Stanley public website. And I'm excited to welcome back to the conference Scott Wells, CEO of Clear Channel Outdoor. Thanks for coming.

Thanks for having me, Ben.

Good to see you, Scott.

It's great to be here.

Back-to-back weeks.

Yes.

So nice to see you again.

Yes. Enjoy catching up.

Yes. So I want to start, before we get into sort of the current trends and 2023 stuff, you guys had an investor event back in December. You spent a lot of time with us talking about your long-term vision for the business. I know it's a business you're passionate about. We only have 28 minutes, so let's not go through the whole Investor Day. But maybe for this group, what would you highlight as kind of the key things that you think drive the growth for the business and sort of the strategy at Clear Channel to be successful?

Sure. Yes. And you're right, I think we were up on stage for like 2.5, 3 hours. So yes, I'll try to give you the nickel tour here.

Exactly.

So look, I think first of all, we're in a great sector. So out-of-home, just generally, set aside Clear Channel, we are in a situation where our audience is growing with more traffic, more people traveling, more people using airlines, et cetera. So the audience is growing. Technology is our friend as a category in the sense that we're not being fragmented, we're not being blocked. And actually, the trends in data privacy are actually playing in a very positive direction for us because we have always been about anonymized and aggregated data. And now it appears that, that is where the marketplace is going as well, a lot of good activity in the adtech world in that space. So I think it's a good macro space. We have it. Within Clear Channel, the exciting things for us, the digital transformation of the business, it's more than just the signs. It's data and analytics. It's programmatic trading. It's automating our connections with our advertisers. That digital transformation is a big tailwind for the business. I look at what we're doing with segmentation and how we're approaching different parts of the marketplace with different sales offerings. And we're getting better at climbing the stack with agencies. We're getting better at calling on advertisers directly. Those are important parts of our growth story. And I think that we're doing a lot of really innovative things around how we market our assets. I think particularly with airports, the way that we've approached the New York Port Authority with a combination of sponsorships, a very strong local sales outreach, along with the traditional kind of big brand conventional outdoor advertising with an airport context has really hit the ball out of the park there, and it's something we've been working on to develop for a number of years. And we're just really excited about where we're headed.

Yes, I get that sense. Yes, I was talking to Sean Reilly -- I believe that was today. I think that was earlier today.

You had a busy day.

It all blurs together. Just about how -- the expectation, I think you shared this, is that growth as we look forward for the industry is going to be better than what we saw maybe during the last cycle. And it's harder to see from your company because you were in a different place. But why do you think -- I guess do you think out-of-home is better positioned today with advertisers than maybe it was pre-pandemic or in the years before the pandemic after the financial crisis?

So when you're talking the last cycle, are you talking about COVID? Or are you talking about the great financial crisis?

I'm talking between 2010 and 2019.

The kind of lost decade.

That's one way to put it, yes. I think it wasn't that bad.

It wasn't that bad. No, it wasn't that bad. I'm being harsh. Look, I think what happened with the great financial crisis, a lot of different factors. And I was not in management, to your point. I was actually on the Board of the company at that time. A lot of things happened that were one-offs. The most notable is the rise of digital media that happened on the other side of it because if you think about what happened to all the different media going into the great financial crisis, what came out on the other side is you had these formidable -- both local and national, but particularly from our perspective, the local effectiveness of Facebook and Google in the early run-up, and then there have been lots of other platforms that have evolved. So in terms of how we're positioned, though, I think the thing that's interesting is we are positioned very well in terms of value. We are positioned very well in terms of audience because our audience is growing. We are positioned much, much better than 5 years ago from a perspective of data and analytics. When we first started doing RADAR -- and I want to say that was 7 years ago at this point. It's hard to believe. But when we first started doing RADAR, nobody in our industry was really talking about planning and attribution for out-of-home with rigorous data and the ability to integrate with first-party data. That's all stuff we're doing now. And I think that, that puts us in a much better place. And the fact that privacy has become such a thing appropriately is really going to help us because we were always kind of coming to the conversation about data and analytics not apologetic because we'd never really apologized for the fact that we were bringing a lot of insight to out-of-home that hadn't had it before, but never able to get down to the one-to-one targeting. And now that the one-to-one targeting is kind of the hold in the first-party data, which we can still integrate with and share our insights with and do that in a privacy-compliant way, that's something that now we're in a conversation that when you had really good point-to-point data, individual data, it was just not a fair fight. It's a lot more of a fair fight now.

