Entravision Communications Corporation (EVC) Earnings Call Transcript & Summary

Okay. Hello, everyone. Next up, we have Entravision. And my name is Aaron Watts from Deutsche Bank. And I'm pleased to have CEO, Walter Ulloa, with us; as well as CFO, Chris Young. Guys, thank you very much for being on today.

Thank you, Aaron. Thanks for having us.

All right. Great. So lots of changes in the industry over the past couple of years with regards to how people are consuming media, competitive forces as it pertains to Spanish language content, a bit bigger focus on digital as well as consolidation throughout the sector. Walter, perhaps you can kick us off with your thoughts on how Entravision is pushing to capitalize on those themes and continue to prosper going forward.

Sure, Aaron. Thank you for the question. I -- we believe Entravision is well positioned for the future. I mean we've built a business that -- it has media assets in some of the fastest growing, highest density Hispanic markets in the country. We have more menu along the U.S. Mexican border than any other media company. We continue to provide better content to our viewers and listeners across the country, particularly our local news. Our local content is -- continues to be of the highest quality. And we believe that our mission is to entertain, inform and educate. And so I think with that approach, we'll continue to be successful. We provide or -- we've become a beacon for the Hispanic community across the country. And we believe our core values are to continue to serve this market and to provide the best in content every day.

Okay. That's a great introduction, and we'll dig into those topics a lot more. Maybe I'll start with the television segment, which accounts for more than half of your revenues. And I'll begin with a question there on the operating and advertising environment. You're fresh off reporting fourth quarter results just last week and excluding political, core TV ads were down 7% in the quarter and 4% for the year. What was the drag -- main drag or drags in 2019 in the segment? And are you seeing any improvement now to start off 2020?

We have seen improvement. We're off to a really strong start in the first quarter of 2020. Certainly, political is seen a well above what we budgeted. I mean just a huge increase in political for the first quarter. But we've talked -- we are seeing improvements in automotive, which softened, I'll say, in the second half of the year. We were minus [ 7% ] in the fourth quarter. But now that category is minus [ 1% ]. Our services category is really strong. We've seen -- we're just talking here, Chris and I, about how well services is doing, which has always been one of our largest categories. Automotive and services, 1 or 2 and vice versa. But now our services category is plus [ 20% ]. So great increases in services. Automotive is now improved. One of the things that we're doing that I'm so proud of with automotive is that we're becoming better and better at bundling our digital products with our broadcast. I mean it's -- we just landed an account last week in one of our largest markets, $180,000 over 6 months, $30,000 a month, that will -- which was unique about that particular order was that not only do we include digital and broadcast combined to provide better solutions for our clients, but the client gave us the total market order for digital. So if we're able to provide the Spanish language media broadcast, media solutions and then we also combine that with digital, and we're managing the entire digital campaign for the next 6 months for this client. So big win in automotive. That's just one that I'm aware of. I know of others that we've closed, I should say that I mentioned. I know of others that we closed just in the last few months. And that combination of digital, local digital and broadcast is proving to be a very successful combination here with automotive. And so again, it's something we've been working on for a while, and it seems like just everything's come together here in the last 90 days.

All right. No. That's certainly encouraging. Maybe this is a good time to ask you as we're talking about the start to 2020, and you are seeing some improvements. But what impact, if any, are you feeling on advertising or viewership at this point from coronavirus? It's sort of the topic this year, of course. And are there any categories that are being affected by what's going on, on that front?

We see very little impact so far -- I'll say, negative impact with the coronavirus. I think we had one market where we lost an account. There was a big event that they were planning and they canceled the event, but it was not material. But what we are seeing is -- and really a strong uptick in our newscast. More viewers are turning into their local Univision affiliate to educate themselves, to inform themselves about what's going on in the market, particularly as it relates to the coronavirus outbreaks. So that's been a strong -- it's really helped propel our viewing -- the viewing of our news throughout the country.

Yes. I think ratings were up double digits for our newscast across the country. So it's good news and bad news, I suppose.

Yes, right. And Walter, I don't want to overlook something that you did mention, which was political. Can you remind us how much political you generated in the last presidential cycle? And any broad expectations you can give us or goalpost you can give us for how to think about what political might look like for this year?

