ARN Media Limited (A1N) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the HT&E 2020 Interim Results Conference Call. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker, Ciaran Davis, CEO and Managing Director of HT&E. Thank you. Please go ahead.

Good morning and welcome to our interim results presentation. I appreciate it's a busy day, so we've prepared a deck that we'll quickly take you through now, with plenty of additional material in the appendices and we can discuss in more detail over the coming days. HT&E is proving resilient with strong fundamentals to work through COVID-19 and be well positioned for growth when the recovery comes. Radio's relevance continues to grow as people have become more engaged over the past few months, seeking a sense of connection and community. More people are listening at breakfast time throughout the mornings and afternoons. Drive time listening is also up. This ongoing growth in radio is enhancing the rise of other audio formats, dispelling the myth that linear radio is the next traditional media format to face disruption from pure-play digital operators. That's because our live and local content, delivered by leading talent and personalities, has proved more valuable than ever before to audiences who want some form of normality. We've seen record growth of iHeartRadio, our digital audio platform for radio, music and podcasts. We are now the leading podcast publisher in the country, growing revenues. But although not material yet, we'll see good growth in the coming years. Quarter 2 was a very difficult and challenging quarter, with revenues back 46%, led by an initial 3-week period of intensive cancellations as advertisers were concerned that traveling to work in the car would impact radio listenership. The industry was quick to combat that misconception, and thankfully, the second wave of lockdown being experienced in Victoria has not resulted in major cancellations. Q3 forward bookings are improving as certain category of clients look to spend at the start of the new financial year, and pleasingly, ARN is winning share. We took immediate cost control actions and are on track to deliver $11 million to $14 million of one-off cost savings in 2020. Unlike most businesses, are looking at our models for '21 and beyond. We made a profit in the half and maintained an exceptionally strong balance sheet with $90 million cash reserves. Maximizing the performance of our core business has preserved shareholder value in the short term. And focusing on transitioning ARN into a digital audio business will see us invest in digital content creation and personalization as well as data and analytical capability to drive new revenue streams. We also made a strategic investment in oOh!media, providing optionality in a media market we believe will increasingly require scale, deeper consumer engagement with brands and multi-platform delivery in order to realize revenue growth and deliver efficiencies. Soprano's performance has gone from strength to strength. And despite only holding 25% of the asset, we believe there is significant value in the business that has not yet been realized for HT&E shareholders. All key metrics are trending positively and provide a platform for further growth. And the accretive share buyback will commence after today. Our reported results on Slide 3 show that advertising spend in both Australia and Hong Kong were obviously significantly affected by COVID-19, with reported revenue down 29% to $93 million. Although aggressive cost-out actions were taken to protect earnings and cash reserves, EBITDA was down 49% to $19.5 million. Reported EBIT was down 66%, and NPAT and underlying EPS down 87% and 86%, respectively. Despite the strong balance sheet, the Board has decided to suspend payment of an interim dividend while it continues to monitor the uncertainty of COVID-19 on trading conditions. And it's also worth pointing out at this stage that there has been no material update to the ATO branch matter. We obviously remain confident in our position and are preparing to pursue the matter fully through litigation. Andy?

