Audacy Inc (AUD) 2003 Q2 法說會逐字稿

During the quarter we also announced the acquisition of KWOD FM in Sacramento ending a seven-year plus battle to enforce our agreement to purchase the station. KWOD becomes our fifth FM in the Sacramento market enhancing our already powerful lineup. Entercom now owns all three major rock stations in the market as well as a successful CHR contemporary hit radio and a smooth jazz station. In addition we recently announced we had reached agreement with premier radio networks to move Rush Limbaugh to our new talk station in Seattle KTTH which we launched last December. Rush is currently the cornerstone program on a competitor station. The move which takes effect in October solidifies KTTH with a powerful lineup led by Rush and including other leading local and national talk show hosts.

While the station launch has adversely affected financial results this year, albeit to a minor extent, we expect KTTH to become a contributor to our growth beginning in the Spring of 2004. Operationally we have enhanced our capability by launching a proprietary new sales account executive training program earlier this year that is giving our new salespeople superior training to enhance their performance. And our brand development efforts continue to pay off with positive results for the spring arbitron (ph) ratings we've seen thus far. Each of these developments enhances our competitive position and our ability to generate excellent results for our shareholders in the future.

Turning to the current market climate, business conditions today are improving. Though less than robust. There are hopeful signs that the indicators are not sufficiently substantive or persistent for us to assert anything beyond cautious optimism at this time. The good news is that we entered Q3 stronger than we entered Q2. Our pacings are clearly ramping up sequentially month-to-month as we look ahead to Q3 and Q4. So August is better than July, September better August, October better than September and so on through December.

In addition we believe that the success of television and cable upfront is an important leading indicator which portends an improvement in advertiser (indiscernible). We cannot ignore the mixed macroeconomic news and therefore need to remain cautious in our guidance. Whatever the economic conditions we will continue to focus on doing the things we do to produce superior results. Recruiting and developing outstanding management sales and programming talent, developing our brand, continuously improving our practices, and looking opportunistically for new growth opportunities and ways to enhance our competitive position. We remain confident that we will continue to outpace the industry gaining material revenue share and delivering superior results to our shareholders. Steve.

Before I begin, first a reminder our Regulation FD as mentioned at the beginning of this call where we do provide guidance we accept no responsibility to update this guided on a regular basis. For the third quarter of 2003, the company expects to report net revenues of approximately 107 from 109.5 million. And have station operating expenses of approximately 62 to 63 million. This would represent pro forma same station revenue growth of approximately 2 to 4 percent and Station Operating expense growth in the range of 1 to 3 percent. As would result in diluted EPS of 38 to 40 cents which will be up significantly from last year's 31 cents per share.

Now our acquisitions during the second quarter in Portland and Sacramento that David mentioned were not included in our second quarter same station performance metrics and the supporting details are included in our earnings release. Our pro forma historical information by quarter for 2003, and for all four quarters of 2002, which has now been updated for the Portland and Sacramento acquisitions is posted on our company website at Entercom.com.

A few other notes on third quarter guidance we would expect CAPEX for the third quarter to be approximately 2.5 million, well below that experienced in the second quarter as we completed several major building facility moves including Denver and Greenville. For the year we anticipate capital expenditures in the range of 12 to 13 million. For our Time Brokerage Agreement of the Portland station the TBA of the two Portland acquisitions, we forecast TBA expense in Q3 of approximately $500,000.

On the balance sheet, again strongest balance sheet in the industry. We did retire our convertible preferred securities in the second quarter. Again further strengthening our balance sheet. Our June 30 total leverage was less than 2.75 times. And if we go pro forma to include the upcoming Portland acquisitions to close later this year, we would be right around three times on June 30. So that is the quick overview; I know you want to get to some questions and hopefully get out to the golf course. Operator, we will now open up the phone lines for any questions.

At this time we are ready to begin the question-and-answer session. (CALLER INSTRUCTIONS) Michael Russell of Morgan Stanley.

I was wondering David if you could give us an idea which markets seemed to be a little bit stronger for you. Those that may be a little bit weaker and give us an idea what your competitive situation is within those? It seems that you were gaining share pretty consistently across a lot of the markets but the markets seems to have some unevenness. Could you give us an idea of maybe if Denver is doing well or if Seattle is doing well?

