ARN Media Limited (A1N) Earnings Call Transcript & Summary

Good morning. My name is Hamish McLennan, Chairman of Directors of your company. On behalf of the directors, I welcome you online today to the Annual General Meeting of Shareholders of HT&E Limited. This year, we are using online facilities to enable your participation in light of COVID-19 public health restrictions. COVID-19 has caused changes upon us in many ways, including the format of AGMs. We recognize some of you would generally prefer to attend in person. So thank you for your understanding as to why an online AGM was necessary. With me in person today is Ciaran Davis, CEO and Managing Director; non-Executive Directors, Roger Amos and Belinda Rowe; and Jeremy Child, Company Secretary. Also here with us today is Andrew Nye, CFO; and the Company's Auditor, Louise King from PwC. Finally, joining online today is Paul Connolly, non-Executive Director and Chair of Remuneration, Nomination and Governance Committee. I'm informed that there is a quorum present, and accordingly, I declare the meeting open. Well, I'm very honored to preside as Chairman of HT&E's Annual General Meeting for the second time. I'm also very conscious that today's meeting is being held against the backdrop of massive uncertainty and our needs for many of our shareholders. So I'd like to open this address with the hope that you and your families are safe and well and that you continue to stay strong and healthy. I'd also like to thank all of our staff for their dedication and adaptability during this difficult time. I want to assure you that myself and the Board continue to remain absolutely committed to your safety and wellbeing. Today's meeting is being held online for the first time. So I thank you for making the effort to join us. Also in the room is our CEO and Managing Director, Ciaran Davis, as I mentioned before as well as Jeremy Child and Louise King. 2019 was a very challenging year for many Australian media companies, but the outbreak of COVID-19 has exponentially accelerated these challenges. As we're in the midst of the sharpest decline in media and advertising, but most of us, if not all of us have ever witnessed. That being said, HT&E is in a very strong and stable position during these unprecedented times. And thanks to a number of strategic steps we have taken last year, our business is 1 of the better placed media companies in Australia currently facing this crisis. We focus on strengthening our core business, giving ARN the platform to capitalize on the expanding consumption of audio being experienced by consumers in Australia. ARN delivered a market-leading ratings performance in 2019, it was the overall #1 metropolitan network in the country. Finishing the year with 4 consecutive #1s was our highest performance since 2015, and we achieved the highest reach in the history of the business. Great talent is the foundation of any radio network and derisking the business by extending key talent contracts in Sydney and Melbourne was a high priority for management, providing the business with surety and a solid platform for future investment and commercialization. Kyle & Jackie O, Jonesy & Amanda, Jase & PJ, Christian O’Connell are all the best broadcasters in Australia. And we are delighted they'll be staying with us for many years to come. Although revenues and earnings were impacted by market conditions, the business backed up its ratings success by growing commercial market share and remains highly profitable and cash generative. Audio consumption is expanding among consumers and ARN uniquely offers Australia's most complete audio offering to audiences based on their own choices and interest across radio, music stream and podcasting, extending our iHeartRadio license and partnership to 2036 plays into our listener and data strategy, by expanding audience reach and offering digitally-targeted content and advertising to clients. In 2019, the Board commenced a strategic review of all operations to assess their ability to deliver real shareholder value and protect cash reserves. As a result, an orderly exit of some of our noncore assets has commenced the shutting of our eSports investment, Gfinity. We disposed off our digital publishing business, The Roar, our interest in VR startup, Unbnd, and recently sold our digital search and social business, iNC. We've put on hold a process to sell our Hong Kong outdoor asset, whose performance has been impacted by process and now COVID-19. And the process being undertaken to dispose of our shareholders in -- shareholdings in Lux Group and Soprano are suspended for now as both businesses focus on operationally dealing with the pandemic. Our shareholders also benefited from our increased dividend policy and our optionality to execute accretive buybacks when deemed appropriate. And the Board is fully engaged on the ATO Branch matter, of which there is no update and we remain confident in our position and are prepared to fully see this through litigation. Today, HT&E has one of