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

All right. Good afternoon, everyone. My name is Cameron McVeigh. I cover advertising and media at Morgan Stanley. It's my pleasure to introduce Scott Wells, CEO of Clear Channel Outdoor Advertising, to the conference. Scott?

Thanks for having me here, Cameron. Good to see you.

Yes. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website. And with that, we'll kick it off. To start, Scott, how would you describe the current growth strategy for Clear Channel and your long-term growth outlook? And maybe what are your long-term investment priorities?

So we are in the midst of our digital transformation. There is an important asset-based part of that in terms of converting sites to digital structures as well as providing digital services, whether that's in how people book all the way through how we process contracts to data and analytics on the tail end. So that transformation is going well. We're moving along, making good progress. I think, from a priority perspective, having just gotten a couple of the areas we've been aiming to sell sold, we're going to be looking to deploy those proceeds to work down some of our debt and reduce our interest expense so that we can grow cash flow and AFFO. So that is the near term. I think the longer term is going to be a matter of continuing to grow our footprint in the markets that we're in, probably some through tuck-in acquisitions, but a lot through just organic growth and finding that right balance of amortizing the debt that we have, along with investing in ongoing digital transformation.

Got it. Great. Scott, implicit in your guidance is an expectation that growth in the Americas segment accelerates over the year, at least from the first quarter. Maybe to start, what gives you confidence in this acceleration in revenue growth?

Sure. Well, I think there's a few things. I think, first of all, we're onboarding a material set of assets in New York that I would expect, by year-end, we're going to have a full run rate. They're making good progress to that now, but between kind of normal seasonal and the fact that we've only had the contract a couple of months, that is ramping. I think there are things that we see in terms of deals on the horizon, bookings that we've already made, that give us confidence. I look particularly where we're sitting today here in San Francisco, and I'm pleased to say that San Francisco is going to be a tailwind for us this year. And as that ramps over the course of the year, I think that's going to be really helpful. It is our third largest market and the progress that the city is making and how it manages itself as well as the fact that advertisers are getting excited to be back in the mix here is going to make a big difference. And at the end of the day, when we guide, we have a pretty good view how the upfront laid in and where we are. We typically have about 60% of our business already on the books and we can see, from the pattern of that, that it's more back-end weighted than front-end weighted.

Got it. And on the SF point, is that tech ad spend primarily that's driving confidence there? Or are there -- is there any other specific vertical?

So tech is definitely an important part of it. But it's actually the fact that national buyers are looking to be back in the San Francisco market that is probably helping it. Those two are probably neck-and-neck in terms of helping things turn. I mean, it was interesting when I was here last year and I visited with the team, there was a ton of confidence about how things were turning in the city, and you were starting to see that progress. And I think, over the course of the year since then, we've done a really good job, along with other folks in different media, of demonstrating that San Francisco's back. And that is -- that's really exciting for us because it is a really important market.

Yes. That's great. Just from an industry perspective, when you think about out-of-home share of ad spend, is it better positioned today than it was pre-COVID 5 years ago in terms of just budget share?

So that's a good question. I think, depending on which measure you look at, you end up right around the same place. We're right around 3% of ad budgets. There has been a number of things added to the top line of advertising that were maybe not included in 2019. So it's a little bit of apples and oranges. But I think the important thing is, as a medium, we are better positioned than we were at that time. If you think about the ability for us to deliver insights on data and analytics, it is substantially better, the type of things we're able to do today versus 2019. If you look at our ability to actually talk to large national advertisers and get time with CMOs and have dialogue, that is materially better than it was in 2019. You look at the progress we've made in our local sales and some of the things that we've done around building our inside sales team to focus on the smallest accounts and things like that, we're much more agile. So the business as a whole is unquestionably better positioned than it was in 2019.

Got it. And in terms of, in the past, you've spoken to a share shift from linear TV and radio and gaining share from these traditional mediums. Are you continuing to gain share here, [ in this ]? And do you expect this to be a continued benefit to out-of-home broadly in '25 and beyond?

I do think that that is continuing. I think that, again, advertisers have so many choices today. Talking about blocks of share going from one media to the other media is always fraught. But if you just look at the kind of trend line relative to those other similar legacy media, we have definitely held up better. So I think that that is continuing.

Great. Let's switch to Clear Channel specifically. You're in the process of selling the remaining international assets. You announced agreements to sell Europe North, Mexico, Chile, Peru. It sounds like Brazil and Spain are next. What have you learned during the sales process? And how are you feeling about the remaining potential asset sales?

