ARN Media Limited (A1N) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the ARN Media Fiscal Year 2023 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 host today, Ciaran Davis, CEO and Managing Director. Please go ahead.

Welcome to ARN Media's results. Good morning. Thank you for joining today's call. My name is Ciaran Davis. Joining me is our CFO, Andrew Nye. We seem to have a lot of people on the call, so we'll get started with our agenda covering the financial and operating highlights for the year. Andrew will go through the financial performance, after which we will look at our investor proposition and provide an update on the proposed transaction we put to SCA on the 18th of October 2023 before closing with the trading outlook and Q&A. Against the backdrop of advertising markets facing ongoing macro challenges, total ARN Media revenues fell 1% to $334 million. Despite an improving second half where our revenues outperformed the market and costs coming in, in line with guidance, EBITDA was back 13% to $72 million and NPAT back 22% to $29.5 million. Our net debt is currently at $75 million, although this is slightly elevated due to the timing of some payments, particularly in relation to our move to the North Sydney office, and we expect this to moderate to 1x in 2024. Despite the challenges, the cash-generative nature of our business means a fully franked dividend of $0.036 per share has been declared for the half, bringing total dividends for the year to $0.071, a 75% payout. Our focus on building an integration business, leveraging the strength of our metro, regional and digital audio assets, [ solos ] performed very well in key audience metrics. We continue to be the #1 metro radio network, growing broadcast radio audiences by 4% to over 6 million. Key to this is the success of our Breakfast shows, which dominate and grew 8% to over 3 million. We now reach nearly 2 million people in the regional markets. Our iHeart registrations grew 10% to 2.6 million, which helped grow our streaming hours also by 10%. And we remain the #1 podcast publisher with 6.8 million listeners, plus 27% growth for the year. When faced with challenging advertising conditions, it is worth taking it up at the radio market and examining the underlying factors driving the results. The table on the right shows that the top 5 radio spenders who account for about 43% of radio revenue, according to SMI, indicates that 3 of the 5 categories experienced growth in 2023. Government and political spend was down 40% or $30 million and was the ultimate reason for ARN's decline in radio revenues. The drop for us was approximately $7 million. And not for this, our revenue would have been close to parity for 2022. So radio still remains a very important part of the marketing mix. And as a medium, audio is not structurally challenged. Radio's role is very well understood by agencies and clients in the delivery of reach and frequency, ground building, and most importantly, campaign effectiveness, and the share of total advertising remains consistent at 7% to 8%. As the quote on Slide 4 says, it drives a disproportionately large impact for a relatively modest investment, important messaging in this current advertising cycle. Despite the economic challenges, our business continues to experience audience success as we grew across our radio, digital streaming and podcasting, creating great content from world-class talent and distributing this content everywhere audience [ reach us ]. We recorded our best ratings results and our highest ever cumulative audience. ARN continues to lead in the key metropolitan markets with #1 FM stations in Sydney and Melbourne. In Melbourne, Gold 104.3 is #1 FM for 2023 in breakfast, morning, afternoon and drive, led by the Christian O'Connell show who has been #1 FM for almost every survey since 2020. Podcast business has now reached mass appeal, 43% of the population now listen to a podcast, and our highest annual audience achieved to date. Listeners continue to demonstrate an appetite to stream and listen to live radio on digital platforms, and we saw an 11% increase to stream over 115 million hours of content. As Australia's leading broadcast and on-demand audio company, we now connect with over 8.4 million people each week across every state and territory in Australia. ARN also benefits from our unique long-term partnership with iHeart Media to license their digital audio platform in Australia. This low CapEx partnership model gives us access to technology stack without the sizable build, maintenance and product road map development costs. It also gives us unrivaled slate of premium podcast content, international radio stations and an exhaustive library of curated playlists, plus cutting-edge commercialization, targeting and AI technology. Extending our product offering, growing our audience on the iHeart brand, together with the expansion of our commercial team, would allow for increased depth of content and engagement across the market, to work with sectors of the app market we currently don't engage with and expand revenue opportunities. [indiscernible] some investors ask us why we invest in digital audio and when will it be profitable. Well, as we have seen, overall listening is growing and this digital engagement with our talented brands. But at this point, although we have seen accelerated advertising growth for the past 2 years, the audience growth is outpacing advertising. Only about 45% of agencies use digital audio regularly and the gap between agency consumption of 74% and the commercial dollars at 1% is wide and an area we are focusing on. The tipping point is when we move out of the radio sector of the market and tap into the digital