Audacy Inc (AUD) 2008 Q3 法說會逐字稿

Good afternoon, and welcome to Entercom's third quarter earnings release conference call. All participants will be able to listen only until the question-and-answer session of the call. The conference is being recorded. I would like to introduce your first speaker for today's call, Mr. Steve Fisher, CFO and Executive Vice President. Sir, you may begin.

Thanks, operator, and thanks, everybody, for joining us here on this fall afternoon. I'd like to point out that today's call will contain certain forward-looking statements that are based on current expectation and involve risks and uncertainties. The Company's actual results could differ materially from those projected.

Additional information concerning these factors that could cause actual results to differ are described in the Company's SEC filings on Forms 10-Q, 10-K, and 8-K. The Company assumes no obligation to update any forward-looking statements. During the call we may reference certain non-GAAP financial measures and we would refer you to our website at www.entercom.com, the Investor tab, for a reconciliation of such measures and other pro forma financial information for your pleasure.

So with that, I will turn it over to David Field, President and Chief Executive Officer.

Thanks, Steve. Good afternoon, and thanks, everyone, for joining us on today's call. I am pleased to report our third quarter results and provide you with an update on recent developments. Despite the challenge in economic conditions that have adversely impacted all ad-supported media, I am pleased to report that for the third quarter, Entercom posted flat adjusted net income of $0.39 per share.

In addition, free cash flow per share increased from $0.76 to $0.77 per share, a record breaking third quarter for the Company. A record breaking third quarter for the Company. Year-to-date our free cash flow per share is up 22%, while adjusted net income is up 12%. For the third quarter, same-station revenues declined 7%. Same-station expenses declined 2% resulting in a 15% decline in same-station operating income. Likewise, EBITDA declined 15% for the quarter.

Here are a few operating highlights for the third quarter. We achieved excellent results in several of our markets that bucked the economic headwinds and achieved significant growth led by Denver, Norfolk, and Buffalo. Local revenues were slightly stronger than national for the quarter. Digital revenues increased by 40% to roughly $3 million and represent approximately 2.5% of our revenues on a run rate basis.

Our strongest growing categories were digital, online, insurance, lottery/casino, travel and hotel and grocery. Our weakest were automotive, home furnishings and improvements, finance, and telecom. No surprises there. Ratings results for the summer Arbitron were strong.

A few highlights worth mentioning, in Portland we have the number one, two, and three stations among adults 25-54. In Greensboro, North Carolina, we have the numbers one two, three, and five-rated stations among adults 25-54. And in both Seattle and Sacramento we have the number one and two-rated stations, again, among adults 25-54.

Now as you are well aware, business conditions have deteriorated significantly over the past few months. With the automotive market reeling and deep declines in retail, housing, finance and a number of other categories ad demand has declined significantly in a number of key categories. It is important to note that this is an issue that is affecting every segment of the ad world and is certainly not a radio issue per se.

Based on the current outlook, we expect fourth quarter same-station revenues to decline by a mid-teens percentage while same-station expenses should decline by 5%. In light of the difficult business conditions and the uncertain outlook for the United States economy, our board of directors today announced that the Company has suspended our quarterly dividend. Since we initiated dividends in 2006, we have paid a total of $3.62 on each share of stock.

Our business model continues to generate an enormous amount of cash, but we have concluded that there are more compelling uses of our substantial free cash flow than a shareholder dividend. We have also taken a number of steps to reduce expenses, but we have done so while continuing to increase our spending in new technologies and in our sales and marketing capabilities in order to drive future growth.

We remain fully committed to pursuing all of our strategic growth initiatives aggressively. I want to highlight just a couple of the many exciting ways in which we are reinventing our business by harnessing new technology with the power of our strong local brands and content. You can now listen to our stations on iPhones and on new Blackberries via a partnership we recently announced with FlyCast. After just a few weeks, we are already experiencing a significant boost in our streaming levels.

