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

Please note that important disclosures, including my personal holding disclosures and Morgan Stanley disclosures, all appears at the handout available in the registration area and on the Morgan Stanley public website. And with that, I'd like to welcome Scott Wells, CEO to the conference.

Thanks, Cameron. Great to be here.

Scott, great to have you. To kick us off, how would you describe the growth strategy for Clear Channel and the long-term growth outlook? What are your long-term investment priorities?

So I'm definitely optimistic on this business in the long term. You think about our growth, there's -- obviously, there's the ad market that we're tied to. So you have a base load of growth from that. Our core kind of business-as-usual strategy is the digital conversions, all of the kind of base level local and national marketing that we do kind of sales execution. That gets you to kind of the GDP plus ZIP code. And then we're constantly looking for discontinuities, things that are going to cause spikes in growth, whether that's channels like programmatic, verticals like pharma that we're working on, new sales approaches like going direct to client. But it's all of those pieces working in conjunction. And it's all part of the ultimate digital transformation of the total business.

Got it. I guess next, there's been a couple of announcements recently surrounding year refinancing, which you priced in your secured notes and also expect to begin refinancing your CCIBV notes. Can you provide any more color on why now?

Yes. So we were real happy with the execution on the bond and term loan that took out the 2026. I mean it's priced. It's not closed at this point but we came in at [ 7.78% ] on the bond and the term loan, we came in at SOFR+ 400 bps. So felt good about where those landed. As for the BV, that actually -- it's kind of 2 pieces working in conjunction. One was just the conversations we had with people around the bond and term loan, there was interest in going ahead and doing it. And we thought that it was prudent in light of it rolling current, this summer to go ahead and take care of that. And so that transaction is just in the process of getting going. I can't give you a lot more detail than what we disclosed in the 8-K. But it was something we definitely had conversations with people about while we were working on the bond and the term loan, and it seemed like a good thing to do to create flexibility for us as we negotiate in the exit of Europe.

Got it. If we look at your guidance and the guidance implicit from your public peers, generally, there's an expectation that growth accelerates over the year and long term is higher than what we've seen many years in the prior cycle. Looking at your industry broadly, do you think out-of-home is better positioned today than 5 years ago in terms of advertiser budget share?

I think we are better positioned than 5 years ago, and there's a few things that add to that. First and foremost, we're the [ last mass ](00:09:43) visual medium. So if you're looking for maximum reach and particularly maximum reach efficiently, we're at linear TV can't deliver that other than a few events each year, it's just not possible with linear TV anymore. I think the second thing is data and analytics are coming our way. We've both been getting more sophisticated over the last 5 years, but the capability of the digital space has been constrained by privacy laws and by different tactics by various parties in those data chains such that what we offer is very compatible and very comparable now from a data and analytics perspective to what people can get with other kinds of media. Of course, we're still a mass medium. So I go back to my last mass visual medium. We're not going to have the one-to-one marketing capability, but that's very challenged for a lot of the people that relied on cookies or mobile IDs or things along those lines. So that market is coming to us. And I think the last part of it is that we, as an industry, have gotten better at telling our story. We still have a lot of ways to go on this. But we have made real progress. And I think programmatic has actually been a pretty central part of that -- of helping advertisers understand that we're able to meet them where they are in terms of how they want to buy. We're a lot more flexible now than we were 5 years ago.

Got it. And on that point, in the past, you've spoken to a share shift from some of the traditional mediums like linear TV and radio. And then as you said, some of these IDFA concerns. Is that still a share shift that you're continuing to gain from these mediums and you expect that to be a long-term tailwind?

Yes. I think our -- we compete in a lot of different markets. So at the local market level, there's no question that there's opportunity and there's shift going on in that degree. The ad market has grown quite a lot in the last few years. I'm thinking of retail media as like one particular manifestation of this. But it's grown in some different directions than where it was before. A lot of what is in that space, kind of broadly known as performance marketing is money that, to a degree, was used in promotion before. And so the market -- the market definition is kind of bigger. So if you actually looked at our percentage of the ad market, I think it's actually flat to down over that time frame even though I think we have been gaining in different -- in different segments. And so I do think one of the big opportunities for us is helping, particularly other digital media understand how much we amplify -- helping advertisers understand how much we amplify the other digital media. You actually have digital media participants highlighting the impact of out-of-home on campaigns being run in digital media because we are a great complement to it. And I think the potential is there for us. We work very nicely with digital media as a complement, and I think that's an opportunity for us.

