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

Joining us -- my name is Marlane Pereiro. I am the high-yield cable and media analyst here at Bank of America. Today, we're very happy here to have with us from Clear Channel Outdoor, Brian Coleman, CFO of Clear Channel Outdoor Holdings as well as David Sailer, Chief Financial Officer of Clear Channel Outdoor Americas. Thank you for joining us today.

Thank you, Marlane. First, I want to thank everybody for being here and being in attendance, and I'm sure asking great questions. And Marlane, thank you for having us. As I look at the sign in front of me, I think it kind of looks a little odd, 2 CFOs at the same conference. I thought I'd explain that a little bit. I think most of you are aware of the company's strategy going forward. How internationally, most of our assets are either under strategic review, in the process of being sold or in fact, have been sold. And what that leads to strategically is an America-centric business. Dave has been the long-time Chief Financial Officer of the Americas business. And so while we talk about the business going forward, I think Dave is very close to a lot of the operational aspects of the business and is best fitted actually to answer some of the operational questions. So I don't think there'll be any problem dividing up the questions. David also oversees corporate development. And so anything that we talk about investments or M&A activity, I think he can share his thoughts on as well. So that's the reason why you have us both here, and hopefully, we can cover everything, Marlane.

Great. Thank you. So I think we will start with the strategic review, kind of the asset sales that we've seen on the European side. So at a high level, can you just discuss and remind us what's sold and what's next and left to do in Europe right now?

Why don't I hit the high level, Dave, and you kind of take over. So we focused on Europe-South first. That has been completed in the sense that Switzerland has been sold, Italy has been sold, France has been sold. Spain, we have an agreement to sell. It's going through regulatory review, and we hope to close that sometime in 2024. So that is all done and behind us assuming Spain goes forward as planned. We've now shifted our focus to Europe-North. And Dave, you're working on that, so I'll turn it over to you.

Sure. Thanks, Brian. I probably want to go back to Europe-South first. When you think about the process that we embarked upon about 2 years ago when we were going to sell the entire perimeter of Europe, also that process didn't go through for a multitude of reasons. Obviously, it was very different in the environment when we started that process until towards the end of it. But we then embarked on the process to sell Southern Europe, which we've been very successful. And I think by selling those assets, and I'd probably call out France probably in particular, which is a tough business to get those assets sold for us now to start working on Northern Europe is very important because the assets we now have in Northern Europe, it is a very good business, and it is very different than the platform that we brought to market 2 years ago. But when you look at the perimeter then and where we are today, the business today is more digitized. The EBITDA, the CapEx ratio was much better. Currently, the business is performing really well, Northern Europe. And when the plan that we had put out in place when we went to market originally, we're actually beating that plan. So some of the buyers that we're into the process today and some of the buyers that -- they're very familiar with the business that they've seen in a couple of times. And I think they're pleasantly surprised that we have exceeded what we said we were going to do a couple of years ago. So we're off into that process. It's a mix of strategic and nonstrategic buyers. I think so far, the conversations are going well. I think the assets are positioned very well. The businesses are performing very well. So we're kind of looking forward from an execution standpoint to move forward with it.

I mean do you envision selling Europe-North as a whole or more opportunistically by country?

I mean right now, our goal is to sell as a platform. And I think it is a platform. I think that the Northern Europe assets fit in quite nicely. There's a corporate structure that we have that run those assets. And right now, we are selling it as a platform. If we need to adjust and shift our focus and if it did go a couple of countries here and there, we would adjust and we would look at it that way. But as of today, we're looking at it as a platform and selling it as one transaction.

Yes. I think you'll hear us talk about being open-minded to different things. And I think that this is one of the areas where that's the case. We're going to be open-minded. But as Dave said, the preference as a platform sale, it's quicker and we think it fits that profile.

It might be a bit early to contemplate this, but how should we think about multiples for Europe-North maybe versus Europe-South or just regionally by country or for the platform as a whole?