Well, in the last -- I'm going to use 2016 because that was the last presidential cycle. And we did a little over $10 million in political. It was a -- it wasn't -- I remember a disappointing political year. This year, we're well ahead of the pace that we established in 2016. We have over $6.4 million on the books in -- through today through mid-March. And certainly, we're almost -- what's that? Was it 60% of what we did in 2010, already [ low ]. So we expect to have a really strong political year. We've done a lot of work around political. And we've got people that all they do is spend their time analyzing data and working with our salespeople to provide them better information about what campaigns are -- in our different markets are in play and to do everything we can to talk to the people that are making the decisions around the media pie as it relates to those campaigns.

Yes. In 2012, we did $16.6 million. So perhaps that's the better look at what the possibility is for political this year. We'll have to wait and see how it all plays out. But generally speaking, once you get into third and fourth quarter, we will typically generate anywhere from $6 million to $9 million in incremental on top of what we've done in the first 2 quarters. So we're feeling pretty optimistic about the political for the season, no doubt.

The other thing -- the other comment I'll make, Aaron, is that in 2018, which was a non-presidential year, but the midterm cycle, we did over $12 million, and that was 2 years ago, and it was the best midterm cycle we've ever had. So I think that's just an indication of how important the Latino vote is going to become, it's already contributed to the increase in voter turnout. But also, it'll -- I think -- I believe that the Latino voter will make a pretty significant contribution to the outcome of the 2020 presidential election.

Right. And I guess, our current president has raised a war chest for this year that was, I think, one of the problems in 2016 is that he didn't spend a lot of money. So that hopefully provides some of the lift you're talking about.

Right. Absolutely. We didn't get any GOP money last time.

Got it. Right, there you go. So on the viewership side, I wanted to ask you about this. So Univision had made some investments in content over the last 18 months. Are you seeing a benefit to ratings relative to your main Spanish language competition as a result of that?

We have seen an improvement in ratings. Univision has had some success here recently. They continue to innovate and they're exploring the high-quality and culturally relevant programming. They're being more innovative with their novela themes that featuring strong female lead characters and their plotlines are more -- have a stronger connection to the U.S. Latino audience. So what we're seeing so far -- and they're also buying programming abroad, which is something new for them. They're buying some interesting quality, novelas from Turkey, which have had great results for both Univision and the UniMás stations. So we're seeing an improvement in earnings, for sure.

Okay. And more broadly, what viewer trends can you share with us lately from the Hispanic demographic? How are they unique or similar compared to English language viewing themes? And are those themes that you're seeing in the Hispanic demographic going to be a tailwind or a headwind for business?

Well, generally speaking, the Latino consumption of video is a little different than English. I mean, remember now, you've got 21% of Hispanic consumers that are watching over-the-air, right? There's no cord to cut in that instance. And that compares to about 6% across the country. So this is already a medium that's over-indexed as far as consumer trends are concerned for the Latino community. So that then -- that's a big part of our business. So the cord-cutting is not as prevalent on the Hispanic side as it is in the general market. And I think that's just a generally supportive fact behind our core business model.

Okay. So I was going to ask you about that, Chris. When we think about cord-cutting and you're under -- the stability of your underlying sub-base, how has that trended? And I guess, as you see some pickup in the over-the-top or virtual services, you're saying, at least on that front, not as prevalent with your target audience.

That's right. I mean you've got about 8% of total Latino households that have access to a high-tech virtual multi-channel video programming. But generally speaking, this demographic is still very much wed to the over-the-air business model. And as far as subscriber trends are concerned, the cord-cutting felt a lot more -- well, let's just say, we witnessed kind of single-digit, low single-digit decline in the first half of last year, but that trend seems to have stabilized. In the second half of the year last year, the cord-cutting trends were relatively flat or stable as well as we've seen that trend as well into the first quarter of this year. If anything, I think in some markets, we've seen a pickup as far as cable subscribers are concerned, but that may be specifically due to what happened with Univision and DISH earlier in the year, and people kind of wanted the option to discontinue watching Univision. So they just switched providers. But generally speaking, the cord-cutting in our markets have been pretty stable as of late.

