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

I'm pleased to have with us from Clear Channel Outdoor, David Sailer, CFO; and Jason Menzel, Treasurer. Thank you both for joining us today.

Great to be here. Thank you.

So I just wanted to start on the MTA contract. I know it was discussed on the last call. But one, can you just give us a very high-level overview of the financial impact and how this fits into the longer-term strategy and outlook for the company?

Sure. No, the MTA, they're a great collection of assets. And I want to be clear, it's the above the ground assets. It's the roadside billboards, which is right in line with what we do on the Americas segment. I know that's been confusing for some folks as far as what assets do we have, but they are the billboards that are on MTA property above ground, obviously, on the railways. It's on trestles as well, above ground. And it's a great collection of assets. In New York, it's -- we have a good presence in New York, but I wouldn't say our presence was great in New York. So getting these assets, especially in the border of Manhattan and going out to kind of where the airports are, really gives us coverage in areas we didn't have coverage before. And New York is a very important market from a national standpoint. So when national RFPs come in, the 2 biggest cities they want are L.A. and New York and other cities in between, of course. But we have a fantastic presence in L.A. And now with the MTA, just enhances the offering that we have, and we'll be able to respond to probably more RFPs than we have in the past. So strategically, I think it was a great fit and I'm really excited about it. We started the contracts in November 1, so we're just starting to ramp. So we'll see a little bit of that effect in the fourth quarter. But as you get into next year, and I'd say from a high level when you're thinking about the financials on the top line, it's probably a little over a 2% increase or 200 basis points to our Americas numbers on the top line. From the bottom line, it is absolute EBITDA that's going to roll through, but it is a lower-margin contract. It's a municipal contract with a MAG and a pretty high rev share. So from a margin standpoint, it will probably decrease margins by 50 points, 0.5 percentage point year-over-year when you look at it. But I mean we look at that as really just really good assets to bring into the fold for the Americas Group. And I talk a lot about it from a national standpoint, but it will also be a very good sale for our local folks in New York and from markets importing dollars into New York as well from a local standpoint.

Great. And then shifting to advertising. How are current discussions or the tone of conversations going with advertisers, especially now that it's post-election? And are there any insights you can provide into '25?

Sure. Yes. Look, the -- I mean, obviously, everyone had concerns with the election. And now I think sides just wanted to have an outcome. And we kind of know what happens. And I think that was helpful, I think, moving past that. But from an advertiser standpoint, I feel good going into 2025. I think cautiously optimistic. I feel better today from a national standpoint and how that business is performing as we're going into 2025. I think 2024 was a better year than 2023. National, we always talk about this will be lumpy. You'll have your quarters, some quarters that will be up and some are slightly down. And that could be to a fact that you could have had a campaign for a specific product that went away, and you have to fill it. But as I look into 2025, I think the conversations are good. There's a lot of activity out there. From a local standpoint, I mean, local has been strong. When you think about from a percentage, I'll talk to the third quarter, we were up 3%. That was up from 5% third quarter from the prior year. We've had 14 consecutive quarters of local growth. So local has performed really well. We've talked about an initiative that we've been trying to hire more AEs when we came out of COVID. And obviously, we did cost reductions. We probably didn't fill our AEs quick enough. That initiative, I think, has helped us this year, and we'll continue that into next year. So I feel pretty good about that as well.

Great. And then for both national and local, are there any categories perhaps that you can call out that are lagging maybe more than expected or starting to accelerate more than anticipated?

Sure. I'll start out with the positive. From a category nationally, pharma, we talk about a lot. That's a category that performed really well in the third quarter and for the full year. Travel has done well, and that's been across both the Americas segment and airports. Telecom or telco has been strong in 2024, and that's probably more at the national level. Amusements have been strong. When I say amusements, that's kind of your theme parks. It's probably a little more of a local buy. That has been strong. So there's been a lot of areas. We've talked about technology has been up this year. So a lot of verticals that have been really strong, CPG. From a negative standpoint, we've talked about media and entertainment. Last year, it was down. The strikes didn't help. It hasn't bounced back as quick as we expected. So that's probably a vertical that has been kind of flat to down this year. We'll see how that plays out into next year. You had a couple of strong movies in the fourth quarter, which should help, and there was a lot of advertising for it, but the vertical has been down this year. As we get into next year, there seems to be a strong slate of movies. You also have the streaming services. They've kind of been a little bit up and down. So that vertical hasn't performed as well. We talked about insurance. I mean that's a vertical that 3, 4 years ago, that's been down tens of millions of dollars over that time period. But the way we've kind of counterbalanced that is with some of the vertical things that we've been doing as far as going after specific verticals. We've talked about pharma a lot, CPG, the beverage category where we have expertise that we'll either hire internally to help to sell those assets or to go into those verticals. So those are the ways that we're trying to offset some of the things like media and entertainment or insurance that has been down, but national has been a vertical has been a little bit lumpy up and down.

