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

Okay. We're going to get started. Happy to kick off the media track here at the Leveraged Finance Conference with Clear Channel. I'm Aaron Watts. I'm the media, cable satellite business service credit analyst at DB. And up on stage with me, I have Brian Coleman, Chief Financial Officer; and Dave Sailer, Chief Financial Officer of the Americas. Guys, thank you very much for being here.

Thanks for having us.

So there's been a lot going on since we last sat on stage a year ago. I know the macro and advertising environment have been less than ideal, but you've been able to make notable progress on your strategic and financial initiatives. Before we dive in, perhaps kick us off with the high-level overview of the current trends, what's been accomplished this past 12 months and where your focus lies in the year ahead.

Well, thanks, Aaron. I think that's right. I think we have started to get some traction in a number of areas. And I think it starts with the transformation of our portfolio. We have talked for a while about focusing on the Americas business, taking a hard look, reviewing the strategic imperative around our international assets. And you've seen us actually strike some deals. We've actually executed sales transactions on both Switzerland and our Italian markets. We are under contract to sell Spain. It is currently going through a regulatory review in that country because of the nature of the buyer who is strategic in that case. And we've announced, I guess, exclusive negotiations is the way to put it. With respect to our French market, that is currently going through a process, I guess, somewhat unique to France, the workers' council process. And we hope to hear back from that and continue to move forward with France. And taken all together, that is our Europe South segment. So it has taken a little while, but we are starting to make progress. I think it's important that we talk about those countries in Europe South as being kind of either behind us or being worked on because those in a lot of cases were unique or more challenging markets when you take a look at it. If you look at our Europe North division, that is a group of countries and markets that have great contracts. They're somewhat homogenous. They have high digital penetration. They operate in more friendlier regulatory regimes. And as a group, Europe North financially performs pretty well. And I think historically, when you look at Europe altogether, sometime that was masked. And so once you conclude with Europe South and you move on to take a look at Europe North, which we're doing right now, you are dealing with a platform of assets that I think is more attractive either altogether or perhaps in pieces to potential buyers. So we're excited about that. We're excited about the transformation of the portfolio. I think another thing that we've leaned into recently, and you've seen some progress on all kind of group in liability management activity. So we did earlier in the year successfully extend our liquidity lines, both our cash flow and our ABL. We went through some amendments, increased the size of the ABL. We did reduce a certain extent the cash flow revolver, but we did push out those maturities, giving us some comfort with respect to those lines. We also launched a $500 million bond deal, which we grew to $750 million, successfully priced and closed, used the majority of the proceeds to pay down our next nearest material maturity. And we paid it down in a way where we applied it towards amortization first. So that $5 million a quarter, $20 million of amortization per year on those term loans now is liquidity enhancing because of the way we applied those proceeds. We put a little cash on the balance sheet, which also bolstered our liquidity position in conjunction with the extension of the liquidity lines. So again, feeling pretty good about the work we're doing on transforming the portfolio, the work we're doing on the liability management side. But it really all comes down to execution on the business side, and Dave will get in that a little bit, particularly with respect to Americas. But -- you've got to continue to focus on the fundamentals. And for us, our operations in the Americas, it's important that we continue to invest in the areas that we think will provide long-term growth. There are certain things in the macro we can't control. And I wouldn't say that our Americas performance in Q2 or how we talked about Q3 during our Q2 call is great, but it's also not bad. And you just got to make the most of what you can do. So I think portfolio transformation, liability management and I think operational fundamentals are key. And beyond the Americas business where we had seen a little softness, we've got great results in airports and great results in Europe North. So feeling good about where we are, all things considered.

Okay. That's a good overview of everything that's been happening. Let's dive in a little more on those various pieces. Let me start with a follow-up on the strategic review. You mentioned France and where that's at. We've seen varying closing times for the different countries that you've sold. How do you envision France playing out? Is that one that can close sooner rather than later? And then separately, with Europe North, is that one where you envision it being sold sort of in pieces by country as we've seen so far with Europe South or a little more likely it could go the other way where it sells as a group?

Why don't I hit that at the high level, and Dave, you can chime in? I think with respect to how quickly a [ market ] can get sold, it kind of depends on who the buyers are and what the regulatory regime is and [indiscernible] contacts. With Spain, a great market. We've had a lot of good contract wins. It's an attractive market. But the purchaser is strategic. It operates in that country. So there's a regulatory review process that's going to take a while. I think we're predicting sometime in the second half of [indiscernible]. So you hope for the best, but you prepare for what you kind of expect. France is a little different. The buyer doesn't have that strategic regulatory concern, shouldn't go through that kind of a process. But in France, you do go to this workers' council process. They do get a chance to review and opine on the transaction. I think our hope is that once that comes in, we can move to finalizing the purchase agreement and closing the sale in France much earlier, perhaps this year, but certainly not second half, I think. Then with respect to Europe North, I described it earlier as kind of a platform. And I think from our perspective, our goal is to -- if we decide to move forward with a sale transaction to move forward quickly, it would be much quicker to sell a platform than it would pieces or segments. That being said, the buyer appeal may be a little different depending on how you break it up. So I think the best guidance I could give is we would look at marketing the whole platform, but obviously keep our eyes and ears open for other levels of interest in case we need [ it. ] Do you agree?