Thanks, Ciaran. Good morning, everyone. We have kept the format of the results presentation largely unchanged. You'll note, we have again included the same reconciliations in the appendices to assist with the impacts of lease accounting. On Slide 5, we have shown the first half reported result. Revenue was down 29%, with advertising spend significantly impacted by COVID-19. On an adjusted basis, excluding revenues attributable to disposed businesses, iNC and The Roar, revenue was back 27.7%. Early cost control measures taken in March saw a total cost decline by over 19%, comprising reduced cost of sales and lower revenues and staff and operating cost savings across a range of areas. Despite these measures, underlying EBITDA from continuing operations and before exceptional items was significantly impacted, down 49%. The effective tax rate on underlying Australian operations remained stable at 29%. However, tax expense includes a $1.7 million true up on finalization of the '18 return. The resulting underlying NPAT was down 87% before exceptional items. Within exceptional items, we've disclosed the benefit of government subsidies, primarily JobKeeper and noncash impairments pertaining largely to goodwill within ARN. I'll cover the remaining exceptional items in more detail later. The results for ARN are included on Slide 6. Advertising revenues across the sector were significantly impacted following government-enforced lockdowns in mid-March. Radio revenues were down 27%, which was ahead of the broad radio market back 30.9%. Pleasingly, we have now gained commercial share in each of the last 3 quarters. On a like basis, excluding disposed businesses, digital revenues were up 33% with good revenue momentum in our podcasting and streaming offerings. Cost control measures taken saw total cost down at 14% on a like basis. Cost of sales were down 26%, in line with reduced revenues. Staff costs were marginally higher on the full year normalization of key commercial hires in H1 '19 and contracted salary increases. The benefits from salary cost actions implemented from the start of May, including 6-month executive pay reductions, reduced work hours for remaining staff and a select number of stand-downs are weighted to the second half. Operating costs were down 36%, with a broad cost savings program encompassing marketing, travel, entertainment and other temporary cost control measures. In order to maintain our recent ratings and revenue momentum, we have recommenced a level of marketing investment in August, meaning the absolute OpEx benefit in the second half will be lower. You will note that we have changed the way we account for our 50% investment in Nova Perth, now treated as an associate with a share of net profit recorded. Resulting EBITDA for ARN was down $19.2 million or 52%. In respect of HT&E's 25% interest in Soprano, the business continued its impressive performance across COVID with revenue growth and further operating leverage, delivering gross profit of $46.1 million, representing a 28% increase year-on-year and 4 percentage point improvement in GP margin to 62%. Resulting underlying EBITDA for the last 12 months grew 55% to $22.2 million, a new high for that business. We have outlined previously this investment has the potential to deliver significant value to HT&E shareholders, well in excess of the current book value of just under $20 million. Given the increasing materiality of Soprano to HT&E, Ciaran will cover the business in further detail later. Turning to Slide 8. Cody revenues were down 47% on a local currency basis materially impacted by COVID-19 from early February, with government enforced lockdowns impacting advertiser sentiment and forward bookings. The impacts of COVID compounded existing concerns for advertisers, cautious following a period of social unrest in the 6 months proceeding. Tram shelter revenues were again most greatly impacted, down 63% with commuter volumes significantly down. Roadside revenues fared slightly better, back 37%, assisted by several pre-booked long-term advertiser contracts. A similar range of cost control measures to those previously outlined were implemented for Cody, and these measures saw total cost low by 40%, assisting in the preservation of cash flow and minimizing the EBIT loss in the period. Corporate costs are outlined on Slide 9. Following the corporate restructure and office downsizing completed in 2019, the corporate cost base has been reduced to $10 million in a normal year before costs associated with managing the ATO branch matter, which have historically run at around $2 million per annum. In addition to the previously outlined cost-saving measures, the Board have taken a 20% pay cut for 6 months and no incentives will be paid to executives in 2020. Compliance and adviser costs were lower, in line with business simplification and the exit of several noncore investments in '19. The cost of managing the ATO branch dispute were lower as we await a response from the ATO to our final objections. Corporate overheads were higher with cost savings from relocating the HT&E corporate team insufficient to cover the growth in D&O insurance premiums. Slide 10 shows the balance sheet at June with key movements as follows: Receivables were lower on reduced revenues in May and June. Income tax receivable includes a $10 million interest deduction in respect to the branch dispute claimed as part of the '18 tax return, with an offsetting amount recorded within the deposit of tax in dispute line. On the basis, the amount would need to be refunded to the ATO under a successful defense of the branch matter. There has been no change to the $30 million tax provision on the branch dispute booked in '19. Right-of-use assets declined $12.9 million, with $7.1 million of that relating to the impairment of Cody advertising concession agreements. ARN and Hong Kong goodwill, impaired, accounted for the material movement in intangible assets. And finally, the market value of our investment in oOh!media at 30 June was just over $25 million, and this has been recorded in other noncurrent assets. Cash flows for the period are outlined on Slide 11. Despite EBITDA being down, the business recorded positive operating cash flows of $19 million, up significantly on the prior year and impacted by positive net working capital contribution of $8 million on lower May-June earnings plus exceptional items of $2.8 million, primarily JobKeeper payments, offset by noncash items. And fewer tax payments in 2020, with the prior period including a final installment of $16.6 million in respect to 2018. Notable financing and investing line items included: Lower CapEx in the period, with the prior year impacted by the Brisbane station move; and the acquisition of OML shares have been included within the investments line. Net cash is outlined on Slide 12. HT&E have maintained a strong balance sheet with just over -- at $90 million at 30 June, offset by a small amount of drawn debt relating to our Hong Kong dollar working capital facility for Cody. Good tenure remains on our existing $260 million facility, with approximately 85% not expiring until January '24. For clarification, with the adoption of AASB 16 in '19, just over $50 million of lease liabilities are included in net debt on the balance sheet. However, this is excluded for assessing covenant compliance under our existing debt facility. Exceptional items in the period are set out on Slide 13. Noncash impairments of over $65 million were taken in the half, specifically relating to: goodwill of over $54 million split across ARN and Cody; right-of-use advertising concession contracts in Cody; and lastly, ARN's 50% interest in Nova Perth. There are also a number of smaller items pertaining to the finalization of exits from noncore investments in 2019. To reiterate, we have recorded JobKeeper payments and other government subsidies as an exceptional item, excluding them from the trading result. Finally, before I pass back to Ciaran, we've provided the standard reconciliation from segment to statutory results and further detail on the composition of working capital and noncash items in the appendices. Ciaran?

