Audacy Inc (AUD) 2015 Q3 法說會逐字稿

Good evening, and welcome to Entercom's third-quarter 2015 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 thank you, everyone, for joining us this afternoon.

Before I go to David Field with our comments, I'd like to make a note that this call is being recorded. A replay will be made available on our company website shortly after the conclusion of today's call and available by telephone at a replay number noted in our press release that was issued at 4.05 this afternoon.

With our notice of today's call, we asked that you submit your questions in advance of this call. In addition, I'm always available for any followup questions if you wish to call me directly at 610-660-5647.

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 materially are described in Company's SEC filings on forms 10-K, 10-Q, and 8-K. The Company assumes no obligation to update any forward-looking statements.

Also 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, let me turn it over to David Field, President and Chief Executive Officer.

Thanks, Steve. Good afternoon, everyone.

I am pleased to report that Entercom had an outstanding third quarter and is well positioned for continued strong performance in 2016 and beyond. We achieved strong top-line and bottom-line growth due to excellent operational execution, which accelerated during the quarter.

We generated strong, double-digit growth in free cash flow and adjusted net income per share. We completed the takeover of our new Lincoln and Bonneville stations in Los Angeles, Atlanta, Miami, San Diego, and Denver.

Today, almost four months later, I can report that our integration efforts have gone seamlessly, and we see abundant opportunities for growth across these new properties.

We accomplished all of this while preserving the strength of our balance sheet, completing the acquisitions with no material impact on our leverage. And we continue to drive innovation and enhancements across the organization to bolster our potential future growth.

In sum, it was a great quarter, and we think we have put ourselves in a strong position to achieve excellent results for our shareholders in the years ahead.

I will share some additional color on the quarter and recent developments, plus our new acquisitions, and then update you on current business conditions. After that, Steve will provide you with a more detailed financial briefing before we open it up for questions.

Third-quarter revenues were up 15%, largely driven by the Lincoln acquisition. But what is far more meaningful is the organic growth we achieved during the quarter.

Same-station revenues, excluding the new acquisitions, were up 3% for the quarter. Excluding political revenues, same-station revenues were up 4%. Strong organic results were driven by significant market-share gains, as our team continued to do a great job driving solid growth in station ratings and improved sales execution. And while we have significantly outpaced our markets all year, our relative performance accelerated in the third quarter.

Some other color on third-quarter performance. Our local revenues were really strong, up high mid-single digits. This follows our second quarter, in which we also achieved mid-single-digit local-revenue growth. National revenues were down slightly in the third quarter.

September was the strongest month of the quarter, but we were up in all three months. Our best performing markets were Boston, Kansas City, Seattle, and Portland. Our best performing categories included auto, health and medical, and home furnishings.

Our revenue growth has improved sequentially over the course of the year. Excluding political revenues, our same-station revenues were flat in Q1, up 1% in Q2, and up 4% in Q3. It was worth noting that our team is continuing to do a wonderful job building our brand and generating strong ratings growth, as well.

You may recall at our last call in August, I noted that Entercom ranked number one among all radio groups in Nielsen ratings growth in our metered markets over the past couple years. I'm pleased to report that our summer ratings results continued this trend, as we grew significantly over the prior year and have sustained our strong ratings momentum as we head towards 2016.

We achieved terrific bottom-line growth, as well, with adjusted net income per share up 21% and free cash flow up 40%. Now, I should point out that the free cash flow percentage growth was inflated by some timing events that will reverse themselves in the fourth quarter, resulting in roughly a 20% increase in free cash flow for the second half of the year.

What is particularly exciting about our great results is how we achieve them -- strong organic local revenue growth, excellent local radio brands with growing audiences, highly manageable expenses, compelling new acquisitions with substantial future upside, and a low marginal cost of capital to fund our new acquisitions, and all of this being accomplished on the base of a strong balance sheet.

We were able to achieve these operating results while at the same time taking on four new markets and moving aggressively to implement significant changes in our new stations to accelerate their integration and realize their cash-flow potential.

So I want to take this opportunity to give a big shout-out to our Chief Operating Officer, Weezie Kramer; our Regional President, Michael Doyle; our President of Programming, Pat Paxton; and our President of Sales, Deborah Kane for their outstanding work, and to all of the men and women of the Entercom team across the country for delivering a terrific quarter.

I also want to recognize our corporate, HR, digital sales, accounting, IT, engineering, and traffic teams and the rest of our corporate team, who have been working so tirelessly and effectively behind the scenes, doing such a great job enabling our seamless integration of the new properties.

And a special shout-out to Steve; our General Council, Andrew Sutor; and Pat Cunnane, our VP of Finance for their outstanding work earlier in the year getting our deals completed and dealing with all the regulatory issues. We're extremely fortunate to have such an outstanding team throughout the Entercom organization, and that has never been more clear than over the past several months.

