ARN Media Limited (A1N) Earnings Call Transcript & Summary

Good morning, and welcome to ARN Media's FY '26 First Half Results Presentation. My name is Michael Stephenson. I'm the Chief Executive Officer of ARN Media. And this morning, I'm joined by Alexis Poole, our Chief Financial Officer. Today, we're once again streaming from our North Sydney studios. Today, I'm going to share with you our company highlights and summarize our first half results before handing over to Alexis to walk through the financial results in detail. I'll then take the opportunity to reiterate our vision for the future of our company and provide a trading outlook before opening for questions. There are 3 key things that I'd like you to take away from today's presentation. Firstly, we have stabilized the core business. Secondly, we're on track to deliver $55 million of cost savings by the end of 2027. And finally, our underlying audience performance is strong, but our metro radio revenue share is below our audience share and below our expectations. Our immediate focus is on regaining the revenue share that we have lost over the past 18 months, primarily because of brand safety issues in KIIS breakfast. If we could turn to Slide 5. At our full year results, we said that we will be focused on stabilizing the core radio business and the divestment of noncore assets. I'm pleased to say that in the half, we've done this. We have entered into an agreement to sell Cody Hong Kong to DFI Retail Group. This simplifies our portfolio, provides greater financial flexibility and creates certainty for our shareholders. And subject to final approvals, we expect this transaction to complete shortly. During the half, we also finalized a settlement with Quasar Media. This settlement also provides certainty for our shareholders. But most importantly, it gives us the freedom to execute our plan and regain lost revenue free from the brand safety and regulatory issues that have existed previously. The Henderson Media case continues to be a matter before the courts. And, of course, we won't comment on that today. Last year, we made a commitment to transform our business to create a leaner, fitter and increasingly more digital organization, and we're making excellent progress. We have an unrelenting focus on disciplined cost and capital management. In the half, we reduced cost by $12 million and have a clear line of sight to deliver $55 million of cost out by the end of '27. The metro radio business is ready for growth. We have spent the last 6 months developing new breakfast shows and selecting fresh new talent, and I'm pleased to say that we are close to finalizing talent agreements for our new shows in both Sydney and in Melbourne, and I can announce today that both shows will launch this year, and both will be live and free. Our regional performance has been excellent with strong audience, revenue and EBITDA contribution. We've made a strategic investment in digital capability. We developed a clear digital strategy, and we've moved away from unprofitable podcast partnerships, and our digital revenue and EBITDA is growing. iHeart is at the very center of our long-term strategy. And in the half, we've created more iHeart original content. We've delivered 8 iHeart live events. And in June, we officially launched video on the iHeart platform. This is going to be an absolute game changer for ARN. At the same time, through the half, we've continued to build our next-generation data infrastructure. We further developed our data partnerships and we've launched new data products. It has been a very, very busy period, but I'm proud of our team, and I'm pleased with what we've achieved. Of course, there is still a lot more for us to do. So turning to our results. Revenue for the half was $128 million, down 14% on the prior period, impacted largely by brand safety issues in KIIS breakfast and the Federal Election in the prior year. EBITDA was $18 million for the half, down $6.8 million versus the prior period. Digital EBITDA was $2 million. Net debt reduced by $28 million to $49 million, driven by strong cash conversion and disciplined working capital management, and Alexis will share a lot more detail later in our presentation. We have a very clear plan to transition to a more digital business. However, in the short term, we must continue to stabilize the core radio business and regain the revenue share that we've lost over the past 18 months because of issues surrounding brand safety. So I'd like to take just a moment to explain why this is so important. Right through the cycle, radio markets will decline by 2% to 3% per year, and digital markets will grow by 12% to 13% to 14%. We've passed the point of inflection. Any declines in radio markets will now be offset by the growth in digital markets. We're operating in a growth market. ARN is Australia's #2 radio network. We have a 28% share of audience, we reached 12 million people every month, and we reached 7 million Australians on the iHeart network. Our audience performance is strong. However, our metro radio share is well below our audience share. This is our single biggest opportunity. You can see on this chart, we're a 25% share of audience in the metro markets. We're only an 18.5% share of revenue. Our revenue share has decreased by more than 6 points over the last 2 years, largely because of concerns around brand safety. The good news is, of course, the brand safety issues that we've had are now over. Every share point is worth $6 million. That means there's $38 million worth of revenue upside for ARN if metro radio share can improve and we can regain what we've lost. 80% of this falls straight to the bottom line. And this is not an unrealistic expectation. We were a 25% share of revenue less than 2 years ago. So whilst we continue to transform our business and enter new markets, and this is critically important, regaining lost radio share is the lowest-hanging fruit and that's our single biggest growth lever in the short term. At our full year results, I shared our vision for the future of our company to transition from a radio business to an entertainment company. And a little later, I'm going to reiterate our strategy, the importance of iHeart to our business and a huge opportunity for growth that comes as we diversify our revenue and into the $5 billion digital video market. Right now, I hand to Alexis to walk you through our financial results in detail.

