Entravision Communications Corporation (EVC) Earnings Call Transcript & Summary

Okay. I'd ask you what points you're going into those meetings for to kind of pull out of them. But I'm guessing you're probably not going to want to go [indiscernible] with that today.

We don't -- yes, exactly. Exactly.

Okay. How is the Univision content performing on your stations? They went through a rough patch years ago. I know...

They did.

A renewed focus with the merger and new ownership and management and maybe you can just talk about that.

No, it's doing really well. Look, some shows are doing better than others. But if you look at overall ad impressions year-over-year, I think last I had -- there was an article, came out yesterday, ad impressions were up over Univision like 20%. So it's definitely a model that's been vastly improved with the merger, putting the content production in sync with the distribution. So we've been pleased with that, and we're looking forward to having that continue.

Okay. And I know you're working with Televisa, Univision's nascent streaming service, ViX, on the digital side of the house. Maybe you can tell us what you're doing for them, a; and then b, I'm curious if the service is impacting your operations at all on the TV side from either a viewership or ad spend perspective because, obviously, we talked about Disney-Charter, one of the touch points there. I think the problems Charter has was that all this D2C content is being put out there and...

Sure, yes. No -- from a rating standpoint, we've really seen no material impact. So that's still a work in progress. But what we do for them -- for ViX, we did 2 things. We sell advertising for them in Latin America, that's our Cisneros Group, now EVC LatAm. So we have a contract to basically sell advertising throughout Latin America on the platform. And then Smadex, our mobile growth solutions group, is actually driving subscribers to ViX. So we've got a 2-pronged relationship with ViX that we're helping them grow that business.

Okay. So just a question on the revenue performance lately. You were down, I think, 8% in second quarter although core was up 1%. Within that local was plus 4%. National was down 12%, similar kind of theme as we've heard from others. Looking forward, you had core TV pacing down 10%. So a bit of a decel there. What's driving that trend? Any particular categories you'd call out?

Yes, 2 categories of note, top 5 categories, retail and restaurants. They were both hurting for us and they're creating most of the drag as of late. The good news is the automotive category, which everyone would think would be somewhat problematic, given everything that's happening in Detroit with the union negotiations, that's been a healthy category for us. And really, it's because the drive -- the ad spend is coming from the likes of the foreign auto producers, right, Toyota and Nissan. And -- if I'm a betting man, I'd say they're looking to scoop up market share in a turbulent time here for the U.S. automotive sector. So they're opportunistic and spending more heavily than they did at this time last year, and that's helping drive that category into the positive for us and picking up some of the slack that we're seeing in TV.

And it sounds like maybe it's too soon, auto with the strike here for the American producers. Is it too early to see an impact from it? Something -- if it drags out, maybe it starts to...

It's too early. We're not seeing an impact. Again, like I said, auto is a positive category for us, and it's a big category. So that's important. But look, if the strike drags on, all bets are off. But right now, what we're seeing from that vertical, we're pleased with.

Okay. Political revenues, let's talk about that. Any early expectations on how next year is going to go, how it may measure up to the past?

Newsflash, orders started pouring in this week for [ political ], this week. So we're seeing already campaign money come in that we weren't expecting to see until midyear next year. So to the effect that that is a statement for what we should expect next year. We're telling our traffic department to get ready because there's a big wave coming, but we'll see. It's still early days, but we're already seeing the orders come in. And we've seen some trickle in before this past -- this week, but this week, when the orders started coming in, we began to validate our thesis that it's going to be probably a record year for us politically. We've kind of internally soft circled the $40 million bogey for political -- for next year. That's up from $28 million in the last presidential cycle, and that's up from $32 million that we did in the last midterm cycle. In the last midterm cycle, we went from around $13 million to $32 million. So we almost tripled. And the real reason for that is we've got one new competitor that's spending with us, and that's the GOP. Historically, the majority of our revenue politically has come from the Democrat side. Now particularly along the Rio Grande Valley, you've got congressional seats that are 50-50 and Republicans are hell bent on making sure that they maintain control of the House. And you can bet again, those seats are coming up again this coming year that they're going to spend in lockstep of what they did in last year. So you've also got the Senate seat, the Senate race in California. Dianne Feinstein is passing, and then that's going to be a competitive environment, both in the primaries, which is in March. California is a mail-in state, right? So you've got to get that messaging out earlier than otherwise. And that means that fourth quarter, we should start seeing significant revenue for that race. So -- and again, Arizona, Nevada, California, Texas. Texas, which is morphing from red to purple right in front of us, and that's going to be the battleground for the next couple of presidential cycles, that -- Texas may very well decide the race is going forward as opposed to Florida, which is kind of morphed into the red now [ over that ] 8 years.

