ARN Media Limited (A1N) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the HT&E 2020 Full Year 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 first speaker, Ciaran Davis, CEO and Managing Director of HT&E. Thank you. Please go ahead.

Good morning, everyone. Thank you for joining our full year results today. Andrew and I will take you through the presentation, and we'll leave time at the end for any questions you may have. Our reported results on Slide 2 show revenue down 22% to $197 million as COVID hit all sectors of the advertising industry. In an unprecedented year, it was pleasing to see the market improve in the back half. And as a result, our revenue was down 14% compared to 29% in H1. Full year EBITDA was $49 million, a drop of 35%. Reported EBIT was down 43%, with NPAT and underlying EPS down 55% and 54%, respectively. HT&E was able to access the first round of JobKeeper, having the desired effect of protecting against more severe job losses, with a total benefit of $10 million being excluded from the underlying results. We did not qualify for the second round of funding. The Board has decided to suspend payment of year-end dividend, however, is committed to reinstating our dividend policy in 2021 if market conditions and performance allows. And by way of update, there has been no change in the ATO branch matter. We remain confident in our position and prepare to sue the matter -- to pursue the matter fully through litigation. These results were achieved in a year where the global pandemic created significant advertiser uncertainty and resulted in widespread falls in local advertising. Against this backdrop, HT&E navigated the period well and has emerged a stronger business by strengthening our core radio operations and investing in our digital audio growth. ARN remains the best-performing audio company in Australia, both commercially and in ratings, delivering audiences and advertising across radio, music streaming and podcasting. We're the #1 ratings network for the ninth consecutive time, with a 12% growth in total listing in the past 5 years, reaching 5.3 million people a week. We're the #1 ratings network at breakfast with our investment in talent continuing to pay off. In Sydney, our duopoly of KIIS and WSFM delivered again. Kyle & Jackie O celebrated 20 years at the top, finishing the year where they started at #1 FM and Jones & Amanda averaging the year at #2. In Melbourne, GOLD 104.3 is now established as the clear #1 FM, along with the Christian O'Connell Breakfast Show, the #1 at breakfast. More importantly, this consistency of raising success, together with a clearly articulated and integrated commercial offering, have seen ARN outperform the market all year and increase commercial share by 6%. We are building momentum in our digital audio transformation as extraordinary growth of digital listing saw a 14% growth in iHeartRadio app downloads and a 19% growth in registered users to $1.9 million. We're now the #1 podcast publisher in Australia after launching the iHeartRadio podcast network early in the year. With over 15 million downloads a month and 5 of the top 10 podcast in the country, our strategy of representing a broad spectrum of local and international publishers as the commercial podcast market builds from its infancy has allowed us to manage investment risks and return while building internal capability at the same time. In many respects, COVID reinforced the power of radio. And in a strange way, the loss of advertising came at a time when listening is at an all-time high and audiences more engaged than ever. Broadcast radio is booming. We've seen record reach with over 11 million listeners tuning into commercial radio each week. That's growth of nearly 1 million listeners or 10% over the past 5 years. We now provide unprecedented availability of our content across multiple devices, with a 65% increase in listening on digital devices, most notably the growth of smart speakers, which now represents an incredibly exciting opportunity for future distribution of radio content. In-home listening switched from the car and demonstrates that the live local trusted content, together with a sense of connection to our talent and are bringing together of community and companionship for our audiences, are unique attributes to radio and ones that no other medium can match. We continued to retain a strong foothold from a revenue perspective, having consistently maintained an 8% share of media spend, despite audio listing diversification, and that's because radio advertising works. Its immediacy, its ability to build strong brands and its ROI as a call to action, all attributes that today's advertiser is concerned about. And I'm delighted to say, our industry body, Commercial Radio Australia, is now in the market to recruit a Chief Commercial Officer as we all work together to better promote the story of radio with the aim of growing our share of revenue. I'm looking forward to the CRA becoming more progressive, demonstrating the power of our medium and building initiatives that makes us easier to trade with and to fight for more ad dollars. ARN's go-to-market commercial strategy is another standout in 2020. We provide the most complete audio experience for our listeners and the most comprehensive audio solutions for our partners. And in 2020, ARN outperformed the market every quarter, and we are continuing to gain commercial share in 2021. As part of that success, recruiting and retaining the best talent not only delivers rating success. But during COVID, the power of our talent to connect brands and consumers and integrate content into the shows helped drive revenue growth and deliver far better commercial outcomes for clients. Kyle & Jackie O and Menulog, Kathmandu and Jase & PJ, Ladbrokes and William Woody are just a few examples that demonstrate the ability of our talent to work with advertisers delivering great outcomes. As you would expect, we did experience a level of price pressure during the year. However, the impacts were substantially mitigated by a clear pricing strategy, focused on articulating the value of our brands and talent to deliver valuable outcomes for our commercial partners. Pleasingly, despite challenging trading conditions, we were able to improve average unit rates on a number of our stations in the year. And in total, rate was only back 10%, which puts us on a good footing as we look to recovery in 2021. We are fortunate that as the strength of broadcast radio is holding up, we are also developing new digital audio formats and monetization opportunities. One is not progressing at the expense of the other. As things like podcasting and music streaming demand increases, so too does listening to radio. Our digital momentum accelerated during 2020 as our product offering expanded, and we recruited new skills and capability into the business. Digital listening hours to our radio brands such as KIIS, Pure Gold and The Edge grew 55%, with total listening hours now nearly 7 million a month. Music streaming on iHeartRadio grew 77% year-on-year, averaging 1.1 million active users a month. And podcast downloads were up 149% since the start of 2020. Our ability to monetize this new content and audience now has real momentum. As we successfully rolled out new innovative technology projects, such as Dynamic Audio, offering personalized audio messaging on broadcast radio and in digital formats and delivering targeted and relevant messages across all of our leading stations. This has been really well received by our partners, and we look forward to rolling out new product enhancements later this quarter. We completed our Adobe platform integration, which now means we offer our first-party data in a trading environment compatible with all the leading agencies, helping us to improve our programmatic revenues. The result is digital revenues growing 122% to over $10 million, with November being our highest digital month ever, and we expect to see this trend accelerate in 2021. Andy?

