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

Hello, and thank you for standing by. Welcome to Southern Cross Austereo's Full Year Results Teleconference. [Operator Instructions] This conference is being recorded. I would now like to hand the conference over to your first speaker for today, SCA's CEO, John Kelly. Sir, you may begin.

Good morning, and welcome to Southern Cross Austereo's full year results presentation. This morning we will take you through our company results for the 12 months ended 30 June 2023. I am John Kelly, and this is my first presentation of SCA's results since being appointed as the new Managing Director and CEO on 1 July 2023. I'm honored and energized to lead the company. I've been with SCA since 2016, most recently in the role of Chief Operating Officer, where I led SCA's strategy and general management team, among other responsibilities. I know many of you through previous interactions when I was the Group CFO at Ten Network Holdings, and it's good to be back. I'm joined today by our Chief Financial Officer, Tim Young. We will hear from Tim shortly for a detailed overview of our financial performance. Turning now to our results summary and new highlights on Slide 4. In the full year, SCA has recorded a solid performance while navigating a challenging operating and highly inflationary environment. We report an EBITDA of $77.2 million and net profit after tax of $21.9 million. Despite the challenging market conditions, SCA maintained its overall Audio revenues and exceeded total market growth. Our metro radio revenue share improved by 0.6% to 27.2%, an industry-leading 24.7% margin. LiSTNR continues its strong growth trajectory, where revenue climbed 36% and narrowed its EBITDA loss for the year by more than 30% to $15 million. The ongoing challenging conditions in regional TV accelerated in the second half, resulting in a 14.5% drop in revenue for the year. SCA's proactive approach to managing costs has delivered a 1.3% year-on-year reduction in nonrevenue-related expenses. In addition, our CapEx reduced year-on-year by 30% to $19.3 million. Finally, shareholders will receive a fully franked dividend of $0.022 per share, bringing the total FY '23 dividend to $0.068 per share fully franked, representing a 75% dividend payout of underlying NPAT. Moving to Slide 5, I'd like to outline our operational scorecard for the year. Irrespective of challenging market conditions across the media sector, SCA has outperformed the total audio market in all segments, growing revenue share in digital from 8.8% to 12.1%, metro radio by 0.6%, and regional radio by 1.1%. We also recorded SCA's highest-ever cumulative audience for Metro Radio in 2023 at more than 6.1 million listeners in radio ratings Survey 4. And SCA remains the firm #1 radio network for the key buying demographic of people, women and men aged 25-54 across the country. Despite the significant headwind for regional television this year, SCA achieved a parity power ratio on its regional network for our major affiliate partner, 10 Paramount. LiSTNR also achieved new record milestones in the second half of 2023, with more than 1.5 million signed up users and more than 9 million monthly content streams consumed in June this year. LiSTNR is now Australia's largest podcast network with a monetizable audience of more than 8 million monthly listeners. You can see on Slide 6, we've recorded strong national audience growth in radio across our Hit and Triple M networks. Pleasingly, the LiSTNR podcast audience has grown by more than 4.8 million listeners or 145% in less than a year to more than 8.1 million. I'll now update you regarding SCA's progress on our strategic priorities as outlined on Slide 7. First and foremost, SCA is increasing its All About Audio focus. The audio industry continues to deliver audience growth and improve revenue share with digital becoming a significant incremental contributor. The industry's radio ratings provider, GfK Radio360, and its new Radio360 measurement system that includes digital audio, provides a trusted currency for agencies and advertisers. LiSTNR is a fully owned world-class digital audio product with the next wave of improvements to roll out to users in the second half of '24. Notably, these will include increased personalization and improved merchandising ability. I'll now hand you over to our CFO, Tim Young, to take you through our group results in detail.

