Q2 2019 Earnings Call
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I'll now turn the conference over to your host Eileen Mclaughlin Vice President Investor Relations. Please go ahead.
Good morning, and thank you for joining clear channel outdoor holdings 2019 second quarter earnings call.
On the call today are William Eccleshare worldwide, Chief Executive Officer, and Brian Coleman, Chief Financial Officer, and clear Channel Outdoor Holdings, Inc.
In addition, Scott Wells CEO clear channel outdoor Americas is on the call.
Well provide an overview of the 2019 second quarter operating performance is a clear channel outdoor holdings, Inc. and clear channel International BV.
After an introduction and a review of the quarter well open up the line for questions before we begin I'd like to remind everyone that this conference call includes forward looking statements. These statements include management's expectations beliefs, and projections about performance and represent managements current beliefs. 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 releases and filings with the FCC.
Pacing data will also be mentioned during the call for those of you not familiar with pacing data. It reflects orders booked at a specific date versus the comparable date in the prior period and may not reflect the actual revenue growth rate at the end of the period. During today's call. We will provide certain performance measures that do not conform to generally accepted accounting principles. We provided schedules that reconcile these non-GAAP measures with our reported results on a GAAP basis as part of our earnings press releases and the earnings conference call presentation, which can be found on the investors section of our web site at U.W. Dot Investor Dot clear channel Dot com.
Please note that our earnings release and the slide presentation are also available on our website www dot investor Dot clear channel Dot com and are integral to our earnings conference call.
They provide a detailed breakdown of foreign exchange and noncash compensation expense items as well as segment revenues operating income and no I began among other important information for that reason, we ask that you view each slide as William and Brian comment on that.
Also please note that the information provided on this call speaks only to management's views as of today August or is 2019 and may no longer be accurate at the time of replay with that I will now turn the call over to William.
Brian will then review, our second quarter results and discuss our financial position.
As an independent company, we cannot fully charged coast as we seek to build on our momentum fulfill our ambition and pursue the opportunities in front of us.
I would like to acknowledge for our employees across our global operations for their hard work talent and dedication to serving our advertising partners and contributing to our success. While also managing the prices of separation from my heart.
Posted by our recent steps to establish our new board of directors strengthen our operating management across all regions and address our capital structure with last week's equity offering we are now well positioned to build on our market leadership as we continue to execute on our strategic plan.
Brian will discuss the equity offering in a moment, but let me just note that this marks a significant step in our focus on strengthening our capital structure.
This is a period of strong projected growth for the <unk> market compared to traditional media.
The fundamentals of our second a powerful but when you layer on the positive impact of the tech fuel transformation, which we are driving we are confident of delivering significant growth opportunities.
Since many of you unusual story I'd like to briefly recap our strategic position outline our growth strategy and provide an update on recent developments.
Please turn to slide four.
Our vision is to create a unique mass reach global media platform that delivers I pods messages across our distinctive portfolio of digital and traditional displays.
First we are focused on growing the out of home medium.
We believe we are well positioned to benefit from unique positive audience trends, an intrinsic strengths of our medium.
And we are building on our unique global footprint across key markets with coal strong strength.
Second we are focused on building on our technology leadership.
We believe we are a pioneer in this space and that we continue to lead the industry in leveraging technology and data to make outdoor that isn't even easier to plan by add to measure.
And we are continuing to improve and coal proposition through our digital displays making the medium even more flexible and creative.
Third we are focused on partnering with our customers.
We are further building on our sales excellence with sophisticated revenue management tools and deepening our relationships and optimizing the yield of our asset base.
And fourth we will continue to evaluate opportunistic expansion.
We are focused on leveraging our strong operational performance to optimize our capital structure now that we are an independent company.
We will continue to evaluate opportunities to expand our portfolio with new contracts and potential tuck in acquisitions.
Please turn to slide five.
We have a tremendous platform to work with with a diverse portfolio of 450000 print and digital displays in 31 countries, reaching millions of people monthly clear channel outdoor is one of the world's largest outdoor advertising companies.
In the U.S., we offer we are in 43 of the top 50 markets and all the top 20 dnase.
Our business is primarily driven by large format billboards, while the international business in Europe Asia, and Latin America is predominantly supported by street furniture small format displays located in 50 centers I tried to point of sale.
All told on the digital front, we have a growing digital platform spanning more than 14000 digital displays in international markets and more than 1600 digital displays in the U.S.
We believe there's no doubt we have superior assets located in the markets, where a major advertisers want to be.
From a macro perspective, the out of home market holds a unique position in the media mix due to its two core role.
Out of home advertising is also very much an activation medium reaching consumers right at the point of purchase.
And that ability to directly influence the so called last moments of truth to consumers is a very critical piece of the marketing mix and a major driver of sector growth.
As a result, the out of home sector has consistently outperformed all other traditional media a trend that is expected to continue in the coming years.
Our audience is that in the street on the highway in the airport or rail station or at the shopping mall.
Not only is that audience growing, but we are getting better and measuring it using sophisticated data and analytics to prove attribution and ROI.
Please turn to slide seven.
