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

Welcome to the Southern Cross Austereo Half Year Results Presentation. [Operator Instructions] I must advise that this conference is being recorded today, Thursday, the 25th of February 2021. I would now like to hand over to your first speaker for today, SCA's CEO, Grant Blackley. Please go ahead, Grant.

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 ending December 31, 2020. I'm joined on the call today by our Chief Financial Officer, Nick McKechnie, who will run through the financial details. I draw your attention to the disclaimer on Slide 2 and will move straight to the group results summary on Slide 4. I'm pleased to report a solid set of results today that demonstrates how SCA has navigated the difficult trading environment over the past year. EBITDA for the half year was $75.3 million, an increase of 11.5%, and net profit after tax was $32.5 million, representing a 59% increase on the prior year. Revenues were down 15.9% for the half year, but pleasingly, advertising trends and the rate of recovery continued to steadily improve month by month, which will naturally benefit the second half. Expenses were reduced by $56.7 million, reflecting the many actions taken by our management team to implement a leaner cost model. Expenses were also lowered by the temporary government support that was provided in the period through JobKeeper support and the public interest news gathering or PING grant. Free cash conversion was very strong at 134%, a reflection of the quality of SCA's earnings and with strong receivables collection and working capital benefits. A result of this excellent cash generation was a 50% reduction in net debt that was achieved in the 6-month period, with net debt now at a historic low of $66 million. Finally, I'm pleased to report that subject to no material adverse change in advertising markets, the directors intend to declare, at the end of the financial year, a final FY '21 dividend with payment in October 2021. Moving to Slide 5 where the headline achievements for the group are set out. The process of creating a leaner operating model was progressively implemented through 2020, and the benefits of these important actions are now being realized, with management having delivered structural cost savings of $30 million annually compared to the cost base in FY '19. We were delighted last Thursday to launch a major new product, namely, LiSTNR, which we will aim to grow into the ultimate audio destination for Australians and which underpins the implementation of a new digital-first audio operating model across all our operations within SCA. The transformation of our business at SCA will require ongoing investment in smart technology systems that will drive further efficiencies in our operating practices, whilst improving the ease of doing business. Advertising markets are recovering at pace, with a step change in the second quarter, in particular. This growth is being led by stronger investment by national advertisers across a large number of key categories. We have reviewed and refreshed our content offering with investment in new metro radio shows across a number of key markets, supplemented with marketing that will help these shows grow audiences and revenues. In television, we continue to operate with a market-leading power ratio of 1.11, up from 1.09 in the second half of FY '20. Digital revenues continue to grow strongly as audience consumption and market demand accelerate. Digital revenues were up 59% compared to the prior corresponding year. The financial stability of SCA improved in the period as we focused on the process of recovering earnings and strengthening our balance sheet. EBITDA, NPAT and operating margins all grew as the trading environment improved. The strong positive cash flow the business generated has resulted in net debt being reduced to historic lows, improving our balance sheet and positioning SCA for further growth. Pleasingly, this has provided the baseline for the business to return to paying dividends from the end of this financial year. I'll now hand over to Nick to walk through the financial results.