I absolutely agree. And I think a lot of it will depend on who the buyer is going to be and who would be interested on -- depending on if we sold it as a platform or by country. But I do think the portfolio of assets definitely leads to help to be sold as a platform, but we'll see how the process plays out when we make that decision.

And you've talked about savings that you could achieve on a corporate level. Obviously, from a retention standpoint, you can shift that in a more focused direction to the Americas. But on the savings side, from a corporate expense perspective, when can you see the benefits of that? Do you have to really exit the platform holistically before that starts to flow in? Or do you start to actually accrue some benefit ahead of that?

So maybe I'll talk about corporate expense in general and how potential transactions will impact it. And then Dave, you can probably talk a little bit about it, the work you do all the time in managing costs. I think we've come out and we've talked about how -- if we were to fully execute on the sale of our European assets, we would expect to save at least $30 million a year in corporate expense. But you hit upon something that -- that doesn't happen right away. Some of it may actually happen earlier in the process. I mean, as we're going through conversations right now, negotiations and exiting countries, we're making decisions to scale back on investments in tech or maybe you don't hire a replacement for this person or maybe you postpone certain things. To a certain extent, I think you're seeing -- in a small way, we're seeing, maybe you don't see it externally, some of these initiatives already starting to take place. But I think the real cost savings happens after you've exited a market and potentially with some lag, particularly in the case where we need to be providing some kind of shared service for a period of time. Or it's an area like international tax where you may have sold your international assets, but you still got to, for a period of time, still report and have those resources available to you. So I do think there's a lag, but it's not like we're waiting. We're taking the opportunity where we see opportunities to reduce costs, we will, trying to anticipate what's coming. But I do expect there's a lag and it kind of depends on the function [indiscernible].

No, I agree in the sense that depending on what happens with Europe North, yes, there will be a big log of cost that will obviously go away as that business becomes smaller. But in the meantime, as you're preparing for certain things within the business, are we always trying to be more efficient? Absolutely. We're going to look across all our corporate functions. This is like a great time to kind of take a step back and look at if we go down that path, from a sales process to really take a look at our overall corporate structure and what makes sense across all kind of the shared services. But yes, there will be a lag in the sense that if you do go down that sales process, there'll probably be some transition service agreements and things along those lines. But as far as the general base business, we're always looking at that. I mean during the COVID process, we actively manage those costs. And that's like an always ongoing conversation. That's how you can be more efficient from a corporate and also just from a business operation standpoint.

It's a little ironic as part of just the ongoing cost savings initiatives, we've actually pulled cost out of Europe and centralized it where we could. Now as you unwind that, it makes it just that more complicated. You got a guide, maybe he's doing a third [ here, ] a third here and a third here. So we know this, and we'll try to think ahead and anticipate as much as possible. But I think we've at least tried to give some color on what the order of magnitude is and something a little bit around time.

Last question around the review. We focused on Europe so far. Remind us what your thought process is around the U.S. asset base. And I asked about that given some new shareholders that have been growing their stakes in the company and pushing seemingly a more broad scope to the review.

Well, Scott said it before, Scott Wells, our CEO, that no doors are closed. I mean we want to keep an open mind. We want to consider everything. But we also want to be very thoughtful about the sequencing of activities that we do and ultimately, how that impacts shareholder value. And I think it's completely natural to say, "Hey, you've got these U.S. assets, and they're very valuable. Why don't you sell some of them and de-lever?" And I think the first thing I would say is be sure that you're considering the tax consequences if you were to do something like that, because we have a very low basis across our U.S. assets. And on an after-tax basis, it may not be as de-leveraging as you think. But you also have to look at the platform that we have and what do you sell that gets you the de-leveraging but doesn't negatively impact the platform and the investments that we've been making over the years in things like national sales or programmatic. If you were to damage the platform by selling U.S. assets, that's certainly something you have to consider. So I think the right thing to do is to continue to push hard on the international front, continue to focus on growing the U.S. business, but also continue to weigh all the options you have, including potential asset monetizations.

Great. Okay. Let's just shift gears over to the advertising environment, and we can focus on the Americas. It's been a challenging year for ad spend and out-of-home, I think, has fared better than many others, but the sector was certainly not immune, and you hinted at that, Brian, earlier. As I think about the cadence, it felt like a stumble out of the gate to start the year, followed by some improvement leading up to June. And then once again, some softness going into the third quarter, you highlighted that on your earnings call about the third quarter not looking great but that 4Q is expected to improve. What are you seeing in the marketplace now? Are things any better or worse than you had expected just a month or so ago?