So I think this has been a long process. And so patience is something that is not necessarily a strength, but we have learned to be resilient. We've learned to cast a broad net. We've learned to -- we, fortunately, were good at this beforehand, but to have all our I's dotted and T's crossed because the level of diligence performed on these businesses has been extraordinary. I think the other thing that we've learned is that finding that good buyer is not always the most obvious thing in that, I guess it goes back to casting the broad net, but really looking at why the buyers are engaging and why the buyers are interested in trying to understand that is something that helps. As we look at Brazil and Spain, I think both of them are performing well and that should be a good factor in being able to get these transactions completed. And I can't put a time line on how those play out. But I think, when you look at it and you think about, okay, we are bringing in proceeds from Mexico, Chile, Peru, they're already in, we brought back some trapped cash from there, we're bringing back proceeds from Europe North, potentially some trapped cash remains to be seen depending on when that closes and how that all plays out, but there's potential there, we're going to run the business with less cash on the balance sheet because it's going to be a less risky business and a less capital-intensive business in aggregate than what it was with all of Europe and Lat Am, all of that is going to give us a nice pool of funds that we can use to start working down our various debt within our covenants and all of the kind of waterfall that we have to work, which should bring down interest expense, which should help on cash flow over time. So I think it's going to be a really good next few months as those proceeds start to flow and we're able to actually start bringing down the actual quantity of debt.

Great. And Scott, would you expect to see a material reduction to some of the corporate expenses when all of these international assets are sold? And then what other potential benefits do you foresee once you're able to sell off these international assets and focus more on the U.S. operation?

So I think, yes, we should be able to bring corporate expenses down. I think it's important to look at our full year '23 versus our full year '24. You can already see, with the discontinued ops, that we've pulled more than $30 million out from just the assets that are being sold. We'll now embark on the zero-based budgeting exercise that we've been talking about, where we'll kind of build back up what we need to run the business as it remains. And that's going to -- it's not going to happen overnight because we have to manage the different transition services agreements. We have to continue to file taxes in all the jurisdictions until those get sunset. But you should see reductions in audit expense. You should see reductions in a number of different overhead categories. So we are not done with the $30-some million that's already come out. But what that's going to take -- and that will be a real focal point of our Investor Day that we're talking about in September, where we really drill into what future corporate expenses look like for the business. I think, operationally, what will be great is we're going to be able to focus all of our energy on optimizing the highest margin part of the company, the America roadside assets and the airports businesses. We're going to be able to put all of our attention on that. We're going to be able to put attention on how do we monetize our inventory at the highest possible level? What are some creative things we potentially can do on that front? What are creative things we can do to leverage all of the great work we're doing in how we manage assets, how we measure campaigns? So I think there's going to be a chance for a lot of innovation and a lot of creativity as we get focused just on the U.S.

That's great. Do you have a date for the Investor Day?

I don't know if we've published a date, but we've been talking sort of end of summer. September-ish is the placeholder I'd give you for right now. We'll get that out there just as soon as we have one confirmed.

Great. Scott, the prospect of selling direct to advertisers has come up as a potential growth lever. I guess how would you characterize Clear Channel's capabilities in the space? And what type of growth might that unlock going forward?

Yes. So it's a really important part of our growth story overall. Those of you who came to our Investor Day back in '22, we talked about our client solutions team, which was an organization we put on the field a couple of years prior, and some of the progress that they were making. That client solutions team was focused on going direct to advertiser. And what it really pointed to, for us, along with some of the things we learned working with RADAR, was that, to really engage the advertiser, you had to have people who had domain knowledge and you had to have data and analytics that were consistent with how that particular vertical thinks about ROI. And so that has led to investments we've made in beverages, pharmaceuticals. The automotive space is the most recent one that we're just starting to work our way through. And I think we've gotten considerably better at this than we were 3 years ago. The gating factor on it is that, to do it right, you have to have all three of the pieces, the people with domain knowledge, the insight into the data and analytics and the access to the clients. And that is best done in a pretty methodical way. And so I don't know how many verticals we're going to try to tackle at any given time, but we're sort of thinking we've got kind of a stack rank of 8 or 10 that we want to get to. And I think success on this, if you just pull the camera way back, we probably generate 50% of our local money truly direct where there's no agency involved at all. That won't happen with the largest advertisers because, very often, they're going to have the agency involved to actually execute the campaign. But I think it is very reasonable for us to think about us growing our national base to where a 1/4, 1/3 in a longer-term horizon, half of our revenue might be generated that way. This is going to be something we're going to drill into at the Investor Day as well to just demonstrate the progress that we've made, because I think it's one of the areas that holds the most promise in terms of really figuring out how to make National a nice, steady grower as opposed to being a little bit more episodic.