So some of this improvement really is a reflection of a reduction in ROI among the digital platforms, particularly for your local small businesses.

Well, it's gotten both a lot more expensive on a CPM basis, and it's gotten a lot less precise. So those 2 things, yes, that...

Not a good recipe.

That would add up.

Okay. Let's come back now and talk a little bit about the fourth quarter results, which you -- during which you also announced plans to resegment the business for external reporting. Why did you guys decide to change the segmentation? And how does the new segmentation sort of provide us with better clarity?

So this was very much a management of the business perspective change. When I came in -- I've been CEO a little more than a year now. And when I came in, I made very clear to all of my team that we were a free cash flow-focused company. And if you look at the characteristics of the 4 segments, I think that the most rudimentary analysis would tell you that they have very different free cash flow-generating activity and potential. And what we're doing with those businesses is, at a rudimentary level, when you think about our business on an operating level, EBITDA less CapEx is your proxy for free cash flow. Obviously, there's a lot more that goes into it when you calculate free cash overall. But EBITDA minus CapEx is a good way to look at those businesses. And you can see the dynamics. And if you're underwater on EBITDA less CapEx, you need to be focused on, okay, I got to either grow one or shrink the other. And that's kind of the regime we're under now.

Okay. So you've been managing the business this way, and now we're going to see externally sort of the way that business is presented.

Yes. And it was important to us as well. There were a lot of perceptions about our European business. We've always talked a lot about the U.S. business, but there were a lot of perceptions about our European business that were not correct. And we also -- part of this was trying to figure out a way to communicate. And so if you look at the 2, some of the drivers in addition to the EBITDA less CapEx, digital penetration is a big driver of difference among those markets. The product mix is a big driver of difference among those markets. So there are meaningful things that are going underneath it. And hopefully, it sheds just a little more light on actually what's going on in Europe.

Yes. This is the northern and southern segmentation you provided. Got it. You did mention also during your earnings presentation that you're not really seeing any major changes from a macro point of view, which certainly puts you in the minority at this conference so far over the first 3 days. But how would you describe the current environment and sort of the conversations you're having with advertisers and your visibility into the rest of the year?

So let me start with the visibility. So our business -- and this is a U.S.-specific comment. But our U.S. business lays in about half of its revenue between October and February when we renew our -- we call it our upfront, but we don't have canapés and Beyonce, we're -- these are a bunch of individual dialogues with people about re-upping the annual contracts. And we had as good of one of those as we've ever had. So that is part of what is giving us confidence looking at the year. From a dynamic perspective, Q4 was not great in how it ended. We didn't get the purging of budgets. People were definitely not spending that last little push like they do most years. Programmatic was kind of flattish, and that had been -- has been a growth engine for us. So there were some things that emerged in Q4 that weren't great. And the good news is that programmatic seems to be turning the corner as we get into 2023. We're seeing some nice growth in that in Q1. But Q1 definitely has some softness to it. I'd be hard-pressed to call it macro, though, because our experience of macro, if you think about the great financial crisis, if you think about COVID for our business, cancellations are the canary in the coal mine on macro, and we're not seeing a ton of cancellations. And in fact, we're seeing a lot of good dialogue about people looking to spend later in the year. Some of the companies that -- a lot of big companies have announced layoffs, a lot of big tech companies in particular. And part of why they're soft in Q1 is just they don't want to be advertising while they're culling their ranks. That doesn't mean they're not thinking they're going to have a good year. That's not thinking they're going to invest in their businesses, introduce products, et cetera, et cetera. And that's what we have visibility to that gives us some confidence that we're going to see some steadiness as the year builds.

Yes. We talked about this last week, but you called out a few, I guess, we'd call them idiosyncratic headwinds in the first quarter, some particular categories that are weak. Just talk a little bit about what those are and sort of why they're maybe down year-on-year in Q1.

