NZME Limited (NZM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to New Zealand Media and Entertainment's 2020 Full Year Results Webcast. My name is Paddy Walker, Investor Relations Manager at NZME. Presenting on the call today will be NZME's Chief Executive Officer, Michael Boggs; and NZME's Chief Financial Officer, David Mackrell. [Operator Instructions] I will now hand over to Michael.

Good morning, everyone, and thank you for joining us for NZME's 2020 full year results briefing. If you're on the webcast, you'll be able to view our presentation pack, which you can follow as we talk through the results. I'll be taking you through our results summary, updating you on the impact of COVID-19 on our business in 2020, how we mitigated and recovered from those impacts, alongside an overview of the broader market dynamics for the year. I'll also take you through the performance of each of NZME's divisions against the strategic priorities for each, before handing over to David, who will talk you through the financial results. I'll then be back to share NZME's outlook for 2021, and David and myself will be here to take your questions. On Page 3, you'll see our 2020 results summary. We are pleased to report an improved earnings with net profit after tax of $14.2 million and operating EBITDA of $67.3 million. This was achieved through a determined focus on our strategic priorities and through a swift and purposeful response to the challenges posed by COVID-19 across March of 2020. The impact of COVID-19 can be seen in our operating revenue, which is down 11% year-on-year. COVID-19 significantly impacted our advertising revenues and our retail and newspaper sales from March onwards. Our continued recovery from the pandemic reflects the strong position NZME was in prior to COVID-19, the efficient response across the company and our focus on looking after our audiences and our commercial partners. This is reflected in year-on-year growth in our radio revenue market share, our ongoing growth in New Zealand Herald Premium subscriptions and our growth in OneRoof. The impacts of the pandemic were also offset by a 14% reduction in our operating cost base. We expect this will deliver an ongoing annual cost reduction of $20 million. I'd also draw your attention to the reduction in net debt by $40.9 million to $33.8 million at year-end. This reflects our ongoing focus on capital management. Overall, this result highlights the underlying strength of the business, and it highlights the ability of the business to respond with resilience and agility when faced with extraordinary circumstances. Turning now to Page 4. This illustrates graphically the significant impact of COVID-19 on NZME's advertising revenue during the year, alongside the actions taken to mitigate those impacts. You can see the subsequent return to growth in advertising revenue that NZME experienced later on in the year. I think it's important to note that as an essential service, which was providing news and information to New Zealanders during a time of crisis and uncertainty, our response had at its core the health and safety of our people. This was especially so for staff required to leave their homes to go to work and to spend time in the community covering COVID-19 stories as well as those we relied on to perform critical duties, such as delivering our newspapers. Key initiatives were aimed at offsetting what, at the end of the year, amounted to a 15% reduction in advertising revenue and included the temporary suspension of a number of newspaper inserted magazines and community newspapers. In addition, wide-scale workforce restructuring resulted in a workforce headcount reduction of 15%. The availability of the New Zealand government's COVID-19 wage subsidy meant we were able to retain a number of roles that supported our ability to deliver on our obligations as an essential service. These roles continued to support NZME's ongoing recovery from COVID-19. Of course, the global impacts of COVID-19 were felt across every business sector, and I'd like to take a moment to discuss the relevant market dynamics, how they were impacted by COVID-19 and how NZME has performed within that environment. On Page 6, the left-hand chart shows the magnitude of COVID-19 impacts on New Zealand's Agency advertising revenues. You'll see that it reflects that NZME total advertising revenue chart I shared earlier on Page 4. The months of April, May and June were especially challenging before staggered improvement across July, August and September. And you'll see finally a swing to year-on-year growth in the last quarter of the year. The chart on the right-hand side of Page 6 is the ANZ Business Confidence Index for New Zealand. This provides a broader view of the impact of COVID-19 on the general business community in New Zealand. It tracks a reasonably steady recovery and business confidence from April of last year before moving into a positive territory in December. What's not shown here is that December 2020 is the first positive reading this index has recorded since August 2017. This positive sentiment has been attributed to the imminent prospect of travel bubbles, which to date are yet to eventuate; encouraging vaccine developments; and continued central government monetary and fiscal support. If you turn to Page 7 now, you see an overview of NZME's revenue performance when measured against the market. We are pleased to have achieved share gains across 2020 in all 4 pillars represented here. We outperformed market revenue growth year-on-year in radio, print and digital display advertising, resulting in gains in market share to 40.4%, 47.1% and 24.3%, respectively. This is a testament to the ongoing progress we are making in delivering on our strategic priorities. I'll now take you through the performance of and