Thank you, Stevo, and good morning, everyone. I'll take you through the financial performance for the first half of 2026. And more importantly, the progress we've made strengthening the fundamentals of the business. Against a challenging backdrop, ARN is now more resilient, disciplined and financially stronger than it was 12 months ago. We have strengthened the balance sheet, reduced debt, divested noncore assets, reset the cost base, generated strong cash flows and accelerated our shift to digital and data-led revenue. We have been super busy resetting our business. Now to the numbers. Revenue was $128 million, down 14%. Adjusting for last year's federal election and ATN contract negotiations, it was down 10%. Despite these headwinds, EBITDA was $18 million, and free cash flow was $19 million. We delivered a further $12 million of cost savings, bringing total savings since 2024 to $43 million. Net debt reduced to $49 million, and digital revenue now represents 11% of group revenue and digital EBITDA increased 55% to $2 million. ARN is leaner, financially stronger and more digitally focused than it was a year ago. Now to revenue on Slide 14. The prior period included $7 million of one-off revenue items relating to the federal election and ATN contract negotiations. On a like-for-like basis, revenue declined by 10%. The regional revenue was down just 1%, with local regional revenue growing by 3%, reflecting the strength of our local market positions and the continued value that advertisers place on ARN's regional presence. Digital revenue grew by 2%, driven by growth in streaming revenue of 16%, demonstrating that our strategy to grow audience and monetize across digital platforms continue to gain traction. Metro revenue declined 20%, reflecting the ongoing impact of brand safety issues carried over from 2025 and into the first half. As Stevo noted earlier, our biggest opportunity is to leverage our strong metro audience positions and rebuild revenue share and continue to diversify the business. Turning to Slide 15. This EBITDA walk demonstrates the benefit of the hard work done on the cost base and how those savings have held offset revenue headwinds. EBITDA was $25 million in the prior period. Our productivity program delivered $12 million in savings, increasing EBITDA to almost $37 million on a like-for-like basis. We deliberately reinvested part of these savings back into the business, including $3 million in data, tech and digital capability. We'll also absorb inflationary pressures while benefiting from $5 million of lower talent costs following the departure of Kyle & Jackie O. Post revenue decline, EBITDA for the half was $18 million. Turning to digital on Slide 16. Digital revenue increased to $14 million in the first half, up 2% on the prior period, while digital EBITDA rose 55% to $2 million. Digital EBITDA growth materially outpaced revenue growth, reflecting the improved earnings quality of our digital business. This was achieved despite lower podcast revenue following our deliberate exit from low-margin third-party agreements. We prioritize higher-quality earnings reinvestment in the ARN own products and deeper integration in the iHeart ecosystem. ARN's disciplined cost management continues to deliver a meaningful reset of the cost base while creating capacity to invest in future growth. As this slide shows, operating costs reduced from $97 million to $85 million, a reduction of $12 million, 13% year-on-year. Importantly, this reduction was achieved by continuing to invest in the business. We are removing structural costs while we're investing in the capabilities needed to support future growth. Stepping out our multiyear cost-out program on Slide 18. In 2025, we embedded a stronger productivity mindset, enabling us to increase our total cost savings target to $55 million over the '24 to '27 period, well above the original ambition. As this slide