Audacy Inc (AUD) 2018 Q2 法說會逐字稿

Good morning, and welcome to Entercom's Second Quarter 2018 Earnings Release Conference call. (Operator Instructions) This conference is being recorded.

I would like to introduce your first speaker for today's call, Mr. Rich Schmaeling, CFO and Executive Vice President. Sir, you may now begin.

Thank you, Thel. Good morning, and welcome to Entercom's second quarter earnings conference call. This call is being recorded. A replay will be available on our company website shortly after conclusion of today's call and available by telephone at the replay number noted in our release. Should the company make any forward-looking statements, such statements are based upon 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 the company's SEC filings on Form 10-Q, 10-K and 8-K. We assume 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.

I'll now hand the call to David Field, CEO of Entercom.

Thanks, Rich. Good morning, everyone. When we first announced the transformational merger of Entercom and CBS Radio, we knew we were creating a very special organization with an outstanding group of many of the country's most powerful radio stations and the scale to compete more effectively for a larger share of total ad spending. The new Entercom is one of the country's 2 largest radio broadcasters, the #1 creator of live original local audio content, the unrivaled leader in news and sports radio, plus radio.com and a significant events business.

Like any transformational merger, we knew that despite our aggressive pace of change, it would take some time for our work to impact performance. Specifically, we have been working simultaneously on 3 principal macro goals: number one, to turn around and resume growth at CBS Radio, which at the time of the merger had many outstanding brands and great people all across the country, but had not been well-managed at a divisional level and was significantly underperforming the industry; number two, to integrate the 2 companies successfully and seamlessly and achieve substantial synergies, while creating a stronger organization than the sum of the parts; and number three, to capitalize on what we believe are great opportunities to drive growth and value creation through scale-driven initiatives and innovation to elevate the new Entercom to compete far more effectively versus other media for a significantly larger share of ad dollars and participate in other new revenue streams.

As we have noted on many occasions, we are very excited about the opportunities and believe Entercom is well positioned for sustainable revenue growth.

In all of our public comments, we have consistently stated that the first half of the year would be a period of extensive building and development, and that we expected to start to see the rewards from our work and achieve significant acceleration and begin to drive top line growth in revenues during the second half of the year. I am pleased to report that despite the challenge of addressing the financially-distressed United States Traffic Network, or USTN, situation, which we inherited with the CBS merger, and that has already cost us over $25 million in 2018 revenue and cash flow, we are on track to deliver on these expectations. As we look forward, we see the positive momentum from the widespread improvements we are making across the company and feel good about where we are headed in the back half of the year and beyond.

Before elaborating on this point, I'd like to first cover our second quarter results and then share some more detailed color on our progress, including some recent developments, and provide an update on our pacings for the back half of the year.

Second quarter revenues declined 8%, exacerbated by the loss of $12 million in revenues from USTN. As you may recall, we noted in our first quarter earnings call that our Q2 pacings were tracking in line with first quarter and that we cautioned that while we were hopeful that USTN would regain its footing, it was entirely possible that they would not. Q2 was also adversely impacted by soft local advertising conditions, which persisted into the quarter. The good news is that we have definitively resolved the USTN situation and have now put this matter behind us. We will provide you with more color on USTN in a few minutes.

Our operating costs for the quarter declined by 5% as our merger-related synergies kicked in. We had noted on our first quarter call that the impact of onetime merger-related costs would abate as we went through the year and in fact, that is exactly what happened in Q2, which we'll have further color on our first quarter results and the second quarter results and the trajectory of our expenses as we look ahead to the second half of the year.

Here's some additional color on the quarter. National revenues were up in Q2 with local down. Top-performing markets were Houston, San Francisco and Austin. Our top-performing categories were insurance, drugstores, lottery and casinos, and e-commerce.

In addition, during the quarter, we continued to take steps to discontinue sales to low rate resellers who buy advertising inventory in bulk at deep discounts, and then resell it to existing clients, undermining our customer relationships and pricing. Purging this poor business practice is smart, but as we noted on our prior call, it does have an adverse short term impact on revenues and cost us approximately 1% during the quarter.

