Okay, we're gonna, we're gonna get started. Happy to kick off the media track here at the Leveraged Finance Conference with Clear Channel. I'm Aaron Watts, I'm the Media, Cable Satellite Business Service credit analyst at DB. And up on stage with me, I have Brian Coleman, Chief Financial Officer, and David Sailer, Chief Financial Officer of the Americas. Guys, thank you very much for being here.
Thanks for having us.
So there's been a lot going on since we last sat on stage a year ago. I know the macro and advertising environments have been less than ideal, but you've been able to make notable progress on your strategic and financial initiatives. Before we dive in, perhaps kick us off with a high-level overview of the current trends, what's been accomplished this past 12 months, and where your focus lies in the year ahead.
Well, thanks, Aaron. I think that's right. I think we have started to get some traction in a number of areas, and I think it starts with the transformation of our portfolio. We have talked for a while about focusing on the Americas business, taking a hard look, reviewing the strategic comparative around our international assets. And you've seen us actually strike some deals. We've actually executed sales transactions on both Switzerland and our Italian markets. We are under contract to sell Spain. It is currently going through a regulatory review in that country because of the nature of the buyer, who's strategic in that case. And we've announced, you know, I guess exclusive negotiations is the way to put it, with respect to our French market.
That is currently going through a process, I guess, somewhat unique to France, the Workers' Council process. And, you know, we hope to hear back from that and continue to move forward with France. And, you know, taken all together, that is our Europe South segment. So it has taken a little while, but we are starting to make progress. I think it's important that we talk about those countries in Europe South as being, you know, kinda either behind us or, or, you know, being worked on because those, in a lot of cases, were unique or more challenging markets when you take a look at it. If you look at our Europe North division, that is a group of countries and markets that have, you know, great contracts. They're somewhat homogenous. They, they have high digital penetration.
They operate in, you know, more friendlier regulatory regimes. And as a group, Europe North, financially performs pretty well. And I think historically, when you looked at Europe altogether, sometimes that was masked. So once you conclude with Europe South and you move on to take a look at Europe North, which we're doing right now, you are dealing with a platform of assets that I think is more attractive, either altogether or perhaps in pieces, to potential buyers. So we're excited about that. We're excited about the transformation of the portfolio. I think another thing that we've leaned into recently and you've seen some progress on, I'll kind of group in, you know, liability management activities. We did earlier in the year successfully extend our liquidity lines, both our cash flow and our ABL.
We went through some amendments, increased the size of the ABL. We did reduce to a certain extent the cash flow revolver, but we did push out those maturities, giving us some comfort with respect to those lines. We also launched a $500 million bond deal, which we grew to $750 million, successfully priced and closed, used the majority of the proceeds to pay down our next nearest material maturity. And we paid it down in a way where we applied it toward amortization first, so that $5 million a quarter, $20 million of amortization per year on those term loans now is liquidity enhancing because of the way we applied those proceeds.
We put a little cash on the balance sheet, which also bolstered our liquidity position in conjunction with the extension of the liquidity lines. So again, feeling pretty good about, you know, the work we're doing on transforming the portfolio, the work we're doing on the liability management side. But it really all comes down to, you know, execution on the business side, and Dave will get in that a little bit, particularly with respect to Americas. But you've got to continue to focus on the fundamentals. And for us, our operations in the Americas, you know, it's important that we continue to invest in the areas that we think will provide long-term growth.
There are certain things in the macro we can't control, and I wouldn't say that, you know, our Americas performance, you know, in Q2 or, or the, how we talked about Q3 during our Q2 call is great, but it's also not bad. And you just got to make the most of what you can do. So I think portfolio transformation, liability management, and I think, you know, operational fundamentals, are, are key. And, and beyond, you know, the Americas business, where we had seen a little softness, we've got great results in airports and great results in, in Europe North. So, yeah, feeling, feeling good about where we are, all things considered.
Okay. That's a good overview of everything that's been happening. Let's dive in a little more on those various pieces. Let me start with a follow-up on the strategic review. You mentioned France and where that's at. We've seen varying closing times for the different countries that you've sold. How do you envision France playing out? Is that one that can close sooner rather than later? And then separately, with Europe North, is that one where you envision it being sold sort of in pieces by country, as we've seen so far with Europe South, or a little more likely, it could go the other way, where it sells as a group?
