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

Ladies and gentlemen, thank you for standing by, and welcome to the Southern Cross Austereo Full Year Results Call. [Operator Instructions] Please note that the conference is recorded today, Thursday, August 20, 2020. I would now like to hand over the conference to your host today, CEO, Mr. Grant Blackley. Thank you, sir. Please go ahead.

Good morning, and welcome to Southern Cross Austereo's full year results presentation. This morning, we will be taking you through our results for the 2020 fiscal year. I'm joined on the call today by our Chief Financial Officer, Nick McKechnie. I draw your attention to the disclaimer on Slide 2. Moving to our executive summary on Slide 4. FY '20 has obviously been a very disruptive year for business and SCA. But I am pleased to report full year statutory EBITDA of $108 million, with positive earnings contribution delivered across all 4 quarters despite the impact of COVID-19 impacting the business from mid-March. With strong support from our shareholders, we completed a capital raising of $169 million in May 2020, which has resulted in our balance sheet being significantly strengthened and with net debt and leverage both at historic lows. Strong cash conversion remains a key feature of SCA, and FY '20 continued with that trend, delivering 131% free cash conversion as we benefited from our working capital unwind as trade receivables were collected across the fourth quarter. Revenues have been improving across Q4 and into Q1, and I will provide some more detail on that later in the presentation. Importantly, I would also like to set out how we are positioning SCA for the future. We have taken significant steps to reduce our cost base in FY '20, and this will be extended further in FY '21 as we create a leaner, tailored operating model. The 3-year process to transform our television assets is complete, with the back-of-house activities now fully outsourced. Our digital audio is a key focus for the business and we will continue to mature existing products and services while investing further in this area of growth. Finally, our CapEx profile has been substantially reduced through the television outsource program, while future CapEx investment will be targeted at driving further efficiency and innovation throughout the business. Moving on to our results summary on Slide 5 for the full year to June 30, 2020. Group revenues for the full year reduced by 18.2% as advertising markets contracted notably late in Q3 and, of course, across the fourth quarter. Revenue declines were offset by a $57 million reduction in our group expenses across both variable and fixed costs, resulting in EBITDA of $93 million prior to lease accounting adjustments back 37% on the prior year. Net debt reduced by 55% to $132 million following the completion of the successful capital raising during the year. Free cash conversion was very strong and represents 131% of EBIT for the year. The Board does not anticipate paying dividends in FY '21. However, we forecast being in a position to recommence dividends in FY '22. Headline achievements for the year are outlined on Slide 6. SCA's sales teams continued to deliver strong commercial outcomes whilst delivering leading creative solutions and insights across the sector. Our television sales teams continued to deliver market-leading power ratios of revenue to ratings at 1.09. Digital audio is growing strongly with 96% revenue growth in our podcast business and over 100% revenue growth in instream sales where we are increasingly serving digital audiences with more addressable advertising. Our investment in developing new digital assets is helping accelerate listening consumption and is driving increasing revenue momentum. Management took proactive steps at the onset of the COVID-19 crisis to minimize cost expenditure in the short term through a large range of initiatives. Total expense reductions for FY '20 compared to the prior year totaled $57 million and includes the JobKeeper subsidy. In addition, we have further developed a series of detailed functional initiatives across the organization that will deliver incremental cost savings in FY '21 as we continue to manage the recovery process. These combined actions are and will deliver a leaner and more efficient operating model. During the year, we acquired the Redwave radio network in Western Australia. This has expanded our national network to 99 commercial radio stations and enabled SCA to leverage cost synergies. We have also completed the 3-year process to transform our television operations by completing the outsourcing of all back-of-house activities, creating a lean and modular asset, with SCA solely focused on sales and marketing excellence. The financial stability of the business has been substantially improved, following the capital raising conducted earlier in the year. Liquidity is very high with $271 million of cash in hand. This will be used to progressively pay down debt as we get more clarity around the recovery path from COVID-19. For clarity, all the funds raised in the capital raising have been applied to the reduction in net debt, with none of these funds required for operating purposes. This has left SCA with net debt at historic lows, along with a reduced leverage ratio of 1.24x EBITDA. Cash on hand has been further enhanced through the strong free cash conversion that was achieved in the year. Whilst cash conversion is a key attribute of SCA, it reached 131% in FY '20 as a result of working capital benefits from the collection of trade receivables in Q4. I'll return later in the presentation to discuss how we are positioning SCA for the future, but now I'll hand over to Nick McKechnie to walk through the financial results.

