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. 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. Bill.

Thank you. We are happy to report a solid improvement in the results for fiscal year 2022. Our revenue increased 12% despite a wide variety of economic difficulties in some of our markets. The revenue achieved for fiscal year '22 was almost equal that of fiscal year '20. The revenue increase led to a 22% increase in adjusted EBITDA when compared to fiscal year 2021. The government wage subsidies during these periods partially hide the actual improvement in results. With the government subsidies [indiscernible] JobKeeper and Canadian Emergency Wage Subsidy are disregarded, adjusted EBITDA increased 43% over fiscal year 2021. This is a very impressive increase. Although operating expenses increased during the period, they were still almost $4 million less than fiscal year '20 on comparative revenue. Australia revenue increased 14% over the prior year, we felt this was a very good result and the continued revenue rebound in Australia as most welcome as this is our largest and most profitable market. A big achievement in Australia is that during the year, we were able to achieve our highest spot rates in history for TV, metro radio and regional radio, keeping our rates high, will pay off as market demand increases. During the second half of fiscal year 2022, we began offering drone light shows in the Australian market for both advertising-supported shows and cash fees. Drone light shows involved the operation of many drones simultaneously to create images that are viewed by audiences in a manner similar to traditional fireworks show. Our first advertiser sponsored event occurred at the Sydney Royal Easter Show, which was great exposure for our product. Canada revenue increased 11% compared to fiscal year 2021, 6% in local currency. Toronto, our largest and most important market in Canada, entered the fiscal year in lockdown due to the pandemic, which led to a 4% decrease in revenue for the first 6 months of the fiscal year. Once the lockdowns and restrictions were lifted, our business started to perform much better, culminating in a 20% increase in revenue in local currency for second half of fiscal year 2022. Brazil once again became our fastest-growing market as revenue increased 47% compared to fiscal year 2021, 39% in local currency. Brazil revenue in local currency is just under pre-pandemic levels. We are happy with the resiliency this business has shown. United Kingdom revenue increased 4% compared to fiscal year 2021, 2% in local currency, recording its highest revenue year in history in local currency. The U.K. continues to be a meaningful contributor to the group's profitability. Our ongoing strategy is to focus on maintaining our unparalleled network and sales infrastructure as we believe this gives us the best opportunity to maximize revenue and profitability both now and in the future. While focusing on the current core business, which we believe has a good deal of further growth potential, we are also constantly looking for new opportunities that will complement our existing business such as the investment in drone light shows. The drone light shows are high-impact visual messages that are supported by our high-impact audio traffic performance. Keeping a close watch on expenses helps us balance the demands of the core business with the investment for new growth opportunities while still increasing profitability. Our strong balance sheet has enabled our business to continue to be resilient regardless of market conditions. I'll now turn the call over to Scott for a complete review of the financials and our capital management.

