Audacy Inc (AUD) 2014 Q1 法說會逐字稿

Welcome to Entercom's first quarter 2014 earnings release conference call.

(Operator Instructions)

This conference is being recorded. I would now 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. Thank you, everybody. Happy Friday. Thank God, it's Friday. I'd like to welcome you to Entercom Communications' first quarter earnings conference call. This call is being recorded. A replay will be available on our Company website shortly after the conclusion of today's call and also available by telephone at the replay number noted in our earnings release out this morning. With the notice, in today's call we asked that you had submitted your questions in advance of the call. 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 reminder that should the Company make any forward-looking statements, such statements are based on current expectations and involve risk 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 the call, we may reference certain non-GAAP financial measures. We refer you to our website at entercom.com for a reconciliation of such measures and other pro forma financial information. With that, we will turn it over to David Field, President and Chief Executive Officer.

Thanks, Steve. Welcome, everyone. Thanks for joining today's call. I'll start with a summary of the quarters financial highlights, followed by some color on recent developments and second quarter revenue trends before turning it over to Steve and your questions. First quarter revenues were up 1% excluding the effect of our non-renewable Boston Celtics radio broadcast. On an as reported basis, first quarter revenues, expenses and station operating income were all flat. Adjusted earnings per share more than doubled to $0.05 per share as we benefited from continuing reductions in our interest expense. Our business model continues to generate outstanding free cash flow. In fact, our free cash flow increased 19% in first quarter. We've now generated $1.61 in free cash flow per share over the past four quarters.

Here are some additional first quarter data points: national revenues outpaced local; January was up low single-digits, while February and March were both down slightly; our best performing categories were telecom, insurance and health and medical; our best performing markets were Austin, Kansas City, Memphis and San Francisco. In addition, we believe the unusually harsh winter weather had an adverse effect on a significant number of our markets. As you know, the negative impact has been widely reported by number of other media companies, not to mention other consumer facing companies. As one of the last companies in our space to report quarterly earnings, we have a pretty good vantage point on how our results stack up against our peer group.

Our core performance appears comfortably in line with the other radio groups. We're far from satisfied with these results as we hold ourselves accountable to deliver upper echelon performance. However, it does represent significant continuing progress in where we were last summer when our performance versus our industry peers had slipped. Looking ahead, we are optimistic and confident that our relative performance will continue to accelerate as we capitalize on our strong ratings, our powerful local platforms and our enhanced sales and marketing capabilities in the quarters ahead. In addition, the launch of our new SmartReach Digital division provides further growth potential particularly as we look to 2015 and beyond.

More of that in a moment, but first I'd like to elaborate a bit on our station ratings. We continue to perform quite well on the ratings. Our winter Nielsen results were up. We have now grown our ratings in seven of the last eight quarterly rating periods over prior-year results. We believe our excellent ratings performance is a direct result of our locally focused programming strategies. We have always been great believers in the importance of strong local personalities, local content and local brands. We continue to make significant investments in great new local shows and personalities to enhance our appeal to our audiences.

It is also worth noting that our content is increasingly picked up as newsworthy and featured in a wide variety of national media. In just the past few weeks, our content has been featured on ESPN, Meet the Press, USA Today, The Colbert Report, the Washington Post, NBC and so on. This is a strong indicator of the caliber of our local personalities and programming. Strong local programming is critical. We believe our excellent ratings performance and powerful local brands and content position us well for future growth. Turning to current business conditions. As we have now heard from a significant number of other media companies that have recently reported, Q2 market conditions have been choppy. In addition, we continue to see business booking later than in past years. Currently, we are pacing down 1% for the quarter.

Earlier this week, we announced the launch of SmartReach Digital, a new division of the Company, that will provide digital marketing solutions for local business customers. SmartReach Digital will focus on designing and implementing fully integrated local digital marketing programs to simplify the complex and constantly changing digital marketing landscape for local businesses. Why are we doing this? We think there is an attractive opportunity to serve the growing digital marketing needs for small and medium-sized local businesses. We believe we are well-positioned to compete in that space, leveraging our existing customer relationships, our marketing assets and capabilities and our powerful local brands and large local audiences.

This is an important expansion of our product line that will bolster our ability to deliver effective solutions to our customers and is a perfect compliment to our core radio business. Our goal is to be the preferred choice to meet the advertising and marketing needs of our customers. We are building SmartReach Digital as a separate business with its own management team, a full service dedicated digital agency and dedicated sales executives and campaign management in each of the markets. We've been building out the business over the past few months, bringing in the leadership team and staffing up the agency along with the rest of our systems and infrastructure.