Yes. So we didn't have a lot of crypto, but we did have crypto. And crypto was big in Q1 of 2022, particularly in our Airports business, that was something -- and I think we all know the story of what's going on and continues to go on there. Emerging tech, San Francisco is one of our biggest markets, and emerging tech is an important vertical within San Francisco. And they kind of flipped partway through last year and got focused on profit instead of adding customers. And so their marketing slowed down accordingly, and we've seen that. And that impacts us pretty meaningfully because of our footprint here. The layoff dynamic I talked about, those are probably principally the things that we've seen slow.

Okay. How about sports betting? Is it another area where you've seen...

We never had much of that. It just wasn't a big part of our book. I mean we had a little here and there, but we still have a little here and there. It's just not that different.

It is interesting that I can't remember a time when we've seen national underperform local so much. I guess during sort of the depths of the pandemic maybe. But what do you attribute that dynamic to right now in terms of the national versus local? Local seems steady. I mean...

Local is steady, and local has been steady really through COVID. I mean local is what really made this business work for all of the participants. And kind of the more local you had in your books, the better you did through COVID. On your specific question on national, I don't -- there's not kind of one thing I'd put my finger on from our perspective. I mean probably the layoffs are, honestly, the biggest thing in our specific activity right now. That money is always the most fickle, it's always the first to kind of pull back, and we did kind of see that generally. I mean we were down in national in Q4, but that was against a monster comp, so there's a little bit of us growing into our comps. But I think the dynamic with it is that those are the folks who are most sensitive to what the Fed is saying. They're the ones that are the most sensitive to the dynamic around layoffs. And that's where -- I mean our local advertisers are not laying people off. They're having a hard time finding people. So it's a very strange world we're in right now in that regard.

Yes. Interesting. I want to ask you 2 technology questions about your business. You mentioned RADAR earlier, but maybe just talk a little bit about what that is offering to advertisers today. And is it allowing you guys to gain share when you think about out-of-home or more broadly looking ahead?

So RADAR, what RADAR is, for the folks not familiar with it, it's our suite of planning, measurement, attribution tools. So think of it as you've got a target market you're trying to reach. We can go in and pull you a visualization of our markets. Let's say you're trying to advertise in Minneapolis-St. Paul. It will pull up the whole set of inventory we have there. You start clicking boxes on, I want this age group, this sexual demographic, this kind of behavioral activity. And that starts to sort of narrow the funnel and focus you on where it is. You then -- and that's free. That's something that all of our customers can use, and we have very high take-up on it at this point, use that for planning. And then with attribution, you actually look at specific activities that the customers do. And this is something that I think most media at this point are striving to do. But whether it's showing up in a store, downloading an app, buying a script, there's an awful lot of things we can do. The way that it helps us -- that part of it in particular and the real cherry on top of that, we call that part RADARProof. RADARView is the kind of planning tool. And then we have a thing called RADARSync, which the big trend in marketing right now is building big bodies of first-party data. With RADARSync, we can go in, in a privacy-compliant way, match your first-party data to our exposure data so that you're then able to both plan based on your segments and do attribution based on your specific data. So that's how those 3 things interact. And we principally use it as an acquisition tool. And it's a pitch that we can make. I mean one of my personal quests is to get pharma into out-of-home in a meaningful way. And we've got a couple of nice pharma advertisers that were in -- we've had a couple of renewal cycles with. They really like what they're seeing on the return on ad sale -- ad spending, and we're working to develop them. That's ultimately how we bring more money into the category. And it's not just pharma, but you can do this with food delivery, you can do it with different kinds of apps. I mean we really have attribution on almost any kind of activity. We integrate with IRI, so you can get case uplift, all sorts of stuff.

That's interesting. I think digital on the display front is now over 40% of your revenue, I believe, generated off digital displays.

Yes, in the consolidated. Yes.

On a consolidated basis, but it varies a lot by geography pretty dramatically. So maybe let's focus this question on the U.S. market. Where do you think that goes over time? Is there some optimal number for revenue maximization? And are there things we should be thinking about that are more locally driven that will impact how that trends?