With second quarter behind us, I am pleased to report a number of positive developments as we continue to make excellent progress in executing our plan and enhancing the organization.

Last week, we signed a definitive agreement to sell our required divestiture assets in San Francisco and Sacramento to Bonneville, for $141 million. We expect to close this transaction later in Q3 or early Q4. This important event completes the last piece of our CBS merger-related, DOJ-required divestitures. Rich will provide some additional color.

In addition, we have signed an agreement to sell a partial amount of nonstrategic real estate in L.A. for $26 million. We now expect to complete nonstrategic asset sales of approximately $95 million this year.

We launched the Entercom Audio Network on July 1 and it is off to a great start. This new in-house venture has already written several million dollars in business in these early days from new clients, including Procter & Gamble, Hyundai, Walgreens, indeed.com, Staples and more. The Entercom Audio Network is just one example of a scale-enabled opportunity that was previously unavailable to us. With our scale and our outstanding premium large market brands, we have a significant opportunity to capture a larger share of the $1 billion radio network market, either directly or with partners. Currently, we estimate our share of that market at roughly 3% and believe the upside is significant and that we could double or better our share over the next couple of years.

Our focus on brands and content continues to yield significant ratings growth. We have now extended our winning streak through June, posting ratings growth in each of the 6 months of 2018, averaging approximately 4% per month across the entire portfolio and see some of the impact of these improvements in our forward pacings.

One subcomponent of our rating success are the -- is the 6 new brands we launched. Within that group, JAMS in Chicago is now almost doubling year ago revenues, and we are also seeing double-digit growth in 2 of the other stations during third quarter. Another one of the brands is still behind last year, but pacing way ahead for fourth quarter, while the remaining 2 brands require some additional work.

We are also very excited about the rapidly accelerating performance at radio.com, our emergent player in the digital audio space. We believe radio.com is positioned to become one of the country's leading digital audio platforms, capitalizing on Entercom being the nation's #1 creator of original local audio content.

Our leadership in local news and sports, plus our deep line up of local personalities across the country, will be an important driver in the success of this platform as well our position as the nation's #2 podcaster through our investment in Cadence13.

In order to control our own destiny, capitalize on the very large upside in digital advertising opportunities and derive the full benefits of owning our own platform such as data and analytics, we terminated our agreement with TuneIn and as of last week, our brands are exclusively available digitally on the radio.com platform.

We are very encouraged by our progress to date. In fact, I am pleased to report that as of June, radio.com is now the fastest-growing digital audio app in the United States according to comScore.

Now admittedly that is being driven off of a relatively low base, but the growth is still noteworthy and does not take into account our huge growth over the past few weeks as we exited TuneIn. That transition has helped us drive a 400% increase in app installs over the past few weeks. In total, cross-platform digital audio listening to radio.com has more than doubled over the past quarter.

Radio.com is now live on Amazon's Alexa devices as well as Sony's smart speakers, Apple CarPlay and Google's Android Auto, and we have also entered into agreements with the Roku, Amazon Fire TV, Microsoft [for 10] and more. We have also added new content from premium publishers, including The New York Times and This American life.

As radio.com continues to emerge as a significant new player in the national digital audio market, the revenues are starting to follow. In fact, bookings from national digital audio agencies are up over 40% through the back half of the year. This is on a small base as the company was not a real player in this space last year, but as radio.com increasingly enters the conversation, the upside here is significant. This is another great example of where bringing our scale to bear is creating significant new growth opportunities for the company.

We're also continuing to see nice growth in our events business and are beginning to see an early influx of sports gambling-related ad revenue. While currently only a few states have legalized sports gambling, as that expands, with our outstanding leadership position in sports talk radio, we are very well positioned to capitalize on that emerging high-growth category.

We've also been working hard to improve performance in our local markets. In addition to developing our brands and growing ratings, we have been highly focused on enhancing our organizational talent, culture and strategies. We've upgraded market managers in 17 of our markets and added a great deal of leadership talent at the corporate team as well. We're also making a number of enhancements to our sales practices and have successfully completed the transition to an extensive list of new, integrated operating financial and digital platforms.