That's great. Let's shift to Europe. Clear Channel is in the process of selling the Europe-North segment, recently initiated the sale as well as the Latin American business. How broadly have negotiations been going with prospective buyers? And how are you feeling generally about European M&A?

So I think we're headed in the right direction. We cast a wide net and are talking to a pretty broad array of potential buyers. It is a really critical time in that process right now. I can't go into a lot of detail because we are very much in the process of sorting out, are we looking at kind of a platform sale? Or are we looking at something less than the platform, moving it in chunks. And there are good arguments to do either direction. But I feel like it's headed in a good direction. We have a good process going. And on LatAm, I'd characterize it similarly. We're probably a little earlier in that -- in that process, but it's going well.

In the fourth quarter, Europe-North had strong growth, 18% and margins in the mid-20s. What's driving that strength? And would it make sense to keep Europe-North assets?

So they have performed really, really well. I'm very proud of what the team has accomplished. The drivers of performance on it, there are a few things. I think they had -- it's fundamentally the U.K. that is the biggest driver. It's the biggest market of Europe North and they have performed ahead of their marketplace and have done very well. That is partly programmatic. It's partly just really good execution of the core sales effort. We've had some good momentum in other countries as well. It really outside of some pockets. Overall, the geographies have performed well, and it's -- it's modernization of the go-to-market strategy, it's programmatic in the markets where we've been able to move that direction. And it's just some really good sales execution by the teams. As to whether it makes sense, I do very much think our long-term future is as a U.S.-focused business. And so I don't think that there's necessarily a long-term role for the business in our portfolio. But at the same time, we very much appreciate the excellent performance, and I think it gives us flexibility as we negotiate with the different parties, and that's something we'll certainly take advantage of.

Got it. As you look -- to make that exit, how much corporate expense is associated with the European and LatAm segment?

So we are going to be doing a full kind of bottom-up budget build, but what we've been talking about directionally is on the order of $30 million that as we simplify the portfolio, about $30 million would come out, much of that directly in those countries, some of it at the corporate center but we need to sharpen the pencil and work on that more extensively as we get closer. Any exit there's going to be a tail to it as we work our way through transition services, which we will get paid for presumably. And then ultimately, an unwind, you're going to have tax filings still to do and things along those lines. So it's not applicable switch, but about $30 million is the right way to think about at a high level.

That's helpful. Do you see Clear Channel in a position to participate in domestic M&A this year? And at what point would Clear Channel consider selling some U.S. assets?

So I think we always are open-minded about M&A participation, but we're also very realistic about our balance sheet, and that doesn't give us a lot of flexibility to be on the buy side. As for the sell side, we've talked about this a fair bit. Our tax basis in the U.S. is pretty low, and our leverage level is pretty high. And -- so when you're in a situation, unless you could get really, really elevated multiples, there's probably not -- you'd kind of be [ descaling ] the business and kind of exposing your corporate cost even more without actually deleveraging, which I don't know is the trade we're looking to do. So it's always a possibility. It's certainly not something that we're adamant that no -- under no circumstances would we would we sell U.S. markets, but I don't think that's the likeliest direction we'll focus as we put Europe and LatAm divestitures in the tail lights.

That makes sense. On the recent earnings call, you spoke to improving business trends. I guess, broadly, could you speak to how current discussions with advertisers are going now that we're into March?

Sure. Well, it really has been interesting because from kind of Labor Day last year on, the quality of the dialogue has gone up. And it really does feel as we've come out of the gates this year that we're in a much better place across, and that's true with the national advertisers as well as the local advertisers. I don't know whether it's all of the current speculation of a soft landing or if it's -- I'm not sure what is behind it. Some of it is stuff that we've generated ourselves, like I look at the work we've done in packaged goods and in pharma, where we've created opportunities for ourselves. But a lot of it is just also people starting to come back to the segment in the case of insurance, that's something we think this year we'll see auto insurance come back, which they were a massive advertiser in the out-of-home space kind of pre-COVID. And I don't think they'll get back to kind of 2019 levels, but I think they're going to come back, and I think they're going to be happy as they come back with the impact that, that drives for them. I think that business services just continues to be really, really strong all across the country. A lot of different home improvement things are strong right now. So the dialogue with advertisers is going well. And of course, it's wonderful to have the actors and the writers back bringing that kind of entertainment vertical back. I don't know that, that will help us a lot here in Q1, but I think it will help us a lot as the year builds.

