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

Good morning, everyone, and welcome to the Southern Cross Austereo Half Year Results Presentation. [Operator Instructions] I must advise that this conference is being recorded today, Thursday, 24th of February, 2022. 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 half year results presentation. This morning, we will be taking you through our results for the 6 months ended 31 December 2021. I'm joined on the call today by our Chief Financial Officer, Nick McKechnie, who will run through the financial results. I will move straight to the group results summary on Slide 4. The results for the first half demonstrates how SCA assets are recovering as advertising markets improve and with the opportunity for further growth across our considerable broadcast and digital audio assets over the next 12 months. EBITDA for the half, excluding JobKeeper and PING funding, was $46.5 million, an increase of 16.3% on the prior year. Audio revenues were 11.5% higher than a year ago as audio markets continue to improve and recover. Television revenues were lower due to the change of affiliation in July 2021 to Network Ten, yet benefited from an improving TV market, coupled with reduced affiliation costs. Overall expenses reduced by $5.9 million and importantly, included targeted investment in SCA's rapidly expanding digital audio suite of assets. Net debt remains at a low level of $68 million and in the period, SCA successfully refinanced its bank facilities for another 4 years. Free cash conversion was lower due to working capital movements related to the increasing revenues and the favorable impact of COVID-related working capital deferrals in the prior period. Finally, I am pleased to report an interim fully franked dividend of $0.045 per share. Moving to Slide 5 where the headline achievements for the group are set out. Audio revenues increased by 11.5% or $20 million with SCA's metro radio revenue growth exceeding the overall market growth. As expected, a sharp increase in audience consumption occurred as lockdowns ended in November and health-related restrictions eased and the level of normality emerged, culminating in a strong recovery in audio revenues across both November and December. Digital audio revenues grew by 36% as the market continues to grow and accelerate, driven by rapidly increasing consumption in this expanding market. Importantly, marketers are recognizing the value of this medium with a larger number of briefs and with increasing weight per brief. On July 1, 2021, SCA seamlessly transitioned to Network Ten following the change in affiliation from Nine. EBITDA improved by 27% over the prior corresponding period, up against the competitive first quarter, which included the Summer Olympics on Prime. And in the second quarter, SCA delivered a market-leading revenue-to-ratings power ratio. Our digital audio ecosystem, LiSTNR, is just 12 months old and has already recorded 0.5 million sign-ups, with an increase in the rate of adoption over the last 6 months. LiSTNR is only one driver of a broader digital-first transformation occurring at SCA, which is core to our strategy for the business. We are acutely focused on embedding a digital-first mindset across the business and our workflows to improve audiences and monetization alike, which are both core to our strategy. Our balance sheet remains healthy with net debt of $68 million and leverage at 0.7x. The refinanced $250 million 4-year bank facility provides the flexibility for SCA to continue growing its digital audio business and to drive increased monetization of this important market. SCA continues to generate consistent cash flows, and this supports ongoing investment as well as the continuation of reoccurring dividends. A fully franked interim dividend of $0.045 per share has been declared. 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 flat on the prior year at $259 million. However, this reflects an 11.5% increase in audio revenues, offset by a reduction in television revenues following the change in affiliation. Expenses were $5.9 million lower at $213 million, inclusive of reduced affiliation fees, and this resulted in EBITDA before JobKeeper and PING funding increasing by 16.3% to $46.5 million. EBITDA margins increased to 17.9% from 15.4% in the prior period. Financing costs were $3.6 million or 30% below the prior corresponding period, while net profit after tax was $16.8 million. The cash flow statement is shown on Slide 8, and free cash flow was $16.2 million with consistent cash flow generation from SCA's assets. Working capital movements were adverse as revenues increased, particularly with a strong November and December and supplier payments normalized compared to 2021 when SCA benefited from a number of favorable COVID-related payment deferrals. CapEx increased to $9 million as SCA returned to a more normalized level of investment in core systems and in support of the ongoing product development of LiSTNR. In the second half of this year, CapEx will include costs associated with the relocation of the Melbourne office, which represents the last major property renewal in our portfolio. Slide 9 highlights the strong balance sheet position of SCA. Banking facilities were refinanced at the end of last year and a 4-year $250 million facility has been established through to January 2026. This demonstrates the