demonstrates, our productivity program continues to deliver ahead of expectations. In the first half of FY '26, we delivered a further $12 million of savings, bringing cumulative savings to $43 million. Importantly, we have already actioned a further $7 million of initiatives for the second half of '26. And our productivity program will deliver a further $5 million in '27, giving us a clear visibility to approximately $55 million of cumulative cost savings by '27. The key takeaway is that we are strengthening operating leverage and creating capacity to invest in future growth. Turning to Slide 19. As mentioned previously, strong cash generation remains a defining feature of ARN's financial performance. Operating cash flow was $13 million, representing an operating cash conversion rate of 145%, reflecting disciplined capital management. Free cash flow was supported by $10 million of proceeds from noncore asset sales primarily reflecting the partial sale of our SCA shareholding and the continued execution of our regional property monetization program. These initiatives support our disciplined approach to capital management and balance sheet optimization. As a result, ARN generated free cash flow of $19 million, representing a free cash flow conversion rate of 202%. Turning to the balance sheet on Slide 20. Despite the challenging operating environment, we closed the half with a significantly stronger balance sheet and greater financial flexibility. Cash increased 72% to $18 million, supported by strong cash generation, proceeds from asset optimization and disciplined capital management. We continue to deleverage the business with net debt reduced to $49 million. Reported net assets were $239 million, down $36 million on the prior period, primarily due to noncash impairment charges of $25 million and litigation-related items. Excluding these items, net assets actually moved in a positive direction. Importantly, the impairment has no impact on cash flow, debt facilities or covenant headroom. And as we prove out our strategy, we get to write back that value onto our balance sheet. We also continued to simplify the group with Cody Hong Kong sale agreement, recognizing a net asset position of $4 million, a significant improvement on the prior year. ARN remains committed to returning capital to shareholders through dividends. As the group continues to divest non-core assets and progresses the resolution of litigation matters, the Board will continue to assess dividend payments in the context of earnings, cash flow and capital requirements. The key takeaway is that ARN exits the half with a stronger, more flexible balance sheet, supported by high cash, lower debt and improved liquidity. You can see that ARN's leverage on a continuing operations basis has reduced materially over the past 2 years and remains comfortably below our target range. Net debt has reduced by $39 million from $88 million in June '24. Net leverage was approximately 1.5x EBITDA, well below our target of less than 3x. The group has $140 million of debt facilities and as at 30 June, $73 million of undrawn capacity. As we head to the completion of the sale of Cody Hong Kong, proceeds of which will be applied to net debt, but more significantly, it will release $30 million of Australian bank guarantees and also parent guarantees. So before I hand back to Stevo, let me recap the first half financial performance. Despite a challenging backdrop, ARN has continued to reset its cost base, continued to strengthen its cash generation, continue to materially simplify and derisk the balance sheet, continue to accelerate this shift to high-quality digital earnings and revenue. And most importantly, we continue to build stronger operating leverage, creating a clearer pathway to long-term shareholder value as we regain revenue share and continue to diversify the business. Thank you. I'll hand back to Stevo now.