That's helpful. That leads me to my next question, where you called out some weakness in Northern California, where we are now at San Francisco. Would -- yes, with an M&E somewhat of an M&E recovery, is that enough to turn around growth in this geography?

So California, if you look at our 10-K, you can see that kind of universally in California, we had softness last year. So Sacramento, San Diego, Los Angeles and San Francisco, with San Francisco being the most pronounced. M&E really only impacted L.A. in that mix. So media and entertainment is not -- it's not what caused California to be soft last year and it's not going to cause California to come roaring back by itself, although it will certainly help in Los Angeles, and there were definitely knock-on effects in Los Angeles as well in terms of restaurants and retail and other, because there were a lot of people out of work for a long time last year in that market. There are some technical things or idiosyncratic things where in 2022, California had a lot of money coming from the government promoting COVID vaccines and other COVID stuff, and that washed out over the course of 2023. So that's out of the comps at this point. And then San Francisco at its core, it's a national advertiser story, and it's a tech story. It's really those 2 pieces that caused it to be as soft as it was last year. And we're definitely seeing things moving in a better direction as we come out of the gates. So I think we will -- it did shrink in Q4 a bit, but the degree of shrinkage was less, and we're optimistic we're going to see growth as that builds. So media and entertainment will help, but it's going to be these other factors. I do think tech is coming back in a pretty nice way as the year gets started, touch wood, we'll see that continue to build.

Right, definitely. And just to wrap up the point, national -- the national ad market has seen pockets of softness throughout last year. In the fourth quarter, both local and national sales were relatively similar. National was up, I think, 30 basis points, local up 60. I know you've mentioned that national is more channel specific, but would you expect the growth to diverge between the 2 into '24?

Well, I think in Q4, there were -- it was actually kind of a weak print for local in Q4 for us in the Americas business. I mean Airports is a whole different story, and the national part of Airports was on fire. So it's not just the national advertisers not wanting to do out-of-home. They just weren't all that keen on billboards necessarily at that particular part. But I think you're going -- I think you're going to see local get back into that kind of low to mid-single-digit growth cadence and touchwood national will be a little less moody. I think last year, we had 2 up quarters and 2 down quarters. With national, we'd like to see good 4 quarters stable, but I can't promise we'll get that. But the leading indicators are encouraging on that front.

That's great. Just to speak about your RADAR suits -- RADAR solutions, what does RADAR offer to advertisers? What is it? And is it similar to other media?

Sure. So RADAR is what we call our planning and attribution suite of tools. So we have RADARView that is a visualization and planning tool so that you can go in and say, "I want to see young women 18 to 36 that are intending to buy cars" and you can go in and you can visualize in a given market where those folks are from an over-indexing perspective and use that to plan. RADARProof is the attribution tool. And we can do attribution on an awful lot of things. It started out just with footfall, but we knew things like app downloads, we can do script uplift, which is how we're doing the pharma progress that we've done. We can do -- we're doing an awful lot of different things with RADARProof. RADARConnect is our digital medium adjunct, so you can buy mobile ads, you can buy CTV by using the same characteristics that you used in that RADARView plan to supplement your campaign. And then RADARSync is when we actually go in and connect through like a live ramp or a data clean room with the first-party data that an advertiser has and that's something that -- with some of our largest advertisers were doing. So it's a pretty robust tool set. Again, it's going to be at the kind of aggregated segment level as opposed to one to one. We're not going to be able to do things that say, okay, we're going to go get Cameron on this particular. It hasn't reached minority report status nor do I expect it's going to with trends in privacy and things along those lines. But that's the tool set. And it's pretty robust. I'm not going to say we can outmaneuver Meta. They certainly have more data and more opportunities to aggregate data than we do. But in terms of giving people a good robust ROI tool, it's very effective.

