Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) Q2 2023 Earnings Call Transcript

Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) Q2 2023 Earnings Call Transcript August 7, 2023

Operator:

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Clear Channel Outdoor Holdings 2023 Second Quarter Earnings Conference Call. My name is Bruno and I’ll be operating your call today. [Operator Instructions] I will now turn the conference to your host, Eileen McLaughlin, Vice President of Investor Relations. Please go ahead.

Eileen McLaughlin: Good morning and thank you for joining our call. On the call today are Scott Wells, our CEO, and Brian Coleman, our CFO. They will provide an overview of the 2023 second quarter operating performance of Clear Channel Outdoor Holdings, Inc. and Clear Channel International BV. We recommend you download the earnings conference call investor presentation located in the financial section in our investor website and review the presentation during this call. After an introduction and a review of our results, we’ll open the line for questions. And Justin Cochrane, CEO of Clear Channel UK and Europe, will join Scott and Brian during the Q&A portion of the call. Before we begin, I’d like to remind everyone that, during this call, we may make forward-looking statements regarding the company, including statements about its future financial performance and its strategic goals.

All forward-looking statements involve risks and uncertainties, and there can be no assurance that management’s expectations, beliefs or projections, will be achieved or that actual results will not differ from expectations. Please review the statements of risk contained in our earnings press release and our filings with the SEC. During today’s call, we will also refer to certain performance measures that do not conform to Generally Accepted Accounting Principles. We provide schedules that reconcile these non-GAAP measures with our reported results on a GAAP basis as part of the earnings presentation. Also, please note that the information provided on this call speaks only to management’s views as of today, August 7, 2023, and may no longer be accurate at the time of the replay.

Please turn to Slide 4 in the earnings presentation, and I will now turn the call over to Scott.

Scott Wells: Good morning, everyone and thank you for taking the time to join today’s call. We delivered consolidated revenue of $636 million during the second quarter, excluding the movements in foreign exchange rates, which was in line with our guidance and up 3.5% as compared to the prior year, excluding the movements in foreign exchange rates and the sales of our former businesses in Switzerland and Italy. In addition, since our last quarterly call, we made notable progress on several facets of our strategic plan. Our results continue to be led by our digital assets, which accounted for 40.8% of our consolidated second quarter revenue and increased 7.3% compared to the prior year, excluding movements in foreign exchange rate and sold businesses.

I’d like to thank our global team for their efforts running our business despite the ongoing strategic reviews and a more difficult operating environment. Your focus remains a critical ingredient for our success. In our America reporting segment revenue was up compared to the prior year with higher revenue in most markets, partially offset by continued weakness in San Francisco. We continue to make inroads with new advertisers and categories during the quarter, particularly pharma due in large part to our investments in data analytics. In addition, our airports reporting segment rebounded robustly as advertisers tapped into our dynamic platform to target millions of consumers on the move, and we saw continued strength in several markets in our Europe north segment, including in Belgium and the UK.

At the heart of our strategy, we remain committed to becoming a visual media powerhouse by understanding our customer’s needs, strengthening our digital capabilities and securely tapping into the right kinds of data to help our clients plan, measure and optimize their campaigns. We continue to believe this is elevating our role within the advertising ecosystem and increasing the range of advertisers we can pursue. In a first for our industry, we recently entered into several partnerships aimed at integrating our radar data platform with best in class data clean room or DCR applications and services to enable brands to utilize first party data matching for out-of-home in the U.S. The marketers that leverage DCRs and the budgets that fund these first party data-driven programs typically are separate from out-of-home budgets and many users of DCRs are not traditional buyers of out-of-home.

We believe these integrations will open more doors for us with digital first brands by allowing them to leverage our scale and creative impact to run the most relevant ads and understand and analyze audience behaviors, all in a privacy conscious and secure manner. Since our last call, we also took several important steps with regard to our plan to optimize our portfolio. We closed on the sale of Italy on May 31st and we expect to close on the sale of Spain in 2024 upon satisfaction of regulatory approval and other customary closing conditions. We also entered into exclusive discussions to sell our business in France and are aiming to complete the proposed transaction in Q4 20 23 subject to an information and consultation process with Clear Channel France’s employee works counsel, execution of a share purchase agreement and the satisfaction of customary closing conditions.