strong support received from the lending group and provides flexibility for SCA as we execute on our strategic objectives. Cash interest payments for the full year are forecast at $3.5 million compared to $7.9 million in FY '21, a result of lower net debt and lower interest rates. On Slide 11, the divisional results for SCA are set out. Audio revenues were up 11.5% or $20 million, reflecting the recovering media market. That said, the recovery rate was tempered by the extended state lockdowns in Sydney and Melbourne, which impacted the half year through to the end of October. Audio expenses increased, reflecting the ongoing targeted investment in the development of SCA's owned and operated digital audio business. Television revenues were 22% lower due to the change in affiliation, but with the market growing by 9% and with sharply lower operating costs, a 27% improvement in EBITDA was delivered. Slide 12 shows that revenue-related costs reduced to 25% of revenue from 30% in the prior period, primarily due to the change in affiliation on the 1st of July. The television segment performed slightly ahead of the audio sector due to the positive disposition towards the TV sector during lockdowns, resulting in a slightly higher revenue-related percentage and forecast by SCA at our full year results. Nonrevenue-related costs increased by 5.3% with targeted investment in establishing and scaling SCA's digital audio business. To increase transparency over the audio business, we now present information for each of the broadcast and digital audio assets. On Slide 13, the performance of broadcast audio is shown with EBITDA up 20% and EBITDA margin before JobKeeper and PING funding increasing to 29%. Revenues increased by 10.3% as markets recovered, albeit this rate of growth was negatively impacted by the lockdowns in Sydney and Melbourne through the majority of the first half. Employee expenses were held flat and other costs increased as some of the temporary COVID-related savings unwound, but importantly, costs remain around 10% below pre-COVID levels. Slide 14 shows the revenue performance of metro and regional radio. Metro revenues grew by $11 million or 13.8%, aided by the recovery in the market and with SCA's revenues growing ahead of that. Regional revenue growth was 4.9% with the rate of recovery impacted by the greater weighting of total revenue towards SME businesses, which endured continuing impact from supply chain and restrictions across a number of important advertising categories. Turning to Slide 15. We highlight the impact that lockdowns had on the metro radio market in the first half. It is worth highlighting that there was an immediate lift in audiences of around 10% as lockdowns ended, together with an accompanying significant lift in advertiser demand in both November and December. The duration of the lockdowns had an increasingly negative impact as they were extended, but pleasingly, November and December saw demand exceed pre-COVID levels for the first time once restrictions were eased. Turning to Slide 16, provides some further analysis of the investment we are making to take advantage of the high-growth digital audio segment through organic investment in our capabilities. Revenues grew by 36% as demand improved following the rapid increase in digital audio consumption. This growth was below our half year expectations due to the extended impact of COVID and resulting lockdowns. That said, we expect these issues will dissipate in the near term, providing an opportunity of delivering even higher rates of growth for the future. We will invest in increasing the depth of our premium content slate, both through commissioning and partnerships with both domestic and international content producers. We are also enhancing our digital sales capability to serve the increasing demand for this growing market, evidenced by the larger and more meaningful volume of digital audio briefs. In parallel, we are investing in developing an enhanced user experience to drive even more rapid adoption and habitual listening than ever before. And finally, we are investing in more owned and bought marketing to increase awareness, drive user sign-ups and active engagement from listeners. Turning to Slide 17. The performance of our television assets is pleasing. EBITDA grew 27% to $17.5 million with EBITDA margins expanding by 10 points to 26.5%. The television P&L reflects the change in affiliation made to Network Ten on the 1st of July. Revenues were forecast to be materially lower under the new affiliation, but benefited from an improving market, up 9% in the period and coupled with substantially reduced expenses, including reduced affiliation fees. Slide 18 highlights how seamlessly SCA transitioned across to Network Ten. Benefiting from early engagement with advertisers prior to the change, SCA was able to immediately generate a power ratio greater than 1 in the first quarter despite the programming impact of the Olympics, while expanding the power ratio to 1.16x in the second quarter and leading market outcome. SCA has also recently executed a sales representation contract with WIN to cover the Ten signal in both Northern New South Wales and Tasmania, which takes effect on April 1. This will create further scale and buying simplicity for national advertisers across the board. I'll hand back to Grant to cover the key priorities for the year ahead.