Thank you, Grant, and good morning. On Slide 7, we present the statutory results. Revenue was 15.9% down at $259 million, but this represents a blend of the 2 quarters, with a significant pickup in the second quarter as markets recovered. Expenses reduced 23.6% to $184 million, including the benefit of the government support, which helped offset around 70% of the revenue shortfall that occurred due to the public health restrictions imposed during 2020. JobKeeper support has now ended, but with the recovery in advertising markets, coupled with the permanent structural cost-outs implemented over the past 2 years, SCA is well placed for the second half of the year. Depreciation and amortization charges have further reduced following the outsourcing of television playout and transmission services, net finance costs were 15% lower and with further reductions to come in 2021. The cash flow statement is shown on Slide 8 and highlights the quality of SCA's earnings. Free cash conversion of 134% reflects the usual high ratio of earnings to cash flow, and it also benefited from around $15 million of temporary working capital benefits. CapEx has been closely controlled in the period, with the run rate to increase slightly in the second half. Full year CapEx will be around $15 million. CapEx spend reflects the trend of recent periods with an increasing proportion of spending directed towards investment in innovation and core systems, including the recent launch of LiSTNR, and this will deliver new revenue streams and enhanced operational efficiency. For the full year, we expect cash conversion to revert to more normalized levels of around 90% to 100%. Slide 9 shows the significant improvements to our balance sheet over the course of the last 12 months. Between July and December, net debt was halved as SCA generated $66 million of free cash flow. With the improvement in market conditions and the reduction in need to maintain high liquidity, $100 million of debt was repaid in January, including the $25 million 1 year facility, which was repaid upon its maturity. Slide 10 sets out the position with our debt covenants. The leverage ratio has reduced sharply in the period to 0.59x on its usual calculation basis and 0.39x when calculated using an annualized Q2 EBITDA, as agreed with the lending banks when COVID began. With debt at historic lows, there is clearly very significant headroom under SCA's covenants, including when the covenant reverts to 3.5x in December 2021.

Thank you, Nick. As I mentioned earlier, last week was a milestone date for SCA as we launched a major new digital product called LiSTNR. The number of Australians accessing digital audio has doubled since 2016. And importantly, is projected to reach 80% of all Australians by 2024. This change in audience behavior provides a significant opportunity for SCA to meet consumer and advertiser needs in this fast-growing audio space. LiSTNR provides a high-quality, personalized free app that aggregates all our premium content in a single easy-to-use destination. We have also been working hard to create more new and entertaining content that I will discuss shortly. With mandatory sign-in, SCA will have a real-time deep understanding of its audiences and will be able to deliver targeted audiences at scale to our advertisers. The depth of insights and new audience identities, combined with accelerated digital audio listing, will continue to cement SCA at the forefront of the digital audio market. Slide 13 highlights the broad range of existing and new digital audio content on LiSTNR. Live stream radio and catch-up podcasts sit alongside our existing premium original podcast, which will continue to expand over time. The music provided through our FM and DAB radio stations is supplemented by new mood and genre-based music channels and specially curated music shows. In addition, a range of new local short-form podcasts have been developed covering news, sport, local events, crime, lifestyle and information to appeal to local communities and visitors to those regions. This will be hyperlocal content and an extremely valuable contribution to our rich radio, podcast and music feeds of the LiSTNR product suite. Turning to Slide 14. We identified where the audience for LiSTNR will come from. Our primary market is the 9.4 million audio-savvy Australians that stream audio on a daily, weekly or monthly basis, while our secondary market encompassing a further 7.5 million Australians will further fuel incremental growth within this valuable digital market. It's important to note that LiSTNR is not starting from scratch. SCA digital audio products already reach 1.4 million radio streamers and 2.1 million podcast listeners each month, providing a solid foundation for LiSTNR. Turning to Slide 15. This shows how SCA's digital audio revenue base is continuing to grow. The journey started 3 years ago with the creation of our podcasting network and now also includes in-stream advertising of live streamed radio, branded podcasts and revenues from the international partners we represent here in Australia, principally SoundCloud and Sonos. Revenues grew by 59% in the half despite a broad contraction in other advertising markets. LiSTNR will provide a mandatory sign-in audience that will provide a scaled digital audio ecosystem. Advertiser demand is growing rapidly for digital audio inventory and LiSTNR provides SCA with the opportunity to grow market share in the digital advertising category as opposed to the radio advertising market. LiSTNR will require ongoing investment as we scale the business with more content, product marketing and sales expertise. Over the second half of the year, we expect net investment to be around $5 million, and we have set a 2- to 3-year investment time horizon to drive rapid adoption and achieve key listening and fiscal targets. LiSTNR is a significant strategic initiative from SCA, and we expect it to drive meaningful new revenue and contribution to profit over time.