Thank you, Ciaran. Good morning, everyone, on today's call. We've kept the format of the financial results similar to the half year with reconciliations to assist in understanding exceptional items and the impact of lease accounting, including the appendices. On Slide 8, we've shown the full year reported results. After being down 29% on the half, an improving revenue trajectory into H2 saw full year revenues finish back 22%. On an adjusted basis, excluding disposed businesses, iNC and The Roar, full year revenue was back $19 million. Significant one-off cost measures, combined with the cost base benefit of disposed businesses and lower variable costs, saw a total cost decline by over $30 million or 16.2%. These measures have lessened the impact to underlying earnings, particularly in the second and third quarters, where ad revenues were back over 46% and 22%, respectively. Despite these cost measures, earnings were impacted with underlying EBITDA down 35% to $49.3 million. The effective tax rate on underlying Australian operations remained stable at 28%. However, tax expense includes a $1.7 million true-up on finalization of the '18 return. Within exceptional items, we've disclosed the benefit of JobKeeper and noncash impairments announced at the half. Turning to ARN. Radio revenues were down 21%, which was ahead of the broader radio market, back over 25%. We continued to gain commercial share in the second half, supported by a strong market proposition and executed by the best tail end market, both on and off air. Radio revenues have now exceeded the market growth in all but 1 quarter over the past 2 years. And importantly, this has not come about through excessive discounting. Digital audio revenues grew 122% on a like basis. The momentum in podcasting and streaming outlined in the half continued, with monthly revenues exceeding the $1 million mark for the first time in November. One-off cost control measures taken, so our total cost finished 10% lower on a like basis. Cost of sales were down 15%, with the cost benefit of lower radio revenues, offset by increasing digital variable costs, largely attributable to podcasting. People costs were marginally lower, offset by contracted salary increases. As outlined at the half, salary cost actions include executive pay reductions, reduced work hours and unfortunately, a number of redundancies that impacted around 5% of our people. Operating costs finished 26% down with one-off cost savings realized in marketing, travel, entertainment and a range of other areas. We are very well placed to capitalize on the growth in digital audio, having spent the past 18 months with a strong focus on developing our end-to-end capability. We'll continue to invest in the right areas, growing internal capability, podcast content development and marketing of our brands. In respect of HT&E's 25% interest in Soprano. The business recorded strong revenue and gross profit in the year with further operating leverage across its key markets, delivering an impressive 63% margin, up 3 percentage points from 2019. Resulting underlying EBITDA for the 12 months grew 45% to $25.5 million, driving a 29% increase in HT&E's share of NPAT to $3.3 million. Soprano completed the acquisition of Silverstreet, a Singapore-based CPaaS business in December. This enterprise-focused acquisition provides a further platform into Asia and bolster Soprano's cloud communications capability, including a bulk messaging SMS system. We have included on the following slide, the core metrics for Soprano on a similar basis to what was presented in June. On all financial metrics, the business continues to perform incredibly well. Turning to Slide 12. Performance of our Hong Kong outdoor business, Cody, was heavily impacted by the pandemic, with full year revenues down 35% on a local currency basis. Consumer sentiment, commuter traffic volumes and inbound tourism from Mainland China remains suppressed across the second half of 2020, with the region heavily impacted by multiple subsequent lockdowns. In recent weeks, infection rates have fallen, restrictions have eased, and we have seen a slight improvement in advertiser sentiment and briefing activity. Trends noted at the half continued into H2 with tram shelter revenues most impacted, down 46%, and roadside revenues faring slightly better, back 29%. Cost measures, plus the benefit of reduced variable rent payments accounted for within OpEx saw total costs lower by 30%. Our primary focus in the current market conditions remains on minimizing the EBIT loss and preserving cash flow. Corporate costs are outlined on Slide 13. In a normal year, the corporate cost base runs at about $10 million before adviser costs associated with the branch matter, which should typically run at about $2 million a year. One-off cost measures, including a 5-month salary reduction program for the Board and senior management, and forfeiture of all executive incentives in respect to 2020 assisted in reducing corporate costs by 35%. Compliance and adviser costs were lower, in line with business simplification and the exit of several noncore investments in '19. Cost of managing the branch dispute were also lower as we await a response from the ATO for our final objections. Slide 14 shows the balance sheet in December with a strong net cash position of $112 million. The deposit of tax and dispute line is where we account for balances associated with the branch dispute, comprising the $51 million deposit, offset by a $30 million provision, which is unchanged from '19 and $16.7 million of interest deductions calculated to December 2020. Of these interest deductions, $10 million was received in 2020 following lodgment of the '18 return and is included in net cash. Interest deductions would be refunded to the tax office on a successful outcome of the matter. Other movements of note include the impairment of remaining goodwill, which is unchanged from June; our initial $18 million investment in oOh!media was rebounded to $46 million, reflecting the closing share price at the year-end; we successfully exited an onerous contract commitment on disposed business, resulting in a $4.8 million benefit; and the reduction in advertising concession commitments associated with Cody explains the majority of the movement in lease liabilities. Cash flows for the year are outlined on Slide 15. Despite EBITDA being down 35%, the business recorded positive operating cash flows after lease payments of $36.4 million, up 16% and impacted by $8.8 million net cash on exceptional items, offset by $7.1 million noncash share of associates and working capital movements; tax refunds totaling $16 million on lodgment of the '18 return, which included $10 million interest deductions under the branch matter; and payments of $3.2 million to settle a separate legacy tax matter. Notable financing and investing cash flows included lower CapEx in the year with 2019 impacted by the Brisbane station move; and the acquisition of oOh!media shares, which were included in the investment slide. I'll now pass back to Ciaran to take through the rest of the presentation.