Great. And then just, David, I don't know if you've shared this or if I missed this. But in terms of media and entertainment, how large of a category is that?

I mean it's a little smaller now than it was a few years back. But it was -- I mean, we don't have any -- we only have a couple of verticals that are really a huge part of our book, but it was an important vertical to the business, especially on the coast, but it has been down. It's probably flattish this year, flat to down. It's an important vertical, but we've been able to offset it. And we'll see how that progresses into next year, as I said before, with the movie slate, how the streaming services goes. But it has been a vertical I'm probably not counting on as much as others as we look into next year.

Great. And then moving on to digital. Over time, what are you targeting that to represent as a percent of total revenue? And then what are really the areas of growth that will get you to that final target?

Sure. I mean you had to got to talk about when you think about digital and our digital transformation of our screens, I'll talk first about the Americas segment, and then I'll talk about airport separately. I mean I don't have a specific target in my head of how much revenue should be digital versus printed. But right now, roughly 35% of our America revenue and right now, I'm talking just from an Americas standpoint, is digital. And we have markets that that are above 50% from -- probably in the low 50s from a total revenue standpoint. Then on the flip side, we have -- obviously, we have markets that are below on that 35% threshold. I mean what's the upper limit? I don't know. Overseas, we have a few markets that are plus 70%. So I'm not going to sit here and say, oh, we want to get to X, but there's plenty of runway. When I talk about that 35% of revenue, it's only 5% of our assets. So there's a lot of runway from an asset standpoint to convert to digital to increase that amount. But I also don't want to sit here and say it's just digital. Our printed assets are valuable, and there are clients that really want that printed asset because you can own that location. It's your sign, it's kind of known as that advertiser in that space. So I think a balance of both is really helpful. Airports is probably a little bit different, and I talk about that in a little bit of a different tone is right now, roughly 55% of our revenue in the airports is digital, but -- and it's been growing over the last several years. But last quarter, printed actually grew faster than digital in the airports. And that just speaks to an advertiser may want to own that specific spot in an airport or they might do an experiential in an airport. So both sides of those products, I think, are really valuable to the consumer as far as -- to our advertisers. But as far as where will that number go in airports, I think it will grow over time. And the dynamic that's different in airports as to roadside, roadside, you're converting digital signs and you do that over time, a certain amount each year. There's a regulatory involved in each municipality as far as to convert to a digital asset from a printed. Where you get that increase on in airports is really when that airport comes up for RFP or you're renewing that contract. Usually after roughly a 10-year contract, it's either an RFP or a renewal, you're going to come to the airport with a program. And right now, and we like this, the airports want their airports to be a little bit more digital. So as you renew those airports, you're going to put in more digital assets. You'll probably have less assets in there, but they're worth more. I mean if you walk through an airport 10 years ago and you walk to that same airport today and if we were the advertiser in there, you probably have less signs today, there's probably more digital, but it's more valuable. I mean less clutter and there certain things that you can do within the airports, it's category exclusivity. You can do certain things, certain airports in San Jose are 100% digital. You can, you can sponsor certain sections of the airports. There's a lot of creativity that the airports team. They've done a really nice job over the last several years. And the proof is in their numbers over the last couple of years, the growth we've seen on airports has really been spectacular.

Great. And then kind of moving on to asset sales and kind of more of a strategic review topic. Just can you discuss your confidence in getting the EU North sale done and when? And at this point, what do you think is more of the delay if we?

I mean, look, we're committed -- I mean, we've said this, we're committed to selling our European assets, but I'd caveat it with -- it has probably taken longer than we would have wanted. But at the end of the day, those assets have performed really well. I mean we went to market back in 2022, and that's when the Ukraine war broke out, and we were selling the entire European platform. The war broke out. Everyone knows the story that happened with rates and the economy, and we kind of stopped that process. And then we went back out with our -- probably our tougher assets to sell, which was Europe-South, which some of those assets struggled during COVID, and we sold Switzerland, Italy and France. Spain was part of that as well, but that regulatory review, that's not going to go through with [indiscernible]. And when we sold those assets, we brought back that process earlier of '24 or late '23, and we went back to the process of selling European North with assets that were higher margin, producing more cash. When we put in our second quarter earnings release, the LTM on our European assets and the bottom line, second quarter LTM of this year was 10% -- roughly 10% on the top line, roughly 20% on the bottom. And I say that because we also want to get the value. I mean the -- those assets are performing well, not looking to get the highest multiple possible, but we want to get the right value for our shareholders. So that obviously held up the process to a certain extent. And then the business themselves, it's a complicated business. It's across many countries with a lot of different jurisdictions, and it's a collection of a lot of contracts. So the diligence from that standpoint is taking longer than expected. But we are committed to selling those assets, and I feel pretty good where we are in the process.