Let's turn to the Lincoln and Los Angeles stations. For those of you less familiar with the transactions, we added four outstanding new top-20 markets to our line-up in Los Angeles, Atlanta, Miami, and San Diego. As a result, we are now in every major market in the West Coast.

We acquired a strong footprint of quality brands with significant development opportunity and margins well below industry standards. When we announced the transaction last December, we asserted that it would be accretive to shareholders in our first year of operations and have only a minimal impact on our leverage. We have already accomplished the latter and are well on our way to delivering on the former.

Four months in, we could not be happier with our progress. We made ambitious plans to institute rapid change without disruption, and I'm pleased to report that the integration has been seamless and we are ahead of schedule.

We have made great progress in implementing new leadership, enhancing brands and systems, evolving culture, improving execution, and implementing new strategies and our Company's best practices.

We began operations in mid-July and replaced the market managers in each of the new Lincoln markets with terrific new leaders on day one. And we have taken a large number of actions during the quarter to improve performance and enhance the business model.

As a result of these steps, we are now roughly doubled the run-rate margin in the Lincoln markets to the mid-20s at the end of the third quarter. And with the benefit of the full-period impact of these actions in the fourth quarter, we should see run-rate margins approaching or exceeding 30%.

I would add that while these changes are driving margins up towards industry norms, just as importantly, they will strengthen the stations and significantly enhance their effectiveness as they compete for audiences and revenues. And as we improve sales execution and drive revenue growth, we expect to see further improvement in margins in the coming quarters.

We're also very excited about our new acquisition of The Sound in Los Angeles, which resulted from our trade of a few stations in Denver to Bonneville.

As you may recall from our last call, The Sound established itself as a highly rated station in early 2015, but its revenue share trails its ratings by a significant margin. We continue to expect strong revenue and cash flow growth in the quarters ahead.

In addition to our strong organic growth and the great opportunities we see of the new acquisitions, we continue to innovate and invest to develop new opportunities for growth and value creation for our shareholders. As part of this effort, we continue to explore new ways to grow our brands and audiences and deepen listener engagement.

In Miami, we recently launched a new alternative station called The Shark, filling the void in this market, which has not had a [current base] rock station in many years. We also are investing to grow and enhance our various station digital and social platforms and build out SmartReach Digital, which continues to progress.

And we continue to enjoy a healthy and growing events business. In fact, several of our stations and now gearing up for their holiday concerts, bringing top national recording artists to perform in front of large local audiences at these highly popular annual branded events.

As we chart the current business conditions, fourth quarter is currently pacing flat. Excluding political revenues, fourth-quarter pacings are up 3%. While October was down due to political, it finished up [3%] ex-political. November and December pacings are both positive. We are experiencing strong growth in health and medical, home furnishings, auto, and professional services, among others.

Meanwhile, the industry continues to generate strong and positive headline. There have been a number of recent stories noting radio's emergence as the number-one reach medium in the United States. And new studies continue to show radio's powerful ROI, eclipsing other competitive media.

In fact, a recent New York Times story on media consumption trends highlighted the fact that in an era in which many millennials are cutting the television cord, radio is the big winner, noting that, and I quote here, more adults use AM and FM radio than any other media type, and this excludes satellite and most streaming radio, end quote.

Ultimately, radio's issue is about perception. And as other forms of media grapple with serious challenges and some of the shiny new toys become somewhat less shiny, radio has a wonderful opportunity to be rediscovered and finally earn the share of ad spend that it deserves.

While Entercom is in a great place to thrive for a number of company-specific reasons, I believe our greatest opportunity will be the positive re-valuation of radio, and the prospects for that look better than they have in a long time.

In conclusion, this was a great quarter for our Company. Strong organic local revenue growth, growing brands and audiences, improving sales execution, excellent integration and progress in our new acquisitions, and solid expense management. Looking ahead, we are optimistic about our potential to drive significant earnings and free cash flow growth in 2016 and beyond.

In addition to strong operational execution, we expect contributions from a number of other important drivers, including the significant upside in our new acquisitions, as well as SmartReach Digital, events, and other innovations. And our healthy balance sheet provides us with flexibility to award our shareholders and prudently create value.

To date, the stock market has not caught up with the fundamental improvement in our story and our potential for earnings and free cash flow growth. With our stock currently trading with a trailing free cash flow yield of 14%, we believe our stock is highly undervalued, but are hopeful that will change as investors absorb our third-quarter performance and reassess our company fundamentals.

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

Thanks, David. That was a lot. That was pretty good.