Thanks, Andy. Turning to Slide 17. Against the backdrop of this disruptive 2020, HT&E has emerged stronger with a solid platform for growth as we head into 2021. We have confidence in the advertising market recovering quickly as the rollout of vaccinations and easing of restrictions gathers pace, stimulating consumer demand with radio remaining a very effective medium for advertisers, particularly in a short market like this. ARN is a high-performing business with leading ratings, talent secured on long-term contracts and building new audience and revenue opportunities in our digital offering. As we know, it is highly cash-generative business with good cut through, and our balance sheet remains very strong with over $110 million of net cash. Over the past few months, we have taken the opportunity to review our shareholding at Soprano and have decided that our 25% is noncore. As a result, we have just appointed Macquarie Bank to explore our liquidity options. There is a high level of global demand for CPaaS capability right now, and we feel this is the right time for Soprano to secure potential new investors for the next phase of its growth. Also on our balance sheet is the 4.7% stake we took in OML, a business we know well, having owned a large part of it, and we remain a long-term and committed shareholder. But there's no doubt that 2020 has had a significant impact on the changing media market worldwide with many trends we've been seeing over the past few years accelerated during the year. Today's consumers increasingly control what, where and how they consume content. In response, advertisers are prioritizing scale and reach, ROI and demanding accountability and measured effectiveness. The opportunity for media owners is to provide reach and scale, multi-platform content distribution and invest in data-led validation. Our balance sheet strength gives us the optionality in what we believe will be a consolidating market. And as the outlook for the ad industry continues to improve, we will continue to explore the right opportunities for the business and for shareholders. Turning to our trading update. At ARN, Q1 revenue outlook continues to strengthen, with current pacing for March indicating total revenues could finish flat on prior year. Revenue for January finished back 6.9%, with pacing improving on this result for February, assisted by continuing improvements in our broadcast radio performance and the growth across our digital assets. We are encouraged by early briefing activity for April and Q2 campaigns. In respect of costs, we are reinvesting to drive growth by improving our digital and data capability, digital audio and podcast development and the marketing of our brands. Subject to the advertising market recovery continuing, we anticipate total people and operating costs to be in line with 2019. In Hong Kong, quarter 1 revenue trend is consistent with H2 2020. Reduced infections and the easing of restrictions in recent weeks is seeing parts of the economy open up and talk of mainland China tourism recommencing. Thank you. I'll now hand you over for any questions you may have.