Speaking historically in Q2 or --?

Yes, in Q2.

Again when you gain share in 12 out of 17 markets, the success ends up being pretty broad base. That was in fact what happened during Q2. I guess if I had to pick a couple markets that stumbled a little bit in the quarter, we had a little bit of an issue in Milwaukee. I guess would be one. And feeling very good about where they are pacing now; that is a good example of the market that is done a terrific job quarter after quarter but had a little tough run in Q2 but appears to be back in gear. Beyond that, again, I think our success is very broad based and very consistent.

If you take it on a macrolevel and look at market revenues again putting Entercom performance aside, you're right there is a range out there. We still are seeing Portland and Seattle slightly negative in Q2. We are seeing pretty strong indicators of Portland snapping back well in the second and the third quarter we probably expect to see Seattle down slightly in the third quarter in terms of overall market revenues.

Again just to reiterate that is market revenue (multiple speakers).

Understood. You also said that you grew market share by about 60 basis points. Could you give us an idea what your market share is in your calculation? Put that in some context.

It is in the high 20 percent range.

Great. Thanks very much.

Richard Rosenstein from Goldman Sachs.

Thanks. Two questions. One is in the second quarter and then maybe for the third currently, how many of your markets would you say were up versus down year-over-year? Then, maybe could you talk a little bit about the Denver acquisition and how it is performing relative to your expectations and how its performing in terms of return on investment at this point. Thanks.

Second quarter 12 of our markets were up, seven were down.

That is in terms of market revenue.

Obviously within our clusters we had more markets that were up than that. As far as Denver is concerned we could not be more pleased with the way things are going. I think the most interesting development there is the emergence of our new radio station, the mountain KQMT, which just had a terrific ratings (indiscernible) which I think sort of ensures its stature in the market going forward. It is on a great run rate here in terms of its revenue and cash flow growth. And we continue to be pleased with the overall performance of the cluster, and we are seeing rapid improvement there in revenues and cash flow which I think are driving the implicit multiple. We pay for those stations down ahead of planned (inaudible).

Can you comment on the third quarter, how many of your markets obviously not Entercom, but markets are up versus down?

We got, David indicated before, we got strong pacing data; we don't have forward indicators for all of our markets. As I indicated earlier in the call, Seattle still has a market at this early stage in the third quarter and I would like to pause and say it is still early stage, Seattle is pacing negative. I would say the rest are kind of a mixed bag but we're seeing some strong snap back in markets like Portland and some lift in Boston and some early signs.

Great. Thanks very much.

(indiscernible) of Wachovia.

Congratulations on Sacramento by the way. You ought to write a book on that one, David. With Portland, the price tag is what $44-45m?

44 million.

How much is left? I do not know what you have in escrow et cetera, but how much would be left to complete that station?

We deposited 2.2 million approximately 5 percent so the balance will go out when we close.

Okay.

It will go out as a revolver Bishop.

We were just assuming that we would just do that right off the revolver?

Correct.

So that we would get to our 3.0. I know it is still early to tell about Q3, but is there any indication either in any of your bigger markets et cetera that Q4 can be stronger market wise and certainly your stations (indiscernible) just off the fundamentals? Is the visibility out there getting any better? As we go along in '03?

It is always difficult to be projecting out two quarters beyond where where we are today, but insofar as the data we can look at is concerned, Q4 looks better than Q3 as I indicated in my earlier remarks. I have also read some analyst reports which I would take exception with -- they refer to the tougher comps the industry is going to be facing in the fourth quarter. I think it is very important to remember that yes the growth rates were higher in the industry in 2002 as compared to 2001. But of course that was comparing with 9/11. So I think if you normalize the growth rates that we're comparing to on the comps, to pretty 9/11 levels, I think the analysis would show that we have -- we are not looking at a particularly difficult comps situation going backwards.

Would you say that both on the strength of CTM and sell through?

At this point in time, I think those tend to correlate pretty closely and I think again so far the early signs are encouraging for the fourth quarter. Again I would not emphasize them too heavily as we sit here in July.

Thanks a lot.

Jason Helfstein of CIBC.

