Audacy Inc (AUD) 2016 Q3 法說會逐字稿

Good morning and welcome to Entercom's third quarter 2016 earnings release conference call.

(Operator Instructions)

This conference is being recorded. I'd like 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 Monday morning to everyone. I'd like to welcome you do to Entercom's Communications 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 this morning.

With our notice of today's call, we ask that you submit 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.

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 the factors that could cause the results to differ is described in the Company's SEC filings Form on 10-Q, 10-K and 8-K. The Company assumes no obligation to update any forward-looking statements.

During this call, we may reference certain non-GAAP financial measures. We refer you to our website at entercom.com for a reconciliation of such measures and other pro forma financial information.

With that, I'd like to turn the call over to David Field, President and Chief Executive Officer.

Thanks, Steve. Good morning, everybody. Thanks for joining our third quarter earnings call.

I'm very pleased to report that Entercom delivered another quarter of performance. Our operating team, once again, produced meaningful organic top-line growth and margin expansion, enabling us to post solid growth in all bottom line metrics including EBITDA, earnings per share, and free cash flow.

I'm also very pleased with the progress we've made in a number of areas to create significant value for shareholders and enhance our future growth. Most notably, we just completed a very significant refinancing of our outstanding debt, and announced a terrific acquisition in Charlotte. Steve and I will provide some additional color on those announcements, as well as a number of other recent events.

But first, I would like to share some of the highlights from our third-quarter financial results. On a same-station basis, net revenues were up 3%. Solid expense management enabled us to increase our station operating margins from 29% to 31%, and we increased both adjusted EBITDA and adjusted EPS by 8%.

Diving deeper into our third-quarter results, here are some other insights. After a slow July, August was the strongest month of the quarter followed by a solid September. Local, political, and digital were all up while national revenues were off a bit. Excluding political, our same-station revenues were up 2%.

Once again, we grew our revenue market share significantly during the quarter. In fact, only 6 of our 23 measured markets lost revenue share during the quarter. Our best performing markets were San Francisco, Denver, Miami, San Diego and Indianapolis. Our best performing categories were financial, grocery, home furnishings, and entertainment.

Stepping back to look at the big picture, 2016 marks the second straight year of strong organic revenue and cash flow growth at Entercom after a solid 2015. While of course we don't have Q4 results yet, for the first three quarters of 2016, Entercom same-station net revenues are up 4%, EBITDA is up 16% and free cash flow is up 34%.

I want to give a shout out to our entire operating management team for their excellent performance led by: Weezie Kramer, our COO; as well as Pat Paxton, our President of Programming; Michael Doyle, our Regional President; and Deborah Kane, our President of Sales. They lead an outstanding and talented team of leaders across the country delivering great results.

Beyond our operating performance, we were also very pleased with our progress in a number of areas. Last week, we announced the very successful refinancing of our debt. Under the new facility, we will reduce our effective interest rate by roughly 270 basis points, enabling us to save over $11 million per year in interest expense. The savings will boost our free cash flow by close to $0.30 per share.

It is also worth noting that the savings alone will essentially cover the cost of our current shareholder dividends. And with arguably the industry's strongest balance sheet, we are well positioned for the future.

We are also excited with the new acquisition in Charlotte, which we announced last month. The deal satisfies the acquisition criteria which we have applied consistently and with great discipline over the years. It fits strategically, adding another strong top-25 market to our lineup. It is accretive to shareholders, and it does not materially impact our strong balance sheet.

We really like the position we will have in Charlotte, with three important local brands including: WBT, the market's news talk leader and the home of the Carolina Panthers; The Link, a strong adult contemporary station and the home of the syndicated Bob & Sheri program; and The Fan, the market's leading sports station and the home of the Charlotte Hornets. We believe there are some interesting synergies and developmental upside at these stations and expect solid results going forward.

Turning to our other markets, our focus on great local brands and content continue to pay off for us in the ratings. Our latest ratings results include particularly strong results in Atlanta, Greensboro, Kansas City and Sacramento, and we are continuously looking for ways to bolster our programming and grow our audiences and deepen their engagement.

We are also very excited about the future opportunities for accelerated growth in the highly undervalued radio industry. Radio reaches 240 million Americans, 12 and over, weekly, more than any other medium. It also delivers outstanding return on investment, superior to competitive medium.

According to the recent Edison Media Share of Ear Study, radio listening trends remain strong and stable. By comparison, other media are facing significant disruptive secular challenges that diminish their relative value propositions. The opportunity for radio to increase its share of total ad spend is significant.

Turning to current business conditions, fourth quarter is pacing up 3% on a same-station basis. With the election now upon us, we can say that our political revenues were somewhat disappointing as they came in a little lighter than we'd hoped for. That said, we have also seen some nonpolitical advertisers hold back their spending in the midst of the contentious political season which has had a small dampening impact on our fourth-quarter growth.