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

Ciaran and Andy, I've got a couple. So the first one is around the appointment of an adviser to explore the Soprano stake sale. Just interested in whether that means that you would explore those monetization options independently from other shareholders. I'm conscious that you previously said monetization might be contingent on what the major shareholder does. So is this perhaps a slight change in approach? And just secondly, your comment on costs into FY '21. I mean I think that's pretty consistent with your prior statements. But just interested in the fact that you've also said it's subject to an ad market recovery continuing. What defines, in your view, a recovery? Are you thinking about getting back to those 2019 levels? Or is that a recognition that getting back to 2019 immediately will be a little bit difficult? So even if it's a little bit on the ad market front, even if it's a little bit below, that still obviously constitutes pretty significant growth from 2020 levels?

Thanks, Entcho, for that. Just firstly, in relation to Soprano. I think as you'll see in the results, the business is still performing exceptionally well. It does have a number of options at this stage in terms of where it goes in its own direction. I think from our perspective, we spent a lot of time analyzing our own business, focusing on our core assets. And we believe that from our perspective, Soprano is noncore. We haven't made a decision yet around what the monetization or liquidity event looks like. But I think as we look to the future for HT&E, it's probably time, from our perspective and Soprano's perspective, that new strategic or indeed, any other type of investor, comes into Soprano for its next phase of growth. It's not core to us, but there's no specific path set out yet at all. And we've just appointed recently Macquarie on that one. In terms of the ad market in '21. I think all throughout the years, we've demonstrated a very strong focus on cost management. We maintain a very close eye on our EBITDA margin. It's something that we monitor regularly, pretty much weekly, to be honest. I think we're also fortunate that the investments that we can make now in digital audio growth in podcasting and data capabilities in growing new audiences, that actually represents a real opportunity, we think, for the business not just this year but in the next few years. So we're very determined to maintain that level of investment. Do I think that 2021 will see ad revenues come back to '19? Probably not. We're encouraged by what we're seeing in terms of the return of advertising sentiment. But I think it will be a big stretch to get back to '19 levels in '21. But certainly, the path to recovery looks good into '21 and '22.

Okay. That's really useful. And maybe one quick follow-up. You made some comments on rates at ARN in your preprepared remarks. Just interested about what you're seeing in terms of rates in the radio industry as a whole. Are you seeing other operators discounting aggressively? And is that part of the reason for the, I guess, some of the market decline over the course of calendar year '20? Or is it just weakness in the market that's driven that?

It's weakness in the total advertising market. I think from our perspective, radio remains very competitive with our competitors from a ratings, from an audience, from a revenue perspective. I think we all value the medium that we have and the ability of our medium to deliver for advertisers. So it's been pleasing that in a market that was suffering quite badly from advertiser turnoff throughout the year, that from our perspective, we've maintained rate integrity. And to be honest, I don't know about other operators, but I'm sure it's relatively similar because we all value the medium.

[Operator Instructions] Your next question comes from the line of John Campbell from Jefferies.