ARN Media Limited (A1N) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the HT&E Full Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Mr. Ciaran Davis. Thank you. Please go ahead.

Good morning, everyone, and welcome to our full year results presentation. Conscious of time, so before Andy takes you through the detailed financials, I just want to highlight some of the key takeouts from today's call. Looking to the statutory results on Slide 2, reported revenue is down 7% to $252 million, driven predominantly by a soft radio market. EBITDA was $75.6 million, 5% up post leasing changes and 17% down on a like-for-like basis. It's been well documented that we are experiencing a challenging cyclical advertising market, and radio is not immune to that. But as I will point out later in the presentation, radio continues to be a highly relevant medium for both listeners and advertisers. Protests in Hong Kong hampered the sale process we were running and also impacted revenue from May onwards with revenue back 18% for H2. EBIT and NPAT were down 15% and 7%, respectively, while underlying EPS grew 1%, thanks to the accretive nature of the share buyback that is ongoing. The strength of our balance sheet and cash-generating assets means that we have increased our payout ratio to 70% with the fully franked dividend of 4.6 cents a share being declared. We spent a large part of 2019 focusing on our core radio business of which there are 3 pillars: content, distribution and commercialization, positioning ARN as the leading radio and digital audio broadcaster with a simple and clear offering of radio, music and podcasts. From a content perspective, audiences continue to tune into radio's live, local and free content, and it is still the major source of audio entertainment in this country. In 2019, we finished the year as the #1 metropolitan network with audiences up 4%, outgrowing the market, and the highest reach in our history at 5.3 million. A large part of this rating success is due to the great talent we continue to recruit and retain and we were pleased to conclude the early contract extensions of Kyle & Jackie O, Jonesy & Amanda, Christian O'Connell and most recently, Jase & PJ in Melbourne, thereby providing security of tenure for both listeners and advertisers and avoiding the distraction of protracted and public negotiations. The cost of these increases was not material and in line with CPI for most talent. Expanding our distribution channels is growing and new audiences and new commercial opportunities. We are developing a unique and integrated radio and digital audio strategy with the benefits of cross promotions starting to be realized. Our confidence to invest in iHeartRadio strengthened with the license being extended to 2036 and in July, we commenced a strategy for greater on-air integration that has seen an immediate impact on usage, growing monthly active users to just under 1 million. Our catch-up radio strategy launched in H2 is already seeing downloads of 2 million a month. Similar to TV's BVOD, this is an effective way to further monetize content we create for on-air broadcast. 21% of our listening is now via smart speakers, which, as we have said before, is bringing radio back into the home. And most recently, we launched iHeartPodcast Australia, creating 30 million monthly impressions of podcast content geo-targeted to Australian audiences. Commercially, the market is challenging, dropping 10% in H2, and if there is a positive from this, then we take some comfort from winning share. We launched a new commercial strategy in H2 that is resonating well with clients and agencies, one that plays to the power of radio advertising, while showcasing our unique digital audio opportunities. We launched a new DMP in quarter 4, one that helps our clients target more effectively, our first-party data set. And with the 62% increase in digital listening hours to over 6 million in December, we are starting to deliver an inventory level to service in-stream digital advertising. HT&E shareholders have a very strong balance sheet providing optionality, with $110 million (sic) [ $111 million ] net cash and undrawn debt facilities of $250 million. We've increased our dividend policy to 60% to 80%. We maintained the optionality of the share buyback, and a review of all noncore investments has seen us exit businesses such as Gfinity and Unbnd, protecting shareholder cash reserves. We are also confident of further material value being realized as we explore all options in relation to our 25% holding in Soprano and 7% in Lux Group. We have simplified our corporate and operational structure, cutting costs by 16%, and will achieve the annual run rate of $10 million, excluding the cost of managing the ATO branch tax matter. And with regard to that tax matter, we remain confident in our position and are prepared to pursue the matter fully through litigation. As a result of recent accounting standards interpretation on uncertain tax matters, $30 million is now reflected on the balance sheet. This figure is only an estimate derived from a wide range of potential outcomes and may or may not reflect the final outcome. Litigation and any resolution may take several years. Andy will now take you through the financials.