strategy for each division in further detail. Firstly, it's useful to briefly recap what and who we are at NZME, which you'll see on Page 9. NZME operates as an audience and customer-centric, integrated, multichannel media business. We connect advertisers with our audience of 3.3 million customers across our market-leading news, sport, entertainment and classified platforms. These include 32 print publications, 9 audio brands, 17 websites and 19 real estate publications. Secondly, Page 10 shows our new divisional reporting framework. We outlined this at our Investor Day in November last year. This aligns with our 2023 strategic priorities. The divisions that we will now report on are audio, which includes broadcast and digital audio; publishing, including print and digital news and journalism; and OneRoof, including our real estate products across all platforms, including the OneRoof digital sites. To understand the performance of each division, a framework has been developed to allocate the various cost pools on an appropriate basis. Let's now begin with audio on Page 11. Our audio story starts with our audiences. The charts on Page 11 show NZME's radio listeners across our key target demographics. Starting with the left-hand chart, NZME has maintained a total weekly radio listeners year-on-year at nearly 2 million. We note that this has been achieved despite the closure of Radio Sport in the first half of the year, which means its previous audience is excluded from the final 2 columns on this chart. The second chart shows NZME's talk radio market share. You can see the impact of the COVID-19-related closure of Radio Sport here, too. NZME's talk radio station, Newstalk ZB, achieved growth in major market share year-on-year to 12.2%. Newstalk ZB continues to hold the strong position of New Zealand's #1 radio station, and it grew its popularity as Kiwis' favorite breakfast show. On the third chart, you'll see that our music radio share in the major markets returned to growth in 2020, lifting in each of the surveys to 27.2%. We expect this growth to continue as the full effects of the 2020 radio strategy are captured by the GfK survey system. This strategy includes several brand audience optimizations, along with talent and content changes. iHeartRadio achieved a significant improvement in engagement with 5.2 million average monthly listening hours in 2020. That's an increase of 35% year-on-year, as shown on the right-hand chart. You'll see the financial performance of the audio division captured on Page 12. While advertising in 2020 was down 16% on 2019, NZME grew its share of the radio revenue market during the year. And prior to the impacts of COVID-19, NZME radio revenue was in growth. I'm also pleased to note that iHeartRadio revenue growth of 45% in 2020 to $2.4 million, supported by significant growth in users and engagement in music and podcasts. An ongoing focus on costs and initiatives implemented in response to COVID-19, including workforce restructuring, resulted in a 14% reduction in expenses allocated to this division. This, along with the audio division's share of the government wage subsidy, contributed to EBITDA growth in this division of 12%. Our 2023 audio strategy is to be New Zealand's leading audio company. There are 3 pillars to this strategy: create New Zealand's best local audio content; grow broadcast and digital reach; and grow market revenue share and digital audio revenue. You'll also see on Page 13 the metrics and targets we have set to deliver on the strategic priority, along with the initiatives that we will focus on to achieve these targets. You'll see our 2023 targets focused on audience share growth, radio revenue share growth and digital audio revenue as a percentage of total audio revenue. I will now share with you the performance and progress in NZME's publishing division. Just a reminder that publishing includes both print and digital reader and advertising revenue streams. Starting with audience growth on Page 14. As shown on the left-hand and middle charts, NZME's print readership grew significantly this year, with 1.4 million weekly print readers and the New Zealand Herald weekly brand audience of 1.9 million people. That's up 16% year-on-year. These charts represent some of the highest audience and engagement levels we have seen. New Zealand has flocked to our newspapers and news websites seeking quality content and brand strength to keep them in the know. NZME's total digital reach also strengthened, which you can see on the right-hand chart. NZME's platforms now reached 2.6 million digital users per month, up 11% year-on-year. Our digital audiences reached an all-time peak during New Zealand's COVID-19 lockdown, with 2.8 million digital users in the month of April. nzherald.co.nz has attracted the largest digital audience of any new site in New Zealand across the last 5 months of 2020. Let's now turn to Page 15 for details of NZME's print and digital subscription platforms. As shown in the chart on the left of this page, we achieved growth in print subscription revenue in 2020 with a 3% yield growth, offsetting a 2% volume decline. We enjoyed 24% growth in our total subscriber base, shown there in the middle graph. This is supported by growth in the digital-only subscriber base and the retention of NZME's print subscribers across the year. New Zealand Herald Premium finished the year with 102,000 subscribers. That's up 56,000 compared to the prior year. This subscriber base includes 53,000 paid digital-only subscribers, up 33,000 since 2019. Moving now to Page 16. You'll see how the consistent growth in digital subscribers and maintenance of New Zealand Herald Premium yield delivered significant digital subscriptions revenue growth in 2020. It lifted to $6.6 million, up from $1.7 million in the previous