ARN Media Limited (A1N) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the ARN Media HY '23 results. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Ciaran Davis, Chief Executive Officer and Managing Director. Please go ahead.

Good morning, everyone, and thanks for joining the call today. Our agenda will follow the usual format, executive summary, followed by financial performance, operational performance, and trading update. In a tough trading environment, the business is doing well, implementing on strategic initiatives, strengthening our position in the radio and digital audio market. And with the commitment to add value to our audiences, advertisers and investors we are hitting milestones that set us up for continued success. Our investment in talent to increase audiences across all audio formats is yielding positive results, growing audiences in radio, up 4% to 6.3 million listeners and podcasting of 23%. We probably held the #1 position at the broadcast network and #1 position broadcast network in 4 out of 5 surveys this year solidifying our reputation as the leading industry player. Additionally, we achieved the distinction of being the #1 podcast publisher for an impressive 39 consecutive periods, showcasing our ability to source and produce high-quality content. Our iHeartRadio platform has experienced a strong 12% growth in its registered user base, reaching 2.5 million users. New changes to audience measurement will see the value of the streaming audience increase over the coming years. Our regional acquisition in January '22 is delivering to its targets despite the hampering macro market conditions. Our live and local content strategy is a key differentiator, setting us apart in the industry. This approach has not only engaged our audience, but also resonates with local advertisers with the local regional radio revenues performing well despite very strong comparatives in 2022. We're making significant strides in our national revenue synergies target. In the first half of '23, we delivered $2 million of the $5 million synergies goal we have for this year. This follows the $7 million growth we delivered in '22, and comes against the backdrop of significantly reduced government spending in the first half. While radio remains on our core, the digital audio market continues to grow with [ IIB ] figures pointing to a market value of $52 million for the March quarter, a 13% year-on-year growth. Earlier in the year, we undertook a massive sales network to accelerate our digital sales capability, justifying the product lineup and implementing a key targeted client growth strategy. These efforts have led to a 37% increase in revenue, and we have confidence of continued growth for the rest of the year and into the next. As a result, our low CapEx model is still on track to hit cash flow breakeven run rate by the end of '24. Good cost management over the years have always delivered for shareholders, producing strong EBITDA margins. And in a challenging market, we have worked hard to keep people at OpEx costs to near flat. This has delivered above 28% margin in Radio operations despite '23 being a year of integration with investments in key projects to deliver future efficiencies. I'm also really pleased with the progress we are making integrating with the regional network with all projects nearing completion in the coming weeks. These improvements will not only enhance our internal operations, but also see us much easier to do business with, which should positively impact future revenue growth. In March, we received the proceeds from Soprano finalizing this noncore divestment. We made a long-term strategic investment of 14.8% in SCA, a business we know well in a sector we believe is undervalued, positioning ourselves for future value creation. We continue to implement a buyback, and we'll continue to do so in the second half. And finally, the Board has declared a fully franked interim dividend of $0.035 per share, translating to an approximate 10% yield and underscoring our dedication to providing strong returns even in challenging times. Because there's no doubt that the market has been undeniably tougher in the first half with many in the advertising industry facing challenging headwinds. Total ARN Media revenues were back 2% to $166 million on a pro forma basis, driven by significant reduction in government spending, which was back 58%. April and May were particularly tough, but we have seen improving monthly performance instead. Despite a strong focus on costs and cost out, the revenue shortfall has reduced EBITDA to $36 million and EBIT to $25.3 million, EPS was $0.048 per share. In terms of our financial structure, we believe we are well equipped to manage through the current cycle. Our net debt stands at $52 million, less than 1x. Operating cash conversion was 86%, and in this context, the $0.035 interim dividend of a payout ratio of 73%, reflecting our steadfast commitment to shareholders even in challenging times. Andrew?

