Westwood One Inc. Q3 2008 Earnings Call Transcript

Westwood One Inc. (WON)

Q3 2008 Earnings Call

October 28, 2008 4:30 pm ET

Executives

David Hillman - Chief Administrative Officer, General Counsel Officer

Ron Sherwood - President and CFO

Gary Schonfeld - President, Network Radion Division

Steven Kalin - President, Metro Networks Traffic Division

Analysts

Julie Lim

Presentation

Operator

Good day and welcome to the Westwood One third quarter earnings release conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. David Hillman. Please go ahead, sir.

David Hillman

Good afternoon, everyone. Westwood One reported its third quarter earnings today after the market closed. If you have not received a copy of the press release, it is available on Westwood Ones website at westwoodone.com.

Our press release and this presentation reference several non-GAAP financial measures, specifically adjusted EBITDA and free cash flow. We have included these non-GAAP measures because we believe they are important in evaluating the company's operating performance. Because they are not calculated in accordance with GAAP they should not be considered in isolation of or a substitute for net income, as an indicator of operating performance or net cash flow provided from operating activities as a measure of liquidity. At the end of our press release we have provided supplemental disclosures to reconcile to non-GAAP financial measures to our GAAP counterparts and in accordance with the SEC's regulation G.

Certain remarks that we make during the call about future expectations, plans and prospects for Westwood One constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Security Litigation Reform Act of 1995. actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors including those that are discussed in our annual report on Form 10-K and in our other periodic filings, which are on file with the SEC. Please refer to those filings for a full description of those matters.

Now, I would like to turn the call over to Ron Sherwood, President and Chief Financial Officer of Westwood One.

Ron Sherwood

Thanks, David. Good afternoon, everybody. Thank you for taking the time to join us for our conference call on Westwood One third quarter earnings. Joining me today are Gary Schonfeld, Head of our Network Radion Division and Steven Kalin, Head of our Metro Business

As you know, I joined Westwood One as CFO in September of 2008 and assumed the additional title of President in October. My financial and operational experience has enabled me to do a deep dive into Westwood One’s business and assess its strengths and operational and financial leverage points.

What I found is, that the pillars of the business are solid and that profitable growth should be present in 2009, as the company's turn around efforts gain traction. The assets of the business are considerable.

First, Westwood One is a well known and respected brand in the media business. It's been serving radio companies and stations for many years with the best programming and traffic information in the business.

Building an enduring media brand isn't easy. You need high quality products delivered consistently to customers whose changing needs you meet. Westwood One has met those standards over time, despite changing economic conditions and fluctuations in the media business. And it will do so in the future.

Today the company must navigate through one of the most challenging economic environments in recent history. Like other media companies, Westwood One is feeling the impact of advertisers cutting their budgets or waiting longer to commit their dollars. Like other media companies, Westwood One has responded quickly to these conditions by reengineering its business to operate more efficiently and reducing costs. All talk more about that later. But unlike some other media companies Westwood One stands to weather the economic downturn and come out stronger on the other side. We have a three-pronged business strategy to improve the company's recent financial performance and we have gained traction on many fronts.

The strategy is based on growing our top line revenue, continuing to reduce operating expenses and in restructuring or refinancing the company's debt. Here is what we have achieved so far. First let's discuss our efforts to grow top line revenue. Westwood One is leveraging the strength and competitive leadership of its core businesses to drive sales performance. The results today are encouraging. Westwood One is the only one of the top three network groups to achieve audience share gains in the core demographics of the adults 25 through 54 and adults 18 through 49 and in the last two RADAR reports.

These gains are the results of actions taken by Westwood One to build a more effective advertising platform for clients and affiliates. Increased clearances from several radio groups helpful fuel this audience growth. For example, increasing deliveries of inventory from MS radio strengthen Westwood One obvious delivery across the female and youth networks.

Other radio groups like Beasley, Greater Media, and Inner City broadcasting also increased with Westwood One improving the company's audience across several networks. In addition, CBS radio stations increased clearance levels of 93.7% and delivered a higher top market based audience with strong advertiser appeal.