Based on the numbers you just laid out, maybe it answers the question I'm about to ask you. But do you think you can -- Television maintain your -- is going to maintain its share of political spending, radio, whatever share you'll see there will be similar to what you've seen in the past?

We do.

Not a ton of leakage to Digital or other...

No. It's still good. Television is a great medium to get your political message out, and it's proven time and time again that it's the preferred medium for politicians and super PACs and what have you. And yes, we fully expect TV to continue seeing that strength into the next cycle. Radio generally does around 25% of our political and with TV doing the balance, 75%. I -- we expect that balance to continue here. Generally, what happens is when TV starts to get sold out, then money starts pouring into radio, right? That's the next available media. But it's interesting, the most recent orders that are coming in now are right now predominantly for radio in Spanish, which was something we weren't anticipating.

And those numbers, like the $40 million for next year, that was soft circle, that's a total number for the year.

The total number. That's right.

All right, got it. So let's talk about radio for a moment. I don't want to shortchange it. It's now around 6% of revenue. So it's certainly shrunk as a percentage as a whole, it's been a tough year for the whole industry. Your 2Q revenues were down 9% or 6%, excluding political. And for 3Q, you guided your core down 12% or at least pacing there. So like TV, a bit of a decel quarter-to-quarter, what's driving the weaker trends in radio? Is it a similar story as Television?

No, it's actually a very different story. So unlike TV, where national has been the drag, while local is holding up. For radio, our local business has been the drag, while interestingly, national is actually up. And that's a preview for third quarter. Second quarter, you didn't see that. Second quarter, we had a couple of large advertisers -- well, I'll just use the word panic, and drastically reduced their ad spend, thinking that the rest of the year with [indiscernible] calamity that ended up not happening, and they went back online with us, on the air with us in the third quarter. So -- but yes, it's a different situation with radio. We are -- in our markets, we are more often not, not the 1 or 2 market -- station in that market. And if you're not 1 or 2, you're missing out on the national spend. And that generally -- it's a much more competitive environment for us in radio than it is in TV, that's been part of the problem.

And just so I'm clear, those couple of large customers that panicked, that was on the local side?

That was on the local side.

Local side. Okay, got it. Do you see the radio segment as a growth business overall for you? You just mentioned the tough dynamics from a market-rank standpoint. But I guess that would be part A; and part B, is the segment still core to the overall business? Are there synergies still to owning that alongside Television and Digital?

I don't know. It's hard to say that the radio as a platform is a growth asset. But I will say this, it is certainly more resilient in Spanish than it is in English market in the country. Radio consumption patterns are very different in Spanish than they are in English. Walk by any major public location where -- whether it's construction activity or kitchens or whatnot, you'll see -- you can hear the Spanish language radio blasting, right? I mean it's just consumed very differently than it is in English. So with that said, radio is still a -- very much a core asset for us. We've got 11 markets where we operate TV and radio together under the same roof. Radio in those markets always outperforms our radio and stand-alone markets just because we're able to package that radio with Television to get a larger share of the buy. So definitely, radio remains a core asset to us.

Okay. I'm going to ask you to put on your CFO hat around expenses and margins now. You did have an uptick in expenses in the second quarter, up over 20% on a pro forma basis. Can you talk about what's driving that and how we should really be thinking about a normalized rate of growth or cost base going forward?

