GTN Limited (GTN) Earnings Call Transcript & Summary

Good day, and welcome to the GTN Limited Fiscal Year 2020 Year-end Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] Representing the company today are Bill Yde, Managing Director and Chief Executive Officer; and Scott Cody, Chief Financial Officer and Chief Operating Officer. Before I turn the call over to Bill, I would like to remind the listeners that this call is subject to the disclaimer and important information included in the company's year-end earnings presentation. With that, I'll turn the call over to Bill Yde, Managing Director and Chief Executive Officer. Please go ahead.

Thank you. As we stated in our trading update in May, the COVID-19 pandemic has had a significant negative impact on the group's financial performance for fiscal 2020. Revenues have dropped 13% for the year. All of this decrease occurred in the fiscal fourth quarter, where revenue decreased 57% when compared to the fourth quarter of the previous year. This shock to the market ruined what was shaping up to be a good growth year for us. Year-to-date revenue for the 9 months ending on 31 March was up 2% despite several million dollars of COVID-related cancellations in the latter half of March. Although we were able to reduce costs during COVID-19 pandemic, not all of the cost reductions had an immediate impact due to the fixed cost nature of our business, and the revenue reduction had a significant negative impact on our profitability measures. There are, however, a number of positive things to report. In Brazil, revenue increased over last year in local currency despite the impact of COVID-19 pandemic. Brazil was our fastest-growing market by a considerable margin and had achieved 9 consecutive months of record revenue prior to the outbreak of the pandemic. Consistent with our growth strategy, we opened Curitiba, our 8th Brazilian market. While Brazil has been especially hard hit by the COVID-19 pandemic, our management and position in this market is strong, and we expect to rebound well when conditions return to normal. After a slow start to fiscal 2020, Canada produced some of the largest revenue months in its history when compared to the same month in previous years. Canada was heading strongly in the right direction prior to the impact of the pandemic. For the first time in our history, Australia accounted for less than half of the group's consolidated revenue. We believe that the geographic diversification of the group's revenue and earnings is a positive sign for the future. We returned over $16.7 million to our shareholders in the form of dividends and share buybacks during fiscal year 2020, while still maintaining a strong balance sheet. Our strategy to deal with the current difficult environment and put the company in a position to take advantage of stronger markets in the future is to protect and maintain our 2 most valuable assets: our unparalleled affiliate networks and talented sales and management teams. We have also put in place measures to conserve cash and eliminate expenses where possible. In order to accomplish this, we have had to make some difficult choices, such as eliminating Nine Radio from our network and reducing the number of our entry-level sales persons. These and other strategic cost reductions, combined with our strong balance sheet, will enable our business to be more resilient during this downturn. At 30 June 2020, our cash balance was $57 million and our net debt was only $7.4 million. Our total gearing ratio of net debt to adjusted EBITDA was 0.52x as of 30 June 2020. As part of our cash management strategy, in May 2020, the company refinanced its bank facility that was set to expire in February 2021. Scott will discuss the details of this shortly. As part of the refinance, our lead lender took over the entire facility, which was previously shared by 2 lenders. We believe that the bank's willingness to commit additional cash to our bank facility is a strong sign of their confidence in the company. Effective September 1, we have appointed Peter Tonagh to our Board of Directors. Peter has a great deal of experience as a C-level executive with major media companies in Australia, such as Foxtel and News Corp Australia. We believe that his expertise in the Australian media sector will prove especially valuable to our Australian operations, which are the largest part of the group. We look forward to his insights as we navigate the uncertainty brought on by the COVID-19 pandemic. I will now turn the call over to Scott for a complete review of the financials.