In sum, this was another terrific quarter of progress for Entercom. With strong organic top-line and bottom-line growth, an excellent accretive acquisition in Charlotte, a very successful refinancing that cuts our interest expenses by over $11 million per year and increases free cash flow by almost $0.30 per share and a powerful foundation of strong local brands, content, digital, events and value-creating opportunities to drive our growth going forward. We are excited about our prospects, and think we are well positioned for the future.

Pro forma for the new financing our 12-month trailing free cash flow is now over $2 per share. We offer our investors terrific value, with our stock providing a 16% trailing free cash flow yield along with a great balance sheet and strong organic growth. All of that and a nice dividend as well, that represents less than 15% of our free cash flow.

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

Great. Well as you just heard, it was really a busy quarter with much accomplished at are brands, and within our portfolio and now also accomplished with our balance sheet. Before I go to the results of our third quarter, let me first cover our recent refinancing which we announced last week.

In short, it was great result for the Company and its stakeholders. I'll highlight a few of the key terms, but you may also reference the full details in an 8-K that we filed with the SEC on November 2.

In summary, we refinanced all our debt and started the process to call back our high-yield notes in a few weeks. We issued $480 million in new senior secured debt, which replaced all our prior senior and junior debt. This facility has a maturity of seven years or a way out in 2023. It has a interest rate of LIBOR plus 350 basis points with a 1% floor minimum. We also put in place a new $60 million revolver which carries a similar interest rate. This revolver is undrawn, so it is fully available to the Company.

On November 1, when we closed on the financing, we also issued a required 30-day notice to call or redeem our $220 million of expensive 10.5% high-yield notes. That call will be effective on December 1, at which time these notes will be retired along with the payment of a call premium payment. So after all the moving pieces, we will save for well over $10 million in annual cash interest expense and realize a nice boost in future free cash flow. As David noted earlier, on a trailing basis, that interest savings would have resulted in pro forma free cash flow of over $2 per share.

We have decided to leave in place for now the $27 million of perpetual convertible preferred, and that is just for now. As I've mentioned in the past, this is a very flexible facility for the Company. We are likely to retire this paper by midyear 2017 using cash from operations and our revolver, which will further improve future free cash flow when accomplished.

Dave just gave you some color on our new Charlotte stations. Let me give you some additional data on the deal as it was it relates to our financial statements. We started operating the former greater media news talk and music stations on November 1, under a time brokerage agreement. We will pay a TBA fee of about $210,000 per month until the deal receives SEC approval and we close. This TBA rate could increase in 2017.

For the Charlotte Beasley sports station, we plan to begin operations for this station on January 1, under a separate TBA agreement unless we receive SEC approval and close prior to then. When we close on all the stations, we will pay $24 million which we will fund with cash holdings or a portion of our revolver. With the TBA commencing on some of the Charlotte stations November 1, or last week, we have now assumed sales and operations and will report these stations' operating results in the quarter for this [stub] period. As noted earlier, we plan to assume operations on the sports station by January 1.

Now looking at a few financial highlights in the third quarter. Our expense management coupled with the revenue growth David articulated, again drove significant operating results in the quarter. Last year, our LFM acquisition closed July 17. So there is a small pro forma revenue and operating expense adjustment of those few week's results last year as compared to the quarter this year. As a result, our pro forma revenue growth was 3% versus the reported gain of 5%.

Once again, we demonstrated outstanding cost management to accompany our leading revenue performance. For the quarter, we had a modest decrease or reduction in our core stations' operating expense coupled with a low single-digit decrease in our new properties, building on the more significant cost actions taken last year in those new acquisitions. As a result, our stations' BCF margins increased by 200 basis points over the prior year.

Our corporate G&A expense in the quarter was $7.5 million which was higher than our expected normal run rate. There were a few one-time items and projects, as well as a well-deserved Company meeting for our general managers and program directors this quarter to recognize and celebrate their outstanding contributions and achievements. I expect fourth-quarter corporate G&A to be about $7 million.

Non-cash compensation expense was $1.6 million, and I expect the same for the fourth quarter. Net interest expense for the third quarter was $9 million, but that's now irrelevant in thinking about the future. Here's how we see the near-term future interest expense as a result of the refinancing. For the fourth quarter, we will have several unique items which mask the overall benefit from the financing. We closed on the new facility November 1, and have placed funds in escrow for the upcoming December 1 call of our high-yield notes.

So in effect, we have double interest for this 30-day period on that $220 million, and we have a call premium of over $5 million on the notes which will be recognized in the fourth quarter as additional interest expense. As a result of interest on the debt and the call premium, I expect we will have about $15 million in reported interest expense in the fourth quarter of this year.