the strongest balance sheets in Australian media. While some businesses are struggling with the capital structures, your company had a $111 million net cash at the end of 2019 with no undrawn debt and a radio business generating strong cash conversion. This is a very healthy position for HT&E to be in at this time, giving us the potential to explore the right strategic opportunities for the business should they arise. We have recently maintained our optionality in what we believe to be a consolidating media sector by purchasing a stake in oOh!media. Having sold Adshel to oOh! for $570 million, it is a business we know well. We believe in the emerging strengths of the combined radio and out-of-home offering, and we look forward to being a constructive long-term shareholder in the business. Before handing over to Ciaran, I would like to express my thanks to my fellow board members for their contributions and dedication. With our Board, we have a team of highly effective directors with a diverse set of skills and business experience to drive shareholder value, and it is an absolute pleasure to work with them. Finally, in closing, I would like to thank our shareholders for your continued support. It's a difficult time for the business, and I can assure you that this Board and management team are fully aligned in our determination to provide the best possible returns on your investment over the long term. Before I move to the resolutions, I would like to invite the CEO and Managing Director, Ciaran Davis, to give a presentation on the company. Thank you, everyone.

Thank you, Hamish, and good morning, everyone. Before looking back on 2019, I thought it would be useful to update shareholders on measures the business has taken since the lockdown restrictions came into force. As Hamish has touched on, the health and well-being of our staff is our top priority. And I'm pleased to report that the business continuity plans we have put in place significantly reduced risks to all staff and allowed the business to broadcast unaffected and to work remotely without any business interruption. Our staff have done an incredible job adjusting to new ways of working without impacting our listeners or our clients. And for that, I'm very grateful. We are monitoring government advice closely and have prepared a phased return to office work if and when it is deemed appropriate to do so. Control measures taken to date amount to largely nonrepeat operational savings in 2020 of circa $20 million to $23 million, across a range of expenditure lines, including marketing, travel, entertainment, bonuses and incentives and new employee hires. The Board, the CEO and the management team are taking a 20% pay cut and will forego all incentive payments in 2020. And staff are being asked to work reduced hours, use up excess annual leave and in some instances, take short-term pay cuts for at least the next 3 months while we assess the state of the market. Non-repeat savings include the expected net cost benefit of the JobKeeper package announced by the government. Our commercial teams have been very active in the market over the last number of weeks, implementing a combating corona trade activity plan, promoting the power of radio to ad agencies and clients, reminding them of ARN's great strengths, immediacy, trust and cost effectiveness with increasing digital targeting capability. During the early weeks of the lockdown, we did experience unprecedented levels of cancellations as the chart on the slide shows, impacting the last 2 weeks of March and into April, May and June, but thankfully, these cancellations have largely abated since early April. Radio plays an incredibly important role in the community as our listeners create engagement and a sense of normality in this isolating environment. As an industry, we have actively managed misconception that COVID-19 was going to have a negative impact on radio listenership, particularly any decline to in-car or at-work listening. It was critical that our advertisers were provided evidence to the contrary and retained confidence in the strength of the medium. As the chart shows, radio consumption is growing, and we have been on the front foot informing the market of the reality that radio listeners are spending longer listening over the past number of weeks, over 1 hour 30 minutes per week compared to the weeks prior to the lockdown. Time spent listening to the crucial breakfast and drive segments have increased by 20 minutes and 18 minutes, respectively. Breakfast growth is particularly impressive when you consider that it accounts for approximately 30% of overall radio listenership. Both weekday and weekend listening is also up. As expected, share of listening in the car dropped by 13.2%, but the amount of time spent listening at home has grown by 17.8% over 4 hours and 3 minutes, well exceeding any decrease in cars or at work. Despite the very challenging times, we are pleased with our progress as we continue to deliver on our strategy to lead the sector