Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) Q4 2022 Earnings Call Transcript

Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Clear Channel Outdoor Holdings, Inc. 2022 fourth quarter earnings conference call. I’ll now turn the conference over 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. Scott, and Brian will provide an overview of the 2022 fourth 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 participate in the Q&A portion of the call. Before we begin, I’d like to re remind everyone that during this call, we may make forward-looking statements regarding the company, including statements about its future financial performance and 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 perform 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 our earnings release and the earnings conference call investor presentation. Also, please note that the information provided on this call speaks only to management’s views as of today, February 28, 2023, and may no longer be accurate at the time of a replay.

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

Scott Wells: Good morning, everyone, and thank you for taking the time to join today’s call. Our four quarter results capped off a strong year for our company, as we soundly rebounded coming out of the pandemic, and benefited from healthy demand for our digital assets. We generated consolidated revenue of $750 million, excluding movements in foreign exchange rates, in line with our guidance, and up approximately 1% as compared to our very strong performance in the fourth quarter of the prior year. Our consolidated revenue was also ahead of the fourth quarter of 2019, excluding movements in foreign exchange rates in China. We delivered a record revenue quarter for our Americas business against a record performance in the fourth quarter of the prior year.

Our European business also delivered strong revenue results despite European turbulence and the ongoing strategic review of our businesses in Europe. For the full-year, consolidated revenue was up 16.5%, excluding movements in foreign exchange rates. I’d like to thank our company-wide team for their dedication and hard work in executing on our strategic plan, and contributing to our results during the past year. We operated at a high level as we progressed in our transformation into a technology-fueled visual media powerhouse, reaching a growing pool of advertisers, and we did this while improving productivity. Our story is both an operating one in terms of our efforts to increase revenue, drive further gains in productivity, and increase operating cash flow.

It’s also a capital structure one in terms of our focus on evaluating all options to improve our leverage ratio and reduce our debt. On the operating side, investing in our digital transformation remains central to our plan, including expanding our digital footprint, strengthening our data analytic offerings, and continuously improving the customer experience. We believe we are elevating our ability to provide our clients with the kind of experience they expect from digital media, coupled with the mass reach of out-of-home. And our experience to date tells us these efforts are leading to growth. During the fourth quarter, digital accounted for 43% of our consolidated revenue, which rose 4% during the quarter, compared to the fourth quarter of last year, excluding movements in foreign exchange rates.

As we expand our digital footprint, we’re continuing to develop a more addressable and efficient operating platform. We’re making our solutions more data-driven, easier to buy, and faster to launch. These initiatives are allowing us to convert more revenue to cash flow and better leverage our scaling reach, while demonstrating results in ways that elevate the attractiveness of out-of-home advertising. We believe these efforts supported our outperformance relative to the majority of other traditional media platforms in the past year. As we execute on our plan, we believe we can drive improved operating cash flow over time, given the operating leverage and strong fundamentals inherent in our model, as shown in the long-term guidance we provided last September, and are confirming today.

Beyond operating execution, we’re also committed to continuing to review avenues that will enable us to establish an appropriate capital structure that we believe maximizes the value inherent in our business. At the close of the year, we announced the definitive agreement to sell our business in Switzerland for $92.7 million, which remains subject to previously disclosed closing conditions. We intend to use the anticipated net proceeds to improve our liquidity position, while our strategic review of our low margin and low priority European businesses remains ongoing. As we said, our intention for Europe is to have a perimeter with substantially higher adjusted EBITDA minus CapEx margins, which is expected to help improve our leverage over time through the generation of operating cash flow and net sales proceeds from potential dispositions.

As we have previously emphasized, we cannot guarantee the timing or success of our efforts, and we will continue to communicate further details as and when we are able. Turning to the year ahead, our business remains healthy, with revenue expected to reach between $2.575 billion, and $2.7 billion, excluding movements in foreign exchange rates. In the US, we’re wrapping up the best upfront since we’ve started measuring, and our premium locations are strong, although a few categories are reducing or delaying campaigns. And, as a reminder, the first quarter faces tough comps with the prior year. Specifically, on a national basis, we are seeing softness in the first quarter due to crypto and emerging tech companies pulling back on significant spending relative to the first quarter of 2022.