Thanks, Ciaran. Good morning, everyone. The financial summary slides presented in a consistent manner to what has been presented historically with additional information included in the appendices. Here, we show statutory reported results for the period with profit up 97% are under the disposal of the group's investment in Soprano. In the pro forma column, we've normalized the impacts of Soprano profit and a Hong Kong contract not retained from the 2022 financials. Group revenues were back $6.1 million or 2% on a pro forma basis with the current macroeconomic factors impacting consumer confidence and advertiser spend. The range of cost measures implemented at the end of Q1 restricted total cost growth to 3% despite ongoing inflationary pressures. Considering these impacts, underlying EBITDA fell 19% to $35.5 million and underlying NPAT attributable to shareholders was back 31%. Here, we set out the pro forma results for the ARN Group, bringing out metro, regional and digital, with total revenues back 4%. We lost a small amount of metro share earlier in the year, but over the past 3 months, we've written revenues at or above market and are confident we can keep the momentum going through the remainder of 2023. On strong comparatives and impacted by reduced government spend, retail revenues finished at 4% and National Agency was most impacted, while local revenues, which comprised around 70% of our regional business, finished close to parity with 2022. Excluding the impact of government spend in the current and comparative periods, radio revenues would have finished down 2.5%. We wrote a further $2 million of incremental national regional revenues in the half and remain on track to deliver a further $5 million of regional synergies in 2023 in addition to the $7 million delivered in 2022. On the cost front, revenue-related cost growth of 12% reflects further investment in digital content. And remaining people and operating costs were managed to plus 1% on a net basis. Whilst we manage ARN as an integrated network, on this slide, we set out the radio and digital earnings, which demonstrate the ongoing strength of the radio business. Despite ongoing inflationary pressures, we remain very focused on costs and a range of measures actioned in Q1 enabled us to limit total radio cost growth to plus 2% year-on-year. Digital revenues were 37% in the period to $8.8 million, an in-depth review of product bundling, pricing, market collateral, sales team training capacity delivered improved growth in Q2 following a slow start. Podcast revenues comprising around 50% of total revenues, delivered good growth, while streaming remains an area of focus. Total digital costs grew 12% or $1.5 million in the period, reflecting further investment in marquee third-party digital content needed to build out the select. The resulting EBITDA loss for the period lessened by 15% to $5.2 million, and we continue to target a cash flow breakeven run rate by the end of '24. On a like contract basis, Cody Outdoor performed well in the period with revenues and earnings of 30% and 51%, respectively. Through a competitive tender process, the Western Harbour Tunnel contract, which made up around half of Cody's revenues was not retained. Whilst the disappointing outcome for the business, with over 20 years' experience in operating this contract, we understand it well and we're not willing to renew on unprofitable terms. We are focused on minimizing cash flow requirements as a strategic review of options for Cody has already undertaken. Operating cash flows reduced by 31% on lower EBITDA in the period. However, good cash flow conversion was maintained. The primary proceeds were partly utilized upon the SCA share acquisition, with the remainder being used to pay down debt in the period. Annual recurring CapEx requirements remain unchanged between $8 million to $10 million as we continue to work through a structured refurbishment program of certain regional offices in the coming years. After more than 20 years headquartered Macquarie Park, we've signed a long-term lease in North Sydney and will relocate in the first quarter of 2024. Given the capital outlay and increase to our annual rent profile, significant consideration has been put into this decision. In addition to the current offer split out, being end-of-line and no longer fit for purpose, the move -- we'll stay closer to key agencies and clients and for our people, provide significantly improved amenities and access to transport. We've included the key financial impacts to assist with modeling. The balance sheet highlights manageable debt levels and 0.8x leverage. Good tenure and access to undrawn limits from [indiscernible] facility. Today, we announced a fully franked interim dividend of $0.035 per share, reflecting a 10% effective yield and a payout ratio of 73%. Finally, we confirm the resumption of our on-market buyback to resume. We continue to believe the company is undervalued and the current valuation, the buyback is accretive and is in the best interest of shareholders. Ciaran?