year. Print advertising revenue was down 27% year-on-year, largely due to the impacts of COVID-19. This included the temporary suspension of newspaper inserted magazines and community newspapers. Other publishing revenue includes the publishing division's $4.2 million share of the government wage subsidy that was received in the first half of 2020. Other revenue has also been impacted by reduced third-party printing volumes. However, this has been substantially offset by a reduction in print expenses. The cost initiatives and workforce restructuring resulted in a 13% reduction in publishing expenses for the year. Overall, this allowed us to deliver a similar EBITDA to 2019, a solid result considering the impacts of COVID-19 on the 2020 year. I will now outline our publishing strategy on Page 17. NZME's strategy for our publishing division is to be New Zealand's herald. We have 3 pillars of focus to support this strategy: to be the #1 news brand for all New Zealanders; a subscriber-first publisher; and a brand safe, scalable destination for advertisers. As with our audio strategy, we have set metrics and targets to deliver on this publishing strategic priority, along with initiatives that we will focus on to achieve these targets. You'll notice our 2023 targets include, firstly, a subscription base exceeding 210,000 subscribers by the end of 2023; a subscription volume mix with digital-only subscribers greater than our NZME print subscribers will have more than 12% of Kiwi households subscribing to the New Zealand Herald; and growth in digital-only share of the advertising revenue mix. We are monitoring the impacts of global regulation and commercial arrangements with the global tech players. We're keeping a keen interest on how this may impact the future market dynamics within New Zealand. We are actively monitoring international developments as some governments move to bring global tech and social media companies into their domestic regulatory frameworks. We're also closely observing the progress of the commercial agreements between some global players and overseas content producers, both of which may have implications for the New Zealand media market into the future. Let's now turn to Page 18, and we'll discuss NZME's progress in our real estate division, OneRoof. The chart on the left-hand side illustrates how OneRoof has grown to become a recognized brand across New Zealand. As at December 31, 2020, OneRoof had more than 89% of nationwide listings, up from 82% at the end of 2019. In New Zealand's largest city, Auckland, with more than 30% of our population, OneRoof held the position as the site with the most residential for-sale real estate listings for the majority of 2020. Revenue growth has been supported by a significant 91% year-on-year increase in OneRoof's digital audience to 460,000 and growth in the ratio of listings upgrades to 12% at year-end, which you can see on the right-hand side chart. On Page 19, you'll see once again the impact of COVID-19 on NZME's revenues. The impacts on OneRoof were particularly significant in the lockdown months of the crisis, which you can see illustrated in the chart on this page. You'll also note the chart shows OneRoof print revenues returned to growth in quarter 4. The return to growth in print revenue has been supported by the launch of 7 new OneRoof local publications during the year, with NZME now distributing 19 real estate publications. OneRoof digital classifieds revenue grew an impressive 53% to $4.3 million for the year, of which 74% relates to listings. Once again, cost initiatives in this division, including workforce restructuring, resulted in a 14% reduction in OneRoof's expenses. These reductions outweighed OneRoof revenue declines of 8% and led to a $1.1 million increase in EBITDA to $2.1 million. We will now discuss OneRoof's 2023 strategy on Page 20. NZME's strategy for the OneRoof division is to be your complete property destination. There are 3 pillars of focus to support this strategy. These are to strengthen the core residential real estate listings business, for OneRoof to become indispensable to agents and to expand the real estate product portfolio. As for our other key strategic priorities, you'll see our specific targets for 2023 and the initiatives for 2021 designed to support meeting those targets. Those initiatives include a new leadership structure with Paul Maher appointed as a dedicated Head of OneRoof. We will also utilize the strength of the NZME audience and expand OneRoof local magazines as a geo-targeted complement to digital vendor listings. This will support our continued focus on audience growth as we work to reduce the audience gap with the #1 platform. Let's now move on to discuss GrabOne on Page 21. At our Investor Day in November last year, we advised that GrabOne is not a core strategic focus for the business, and as such, GrabOne is now classified as an asset held for sale as divestment opportunities are being explored. GrabOne revenue declined 8% in 2020, with COVID-19 impacting the Experiences and the Escapes products. However, COVID-19 assisted an acceleration in the store e-commerce revenues, as shown on the chart here. A significant reduction in costs outweighed the revenue decline, resulting in EBITDA growth of 4% in 2020. Slide 22 shows the performance of the corporate division, together with our events business and our automotive website, DRIVEN. Revenue reduced $2.5 million during the year, primarily due to the COVID-19-related cancellation of events. Expenses predominantly relate to corporate overheads and reduced as a result of our ongoing focus on costs and initiatives implemented in response to COVID-19 together with lower costs due to fewer events. Let me now hand over to David Mackrell, our CFO, to take you through NZME's 2020 financial results.