Another important sales platform for advertisers is Westwood Ones business radio network BNR, which is the only radio network to aggregate top business brands like MarketWatch.com radio network, the Wall Street journal report, CNBC Business radio and the Dow Jones Money Report.

Nearly 900 stations in 98 of the top 100 markets take this content and the platform delivers a premium audience on a highest rated news outlets in two thirds of the top 50 markets. The Business Radio Network has attracted new advertisers who have never before advertised in network radio.

We believe this trend will increase as more business news is added to local radio programming to meet consumers need for more financial information. Westwood One is building advertiser platforms in other key consumer segments especially the women's market, which is a primary audience for retail advertisers.

Today it announced a partnership with CMT, a division of MTV networks, for CMT Radio Live with Cody Alan, a new nightly country entertainment radio show to be launched nationally in over 50 markets in January of 2009. This new programming with strong appeal to women has already generated considerable interest among advertisers and attracted a launch partner with Cumulus radio.

Westwood One also is launching shortly "Into the Night with Tony Bruno", a new nightly three-hour sports-talk program, produced by The Content Factory, marking veteran sportscaster Tony Bruno's return to national radio.

The company will continue to seek programming partnerships to complement its popular branded offering in news, talk, sports, music and entertainment. In the Metro Networks traffic business, Westwood One took significant steps to maintain its competitive position as the leading provider of traffic information, serving a 129 markets with incident monitoring services, covering more than 350,000 miles of roadway.

In a move to build leading edge technology partnerships, Westwood One entered into a multiyear strategic partnership with Air Sage, the only US supplier of traffic data from cell phone signaling systems. The combined offerings will monitor traffic flow and speed, provide faster alerts, and provide best choice alternatives to minimize the hassles of daily commuting.

Westwood One is continuing to expand its traffic product with state-of-the-art technology partnerships, product enhancements, and revenue initiatives that provide strong local advertising platforms. Westwood One is also gaining sales traction in the traffic business by expanding its ability to deliver advertiser messages including prerecorded commercials and 15-second ads to more effectively capitalize on opportunities for specific advertisers.

Our goal is to constantly enhance and differentiate our leading traffic reporting expertise. Westwood Ones Metro traffic business is a powerful component of the Westwood One brand. It is based on satisfying local consumer needs and we are committed to maintaining our status as best in class for our affiliates and their listeners.

Last but definitely not least we have put in place new management of our two core businesses. Network Radio and Metro Networks traffic. Gary Schonfeld, President of Westwood One Network Radio, is a radio industry veteran who most recently served as President of Jones Media America. Steve Kalin, President of Metro Networks traffic division and previously COO of Westwood One has 20 years of media experience in both traditional and digital platforms and served most recently as COO of Rodale, a global publisher of magazines, books and online health information.

These executives have track records of success in sales and operations and they have brought on board highly talented sales managers, with long experience and client relationships in the industry. They are hard at work doing their radio up front to build our business with advertisers who recognize that radio is an efficient and highly effective media for driving customers into their stores, banks, dealerships, supermarkets and other places.

Turning now to reducing operating expenses. We have not hesitated to implement reengineering and cost savings initiatives that will improve operating performance and deliver annualized savings starting in 2009. In September and October, the company successfully executed the first phases of the reengineering program for its Metro Networks traffic business.

As I just mentioned, this reengineering allows Westwood One to provide a superior traffic product to its markets more efficiently in part by leveraging new digital technologies through strategic technology partnerships. Westwood One will be a more nimble, flexible provider of critical traffic information to our radio and television affiliates in all of our markets with a more consistent, higher quality product and increased customer service and support.

Reengineering initiatives will result in a reduction of staff and facility levels and the eventual consolidation of 60 operation centers into 13 regional hubs. Some operating centers will relocate during the fourth quarter of 2008 with the remaining markets moving into the 13 regional hubs by the end of the second quarter of 2009.