Well, you just heard, we've had a pretty busy quarter. And in summary, let me just say that we're very pleased with our progress, our results, and our outlook.

David covered revenue highlights for the quarter and how you should think about core revenue growth and sales execution. Some color on station-operating expenses. Consistent with what I've guided you to over the past few quarters, we had expense growth in our core operations, that is, before acquisitions, of low single digits in the quarter.

For our new properties, as you've heard, we're on track to achieve the savings we originally envisioned. And we were pleased to see the steps towards realization of our planned margin expansions. Our integration with Entercom systems, culture, and expectations is on track.

But we did have to make some tough changes. As a result of permanent changes to the business models of the new Lincoln markets, we recognized approximately $2 million in restructuring, along with M&A expenses in the quarter.

The vast majority of this amount was a write-off of unneeded or abandoned vendor agreements, plus there was severance from permanent position eliminations. There was also a few hundred thousand of M&A legal costs related to the mid-July closing and the related time brokerage agreement with Bonneville. I'd note that we exclude this line item from adjusted EBITDA.

And we may have an additional small restructuring charge in the fourth quarter, but I do believe that will be the final restructuring charge as related to this transaction.

So with these changes and others, we've already taken many millions of dollars out of the run-rate model for these properties, and it reflects the margin-improvement trajectory that David mentioned earlier.

Next year, as other contracts come up for renewal, we see further opportunities for savings, plus we'll continue to adjust station spending and staffing priorities. So for these new properties, I believe we'll continue to see margin improvement next year, apart from any expansion related to sales growth.

Our corporate G&A expenses in the quarter were down from prior year, but that was largely due to a one-time legal settlement in last year's expense. I think corporate G&A expense should be around $5.7 million to $5.9 million for the fourth quarter of this year.

As part of our station swap with Bonneville, Entercom received $300,000 per month in time-brokerage-fee income. So we recognized a partial-quarter TBA income of about $745,000 in the third quarter.

We expect to close our TBA with Bonneville shortly, as the FCC has now approved this transaction. And at that time, this fee would stop, so I would estimate around $400,000 in TBA income for the fourth quarter. We do not include TBA fee income in our adjusted EBITDA number.

And to clarify the obvious, we do include revenue and operating expense of the TBA stations, but we exclude the traded stations in our results of operation. And as a side note on our balance sheet, at the close of this swap with Bonneville, we have no cash-consideration impact on our balance sheet. It's a straight-up trade.

Net-interest expense for the third quarter was $9.7 million, which includes about $800,000 in amortization of noncash interest-related items. Our noncash compensation expense is $1.6 million for the quarter, and I think that's probably a reasonable run rate for the fourth quarter.

Our depreciation and amortization increased to about $2.2 million in the third quarter, due to the transaction. And with the pending closing on the LA station anticipated soon, I could see this increasing to $2.3 million to $2.4 million in the fourth quarter.

Turn to the balance sheet, we've reduced debt to approximately $496 million net of cash at September 30. [Plus] new to our capital structure this quarter, we have $27.5 million in newly issued convertible preferred, which was issued to Lincoln Financial Group in July as part of the transaction.

This perpetual convertible preferred is to be held only by Lincoln and is not transferable. We currently pay a dividend on the preferred at the rate of 6% annually, which you'll see is a separate line item in our financial statements.

This preferred dividend resulted in $339,000 in the third quarter, which was a partial period. So for the next few quarters, we would expect to record about $413,000 per quarter. The preferred dividend rate will increase next July to 8% annually, if we have not called the paper, which we can do in whole or any part at par. The convertible preferred stock does not count as debt under the Company's credit facilities for our financial covenant calculations.

We have pro forma leverage at September 30 of 4.6 times. I'm pleased to report that's slightly better than what I forecasted to you early in August on our last call. I'd make a note, our credit-facility calculations includes certain allowed pro forma expense adjustments applied to the trailing results.

There's a data point, as David mentioned, in our press release, which is worthy of some color because it's a little misleading. Yes, we did enjoy an outstanding increase in free cash flow of 40% in this quarter. But besides the strong operating results, that increase also benefitted from a reduction in capital expenditures from last year, mainly due to timing differences; and I pointed out earlier that our corporate G&A was higher last year due to that one-time legal settlement, which depressed prior-year comparative results. And the way we look at it internally, it's more like a healthy 20% increase in free cash flow in the second half.

Before I go to your questions, I'm sure there'll be interest in the status of our capital structure and thoughts on refinancing. We are well aware that given our outstanding free cash flow generation and moderate leverage, we might seek to reduce our overall interest expense and increase our free cash flow.

Our high-yield notes are now callable, albeit with a call premium. We did have a refinancing plan in mind with the intention of triggering an action plan by this time. However, the credit markets have worsened since Labor Day, both in terms of rates and terms of conditions.