Thanks, Bill, and good morning, everyone. Revenue for fiscal 2020 decreased 13% to $160.9 million. Revenue in all of our operating geographies decreased when compared to the previous fiscal year. When compared to fiscal 2019, Australia revenue decreased 16%, Brazil revenue decreased 2%, Canada revenue decreased 19% and U.K. revenue decreased 6%. Through third quarter fiscal 2020, revenue was up compared to the previous year in all of our markets outside of Australia. Revenue from our Canada and United Kingdom markets was aided by favorable foreign currency movements, while revenue from our Brazilian operations was negatively impacted. When measured in local currencies, Brazil revenue increased 6%, United Kingdom revenue decreased 9% and Canada revenue decreased 23% compared to last fiscal year. Adjusted EBITDA, which we define as earnings before interest, taxes, depreciation and amortization, adjusted to include the noncash interest income generated by the financing component of our long-term station affiliation agreement with Southern Cross Austereo and excludes transaction costs, foreign exchange gains and losses, refinancing losses and gains on lease forgiveness, was $14.2 million, a decrease of 62% compared to fiscal 2019. We consider it appropriate to add the financing component of our long-term station affiliation agreement with Southern Cross Austereo to EBITDA because EBITDA includes a large portion of noncash station compensation expense related to the agreement. And by including both amounts in adjusted EBITDA, we believe it provides a clearer view of the financial impact of the agreement. The decrease in adjusted EBITDA was due to the drop in revenues during the period, as operating expenses decreased $0.8 million when compared to the previous year. The largest component of the expense reduction was sales, general and administrative, which dropped $3.3 million, 9%, primarily due to lower commissions and bonuses on the reduced revenue. Network operations expenses dropped $0.4 million, 2%, while station compensation increased $2.6 million, 3%. Station compensation increases included 12 months of Rogers in Toronto compared to 8 months in FY '19, an expansion of the relationship with one of our key affiliate groups in Australia and additional station compensation in Brazil from new markets. There were no savings in fiscal 2020 related to the termination of Nine Radio as these agreements did not end until July 2020. Adjusted NPAT, which is defined as net profit after tax adjusted to add back the tax-effected noncash amortization expense related to acquired intangible assets, fell 76% to $4.9 million. The primary driver of the shortfall was the revenue-related decrease in EBITDA that was previously discussed. In May 2020, the company refinanced its bank facility that was set to expire in February 2021. The new facility has no scheduled principal repayments and the due date has been extended to 30 September 2023. The current interest rate is BBSY plus 2.5%, which is approximately 2.6%. Distributions, including dividends and share buybacks under the revised bank facility, are limited to 100% of adjusted NPAT. Because of this, the earliest the company is likely to be able to make distributions will be after 1H FY '21 reporting in February 2021, should adjusted NPAT be positive for that 6-month period. Consistent with our desire to conserve cash and the distribution limitations of the new bank facility, the Board has decided to not declare a final dividend for FY 2020. I will now turn the call back to Bill for an update on fiscal 2021.

Thanks, Scott. While July and August 2020 revenues have decreased sharply when compared to July and August of 2019, the amount of the decrease is an improvement over what the group experienced in April, May and June. Due to the fixed cost nature of our business model, the improvement in revenue compared to fourth fiscal quarter 2020 will lead to an improvement in EBITDA over that reported in fourth quarter 2020. Future results are likely to be highly dependent on COVID-19 impact on the markets in which we operate. However, when compared to fourth quarter fiscal '20 performance, the initial trends for fiscal year '21 are positive. All 4 of our markets continue to be positioned to perform well with solid affiliate lineups, strong sales staffs and virtually no direct competitors. While the COVID-19 pandemic has had a material impact on our operations and results, we have strategically lowered our costs where possible. We have a strong balance sheet with ample liquidity and believe that we will perform well when markets improve. This ends our prepared remarks, and we will now open the lines to questions.

[Operator Instructions] The first question is from Callum Sinclair of Macquarie.

Maybe just starting with the macro. Can you just speak to the differences between the regions in terms of how COVID has impacted the various ad markets? And maybe the kind of booking visibility that you're seeing at the moment across each of those countries?

Yes. Look, it was dramatic in all of our markets, the initial impact. Early in March, we started raising -- receiving massive cancellations in all 4 of the markets. Through April, the cancellations kind of continued and then things started to ease up a little bit in May, started to get a little bit better in June. And so far, July, August and September, the billing that we're adding is a improvement in all markets over the billing that was added in April, May and June. It's kind of how we expected it to go. No one had a clue, and we still -- none of us still do have a clue. We don't know when COVID will end. We don't know when the markets will come back. Those are all completely unknown. But we did cut our costs significantly. We did prepare ourselves. We got a strong balance sheet, and we're really positioned to make this -- to hold out quite a while until the markets do come back.