Last month, we also announced a value-creating simultaneous acquisition and divestiture in Philadelphia. We are buying WBEB in Philadelphia, an independently-operated, stand-alone station that has been a perennial top-rated performer for many years for $57.5 million. We are selling WXTU, the market's country station, to Beasley for $38 million. As we previously announced, the transaction has large net synergies and the transactions are significantly accretive to Entercom and are leverage-neutral.

As I noted earlier, we have also extricated ourselves from the challenging situation with USTN. This has been a very unfortunate distraction that we inherited from our CBS Radio merger. Rich will provide more color, but the headline is that while USTN has had a big impact on our performance since the merger, including a $12 million hit in Q2, it will have a diminished expected impact on Q3 of roughly $6 million and no expected impact on Q4 as our internal traffic sales efforts take root. Looking ahead, we expect 2019 traffic-related revenues to roughly double the disruptive level of 2018 revenues.

With leading news brands like 1010 Wins in New York, KNX in Los Angeles, and WBBM in Chicago, Entercom is the industry's most valuable traffic inventory, and we are pleased to be in control of our own destiny as we pursue opportunities in this attractive market segment. We are very happy to be moving on and putting this matter behind us.

Turning to third quarter performance. I am pleased to report that our performance is improving, and we are beginning to capitalize on our new sales initiatives and our many organizational enhancements. As I mentioned earlier, as with any transformational merger of this magnitude, we have been clear from the start it would take some time for our strategies to take hold and our enhancements and initiatives to begin to positively impact our performance. That is now happening. Third quarter pacings, excluding USTN, are currently down 2%. With the adverse impact of the loss of USTN compensation for the third quarter, we are pacing down 4 %.

For fourth quarter, we are currently pacing up 3% on an unadjusted basis. I caution that it is still very early, but it is directionally encouraging. I would add that neither quarter has any material political ad dollars in the book shed, as that tends to get placed a bit later.

It is also worth noting that our acceleration is coming from some of the growth initiatives I previously mentioned, but mostly for improving local market performance. While the legacy Entercom stations improved their performance in the second quarter and outperformed their markets, the legacy CBS stations continued to lag. But as we look to third quarter pacings, the legacy CBS stations have improved and are now pacing roughly in line with the legacy Entercom stations. In fact, several of the largest legacy CBS markets are now pacing up during the second half of the year, including New York, Los Angeles, Philadelphia, Washington and Houston.

In sum, as we turn the page on Q2, we see considerable evidence that we are turning the quarter. We have successfully resolved our Bonneville divestitures and our USTN mess. We achieved -- we have achieved significant expense reductions, and we have achieved strong early results from our radio.com and Entercom Audio Network launches. Much of the heavy lifting and systems integration for the merger is behind us and our pacings are accelerating as we begin to gain traction locally and across several of our key growth drivers.

We certainly have much work in front of us and challenges await, but we feel very good about our progress and where we are headed. Like any major transformational merger, it just takes a bit of time.

Given our pacings and the progress we are making in our markets and across our various revenue drivers, we continue to expect significant revenue acceleration and to begin to drive top line and EBITDA growth during the second half of the year.

I want to close by thanking the outstanding team at Entercom for all the terrific work they're doing to build the new Entercom and capitalize on our abundant opportunities.

And with that, I'll turn it over to Rich.

Thanks, David. On a same station basis, our second quarter net revenues were down 8% exacerbated, as David said, by the loss of about $12 million of revenue from USTN.

After learning that USTN was not progressing, as we had been led to believe in solving its financial problems, and after thoroughly evaluating and then ultimately deciding against acquiring USTN, Entercom terminated its agreement with USTN in July as a result of their breach of our contract and we are now selling all of our traffic inventory on our own, and we are close to filling the couple of gaps in local markets where we relied on USTN for traffic report content.

