Southern Cross Media Group Limited (SXL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Southern Cross Media Group's first half results update. [Operator Instructions] Please note that today's conference is being recorded, Thursday, the 20th of February 2020. I would now like to hand the conference over to your first speaker for today, Southern Cross Austereo's CEO, Mr. Grant Blackley. Thank you. Sir, please go ahead.

Good morning, and welcome to Southern Cross Austereo's half year results presentation. This morning, we will be taking you through our results for the 6 months ended 31st of December 2019. I'm joined on the call today by our Chief Financial Officer, Nick McKechnie, who will run through the financial results later on the call. I draw your attention to the disclaimer on Slide 2, and we'll move straight to group results summary on Slide 4. Underlying EBITDA for the group over the period July to December 2019 was $62.2 million, in line with the guidance range provided to the market in October. Group revenues were 8.2% below the prior year, the result of a broad advertising contraction across all markets and segments. Radio and Television were impacted to a similar degree with a reduction in spend levels across most advertising categories. Statutory EBITDA was $67.5 million, inclusive of the noncash adjustments from the implementation of the new leasing accounting standard. We have presented the income statement with a third column to provide a comparison of the results to the prior period, excluding this accounting standard change. On December 31, we completed the acquisition of the Redwave radio assets in Western Australia, and this will be a positive contributor to earnings in the second half. This acquisition was debt funded by a drawdown of available funds under our existing banking facilities. A fully franked interim dividend of $0.0275 per share has been declared. The dividend is within SCA's policy of distributing 65% to 85% of underlying NPAT and represents a strong yield for investors. Moving to Slide 5 where the headline achievements for the group is set out. Whilst advertising market conditions have been difficult, SCA continues to find opportunities to outperform the market, including through the ongoing education of national advertisers regarding the historic underinvestment in regional markets. Our affiliation with the Nine Network continues to strengthen, and SCA delivered a further improvement in the power ratio of revenue to audience, achieving a market-leading ratio of 1.11x over the 6 months. Digital audio represents the area of greatest opportunity for SCA. Pleasingly, our investment in this important growth sector through our market-leading premium podcast network, coupled with the implementation of addressable or digital targeted advertising technologies, has paid dividends with growth of 140% over the prior period. SCA has continued to leverage its core competencies in growing the asset base supported by the acquisition of Redwave Media's 8 stations, increasing our national radio portfolio to 96 commercial radio stations. This acquisition will provide numerous opportunities to extract synergies from these stations and more broadly across our West Australian operations. We continue to expand our offering of DAB radio stations in major cities and select regional geographies, and we have plans for additional stations in the year ahead. The investment in PodcastOne Australia over the past 3 years is bearing fruit with a market-leading share of downloads and accompanying revenue and a clear expectation of achieving cash flow breakeven in this next half. We have also conducted a comprehensive and holistic review of our cost base with a stated aim of reducing our group costs both now and for the future. This is in response to the current market conditions and our desire to invest further in the development of new digital audio products. I'll cover this in more detail shortly. The successful refinancing of our debt facilities in the period provides certainty of funding for the next 3 years, and we retained substantial headroom under our covenants as a result of the actions taken over the past 5 years in delevering our balance sheet. Our assets continue to generate strong cash flow with a high conversion ratio from earnings, highlighting the attractiveness of our assets in this sector. Moving to Slide 6. I want to highlight the meaningful savings and actions we have made to our operating and capital costs in response to the cyclic headwinds across the sector and affecting SCA directly. During the period, we conducted a thorough review of our operating business and have taken a series of actions to reduce our future cost base with savings across labor, discretionary costs and capital expenditure. $2.9 million of restructuring cost were incurred in connection with the changes implemented in the business. As a result of the changes, we expect full year operating costs to be $5 million to $10 million lower than the costs incurred last year. These savings are after accounting for wage inflation and other contractual cost increases of some $8 million as well as $4.5 million of annual CapEx moving to OpEx as a result of the outsourcing of our transmission and playout services. Importantly, we've also set aside investment funds within this forecast for direct investment in developing new audio and on-demand products that will provide a stimulus for potential incremental revenue and earnings in the future. Finally, after detailed review of our capital projects, we forecast that CapEx will be $6 million to $8 million lower for the full year, being in the range of $19 million to $21 million across that full year. These cost adjustments are meaningful and have set a lower cost base for the company for the future. I'll now hand over to Nick to take you through the financial results.

