Audacy Inc (AUD) 2013 Q2 法說會逐字稿

Good afternoon, and welcome to Entercom's second quarter 2013 earnings release conference call. All participants will be in a listen-only mode. This 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.

Thank you, operator, and good afternoon, everyone. I'd like to welcome you to our second quarter earnings conference call. This call is being recorded. A replay will be available on the Company's website shortly after the conclusion of today's call, and is available also on the telephone number at the replay number noted in our release this afternoon. With our notice of today's call, we ask that you submit your questions in advance of this call to the email address Questions@Entercom.com. In addition, I'm always available for any follow-up questions if you wish to call me directly at 610-660-5647.

Before we begin the call, I'd like to make this note that should the Company make any forward-looking statements, such statements are based on current expectations and involve risks and uncertainties. The Company's actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ is 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 this call, we may reference certain non-GAAP financial measures. We refer you to our website, Entercom.com for a reconciliation of such measures and other pro forma financial information.

With that, we'll turn it over to David Field, President and Chief Executive Officer.

Thanks, Steve, and good afternoon, everyone. Thanks for joining today's Entercom earnings call. I'll start with the summary of the quarter's financial highlights, followed by some color on recent operational developments, and then address current business conditions before turning it over to Steve and your questions.

Second quarter revenues were down 3% to $101.2 million, partially offset by a 3% decline in station expenses to $65.7 million. As a result, adjusted EBITDA decreased 4% to $30.7 million, adjusted net income rose 8%, to $0.26 per share, while free cash flow decreased by 2% to $19 million. On our last earnings call in early May, we noted that second quarter pacings were down 1%, so obviously we saw business conditions weaken later in the quarter, particularly in June. April ended flat, while May was down 3%, and June down by 8%. Here are a few other insights on the quarter. Local was down 3%, while National revenues were flat. Political fell by $700,000. Overall, total radio market revenues in the markets in which we compete declined by 1.5%, so we lost share for the quarter. Our best performing markets were Kansas City, New Orleans, Indianapolis, Portland, and Memphis. Top performing categories were telecom, department stores, and travel.

As I noted earlier, we continue to prudently manage expenses and achieve meaningful, sustainable reductions to our cost structure. This past quarter's 3% decline in expenses comes on top of a 4% reduction in expenses during 2012 and a 3% drop in Q1. As Steve has pointed out in past calls, and will touch on in a few moments, we will be reporting an increase in reported costs versus prior year for the third quarter, due to a large one-time credit in last year's first quarter. That said, we expect our costs to, once again, decline in fourth quarter. I also want to note that this morning we announced that we have completed a new four-year agreement with Arbitron across all of our markets. The agreement runs through mid-2017.

Now, I want to focus the bulk of my remarks today on our current sales performance. Our second quarter results lagged our peer group and are unequivocally unsatisfactory. To some extent, it is due to the relative weakness in our markets versus radio in general. As you may have seen, New York and Los Angeles radio ad spending are up significantly this year, which by the way is an important positive indicator for the industry. In contrast, our markets have been a bit weaker, down 1.5%. That said, and let's make no mistake about it, we did not get the job done in executing on sales in Q2. To be blunt, we did a poor job in driving our revenues. It is totally unacceptable. And just to be clear, our expectation is to deliver upper echelon performance, not just a pace in line with the peer group. That has been our track record over the years, and we have every intention and confidence that we will deliver upper tier results again in the not-too-distant future.

Unfortunately, I expect that our relative weakness will persist in Q3. We are currently pacing down 5% in third quarter. The month of July was down 3%, with August and September off a bit more at this time. National pacings are currently stronger than Local. We have seen some recent firming of our pacing trend, but it is premature to draw any meaningful conclusions from this data point. Let me try to put all of this in context. Our poor top-line performance is essentially all due to a single cause, poor sales execution. We believe the problem is entirely fixable. We are executing well against our plans in every other facet of the business. Our brands and ratings are generally in terrific shape. More on that in a moment. We have a strong and growing arsenal of impactful digital assets and sales resources. We have invested millions of dollars in new personnel and capabilities in a number of areas, to further bolster our opportunities in growth potential. In fact, in recent months we have made significant new investments in a new CRM platform, launched a revenue management team, and enhanced our digital platforms.