Yes. No, that helps. And maybe just, obviously, on the cost side of things. Clearly, there's a big improvement in July and then obviously into August, relative to the final quarter of the year. But just how much of that is both top line impacts and operating leverage in that versus sharper cost? I guess, just trying to understand how much further you might see cost reduction benefit, adjusted EBITDA on a monthly basis beyond August, will there be some Nine or other agreements and cost outs?

I'll let Scott talk to the details of the cost cuts, but we do have more that we can cut. We're trying to maintain a balance between keeping decent staff and decent products and as the markets come back. And we are seeing positive increases, especially in Canada and Great Britain. We're seeing very, very decent returns coming there. But as far as the specific cost cuts, I'll let Scott tell you about those.

Yes. So yes, I'd say it's probably about $7 million right off the top of my head that has not been reflected at all in the numbers. There's some other parts that are -- that maybe partially reflected. But there's clearly at least $7 million that have not been reflected at all. It does -- it is -- it does get a little hard to parse out because some of these things, if revenue increased better than we expected, may come back in even though, but right now, we consider them permanent.

Yes. That helps. And just to clarify, that $7 million is on a run rate basis for, I guess, looking forward to FY '21 full year?

Yes, sir.

Yes. Great. That's fine. And then maybe just going back to the full visibility. I know previously, I think -- I know the markets pulled back in terms of the number of weeks out that you can probably see. But with the cancellations that happened from some customers in March and April, clearly, some industries weren't actually open for business, and that's canceled. So I guess, based on the conversations that you've had with some advertisers, had some of that budget actually rolled forward into future periods where it's still available to marketing teams? Or is it sort of canceled entirely and we're sort of entering in -- yes, I guess, a completely new budget period for some of these businesses?

Yes. You've kind of touched them all, all of those things. Most of the activity we had in Brazil was like pretty much canceled and not rescheduled, a little bit was. We've got some fairly major orders in Canada that were put off until later when their stores can open back up, didn't cancel, just moved them, and that was good. But like Australia, with Melbourne on and back off, that one has been up and down. So you can't really point to anything, but everything you mentioned happened. But look, we're -- we are -- we do feel like the environment is improving in all of the places. Maybe people are just getting used to it. But the sales environment, the briefings are improving, the contacts improving. So we don't feel it's -- we don't feel we're in desperate straits at all.

Yes. Now that helps. Maybe if I could just ask one last question. Forgive me if it's disclosing the accounts. I haven't got through each page yet. But are you getting JobKeeper in Australia? Just assuming you would be, is that sort of helping you for this September quarter materially? Any, I guess, help on wage schemes and how you might benefit in this sort of quarter and for the first half '21 would help.

Yes. It's not a big amount because the thing about our business is we're not very labor intensive. So the -- but you may -- look, every bit helps, but...

Yes. I was -- we also -- they also have a similar program in Canada, which is called the Canada Emergency Wage Subsidy. So between the 2 programs, we had about a $1.4 million pickup. Of that, about $850,000 was in Australia and about $500,000 was in -- a little over $500,000 was in Canada. So it was helpful, but certainly, not the driver in some of the other places that you've seen. So that's why we didn't really highlight it in the results.

Our next question is from [ Mike Younger of Grace. ]

Just wondering if you can give us a little bit more quantification of how July and August revenues tracking versus pcp, please?

July and August combined are doing much better than the 50% decrease that we had in the fourth quarter and dipping down into -- every market is different, like Australia maybe getting into the 40s, whereas Great Britain is only in the 20s. And we even had a month where Great Britain -- I think it's July, Great Britain is only down 2%. And Canada has actually got a month that's up. But Australia, where our biggest portion of our revenue is, is still not where we want it to be, but it's improving, like, every sign for every month in all the markets is better. We kind of built our own internal models to see how long we can last under bad circumstances. And we're not making projections because it's insane to do so under these conditions. But the model -- we're doing better than the model that we built. We're happy with where we're at. We're happy with what we've maintained from our business. We're happy with the improvement in revenue, and we're happy with our balance sheet that we can hang on for a long time.