I'll take that. I think you gave a really good summary of kind of how the year started. It was definitely -- it was soft when we first got into the year. Second quarter started to pick up. And then towards -- when you get towards the end of June, that definitely was a little bit tight in softness. And this is -- I'm talking from the Americas standpoint. And when I think about the guidance that we issued in August, I mean, as I look at it today, we said Q3 is going to be soft. A lot of that is driven by the national business, has definitely been softer in Q3. When we issued guidance, we did expect that what we were seeing in the market for Q4 to get better than Q3. And as I sit here today, I don't really think there's anything that I see that would change that opinion. When I look at it from the airport standpoint, their year has definitely been a little bit different. I don't even want to say they stumbled out of the gate because they were definitely soft in the first quarter, but that was really more due to a couple of contracts that got pushed back or campaigns that businesses were doing. It really had nothing to do from an environment standpoint. They had a really good second quarter. As we were getting into Q3, we issued guidance, and we see positive growth, and we see that continuing into the fourth quarter. So really, when I talk about the Americas business or the airports business, kind of where -- what we issued in August from a guidance standpoint for Q3 and the remainder of the year, I don't really see anything different today than when we were looking at it back in August.

Okay. And Scott had mentioned that people were -- you had some commitments, but there was some hesitancy to push go for some 4Q campaigns. Any update on that front now that we're sitting in early October? Has some of that money kind of been fully engaged now? Or are you still wait and see?

I mean, as we're here -- I mean, it's only -- I mean October, so we have a little bit of time as we're getting into Q4. But I still think that the conversations that were happening over the summer and even when you just think about it from the media industry in general, I think there is definitely more activity in what we were talking about. In August, as though there was a little bit of a pause and we expected more activity as you move forward, I think those conversations are still evolving. But I think we still have that same opinion that we did in August that we're seeing the same thing as today.

And relatedly, in terms of cancellations, no kind of pickup on that front?

No. Those have been pretty -- just average. I mean we track those pretty closely, and we'll look at those every week, and we'll compare them to the prior years or the last couple of months. And there's normal cancellations that are just part of the business. I hate to use the word cancellation, some of it -- campaign may be pushed forward and things along those lines. But from that standpoint, there's definitely not an uptick.

Okay. In past slowdowns, we've seen national dip and then local eventually follow it lower, albeit less pronounced. Well, local hasn't exactly been exuding strength, as you mentioned earlier. It's been certainly faring better than the national side. What gives you confidence that the local ad market is set up for further stability, if not growth from here on? And can we avoid that pull down that you've seen in the past?

The local business, I mean post-COVID, has definitely been more resilient than the national business over that time period and it definitely has been stronger in Q2. And I'm more talking from an Americas standpoint versus airports. But local has definitely been more resilient in Q2. It's definitely going to be stronger in Q3 as we spoke about from an earnings standpoint. But I will say, as I look into the remainder of the year, I'm not sure which one will be higher. It's like they're both in a good place as we move into the fourth quarter. So I don't think you're going to see that lull continue from a national standpoint. But as I sit here today, I'm not 100% sure which channel will actually grow further in the fourth quarter, which is a good sign.

Yes. And on the digital front, that growth slowed a little bit in the second quarter. What do you attribute that to specifically? And does it change your outlook or expansion plans on the digital side?

Now from a digital standpoint, and this is more talking from an Americas standpoint, really what caused that slowdown in -- towards the end of Q2 into Q3 was definitely the national business. There definitely was some softness. The programmatic business was then as strong over the summer as well, and those 2 are obviously highly digital. They're highly buying the digital product. As far as the slowdown from an investment standpoint, I mean, look, we're going to look to put in 100, 110 digitals this year. That is a huge growth player. Just being down over the summer or in the second and to the third quarter is not really something that's going to change our outlook and how we're going to invest, but we're going to look at it the same today as we did 6 months ago. And going forward, we look at where we're going to put in digital assets, what does that property look like? What do we think the returns are going to be on that individual sign? And we're going to make a decision based on that. And what are the returns going to be? From an airport segment, from a digital investment, the assets are performing really well. I mean the inventory that we put in, in the New York airports and other airports across the country are performing really well, and the demand is really high right now for it. And I think a lot of that has to do with the products we're putting in. But in addition, the passenger traffic has come back, so it's been a really nice story on an airports perspective.

And in terms of your further investment in digital across the U.S., do you feel like there's further white space or further opportunity to continue to invest there? And I ask from the perspective of not wanting to overload on supply and keep that balance with the demand that's out there.