When you look at when we sold the assets in the South, they were one-off country sales. They went to strategic buyers, Switzerland went to a strategic buyer and so Italy and Spain, with JCDecaux, France was more of a nonstrategic. But selling those individual countries, we had good multiples for them. They were good operating businesses. But when you start getting into a platform, it's a much bigger process. I wouldn't sit up here and say we're going to get x multiple, but your best proxy out there is probably a JCD and everyone kind of knows they're trading kind of in the 7s. But we'll see where the process plays out. I think we have very good assets. They're performing well and we'll see where that process goes.

Great. And can you remind us if there's any limitations or restrictions on how the proceeds from the Europe sale would be applied and especially any implications for the European bond?

We do have restrictions in our indentures. And I think the one to start with is the CCIBV notes. And so they sit upon the European assets and also Singapore, which was interestingly enough part of Europe, and we did the note offering. But don't tell my geography teacher. So in that indenture, proceeds will have to be applied to repay those bonds. That wasn't the case with the sale of Switzerland because we were able to take advantage of reinvestment baskets, but substantial asset sales in Europe, those proceeds would need to go to pay those bonds. So if you think of a platform sale, think of proceeds being applied to repay the CCIBV notes and then excess proceeds moving up in the system and then having to follow the CCOH indentures, which also have reinvestment provisions and we would likely avail ourselves to those or they would have to be used to pay down secured debt at par, I think, pro rata across the secured bonds and the term loan, I'm looking at our Treasurer, he's nodding his head. So that looks good. But like I said, I think we would try to optimize our flexibility, use the reinvestment basket capacity and likely take the funds then that would have otherwise been used to fund those investments and go into the open market, buy back bonds at a discount, perhaps use that cash to help facilitate a term loan, an extension, pay down term loan, possibly reinvest some of the proceeds in the business on specific projects that we want. So I think that's kind of the waterfall from proceeds from the divestiture of Europe-North.

Great. That's very helpful. And then shifting gears to the U.S. business. Can you talk about the strategy there in terms of growth drivers? Should we also think about potentially any non-core assets that could also be monetized? Just at a high level as you start to remove yourself or move away from Europe and the focus shifts to the U.S., what are the priorities there?

I mean look, I'd say the first priority is to grow EBITDA. I mean that's probably the #1 focus. It's probably -- it is why we're going through the asset sales overseas is to become a U.S.-centric business and the goal is to grow that business. And some of the avenues, first and foremost is our digital strategy, obviously, optimizing the capital that we're spending on our digital boards, both on the roadside business and in the Airports business. And then when you go further into the business, it's really how do we grow our advertiser base. And we talk a lot about our verticals and if we talked about certain quarters this year, which verticals are down, our goal is how do you grow some of those verticals. We've talked on our earnings calls about getting -- growing our pharma vertical, which is something we've been trying to crack for a while. I think we're making good progress there, packaged goods, we've talked about. So some of those initiatives is really -- but at the core of it, how do you grow the top line to grow EBITDA. As far as you mentioned earlier on asset sales in the U.S., look, as Brian said earlier, we're open to anything. We're always thinking about how do you grow shareholder value. But I think it makes sense to kind of go with a process where we're trying to become that U.S.-centric business. We're going through the process overseas in Europe. We mentioned on our earnings call, we're looking at strategic initiatives in Latin America. So I think as we kind of go through those processes, see where things settle, and then grow the U.S. business. And then from there, we'll figure out kind of what avenues and tools we'd have available because obviously at the end of the day is to lower the leverage of the company.

Great. And then obviously, the advertising environment has been lackluster this year as we head into 4Q into next year. So one, what do you see as potential growth drivers for advertising as we head into next year? And can you also discuss any material difference, if there is one, in fact, versus if we think about airport versus traditional city boards, and then also static versus digital?