Got it. Okay. That's helpful. There's been an investor focus on your leverage levels, and we touched on this at the start, but I'm curious. Your road map to delever and what leverage you think you might need to ultimately convert to a REIT?

Yes. So I think, for us to convert to a REIT, we're going to need to be probably about half as levered as we are right now, give or take, somewhere between 4x and 6x. I think, as we get closer to that 6x number, the possibility of doing something to kind of push across it is unlocked and as possible as you get there. But obviously, we have to -- to get to 6x, you have to go through 9x, 8x, 7x, en route. And I think what we're doing with the Europe transactions is going to be more or less neutral when the dust settles on all of these, maybe a little leveraging. But as we start to pay down that debt, reduce that quantity, bring the interest expense down from the low $400s million into the high $300s million to the mid $300s million, to the low $300s million, it's a step-wise process as we go. And we have a variety of tools that we can use and certain things that will help as we make progress working our way through. There are levels within our structure that, if we bring our debt below certain thresholds, it gives us the ability to issue more senior debt. And so given that the spread between our senior debt and our junior debt is 400 basis points, every $100 million of senior debt that you're able to do instead of junior debt is meaningful. And we're going to be -- we have a very good treasury team. We've demonstrated a good track record of being able to manage this particular debt pile. And our expectation is that, as we pay things down, as we get cash flow positive, rerating can be a tailwind at some point in there, and then the ability to potentially have more senior in the mix. And there are other things. Certainly, people talk to us all the time about different creative things we can do with like an asset-backed approach. We're going to evaluate. This is some of what we're going to benefit from, not having the global footprint. We'll be able to focus our energy so that we can give -- does asset-backed securitization make sense for our business the way that we're structured? Is there something akin to that, that would make sense for us to do? That wouldn't necessarily be adding any debt. It would be kind of a refinancing type of thing, but perhaps refinancing at a lower rate because the real home run here is anything that's going to grow cash flow.

Got it. Okay. Scott, 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 U.S. assets?

So in terms of buying, our focus is reducing the debt pile. I think, if we find tuck-ins that are particularly compelling, we would consider that just out of -- not at anything like a large-scale acquisition program. But there are certain assets that, if they were to come available, they're such a good fit with us, it would make sense for us to do that. It's not going to be -- that wouldn't be a big part of it. In terms of asset sales, I think our answer on this has been pretty consistent over the last few years. As long as our leverage is at the level that it's at and tax implications are what they are, it's hard to picture us making a lot of progress selling assets at what we think the market would pay, paying the government, and then kind of being more or less neutral in terms of you're not actually delivering. You're just shrinking the size of the business. So the fact that these assets are very marketable, I think, is part of the reason why our credit is so sanguine. I would like to get our equity to be similarly sanguine as our credit is, just a pitch out there. And we're working on making you all comfortable in that regard. But I don't think that -- look, if somebody comes and offers a phenomenal price, I know I've got people in the industry who like to speculate about buying pieces of us. Just put a really great price in front of us and maybe we would consider it. But it's hard to picture at the kind of market multiples we've traded things before with taxes and everything else.

Got it. Okay. I wanted to ask about the state of the ad market. On the last earnings call, you mentioned you're seeing strength in local advertising, while National remains a little soft. Maybe if you could just discuss how conversations with advertisers are going. And you hit on the level of visibility in the past, but where you're at currently?

Yes. I mean, I think -- I'm not 100% sure I agree with the characterization of National as soft because I look at us having had double-digit growth in airports for the better part of the last couple of years in National, and that's certainly not soft. I wouldn't say it's a characteristic of the National market that it's soft. It might be a characteristic of how we relatively report our numbers versus how other data points might be reporting their numbers that causes that impression. But I'd say the dialogue, I mean, it has been quite positive, the upfront that we did. And again, we don't do upfronts like TV, but we kind of have a selling season between the fall and the winter where we re-up our perms and do a substantial part of our book. That has been very positive, and we had some good, new advertisers come in during that process. And I think we are very encouraged that the year is shaping up well. We think we're going to see growth in National as well as Local. There's certainly nothing that we're picking up right now that suggests the Local market is getting softer or anything like that. But we are also doing a number of things like our inside sales team, like the investments we've been making in growing our Local team that are all built to help facilitate that and get it to continue. So we feel good about the revenue outlook.

That's great. I guess just on that point, would you have an expectation for one to grow faster than the other over '25 based off what we've seen in the past couple of months? And I guess what -- in your view, what's the key driver for each of those?