We are excited by the rapid growth at many of our websites including at WEEI.com, digital platform of our Boston sports station WEEI.com aggregate a wealth of proprietary content from a variety of sources including our award-winning talk show hosts, local sports celebrities and a team of reporters and editors we've hired at WEEI.com to ensure that the website has the richest Boston sports content.

What makes radio websites like WEEI.com work so effectively, and of course it's not unique to that website, it's common, is the authentic connection between our personalities and our listeners and the rich opportunities to enhance and expand our listener relationships by engaging them across multiple content platforms with creative content.

A few additional editorial comments before turning it over to Steve. First, the dramatic decline in our Company's stock price over the past few months has been in a word stunning. We recognize that the market has punished a great number of good companies, particularly those in industries they believe will suffer in a challenging economic climate.

But, frankly, we believe the market has discounted our stock somewhat indiscriminantly placing us in the same penalty box as a number of other broadcasters and other businesses with leverage significantly greater than ours. I would like to share a few meaningful headlines that put our situation in proper perspective. So far in 2008, we have cut our debt by $99 million.

Our leverage, as defined by our credit agreement, declined to 5.3 times at the end of the quarter. And our interest coverage ratio is at 3.4 to 1. Our bank facility does not mature until 2012 and there is up to $266 million in borrowing capacity under the facility.

Secondly while admittedly the industry's revenue performance has been uninspiring over the past few years, the fact is that radio has a very strong relative value proposition compared to other media and ultimately ad revenue should grow to reflect the medium's underlying strength. Unlike certain other media that have seen substantial erosion to their public usage, and significant disruption to their ad models radio has proven itself to be remarkably resilient.

Radio reaches 235 million Americans 12 and over each week, or 93% of the population. In fact, radio reaches more Americans today than ever, adding 3 million listeners in the last year alone. Radio is also the low cost provider of advertising, offering great value to our customers. And no medium is more effective at delivering results locally to our customer base.

In addition, the industry is rapidly reinventing itself through aggressive investments in new digital technologies and capabilities by all of radio's leading companies. We are dramatically enhancing our value to our customers by enabling them to engage our audiences across multiple platforms in ways we could not even imagine years ago.

We are excited by the future and believe that once we get past the current cyclical challenges our prospects will prove bright as radio is increasingly recognized and rewarded as an undervalued medium that uniquely offers universal reach, the most cost effective means to reach large audiences, a terrific business model and the vibrant power of its emerging integrated marketing capabilities.

With that, I'll turn it over to Steve.

Thanks, David. First, let me provide some color on our guidance for the fourth quarter, highlight a few things on the third quarter and then we'll go to some questions. As David said, we expect same-station revenues in the fourth quarter of 2008 to decline in the mid-teens range. We currently expect our station operating expenses to be down by approximately 5% for the quarter.

For comparison purposes, our prior year, that is last year's fourth quarter same-station information is $121.5 in net revenues and $69.4 million in expenses. I would note that this base excludes non-cash compensation expenses. A reconciliation of this information and other non-GAAP measures is on our website.

A few other notes on our fourth quarter line items to assist you in your modeling. Our corporate expenses in the fourth quarter should be approximately $5 million. Our non-cash compensation expense should be approximately the $2.3 million. And we would expect third quarter depreciation and amortization to approximate $4.5 million. Our net interest expense for the fourth quarter should approximate $10.4 million.

Now a few comments on the third quarter. David has already covered a lot of it. As he indicated, with our strong free cash flow and the sale of our required divestitures in Rochester we were able to reduce our debt by $44 million in the third quarter. And as David indicated, through the first nine months of the year we've reduced our debt by almost $100 million with the free cash flow generation and other sources of the Company.

As indicated, our debt leverage at the end of the third quarter as defined by our bank facility agreement declined to 5.3 times. I'd note our covenant is 6.0 times with no step downs.

It's interesting to note that with the strong free cash flow generation of our business model and the reduction of shares outstanding through prior share buybacks, we have been able to increase our free cash flow per share this quarter to a record level in spite of the challenging economic environment, a testament to the business model of this industry and this Company.

