Audacy Inc (AUD) 2014 Q4 法說會逐字稿

Good afternoon and welcome to Entercom's fourth quarter 2014 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. Good afternoon everyone. And welcome to Entercom Communications fourth 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 press release from this afternoon. With the notice of today's call, we ask that you submit your questions in advance of the call to email address questions at Entercom.com. I would like to note as I always do, that I am always available for any follow-up questions, if you wish to call me directly at 610-660-5647.

Before we begin, this note should the Company should 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 obligations to update any forward-looking statements. During this 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, I will like to introduce David Field, President and Chief Executive Officer.

Thanks Steve. Good afternoon everyone. Thanks for joining today's call. I'll start with a summary of the quarter's financial highlights, followed by some color on recent developments including our recent Lincoln Financial Media acquisition, and then update you on current business conditions. Entercom's fourth quarter revenues were up 2%, and station expenses were up 3%, resulting in flat station operating income. Adjusted EBITDA increased 1%. Adjusted net income per share was up 3%, and free cash flow increased 4% in the quarter. For the full year 2014, Entercom's revenues were up 1%, while expenses increased 3%, resulting in a 5% decrease in adjusted EBITDA.

Digging a bit deeper into the fourth quarter numbers, while our reported revenues were up 2%, these results were adversely impacted by the absence of Boston Red Sox playoff games in 2014. As you may recall, the Red Sox won the World Series in 2013, driving significant post-season revenues. So on a pro forma basis, excluding the Red Sox, our fourth quarter revenues were up 3.5%. On the expense side, virtually all of our cost increases for 2014 were related to start-up expenses from our new SmartReach digital division. Excluding SmartReach, our fourth quarter operating expenses were up 1%, and our EBITDA was up 5%. Here are some additional data points for the quarter. National revenues were slightly better than local. October was the strongest month in the quarter, due to political spending up 5% over the prior year, while November was flat and December was up 1%.

In addition to political, the strongest performing categories were insurance, financial, lottery and casinos, and entertainment. And our best performing markets during the quarter were Buffalo, Indianapolis, Kansas City, and Sacramento. As we look ahead to e remainder of 2015 and the next couple of years, we're pretty excited about our promising opportunities for significant value creating growth. The Lincoln Financial Media acquisition, the launch of our SmartReach digital division, and the opportunity to refinance our very expensive high yield notes later this year, each represents significant future growth catalysts. In addition, we are well-positioned for solid performance across our core radio business. Collectively these emerging opportunities provide us with great potential to achieve meaningful growth in revenues, adjusted net income, and free cash flow over the next couple of years.

I'll elaborate a bit on each of these. We launched our new SmartReach digital division in 2014, building out a full scale digital agency in Denver, and then launching dedicated sales operations in 12 of our markets during the spring and summer months. Revenues are growing significantly in percentage terms, but from a small base in this early stage, largely due to the long lead times in the business. We are excited about where this business is going in 2015 and beyond. SmartReach offers a broad line of digital marketing solutions, enabling us to serve this growing market, and bolster our ability to meet the advertising and marketing needs of local customers. It as a wonderful complement to our core radio business. It is still very early, but as we continue to ramp up, we expect SmartReach to produce steadily growing revenues in the years ahead.

Another exciting recent development is our agreement to acquire Lincoln Financial Group's radio division for $105 million. Lincoln is a great fit as it enables us to enter three new Top 20 markets, Miami, Atlanta and San Diego, plus Denver where we already operate. The transaction fulfills our disciplined acquisition criteria, as it enhances our competitive position and growth potential, and should be accretive to shareholders in its first year of operations, while having a minimal impact on leverage. We believe the Lincoln station group will benefit from being part of a focused pure play radio company, we will all benefit from the addition of these terrific markets, strong brands, and talented individuals to Entercom. Combined the Entercom and Lincoln platforms in Denver have six FM stations, so in order to meet FCC limits on station ownership and bring our combined FM station count down to the permitted number of five, we decided to divest KKSN FM, and all sports station. The deal is also subject to Department of Justice approval.

This week we were notified that the Department of Justice wants additional time to look into our prospective ownership in Denver, and issued what is called a second request for more information. This expansive scope of their review unfortunately delays the eventual outcome. It is worth noting that after divesting KKSN to meet FCC ownership limits, our pro forma Denver station group would have a revenue share of approximately 32%. By comparison, iHeart which the largest radio station in Denver has a revenue share of in excess of 40%. Fortunately the second request means that there will be some delay on moving ahead with this transaction.