in defining audio. Ratings are the key driver of success. And we remain the #1 metropolitan network in 2020 with very strong performances across the country. The performance of iHeartRadio platform has been particularly impressive, recording its best month ever in March. Active users grew 24% to 1.2 million, and the number of new registrations is now running at approximately 1,200 daily. We recorded over 3 million listening hours to our stations in the month, which is the lead indicator confirming that the cross-promotion activity we are seeing between FM brands and iHeartRadio is driving people to the platform and is working. We launched iHeartPodcast Network Australia in February and immediately became the #1 podcast network publisher in the country. 40 million impressions is a very strong number, and our sales teams are very active in the market, educating clients on the benefits and effectiveness of podcasting. This will take time, but we are seeing good levels of engagement. Our digital and social sites are also experiencing strong growth as people try to escape bad news in favor of entertainment and celebrity stories, and the audience is being effectively bundled with our radio and digital campaigns to add to our total commercial offering. And this week, we launched 2 new digital products to strengthen our commercial offering and expand the digital capability, ARN dynamic audio and ShakeMe interactive. ARN's dynamic audio advertising is an exciting development and delivers more personalized and measurable campaigns for advertisers on radio. We have already successfully implemented this technology across the iHeartRadio platform. But now we are the first and only media business in the world to have the capability to provide dynamically targeted real-time advertising on AM, FM and DAB+. Never before has a media company been able to automatically deliver real-time personalized advertising to radio audiences, but ARN can now send real time messages to people based on their gender, age, location, interest and even the weather. This will prove very attractive to a number of our larger advertisers across a range of industries as research has shown that compared to non targeting messaging, the new technology delivers 52% uplift in advertisement recall, a 49% increase in engagement and 240% increase in customer conversations. Interactive ShakeMe technology is the next evolution for us in audio advertising. ARN now gives advertisers the unique ability to empower listeners to connect with the ad by responding immediately to that advertisement. For instance, a person listening to an ad in a car can now simply shake their phone or give a voice command to open a website, get directions to the nearest dealership or even call their directorship directly, making it easier than ever before for advertisements to close the loop on radio. A listener doesn't even have to unlock their phone or look at the screen to access an advertiser's offer. ShakeMe technology trials are seeing a 12x weekly uplift in ad responses, and we are excited to bring both of these technologies to the market. In terms of our statutory results for 2019, group revenue from continuing operations decreased $19 million to $253 million, with both ARN and Cody Outdoor experiencing declines. It has been well documented that prior to COVID-19, Australia was facing a challenging cyclical advertising market, and radio was not immune to that. Protests in Hong Kong hampered the sale process, and we are running -- we were running and also impacted revenue from May onwards, with revenue back 18% for H2 on a like basis. Group EBITDA from continuing operations increased by $3.8 million to $75.6 million due to the impact of the new lease accounting standards. Ignoring these standards, EBITDA would have been down 17% to $60 million. EBIT and NPAT were down 15% and 7%, respectively, while underlying EPS grew 1%, thanks to the accretive nature of the share buyback. And as Hamish mentioned, the strength of our balance sheet and cash-generating assets meant that we increased our payout ratio to shareholders in 2019 to 70% with fully franked dividend of $0.086 per share. Turning now to ARN, and 2019 was a difficult year for the media industry. With macroeconomic factors in the key auto, retail and banking sectors, leading to reduced advertising budgets and the total advertising market contracting for the first time since 2012. A challenged SME sector also saw direct advertising revenues come under pressure as local businesses activity began to contract. Although radio revenue declined 6%, the effectiveness of radio and the marketing mix remained strong, and has still maintained its share of total advertising spend at 8.6%. Full year revenues were down 6% to $208 million, which is in line with market. In H1, the market benefited from the federal government election spending, however, economic sentiment deteriorated post May, which in turn impacted consumer spending, and advertising volumes in the second half of the year