ARN Media Limited (A1N) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the HT&E 2022 Half Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today to Ciaran Davis, CEO. Please go ahead.

Good morning, everyone, and thank you for joining the call today. I'm joined by our CFO, Andrew Nye. And this morning, we will take you through our financial highlights, our investor proposition, the group financials and operational performance before closing with the outlook and Q&A. It's been a busy and exciting 6 months with the business delivering a very strong financial result for the half. Given the scale, speed and success of the integration program underway, these results are particularly pleasing. Revenue for the half was up 58% to $172 million. EBITDA is up 60% to $49 million, EBIT up to $38 million and NPAT up 61% to $26 million. EPS grew $0.079 per share. And consistent with this nature of our business, really strong cash generated was up 71% to $34 million. As a result, the board has declared a fully franked interim dividend of $0.05 a share. When we acquired our regional business, we were confident HT&E would continue to drive shareholder returns in 2022 and beyond. After 6 months of ownership, this view has strengthened for a number of reasons. Firstly, we are leaders in a very strong, robust, innovative commercial radio and audio market, that continues to play a critical and central role in the lives of our audiences and advertisers. Listenership is at an all-time high, reaching nearly 12 million weekly. We're still the #1 ratings network and have been for 21 surveys in a row despite having to sell 4KQ during the year and continue to produce market-leading performances in key markets like Sydney and Melbourne. Group radio revenues are up 7% with EBITDA up 11% and despite pressure on people and OpEx costs, which we are actively managing, we are forecasting to keep these costs to circa 5% growth for the year, which is very close to the guidance we provided in February. Secondly, I'm really pleased to say that our regional integration program is ahead of schedule and gaining further momentum and margin expansion. Andrew will take you through the details in a moment, but revenues in regional markets are up 11%, with material cut-through to earnings up 21%. Thanks to the efforts of everyone in the business, key milestones in our integration program has been achieved. And we are starting to see revenue synergies of close to $3 million coming through and are confident we will hit the $6 million to $8 million forecast for 2022. Thirdly, we are in a privileged position where our core radio business is being enhanced by complementary new digital audio offerings, expanding our audiences and commercial opportunities. Digital audio is our future with radio at its core, and we are successfully executing our strategy to build an audience and commercial bridge between linear and digital audio. iHeartRadio is our exclusive global platform technology, where we have complete local control, giving us the best of both worlds. We are providing listeners and clients with more targeted and personalized content and ads and are seeing strong growth with digital billings up 40%. We are the leading podcast publisher of successfully implementing a broadcaster podcast strategy. And in April, we launched CADA, a youth-focused digital entertainment brand, which has grown a strong audience base already and is generating a lot of interest with clients. And for our shareholders, our leverage is now below 1x forecast. We continue to generate really strong cash of between $35 million to $45 million in a normal year. We have declared an interim dividend. And today, we are reinstating our buyback to support our view that our stock is undervalued. We have an opportunity to further realize value through our 25% shareholding in Soprano, which is noncore and 1 we would look to divest at the right price. And finally, as a business, our commitment to ESG prioritizes the creation of a more sustainable future for our team, our local communities and the cloud. We've made exceptional progress integrating our regional business, and I'd like to thank all of our staff for their commitment and professionalism over the past 6 months. There is genuine excitement and belief in what we are creating. Our new colleagues are fantastic to work with, great people who deliver something truly unique in media in Australia, a genuinely local product that is a key differentiator in the communities we serve. As you can see from the time line, we sold 4KQ in July for $12 million, just under 12x EBIT multiple and with other key milestones being the integration of our agency sales team announced on August 1. This will bring together our national, metro, regional and digital salespeople into 1 team, and we're looking forward to seeing the benefits of such a structure. One of the critical priorities we had when we took on this business was to ensure and continue to perform as well as it had been prior to being acquired. In addition to strong revenue and EBITDA growth, we've had some market-leading rating results in key markets like Gold Coast, Mackay, Cairns, Bundaberg, Ipswich, Darwin, Launceston, Gympie and Ballarat. It's early days, but good progress has been made. And as the chart on the bottom right indicates the benefits of ownership under ARN are already start to come through. Andrew?