sector, where, 2 years ago, we had no relationship with that segment of the market. When you consider that the top 500 spenders on social, for instance, 170 of them spend 0 on radio yet still spend $500 million. The opportunity is to build a business that can play in this space. It will take greater scale of audience, enhanced digital sales and transaction capability, a dedicated sales team and we are looking at our options in this space. Over the past 12 to 18 months, we have invested a lot of time and energy to setting our commercial teams up with the right structure, training, product suite to deliver comprehensive commercial solutions for clients. In particular, the ability of our sales team to provide the right solution to the right clients with the right commercial response is something we are focused on. On top of how our sales teams are regarded in market, we are pleased that our investment in sales capability resulted in outperformance in H2, as illustrated in the chart at the bottom of Slide 6, across metro, regional and digital. We are gaining share in all 3 areas, and that trend has continued into 2024. ARN is a major force in regional media with 47 regional stations across Australia, serving as key pillars of the communities they broadcast in. Two years after acquiring the regional radio network, we have in place an experienced team to deliver integration projects. And I am pleased that this acquisition is now fully complete and integrated with singular inventory, revenue and finance systems. In 2023, we prioritized strengthening the critically important connection to community through investing in local teams, local content and improving infrastructure. Local revenues, which account for about 70% of overall regional revenues, continued to perform exceptionally well, and despite market conditions, has increased revenue by $4 million since we acquired the business, highlighting the resilience of regional markets. Our goal to deliver revenue synergies of up to $20 million in a year within 3 years of acquisition has been impacted by reduced national agency budgets and considerably lower government spend following the federal election in 2022. As the chart illustrates, excluding the impact of reduced government spend, we have delivered approximately $8 million annual incremental revenues after 2 years. Yes, this has been offset by $4 million reduction in government spending. With the share gains we are seeing and the feedback we are getting from clients gives us confidence to deliver further incremental revenue in 2024 with the focus being on driving the national agency share. One of the key priorities for the year was the retention of our top-rating Breakfast shows in Sydney and Melbourne on extended long-term contracts, which we announced in November. The Kyle & Jackie O and Christian O'Connell shows have enjoyed unparalleled success for many years and both have proven ability as world-class broadcasters to build audiences. These extensions reflect our ongoing strategy to invest in and retain the best on-air talent across our network and are designed to create full alignment with ARN Media with the unique compensation package that rewards ratings and commercial success. We believe these contracts set the foundation for the next chapter in ARN Media's evolution as an audio business, aligning the objectives of our key talents with that of the company and creating a platform for improved shareholder returns over the medium term. All the details are on Slide 5, which I won't go through now, but I just want to highlight the key ones. Kyle & Jackie O were broadcast in Melbourne on KIIS 101.1 in H1 2024. A total of $7 million worth of shares in ARN Media has been issued to Kyle Sandlands, Jackie Henderson and Christian O'Connell and will vest at the end of the contract term. Importantly, the net total increase is limited to approximately $2 million to $3 million per annum, and these fees are all subject to CPI or any further fixed increases over the term of the contracts. We have budgeted for an additional marketing investment of around $3 million to $4 million in 2024 to launch the Kyle & Jackie O show in Melbourne, which Andrew will talk to later in the presentation. We are fortunate to have Australia's best talent on and off air at ARN, and we believe these re-signings strengthens our ability to engage audience and derisks the business from future broadcast for many years. We very much look forward to an Kyle & Jackie O commencing their broadcast in Melbourne. I feel the time is right now for a number of reasons. Melbourne at $220 million is a more valuable radio amortizing market in Sydney and, combined, the 2 of them represent 62% of the metro radio market. Historically, KIIS 101.1 hasn't performed as well as KIIS 106.5 in Sydney from an audience perspective, with Sydney having more than double its audience and the Breakfast show ranking of 1 versus 6. This naturally impacts commercial share. And as the graph on the bottom right shows commercial share of [ followed ] audience with our modeling demonstrating a potential share -- a 10 share point opportunity with audience and writing improvement. A lot of preparation is already going on within the show, we've commenced marketing and on-air promotion, and we are confident of the success based on some of the proof points we already have. For instance, the success of the syndicated Kyle & Jackie O show in Melbourne, the fact that the Kyle & Jackie O broadcast is the #1 catch-up podcast in the country with over 2 million downloads a month, of which over 10% come from Melbourne. And finally, the incentives for Kyle & Jackie O to succeed commercially provides further focus for everyone. Andrew?