Thanks, Alexis. In February, I shared our vision for the future of our company to transition from a traditional radio business to an entertainment company, a company focused on the creation, the distribution and the monetization of content. We have a very, very clear strategy. Create great content, distribute it across all platforms, amplify that content on social to engage our audiences and our advertisers. That's our plan. Our focus is on maximizing the return on our existing content and talent investment by using our leading radio brands and #1 radio shows and our new stars to create content for every other platform, content for radio, content for podcasts, increasingly, content for video and, of course, social platforms. Radio remains the foundation of this business, but what we're building around it is something bigger, a platform that brings together audio, video, social and in real-life experiences to create one connected entertainment ecosystem. Now the very, very center of our digital strategy is iHeart, the world's largest free streaming platform. Our partnership creates long-term competitive advantage for ARN. It gives us access to global development and product teams via a long-term license agreement. Critical to our long-term plan is the ongoing development of our next-generation data platform. Over the half, we've continued with our data partnerships with Westpac, with Experian and with Azira to enrich our audience segments with banking, consumer lifestyle and location-based data. We now have over 800 audience segments that advertisers can use for targeting. We're building a first-party data asset at ARN that dramatically improves monetization of our growing digital audiences. It's my view that the convergence of audio and video is a clear medium-term opportunity for ARN. We launched short form and vertical video on the iHeart platform in June, and next year, we will start live streaming long-form content, video advertising and video content arriving in September. It's this strategy that I expect will grow -- help us to grow and diversify our revenues, whilst improving the long-term monetization of the core audio assets we already have. The implementation of our strategy will fundamentally change the shape of our revenue. Today, 45% of our audience is delivered on a digital platform, but it's only 11% of our revenue. Over time, any decline in radio revenues will be more than offset by the growth in digital revenues. And this growth will come from audio and video podcasts and video live streaming, both of which attract a CPM, that is 3 to 5x higher than the traditional radio yields that we received. The creation of video content using our existing talent and the monetization of short-form video on social is going to allow us to participate in the $5 billion digital video market and a $2 billion social media market. It's this clear gap between audience share, revenue contribution and margin that highlights a significant runway ahead for monetization and, of course, supports the digital transformation program that we're undertaking. Now turning to Page 30. As we've said previously, our plan will be executed in 3 phases over 5 years. Our immediate priority is to regain the revenue share that we have lost. In the midterm, we'll be focused on accelerating our digital transformation, leveraging our investment in data, our investment in video and investment in digital capability to enter new and emerging markets. Right through the cycle we'll develop new products, new services and we'll develop digital adjacencies that will allow us to enter high-growth digital markets and further diversify revenue and earnings over time. Turning to Page 31 to our outlook. We expect the total audio market to be flat in FY '26, excluding the election revenues from the prior period with low single-digit declines in radio markets being offset by the growth in digital revenue. We expect our metro radio share to improve throughout the year, regional radio share to be flat and digital revenues to grow in the mid-teens. And we will, of course, continue to be focused on executing our cost-out plan. As I mentioned earlier, there are 3 key things that we'd like you to take away from today's presentation. Firstly, we have stabilized the core business. Secondly, we're on track to deliver $55 million of cost out by the end of '27. And finally, our metro Radio revenue share is behind our audience share. Our #1 priority is regaining the revenue share that we have lost over the past 18 months. Thank you for your time, and we will now open for questions.