At your Investor Day a little over a year ago, digital transformation was the theme that came out. You highlighted a few different means of transformation. You digitizing order flow, integrating programmatic selling and potentially future self-serve capabilities for SMBs. Can you discuss how these investments have been going and the potential long-term impact to the business?

Yes. I mean this remains -- creating a digital experience across our whole business is what unifies our strategy and getting to where from the idea to the proposal to the order to the cash and having that all flow smoothly, electronically is a crucial thing that we're working on and have done a lot of work on. I think we're in a good place on it. If anything, in some ways, we were too productive at it because we absorbed the great demand that came out in COVID without having to add people. So that was fantastic during kind of the latter part of '21 and the beginning of '22. When I was on that stage talking about that, and Erika was talking about it in September of '22. We were at a moment where the market was starting to shift and the demand profile was getting tougher. And because we had absorbed so much business, we hadn't had the pressure on our local teams to staff up their sales teams as much as we would have liked. And that is one of the contributing factors. So maybe we were too successful in our automation efforts. But we have addressed the staffing issue on the sales team over the course of '23 and here at the beginning of this year. So overall, I'd say we're on track with the investments. We're in the midst of making a shift in how we actually serve digital ads, and we're doing it in Airports first. We're moving off a homegrown system to a vendor-supplied system that should have some productivity benefits for us as well as well as robustness and sort of stability benefits. So it's ongoing, but good progress.

Got it. That's helpful. Speaking of digital, your digital revenue now accounts for roughly 46%, I think, of consolidated. As you think about the business long term, what would you expect the long-term digital share of revenue to represent? And how does that differ across geographies?

So it's very different already. I think we talk about -- the U.K. is probably our farthest along big market and they're north of 70% in terms of digital revenue as a percentage of it. Within the U.S., we have a handful of markets that are over 50% digital. And this is on the roadside product. Airports, it's very airports specific. Some Airports are very, very digital, some not as much but Airports is farther -- is farther into digital, but it's not -- it doesn't have the kind of magic economics that many of the people in this room like and so we don't talk about the digital transformation in that business in quite the same way. It just doesn't work with the same uplift factor because of the revenue share dynamic in it. So how far could it go? I think getting to where -- at some point in the next decade, you're going to see a bifurcation of out-of-home buys where a part of out-of-home is going to stay firmly in the real estate by where everything was a decade ago. So a decade ago, kind of everything was a real estate buy. A subset of the inventory is going to stay as a real estate buy because it's going to be those like incredible marquee locations in Times Square or Sunset Strip or certain airports or things like that, where the audience justifies a really premium product. But the rest of it is going to become more like other digital media, which is an impression-based by and the value of the impression is going to be based on what the audience is. Neurosurgeons are going to be -- well, neurosurgeons that specify equipment, CIOs for hospitals are going to be a very valuable and hard-to-reach segment, whereas those auto intenders I was talking about before maybe are less, and it will evolve in that direction. And I think that we're seeing the beginnings of that with the success in programmatic because that's very much how programmatic is bought and sold but we're starting to see it trickle in because the local markets have actually gotten very comfortable buying this way with the work that they do with the digital players like the Googles or Metas or so forth. And so I think we're going to adapt to that. And so you're going to see a shift. And as the business gets more digital, you're going to see us creating a lot of different kind of buy cases for people that the core real estate type of buys will still exist, but they'll be supplemented with lots of different ways of selling that inventory.

Got it. As you think of digital conversions in the U.S. from a run rate perspective, do you have an ideal run rate in mind as you continue to convert boards?

So our pipeline management, there's an OpEx-CapEx relationship that we're in kind of a zone that works with where we are from a leverage perspective and from a size perspective, that somewhere between kind of 90 to 120 boards is that kind of sweet spot delivery with the caveat that we're always working on getting the lumpy, it's what I call discontinuous on the revenue generation. It's the same thing with digital. If you think back, there was a period of time in Clear Channel's history where we had a big discontinuity in our digital revenue because we were building out L.A. There was a time when we had a big discontinuity in digital revenue because we were building out Dallas. And so if we can get a big city to allow scale conversion, we'll take that 90 to 120 to 200 in a year if we need to. But it's really predicated on getting those lumpy kind of opportunities for the number to be a lot higher for us.