In the third quarter, our tax provision, we made a conservative adjustment in the quarter to provide a valuation reserve of $11 million for certain deferred tax assets. This is a non-cash accounting item which was reflected in our overall tax position for the quarter. And we pay no cash taxes this year given the tremendous tax shields from intangible amortizations that we have on our books from prior acquisitions.

On the operating expense side, we, again, managed our station operating costs down by 2% in the quarter. And you've noted our guidance for Q4 is to be down at least 5% in the fourth quarter as we continue to prudently manage and pare our expenses in a difficult environment.

So in summary, record free cash flow for the quarter, significant debt paydown through our business model, actually slightly lowering our bank leverage from the previous quarter, and, yes, in a tough economic environment we continue to manage our expenses as you've seen in prior years.

So with that, operator, we will now open the phone lines for questions.

Thank you. (OPERATOR INSTRUCTIONS) One moment, please. Our first question comes from Marci Ryvicker from Wachovia. Your line is open.

Thank you, good afternoon. You addressed Q4 in terms of revenue and expenses. I'm not going to ask you about revenue for '09, but how do you think about expenses in 2009 given that we still don't have any idea what is going to happen with the economy?

Good point. As David mentioned, and you may have seen in the trades, the Company did -- we have always incrementally taken steps, but we did take some steps in the fourth quarter to make some additional moves that will give us some benefit in 2009.

We have not quantified that for you all. I would just say that we are quite confident that you will see an acceleration of our year-over-year expense management next year versus this year.

Okay. And then also, given the current environment and the fact that expenses could go up slightly because of Arbitron's PPM, do you have any recourse in terms of negotiating what you are paying them or canceling your contracts altogether?

First, let me address the overall expense and then I'll let David address Arbitron PPM. When I commented that while we are not giving guidance for next year, but we're confident that you will see an increase in our cost management for next year I am factoring into that the contractual increase we have in Arbitron as it rolls PPM to a couple of our markets.

And, Marci, the other question, the Arbitron, it does not have a significant impact in 2009 because we only roll in a couple of markets during the course of the year.

Okay. But if things were to continue to get worse or stay the same is there anything that would allow you to go back to the table with them?

Nothing contractual.

Nothing contractual, but I wouldn't pick on Arbitron. I think, under your scenario, I think we would look at E, all of the above.

Thank you.

Okay. Good question, though.

Our next question comes from Lee Westerfield with BMO Capital. Your line is open.

Hi, David, and Steve. Good evening. Steve, I just wanted to ask specifically about the fourth quarter in terms of the impact, the political advertising and also year-on-year comparison at Boston with the Red Sox year-on-year to understand what the moving parts are in your fourth quarter numbers?

And then, secondly, as you, as the Chief Financial Officer think about the radio industry and your own Company what over a longer period of time do you think an optimum, if there is such a number, an optimum leverage level would be on a sustained basis in future years?

Let me address the last question first. We get asked often what is our Company's optimum debt level. We have always declined to do that. I think a lot of that is dependent on one's view of the revenue future. I think as the largest shareholders we always want to manage that prudently.

As to political, you are right for bringing that up. It is that season. We had record political this year, most of it in the fourth quarter. And that is baked into our guidance. We would have approximately $7 million this year through all four quarters of 2008.

And then the last question, the Red Sox, which won the World Series last year, we would like to point out, world champion Philadelphia Phillies here, which we do not carry this year, but that was a fairly de minimis impact in terms of our year-over-year comparison. There was some dilution from not having the Red Sox in the World Series, but as you know Red Sox were able to at least go through the league championship.

And, Lee, I just want to be clear when Steve commented on the $7 million in political that is a calendar year '08 number and not a Q4 number.

Okay. That is very helpful.

Our next question comes from Bishop Cheen with Wachovia. Your line is open.

Hi, everybody. Thanks for taking the question. Mine is going to be focused on the leverage. And David, Steve, look, you guys have certainly managed this Company through severe dislocations before.

But you are sitting there, I think, with 5.3 times against a cap of 6 and, as you know, with this kind of deep recession, it doesn't take that much to [disrate] the covenant. So as you think about going forward and staying ahead of it, what are some of the options and the levers that you think you can easily pull and what is your bank group telling you in terms of their flexibility with you?