Thanks, Bill, and good morning, everyone. Revenue for fiscal 2022 increased 12% to $160.1 million. Revenue increased in all of our operating geographies. When compared to fiscal 2021, Australia revenue increased 14%, Canada revenue increased 10%, brazil revenue increased 47% and U.K. revenue increased 4%. Revenues from our non-Australian operations benefited from favorable foreign currency movements. When measured in local currencies, Canada revenue increased 6%, United Kingdom revenue increased 2% and Brazil revenue increased 39% 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 excluding transaction costs foreign exchange gains and losses, refinancing losses and gains on lease forgiveness, was $17.1 million compared to $14.0 million in fiscal 2021, an increase of 22%. 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 amount 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 adjusted EBITDA increase was driven by a 12% increase in revenue for the period. Operating expenses increased 10% compared to FY '21. The largest portion of the increase was $7.2 million, a 7% increase in network operations and station compensation expenses. The largest portion of this increase, $5.5 million, was due to a 6% increase in station compensation. Selling, general and administrative expenses increased $6.6 million, with the largest portion of the increase due to higher selling expenses, primarily related to higher personnel costs from both commissions and bonuses earned on the increased revenue for the period as well as expansion of sales staffing. $1.8 million of the operating expense increase related to JobKeeper and the Canadian Emergency Wage Subsidy, which are treated as a reduction in general and administrative expenses. The group recorded $0.7 million benefit from these programs in FY '22 compared to $2.5 million in FY '21. Operating expenses related to the newly launched drone operations was $0.7 million for FY '22. 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, increased 59% to $7.4 million, The increase is primarily related to both the improved operating performance for the year as well as a $0.7 million reduction in finance costs, primarily due to lower amounts outstanding under our debt facility. During the pandemic, the group and its lender agreed to modify certain covenants and other terms of its debt facility. As a condition of this relief, the company agreed to restrict distributions, including the elimination of dividends and share buybacks and other tightening of the terms of the debt facility agreement for the period of the modification. These modifications expired upon the delivery of the 31 December 2021 financials and related compliance certificate. Distributions, including dividends and buybacks, have reverted to the previous restriction of 100% of adjusted NPAT. The group was in compliance with all its financial covenants for fiscal 2022 and continues to be so. We repaid $20 million of our outstanding debt facility through FY '22 while still maintaining a strong balance sheet without needing to raise additional capital. At 30 June 2022, we had $34.8 million of cash, and our net cash balance, cash less financial liabilities was $1.2 million. Due to the group's strong balance sheet and improved financial performance, the Board has decided to declare a final dividend for FY '22 of $0.013. The dividend is unfranked. In addition, the company has announced it is resuming its share buyback that was canceled due to the economic impact of the pandemic. I will now turn the call back to Bill for an update on fiscal 2023.

Thanks, Scott. July 2022 revenue increased 6% compared to July 2021. This increase was led by our Australian and Brazil segments, which have grown significantly over last year. U.K. and Canada had declined due to tough market conditions. Due to the large variable component of our station compensation agreements in the U.K., the impact on profitability was mitigated compared to what similar revenue decrease would have in our other markets. August revenues for the current fiscal year are also expected to be up 6% to 8% compared to August 2021. Once again, Australia and Brazil have led the growth in revenue with each exceeding 20% or higher growth over last year. Further results are likely to be highly dependent on the economic conditions in the markets in which we operate. However, we are pleased with the revenue performance for the first 2 months of fiscal year 2023. All 4 of our markets continue to be well positioned with solid affiliate lineups, strong sales staff and virtually no direct competitors. We have a strong balance sheet with ample liquidity and believe that everything is in place for strong financial performance as economic conditions improve. This ends our prepared remarks. We will now open the lines to questions.

[Operator Instructions] Your first question comes from the line of Julian Mulcahy from E&P.

Bill, I just maybe you could talk about the addition of inventory for the year, I see that Australia about at 8% of inventory. I'm just wondering why you're doing that given the sellout rates are so low and they kind of dip to 49% in the second half.

This all kind of relates back to returning back as we go back towards normal. We used to have 9 radio, all of the radio stations, and we dropped out of there right as the pandemic started. And this, roughly the spot rate that we were paying for the stations of about $56 a spot. Some of those stations were recently leased by base broadcasting and we were able to enter into an agreement with them to pick up phone stations at a very, very minimal rate of roughly $14 a spot. So we believe that this increase in inventory does not cost us very much money at all but certainly provides us for more inventory as we head into the July through December portion, which usually we had a need for inventory. So very little additional inventory or very little additional cost from that and had very, very little expense. Hardly any risk whatsoever. The additional costs that we have in compensation are all related to -- we have successfully renewed both the Nova and smooth affiliation agreements for another period, and we have successfully renegotiated our affiliate remote HT&E.

Okay. And so we feel like the sellout rates, I mean, it's been languishing for a while now around sort of 50% mark. How does that -- do you think that's going to move up much over the next year or we now have a problem with the questions over the ad cycle?