And good morning. I'm Fiona Ellis-Jones, Head of News and Information at ARN. I'll be moderating today's live Q&A. [Operator Instructions] And we do have a few questions already. So let's go to them now. Stevo, first to you. And the question, if you were sitting in our seat, what would you need to see before becoming more positive on ARN?

Thanks, Fi. Well, first, I think there's a number of things to consider. The first as I reflected a little bit of this in our presentation. The first is that we should feel confident that we're in a growth market, right the way through the cycle, I believe any declines in metro radio markets will be more than offset by the growth in digital. We've got a very strong audience. Through the half, we -- obviously, we entered into an agreement with DFI Retail to divest the Hong Kong business. We've also made a settlement with Quasar Media. We've reduced our cost base. We've reduced our net debt. The fundamentals of this business are very, very strong. Of course, the big challenge and what I see as a significant opportunity is to regain the 6 points of revenue share that we've lost over the last couple of years for all of the obvious reasons. I think there's a lot for us to feel confident about and our ability to do that. It was only 2 years ago that we were a 25% share of revenues, and I have every expectation that, that's where we'll return.

I see we do have a question on Cody Hong Kong. We'll get to that in just a moment, Stevo. But first, how does the iHeart partnership translate into actual revenue growth in Australia?

Yes. So again, in the presentation, I highlighted that we have 5 million signed-in users on the platform. We've got a monthly reach of 7 million Australians accessing content on the iHeart network. We obviously -- we have launched video in June on the platform. We invested heavily in data in terms of time and resource to develop data products over the course of the last 6 months. We've now got over 800 audience segments, and we're starting to see the revenues that, that is generating. I think we should be very confident that our ability to monetize the audiences that we have will continue to grow over time. We've spoken about the fact that 45% of the consumption of our content happens on a digital platform. But today, it's only 11% of our revenues. So the opportunity to continue to build momentum on the digital revenue line is real and is happening.

Thanks, Stevo. Alexis on Cody, does the Cody Hong Kong sale create capacity for dividends? Is it debt reduction, reinvestment? Or is it actually all 3?

It's actually all of the above, but I just probably want to state we haven't changed our dividend policy. We still believe that returning capital to shareholders is what we want to do via dividends. And as we progress through the completion of the sale of Cody Hong Kong and also resolving outstanding legal matters, we'll turn our hand to looking at paying dividends. But of course, looking at cash flows, performance and other capital requirements.

Stevo, a question here from UBS, Ailsa at UBS. My question is following the departure of Kyle & Jackie O. Can you talk through how management is thinking about new talent benchmark and rebuilding audience share? What are the key initiatives underway to address the talent gap and restore ratings momentum?

Yes. So again, as I mentioned in the presentation, we are very close to finalizing all of the talent agreements with the new stars that will join ARN over the coming weeks and months. We also announced in the presentation that we will launch this year, a new show in both Sydney and in Melbourne. So very rarely do you get an opportunity to reset your talent base, and that's what we've had in this 6-month period. We're also being quite public about the point there or the fact that we're not going to rush it and we haven't. There's been a lot of demand from a lot of people wanting to join ARN for these very premium roles in our breakfast time slot. In terms of how we think about the KPIs, like, of course, we look at the basic KPIs of audience, audience share, the reach that particular program will deliver, the average audience and, of course, our ability to monetize that audience both by the audience that it delivers and also the ability to integrate brands in and around that content. It is interesting, I think, just to think about the economics of breakfast, of course, it's a very high demand daypart. Where we were not that long ago was a show that delivered very strong ratings. There's no doubt about that. But we weren't running full ad breaks in terms of we had reduced the inventory because of the lower demand. The ad breaks that we had weren't full and the price that we were selling it at were significantly lower than we had done previously. We enter into a new world where sure the audiences might be lower to start with. And I have every expectation that will grow over time, but we'll have full ad inventory. We've got greater demand, and we will generate as much revenue as we did previously, albeit on a different model, and now I'm quite excited by that.

Thanks, Stevo. [Operator Instructions] But Stevo, what monetization uplift are you seeing from the 800 audience segments?

I've always really -- I believe that data is the currency of the future. It's why we launched a whole range of data partnerships at our upfront last October. The result of those data partnerships with Westpac, Experian, Azira location-based data gave us the opportunity to generate 800 audience segments. 50% of the inventory that we now sell, digital inventory that we sell now has data attached. The revenue that we are delivering as a result of that is growing at about 70%. And I see absolutely no reason why that won't continue. We are building more data partnerships, new data products, and we're getting a lot better at telling that story in the market to advertisers.

Alexis, free cash conversion was very strong as we saw in your presentation. How much of that is sustainable versus being timing related?

Yes. So we had, I guess, a split of our results. We had really good working capital improvements, which will continue as we launched different projects, and we've seen it set up our procurement function, we're going to procure to pay going through. And in time, we'll continue to work on improving our days capital. We have benefit in the regional property monetization. There is a significant amount that came through, just approximately $5 million. That will tail off as we reduce the amount of properties that we can sell.

Alexis, thanks. We have a question from Annie on audio, and this question is for Stevo, Annie from Barrenjoey.

I had a couple of questions. First, one is just on the improved radio outlook. So from the update you provided in May, that has been improved a bit and in line with the guidance you have prior to that. Can you talk about what you're seeing driving that change?