Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) Q3 2023 Earnings Call Transcript November 8, 2023
Clear Channel Outdoor Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.55 EPS, expectations were $-0.09.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Clear Channel Outdoor Holdings 2023 Third Quarter Earnings Conference Call. [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 third quarter operating performance of Clear Channel Outdoor Holdings, Inc. and Clear Channel International BV. We recommend you download the earnings 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, and Dave Sailer, CFO of Clear Channel Outdoor, Americas 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 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, November 8th, 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 us today. We’re pleased to report we delivered consolidated revenue of $517 million for the third quarter, excluding movements in foreign exchange rates, reflecting a 2.7% increase as compared to the prior year. This revenue is within our guidance after excluding Europe South, which was moved to discontinued operations. Airports in Europe North stood out with the America segment lagging as anticipated when we provided third quarter guidance in August. Brian will go deeper on the drivers in America, but the combination of soft national sales and our market mix drove the challenge. We are seeing improving trends domestically and believe we’ll have a better performance in the US in the fourth quarter.
While we knew 2023 would be a challenging year for several reasons, including unwinding COVID rent abatements and absorbing higher costs on a large roadside contract as previously described, we expect our full year 2023 results to be within the guidance we provided in February, excluding Europe South and are excited about the trajectory we are on as we head into 2024. As we’ve discussed previously, our management team and Board are focused on driving meaningful deleveraging over the near to medium term. There are two key levers to affect this. One, continuing to execute our operating plan to organically grow adjusted EBITDA and improve free cash flow, including taking action to further optimize our cost structure. And two, methodically working to monetize our European assets, while we focus on our higher-margin markets.
With our recently completed sale of our business in France, we have made significant progress on our portfolio this year, selling or agreeing to sell all of the businesses in our Europe South segment. In addition, we have commenced the process to sell the businesses in our Europe North segment and potential buyers are reviewing preliminary information. We have also initiated a strategic review of our businesses in Latin America and have hired an advisor to explore options for these businesses. While we can’t guarantee the outcome of either process, we are confident that upon the sale of these assets, we will be a more focused US-centric out-of-home operator with less debt and enhanced optionality to become a REIT. We also know that we must increase our adjusted EBITDA in order to meaningfully reduce our leverage multiple.
So, while we are executing our international divestiture processes, we are simultaneously continuing to focus our energies on executing our operating plan, including growing adjusted EBITDA organically, expanding our advertiser base, optimizing our deployment of capital, and reducing corporate expenses. These actions include things like growing key verticals in the US, developing multiple channels to advertisers, turning around challenged markets, conducting a zero-based budget review of corporate expenses as our portfolio simplifies, and the deployment of proceeds from our divestitures to improve our liquidity position, reducing debt. We believe these actions provide the roadmap to achieve meaningfully lower leverage multiples over the next few years, which in turn should enable us to generate stronger free cash flow to support further deleveraging and to unlock shareholder value.
Let me share a few proof points that support our belief in our ability to deliver. In the second quarter of 2022, I stated that we were pivoting on our plan to sell all of Europe with the intention to sell the lower margin, lower priority European assets first, with the remaining businesses expected to have substantially higher adjusted EBITDA minus CapEx margins. As you can see from Slide 5, which compares fiscal year 2022 actual results for the combined Europe North and Europe South segments to the Europe North segment guidance for fiscal year 2023, we now have a business that is more digitized with higher segment adjusted EBITDA minus CapEx margins as compared to our combined European businesses in 2022. These results demonstrate our team’s ability to execute our strategy, including expanding our digital footprint and programmatic platform and underscore the strength of the out-of-home industry.
We believe we now have a much more valuable and attractive Europe North business. And while we are committed to selling these assets, we will be disciplined in doing so to maximize value. Second, let me share some insight on the fourth quarter. We expect two of our fastest growing verticals in the US will be pharma and packaged goods. These are verticals we’ve called out as opportunities for several quarters and our sales teams are making good inroads in building business in both areas. In addition, we continue to see success in building our programmatic platform Following a strong September, October has been our best month-to-date. Finally, let me return to where I started and call out that we believe our 2023 results will be within the guidance range we provided in February after excluding the Europe South segment.
Looking forward, we believe we are poised for significant organic adjusted EBITDA growth in 2024 and we will provide in-depth outlook 2024 on our Q4 call in February. So, we know we have a lot of work ahead of us, but we believe we have the right team and strategy in place to deliver the full value we believe is inherent in our business. And on this store, I would like to share our appreciation for all the work our global team is doing as we focus on achieving our objectives. With that, let me hand the call over to Brian.