Thank you, Grant, and good morning. Looking at Slide 8, group net profit after-tax was $20.4 million on a statutory basis or $22.4 million, excluding the new leasing standard adjustments. Group revenues were back 8.2% as a result of the challenging and weak market conditions. Operating costs were $4.9 million lower on a comparative basis, and the results include $3.3 million noncash impairment of a contra-based investment that was held on our balance sheet. Depreciation costs, pre-AASB 16 adjustments, are 22% lower than the prior comparative period, reflecting the changes we have made to our asset base through the outsourcing of television playout and of transmission services. Looking now at our cash flow on Slide 9. SCA continues to demonstrate the quality of its asset base with operating and free cash conversion both in excess of 90%. CapEx was $3.5 million lower than the prior corresponding period, reflecting the benefit of outsourcing capital-intensive activities, which will be further reflected at this lower level moving forward. The Redwave acquisition completed on 31 December and was funded from available facilities. Moving to Slide 10, and the table sets out the new facilities that were entered upon the successful completion of SCA's refinancing in December. The leverage ratio increased to 2.29x, and interest cover ratio reduced to 11.5x as a result of the reduced earnings, but substantial headroom remains against both covenants due to the significant reduction in net debt that has been achieved over the past 5 years. Results of operations are set out on Slide 12, but I will cover this off in the review of each business unit on the following slides. Moving to Slide 13, which provides further detail on our Audio segment. Underlying EBITDA was back 23.8% to $61.1 million as a result of the 8.4% decline in revenues during the period. Operating costs were flat in the period with cost savings achieved, offsetting inflationary and contracted costs as well as the impact following the outsourcing of transmission services. Slide 14 clearly demonstrates the strength of radio as a medium. The graph highlights that cumulative audiences have grown steadily over the last 10 years with average time spent listening stable across the last 5. SCA's Audio assets remain well placed to benefit from an improvement in a market when the current cyclical weakness eases. Broadcast advertising revenues are shown on Slide 15. Metro revenues were back 13.2% for the half year with similar declines in both national and local revenues. Regional revenues performed better and were only back 5.7% aided by a very large and diverse client set across our 65 markets. Our continued education of advertisers and agencies alike is gathering pace and being rewarded with increased inquiry and conversion of new national advertiser interest in a regional sector. The Boomtown initiative has been pivotal in driving the strategy with the investment in new education and training tools to further assist our clients will be deployed over the next 6 months. A summary of the Redwave acquisition is provided on Slide 16. This acquisition has increased SCA's radio network to 96 stations, aiding our reach and coverage across Western Australia. Integration of the asset is well underway, and the assets will add around $2 million of incremental EBITDA to SCA in the second half, inclusive of a share of the $1 million of synergies that have been identified. Slide 17 highlights the expanding digital audio market and SCA's strong position within this important sector. PodcastOne Australia is only 3 years old and [Audio Gap], with SCA investing more resources in expanding our premium content slate and delivering a 38% increase in the number of episodes published compared to the prior comparative period. In addition, SCA has expanded its distributional reach after recently announcing a partnership with Spotify to make all our podcasting content available across their platform. The combination of an expanding premium content offering, coupled with a broader distribution and strong advertiser demand, has resulted in revenues increasing 140% over the prior comparative period. In our August 2019 full year results presentation, we forecast that PodcastOne Australia would reach cash flow breakeven in the second half of this year, and we remain firmly on track to deliver that outcome. In addition to our premium original content created for PodcastOne, SCA delivers a broad array of on-demand catch-up radio podcast, delivering over 2 million downloads per month. Consistent with our PodcastOne model, the monetization of our catch-up inventory is being reshaped in a similar manner: deliver a set of premium, live-read advertising events, which will improve available inventory and resulting revenue. Moving to Slide 18. We set out SCA's approach to delivering in-stream addressable advertising across our vast digital audio asset portfolio. This is the BVOD of radio. Scale is important in this area of our business, and SCA has over 3 million monthly users across our own digital properties as well as through our partnership with SoundCloud. In addition, SCA has over 450,000 signed-in unique users to our apps, providing the ability to meaningfully target consumers with marketing solutions for our broad range of advertisers. This combination of an expanding pool of digital audio assets and content, coupled with a detailed understanding of our user base, will drive incremental and improving revenues. Turning to Slide 19 and the performance of our Television assets. Similar to our Radio assets, revenue declined by 8.1% that was offset by a 6% decline in operating expenses due to the variable nature of programming expenses. This resulted in underlying EBITDA of $13.1 million for the half. On Slide 20, we show the power ratio performance of our Network Nine-affiliated TV regions. Our power ratio is shown for the 4 aggregated markets of the East Coast, understanding that SCA provides both local and national sales representation of a Nine-owned NBN market. Pleasingly, our commercial revenue share grew in the period to 38.3% of the market driven by a market-leading power ratio of 1.11x, the strongest outcome to date under our affiliation agreement. I'll now hand back to Grant to cover the outlook and the priorities for the period ahead.