Entercom had already been self-producing the vast majority of its traffic reports. This USTN issue first reared its ugly head in November upon closing the CBS Radio merger, when we learned that USTN had stopped paying CBS Radio. And then, immediately thereafter, they stopped paying Entercom. By the end of March, they owed us $23 million, which from an accounting perspective, has been fully reserved for either via purchase accounting for the pre-acquisition receivables or by not recognizing revenue for the period subsequent to closing. As a result, we have no balance sheet exposure to this matter.

After exploring all of our alternatives, including an agreement with total traffic, and launching our own traffic network, Entercom agreed in April to restructure its contract with USTN to give them some breathing room to fix their financial problems, including converting our receivable at the end of March into equity and into a $12 million senior secured note.

In addition, as part of this restructuring, Entercom took back 1/3 of its traffic inventory and combined that inventory with other traffic inventory that was already being sold directly by an internal Entercom sales organization called the Traffic, Weather and Information Network, or TWIN, at our local markets.

Since closing the CBS Radio merger, Entercom had not been able to recognize revenue from USTN, even if they paid us under the new revenue recognition accounting standard because of concerns about their financial viability. They did pass about $3 million through the end of June that we will recognize in the third quarter now that our contract with USTN has been terminated.

For the full year, we now project that our traffic revenues from this inventory that was formerly part of the USTN contract will be about $15 million or about 1/3 of the amount expected under our contracts with USTN at the outset of this year. USTN currently owes Entercom approximately $14.5 million and we will recognize additional revenue if they make further payments to us, or if we realize a recovery through a legal process.

Given our scale, our premium brands and our internal subject matter expertise in the traffic market segment, we are confident that we will be able to successfully monetize this inventory by ourselves and we project that in 2019, we'll be able to more than double our 2018 revenues from this inventory of about $15 million.

To say the least, we are happy to have the situation largely behind us and to be in control of our own inventory, and we view the traffic segment of the network market to be a natural for Entercom given that we are the leader in radio news.

Finally, as you may know, this situation with USTN is the subject of litigation, which we believe is frivolous and without merit, so we won't be able to provide further specificity about this dispute or our claims against USTN and its former owners. As discussed by David, our same station revenues for the second quarter were also impacted by continued softness in the local advertising environment and our pacings slipped as the quarter progressed.

Moving to our expenses. Our total as-reported operating expenses for the quarter came in at $344.6 million and include a $29 million noncash impairment charge, primarily related to the Bonneville divestitures and $10.9 million of integration, transitional services, restructuring and M&A costs.

Since closing, we've incurred about $15 million of expense associated with transitional services from CBS Corporation for administrative, digital and IT services. These costs have been classified in the integration costs caption on our P&L and were not included within our estimate of $40 million of onetime costs associated with executing our integration program. As of June 30, the company completed migrating off of all of CBS's services and the related transitional service agreements have terminated.

Excluding onetime costs and adjusting out noncash items like D&A and miscellaneous income, our same station total cash operating expenses came in at $290 million, down 5% or $14 million from the $304 million on a pro forma combined same-station basis in the second quarter of 2017. June year-to-date, our same station total cash operating expenses are down 1% or $7.4 million. And for the remainder of this year, we expect that our same-station cash operating expenses will be down between 2% to 4% each quarter.

In the second quarter, we realized about $12 million in net cost synergies, bringing the total to $21 million June year-to-date, and we are on track to hit or slightly exceed our $45 million net cost synergy target for this year. Our overall integration program continues to run slightly ahead of our plan and we remain on track to achieve our target of $110 million in net cost synergies at run rate by the middle of next year.

Turning to our financial position. We ended the quarter with $1.89 billion of net debt and our total net leverage, on a compliance basis, was 4.8x. Our senior secured leverage was 3.8x as compared to our covenant of 4x and our weighted average cost of debt was 5.3%.

As mentioned by David, we reached a definitive agreement to sell the remaining divestiture stations to Bonneville for $141 million and we expect these sales to close either late in the third quarter or early in the fourth quarter, depending on the timing of regulatory approvals.

For these sales -- from these sales, we expect $122 million of after-tax proceeds. These after-tax proceeds are $38 million less than what was expected based on Bonneville's indication of interest from back in August of last year, primarily due to softness in the San Francisco market and a reduced seller multiple, although consistent with market at 8x.