Just to add to Chris's point. About 21% of Hispanic households across the country watch their television over-the-air versus 13% for the total population. In fact, we have some markets like McAllen, Texas, which is a large Hispanic market, #10 in the country. And I know that the over-the-air viewing there is like 30%.

That's right.

So we are -- we continue to be a community of strong consumers of over-the-air television.

21% versus 13% is sort of the overall average?

Correct. Yes. And remember, in our markets, particularly along the U.S.-Mexico border, a lot of the local cable providers don't have a lot of Mexican content on their carriage. So what you want to do, if you want to watch Mexican TV content, the only great way to do it is over-the-air. So that's one of the reasons why the over-the-air viewership along the Mexico border is much higher than anywhere else in the country, because they want to keep that optionality to be able to flip back and forth between Mexico and U.S. on the viewership.

Got it. Okay. So on the contracted revenue side, your retrans dollars were up 1% year-over-year in the fourth quarter. And I believe that primarily feeds through your agreements with Univision. They recently renewed with AT&T and Charter. What should we expect in terms of growth from that revenue stream for Entravision this year?

Yes. The retrans should grow this year, 2020, mid-single digits compared to prior year, pretty comfortable with that number. The Univision side will grow probably closer to high- to low single digits to mid-single digits. And then we've got English language programming that's picking up the pace a little bit. So all in, you should be seeing a 5% or 6% improvement year-over-year.

Got it. And what percent of your TV revenue is retransmission income now versus advertising?

Well, we did about $36 million in retrans in 2019, that's against the TV ad revenue base of $114 million. So that's about 31%. And if you take the total TV revenue, including retrans, it's about 23% of total TV revenue.

Okay. Got it. Last one for the TV group for now. Univision recently announced a transaction that will bring in a new private equity owner alongside Televisa as well as a change at CEO. Any thoughts on those changes and what impacts, if any, they could have on Entravision?

We continue to view the Univision relationship as one of our most important assets, and it's been a great partnership. And I'm sure it will continue to be a great partnership. We've heard positive feedback from -- or received positive feedback from the new owner, Wade Davis, and the people at Searchlight. So we think it's going to be a strong team that they've put together and we'll put together. So we look forward to working with them.

Okay. Great. Shifting gears to the radio segment. It was a challenging 2019, from my seat. You had core ads down high single digits, but on a more positive note, Walter, I think you spoke on your earnings call that you expect to return to growth in 2020. What's been done to help turn that business around? And what gives you confidence in having a better year ahead?

Well, first, Aaron, we've made a number of management changes throughout our platform. And all good changes in the last 4, 5 months. We've probably changed out 7 senior vice presidents across the country. All the people we brought in are excellent media sellers and operators. That's probably the most important change that we've made. We have new leadership in our Revenue Chief, Karl Meyer, an experienced broadcast sales leader, worked with us 10 years ago, then worked with Univision for about 5 years, has now returned to Entravision in the last 6 months. And Karl is an experienced media sales leader and is doing a great job in continuing to build a fantastic team around him. We also -- we combined 2 of our stations in LA last year to create a superstation under the successful Jose format. We have some of the strongest on-air Spanish language talent in the nation and certainly in LA. Our morning, mid-day and afternoon drive are #1 in the morning, #3 in the mid-day and #1 in the afternoon. So that's against other Spanish language radio stations. So we're very pleased about what we've done in L.A. and how we are -- we continue to improve our programming in the market. And then as I mentioned on the call, we've taken about $8 million in annualized programming costs out of our radio division. And that was a result of negotiating and renegotiating some of our talent contracts. So certainly pleased with the improved margin that we'll see in radio as a result of a lower cost structure. And then I also mentioned that we made a deal with Katz Media through their -- one of their affiliates, Eastman, to take over the national representation of our radio stations with national agencies instead of keeping the business in-house. And we did that for a couple of reasons. One, most importantly, we believe that Eastman -- Katz has better visibility with national avails, which we believe and are certain will create more sales opportunities for our audio inventory and business. And also, there'll be some savings as a result of retaining Eastman as our audio rep. We expect to see some savings from that. And so we're pleased with what we're seeing so far in Q1. As you know, this is the first quarter that they've taken over our business, but we're pleased with the way they continue to improve week after week. And as we look ahead to Q2, we think they're going to get even -- the progress is even better. So far, we believe we made the right decision for sure.