Thank you, John, and good morning, everyone. As you can see on Slide 9, SCA's overall group revenues are down 3.7% on prior year, with overall audio growth of 0.3%, offset by a decline in television of 14.5%. Nonrevenue-related expenses reduced by $3.8 million or 1.3% on the prior year. Depreciation and amortization is down by $2.7 million, driven by reduced CapEx. The resulting EBITDA of $77.2 million was $10.7 million or 12.2% below FY '22. Net profit after tax is $21.9 million, which is $5.5 million or 20.1% below the prior year. Turning to Broadcast Radio on Slide 10. You'll see that overall radio revenue declined by $4.5 million or 1.2%. However, SCA's Metro Radio revenues grew 0.6% or $1.1 million, lifting our revenue share of the market to 27.2%. Our regional radio revenue declined by 4.6% or $7.8 million, largely due to the decline in government spending. Despite the inflationary pressures, total expense growth was kept to 2.6% with revenue-related expenses down 1.4%. EBITDA of $92.2 million was a decline of $11.6 million or 11.2% with an underlying margin of 24.7%. Moving to Slide 11, I'll draw your attention to digital audio and LiSTNR. LiSTNR revenue has climbed by 36.2% above FY '22 levels to $21.3 million. SCA's total expenses fell by 3.3% or $1.2 million, despite a 5% increase in employee expenses, which are focused on the capture of monetizable audiences. Our investments in martech and analytics are crystallizing as we report an 11.1% reduction in nonrevenue-related expenses, notably for promotions, marketing and content development. LiSTNR's EBITDA loss has narrowed to $15.2 million for the year, a reduction of $7 million or 31.3% and improving its path to cash flow breakeven. Moving to Television on Slide 12. SCA's overall revenues contracted by 14.5%, with National revenue as the main driver contracting 20.2% and local revenues by 8.6%. This is due to a number of factors including: A duplicated national sales process compared to the unified sales proposition of our competitors; and a comparatively softer ratings performance by Ten in the second half. Overall expenses for television were down $7.2 million or 7.5%, while other nonrevenue-related expenses were up 2.3% in a highly inflationary environment. Underlying television EBITDA reduced by $11.1 million or 37% to $18.7 million. EBITDA margin fell from 23.6% in FY '22 to 17.3% in '23. Moving to SCA's operating costs on Slide 13. Revenue-related expenses as a proportion of revenue remain unchanged at 24.9%. Revenue-related expenses were $4.7 million or 3.6% lower than FY '22, only partially offsetting the 3.7% decline in revenue. Active vacancy and productivity management has meant that employee expenses grew by less than half the rate of inflation for the FY '23. Nonrevenue-related expenses improved by $3.8 million or 1.3% over the prior year and therefore, significantly better than prior guidance of 0% to 2% increase for FY '23. On Slide 14, you can see SCA's reduced CapEx by 30% or $8.2 million year-on-year to $19.3 million, below our previous guidance of $20 million. This reflects lower maintenance burden of contemporary systems and the conclusion of refurbishment and relocation efforts. Over 80% of this CapEx has been directed into innovation to increase monetizable audience. And this is expected to further reduce in FY '24. We'll now move to SCA's cash flow and financing, which is covered on Slide 15. Free cash flow has remained broadly stable, down $1.3 million despite net cash from operations falling 15% or $11.3 million, benefiting from lower CapEx in FY '23. Net CapEx of $21.3 million was $8.5 million lower than the prior year, reflecting one-off refurbishment and relocation costs in FY '22. Tax payments reduced as a consequence of lower profits and refunds from the prior year. Operating cash conversion remains relatively stable at 83%, down from 86% in FY '22. SCA has achieved strong free cash conversion of 75.8%, up from 67.2% in the prior year. The higher net debt of $105 million largely reflects the $21.3 million impact of the share buyback program in FY '23. SCA's leverage ratio of around 1.48x, up from 0.95x in FY '22, is comfortably within covenant tolerances. Concluding the group results on Slide 16, SCA will provide a final dividend of $0.022 per share and a total dividend of $0.068 per share fully franked. The payment date is the 4th of October of this year. The lower final dividend reflects the difficult trading conditions in the second half of 2023, that have lowered the total dividend by 27% from FY '22. The payout ratio of 74.6% of underlying NPAT is in the middle of the target payout ratio of 65% to 85%. I'll now hand back to John.