In addition, we have an additional item in the fourth quarter which is related to the retirement of our old debt facilities. We'll record a non-cash item of about $5 million in a separate line item called Debt Extinguishment Expense on our financials in the fourth quarter. But now let's look ahead. For purposes of modeling, let's assume we close on our $24 million Charlotte transaction on January 1. With that and the financing, I would expect reported interest to drop to about $6 million in the first quarter of 2017. There you can see the true impact from the refinancing. These interest expenses do include non-cash amortization of financing costs included in reported interest expense.

In addition to the above net interest expense, we also will continue to have our dividend on the $27.5 million of the convertible preferred held by Lincoln Financial Group. This is currently about $550,000 per quarter. When we do call this paper, in whole or in part, we will realize additional cash savings by using our cheaper credit facility. But for now, we like the flexibility of this preferred paper in our capital structure. Our depreciation and amortization of $2.5 million represents a good run rate for your models for the remainder of the year, and I will refresh this data point early next year when we close on the Charlotte transaction.

This quarter's capital expenditure was $2.2 million, which was an increase in the run rate from the first half of the year merely due to the timing of several major projects. Our current thinking on capital expenditures for the full year remains at $7 million to $8 million.

We had a interesting event in the third quarter which was recorded as, other income, on our financials. I'm sure you recall the 2010 British Petroleum oil spill in the Gulf of Mexico which impacted bit businesses and tourism in that area. Entercom is the leading radio operator in New Orleans, and as a result we received $2.3 million in net crash settlements from funds BP set aside to settle claims from Gulf Coast businesses.

And another non-operating note I bring to your attention, we expect to record an M&A or restructuring expense in the fourth quarter of about $300,000 as we restructure certain tower and land assets acquired with last year's Lincoln acquisition. With these moves, we believe we can recapture $3 million to $4 million from sales of certain non-core assets in the coming months.

Once again, it's a quarter of continued strong operating results which of now has delivered double-digit same-station EBITDA growth through the first nine months. Plus we have the addition to the portfolio of the great Charlotte transaction, and now the completion of a great refinancing package. It's great to note that we can also continue to directly reward our shareholders. As noticed in today's earnings release, Entercom's Board of Directors today announced a quarterly dividend of $0.075 per share which will be payable on December 15 to shareholders of record on November 28.

So in summary, Entercom has a great business model that provides outstanding free cash flow which is growing. A quarterly dividend directly rewarding shareholders, the benefit of our significant NOLs to shield future earnings, all coupled with the benefit of free cash flow from our attractive refinancing. So we believe Entercom continues to be a attractive platform for both debt and equity investors.

So with that, David let's go to the questions that came in, in advance.

First question from Marci Ryvicker at Wells Fargo Securities. David, can you give more color on the fourth-quarter pacing number you mentioned both in terms of local and national and categories? And then let me do a follow-up question at the same time, several had asked for your thoughts on auto spending.

So local is up in fourth quarter, national is down in fourth quarter. If you look specifically at categories, some of the leaders that are driving performance of consumer electronics, drugstores, home furnishings, restaurants, and, of course, political. Auto is up is, not a leader for us, but it is up for the quarter.

One other comment I make is that in 48 hours, this trying election is going to be behind us, and some of the uncertainty and some of the angst will be behind us. And we're pretty optimistic about the climate that sets then going forward for the business climate we're going to see for advertising for the duration of Q4 and into 2017. And I would add that while it's really early, our bookings for 2017 look great.

I'm going to jump in now with a question to myself. Several people have asked about specific data points on Q3 and Q4 political.

We ended the third quarter with about $1.9 million in political, and late last week we had over $4 million in political. That I should note that in several cases, there will be runoff elections, and all so it actually will not all end tomorrow Tuesday. But over $4 million for the fourth quarter at this time.

David, let me circle back with a question from Avi Steiner at JPMorgan. Marci Ryvicker and several others also asked the same question. How should your shareholders think about Charlotte as it impacts the business model in 2017?

First of all, great acquisition for us. These are great assets, strong brands. But frankly, performing well below industry norms.

As we've discussed, it fits all the criteria with which we apply to investments, to acquisitions I should say. If you look specifically at the numbers, this is a cluster that is generating somewhere in the mid teens in terms of revenues. But with margins about half of industry norms, and frankly our Company norms.

It will be accretive to us in the first year on an EBITDA and a free cash flow basis. And we have already implemented a bunch of changes that we think will make a difference, like we did in some of our recent acquisitions across the Lincoln platform.