Thank you, Nick. Before I discuss our outlook, I want to highlight the strategic pathway that SCA has employed. SCA has adopted a dual transformation pathway, which is designed to ensure SCA focuses on driving improvements of our existing core assets while also investing and working on the development and deployment of a new set of audio products to engage consumers and, importantly, open new streams of revenue and earnings. Under Transformation A, SCA will focus on what it does best: the generation of compelling content using SCA's highly creative teams, coupled with the delivery of insight-driven solutions for SCA's thousands of customers. This will be underpinned by an ongoing investment in technology that will increase the levels of automation and simplify the ease of doing business. These assets are highly cash generative and will enable investment in growing new revenue streams. Transformation B involves simultaneously deploying capital to develop new and unique audio products that allows SCA to take advantage of the evolving technological landscape and increasing consumer appetite for audio. The results will be the creation of new products and services that excite and delight our audiences and customers. And given our increasingly connected world, personalization and on-demand will be at the heart of these new solutions. Turning now to Slide 23, we set out what we believe differentiates SCA and provides us with a competitive advantage. Our internal mantra is simply proudly national and fiercely local. We are proudly national by virtue of being the largest radio group in Australia, with 96 owned and operated radio stations, stretching from coast to coast. Our Television business broadcasts 105 different signals across 35 markets. We also own the leading premium podcast network in Australia, PodcastOne, which is gathering increasing momentum. And collectively, these assets mean that we reach 95% of the Australian population each and every week. We are fiercely local because we understand the needs that local communities have, and we serve those communities through our network of 55 offices, creating thousands of hours of local programming and news updates each week. In times of needs, such as bushfires or floods, we consistently provide up-to-date and vital information to those communities most in need. As a local media business, we are proud to connect audiences with the thousands of small and medium-sized businesses that are at the heart of our local economy. The final slide, 24, sets out the trading update. Conditions remained challenging for the start of Q3, with the market showing similar levels of trading for the first half of the year. We did and are seeing recovery in some important advertising categories, notably insurance and banking, following a disjointed and weak prior period. We also expect to see signs of federal and local governments returning to advertising after a usual slowdown of investment following any election. The strong growth trends we saw in the first half across our range of digital audio assets, including premium podcasting, catch-up podcasting and addressable advertising, continues. And our focus will remain on creating compelling content with large audiences to meet increasing advertiser and consumer demand in this new segment of the market. As outlined earlier, we have taken a series of actions to reduce the level of expenditure or costs within the business, and we are forecasting that full year operating expenses will be $5 million to $10 million below last year after accounting for $8 million in labor and other contracted cost increases as well as $4.5 million in annual CapEx moving to OpEx as a result of the outsourcing of transmission and playout services. Finally, full year CapEx will be $6 million to $8 million below the prior corresponding period at circa $19 million to $21 million. Thank you for your attention, and I'll now hand back to the operator to take any questions you might have. Thank you, operator.