Thanks, Andy. Turning to ARN's operational performance, where radio audiences are more engaged than ever. Slide 21 illustrates radio's ongoing growth with record weekly reach of 11 million. We are growing across the whole day, reaching 7 million people from breakfast to drive. During COVID, radio listening grew 7%, with the highlights being mornings up 22% and afternoons up 17% across most age demographics. Listening in the home grew 48%, not only indicating any loss of listening in car, but actually building listenership as people tuned into breakfast shows and stayed throughout the day. New technologies offer exciting new ways for radio content to be consumed like smart speakers, which has seen a 60% growth since COVID outbreak. Linear radio is still the dominant audio format, accounting for 62% of overall listening. The role of our talent and local content remains as strong as ever and difficult for digital players to compete with because our live and local content has proved more valuable as audiences seek connection and community from personalities they know like -- that they know and like. iHeartRadio is a key asset for ARN and has seen an accelerated growth of 31% since March. Rather than cannibalize our core product, iHeartRadio is growing listening to KIIS, Pure Gold and The Edge radio brands by 9%. Registrations are up to 1.7 million, and a significant amount of work is underway to unlock the power of this first-party data, both from a listener and advertiser perspective. We are building new audiences to our podcast and music streaming services. Podcasts have seen a 33% increase while music streaming grew 31%. ARN is now the leading publisher of podcast in the country with over 13 million downloads a month and growing revenues. In a, we launched ARN's Dynamic Audio, becoming 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+ radio. Coles Express were our launch partner that saw 1 script and 1 voiceover delivering nearly 4,000 variations. This was incremental revenue for ARN, securing a campaign that was not originally allocated to radio. Results are highlighted on Slide 17, and the client has been exceptionally happy with their ability to provide greater cut-through and brand relevance. We are now building a pipeline of additional advertisers across numerous categories, retail and real estate, with a number of audio brands pending as well. Commercial Radio Australia will soon roll out RadioMATRIX, an industry-wide initiative which will transform the audio buying process and make it easier for advertisers to invest in radio and podcasts. We're delighted to see the industry work together, building a more combined commercial approach that focuses on the effectiveness of the medium and the ease of transaction to the benefit of advertisers and all operators. It's been a very challenging time for our clients, and the impact of COVID has affected us all. Pleasingly, ARN outperformed market in Q1, down 7% in a market that was back down -- back over 12%. In Q2, we were in line with the market but grew market share. The lockdown in March saw an initial 3-week period of intense cancellations as businesses pulled campaigns partly driven by a misconception that radio consumption would decline as people were not in the cars. The radio industry did a good job quickly proving the inaccuracy of that. And as the chart on the right shows, cancellations have been much -- at a much more reduced scale. And even the second wave lockdown in Victoria has seen minimal cancellations. It was great to see the commercial directors from all the major radio networks presenting together to most ad agencies, promoting the strength of radio and instilling confidence in the sector. Our talent are working harder than ever before on integrating client campaigns and going above and beyond to ensure these campaigns are successful as possible, delivering authentic and native content across broadcast, digital, video and social touch points. We are starting to see increasing briefings across agency, direct and digital by clients wanting to lay down plans for the key retail period leading up to Christmas. And we are actively reinforcing radio's ability to drive a call to action for advertisers, along with radio's agility and ability to turn around a brief really fast as a real advantage in this environment. And our Defining Audio commercial strategy rolled out at the end of 2019 is delivering incremental revenue through digital audio platforms with podcast briefings, in particular, building. Over the past few