Yes. Look, the sellout rate has been very, very, very much higher in some of our peak months as demand occurs. And the other thing to kind of keep in mind it is about 40% of its inventory is regional, which we don't have people out in the region trying to sell this. The regional is there as an accommodation for our big advertisers when we want to reach the whole country. For instance, KFC advertising with us at quite a high level. And one of the reasons they do is we cover every single one of the KFC restaurants in the entire country because we have such a large regional network. So the sellout ratio for our metro stations is higher. And in the peak period has been getting higher, we very clearly expect that to expand as the market growing. So the market grew, I think, something like 8% last year. We grew, I think, 14%. So we're -- you have to kind of anticipate where the market is going and prepare for that. So we're still operating at extremely reasonable levels of expense. We've got better and more inventory prepared for the July through December period that we're expecting to be a decent period.

Right. Okay. And just remind us how the business typically travels during sort of weakness in the economy in terms of [indiscernible]?

Our -- look, the July through December is almost equal every year to the January through June period with June being our highest month of all times and then the October, November, December being the very high periods. So July, August are weak, January to February are weak, April is weak. So each of them has a weak month, but all in all, they also both have their strong months. But walking into October, November, December, we are extremely encouraged because we finished -- in Australia, for instance, we finished both July and August, pretty close to 30% ahead of where we were last year. So we know that the demand is returning and our rates are higher. So we should be able to produce a pretty good first half.

Okay. Good. And with the U.K., so I mean U.K. down on last year, but the last year's first half was quite elevated. It was just like a one-off blip, and it's back to a normal run rate on a half-by-half basis?

U.K., I think having a couple of things because the level is different than our others. It's strictly a cost per thousand, which is dictated by the agencies in the market. So they don't have the ability to get more than what they have. So if the people listening to radio, let's say it's $1,000 per 1,000 people, and it drops to 900 people, you have 10% less listeners and you're going to get 10% less revenue. So part of that drop was the listeners listening to the commercial radio drop in proportion of what was listening to the BBC. Now just coincidentally, the book after the financial year ended our audience has increased back up. So we're hoping that, that will come back. The other problem is occurring in Great Britain are obviously massive inflation, the concerns over the neighboring war with Russia, all kinds of issues. So Great Britain is not having its best time. But as we say, the U.K. market because it's a variable cost market, it's down to showing our costs go down significantly. So it doesn't hurt as much as the other 3 markets.

Okay. And Canada, is it now totally clear in terms of all the markets are open? Your salespeople are out knocking on doors again?

Yes. The markets are totally back open. As you can see, we had a really strong second half of the year there. July, the market in Canada in July was extraordinarily weak compared to where we were getting. So our July month in Canada was down. We don't expect that to be a long-term impact. The key category in almost all of our markets that we're missing is the auto. As you know, autos have been in short supply and people are advertising. Auto brand is usually one of our very, very top categories. In Canada, pre-pandemic, we were getting about 26% of our revenue from the auto industry. Currently, right now, we're sitting at about 4% and 5%. So we expect the auto industry to come back. We don't think the auto industry is over. I actually personally believe the auto industry will become a heavier advertiser because everybody is going to be switching from petrol-driven cars to electric cars. Everybody is going to be producing more electric cars, there's going to be more demand to try to create a brand awareness, and we think -- in not too distant future, we think auto advertising will be significantly higher. But certainly, we don't think the auto industry is over, but it's weak. So in Brazil, in Australia, in Canada, virtually every market is in -- virtually every market is down AUD 5 million in Australian currency revenue. Canada is even lower. We had -- in Canada, we had $9 million in auto advertising in 2019. And for the current year, we currently have about something like $500,000 only. As you can see, we're doing pretty good in the other categories, and we believe auto will bounce back. And when it does, you should be able to see a pretty big spring in our numbers quite easily.

Okay. cool. And just finally, on the drone operation. How significant do you think that can become?