ARN Media Limited (A1N) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the HT&E 2021 half-year Results. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Mr. Ciaran Davis, CEO and Managing Director. Please go ahead.

Good morning, everyone, and thanks for joining today's call. We've had a really positive start to the year. And despite the uncertainty of the broader environment, and we are very well positioned as we pursue our agenda for further growth. Revenue has recovered strongly, finished the half up 21% on a like basis at $110 million, driven by a good agency market. EBITDA was $30 million. EBIT was up 139% to $24 million and NPAT grew to $14.5 million. As like in February, the Board was committed to reinstating dividends. And today, the directors have declared a fully franked dividend of $0.035 a share. Our balance sheet strengthened further with net cash of $122 million and provides optionality as we explore the right opportunities to grow scale, creating multi-platform content, and building data capabilities, in what we believe will be a consolidated market. We are investing to grow our core radio, broadcast radio and digital audio business in the area of content, distribution and new technologies. In May, we announced the signing of a nonbinding term sheet to sell 100% of Soprano to Link Mobility and I'm pleased to say the process is progressing well with the binding SSA expected to be executed shortly. The term has valued Soprano at approximately $560 million with HT&E's stake at $140 million. Link's trading update to the market yesterday was encouraging, and we're excited to see these 2 businesses come together, creating 1 of the world's leading CPaaS providers, while giving an opportunity for further value creation to HT&E shareholders. Link's shares will be held in escrow for a period of 6 months following completion of the sale, after which HT&E is permitted to dispose off the shares on an off-market block trade or sell down over a period of time. Operationally, the advertising markets in Australia and Hong Kong strengthened, and we are particularly pleased with the progress ARN continues to make. Despite lockdowns, reduced commutes, new forms of audio growing in popularity, radio remains a very relevant and resilient media, growing in listenership up 2% on this time last year. Increasingly, we are seeing our content migrate to live streaming on digital platforms, making it more accessible, extending our reach, and potentially offering new commercial opportunities. ARN remains the #1 metropolitan radio network, thanks to some outstanding performances. And having launched just over a year ago, our podcast offering is also the clear #1 publisher in the market. We are winning commercial share, and our digital revenue growth is gathering pace and ahead of expectations. Finally, this is a tough time for our staff, as we navigate lockdowns and work from home, while at the same time as a business, we are making the cultural transition to become a digitally enabled company. I'm very proud of the whole team's contribution at this time, and I'm committed to continuing investments that prioritize employee health and well-being, and supporting our people so they can be 100% focused on achieving their goals. Andy?

