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

Welcome to the Southern Cross Austereo Full Year Results Presentation. [Operator Instructions] I must advise that this conference is being recorded today on Wednesday, the 18th of August 2021. I would now like to hand over to your first speaker for the day, SCA's CEO, Grant Blackley. Please go ahead, Grant.

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 year ended 30th of June 2021. I'm joined on the call today by our Chief Financial Officer, Nick McKechnie, who will run through the financial results. I draw your attention to the disclaimer on Slide 2 and I'll move straight to the group results summary on Slide 4. I'm pleased to report a set of results today that demonstrates how SCA has recovered strongly over the financial year and the exciting opportunities that lie ahead for us as we further build and accelerate our digital audio business. EBITDA for the year was $126 million, an increase of 16.4% on the prior year and just above the top end of our guidance range. Net profit after tax was $48 million, representing a 92% increase over the prior period. Revenues in the second half continued to recover well and were up 16% on the prior year. Group revenues for the full year were down 2.2%. Expenses were reduced by $29 million, a combination of the targeted structural cost-out initiatives enacted over the past few years, together with the benefit of JobKeeper support received during the first half. These savings were partly offset by an increased investment in digital audio, which is expected to continue in FY '22 and beyond as we further our investment in this important growth driver. $79 million of free cash is generated and applied to debt reduction, reducing SCA's net debt to a historic low of $53 million. I'm also pleased to report that as indicated in our half year results in February, the company is now in a position to recommence dividends and a fully franked final dividend of $0.05 per share has been declared, representing 85% of the second half net profit after tax. Moving to Slide 5 where the headline achievements for the group are set out. SCA's investment in growing our digital audio business is underpinned by a strategic goal of implementing the digital audio first operating model across the entire business. Evidence of the success of this investment is underpinned by our growing premium library of content resulting in digital audio revenue growth of 40% over the prior year. We will continue to focus on our core formats and key shows across the Hit and Triple M networks and invest in support and marketing to grow and improve these formats, evidenced by growth in metro market share in the second half. Our performance with the leading sales house in television continues with our second half television revenues delivering a best-in-class power ratio of 1.11x, despite the impending change in television affiliation which has now occurred seamlessly on the 30th of June. Operationally, we continue to focus on developing a leaner and more efficient operating model with a $31 million reduction in nonrevenue-related costs in the year. In February, we successfully launched a major new strategic initiative and product, LiSTNR, which is delivering a personalized, premium and on-demand audio experience. We will cover off how this product is growing later. In television, we executed a new affiliation agreement with Network 10, which commenced on the 1st of July, and we expect the agreement to deliver a neutral earnings impact compared to our former agreement with the Nine Network. A highlight of today's results is the quality of earnings with free cash conversion of 122% for the year. This strong cash generation enabled a 60% reduction in net debt of $53 million and leverage is now 0.43x. We are also pleased to reinstate dividends with a fully franked $0.05 per share final dividend. 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 2.2% lower than the prior year at $529 million, but was supported by a recovering market through the year with a 16% increase in the second half. EBITDA was up 16% to $126 million, and the EBITDA margin increased to 23.8%. Depreciation was 10% lower, and net finance costs were 20% lower than the prior period, resulting in a 93% increase in net profit after tax of $48 million. The cash flow statement is shown on Slide 8 and highlights the quality of SCA's earnings. Free cash flow was $79 million, reflecting strong cash collection, modest capital investment in the year at $13.8 million. Interest and tax payments was slightly lower than last year. This resulted in free cash conversion of 122%. On Slide 9, we show the consistently high quality of earnings that SCA has generated over the past 5 years. The last 2 years have benefited from working capital benefits and restrained capital investment. Cash conversion is expected to be lower in FY '22 due to higher capital investment in core systems and properties before normalizing back towards the 90% to 100% level. Slide 10 highlights the strength of our balance sheet. $275 million of debt is repaid in the period, with our debt facility reduced to $250 million, of which $128 million is drawn. The leverage ratio reduced further in the period, which is now at 0.43x. With interest cover at 15.6x, both ratios are comfortably under the covenant levels. Regular dividends had recommenced, and our dividend payout ratio remains 65% to 85% of underlying NPAT. Slide 12 sets out the performance of the operating units. Audio EBITDA was up 6% to $115 million, and television EBITDA increased 59% to $38 million. Total expenses were down $29 million as a result of structural cost savings implemented as well as receiving JobKeeper support in