Well, why don't I hit that at the high level, and Dave.
Sure.
Y ou can chime in. I think with respect to how quickly a market can get sold, it kind of depends on who the buyers are and what the regulatory regime is, and context. You know, with Spain, a great market, we've had a lot of good contract wins. It's an attractive market, but the purchaser is a strategic, it operates in that country. So there's a regulatory review process that's gonna take a while. I think we're predicting sometime in the second half of 2020 close, so you hope for the best, but you prepare for what you kind of expect. France is a little different. The buyer doesn't have that strategic regulatory concern, shouldn't go through that kind of a process.
But in France, you do, you do go through this workers' council process. They do get a chance to review and opine on the transaction. I think our hope is that once that comes in, we can move to finalizing the purchase agreement and closing the sale in France, you know, much earlier, perhaps, perhaps this year.
Correct.
B ut certainly not second half of next year. Then with respect to Europe North, I described it earlier as kind of a platform, and I think from our perspective, you know, our goal is to... if we decide to move forward with a sale transaction, then move forward quickly. And it would be much quicker to sell a platform than it would pieces or segments. That being said, you know, the buyer appeal may be a little different, depending on how you break it up. So I think the best guidance I could give is we would look at, you know, marketing the whole platform.
Yeah.
But obviously keep our eyes and ears open for other levels of interest in case we need to. Do you, do you agree?
You know, I absolutely agree, and I think a lot of it will depend on who the buyer is going to be and, you know, who would be interested in depending on if we sold it as a platform or by country. But I do think the portfolio of assets definitely lends itself to be sold as a platform, but we'll see how the process plays out, you know, when we make that decision.
And you, you've talked about savings that you could achieve on a corporate level. Obviously, from an attention standpoint, you can shift that, that in a more focused direction to the Americas. But on the savings side, from a corporate expense perspective, when can you see the benefits of that? Do you have to really exit the platform holistically before that starts to flow in, or do you start to actually accrue some benefit ahead of that?
So maybe I'll talk about corporate expense in general and how potential transactions will impact it. And then, Dave, you can probably talk a little bit about it, the work you do all the time, in managing costs. I think we, you know, we've come out, and we've talked about how if we were to fully execute on a sale of our European assets, we would expect to save at least $30 million a year in corporate expense. But you hit upon something that doesn't happen right away. Some of it may actually happen earlier in the process.
I mean, as we're going through conversations right now, and negotiations, and exiting countries, you know, we're making decisions to scale back on investments in tech, or maybe you don't hire a replacement for this person, or maybe you postpone certain things. So to a certain extent, I think, I think you're seeing in a small way, we're seeing, maybe you don't see it externally, some of these initiatives already starting to take place.
But I think the real cost savings happens after you've exited a market and potentially with some lag, particularly in a case where we need to be providing some kind of shared service for a period of time, or it's an area like international tax, where you may have sold your international assets, but you still got to, for a period of time, still report and have those resources available to you. So I do I do think there's a lag, but it's not like we're waiting. We're taking the opportunity where we see opportunities to reduce costs. We will trying to anticipate what's coming, but I do expect there's a lag, and it kind of depends on the function I-
No, I, I agree in the sense that depending on what happens with Europe North, yeah, there'll be a big slug of cost that will obviously go away as that business becomes smaller. But in the meantime, as you're preparing for certain things within the business, are we always trying to be more efficient? Absolutely. And, you know, we're gonna look across, you know, all our corporate functions, and this is like a great time to kind of take a step back and look at, you know, if we go down that path, from a sales process, to really take a look at our overall corporate structure and what makes sense across all kind of the shared services.
But yes, there will be a lag in the sense that if you do go down that sales process, there'll probably be some transition service agreements and things along those lines. But as far as, you know, the general base business, you know, we're always looking at that. I mean, during the COVID process, we, you know, actively managed those costs, and that's, that's like an always ongoing conversation. That's how you can be more efficient, from a corporate and also just from a business operations standpoint.