Okay. Good. That's a good overview on the radio side. Let me ask you about digital. It's around 1/4 of the revenues of the business now. You characterize 2019 as a transitional year for your digital segment. What changes have been made there? And similar question to radio, what gives you optimism for growth in 2020?

Well, a couple of comments, Aaron, to your question, and Chris might want to add his comments as well. But we -- 2019 was a tough year for digital. And we changed out our top management midway through the year. We weren't pleased with the way the business was progressing. So we made some difficult decisions there. And so far, the decisions we made had been positive and good ones. Our -- Luis Barrague was our CTO. We now -- we promoted him to CEO. We brought in a new CFO, Mauricio Calderon, and we are pleased with the way -- with the direction the business is going. And that is supported by the fact that we had a strong fourth quarter, certainly much stronger than fourth quarter of 2018, not only was our -- but our cash flow was up. Revenue was up slightly, but our cash flow was up significantly. So that's one data point to share with you. And we continue to track that business very, very carefully and -- or I should say, wisely and every day, we spend time looking at it. We've got people that all they do is track the business from every aspect of it. I also mentioned on the call that Smadex, our proprietary mobile DSP platform, competes in the digital ad marketplace. It's a transparent mobile media buying platform that connects to international mobile ad exchanges and offers real-time bidding for ad space. And we think that this particular software, this platform is as good as anything there is in the world. And so far, we continue to see that software continue to be successful by attracting some of the biggest ad names in global advertising, including Nike, American Express, American Airlines, Samsung, Audi, BMW Europe, et cetera. So we think that this particular product is -- competes globally with any other -- any of the of the other companies. And so far, we're seeing it continue to improve week after week. And we're looking forward to accelerating the growth of this particular product in the United States in 2020.

So is it -- as you -- okay, got it. As you look at Smadex and your other digital components, do you feel like you have sufficient scale now to compete in that arena? Or do you think you'll have to make strategic acquisitions, tuck-in perhaps, to help complement your organic growth opportunities?

Well, I think we have sufficient scale with the platform we have, with the products that we have, particularly Smadex. But we're continuing to look at other opportunities. If we can find new tuck-ins that will improve our overall digital business, then certainly we'll do what we can to make these businesses part of the overall Entravision digital banner.

Got it. I wanted to cover the cost side of the ledger here for a minute. Walter, you did mention that you were able to take $8 million of programming costs out of the radio unit. But maybe holistically, how should we think about your cost base across the business lines as we move through 2020?

Well, we've put a lot of -- this is Chris. So we put a lot of work into the budget process for 2020, trying to streamline all of our platforms as much as possible. So TV business, on its own, you're talking about a fixed cost base that will be increasing by low single digits. So then anything in the variability expense category, driven primarily by political, we'll take it beyond that. So maybe low to, perhaps if political is really successful, maybe low to mid-single-digit improvements or increases in expense for TV. For radio, as Walter mentioned, so with that $8 million of cost-cuts taken out of the business effective Jan 1, that should be a double-digit decline in expenses for the balance of the year. So, I mean $8 million is meaningful to that business platform. And then digital, also, we've streamlined that business, but the bulk of the expense in the digital side is based on the cost of media. And as that ramps up as -- knock on wood, revenue ramps up, that, that cost will not necessarily be in line with the broadcasting side because it's a different dynamic as far as that business unit is concerned. Hopefully, that's helpful for you.

No. That frames it well. And then maybe just on the CapEx side. Your CapEx spend was certainly elevated over the past year relative to historical levels. Can you remind us why that was and what you're budgeting for 2020?

Yes. CapEx for 2019 was unusually high. It -- kind of it was one of those things where you just -- we had a couple of one-offs that there was nowhere else to put it but in 2019. So you had core CapEx. Total CapEx was $25.3 million. Core CapEx, if you break that out, core CapEx was $10.3 million. You've got also CapEx, and this is seen throughout the industry, CapEx related to the FCC repack. That's reimbursable, but it comes back and gets booked into other income, right? So we book it, we send the receipts to the FCC. It generally takes about 6 to 9 months for them to remit the cash. So that will be coming back to us, but it gets booked at CapEx initially. That $6.7 million. And then we had a one-off project in Texas, where we centralized some back-office operations at our TV platform. That was an $8 million price tag. That was onetime. It's going to result in some cost savings that are already baked into the expense structure that I walked you through. That will be about $1 million right there, but that -- in expense savings. But that ended up being an $8 million line item for 2019. The good news is now that we've cycled through all those one-offs, you're talking about a normalized CapEx of between $8 million and $9 million all in for 2020.