This is Steve and I will go first, and then I'll see if David wants to add. First, we are aware of the environment, Bishop, and, I think, as you saw with today's action by the board on the dividend that is lever one. You heard lever two which is some cost actions we made. We indicated in the press release (inaudible) other delevering, such as purchasing back some of our subnotes at a discount.

( inaudible ) banks. I would say we are not in conversations now because we've modeled and while we don't know what the revenue will be next year, I'm not representing that, we're not currently on any, if you will, watch list or in current negotiations with the bank. I am aware that there have been other media companies, other radio companies which have gone to the banks and gotten relief from their current covenants. We're not currently doing that.

But I would point out that you can be aware, you see the filings that others are making those changes. If you get into the severe scenario you just described there will be a lot of people there and I think the banks will be accommodating. I would point out that the interest coverage, which David mentioned, is 3.4 times to one. The interest coverage and strong free cash flow generation and debt pay down of the business model.

I do not disagree, but it is always helpful to hear your view on it. Thank you, Steven, and thank you, David

Our next question comes from Robert Berzins from Post Advisory. Your line is open.

Good afternoon. Obviously, you did a great job in terms of buying back debt in the quarter, $16 million worth of notes. What kind of limitations are imposed on you, if any, by the bank agreement in so far as your continued ability to buy back notes?

Bob, and I will do this off the top of my head, but I am not aware of a limitation. And clearly nothing to date which is why we have been able to do it. I'm not aware of any further limitation in our bank agreement that would allow us to do that.

Okay, so you just have to live with the leverage tests and that's the constraint that you face?

That's correct.

Okay. Is it reasonable to assume that you will be seeking -- given that is the most expensive portion of your capital structure to continue to buy back notes in the foreseeable future?

I hate to give you the answer. You know what is going to come, but we don't comment on forward looking actions.

Okay. Thank you very much.

Thanks, Bob.

Our final question comes from Michael Kupinski from Noble Financial. Your line is open.

Thank you for taking the question. I was just wondering, Steve, if you could give us a little color in terms of the fourth quarter related to the revenues, local versus nationals, particularly if you strip out the political in the fourth quarter? I know in the past, many radio guys would enter the quarter with 70% and 75% of their advertising sold entering a month.

And I was just wondering if you can, I know with this current environment it is almost day-by-day, I was wondering if you could give us any feeling for how you are entering the month in terms of the sellout? And then my final question is just the CapEx, if you can remind me if you mentioned what the CapEx is going to be in the fourth quarter?

Let me do the CapEx and then I'll let David address the overall business climate which I think is the broad context for your question. We will be filing our Q. What we'll be saying in our Q is that we expect CapEx to be approximately $8 million for the year. So just do the math backwards from our spending today. So about $8 million for the year.

By the way, you will note that is a significant reduction from prior years and I think you will see very prudent management of that. Part of that is just prudent management. Part of that is we are, if you will, lucky in terms of timing. We have no major projects. David, I will let you address the business conditions.

Yes. Business conditions are quite challenging. Our guidance speaks for itself. Our national pacings are a little worse than our local pacings for fourth quarter. There are areas of great strength. Steve mentioned political, obviously, but also digital has been a growth area and we continue to see great results from our business development efforts which continue to accelerate.

But at a time when retailers are experiencing double-digit declines in revenues and automotive results were as ugly as we all saw they were in October, and with other segments of the economy having been in deep recessions now for multiple quarters, the reality is that it is tough out there for all ad-supported media. Therefore, what happens is, the -- everything comes in late. Things are later than usual. And there are greater levels of cancellations and last minute orders than we have seen in the past. And that is the climate we expect to continue during the remainder of this quarter.

Fine. Thank you very much for the color. Appreciate it.

Thanks, Michael.

So with that, we thank you all very much for your time this afternoon and we look forward to reporting back to you in three months, hopefully in better times. Thanks.

Thank you for participating in today's conference call. You may disconnect at this time.