NZME Limited (NZM) Earnings Call Transcript & Summary

Welcome to the NZME 2019 Full Year Results Webcast. My name is Julia Belk, Investor Relations Manager at NZME, and presenting on the call today will be NZME Chief Executive Officer, Michael Boggs; and NZME Chief Financial Officer, David Mackrell. [Operator Instructions] I will now hand you over to Michael Boggs, who will start the presentation.

Good morning. I'm Michael Boggs, the CEO of NZME. And with me today in Oakland is our CFO, David Mackrell. Thank you for joining us for our 2019 full year results briefing. If you're on the webcast, you'll also be able to view our presentation pack as we talk through the results. I'll take you through our results summary, market dynamics and channel performance before handing over to David, who will take you through the 2019 financial results. I'll then discuss our strategic priorities, our sustainability commitment, our potential acquisition of Stuff and our outlook for 2020 and beyond. We'll then have time for your questions. See Slide 3. It summarizes our 2019 results. Operating revenue was $371.7 million with strong growth in Radio revenue, growth in new Digital revenue streams, offset by lower Print revenue. Performance reflects the strong momentum in all of our key strategic priorities. I'd especially make note of this growth in Radio revenue, which had a positive impact on our overall performance for the year. Operating EBITDA was $50.6 million, which is down $4.1 million or 7% on 2018, an improvement on the 17% decline in the previous year. I should point out that the 2018 year included an extra week's trading. When we look at the years on a comparable basis, 2019 operating EBITDA was down 5% on the full year, but in the second half, it grew 4%. Contributing to this was our continued focus on our cost base, resulting in savings of 4% compared to the prior year. Operating NPAT was up 4% on the prior year. We have reported a statutory net loss after tax of $165.2 million, impacted by an impairment to intangible assets of $175 million in the year. This impairment is due to intangible assets, which were the result of historic transactions, which occurred prior to the demerger. This is an accounting charge only with no change to cash flows and no impact on bank covenants. Our ongoing focus on capital management resulted in a $23.6 million reduction in net debt to $74.7 million. Overall, these operating results are pleasing, given some of the ongoing and well-documented challenges faced by our industry. On Slide 5, you'll see 2 charts that show some interesting trends in our markets. It's been pleasing to see the turnaround in Agency Advertising growth across the market. The turnaround in May, peaking in September, delivered a positive growth number for 2019. The impact of the 2019 Rugby World Cup was a positive one for the market. In the year, Radio growth was nearly 4% and Digital display showed some strong signs of recovery. Unfortunately, newspaper advertising across the agency market didn't benefit from the overall agency growth and was down 10.9% in the year. It was also good to see business confidence returning as highlighted by the ANZ Business Confidence Index. We're looking forward to that positive momentum continuing. However, we note that there are reports of some pessimism in early 2020 primarily due to trading and economic uncertainty following the coronavirus outbreak. We are seeing some early impacts of this on our bookings. Slide 6 shows NZME's performance compared to the market. Radio had a solid performance, with NZME Radio advertising revenue outperforming the market revenue growth and consequently, increasing our Radio advertising revenue market share. It's particularly pleasing to see growth in Radio, as it's one of our key strategic priorities. During the period, it has become the largest advertising revenue platform within the NZME. While it's disappointing to see NZME Print advertising and circulation revenue declining, both of these continued to perform better than the market. Digital general display revenue was up across the market, while NZME's combined Digital advertising and classified revenue experienced small growth. The introduction of the New Zealand Herald Premium had an impact on page impression numbers across newzealandherald.co.nz for an initial period around the launch of our freemium content model. This was expected and page impressions returned to previous levels during the