The installation of digital screens globally has completely transformed the oldest advertising medium into one of the full front of media offering advertisers, an infinite range of creative possibilities and flexible solutions to reach and engage target audiences at the right time and in the right place.
For perspective in the U.S., we installed 26, new digital billboards in the quarter to reach a total of more than 1300 digital Billboards and we now have more than 1600 digital displays which represents approximately 32% of our us based revenues in the second quarter.
And accounting for close to 30% of our international revenue, excluding China in the second quarter.
[noise], our leadership in supporting and expanding the creative boundaries of our medium was evident at this year's Cannes Lions International Festival of creativity.
For the 10th consecutive year, we sponsored the outdoor Lions category celebrating and championing outstanding Creative Achievement Tonight.
We also partnered with some of the world's most recognized brands to showcase the creative dynamic and targeted possibilities of digital out of home through the use of artificial intelligence dynamic real time messaging integrated user generated content and geolocation data amongst other innovations.
Leveraging all our resources, we remain focused on pursuing and winning new contracts both internationally and in the U.S.
Our recent Paris win which I will discuss in a moment is one example of the power of our platform and the innovation, we bring to mass deployment of incentives.
We're making progress in executing against our plan at all levels.
As you will see in the results, which Brian will review in a moment, we are continuing to see momentum in our business with particular strength in the U.S. offset in part by continued softness in China, which we noted on our last call.
In China, we own just over 50% of the publicly listed company clear media limited.
The business has delivered exceptional results for a number of years, however, starting with the fourth quarter of last year. They have experienced flat to declining revenues due to the slower economy and that e-commerce and industry customers remain cautious with their spending.
So we immediately put in place a plan to broaden that customer base and reduce that dependent on large customers from the tech sector.
In addition, they also realigning the sales organization and implementing cost saving initiatives to address the shortfall in revenue and higher rental payments.
It's still early in the process, but we believe they are moving in the right direction.
Moving to slide eight.
In the Americas region, our local business continues to deliver solid growth and we are capitalizing on the strength of the national out of home market in particular with strategic initiatives, we've been developing over time.
Some of those initiatives include our national team expanding our direct to talk on selling capabilities and developing our ability to respond rapidly to RFP.
And improving our sophisticated revenue management tools.
We are continuing to benefit as advertisers backfill for customers in key sectors, such as streaming food delivery services virtual meeting services and technology.
Our sophisticated revenue tools allow us to manage pricing as occupancy improves.
Branded as CCOH radar this suite of proprietary mobile data solutions.
Makes it as easy for brands to plan buy and measure as an online campaign, but with the increased impact and brand safety of the core out of home proposition.
Importantly, these tools, we developed and continue to be enhanced based on direct feedback from our clients, making them, even more powerful in delivering consumer insights and making them immediately useful yet buying process.
To that end, we are very excited about the recent addition to our radar line of solutions.
Launched in June radar think directly addresses our clients' needs by augmenting our radar offering to enable brands to integrate that unique proprietary datasets into our industry, leading planning and analytics platform.
Radar proof has already been providing advertisers with insights from the analysis of aggregated an anonymous mobile data.
Illustrating the behaviors of audience isn't supposed to out of home campaigns.
Please turn to slide nine.
On the international front, we are very pleased to have been chosen to partner with the city of Paris to 2020 four in modernizing and bringing in street furniture to life across the city.
A transformative win for our French business. This is one of the largest out of home contracts in Europe and will enhance our ability to deliver a full national network.
We will begin installing the street furniture across the capital later this year with the first advertising campaigns on the new displays is expected in the fourth quarter of this year.
Our recent win in the municipality of Monaco is a great example of our smart city initiatives.
These new shelters feature interactive digital touch screen are equipped with Wi Fi hotspot.
Org and a smartphone in Georgia and provide advertisers with a new way to deliver that brand image to an affluent audience.
Our UK market continues to deliver exceptional growth with almost 60% of the revenues generated from digital from our extensive network of assets. We have extended our National Street furniture network, having successfully won three major tenders to work with local authorities in Southampton Solihull and the London bar of hearing day to deliver new Street furniture to these areas.
In addition to these considerable wins, we continue to excel on the technology and creative fronts internationally.
In Sweden, we're differentiating ourselves in the marketplace by winning numerous awards for the creative use of out of home media, including winning the Best Innovation Award from I.B., Europe's Digital Trade Bureau.
The campaign was in partnership with the city of Stockholm to notify homeless people at the nearest emergency shelters when the temperatures dropped two critical levels.
As an independent company, we continue to tap into the energy creativity and focus of our employees across the globe as they deliver everyday for our client partners, while seeking to fully capitalize on the investments in advances we are making in our technology data analytics and creative capabilities.
And these initiatives are reflected in our results.
If you can please turn to slide 10, I will now turn the call over to Brian for the financial review.
Thank you William.
I too would like to welcome all of our stakeholders to our earnings conference call and Echo the statement and we are optimistic about the future of clear channel outdoor.
With the strength of our management team and board of directors supported by our stakeholders. We believe we have a unique opportunity to benefit from the ongoing trends and the out of home industry.
We will first review our second quarter results and then discuss the recent equity offering.
As in the past during our GAAP results discussion I'll also talk about our results adjusting for foreign exchange. We believe this improves the compared ability of our results to the prior year.