Thank you, Nick. I would like to move our attention to 5 core opportunities for growth over the next 12 months. Each of these growth drivers are either a factor of the recovery cycle or an integral part of previously crafted strategies in maturing our asset base and had been planned for a considerable amount of time. On Slide 21, we highlight the recovery profile in the metro radio market to date, showing a 16% improvement across 2021. Radio's recovery has lagged the TV recovery. However, with further radio recovery expected over the next 6 to 12 months, this could culminate in an incremental recovery of circa 15% or $100 million for the radio sector. By comparison, this would mean that the market would achieve similar levels of market revenue to that of 2019. Category analysis supports this recovery with several major advertising categories expected to increase investment as supply chain issues ease when health restrictions are unwound, allowing the entertainment, travel and retail categories to fully reopen. On Slide 22, we have invested in launching and reinvigorating core metro formats, namely 2Day FM Breakfast in Sydney and Triple M Breakfast with Marty Sheargold in Melbourne. Both formats are fresh and engaging. And we are pleased with the maturity of these formats, the underlying story arcs and the production values, which have resulted in an increasing number of digital streams week-on-week. With communities returning to a level of normality, we expect the daily commute to work and/or school will offer consumers the ability to more readily trial, engage and embrace these entertaining formats. It's also worth noting that on 2Day FM, we are targeting a slightly more mature audience profile that is underserved in Sydney as evidenced with our new music offering. Both of these formats can deliver more growth in audience and revenue as they mature. Slide 23 highlights the digital audio growth trends in Australia are being mirrored or exceeded elsewhere. In the U.S., the podcast market is reaching an inflection point and is expected to further double from $1 billion to $2 billion over the next 2 years. These trends provide the conviction for SCA to pursue our strategic objectives of being the leading operator in digital audio through our content, sales and product capabilities. SCA has high aspirations for growth across both consumption and monetization, knowing we are expertly placed to benefit from this expanding market. Slide 24 showcases the rapid adoption of our LiSTNR product in Australia. Having launched just 12 months ago, SCA now has 500,000 signed-up users within our ecosystem with future growth driven off the back of increasing awareness and the strengthening of our premium content offering. LiSTNR is a world-class product with premium audio content at its core. LiSTNR is core to the digital transformation and growth aspirations of SCA, both in terms of consumption and increasing revenue opportunities. In regard to that premium content offering shown on Slide 25, SCA is constantly commissioning content across verticals with the greatest audience appeal. LiSTNR has been built on the strength of our Australian commissioning with known and engaging talent, but this is being supplemented with additional premium partnerships domestically and abroad, along with new content innovations. A new audio content innovation announced yesterday is highlighted by example on Slide 26. Working with leading talents such as Zöe Foster-Blake, we are creating new scripted audio dramas, which will shortly be launched on our platform, LiSTNR. Developed in partnership with renowned film and TV executive, Bob Campbell, Foster-Blake's best-selling book, The Younger Man, will become the first of 4 of LiSTNR's audio fiction episodic series. We expect consumers and advertisers will be attracted to these exciting new formats, providing even further incremental growth. Turning to Slide 27. It is evident that SCA embarked on a bold and aggressive digital transformation commencing over 5 years ago. We have purposely crafted a series of strategies, employed a new way of operating and invested in the right technology in the pursuit of creating a forward-facing digital enterprise. SCA unified our brand portfolio across our 99 radio stations to simplify our proposition to national advertisers. Investment in best-of-breed sales system and enhanced workflows has improved management information and enables SCA to effectively manage yield and focus on serving all our clients. Technology investment has also enabled SCA to centralize the monitoring and management of all radio playout operations, creating efficiencies while also outsourcing capital-intensive transmission services to a specialist provider. Through direct investment and via partnerships, we have leveraged leading-edge technology in AI and ad tech that are rapidly enhancing the consumer proposition while providing our clients with the insights and solutions they need to reach audio audiences in ever more effective ways. The journey has been transformational and has set SCA up in a solid technical framework with a revitalized digital-first mindset and a suite of digital products and services to enhance our future. The combination of these 5 growth opportunities provides added stimulus for future growth and is both exciting and measurable. On Slide 29, our ambitions in audio are clear. Radio will remain a key driver of our earnings and we remain laser-focused on improving those formats in key markets which need to improve. Further recovery in audio markets is expected over the next 6 to 12 months as a sense of normality returns to our personal and professional lives. This in turn will feed business and consumer confidence, aided by the easing of supply chain issues. In digital audio, SCA will continue to embrace this rapidly evolving marketplace with market-leading products and services for our consumers and advertising partners. We will drive stronger awareness, education and migration to a digital consumption model. The digital transformation of SCA is evident and it is well advanced, and our focus remains on creating and operating a structure and a mindset that produces a more efficient operating model with a digital-first backbone. LiSTNR will continue to drive inquiry and sign-ups to this owned and operated product, creating a larger base of authenticated signed-in known users with stronger habitual listening. This in turn will support our aspirations for above-market growth in revenue in this expanding market. Financially, we will continue to drive strong cash conversion from our assets, increasing earnings from audio markets and allow for continued investment in growing new income streams supported by investment in technology. We will retain low debt gearing and benefit from reduced financing costs. In the area of sustainability, we will also continue to develop our road map that will guide the sustainable development of SCA for its future. Our final Slide 30 provides a trading update. While we gathered trading momentum in November and across December as Australia opened up, January and February were directly impacted by the Omicron lag, which has resulted in booking deferrals due to the disrupted supply chains and reduced consumer and business investment. That said, Q3 audio revenues are forecast to grow by mid-single digits over this period. Specifically, January audio revenue grew by 3% on the prior year, but pleasingly, February and March pacing indicate higher growth rates in January as conditions improve with increased mobility and decreased restrictions. Television continues to perform to expectations and is expected to deliver a similar result to that of the first half. The fourth quarter is expected to benefit from a normalizing market with improving demand and further supported by the benefit of the upcoming federal election. Nonrevenue-related costs are forecast to be between $300 million and $305 million, inclusive of a full year's investment in SCA's digital audio business of circa $35 million. Cash interest costs for the full year will be around $3.5 million compared to $7.9 million a year ago and total financing charges will be around $16 million compared to $21.8 million in FY '21. Our capital expenditure forecast has been reduced for FY '22 from prior guidance of $35 million to $30 million following the deferral of a finance system refresh. Our primary technology investments remain focused on core sales systems and enhanced digital sales and product investments. Thank you for your attention. And I'll now hand you back to the operator to take any questions that you might have. Thank you, operator.