year. Slide 8 is a great reminder of what we do to keep Kiwis in the know. Each of the logos on this page represents more than just a brand. Each of them represents teams of hard-working New Zealanders doing their best each day to ensure that Kiwis that pick up the paper, listen to the radio or click on one of our websites are enlightened, informed, entertained and get what they're looking for. Slide 9 shows how many New Zealanders engage with our brands. Through our 35 Print publications, our 9 Radio networks and our multiple Digital platforms, NZME reaches 3.2 million New Zealanders. The New Zealand Herald is the powerhouse of our newspaper portfolio read by 1.3 million Kiwis each week. Radio has a host of brands dominating the target demographics, such as Newstalk ZB and ZM, reaching 2 million listeners each week. And we have 2.3 million users engaging with our digital platforms every month. I'll now take you through the individual performance of Print, Radio and Digital. Starting with Print on Slide 10. Print advertising revenue continues to operate in a tough market with NZME Print advertising revenue down 10% on 2018. Adjusting for the extra publishing week in 2018, total print revenue in 2019 declined 8%. Despite the disappointing lower print advertising revenue, NZME's performance was better than the market, which saw total Print advertising has been down 13.7%, resulting in NZME increasing our Print advertising market share to 46.9%. Circulation revenue was down 6% due to declines in volume, but offset by an increase in yield. NZME achieved better than market circulation volume declines. Other Print revenue also declined primarily due to Stuff printing some of their own publications in-house. Previously, these were printed by NZME. Moving on to Slide 11, you'll see readership levels and audience engagement remained strong with our key New Zealand Herald publications having a positive trajectory. Both readership and audience peaked in the first and second quarters of 2019 largely due to the unprecedented events in Christchurch in March 2019. Q3 2019 readership grew compared to the same time last year, and Q3 2019 brand audience maintained at the recent levels of 1.7 million New Zealanders. Subscriber yield has increased, with total subscriber and retail yield increasing 4% in the year. Turning to Slide 12 and Radio. Our strategic focus on returning Radio revenue to growth delivered good results during 2019. We had a strong second half, with growth of 5% contributing to full year revenue growth of 2% against 2018, bringing total revenue to $110.9 million. Revenue and audience market share both improved in 2019, and the opportunity remains to grow revenue by delivering more aggressive audience market share growth. Digital music listening and podcasts continue to drive engagement of our online audio platform, iHeart Radio. Leading the growth of digital audio is a key part of our Radio growth strategy. I'll share more on that with you shortly when we discuss our strategic priorities for 2020. On Slide 13, you'll see Radio listeners remain at 2 million listeners per week, albeit the graphs show fluctuations, which result from significant events in each period. Our Radio audience market share increased from 34.9% in December 2018 to 35.9% in December 2019. iHeart listening hours continue to grow, up to an average of 4.2 million listening hours in the fourth quarter of 2019. We also had a strong second half of the year in our Digital performance, with 5% growth in the second half contributing to total Digital revenue of $60.4 million for the year or 1% growth. There are a couple of key features to note that impacted on Digital revenue in 2019. Digital advertising revenue was 4% lower partially due to the decline in Digital display agency advertising across the market of 2.4% for the year. With the launch of New Zealand Herald Premium at the end of April, the number of page impressions were reduced as anticipated. The audience has now returned to previous levels. The number of New Zealand Herald Premium subscribers now sits at over 46,000. This includes 21,000 paid Digital subscribers, generating $1.7 million in revenue in the first 8 months. We have an aggressive subscription growth and retention program, including a new Herald app, which will be launched soon with a new look and improved functionality. I'll now hand you over to our CFO, David Mackrell, who will take you through the full year financial results.