Thanks, Michael, and thank you to all those who have joined us on our call today. Let me begin with Page 24, where we are pleased to report an improved earnings with growth in operating EBITDA and operating NPAT for the year. Operating revenue was $331.2 million, a decline of 11% on 2019. The decline, as discussed, is largely a result of the impacts of COVID-19 on advertising revenues. The operating result includes the $8.6 million wage subsidy received from the New Zealand government, which has been classified as other revenue. Operating EBITDA grew 3% to $67.3 million, supported by a 14% reduction in operating expenses. As Michael mentioned earlier, these cost reductions were achieved through a combination of an ongoing focus on cost efficiencies and the swift actions taken to mitigate the impacts of COVID-19 on the business. I'd also like to point out that these results have been presented incorporating IFRS 16 adjustments. To understand the results excluding IFRS 16 adjustments as well as other adjustments, we have provided a reconciliation in the appendix to this presentation on Pages 35 and 36. Operating EBITDA, excluding IFRS 16 adjustments, grew 5% to $53 million. Operating NPAT increased 27% to $22 million, and operating earnings per share increased $0.033 to $0.111 per share for the year. Turning now to our expenses on Page 25. NZME has a continuous focus on improving cost efficiencies. This focus, combined with the swift actions implemented to mitigate the impacts of COVID-19 on the business, resulted in a 14% reduction in operating expenses for the year. This resulted in a reduction in total operating expenses of $42.2 million. You'll see one of the key areas of cost reduction was people and contributors expenses down 10% or $14.6 million year-on-year. Print and distribution expenses were 19% lower, partly due to the significant reduction in print and delivery volumes, mostly relating to the temporary suspension of some print products due to COVID-19 and lower third-party print volumes. Agency commission and marketing expenses decreased year-on-year in line with revenue, excluding the wage subsidy. You'll also see other expenses reduced 30%. This was primarily due to the cancellation of events and savings in travel and entertainment costs. The annualized permanent reduction in the cost base is expected to be $20 million per annum. Exceptional items in 2020 largely relate to redundancies as a result of workforce restructuring. Let's now look at our summarized balance sheet on Page 26. The $9.2 million reduction in trade and other receivables and inventory was primarily due to lower credit sales, reduced aging of debtors and lower prepayments. And the decrease in trade and other payables was largely due to GrabOne now being classified as net assets held for sale. These movements resulted in a $9.9 million decrease in net working capital. The increase in right-of-use assets and lease liabilities is due to extensions of leases relating to transmission sites. We are pleased to report further significant reduction in net debt of $40.9 million in the year to $33.8 million as at December 31, 2020. Overall, total net assets increased $15.6 to $132.1 million at 31 December 2020. Moving now to the cash flow summary on Page 27. Operating cash flows increased $10.1 million (sic) [ $9.9 million ] in the year to $56.9 million due to increased earnings and lower working capital. Capital expenditure was $6.3 million in 2020 compared to $11.8 million in 2019 as expenditure was contained in response to COVID-19. Ongoing capital expenditure is expected to be between $10 million and $12 million per annum. Lease liability principal repayments reduced to $9.5 million due to the transmission cost relief received from the government and rent concessions. The graph on Page 28 shows the significant reduction in net debt achieved over the last 2 years. Net debt was reduced to $33.8 million as at December 31, 2020, which equates to a leverage ratio of 0.6x operating EBITDA, down from 1.5x at December 31, 2019. NZME announced a change to the dividend policy in November 2020, with the primary change to shift the basis from NPAT to free cash flow. NZME intends to pay dividends of 30% to 50% of free cash flow, subject to being within its target leverage ratio and having regard to NZME's capital requirements, operating performance and financial position. We note that our current bank facilities limit dividend payments until after 30 June 2021. The company's target leverage ratio is 0.5 to 1x rolling 12-month EBITDA pre-IFRS 16. With the current leverage ratio at the lower end of the target range, the company is in a strong position to continue to invest in growth opportunities. I will now hand back to Michael to talk about the outlook for 2021.