You know, it's a little ironic, as part of just the ongoing cost savings initiatives, we've actually pulled cost out of Europe and centralized it where we could. Now, as you unwind that, it makes it just that more complicated. You got a guy, maybe he's doing a third here, a third here, a third here, and. So, we know this, and, you know, we're, we'll try to think ahead and anticipate as much as possible. But, I think we've at least tried to give some color on what the order of magnitude is and, you know, something a little bit around timing.
Last question around the review. We've focused on Europe so far. Remind us what your thought process is around the U.S. asset base. And I ask about that given some new shareholders that have been growing their stakes in the company and pushing for seemingly a more broad scope to the review.
Well, you know, Scott said it before, Scott Wells, our CEO, that no doors are closed. I mean, we wanna keep an open mind. We wanna consider everything, but we also wanna be very thoughtful about the sequencing of activities that we do, and ultimately how that impacts, you know, shareholder value... and I think it's completely natural to say, "Hey, you've got these U.S. assets, and they're very valuable.
Why don't you sell some of them and de-lever?" And I think, you know, the first thing I would say is, you know, be sure that you're considering the tax consequences if you were to do something like that, because we have a very low basis across our U.S. assets, and on an after-tax basis, it may not be as de-leveraging as you think. But you also have to look at, you know, the platform that we have and, you know, what do you sell that gets you the de-leveraging but doesn't negatively impact the platform and the investments that we've been making over the years in things like, you know, national sales or programmatic.
You know, if you were to damage the platform by selling U.S. assets, that certainly is something you'd have to consider. So I think the right thing to do is to continue to push hard on the international front, continue to focus on growing the U.S. business, but also continue to weigh all the options you have, including, you know, potential, potential asset monetizations.
Agree. Okay, let's just shift gears over to the advertising environment, and we can focus on the Americas. It's been a challenging year for ad spend, and out-of-home, I think, has fared better than many others, but the sector was certainly not immune, and you hinted at that, Brian, earlier. You know, as I think about the cadence, it felt like a stumble out of the gates to start the year, followed by some improvement leading up to June, and then once again, some softness going into the third quarter. You highlighted that on your earnings call about the third quarter not looking great, but that 4Q is expected to improve. What are you seeing in the marketplace now? Are things any better or worse than you had expected just a month or so ago?
No, I'll take that. I think you gave a really good summary of kind of how the year started. It was definitely, you know, it was soft when we first got into the year. You know, second quarter started to pick up, and then, when you got towards the end of June, you know, there definitely was a little bit tight softness, and this is, I'm talking from the Americas standpoint. And when I think about the guidance, you know, that we issued in August, I mean, as I look at it today, we said, you know, Q3 was going to be soft. A lot of that is driven by the national business, you know, has definitely been softer in Q3.
When we issued guidance, we did expect and what we were seeing in the market for Q4 to get better than Q3. And as I sit here today, I don't really think there's anything that I see that would change that opinion. When I look at it from the airport standpoint, their year has definitely been a little bit different. I don't even want to say they stumbled out of the gates because, you know, they were definitely soft in the first quarter, but that was really more due to a couple contracts, you know, that got pushed back or campaigns that businesses were doing. It really had nothing to do from a, from a, from an environment standpoint. You know, they had a really good second quarter.
You know, as we were getting into Q3, we issued guidance, and we see, you know, positive growth, and we see that continuing into the fourth quarter. So really, when I talk about the Americas business or the airports business, kind of where... What we issued, you know, in August from a guidance standpoint for Q3 and the remainder of the year, I don't really see anything different today than when, when we were looking at it back in August.
Okay. And Scott had mentioned that people were you had some commitments, but there was some hesitancy to push go for some 4Q campaigns. Any update on that front? Now that we're sitting in early October, has some of that money kind of been fully engaged now, or are you still wait and see?
I mean, as we're here, I mean, it's only October, so we have a little bit of time as we're getting into Q4. But I still think that the conversations that were happening over the summer and even when you just think about it, you know, from the media industry in general, I think there's definitely more activity in what we were talking about in August. As I said, there was a little bit of a pause, and we expected, you know, more activity as kind of you move forward. I think those conversations are still evolving, but I think we still have that same opinion that we did in August, that we're seeing the same thing as today.
Relatedly, in terms of cancellations, no, no kind of pickup on that front?