We have a new general manager who started on day one, and we also have some interesting synergies we think over time in being able to take advantage of the proximity of our strong positions in Greensboro and in Greenville, South Carolina to give us a really nice position in the Carolinas. If you look down the road, not only is there a significant opportunity for revenue, margin, ratings and operating income growth over time, we think the terminal multiple on this once we've really built it out is going to be super attractive.

Let's come back to operations. A question from Kyle Evans at Stephens. And then I will ask you a specific question, and then also I'm going to tie in a couple of questions that are related to that came in from Cheryl or from Kyle.

How should we, the street, think about thoughts on pricing and inventory that's driving revenue? And let me then tie in a related question I think it's fair to tie in. Guys, another great quarter. What are the drivers enabling Entercom's continuing revenue outperformance?

Dealing with those in combination, it's a little bit of we don't add inventory. We've talked about that over these calls over many years. So it is a little bit of better utilization of existing inventory.

It's a little bit of an improvement in rate. It's a little bit of adding more ancillary products that we sell into the marketplace as we continue to build on our platform across digital events and so forth, a mash up of those three.

To the broader question about our performance, we have now been posting strong results over some period of time. And as we look into the future, we feel pretty confident that we can continue to do that as we have done over the years.

I think that if I had to highlight some of the things that really enabled us to accomplish that it would start at just having a consistent strategy of building and believing in strong local brands, local personalities, local content, local marketing solutions and then executing really well against that plan with a great team of people. And I think that is facilitated by having a strong culture, which enables us to bring in top people and have them thrive in their careers in this Company.

As we look forward and think about our ability to continue to do that over the long haul, I would take all the things I have just cited plus I'd talk to -- I'd think about our portfolio. We have a lot of upside development opportunity, in not only some of the more recent acquisitions but also in some of the -- a lot of the core markets and stations we have. And we are also big believers in continuous improvement in our sales practices, our productivity, our revenue development areas, doing a lot of things to keep getting better and give ourselves more growth mojo.

Building out more events and digital, our smart reach digital platform, our local digital, all of that comes into play. I think discipline, discrete future acquisition opportunities, as we might see more Charlotte's pop up and helpful.

Last and certainly not least though is the industry. I think radio remains hugely undervalued. There are a lot of interesting catalysts and interesting work going on to capitalize on the increasing disequilibrium between our share of the market and our competitive decision, so I think there's a lot to get excited about as we look forward.

I'm excited. We'll jump back to the balance sheet for the two closing questions. I'll take the first one myself, it's from Mike Kupinski at Noble Financial. The question was how should we think about redeeming the preferred stock?

Mike, I think I answered that in my prepared remarks earlier. We look at that $27.5 million facility as very flexible. It sits on our capital structure as equity not debt.

Clearly as we delever going into next year and we have some of the lowest leverage levels in the industry, we think that plus our cash generation, we have the $24 million in Charlotte coming up and our $60 million revolver. As we move those dials, we expect probably to take that preferred, out as I said I'm my remarks, by earlier next year.

David, let's conclude with the balance sheet and I think it feeds off a theme that you just mentioned of acquisitions. So let me go to a question from Kevin Ruth at Raymond James which also dovetails the question, similar question, from Brandon Osten and Jeff Parks at Venator.

How should we think about the use of your enhanced free cash flow in 2017? Do you want to delever, M&A opportunities? Do you see dividend increases or share buybacks in the future?

We're in an enviable position right now with a very strong balance sheet that's only gotten stronger now through our refinancing with over $2 a share of free cash flow. But I think it's also important to note that we've been a very disciplined steward over the years, and that is going to continue. We're comfortable with our current level of leverage, but we also like the idea of continuing to delever and taking advantage of the free cash flow.

We do have a couple of upcoming uses of capital. The execution of the Charlotte purchase, and then in addition we will ultimately take out the preferred, as we've touched on, probably sometime in 2017, as well, which will be a accretive event to us.

Beyond that, our dividend is a relatively small -- I think it's a relatively small share of our free cash flow, roughly 15% of trailing free cash flow on a pro forma basis. So that's something I'm sure the Board will think about over time. And we will continue to look again with a very disciplined eye towards value creation and M&A, and think our balance sheet gives us -- puts us in a nice position to be able to take advantage of opportunities as they present themselves.

But again, we'll do so opportunistically but without feeling compulsion or necessity to do so. So I think we are in a great position, and I am excited about where we are for the remainder of this year and into 2017 and beyond.

With that, that is the conclusion of the questions in advance as I indicated earlier. If you'd like, feel free to give a call to Steve Fisher at 610-660-5647.

And once again, we appreciate everybody's time this morning, and look forward to reporting back to you all in about another quarter. Thank you.

Thank you speakers. That concludes today's conference. Thank you for participating. You may now disconnect.