Thank you, Grant, and good morning, everyone. Slide 8 provides the group results summary. Statutory EBITDA was $108 million or $93 million on a comparative basis, excluding the impacts of AASB16. In future periods, all results will be reported inclusive of AASB16. Depreciation is $7.6 million lower following the outsourcing of television playout and transmission. This lower run rate will continue going forward. Impairment charges of $6 million were taken for the full year as we partially wrote down the carrying value of some of our small investments, given the current economic environment. Underlying net profit after tax is $35.8 million, down 52% on the prior year. COVID-19 impacted SCA from mid-March, and Slide 9 shows the impact it had in the fourth quarter compared to the average operating performance across the first 3 quarters. Quarterly revenue declined by around $45 million as demand was substantially reduced, but a strong performance on costs mitigated the EBITDA impact to $5 million. Aside from revenue-related cost reductions, discretionary savings of $12 million were made in the quarter, providing a strong cost offset, as outlined in the capital raising conducted in April. SCA also received $16 million of JobKeeper assistance in Q4, which mitigated employee expenses at a time of heavily reduced advertising demand. Moving to Slide 10. The key attribute of SCA is its ability to convert a high proportion of earnings into cash flow, and this continued in FY '20 with cash flow pre-dividend and nonrecurring item of $61 million compared to $70 million in the prior year. Free cash conversion was 131% with a strong benefit from our working capital unwind as trade receivables were successfully collected across Q4. Cash CapEx was reduced to $15 million from $27 million in the prior year, although only $2 million to $3 million of this represented incremental savings as a result of COVID-19. The majority of the reduction is due to the completion of outsourcing of a number of broadcast services and from reduced investment in leasehold property. Including the proceeds from the capital raising, the closing cash balance is $271 million, providing very high liquidity for the business at the current time. Excess cash will be progressively applied against repayment of bank debt as greater certainty arises regarding the trajectory of the economy and with ongoing developments regarding the management of COVID-19. The improvement in the balance sheet is highlighted on Slide 11, with net debt reduced to a historic low of $132 million. Pleasingly, 100% of the capital raising proceeds have been applied to a reduction in net debt and none of the capital raise was required for operating purposes in Q4 and is not forecast in the existing or future quarters at this time. Net debt has also reduced through the $29 million of surplus cash flow that was generated in the period, partially due to the improvement in working capital in Q4. On Slide 12, we show that leverage is now at a historically low level of 1.24x as net debt has reduced following the capital raising. As part of that process, SCA's supportive lending group has provided enhanced covenant headroom through to June 2021. The December 2020 covenant will be calculated on an annualized quarter 2 basis before reverting to a trailing 12-month calculation from June 2021 onwards. As you'll see shortly, revenue trends have been improving, but the extension to the JobKeeper program announced by the government does provide a further safety net to SCA in the event Q1 FY '21 revenue is greater than 30% below the pcp.

