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

Good morning, everyone. Welcome to the Southern Cross Austereo full year results presentation. [Operator Instructions] I must advise that this conference is being recorded today, Monday, 22nd of August 2022. I would now like to hand the call 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 2022. I'm joined on the call today by our Chief Financial Officer, Nick McKechnie, who will run through the financial results. I'll move straight to the headline achievements 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 of us as we further build and accelerate our digital audio business. Recovery has been led by a strong recovery in broadcast radio and SCA has achieved record audiences and delivered EBITDA up 13.9%. SCA remains the #1 network for people 25 to 54, which is the key buying demographic for advertisers. We have maintained our earnings from television following our affiliation change to Ten, with EBITDA of $30 million and margins up to 23.7%. Digital audio revenue continues to scale rapidly with revenue up 35%, and this has been supported by the higher speed adoption of LiSTNR with signed-in users now exceeding 850,000. Finally, our back-of-house digitization program is complete, creating a digital infrastructure fit for the future and enabling future CapEx investment to reduce. The results summary is shown on Slide 5. In summary, underlying EBITDA for the year was $88 million, an increase of 2.8% on the prior year. While underlying NPAT was $27.4 million, a 38% increase year-on-year. Audio revenues recovered by 9.2% or $33 million in the period. While total revenues reduced by 1.8%, a direct reflection of the change in affiliation at the commencement of the fiscal year. Underlying expenses were $11.9 million lower than the prior year, reflecting our continued focus on expense management and workflow efficiencies. Lower programming costs within television were partially offset by the substantial investment made during the year in further scaling our all-important digital audio business. SCA's balance sheet remains robust with net debt of $78 million and leverage below 1x. Free cash flow was lower than the PCP as working capital normalized post-COVID and due to the higher capital investment in FY '22, principally due to the one-off relocation of our Melbourne office. A final dividend of $0.0475 per share fully franked has been declared improving our full year dividend to $0.0925 and representing a strong yield for our shareholders. 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 1.8% lower than the prior year at $520 million, but this reflects the recovering audio market offsetting the impact from the change in television affiliation. Underlying EBITDA was up 2.8% to $88 million, and the underlying EBITDA margin also increased to 16.9%. A tax-affected impairment charge of $179 million was recorded, reflecting an increased discount rate and an uncertain global outlook. Financing costs were 26% lower than the prior year at $16 million and underlying NPAT was up 38% to $27 million. Slide 8 provides a reconciliation of reported to underlying results. Significant items of $4 million were recorded in respect of restructuring charges and some nonrecurring expenditure associated with the termination of a finance system refresh, which is being deferred into the medium term. Government grants received in the year reflects the final recognition of $1.7 million of income related to the PING grant, which ended in August 2021. The cash flow statement is shown on Slide 9. Cash flow generation in FY '23 reflects a normalization of working capital following the COVID period as well as higher capital investment as the SCA completed its last remaining major property renewal in Melbourne. The completion of this 5-year digital infrastructure refresh program means that CapEx is forecast to reduce to around $20 million in FY '23. Around 80% of this future capital expenditure will be targeted at further innovation and improvements in core systems. Free cash conversion is expected to revert to its typical range of 90% to 100% in FY '23. Slide 10 provides details of SCA's strong balance sheet. The refinancing of our bank facilities was completed at the end of 2021, and this provides security of financing through to early 2026 through a $250 million facility. With leverage below 1x, there is very significant headroom under this facility. Total dividends for the financial year are $0.0925 per share and represents a payment at the upper end of our dividend policy range. We are targeting a further recovery in audio markets given the strong audience recovery seen in 2022. In addition, the capital requirements