Grant Broadcasters Pty Limited (A1N) Earnings Call Transcript & Summary

Thank you all for standing by, and welcome to the HT&E market update. [Operator Instructions] I'd now like to hand the conference over to your first speaker, Ciaran Davis, CEO and Managing Director. Thank you. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining the call this morning. It has been a very busy time preparing for this announcement. But after successfully settling the ATO matter, divesting of our OML sake, delivering #1 ratings for the 16th consecutive time, growing revenue and winning commercial share, I'm delighted to outline to you the details of this exciting acquisition, the purchase of Grant Broadcasters by HT&E, one that we believe is truly transformative for the company. Grant Broadcasters is Australia's oldest family-run and most successful regional radio company. ARN, HT&E's Australian Radio division, is the #1 metropolitan network in the country. Thanks to this unique opportunity, both businesses will be better together, creating a powerful national radio broadcast network of scale. This acquisition is full of upsides. It unlocks new growth markets and audiences with the potential for significant digital audio expansion for iHeartRadio. It is highly accretive to HT&E shareholders with future revenue synergies to come as we build a footprint across the country. The combined network is made up of 58 stations across 33 markets, delivering innovative, digitally-enabled commercial solutions, solutions that our clients are increasingly seeking. Unlike many regional operators, this expanded network will have an unwavering commitment to live, local and multiplatform content across an 8 million strong broadcast and digital distribution network. As I say, an exciting acquisition, creating a strong proposition for our clients, our listeners, our shareholders and our people. Slide 4 provides a top line summary of the transaction. The deal is for a total consideration of $307.5 million on a cash and debt-free basis. The consideration is payable at 77.5% cash and 22.5% in new ordinary shares, and will be funded through existing cash reserves, undrawn financing facilities and the issuance of HT&E shares. With an acquisition multiple of 8.7x pro forma EBITDA and 10.3x EBIT, the transaction is expected to deliver over 20% EPS accretion before synergies and one-off integration costs. In addition to the new shareholding in HT&E, we are also delighted to announce that Grant Broadcasters will nominate Alison Cameron, the current CEO, to join the HT&E Board, retaining knowledge of the business and also showing their confidence in the future of the combined network. Grant Broadcasters has a stronghold in 26 markets, has 46 stations with revenues in excess of $100 million and EBITDA of $36 million. They are fiercely proud of the live and local content they broadcast to all the communities they serve, a real competitive differentiator in today's regional media and one that we are committed to continue post completion. Andrew will take you through more detailed financials shortly. But consideration will be funded by $238 million of cash and debt from existing reserves and facilities and the issuance of shares has been calculated on a 5-day VWAP of $1.93 per share. Net debt for completion is expected to be 1.4x in a highly cash-generative business, providing HT&E with ongoing balance sheet flexibility to support our continued investment in organic and inorganic growth initiatives. Under the structure, HT&E will acquire the radio and digital operations owned by Grant Broadcasters, but the [indiscernible] operations and certain joint ventures are excluded from the transaction. Acquired assets will also include land and buildings, transmitter and translator sites, valued in excess of $10 million. Completion is expected early in January and is subject to customary conditions precedent such as relevant ACMA consent, and this includes the approval of the temporary breach and proposed divestment of 4KQ. This is ARN AM station in Brisbane. 4KQ is the station that's rich in history and a hugely important part of the ARN story, and we are sorry to see it leave the network. All those involved in the stations have been integral to our success and deserve great credit for the quality stations they have helped build. CPs also includes the transfer of relevant employees and the innovation and consents for certain contracts on change of control. On Slide 7, we have provided an overview on the scale of the Grant broadcasting business. It's rare that an asset of this quality and strategic fit becomes available, and we are genuinely excited by the possibility this acquisition brings. Founded in 1942 by Walter Grant, his daughter Janet Cameron and her family, Grant, Dugald and Alison, have been operating regional radio stations, servicing local communities in regional Australia for over 80 years. The portfolio, as I say, includes 46 radio stations, 37 FM and 8 FM across 26 markets. There are also 4 additional DAB+ stations in Hobart in Darwin with Gold Coast expected to go live in early 2022. Grant Broadcasters have circa 700 employees across the 4 key regions, including the national sales team, TRSN, and centralized supporting teams. Slide 8 shows the timetable history of the business of the highest quality, a fantastic Australian success story that Janet and her family should be incredibly proud of, which has expanded through acquisitions since the late 1980s. There's a strong cultural similarity between our 2 businesses, and it's exciting to know that the leading metropolitan audio network in Australia and the leading regional radio network in Australia will operate across an 8 million strong broadcast and digital distribution network. Before handing over to Andrew, I'd like to talk a little bit about the rise and importance of regional Australia. According to the regional Australia Institute, more people are moving into regional Australia than outlet, a trend accelerated as we navigate the changing COVID world. Part of long commute, not shackled by need for face-to-face meetings in the office and the reappraisal of lifestyle priorities, more and more Australians have fewer ties to city life, and they're expanding their horizons and considering a different way of life that was never previously an option. We believe this is a huge opportunity for brands to rethink beyond our major cities and capitalize on these powerful and profitable markets. Here's a few proof points that we will actively be talking to our clients about and how the new ARN will have a unique ability to connect locally with these audiences. 8 of the 10 fastest-growing centers are in regional Australia. Over $20 billion is spent regionally on household goods, hardware supplies, clothing and footwear. Lower housing costs means higher discretionary income, and with the different filter on life more spent on food and holidays than individuals living in metro areas. 36% of all these are happily living in regional Australia. That's 9.1 million people and almost 0.25 million people migrated to regional areas in the past year, the highest on record. Advertisers are increasingly switching their spend to support media that produce live and local content with spend on regional radio growing over 20% in the past 5 years -- sorry, 30% in the past 5 years. This trend will continue, thanks to the growing distribution of syndicated metro content in regional newspapers and regional TV. Advertisers want more than just scale of audience. They want attentive and engaged audiences. And we know that local audiences are more engaged with local content, and that will be our point of difference, and we will be unashamedly be proud of. Ultimately, we see a significant opportunity to close the gap between population and revenue. Brands are only investing 10% of their media budget in regional Australia with an overwhelming majority being spent in major cities. The smart brands will now be able to extend their partnership with ARN in one easy transaction, as they look to grow market share and access growing target audiences. Andrew?