Thanks, Andrew. Across all formats, audio continues to strengthen as the media. There are more people listing more often across all formats. Metro commercial radio audiences continued to grow with an additional 300,000 people listening in '23. For ARN, this means 4% growth for our total audience. Some of this growth is coming from increased listening opportunities supported by digital streaming. Online streaming of radio was up 41%, 3 million hours a week in total listening hours since COVID. Further, we are seeing continued growth in Australian podcast consumption with 43% of all people listening to podcasts monthly. ARN about strictly year-on-year market growth rate of 7% to grow listenership by 23%. And today, nearly 60% of podcast listeners listen to iHeart podcast. Importantly, though, we don't see this audience uplift coming at the expense of radio revenue. What we are seeing is that digital audio monetization is complementary and incremental. Many of the clients believe we are responding to now have digital audio as standard on top of radio campaigns. While the growth of digital has also seen us unlock completely new revenue with digital-only agencies. The volume of digital brings that we received has grown about 67% year-on-year. After our most successful ratings year ever in 2022, we have continued to deliver outstanding results, achieving our highest-ever network cumu, reaching 6.3 million listeners in metro markets. Talent is our key differentiator because what's between talent is more important than the sounds themselves. Whether in metro or regional markets, engage audiences with strong talent with C Radio continue to maintain strong relevance despite the efforts of global platform. We've experienced 10% growth in the key commercial demographic of 25, 54-year-old and continued growth on key shows in Australia's 2 biggest markets, Sydney and Melbourne. KIIS 1065 was ranked Sydney's #1 overall station twice and remains Sydney's #1 FM station, FM breakfast, FM drive. Kyle & Jackie O continues to go from strength to strength, growing their audience to 921,000 in surveys of this year. They consistently deliver at least 230,000 more listeners than any other breakfast show nationwide. KIIS Network drive show, Will & Woody has had a breakthrough year, reaching over 4 million people each week and growing the critical 25-54 demographic by 16%. Gold 104.3 remains Melbourne's #1 FM station, FM Breakfast, FM Morning, FM Afternoons and FM Drive. While it's an iconic station, these results have largely been driven by the bold move to import Christian O'Connell into the Melbourne market. It's a structured landscape and gave the station the momentum it needed to both and fill gap between #1 and the rest. Christian celebrates his 1,000 show today is doing a terrific job and has been the other 1 breakfast show in the market for 25 surveys straight. In retail markets, we are fiercely live and local and unlike any other media operator. 79% of the population listened to radio and 74% of people believe that radio contributes to a sense of community by broadcasting local news community enhancement. We take our position in the community incredibly seriously and are firmly committed to our unique live and local content strategy, delivering 147 localized shows across the network. This is more than any other media owner. Our approach has resulted in ARN taking the #1 station ranking in 11 markets with 4 secured this year, Bundaberg, Gold Coast, Hobart and Bendigo. The regional integration program is nearing completion, which will deliver improved ease of trading with ARN. Specifically, moving to 1 traffic finance at the invoice process will result in our clients having a much more seamless engagement with us. These projects are due for completion by the end of Q3. These valuable regional holdings is converting to revenue opportunities as advertisers look to connect with engaged communities. We know that advertisers are increasingly paying attention to the importance of the regional market with agency audio spend growing from 9% to 15% share of total media spend over the past 10 years. More recently, in regions, Radio continues to outpace other media channels, including digital when it comes to revenue growth. Our live and local content strategy, despite the current economic environment has helped ARN deliver a robust regional performance. We wrote over $36.5 million in local regional revenues slightly back on last year with very strong comparatives in '22. We are gaining share of national revenue in the top 8 markets regionally and have delivered $2 million of the $5 million synergies nationally that we targeted this year. This solid metro and regional radio performance is underpinned by continued growth in key digital audience metrics. We've grown our registered user base, music stream starts and podcast downloads as well as maintaining our #1 podcast publisher position, 39x straighter. Both in terms of audience take-up and advertising investments, digital audio is the fastest-growing category within our markets. And for this reason, our global partnership with iHeartRadio is of critical importance. It allows us to maintain a continuous product innovation road map, completely free of capital expenditure. In the second half of '23, we will focus on delivering 2 key initiatives. The first, we will launch iHeart Playlist, where users will be able to make their own playlists. This is a key acquisition and retention driver for iHeart audiences, elevating the personalization capabilities of the platform and our ability to capture valuable first-party data that can be used by our commercial partners for audience targeting. Today, we also announced a multiyear agreement with Ted conferences to represent their network by our sales team. The content side will bolster our existing network, having a further 1.8 million downloads per month. And as we start to see this sustained revenue growth model, our low CapEx model is on track to hit cash flow breakeven rate by the end of '24. Before moving to the trading update, I think it's important to reiterate the strength of our operational and financial position as we move through this tough market. We are growing audiences across all audio platforms, including our core and plausible business of radio. We are seeing incremental revenue opportunities in digital audio. Our unique localized content strategy is a key differentiator, and we are seeing good regional revenue performance, growing commercial share in key markets and delivering synergy targets despite the headwinds. Local regional revenues are holding up on strong comparatives. Our balance sheet is well equipped to manage through the current cycle. Net debt of 0.8x, 86% cash conversion, 73% dividend payout ratio with the buyback continuing. And finally, in a short market, we are seeing an improved trading performance for Q3. Looking closely at the trading update, Q3 radio revenues are pacing in line with prior comparative period following above market performance in July. Briefing activities suggest a similar trajectory into the final quarter. H2 digital audio revenues are pacing to plus 25% year-on-year. Total ARN people and operating costs in challenging market conditions remain on track to finish near flat year-on-year, in line with May guidance. Thank you, and I'll now open up for questions.