So, at this point, we’re not seeing any major changes from a macro slowdown. Rather, the impacts we’re seeing relate to dynamics within specific categories. Dialogue with advertisers remains very constructive, and in fact, we are continuing to develop new categories and broaden the universe of advertisers we can pursue. In Europe, we’ve maintained some of the momentum we saw in Q4, and we’re seeing healthy demand with no indications of a slowdown due to macro concerns. Based on our conversations, brand owners have indicated that they will continue to advertise as they recognize both the need and opportunity to remain visible. I should note that we also have an easier comp in Europe given all markets hadn’t fully rebounded in last year’s first quarter.

So, overall, Europe is off to a good start, and January came in marginally better than our expectations. As we execute our plan, we are keeping a close eye on trends across our markets, and remain optimistic about our business. Brian will provide our guidance for both the first quarter and the full-year. 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. This has been a good year for our business. And so, before going through our fourth quarter results, I want to comment briefly on the full-year results. As you know, we provided detailed guidance for 2022 during our Investor Day, which was updated on November 8. I want to point out, our actual results were in line or ahead of guidance for every metric included in the guidance. In my view, this clearly demonstrates the resiliency of our business and the team’s ability to remain on course and rebound from the pandemic. Now, on to fourth quarter reported results. 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 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 fourth quarter of 2022, and the percent changes are the fourth quarter of 2022 compared to the fourth quarter of 2021, unless otherwise noted. Additionally, Switzerland, which is now considered an asset held for sale, will continue to be reported in revenues and adjusted EBITDA until we conclude the sale. During the fourth quarter, we expanded the number of segments in our reported results. We now have four reportable segments, America, which consists of our US operations, excluding airports.

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Airports, which includes revenue from US and Caribbean airports. Europe North, which consists of operations in the UK, the Nordics, and several other countries throughout northern and central Europe. And Europe South, which consists of operations in France, Switzerland, Spain, and Italy. Our remaining operations in Latin America and Singapore are disclosed as other. Given the guidance we provided as part of our third quarter results was in our previous reporting format, this morning’s presentation and our fourth quarter earnings release use the prior segments for comparability. However, the 10-K we filed this morning includes results for the fiscal years ending 2022, 2021, and 2020, using the new segments. Consolidated revenue for the quarter was $709 million, a 4.5% decrease.

Excluding movements in foreign exchange rates, consolidated revenue was up 0.9% to $750 million, at the mid-range of our consolidated revenue guidance of $740 million to $765 million. Net income was $99 million, an improvement over the prior year’s net income of $66 million. Adjusted EBITDA was $205 million, down 7.6%. Excluding movements in foreign exchange rates, adjusted EBITDA was $214 million, down 3.5% as expected, primarily due to lower rent abatements as a result of the rebound in the business. AFFO, which is a metric we introduced recently, was $84 million in the fourth quarter, and $93 million, excluding movements in foreign exchange rates. Please turn to Slide 6 for a review of the Americas fourth quarter results. Americas revenue was $374 million, up 28%, in line with our guidance range of $370 million to $380 million.

And even more significant, we continue to surpass pre-COVID revenue levels, with revenue up 8.5% compared to Q4 of 2019. As Scott mentioned, this was a record revenue quarter against a record performance in the fourth quarter of last year. Revenue was up, driven by airports and digital, partially offset by lower revenue from printed formats. Digital revenue, which accounted for 42.1% of Americas revenue, was up 2.8% to $158 million across all display types. National sales, which accounted for 40.6% of Americas revenue, were down 2.7%, primarily due to tough comps as the fourth quarter in the prior year benefited from pent-up demand and a few large campaigns from brand owners that have pulled back spending. Local sales accounted for 59.4% of Americas revenue, and continued to deliver growth, up 3.4%.

Direct operating and SG&A expenses were up 8.1%. The increase was primarily due to an 18.2% increase in site lease expense to $132 million, driven by higher airports revenue, new contracts, and lower rent abatements. This was partially offset by lower variable incentive compensation. Segment adjusted EBITDA was $156 million, down 7.9%, with segment adjusted EBITDA margin of 41.8%, down from Q4 2021, due primarily to mix and one-time items. However, Americas margin was more in line with Q4 2019, as expected. Turning to Slide 7. This slide breaks out our Americas revenue into billboard and other and transit. billboard and other, which primarily includes revenue from bulletins, posters, street furniture displays, spectaculars, and wallscapes, was $295 million, up slightly from the prior year.