Thank you, Grant. On Slide 17, the divisional results for SCA are set out. Audio revenues were 17.6% back on the prior year, but with steady improvement across the period as advertising markets improved. Television revenues have led the advertising recovery and were down 11.7%, underpinned by strong national advertiser spend. Expenses reduced by $56 million with benefits from a leaner cost model, coupled with targeted government support. Corporate cost increases reflect substantial increases in our D&O insurance premiums as well as some temporary one-off increases in advisory fees related to managing our response to the pandemic last year. Slide 18 highlights key advertising categories and a significant recovery in the market over the past 3 quarters, and has been an improving and sustainable trend across all categories, and with further improvements to follow in those categories still affected by the public health restrictions, including live entertainment, sport, cinemas and theme parks. Slide 19 provides updated cost guidance for FY '21. Revenue related costs were 30% of revenue in the first half, up marginally on the prior comparative period, reflecting the stronger television revenues recorded during the first half. Non-revenue-related costs are forecast to be $255 million to $260 million for the full year, inclusive of AASB16 adjustments. The cost guidance includes the investment in digital audio for the launch and growth of LiSTNR and also represents incremental promotion and marketing to support the major new shows launched in metro radio. For clarity, JobKeeper support benefited the first half, but is now finished, and a $10 million PING grant is being recognized over the 12-month period from September 2020. Slide 20 shows the performance of our audio business with EBITDA increasing 8.6% to $71 million. Broadcast and production costs have trended lower, but are offset by growing investment in our digital audio content offering, including LiSTNR. Employee costs were 40% lower, reflecting the benefit of JobKeeper support, but also the leaner cost base that has been implemented. SG&A costs have reduced on the back of lower commissions and reduced discretionary expenditure. Slide 21 highlights the investment we've made in core time slots and shows. The successful Hughesy & Ed drive show is the new breakfast show at 2Day FM in Sydney, and with the addition of Erin Molan, it's creating a very strong Sydney-centric show. The Marty Sheargold Show has launched on Triple M in Melbourne and creates an entertainment-focused Triple M network around the country. Fox FM has been enhanced with the addition of Nick Cody into breakfast, and the Carrie & Tommy show is now our flagship national drive show from 3:00 to 6:00 p.m. Finally, Perth has its very own Triple M station, completing the Triple M network across our 5 metro markets. On Slide 22, we highlight the broad and diverse client base of SCA and the split of national and local advertisers across our audio business. Over the past 3 years, we've been consistently educating the market about the long-term underinvestment in regional markets by national advertisers through our industry education campaign called Boomtown. That work is paying off with 7% growth in national regional radio advertising recorded in the period, bucking the trend against the overall COVID-impacted market. Future growth will be supported by the economic factors, which highlight the positive trends occurring in regional markets with net positive migration and rising asset prices. The operating performance of television is shown on Slide 23. The revenue decline of 11.7% was offset by reduced programming costs and sharply lower employee costs, which benefited from both lower headcount following the outsourcing of playout services as well as temporary government support. The streamlining of our television asset was completed in the previous year, and SCA is now receiving the benefits of those contracts and the reduced capital investment requirements. Turning to Slide 24. The core function of our television business is the effective selling of the programming, and this continues to show improvement through the strong power ratios achieved, reaching 1.11 for the current period.

Thank you, Nick. Our key priorities are shown on Slide 25. Our ambitions in audio are clear, following the successful launch of LiSTNR, our goals are to grow and mature this asset to create a meaningful new stream of addressable advertising. In addition, we have also invested in growing audiences in key radio markets with new shows and formats. Our television affiliation with Nine matures in June this year, and we've had discussions ongoing around the continuation of our partnership, while our affiliation with the Seven Network in Tasmania, Darwin and Central has been extended by 12 months to June 2022. The future success of LiSTNR requires the business to rethink how we operate. And the implementation of a new digital-first operating model, supported by ongoing investment in new technology to deliver further operating efficiencies, will be a key part of our business transformation. Achieving a full recovery of our earnings remains a key focus, together with investing for the future in unlocking new and profitable revenue streams. The results achieved to date have created a strong balance sheet that enables SCA to organically invest and grow, and it has put us in a position to recommence dividends from the end of the financial year. The final slide, 26, provides a trading update. The revenue recovery experienced in Q1 and Q2 is continuing and Q3 revenues are expected to be between 6% and 8% down against the pcp. Our full year cost guidance is for revenue-related costs of 30% and $255 million to $260 million of non-revenue related costs. Full year CapEx will be approximately $15 million and depreciation and amortization will be around $32 million. Finally, financing costs will be around $22 million, with the second half around $2 million less than in H1 due to the lower debt levels and improved swap rates. 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] Our first question comes from Brian Han, Morningstar.