We were able to move forward with these agreements during a difficult environment for transactions including Titan credit markets and the increased cost of financing. I’d like to thank our team and advisors for their diligence and hard work in executing on our business sales efforts. We expect the sales of our businesses in Switzerland, Italy, as well as the anticipated sale of our business in Spain, will generate approximately $175 million in gross total proceeds if and when completed. These transactions together with France will enable us to exit markets that have historically demonstrated a greater degree of volatility in our portfolio, which we believe will improve our risk profile and elevate our ability to drive positive cash flow. Consider that our remaining European businesses, encompassing our Europe North segment, on a trailing 12 month basis, as of June 30, 2023, delivered revenue of $577 million.

Segment adjusted EBITDA of $102 million and invested $34 million in CapEx, consistent with the vision we laid out in our Investor Day last September. The European markets which currently comprise our Europe North segment have delivered higher margins and better financial metrics overall have a higher degree of digital penetration and have less volatility than the businesses in our Europe South segment. And importantly, we believe Europe North is in a stronger position to meet its own cash needs. Our Board is continuing to conduct its review of strategic alternatives for our remaining businesses in Europe, as well as evaluating a range of other strategic opportunities to enhance value. We remain focused on delivering profitable growth, strengthening our balance sheet and further demonstrating the operating leverage of our model.

In addition, we intend to meaningfully restructure our corporate expense as our footprint simplifies. Now turning to our outlook, looking ahead, our visibility is somewhat reduced, but we are not seeing an uptick in cancellations and we remain within our annual financial guidance ranges after adjusting for sold businesses. However, we did tighten the high end of our guidance range. We’re closely monitoring business trends and reducing costs and CapEx as appropriate while operating in a disciplined manner as we execute on our strategic plan. There were in fact benefits from this cost discipline in our Q2 results. Brian will go through the guidance in detail, and as you might have seen in the earnings release, we are expanding our guidance by providing revenue guidance for America, Airports and Europe North for the third quarter and fiscal year in addition to the consolidated guidance we have provided in the past.

In our America segment, we started to see the market softening in June resulting in a slightly lower Q2. This trend has continued into the third quarter and is mostly national and includes media and entertainment, auto and technology. This is disappointing given the strong start of the year we had with our upfront, but what we are hearing from certain advertisers and agencies is that some brands are pausing with an intention to spend in the fourth quarter, so we remain optimistic. As anticipated, our airports business rebounded strongly and we’re seeing continued momentum with the potential for revenue to grow at an even faster rate in the third quarter as compared to the prior year than it did in the second quarter. In Europe North currently, we are seeing continued strength in the UK, our largest market driven in part by the strength of our digital footprint, somewhat offset by tougher comps in certain markets due to the timing of the COVID-19 rebound last year.

As we execute our plan, we are keeping a close eye on advertiser sentiment while operating in a disciplined manner, and with that, let me now turn it over to Brian.

Brian Coleman: Thank you, Scott. Good morning everyone, and thank you for joining our call. Please turn to Slide 5. As Scott mentioned, the second quarter reflects a mix of results, but overall our second quarter consolidated revenue was in line with our guidance. As a reminder, during our discussion of GAAP results, I’ll also talk about a results excluding movements in foreign exchange rates and non-GAAP measure. We believe this provides greater comparability when evaluating our performance. Direct operating expenses and SG&A expenses include restructuring and other costs that are excluded from adjusted EBITDA and segment adjusted EBITDA. And the amounts I refer to are for the second quarter of 2023, and the percent changes are the second quarter 2023 compared to the second quarter 2022, unless otherwise noted.

It has been a busy period since our last call with the sale of Italy, our agreement to sell Spain and our entry into exclusive discussions on France, including Switzerland, these are all the businesses within the Europe South reporting segment. When we report our third quarter results, all businesses within Europe South are expected to be considered discontinued operation in all periods presented. In addition, when I refer to results excluding sold businesses, I am referring to Switzerland and Italy. The sales of Switzerland on March 31st and Italy on May 31st are impacting comparability to prior periods. Now onto the second quarter reported results. Consolidated revenue for the quarter was $637 million, a 1% decrease. Excluding movements in foreign exchange rates, consolidated revenue for the quarter was $636 million, in line with the second quarter guidance we provided in May and within the guidance range of $629 million to $654 million after adjusting for the sale of Italy.