Thanks, Ciaran. Good morning, everyone. We've maintained the same format for our financial results with the usual reconciliations to assist in understanding of exceptional items and lease accounting included in the appendices. The results include a full 6 months of earnings for ARN Regional and where appropriate, pro forma comparative financial information has been provided. On this slide, we show the statutory result for the period where group revenues were up over $63 million or 8% on a pro forma basis, owing to a solid 6 months for ARN Regional. Costs were up 12% on a pro forma basis, impacted by higher variable costs on improved revenues, incremental investment in CADA and podcasting and the timing of marketing investment compared to 2021. Resulting underlying EBITDA for the group grew $18.1 million, up 1% on a pro forma basis. An uplift prior to disposing of our residual investment in Lux Group and a part impairment associated with the sale of 4KQ are included as exceptional items. Underlying NPAT attributable to shareholders grew $10.1 million and earnings per share increased 51% in the period. Looking at the pro forma results for the ARN Group, incorporating both our metro and regional businesses for the 6 months. Radio revenues were up 7% and digital up 6%. Digital billings to customers grew over 40% with cut through to revenue impacted by third-party content costs as we scale the business. Total costs grew 10% on a pro forma basis, impacted by a higher cost of sales in line with revenue growth and increased people and operating costs reflecting our investment in CADA, the part year impact of new digital and commercial roles and the weighting of marketing investment relative to 2021. With tight cost control measures in place to limit current inflationary pressures, we expect full year people and operating cost growth of 5%, excluding digital investments. Presented here are the pro forma results for both the metro and regional radio operations. Total radio revenues were up 7% in the period, with Metro up 5% and regional up 11%. The Metro result demonstrates the level of focus our teams have maintained over the core radio -- metro radio operations whilst managing a complex integration program that is progressing to plan. ARN Regional had a brilliant first 6 months under ARN ownership, delivering total revenues of $54.2 million, up 10% on already strong comparatives. Looking deeper into the regional numbers, local direct revenues, which make up 70% of the business were up 10% year-on-year. Most stations across the regional network grew in the period, a clear demonstration of the quality of the people, content and commercial strategy already in place, underpinned by the momentum created through the integration. For 2022, we set a revenue synergy target of between $6 million to $8 million for the year. To date, we've generated over $2.7 million of incremental revenues and with our commercial agency structure now set, we are increasingly confident of hitting the target. Cost management remains a constant focus. And whilst there is a level of pressure going to current macroeconomic factors, total cost for the period grew 6%, delivering 11% EBITDA growth and a 1 percentage point improvement in the total radio margin to 34%. Digital audio billings to clients grew 41% on a pro forma basis, owing to strong podcasting advertising growth in the second quarter after a slow January and February. The flow-through to revenues, up 6% in the period was impacted by a higher percentage of third-party inventory compared to owned inventory as we continue to scale the business. We've made a number of adjustments to our product offering and supporting ad tech that will see improved utilization of ARN owned inventory going forward and a better conversion to revenue. We are pleased with the progress to date in the development of CADA as a new youth platform and national brand, and reiterate the business case to deliver positive digital earnings contribution within 3 years. Total revenues for Cody Outdoor grew 5% on improving market conditions in Hong Kong with roadside billboard revenues, up 7%. Following the completion of Hong Kong Tramways contract in May, Cody is actively investigating tender opportunities for new contracts as they arise. Importantly, on current revenue levels, the business remains cash flow positive. Briefly on Soprano, a local software business in which HT&E holds a 25% interest. Pro forma revenues grew 28% to $133 million and EBITDA increased 5% to over $30 million. The business continues to invest in R&D and portfolio diversification to drive customer acquisition and retention. The medium to long-term fundamentals of the CPaaS sector remain robust and for a well-capitalized business, such as Soprano, current sector valuations present potential acquisition opportunities. We remain committed to selling our investment in Soprano and retained Macquarie Capital for this purpose. The balance sheet illustrates the post-acquisition capital structure of the group and highlights very manageable debt levels of $78.3 million (sic) [ $78.4 million ] and gearing under 1x EBITDA on an LTM basis. Good tenor and access to undrawn limits remain on the group financing facility. The majority of variances compared to December '21 are due to the acquisition of ARN Regional with a few call outs of the remaining movements. 4KQ assets were classified as held for sale prior to disposal in July. Remaining liabilities on the ATO [ branch matter ] totaled over $35 million was settled in the period, and we've recorded a deferred tax liability on regional radio licenses acquired in line with accounting standards. Operating cash flows totaled $34.4 million, up 71%, reflecting a full 6-month contribution from ARN Regional. The group remains highly cash generative with the ability to generate cash flow before dividends of between $35 million to $45 million in a normal year after incorporating annual CapEx of around $8 million to $10 million. Proceeds of $21 million relating to the disposals of 4KQ and Lux Group received in July will further improve leverage in the second half. Before I pass back to Ciaran, today we've announced a fully franked dividend of $0.05 per share, along with the reinstatement of our on-market buyback to commence following the results. Whilst the provision of franked dividends remains the preferred means of capital management, with our share price trading back over 35% in the year, we strongly believe that HT&E remains undervalued. And at the current share price, it is appropriate to reinstate the buyback. Ciaran?