I will refer to these results as adjusted revenues adjusted expenses and adjusted OIBDA.
This quarter, we have added additional digital revenues.
For the Americas, and international segments, as well as the percentage of America's revenues attributed to national.
Going forward, we will we will continue to review additional disclosures that may be helpful to investors.
Our results this quarter reflect two very different stories in the us the team delivered exceptional growth.
Consolidated revenue decreased 2% after adjusting for the impact from movements in foreign exchange rates consolidated revenue increased 1.1%.
The 1.1% increase in adjusted consolidated revenue is due to growth in our Americas segment, while international was impacted by the substantial decline in China.
Consolidated operating income was $82.4 million down 12.3% as compared to the prior year.
Adjusted consolidated OIBDA declined to 2.8% to $172 million with growth in the Americas offset by a decline in international primarily due to China.
Moving on to Slide 11, I will discuss America's results.
The Americas business had a very strong quarter with revenues up 9.1%.
We are benefiting from the positive trends in the out of home industry in the us with growth across all of our channels.
As well as the initiatives, we have taken to capitalize on this growth, especially international business, which was up over 16% in the quarter.
Within our national team, we've been working on a number of initiatives to drive growth.
This includes expanding direct to client selling.
Increasing our speed or responding to RF piece.
Leveraging our sophisticated revenue management tools to optimize yield and of course, continuing to expand our reach radar suite of solutions.
Local continues its growth trajectory and was up about 5% in the quarter due in part to the strength in digital.
Digital revenue was 105.9 million or 32% of total revenues in the quarter.
And increased about 20% in total due primarily to the increase in both digital and both Billboards and street furniture benefit benefiting from organic growth due to higher rates and new digital displays.
Airport displays print billboards in Los Gatos also contributed to the overall growth in revenue.
And total operating expenses were up 7.5%.
Direct expenses were up 4.3%, primarily due to higher variable site lease expenses related to higher revenue.
And as DNA expenses were up 16%, primarily due to higher employee compensation expense, including variable incentive compensation.
Operating income increased 15.8% to $91.1 million.
With the way the dot up 11.4% with an improvement in margins due in large part to the strong revenue growth.
Pacing for the third quarter was up 8.4% of as of last week.
The growth we have seen for the last several quarters is continuing with strength in all channels.
Reported revenues were down 10%.
Adjusting for foreign exchange revenue declined 4.7% or 19.6 million.
As we mentioned during our first quarter earnings call our business in China has continued to decline and in Europe . We are still feeling the effects from the non renewal of the by contract in Barcelona, and the conclusion of the airport contracting wrong.
However, in our two largest markets in Europe , France, and the UK, we continue to see positive momentum in revenues, especially in UK with its expanded national Digital network digital now accounts for close to 60% of revenues in the United Kingdom.
Total digital revenue was $90.1 million in the quarter up 10% after adjusting for foreign exchange.
And accounted for 24.3% of total revenues, excluding China digital represented 30% of total revenue.
Expenses were down 4.3% during the quarter and adjusted expenses were up 1.4%.
Adjusted direct expenses were down 6.4% due to lower site leases expenses in Italy, and Spain attributed to the non renewal of contracts.
Partially offset by higher site lease expenses in countries experiencing revenue growth.
Adjusted SGN expenses increased 2.3%.
Due to higher professional fees related to the investigation in China.
It is disappointing to see the substantial decline in car Media's revenues and OIBDA contribution.
However, as you know we own approximately 51% of clear media and we consolidate 100% clear medias results under us GAAP.
Operating income for the international segment in the quarter was down 42.3% and adjusted EBITDA was down 26.1% due primarily to China.
International pacing for the third quarter of 2019 was down 4.6%, including China as of last week.
Europe's pacings are flat with continued strong growth in the UK, primarily offset by Italy and Spain.
Latin America is continuing to show growth with strength in Brazil.
Before we go onto the rest of the slides I'd like to take a few calls I'd like to make a few comments on cc Ivy. These results for the second quarter Cc Ibds consolidated revenue totaled 290.4 million.
A decrease of $20.5 million from the prior year on an adjusted basis CCR. These revenues decreased $3.7 million during the quarter.
Now please turn to slide 13.
Capital expenditures totaled $79.3 million year to date through June Thirtyth.
The increase in corporate Capex was primarily related to the build out of the new San Antonio office and infrastructure due to the separation.
Our capital expenditures in our Americas segment were primarily for the conversion of digital Billboards and the international segment for the deployment of street furniture and transit, including digital displays.
Now on to slide 14.
Kurt General outdoors consolidated cash and equivalents totaled $372.5 million as of June Thirtyth 2019.
This balance includes 146.1 million of cash held outside the us by our subsidiaries a portion of which is held by non wholly owned subsidiaries or otherwise subject to certain restrictions and not readily accessible to us.
In the second quarter, we received a net $115.8 million from Iheart media as part of the bankruptcy settlement.
And net $43.8 million from the sale of preferred shares.
And during the first half of the year the cash interest payments were $161.2 million. This is lower than the prior year due to the timing of interest payments.
Our senior leverage ratio was four and a half times with consolidated leverage at 8.8 times.