Thanks, Ciaran. Good morning, everyone. You'll notice the financial summary slide is presented in a consistent manner with the half year results and additional information in the appendices. Here, we show the statutory reported results for the period with a loss of $9.8 million owing to a noncash impairment of ARN intangible assets, partly offset by a gain on disposal of the group's investment in Soprano. Impact on Soprano disposal and exit contracts for Cody Outdoor has been normalized to allow comparability in the far right column. Group advertising revenues were about $10.6 million or 1% pro forma, with second half trading slightly improved on the first. The result was obviously impacted by a range of well-understood macro factors. Costs were up $4.1 million or a 2% pro forma, and we'll cover it in more detail later. Impacting the set of result is a $72.6 million noncash impairment charge on historical or and intangible assets, predominantly radio licenses. As an integrated group, we assess the recoverability of intangible assets relative to the entire cash flow of the entire ARN business, not as stand-alone metro or regional operations. The charge is a direct consequence of the trading environment and reflects current depressed trading multiples of ARN and our peer companies. We declared a final fully franked dividend of $0.036 per share, bringing the total 2023 dividend to $0.071 per share, equating to a yield post-Soprano and benefit of over 10%. Here, we set our performance for the ARN Group, breaking out metro, regional and digital, with total revenues back 2%. Despite a soft market performance across all sorts of revenue improved in the second half, metro revenues finished back 5%, marginally ahead of markets. National regional revenues to account for approximately 30% of regional revenues or about 6%, materially impacted by government spend local region revenues, the remaining 70% were up 1% on already strong comparatives. Excluding changes in government spend, metro revenues were back 3% and regional was flat. On the cost front, revenue-related cost growth reflects investment in premium digital content, whilst combined with people and operating costs were managed to flat year-on-year, in line with guidance provided in the first half. Digital audio revenues grew 36% to $19.8 million and EBITDA losses narrowed in the period. A series of actions taken following a comprehensive review of our digital audio offering completed in the first quarter of last year has delivered consistent revenue growth since May '23, and this trajectory is continuing in the first quarter of 2024. Total digital costs grew 7% in the period, reflecting investment in premium content, offset by lower operating costs, specifically marketing, in line with our overall cost guidance. Digital losses for the second half narrowed by 31% to $3.6 million, and we are now very confident of achieving a breakeven run rate, both EBITDA and cash flow in early Q4 of this year or possibly sooner. The low CapEx nature of digital business model means that we will be cash flow breakeven when we are EBITDA breakeven, an important distinguishing factor under our long-term partnership with iHeart Media. In mid-'23, we commenced an internal review of the ARN operating model, and we are now well progressed in the [ expectation ] phase of program to simplify and standardize radio operations. The objectives being to maximize operating margins through the current economic cycle and to enable continued investment in line with our strategy. Under the program, annualized permanent cost savings of $10 million or 5.5% of the addressable cost base have been identified, with $6.5 million P&L impact in '24, the remainder in '25. In some detail, we've included a bridge of targeted total people and operating costs for FY '24, incorporating the selective reinvestment of certain costs saved in 2023, one-off marketing costs for launch of the new Melbourne Breakfast show, a level of CPI growth and the expected current year savings from the cost out front. In total, we are expecting year-on-year people and operating costs to increase by circa 2% to 4%. As has been the case in the recent past, should trade conditions deteriorate, we'll move early to manage available cost levers. Following a period of contract rationalization and business contraction, we are very pleased to confirm today that Cody has finalized an agreement through a competitive tender process to operate as an advertising partner for Hong Kong Tramways under the Tram Body contract. For those committed with Hong Kong Island, to be well aware of the iconic trend to circulate the densely populated key business and residential districts. This long-term contract is a major milestone and reestablishing Cody as a key player in the Hong Kong market, building market share and business valuation. It's a significant contract expected to generate annualized revenues of over AUD 30 million. However, due to the impact of lease accounting, annualized contract EBITDA is expected to be above $25 million, while net profit before tax attributable to the contract will most likely be under $5 million per annum. A personal review of the current Cody business, removing the partner impact of equity contracts, is included to assisted modeling. ARN remains a highly cash-generative business. However, cash metrics in the period were impacted by the now near-complete Sydney office relocation for which we incurred $11.5 million in 2023. Investing cash flows include the proceeds on disposal of some prime design, offset by our investment in Southern Cross. Annualized recurring CapEx requirements for the network going forward are expected to remain unchanged at between $8 million to $10 million per annum. We have again set out the financial impacts to help us move to assist with modeling. And finally, after 25 years in the current Sydney premises, we're excited about the head office and studio move to North Sydney being closer to key agency and the clients, and for our people, providing significantly improved amenities and access to transport. The balance sheet remains sound, with net debt of $75.1 million and slightly elevated leverage owing to necessary CapEx investment for the Sydney office relocation. Group tenure and access to $100 million of undrawn limits train on our group facility. You'll note the increase in right-of-use assets and lease liabilities on recognition of the new Sydney office lease and the impact of the previously noted impairment on intangible assets and deferred taxes. Today, we announced a fully franked final dividend of $0.036 per share, bringing the full year dividend to $0.071 per share, a yield in excess of 10% after the franking credit benefit. And finally, we have kicked the buyback on hold whilst the potential SCA transaction progresses. Ciaran?