for the business remain modest with the majority of the investment required to scale our digital audio business being expensed. SCA also commenced a share buyback scheme in the fourth quarter, and this will continue in FY '23. Slide 12 sets out the performance of the operating units. Audio revenue was up 9.2% across both broadcast and digital assets, and the expense increase primarily reflects the investment in growing and maturing SCA's world-class owned and operated digital audio platform, LiSTNR. Television expenses reduced by 31% in the year, offsetting the revenue reduction that resulted from the change in affiliation to Network 10 which produced a flat outcome at the EBITDA level for television. Slide 13 provides a breakdown of our cost base. Revenue-related costs reduced to 24% in the year, largely a recognition of the new affiliation agreement in television. Nonrevenue-related costs increased by 6.7%, reflecting the investment in our rapidly scaling digital audio business, as well as some increased costs as we exited from COVID-related restrictions. The performance for our broadcast audio assets is shown on Slide 14, with underlying EBITDA growing 13.9% to $104 million and with margins expanding to 28%. Revenue growth was 8% for the full year, reflecting the recovering market. Expense growth was 5.9%, with labor cost inflation held to 3% due to ongoing workflow efficiencies. Further detail on our radio advertising revenues are provided on Slide 15. Metro revenues grew 9.4% in the year or $15 million, in line with the overall growth in the market. Regional revenues were up 6.4%, with national revenues up 8.9%. Local regional revenues recovered 4.3%, but the pace of recovery lags the national market as supply chain issues and the East Coast floods impacted local investment levels. The performance for our digital audio business is shown on Slide 16. Digital audio revenues grew by 35% in the year to $21 million, supported by the growth in consumption of our digital audio content, coupled with the expanding digital audio market. As set out in our first half results, SCA invested in the year to build the capability and platform to ensure that SCA maintains a leading position in an ever-expanding digital audio market. In parallel, we invested in strengthening our premium content library and sales capability with costs in the second half at a similar level to the first. Cost growth has now moderated. And with digital audio revenues forecast to grow at a similar rate to FY '22, the net investment in digital audio is expected to reduce in FY '23. With increasing consumption and growing awareness underpinning this expanding market, we expect our digital audio business will breakeven by FY '25. Turning to Slide 17, the performance for our television asset is shown. EBITDA was held flat year-on-year, while the margin increased to 23.7%. the change in affiliation to the Ten Network on 1 July 2021, resulted in a reduction in revenues as expected, but this was offset by substantially reduced expenses in programming and other costs which enabled EBITDA to be held flat, in line with the guidance provided at the start of the year. After a strategic review of our TV assets conducted across the fourth quarter, we have concluded that we will retain these assets moving forward. Although we received multiple bids for the asset, the value did not align with the value we expect to realize if we continue to hold the asset. Television is a well-run business that has been simplified over the past 5 years through outsourcing of back of house functions and which provides a solid contribution to earnings and cash flow. Television provides SCA with scale in a growing regional market as well as providing a marketing platform for SCA to further mature LiSTNR. The asset is in a structurally challenged sector, but SCA will continue to operate the asset to maximize cash flow and returns over the coming years. Moving to Slide 18. After outsourcing or selling all capital-intensive assets and functions, our core influence is the sale of advertising, which is expertly performed. After transitioning to Network 10 at the start of the fiscal year, SCA has managed to deliver a power ratio of revenue to audience of 1.09 in this first year, a highly credible result given the competition of the Olympics in the first quarter. During the year, SCA also executed sales representation agreements with the Ten products in Northern New South Wales, WA, Tasmania and Mildura. This provides SCA with a broader footprint across all regional markets for Ten, providing a simplified buying process for agencies and national clients. I'll hand back to Grant to run through the outlook for FY '23.