We expect cash interest payments and 2019 to be approximately $322.2 million.
In 2020, we expect cash interest payments to be $385.8 million.
Moving to slide 15.
As we've discussed our new board of directors has made it a priority to address the capital structure, including reducing leverage.
Last week, we took the first step in the process of reducing leverage and normalizing the balance sheet with the public equity offering of our common stock.
On July 25th we sold 100 million shares of our common stock for a public equity offering.
We will use the net proceeds of the offering together with cash on hand to redeem approximately 333.5 million aggregate principal amount of our nine and a quarter senior subordinated notes due 2024.
The proceeds from the offering will enable us to reduce our debt to $5 billion.
And more importantly, it will reduce the consolidated leverage ratio by 0.6 times to 8.2 times based on our trailing 12 month results through June Thirtyth.
And we expect to generate an incremental $30.8 million in free cash flow on an annualized basis due to the reduction in cash interest expense.
In addition.
We granted the underwriters a standard 30 day option to purchase up to 15 million additional shares of common stock on the same terms and conditions.
If the underwriters exercised their option to purchase additional shares in full we intend to use the net proceeds together with cash on hand to redeem an additional approximately $50.2 million of senior subordinated notes.
You may have seen the announcement that we will that we will be holding a bank meeting. This afternoon to launch a $2 billion secured term loan b to refinance existing debt.
Following the equity offering this proposed refinancing marks another step the company is taking and normalizing its capital structure.
We are excited to take these first steps in what we believe will be a sequence of steps to continue to delever.
Improved free cash flow and strengthen our strategic flexibility.
That concludes my formal remarks, now let me turn the call back to William.
Thank you Brian .
As I said earlier. This is an exciting time for fish on lot door now that we are an independent out of home advertising company.
With our driven and dedicated team in place and the support of our new shareholders in both directors. Our team has the focus energy and ambition to take the business to the next level.
The fundamental strength of our industry combined with our strategic investments in Digitization automation and data analytics and delivering growth and supporting our positive long term outlook.
We welcome our new investors and look forward to updating you on our plan and ongoing progress.
And now Scott Wells will join Brian or myself in taking your questions.
Our first question comes from the line of Steven Cahall of Wells Fargo.
Thank you so really strong growth in the Americas. This quarter I was wondering if you could just help us dissect that a little bit.
Is pricing a big tailwind in the market right now on tight capacity have you added any significant capacity, that's helping to drive that is that the conversion to digital inventory. So any color there would be helpful.
And then also I think what are your competitors want to use contract you've taken some share from them recently, including in Paris. So do you see them showing up a little more on the US market as you continue to increase your market share in Europe , and then finally really strong free cash flow in the quarter. Despite some elevated capex. So just how are you thinking about cash generation, maybe outside of the interest color that you've already given.
For the coming quarters. Thank you.
Thanks, Scott here and I'll start off with the first couple that had the Brian on the free cash flow front.
On the U.S. growth, we really saw a growth across all channels and all product lines. So it was it was really balanced growth.
Quarter, we saw growth in national that you heard Brian referred to.
And there was strong growth in local as well.
From a category perspective business services technology insurance, but moves were the big growth categories and the big growth drivers.
From a regional perspective, it was pretty balanced across the country, but strongest on the coasts.
There were of course, we have our study digital conversion so.
That gives us some that gives us some strength, but it was a it was a growth story that that really touched on all fronts and.
We have seen some enhanced yields we've definitely seen occupancy growing.
So you know it's.
The bunch of a bunch of different drivers I guess, the other thing I'd just call out is we're seeing fruit from our direct to client outreach.
With some new clients coming in.
They leverage the radar tools pretty effectively so radars, but an important contributor.
Certainly programmatic.
Giving a new channel for people transact electronically.
So that's.
In terms of the U.S. contract and just a clarifier if we could you referring to the San Francisco contract that was just announced today.
I am yes.
Yes that was actually a renewal so that's a that's a contract that they've gotten.
They have had for quite some time that they are they are getting the right to digitize. It I think is the main thing that's happening in the.
I don't particularly see it as something that is.
Yes look I think the way to think about free cash flow is that theres, a great deal of seasonality in the business and so any quarter in isolation.
This until the full year story, I think I think in terms of.
What to think about going forward.
You may see a little higher capex expense relating some of the investments, we're making in Europe and later in the year, you will see Paris come online, so maybe a little bit higher than what you've seen historically, but it's for for good reason, we've got some great contracts that we've won and investments that we've made but I think the biggest impact of free cash flow going forward is really the efforts that we're doing on the on the capital structure side. If you saw the equity issuance that we did we are taking the net proceeds or paying down some expensive.
Subordinated debt utilizing a 103 equity call that we had previously negotiated.
Now that will have you can do the math that will have about a $30 million per annum impact that will that will be cash interest reduction free cash flow generative.
There has been an announcement about a bank meeting.
And so it's in the marketplace that were kind of.
Great. Thank you.
Your next question comes from the line of Aaron Watts of Deutsche Bank.
Everyone. Thanks for all the detail today.
And I know you talked about in the pacing.
That Europe is pacing flat as of last week.