Thanks, Tim. On Slide 18, we have outlined our approach and strategy to building shareholder value in FY '24. We will seek to continue to build revenue share across our broadcast audio assets and we will achieve greater collaboration and synergy on national television sales with Ten. We are committed to growing our digital audio revenues at least in line with FY '23 levels. We will ensure our always-on cost disciplines are maintained throughout the business to underpin the gains made in FY '23, and we will continue to reduce capital expenditure. We will construct and implement a strategic cost review to remove $12 million to $15 million in annualized costs with $5 million to $7 million realized in FY '24. In respect to LiSTNR, we will target 2 million signed-in users and the delivery of 10 million monthly streams. We will reach an EBITDA breakeven run rate for LiSTNR in Q4 FY '24, a year earlier than previous guidance. In regard to our trading outlook, the short and inconsistent trading conditions are expected to continue through the first half of FY '24. However, revenue markets in the second half are expected to improve with more favorable market conditions. Digital audio revenue is currently pacing at over 30% in line with FY '23. That concludes our full year results presentation. Tim and I will be happy now to take any questions you may have. I will hand back over to our operator to facilitate the Q&A. Thank you.

[Operator Instructions] Our first question comes from the line of Roger Colman with [indiscernible] .

I've got a query on the CapEx. How far is it likely to fall? And the second follow-up query is on Ten Network EBITDA. Is there a core EBITDA that you deserve from promotions, sales and network infrastructure? And what do you think the core EBITDA should be for distributing their signals and promoting it and during cycles?

Thanks, Roger. In relation to CapEx, we're pleased to be able to reduce CapEx this year by 30%. And I think our run rate moving forward is sort of mid-teens is what we'll be aiming to get to and expect it to reduce again next year. In relation to Ten, obviously, it was a difficult result this year. As you'll be aware, Roger, we extended that deal by 6 months to 31 December, and we're working in earnest with them at the moment to try and work out what an appropriate arrangement will look like for '24 and beyond. And in particular, we want to work with them to collaborate on a joint national sales effort to match the propositions of our competitors, Seven and Nine, which particularly impacted us in the second half this year.

And just follow-up very quickly. Don't [Technical Difficulty] TV had positive in September. It's very important by August. Are you seeing any [Technical Difficulty] September or October forward bookings trends? They're different or so better than what [Technical Difficulty] has indicated [Technical Difficulty].

Nothing changed, we made the comment that it was pacing ahead in September. Look, we use the terms short and inconsistent, and I'll stay with that term for all media, including TV, Roger.

[Technical Difficulty].

I'm sorry, I missed that.

Yes. Just repeat the last sentence.

We've used the term in terms of trading outlook that the market's short and inconsistent. That said, in digital audio, where we've made the observation that we're growing in accordance with what we achieved in FY '23, which is a really [Technical Difficulty].

Our next question comes from the line of Darren Leung with Macquarie.

I just wanted to follow up on that cost question, please. And just a bit of color as to when you expect to realize the remainder of that $12 million to $15 million annualized costs, please?

Yes. Look, we've obviously given a range. We said $5 million to $7 million in '24 and probably over the next 1 to 2 years, we'll realize the rest of that saving. As you'd appreciate, we have contracts, which we can begin beyond the current period, hence, why there's a slight delay in the full utilization of that cost out.

I understand. And maybe just a second one for me was just on the trading piece again. And I appreciate the market is obviously quite short at this moment. [ PVPs ] are talking to sort of September doing quite well and potentially even like a, call it, increasing optimism into the December quarter. Is that a similar conversation you're having with advertisers and management team as well on your end?