A few questions, just a little more probing on Denver. Is it fair to assume that Denver grew faster than the overall growth rate in the second quarter? Number two, perhaps some discussion on new business development and nontraditional revenue, clear channel talked about how they are trying to I guess shift efforts away from there. I am hearing from some private companies of them having some success; perhaps talk about your efforts in that regard right now. I know political is not big for you guys, but probably was a little bigger than normal in the fourth quarter last year, and I was just curious if you had a number for that last year? Thanks.

Your first question pertains to Denver, yes it definitely grew faster than the overall growth. I would not want anyone to think that Denver accounted for a large portion of our growth because again I will remind you of the fact that 12 of our 17 markets had market share gain compared to our competition during the quarter. From an NTR standpoint, it continues to be an area that is relatively small in the overall picture, but one in which we continue to look at opportunistically for ways we can evolve intelligent business models and smart small-business initiatives if you will that enable us to incrementally gain profitability. And we're not interested in doing NTR events to for the sake of the effort, they have to be highly profitable and they have to fit our overall business needs, but we will continue to look opportunistically within there. As to your third question I will turn it back to Steve.

For political I don't have it in front of me, but off the top of my head I recall it as being around $2 million last year in 2002.

Thank you.

Kit Spring from Stifel Nicolaus.

Good afternoon. Two questions. First, are you seeing any increased competition from cable or media like the Internet? Secondly, you have the best balance sheet in the industry as you mentioned, what do you plan to do with your free cash flow? Are you still just considering acquisitions or does a dividend or buybacks makes sense now? Thanks.

Let me start with the first question. I don't think we have seen any meaningful change in our competition. From cable or from the Internet over the last few years. I want to let Steve address --.

I think we have been fairly consistent in saying the number one focus of this management team is to use its balance sheet to make accretive deals in radio. That continues to be I think its fair. We are very cognizant and aware of the fact that there has been tax changes. We are very cognizant of the fact that we generate enormous free cash flow in this business model so clearly over the years ahead that is something that the board will take a look at. Your hidden question is where do we stand on dividend and share buyback. Again number one goal of the company is accretive acquisitions, but we will consciously take a look at that over time.

Any change in the acquisition environment?

No.

Asking high prices?

We continue to have interesting conversations with a lot of interesting companies that have potential to be meaningful transactions for us in the future. We continue to believe that we will be in a position to make meaningful acquisitions going forward. Over the last quarters I mentioned we did the Portland deal, we did the Sacramento deal and we got that closed. I suspect as we go-forward we will continue to be successful on those efforts. Although frankly our attention is more on larger transactions as opposed to one off deals.

Thanks.

Victor Miller from Bear Stearns.

Thanks for taking the question. David and Steve on the expense guidance, there has been a concern recently that there are problems with operating leverage in the business; you provided some pretty mild expense growth guidance for the third-quarter. Also, in the past you have said the higher growth and expenses is really a sign of your belief that there is a strength of the radio market in general. Could you give us a sense of what signs we should take in terms of the expense guidance you have given for the third quarter? Secondly David on regional consolidation the new radio rules would permit a lot more potential regional consolidation once you get away from the contour base rules. Could you take advantage of those?

Let me go first on your comment on expense guidance. Keep in mind yes, thank you for noting the mild quote unquote mild expense guidance -- don't forget, we did say that in the early part of the year -- that one we have not changed our business model for the year long-term. Number two, we had chosen to escalate our operating expenses to the first half of this year, so I think you see that reflected in our expense guidance. I for one believe very strongly that the operating model in this industry is fixed. That is it has not changed and I think our guidance and our performance has reflected that.

I would just like to add to that, I think also in the year prior, we could make some relative aggressive investments in marketing and so a comp standpoint it was -- we are still continuing as we said before to invest in opportunities to develop our radio stations and that continues. And so you should not take any sort of negative inference from our mild guidance for the quarter. As far as regional consolidation is concerned, no I do not think you are going to see us get into that game Victor. That is not what we are all about and we will continue to remain focused on building strength in the top 50, possibly top 75 markets where we do our best work.

Just to follow on Sacramento what is the final price and what was the acquisition multiple ultimately?