Thanks, Andrew. Some of you may have read analyst reports suggesting the death of radio, which was a surprise to us as we operate day in, day out in a sector that remains as relevant as ever, while continuing to successfully evolve, grow and embrace the future competing against digital global players. We operate in an exceptionally strong Australian commercial radio market that engages audiences and delivers tangible results for advertisers. Commercial radio listenership reached an all-time high this year, nearly $12 million a week. It's grown every year for the past 10 years. On average, people are listening to over 15 hours of radio a week. And yes, younger audiences may not be listening as long as the parent, but the level of consumption is still very healthy across all ages. Radio and podcasts are the dominant form of audio, accounting for nearly 70% of all listings on audio platforms. And despite all the noise we hear about streaming giants, that's 4.5x more than music streaming. Commercial radio accounts for 3/4 of all listening on audio platforms that have advertising, which, as we know, is becoming more targeted and personalized, just like our global competitors. It's also worth pointing out our industry body, Commercial Radio Australia and what it is doing. It's a rare example of a collegiate approach amongst industry players with the goal of advancing our industry for the good of all. There are some exciting developments underway that can only serve to make radio and audio more relevant and easier to buy and trade with. ARN is leading the way in audio content, distribution and innovation. Our on-air talent continue to deliver rating success. We've been the #1 metropolitan FM network for 3 years and are backing that up with some very strong results in regional markets. ARN continues to lead in key markets like Sydney and Melbourne, and we're the #1 station in Adelaide. In Melbourne, Gold 104.3 is #1 with The Christian O'Connell Show taking out the #1 breakfast position for 17 consecutive surveys. In Sydney, ARN has maintained its dominance in breakfast with KIIS 1065 Kyle & Jackie O and WSFM Jonesy & Amanda finishing #1 and #2 spots, respectively. We are the leading podcast publisher for 27 consecutive rankers and have learned a considerable amount about podcast consumption and monetization. This was the changes to our podcast offering in the coming months that are more profitable and sustainable in key categories. We deliver Australia's most compelling audio offering with strong integration across all platforms backed by a market-leading commercial products that are now being rolled out across our regional network. Our leaders in local positioning is very relevant, 58 stations across all territories, reaching over 7 million a week, over 1,300 highly skilled and talented team members with the best on and off air talent in the country. Live and local content, local news, weather, travel sports are unique to us. And as we saw during the most recent floods in Queensland and New South Wales, provide a vital and life-saving services during emergencies, valued by our listeners and providing an incredible sense of engagement for our advertising partners. We are investing $7 million to $9 million this year, expanding our digital audio network, which is delivering complementary commercial growth opportunities. Although we view the PwC estimates shown on Slide 17 is conservative, they do point to a very resilient and significant radio market that is continuing to grow, reaching over $1.2 billion. PwC are forecasting the live streaming and podcasting audio markets to be worth over $300 million by 2026 with a 40% CAGR. Again, it's