finished back, 9.8%. Pleasingly, following a period of sustained ratings success and our redefined commercial proposition resonating with clients, ARN Q4 revenues and share finished ahead of the market. Total costs for the year finished out on 1% on a like basis. Cost of sales were lower on reduced revenues. Staff and talent costs were up 4%, impacted by contracted talent increases, ratings bonuses that were not paid in 2018 and enhanced commercial team capability. Operating costs were flat on a like basis. Resulting EBITDA of $73.3 million was down 17% on a like basis. We spent a large part of 2019 focusing on our core radio business, positioning ARN as the leading broadcaster with a simple and clear offering. From a content perspective, audiences continue to tune into radio. It is still the major source of audio entertainment in Australia and has grown 22% over the last 10 years. We finished the year as the #1 metropolitan network with audiences up 4%. A large part of this ratings success is due to the great talent we continue to recruit and retain, and extending key contracts with overall limited cost increase is helping us deliver the largest library of content in Australia in radio, music and podcasting. Expanding our distribution channels is growing new audiences and new commercial opportunities. 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 saw an immediate impact on usage. 21% of our listening is now in smart speakers, which, as we have said before, is bringing radio back into the home and changing how we see audio content being consumed in the future. Our catch-up radio strategy launched in H2 is already seeing downloads of over 2 million a month. Similar to TV's BVOD, this is an effective way to further monetize content we create for on-air broadcast. And as I mentioned earlier, we launched iHeartPodcast Australia Network in February this year. We also launched a new commercial strategy in H2 that is resonating well with clients and agencies. And if there is positive news in a challenging market, then we take some comfort from the fact that we're winning share. We launched a new DMP in quarter 4, one that helps our clients target more effectively our growing first-party data set. And with a 62% increase in digital listening hours to over 6 million in December, we are now starting to deliver an inventory of -- level of service of in-stream digital advertising that is attractive to advertisers. But as I've said many times before, it is talent that wins ratings and ratings are the primary driver of commercial share. Our investment in talent continues to deliver. In 2019, we had our best performance since 2015, with the #1 commercial network in Sydney, Melbourne, Adelaide, and we have the #1 commercial station in Brisbane. KISS was the #1 commercial network. Due to COVID-19, rating surveys in 3, 4 and 5 of this year have been canceled. So the results from survey 2 were particularly important to take us through to September. As well as being #1 nationally, we have the #1 and #2 breakfast shows in Sydney, #1 show and station in Melbourne, #1 station in Brisbane, #1 station in Adelaide and the #2 station in breakfast show in Perth, and we're actually disappointed with that. Turning to Hong Kong. And after returning to profitability in 2018, Cody started the year strongly and was more than 200% ahead of prior year -- sorry, ahead of prior year EBITDA on a like-for-like basis to the end of June. Unfortunately, the political unrest and resulting protests in Hong Kong escalated in severity from June and has significantly impacted revenues for the second half. Tram shelter advertising assets at street-level were particularly affected, sustaining regular damage during the protests. Revenues on the important Western and Eastern Harbour Tunnels and on other billboard assets were less impacted by the protests but lower on overall reduced advertiser demand in Hong Kong. Revenues were down 20% to $25 million, while EBITDA of $12.4 million was up on last year. Normalizing for the impact of lease accounting and currency fluctuations, EBITDA was breakeven for the year. We continue to assess our options around our future investment in Cody with a preference to exit the market in a reasonable period of time with the right outcome for shareholders. The COVID-19 government response and restrictions in Hong Kong are similar to Australia. Subsidies of $9,000 per employee per month for 6 months from June 2020, providing there was no terminations. Quarantine measures have been extended for 2 weeks until the 7th of May, and possibly further extensions being put in place with a maximum of 4 people being in public places. Over the past couple of weeks, small protests resumes following a dip in COVID-19 cases despite social distancing rules. Post the sale of Adshel in 2018, significant progress was made in 2019 to reduce corporate costs and simplify the management structure between HT&E and ARN. The reduction in salary costs reflects the part year benefit of reduced headcount and