Thanks, Ciaran. Good morning, everyone. We've kept the format of the results presentation largely unchanged. Again, there are a few things to explain around the full year impacts of lease accounting. You'll note, we've included the same reconciliations as provided at the half to highlight these impacts. On Slide 6, we've shown the full year reported result for HT&E for 2019. Revenue, down 7% with both ARN and Cody operating in challenging advertising market conditions. Excluding AASB 16 impacts, total costs were down 3%, comprising a decommissioned outdoor site for Cody, reducing rent; lower corporate costs, including management incentive costs, offset by increased staff and talent cost at ARN. As a result, underlying EBITDA from continuing ops and before exceptional items was up 5%. However, ignoring the impact of leases, EBITDA was down 17%. Within exceptional items, we recorded tax expense of $30 million in respect of the ongoing New Zealand branch tax matter with the ATO. I'll cover the remaining exceptional items in more detail later. Resulting underlying NPAT for 2019 was down 7% before exceptional items. The results for ARN are included on Slide 7. As Ciaran outlined, 2019 was a challenging year for Australian media companies with the total advertising market contracting for the first time since 2012. The radio sector was not immune to these challenges, however, maintained share of total advertising spend. Full year ARN radio revenues were down 6%, which was in line with market. In H1, the market benefited from federal government election spending, but contracted in the second half to finish back 9.8%, with macroeconomic factors in key auto, retail and banking sectors leading to reduced advertising budgets. Pleasingly, following a period of sustained ratings success and with our redefined commercial proposition resonating with clients, ARN Q4 revenues finished ahead of market. Revenues were higher in our digital media and social marketing business, iNC, but at low margins, offsetting lower revenues for The Roar prices disposal in December. Managing costs continues to be a key priority of management, and a cost review completing the second half of '19 will limit salary and OpEx cost growth in 2020. Total cost for the year finished up 1% on a like basis, excluding the impacts of the new lease standard. Cost of sales were lower on reduced revenues, however, the cut through to earnings was limited by higher cost of sales on iNC Digital revenue growth. Staff and talent costs were up 4%, impacted by contracted talent increases, ratings bonuses not paid in '18 but paid in '19, and enhanced commercial team capability. Operating costs were flat on a like basis. Resulting EBITDA was therefore down 17% on a like basis. Cody started the year strongly and was well ahead of prior year EBITDA on a like-for-like basis at the end of June. Unfortunately, the protest activity in Hong Kong escalated in severity from June, materially impacting revenues in the second half. Tram shelter advertising assets were particularly affected, with revenues down 24% for the year. The Western and Eastern Harbour Tunnel crossings were less impacted by the protests, however the occupancy suffered from lower overall advertiser demand in Hong Kong. Roadside revenues were down 5% on a like basis after adjusting for the nonrenewed Hung Hing Road contract, which is decommissioned in December '18. The decline in cost of 61% was largely driven by AASB 16 and a previously mentioned nonrenewed contract. Resulting EBIT of $1 million was broadly in line with '18 on a local currency basis. Following the sale of Adshel, the decision was made to focus on audio, resulting in a strategic review of operations and commencement of an orderly exit for most nonaudio assets. The outcomes of our review and progress made in the period is summarized in Slide 9. Emotive, HT&E's 51% owned creative agency, continues to deliver to the strategic plan. Following the completion of its remaining commitments, Gfinity was closed in November. In respect of Unbnd, our original investment rationale for acquiring the interest in 2017 was centered on leveraging Unbnd's technology to create a point of difference and drive incremental revenues into Adshel. The strategic alignment of Unbnd with ARN was not as compelling. Unbnd was also at a critical stage, requiring additional capital, and our exit enables that business the opportunity to secure a new strategic partner for the next stage of its growth. Should the business be successful, the terms of the sale allow HT&E to share in its success. HT&E's long-term 7% interest in Lux Group is held at 0 value. The luxury estates business has grown significantly in the past 2 to 3 years to be a serious player in the domestic travel market. The business is currently conducting a trade sale process which, if successful, will deliver value to HT&E shareholders. In respect of HT&E's 25% interest in Soprano, Soprano continues to go from strength to strength, recording the strongest operating performance in the history of the company in 2019, with EBITDA up 23% to $16.2 million and improved margin through operating leverage. The Board of Soprano have appointed UBS to review strategic options that if successful, would allow HT&E to exit its investment and realize significant value for shareholders. Corporate costs are outlined in Slide 11. In line with our strategy, significant progress was made in '19 to reduce corporate costs and simplify the management structure between HT&E and ARN. The reduction in salary costs reflects the partly benefit of recent personnel changes and lower incentive costs. Compliance and adviser costs increased, split between nonaudio portfolio review and the final wrap-up of transaction costs associated with the Adshel sale. The restructured corporate cost base is now the right size to achieve the $10 million target we've been working towards since the disposal of Adshel. Slide 12 shows the balance sheet at December and on a pre-lease adjusted basis for comparison to 2018. Receivables were lower on reduced revenues in November and December and the timing of amounts billed in advance at Cody. The deposit of $51 million provided to the ATO in '18 has been disclosed on a net basis with the $30 million tax provision estimate