Thanks, Ciaran. Good morning all. The acquisition of Grant Broadcasters represents a truly transformative transaction for HT&E, delivering the business material scale, increasing revenues and earnings in excess of 30%. On a pro forma June '21 basis, group revenues and earnings should increase to circa $315 million and $96 million, respectively. Importantly, the acquisition provides significant exposure and opportunity for growth into key regional markets and a level of diversification beyond our current metropolitan-based business. On Slide 14, we've outlined some of the key investment metrics. The acquisition of Grant Broadcasters is highly accretive for shareholders, and in our view, represents a very appropriate use of capital. We're investing further in a sector we know extremely well with increased certainty over our balance sheet following the recent resolution of the long-dated ATO tax matter. On June 21 pro forma numbers, we estimate EPS accretion in excess of 20%, utilizing over $130 million in cash reserves, $115 million of bank debt and through the issuance of approximately 35 million new HT&E shares. The acquisition multiple of 8.7x pro forma EBITDA reflects our disciplined approach to valuation, incorporating the high-quality nature of underlying earnings we're acquiring and is comparable with historical transactions in the sector. We've called out expected revenue synergies in excess of $20 million per annum to be delivered within the first 3 years. We see significant opportunities in bringing together the collective expertise of Grant Broadcasters national agency sales team, TRSN, with our existing agency sales team, creating a market-leading offering with increased opportunities for nationally integrated campaigns and a simplified buying process, which in turn will provide our clients access to more than 1/3 of Australian consumers in one transaction. On the following slide, we have set out the combined pro forma revenues and earnings of the enlarged HT&E Group, along with pro forma leverage. Like HT&E, Grant Broadcasters is a highly profitable and cash-generative business with strong EBITDA margins of over 30%. Going forward, we estimate annual CapEx spend for Grant Broadcasters business of between $3 million to $5 million in a normal year with any significant station refurbishments or technology upgrades on top of this number. With regard to debt levels, we expect the pro forma leverage on completion for the combined business to be around 1.4x earnings, providing sufficient ongoing balance sheet flexibility to support continued investment initiatives. Reaching a settlement with the ATO in late October was a very significant milestone for the business ahead of this transaction. With this matter firmly behind us, we have a high degree of confidence in our balance sheet and can set about establishing an appropriate go-forward capital structure for HT&E, reflective of the highly cash generative nature of our business and more in line with our industry peers. Before handing back to Ciaran, you'll note we've included appendices of pro forma 30 June '21 P&L and a balance sheet for the combined group supporting the financials we've covered today. Ciaran?