Sure. I mean I'll start with your second question first. I mean it's interesting when you look at our roadside business, it has struggled this year, and a big part of that has been the national business on roadside on our Americas segment. But when you look at Airports, national has been very strong in the third quarter. We were up close to 20% and the business has been growing. And I'd say, probably your difference there and why one is growing, one is not, it's more of a -- I think the market, and we've talked about this, I feel like the market this year has been strange. And if I went through the year, started off slow, started to pick up a little bit in the second quarter and then the third quarter was really tough. But I'd say it's been a pretty strong premium market all year, and our Airports division is more of a premium buy. When you look at our roadside business, our iconic Las Vegas, New York type of assets have actually sold pretty well. But going to your first question as far as what do I look at next year and where do I see some bright spots. Look, it's some of the things I said earlier, some of the verticals that we're going at, they're pharma, packaged goods. You look at the verticals that have struggled this year and what really hurt us in the third quarter, especially in our national business, media and entertainment has been tough. Obviously, the strikes have hurt us. As the writers and the actors come back and content starts being created, they're going to advertise for it. So I see that vertical coming back. Technology has been tough this year and we're starting to see signs of that coming back to life a little bit in the fourth quarter. So I look at that as we get into next year. Programmatic, we mentioned on our earnings call in September, that channel really started to kick in, and we had a really good October. That has continued into November. We're hearing signs that, that's going to continue into next year. I mean there's not a lot on the books today for 2024. So it's really tough to project, but the conversations, I think the advertisers, there's a good dialogue. When we were talking in third quarter, it was pretty quiet. The RFP volume has picked up as we got into the fourth quarter. So I think those are good signs. I mean nothing set in stone, but I think it's pointing in the right direction.

And then turning to your free cash flow profile, like what do you really see as the drivers of positive free cash flow over the next few years? Is it top line? Is it streamlining the business? Is it a combination of both?

I think it's a combination of both. As Dave mentioned, the fundamentals are take care of your business first, grow EBITDA. And for us, it's a function of growing the top line because each incremental dollar of revenue disproportionately contributes in an increasing way to the bottom line. So if we can capitalize on the initiatives that we've invested in, in the Americas business, we expect to grow revenue, we expect to grow EBITDA disproportionately. So that's fundamentals. I do think some of the M&A activity helps to clarify things. I don't think the asset sales will be materially deleveraging but they -- you will have proceeds that you'll apply to reduce the aggregate amount of debt. You will reduce committed capital obligations that's required in the capital-intensive international businesses. You do clarify and focus management activity on the U.S. business. And so I think there's an alignment in all these things and the strategy were going down. And I think they do lead to an America-centric business focused on growth, and that growth will help lead ultimately to deleveraging of the business -- free cash flow generation and, ultimately, deleveraging of the business.

Great. And that was actually kind of the next follow-on, right, is what really drives leverage meaningfully lower? And overall, what is your balance sheet strategy as you think about it?

Yes. I think it makes sense to execute on these plans and see where you are. Now I don't expect them to be, again, materially deleveraging in the short run. So you will have to take a look at, okay, where are we at the end of these processes? What's the trajectory of the business and what options are available to us at that point in time? It doesn't mean we're not thinking about things today, but it seems a little premature to execute on anything until you've actually done these things first. I do think sequencing is an important part of the initiatives that we've laid out. Ultimately, where do we want to be? Well, I think we've said that eventually, we want to be in a position to have the option to convert to a REIT. That's a much lower leverage profile than where we are today, maybe in the 4 to 5x range, looking at some REIT comps that are out there. But we're not in a hurry to do that. The biggest advantage of being a REIT has to do with tax payments and we benefited from that currently through the elections that we've made. And so we've got a few years until we generate enough taxable income or that would become an issue. We happen to have a few years of runway with respect to our capital structure. And so I think over those few years, once we're on the other side of some of the initiatives we're working on, we'll have to make those decisions and how do we get to that position where we can be in a position in a few years to convert to a REIT, that being in a position to convert before you have sizable cash tax consequences of not doing so.

Great. And that was actually the next question is the...

I'm reading your mind, Marlane. It's like I've seen the questions.