Thanks, Ciaran. Good morning, everyone. We've kept the format of the financial results consistent with the recent past, with reconciliations to assist in understanding exceptional items and the impact of lease accounting included in the appendices. For clarity, references to, on a like basis throughout the presentation, refer to the removal of disposed businesses from the comparative. The impacts of JobKeeper payments received under the initial scheme have been excluded from our underlying results, and the comparative cost base includes the financial benefit of temporary cost control measures taken in early 2020. On Slide 4, we have shown the half year reported results. Results for the half were significantly improved on 2020 with revenues up 21% on a like basis, driven by increased consumer confidence, delivering a return of ad spend across both our markets of operation. Costs were up 12% on a like basis, impacted by higher cost of sales, continued investment in digital audio capability, delivering revenue growth, and the reinstatement of marketing and certain discretionary costs. Resulting underlying EBITDA improved 55% to $30.4 million for the half, and the effective tax rate on underlying Australian operations remained stable at 29%. Included within exceptional items is an increase of $4 million for provisions relating to previously disclosed historical tax matters. Looking at the consolidated results of ARN for the period. Radio revenues were up 19%, broadly in line with market, noting ARN has delivered significant share gains across the previous 2 financial years. On a like basis, digital audio revenues grew 149% propelled by podcasting and streaming growth. Total costs rose 13% on a like basis. Higher cost of sales were recorded on improved total revenues and an increasing contribution from digital audio at lower margin under our current podcast content model. People costs were up 5%, impacted by ongoing investment in digital capability and the reinstatement of FY '20 temporary cost savings. Operating costs finished 13% up, also impacted by the reinstatement of FY '20 cost savings, in particular, marketing, travel and entertainment expenditure needed to execute our strategy in an improving advertising market. Pleasingly, resulting EBITDA saw a significant improvement, up 57% on a like basis. On the next slide, we've included additional detail around our radio and digital operations, with revenue, costs and earnings of each split out. We anticipate providing this detail in future reporting periods to highlight the earnings contribution and quality metrics of the radio business, whilst demonstrating our approach to investment in digital audio. Broadcast radio fundamentals remain robust with a sustained focus on controllable costs over a number of years, contributing to a healthy EBITDA margin. Cost of sales grew on significantly higher revenues, whilst the reinstatement of FY '20 temporary cost savings contributed to the remainder of the cost increase noted in the period. For clarity, total people and operating costs effectively our controllable costs, remain below '19 levels in the first half. Turning to digital audio. Revenue growth accelerated in the period with our commercial team now consistently writing revenues in excess of $1 million per month. We continue to secure significant benefits from our long-term partnership with iHeartMedia, including providing listeners exclusive access to some of the best content, an expansive technology road map, and relationships across key functions, enabling fast learning. Encouragingly, the volume and value of podcast campaigns is increasing month-on-month, with regular listening to podcasts forecast to surpass 37% of the population this year. We believe the podcast advertising market is nearing an inflection point. Consequently, in H2, we'll be investing further in ARN original content and scaling our digital commercial team. Turning to Slide 7. Performance of Cody Outdoor improved substantially in the period with fewer lockdowns and a well-progressed vaccination program, driving renewed advertiser confidence and a 28% improvement in revenue on a local currency basis. Total costs rose 15% with higher cost of sales on improved revenues, while the remaining cost base was held largely unchanged from the prior period. The business returned to positive EBIT, aided by improved revenues and also a reduction in depreciation attributable to advertising concession leases following impairments taken in June 2020. Our focus remains on returning Cody to positive cash flows on a consistent monthly basis. And with increasing consumer confidence and improving business trajectory into the second half, this is looking more likely as we move into Q4. The next slide shows the balance sheet at June with a strong net cash position of over $122 million. The deposit of tax in dispute line continues to be where we account for balances associated with the branch dispute, comprising the $51 million deposit, offset by a $30.5 million provision and $18.4 million of interest reductions. Briefly, in respect of the ACO matter, unfortunately, there has been no significant progress in the past 6 months. We continue to await the decision from the ACO regarding our objections to their amended assessment covering the 2009 to '15 period. We remain confident of our position and are prepared to pursue the matter fully through to litigation. Other significant balance sheet movements include the rebuild of net working capital in line with improved revenues, a reclass of our investment at Soprano as a held-for-sale asset, $3.5 million tax provision for a previously disclosed historical loan forgiveness matter, and the reduced reduction in right-of-use assets and lease liabilities reflecting the passage of time on remaining advertising contracts in Cody. Cash flow for the period are outlined on Slide 9. The business recorded positive operating cash flows after lease payments of $14.5 million, up 26% in the period. The operating cash flow result was impacted by improved earnings, up 55% and offset by noncash share of associates of $4 million, attributable to Soprano and the Perth JV. There were a number of material items impacting the prior year comparative, which we've called out, including our investment in oOh!media, which we still maintain, working capital benefit on reduced revenues and a dividend payment in respect of 2019 paid in March '20. I'll now pass back to Ciaran to take you through the rest of the presentation.