Grant, traditionally, it felt like radio always got an immediate spillover of demand whenever TV inventory was tight. It doesn't feel like we're seeing that to the same extent in this cycle. Are there any reasons for the muted recovery in radio at this time around?

Thanks for the question, Brian. I think, this time around, as you know, we had a suspension of our surveys through the middle part of last year, which I don't think necessarily aided the recovery of the platform, but now that we have resumed those surveys, you've seen really the tail of 2 quarters where, principally, in the first quarter, we delivered an improvement on the quarter prior, but certainly in the -- in Q2 being October through December and the resumption of those surveys and more data in the market, you actually saw an acceleration of a recovery. So it has trailed TV, which is not typical. In many respects, we often see TV, in any economic crisis, move into it first, radio tends to follow, and TV tends to come out first, with radio following that recovery on the way through. But we're confident in the short to medium term that we'll start to see this continued steady recovery and improvement in the radio market and accompanying audio market that should underpin the full recovery of the radio sector.

Great. And Grant, while you're there, the reinstatement of dividends for the second half, can you talk about what the payout policy will be going forward with respect to that reinstatement? And just confirming that, that payout will begin with just the second half of this fiscal '21 as opposed to giving shareholders a catch-up dividend based on full year earnings?

Brian, it's Nick here. Correct, we do intend to recommence dividends in the second half. When we get to the end of the year, and we can see the full year position, we'll determine the quantum of that dividend and also determine what the payout ratio is going to be going forward. I think the Board has gotten enough confidence that the business is recovering well. And certainly, with the balance sheet we have, we're in a position to recommence, but we'll finalize those decisions around quantum and payout policies when we get to the end of the financial year.

Right. So are you saying that there is a potential for catch-up dividend to reflect the full year earnings?

Look, there's no decisions being made on that at this stage, Brian.

Brian, the only thing I'll add is that our historic range and payout ratio has been between 65% and 85% of earnings, and that is a fully franked dividend. So we'll take all of that under advice as we see the continued recovery of the market, and the Board will -- and management will make a decision in due course.

[Operator Instructions] We appear to have no further questions at this time. I'd like to hand the conference back to -- please excuse me, we've just had a number of questions come back through. We have a first question from [ John ] of [ Brendant ].

The question is, can you give us any flavor or color how the recent Hughesy & Ed show is performing in terms of market share?

Thank you, John. We haven't yet received Survey 1, which will be forthcoming in the middle of March. But what I can tell you is that we look at this on a range of data points. The first data point naturally is feedback from our listeners that has been plentiful and positive. Secondly, we look at Pulse surveys, which are interim surveys we operate as SCA in isolation. Once again, we've been receiving very positive feedback. And lastly, we look at the number of digital streams, which we know what is leaving us every day, and we have seen a continued rise in digital streams for the product since Hughesy, Ed and Erin joined that slot. Matter of fact, I can say, not only that, but we've seen a very similar pattern of behavior in Melbourne with the Marty Sheargold show as well as a new Triple M format in Perth. So we had 5 key areas of attention and investment that we wish to make, which is incorporated within today's numbers and our cost guidance moving forward. And those are strong economic markets, particularly in Sydney, Melbourne and Perth, and we have a stated aim of getting our leadership back in our targeted market for each of those programs.

So my take from that is that they are performing at or exceeding expectations?