It's also worth elaborating a bit on a number of positive developments within our core business. As we have discussed on recent calls, we are relentlessly focused on enhancing our value to listeners and customers and increasing our growth potential for the future. And we have been working to enhance the systemic effectiveness of our sales organization in a world where the bar keeps getting higher. I am pleased with the progress in this area, and believe we are well-positioned to deliver strong relative growth in 2015 and beyond. It is worth noting that our fourth quarter results compare quite favorably with our peer group. As you recall we reported revenues plus 2, and noted that an apples to apples basis, ex-Red Sox we were up 3.5%. I'm also delighted to report that Boston has accelerated into 2015 is now delivering strong top line and bottom line growth, as well as significant ratings growth at both WEEI and WAAF. And across the rest of the country, our investments in great content have been able enabled our brands to remain strong and vibrant, and to register another quarter of growth in the fall Nielsen ratings reports.

Turning to the current business climate, consistent with what you have heard from a number of media companies, first quarter business conditions are mixed, and we are currently pacing down 1%. Solid growth in retail, financial services, grocery, insurance, and TV cable, are being offset by a decline in Telecom. While the ad climate is choppy in this early stage of 2015, we're pretty excited about our opportunities for significant growth looking forward. Between Lincoln, SmartReach, the potential refinancing, our excellent core radio platform, and our strong balance sheet, we think we are in great shape and well-positioned to reward our shareholders in the quarters ahead.

Finally as many of you know, I generally like to share a brief observation about the fundamental vigor of the radio industry which is so often undervalued. It's interesting to observe that in a world in which so many competitive media are suffering from significant fragmentation, declining audiences, DVRs, and so forth, radio is the least disrupted of all major forms of advertising. And it's encouraging when key advertising leaders take notice. So I will close with a quote from Andrew Robertson, the CEO of global ad agency BBDO, who was recently asked about radio advertising and said, quote, There are still huge, huge radio audiences, and frankly, it as a massively underutilized medium. end quote The truth is that with all of the enormous challenge facing other forms of media, radio is the superior choice for any customer looking for enormous reach, local activation, and strong engagement at an attractive price. With that, I'll turn it over to Steve for some additional thoughts before we turn to your questions.

Thanks David. I am going to go through a little longer today than normal. I'm going to give some color on items for your models. First of all let's look back on 2014 and the impact of political advertising. Throughout the last year we indicated to you that we believed political revenue would be between $6 million and $7 million for 2014, and indeed it came right in the middle of that range. Political in the fourth quarter was $3.8 million, and that was versus $600,000 in the prior year, for an incremental pickup of over $3 million in the quarter. But as David noted earlier, offsetting that political gain was the loss of post-season Red Sox from the World Series run in the fall of 2013.

As I go through some of the line items in our earnings release where appropriate, I'll give you our current thinking on our 2015 business model. But caution, this forward guidance is based on our current portfolio, and does not incorporate expected results from the Lincoln acquisition. So any guidance will be merely to help you, give you color on our existing portfolio of operations. For Lincoln, the acquisition David mentioned, we will wait until we're closer to assuming operations on these stations to give you color, pro forma expectations, and thoughts on the business model and balance sheet outlook, as a result of that transaction. .

Fourth quarter station operating expenses were up 3% over the prior year, which is in line with our guidance to you earlier in the year, and on the last call. And as David mentioned, almost all of that increase is as a result of the incremental spending in the roll out in the quarter of SmartReach digital, which launched in the second quarter of last year. In 2014. Excluding the impact of SmartReach investments, station expense would have been up by about 1%. Looking forward to the first quarter of 2015, we expect station operating expenses to again be up by about 3%. With expenses at core stations up slightly, and our digital investments adding another couple points to expense growth in the first quarter. For 2015, the full year, excluding the impact of any acquisitions, we believe station operating expenses should grow between 2% and 3% for the year, about half of that growth will be in our radio stations with the additional increase coming from the full year of operations and the growth of SmartReach digital. Our corporate G&A expense in the fourth quarter was $5.2 million. For 2015, we believe a run rate for corporate expenses for the $5.2 million to $5.4 million per quarter is a good estimate.

In the fourth quarter we had about $1 million of expenses related to our announced transaction with Lincoln, and you'll see this on our fourth quarter financials reflected in a separate line item under merger and acquisition expense. We expect additional Lincoln deal related expense in the first quarter of 2015. I might model a similar number of about $1 million in the first quarter, and again this will be reported in a separate line item of M&A expenses. Fourth quarter net interest expense was $9.4 million. This amount includes about $800,000 of amortization of non-cash interest items, and that represented a decrease of about $300,000 from prior quarters. I expect a similar net interest expense of about $9.4 million in the first quarter of 2015, since we are building cash versus paying down debt at this time. Non-cash compensation expense should continue into 2015 at a rate of about $1.3 million to $1.4 million per quarter.