Thanks, Andy. And turning to operations on Slide 11. Commercial Radio has never been stronger, growing and reaching 11 million listeners a week with live and local content delivered by well-known personalities. ARN is dominating again in 2021, has now had 13 consecutive surveys as the #1 network and reaching over 5 million listeners a week. We've made gains across the country, but I'm particularly pleased to see the progress we're making in the key Sydney and Melbourne markets. Kyle & Jackie O's popularity is enduring and long lasting. They achieved another significant milestone in this half, taking the #1 overall breakfast show AM and FM for the first time in their history. They've had 20 consecutive surveys as #1, building close connections to listeners with the unique ability to influence and engage, as demonstrated by the reaction to Kyle's GetBack Baby video. This trusted real authentic relationship between on-air talent and audiences is a really engaging environment for advertisers to utilize. Also, we're very pleased with the growing strength of Christian O'Connell in Melbourne. Christian has changed Melbourne Radio, is very commercially friendly and has enjoyed 9 surveys as #1, with Gold, the #1 station for 12 surveys in a row. Our investment in talent is paying off. One of the upsides of COVID is the accelerating uptake of digital listening via a mobile phone, tablet or smart speaker. Live radio streaming is seeing considerable growth, up 19% to 2.4 million listeners on average streaming each week. This tells us that fans will find a way to listen to content they want with streaming on mobile up 5%, tablets and PCs up 20%, and smart speakers up 51%. ARN live streamed nearly 8 million total listening hours a month across all platforms with smart speakers now accounting for 35% of this figure. Strong growth over the past year. This scale will only build as we continue to focus on live stream distribution. The key benefit of which will be radio offering's increased targeting capabilities. Podcast listing is also growing strongly, offering a unique opportunity for advertisers to extend their audio footprint with 284 million podcasts downloaded in Australia this year. 37% of Australians now listen to podcasts every month. That's up 53%. Launched at the start of 2020, ARN is the #1 podcast publisher in the country, with 5 of the top 10 podcasts downloaded, and as the table shows, 15 million downloads in July. New digital audio formats like podcasting are not a threat to radio's long-term future. It's now widely accepted that radio, music and podcasts are complementary, expanding audio consumption. And in fact, this additional time spent with audio is coming from other mediums, not radio. The commercial opportunity for ARN is that advertisers are lagging behind this listening behavior, and our job is to unlock ways of commercializing this content. How do we do this? By continuing to create content for growth scale of audience, by making it easier to buy, by providing measurement insights, attribution and targeting that gives confidence to advertisers, and we're going to continue to make investments to unlock this opportunity, which includes increasing sales head count to target digital revenues. Particularly pleasing in our drive to create the best audio experience for audiences and the most comprehensive solutions for advertisers is the progress we are making with iHeartRadio. We launched iHeartRadio 7 years ago in Australia, well ahead of the market. And we're pleased to offer the most complete destination for digital audio in the country, offering about 86% of people desire, their favorite content in a centralized and easy-to-navigate location. In other words, radio, music and podcast all in 1 place. We've exceeded over 1 million unique users a month and topped 2 million registered users, a growth of 53%. But more importantly, iHeartRadio distributes content everywhere our audiences choose to listen, across 2,000 devices from smart speakers to wearables to gaming consoles. Our exclusive partnership with iHeartMedia in the U.S. delivers great benefit. Having this global scale and intellect at our disposal, we and our advertising partners have the ability to continually enhance the scale of customer experience with improved features and functionality, have access to advanced AI personalization tools, and leverage key technology integration learnings. Meaning we can fast track our Australian content and platform strategies with confidence, generating greater scale, engagement and quality first-party data. I won't spend a lot of time on this slide now. Within our core business, the strategy is to build the best-in-class broadcast radio and digital audio business, investing to grow audiences, offering multi-platform content, distributed at scale and increasingly backed by digitally enabled solutions. We're focused on 3 key pillars for long-term growth: content, distribution, and commercialization and partnerships. In content, our network of super brands caters for all the key age demos, is backed by the best Australian talent and complemented by a unique and compelling podcast library. We distribute this content at scale. We are the leading radio and DAB+ network in metropolitan markets, the #1 podcast publisher and have the most established full-stack audio distribution channel in iHeartRadio, providing radio, music and podcast all in 1 place. And we continue to roll out new, innovative and increasingly digitally focused solutions for advertisers that are winning share and allowing us to develop mutually beneficial partnerships with local and global brands like New York Times, Tiktok and MTV to name a few. Just before I move on to the trading update, a quick look at how the radio advertising market is performing during COVID lockdowns. The total market for the half grew 20%, up 54% in Q2. We've seen a 2-tier recovery so far with the agency market of 28%. SMEs, which account for about 25% of total revenue, is slower to return, as you would expect. But in markets less affected by lockdown, we have seen direct advertisers starting to return, giving us confidence that this sector will bounce back from lockdown then. Key categories continue to spend on radio with 4 of the top 5 in growth over 2020. And in relation to cancellation, as you can see from the graph on the bottom right of this slide, we have not seen the level of cancellations we saw in April and May last year, despite the prolonged lockdown in Melbourne late last year and the current lockdowns being experienced. Advertiser sentiment remains positive to year-end with briefing activity high, although uncertainty exists as we grapple with extended lockdowns in key markets. Moving to the trading update at ARN. In July, ARN revenues grew 19% on the prior comparative period. August has seen a slight easing of bookings, but pacing suggests a similar result for the month. Extended lockdowns, particularly in Sydney and Melbourne, may impact FY '21 performance, mainly due to some uncertainty of the SME sector. However, forward bookings for the remainder of the year are currently tracking well ahead of this time last year with briefing activity remaining positive. Recent digital performance has continued into Q3 with average monthly revenues for the quarter, pacing to finish in excess of $1 million a month. Investments in the launch of a new breakfast show in Melbourne, the implementation of original podcast creation, increased digital commercial capability, and the relaunch of the Edge, will see total people and operating costs for FY '21 now expected to finish $2 million to $3 million above FY '19 levels. At Cody, improved mobility levels, low infection rates and a strong vaccination program are driving consumer confidence and a return of advertising spend in Hong Kong. Trading conditions continued to improve in July with revenues finishing up 56% on the prior comparative period. Should current COVID settings be maintained, forward bookings suggest a continuation of this trend for the remainder of Q3. Thank you for your time, and I'll now open the floor for any questions you may have.