Great. I mean is that something that you do see as a '25 event or is it hard to say?

Yes. Look, we're not going to -- I mean, we sit here towards the end of '24. We said we're not going to give a specific date on it. But look, where we are today, I feel pretty good about it.

Great. And then the application of proceeds from that sale, can you just remind us kind of the waterfall there?

Sure. I mean that's probably a perfect question for Jason to go through.

Yes. So the proceeds from that sale, obviously, as David said, the sale has taken a little bit longer than anticipated. And I think when we were here last year, we were facing down the maturity of that -- the [ CCIBB ] bonds that are tied to those assets in 2025. So in March of this year, we actually went out with a maturity extension and converted that bond into a term loan. So that gave us until 2027 to figure that out. But we did put some special provisions in there in the event of the asset sale being successful, which is proceeds from the sale of any of the European assets are paid down at par. So not necessarily any call protections for asset sale proceeds. So that was a great outcome from that. So anyway, any proceeds that come out of any of the sales from the European assets that are material, obviously, carve-outs for small things that are just running our business, but they will be applied to the BB term loan. If there are proceeds left over from that, we would run those up the chain through CCOH. And that's where we kind of obtain a lot of our optionality, right? We have options under the CCOH agreements to reinvest in the business via CapEx or acquisitions. We have options to make first lien debt offer -- or sorry, an offer to first lien debt holders. That's a par offer to all of our secured debt holders. That's the term loan, the [indiscernible] the 9% and the 7.78%, which I think is another bond we had just recently refinanced before we were here last time. So we have lots of optionality when it comes to the application of those proceeds. And I think the way that we think through that is do we want to apply those proceeds to delevering on the numerator of the leverage or the denominator. And we're very thoughtful in that capital allocation process. It's a process that David is involved. I'm involved in. We have lots of folks that are very smart at our company that are also involved in that process. And we put a lot of time into how we allocate what I'll call capital that's available for debt repayment or investment, and we'll make that call when we get those proceeds.

It's a decision we want to make.

Yes, it's a decision we do want to make.

That's helpful. And once EU-North is completed, what's next? Kind of how do we think about additional asset sales? And then once primarily a U.S.-focused business, what then becomes the main focus for the business?

Sure. I mean Jason spoke to the European process. Obviously, Spain, which was sold -- was being sold to JCDecaux and regulatory concerns that JCD kind of backed out of that ideal, which was totally within their right. That is a country that we will market at this current time. That's something that will happen in 2025. We are also in the middle of the process in Latin America with our 4 countries that we have down there, which is Mexico, Brazil, Chile and Peru. But once those processes are over, I mean, it is the focus on our U.S. operations. And the goal was to sell those assets, utilize those proceeds, as Jason said, to pay down debt or potentially to invest in the business and then to really focus on our U.S. business. I mean we look at our -- and it's really to continue what we're doing. It's not like we haven't been running that U.S. business. It's -- yes, there'll be more focus and more management attention to it as the European assets and Latin American assets are sold, but it's really to continue the goal of creating that visual media landscape that we have for our clients is really to grow our asset base in the U.S. and MTA is part of that. And it's really to grow the U.S. business. It's a higher-margin business. It kicks off a lot of cash, obviously, pre debt service. But as we said last year is to be cash flow positive going forward. We mentioned last year on our calls that we're at a point now where our AFFO, if you include our growth or our growth CapEx that we're positive. So the goal is to get to positive cash flow and to really look at that capital structure to start paying down debt to continue growing that U.S. business. And from that point in time, as you start paying down debt, you're growing that U.S. business, your equity value, as you sell your European assets, you'll kind of -- you should get a multiple uplift. You'll have a little bit of a currency there. It's something to go after from a capital structure. But from a pure business standpoint, I mean, it's really to keep doing the things that that we have been doing it to focus on as far as our data and analytics, our RADAR platform, which enable us to do the pharmaceutical sales that we're doing. I talked about the verticals as far as pharmaceuticals and going after bed, beverage and automotive and things along those lines -- at a local level is to increase the amount of AEs that we have to grow that local business. At the end of the day, that's -- the margins on those businesses are high, and that's really what the strategy was to become a U.S.-focused business. It's kind of the opposite of what some companies are doing. It's more to be global, and we're kind of focusing to be a U.S. business. And the reason for that is the U.S. business at-of-home industry is very different than the businesses that we had overseas.