Our booked tax provision in the fourth quarter of 2014 was about a 43% tax rate. This is in line with our guidance to you earlier of a tax rate in the low to mid 40% range, and that range should also become a good estimate for 2015, subject to quarterly adjustments. And this important reminder on the tax expense that you see in our financial statements. It's a GAAP tax provision. We do not pay cash taxes. And in fact we enjoy significant ongoing tax shields from the amortization of intangibles, primarily FCC licenses for our tax return calculations. Plus we also have a significant operation loss carry forward, a balance of almost $300 million at this point in time to shield future year's profits.

Turning to the balance sheet, through the first portion of last year we paid down about $37.5 million of our term loan B debt facility. But then starting last fall, we began accumulating cash in anticipation of our Lincoln transaction. And then we had about $31 million in cash on our balance sheet at year end. Looking at our net debt, debt net of cash balance we reduced our debt to below $450 million, which resulted in year end leverage of about 4.5 times. This ratio is as defined in our credit facility which nets cash against debt. And this ratio is well within our leverage covenants. Our capital expenditures for the quarter was about $1 million, bringing the full year 2014 to $8.4 million. Looking ahead to 2015, we expect similar capital expenditures in the range of $8 million to $9 million, as we have several studio and transmitter projects timed to hit in 2015. On the flip side we believe that our capital expenditures should drop in 2016 to the $4 million to $5 million range.

And now a few notes on the Lincoln deal structure. Upon regulatory and FCC approval and at the closing of this $105 million transaction, we will pay Lincoln $77.5 million in cash, plus issue to Lincoln new perpetually convertible preferred securities of $27.5 million. The cash portion we have an undrawn revolver today of $50 million, and as of today's call we have about $36 million in cash, an amount that will continue to grow into the future. The $27.5 million of preferred is to be held only by Lincoln. It is not transferable. It may be called in whole or in part by us at any time in the first three years at par. We'll pay a dividend at the rate of 6% annually, that will increase in each of the first three years if we've not yet redeemed this paper. There's no put option at the option of the holder. As David noted earlier, we will divest a Denver FM station for either cash or through trade or swap to meet FCC ownership caps in this market. We will also pay Lincoln for any working capital assumed in the purchase. So there will be some additional adjustments to the overall consideration. Important for all of you with your modeling, once we get closer to assuming operations, we'll give you more color on the expected changes in our business model.

Now before we go to our questions, a few comments on our financial progress in recent years, and some unique opportunities in the future, which are the foundation of why we're excited about our business model going forward. We've reduced net debt by $275 million in the past five years, even while completing two tuck-in acquisitions in the Bay Area. Our leverage has declined to 4.5 times. That is the lowest in many, many years. We have significant tax shields in the future, and an NOL balance of $300 million, so we do not expect to be a cash taxpayer for many years. Our trailing free cash flow of almost $1.50 per share represents an outstanding yield to our shareholders, and we have the opportunity later this year to call our existing 10.5% coupon notes, which if done and depending on refinancing assumptions, could alone increase free cash flow per share by another $0.25 to $0.30 per share. Entercom stock price was up 16% in 2014, and it's increased by 50% since this same date two years ago. All in recognition of the above points. So as we've said many times, it's a great business model.

So with that, let's go to the questions you submitted in advance. I think David maybe we'll address first Lincoln. Several people asked first, and let me answer this, for pro forma information to help in their modeling, and I think I addressed that in my comments, that we're going to wait until we get closer. Let me give some more color in several people wanted to know for instance Avi Steiner and Jeff Parks, a shareholder in Canada, what made this deal so attractive, and can you help us with what multiple you paid?

Sure. Look, we're very happy with this deal and it's a deal that we've been seeking for quite some time. It's a great set of markets. Four Top 20 markets, good growth markets. Great brands. Some light FM in Miami, KSON, a country station in San Diego, and a number of others, strong great brands. And we also believe that like all businesses, they benefit from being part of a pure play focused company. And we have a ton of respect for Lincoln National. It's a great, great organization. But we think these stations will perform better within a radio company and a broadcasting company. And we believe there are significant opportunities to grow from this platform in the future.