I apologize if I missed this but how did Europe performed in the second quarter.
So I think we probably say Europe with was pretty much flat in Q2 as well.
I mean, it impacted by a couple of significant loss contracts, the Barcelona bikes, which we didnt renew and the Rome Airport contract, which went in house into the airport and those have some impacts, but yes, the vet that disguise Dave.
Across the region, we feel very strong performance in the UK in the quarter.
We saw a strong performance in Norway in Finland, and Sweden, and France, showing growth as well. So some good performance from some countries as you'd expect.
Okay Thats helpful and Brian one other question for you I know last time, we convene for the earnings call you had given some initial thoughts on your standalone kind of cost going forward now that we're a few months removed from the separation.
Can you maybe give us your updated thoughts on how you envision costs for clear channel outdoor kind of going forward and if it's in line with what you said.
Commented on last time, we spoke with you.
Yes.
I think I think it's generally generally in line I think what you will find over the nine month to 12 month post separation as we migrate from the TSA agreement that's in place that theres going to be some volatility in corporate expense.
An example would be.
You just don't exit the TSA and then start day, one you actually have hire the people train the people have some processes Ron.
A bit of an increase in separation costs. During this time period.
I think the more relevant question that that you may be getting to is what's the run rate kind of after all these costs have been processed and.
I'm I'm I'm still.
Sticking to we hope to be around the same place. So if you took a first quarter kind of corporate expense number that were in the same ZIP code backing out all the kind of onetime things that occur.
There'll be pressure on that I think that there may be some ability to.
Operate more efficiently in certain areas and there's going to be other areas, where for example, you don't get the economies of scale that you got because.
I heart was able to combine both companies in purchase things services different things.
More cheaply than than we could so we're still working through all that in any case I don't expect.
A major changes in the run rate and as soon as we are able to identify that is not the case, we would communicate it but generally I think we're in the same place as we were when we last spoke.
Okay, Great that is it that is helpful and if I could sneak one more in and I. Appreciate the time, William you talked about opportunistic expansion being one of the tenants of your kind of vision going forward.
Can you just give us your latest thoughts on the M&A environment, maybe both in Europe and here in the U.S. and and how you think about being kind of an acquirer of assets versus divesting some assets potentially but more generally even just.
How active you think the environment will be for the industry for the next kind of 12 months.
Yes.
I mean, I'll give you my view overall for the industry, which is I think it will it will continue to be active across the across the globe. I mean, the fact that the out of home sector. As I said in my introductory remarks, it's a very hot it's a very hot sector. We then appetizing at right now and that that tends to lead to opportunistic M&A I think there is still opportunity for consolidation in pretty much every market that I look at around the world. So I would expect to see continuing activity.
We have seen is in the U.S., we've seen it in Europe , we saw all of the activity in Australia last year. So yes, I think we would certainly expect that trend to continue as for ourselves.
I'm not going to make any specific.
Observations about our plans I mean, we we will look at opportunistic.
M&A, we will have to.
Two tuck in acquisitions, where they make sense for us.
I don't think you should anticipate a a massive acquisition spree in the next few months.
Not the plan at all.
But.
For us, it's about winning winning the right contracts that enabled us to.
Increased the value of our existing asset in the markets, where we have presence.
And yes, we also will continue to review asset sales if someone else values, our asset more highly than we do and then we will obviously pay attention to that and consider that.
But to be very clear, we do not think it makes sense to sell off individual market for individual countries that might devalue the remained.
Of our footprint.
And to be absolutely Crystal clear nothing planned at this time does that give you enough of an offer.
Thank you very much.
Thank you.
Your next question comes from the line of common sense attached war of Barclays.
Hey, Dave.
Hey, Bill on behalf of common one question on international.
Uh huh.
Digital revenue growth it seems to be a little slower than us are we are we view.
Is it mostly due to macro factors or do something else going on in particular, and then I have one follow up on international around topline growth.
Well, it's a little bit of breakdown of organic growth without Italy and Spain.
Thanks.
Okay. So let me take those on digital growth, if you back out FX around 10% growth.
And it will vary quarter by quarter.
Depending upon which contract to come on stream in that quarter.
So I don't think it does reflect any particular macro trend some contracts that we win will have us.
Hi, Adam until of of digital such as the Madrid Fleet Street furniture contract that we won a couple of years ago, but other big new contract such as the Paris, one that we mentioned and that is not a digital contract that subscriber contract. So it just really depends on which new contracts we have.
And on the specific roadmap plans within a quarter. So so I think the short answer to your question no. It doesn't reflect any any slowdown in our ambition regarding digital.
Your second question regarding the kind of the specifics of the.
The contract losses in Spain, and Italy, we don't breakout individual contracts or individual country or market.
Financials, so I'll try to call give you any more detail on that.
Okay. Thank you.
Thanks.
Your next question comes from the line of Marci Ryvicker of Wolfe Research.
Good morning, its Stefan from RC, Brian You mentioned the equity offering was step one.
Kind of the terminus two to fix in the capital structure, what are the possibilities for cips three possibly four.
Yes, I think I think first I talk a little bit about the term loan launch which is out there as kind of the the debt side step to being addressing the debt and.