Thank you, Nick. On Slide 14, I want to set out the changes we have implemented to deliver a leaner operating model with lower costs and targeted capital investment moving forward. Nonrevenue-related cost, which represented 64% of total costs in FY '20, were reduced by $29 million in the year to $287 million. In FY '21, as a result of a series of initiatives we are undertaking, these costs are forecast to further reduce to between $270 million and $275 million. This will occur following the implementation of a leaner internal structure within the business and the development of more efficient workflows. This is being partially achieved through the introduction of new software tools and automation to further drive efficiency in our processes. The cost forecast is inclusive of all full year costs associated with the Redwave acquisition and overarching annual contract cost increases across the business. Many of these cost reductions achieved in Q4 will continue to run through FY '21. SCA is expected to benefit from $10 million of PING funding provided by the government in order to support regional journalism through FY '21. The forecast is inclusive of the JobKeeper support during the first quarter of the year. Any extension beyond Q1 would represent additional savings. Following the outsourcing of back-end functions for our television business and the consequent reduction in maintenance and upgrade expenditure, SCA is able to focus its capital investment on efficiency and innovation projects. This means that over 60% of CapEx in FY '21 is forecast to be invested in implementing software that will deliver further efficiency benefits and improve our suite of owned and operated new digital audio products, which will enhance our future revenues and reputation. Moving to Slide 15. We have provided some granular detail as to how revenue has changed through the COVID-19 health crisis. As expected, April and May represented the low point in the crisis, with a progressive improvement in June and July as advertisers returned to the market with new campaigns, reflecting the changed market conditions and as government restrictions have slowly wound back. Melbourne is being impacted by the recent Stage 4 restrictions, which is hindering the general pace of the recovery. However, we have not seen a repeat of the drastic advertiser response that we saw at the start of the pandemic late March. SCA does benefit from its national scale across Australia. And whilst Melbourne is a key market, it represents around 12% to 13% of annual revenue. On Slide 16, we have provided the breakdown of revenue trends by advertising category across Q4 and into Q1, highlighting those categories which are over and underperforming against the trend line. Government restrictions naturally have a large impact in influencing the level of demand across categories. Government communications and service businesses have maintained higher levels of investment, while the retail category, auto dealers and parts, domestic travel, agricultural services, food, alcoholic beverages and restaurants have all started to recover as restrictions have eased. Advertiser demand is also linked to growth in audio consumption. And starting on Slide 17, we look at the emerging trends. The first change to note is that overall radio listening increased across the period, most notably across the day, with more people based at home or working remotely. As restrictions have eased in most states, we have also seen an uptick in travel and, unsurprisingly, driving has rebounded much faster than public transport use being a natural benefit to in-car listening. On Slide 18, we show how increased audio consumption is being supported by significant growth in listening via multiple digital devices. Mobile, desktop and smart speaker usage are all growing strongly given their usage and accessibility. And this, in turn, is providing an increased volume of addressable inventory for sale to advertisers seeking scaled targeted audiences. On Slide 19, we set out how SCA has developed and matured its digital product offering to satisfy the changing consumption trends. All of SCA's radio stations can be livestreamed, and these provide a strong base of digital audio listening when combined with our other exclusive representation of SoundCloud, which provides a music streaming audience of 2.5 million monthly listeners. This has been increasing month-on-month and is both meaningful and simple to access via our instream sales proposition. Podcasting of both radio shows and, importantly, premium original podcast on PodcastOne Australia encompass now 92 original podcast creators, and it continues to gather momentum with growth rates accelerating as a result of COVID-19. Turning to Slide 20. This slide highlights the aggregation of our content assets across both broadcast and on-demand platforms, demonstrating the scale and multiple layers of linear and on-demand content within the SCA audio ecosystem. Broadcast audio remains a compelling platform for advertisers, providing engaging content with national reach and scale. Our creative-led solutions provide clients with highly integrated campaigns. Within digital audio, the combination of original and repurposed content enables SCA to provide large volumes of audio content on demand. These addressable audiences can be served with instream advertising, providing advertisers with impressions-based advertising at scale. I'll now hand over to Nick.