the first half of the year. Corporate expenses have increased largely due to a significant increase in D&O insurance costs during the year. Slide 13 provides a breakdown of our cost base. Revenue-related costs were 30%, up 1 percentage point in the year due to the stronger and faster recovery of television revenues during the year. Nonrevenue-related costs reduced by 11.2% to $245 million, below the guidance of $250 million to $255 million. In FY '22, nonrevenue-related costs will increase as we cycle over the benefit of the JobKeeper assistance received during FY '21, and we will continue to invest in growing our digital audio business, although this investment will be offset by growing revenues in this expanding market. On Slide 14, we highlight how the advertising market is recovering. The top 10 categories, which account for around 60% of total spending, have been showing a progressive improvement across FY '21. Looking forward, we expect further recovery in these categories back towards FY '19 levels as we progress through FY '22. Some categories, notably automotive, have been impacted by global supply chain issues, and these bottlenecks on supply are expected to ease over the next 12 months. Once we turn, restricted categories are those that have been more directly affected by the impact of COVID-19 and the related barriers to conducting business. Live entertainment, travel, cinemas, theme parks and sports reside in this category. While we've seen an improvement in these categories in the last 6 months, the reinstated lockdowns in various states and communities will slow the rate of recovery. However, we expect the return of spend in these categories towards the end of the calendar year and into the second half of the year. Turning to Slide 15. The performance of the audio business is shown. Revenues decreased by 3.1% year-on-year, but with a progressive recovery across the year. And in the second half, a 17% growth as advertising markets increase. Revenue-related costs also increased slightly due to revenue share arrangements with our successful suite of premium podcast creators. Employee-related costs reduced by 11.1% or $15 million, but was supported by having 2 quarters of JobKeeper support in the first half compared to 1 quarter in FY '20. Radio advertising revenues was shown on Slide 16. Regional radio revenues recovered at a slightly faster rate than metro revenues, led by 10% growth in national regional radio revenue. This improved monetization has been a result of continued education of the value of regional markets through the industry Boomtown initiative as well as a lower impact on regional markets in COVID-19. Metro markets were more impacted by the temporary cessation of surveys in the first half of FY '21 and from reduced listening that occurred in all commercial FM stations. Turning to Slide 17. Digital advertising grew by 40% in the year, driven by growth in both addressable in-stream revenues and in podcasting. The total audience network of 4.5 million listeners across all digital platforms, with increasing consumption of content with increased live streaming, podcasting and use of smart speakers, the digital audio market is expanding due to increasing consumption and growing advertiser demand. On Slide 18, we look specifically at the rapid growth in content consumption on the LiSTNR platform. LiSTNR was launched with 4 main content verticals: Radio, music, podcast and news, and we will shortly add a fifth vertical with the inclusion of live and on-demand content across key sports, inclusive of streaming, AFL, NRL and cricket broadcast. Overall, audio consumption on LiSTNR has grown 5x since its launch in February. Podcasting listening has increased threefold since February when it operated as the PodcastOne app, and radio streaming on a standing start is now growing strongly and represents the same level of listening within the app as podcasting. Pleasingly, we've seen the volume of content listened to per user increased by 60% over this period. With a rich slate of premium content, we are finding users discovering new and interesting content as they browse through the app, increasing the time they spend engaged listening through the app. Slide 19, highlights tailored consumer app experience that helps users identify them favorite content and which provides them with a personalized data feed and a simple way to discover new content. Slide 20 shows that the accessibility and portability of radio is enhanced in LiSTNR with content, both live and on demand, available for consumption at a time and place of your choosing, either on your daily walk, in your car, over a smart speaker or on your connected TV. On Slide 21, we showcase some of the premium content that can be found on LiSTNR across our radio, podcast, music and new verticals, with our fifth pillar of sports to be expanded shortly. Moving to television on Slide 22, which highlights a strong recovery in earnings. Television has led the overall market recovery, and revenues were earning back 0.3% of 1% on FY '20. Nonrevenue-related expenses declined 29.8% on the prior year with JobKeeper and PING funding, temporary COVID measures and permanent reductions in head count all contributing to the lower cost. The revenue and cost profile will change in FY '22 with a transition to network TAM. And SCA will also receive a modest benefit from the launch of SkyNews Australia in the start of August. Slide 23 demonstrates that SCA has managed to maintain its market-leading power ratio of 1.11x despite disruption caused by the change of affiliation at the end of June. Strong market leadership in this area has ensured a smooth transition since 1 July and with effective monetization of Ten content.