Transit was up 3.7%, with airports revenue up 5.2% to $77 million, driven by growth across the airports portfolio, including the port authority. Now, on to Slide 8 for a bit more detail on billboard and other. Billboard and other digital revenue continued to rebound in the fourth quarter, and was up 3.6% to $111 million, and now accounts for 37.7% of total billboard and other revenue. Non-digital billboards and other revenue was down 1.9%. The largest increases were in travel, food, and hotels, with declines in insurance, media, and retail. Next, please turn to Slide 9 for a review of our performance in Europe. My commentary is on results that have been adjusted to exclude movements in foreign exchange rates. Europe revenue increased 2.1% to $357 million, at the high end of our guidance range of $345 million to $360 million.

The increase was driven by our new Europe North segment, most notably due to new transit contracts in Denmark, as well as growth in other Nordic countries, UK, and the Netherlands. In our new Europe South segment, Revenue was higher in Spain and Italy, and revenue was lower in France and Switzerland, with the latter driven by loss of certain contracts. Europe revenue was also up 4.7% compared to the 2019 comparable period. Digital accounted for 41.6% of Europe’s total revenue, and was up 7.4%, driven by new digital inventory, as well as the success of our programmatic platform, LaunchPAD. The largest contributors to growth included Denmark, Spain, the UK, and Norway. Direct operating and SG&A expenses were up 2.6%, with the largest driver being an increase in site lease expense.

Segment adjusted EBITDA was $86 million. Segment adjusted EBITDA margin was 24.1%, in line with the prior year, and ahead of Q4 2019. Moving on to CCI BV. Our Europe segment consists of the businesses operated by CCI BV and its consolidated subsidiaries. Accordingly, the revenue for our Europe segment is the same as the revenue for CCI BV. Europe segment adjusted EBITDA, the segment profitability metric historically recorded in our financial statements, does not include an allocation of CCI BV’s corporate expenses that are deducted from CCI BV’s operating income and adjusted EBITDA. Europe and CCI BV revenue decreased $33 million during the fourth quarter of 2022, compared to the same period of 2021, to $316 million. After adjusting for a $41 million impact from movements in foreign exchange rates, Europe and CCI BV revenue increased $7 million.

CCI BV operating income was $27 million in the fourth quarter of 2022, compared to $56 million in the same period of 2021. Now, moving to Slide 10 and our review of capital expenditures. CapEx totaled $60 million in the fourth quarter, a decrease of $5 million compared to the prior year. Americas was up 7 million, as we ramped up our spending, particularly on digital displays. However, in Europe, CapEx was down $13 million, due in large part to the timing of new contracts and movements in foreign exchange. In addition to our capital expenditures, I also want to highlight that during the quarter, we did continue to close a few more asset acquisitions in the US totaling $10 million. Given our renewed focus on liquidity amid the current macro uncertainty, we are being more selective in our acquisitions.

Now on o Slide 11. During the fourth quarter, cash and cash equivalents declined $41 million. The decline was in part due to adjusted EBITDA being more than offset by cash interest payments, CapEx, and asset acquisitions, as well as changes in working capital as a result of an increase in accounts receivable. Our liquidity was $501 million as of December 31, 2022, down $41 million compared to liquidity at the end of the third quarter, primarily due to reduction in cash. Our debt was $5.6 billion as of December 31, 2022, basically flat with September 30. Cash paid for interest on debt was $124 million during the fourth quarter, a slight increase compared to the same period in the prior year, primarily due to higher floating rates on our term loan B facility.

Our weighted average cost of debt was 7.1%, an increase compared to the weighted average cost of debt as a September 30 of 2022, due to increases in LIBOR rates. As at December 31, 2022, our first lien leverage ratio was 5.2 times, up slightly as compared to September 30 of 2022. The credit agreement covenant threshold is 7.1 times. Moving on to Slide 12 and our guidance for the first quarter and the full-year of 2023. At this point in time, we believe our consolidated revenue will be between $540 million and $565 million in Q1 of 2023, excluding movements in foreign exchange rates. Based on month-end January exchange rates, foreign currency could result in a 3% headwind to year-over-year reported consolidated revenue growth in the first quarter.