Sure. So the bottleneck, and I think we've been very consistent in communicating this, but the bottleneck on us converting is a regulatory bottleneck principally. And so the U.S. is a couple of thousand municipalities. They all have different sign ordinances, and our job is to get those sign ordinances set up in a way that we can convert signs. But we're regulated federally, state level, city level and municipality. So there's a lot of hoops to jump through. So that's what prevents us from just saying, we're going to turn everything digital. It's not just a question of capital. But in terms of where that could go, our furthest penetrated markets are north of 60%.

In the U.S.

Well, that would be in Europe. In the U.S., it would be in the 50s. So we do have markets that are in the 50s on digital. I do think that you probably -- I mean the dance you're trying to do is we have a lot of inventory that is very premium that the customer wants to own. And so those things probably will never be digital. Apple is the prototype advertiser that actually really likes what they're able to do with printed inventory, and they like owning a location, as one that I think people can relate to as you travel around the country. So I don't think from a customer perspective that you're ever going to see it become -- it never is a long time. So it's a long way off that you're not going to have those kind of iconic printed locations. But I could imagine from an operating perspective, there are a lot of advantages ultimately of getting the flexibility of digital. And a lot of customers really like that. So seeing the revenue get up into the 60s, even the 70s is not crazy to me. And we have -- I mean we're doing -- in the U.S., I want to say, on the billboard side, it's less than 10% of our assets that are driving almost 40% of the revenue. So there's definitely room to do more conversions.

Interesting. Let's talk about Europe. You guys announced a sale of your Swiss business. I think it's expected to close in the second or third quarter. But that whole portfolio is sort of in a strategic review, I believe. What do you want -- what message do you want us all to take in terms of the process and sort of where we should have our expectations around the European assets and monetization there?

I mean it's interesting how that one's evolved because when we first embarked on it, we had elements of our investor base who were basically of the mind that we needed to just be out of Europe from a risk profile, having seen what happened with it during COVID because just given how some of the contracts were, we burned some cash, and we actually had to ship some cash to Europe. It's really the first time in my affiliation with the business that money has gone in a sustained way across the pond as it were. Usually, Europe has been sort of on its own. What we embarked on at the beginning of last year was a sale process of a cash flow-breakeven business that had one good quarter behind it, Q4 of '21. What's happened since is the Ukraine war, energy inflation, all sorts of other uncertainty. And we communicated that we had pivoted to a country-level dialogue kind of midway through last year, and Switzerland is the first of what I think will be a number of transactions over time. And the target of those transactions is actually it's kind of funny because Switzerland is not -- Switzerland is like not a low-margin business. It's kind of like right on average within our European mix, and we're getting a reasonable multiple for it. So we feel good about how that played out, but it's maybe not the prototype of what people were expecting as we got into the dialogue. It's just the nature of the dealmaking and how we've managed the funnel. But I think what we're aiming for is to have a European business that is clearly self-sustaining, cash flow positive, free cash flow positive, covering its own debt and then hopefully contributing to the parent. And our plan has not changed. In the medium term, we are going to exit Europe, and we can talk about the reasons why, but I would expect that we will exit it. That's something that we think is important for other elements of our story. But we find ourselves now in a situation where if we're able to be successful doing what I've described on the lower margin, lower priority, we'll have this business that is not cash flow breakeven. It will be positive, cash flow generative. We're going to have more options with what we can do with it relative to what we had before. And the people who looked at that business and were enthusiastic about it early last year have just seen us, despite all of the things that caused them to get alligator arms in March, April last year, we delivered. And I think that is -- if there's one message for you to take away is, despite a process, despite Putin, despite energy, despite, despite, despite, we delivered against the SIP that we put out. And that should position us well when the time comes for us to remarket those assets.

Right. The time is sort of on your side here.

I'm never going to say that.

To quote The Stones. Yes.

But I like the spirit of it, but you didn't hear those words from me.

Right. You mentioned the benefits of exiting Europe. So let's talk about that. Obviously, there's a lot of focus on deleveraging. We can run math around that. But I think you guys see a broader impact on the positive side to Clear Channel and the story from exiting Europe. So maybe just walk us through the key points there.