We've commenced sales and operations in six of our markets as of April 1, with the plan to roll out additional markets over the next year. Our start-up expenses for SmartReach Digital added about 2% to our reported Q1 costs. Absent these start-up expenses, we would've reported costs down 2% and EBITDA up 5% for the quarter. Second quarter SmartReach Digital division revenues will be negligible as we have launched in just six of our markets and most orders will extend over longer-term contracts. By fourth quarter, we would expect to see revenues approach 1% of our total sales. Looking ahead, we believe that SmartReach Digital can be a significant contributor to the organization commencing in 2015. 2014 will be a developmental year for the business as we ramp up revenues.

Finally, we are increasingly enthusiastic about the radio industry's future growth outlook based on a number of recent developments. You may recall that a few months ago Nielsen announced that local radio was the number one medium in the country from 5A to 5P daily. Now, Nielsen has released a new landmark study that showed radio generating outstanding return on investment results, significantly outperforming other competitive media. The results are eye-opening. The study utilized single source data to measure the impact of radio advertising on product sales across 10 major national consumer brands. They found that radio ads generated an average sales lift of over $6 for every $1 of radio advertising.

According to Ad Age, this is -- I'm quoting here -- an ROI double that of even the best results in many recent studies of digital or TV media -- unquote. The study has been presented at the advertising research foundation's recent conference and at a major advertiser event hosted by Clear Channel at their headquarters and attended by the CEOs of the largest radio broadcasting companies. Judging from the discussions that have ensued from these presentations, the data has the potential to be a game changing catalyst for radio revenues by significantly enhancing how advertisers view the media. The data makes a very strong case for radio to be allocated a significantly larger share of the media mix than it has historically received. With that, I'll turn it over to Steve for his thoughts before we turn to your questions. Thanks.

Thanks, David. David's already covered revenue for the first quarter and our current revenue pacing for the second quarter as well as a great overview of our brands and the introduction of SmartReach Digital, our new digital initiative. So, let me add some color on expenses and balance sheet items. During our last conference call in February, I guided your thinking on modeling our 2014 annual expense growth up 2% to 3% for the year, noting that our core station expense growth would likely be up nominally and investments in digital events and brands would add 2 to 3 points to the year's expense growth.

Now with our recent announcement of the start-up of SmartReach Digital, we can now flush out our thinking on that prior guidance. First, there's no significant change to our thinking for the overall full year, just maybe the flow between quarters. As you noted, our first quarter expenses were down slightly. Now, we did have a slight benefit from our decision to no longer carry the Celtics basketball games. As David noted, excluding that impact and the SmartReach start-up expenses, core station expenses would've been down for the first quarter or lower than our overall expense expectation. This is mostly due to timing. As we look to the second quarter expense growth, it's going to be a little lumpy, but then fine for the balance of the year.

Last year, we had a significant one-time expense credit in the second quarter. This distorts our year-over-year comps as we go into Q2. That, coupled with the operational investments and expenses for SmartReach Digital sales and infrastructure, should result in unique bump in the second quarter with expense growth of about 5%. This is a one quarter bump, not a change to our business model. At this point, as we look in the third and fourth quarter, we see operating station expense growth of about 3% for each of the third and fourth quarter. That guidance includes what we currently anticipate for our investment in SmartReach Digital. So in total, this would build to a full-year expense growth rate in your models of about 3% or the same as we guided in our February call.

Our view on how to look at our expenses for the year remains the same. Core expenses up nominally with additional investments in SmartReach which will result in total station operating expense growth of about 3% for the year. Our first quarter interest expense decreased by over $1.5 million from last year as result of our continued debt reduction and more significantly from the reduced interest rate in our term loan facility which was repriced last December. Our book tax rate for the quarter worked out to about a 34% tax rate, mainly due to favorable one-time adjustments to that tax provision. Our guidance of a tax rate for the year remains in the low to mid 40% range subject to quarterly adjustments.

A reminder that these are accounting tax provisions as we do not pay cash taxes due to our significant tax shields and ongoing net operating loss carry-forwards. On the balance sheet, we achieved a nice milestone in the first quarter reducing overall net debt below $500 million for the first time in many, many years. We continue to highlight the strong free cash flow generation of our business model, our significant tax shields, the continued reduction in debt which we believe benefits our shareholders and will provide a great opportunity to better benefit with future debt structures in the future. So with that, for concluding the opening remarks, let's go to your questions which were submitted in advance.

David, as I look at the questions across the board, there were quite a few wanting more insight and color on SmartReach. I know in your general introduction, you provided a little detail. But let me characterize maybe by using one question out of the many on SmartReach, how do you see SmartReach differentiated from some of the other competitive local digital offerings in the market?

We spent a lot of time studying this. We believe, again, that we are ideally positioned to compete in this space. Some of the companies that are serving this marketplace are national companies that just don't have the level of local commitment that we do in our business. The opportunity to integrate our local sales teams, our customer relationships, our existing digital platforms, our brands and so forth, we think is just a leg up onto basically what is a business of national pure play companies competing in the space.

Let's go back to Q1. You mentioned weather in your remarks, others asked, can you quantify weather and any potential impact in the first quarter?