There have been some headlines about shareholder, what's the right word, interest in the company and talking about maybe pursuing a strategic review or different types of reviews. So if you can -- how are you thinking about that? Does that really influence anything in terms of what you're already executing on? Is it noise? Is it something you're focused on?

Yes. Look, I think we're pretty open to dialogue with our shareholders. And we -- I think we have a good dialogue with most of our shareholders. If we don't have that dialogue, it's a decision by the shareholders, I would say. And we have had some -- I mean there's been activist letter that's out there. There's been different conversations. And I think I would characterize that as being at the end of the day, what everybody is saying is that the value of these assets isn't being fully reflected in the share price. I couldn't agree more, right? I think we all agree. I think the issue is how do you get it to be reflected in the share price. There's nothing really new in these ideas. I think a lot of it really has to do with we've thought about them. We've talked about them. We've talked about them with investors. We've talked about them at investor conferences. It's just a matter of what you're executing and when. And so for a long time because there is a long lead time, we've been looking at a strategic review and/or divestiture of our international businesses. So none of that was stimulated by any kind of outside influence. We have looked at and are open-minded to potential divestitures of outdoor assets. I just think that it makes more sense to sequence it in a way where you're creating that core U.S.-centric business first. And you also have to consider what are the implications of a sale of U.S. assets. You have to consider tax consequences. You have to consider impact upon the platform. So I think in summary, I would say we are in full agreement that the value of the business isn't being fully reflected in the share price. We agree on many of the avenues that can help get you there. It's just a matter of prioritization and kind of that sequencing of events. And that's where we are today. We think we're doing the sequencing in a way that makes the most sense. And we are doing it as fast as we can. I don't want anybody to think that for some reason, we're lack bandwidth or we can't execute. We're putting the resources we needed to get as fast as possible. It's just that some of these things stay a long time and we continue to push on it. We'll continue to let folks know and have that disclosure when it is appropriate to do so.

Great. I'm just going to turn it over and see if anyone has any questions from the audience. I do have more in case...

What's going on in pricing these days? Is there sort of less demand? Or are you still able to act to price increases going forward to [indiscernible]?

It really depends on the product we're selling and the inventory that you're looking at. And if I talk about the premium from an airport standpoint, some of the premium products in our airports as we were still driving price and from a roadside standpoint, I'd say back 2 years ago, we were probably driving price on all the inventory. Now it's probably more on the premium inventory that we're really driving price and the non-premium you're probably driving a little bit more from an occupancy standpoint. It's not at the level that we had coming out of COVID, which you would not expect just because of how far down it is. But no, we are still driving price on some of our inventory, especially the premium iconic type stuff.

Can you give us a sense of the differential in CPMs for static versus digital, also airport versus non?

Sure. I mean we more sell in a 4-week period, so it's less of a CPM type of purchase. I mean you can convert it, but we do sell in 4-week buys. So if you come and buy a static or a digital board, you're going to pay a 4-week rate and most purchases are for more than 4 weeks, you could do it if you come into a splash for 2 weeks, you can do that. It really depends. It's hard to answer that question because it really depends on where that asset is. I mean our assets are -- I mean we're priced based on where it is, location is a big part of it. Where does that board index on what audience is, the demand for that inventory is you can -- is it sitting on a highway versus a surface street? So it's hard to kind of give that flavor. And when you convert a board that's a printed board and you're converting it to a digital board, now you're selling at 8 times. So maybe that slot, that one slot might be less from a digital standpoint, but you're selling at 8 times. So it's a kind of a tough comparison. From an airport standpoint, it's very similar. An asset sitting above security or down the terminal in JFK is going to be a much higher price point than a board coming through with Miami Beach or Fort Lauderdale are still very good airports, but it really depends on how much traffic is flowing through. And obviously buying in New York, people want to be like that is a high premium sale versus maybe a regional-type airport. But they are tough comparisons and there's also more traffic going through a larger airport. So you're going to pay for that.

Got it. And then when you do convert from static to digital, how do we think about the uplift or the impact on margin when the conversion happens?