Thanks, Andrew. You've seen today the different strengths of our business that we are operating as we build foundations for an audio-centric entertainment business. So how does all this come together? We're making investments in key talents across the country to create great content and attract mass audiences. We are then distributing that content everywhere our listeners want to listen to it from a location to platforms to device to ensure it accessible and easy and free to listen to. Finally, we are building expansion of skills plus technical capability to meet the commercial market on its terms and unlock revenue through all buying channels with an ever-increasing focus on programmatic trading, addressable and contextual targeting with integrated content and influence our talent alignment as we aim capturing the lion's share of the radio market and target the digital advertising segment. Before we move to the next section, I think it's important to highlight some of the headwinds and tailwinds we are facing into at the start of 2024. Obviously, the macro environment is uncertain on many fronts, and we continue to watch closely the impacts on overall consumer sentiments. Closely linked to this is CPI and the pressure on cost inflation on our business, particularly our ability to retain key people that meet wage demands. And while our teams are doing all they can to drive revenue opportunities, the advertising market is subject to these external factors and remains short with limited visibility and pressure on pricing. That being said, we have a number of initiatives underway to help drive improved performance in commercial returns and ultimately improve shareholder value. These include the Kyle & Jackie O opportunity in Melbourne already discussed, the further realization of regional revenue synergies, achieving digital audio cash flow breakeven in H2 '24 and looking at ways to unlock new sources of sustained revenue growth, the commencement of the Hong Kong planned contract in May to rebuild market share and business valuation. And finally, the proposed SCA transaction, which we believe is a compelling value-creation opportunity for both SCA and ARN shareholders. Respecting that there's a process underway and an NDA all parties have entered into, I do think it's appropriate to provide an update on the status of the indicative proposal we put to SCA. On the 18th of October 2023, ARN and Anchorage Capital Partners Limited made a nonbinding indicative proposal to acquire 100% of the fully diluted share capital of Southern Cross Media Group Limited. Consideration comprised of 0.753 ARN shares and $0.296 per fully diluted SCA share, with the potential for eligible SCA shareholders to access additional value from franking credits. At the time of the approach, the indicative proposal represented a premium of 29% to SCA undisturbed share price and 46%, including franking credits. Regarding the status of the engagement, the consortium has proactively sought to engage constructively with SCA to progress the indicative proposal in the 4 months since it was first made. On the 19th of December 2023, ARN announced that the consortium has reconfirmed the indicative proposal and was undertaking further due diligence subject to receive unnecessary information from SCA. The consortium again reconfirmed the indicative proposal on the 5th of February 2024 based on partial access to necessary due diligence information from SCA. As part of this most recent reconfirmation, the consortium also provided SCA with an update on its detailed work confirmed, the commercial rationale for the proposed transaction, its practical executability and the value-creation opportunity it represents for SCA and ARN shareholders. So actions from here required to deliver a binding transaction include subject to the timing receipts of complete information required to finalize due diligence, the consortium would be in a position to execute a binding transaction by late March 2024. This includes immediately commencing work to finalize mutual due diligence, including customary confirmatory financial, legal and tax review. It also includes further engagement with SCA to agree the necessary transaction documentation as set out on the indicative proposal. Crucially, the consortium remains committed to delivering a clear, compelling and certain transaction for SCA shareholders in a timely and efficient manner, unlocking material value for both ARN and SCA shareholders. This includes creating Australia's leading domestic audio business, with 10 metro stations, 88 regional stations and a 50% interest in a digital audio joint venture, consisting of substantially all of SCAs and ARN digital audio assets. The strategically focused metro network will be anchored by the KIIS and TripleM brands in all 5 metro markets, with world-class/great set of talent. It will create a larger, more profitable regional footprint across Australia with proven strategies to grow local audience revenues, and this will accelerate the more profitable and scaled audio -- digital audio business that is independent, well-capitalized and better equipped to compete with international media platforms. Finally, looking to the trading outlook. January metro, regional and digital revenues were all up on prior comparative period and delivered market share gains. Q1 total revenue was pacing 1% ahead of the prior comparative period, with radio revenues pacing circa 2% down, offset by digital audio revenues pacing circa 35% up. Full year cost guidance is expected to deliver $6.5 million of the $10 million 2-year permanent cost-out program weighted to H2. In 2024, we are targeting total people and operating cost growth of 2% to 4%, with short-term levers available should market conditions deteriorate. Thank you, I will now hand over for Q&A.