recorded in the current period. On income tax, the prior year provision included a final installment for FY '18 of $16.6 million, which was paid in May '19. For December '19, the tax receivable includes refunds owing of around $7 million in respect of the '17 and '18 years, offset by tax payable for the current year. Cash flow for the year is outlined on Slide 13. On a like basis, operating cash flows were $31.3 million, down 21% on 2018 and were impacted by: EBITDA, which was down 17% pre transition; $5.5 million cash paid on redundancies and other exceptional items; a higher noncash share of net profit in Soprano, offset by a positive change in net working capital on lower November-December revenues. Other cash flows for the year included: CapEx for the Brisbane station move, purchase of treasury shares to satisfy prior year incentive obligations and cash payments under the share buyback. Exceptional items in the period are set out on Slide 14. The pretax items on the slide relate to costs in exiting noncore investments and simplifying the group structure in the period. This work is now largely complete. You'll note an exceptional charge of $13.4 million for the disposal of our interest in Unbnd. There is a mechanism within the sale agreement for HT&E to recover its investment in full. However, the timing and quantum of an equity event needed to unlock value in Unbnd is unknown at this stage. The charge in the period reflects HT&E's maximum financial exposure. On other items, Ciaran outlined progress on the ATO branch matter previously, so I won't touch on that again. The other tax provision estimate of $3 million relates to a legacy New Zealand financing arrangement. In light of recent correspondence with the ATO and consultation with our advisers, we recorded tax expense of $3 million, in line with requirements under accounting standards. Net cash is outlined on Slide 15. HT&E has a net cash balance of $111 million and no drawn debt, we extend the majority of the facility a further 12 months to now expire on January 2024, providing HT&E with funding certainty and optionality. With the adoption of AASB 16, $59 million of lease liabilities are now included in net debt on the balance sheet. However, this is excluded for assessing covenant compliance under our facility. Finally, before I pass back to Ciaran, we've again provided additional financial material in the appendix, including the usual reconciliation from segment to statutory, a reconciliation of transaction impacts on AASB 16, splits of H1 and H2 performance and further breakdowns on working capital.

Thanks, Andy. Moving on to Slide 17, radio is resilient and relevant. Radio's cumulative audiences continues to grow year-on-year for the past 10 years, reaching nearly 11 million a week. It is still the dominant form of audio, with 68% daily reach and time spent listening has grown to 2 hours and 7 minutes a day. All of this has happened at the same time as digital audio was growing, particularly podcasts, but not at the expense of radio. People are creating their own audio stacks and switching between radio, music streaming and podcast to meet their needs, complementing, not detracting from radio. And that's why we have a laser focus on our core business while at the same time, building a complementary digital audio offering. From a commercial perspective, the metro radio market is worth $760 million a year, with radio securing 8.6% share of advertising in 2019, the joint highest on record. Radio advertising works. It's a brand builder, a call-to-action medium, and when combined with other media, radio remains the ultimate incremental effectiveness driver, growing ad awareness by 80% when combined with out-of-home and 37% with TV. According to the IAB, broadcast radio, combined with other cross-platform audio, is the #1 way agencies intend to buy audio advertising in 2020. So we are right on strategy with our commercial proposition. Nine in 10 agencies and advertisers are satisfied with audio advertising and delivering results, both for brand awareness and specific promotion activity, and agencies are also connecting with podcasting, with advertising having increased by 65% on the last year. As we have said many times, talent wins ratings and ratings grow commercial share. Our investment in talent delivered the #1 ratings position in 2019. We were the #1 commercial network, had 4 consecutive #1s, our best performance since 2015. We were the #1 commercial network group in Sydney, Melbourne and Adelaide, and have the #1 commercial station in Brisbane. KIIS was the #1 commercial FM network. And we have the highest reach ever of ARN at 5.3 million. We extended the contracts of Kyle & Jackie O, Jonesy & Amanda, Christian and Jase & PJ, securing some of the best talent on Australian radio for multiple years. Christian's progress on Gold in Melbourne is particularly pleasing as his style of broadcasting has been recognized after less than 18 months in the market. Before closing, I just want to touch briefly on our content and distribution expansion. Our exclusive iHeart partnership has been extended to 2036, providing a simple digital platform and content play with radio, music and podcast all in one place. A huge catalog of content split between live radio, catch-up radio, streaming, podcast and third party partnerships, all contribute to the growth we've experienced in downloads, up 22% to 2.2 million and registered users up 33%, providing 6 million hours of listening a month that we are now starting to commercialize. In July, we fully integrated iHeartRadio with our FM and AM brands, promoting 4 times an hour, every hour across the whole network. This has seen a 70% -- 77% growth in uptake, a great case study for the power of radio advertising growing monthly active users to over 1.8 million for the quarter. We also broadcast exclusive international content and events for the Australian market all co-promoted on-air, and it is this distribution between radio and digital assets that will provide future growth for the business. iHeartRadio was integrated into 65 devices in Australia, including Apple TV and Telstra TV, expanding our distribution, and we are 1 of only 3 radio apps in the world to be integrated into Siri. And with smart speaker uptake now accounting