I think that it's important that we take a look at all of our senior debt and look at a comprehensive refinancing. So the bank loan is the start of that I think there's there's more to come.
Your question really is though after that what what comes next and look I think.
The we've done a great start we've we've issued equity we put ourselves in a position to.
Take advantage of opportunities in the high yield marketplace.
Do some significant refinancing.
Dramatically increase our free cash flow by interest cash reduction strengthen our strategic flexibility. So I think that puts us in a pretty good place and I think that will help with with further steps that we can take to de lever because ultimately that's the goal here with the company upon separation had too much leverage it was a goal of the board and senior management to reduce leverage but there are still significant amount of leverage even after we do this the company upon separation didnt have strong for free cash flow. If we had operated a plan, which we expect to do it still would have been a while before we generated free cash flow. These actions.
Hello Hello.
Accelerate that free cash flow generation and the ability to delever organically by 18 months to two years. So those are big steps.
But it does put us in a better strategic position and what I mean by that is some of the other things that we look at such as potential asset monetizations or M&A activity, where we can go out and acquire tuck in acquisitions or when contracts that are that provide a network effect affecting our accretive to the business.
We're going to be front footed now will be better able to.
Operate from a position of strength I think you know and cases people saw us as a company that was separated from a bankrupt parent and had a weak balance sheet and that will no longer be the case and so I think we're better positioned so without telegraphing what the next steps are beyond that.
The the refinancing is probably bigger than what we're seeing today.
I will tell you that we are open and we are looking and we are we want to be aggressive operators of the business as long as it makes sense and we think we're in a position to benefit from that.
Great. Thanks, and then just one more how should we think about the expenses for Opex and Capex regarding pairs.
You know on on specific contracts, we don't really talk about any of the details the.
You just I think conventional wisdom, we tell you that this is a big new contract versus significant amount of Capex. That's involved the timing of this is.
Pretty much now as we're acquiring.
And over the third and fourth quarter as we start putting plant into ground.
So you will see some capex flow through the company in the latter half of the year, there's a little bit of a delay before you start monetizing that capex, but you should see the revenue benefit coming shortly thereafter, so in a general way that's the sense of how I would think about it but details. We just don't provide on a contract by contract basis, and just to add to that I mean revenues will start to flow in Q4 of this year and then in 2020 that we'll see the full impact of that contract and as I said in my remarks. It is a very significant contract for us not just for the value that it gives us in the city of Paris, but the impact that it has on the the rest of our assets in France, our ability to sell.
National network to our advertisers.
Across France is a significantly improved bye bye bye winning Perry.
I think that.
Probably true to say that that contract was worth more to us than to any of our competitors because of the incremental value. It gets to the rest of our assets.
Great. Thanks, so much.
Your next question comes from the line of Jason Bazinet of Citi.
Just had a question for Mr. Coleman do you mind, just going back to the equity raise last month than just walking through.
Some of the alternatives you considered in terms of raising capital.
What were the sort of the pluses and minuses are going down the equity route that you wind down that sort of closer to to reach that conclusion.
Thanks, Jason that's that's a question that that not only do I get.
From investors, but one that I've been asking myself for 90 days because it's the exercise that we've gone through and we've gone through with the board.
And we did look we did look at a lot of options I think on our last earnings call. We talk about the tool kit and we talked about.
Equity is one of the levers that we have asset monetization as being another lever.
Addressing.
Our capital structure, our debt in the financial markets as being another so we looked at all the different.
Different.
Levers that we have and really didnt want to work and really couldn't rely on any one of them. There had to be a combination of these different levers to to really address where we want it to go.
And again, if you focus on the priorities of reducing leverage.
Increasing slash accelerating free cash flow and establishing some strategic flexibility, which we didnt feel like we had upon separation.
The one solution that actually impacted and improved the other solutions was an equity issuance. The two questions I get the most are why did you issue equity Onest and why didn't you issue a whole lot more.
And and you know that the answer really is.
We wanted to issue enough equity to kind of unlock the benefit of.
The refinancing options being in a better position being in a position, where we got a ratings enhancement being able to tap both the term loan market as well as the high yield market potentially.
To help refinance at lower rates and push out our maturities.
The equity offering does that did that if we've got app refinanced without it we'd be much more restricted and in a much worse position, we might have been able to do some refinancing we might not have been able to we might have been able to do it at at current rates, but it wasn't it would have been at attractive had had we not improved our financial position.
I think the same thing goes with respect to asset monetization the strategic flexibility, we get by having a stronger balance sheet and not being in a position where we are a distressed seller can only help us as we begin to negotiate potential monetization or contracts, where we're building on the business.
And then within the equity option itself there were a combination of different things that we looked at but again if your focus is on de leveraging and an increasing free cash flow a lot of those other options didn't really provide that benefit they were real equity or didn't get full equity credit are they got full equity credit, but they had a significant cash coupon tied to it.
So a long winded way at the end of the day I think we felt that this was the appropriate amount of equity it didn't fix the balance sheet, but but it would have been a lot bigger to fix the balance sheet.
But it was enough equity to start this kind of virtue a sequence of other things that we could do and we'd be in a lot better position to do it and it's the combination of those those items that we feel will ultimately put us on the right track to Delever delever organically because of the free cash flow, we've generated and having a much stronger position from.