Thank you, Michael. Hello, and thank you to everyone joining us on the call today. Consistent with previous years, Slide 16 presents the results for the year on an operating basis, which excludes the impact of New Zealand IFRS 16 and exceptional items to allow for a like-for-like comparison between 2019 and 2018. I will discuss the impact of IFRS 16 shortly, but a full reconciliation of these operating results to the financial statements is available in the supplementary information on Slides 33 and 34 of this presentation. Total operating revenue declined 4% in the period to $371.7 million, consistent with the decline at the half year and primarily due to the decrease in Print and Digital advertising, but offset by growth in Radio, Digital Classifieds and Digital subscriptions. Operating revenue in 2018 [indiscernible] also benefited from an extra week's revenue of $2.7 million or 1%. Our revenue movement analysis between 2018 and 2019 is available in the supplementary information section on Slide 35 of this presentation. Our continued focus on cost savings, increased efficiencies, combined with the reduction in Print volumes, resulted in 4% lower operating costs, a reduction of $13.2 million. This includes an increase in Digital Classified costs of $1 million with the accelerated development of OneRoof. Operating EBITDA decreased 7% in the year to $50.6 million. The underlying depreciation and amortization charge, excluding the impact of IFRS 16, was $5.7 million lower at $18.9 million for the year as some assets became fully depreciated and the benefits of lower capital spend flow through to the income statement. Interest expense, excluding the impact of IFRS 16, was consistent with prior year at $4.6 million. Average net debt decreased $7.7 million year-on-year while interest rates increased slightly in the period, combined with slightly higher facility fees. These movements result in operating net profit after tax of $19.7 million for the 2019 financial year, an increase of 4% on 2018. I'd like to draw your attention to an analysis of the half year performance, which we outlined on Slide 17. This shows the story of 2 halves, with the first half EBITDA down 16% on 2018, while the second half was up 4% on the prior year. We are very pleased with the performance in the second half of 2019. This was driven by growth of 5% in both Radio and Digital revenue, together with lower costs in the second half. Slide 18 highlights the benefit of our relentless focus on reducing costs and improving efficiencies. People and contributors expenses reduced 4%, reflecting a 4% reduction in headcount from 1,427 to 1,366 full-time employees. Printing and distribution expenses reduced 9% due to an 8% reduction in Print volumes, combined with additional production efficiencies. Incremental Digital Classified expenses increased by $1 million to $7.1 million in the year due to the continued development of OneRoof and DRIVEN. These 2 platforms continue to grow. Spend on YUDU was halted as the decision was made to put our employment sector efforts into New Zealand Herald employment online and close the YUDU site. Exceptional items include $6 million of redundancies, $3 million of one-off project costs, historical holiday pay obligations and costs in relation to the potential acquisition of Stuff Limited and just under $1 million of impairment of financial assets relating to joint venture initiatives. As mentioned, we have recognized an impairment on some non-amortizing intangible assets this year of $175 million. This is an accounting adjustment and does not impact operating performance, cash flow or banking covenants. I will cover this in a bit more detail shortly. Slide 19 shows the impact of IFRS 16, which requires leases to be recognized as a lease liability on the balance sheet with a corresponding right-of-use asset. We adopted IFRS 16 on 1 January 2019. This disclosure is consistent with the half year but now shows the impact on the full 12 months. In the income statement, the lease expense, which was previously classified under operating costs, is reclassified to depreciation on the right-of-use asset and interest expense on the lease liability. For the 2019 financial year, this results in an increase in EBITDA of $15.7 million due to reclassifying the operating rent expense to a $12.8 million charge to depreciation and a $4.8 million interest expense. Net profit after tax is negatively impacted by $1.7 million due to the higher interest costs and a lease's earlier years, which will be offset by a positive impact in the lease's latter years. Lease payments are now split between the lease principal and interest expense, and the right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. The increase in right-of-use assets of $75.5 million predominantly relates to leases on the Graham Street offices and the Ellerslie print plant. Following a comprehensive impairment review, the directors have resolved to impair the carrying value of non-amortizing intangible assets by $175 million as at December 2019. The assessment recognizes that the difference between the value of the company implied by its share price and the accounting value of equity has increased to a level which can no longer be supported without an accounting adjustment. The non-amortizing intangible assets include goodwill, Masthead brands and other brands. These intangible assets are the result of historical transactions that occurred prior to the demerger. This is an accounting charge only with no change to cash flows and no impact on bank covenants. The result of this is to reduce the carrying value of net assets from $1.46 per share as at December 31, 2018 to $0.59 per share as at December 31, 2019. Slide 21 shows a summarized balance sheet. Working capital, excluding cash, decreased due to a lower receivables balance and movement from a tax receivable in 2018 to a tax payable in 2019. Noncurrent assets have decreased due to the impairment of intangible assets of $175 million, as we just discussed. The impact of IFRS 16 on the balance sheet is clearly shown with $75.5 million of right-of-use assets, offset by $95.9 million of lease liabilities in 2019. Overall, total new assets have decreased primarily due to the impairment of intangible assets, but offset by lower net debt as at December 31, 2019. Moving on to cash flows on Slide 22. Operating cash flow was assisted by IFRS 16, reclassifying $11.5 million of lease payments to financing cash flows. Excluding this reclassification, operating cash flows in 2019 were $13.7 million better than in 2018 due to reduced tax paid and improved working capital. Tax paid for 2019 was a more normal $4.5 million compared to $14.1 million in 2018, which was significantly higher due to the timing of 2017-related tax payments falling into 2018. Capital expenditure was in line with the expectation at $11.8 million in 2019, $2.3 million lower than last year's $14.1 million. Capital expenditure in 2020 is expected to be similar to that in 2019. The result of these cash flows was to reduce our net debt by $23.6 million as at December 31, 2019. As I said, net debt has been reduced by $23.6 million to $74.7 million, well ahead of our targeted $10 million to $15 million reduction for the year. Net interest cover decreased slightly in the period due to lower operating EBITDA over the same interest expense for the period. The reduced net debt position improved the leverage ratio to 1.5x EBITDA as at 31 December, 2019, compared to 1.8x for 2018. The Board have elected not to pay a dividend for the full year ended December 31, 2019. Our target is still to achieve further net debt reduction and to reduce the leverage ratio with the aim to return to paying dividends when the trading and investment conditions permit. I'll now hand back to Michael to discuss strategic priorities and outlook for this year.