That's helpful. And just on this digital point to tie it up, you think about your guidance, how much of a contributor are digital boards and conversions to growth?

I mean, they're always part of our -- as we build our guidance up, one of the key things we're looking at is how many digitals and where and when. That's part of how we actually -- we build the guidance. And because it's quite predictable. It usually takes 3 to 6 months for a unit to ramp. But once the unit ramps, you're getting 4 to 5x what revenue you were getting out of a location. And so it's something that we're able to build into our plans and our budgets pretty effectively. It's not the prevailing thing, but it's -- I'd call it somewhere in that 1/4 to 1/3 of our annual growth is coming out of the new inventory.

Got it. Shifting more to Airports. Very strong growth in the quarter, about 44% year-on-year. Can you discuss some of the growth drivers for Airports and then -- yes? How much of an impact does general ridership trends have over maybe digital conversions of Airport boards? And then what's an appropriate long-term growth rate to assume for Airports?

Sure. So the Q4 growth was phenomenal, and it was a record quarter for that team. The New York airports were a big part of it, particularly Terminal A at Newark that came online in January of last year. And so Q4 was the last, it's always seasonally our strongest quarter, and it was the kind of last fresh quarter for that new inventory. We'll still have a very strong performance into Q1 because we did have a slow start to last year. The Airports team, you all probably don't really even remember this necessarily, but January and February, we had an advertiser shift their campaign from Q1 to the balance of the year. They kind of took a chunk of Q2, Q3 and Q4 instead, and they did it late in the year before. So we didn't get that backfilled. But they did a fantastic job recovering from that and having a really strong year. I think long run, Airports should be something that people look at as also a kind of a GDP plus type inventory that's the sustainable rate on it. It does relate to the number of passengers for sure, but it also relates just to how effectively we're bringing categories in. The team has done some really excellent work on creating the notion of sponsorship in a lot of our airports. And so that's basically a revenue stream we didn't have a few years back. And that concept is something we're actually looking to expand and build on because it really does resonate with marketers being the health care partner of whatever airport or the health care expert in a terminal or the banking partner of a terminal that kind of thing. So that is something that we've gotten more effective at. And so I talked about the long-term rate. I think -- did I answer all the parts of your question there?

I think so. The other was just the general digital conversions and the budget share shift, but...

Yes. I mean that's really driven by the Airport contracts. Everybody wants to have a highly digital contract -- highly digital airport now. It's just a question of how much does the traffic justify the investment because you can't do what we do at JFK and a small regional airport that just would be overkill.

Sure. It's a U.S. political election year, and there's been some back and forth on the how much of an impact political has on outdoor advertising. Curious what your thoughts are there, if it's -- how much of a crowding out effect it has on the industry versus just pure political advertising coming into billboards?

So we don't get a lot of pure -- like when you talk about the like national races, so the President, the Senate, the House, we don't get a lot of those dollars historically. We are trying like the dickens to get them, we are in a lot of swing states. So I would like to think we have some opportunity there. But getting the political operatives to embrace out-of-home, it's convincing them that they can be as fast and agile on it as they can be on other digital media, which they can be, but it's a tough nut to crack. We've got to get somebody elected who's very prominent on the back of out-of-home and then we'll have a story to tell. So stay tuned. We'll see if we can pull that off this year. But we do get a benefit in political years from the crowding out effect you referenced. So it's a dialogue we have, particularly in swing states where the TV schedule gets so loaded with political ads that local advertisers or even national advertisers want to get on to other media so that they can get their products out there during election season. And so we'll see some benefit from that. It's not anything we've ever been able to like size, because it's kind of idiosyncratic how it comes in. But that is a tailwind in an election year. And God willing, we'll get some top line political dollars, but stay tuned. We haven't gotten to the point that I can say for sure.

Let's shift to margins, so rent abatements should taper off over the course of the year, both the Americas and Airport segments. How are you thinking about margins and the drivers of margin expansion over time?