[Operator Instructions] Our first question comes from the line of Entcho Raykovski with E&P.

I've got 2 questions. First one on the outlook and one on the Southern Cross proposal. Just when I look at the outlook in the ad market, some other media operators [ have bound ] it to a significant slowdown in November and December. I'm just interested in whether that's something that you saw within your bookings. And then if I look at what you said into January and Q1, your Jan bookings look reasonably good, but then maybe some slowdown for the remainder of 1Q. Can you perhaps explain what dynamic is driving that? Should we maybe not be focusing too much on a single month? Maybe a few questions in there, but if you could elaborate, would be great.

Entcho, I think you answered your question with the last one there, that's not focusing too much on 1 month. And you're right, there was a slowdown that we experienced towards November, December last year, with the market sort of coming under pressure, obviously, and all mediums experienced that. Yes, January has started up on last year. I think what we look at for the quarter would be pacing sort of 1% ahead, with the digital growth offsetting maybe a slight radio decline. I think what we're seeing is that it's still short, limited visibility. But we tend not to look beyond 6 months in terms -- 6 weeks, sorry, in terms of these outlooks. But I took the quarter and I think we will be ahead for the quarter and last year. Radio's role is well-known, as I called out in the presentation. Its ability to drive short-term returns and ROI for advertisers is helped in environments like this. And we recently had a conference last week where we had 400 media buyers there talking about the power of radio, talking about its [ weight ] on frequency, talking about its brand extension capabilities. I'm talking about campaign effectiveness. So all of this are in place for us to respond to bring in a very short-term manner, in a very timely manner, and that's proving positive with the market at the moment.

And given you're saying this slight growth in Q1, albeit, as you say, limited visibility, do you think you're taking some money from TV? Is it the market stabilizing? What's the ad market dynamic that you're seeing?

I think there's 2 out there, but the first would be, we're pleased with how our sales teams are performing. So we have seen share gain across metro, regional and digital in January. And I'd expect that to continue for the quarter. I think the dynamics are -- in terms of radio, as I said before, there's just a genuine appreciation and understanding for radio's growth. And all the work that we have done about investment in digital audio, our capability to drive digital audio revenue growth, none of that would have resulted in sort of the outlook that we had, we haven't done it over the last 2 years. So we are seeing some sort of radio still perform okay, slightly backward okay, and being offset by digital audio growth, which is the justification for the investments we've made over the last couple of years.