No, those have been pretty just average. I mean, we track those pretty closely, and we'll look at those every week, and we'll compare them to the prior years or the last couple of months. And there's normal cancellations that are just part of the business, and I hate to use the word cancellation. Some of it, you know, a campaign may be pushed forward and things along those lines, but from that standpoint, there's definitely not an uptick.
Okay. In past slowdowns, we've seen national dip and then local eventually follow it lower, albeit less pronounced.
Yep.
Well, local hasn't exactly been exuding strength, as you mentioned earlier. It's been certainly faring better than the national side. What gives you confidence that the local ad market is set up for further stability, if not growth, from here on? And can we avoid that pull down that you've seen in the past?
Yeah, the local business, I mean, post-COVID, has definitely been more resilient than the national business, you know, over that time period. And it definitely has been stronger in Q2, and I'm more talking from an Americas standpoint versus airports. But local has definitely been more resilient in Q2. It's definitely going to be stronger in Q3, as we spoke about from an earnings standpoint. But I will say, as I look into, you know, the remainder of the year, I'm not sure which one will be higher. I feel like they're both, you know, in a good place, you know, as we move into the fourth quarter.
So I don't think you're going to see that lull continue from a national standpoint, but as I sit here today, I'm not 100% sure which channel will actually grow further in the fourth quarter, which is a good sign.
Yeah. And on the digital front, that growth slowed a little bit in the second quarter. What do you attribute that to specifically, and does it change your outlook or expansion plans on the digital side?
Yeah, from a digital standpoint, and this is more talking from an Americas standpoint, and really what would cause that slowdown towards the end of Q2 into Q3, there was definitely the national business. There definitely was some softness. The programmatic business wasn't as strong over the summer as well, and those two are obviously highly digital. They're highly buying the digital product. As far as the slowdown from an investment standpoint, I mean, look, we're gonna look to put in, you know, 100, 110 digitals this year. You know, that, that is a huge growth player. Just being down, you know, over the summer or in the second into third quarter is not really something that's gonna change, you know, our outlook on how we're going to invest.
But, you know, we're gonna look at it the same today as we did six months ago and going forward. We look at where we're gonna put in digital assets, what does that property look like, what do we think the returns are gonna be on that individual, that individual sign? And we're gonna make a decision based on that. And you know, what are the returns going to be? From an airport segment, from a digital investment, the assets are performing really well. I mean, the inventory that we put in, in the New York airports and other airports across the country are performing really well, and the demand is really high right now for it. I think a lot of that has to do with the products we're putting in.
In addition, passenger traffic has come back, so it's been a really nice story on an airport's perspective.
In terms of your further investment in digital across the U.S., do you feel like there's further white space or further opportunity to continue to invest there? And I ask from the perspective of not wanting to overload on supply.
Yep
An d keep that balance with the demand that's out there.
No, I'd say absolutely. I mean, we have 27 or 28 markets when you include the airports division. But absolutely, we're going to invest going forward. I think we are still in the early stages. I mean, early is probably a strong word, but there's a long runway to go. When you think about how many assets that we have on the Americas, you know, traditional roadside business, we have roughly, you know, 1,700+ digital assets. And when you look at just our posters and bulletins plan, you know, that's 35,000 assets. There's plenty of opportunity from a conversion standpoint, but also many of our markets, we're still building organically, and there's definitely, there's definitely room and opportunity from a marketplace standpoint there.
Okay.
We do have a runway.
And remind me, do digital boards support margin expansion relative to your static board base? Do you see a margin uplift when it's converted? And maybe that's a good segue into a broader question around margins and what the right context is for normalized margins, both for the U.S. platform.
Sure
T he airports platform, and I guess that would be the whole platform in the future. But maybe touch on the different margin components there.
Yeah, from an Americas standpoint, yeah, I mean, a digital asset, when you convert or you put up a new organic digital board, you know, the way... Simplistically, when I think about it, when you have a printed asset that you're going to convert, currently, it's one advertising structure. When you convert that to a digital platform, I look at it now, I have eight advertising structures because you have eight slots. So you're gonna drive higher revenue. You will pay, you know, more from a slightly standpoint on a digital asset than from a bulletin asset, but that increase in revenue is going to help you from a margin standpoint, you know, going forward.