Thank you, David. As you'd expect, we continued to remain alert to the ongoing impacts of COVID-19 and the future economic environment and the changing market dynamics. While business confidence has improved significantly, we are seeing advertisers remain cautious. This is resulting in more of their bookings being made in the month than previously we have experienced. With this in mind and on the basis of a continued improvement in economic conditions, COVID-19 recovery, improved revenue trends and the permanent cost reductions we have made, we would expect profit growth in 2021. We are pleased with the significant reduction in debt. Given this, and based on this outlook and NZME's capital requirements, the Board expects to be able to return to payment of dividends in the second half of 2021. We look forward to providing you with further updates on our strategic priorities at our Annual Shareholders' Meeting in April of this year. That concludes today's presentation. Thank you all for joining us. We'll now be happy to take your questions.

Thank you, Michael and David. We will now open the webcast for questions. [Operator Instructions] Our first question is from Grant Lowe.

[indiscernible]

Sorry, Grant, we can't quite hear you, please try again. That's a bit of a bad connection. We'll come back to you in one second. Our next question is from Roger Colman.

Can you hear me now?

Yes, we can, Roger. A little bit louder, please, if you could.

Very good. Congratulations, gentlemen. Pretty good performance. Could I just ask a couple of quick ones in a row, and we get it over and done with. Firstly, as I understand from Seven West Media, West Australian Newspapers, which is about your size, would roughly be allocated around about $4 million to $5 million added to their $30 million they got from Google. What range are you looking for in respect to your print operations from Google? And also add anything from Facebook you expect.

Roger, thanks for joining the call this morning. There's no specific conversations or negotiations currently happening in New Zealand. And as you may have seen, our government is currently saying that they're getting advice on the topic. I can certainly tell you we're watching what's happening with Australia very closely. And as has been reported, current arrangements sound like they're around $30 million per annum, say, for a Seven West and others. We would welcome values in that range. And even if they were adjusted for population size as opposed to audience size, they would still be significant values for our organization.

Right. Right. And on GrabOne, the $2.6 million EBITDA ex IFRS 16, can you get -- what multiple do you think you can sell it for, 5 or 10x? Or what should we look for in range? And how are negotiations progressing with selling it?

Yes. So I think the first thing we do is we have real interest in the asset from a real number of parties. We've commenced the process with an [ IM ] being completed. And so I'd rather those negotiations proceed before sort of talking about a number.

Right. Okay. And you want to get back to -- I'll come back later. Is that okay, Paddy?

Of course. We'll come back to Grant.

Can you hear me okay now?

Yes, that's great.