Thanks, Andrew. On Slide 17, we again reiterate the compelling reasons why this acquisition will benefit audiences, advertisers, shareholders and our people. It creates a truly national scale broadcast radio and digital audio business with a presence in every state and territory in Australia with heritage brands in high-growth regions. It enables us to deliver nationally integrated commercial partnerships for our clients, giving them the ability to access more than 1/3 of Australian consumers in one transaction. This will result in material revenue synergies of up to $20 million per annum within 3 years. It provides the opportunity for an accelerated rollout of ARN's established iHeartRadio digital audio platform into regional areas. It creates new opportunities for our people to develop and grow their careers through a larger and more diverse business. And for shareholders, the transaction is accretive and maintains a conservative capital structure in a highly cash-generative business. It also accelerates our strategic intent to build the best broadcast radio and digital audio business in Australia. ARN 3 pillars for growth: content, distribution and commercialization will offer audiences and advertisers a gateway to develop deeper connections in the booming world of audio. And as we have spoken about many times, we believe media companies of the future will need to deliver audiences of scale and attention, create and distribute multi-platform content, build larger capabilities and targeting and be easier to do business with. Fundamentally, this acquisition greatly assist in the creation of such a media company capable of delivering on the future needs of our advertisers. Finally, we move on to a trading update. At ARN, revenues for September quarter grew 17% on the prior comparative period with consistent ratings and a strong commercial offering driving increased yields on certain key stations. October radio revenues finished up 8.1%, ahead of the broader market, up 6.1%. Forward bookings are pacing well ahead of the same time last year, with radio revenues expected to finish 5% to 10% of the quarter on a strong comparative period in 2020. Digital audio revenues continued to gain strong traction and now averaged circa $1.5 million per month, up from $1 million in the previous quarter. Full year cost outlook remains unchanged with total people and operating costs expected to finish $2 million to $3 million above 2019 levels. At Soprano, it maintained its recent strong financial performance for year ended 30th of June '21, with total revenues of 25% to $93.9 million, gross profit up 12% to just over $52 million and underlying EBITDA up 23% to $27.2 million, driven by organic growth and the successful integration of the Silverstreet acquisition. Performance in September '21 quarter achieved budgeted growth, and the business remains on track to meet forecasts for the December '21 quarter. At Cody, full year revenues are expected to finish between HKD 120 and HKD 125, up circa 40% of 2020 as the post-COVID recovery continues. The business has returned to be cash flow positive on a monthly basis. Thank you for your time, and I'll now open up for questions.

[Operator Instructions] Our first question comes from Entcho Raykovski from Credit Suisse.

Ciaran, Andrew, busy few weeks, you've had plenty on. So I'll just ask to my questions in turn. Firstly, interested in whether you are part of a competitive process or whether you were the only bidder in reaching agreement for this transaction. And secondly, can you give us any more color on what the earnings trajectory has looked like at Grant Broadcasters over recent years. You've obviously given us color on the regional market as a whole of the regional radio market. But anything more you can give us for the business would be useful. I presume there was a COVID impact in there. But maybe just taking that out, what the earnings trajectory has looked like. And just finally, what are the sources of the revenue synergies, given they seem to be a pretty key part of the transaction? Is it higher rates that you think you can charge post the combination? Is that additional advertising you can bring to regional areas? And is it just about sort of metro advertising into regional areas or can it work the other way as well?