months, ARN has been working on the next phase of its growth, transitioning from a linear radio business, building the skills and capability to deliver an authentic -- an audience-centric data and insights-led digital audio business. Firstly, we are absolutely focused on maximizing the performance and returns of our core business. We will be investing in 3 areas: building more engaged audiences through data and personalization, growing new audiences by enhancing digital audio formats and delivering advertisers new products with greater targeting capabilities. ARN is in a very strong position to utilize the power of its brands and personalities as well as its exclusive iHeartRadio license to help make this transition. We're the #1 commercial metro radio network. We're the #1 podcast publisher. We have one of the largest libraries of audio content in the world. And we are growing a rich data set of addressable audiences. Over the coming months, we will be looking to build the necessary skills to deliver on our strategy. Moving to Soprano. And as indicated at the AGM in May, Soprano was looking at its strategic options in a sector experiencing strong growth and rising valuations. Andy has outlined the business' financial results that continued to outperform, and the review completed over the past few months identified significant valuation opportunity for HT&E, one that is not reflected in the sum of our parts valuation. I'll draw your attention to the peer comparison table on Slide 21 as an indication of the multiples in the sector. This slide also outlines the fundamentals of the business: that has over 2,500 customers; provides enterprise solutions over SMS, MMS, e-mail, voice, WhatsApp and secure IP; has sent over 7 billion messages with 100,000 active users; and a mix of global MNO partnerships and the growing direct relationships with customers. The global CPaaS market has performed exceptionally well during COVID and tracking well in the Rule of 40, which provides a high-level view of a software business' health. But simply, if your percentages of growth rate and profit margin totaled at least 40% when added together, then your business is in great health. Soprano was founded in 1994, and on all key metrics, its trajectory is positive: over 130 net new customers, annual revenues in excess of $74 million, $46 million in GP and a margin of 62% and it's profitable with EBITDA in excess of $20 million. Avenues for further growth will come from expanding its diversified geographical spread, which also protects the business against overreliance into a particular market. Looking at the industries it operates in, each with differing needs and volumes during COVID, but all well placed to avail of Soprano's product offering during the next 12 months. Other levers include organic growth, product upsell, new MNO partnerships and, in particular, acquisitions that would fast track growth and IP synergies. Before closing with the trading update, I wanted to make special mention of our staff. Like many around the world, they are operating on reduced hours and pay, working harder and under stressful conditions where they are concerned about safety, well-being and job security. Many are working from home, taking responsibility for child care, education or they may be in isolated environments without contact from friends and colleagues. We are fortunate at HT&E to have a team of people who, despite these obstacles, continue to do their best and produce outstanding work. Our business will be nothing without them, and the Board and I are truly appreciative of their support and endeavor. Thank you. Moving to the trading update. Trading in July has improved and finished down 27% for the month compared to 46% down for the April quarter as certain categories of clients recommenced advertising as lockdown restrictions eased. At this stage, August and September are tracking similar to July. Early pacing suggests this trend could improve further into quarter 4 if current COVID restrictions in Melbourne moderate and are not tightened elsewhere. In Hong Kong, the impact of COVID is continuing into quarter 3. However, should restrictions improve and with the absence of protest activity, we expect to see some categories recommencing spend in H2. Cost controls. We remain on track to deliver total temporary operating cost savings in 2020 of between $11 million and $14 million, before the current JobKeeper subsidy payment of approximately $9 million. Thank you for your time. I'll now open for questions. Thank you.