And then just shifting to free cash flow, capital allocation, and you touched on this, David, but what are some of the other drivers of free cash flow generation? And how are you envisioning some of the puts and takes, let's say, over the next couple of years out?

Sure. If you want to start, and I'll come pile over the top?

Yes. I think David's talked about the investments in technology is, I think, a big driver of our cash flow and investing in the top line, right? Our free cash flow generation, as we said on the last couple of earnings calls, is AFFO as being able to pay for both our maintenance CapEx and our discretionary CapEx is a huge turning point for us -- for that to be positive in the second half of this year and hoping to improve on that next year is really a big turning point for us, especially when you consider some of -- most companies have had to endure interest payments and interest rate hikes in the last year or so. We've been able to absorb that and still show positivity.

And to that point, not to end up, Jason, look at what our interest was a few years ago and where it is today, it's probably roughly $100 million increase in interest and the business was able to absorb that, and we're on that cusp of free cash flow positive. And as you start to pay down debt and your interest goes down, it's a really nice equation as you grow the business, if rates come down a little bit as we refinance, there's a really good story there.

Yes. And I think it is a snowball, right? Like given that we have a focus of delevering the business, I think we're all on the same page there. So I think I don't want to understate the emphasis of us being able to make that statement how important it is for us.

It's about paying down the debt, growing the business, growing that top line and all the initiatives we talk about, I mean, it's things that we're doing today. It's just -- it's to continue on that track, but also to amplify them.

Great. And is there any appetite to potentially repurchase any debt that's trading at a discount right now?

If it was a big discount, yes. I think when we did do that last year, it was a very small window. It was a time when the bonds -- the unsecured bonds were trading at a discount that we felt was enough to have a guaranteed return. Unfortunately, today, those senior notes are -- I think I checked earlier today, we're in the high 90s -- sorry, the low 90s, high 80s. So not a lot of opportunity for discount capture there. But look, less than par is less than par. So we will take what we can get. But there is an opportunity -- there are windows that we would have to abide by, right? Obviously, there's trading windows and blackout windows. We have to have free cash flow available. I think we are focused on utilizing asset sale proceeds to delever. We are focused on taking free cash flow and using it to delever in opportunistic ways. And again, whether that's investing in EBITDA or taking down and capturing discount. I mean there's lots of ways for us to do that. I think the important thing is that we are realizing that the business is spinning off or we are getting to a position where we are -- we can start evaluating that again, which is really important to us.

It's exciting. Definitely exciting.

And what do you see as kind of the right leverage for the business?

That is the million-dollar question. It's lower than it is today. I can tell you that. I think when we think about leverage and we think about our long-term goals, we've always set out for this plan since we've separated in 2019 to eventually fix our capital structure, eventually rightsize it, possibly become a REIT like our competitors. We set out on that journey, and we've had some hiccups along the way with things that everybody has been dealing with, which is a pandemic and inflation and rate structure. I don't know if any of that's changed. So I don't know if my answer would change that we do just want more -- less leverage. I don't want to put a target out there, but I would say that it's lower than it is today, but I do think that we will need to utilize all these tools that we have to delever, and we may need a little bit more or top line growth does really well. David sells a ton of ads. And -- but it is lower than it is today. I don't want to put a target.

Yes. We won't have a specific target. But yes, obviously, where we are today is it doesn't make sense. I mean the REIT question comes up, and that's probably something we're not doing in the immediate future. I mean the benefit of a REIT is really tax savings right now. We're not obviously a huge taxpayer at the moment due to our 163(j) election where we can deduct interest to a certain extent on real property. But when you look at it from a REIT standpoint, you got to be -- you look at our competitors in the 4% to 5% range, and we're not there. So that REIT conversion, that's down the road, but it's something that we do think about.

Great. That was actually the next question is that if.

I knew it was coming.

Actually, a side question, any consideration for ABS?