lower incentive costs. Compliance and adviser costs increased, split between, not only our portfolio review and the final wrap-up of the transaction cost of the Adshel sale. The restructured corporate base is now of the right size to achieve the $10 million target we have been working towards since the disposal of Adshel. And finally, turning to our trading update, and ARN remains the #1 metropolitan radio network in Australia with ratings success in 2019 and the first 2 surveys of 2020, now delivering consistent commercial share gains. During quarter 1, ARN, down 7.2%, outperformed the broader media -- metro radio markets, down 12.4% and gained market share. Q2 bookings have been adversely impacted by COVID-19, with April revenue declines over 40%, with direct clients, normally comprising 30% of total revenues, particularly impacted. The high level of client cancellations experienced in the weeks immediately following the national pandemic lockdown have abated. Forward bookings for May remain broadly in line with April. And briefing activity levels improved across specific sectors, including financial services, government and supermarkets. In Hong Kong, following the political unrest experienced in H2 2019, trading performance of Cody Outdoor has been further impacted by COVID-19 with Q1 revenues down more than 45%. Forward bookings for May have deteriorated slightly as Hong Kong trams are the most affected on reduced commuter volumes. Cost reduction activity where possible has been implemented and remains a priority. Cost control measures taken to date amount to predominantly nonrepeat operational savings in 2020 of between $20 million and $23 million. As I mentioned earlier, the Board, CEO and management team are taking 20% pay cuts and will forgo incentive payments. Staff are on reduced hours, utilizing annual leave and in some instance, taking salary cuts, and nonrepeat savings include the expected net cost benefits of the JobKeeper package. Before handing back to Hamish, I'd like to thank the shareholders for their ongoing support. I'd also like to call out the management teams at HT&E, ARN and Cody, and in particular, I'd like to call out our staff, who remain committed, upbeat and are a pleasure to work with in these difficult times. Thank you.

Thank you, Ciaran. We now move on to the formal part of the meeting, and I wish to explain the arrangements for voting and asking questions. The full details are set out in the online guide provided with the ASX announcement on the 1st of May. And our Investor Relations page, which I now summarize as follows. To register to vote, click on the get a voting card box. This will bring up a box headed voting card, where you will enter your shareholder number or proxy number. You can then click the blue submit details and vote button, your voting card will appear with all the resolutions to be voted upon. Once you finish voting on the resolutions, scroll down to the bottom and click the blue cast a vote or cast partial vote button. If you later wish to make a change while voting is still open, you can do so by clicking the edit card button and making the required change. At the conclusion of the AGM, a red bar with a countdown timer will appear, showing the remaining voting time available to shareholders. Please make any changes required to your voting cards at this point and submit your voting cards. In terms of asking questions, you must be registered to vote. [Operator Instructions] Not all questions are guaranteed to be answered during the AGM, but we will do our best to address your concerns. Once you've asked a question, a view questions box will appear. You can -- only you can see the questions you have asked. Questions could be submitted now before the meeting begins and can continue to be submitted up to 5 minutes after the meeting closes. [Operator Instructions] I will now move to the matters set out in the notice of meeting. Financial statements are tabled before the meeting, the financial report, the director's report and the independent auditor's report for the year ending December 31, 2019 for consideration, and invite any questions or comments that you may have on these reports or on company management. As previously mentioned, the auditor of the company, Louise King is in attendance and can answer any questions you may have about the conduct of the audit, the preparation and content of the independent auditor's report, the accounting policies adopted by the company and the independence of the auditor. Are there any questions or comments? Okay. Thank you. There's nothing there. We now move on to Resolution 2, reelection of Roger Amos as a Director. To consider and if thought fit, pass the following as an ordinary resolution that Roger Amos, who retires as a director by rotation under the constitution and the ASX listing rules and being eligible for reelection, be reelected as a Director of the company. I invite Roger to say a few words about his experience and his skills he brings to the Board. Roger?