Thank you, Grant. Turning to Slide 22, the operational review. The segment analysis shows that both the Audio and Television segments contracted by 18% during the year, reflecting the broad impact of COVID-19 across media. Each segment is analyzed further on the following slides. Slide 23 shows the change in audio performance across the year. Against the 18% reduction in revenues, operating expenses were reduced by $29 million or 10%. Employee expenses reduced by 12% as a result of a series of initiatives to reduce employee expenses, including JobKeeper support. Broadcast and production costs have trended lower but do include revenue share costs for podcast creators, which increased in the year, given the 96% increase in podcast revenue. Slide 24 shows that regional radio revenues have been less impacted than in metro markets. This is a combination of national advertiser demand into regional markets remaining more buoyant, coupled with the lower relative impact of COVID-19 in regional compared to more densely populated metro cities. Furthermore, the industry Boomtown initiative remains firmly focused on driving increased education of the benefits of regional advertising. And in the current environment, regional markets are set to benefit from increased domestic tourism and related economic investment. Turning to Slide 25. Podcasting has reached a level of maturity from a return-on-investment perspective as it becomes an earnings contributor for the group as previously forecast. Advertiser demand has continued to grow with increased understanding of the product and with continuing growth in consumption. Revenues increased by 96% in the year to $4.6 million, while in Q4, revenues bucked the general advertising trend, rising 47%. SCA continues to invest in premium original content, evidenced with a 41% increase in the production of marketable episodes, leveraging existing facilities and studios within the SCA business. This is creating more salable premium inventory to serve growing advertiser appetite. On Slide 26, the performance of our television business highlights the benefit of variable programming expenses, coupled with significant cost reductions in employee expenses, helping to mitigate the revenue decline. SG&A costs were impacted year-on-year by the transition of CapEx to OpEx, following the completion of the outsourcing of back-office functions. Minimal ongoing capital expenditure is expected in TV in the future. Turning to Slide 27. SCA continues to maintain a market-leading power ratio through the performance of its TV sales teams, despite the delayed start to the NRL season. The postponement of State of Origin until after the end of the regular season will also provide a further benefit later in the calendar year. The final slide on television, Slide 28 highlights the steps taken to operationally transform the TV asset with the creation of a modular structure with specialist third-party providers supporting playout, distribution and transmission. This has left SCA to focus on its core sales and marketing expertise, which continue to deliver market-leading results. I'll hand you back to Grant to summarize the key priorities for the year ahead.

Thanks, Nick. On Slide 29, we have set out our key priorities for the year ahead. In audio, SCA will seek to increase radio audiences with targeted investment in key time slots and markets while also leveraging our new market branding of the Hit Network and the associated talent improvements. In regard to our broader audio ecosystem, SCA will continue to identify and invest in growing and monetizing new digital audio products and content. This will occur hand-in-hand with the expansion of both our education and awareness of the growing volumes of digital audio, the premium nature of the content suite and the ease of transacting across this growing impression-based marketing platform. In television, the operational transformation of the asset is complete, and our focus remains on sales outperformance and in securing renewed program supply for 2022 and beyond. Our operational strategy is laser-focused. We have and will continue to successfully implement a series of initiatives that will deliver a leaner operating model across FY '21 and beyond. Concurrent with this focus, our organizational structure will be designed to enable a singularly focused, investment-led philosophy, supporting growth of our assets across both broadcast and digital platforms. But our principal aim is to recover our earnings position as rapidly as the market permits. Our balance sheet is much improved and will further benefit from application of surplus cash flow in FY '21. And we will ensure SCA remains positioned to take advantage of market developments as they arise. Thank you for your time, and I'll now hand you back to the operator for questions. Thank you, operator.

[Operator Instructions] Your first question comes from the line of Jay Shyam from Macquarie.

Just a couple from me. Just firstly, it'd just be good to get a bit more color on current trading trends and the like. So obviously, an improvement into July. How are you kind of seeing things in terms of brand campaigns and the like from commercial advertisers? I guess the government spend, that underpins the second -- the fourth quarter in '20. And then just any comments -- I know you highlighted Melbourne as about a 12% to 13% impact. Any comments around, obviously, your regional exposure. And the impact of COVID is broad-based, a lot less than regional, so how has that kind of held up versus your metro markets would be the second one. And then just in terms of your gearing profile, obviously, net debt has come down significantly since the capital raise. But previously, you've highlighted a gearing ratio of bands of 1.5 to 2.0x. I think one of your comments was that any kind of cash flow is going to be going to be applied to repay debt further down. How should we think about that going forward? Is that just kind of being prudent just with the COVID headwinds you're facing or something a bit more medium, longer term?