for 21% of our digital listening, we are developing new ways to distribute exclusive content. This content and distribution growth is now being monetized off low levels as we invest in commercial strategies and capabilities. Currently, we are in market offering in-stream advertising, 54% of our digital listening is still live radio so there is available imagery of enough scale to be monetized. Catch-up radio provides advertisers premium audiences and is a low-cost method for us to rebroadcast FM content similar to BVOD in TV. We are working to educate our advertisers and clients on the best strategies for podcast integration, and the new DMP launch in November offers targeting capabilities digital in nature across many filters. For advertisers, the range of benefits is exciting, and our sales teams are being trained to offer the most comprehensive audio solutions in market. Pleasingly, we are making good progress, and we expect activities from our digital operations to be breakeven by Q4 2020 as uptake and awareness of our offering gains momentum. Finally, on to the trading update on Slide 23, in radio, market trading conditions in January were consistent with H2 2019. ARN remain ahead of market with mid-single digit declines. Strong cost management is being maintained as we continue to assess market conditions. Overall cost growth limited to CPI, as savings in core operations are offset by incremental investments in digital audio audiences, content and revenue growth strategies. In Hong Kong, trading at the start of the year against strong comps saw some recovery from the declines of H2 due to the easing of the protests. No bookings have been canceled to date due to the coronavirus. However, clients are noncommittal for Q2 as the impact of the outbreak is still being assessed. Thank you for your time, and we'll now take any questions you may have.

[Operator Instructions] Your first question today comes from the line of Eric Choi from UBS.

This first one, just a high level one, I guess, just from all your conversations with advertisers and agencies. Just wanted your view on how much of the 10% market decline we're currently seeing is due to structural versus cyclical factors. And then just a second question on the outlook. I just noticed you've chosen not to comment on potential June quarter trends like one of your peers. So I'm just wondering if you think that that's a possibility for industry yields to sort of stabilize for that June quarter from the return of some of those major advertising categories. And then just the last one on Soprano, just wondering if you can comment on -- just at a high level, what's driving those sort of circa 20% revenue increases at the moment. Maybe between penetration versus yield. And then just what that 20% has been like over history.

Thanks, Eric. So firstly, on your structural versus cyclical comment. I hope I've called out in the presentation that we firmly believe that this is the challenging cyclical market that we're in at the moment, and all media are experiencing that. Radio's resilience, its growth in audiences continues to accumulate. We are not -- we're not growing -- sorry, the extensive digital audio is not growing at the expense of radio. Again, I've put in 2 charts that clearly demonstrate that while podcasts have grown, doubled in listenership in the last 12 months, radio has still grown as well. Talking to agencies and advertisers, the relevance of radio is still as strong as ever. I think, and I'm sure you're talking to many agencies as well, nobody is saying that this is a structural thing for radio. And in times like these which are challenging, radio's ability to be immediate, to be effective, to be a both a brand builder and a call to driver from a retail perspective, they're key strengths that we're in market talking about at the moment and driving home the advantages of radio. So I don't believe this is a structural thing for a second, and in fact, while we focus on our core radio business very, very strongly, we actually are growing our capability and in our digital audio functions around podcasting and streaming. So we see them as being extremely complementary, not just from a listenership perspective, but also from an advertiser perspective, and part of our distribution is to co-promote between radio and digital. So I hope I'm calling that clearly enough because I know there's been a little bit of commentary around that. The second one around Q2 trends, I think in the last sort of 2 updates that we've given over the last -- in 2019, we've been talking to pipeline. The willingness of advertisers is still there. Our teams, our integration teams are still very busy, putting forward integration ideas, working hard in terms of promoting just radio assets, but also integration with our iHeartPodcast assets and our streaming assets. Categories are -- some categories are looking to spend, but in terms of putting it in an official trading document, I'm slowly reticent to do that because the market is extremely short. I think I was -- I mentioned in the paper last week that last Monday, we had a client that phoned up that we didn't know about and was on-air on Monday afternoon. So the market is that short that I sort of don't want to guide to Q2. But I will say that our integration teams are very busy responding to briefs that are in-market. And finally, just on Soprano and what's growing that, over the last 2 years, the team at Soprano and Richard have worked hard to recruit really good salespeople. And we've increased the sales force, I think, by about 8 to 10 people internationally. So it's really been driven top line through investment in commercial activity and in the commercial teams. Australia has always been a very big market for Soprano but Asia is starting to grow. We've always known that there's a huge opportunity in America for us, and we focused a lot of our attention there in terms of recruiting people. And obviously, Europe as well with smaller markets, well, what are smaller markets for us but should be bigger markets in the likes of Germany and Holland. They will be, obviously, focused very hard in terms of continued commercial growth. But it's been a top line strategy around driving -- employing commercial people and driving revenue growth there.