Audacy Inc (AUD) 2016 Q2 法說會逐字稿

Good morning, and welcome to Entercom's second quarter (inaudible) 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 morning everyone and welcome to Entercom Communications' second quarter earnings conference call. We released our earnings this morning, those are available on the Wire and our company website. This call is being recorded. A replay will be available on our company website shortly away after the conclusion of today's call and available by telephone at the replay number noted in our release.

With our notice of today's call, we ask that you submit your questions in advance of this call. In addition, I'm always available for any questions you might have, 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 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 this call, we may reference certain non-GAAP financial measures, and we refer you to our website at entercom.com for a reconciliation of such measures and other pro forma financial information.

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

Thanks, Steve. Good morning everyone. Thanks for joining our second quarter earnings call. I am very pleased to report that the Entercom team completed another quarter of terrific performance. Our financial results were outstanding with strong organic revenue growth, and significant margin expansion, enabling us to post robust growth in EBITDA, earnings per share and free cash flow. In addition, we continue to make great progress on a number of fronts to enhance our competitive position, grow our capabilities and bolster our future growth potential. And we are optimistic about our business for the remainder of 2016 and on into the future.

Turning to second quarter results, net revenues were up 20% including the impact of our 2015 acquisitions, but more meaningfully on a same-station basis, net revenues were up 5%. Solid expense management enabled us to increase our station operating margins. As a result, adjusted EBITDA rose 21%, adjusted earnings per share increased 27% and free cash flow increased 47%. In sum, it was a great quarter.

What is particularly noteworthy is not just the magnitude of our growth, but its consistency. We have demonstrated our ability to generate solid growth quarter after quarter on a sustainable basis. Taking a look back over our past 12 months through June 30, Entercom's same station net revenues were up 5%, and free cash flow increased 35%. And as you will hear in a few moments, our pacings look strong for the remainder of the year and we are optimistic about our ability to continue to generate strong same station growth.

Here are some additional color on our second quarter results. All three months were positive with June being the strongest. Local and national revenues were both up for the month with local leading the way. In fact, it is worth noting, this was our fifth straight quarter of mid-single digit or better organic local revenue growth. We grew our revenue market share significantly during the quarter. In fact, only four of our 23 measured markets lost share during the quarter, our 5% growth compared to low single-digit growth for our markets.

Political revenues were under 1% of our quarterly sales. As a result, our same station revenues excluding political were up 4%. Our best performing markets during the fourth quarter were San Francisco, Denver, Miami, Kansas City and Indianapolis. Our best performing categories were auto, entertainment, restaurants and fast food and professional services. And we continue to improve our balance sheet with leverage dipping below 4 times to 3.9 times as of June 30.

It's worth noting that our leverage has declined from 4.6 times to below 4 times over the past year, notwithstanding the fact that we completed the Lincoln and Los Angeles acquisitions during that period. Our performance is being driven by many factors, most notably, our strategic focus on building strong local radio brands with compelling personalities and content to drive strong ratings performance, and developing best-in-class marketing solutions for our customers, along with enhanced local sales execution and capabilities.

Our team across the country is doing an excellent job of executing our game plan, and delivering results. It's also worth noting that we closed our Lincoln acquisition a year ago in the middle of July, 2015. At the time, we asserted that the transaction would be accretive in its first year, and not adversely impact our leverage.

I'm pleased to report that a year later, we have over-delivered on our promises as the Lincoln stations are in fact accretive, and as I previously mentioned, we have lowered leverage from 4.6 times to 3.9 times since closing on the deal. And it's not just Entercom generating strong operating results; a number of our peers, large and small, most notably, iHeart, which is of course the largest company in radio, have posted consistently strong operating results, demonstrating radio's great vitality.

Radio is a terrific business with a great business model. We reach more Americans than any other medium and that number continues to grow as we currently reach an all-time record of 240 million Americans, 12 and over. And as other media continue to face significant secular challenges, radio's relative value proposition continues to grow. The opportunity for radio to increase its share of total ad spend is significant.

As you know, we launched our initial dividend last month. What is remarkable is that our current dividend represents only 16% of our trailing free cash flow. This gives us plenty of headroom to consider future dividend increases while continuing to invest in the business, pursue compelling growth opportunities, reduce debt and further enhance our strong balance sheet.

We're also continuing to make progress in a number of other areas. Our focus on great local brands and content continues to pay off for us in the ratings, as Entercom remains a leader in Nielsen ratings growth, and we are continuously looking for ways to bolster our programming and grow our audiences and deepen their engagement.