Just to add to Chris' comment about the national master control that we installed and are in the process of completing the installation. It's going to give us -- not only will it be a savings that relates to labor and personnel, but also it's going to streamline our overall delivery of our content across the country in a much better way. We'll also be able to look at our real estate portfolio and say, do we need to have space this large or can we reduce our space and become more efficient as a result of that. So we're looking under every possibility to reduce our costs and to operate more efficiently, and this is just one investment that we've made. Like Chris said, it's a onetime only, and we think we're on the right track in terms of how it's going to improve our overall business.

Okay. Got it. Chris, maybe a couple for you here. On the balance sheet and capital priorities, you finished 2019 with debt of $218 million, cash and marketable securities of $125 million, which I think puts your gross leverage a bit above 5x, though net of cash under 3x. With that framework, how should we think about your priorities for your cash and the cash flow you're going to generate going forward?

Well, I think that we mentioned on the call, this was a question, what are we going to do with all that cash, you get in excess of $138 million of cash as of this week, how do -- how are we thinking about it. We're looking at this as kind of taking a balanced approach towards the application of that cash. You take perhaps 1/3 of that cash and allocate it towards return of capital to shareholders. We've got a buyback program that's in place. We've got a dividend program that's active and that's rock solid, given the cash generation of the business as well as the cash balance. And then you look towards debt paydown. We were -- we paid the debt down $25 million at year-end last year. The year before that, I think it was $50 million. So we've been very proactive in managing the debt of our cap structure. And then the other 1/3, we kind of think about it as far as opportunistic M&A possibilities. And that's something that we look to be perhaps more active in, given what's happening in the cycle here. If things -- if this coronavirus turns out to be something that's a little less enticing as far as the macro environment is concerned, that may cause some of our competitors who have levered balance sheets to run into forced asset sales. So we'd like to be in a position to capitalize on that if and when they become available. So that's kind of how we think about it.

Okay. And that's a good segue to what my next line of questioning was, was on M&A. We've seen a great deal of consolidation in the TV broadcast space with chatter of more to come. Participants extolling the benefits of scale. Radio has been a bit less active, though, it seems like there are stations available if the bid was there. What is Entravision's approach going forward to consolidation? Where is your focus going to be? And do you see being more active than maybe you've been in the last couple of years as we look ahead?

As Chris said, we maintain a pretty strong balance sheet, and we've got cash available to do acquisitions as we see fit. But we're being very careful about how we approach any acquisitions, certainly, television. If we could add Univision affiliates to our portfolio, that would be something we'd be interested in doing. Digital, we continue to improve and expand to our digital portfolio. Certainly pleased with the direction of that business is going in. And as far as radio is concerned, Spanish-language radio, if there were an opportunity to strengthen that business and we could do it in a cost-efficient way, certainly, we'd look at it. But I think we're going to see, as Chris said, we're going to see people, particularly with balance sheets that are heavy, we're going to see maybe more realistic behavior as it relates to what the expectations are in terms of value.

Yes. Remember, there hasn't been any consolidation on the Spanish language side, like you've seen in English over the past couple of years. And we think that's getting a little long in the tooth. But that's a function of where we are in the cycle. So we'll have to see how that plays out. But we like being in the position that we're in with the cash balance that we have, and shareholders are going to get an 11% reward based on today's prices as far as the dividend yield is concerned while we seek out those opportunities.

All right. Great. Well, this has been a really helpful discussion. And I want to thank you again for your flexibility in the retooling of the conference. And I hope that we will see you next year in the sunny confines of Palm Beach.

Absolutely.

Thank you, Aaron. Thanks for seeing us. Thank you. Thank you for your time.

Okay, guys. Have a good night.

You too. Take care.