The strategic flexibility standpoint.
That's helpful and this may be an appropriate follow up but is it reasonable to assume that the daisy chain that you're talking about is essentially.
Issue equity pay down debt opened up the credit markets Rifai lower interest and then come back to the equity market and sort of rinse and repeat.
I would I would say I would not come I would not say come back to the equity markets and rinse and repeat we think we think Weve got this process. Once we go through it we may have to see where we are but but I like where we are I think that through the equity raise in the paydown of debt and come to the debt recapitalization.
We're going to be we're not going to be at the maybe the the target our optimal leverage level, but we'll have a path to being there and we won't really have to do anything else. So.
I would say that it's that sequence that Daisy chain as you put it and that I think it's all right, let's see where we are but I would not say that theres any plan or desire at this point to come back to the equity markets.
Okay. Thank you.
Your next question comes from the line of Davis Hebert of Wells Fargo.
Good morning, everyone. Thanks for taking the questions just a couple from me.
Given all your commentary, Brian I Wonder if you could help us with any sort of.
Targeted leverage over time.
And any sort of targeted credit ratings profile as you think about some of these refinancings.
Yes.
I'm going to be real careful and never ever say that there's a there's a quote I'm doing air quotes target out there.
Unless that target is lower.
Leverage is something we need to work on and this is the first step and we'll need to continue to grow.
Approach a more meaningful unbalanced number.
When I when I answered Jasons question, and I talked about gives us line of sight and really my my goal I won't call. It a target, but my goal is to have that downward sloping.
Leverage profile, we are in the next 18 to 24 months, you can see yourself getting to six and a half and 6%.
That's dependent on you being conscientious and taking your excess free cash flow and paying down debt there maybe opportunities to continue to invest in the business and we'll have to balance those options versus a repayment of debt options, but those options grow the business grow EBITDA. So it still.
It still could be a way to approach a more meaningful leverage target and then I think once you actually get to that then you have to reassess where you are but the first step was being able to equip the company with the ability.
To to reach that point and that's that's what these actions are designed to do.
And then you asked about ratings I think it I think it was important as we went through this process too.
You get some ratings enhancement, particularly from from S&P, We hope that the equity process in combination with some of the stuff we're doing on the debt side will resonate.
It was one of our goals.
Ultimately, where we want to be as probably still an open question.
But we needed we needed to get some enhancement to kind of kick this off.
And maybe maybe next quarter or the next we'll have a better idea of where we want to be when we grow up. The first step was the first step and thats to get to that is to get into outer Triple C land into an end to leasing will be land.
That's helpful. Thank you and then one fundamental question on China. It seems like this weakness have gotten worse.
Should we expect.
Some sort of turning the corner.
Down the road or is this something we should be concerned about as being maybe an impaired assets just any thoughts there.
Yes, I mean, I think it's a fair question. It's also a difficult question for me to answer.
Because as you know it's a this is a joint venture.
Perimeter as a publicly traded company in Hong Kong and I don't want to preempt in any way the results announcement, they will be making in August late later this month.
They did issue a trading update.
A couple of days ago, which is publicly available.
Well they talked about the uncertainties around the external environment and a continued slowing in the market.
I really don't want to make any kind of indication about what we think the second half will be what I would say is that I do think that we are we.
Seeing here a significant.
Macro impact the China, the China economy was undoubtedly overheating the China government took some pretty significant steps to two to slow things down we've seen retail sales slow down the low is the lowest growth in retail that we've seen in the last few years, we've seen GDP growth slowdown weve seen media spending overall in China declined 11% in Q1 of this year. The the biggest drop that they've seen in China for 11 years.
And we've seen the out of home market as a whole declined by 18% in China.
Which is also the biggest drop since the global crisis 11 years ago. So I think there's a macro issue here without a doubt and we have been particularly hit by because our effect.
Of the out of home business, which is the traditional bus shelter business.
Even almost entirely a paper and vinyl business. It has virtually no digital we just have a small digits. So.
Pilot in the city of Nanjing, and traditional outdoor has been particularly badly hit and then finally, we've been hit as we say in our statement by the decline in.
Big categories for us around technology and E. Commerce. So I think we're seeing a cyclical issue not a structural issue for the clear media business, but I don't really want to say more than that until they pay media and activists results later this month.
Thanks.
Great. Thank you.
Your next question comes from the line of Lance Vitanza of Cowen.
Hi, guys I had a couple of follow up questions and then I wanted to ask about the Paris contract, but first so the follow up on the refinancing at lower rates.
Given your leverage profile should we assume that any pre tax interest savings you're able to generate.
Would equal after tax interest savings.
Any pre tax interest savings that we get I'm, sorry from Remy by that again as we mentioned, yes. So just given your high leverage I'm wondering if we can assume that pre tax interest savings from it.
Lowering the coupons on your debt would translate into would equal after tax interest savings in other words are you in the zone, where you're really not getting any.
Tax shield from from the from the from the from the interest expense that you're Bay.
Yes.
Okay.
So the follow up question on us growth.