For example, since the start of the year, we have added a number of new air personalities, most notably at Star in Atlanta and have successfully rebranded two of our stations in Miami and San Diego. Since making those moves, Star and Atlanta has jumped from deep in the pack, up to number 3 among women 25 to 54. And The Beach in Miami has grown from the middle of the pack to fourth in men, and Sunny in San Diego has similarly climbed to number 4 in women.

In addition, we are also accelerating our focus on programming innovation, developing exclusive compelling content across our many markets. In just the past few months, we have developed exclusive programs with Chris Martin, the Red Hot Chili Peppers, and Justin Timberlake.

On our last earnings call, we mentioned that we had entered into an agreement to become the new flagship radio broadcaster for the San Diego Padres beginning next year. Since then, we were delighted to announce that as partners with ESPN, we are the new FM flagship station for the Los Angeles Rams, as they make their historic return to Southern California this fall.

Turning to current business conditions, third quarter is pacing up 3% on a same station basis. It is worth noting that political advertising has not impacted Q3 yet and we expect that to roll in during August and September. That is the usual pattern in political years. We are experiencing strong growth in the following categories; financials, entertainment, groceries and TV cable. And while it is very early, our pacings for the fourth quarter are very strong.

Looking forward, we expect a strong second half of the year as we benefit from our excellent ratings performance, enhanced sales execution, multiple growth initiatives and election year political revenue. In sum, this was an excellent quarter for Entercom on essentially every level. We are very well positioned for solid growth for the remainder of 2016 and beyond.

And we offer our investors terrific value with our stock providing a 13% trailing free cash flow yield along with a very solid balance sheet, strong organic growth, a great portfolio of local brands and content, a number of value creating growth drivers and a nice dividend as well.

With that, I'll turn it over to Steve before we answer your questions.

That's great. And as David just covered, the Entercom team has delivered an outstanding quarter yet again. Our brands and operating team continue to drive solid ratings and industry-leading revenues leading to EBITDA and margin expansion plus continued impressive free cash flow growth.

Make a note that last week, Entercom's Board of Directors announced our second dividend this year of $0.075 per share, which will be payable to shareholders of record of August 15, payable on September 15. And for your background information, this dividend at the current run rate represents about $12 million annually in cash payments to shareholders, but is less than 16% of our free cash flow. We continue to improve our already solid balance sheet and we were pleased by the upgrade of our credit rating by Moody's in May, which reflected positively upon our progress.

Now looking at a few financial highlights for the second quarter, our expense management, coupled with revenue growth again drove station margin expansion. We had a minimal increase in station operating expenses in our core stations and realized a mid-teens decrease in operating expense versus prior year and prior owners on the properties acquired last summer, which reflects our operational restructuring initiatives on those new acquisitions. Collectively, our stations' broadcast cash flow margins increased almost a point over prior year.

Our corporate G&A expense in the quarter was $7.3 million, which was consistent with my prior guidance to you on our last call and included a one-time bonus payment on our CEO's new contract. I expect third and fourth quarter corporate G&A to be about $6.5 million per quarter.

Non-cash compensation expense was $1.5 million and I expect the next two quarters to be about $1.6 million per quarter. Net interest expense for the second quarter was $9.1 million. This amount benefited from a minor one-time adjustment. So I believe we will report a similar net interest expense for the third quarter.

In addition to net interest expense, we also have our dividend on the $27.5 million of convertible preferred held by Lincoln Financial Group. This expense was $412,000 in the second quarter. I would note for your models our rate increases this quarter. So I would model about $550,000 per quarter in future quarters. However, this instrument is callable by us in whole or in part and we are likely to retire this paper sometime in the coming 12 months.

Our depreciation and amortization of $12.5 million represents a good run rate for your models for the remainder of the year. The quarter's GAAP book tax rate was about 41%. Looking forward, we believe our GAAP book tax rate should be about 40%, but as always subject to fluctuations due to discrete period adjustments and as I love to point out on these calls, that is a non-cash tax provision in our financial statements as we do not pay cash taxes nor expect to for quite a few years.

Turning to the balance sheet, we finished the quarter with net debt, net of cash, of approximately $454 million. This resulted in leverage on June 30 of 3.9 times as defined in our credit agreement. For your background, our second quarter debt reduction is always lower due to the timing of our semi-annual bond interest payments and working capital seasonality, coming off the seasonally lower first quarter net sales levels. We expect to see a larger sequential reduction of our net debt and leverage ratio in the second half for the year.