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Lastly, excluding movements in foreign exchange rates and sold businesses, consolidated revenue was up 3.5%. Net loss was $37 million, an improvement over the prior year’s net loss of $65 million. Included in net loss was $19 million related to an increase in our legal liability for the previously disclosed investigation into our former joint venture in China, which relates to conduct occurring prior to our separation. Adjusted EBITDA was $146 million, down 10.9%, excluding movements in foreign exchange rates and sold businesses adjusted EBITDA would be down 7.2%. AFFO was $31 million in the second quarter. On the Slide 6 for America segment second quarter results. America revenue was $288 million, up 0.9%, reflecting higher revenue in most markets partially offset by the impact of the weakness in our San Francisco Bay area market.

Digital revenue, which accounted for 34.2% of America revenue was up 2.4% to $98 million. National sales, which accounted for 35% of America revenue were down 1.5%. Local sales accounted for 65% of America revenue and continue to deliver growth up 2.2%. Direct operating SG&A expenses were up 4.4% to $158 million. The increase is primarily due to a 6.8% increase in tight lease expense to $86 million driven by lease renewals and amendments, including the large lease renewal that has been creating a headwind since Q4 of 2022, as well as lower rent abatements. Segment adjusted EBITDA was $130 million, down 3.3%, but the segment adjusted EBITDA margin of 45% down from Q2 2022. The renegotiation of a large existing site lease contract I just mentioned and the decline in rent abatements resulted in the margin declining this quarter as compared to the prior year.

Excluding rent abatements and the impact of the lease renewal, the margin would have been at pre-COVID levels. Now please turn to Slide 7 for a review of the second quarter results for airports. Airports revenue was $71 million, up 16.3%. The robust increase in revenue was driven by increased demand due to recovery in air travel after COVID-19 and the timing of campaign spending. Digital revenue, which accounted for 59.3% of airports revenue was up 22.5% to $42 million. National sales, which accounted for 59.7% of airports revenue were up 31.6%. Local sales accounted for 40.3% of airports revenue and we’re down 0.8% due to exiting a few regional airports. Direct operating and SG&A expenses were up 18.1% to $55 million. The increase is primarily due to a 24.7% increase in site lease expense to $43 million driven by lower rent abatements and higher revenue.

Segment adjusted EBITDA was $16 million up to 10.5% with a segment adjusted EBITDA margin of 23%, which is a bit elevated compared to normalized levels due to rent abatements. Next, please turn to Slide 8 for a review of our performance in Europe North. My commentary on Europe North and Europe South is on results that have been adjusted to exclude movements in foreign exchange rates. Europe North revenue increased 4.5% to $152 million, driven primarily by higher street furniture revenue. Revenue was up in most countries, most notably Belgium and the UK and Denmark, partially offset by lower revenue in Sweden and Norway. Digital accounted for 52.8% of Europe North total revenue and was up 6.2% to $80 million. Europe North Direct operating and SG&A expenses were up 6.9% to $126 million.

The increase is due to higher rental costs related to additional digital displays and higher labor costs and electricity prices. In addition, site lease expense was up 3.4% to $60 million, mainly driven by higher revenue and new contracts. Europe North segment adjusted EBITDA was down 5% to $26 million and the segment adjusted EBITDA margin was 17.4% down from the prior year, primarily due to the increase in expenses that I just mentioned. Now on to Slide 9, for our performance in Europe South. Europe South segment revenue decreased 20.6% to $104 million. Sales of our former businesses in Switzerland and Italy resulted in an FX adjusted decrease of 28 million. Additionally, higher revenue from Spain related to the continued recovery from COVID-19 was partially offset by lower revenue from France due to weaker demand as a result of civil unrest and protests, as well as billboard takedowns.