[Operator Instructions] Our first question comes from the line of Tom Beadle from UBS.

I just had 3, please. Just -- firstly, just around the radio ad market, it's obviously still below pre-COVID levels. But can you talk about the advertiser types or categories that are holding back the market, just because of the current round of lockdowns? And what proportion of your advertisers from, say, 18 to 24 months ago aren't advertising simply because their businesses are shut at the moment? And on the flip side, can you also talk about the categories that are spending more? And to what extent do you think they're holding up the market? Just the second question is just on your radio OpEx guidance. There's obviously a revenue growth assumption in there to get to that guidance. But -- so can you talk about just maybe the moving parts in the people and operating costs in the second half, please? And then finally, just a question around Google and Facebook. Southern Cross obviously announced yesterday that they have a provisional agreement with Google. Are you in negotiations with Google or Facebook? And could you provide any color?

Thanks, Tom. I'll take 1 and 3 of that and maybe Andy could cover part 2. The radio ad market is not quite back to '19 levels yet, and that's primarily driven by the SME market, which we called out there in the presentation. That accounts for about 25%. Now that's back maybe 10%, 20% on what it was in '19 levels. We're starting to see a return come through in markets like Brisbane, Adelaide and Perth, which have been less affected. In terms of the overall percentage of business, I'll just stop there. I don't have that to hand. But what I am seeing, though, is a new form of advertiser coming through. All those SMEs, which have shifted business models to become much more digitally focused and online transactionally focused, they're still using radio, because they know that radio drives big conversion for driving people to digital. So my concern that the SME market is not going to return when normality comes back. No, I'm not, because there are new categories of advertisers coming through. There's new business models coming through. And those that have spent in the past know the power of radio and what it does for the business in terms of delivering ROI. In terms of categories, I called out on slide, I think it was Slide 16, just the advertising market. We've given the SMI categories there that are back in growth, driven primarily by retail, government, auto dealers and insurance to some extent. Categories that are not spending would be the likes of, say, automotive brands and who have to do -- generally do large brand building pieces. They're not spending at the moment, they're back a bit. And obviously, the sectors of hospitality and events, festivals, those sort of things are not. Again, we start to see that come back a little bit in March, April of this year, but with current uncertainty and some cancellations, excuse me, of festivals that, they will come back at some stage, but probably not this year. What I am encouraged about, though, from a radio industry perspective is that all radio operators have really started to align together, in terms of promoting the power of radio, which is a new development and something that we're all very positive about. Commercial Radio Australia has just hired a commercial director, and her job is to reinforce the strength of radio, make radio easy to understand, improve metrics that we have in the market, and really drive increased share of advertising into the radio market. I think it's really important to point out that radio listening continues to grow. The effectiveness of radio is still very strong amongst advertisers. People are not listening to less radio, because of new audio opportunities. And we see an opportunity, not just in growing -- regrowing the radio market, but also growing into the digital audio market, which we are starting to target digital revenues, not radio revenues. I'll do #3, and then Andy can do number 2. In terms of Google and Facebook, part of the mandate that CRA are working on for the moment is as an industry. We're going to be working closely together to work with Google and Facebook and we are working closely with CRA to make sure that happens. So we're not engaging individually with them. We're doing it as an industry. Andy?