Thank you, Nick. On Slide 24, we set out the key priorities for the year ahead. First, growing our radio audiences remains paramount, and we will retain a laser focus on improving high-value shows in major markets to increase ratings and revenue. In parallel, we will continue to optimize our earnings in television by delivering strong revenue to ratings' power ratios. Operationally, our focus is on maturing and ingraining our digital audio-first operating model across all 65 offices and 105 communities in Southern Australia. We will enhance our capabilities in digital sales and data and insights, and we are redefining workflows to enable the delivery and monetization of content across all platforms. We will continue to invest in developing the LiSTNR product through enhancing the customer experience, providing more functionality, adding more premium content and improving customer recommendations through advanced AI technology. All of this will increase the value of our customer-facing experience and the accompanying monetization of this growing digital audio consumption. The result of these actions to invest ahead of the curve will create a meaningful digital audio marketplace. By taking a leadership position in enticing consumers and rewarding our business partners in a meaningful way with a scaled audio product, we will deliver increasing returns for SCA and its shareholders. Financially, we remain focused on continuing to deliver a high quality of earnings and conversion of earnings into cash flow. Our balance sheet is strong, and we will focus on enhancing shareholder returns. The final Slide 25 provides a trading update. In regards to our audio segment, we are pleased to confirm that revenues in both July and August will post growth of over 20% against the pcp. Television revenues have achieved our internal forecast of both July and August, and we remain on target to deliver a mutual outcome at the EBITDA line for the year, excluding the nonrecurring nature of JobKeeper and PING funding. Digital revenues in the past year grew by 40% over the prior period, and we forecast revenues to grow a further 75% to 100% year-on-year. The digital audio listening increases, advertising demand grows, and we enhance our share of this accelerating and exciting market. We can confirm that we have reached provisional agreement with Google for SCA's content to be published on Google News showcase. We are pleased with this outcome. And whilst the terms of the agreement are confidential, the impact is not material to earnings. Looking at our cost guidance for FY '22, we will see a significant reduction in revenue-related costs down to 23% to 24% of revenue following the transition to Network 10, which will offset the anticipated reduction in television revenues of around $35 million. Financing costs were reduced by a further 20% to around $17 million. Capital expenditure will increase this year to around $35 million, a direct result of investments in our core finance and sales systems, which will improve workflows, increase efficiency and provide the opportunity to further grow revenues. We are also relocating our Melbourne office to a smaller, more efficient building. It is worth managing in property terms, this will be the last major office move for at least 5 years, and importantly, we expect to see CapEx normalize at around $18 million to $20 million per annum thereafter. Our focus will remain on principally investing in innovation CapEx to further improve our core systems and business growth. 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 Darren Leung from Macquarie.

Just a few quick points from me. One, can I get a feel for the incremental cost that goes alongside listener and the digital audio revenues more broadly just as that grows? And then sort of how big of the audio pie do you think that can start to take up in maybe like a median term, $3 million to $5 million? So that's question one. Question 2 is a media article talking around the sale of the TV assets? Any color on what might be limitations of potential buyers or any sort of in limitations on your end that we should be thinking about, please? And the third line, maybe for you, Nick. Just a mechanical one. So TV revenue-related expenses at 57.5%. My understanding is that previous arrangement have bottomed around 50%. So how do we sort of think about that for the new agreement with Ten, please?