Europe South segment adjusted EBITDA was $2 million. Moving on to CCI B.V. on Slide 10, Clear Channel International B.V. referred to as CCI B.V. is an indirect, wholly owned subsidiary of the company and the issuer of our 6 and 5, 8 senior secured notes due 2025. It includes the operations of our Europe North and Europe South segments, as well as Singapore, which following the changes to our reporting segments in the fourth quarter of 2022 is included in other. The CCI B.V. revenue decreased 6.8% to $261 million from $280 million. Excluding the $0.1 million impact from movements in foreign exchange CCI B.V. revenue decreased 6.9% driven by the sales of our former businesses in Switzerland and Italy, which resulted in an FX adjusted decrease of $28 million.

This was partially offset by higher revenue for many of our remaining European businesses as I just mentioned. Singapore represented less than 2% of CCI B.V. revenue for the three months into June 30th, 2023. CCI B.V. operating income was $13 million compared to $16 million in the same period of 2022. Now moving to Slide 11 and our review of capital expenditures. CapEx totaled $37 million in the second quarter, a decrease of $9 million over the prior year due to timing. On to Slide 12, our liquidity was $456 million as of June 30th, 2023, down $89 million compared to liquidity at the end of the first quarter, due to lower cash and cash equivalents partially offset by higher availability under our credit facilities driven by an increase on our total borrowing limit.

As you may know, in June, we were able to amend and extend our revolving credit line, which we believe strengthens our liquidity profile given the significant market volatility and tightened credit availability. During the second quarter, cash and cash equivalents declined by $107 million to $233 million driven by net operating cash outflow and capital expenditures. The net operating cash outflow was driven by cash, paid for interest and other changes in working capital, primarily accounts receivable. Our debt was $5.6 billion as of June 30th, 2023, basically flat with March 31st. Cash paid for interest on debt was $130 million during the second quarter, an increase compared to the same period in the prior year due to higher interest rates in our term loan facility.

Our weighted average cost of debt was 7.4%, a slight increase compared to the weighted average cost of debt as of March 31st, 2023 and as of June 30th, 2023, our first lien leverage ratio was 5.52 times, a slight increase as compared to the March 31st, 2022. The credit agreement covenant threshold is 7.1 times. Moving on to Slide 13 and our guidance for the third quarter and the full year of 2023. As you can see on this slide, we have expanded our revenue guidance for both the third quarter and the full year to include revenue guidance on America, Airports and Europe North. Spain and France are still in our consolidated guidance along with other, but Europe South is expected to be considered discontinued operations when we report our third quarter results.

And therefore, we’re not providing separate guidance, all consolidated guidance and Europe North guidance excludes movements in foreign exchange rates, with the exception of capital expenditures and cash interest payments. For the third quarter, we believe our consolidated revenue will be between $570 million and $600 million. We expect America revenue to be between $273 million and $283 million a decline compared to the prior year, driven primarily by softness in national and Airport’s revenue is expected to be between $73 million and $78 million, a 17% to 25% increase over the prior year, potentially offsetting the decline in America. Europe North revenue is expected to be between $132 million and $142 million. Based on the average foreign exchange rates in June, 2023.

There could be an FX benefit in a quarter of about 5% or $7 million. Now that we are halfway through the year, and based on our current visibility, we have updated our full year guidance previously reported in May to reflect the sale of our former business in Italy, and to tighten the high end of the ranges provided. For the full year, we expect consolidated revenue to be between $2.465 billion and $2.535 billion. America revenue is expected to be between $1.095 billion and $1.115 billion. And Airport’s revenue is expected to be between $285 million and $295 million. Europe North revenue is expected to be between $590 million and $610 million. On a consolidated basis, we expect adjusted EBITDA to be between $522 million and $552 million. AFFO guidance is $62 million to $82 million.

Capital expenditures are expected to be in the range of $163 million and $183 million with a continued focus on investing and our digital footprint in the U.S. Additionally, our cash interest payment obligations for 2023 are expected to be approximately $416 million an increase over the prior year as a result of higher floating rate interest on our Term Loan B facility. This guidance assumes that we do not refinance or incur additional debt. Lastly, as part of our review of strategic alternatives for our remaining European businesses and assume disposition of those businesses, which is uncertain, would be expected to ultimately reduce our corporate expenses by at least $30 million annually. And now let me turn the call back over to Scott for his closing remarks.