So yes, abatements should -- this should be our last year of abatements in Airports, and there shouldn't be much of anything in roadside. If there is, it would be because of a lawsuit that has lingered, but I'm not holding my breath. So the abatements should stabilize. In terms of margin over time, the single biggest thing that we could accomplish is getting more of our business on the less super-premium assets. One of the things that's a real challenge is in a super premium market like what we've had where you're selling everything that you've got in Times Square and on Sunset Strip and things like that, those tend to be our most expensive and most likely to be revenue share leases. So to the degree, I mean one of the cores to our strategy of working with pharma is they really value reach. And for reach, that puts you a lot of times in neighborhoods and on secondary roads. And that is a big area when we tend to be posting heavily in those areas, that tends to drive a lot of operating leverage because you're on fixed cost leases that are not terribly expensive. So that is a core part of why we're going after that particular vertical. It's one of the things that, as we work with a variety of the other verticals, we're trying to drive more movement in that direction. We're always working on reducing lease expense. Our teams take out a meaningful amount of that every year, but we're also up against ratchets and contracts. So it's kind of a forever battle as contracts increase in value, we renegotiate ones that are not getting used as much and you work your way. I think you're already seeing that as we get passed, we had that 1 big contract come up last year that kind of with $3 million or $4 million every quarter. We got past that in Q4, and you saw that our site lease was up around 2%. So we're going to be striving to keep those increases as minimized. And I mean for the company as a whole, it's also a matter of mix. We had such a strong year in Northern Europe and Airports last year, but we didn't see a lot of flow-through from it because those are largely rev share contract. It's just we need to mix toward the U.S. road side is what we're looking to do.

Great. That's helpful. Just have a few minutes left here to open up to any audience Q&A, if there is any?

Could you talk a little bit about the lease contracts that you have in place as you go to invest in upgrading these roadside boards to digital? Like what's the term of the contract?

Well, usually, the first thing we do when we're going to convert a digital sign as we lock in a long-term lease or we buy an easement. We don't buy as many easements as I wish we did. That's a function of our balance sheet, but we're always trying to lock in either ownership of the location or have a long-term fixed cost lease. So that's -- it's part of the process, frankly, of how we do digital conversion.

What is long-term?

Long term, it's kind of 7 years plus. I mean it is a little bit driven by location because the closer you get to like a New York City or a Los Angeles, the harder it's going to be to get a fixed lease for that long. So you have to factor that into the mix.

Is it the investment [indiscernible].

For the for the vast majority of our signs, we're the ones putting the CapEx out. We've historically worked with some advertisers where they actually underwrote the conversion, but that's the exception. It's almost all with us.

Scott, just on visibility through the year. You guys -- relative to other media, have a pretty good look into how like Q1 is already shaping. Just remind us like how much of sort of Q1, Q2, do you already have line of sight into? And how does that inform -- it seems like a pretty positive outlook on just advertiser demand right now?

Yes. So we do what we call our upfront. We call it that for lack of a better word. I know we need to rebrand it because it's not like the upfront TV does. But we do that between October and February. We just wrapped up this year's. And that's when we do all of our perms and perms kind of defined as anything 6 months or longer, roughly. But we exit that period, and at the time we're doing our earnings, we usually have about half of our revenue for the year on the books. And that's spread pretty uniformly. Obviously, we know more about January and February than we do about November and December. But I think of the way to characterize in quarter, when we do an earnings call in quarter, we're close to fully good on knowing what's going to happen. For the next quarter, we usually have a fairly high degree of visibility, call it, in the mid-70s already on the books. And then for the ensuing 6 months, you're probably talking more like 50% on the books at those times, roughly. It is better visibility than a lot of businesses.

Referenced to the [indiscernible] transactions that you referred to. Any time line that you can [indiscernible] your expectations for Europe and LatAm.

No. We need to keep our negotiating flexibility high at this point. But we will share concrete news just as soon as we have it. I promise you that.

[indiscernible] 4 to 5x revenue increase? [indiscernible]

It's kind of shockingly consistent. It sort of scales up and down based on where the location is. So if it's a less costly secondary street, you got to make sure that your conversion is inexpensive because you're not going to get 10x because it's like going to -- you're going to get roughly what that value is 4 to 5x and it's pretty rock solid. I think the next group is about to come in.

Scott, thank you so much.

Thank you, Cameron. Appreciate it.