When you say the overall margins for the business, I mean, right now, it's been a little strange over the last couple of years, just what relief we're getting from a site lease standpoint across both businesses, when I think about it, from airports or Americas. But the digital assets will help from a margin expansion standpoint, and the same goes for airports. And I probably wanna go just a little bit more deeper on airports. Airports over the last 24 months, and we're still seeing it trickle in, we have received relief on some of our deals because of COVID. I don't expect that to accelerate. That is definitely slowing down, and it will slow down into next year.
But these negotiations or conversations take time, and when the government funds the airports, it takes time to trickle through to the concessionaires. So we're still seeing that trickle through. So some of the margins you're seeing on our airports segment right now, I would say, are a little inflated. We're probably in the low 20s. That business is probably more high teens, you know, from a margin standpoint, and that will level off over time. But that's a little bit of a headwind as we get into next year, 'cause we're gonna get relief this year, and that's why a little bit more as we get into the end of this year. You might see a little bit next year, but you'll have less relief going forward as to what you're getting today.
On a normalized basis, airports, high teens?
Yes.
America, high 30s, 40-ish?
You're in the mid to low forties. Low 40s.
Anything you'd call out, aside from what you just mentioned about airports with some of the abatements you got, anything else you'd call out for the second half of this year in terms of, you know, the contract renewal, that you-
Yep
T he big one that you had last year, and how that impacts costs, further cost out actions you're contemplating? Anything else we should be thinking about?
I mean, nothing too major. I mean, the contract you brought up was something that was done in the fourth quarter of last year, so that's finally gonna normalize as we get into the fourth quarter of this year. I mean, when you have a broad base of the amount of contracts and assets that you have, you're always gonna have, you know, a one-off here and there, but, like, nothing that I think I'd need from a material standpoint to bring out, you know, to the audience today.
Okay. On the midterm outlook that you provided last year at your Investor Day, you called for a CAGR of, I think, 4%-6% on the top line, 7%-10% EBITDA growth. With the way that this year has played out, and the macro backdrop is still a little bit uncertain, do you still, do you still see those targets as reasonable and achievable for the business?
Yeah, I mean, we don't want to reaffirm that guidance. We'll update it. But I will tell you that, we expected 2020. Safe to say, we haven't seen
stop short of reaffirming that until it's signed.
Okay, so I wanted to ask a question about cash flow, and I'm curious when you see the business turning the corner to positive free cash flow generation?
Oh, we're working on it. You know, COVID, we recapitalized the balance sheet in 2019, 2020. COVID hit, we did some more work, had interest rates swing against us. So, I do hope, you know, as we continue down our path, we will kind of cross that cusp and start to generate free cash flow. I think, you know, part of it is let's continue to focus on right-sizing the portfolio, focus on the Americas growth, and hopefully we'll see that soon.
On the capital structure and liquidity, you highlighted a couple of things in your opening remarks, but in terms of how you think about going forward, how you can accomplish more in terms of bringing down leverage or lowering the maturity walls that you have ahead of you, what are the next steps and the sequencing of that?
Well, you know, it is not lost on any of us that, you know, one of our greatest challenge, at least non-operational challenge, is the amount of leverage that we inherited at the separation. I wanna make that statement first. I don't know that there's a single answer to the question. I described it a little bit last night as maybe you're hitting a number of singles and adds up. And I think that's the right way to look at it. You know, let's continue to transform the platform. Let's pay down debt. It may not be deleveraging as you sell some of these international assets, or at least not material so, but you are reducing the aggregate amount of debt.
The debt we have has always been serviced by free cash flow of the U.S. business. You do get rid of the high capital intensity of the international business, start to shed some of those markets. You certainly reduce the volatility in the business through, you know, natural or unnatural downturns. So look, I think focus on the fundamentals of your core business, but continue to pursue the strategic review and execute upon that. And then, you know, continue to do the things you can from a liability management standpoint. Standard liquidity, we raise some liquidity, we start to attack our next, you know, nearest major maturity. We need to continue to do those things, but it's EBITDA growth, asset monetization, liability management for.