Also note that all of the operating income associated with the stations being divested to Bonneville has already been deducted by us in determining pro forma adjusted EBITDA, as you will see in the reconciliation of GAAP net income to pro forma adjusted EBITDA in the other financial data section of this earnings release.

Our other redundant asset sales are proceeding better than expected. We expect to close on the sale of the tower site adjacent to O'Hare Airport in Chicago today, and realize $46 million of gross proceeds, and we expect to close on the sale of an office building on Venice Boulevard in L.A. in September and expect to realize $26 million in gross proceeds.

For the full year, we now expect gross proceeds from redundant asset sales of about $95 million, with the 2 specific third quarter sales I just outlined accounting for $72 million or 76% of this total, and after-tax proceeds of close to $80 million versus the $50 million we anticipated at the time of our first quarter earnings call.

In summary, we now expect total after-tax asset sales proceeds of about $200 million by year-end, which we'll use to pay down debt. Looking at the impact of these after-tax proceeds on a pro forma basis, as if all of these sales had closed by June 30 and deducting the sold TTM EBITDA and the related TBA fees from our compliance basis leverage calculation, our total leverage would have been 4.5x versus 4.8x as reported. And our senior secured leverage would have been 3.4x versus 3.8x as reported. Given the benefit of these expected asset sales and the improving revenue outlook, we expect to remain compliant with our senior secured leverage covenant as of September 30, whether or not the Bonneville divestitures close in the third quarter or the fourth quarter.

In addition, we expect to be able to reduce our leverage from our second quarter as reported leverage by about 1/2 turn by year-end, and we remain committed to getting to our target total leverage of 3.5x as rapidly as possible.

Our Q2 capital expenditures were $12 million and we expect that our CapEx will continue to ramp up as this year progresses, and that our full year expenditures, including onetime integration-related expenditures, will range between $55 million and $60 million. This range is up $5 million from what we provided during our first quarter call as we hurry up a few of our real estate projects to maximize the income tax savings from sheltering the gains on our redundant real estate asset sales via 1031 like-kind exchanges.

With that, we will now go to your questions. Operator?

(Operator Instructions) Our first question comes from Marci Ryvicker from Wells Fargo.

I have a couple. The first is, Rich, thank you, for the synergies. $21 million year-to-date, $24 million left. Can you talk about how that $24 million maybe fall in -- falls into Q3 and Q4?

Yes. I think it will be kind of split evenly. That's what it looks like to me right now.

Okay. And then, I just want to understand underlying trends because I know we've gotten a lot of numbers, just for all the quarters, I know in the first quarter, underlying revenue was down 4%, but I think there was a 1% impact from format changes at CBS. Q2, I think, was down 5%, including a 1% impact from format changes. Q3 is down 2%, I think all-in, and Q4 is pacing up 3% unadjusted. What does unadjusted mean? And I guess, are the rest of my numbers right?

Yes, Marci. So just to be clear, third quarter is pacing down 2%, excluding the impact of USTN, but down 4% if you factor in the additional -- the remaining impact of roughly $6 million that we will like -- we will incur in the third quarter, or expect to incur. For fourth quarter, we're done talking about USTN. We believe that our own internal efforts now that we have taken back control and are, again, in control of our own destiny. We now have the ability to get to a position in fourth quarter where it will be a wash, and so the plus 3 represents an all-in number, which frankly, prejudices us a little bit because we now have the opportunity to accelerate from that point.

Okay. And then I'm a little surprised you're not seeing a lot of political, because the TV station groups are seeing a tremendous amount starting in the second quarter and into the third quarter from what we've seen from guidance. Is it a radio issue? Or is it a market issue?

I'd say it's not an issue per se, it reflects the fact that radio traditionally gets its political dollars later than television gets it. So this is entirely normal. It's consistent with past periods, and we still expect a healthy amount of political in September, October, and obviously, early November.

Okay. And that's not included in your pacing if you're not seeing those dollars yet, correct?

That is correct.

Our next question comes from Aaron Watts from Deutsche Bank.