Thank you, Nick. Slide 20 clearly demonstrates how radio continues to perform as a medium with very significant reach enhanced with the addition of over 1.2 million listeners across the last 5 years, a growing and resilient platform with increasing consumption across all age groups. Slide 21 highlights how SCA has substantially recovered audience following the return to a more normalized environment post-COVID. However, that's only half the story as SCA has grown at a faster rate than our peers over the last 5 surveys. On Slide 22, I want to highlight the rationale behind our investment in digital audio. Consumers are migrating at pace to digitally enabled listening across multiple platforms and devices. It is inevitable that listening in an IP-enabled manner will become the norm and be the dominant mode of consumption of audio over time. Every data point reinforces our belief in the changing consumption of both radio and on-demand content, and we, therefore, understood the strategic imperative to own and operate our own platform. We simply wanted to own the house, not rent the house. Providing our audiences with local stories and content is our key antidote to global tech platforms, and this differentiated position will enable us to continue to grow audience and revenue. On-demand content is growing and adding to the strong and resilient demand for live and local radio content. And this aids the maturity and expansion of our user base. To that end, we have instituted a digital audio-first strategy, and this entails rethinking the way we program and commission content to best serve our audience needs. Slide 23 highlights the growing success of LiSTNR, the fastest-growing audio entertainment app in Australia. Like any new product innovation, the results must speak for themselves. We are past the implementation and deployment since launching over 18 months ago. I'm pleased to report that signed-in users now exceed 850,000. The rate of customer acquisition has grown substantially across each quarter. As awareness of the product grows, the content library is enriched and the app and functionality is fine-tuned. On Slide 24, we know that audio consumption is scaling quickly on the LiSTNR platform, in line with more signed-in users as well as an increasing depth of content. This growth in consumption is providing the bedrock for further monetization of more inventory and a higher number of monthly streams. Turning to Slide 25. With the global outlook looking uncertain and with inflation rising, this slide highlights what SCA in the broader audio industry is determined to market. The fact being radio plays a meaningful role in a cost-conscious market where consumer behavior is changing. Radio is a cost-effective and efficient medium with rising consumption. And with the large reach that radio offers, this provides advertisers with a way of reaching their audience targets at lower cost through blended media campaigns. The key priorities for the current year are set out on Slide 27. Our broadcast goal is to continue to build audiences in key markets and shows and specifically drive stronger habitual listening across all dayparts. This will naturally drive the opportunity to deliver higher broadcast and streaming revenues. We are focused on securing new premium partnerships, which will supercharge the growth of LiSTNR. Operationally, we will seek to enhance the sign-in rate for LiSTNR along with the time spent on platform through exceptional marketing, premium content and our digital audio first publishing strategy. We will enhance the LiSTNR experience with new and exciting content and intuitive product enhancements, and we will continue to retain our focus on continuously reviewing our cost structures to gain greater efficiencies. Our financial goals remain to focus on the quality of earnings that SCA delivers with high cash conversion from the improved operating performance across both audio and television assets. Finally, we are acutely focused on driving improved shareholder returns through a stronger operating performance and ongoing capital management initiatives. The final, Slide 28, provides a trading update. Q1 broadcast radio revenue is forecast to be up 5% to 7% with stronger momentum in metro radio. Digital audio continues to grow at pace with Q1 growth of around 30%. The TV market is tracking below last year as it cycles over tougher comps. Nonrevenue-related costs are forecast to be up between 2% and 4% in FY '23. Financing costs will be around $17 million. And CapEx is forecast to reduce from $30 million to $20 million. Growth in digital audio is underpinned by sign-ups to our platform, and we forecast these will double again to 1.7 million within the next 2 years, and we will continue to increase platform engagement by creating leading content and working with new premium content partners. Thank you for your attention, and I'll now hand back to the operator to take any questions that you might have. Thank you, operator.