Yes. I mean I think we've been very clear, the actual sale of Europe is highly unlikely to be deleveraging. I mean you just look at the multiple on Switzerland, which is a good multiple. It's in spitting distance of our debt multiple. So it's unlikely we're going to sell the rest of it for better than that, but I don't want to undershoot on that either for all our counterparties out there. In terms of the benefits, simplifying the business is really important because this is a highly regulated business. And so every country that you're in, you got to have compliance, you got to have internal audit, you got to have tax, you've got to have special legal, you've got to have special HR. This is -- and so simplification and bringing it to a narrower should help us to bring our corporate costs down once we're out of the transition period. And that's going to be true to a degree with our other geographies as well because those are also going to drive some complexity. I think the other thing that it does is it makes -- right now, in our optics, many of your peers -- I won't critique your own analyses of us because that doesn't feel sporting. But many of your peers will put a graph out that sort of says, more U.S., more international. And we're like smack in the middle of that, and our margin structure doesn't look great because we've got a big exposure to relatively low-margin businesses. As you clarify that and simplify that, our margin structure, now it's not going to change the debt multiple. But I think it is going to cause many investors who maybe don't do deep analysis to think differently about this business if they see us with an aggregate margin in the 30s as opposed to something in the 20s. So I think there's some -- I'm not going to sit here and call for rerating because that's every CEO's black hole. But I think there's an opportunity for people to understand us more. And I think the other thing that it does is that it eliminates a point of contention for lots of big strategic conversation. And I'm not going to say that any of those big strategic conversations go anywhere. But with us having what we have as a portfolio, it makes this difficult for international companies to think about us as a partner, and it makes it difficult for domestic companies to think about us as a partner. And again, I am not putting my company in play, but it is on -- I've had a lot of investors ask me about it, so I figure I need to at least acknowledge that simplifying the business addresses that, too.

Got it. Makes sense. I've got some more questions. We only have a few minutes left, so I want to make sure I give the audience an opportunity. If you have any questions, please raise your hand and please wait for a microphone. Scott, you guys talked about CapEx for '23 of, I think, $185 million to $205 million. Just talk about where you guys are investing, where you are leaning in and see the highest return opportunities for the capital.

So I mean digital conversion pretty much everywhere is our #1 opportunity. And that's where a good portion of that money is going to go. We are still in the buildout stage of the New York Port Authority, and we're seeing real nice growth off of that. So that will be where a good chunk of it goes. This is a business that is in deep technology transformation. So there is a fair bit of technology that we need to be building out as we go in terms of how we serve our ads, in terms of how we provide data back to our customers, so there's some tech that goes into it. But it's -- that's a pretty good number for where I think we're going to be at least as long as we have the perimeter that we have. Obviously, that will come down should we succeed in divestiture processes.

And last year, you guys did pull the trigger on some acquisitions, I believe, in the U.S. Is that still something you're looking at this year? Or has the interest rate environment just made that more challenging for a variety of reasons?

Yes. I mean I think we have to be very prudent about liquidity. We're not at all concerned about liquidity, but I think that there's a life cycle on deals. Deals get done faster in the U.S. than they do in Europe, but it's not that much faster. And you still -- we're going to have a tail of some investments, some deals that we did in '22 that we'll fund in '23 because they didn't close before the end of the calendar year. But we're a little bit -- I won't say hitting the pause button because if something compelling were to come available, I wouldn't want you all to hang me if we went and did it. But we are being less aggressive on it while we get a little more clarity on what the macro actually is going to be.

Makes sense. All right. Any last comments, Scott, before we wrap up?

No. I mean I think outdoor is a terrific business. We're headed in the right direction. I think this is a great year for us to prove our resilience. And just for the people that follow us, I would urge you to listen carefully to all the talk we've had about the different margin puts and takes in the business because this is going to be our kind of new baseline year as we get away from having all of the abatements flowing in and as the mix sort of normalizes across the portfolio. It won't be perfect because we are in the midst of divestitures. So there's going to be some puts and takes as that goes. But don't overread in our guide that there's something fundamental changing in the business. There's just a number of dynamics in play.

Okay.

Thanks, Ben.

Thanks very much. Thanks for coming. Thanks, everyone.

My pleasure.