Thank you, Jay. Grant here. In relation to your first question, yes, as we've highlighted there, the continuing trend, as the government opens up the economy, we are seeing improved trading on a month-by-month level. Trading into August is not dissimilar to what we've seen in July. And certainly, whilst we understand there's been a slight setback in Victoria or, more importantly, just in Melbourne, fundamentally, the rest of the country continues to recover and is offsetting that challenge in Melbourne alone. In relation to Victoria, yes, Melbourne as a single market represents between 12% and 13% of our national revenues, which is far less than most of our peers, given the disbursement of our assets across 105 markets around Australia. So we are seeing it relatively contained at this point in time to Melbourne. Certainly, some of the regions in close geographical proximity are feeling a little bit of pain at a local level. But the offset to that is that we are seeing compensation in a positive light coming from other markets. In relation to gearing, yes, we have previously talked a lot about our gearing. We're very comfortable with the levels we see at this point in time. You selected the word prudent, and I think we'll latch on to that. We are being prudent by holding $271 million of cash, which will retire debt progressively over the course of the next 6 to 12 months as we see the economy open up even more and we see a higher level of sustainable improvement in our earnings. But that level, we're comfortable with at this point in time. Any excess cash flow that does come through will also retire additional debt. And then we'll reevaluate that at the appropriate time in the future.

Yes. And can I just add to that, Jay, just in terms of dividends. As we see that sustainable recovery in earnings come back, then we'll reevaluate the payment of dividends. But at this stage, we expect that to be in FY '22.

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

How much of your planned cost cuts this year that you mentioned back when you were raising capital, how much of that cost do you think will be reversed by the resumption of NRL and AFL? And do you think that will be more than offset by the incremental ad revenue from that full resumption?

Thanks for the question, Brian. Yes, we -- when we put out our capital raising papers, as you will recall, we targeted a calendar year reduction of $45 million in costs, and we certainly achieved that actually at the higher end of the range that we put out at that point in time. A lot of those cost reductions emanated from a change in structure that we've employed that will have ongoing benefits into the future. And that's why we're confidently calling out a cost number this year of around $270 million to $275 million because we see further incremental benefits across a range of things: one, the benefit of the cost structures and workflows being more effective and efficient; and secondly, the further employment and opportunity to utilize technology to actually cleanse a lot of those work processes and ultimately, the costs afforded to that. So we see a lot of that as being permanent savings at this point in time. Offsetting that naturally, we -- with the NRL and AFL moving into hibernation, we really saw a hibernation of fees, but we also saw a hibernation of revenue from our key sponsors. So as we've seen a return of those codes back into some semi-normal state, we've certainly seen a return of nearly 100% of those sponsorship in key categories returning into those respective codes. And that's certainly improving the profile of Triple M, which is most disposed to those 2 codes on the way through.

Can I just follow up perhaps for Nick? The covenant testing at the end of December this year, can you please clarify whether that EBITDA is inclusive of restructuring and other one-offs? And is it on an underlying EBITDA basis pre-AASB16?

Yes. It's Q2 EBITDA, which is annualized. If there were restructuring costs, they would be included in EBITDA. But any changes that are being made will fall into Q1, not Q2, and it is exclusive of AASB16 adjustments.

There are no further questions at this time. I will now hand back to the speakers. Please continue.

Thank you, ladies and gentlemen. I'd also like to just call out 2 final matters, and that is really a shout-out to the people of SCA who, certainly over the last 6 months like most businesses in Australia, have performed above and beyond a lot of the expectations that we all would have had. So I'd like to personally thank them and their families for the most part. And also, we announced this morning the retirement of our Chairman, Peter Bush, who has been a wonderful leader and mentor to myself and the management team. And we'd also like to thank him for his commitment and service and the testing times that he often put us under for the benefit of shareholders. And finally, Carole is joining us as a new director. We will have some further announcements on the way through as we progress, but we'd like to thank you for your time this morning.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may all disconnect.