Sure. It takes a little bit of time like you'll convert that board. It's a little bit of a ramp time, but once it's being fully sold, there is definitely a margin impact because you're driving more revenue. And as Brian said earlier, most of our inventory from a roadside standpoint, a lot of our leases are fixed. So if you drive more revenue to that board, it's going to be a -- it's going to be margin accretive to the business. From an uplift standpoint, I mean it's probably in the neighborhood of 4 to 5x from a revenue standpoint, some being higher, so maybe a little bit lower depending on the location, but on average, that's probably fair.

Great. And can you just -- are there any expectations for what political could be? I mean I know we talked about it more in the context of broadcasting and radio but for outdoor, just a sense of where you think it could be in versus '20, for example.

I was actually going to bring this up when we were talking about upside to the business and you're thinking about next year. And I look at political a little bit differently. We're going to sell political, and I know we'll sell more political ads in 2024 than we did in 2022 or in 2020. But it's not a huge vertical for us, and it's not a huge vertical for the outdoor space. But what political is going to do next year is there'll be -- money will come into the marketplace from a political standpoint, and it's going to tighten up the inventory across a lot of products and a lot of media out there, which I think will drive dollars to our space and to our company. So I do think it is a tailwind for us as we get into next year, less about the actual dollars coming in for political, but what it could do to the environment, to the atmosphere.

Great. Any other questions from the audience? My final question to you is -- unless there's another question out there. What do you ultimately see as the biggest opportunities and challenges for the business?

I'll start on opportunities, maybe [ toss ] to Brian on the challenges. Look, from an opportunity standpoint, I mean, when I think about the out-of-home space, it's the only traditional medium. It's been around, obviously, for a very long time. That's still growing. All the other traditional medias are declining. So with the assets that we have, the attribution that we provide to our clients to a RADAR, I mean, we can prove to our clients how it drives people in their stores or drives their products. We need to do more of that with our clients. But the opportunity I see is when Scott talks about cracking the pharma vertical or the packaged goods vertical, when you think about the overall advertising pie, there's 65% of clients of that pie advertising out-of-home, but they advertise probably 5%, 6%, they under-index in out-of-home. Our goal is how do you get them to spend more. And I think it's to the tools that we have, whether it be programmatic or a direct sell or the RADAR. And then the other opportunity I look at is that 35% that are not buying out-of-home and why they're not buying out-of-home. And I mean, these are the 2 areas we've been focusing on and we're making definite progress on the 35% that are not spending on out-of-home. We have a sales channel dedicated to that to go direct to the client. And we've made some really good inroads over the last several years on bringing clients to the space. And I got to kick out of this when the sales guys come back and one of the things I hear all the time is when we're talking to those clients, they'll say, "Oh, wow, I didn't know out-of-home could do this," or, "Wow, I didn't realize you can do that." So to me, that's the opportunity. That's where I can see our medium will continue to grow.

On the challenge side, thanks, David, [indiscernible] I recall coming over the company in 2019, having the levers that we had as part of the separation. The company [indiscernible] its balance sheet. It's a -- I've used this internally to describe it, it's coming with great operations in that balance sheet. And that leverage we inherited, we probably did tackle in '19/'20. And since that, we have refinanced all capital staff. We captured low rates. We were on a path to free cash flow generation. We have done the things that we needed to do and then COVID [indiscernible] it happened, it set us back and our runway has narrowed, but we still have a runway. The business still has great operations. We can still grow this business. But what we're challenged with now is it's a high degree of leverage on that runway. And even that we can refinance, the debt maturities that we have '26, '27, '28, we're likely to refinance in the higher rates. And so we've got to adjust to that environment and do the right things over the next few years and that will set us up to growing that capital structure. And that's through growth of our EBITDA from our core business, application of sale proceeds from divestitures and whatever else that we need to do. So that's the challenge. I would say the good thing is, as we're sitting on some great assets to help us get there, but we've got to figure out the trial.

Great. Well, thank you very much for joining us, Brian and David. It's been a pleasure.

Thank you for having us.