So it's not how we forecast our business. So it's not something I have a quick a quick and easy off-the-shelf number I can give you. I think the driver for Local is there's a certain macro, and I know a lot of people at this conference are getting worried about the macro right now. I know the market is concerned, but I think there is a macro overhang that you have to look at that, as long as you're in a good place on that -- and again, everything that we're seeing right now says that we are, in fact, in a good place on that. People are placing campaigns. There's not a lot of talk of, I'm going to hold off and do this later. That is what you have at the local level. At the national level, there's a few things that come together. First of all, it's the big national drivers is tech spending, is media and entertainment spending, our financial services spending. Those are the kind of -- some -- we'd like to see more packaged goods. But if you define packaged goods broadly into beverages and alcoholic beverages, there are -- that's an area to be looked at. So how are they spending? There's how is the programmatic market evolving and how is that building that you want to take into account? And right now, that looks good. On the tech and media entertainment, those both look good for this year. The packaged goods are a little bit more of a question mark, but not because of any specific thing. It's more the idiosyncratic things of the individual companies. So Overall, again, we feel like the demand environment looks positive across the board from where we're sitting right now.

Good. Okay. Good to hear. When we've spoken in the past, it seems like pharma is another key vertical that has a lot of potential to drive future growth. How are you internally thinking about the opportunity there? And what needs to go right or what needs to happen to gain more share?

So pharma is an enormous opportunity. It's the single biggest advertising vertical in the U.S., of which a good portion is addressable by out-of-home. In terms of what has to go right, our experience with pharma has been the data and analytics part is absolutely critical. They are very sophisticated in their ROI modeling and they need to see the medium really supporting their models because they have very specific models for each type of drug. And we've had very good success in that. So I think we feel very well positioned there. What has happened within pharma is our first client took probably 2 years to become a committed client. They did a number of tests. Then they told some of their friends within their broader company. And we started having multiple drugs within that one company. During the course of last year, we started to branch out to where we were in deep dialogue with a number of companies. And now we are building pipeline with a number of companies. I think what has to happen here is that we keep the course and that we continue to see, in the analytics, the kind of ROI we've seen in the early stages. And if that were to happen, I think that this could be a very important vertical for us 2 or 3 years from now. But they are very methodical. You have to work within their budgeting cycle, and you have to get in at the right time and get that trial at the right time, pull the data out, show the ROI and then get the renewal. And what happens, it usually takes a couple of years from when you've gotten onboarded with a drug to where you're part of the routine plan. And that's where we are with a couple of drugs at this point. We would like to have that be 10 or 12, not 1 or 2.

Right. Great. Okay. Let's switch gears to talk about some of the RADAR solutions that you have. You've spoken to it in the past. Maybe what does it do for advertisers? And is it able to provide solutions similar to other media?

So we designed it expressly to be consistent with the kind of tools that people use in other media. So what RADAR is, for those of you not familiar with it, it is a suite of tools that we use for planning, for attribution and for actually extending campaigns and ultimately integrating. So the most -- the most extreme use of RADAR is where an advertiser gives us their segment data. We onboard it. We score our signs based on what they care about. And then they use that to decide what they want to buy and how they ultimately are going to -- how they're going to be able to measure the campaign. It's central to how we're doing pharma. So in pharma, we are actually onboarding their data in a clean room environment. It's all privacy compliant. And they are the ones actually scoring our results based on the different data providers that they use. And they might be using it to look at specialty doc visits. They might be using it to look at scrip uplift. But they're able to do that because we're able to integrate our exposure data with their ROI models. So it's a very important enabler to the growth that we're talking about.

Got it. Okay. And digital, I think, now accounts for 40% of U.S. revenue. What would you expect long-term digital share to represent? And maybe how do you think about the growth contribution from digital boards?

So the growth contribution from digital is really important. That's a key element in our ongoing conversion process. We have markets -- I mean, we have markets that are 0 because they just don't allow digital boards. But of any markets where we've been able to develop digital, we're anywhere from 20% of the revenue to close to 60%. This is in the U.S. In the U.K., we're north of 70% digital. So I think the -- if we're at 40% now, getting to 60% or more is not unreasonable if we can continue to evolve regulations, because that's really the key thing for where we're at, at this point. There are 4 or 5 cities that we are sitting less than 30% digital revenue because the city is keeping a cap on how many digitals we're able to convert. We are constantly working with those cities to rethink that and to see reasons why they should work with us and allow us to expand the digital footprint. That's what will cause step functions from where we are right now. Otherwise, it will just continue to be kind of a steady part of the growth story.

If regulations weren't an issue, what would the ideal run rate of digital conversions be?