You mentioned that one point early on you did benefit from some new customers and I'm just wondering if those new customers.
We're new to out of home advertising or.
Had been advertising with some of your peers and you sort of stole them.
Could you comment on that.
So I think I think about new customers in a in a couple of ways Lance.
First off with.
With our move into selling programmatically weve enabled our inventory to be accessed by a bunch of customers who buy a digital first.
And some of those are customers, who did out of home years ago. It had gone away and they've come back some of them are customers that are truly new to the category.
From a direct client outreach.
A lot of the activity in new customer development is with emerging growth companies and.
That's an area that we've had some really good success in.
And we're definitely not.
Not.
Poaching them from from other out of home companies.
I think when we bringing these companies in our competitors benefit from it.
We hope in the long run that we benefited as well as they bring new customers to the category I think all of us benefit from growing the out of home pie.
Great and then just lastly for me on Paris, I, just let me play Devil's advocate here for a second and this may be the wrong premise, but given its presence throughout Paris, I would've thought that dico would sort of had it would have had an advantage on bidding for that business and that therefore, presumably you bid down the expected IR are so to speak on that business to a level that perhaps to co found unacceptable and I'm wondering you know.
I understand I mean, why would you what are the benefits to you are there tangible benefits beyond the value of that contract data, whether it's being able to offer Paris on a national campaign throughout France, but just if anything you could help us that would help us draw a clear line too to why that contract.
Okay. Why you did what you did there.
Yes sure.
Thanks, Lance I think I touched on it in the off the two and on your question and I think youre pretty ties to the off when you. When you talk about the ability to offer national campaigns, I mean, I certainly can't comment on our competitors bidding strategy strategy that entity, there with you and clearly they fail to retain the contracts and we want it so.
We are delighted by the when we feel we bid at a very rational level for us and as I said earlier I think it is plausible to argue that the the contract was worth more to us than to any of our competitors because of the impact. It has on the rest of our inventory in France, and the added value. It gives to that inventory by giving us full national coverage and what we call. The network effects. So I don't really want to go into our bidding strategy any more detail than that but I think you pretty much got your onset.
Thanks Thats helpful. Thanks, very much.
We have time operator for question one more question comes from the line of Jim Goss with Barrington Research.
Thanks, I'm wondering the enhancement to digital by Raiders targeting and measure measurement capabilities.
Obviously, it creates improved pricing power I am wondering if the benefits are immediate or should there be in.
General upward bias in your capabilities to.
Secure dollars, there and the overall impact on margins.
As a as this is affected.
Thanks, Thanks, Jim Scott here I'll take that one.
First and foremost radar is relevant for all of our inventory, it's not just for digital inventory.
It is an important part of our programmatic offering which focuses on digital but we.
Do a lot of deals with radar using it.
Against our traditional inventory.
I would think of it as a tool in the tool kit to drive revenue growth, which revenue growth. We have good flow through as we as we get increased revenue.
It's probably the biggest tool we have for improving margins and I wouldn't it'd be hard for me to put a.
Margin enhancement number specific just to radar because it's part of several several prongs that we're using to drive revenue growth.
So im not sure I can answer that question for you in a in a dimensionalized way, but you should think of it as a critical part of us driving our topline, which then enables us to get operating leverage that you've seen in our last few quarters results.
Okay fair enough.
One other thing on capital allocation and the M&A in context, given that you do want to bring down leverage.
In order to trade up your.
Properties will it be necessary to sell certain.
Assets in order to create room for.
Additional M&A or is there enough flexibility within the overall M&A or within the overall.
Capital allocation, where you feel you can use some of your free cash flow to make those.
Acquisitions.
Well, Jim part of.
Part of the what we've talked about the issuing the equity the refinancing and debt to the.
The creation or acceleration of free cash flow generation.
Is to ensure that we're not in a position where we have to sell.
That doesn't mean my asset monetization is off the table I think we very we're very open to looking at opportunities, but again, we don't want to be perceived as a company that is distressed and has to sell assets because that will be reflected.
And the prices that you are offered.
And I've heard William saying I know I've said that we're open and if our assets are worth more to somebody else than they are to us.
We'd be very open to entertaining discussions but.
We also want to be in a position, where we can operate our businesses fund the growth of those businesses and we think we can do a pretty good job at it and so that's that's the work we are doing right now is to position the capital structure to match that strategic objective.
Okay. Thanks very much.
Thanks, Jim Thanks, Jim.
Okay, we're going to end, we're going to end that I'd like to thank everyone very much indeed for joining us today I just wanted to make a couple of closing remarks festival in clearly we have some challenges in China as a result of the.
Issues in the macro that I talked about I don't think we should allow those to overshadow the really exceptional performance that we've seen in the United States in the last quarter and I congratulate Scott and the outdoor Americas team on delivering those results.
And I'd also end by thanking Brian and his team for that work on the balance sheet, which truly does increase optionality for the business at this very exciting time for channel at all so I. Thank you very much to everybody for joining us. If you have any questions. Please do direct them to Eileen.
And we look forward to joining you next quarter. Thanks.
Thank you for participating in the clear channel outdoor holdings Inc. 2019 second quarter earnings Conference call. You May now disconnect your line and have a wonderful day.