Okay, great. And just 1 on the proposed transaction. When you made the release, you spoke about double-digit earnings accretion to ARN shareholders, if the transaction was to go ahead. Can you talk us through the key synergy assumptions, which underpin that accretion? I mean is it mainly about eliminating some of the digital losses? Or are there other things that you see as potential? And I'm just conscious that -- I mean you've just reiterated your expectation that digital will be breakeven by end of calendar year '24. So I would have thought if it's just digital, there's probably -- it doesn't feel like it's that much. But any other factors that you have in mind, if you could talk to.

Yes. I'm not going to go too much into the detail, Entcho. As you can appreciate that [ the building ] process underway, we have signed an NDA. But the accretive element of the transaction we still see, and we reconfirm that. I think there's 2 other drivers, yes, the digital audio piece and the initial savings that can be done, but more so that the revenue opportunity is longer term that we see, but also the concept of having more FM licenses within ARN means that we have a greater ability to drive revenue as well. So without going to too much detail, but I don't really want to, to be honest, Entcho, the business case, the transaction is as we see it from a value perspective for both ARN and SCA shareholders.

Our next question will come from the line of Darren Leung with Macquarie.

Ciaran, Andrew, can you guys hear me?

Yes.

Yes.

I had 2 as well, please. And maybe just the first line in relation to key talent. So congratulations on unlocking them down for another several years. We saw a little bit of a drop-off in terms of surveys, 7 and 8 towards the back end of last year. So I guess the question is, how sustained do you think these [ reigning ] drop-offs are? And was it just sort of part of the negotiation process? Were you expecting it to come back throughout calendar year '24? That's the first question. And then the second one was a stimulation to Seven West Media. Any comments you can talk about in terms of discussions? Or any merits you can talk about in terms of like the combined radio TV entity, given your comments around what's happening in terms of the other mediums?

Thanks, Darren. Firstly, on ratings, we -- and I always guard against this, we don't sort of look at booked or unbooked and judge the performance if this is booked, unbooked. There is a trend and sometimes books go up and sometimes books go down. But I think if you look at the history of Kyle & Jackie O, off the top of my head, they've been #1 for 50 or 55-odd service for the last 10-plus years. So their track record of driving audiences is there. And I'm also very cognizant of their ability to drive audience at the younger end as well. One of the questions we get from time to time is their ability to stay relevant to audiences and regenerate younger audience coming through. That has been the foundation of their success for the last 10 years. They are very hungry. They're very motivated. The construct of the companies that there is upside for them on commercial success as well. So we didn't sort of lock at the contract from Service 7 and 8. This is a long-term gain and plan for the business because we believe that they will stay as relevant for the next 10 years. Similarly, to Christian, he has been #1 at the FM breakfast show for, I think, most of the service in 2020. His performance were normally well since he came into the market from the U.K. back in 2017, I think, 2018. His, again, record speaks for himself, and he is equally motivated with the similar type contracts to drive a commercial return. So service sense down. I think you find open down this year as well every other radio network. In terms of Seven West, we haven't spoken to Seven West. We haven't -- in fact, we haven't talked to them at all. But obviously, it's partnerships that go on, particularly in Breakfast shows, with selective car doing idle. But equally, we have similar partnerships with the 10 network and with the 9 network, but we have no engagement, no discussions with them at all.

[Operator Instructions] Our next question will come from the line of Cameron Halkett with Wilsons Advisory.

Ciaran, Andrew, can you hear me okay?

Yes, we can.

Yes, we can.

Wonderful. Just 1 for me at the moment. Can I just touch on the marketing investment for Kyle & Jackie O going to Melbourne? The pack today has got 3 million to 4 million. But if I went back to the release in November, that was stated it was 2 million. So just wondering the change there and the reason for the step up.

Thanks, Cam, I can take that. So it has changed a little. Yes. We've done the right amount of work now to be comfortable with the level of investment required. We did say in that release that we would be multiyears, probably not the same need to have that investment running over multiyears. So there are the differences between the 2 releases.

Okay. So they get upfront and then taking off to probably that 2 million per year through the initial. Okay.

That concludes today's question-and-answer session. I'd like to turn the call back to Ciaran Davis for closing remarks.

Thanks, everybody. I know it's the morning, and thank you for your time, and we look forward to talking to most of you over the next few days. Thanks a lot.

This concludes today's conference call. Thank you for participating. You may now disconnect.