Just a couple from me. I guess, first, to follow-up on the improving trends you're seeing. Anything you can call out that's driving that? It sounded like local was a little softer than national. Is that theme continuing? And anything else that you're seeing that's helping push things to a better place the rest of the year?

Yes. Thanks, Aaron. So it's a number of things, right? There's no one single element. We're seeing it locally, which clearly has been what has held us back in the first half of the year, and local pacings are absolutely improving as we progress through Q3 and Q4. I mentioned earlier that we're seeing improvement across our markets and that New York, Los Angeles, Philadelphia, D.C., Houston and others are now pacing up for the second half of the year. So clearly, the enhancements we've made, the leadership moves, the new systems and so forth are starting to gain traction. But it's also some of the scale-based initiatives. So we're now we're experiencing the impact of the first Entercom Audio Network dollars that are rolling in, which is great. We're starting to see a little bit of acceleration in our radio.com national digital sales. So it's a number of things that we've been working hard on for several months and just knew it would take a little bit of time, and we're starting to see it.

Okay. Great. And then one for Rich. A couple of clarifiers on the leverage targets. When you talked about the half a turn of deleveraging that you expect to see off your reported numbers today, is that independent of any asset sales that's half a turn of deleveraging from the business?

No, that's -- so from where we are now through year-end, including the benefit of our after-tax asset sales proceeds, we expect to delever about 1/2 churn.

Okay. Got it. So it would be inclusive. And is it your expectation that there will be actual principal debt paydown with those proceeds? You're not just going to hold the cash in on a net basis to see that leverage reduction?

Look, we expect our net debt will decline by year-end.

Our next question comes from Davis Hebert from Wells Fargo Securities.

Just wanted to focus on the traffic side for a second. I think, David, you said you anticipate that revenue doubling. I just wanted to understand the time frame, and what -- from what level we're talking about?

Sure. So just to be clear, we expect about a $6 million adverse hit in the third quarter. We expect it to be about a wash in the fourth quarter, and then we expect our 20 -- these disruptive 2018 revenues to double in 2019. So we have essentially zero traffic dollars in the first quarter and second quarter because of the situation, and so you'll see, I think, some easy comparisons there as we ramp up our own traffic business and the growth rate will diminish in the second half of the year, obviously, as we -- as the comps get a little more difficult.

And just to add to that, we did say that we expect -- in 2018, our full year revenue from the inventory that was formerly part of the USTN contract to be about $15 million. So doubling off that $15 million, more than doubling in 2019.

Okay. Understood. And are there any investment-like expenses as you ramp up that traffic business? Or is that already in the numbers?

Well, you know what's nice is that we had essentially been doing virtually all of the traffic reports and services in-house prior to this whole situation. So the incremental costs from an operational standpoint is negligible. We will beef up our sales expense a little bit. We brought in some new leadership to drive that area, but it'll be very, very small relative to the revenues involved.

Okay. Understood. And then, just a couple on leverage. I saw you borrowed another, I think, $80 million on your revolver this quarter. Was there some seasonality in that borrowing? And should we expect some pay down in the back half of the year?

That's just 2 things going on there. Normal working capital seasonality, about $50 million. Then we also consummated the acquisition of a couple of stations from MS in St. Louis during the quarter for $15 million. Those are the 2 primary drivers of the $71 million increase in our net debt in the quarter.

Okay, understood. And then the 4.8x, which I know doesn't include asset sales, that does include unrealized synergies. And I was getting to about $100 million of positive impact in terms of the 4.8x leverage. Is that about, right?

That is a little high, that our calculation has about $90 million of pro forma cost-savings. And that, to be clear, is based on the 30% cap in our agreement. So when I look at the total unrealized gross synergies, it's greater than $90 million, but were subject to a 30% cap, and that $90 million is what's included in our calculation.

We show no further questions at this time. (Operator Instructions) We show no further questions at this time, speakers.

Thank you, operator. There's -- we're conflicting with other calls at this point. Thank you very much. This concludes our call.

Thank you all. Bye now.

Bye-bye.

And that concludes today's conference. Thank you for your participation. You may now disconnect.