[Operator Instructions] And our first question comes from the line of Darren Leung from Macquarie.

Just the first one from me, 2 questions in total. First one for me, I just wanted to clarify on that trading comment. So the third quarter ARN revenues pacing in line with the PCP, is this a dollar million comment? Or is this a percentage growth comment, maybe the same question for the second sentence as well?

Sorry, the absolute dollar or percentage. Is that your question?

On your trading update on Slide 21?

Yes. So the third quarter at the moment is tightening percentage-wise in line with the same period last year.

Okay. So that sounds like it's pretty strong, particularly versus your peers who were calling out a softer -- a softer first September quarter and a better December quarter. Is that largely attributed to market share?

Probably too early to hold up on an at this stage. But certainly, we have the both market performance for July. I don't know that the market performance, obviously, for August and September yet, but certainly, the pacing that we're seeing would suggest that we'll be flat for the quarter near flat for the quarter.

Got it. And then the second question that I had was just any logical color you can provide around the stake in one of your major peers is the 15% back in some gross?

The logic, obviously, as we explained, when we [indiscernible] we obviously have a firm believer in the sector, and we believe it is undervalued. We know the business well. It's a good business. And I think it's a strong statement from us that there's future value creation for shareholders as audio comes through this tough cycle. It's a long-term investment to strategic investment, and we believe that was to say that there's value creation ratio shareholders in the medium term.

Got it. I might sneak one more in. Any comments you can provide around managing key talent risks in your portfolio, please?

Well, I think key challenge obviously is a key difference here for us. And over the years, we have obviously invested in the best talent. And I think there's been a bit of noise about contracts in the papers in the last few months, but we don't see contract negotiations as an on of exercise. We're always talking to our talent. We're always looking to see how we can work closer together, how we can support each of them more and how we can maximize the mutual beneficial relationship. Key contracts aren't up until the end of '24, but obviously, we will talk to talent every day, and we'll update the market at the appropriate time.

That makes sense. Thank you.

[Operator Instructions] And I'm not showing any further questions from the phone lines at this time. I'd like to hand the program back to Ciaran Davis for any further remarks.

Thank you, everybody, for joining the call. We look forward to seeing you all in at various stages over the next few days. Thanks a lot.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.