[Operator Instructions] Our first question is from Darren Leung.

Thank you for the update. I just have one just around the revenue-related costs of $300 million to $305 million. If we take out the $35 million of digital investment, which we understand observe a longer rate of return profile, and the $31 million of government assistance in the PCP, it still looks like quite a big increase versus the prior year. Just can we get a bit of a feel as to what's driving the cost increase here, please? .

Darren, it's Nick. If you -- if we work out from FY '21, we had $245 million. There's $40 million of government support across the year. There's a little bit of CPI related to salary and wages and property and technology costs. A small amount of COVID unwound, so probably $10 million between the 2. That sort of gets you to about $295 million. And then as you say, you've got that investment in digital audio. So I think about $10 million of savings we've made across all the broadcast assets and other areas of the business to sort of fund and help that investment in digital audio. Does that answer your question, Darren?

Okay, that makes sense. And then the second one, just a bit more open question, but federal election and the impacts, particularly on nonregional radio markets, please?

Yes, I'll take that. Thanks, Darren. We always look forward to a lead-up into the election as much as the 6-week cycle of the physical election. We would expect, as we are seeing and hearing on media at the moment, further investment across participants in the federal election, which is increasing demand. I think the regional markets are well placed to benefit from investment by all parties and all participants in that regard. And the only thing I'd say, as I always do, within the 6 weeks of the election once it is called, whilst there will be an increase in electoral commission funding and whatnot, you do find some retail advertisers who abstain from the market at that point in time, but we continue to expect that we will see stronger revenues from this sector leading up to that announcement and possibly beyond.

[Operator Instructions] Grant, we appear to have no further questions at this time. I'll throw the call back to you, please.

Much appreciated. And thank you for your time, ladies and gentlemen.

Ladies and gentlemen, that does conclude today's conference call. Thank you all for attending. And you may disconnect your lines.