Brian Coleman: Thank you, Scott. Good morning everyone and thank you for joining our call. Please turn to Slide 6. As Scott mentioned, Europe South is now included in discontinued operations as announced on October 31st, 2023. During the third quarter of 2023, our plan to sell the businesses comprising the Europe South segment met the criteria be reported as discontinued operations. As a result, each of the Europe South segment businesses has been reclassified to discontinued operations in our financial statements for all periods presented, resulting in changes in presentation of certain amounts from prior periods. As a reminder, during our discussion of GAAP results, I’ll also talk about our results, excluding movements in foreign exchange rates, a non-GAAP measure.
We believe this provides greater comparability when evaluating 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 third quarter of 2023 and the percent changes are third quarter 2023 compared to third quarter 2022 unless otherwise noted. Now, on to the third quarter reported results. Consolidated revenue for the quarter was $527 million, a 4.7% increase. Excluding movements in the foreign exchange rates, consolidated revenue for the quarter was up 2.7% to $517 million. The third quarter consolidated revenue guidance we provided in August included a range of $70 million to $80 million for France and Spain in the Europe South segment.
Excluding the Europe South segment, our third quarter consolidated revenue was within the adjusted guidance range of $500 million to $520 million. If we had included the Europe South segment, consolidated revenue, excluding movements in foreign exchange rate, would have been $596 million, also in line with the guidance we provided in August of $570 million to $600 million. The loss from continuing operations was $51 million, an increase over the prior year’s loss continuing operations of $19 million. The consolidated net loss of $263 million included a $201 million net loss on disposal of set related to the sale of France. Adjusted EBITDA was a $139 million, up 0.9%. Excluding movements in foreign exchange rates, adjusted EBITDA was down slightly.
As you will see in our results, rent abatements, which were down $11 million this quarter, continued to create a headwind. AFFO was $25 million in the third quarter, down 27.3%. Excluding movements in foreign exchange rate, AFFO was down 33.5%. On to Slide 7 for the Americas segment’s third quarter results. America revenue was $279 million, down 1.9%, driven by weakness in our media and entertainment vertical in the San Francisco Bay Area market. Digital revenue, which accounted for 35% of America revenue, was up slightly to $98 million. Cash flow [ph] sales, which accounted for 32.7% of America revenue, were down 14.9%. Local sales showed strength and accounted for 67.3% of America revenue, rising 6%. Direct operating and SG&A expenses were up 1.7% to $157 million.
The increase is primarily due to a 10.4% increase in site lease expense to $90 million, driven by lease renewals and amendments as well as lower rent abatements, partially offset by lower property taxes related to illegal settlement and lower credit loss expense. Segment adjusted EBITDA was $121 million, down 6.4% with a segment adjusted EBITDA margin of 43.5%, down from Q3 of 2022. Please turn to Slide 8 for a review of the third quarter results for Airports. Airports revenue was $76 million, up 21.2%. The robust increase in revenue was driven by increased demand due to the continued recovery of air travel after COVID-19, and investment in digital infrastructure. Digital revenue, which accounted for 55.3% of airport’s revenue, was up 15.6% to $42 million.
National sales, which accounted for 56.8% of airport’s revenue, were up 25.1%, and local sales accounted for 43.2% of airport’s revenue and were up 16.6%. Direct operating and SG&A expenses were up 27% to $60 million. The increase is primarily due to a 47.9% increase in site lease expense to $47 million, driven by lower rent abatement and higher revenue. Segment adjusted EBITDA was $16 million, up 3.1% with a segment adjusted EBITDA margin of 20.5%, which remains a bit elevated compared to normalized levels due to rent abatements. Next, please turn to Slide 9 for a review of our performance in Europe North. My commentary on Europe North is on results that have been adjusted to exclude movements in foreign exchange rates. Europe North revenue increased 4.5% to $142 million, driven primarily by higher revenues in the UK, Belgium, and Denmark, partially offset by lower revenues in Sweden and Norway.
Digital accounted for 55.8% of Europe North total revenue and was up 8.5% to $79 million. Europe North Direct operating and SG&A expenses were up 3.7% to a $115 million. The increase is due to higher electricity prices, rental cost for additional digital displays, and higher property taxes. Site lease expense was down 0.7% to $53 million, driven by a contact renegotiation. Europe North segment adjusted EBITDA was up 9.2% to $26 million and the segment adjusted EBITDA margin was 18.7%, up from the prior year. 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 6.625%senior secured notes to 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.