We actually do not have a final price. The quick metrics on Sacramento was an agreed-upon purchase price of 25 million. We have disclosed the court awarded us damages of 3.8 million which will reduce our purchase price and there is one small claim outstanding. So let's round it off with legal expenses and everything like that is, I will round off to between 22 and 23 million. As for multiple we have not disclosed it but it is in essence implied in the pro forma numbers we released and put on the website today, the station was operating at a slight loss, given where it had deteriorated to over the past year and a half through litigation.

Thank you very much.

Tim Wallace of UBS.

Looking at your performance in the second quarter, your pro forma performance which is pretty good under the circumstances, it seems a little disappointing your guidance on the third-quarter. So, could you maybe give us a little more color on the pacings that you're seeing so far. Are you seeing signs -- I know you said things are getting better but are there any markets that are underperforming for you? That is a general question and more specifically, Seattle is a very important market for you, I think it is roughly 20 percent of your revenue. I know you said the market was a little soft, but how are your stations or how was your portfolio doing this year and won't you be having some fairly easy comps in Seattle going forward? Thanks.

First on easy comps, I think if you're referring to the fact that we no longer carry the Mariners we have taken that out of prior year for pro forma. So, no we don't have easy comps.

First of all let me take your second question first in terms of Seattle. No, we're seeing Seattle as Steve said the market is a little bit sluggish, but our performance in the market is fine and we are gaining share in Seattle as we look forward. Tim, you are right, our guidance is as I mentioned in my remarks I think it is cautious. We are seeing incremental sequential improvement month-to-month. We entered this quarter better than we entered second quarter, and I would say to you that our management team would be disappointed if we were not able to exceed our guidance. But, to be responsible we need to give you guidance that reflects some expense or bakes in some uncertainty in the marketplace today. We saw consumer confidence figure that came out yesterday that was not particularly really robust. We're going to make sure that we are cautious in our guidance and that we deliver performance that when the dust clears that we will continue to be provide superior results and industry-leading performance.

Maybe you could help me out a little bit with some more specifics, in terms of say sellout on a forward basis. Could you discuss where August and September are? And how that trend has been working over the past couple of months?

We're going to enter August pretty much about I think 80 percent done, which frankly is a positive indicator for us. I would say also we are go into looking a month out in September, you did not ask but I will be happy to offer up we are well over half way towards our September goal. So again those would be indicators that we look at positively. But, as I said, we are being reasonably cautious in what we are guiding to.

In terms of the mix of your business, is that changed in any way? From zero advertisers.

National local?

Local advertisers.

That is one of the I guess you could call it an anomaly in the market right now is we're seeing national meaningfully stronger than local. That has been consistently reported by the rep firms as well as some of our peers in the industry. We will see how that plays out.

Has any significant local category softened?

No.

Thanks a lot.

Andre Marcus from Deutsche Banc.

Good afternoon gentlemen. Could you discuss cluster selling if you are able to break it out? What kind of percent of revenues come from selling individual stations versus selling stations bought together?

We don't have any specific data point there, but I would say to you that probably if we just look at local business, I would guesstimate that about 80, 85 percent of that is still single station sale. Maybe slightly lower than that at this point in time.

Great. Thanks a lot.

Mark Nabi of Merrill Lynch.

A lot of them have been answered just one question you were talking before about Rush and signing him on and starting in the Seattle market and starting off in October. Does that change the -- you had talked a lot about reducing expenses in the latter half of 2003. Will we see a slight increase between third and fourth quarter on an annual basis from from (indiscernible)that?

My guess is we might see that. I would not expect it to be material, but I think if we get to the end of the year and look back we will see Q3 is probably the lowest year-over-year expense, assuming that the year plays out on the top-line as we expect it to.

Great. Thanks very much.

Alyssa Goldwasser of William Blair & Co.

Good afternoon. I understand that you're making some signal (technical difficulty) can you talk about the thinking behind that, how you are executing and what.

You broke up at the beginning of your question. Could you repeat it please.

Can you talk about what is going on in Kansas City and your thinking behind the format and signal changes?

Sure. It is a very interesting story. Because again how we are very entrepreneurial in our thinking and constantly looking for ways we can improve our poker hand. We were able to recruit three of the top sports personalities in the market from another station in town, and they are joining our team. That creates an opportunity for us to launch a brand-new brand which we think will be an interesting addition to our portfolio. It also affords us the opportunity to take our AM country station which has terrific numbers for many years in which we have considered the possibility of moving to FM to expand its audience, with the obvious improvements in signal quality and into stereo. We will be making that move now over the course of the next few weeks, we think that will enhance that brand. And so collectively we think it gives us a nice little lift going forward particularly as we look into 2004 when those moves get a chance to take effect and we begin to generate some ratings improved ratings for those stations.