Since we view this project opportunistically, we're currently on hold with our plans and monitoring market conditions. Our timing could change at any time. We won't comment on specific timing or structure, other than to say, we're on it.

So in conclusion, you've heard details on the color of our transactions; the ramp up with results, along with solid execution within our core Entercom portfolio; our belief in the revenue and margin opportunity from the new markets; and our balance-sheet strength and future free cash flow enhancement opportunities.

So with that, David, let's go to some of the questions. Let me pause and reorder these.

First question from Michael Kupinski at Noble Financial. David, many broadcasters sited auto bouncing back. Is Entercom seeing the same?

Well, auto's been a solid category for us for a while now, and it certainly looks to be the same in the fourth quarter.

Our next [call] from Marci Ryvicker at Wells Fargo, and it's about -- some more color on political. Why don't I take that, David, since I happen to have the data points here.

The question was on political. Let me give political for third quarter of this year and last year. Last year, we had not cycled -- check your calendars (inaudible) like November 7 or 8, so a few more days. We are past the political season this year.

Third quarter of this year, we had $400,000, last year $1.5 million. For the fourth quarter as of this point in time, this year $600,000, last year $3.9 million.

And then a related question, both from Wells Fargo and a few others -- what do we see for political for 2016?

We always love this question because we look back over time, and like death and taxes, political is pretty predictable. So if you look back on past presidential election cycles, I would say for this platform, keeping in mind we have some new markets so I'm still not totally as solid on this, I think between $7 million and $8 million would be the historical trading range, based on what I see out there in political activity. It might be higher. We're not yet in that season.

David, the next -- this is fun. I'll call this softball or hardball, and this is a great question. Jeff Parks from Venator Capital in Toronto wanted to know, did the Kansas City Royals winning the World Series have any impact on our fourth quarter?

No, not meaningfully. We actually -- our deal with -- let me say first, it was a great thing for the station, a great thing for the market, and there was a tremendous amount of energy around it. And certainly the station's ratings were impacted significantly by it, which could end up having some impact on that station going forward, and it's doing really, really well.

That said, we do not take the [inventory] for the Kansas City Royals games, and so there was no direct financial consequence to us for their success.

And I hope everybody saw the television news coverage of the World Series presentation and the trophy in Kansas City (inaudible) 500,000 people in a sea of blue. That's for our friends in Kansas City. Congratulations.

Let's switch over to the industry -- kind of a related question, both from Mike Kupinski at Noble, who I cited earlier, and Avi Steiner at JP Morgan. David, do you see a change in the competitive landscape in radio, especially given the leverage profile of some of our radio peers?

We don't really look at it like that. We love our competitive position. I think it's been pretty clear. We have a strong balance sheet. We have pure-play focus. We have, I think, strong strategy capabilities and a quality group of people and markets and brands, and we're executing well. And I think that's enabling us to perform well at this point in time.

With that said, we have some very formidable competitors. And their balance sheets don't really impact the day-to-day of how we compete in the marketplace. And there are a lot of really smart and talented people out there we compete with and are doing great things for the business. So we don't really see any sort of material change in the competitive landscape today.

Let me stay with a question from Avi Steiner, [who's] a little different. Recently, the FCC came out with some proposed plans for future AM revitalization. Does Entercom have any thoughts on that?

Look, we're obviously taking a look at that, and we're exploring some opportunities. And at the margin, it's probably a good thing. But we really don't have a definitive view on it yet.

Let's turn back to the Company. Again, from a -- a theme across several people from Wells Fargo, to others. David, do you have plans to expand the station portfolio and footprint, having just, obviously, completed a significant acquisition?

Well, if you look at our history in M&A, I think everyone is aware that we've been very disciplined over the years and have walked away from a number of deals that were tempting to us but that we felt were not prudent based upon what it would have taken to have purchased them.

The Lincoln deals satisfied our fundamental criteria, which was it needs to have some strategic relevance to us. It needs to enhance our -- create shareholder value, and at the same time not impair our balance sheet. And so we were able to achieve that on Lincoln, and that's great.

Looking forward, our competitive position is strong, so we have no need to make any acquisitions. But should a deal come along that fits the same criteria, ala Lincoln, it's something that we would certainly look at. But you know, again, with great discipline and prudence.

I think that wraps up the questions that came in. I'll say again before I turn it over to David for any closing comments, if anyone has any specific questions, please feel free to call Steve Fisher at 610-660-5647.

We appreciate everybody joining us on what has been a very busy day and earnings season. And we'll look forward to reporting back to you again in three months. Thank you.

Thank you, and that concludes today's conference. Thank you for participating. You may now disconnect.