As the businesses in our Europe South segment are considered discontinued operations, results of these businesses are now reported as a separate component of consolidated net loss and the CCI B.V. consolidated statements of loss for all periods presented and are excluded from the discussion below. CCI B.V. results from continuing operations for the third quarter of 2023 as compared to the same period of 2022 are as follows; CCI B.V. revenue increased 10.3% to $154 million from a $140 million. Excluding the $8 million impact, of movements in FX, CCI B.V. revenue increased 4.6%, primarily driven by higher revenue in our Europe North segment, as I just mentioned. Singapore represented less than 3% CCI B.V. revenue from continuing operations for the three months ended September 30th, 2023.
CCI B.V. operating income was $9 million compared to $3 million in the same period of 2022. Now, moving on to slide 11 and a review of capital expenditures. CapEx totaled $33 million in the third quarter, a decrease of $5 million over the prior year due to a reduction in airports and Europe North CapEx. Airports CapEx was down due to large investments in the digital network in the prior year. Now, on to slide 12. In June, we amended and extended our revolving credit lines and in August, we issued $750 million aggregate principal amount of 9% senior secured notes due 2028. We used a portion of the net proceeds from the note offering to prepay a $665 million of outstanding principal on the term loan facility, which we repurchased at a 1% discount.
We incurred debt issuance cost of $12 million related to these transactions, and we intend to use the remaining proceeds of approximately $76 million for general corporate purposes. Additionally, our next debt maturity with CCI B.V. notes in the amount of $375 million is in August of 2025, with our next debt maturity to term loan in August of 2026. Our liquidity was $531 million as of September 30th, 2023, up $80 million compared to liquidity at the end of the second quarter due to the increase in cash and cash equivalents. During the third quarter, cash and cash equivalents increased by $85 million to $313 million and our debt was $5.6 billion as of September 30th, 2023, a $71 million increase since June 30th. These increases were driven in large part by the note offering I just mentioned.
In September, we repurchased in the open market $5 million of the CCOH 7.625% senior notes, and $10 million of the CCOH 7.5% senior note at a discount, resulting in a gain on extinguishment of $3 million. Repurchase note remain outstanding. Cash paid for interest on debt was $81 million during the third quarter, a $25 million increase compared to the same period in the prior year, primarily due to higher interest rates on our term loan facility and the timing of accrued interest payments. Our weighted average cost of debt was 7.5%, slightly above the weighted average cost of debt as of June 30th, 2023. As of September 30th, 2023, our first lien leverage ratio was 5.59 times calculated based on continuing operations, a slight increase as compared to June 30th 2023.
The credit agreement covenant threshold is 7.1 times. Moving on to slide 13 and our guidance for the fourth quarter and the full year of 2023. All consolidated guidance and Europe North guidance exclude movements in foreign exchange rates, with the exception of capital expenditures and cash interest payment. Please note, our consolidated guidance has been adjusted to exclude the Europe South segment. For the fourth quarter, we believe our consolidated revenue will be between $591 million and $618 million. We expect America revenue to be between $293 million and $305 million, and Airports revenue is expected to be between $100 million and $105 million, another really strong quarter as compared to the prior year. Europe North revenue is expected to be between a $170 million and $180 million, an increase over the prior year.
Moving on to our full year guidance. Given the change as a result of the Europe South segment moving to discontinued operations, we thought it would be helpful to show the detail of how we adjusted the guidance we provided in August. As you can see on the slide, now that we are close to the end of the year, we have tightened the range for consolidated revenue. We expect consolidated revenue to be between $2.091 billion and $2.118 billion. As Scott mentioned, this is also still within the guidance range provided in February, excluding discontinued operations. America revenue is expected to be between $1.095 billion and $1.107 billion. Airports is ending the year stronger than expected with revenue expected to be between $300 million and $305 million.
Europe North revenue is expected to be between $604 million and $614 million, also an improvement over the August guidance. On a consolidated basis, we expect adjusted EBITDA to be between $540 million and $542 million, a slight improvement over the guidance we provided in August, including discontinued operations. AFFO guidance is $67 million to $80 million. Capital expenditures are expected to be in the range of a $143 million and $151 million with a continued focus on investing in our digital footprint in the US. Additionally, our cash interest payment obligations for 2023 are expected to be approximately $405 million, up over the prior year due to higher floating rate interest on our term loan B facility, but down versus the August guidance due to timing of interest payments related to the transactions I described earlier.