So, what is the sales execution problem? Over the past year or so, we have made significant changes in our sales strategies systems and practices. The changes we're making will make us a stronger and more successful selling organization. But in the short run, they have caused a bit of disruption, and our performance has obviously suffered. Nothing that can't be fixed, but clearly there has been an adverse temporary impact on our sales productivity. How do we fix this and how long will it take? The good news is that the problems are manageable and our management team is taking corrective actions to get us back to the high standards of sales performance that we have sustained over many years. Our team has great confidence in our ability to get back on track quickly. We believe that we are well-positioned to accelerate our performance later in the year, based on our excellent ratings and our strong competitive position that has been further bolstered by a number of recent operational and strategic enhancements.

Let me elaborate a bit on the strength of our brands. Our ratings performance has been excellent. We have gained aggregate rating share from our peers in four of the past five quarters. Here are just a few of the highlights from the most recent ratings reports. Our stations ranked first and second among women, and second and third among adults in Denver. We have four of the top five stations with adults in Greensboro. We have all of the top three stations with adults in Kansas City. We have all of top four stations with adults in Sacramento. We have all of top three stations with adults in Rochester. In San Francisco, we have the number one station with adults and women, and our 2012 acquisition KBLX, which was outside of the top ten when we acquired it, has climbed to fourth with women.

Again, the seminal point here is that when you aggregate the ratings across all of our brands and compare them to our peers, we have gained share in four of the past five quarters. We just haven't yet converted that into greater revenue shares. I think our sales performance will be in significantly better shape in fourth quarter, and we are positioned for an excellent 2014 when we should be able to fully capitalize on our powerful brands and all of our various organizational enhancements and growth initiatives. In fact, we are already seeing significant acceleration in our largest market, San Francisco, which is poised for substantial growth as we capitalize on our enhanced ratings position. While we are currently enduring a few significant bumps in the road, I am quite confident about where we are headed.

With that, I'll turn it over to Steve for some additional thoughts before we turn to your questions.

Thanks, David. The press release really contained the key financial headlines of the quarter, so I'll try and focus my comments on a few additional insights before we go to your questions. Importantly, as David had mentioned, we were able to partially offset the decline in revenues with prudent cost management which drove our station operating expenses down 3% versus the prior year. Important to note, this continues a trend of expense management, which we've demonstrated in recent years.

Let me give you a little background on a few separate line items in our financial statements on the release this quarter. Our second quarter results include a separate line item for an accounting gain from the completion of the sale of our non-core tower assets to American Tower back in late 2009. As a result of the lease-back of some of these towers for our needs, accounting rules required us to keep these tower assets on our balance sheet over the past few years and treat the sale as if it were debt financing until the earn-out provision was settled. With this now finalized, we recognized a net gain of $1.6 million from this 2009 sale in this quarter. We'll have additional gains throughout future periods. This was an accounting item, not a cash item. We received the sale proceeds in 2009.

Also in this quarter, we put some excess land up for sale at a transmitter site in one of our markets. As a result of this, we wrote down this asset to what we consider fair market value and moved this asset to the category of assets held for disposition on our balance sheet. This resulted in a non-cash impairment charge of $800,000 in the quarter. We would hope to or expect to complete this sale and receive the proceeds from this sometime in 2014. Second quarter net interest expense decreased to $11.3 million, which included $1.1 million of non-cash deferred financing costs. We ended the quarter with $539 million of total net debt on our balance sheet, and our bank leverage calculation for the quarter puts us at 4.7 times leverage, and that compares to a covenant of 6.75 times. Non-cash equity expense was about $1 million in the quarter. We would expect that quarterly equity compensation expense to be about the same for the remaining quarters of the year.

Now, David highlighted earlier, and I'll highlight it again, that as you look at our station operating expenses for the third quarter for your models, it's important to note that we would expect station operating expenses in the third quarter to show an increase of about 5% to 6% versus the prior year. However, this is a result of prior-year credits, which we booked last year, not a change to our business model. Last year, you my recall that we included a significant one-time expense credit we received as part of radio industry settlements with one of the music rights organizations we license with. And as David said, we would expect to return to slightly favorable expense comparisons in the fourth quarter of this year as we constantly work on improving our operational efficiency. With those few highlights, let me go to the questions that you submitted in advance. As has been our practice, I'll try and moderate and combine questions. Again, if there were specifics that you don't feel were adequately addressed, please feel free to give me a call.