You mentioned you were comfortable with your liquidity. You added to it with that recent bond deal. As you think about the cash that you have available to yourself, we've seen other companies take advantage of market dislocation and trading levels. You have bonds trading at a discount to par. How do you think about potentially going into the market and attacking that as a means of deleveraging and again, taking advantage of this dislocation that currently exists?
Yeah, it's an option that exists, to the extent that we're not in possession of an MNPI, because of some other things. But, but setting that aside, it is an option that exists. We do feel comfortable our liquidity position, and it's just an alternative we would have to, to kind of rack and stack versus investment somewhere or some other thing. So I think, I think it's possible that, that is in the mix, particularly if, if the dislocation is exaggerated and those returns become even more compelling. You know, there's a certainty of return, like to buying back your debt as opposed to investing in a, you know, acquisition. But, you know, it's certainly, it's certainly something that's in the mix and, and up for consideration.
And you mentioned MNPI. Any other restrictions that would keep you from doing something like that?
No, there's nothing in the debt agreements. It's really, you know, are you able to trade, and are you willing to? I think that's a matter of liquidity. We could certainly be-
Okay. You have been vocal about your goal of ultimately heading towards a REIT structure. When I think about that, it would require a lot of deleveraging. At the moment, you pointed out you're not generating positive free cash flow. So what's the path to that REIT conversion? How do you get there in a reasonable timeframe?
Yeah, this kind of touches on some of the things we talked about earlier. But first, I want to say, I want to be able to move the company in a way that puts us in a position we have the option to convert to a REIT, right? We spun away from iHeart, and we gave up a lot of NOLs, both companies did, to preserve that optionality. I still think, you know, we have to decide on whether or not the pros and cons of the REIT make conversion to a REIT makes sense. But if it were to make sense, it would be at the right leverage multiple, which we've got a long way to go. But we're not missing out on the biggest advantage of a REIT, right?
The tax advantages, we already accrued the benefits of that through our 163 election. So, I at least want to point that out. There are other advantages to it being a REIT, and those are things we want to continue to observe. So how do we position the company, you know, by the time we would generate taxable net income and be a material federal income taxpayer, how do we put the company in position over those few years, to have the option to convert to a REIT? And I think it's a lot of the things that we're just talking about. It's simplifying the portfolio. It's focus on the Americas business. It's continuing to invest in the things that you think will help grow that business and grow EBITDA. Growing EBITDA is part of the answer.
I think other parts of the answer are, you know, are there things you can do on the liability management side? Can you create more equity value where that would become a concurrency, as a part of the solution? But I don't think there's a single answer. I think it is a number of things that you'd have to lean into, and then lean into at the right. Right now, it's the things we talked about earlier.
We're coming close to the end of our session. I wanted to make sure to ask about some news that came out last week. You announced a settlement with the SEC around Clear Media, which obviously you no longer own. Any details you wanna highlight around that? Does this settlement put it behind you? And maybe you can also help us understand when the cash actually goes out.
Sure. So, you know, first, this is obviously a lot of the details are in the disclosure, so I'm not sure how much I'm actually gonna expand on, on what's out there. So I encourage everybody to read it if it's of interest. But this is obviously, it's something that occurred well before the separation and, you know, the current management team. That being said, it was something we needed to deal with. And I think we've come to the, you know, we came to the conclusion that it was best to kinda wrap this up and put a bow on it, get it behind us, and move on. We do think this settles it. It settles it with the SEC. The DOJ has chosen not to pursue any kind of additional review.
So hopefully, it is at an end. It is unfortunate. I don't think we're the only ones that have had to deal with operations in China, particularly non-wholly-owned operations, and the challenges that are there. I think we have a good, you know, audit team, and I think if anything, we've done things to enhance and improve our compliance and our internal controls. But, you know, in 2020, when we sold Clear Media, there were a number of reasons why we looked to do that, and this was certainly in the consideration set as we looked at it. So that business has been sold. The payments, I think we do half of it in Q4 this year and the other half in Q3 of next year.
And so that's when the money will be leaving. We fully accrued at the end of last quarter. You know, we had some on the books, and the remaining amount was fully accrued. So, you know, it's unfortunate, but we, you know, we learned some lessons. We've improved our compliance and internal controls, and, you know, we won't have another one.
Great. We are just about out of time, but Brian, Dave, thanks so much for being here.
Thank you.