We expect a $121 million of cash interest expense to be paid in the fourth quarter. This guidance assumes that we do not refinance or incur additional debt. And now let me turn the call back to Scott for his closing remarks.
Scott Wells: Thanks Brian. Looking ahead, we remain confident in our annual guidance. We continue to execute on our plan to streamline our business, concentrate on our domestic assets, and position our organization for growth and improve profitability. We believe the steps we are taking to modernize our organization and elevate our position as a digital media powerhouse will only strengthen and EBITDA growth. As we progress in the sale of our Europe North businesses and the strategic review of our businesses in Latin America, and work on organically growing adjusted EBITDA, we believe we will ultimately begin to reduce our indebtedness and deliver improved free cash flow and drive material equity value creation. And now let me turn over the call to the operator for the Q&A session. And Justin Cochrane and Dave Sailer will join us on the call.
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Q&A Session
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Operator: Thank you. [Operator Instructions] You have our first question comes from Avi Steiner from JP Morgan. Avi, your line is now open. Please proceed.
Avi Steiner: Thank you, and good morning, everyone. Just want to start with the ad environment, if I can. And if you could just discuss maybe ex-San Fran, what you’re seeing in this fourth quarter? And any material differences in airports versus your traditional city boards? And then I’ve got a couple of follow ups. Thank you.
Scott Wells: Hey, Avi. Thanks for the question. You know, this has been a really strange ad market year. And so I’m a little hesitant to give you two sweeping of generalizations. If you just look at what we reported nationally for our roadside business in America versus nationally for airports, you can see one of the strange dynamics that has been going on, which kind of has been going on all year. The whole focus on super premium assets. It’s been a very premium market this year, and we’re seeing that continue into Q4. I think, big picture, we think media and entertainment now that the writers are back working, and I know the actors aren’t there yet, but we’ll hopefully see some progress there. Obviously, the auto strikes have cleared up, that’s not a huge vertical for us, not a huge impact.
And we’re starting to get to a point where we’re seeing tech companies talking about investing in their brands a little more aggressively. I think there are a number of things that suggest we’re headed in a we’re headed in a good direction. For us, specifically, I do think the trends that we’ve seen year-to-date, of some challenges in the Bay Area and, frankly, California and the Midwest more generally have been not great markets whereas we’ve seen, a lot of a lot of goodness in Texas and Florida and along the East Coast. But it’s a much more — I think I’ve referred to this on some other calls, it’s a much more, normal market and that you have normal local dynamics driving what’s going on. So, it’s a tough market to generalize on Avi, but I’d say that in general, I’d characterize it as firming up and that there are indications that some — there’s some strength in in categories that had pulled back this year.
And then obviously in the in the call, we referred to seeing some growth in area we’ve been investing in with pharma and CPG. So, hopefully, that that gives you a flavor.
Avi Steiner: Very helpful. Appreciate it. And then if I could, turn to the expense side, and corporate, if I could, I believe it was down almost 14% this quarter, adjusted corporate expenses. You can correct me if I’m wrong. But as we think about this line item going forward, I know Europe South is now discontinued. There’s some moving pieces. But how should we think about corporate? And then if you can remind us what corporate savings will come through once your North is sold? And then I’ve got a couple more. Thank you.
Brian Coleman: Sure, Avi. I’ll take that one. A lot of the reduction you’re seeing this year is unfortunately, a variable compensation expenses as business hasn’t performed as expected, in particular in America. But I think the bigger question about corporate expenses, we are looking to reduce it. We look at opportunities to make savings. And that’s kind of regardless of activities that are that are going on within the business. You pointed to divestitures. That is something that will be a catalyst for further examination of corporate expense. We’ve said in the past, with the divestiture of the international businesses, we would expect at least $30 million of corporate expenses to be reduced. That doesn’t include shared cost or embedded cost on the corporate center that also will need to be examined it, but may take a longer period of time to extract from the business.
So, that’s why we use the at the at least kind of qualifier there. But I — look I think over time, we’ll have a little bit of headwinds next year as we hope the business will rebound a little bit in that variable compensation expense, which we’ll be happy to pay if the business does rebound, comes back. But working the other way will be a sharp focus both on corporate expenses — expense reduction, in general, as well as capturing corporate expense, that are tied, are related to the divestitures.