Yes. Okay. And can you comment on whether the arrangements with Nine Radio, whether that change in the lineup that you're now offering early days, but is that having an impact on revenue or rate at this point?

We haven't lost an account yet because of it. It's a very strategic thing that we were looking at anyways because most of the Nine Radio stations had lost all of their ratings. And virtually, 2GB and 3AW were the only stations left that had significant ratings, but they are much older demographics. So by eliminating 100,000 spots of our whole network that were very low-rated stations, and even GB (sic) [ 2GB ] and 3AW didn't have high younger demos, and replacing those spots with things like KIIS and Nova and smooth, our offering actually became better for advertisers. So we've had a wide range of responses. Some people said, they really want those stations anyway. Some people asked if our reach has improved or gone down and because we're adding more smooth and Nova and KIIS, and all those -- actually, our reach is going up. So it was something we had in the works for several months anyways that we had to renegotiate Channel 9. We'd like to keep them. We always want them -- have all of the stations and all the networks. But during this particular portion of the pandemic, having those stations has no impact on our revenue, but has a material impact on our cost. So it was quite easy to walk away at this point in time. And the goal is to get through this pandemic, survive as strong as we can and then reload when things come back. But in a long way, the cost impact was very beneficial to us getting rid of it. The revenue impact was next to none.

Okay. And I presume that when you talk of the $7 million in costs that have come out of the business, $6 million of that, is that Nine agreement?

Yes. That's correct.

Yes. And I guess just back on the prior question around the July and August trading. So I mean, we saw around the listed radio company you're talking to, I think in the order of a 25% decline as to what they're looking at, at the moment. So are you suggesting that your business is still down around that 40% mark?

Not in all markets. Every market is really different right now. Like I said, Canada is actually ahead. Great Britain is very, very close. Brazil was worse. And Australia is improving quite a bit, but not where we want it yet. It's very easy for most people to compare us to radio stations, so you're doing worse on radio stations. But you got to remember, we're actually a different product. We don't -- I guess the analogy I would use. I'll give you analogy, but we don't sell small packages because we make people buy a whole network. So where a radio station can sell a $5,000 or a $10,000 or $20,000 order to somebody, we can't really do that. So we -- there's -- when things are bad like this, there's -- we lose most of our top end revenue. So I'll give you 2 examples. If Mercedes -- if a stock market crashes and a lot of people lose their money at high income levels, probably the sales of Mercedes-Benz goes down, whereas at the low end, probably FIAT still sell because nobody -- they don't care. On the opposite thing, if a factory goes out of business and a lot of lower end jobs lose their -- a lot of people lose their jobs, probably the sales of FIATs go down more, but it doesn't affect the sales of Mercedes. So I think that because we're a much more expensive and bigger buy for bigger advertisers, we're tending to get hit a little harder. And that's how I would explain it, I guess. We'd be really happy, I think, if somebody is doing 25% down right now, they're going pretty good.

Yes. Okay. And then your cash flow conversion was exceptionally strong. Is there anything in particular that is one-off or temporary that will reverse into the next period?

I'll take that one. Hopefully, because really, the whole cash flow conversion was the fact that we collected our AR. And so the fact is, is that, that will start to -- hopefully start to unwind as revenue increases, so there will probably be a working capital need if revenue starts to recover like we hope it will over the next 6 to 12 months. But I mean, with the actual conversions, what you'd exactly expect is basically, we collected almost all of our AR from the period before the COVID. And so that is a very positive thing.

Okay. That's the other benefit of having big orders with big companies as your receivables are usually less stressed than small order.

[Operator Instructions] Since we have no further questions on the line, I would now like to hand the call back to Mr. Yde for closing comments.

Thank you. Despite the impact of COVID-19, we are confident that we will survive the crisis and return to profitability. We have retained an excellent management team, maintained a strong balance sheet, implemented strategic cost cuts, and these factors position us favorably to capitalize on the expected advertising recovery. We are confident that we have ample liquidity, even if the recovery is slow to arrive. We look forward to speaking to you again after half year fiscal '21 results. Thank you all for attending, and we'll talk to you soon. Bye now.

Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.