We did take a look and study it. What we found is that, in fact, there is a significant or was a significant performance differential between our markets which were significantly impacted by weather and those that were not. There's a meaningful delta there which we took as supporting evidence to the thesis that, in fact, the weather did impact local businesses and advertising in those markets.

Maybe I'll ask this question to myself, maybe it pulls up a good data point. Marci Ryvicker of Wells Fargo asks about auto pacing in Q1 and Q2.

Marci, auto was down in Q1 mid single-digits or under indexing our overall performance. We think we look at that as seeing weather related. As for Q2, right now, it is over indexing the pacing that David indicated. Again that was for just the auto category.

Question from Mike Kupinski at Noble Financial Group. How much political advertising in the first quarter? How do you see it for the year?

Yes. It's kind of a de minimis number in Q1. I think maybe it's counterintuitive but it's also a pretty de minimus number for us in the second quarter. It really does, of course, build later in the year. As we've indicated in the past, looking at a $6 million to $7 million historical political number for the year, with the bulk of that being in Q4 and to also a significant extent, Q3.

Let's go back to the brand side again. A question from Mike, this is going back to a year or two, but okay. I think an interesting question. The Company has simulcast some of its AM stations on the FM band particularly in Sports Talk. Can you provide some insights on how this strategy has performed for the Company?

Yes. We've done this with some of our brands, particularly the sports brands. We think that it's very much selective in terms of the demographics of the audience and where we see opportunities to grow. I do not see a problem with a strong news or talk brand existing solely on the AM. We've seen competitors actually going back to that model. If you have great content and a strong AM signal, you're going to prosper and do just fine.

That said, going to FM in certain brands makes sense because it opens the door to an expanded audience and some additional growth opportunities. I would add that one of the things that we're doing now which we're excited about is adding translators which are essentially smaller FM signals in a small handful of markets which give us the ability to expand our coverage into FM at what is a very minor expense with the higher ROI on those investments which are generally in the low six figures.

Okay. I'll stay on the brand theme then. A question from Avi Steiner at JPMorgan. Any significant sports contracts coming up over the next year?

No. I mean, we -- our deals -- our major sports contracts tend to be three-year to five-year deals. There were some exceptions to that, but that's the norm. There's really nothing in the cycle right now which will have a material impact on financials, again, on the near-term horizon.

Let's turn around and go back to -- looking at second quarter, you provided second quarter pacing information. One question, how did the month of April finish?

April finished down 1%, which again, is in line with our pacings for the quarter. Of the two remaining months, June appears to be a little stronger than that.

All right. Let's maybe turn to the balance sheet. Why don't I ask myself a question. Then I'll throw out some more strategic ones. Any plans to refinance our current debt structure?

Short answer is, we're obviously very aware of both the currently high-yield notes out there with a call on December 2015 in our term loan B, which we did reprice successfully last February and are benefiting from that. I would not expect to see anything on the near-term, but certainly, we'll continue to monitor that. We do think that the fall of 2015, both as we visualize out our overall leverage -- again, we can't anticipate what the market conditions will be at that time. But we do think there's a significant free cash flow benefit from looking at our capital structure, primarily more in later 2015.

David, quite a few questions. Let's start with one strategically kind of around the M&A front before we go to returning cash to shareholders which is a common theme on questions. In your view is scale in market more important than geographically more markets?

Yes. But we're a local business, about 80% of our revenues come from local customers. So it's always been true that the strength of your positions locally is what -- is far and away the most significant factor in your competitive position. We pride ourselves in the fact that we have really strong clusters, multiple brands, reaching different target demographics. As I mentioned in my remarks earlier, we are very focused as well on investing in great local content, great local personalities and building strong brands which we think is important to us particularly in an evolving world of audio distribution.

So, we think our strategy is smart. We think it positions us well to complete locally in our marketplaces, particularly at a time when we see substantial erosion in other competitive media that we think creates opportunities for us going forward. So being strong in the markets matter. Adding additional markets is great if there's a good return to shareholders and you can do it in a way which is friendly to the balance sheet.

I'll conclude -- I think there's again a common theme of questions, not only for this call, but we've had the same questions in the past calls. We -- people note our continued great progress in paying down debt, reducing leverage. What's the Company's thinking on returning cash to shareholders? Where do we see that going?

Right. As you said, we have talked about that in the past. I think nothing has really changed, other than to say that it's worth noting, that we continue to delever and we continue -- now, I think very close to that line we've talked about in the past, where we see our -- where we're comfortable with leverage and where conversations around returning cash to shareholders make a lot of sense. So we're getting close to that point. I think, I'll just leave it at that for now.

I think we'll leave it at that for now. So with that, that's the questions submitted in advance. Again, I remind you that I'm always available to answer any calls at 610-660-5647.

Thanks you all. I appreciate your time this morning. All the best.

This does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.