[Operator Instructions] Our first question comes from Darren Leung from Macquarie.

I just had 2 questions, please. One is just on the impairment of the assets -- [ broadly ] assets. It looks like it is -- excuse me, there's some [indiscernible] just that it's regarding a slower-than-expected recovery of the economic impacts and also a broader economic view from advertisers. Can you give us a feel for if this is the e-com [ ad ] market or if this is around that radio medium more broadly, please?

Darren, let me take that question to start with. So the impairment occurred -- Our discount rates are going up around the world, as you know, through the tightening cycle, and so that gets reflected in valuations. And then when we look at sort of market growth rates, we're really taking some of the external forecasts that are published out in the market, such as the PwC outlook forecast, which are then used to provide a sort of set of assumptions going forward. So that are the key inputs into the model.

Okay, I understand, thank you. And the second one that I had was just in relation to that sort of softer, call it, market outlook as such. How much opportunity do you have in the execution of the buyback and some of our schemes in relation to the [ now ] that's been done so far? And I suppose a follow-on question from that would be, what do you think the appropriate level of gearing that we should be thinking about on a through the cycle basis, please?

Yes. So we conducted -- we started the buyback in the fourth quarter, and we've conducted about $5 million, $5.5 million of that. We will recommence that buyback once we're out of this blackout period. And we will continue to monitor as we go through the year. . Our leverage is just below 1x at the moment. We'd be comfortable with leverage around 1x and slightly above. But obviously, if there's any significant change, we can monitor the pace at which the buyback is conducted.

And Darren, it's Grant Blackley. I'd just add there, too, that we are providing a trading update for Q1 with broadcast radio forecast to be up between 5% and 7%, led by a stronger metro market. And we're also forecasting that Q1 digital audio revenue will be up circa 30%. So that's showing a continued recovery within the broadcast audio market and obviously, an accelerating pattern within the digital audio forecast.

Our next question comes from the line of Eric Choi from Barrenjoey.

Just wanted to go on record quickly to say, Nick, I think you've been a great CFO when you're leaving the balance sheet in good shape. So just sad to see you go, but I enjoyed working with you. Just on to the questions. First one is just that trading update, the 5% to 7% growth, it's a little lower than what HT1 quoted. So I was just wondering if that's your metro radio revenues lagging your audience improvement? Or is it HT1 taking share in regional? Just interested in your thoughts around the difference.

Yes. If I can take that one, Eric. And yes, I marry your comments towards Nick. He's been a wonderful supporter and ally and confidante over the last 8 years. So we wish Nick exceptionally good things moving across to The Gurner Group in Melbourne. Just to take your trading update. Yes, our update is between 5% and 7% for metro. I think HT&E from memory were pacing 6% to 8%. Our pacing numbers are higher, we think we'll settle around that 5% to 7% moving through. And in relation to the regions, we obviously have very strong revenues throughout the regions. We've continually reinforced that strength through an increasing contribution from the national advertising market as our marketing effort through Boomtown has continually underpinned the education and interest in national market is investing more in the regions. So I think that will continue. Where we are seeing a little bit of a lag is in the SME market in the regions, which fundamentally have been hit by a number of things. They are still growing. But they're growing at a slightly slower pace than the national market. I will point out though that as we grow the national market, which does provide a premium CPM for us moving through, they obviously do occupy more inventory and more key slots, which therefore, puts a bit of pressure on the SME market in trying to achieve those same slots, particularly in key markets.

Got it. And then just a second question, just there's a comment in there that bids were aligned with SCA's valuation on the regional TV. I guess the only comp out there is the PRT valuation of around 3x EBITDA. I'm just wondering if you can comment on whether your internal valuation is at a premium to recent comps?

Yes. Eric, I'm not going to comment on the bids we received or the valuation. But just to reiterate that television generates good solid earnings and cash flow. You can see from the $30 million that EBITDA contribution in FY '22. We do expect the market to retrace it steps slowly as it has been for the last 3 years, but we run the asset very efficiently. And we think that will continue to deliver good earnings contribution as we go forward. And so we obviously went through the process and we thought that, that is the best value that we can deliver back to shareholders is through holding the asset.

And Nick, just to reinforce that, that the asset is a CapEx light and light touch asset for SCA now. We've done an enormous amount of work over the last 5 years to bring it into that state. It is highly effective and efficient for us. Certainly not a distraction to management. And our sales team have executed exceptionally well. I think it's evidenced through the fact that we were able to transition from a Nine network affiliation in now [ 3x ] across to Network Ten and appropriately maintain the earnings through that at $30 million, which I think is a solid achievement through the course of the year.

And just a follow-up on the first question. Just to clarify as well, that broadcast 5% to 7%, that excludes digital. Is that right, Nick?

Yes, that's correct. .