Thanks, Entcho. In terms of a competitive process, no, it wasn't. It was discussions that opened up between ourselves and Grant Broadcasters. I'll let Andrew take the trading one. In terms of the source of revenues, yes, I think, yield is something that we kind of look at. But really, what we're looking at is that national advertising revenue. The business is incredibly good at generating direct revenue. And what we've seen is that it recovered really quickly and much faster that the direct revenue recovered really quickly and much faster post-COVID. But from our perspective, we see an opportunity to drive increased dollars in from national advertisers on 2 fronts. Firstly, it's our ability to provide national solutions in one easy transaction. And secondly, the education of advertisers on just how important the regional market is, which is beginning to get traction, and we're looking forward to sort of talking that through a bit more.

In terms of the recent revenue trajectory, it has been fairly steady as you would have read elsewhere. Regional markets advertising in regional markets wasn't as heavily impacted as a result of COVID. And then over the past year, the revenues have sort of stayed fairly steady. Now they did come back slightly in the sort of the last lockdown as with others. But they really haven't been impacted as hard. If you look into the sort of the breakdown, the revenues are almost the inverse of us. So a lot heavier into direct. And as we know, those regional markets have been more resilient than -- or more or less impacted than some of the metro markets. The sort of circa 35%, which is the national revenue piece with larger advertisers, national brands, et cetera, did have some impact through COVID, but not to the same extent as Metro.

I think, Entcho, if you look at SMI, it shows that the regional market is up 7% -- over 7% for the 9 months at the end of September, which is ahead of the Metro market.

Our next question comes from Tom Beadle at UBS.

Congratulations on the acquisition. I just had 3 questions. The first one is probably a bit of a follow-up on Entcho's. I guess what we -- but it's probably trying to work out is what's a post-COVID level of revenue and earnings. Just wanted to check, you provided that trailing EBITDA for Grant Broadcasters. Has that been adjusted for JobKeeper or any one-offs that we should be aware of? Maybe just on the trading update, just on -- I'd be interested just to understand sort of how the reopening has impacted Sydney and Melbourne in particular. Have those markets rebounded as expected? And have all the advertisers come back? Or are there still some yet to return? And just finally, on the -- I know you've got sort of a share buyback out there. Will that continue? Or will you sort of -- I guess, discontinue that now that you've made this acquisition?

I'll take just the market recovery, Tom. Yes, I think, with the leasing of restrictions and coming out of lockdown in Sydney and Melbourne, we have seen, obviously, growth of advertising into November and December. November is tracking particularly well. I think our issue is that we're looking at how we can drive increased yields, which is very important and something that we're really focused on, on a day-to-day trading perspective. Our advertisers coming back, yes, they are. We're seeing an uplift in both agency and direct as people are trying to sort of look to the busy Christmas period. So we're pleased with how the market has reacted post the lockdown piece.

In respect to the numbers, Tom, so JobKeeper and a couple of other underlying abnormals have been removed from the numbers. On the growth trajectory, the growth for this business has been really steady across the last few years. As I said, 2021 wasn't as significantly impacted by COVID as our business was. And then if you give a flavor of the earnings there, they're on track with their budgets up under this point in time for FY '22.

And I'm just sorry, the third question, just on the share buyback. Will that continue?

At this point in time, Thomas, we haven't made a decision on the buyback.

Our next question comes from Darren Leung from Macquarie.

Just 2 questions from me, please. One, just on the revenue synergies. Can we please confirm if -- it sounds like your EPS accretion number of 20% doesn't include revenue synergies. But if you include it, is it fair to say that sort of the EPS accretion could be well over 50% in outer years? That's question one. And question two is, is there any color you can provide on your thought process around the federal election and the impact on regional markets over the next 12 months or so?

Just in terms of the synergies, Darren, yes, the 20% we talk about doesn't take into account future revenue synergies. So your numbers are correct on that one. In terms of the election, I think, it's particularly important in regional markets where there is -- tends to be a lot more regional advertising from the election. Whether that's in March or in May next year, it's something that we're looking at. But certainly, there tends to be a bit more of a balance for regional advertising and election period than there would be in the metro market.

Is it fair for me to conclude that if we look on the last 12 months basis, that means the numbers are probably too low versus what's coming up in the next 12 months?