[Operator Instructions] Your first question comes from the line of Eric Choi from UBS.

Good result in the context of this market as well. Just a few for me. The first one, just interested in your view, I guess taking into account conversations with agencies and advertisers, just on this current market weakness, how much of it you think is cyclical versus structural. Then a second question -- apologies, I didn't see a market number for regional radio market growth, but I might have missed it, but I'm just wondering how you're performing share-wise. And then just lastly, I guess, in FY '21, in the event that the market doesn't improve, is there still enough cost-out left to offset that $8 million of natural cost inflation pressures?

Thank you, Eric. Grant Blackley here. In relation to your first comment, in terms of the current weakness in the market, I think there is both cyclic and structural elements at play here. Certainly, within our Audio assets, most prominently, our radio assets, we do see this firmly as a cyclic position at this point in time, and we'll start to cycle over some lower PCPs, and I think start to see better performances from our Audio and Radio assets as we move forward. I think a very important element here is to understand that Audio continues to be consumed by our audiences in a greater form every month, every year, and I think the underlying benefit of Audio growing actually tends to support the cyclic modeling we're coming up with. Within TV, we have seen some other structural influences that are also at play here and are naturally from competitive services in the marketplace, from streaming and the like. Nevertheless, we are trying to mitigate any and all of those structural influences through better cost management, better contractual development, Boomtown driving increased revenue, and importantly, reinventing the way in which we operate as an affiliate of principally the Nine Network. Nick, would you like to talk to the regional question?

Yes. Eric, so the regional market doesn't produce industry aggregated stats as the metro market does, but just we represent about 50% of the total stations and about 70% of total audio listening in those markets. So really, we benchmark our sort of revenue against the prior period. And as you would have seen, Eric, the declines -- we did see declines, but it was to a lesser extent than where we're seeing elsewhere in other markets. Just to your final question on FY '21, yes, we will continue to have inflationary cost pressures in our business. They won't go away. Our strategy, as Grant outlined, in Transformation A is to keep investing in new technologies so that we can simplify ease of doing business and continue the levels of automation we get, keep trying to find further efficiencies to offset those inflationary pressures.

[Operator Instructions] Your next question is from the line of Brian Han from Morningstar.

It's hard to keep track of what's going on at 2Day FM. Can you please tell us how much of the expected cost savings is from sort of reinventing 2Day FM as a personality-driven network? And my second question is, when you say full year costs will be down $5 million to $10 million, is that from a base of $514 million pre-AASB? And also, what's the swing factor of that range, $5 million to $10 million, because that's a pretty big range?

Okay. Brian, Grant. I'll answer the first question with regards to 2Day FM. As you're aware, back in October, we made a change to our morning breakfast lineup there with an all-music format. We've only really had effectively one survey that has fully encapsulated that change. And pleasingly, we saw cume growth of about 60,000 listeners within that survey. We'll obviously look forward to survey one in regard to the ongoing performance of that change strategy at this point. In regard to the cost levers, I think we look overall at the investment within, frankly, 96 breakfast shares across the board, and we're certainly marketing new positions at both 2Day FM Sydney and other markets. So it's relatively neutral at this point in time in regard to what we invested previously and what we're now investing because we do have to market that as well. In regard to full year cost, Nick?