So we have had that discussion come up quite a bit. Two things. One, it has to make sense for us from a perspective of the breakage costs of our current capital structure, one. Two, there's a lot of leg work that has to go into setting up that structure. Those 2 things need to align. I'm not saying that we're rolling it out. I'm just saying we just need to scratch the surface a little harder to make sure it makes sense and to see if it makes sense. What we've seen today is that you may be indifferent, but the pricing would have to stay consistent for long enough for us to set up that type of structure. Right now, we have a term loan and one piece of secured debt that's callable. The rest of the debt either has some type of call protection or premium. If you were going to go down the route of setting up an ABS, you'd have a significant amount of breakage costs. So you have to make a lot of sense.

And then 2 quick kind of housekeeping questions. One, can you remind us of your secured capacity? And 2, what's the lowest cash liquidity balance you'd like to maintain?

So secured capacity, we think about this in a couple of different ways. We have roughly call it, $500 million and something of secured capacity today that we could tap into at any point in time. There are leverage qualifiers that would possibly allow that to go higher if we were to meet them. We do like to reserve some of that capacity and assume that our revolvers are 100% drawn, whether it be LC capacity or cash draws. So that does bring that number down a little bit. So that number would be more around the $250 million range. But we have not historically drawn on our revolvers or at least if we've drawn on them, we haven't had to use the cash and we've paid it back. So I would say the number is around, call it, $550 million with revolver capacity, it's around $250 million. With regards to liquidity, look, I feel like we have ample liquidity. The business itself, I think, given that we've streamlined the operations overseas, the amount of liquidity that we actually need to carry is a lot lower than it used to be because the volatility is no longer there in the event that we see softness in the economy, right?

Europe-South was definitely hurt us.

Europe-South was -- yes, it was an area where we had to reserve a lot more of liquidity just to have it on reserve. So I think the number -- cash number is very low, especially when we have as much access to the revolvers that we do today. I mean we have an entire ABL facility. We have a cash flow revolver. Both those facilities mature in 2026, but we're going to take actions to extend those. So I don't want to put a number on it, but I feel like we have ample liquidity for quite some time.

And then obviously, post-election, thinking about the regulatory environment, is there anything you're particularly focused on? And also just bigger picture, where do you see some of the bigger opportunities for the company?

I look from a regulatory standpoint, obviously, there's going to be a lot of change. But right now, like I really can't comment on what they're going to be because I think a lot of -- you really don't know. So I don't want to waste people's time comment on things along those lines. But as they come out, we're obviously watching it very closely. I want to be clear about that. But look, as I look into next year, I'm very excited about what's going on and kind of where we are in our strategic reviews in our assets overseas and Latin America and bringing those to execution and what that could do for our capital structure. I mean you started this call off with the MTA. I mean that just shows we're looking to grow that U.S. business. It's great to have those assets within the fold and I'm looking forward to us capitalizing on those as we get into next year. From a sales standpoint, talk about the vertical strategy. I feel like we've done a really nice job on the pharmaceutical vertical. I think we're making progress on the CPG vertical. We're doing the same thing with beverage. I think automotive is the next one. So really excited about that. I mean from a data and analytics standpoint, our RADAR platform, just that group just continues to enhance and evolve that program. You can see what it did from a programmatics -- I mean, from a pharmaceutical standpoint. Programmatic is another one that I think that there's ample growth and how that's going to evolve over time. I mean not even to mention probably our best investment would be converting our digitals and what that's going to do and the way we can sell our digital assets and there's multiple ways we're going to monetize and increase we're doing from a digital standpoint. So those are all the areas that just focused on and then tying it back to some of the things that Jason spoke about, even just from getting to free cash flow generation and growing the business. So super excited as we get into 2025 and the initiatives that we're working on. Still a lot of work to do and a lot of things to get done, but looking forward to what we can accomplish in 2025.

And just one really quick last one is, do you envision a good amount of consolidation or some consolidation within the industry more broadly as talked about by some of your peers?

Yes. I never think about it as consolidation. I mean I think it's kind of part of the industry where it's an industry where you have -- it's very fragmented in the sense that you have Lamar Outfront and ourselves as kind of like the big 3 players. And there's several players smaller than us that are in the industry as well. And then it goes down to the size of these companies go down to folks that may own like one or 2 boards. And -- but there's constant development within the space. Yes, I don't look at it as a year of consolidation. I just feel like -- when you came out of COVID, obviously, during COVID, M&A kind of shut down. And then as you came back, I think there was just pent-up demand and there was a lot of activity. In 2024, that kind of slowed down. And I can -- and I think valuations got really high, which probably was the reason why it slowed down. But yes, seeing what's out there and talking to folks, I could see more M&A in the out-of-home space to pick up in 2025.

Great. Well, David, Jason, thank you very much for being here.

You're welcome. Thanks for having us. Appreciate it.