Yes. I mean, [ now you can ] seen the market is short. It's too early to call exactly where September will look like. That said, I think we, like our peers, also believe that the second half of FY '24, so from January onwards, we will see a bit of [ pause ], both due to improved economic conditions, but also the fact that the comparables are slightly lower as I said, are far lower than they were in the first half this year. So we are optimistic about the second half of the year. But at the moment, I will stay with the word short and inconsistent in relation to the trading conditions we're seeing at the moment.

And just a final question for me. Any comments you can provide around potential key changes and things like that? There's obviously a lot of commentary from recent media, sort of curious in your comment, please.

Yes. Darren, as you appreciate, we've got 99 radio stations in the country at all metro stations, we just don't comment on negotiations [indiscernible], and we just want to have the best possible audience. I think the one thing we have achieved in 2023 is we've continued to grow our audience share across all our radio assets. We've got 9 million across Australia, 6 million across metro markets, and we're the #1 [ 25 ] network, which is the key buying demographic for our metro radio networks, particularly we've got #1 for Hit with a female 20-54 and #1 for males with the Triple M network. So we're delighted to have that, and we need to monetize that better in '24 and beyond.

We have a follow-up from Roger Colman.

John, for you, in your above-the-line costs would also be the total directors' fees. And I just note that $1.16 million got down is only $150,000 [Technical Difficulty] with nearly a quadruple EBITDA. And [Technical Difficulty] media includes $135,000 per [Technical Difficulty] alone. I wonder if you had the Board doing a bit of [Technical Difficulty] cost reduction, please?

Yes. I'll [indiscernible] . I'll come to the rest in the second. We are very mindful that a cost base of where we sit as a market cap at the moment. It has, in the past, been significant, and it's one of the reasons dividend for the cost out today. I should make the point that in relation to the transition from myself to Grant and the change of the leadership team that, that brought for the leadership of team alone a 25% reduction in cost for the corporate cost of my leadership team. In relation to directors, we currently have one less director than we had the previous years. And I think the Board is fully mindful of the same position that we're adopting in cost out for the broader group also needs to apply to all that corporate costs. So we'll see what that results in the months and years ahead, Roger.

Right. And in respect to the Board, do you get any 1 media per normal Board [Technical Difficulty]. Do you guys feel a bit alone like the SBS [Technical Difficulty]?

I'm not sure what you mean by alone. I've got a very supportive Board, and they've been very supportive of the strategy. I've come aboard halfway through our strategy. In my previous role on the strategy, I'm very long on what we're trying to achieve, particularly in the audio business. So all I can say is they've been incredibly supportive, and they've got a vast array of experience and skill led by Chairman, Rob Murray. So I'm delighted to have that support of that Board.

Just on regional radio, if you look at the poor revenue performance, and that's obviously the [Technical Difficulty] recovery and a few other issues that flood all over the place. Is that [Technical Difficulty] some structural change in the amount allocated to regional radio?

No, I don't think so, Roger. I think we remain really excited about the opportunity in regional radio. I mean you -- well, we have the Boomtown initiative where we're targeting at the 9.6 million Australians a bit across regional Australia. We -- look, it's been a difficult time in the cost of doing it. But also, as you'd be well aware, that the lack of government spend across all our 60 markets has been really difficult, particularly in those markets where we rely on support from government to spread their messages, both locally and federally and through state, and that simply hasn't been happening. And it's not just us, it's print, it's TV, it's across the board. So that part has been difficult. But we absolutely believe that a live and local approach to regional Australia is our antidote to globalism in terms of content offering, and we'll remain invested in that for the foreseeable future.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to John for closing remarks.

Thank you, Twanda, and thank you, everyone, for attending the call today. Really look forward to speaking to you in the days and weeks ahead, and I'm delighted and honored and energized to be the new CEO of SCA. So thank you, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.