worth pointing out that these views are underestimated in our view, particularly podcasting. Notwithstanding that, we are investing in content creation, digital data targeting capabilities and increased sales capability to build a commercial bridge between our linear and digital audiences. Our future is digital with radio broadcasting at its core, distributed increasingly in digital environments, such as DAB+, mobile, desktop and smart speakers. iHeart is our long-term strategic partner that gives us exclusive access to global technology innovation without significant investment, but with complete local control and monetization. Essential to our digital audio growth strategy, we are successfully investing to grow audiences and reach them on all platforms. In June, we had just under 12 million total listening hours to radio and music streaming. Our streaming station catalog is the most extensive in the country and further expanded after the inclusion of our regional stations. In podcasting, we had 23 million podcast downloads in June, a 43% year-on-year growth. These figures had a positive impact on our commercial delivery with a 40% increase in digital billings for the half. In June, across streaming and podcasting, we delivered advertisements to 8 million unique users. Although our digital audience reach is much greater than this, this was the biggest digital audio month we've had to date, and we are learning a lot about the most efficient strategy to accelerate this growth and to do so with greater profitability in H2 and into 2023. And finally, the CADA, our new multi-platform youth brand, which is only 4 months old, but already establishing itself as Australia's Home of Hip Hop and R&B, targeting 18- to 29-year-old, this multichannel approach is aiming to provide us access to revenues beyond traditional media budgets by creating content for young adult, by young adult and distributor across broadcast, podcast, digital, video and social. Audiences have grown from 367,000 prelaunch to 3.3 million weekly connections in June. We've had over 1.2 million views of exclusive video content on CADA's YouTube channel. CADA is the #1 DAB station for 18-24s in Sydney, and our podcast offering is gaining popularity. Pleasingly, new brands to ARN, like Red Bull and Netflix have already signed up. And by the 30 days, we are encouraged by the progress and the commercial discussions we are having. Moving now to the trading update. At ARN, total radio revenues for Q3 are pacing 6% to 8% up on same time last year, following a soft July advertising market. Growth is in both metro and regional markets and weighted more towards Metro. Limited visibility into Q4 is in line with radio industry forecasting over many years. However, briefing activity remains solid. The cost-effective nature of radio during inflationary times will deliver more favorable CPMs compared to other mediums. And radio's ease of trading and ability to transact at much shorter lead times will be advantageous in H2. Full year people and operating cost growth is limited to 5%, digital audio investment will be $1 million less than previously guided, now in the $7 million to $8 million range. HT&E is a high cash-generating business with a strong balance sheet. Leverage is less than 1x EBITDA and will be further strengthened through recent asset disposals. At Cody Outdoor, the improving market conditions experienced in the first half have continued into Q3, with adjusted revenues for the quarter pacing 15% up on same time last year. The business is expected to be cash flow positive for the year subject to market conditions holding. Thank you, and we'll now open up for questions.