Scott Wells: Thanks, Brian. Looking ahead, we continue to be optimistic about our outlook. Within the U.S. the America national business remains challenged while local continues to grow and Airports is experiencing strong growth. In Europe, Europe North continues to deliver solid results. We remain within our annual financial guidance ranges after adjusting for sold businesses, as well as tightening the high end of our ranges, and we’ll take further steps to address our costs if necessary. Additionally, assuming a stable macro environment and continued progress in the execution of our strategic review process and successful application of resulting net sales proceeds, we believe the company will reduce its indebtedness. And in 2024, meaningfully grow AFFO.

Further and as previously mentioned, we anticipate that the assumed disposition of our remaining European businesses would enable us to lay out a timeline for material corporate cost reductions. We continue to believe these actions will ultimately drive value for our shareholders. And now let me turn over the call to the operator for the Q&A, and Justin Cochrane will join us on the call.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Ben Swinburne from Morgan Stanley. Ben, your line is now open. Please proceed.

Ben Swinburne: Thank you. Good morning. Hi guys, hope you’re doing well. Scott, may be just one for you. As you think about the categories that are under pressure that you called out in your prepared remarks, what are you thinking or seeing from them as you look into the fourth quarter? You’ve obviously got a fourth quarter sort of implied in your full year guidance and your Q3 guidance. I’m just wondering if you think this weakness sort of continues on or gets any visibility to improvement or further decay? Maybe that’s just a conversation about the weaker categories would be helpful. And then, Brian, anything you want to highlight on expenses in the second half, whether it’s year-over-year comparisons to renovate and thinking about the Americas segment or anything else you’d want to call out in terms of cost action as we think about OpEx in the second half of the year? Thank you both.

Scott Wells: Thanks, Ben. First off, on the categories. The behavior of the market has been a little eclectic of late. And the categories that we called out are the ones that were weakest, but there’s definitely been some account campaign activity being held over the course of the summer. We really saw it start happening in June, and it was pretty broad-based. The ones that we called out were the ones that were the weakest. As we think about how things are going to build, we always have pretty good visibility. We talked about our upfront, and I referenced being disappointed that we’re not seeing the growth that we thought we might see in Q3 when we saw what our upfront looked like. That’s really what continues to give us confidence in Q4 also just looking at the current booking activity that Q4 is going to be stronger than what Q3 is going to be.

But it is always very difficult to tell when people start going into this mode. The thing that we’re hearing from a lot of our agency partners is that there are – the pipeline of activity for Q4 is really strong. It’s a question of whether people are going to hit go buttons toward the latter part of August, early part of September, that’s when we’re really going to know for sure how things build. But the book has the strength to deliver the guidance that we’ve put and then some, I think. And I think as this plays out, it does seem like there may be some shifting of seasonality. And I don’t want to read too much into this because I think tech in particular, have been working on their P&Ls this year and have really been quite pausing in their campaigns.

Media and Entertainment, who knows where the writers of actors strike go. Television is a less important part of media and entertainment to us than movies, and movies are not going to be as impacted if this doesn’t go on a super long time. So I guess what you’re getting from me is, we’ve given a guide we feel very good about, but it is very hard to create the straight line between exact categories and exactly where that guide is. Brian, do you want to take the expenses?

Brian Coleman: Sure. Thanks, Ben. For the second half of the year, we’re going to continue to monitor operations closely. In fact, I think you probably heard in the script, the prepared remarks that we are seeing the benefit of some cost reductions even in Q2, even though there wasn’t a lot of elaboration. So certainly monitoring operations through the second half of the year, and we’ll adjust as appropriate. Abatements, they kind of continue to roll away from the prior year. It’s a bit chunky, but as we lap the last year, where we had a lot of abatements, I think we’ll continue to see those fall away. We are still seeing the impact from the large contract that we’ve talked about. That will roll away after Q3 of this year, and so the comps will normalize.