Okay. Thanks, Darren. I'll take the first and third question there. So just in terms of our investment in LiSTNR. As we said, we expect to see our revenues grow by 75% to 100%. And we think that, that will be largely offsetting the cost investment that we will make. The key areas that we're investing in is enhancing the products, growing our digital sales capability and acquiring and commissioning more content and obviously marketing the platform. So we think over the next couple of years, we will remain in this investment phase, but clearly, we do expect to see revenues grow pretty rapidly for this period. In terms of the third question, so the 57.5% TV revenue related is a mixture of the fees we pay to 9 and 7 and 12 as well as agency commissions and any other variable costs like license fees. So that's why it goes above the 50 you might have had in your head. So obviously, under the new affiliation arrangements, the affiliation fees are lower for TAM, but you still have those same agency commissions and other variable costs. The guidance we've given of 23% to 24% is across the total cost base. So there's roughly 15% revenue-related costs on audio and then the balance of them is in TV. Grant, do you want to answer the second one?

Yes. Thank you, Darren. In relation to TV, our television assets do continue to generate steady earnings. And we've spent the past 3 years streamlining the asset through outsourcing of all our back-of-house functions including play out, distribution and transmission services. It has performed well throughout COVID as represented today with a recovery in earnings for $38 million in FY '21. In addition, the new affiliation agreement with 10 will enable us to maintain a mutual earnings position in FY '21 when it was under a Nine network. We are approached from time to time in relation to opportunistic acquisition of those assets. They do remain part of the business and have an active role in not only presenting a more unified picture across multi platforms for our regional markets. But secondly, they are also a very good scale product to promote a new digital audio suite of products and services. So if someone does present themselves, we will obviously take that on merit and discuss that. But at this point in time, TV remains an active part of our business.

Our next question comes from Tom Beadle from UBS.

I just had 3, please. Just firstly, just on the Google News showcase deal, I realize it's immaterial, but just confirming, that's around your regional TV business. And also, is there a possibility to do a more material deal with Facebook that might include some of the digital content produced by the audio side of the business? The second question is just around radio revenues. Obviously, up nicely in July and August. I mean, you are comping a radio ad market that was down 28% in September last year. So I realize it's not completely apples and apples, but it appears that revenue is still well below pre-COVID levels. So just wondering if you could sort of talk to why this is the case and to what extent you expect radio ad market revenues to return to pre-COVID levels. I mean what's the data telling you here. Just a final one on the CapEx outlook. It's probably a little bit higher than what we expected, although we could have been wrong there as well. But are there any accounting changes or transfers from OpEx to CapEx that we should be aware of in that number?

Thank you, Tom. Firstly, in relation to Google, we're not at liberty to discuss any aspect of that arrangement. It is a provisional arrangement, of which we'll seek to document over the next coming weeks. So I can't talk about the structure magnitude or term of that arrangement. But we are pleased with the fact that we do have a preliminary arrangement with Google. And importantly, we will also continue to engage with Facebook and knock a similar outcome if that's possible. On the second issue in relation to July and August, yes, we are pleased that we're going to see a 20% growth rate over the prior year. And remembering that July and August had today, early stages of recovery out of the depth of what we would have seen, particularly over that April, May period, there was improvement into June, further improvement into July, August and so on. So we are comping against slightly better numbers than the depth of CAGR that we saw early in the piece. But we are starting to see most categories return to very strong growth. That continues at this point in time, certainly through the fourth quarter, and it is now making its way firmly into the first quarter. So we're seeing about 9 out of 10 categories of the major categories, actually in double-digit growth. The one that is the outlier at this point is retail, which obviously is a very large and expensive category that encompasses both national retail and local SMEs. And I'd have to argue that the national market is stronger and fitter and has recovered more quickly than the local or regional marketplaces. And to that end, I think with the current lockdowns that we're seeing, whilst we're still seeing growth come back in the trajectory of that growth improving, we are seeing a bit of a cessation in terms of the growth rate, albeit it's still positive on the prior year. So as Nick described in his slide earlier on, some of those restricted categories are the categories that are going to take us home from here, which still includes sport, theaters, live entertainment and related. And we do believe that there's more markets coming out of lockdown. Principally, we're going to see that accelerate. We should see that, one would hope, towards the end of the year and certainly improving into the second half of our fiscal year.