Okay, great. A great result, particularly on the deep side of things. The key sort of question for me is just around momentum in the advertising side of things. Can you -- obviously, coming out of the back end of last year, had returned to sort of level of growth, which is great. Can you give us a sense of how things are tracking [ fits ] by the divisions for the first quarter? And then give us a sense around -- obviously, we're not expecting to see the same sort of hole that we saw in the middle of last year this time around. But can you give us a sense as to sort of where you see things landing this year, all else equal, in terms of sort of a new base for that -- those advertising revenues?

Yes. Grant, again, thanks for joining as well. So you're quite right. As we pointed out, the back end of last year did have some strong momentum. Some of that I would put down to being some pent-up demand. But certainly, it is that advertisers are back spending. You'll note so we did raise some caution just around people are being cautious, and bookings are turning up later at times than we'd like. As we come into first quarter, what we're really looking for is starting to compare ourselves not to 2020 but to 2019. And right now, we can see at the back end of that quarter, we're really getting back to those 2019 levels, and that's where we want to hold ourselves accountable for, for this year. As you'd expect, different performance across different platforms. So we have seen reduction in print performance overall. And that would be -- fundamentally, that's 2 years since 2019 of ongoing reductions, whereas we're seeing the complete inverse, obviously, in digital, with really strong digital growth, some transition of those print revenues to digital. And then radio, we're seeing really strong positive performance. And as we've noted, we've seen strong share gain there as well and continuing to momentum there.

Got it. So sort of adjusting for market share gains and the like, we should sort of think about it in terms of sort of '19 -- FY '19 sort of growth rates, skip a year and sort of continue on that sort of same sort of trajectory as sort of the baseline way to think about things?

That's exactly right, yes. Fundamentally, though, just -- we are focused on not wanting a business that's going backwards but comparing ourselves to actually '19 numbers, whereas, obviously, '19 had overall revenue still going backwards on '18. That is all we're looking to do.

Yes, I understand that. Okay. Yes, so you mentioned the dividend restrictions being lifted at 30th June, I understand. And obviously, debt -- you're projecting debt will be coming down through the year. Do you have sort of a sense of where that debt might sort of -- debt might land at the half at this stage?

Grant, it's David here. So just in terms of where that tracks, the first half is probably not as strong in terms of debt reduction as we saw in the second half of this year. But we will continue to see it go down in the first half and will be lower than where it is now and then continue on through the rest of the year, but probably not as with CapEx returning to normal. And also, we saw quite a reasonable reduction in working capital this year, so I don't expect we'll see that same benefit in the cash flow in the coming year.

Thank you, Grant. We'll now come back to Roger.

Yes. Can you hear me now?

Yes.

Following on from Brian's question which is related to the net debt movements. I mean, you did $22 million net PAT. You just finished, and I presume you've got CapEx gap on depreciation, about $7 million or $8 million. If you get the earnings up to $30 million, you've got $37 million worth of free cash flow by the end of the calendar year, ex GrabOne, we should be a net cash surpluses. Is that logical or balanced at least?

Certainly, those -- that perspective around free cash flow is probably not far away. And so we'll be -- on those numbers, we'll be getting close, yes.

Right. So therefore, looking at 2022, if you end up with, excluding GrabOne sale, a net cash position or close to net cash, is 2022 capital management likely to see a regearing of the company subject to economic conditions?

Subject to economic conditions and other opportunities that might emerge.

Yes, but you are in New Zealand. There's not many other opportunities, isn't it?

Yes, I think you're exactly right. The Board currently has the [ settings ] at 0.5 to 1x, and we would be well below that. So it gives us the chance to actually continue to have further gearing on the books, if that was the case.

Right. Now the question relating to the prospective mix of 50-50 digital and the print subscriptions. I'm presuming your print is running at just 120,000, and then you have digital, gets to, let's say, 100,000. That's a pretty severe drop in print numbers you're projecting at 20% -- nearly 20%, call it, 18% or 15%. Could you give us some idea of the EBITDA margin you get on print cover prices when you lose print and then the EBITDA margin on digital subscription so we have an idea what the mix ratio is in terms of [ profitability ] prospects in the print -- in your newspaper market?