You anticipate some dislocation as you move country from AM to FM?

No, I think to the contrary I think that we have a good plan in place and will enable us to pick up where we are now, and be able to be a more formidable competitor to the existing FM country stations because we will now have of course we will have stereo characteristics that we've never been able to present to the marketplace before.

Steve (technical difficulty)

Apologies again, he question broke up.

(technical difficulty)

No we can't and if we can move on and operator if you can put Alyssa back in the Q for later hopefully the signal will clear up.

Paul Sweeney from Credit Suisse.

Thanks very much, good afternoon. Just a couple market questions. Seattle again just to go back to that for just a minute. Any reason that you have -- what is the main reason you would say is impacting that market -- is it something on the global economic front? Is there anything unique there national versus local and perhaps what gives you confidence that the fourth quarter looks stronger? Second, in the Boston market just update on how the market conditions are there? Looked like you had a great spring book 12-plus, I'm wondering if the demos were as strong as 12-plus numbers?

Let me deal with those in order as far as the Seattle -- I am not sure I understand what you are looking for.

What is driving -- what is been keeping that Seattle market down and what is changing to give you confidence about improvement there?

I do not think there is anything particular that is there, I think you just had a sluggish psyche in that marketplace and when you look fundamentally at the Seattle metropolitan area and its economic base, we still think that over the long haul even over the short to medium haul, its one of the first markets in America you would want to put your money in as an investor. So we are very confident of where that goes. Month-to-month quarter-to-quarter, it sort of is what it is.

As far as Boston is concerned, yes, the ratings there really were terrific. In particular, Star 93.7 one of our FM stations in that market had a phenomenal book and yes the strength was not just 12-plus but very much throughout the demo. As I mentioned on the call we had several markets where we really were positively surprised by our ratings performance, that being one of them.

Great. Thanks much.

Bill Myers of Lehman Brothers.

A couple quick questions. First off if you could update us on the status of the sports contracts. I think the (indiscernible) expired this year, anything that expires (indiscernible) ? Just if you could update us on the NOL balance and cash tax projections for the balance of the year.

I will do the latter part first. We believe based on the guidance we have given for Q3 that we will use the balance of our NOLs in this quarter. We begin being a small taxpayer this quarter, incrementally we will start moving forward. I think the guidance for your modeling and this is rough because when it comes to cash taxes paid, there is a lot of moving pieces. But I think our effective cash tax rate will be about 16, 17, 18 percent in that range. And it will bounce around beginning about in the fourth quarter this year on.

As to sports contracts, the only contract as you mention that is currently in play is the Royals, which perhaps explains why they are having the year they are having for those of you cynics in the group. We are in the process of discussing next year with them. And (indiscernible) if we are able to put a deal together that makes business sense for us we would be thrilled, we would love to have the Royals back on the Entercom team. But if we can't we can't. I do not view it as something that is essential to our success going forward in any way shape or form. As far the other contracts they're all long-term with several years left and those would be the Red Sox, the Saints and the Seahawks.

Also is the Royals contract revenue sharing or is it a fixed right (inaudible)?

Fixed deal.

Thank you.

David Banks of RBC.

I think you got all mine. Thanks, guys.

Kit Spring of Stifel Nicolaus.

You guys have enough handy in the fourth quarter pro forma revenues and cash flow for Q2? Fourth quarter pro forma revenues and cash flow you gave us your third quarter in the press release this morning, just wondering if you had fourth quarter also?

I believe that was on our website.

Okay. Thank you.

Alyssa Goldwasser of William Blair & Co.

Just wondered whether you are currently accruing for bonuses?

We accrue bonuses every quarter based on expected payout.

That hasn't changed as we move through the year?

No.

Great. Thank you.

(CALLER INSTRUCTIONS)

Thank you very much and we look forward to reporting back to you in 90 days.

Thank you.

(CONFERENCE CALL CONCLUDED)