[Operator Instructions] Your first question comes from the line of Entcho Raykovski from Crédit Suisse.

I've got three. I'll keep them snappy. So the first one, obviously, very strong digital revenues in radio. Can you give us an indication of where you think digital could get to longer-term as a percentage of total revenues? I appreciate it's early in the piece, but any indication would be useful. And then just secondly, if you can give us some more color on the rationale for keeping the buyback but not paying a dividend? Is it just a matter of your view on the share price and that's the most effective use of capital? But -- any color would be useful. And then just finally, interested in what you view as the most likely monetization opportunity for Soprano.

Entcho, Ciaran here. If I could just deal with digital revenues first. I think it's still very immature. It's -- the market advertisers are still learning about digital audio podcasting, advertising in particular. It gets a lot of coverage, as we know, but the market still is relatively small. Interest is building. Obviously, we can see consumption of podcast is building. There will come a tipping point. And if you look to other markets in terms of how podcasting revenue tracked following the growth of consumption, it will happen at some stage in Australia. But honestly, we don't know. But what we are doing is making sure that we have an offering that audiences can easily consume and building the capability and the learning, if you like, for advertisers to understand when and how and where to use podcasting best. So I actually, in some respects, don't know where -- what percentage of revenue it will go to. I think what we are seeing though is that the combination of our radio and our core radio audiences mixed with -- combined with digital audio, other products like live radio and digital or podcasting or music streaming, is actually helping us to win share as well. So -- as well as sort of winning share in the radio market, we will increasingly turn our mind to that digital audio market. And that's why we will need to invest in skills and capabilities to make sure we have the data specialists, the programmatic specialists, the analytical specialists to deliver in that digital environment and not just in the radio environment. I'm probably not answering your question, but I hope it gives you some insight into why I can't. In relation to the buyback versus the dividend, I think, obviously, cash preservation is top of mind for our Board and making sure that we monitor the situation with COVID, which is very fluid, changing quite a lot. Protecting cash is something that we want to do, and that's the reason why we've looked at just the interim dividend today, but we will obviously reconsider at the full year. Why we did that and not do that and sort of continue with the buyback? The buyback is very accretive for shareholders, as we know, and we can have some days when the volume in our shares is particularly small. And having the ability to sort of buy back shares on days like that where there is a big price fluctuation is a big advantage, I think, for HT&E shareholders. And finally, the monetization event for Soprano. There are many options on the table. We went through a review over the last couple of months. It really highlighted the value of the business, the performance of the business, the strength of the business. There are very definitive avenues for growth over the coming period of time, and we'll work with a major shareholder to see what the best option is. But there is no definitive plan yet.

[Operator Instructions] Your next question comes from the line of Conor O’Prey from Canaccord Genuity.

Do you feel that the absence of diaries and surveys in the market is impacting your revenue at all across the sector? And do you think -- I think they're coming back at the end of September. So do you think that, that's a bit of impetus into the fourth quarter?

I don't, Conor. I mean, obviously, the safety of all -- those researchers was paramount for the industry, and that's why we decided to postpone surveys 3, 4 and 5. I think there was a large misconception out there that the lockdown was going to impact in-car listening, which many people felt was the majority of listening to radio. That was a misconception, which, as an industry, we knew was not going to happen because of the strength of the content that we have. And I think the numbers show that radio listenership increased. What we did do, though, was run sort of top line industry data to show that radio listenership in total was growing. The commercial directors got together and were out in market showing the strength of the medium, instilling confidence in the medium. And as we saw, there was an initial 3-week period of cancellations. That was negated by the quick action that we took to help show that the radio industry is probably more relevant today than ever before because of its ability to inform people quickly, because of the entertainment value and basically because of the sense of normality that people want.

And then just -- apologies if I missed this in your comments. Obviously, better trends into the third quarter versus the second. Are you able to talk about any of the sectors or pockets of sort of positive momentum you're seeing in there?

The government support has been very welcome for the radio industry, and we'd encourage the government to realize that we have a very strong medium that is a very powerful communication tool for them. But categories like retail have been very strong. Banking has been strong. The auto category has been strong. Obviously, there are categories that are not there at the moment, SMEs particularly. Those businesses that are in hospitality, in tourism, they're obviously affected. But the bigger spending categories are looking to spend again. Briefing activity has improved, and we can see that in the July numbers and how August and September is tracking.

[Operator Instructions] Your next question comes from the line of Jay Shyam from Macquarie.

Just following on from maybe the last one. And obviously, Melbourne is going to stage 4 lockdown. I know it's early and you obviously have national exposure, but how do you think about just the impact of Melbourne and kind of regional Victoria versus the rest of the country? And are there any kind of flow-ons in terms of consumer and business sentiment? Or they're still pretty resilient at this stage?

I think -- firstly, thanks, Jay. It's particularly pleasing that the slide that we put up, which showed the cancellations, the lockdown in Melbourne, while it's impacting the population and our staff and the mindset of people, has not impacted meaningfully cancellations that we're seeing coming through. Yes, I would suspect that businesses are taking longer to consider their commitment to spend, but the cancellations have not come through. And honestly, if I look at July and into August and September, the performance of our Melbourne team has been pretty strong, to be honest. So at the moment, we're not seeing a material impact of the lockdown in terms of radio spending. Going back to my point being that consumers are engaging more with radio, advertisers realize that and it's a very quick, efficient, agile medium in which advertisers can reach their audiences.

[Operator Instructions] There are no further questions from the telephone lines. I would now like to hand the conference back to your presenters. Thank you, and please continue.

Thanks, everybody. Look forward to talking to you all virtually over the next couple of days. Thanks.