Our current thinking on capital expenditures for the full year is $7 million to $8 million, so depending on the timing of these projects in coming months, we would expect to be in the ballpark of $2.5 million to $3 million per quarter for capital expenditures in the second half of the year.

Besides industry-leading ratings and revenue growth, another key part of the Entercom story is our outstanding free cash flow generation. This quarter's free cash flow was up almost 50% versus last year, building on the first quarter's free cash flow which doubled. And our trailing 12-month free cash flow has grown to $1.86 per share, representing an attractive increase in just the past six months from our 2015 annual free cash flow per share of $1.56.

And that great free cash flow comes in spite of some expensive 10.5% notes placed years ago during a period of credit market turmoil. We've pointed out to you in the past that our unsecured notes call premium steps down by several million dollars this fall, an amount that factors into our thinking as we consider the trade-off of refinancing now for reduced interest rate versus the overall upfront cost of replacing some or all of our existing credit facilities.

Also, as we continue to delever over the remainder of the year, our reduced leverage should open up additional favorable financing options for the benefit of shareholders. And, any refinancing should and will potentially provide a significant step down increase in our -- a step increase in our free cash flow generation story.

So, as you just heard from David, this quarter again built on our great operational results over the past year. While it's been a great start to the year, we're just as excited about the second half, continuing to build on our successes, strong brands, industry-leading organic revenue growth, and sales performance coupled with solid expense management.

We have a great business model that provide outstanding free cash flow, which is growing, a quarterly dividend rewarding shareholders, and the benefit of our significant NOLs to shield future earnings, plus the potential of a future reduction in cash interest expense. All this coupled with high insider stock ownership makes Entercom an attractive platform for both debt and equity investors.

So with that, David, we'll go to questions which came in, in advance. There are quite a few. I'll start maybe with some more operational and conclude with balance sheet oriented.

From Mike Kupinski at Noble Financial, asked for data points on political in the quarter, and our outlook, and David, why don't I give the data points for political, and why don't you have -- handle the outlook? For those of you modeling in your notes, second quarter political was about $1 million. That compares to second quarter of 2015 of about $300,000. Just a data point, that's about $1.8 million in political for the first half of the year.

We're looking at the political landscape being normal. Obviously, it's somewhat of an unusual year politically, depending on one's perspective. But from an advertiser perspective, with all the local, national, state and so forth for ballot initiatives, we're anticipating business as usual as we go through the next few months.

From Marci Ryvicker at Wells Fargo Security. Marci notes that Enter came in about a point higher than the pacing data we gave on the last call in May, what strengthened?

Yes, but we've seen that pattern now over multiple quarters, right, and obviously, we're certainly hopeful that, that remains the case in Q3 and beyond, but I think a lot of the credit goes to our team for executing well, and being able to take advantage of opportunities as they present themselves, and a lot of it just goes to just the way business is being placed these days as advertisers have better and better information about their business and place their advertising accordingly.

From Avi Steiner at JPMorgan, I'll connect two separate questions he had, because I think they're both relevant. First, any color that you can provide the Street on differentiation and performance between our larger and smaller markets, and let me go to the part two question, what are we seeing as we deal closely with small and medium businesses?

Now, look, we've been -- I think, if you look back over the last few quarters, we've now generated organic local revenue growth over the last five quarters in the mid-single digits. So we're pretty happy with that and I think it's reflective of the fact that we're bringing to our local customers a good offering of the power of radio and all the benefits that come with it, plus digital events and the rest of our portfolio. So we feel very, very good about where we're going in the future with our local customers.

Let's stay with the revenue growth theme from Kyle Evans at Stephens. Any color you can give on our second quarter revenue growth, how much of that was driven by rate versus ad loads?

Well, again, one sort of baseline point is that we do not increase our ad loads as a company. It's a very rigid foundational limitation that we have with all of our markets, and so what we had in Q2 was a little bit of an increase in yield per minute, and also a little bit of an improvement in the inventory utilization, meaning the percentage of our inventory that we were using as opposed to spilling. So I think good news on all fronts.

Let me go back to a follow-up question from Mike Kupinski, kind of staying in this same theme. David, you've talked in the past and including on this call about Entercom being an industry leader with strong ratings. How much of the performance in the second quarter outperformance can be attributed to ratings?