So if I pick up the last question on CapEx. It is a high year coming up next year. Its 2 main projects, really have sort of effectively doubled the CapEx spend. One is the relocation in Melbourne. So we are moving to a smaller premises. There are those extensive fit-out costs included with the studios that we have to build there, but we will get the benefit of kind of the long-term rental costs that we'll pay will be lower going forward. And the system refresh is the other main cost. These come around. Our finance system is about 20 years old. So it's due for a refresh, and that will come into next year. Thereafter, you will see the CapEx reduce. I'll reiterate that having outsourced a lot of our back-end play out and transmission services, we have very little maintenance CapEx associated, almost none associated with our television assets, and a very small amount associated with our audio assets. Going forward, we really will be investing really in IT systems and innovation CapEx. The final point was on the reclassification. So if you look, there is a footnote on that, trading up that slide, that yes, we do expect about $6 million to $7 million of the system implementation costs will be reclassified as OpEx because it relates to a cloud computing system.

And Tom, I'll just jump back into clarifying. In relation to the marketplace at this point, there's a very measured and considerable response from the market and our advertisers at this point. So it's a very different situation this time around to what we saw ourselves before. So whilst we're still seeing growth at the double-digit rate, we're moderating some of our short term here in terms of the recovery rate, although positive, to actually just pushing that out just a little bit. So we're seeing a few cancellations in the current market, but they are from smaller retailers across the board, more so than national advertisers who have led us out of this recovery quite confidently.

Our next question is from Conor O'Prey from Canaccord Genuity.

Just -- Grant, you took my first question on the final answer, it was very helpful. Just maybe -- just on LiSTNR, can you maybe -- your report with this. But just in terms of the advertising which you can get on that platform versus standard sort of linear video, are they higher because you can target this better? Is that sort of a reasonable assumption?

I think that is a fair assumption. Kind of what we find with LiSTNR is it's an addressable market. We have a more barter-centric insight that we can offer to advertisers and it's obviously a personalized experience. So to that end, a bit like podcasting and PodcastOne on in its prior iteration, we found that the absence of the same commercial load as linear radio. But in actual fact, advertisers and agencies are willing to pay at least the same, if not more, for that experience because it's a different experience. So we're finding that with the list of revenues that we're accumulating to date. And secondly, we've obviously opened up an entirely new stream of revenue with our in-stream product, which through a digitally enabled IP device like a mobile phone, we can insert a different set of advertising that is highly targeted to a person and their behaviors and interests, which also commands greater demand and interest from advertisers. So the short story is, yes, we do see a high yield coming out of the LiSTNR model than what we would typically see in a linear fashion.

And let me just pass into the sort of current situation, lockdown [indiscernible] but as you said, the spending is not retrenching anyone near like it was last year. What do you think is difference is, say, for agency buyers? Did they just learned that the world doesn't sort of end and spending will continue? Is that sort of relevant to driving you to perhaps more moderate behavior?

Conor, I think there's a myriad of things. One, what we saw over 12 months ago was something that was new. There was a bit of fear and panic in the marketplace. We are now living to deal with a fairly agile marketplace at this point in time. So agencies and markets -- the marketers did spend some time out of the market last year and progressively came back. Through this lockdown, we are seeing that they're more resilient and more considered in the manner in which they plan and buy media. They are more tactical on the way through. And certainly, we're starting to see more categories emerge that we actually haven't seen on a pre-COVID basis. So we've obviously seen anything with an e-commerce model pivot to a point that people are putting more money behind that and opening up new markets. Certainly, the government is very strong at this point in time, and we expect to see that accelerate through the course of this fiscal year as we actually go into an election phase, which should be by May '22. So there's a lot of different attributes to the market, first and foremost. I think in SCA's case, remember that we serve 105 communities through 65 of our offices. And the health and economic crisis is actually very different at different places throughout Australia. So we have a number of markets that fundamentally have carried on in the absence of the health crisis. And therefore, the economics of that market have remained stable or improved. And that's why we've seen our regional radio business perform slightly better than the metro business, that it's hit with 2 things: One, the absence of ratings for a short period of time, which are now being COVID-proofed by the industry, and will continue moving forward. So we've taken away that risk and liability. But we are in a lockdown in certain places, but people are leaning to live with that certainly as marketers and advertisers.