Thank you, David. Let's now turn to our strategic priorities outlined on Page 24. Our strategy is working. The strategic priorities set out at the beginning of 2019 are showing results and will continue into 2020 that is to lead the future of news and journalism in New Zealand, to grow Radio and be the leader in Digital Radio, and to create New Zealand's leading real estate platform on OneRoof. We've made pleasing progress across all 3 strategic priorities in 2019 and believe a continued focus on these areas remains the best approach to building shareholder value. In 2019, NZME took a market-leading initiative and launched New Zealand Herald Premium, see page 25. Our Digital subscription new service launched in April with immediate success, quickly surpassing subscription and revenue expectations. New Zealand Herald Premium now has more than 46,000 subscribers, with over 21,000 paid digital subscribers and 25,000 eligible print subscribers who have activated their digital subscription as part of their print bundle package. An unexpected impact of the launch of premium is the focus it has brought to the value that New Zealand has put on quality journalism. New Zealand Herald Premium has proven that New Zealanders will pay for high-quality content. We take heart in the fact that over 35% of our premium subscribers are only in new subscriptions. 2020 will continue to see us focus on growing Digital premium content and subscriptions and increasing Digital advertising revenue. One of the initiatives supporting this is the imminent launch of a new Herald app. With a new look and some enhanced functionality, the new app is also designed to provide more opportunities for Digital advertising revenue. On Slide 26, we outlined our ambitions in Radio, and I'm really pleased with the results our Radio teams have delivered in 2019. The combined approach of improving sales capability and technology, with our new talent acquisitions to build audience engagement, helped drive growth across the year, including growth in Radio revenue and growth in Radio audience market share. We've also seen growth in iHeart Radio with increased registered users and increased average monthly listening hours, resulting in a 40% increase in revenue from iHeart, now making up approximately 2% of total Radio revenue. We continue our focus on Radio into 2020 and are already seeing the benefits of our strategic decision late last year to bring our commercial and Radio teams together under one leader with Wendy Palmer joining NZME as Chief Radio and Commercial Officer in November of last year. This month, we announced the reorganization of some of our hosting lineups on 2 of our major Radio brands. The move is a part of a strategic review of our Radio networks, ensuring we're delivering the best content for our audiences and providing the best opportunities for our commercial partners to connect with those audiences. Slide 27 shows the results of our development on OneRoof and our focus for 2020. Despite a downturn in the New Zealand real estate market in 2019, real estate remains NZME's largest vertical with revenue of $40 million in 2019. Albeit, it was down 3.7% against 2018, given the property market conditions. OneRoof is becoming the place to go for people interested in real estate with over 75% of New Zealand's residential for-sale listings and 95% of open listings on the platform. It's attracting over 240,000 unique audience visitors each month. This will be enhanced with the recent signing of an agreement to allow Harcourts officers to put their listings on the OneRoof site automatically. OneRoof delivered revenue of $2.8 million in 2019, up from $0.7 million in 2018. 2019 saw higher incremental direct costs for OneRoof compared to 2018 with 2019 representing a full year of costs. We expect 2020 to be at similar levels to 2019 but with increased revenue. Our focus in 2020 will continue to improve audience engagement through growth in listings and content to increase revenue from agents and to grow OneRoof review and contribution. I will briefly highlight our relatively new sustainability commitment. This was first announced at our 2019 half year results, and we're thrilled with the progress we're making on this journey. In 2019, we completed our materiality matrix to determine NZME's corporate social responsibility framework. We've made great progress in identifying initiatives, objectives and measurements against each of our commitments to our communities, our people and our environment. We've also aligned these to the guidelines set out in the UN's sustainable development goals. Further details of these initiatives, objectives and measurements are detailed in the 2019 annual report, which has also been released today. Moving to Slide 29. You're no doubt aware of the reports in the second half of last year regarding a proposed transaction between NZME and Stuff. We do firmly believe we are the right owner of Stuff. And we believe the acquisition of Stuff would deliver strategic benefits, which are aligned with NZME's existing strategic priorities and our commitment to predicting the craft of journalism in New Zealand. The proposed transaction currently involves the Stuff newsroom being transferred to a new NZME subsidiary company and a Kiwi share in this company would be held by the New Zealand Government. This arrangement imposes certain obligations on NZME and Stuff to address the concerns, which were upheld by the Court of Appeal in 2017. We're actively engaged with the government and are encouraged by recent progress. No agreement has been reached at this time. However, we continue to progress towards the required regulatory approvals. The proposed transaction is subject to the government's agreement to hold the proposed Kiwi share, New Zealand Commerce Commission clearance, agreement with Nine, shareholder approval and finance. And so to wrap up, it was an encouraging 2019 second half, which provides momentum into 2020, particularly with continued growth in Radio, Digital Classifieds and Digital subscriptions. New Zealand business confidence showed an improvement at the end of last year. However, we do remain cautious of the potential impact of a softening economy and weaker business confidence, particularly with trading and economic uncertainty following the coronavirus outbreak. Advertising bookings for Q1 of 2020 are tracking 2% below those of Q1 2019. On the other hand, we note that the New Zealand real estate market is improving with listings and sales momentum, and this is expected to benefit our real estate advertising and classifieds and print in OneRoof. The company continues to focus on containing costs and to target lower net debt and reduced leverage ratio to be within our target range, in line with our capital management policy. We do expect industry consolidation activity to continue in 2020, and this has the potential to present a real opportunity for NZME. I'd now like to open the call up for any questions you may have.