As to the numbers, we have said and I'll repeat that the deal will be accretive in year one and in addition, we're able to structure the deal in a manner which had a minimal impact on our pro forma leverage. So again, love the deal in every respect. And excited to get going.

I asked myself this follow-up question from comes from Marci Ryvicker at Wells Fargo. Did this deal do anything to your tax position? Yes, Marci, we are buying the stock of the subsidiary which holds the stations, but we will get a step up on the transaction. So I mentioned in my prepared remarks that we have significant tax shields. This will only enhance that position going forward, and it was another part of the attractive aspect as we look to this. Let me have stay on that M&A theme, David and take, while it's not related directly to Wells Fargo. Avi Steiner of JPMorgan asks, is Entercom happy with its station footprint? Do you feel the need to grow larger on gain more scale?

We are very happy with our footprint, and I think as we've said before, radio is a local business, and approximately 80% of our revenues come from local, and we have outstanding footprints and outstanding clusters in the vast majority of our markets across the country. And that gives us strength from the competitive standpoint. That said, we're going to be opportunistic and look for deals which can enable us to enter great markets, if we can do so in a manner which is accretive, and which doesn't impact our balance sheet adversely like the Lincoln deal, but they are few and far between and if they don't arise, we are a perfectly happy with our current plan.

Let's turn back to operations, and let's go to the first quarter of 2015. Mike Kupinski of Noble Financial asks, can you give any color on local national and first quarter basics?

We touched on that on the remarks as you know, and first quarter pacing down 1. We've heard from many media companies and just the general tone of business is that things are a little choppy, and we would concur with that. With local and national being roughly at the same level.

And let me kind of stay on that theme from Marci Ryvicker at Wells Fargo. Several media companies including IR this morning mentioned local being weak across the industry. What would you ascribe this to?

Well, let's step back and look at the big picture of what's going on, in terms of where ad spend is going. I think you can sort of divide the media landscape into three buckets. What's growing, what's stable and what's declining, and I think we're all aware that digital and mobile, and a couple of other media are growing. Newspaper, magazines, yellow pages, and so forth are declining, and radio is stable. And stable to let's call it low single-digit growth. What we love about the position of radio, and why we think we're positioned well for the future, is that we're really undervalued at that stable level. Usage rates of radio remain very strong.

We are the least disrupted of all traditional media. Again a point that is lost I think on most people. And we have massive reach. We're the only realtime mass reach medium that exists today. Great ROI studies have recently come out that show a 6-to-1 ROI in the case of RIB in the United Kingdom actually over a 7 time ROI, which compares very favorably to digital TV and other forms of media. We think there's a great story there, and radio over time will accelerate going forward. I want to tip my cap to some of our peers, and particularly the folks at iHeart and Catch Radio, who I think are leading the charge, but plenty of others in the industry also doing great work in this area. But it's a slow process, right? The perceptions do not change overnight. But I'll go back to the quote I concluded in my earlier remarks with, the Andrew Robertson, CEO of BBDO, his comments again, as you can enlighten and you can find opportunities to when you find leaders in that industry who adopt that perspective, I think it goes very well for the industry's future.

I'll take this next question which is bundled by quite a few people asked on thoughts on refinancing, and might we do that earlier, so let me make a comment on that. I think everyone is aware that our 10.5% notes are callable in December. We can actually call it earlier than that by paying a slight premium. I think realistically, I think we want to digest Lincoln, and I think in the second half of 2015 we'll look whether that will be earlier or later in the second half, I don't want to prejudge. Some of that will be based on the markets. But as I mentioned in my remarks earlier, we think there's a significant opportunity for our shareholders to reprice that traunch of our debt at much more attractive rate, given where we are in our financial profile, given where we are in operations, and given where we are in our overall leverage. Which overall leverage, let me transition to what I think is a last question, and this comes from several sources, so I won't ascribe it to any one person. But David, great job in paying down debt, your leverage now about 4.5 times. What's your thinking on return of cash to shareholders, and when might that be?

We're really happy where we are on the balance sheet. Steve, you're articulated that point earlier in your remarks. But we're really happy with the balance sheet, and I think that at this point in time, our first priority is getting the Lincoln deal locked down, and moving ahead with that. But I would expect the Board to be seriously considering a dividend at some point in 2015.

That's great. In conclusion then, let me again give you my phone number if you have any questions, and then I will throw it to David for final comments. Again my number, Steve Fisher, 610-660-5647.

Thanks all, we'll report back to you next quarter.

That will conclude today's conference. Thank you for participating. You may disconnect at this time.