Yes. So the first half of the year was a bit choppy on the expense growth side, so we had to build out some infrastructure with some of the acquisitions that we had executed in prior years. That cost us a couple of points. You also had some one-offs. We moved our radio operations into our corporate facility in Los Angeles, and that was supposed to be kind of a 6-month process beginning in September of last year, ending in March of this year. Because of COVID, we couldn't get the permits processed timely, so we actually didn't start that project until January. And because that project ran late, we had to keep our radio operations where they were, running amok of our lease. So we had to pay double rent penalties for our radio division. So that drove up expense. So that represented in the second quarter about $1 million in incremental expense. Secondarily, historically, what we've done with company-issued RSUs for employees is we had liked to issue those in fourth quarter and expense all of those in the fourth quarter. From a retention standpoint, it made more sense. This was earlier in the year when things were kind of influx with Walter's recent passing. But we made the decision to issue the RSUs in the first quarter because you have a better retention policy for employees who now know what they're going to vest at the end of the year, but what you have to do then is instead of expensing that full vesting amount in one quarter, fourth quarter, you have to spread that expense evenly throughout the three quarters of the year with fourth quarter getting the benefit of a lower amount. So that drove the expenses up in the first quarter and second quarter and will drive the expense up in the third quarter as well. If you had to normalize for all of that, I would look to see our operating expense on a normalized basis kind of settle in the kind of the mid- to high single-digit increase range over the next couple of quarters.

Okay. And as we think about cash flow conversion, it seems to have slowed a little bit. You just walked through the expenses, but anything we should be thinking about on CapEx, taxes?

Sure. So CapEx usually for us runs at around $10 million annually. This year, on a cash CapEx basis, it's going to be about $16.5 million to $17 million. That's because of the build out again at corporate, a one-off situation that we were hoping to kind of straddle last year and this year and cut it in half and therefore, the burden wouldn't be as great, but it is what it is. So look for CapEx on a more normalized basis to be back in the $10 million range going forward. Look, taxes are up for us because we historically have had the benefit of NOLs working for us to help shield the tax, and those are gone. Those went away basically when the proceeds from the auction came in. On interest expense, I don't think I have to explain what's going on in the interest expense. The good news is we've got $126 some-odd million in cash that's being put to work. So you're getting a nice hedge against at least a portion of that interest expense going up as we're making money off the cash.

Right, right. And so that's a good segue to talk about your liquidity, your capital allocation policy. So the nice thing is with the balance sheet, you have extended out your debt maturities earlier this year. So I don't need to worry or fret about that one. Maybe you can just quickly remind the audience...

Sure. So we exited the institutional loan market in March of this year, and we did a pro-rata bank deal, relationship deal with 7 different banks. That's a 5-year deal, runs through 2028. We closed that transaction when Silicon Valley Bank collapsed. So that was a fun couple of weeks to get a transaction closed. But we got that done. So maturity is all pushed out to 2028. We'll manage that debt balance accordingly with our cash. If the macro environment deteriorates from here, we'll keep a mind -- we'll be mindful of what our debt load is. And if we need to reduce debt and keep leverage in check, we'll do that.

So right now, your leverage is under 2x. Is that where we should expect leverage to live for the business? How high would you be willing to take it if you saw the right acquisition opportunity?

Well, if Walter were here, he would say 2.5x is what he's comfortable with. I would say, 3.25x, 3.5x is kind of -- we have a max covenant in our new debt deal of 3.5x, and that's net of $50 million of cash. So that's something to keep mindful of. We'll manage that leverage calculation accordingly. We have a question. Are we going to questions?

Let me ask one more, and then we'll get to it.

Okay.

How should we think about capital allocation then, given those comments around debt and leverage, between the dividend, share repurchases that pay down acquisitions, where do they rank?

So we just restored our dividend to pre-COVID levels back in February. So -- and you're getting -- at our current price, I think it's a 5.5% yield, which -- you know what, that's pretty hefty. So the dividend is where it needs to be. The debt is where it needs to be in the 2x zip code, but we'll manage that if we need to. The share buyback is probably not at this point. We have a program that's been approved and authorized. But I don't think it's realistic to see us going back into heavy share buybacks right now. So -- and look, there are always opportunistic acquisitions out there. Probably not -- you shouldn't probably expect to see anything on that front, at least in the near term. We are, like I said, working on some exciting new announcements with new platforms that's going to suck up a lot of management bandwidth as we get brand-new relationships up and running in interesting regions of the world. So look for that to hit the news at some point in the near term, and that's going to be what our focus is, just growing our business organically and growing out our relationships with new digital platforms.

All right. Great. We're about out of time. So we'll wrap it. Chris, thank you for being here.

Thanks, Aaron. Thanks for having us.

We'll get the questions on here offline. Thank you.

Thank you, all. Thanks for coming. Bye-bye.