It's a factor right, and no question that there is a correlation between ratings and revenue performance albeit there is a lag effect with it. What's nice is that our ratings growth, because of our core strategies and our focused investments in great local content and personalities and brands, we've seen a consistent leadership in ratings growth over quite some time, but I also don't want the inference to be that that's really the ultimate driver here. I think a lot of it has to do with our sales execution, our expanding product line and the things that we're doing in other areas. And I think all of that makes us optimistic that we have quite a sustainable opportunity here to grow, but -- and also a great deal of headroom as we capitalize on some of the ratings that we're currently achieving and again that takes some time into the future to fully monetize.

Let's step back, a follow-up question from Avi Steiner, who noted the recent press release by Entercom and other industry participants regarding Shazam, any color you can provide the Street on the Shazam announcement of last week?

Yes, look, it's an exciting opportunity. There's obviously some very interesting technology there and a user base that got significant potential. I think it's important to note that this is nothing against Nielsen, they're a great organization, and they've been a good partner for broadcasters for a long time, but competition is a good thing. And we think there is potential to significantly expand sample sizes to enhance data collection and our knowledge of our listeners and to boost radio share of the media mix going forward. So we're excited about the potential.

This is a broader generic question and while we stay on competitive technologies, a few questions came in looking for your color on the multitude of streaming services and satellite collectively on the impact on radio listener show.

Yes, there were some interesting comments from the Sirius XM CEO yesterday and it's interesting, he made the point that there really is not a zero-sum game going on here in audio and just like in video and it's absolutely true that the pie keeps expanding, audio is growing at a significant clip. And what's great is that local radio retains the lion's share of that audience.

We are the least disrupted of all media and have now a record number of listeners to local radio and that's -- and Entercom's ratings continue to grow too. So I think that it's great news across the board and that the additional competition in audio isn't -- again isn't cannibalistic and a zero-sum game, but is actually additive and speaks well to the health of the whole audio ecosystem in which we're thriving.

Let's change gears, come back to an Entercom-specific question from Davis Abaire at Wells Fargo. Question is, David, how we should think about your dividend which was begun -- commenced in the second quarter and the pace of any increase in the dividend over time into the future?

So, as you mentioned, of course earlier, Steve, this is now our second quarter of having a dividend, but what is really interesting is that only 16% -- we're only using 16% of our free cash flow on a trailing basis to fund that dividend and our balance sheet is of course in great shape. So certainly there's an opportunity there to be able -- to have an opportunity to increase our dividend over time and further reward shareholders as we continue to grow.

I'm going to direct this next question to myself, if that's okay. Several people asked the obvious question, I think we've gotten it every quarter now for the past year or so on our thoughts on refinancing specifically from several people including Aaron Watts of Deutsche Bank and Jeff Parks at Venator.

So for the Street, I think we've been as transparent as we can be with you. We had hoped to refinance last fall, the credit markets went south I think as everybody is aware. The markets are better now, but as I noted in my remarks earlier, we are aware of the step down in the bond call premium this fall. So our current thinking is that's most likely a fall then depending on credit markets than an event at the moment.

I'd also note and this kind of dovetails back, David, to your comments just now on the dividend and free cash flow, any refinancing should result, we would hope, that's why we would do it, in a significant reduction of the cash interest, increasing free cash flow and making that available for shareholders in the form of dividend or how's this for a transition and the concluding question, how do you view the M&A market, David?

Specifically, quite a few people noted the recent CBS filing for their radio group IPO coupled with last week's announcement of Beasley acquiring Greater Media. How do you view the M&A market collectively for radio, and specifically for Entercom?

Yes, first, you may be interested to know we did not get a look at the Greater Media assets. That was not shopped to us. From what we see and the limited information we have, it looks like a great deal for Beasley, so congratulations to those guys. They've got a great opportunity here to create value.

For us, our track record, I think, speaks for itself. We've been pretty consistent in noting that there are three things we look at in any opportunities; it needs to be a strategic fit, it needs to be accretive to our shareholders and it needs to protect our balance sheet. And we've been very disciplined about that over the years. We've avoided some pretty well publicized acquisitions that have caused problems for others, and I think what we've chosen to do I think has worked out very well for us.

So, with all that said, we're very happy with our strategic position right now and the opportunities in front of us going forward. So if opportunities should present themselves, we'll, of course, be looking, but we're very happy with our current situation and where we're headed going forward.

So once again, in conclusion, if anyone has any questions, give me a call, Steve Fisher, CFO, 610-660-5647.

And thanks to all. I appreciate your time in this morning and we'll look forward to reporting back to everybody in three months. Thanks.

Thank you, speakers. And that concludes today's conference call. Thank you all for joining. You may now disconnect.