Thank you, Michael and David. We will now open the webcast up for questions. [Operator Instructions] And our first question is from Arie Dekker from Jarden.

First question is just in relation to the outlook comments. I guess, with the positive EBITDA in the second half, would you be confident enough to sort of say that, that momentum in positive EBITDA is continuing into FY '20, when you look across the full business and trading in January here?

Arie, it's Michael here. Look, I guess, we're a little cautious at the moment. We've obviously started the year being 2% below for Q1. Cost containment continues though. So probably just at this stage, I don't want to forecast anything for the future, but good signs with that momentum from last year.

Sure. Just turning to Stuff. I guess, just 2 questions. Can you say anything on what you've put forward with regards your -- what your obligations would be under the Kiwi share as it relates to the Stuff newsroom? And then also just comment on time frame for progressing something to shareholders.

Yes, absolutely. So some of you will have heard the commentary from the leader of New Zealand First at the end of last year, where what he said he supported was commitments around Mastheads and around numbers of journalists for periods, and he talked to periods of sort of 2 to 3 years. So we fundamentally believe in the future of journalism as part of our sustainability commitment. So the commitment we would be making along those lines is to protect journalism for a period of time, which gives us the opportunity to utilize the synergies that we get across the rest of the businesses to return the business to growth and make it more sustainable into the future. We continue to progress hard on it. We're pleased with the commentary that we had pre-Christmas and pushing hard, and we don't think we'll be too far away in the coming weeks to be able to say more.

That's great. And just in terms of those commitments in the periods of time, would there be a period after which the Kiwi share fell away? Or would there be renegotiation of it after periods of time?

The way we anticipate it is the Kiwi share would be an obligation well into the future, but a number of those metrics would be open to discussion based on market dynamics. And fundamentally, into the future, if there is strong competition in the market, Digital platforms that are delivering strong competition to a combined NZME and Stuff, it may mean that a Kiwi share is not required.