It's a really hard question to answer because the thing you run into next is people costs. And so actually getting a site permitted and developed, doing what you have to do with the landlord, doing what you have to do with the city -- because even if it's regulatory allowed, you have to make sure that it can hold the weight. You have to make sure that it's in a place that's not going to be visible to certain neighborhoods, whatever the case may be. There are many, many details you have to work through in the conversion and they're people intensive. What we would do were we to get 1 of those 4 or 5 cities I described is we would pull people from other markets to go help that market and probably hire lobbyists and outside counsel to help accelerate. That's what we've done when we've opened cities in the past in order to accelerate through the early development stage. I don't know -- if I just snap my fingers and didn't have regulations, I don't know that we would suddenly proliferate everywhere, but we would certainly, with those 4 or 5 cities, spend the money to get to where we're closer to 50%, 60% digital revenue for sure.

Got it. Okay. We have a few minutes left. See if there's any Q&A. Got one over here. Yes, let's wait for a mic for the webcast.

Yes. So the sale of the Northern European business is -- the multiple looked a bit loaded. And it didn't delever your business. So why did you sell it in such in one chunk and not sort of slice it up in different markets [indiscernible]?

So first of all, I think, if you look at the publicly trading comps, it's a pretty good multiple that we got. So I think I'm not going to be defensive about the multiple because, especially in the environment, I feel good that this was a win-win for us and the buyer. The reason not to do it in multiple chunks is that you have -- the way that business is configured, you have kind of a very large chunk of business in the U.K. and then you have 4 countries that are scale but not big enough that they'd be stand-alone businesses. And then you had a half dozen countries that are not -- so you've got 4 or 5 that could be stand-alone businesses, but they're not scale stand-alone businesses. And then you've got 4 or 5 countries that are just not. They wouldn't be good stand-alone. So there's a real logic to that cluster of assets. And it would have been a lot of gymnastics managing transition services and things along those lines. The reason not to be -- if we had a better balance sheet, there's no reason necessarily that we would have sold Europe. The reason that we sold Europe is that, with our balance sheet, the risk involved, because of the fixed nature of the contracts relative to the upside because they're so capital intensive, it just didn't make sense for a company as levered as we are. Us being leaner and simpler is going to be a much healthier configuration for this business. But I mean, we were honestly very clear from day 1 that we never thought we would delever the business. And frankly, the way we're valued by our equity investors, I don't think any of our equity investors had a big multiple necessarily against Europe. So I feel like this is a good outcome for both the creditors and the equity investors. And it's on us to demonstrate all the benefits of being focused, which we're aiming to do. Thanks for the question.

We have another one. We have another one.

How much of the digital revenue is programmatic? And do you have a programmatic strategy? What is it -- what technology service providers are you using for that programmatic strategy?

Sure. So we've not disclosed our programmatic. Of our digital sales, it is in the 10% ZIP Code. But again, we have not disclosed it in detail. And I think the right way to think about it is not just programmatic, but kind of anything automated that you're doing. And that gets to your second part of your question, which is we are in the process of implementing a new content server. We actually are going from a homegrown system to Vistar. So we are very happy that T-Mobile, the new acquirer of Vistar, is committed to software. So we anticipate continuing to implement that in our stack. And the technology that we've got enables automated sales to people other than SSPs. So that's going to further enhance our ability to do automated selling. I would think, 5 years from now, half of digital revenue is going to be automated in some form or fashion. And as the number gets bigger in programmatic -- I mean we've really wrestled with what to disclose because our goal is not just anything SSP, sold. We want it to be sold on impressions in an automated way, which is a broader universe than just what's programmatic.

Great. And what's the uplift as you move to digital and the ROI on converting the sites, sort of typical growth?

They've been pretty consistent on this in terms of you get about a 4x to 5x revenue uplift on the side. The cost for building them varies a lot depending on where you are and what bells and whistles you have to put in, depending on the location. But our track record on IRRs have been high 20s% to the mid 30s%. I mean, frankly, sometimes up into the 40s% for some markets. It's a very good investment. It's an investment that has been stable over time. And we are absolutely pathological in watching those IRRs and making sure we're achieving them, making sure that they're paying out and so far, so good.

Great. Maybe I think we're out of time. Any closing remarks?

No, I'd just tell you we're excited. We feel like we're at an inflection point. Getting these transactions done is going to free up a lot of brain space for us to work on the core thing, which is that debt stack. And we're excited to be able to get our energy deployed there. And we're excited to start chipping away at it. Even if it's not deleveraging, it's moving in the right direction from a quantity perspective, and we're going to be bringing that interest expense down. So we're excited.

Scott, thank you so much.

Thank you, Cameron. Great to see you.