David, let me circle back, and probably go right back to the elephant in the room here, from Mike Kupinski at Noble Financial Group, revenues seem light relative to the rest of the industry. Can you give us any further color as to categories, markets, Local, National, anything that would account for that weakness? I know you addressed it in the comments, David, but I think so many asked about it I thought it's worth repeating the question.

Yes, it's fair. Our revenues are light, relative to the peers this quarter, and are going to be light relative to the peers in third quarter, it appears.

Let me elaborate a little bit more on that. Again, we covered that extensively in my earlier remarks. But let's subdivide that between the industry and Entercom.

First on the industry side, I think it's worth noting radio's doing pretty well here. If you look at peer results across the spaces, because we're pretty much the last ones to report here, I think the reports were pretty solid for both Q2 and Q3. We have New York and LA, the two most important bellwether markets in the country, doing well this year. We have radio listener usage very strong, continuing to grow in terms of the number of people listening to local radio stations each week. I think the industry is innovating and initiating and developing new products and developing business in an accelerated fashion that, again, bodes well for the future.

I think there's reason to be pretty optimistic and feel good about things from the industry standpoint. Obviously, we didn't pull any punches in our remarks. We didn't get the job done in second quarter, but we'll get past it. We'll get past these short-term sales execution issues and the be positioned to grow nicely, both top line and bottom line going forward.

To reiterate, there is nothing fundamentally broken. To the contrary, we think we're in a strong competitive position. If you look at our brands and our ratings as we talked about, our local digital assets, our capabilities, our resources, our people, our initiatives, I think we are very-well positioned going forward. I think we have significant upside opportunities in multiple facets of our business, and again, I'm pretty optimistic about where we're going once we get past this period.

Let me stay with that theme, David, and I'll stay on the question list that Mike had sent before I go to some other questions. Let's look ahead. How are the various format changes that were made last year doing as you look ahead? And in particular, you mentioned in your remarks KBLX, the station that was acquired last May now coming up, just past, its first anniversary.

Right. I want to be clear here. Our sales execution issues are discrete from the performance of our new format. Two separate issues. I want to make sure nobody confuses the two. But insofar as our new formats are concerned, I think we're doing very well.

KBLX, you mentioned Steve, let's start with that. When we acquired it, we talked about the synergies we were able to capture on the cost side right away, which made the acquisition highly accretive for us. And we noted at the time that our next job was to elevate the brand, improve the ratings, and then begin to monetize the enhancement to the brand.

We're executing very well against that plan. We have taken the brand from being a non-top ten player in San Francisco, to now what is the number four brand with women, which we're very pleased with, and is beyond frankly what we had hoped for. We're now seeing strong acceleration of revenues in the third quarter. We expect this to be a nice growth engine for us going forward.

In addition to that, some of the other highlights, we launched AC video stations in Kansas City, the Point, and also Star in Sacramento. Both of which are doing very well in the ratings game and have dramatic upside and on the revenue side, as they grow into their market positions. Another station I'll give a shout-out to is WMFS, our sports station in Memphis, which is now up to number two with men, again, a station which was barely on the map a couple of years ago.

I feel very good. Of course, we're never perfect. We have our hits and we have our misses. But overall, I think we're doing very well with growing our new format portfolio.

Okay. Let me change gears from revenues and brands, a question from Marci Ryvicker at Wells Fargo. What's the impact of the new deal with Arbitron that was announced earlier today?

Unfortunately, we can't speak publicly to the terms of that agreement. I think it's worth noting that, unlike some our peers, we have had all of our radio stations covered under the Arbitron agreement. This is essentially an extension of the prior agreement, but we feel very good about the terms and feel good about our relationship with Arbitron and where we're headed.

Why don't I take the next question from Marci, it's when do we anticipate we'll start to see the benefits from the Affordable Care Act, or Obamacare? Marci, good question.