[Operator Instructions] I show our first question comes from the line of Entcho Raykovski from Credit Suisse.

I've got a few questions, hopefully, pretty straightforward. Firstly, are you able to talk to what you are seeing in the market and what's driven the week of July, whether it's the Olympics comp just driving the market lower overall? And then how are you seeing any recovery in August and September?

Entcho, the Olympics would have nothing to do with us, to be honest, and never have. I think what we saw was there was -- June was a very good month for the end of financial year saw a lot of categories of spending. The election probably had a little bit of impact as well in terms of post the election, there was a bit of a breather. We do tend to find that when we have a very strong July -- sorry, June that July pulls back a bit. I think that coupled with the noise we were seeing in those few weeks around inflation, interest rates and all the other macro events probably had an impact. But it was definitely only short term because we're seeing strong growth into August and September.

Okay. Got it. And then on revenue synergies from the Grant Broadcasters transaction. Just for clarity, have you delivered $2.7 million in the first half? Or is that something which has been identified to date?

No, it's been delivered, and we're confident of delivering that 6% to 8% for the year.

Okay. Got it. And just when it comes to that 6% to 8% for the year, obviously, again, looking at your outlook comments, are you concerned that the metro growth is higher than regional into the second half because I would have thought, obviously, with the synergies, that should be driving higher regional growth? And is there anything specific which is driving a better metro market?

Yes. No, the revenue synergies are across both metro and regional, Entcho. We're obviously talking to clients who haven't advertised regionally, but also we're talking to clients regionally who haven't advertised metro wise. So there's growth across both in that revenue synergy number.

And Entcho, on the Metro number, Q3 '21, there was a lockdown in metro. So the comparatives were softer compared to our regional markets, which were not as affected.

Okay. Great. Very clear. And then just on the digital side, how do you see a more normal conversion of billings through to revenue? I mean, obviously, you've identified very strong billings growth, but not much of that flowing through to revenue growth. And you've said you expect that to rectify, but do you expect that to improve in the second half? Or is it longer dated?

It will be longer dated. Look, we do see a sort of year-on-year revenue growth in the second half have started 15% to 20%, if that assists.

Yes, that's great. And sorry, so if we take that into account, presumably, your expectations for billings for the full year to translate to revenue in the high teens [ billing ] obviously no longer the case, but we can sort of work out the 15% to 20% growth and what that implies?

Yes.

And I show our next question comes from the line of Eric Choi from Barrenjoey.

I just had a few as well, if that's all right. The first one, I just wanted to check if we're growing -- I know you're not saying Metro radio revenues in isolation are growing at sort of 6% to 8%. I know that inclusive of regional. But if I sort of apply that 6% to 8% to Metro, it probably implies -- are we still around 10% below like pre-COVID 2019 levels, and therefore you'd probably expect that percentage growth rate to step down in the fourth quarter of this calendar year. That's the first one.

So maybe the best way to answer that is similar to the last -- to the response to Entcho. So Q3 '21 in metro markets was lower. Q4 '21 was a better period for radio. So I think you're on it.

Excellent. Second one, just bit of my new ship, but can you just clarify what the 4KQ and Lux revenue and EBITDA contributions to come out in the second half will be?

The 4KQ EBITDA contribution is full year is -- sorry, the second half is $1 million. And Lux had no contribution. Lux with an investment.

Excellent. And then just the last one, just more high level. I guess people are sort of out and about now, and we're tracking 6% to 8% up on PC, but still kind of 10% below pre-COVID just which, as you said, implies CPMs at a big discount, given other mediums of sort of been increasing their yields. So just interested in your thoughts around what's driving that bigger CPM differential versus history?

I won't agree with the CPM comment, Eric. I think from a trading perspective, our CPM, we're very pleased with the growth that we've seen there. As we've talked about before, the agency market has recovered exceptionally well and is close to 2019 levels. We're seeing increased confidence in the SME market come through. It still is now back to 2019 levels. But as people are and about more, as festival events, all that key category for radio advertising comes back stronger, it will obviously have an impact -- positive impact on total radio revenue, but this is not a CPM game that this is an advertiser client category game.

[Operator Instructions] And I show our next question comes from the line of Brian Han from Morningstar.

I'm not sure which analysts were occurring the death of radio, but it certainly wasn't us. But I do have a question on the industry, and that is -- do you think the industry is dependence on breakfast and drive time what is getting perhaps a little too high?