Thanks, Ciaran. I'll take the costs. So Tom, in response to your question on radio OpEx, so costs in the second half as an absolute compared to the first half will be higher. That's predominantly due to marketing phasing. So the launch of KIIS101, our Melbourne Breakfast Show, which is in the second half, will contribute to higher marketing costs plus the current activity you see on screens for WSFM and KIIS. People costs within the radio business will remain relatively steady into the second half. So that's radio. In respect to digital, costs will increase in the second half as communicated through the trading update. That's going to be covering commercial capability, as we see the opportunity in front of us and original content creation for podcasts. I hope that assists.

But, Tom, I think it's also important just to back up is that we've broken out the radio revenues and P&L and the digital P&L. Our radio margins and business is extremely stable and very, very profitable. We see a big opportunity in the coming years in digital audio growth. I think with the strength of our balance sheet, the strength of our broadcasting radio business, we are really confident of what the future could hold, but it does mean that we have to start investing in capability to build our digital audio, content creation and monetization. So that's really the area of focus of investment for us over the coming 12 to 18 months.

Our next telephone question comes from the line of Entcho Raykovski from Credit Suisse.

My first question is around ARN. Interested in what's happening to average unit rates. The last result, you spoke about rates being down about 10%. Obviously, we're in a different market at the time. Just interested in whether the recovery in the market has benefited like significantly? Or are you perhaps seeing a slightly slower recovery? Maybe if you can answer that, and I've got a couple of others.

Sure. In terms of the rate performance, we're not quite back to '19 levels yet, but we have seen rate improvement come through this year, particularly on stations like Gold and Melbourne, where we're obviously growing an audience base quite substantially and consistently holding it. So our target is to get back to '19 levels. We are in growth. We're not quite back there yet, but I certainly see, subject to the certain uncertainty of lockdowns, which will end, we are very focused on making sure we return to '19 level from an AUR perspective, not quite there yet, but getting close.

The other point to note is -- sorry, Entcho, probably the other point to note is the market was -- radio market was back 25% last year, and our average unit rates, as you say, sort of dropped 10% or just under 10%. So we were able to hold rates pretty well across last year.

Okay. And then your ratings, as you say, if you find out through the presentation, have been very strong. Interested in your thoughts on whether you would have expected to do better against the market given those very strong ratings? I mean are you concerned that you haven't had higher growth? Or is that an opportunity in the future periods?

Not concerned at all and always want more share, but certainly not disappointed with the share that we're getting. I think it's a combination of consistent ratings, but also a consistent commercial strategy to market. But that's really influencing how our share growth over that period of time. You may have a great audience, but that doesn't necessarily always translate into winning share. Because if you're not meeting advertiser requirements, if you're not doing good integration, if you're not hitting the strategy that the clients want, then your audience can be as big as you want, but they still won't advertise. So what we're very pleased about is consistency of ratings and you can go up and down in 1 book or 2 books, we know that, but it's the consistency of ratings and it's also our commercial strategy to market that's actually winning the share for us. I think where we still see opportunity is in Melbourne on KIIS101.1, where we have a new breakfast show launched. We're quite excited about what that can do. And if we can generate the level of growth that we've seen through our introduction of Christian and Gold in Melbourne, then I think there's an opportunity for another share growth. But it has to be combined with a very good commercial strategy, good implementation, good execution and good post campaign reporting.

Okay. And a final one, I guess, linked to that. How are you thinking about any risk of losing talent given those strong ratings? I mean what are the sort of implications for costs into FY '22? Are you pretty -- are you satisfied with the talent you've got having been locked in? Or is there some risk for costs to go higher into next year?

We're very satisfied with talent that we have. You may remember that towards the end of 2019, we locked all our key talent into multiyear contracts, so not expecting much cost increase going into '22 from that perspective, maybe a bit of CPIs, but not concerned about talent leaving and the cost impact has been well recorded. So not concerned there.

Out next telephone question comes from the line of Conor O'Prey from Canaccord.