If the government and political parties are intending to use regional radio and metro radio, then yes, as with all radio advertising in election year, we would look at it. I think sometimes what we find is that some advertisers don't spend on radio during an election period because of -- they want to get lost in the noise. But I think next year, if you look at the indicators for the economy for the broader advertising market, it looks it's shaping up to be quite a busy time for advertising. And I think there's many businesses that are out there that will need to advertise, that will want to advertise as well as political parties. So it will be interesting to see what the overall impact is.

[Operator Instructions] Our next question comes from Brian Han at Morningstar.

I have 2 questions, if I may. The first is in terms of your metro radio competitors who already have regional presence, in what areas do you think you can do better in terms of leveraging your content in regional areas or tapping into the regional advertising opportunities? And the second is, compared to its competitors in regional markets, how much more local content does Grant broadcasts, for example, as a percentage of, say, the [ radio ] schedule?

I suppose if we're looking at competitors that we have in the radio market, I think, if you look at the track record of ARN over the last number of years competing with those very good competitors that we have, we've demonstrated that we turn in superior performance. We've had 16 consecutive services, number one. We're growing share. We are delivering increasingly digital audio solutions. We are rolling out new primarily digital audio products to help us commercialize. Things like the Audio Kannada we launched a few weeks ago, things like Dynamic Audio, which is a world first. So I think our reputation as being a superior radio operators is there for everybody to see. I think we're on the back of that, we understand that live and local content is the key winning attribution for radio. It drives audience. It keeps audience engaged. And in a world where people think that radio is going to be slow and swallowed up by sort of global players who -- like Spotify and those sort of guys. Actually, we've seen through our COVID that radio's role is extremely relevant. And it's because we maintain live and local content. If you look at the role of regional radio particularly at crises times like the floods in Brisbane, like the bush fires that happened, like what's happening in COVID, that's when regional radio really comes into its own. And the strength of the audience, it's something that we'll be working very, very hard with advertisers to reinforce. I think what we're looking forward to from an engagement with advertisers' perspective, is bringing the knowledge that we have in metro radio, the creative solutions that we provide, the partnerships, the integration, the strong relationships that we have with agencies that have been very big brands and helping them roll that out in one easy transaction into regional markets. That's a significant opportunity for us and one that we're going to work very hard on. In terms of local content, there is a bigger restriction of local content creation, that's an ACMA regulation. That's, obviously, something that we will conform to. But even if that wasn't there, to be honest, whether it's a big stars like Kyle & Jackie or Christian O'Connell or whatever station may be in Ballarat or the Gold Coast or the Sunshine Coast are in Port Lincoln, those personalities in those markets are just as strong as Kyle & Jackie would be in Sydney very important. And that's what audiences want and that's what we'll keep people engaged in radio in the long term, in my view.

While I have you there, just on that point, in the 20-odd markets that Grant operates in, how many of those markets can actually receive metropolitan radio station signals?

I'm not sure off the top of my head, Brian, but I was -- if you think of Brisbane, obviously, you've got [indiscernible] you've got [indiscernible] you've got the Gold Coast to some extent that they cross over. So that's an opportunity, if you like, in terms of audience extension. You look at Adelaide and you've got Port Lincoln in areas like that. But again, I think, if you were living in Port Lincoln, if you're living in Ballarat, the crossover of metro, is not something that is of significance to you because you can easily consume content on a digital platform, if you want to. So people are still searching out that local continent because it delivers all the aspects that I've spoken about earlier on.

[Operator Instructions] We appear to have no further questions. So Ciaran, I'll hand back to you. Thank you.

Thank you very much, everybody, for your time at such short notice. We're very pleased with the acquisition that we were presenting today. We think it's very transformative for HT&E. We think the upside for all the reasons that we've spoken about are very strong. And we're looking forward to working with Grant Broadcasters and the team there to deliver something quite exciting a national radio network of scale, broadening our digital audio capabilities and targeting and content creation and providing really creative national solutions to advertisers. So a lot to do, but we're very pleased where we sit today. Thanks, everybody.

Thank you so much. Ladies and gentlemen, that does conclude the call today. Thank you all for joining. You may now disconnect.