Overall, for the year, we expect revenue to be between $2.575 billion and $2.7 billion, with adjusted EBITDA between $540 million and $600 million, both excluding movements in foreign exchange rates. The drivers of revenue guidance relative to adjusted EBITDA guidance, are related to mix, the effects of one-time items, and the renegotiation of a large existing site lease contract. AFFO guidance is $75 million to $125 million, excluding movements in foreign exchange rates, down from fiscal year 2022, due primarily to increased interest expense. Capital expenditures are expected to be in the range of $185 million to $205 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 $413 million, an increase over the prior year as a result of higher floating rate of interest on our term loan B facility.

This guidance assumes that we do not refinance or incur additional debt. As you can see in our guidance for the full-year, we expect our revenue to continue to grow. However, we will continue to monitor this closely, but have proven our ability to pivot should the need arise, and believe we know how to quickly adjust our expenses and preserve liquidity if needed in the future. And now, let me turn the call back over to Scott for his closing remarks.

Scott Wells: Thanks, Brian. We’re off to a good start and believe 2023 will be a positive year for the business, despite some uncertainties regarding the macro environment. Supported by a great team and assets, we remain centered on executing against our strategic priorities, including accelerating our digital transformation, improving customer centricity, and driving executional excellence. We believe these efforts are enabling us to elevate the experience and results we deliver to our clients, and broaden the pool of advertisers we can pursue. At the same time, we remain committed to addressing our capital structure, divesting our lower margin and lower priority European businesses, and taking the necessary steps to support cash generation of our core business, and ultimately reduce our debt. And now, let me turn the call over to the operator for the Q&A session, and Justin Cochran will be joining us on the call.

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Q&A Session

Operator: Thank you. Our first question today comes from Ben Swinburne from Morgan Stanley. Your line is open.

Ben Swinburne: Good morning. Scott, maybe one for you to start us off here. Can you talk a little bit about how you’re thinking about the shape of the year? You mentioned the first quarter, particularly in the US, faces some category-specific headwinds. But talk about your visibility into Q2 and beyond. And sounds like you expect the year to improve from a growth perspective as we move through the year. And then, maybe since we now have your airport segment, which reported pretty massive growth last year, obviously port authority contributing, can you talk a little bit about the outlook for that business as we look into €˜23 and ’24? What kind of expectations should we have, and is there other business out there you may be bidding for that might be material? Anything you could share with us on the outlook for airports I think would be helpful too.

Scott Wells: Thanks, Ben. Good morning. So, for the shape of the year, it is a – sort of Q4 and Q1 have been a little bit of a pause in the momentum that we have seen in the business over the last five or six quarters, and I think it’s attributable to a couple of things. It’s pretty narrow and it’s pretty account-specific. And so, particularly as I look at Q1, it’s the emerging tech companies and the crypto companies. We never really had that much exposure to sports betting, but that was always – that was also one. There were just a few categories that were kind of ephemeral in Q1 of last year that have – well, I’ve proven ephemeral. We didn’t know they were ephemeral in Q1. And that’s creating a little bit of a little bit of slowness end of last year, beginning of this year.

But that’s offset by what I referred to in the prepared comments that we had our best upfront ever and our visibility into the rest of the year is strong. And so, what we believe is happening is that you had a bunch of companies make announcements about layoffs and things like that, and people don’t tend to want to do advertising heavily while there are layoffs. You had the companies that had the dynamics I described a moment ago. And so, it’s a market that thinned out a little bit versus where it was a year ago. But the laydown for 2023 is strong and the dialogues and plans people have are strong. I guess the other thing I’d call out is the film release schedule wasn’t stellar sort of late last year, early this year, and that’s obviously an important category for us, particularly in a couple of our bigger markets.

So, all of those things combined, make us think that what we’re seeing in terms of a little bit of softness here at the beginning of the year, is not going to be how the year as a whole builds, and we guided accordingly on that. So, I think our guidance truly represents the best information that we have at this moment. To your question on our airport segment, a couple of things I’d call out. I think we’ve kind of mentioned this, and we certainly mentioned it when we were doing our Investor Day in September, but we are selling airports differently than we might have sold airports five years ago. We’ve gotten more creative in terms of looking for kind of sponsorship type, think of things like naming rights kind of things. That business has gotten a lot more digital, and it’s gotten – coming out of COVID, it’s had a very strong tailwind as travel has taken off.