Thanks, Hamish. So I joined the Board in November 2018 after the sale of Adshel. And I was reelected at the AGM in May last year. My background was with KPMG, specializing in telecommunications, media, entertainment and technology industries. I also -- many years ago, I had a 6 months scrumban at a radio group. So I -- whilst things have changed since then, there's still the fundamentals. Last year, we, as a Board and management focused on talent retention and development. And we spent a lot of time on costs and even more time on costs. We also spent a lot of time working at the strategy of radio in the world and in Australia, including audio. COVID-19, we spent a lot more time on costs. And we also, I'm pleased to say, have not had any retrenchments of our people today, that these are in uncertain terms, and hopefully, that will continue. I think with Ciaran as our CEO, we've got a bright future as a competitor in the radio industry in Australia. And I also thank Hamish and his leadership.

Thank you, Roger. I now invite questions or comments on this resolution. I can say there are no questions submitted. As there are no further questions in relation to this resolution, we'll move to voting on this resolution. I advise that proxies received on this resolution are shown on the screen. Please make your vote online for Resolution 2. [Voting]

Item 3. We now move on to the adoption of the remuneration report. The remuneration report can be found on Pages 28 to 44 of the 2019 annual report. To consider and if thought fit, pass the following as an ordinary resolution that the company's remuneration report for the year ended December 31, 2019 be adopted. I note that this resolution is advisory only and does not bind the directors or the company. I now invite questions or comments on this resolution. There are no questions. Thank you. If there are no further questions -- as there are further questions in relation to this resolution, we'll move to the voting of the resolution. In accordance with the Corporations Act, no persons nominated by key management personnel in the 2019 annual report or the closely related parties as defined in the Corporations Act will vote on this resolution. I advise that proxies received on this resolution are shown on the screen. Please make your vote online for Resolution 3. [Voting]

Thank you. Item 4. We now move on to the graph of deferred rights to the CEO and Managing Director, Ciaran Davis. You are being asked to vote on the resolution granting Ciaran deferred rights to acquire shares in the company under the FY '19 total incentive plan. Under this plan, eligible executives receive an annual incentive award, which if performance conditions are met, is delivered half in cash and half in shares. Shares are subject to a further 2 year trading restriction after an initial 12-month rights vesting period. It is currently intended that shares will be acquired on market for any of Ciaran's vested deferred rights. Shareholder approval is therefore not required under the ASX listing rules. However, it is being sought as a matter of good corporate governance and transparency as well as to provide the flexibility for shares to be issued by the company. To consider and if thought fit, pass the following as an ordinary resolution. That for the purpose of ASX Listing Rule 10.14 and for all other purposes, approval be given for the issue of 97,289 deferred rights to Ciaran Davis, CEO and Managing Director in relation to the company's FY '19 total incentive plan award on the terms summarized in the explanatory notes. I now make questions or comments on this resolution. There are no questions. As there are no questions in relation to this resolution, we'll move on to the voting of this resolution. In accordance with the ASX listing rules, any votes cast in favor by or on behalf of Ciaran Davis and any of its associates as defined in the ASX listing rules regardless of the capacity in which the votes are cast will be disregarded on this resolution. I advise that proxies received on this resolution are shown on the screen. Please make your vote online for Resolution 4. [Voting]

So in closing, shareholders are reminded that they can submit their vote online until 5 minutes after the meeting closes. Ladies and gentlemen, that concludes the business of the meeting. On behalf of the Board, I would like to thank you for your support and I now declare the meeting closed. The results of the poll will be announced to the ASX later today, and will be available on the company website. Thank you for your attendance and participation in this meeting. As there is no further business, I declare the meeting closed. Thank you, everyone.