No, I don't. And it wasn't you, Brian, who predicted that death of radio. I think it's a very important slot, both drive and breakfast. And that's why all radio offers put a lot of effort into it. But the commercialization of radio is a reach and frequency game. It's not just about buying spots in breakfast or drive. It's about buying [indiscernible] station. Our listenership across mornings, afternoons are still very, very healthy, but it obviously is peak time, breakfast and drive. I think what's really important to note as well is that the slacker times for radio listing like evening time, weekend, that's actually when people are listening to podcasts. So when we talk about the complementary nature of digital audio podcasting, it actually is in realistic terms. People are listening to the radio at the traditional times they have done and podcasting is later on in the evening and at weekends. But in terms of too much emphasis on breakfast and drive no talent wise, we do tend to because people are doing other things in the morning time or in the afternoon, there at work or doing other things. So it doesn't tend to be as important to have high personality profiles on during that time.

Ciaran, just wire on podcasting. Why do you think PwC's forecast of that podcast market in [ 2016 ] is conservative? And even if it is conservative, is it possible that most of that additional podcast growth will be enjoyed by the overseas place?

In terms of the conservative nature, it's more built around the fact of what we see and what we estimate is in the market already from a podcasting valuation. And we think the acceleration to $150 million, $160 million will be faster than the time line that they've indicated. But that's a personal and probably a view that -- that we have just from what we see in the market at the moment. Do I think that it will be taken on by the larger players? Obviously, a portion of it will. But I think what radio in Australia is doing very successfully is actually leaning in very, very quickly into the podcast market. We're all developing strategies to monetize it. We, as an industry, in Commercial Radio Australia, developed a podcast ranker. We all sign up to it to deliver our download numbers so that the commercial market has visibility on the number of demos that have, the engagement that it has, the usage of how it's growing. We're all investing in our ability to drive personalized ads. We're all investing in our ability to drive programmatic trading platforms. And I'd like to think that there's more advancements in that as an industry coming down the road. But I also think as well that we're -- from our perspective at ARN, we've worked really hard on what we call our broadcast to podcast strategy. We've identified across Australia new talent in the audio market that is working very well on radio and on podcasting. And that strategy is yielding good commercial results because we're able to cross-promote both content and advertising campaigns in both. So from the perspective of global giants, taking podcasting revenue, the radio industry in Australia is probably the most advanced, I think, in the world that I've seen in terms of embracing it and building new commercial opportunities as a result of it.

And I show our next question comes from the line of Cameron Halkett from Wilsons Advisory.

First one just around capital management. So dividend of $0.05 per share, is that something we can expect going forward in the second half, given steady state conditions? And how are you going to, I suppose, directors to think about the mix of disease, debt repayment and our buyback as well.

Cameron, how are you? And I think in terms of dividend payments, the board remained very committed to the payout ratio that we have with [ 60% to 80% ]. Obviously, it's subject to market conditions, but I think that, that form of capital management is something that the board is very committed to. It is the most efficient form of capital management that we have. But we do look at the share price. We see how undervalued it is. We think a buyback with the benefit of the additional funds we've got in through Luxury Escapes and through 4KQ, that now is the right time to look at it. In terms of the quantum, not quite sure. I think if you look at the volumes that we have in our stock, it's quite tight. There isn't much volume on a daily basis, but we will monitor it daily and see what we can do.

Yes, understood. And then just on Soprano, if I can. So first, just around the organic expansion into the U.S. market. Do you think that increases the likelihood of the sale of your stake just given the open door to some financial [ conflicts ] in that market?

I think what is interesting in Soprano is the continued improving performance of the business. We've seen that the fiscal management that Soprano has, it's focused on EBITDA growth, P&L. Good investment means that it is continuing to grow from a profitability perspective, which is not necessarily assigned in the rest of the market. From our perspective, with non-core. We've obviously been talking about exiting for a while. We have a price. And I think with the valuations that are in the market at the moment, we're going to hold the valuation that we would like to achieve on it. We're not in a rush taking out. The business still performed well. It's got a very good 3-year plan that it's implementing. Obviously, we're pleased that maybe the transaction didn't happen last year. But from our perspective, the business is going well. I'm not just expanding in the U.S. market. It's looking to expand in other international markets as well, and still doing well in Australia.

And I show our next question comes from the line of Ray David from Schroders.