We are beginning to talk about that, but nothing significant to date, inbound from clients and advertisers other than we're aware that this obviously is an issue of national concern affecting a lot of people. We think radio, obviously, provides a great platform to reach. I think probably more on that on the next call.

I guess while I have the plate, let me go to a question, David, that I'll ask. Bobby Steiner at JP Morgan asked, as a reminder what Political revenue was in the third and fourth quarter for 2012, as we think about the model for comparison purposes? Yes, obviously last year Q3, Q4 had significant Political revenue. The totals for Entercom, Q3 $1.2 million, Q4 2012, $4.5 million. Again, Q3, $1.2 million, Q4 2012, $4.5 million.

David, there's quite a few questions related to the balance sheet. I'll ask a few in a moment on the prospects of refinancing. But I think, fair for you leading the Company to say, as the balance sheet's in good shape, what's the thoughts on the Company's use and deployment of cash? And any updates on the M&A market?

Coincidentally, there was an inbound, did Entercom look at the Sandusky Radio properties? I think there's, in general, a batch of questions on the balance sheet and on M&A. Why don't you address that, and then I'll address thoughts on refinancing.

Sure. I think everybody who's followed us over the years knows that we have spent the last several years deploying virtually all of our free cash flow toward reducing debt. As a result, we've been able to reduce our debt by hundreds of millions of dollars over that period of time and have emerged with a pretty strong balance sheet.

That said, we've also consistently noted that our goal was to get our leverage down to 4.5% or a bit lower, at which point in time, the Board would consider various uses of the balance sheet in the line of a possible dividend, or I suppose, also possibly buybacks. I think we are reasonably close to that threshold level, where the Board can begin to look at that, albeit I don't think we will hit that threshold in this calendar year.

Looking at M&A, you asked specifically about Sandusky; no, we did not look at that asset. I would add on a more general note that we remain open to looking at acquisitions. They would have to fulfill the criteria, which again, we've been pretty consistent about. It must create value for our shareholders, and we are not going to do anything that harms our balance sheet.

I think it's also important to put it in context. We're very strong in the markets in which we compete. Therefore we don't feel compelled to acquire any stations to complete our portfolio in the markets we serve. The KBLX example in San Francisco is a good illustration of where we opportunistically made a deal that didn't hurt our balance sheet and was materially accretive to the Company.

Again, I would not expect us to look at anything that, as I have already laid out. I have already answered the question, I suppose. Steve, do you want to touch on the other part it?

Yes, maybe just let me add one question from Steve Roberts at NorthPointe Capital. At what debt level can the Company start paying dividends?

There are two issues, can and will. I think David just questioned the will, which is, at lower debt levels than what we have today. Most likely next year, we would return cash to the shareholder, do something else with the balance sheet. But just to answer the technical question, at below 5 times leverage, which we are today, the Company, can.

Let me go to a related question on that, which came in as we look toward the end of the year, what's the thoughts on refinancing some or all of the debt? Let me remind listeners that our high-yield notes are out, through 2015. Our term loan B tranche, approximately $330 million which was refinanced last November, has a one year no-call, or a soft call, if you will. You would expect us to re-look the debt markets for that term loan B tranche sometime this fall, most likely November, December.

David, I think the last question, and I think you've touched on it, but I'll throw it out there as a way to segue out, looking ahead. The question is, as you look at the third quarter, what are you seeing in terms of firmness or trends in advertising?

We touched on that. We've seen a little bit of firming over the last couple of weeks. But again, I don't think we've seen enough to be able to assert any fundamental change one way or the other.

I think we've more or less answered what our expectations are, in terms of the path forward here. Again, pretty optimistic about where we're headed, based on our fundamentals trends once we get through these bumps in the road. With that, Steve, were there any other questions?

No, I think you've covered them. Again my reminder, if you'd like any specific follow-up, my number is 610-660-5647. David, your wrap-up comments.

We look forward to reporting back again in 90 days and hopefully, reporting back a more positive direction of the Company and are looking very much forward to that. Thanks all, for being with us this afternoon. We'll look forward to getting back to you all in 90 days.

Thank you for joining today's conference. That does conclude the call at this time. All participants may disconnect.