The enhanced digital platform, overall improvements in communications technology, and scale benefits of larger 24x7 hub centers, better position Westwood One as a continuing leader in the traffic business. Once completed, the reengineering program and other cost savings measures will result in a total cost savings of $25 to $30 million on an annualized basis, which includes $4 to $5 million of savings in 2008 and an incremental $20 to $23 million in 2009.

The final part of our strategy is to restructure or refinance the company's debt. The company has taken aggressive actions to reduce the debt. Debt is decreased by $113 million as of September 30th, 2008, versus debt outstanding as of December 31st, 2007, and by $125 million versus September 30th, 2007.

As previously disclosed, active discussions are taking place with our lenders and note holders to restructure or refinance debt which comes due on February 28, 2009, and November 30, 2009 respectively. We have engaged Moelis & Company to represent the company in such process. The company continues to believe, it will likely be successful in these negotiations.

So far I have outlined the achievements to date in our business strategy of growing revenue, reducing operating expenses and commencing constructive discussion on restructuring or refinancing the company's debt. We have gained traction in all three areas in 2008.

Clearly, we have more to do. We are confident, we can achieve our goal of sustaining profitable growth and riding out the economic storm that is affecting almost all businesses today.

Turning to the financial summary. Let me start by highlighting some of the key developments during the third quarter of 2008. We have initiated our planned reengineering and cost savings initiatives to improve operations and streamline our cost structure.

We successfully completed the first phase in the third quarter. On September 12, 2008, we announced a plan to restructure the traffic operations, address underperforming programming, and implement other cost reductions. The company estimates it will record an aggregate restructuring charge of approximately $25.6 million consisting of one $10.3 million of severance, relocation and other employee-related costs.

Two, $8.3 million of facility consolidation and related costs. Third, $7.5 million of contract termination costs. For the three and nine months ended September 30, 2008, the company recorded a restructuring charge of $10.6 million comprised of $4.1 million of severance and employee-related costs and $6.5 million of contract termination costs.

Revenue in the third quarter decreased $11.8 million or 10.9% to $96.3 million from $108.1 million in the third quarter of 2007. Local regional revenue fell 16.6% to $48.2 million and national revenue decreased 4.3% to $48.1 million. The decline in local regional revenue was principally related to a weak local ad marketplace primarily in the automotive, banking and real estate categories and from increased competition.

The decrease in national revenue was principally attributable to lower advertising demand. Adjusted EBITDA, which we defined as operating income plus depreciation and amortization, non-cash stock-based compensation, non-cash goodwill impairment, restructuring and special charges decreased approximately $20 million or 71.2% to $8.1 million from $28.1 million in last year's third quarter.

The decrease in adjusted EBITDA was principally due to our decline in revenue, and increased investment in management in the sales and digital areas of our business. Higher operating costs, which included the broadcast of the 2008 summer Olympics and higher station compensation expense. Higher station comp is due in part to improved commercial clearances by CBS Radio stations.

Our higher commercial clearances by CBS are expected to deliver higher RADAR audiences in 2009. We reported an operating loss of $7.6 million in the third quarter of 2008, primarily due to the restructuring charges of $10.6 million and lower revenues. In the third quarter of 2007, we reported operating income of $19.7 million.

Other items affecting our third quarter 2008 operating loss were an approximate $2.4 million reduction in depreciation and amortization due to the cancellation of the CBS Radio awards. Lower stock-based compensation and other special charges partially offset by higher station compensation costs and costs related to the broadcast of the 2008 summer Olympics.

For free cash flow, we define this as net income plus depreciation and amortization, amortization of debt discount, non-cash stock-based compensation, goodwill impairment, restructuring and special charges, plus capital expenditures. For the third quarter of 2008, free cash flow increased approximately $0.7 million to $15.8 million or $0.16 per share from $15.1 million or $0.17 per share in the third quarter of 2007.

We believe free cash flow is the most important measure of any company's operating performance as it represents the amount of cash available for debt service and acquisitions. Net loss for the third quarter was less than $0.1 million or less than $0.01 per share compared with net income of $8.5 million or $0.10 per basic and diluted common share in the third quarter of 2007.

This is primarily due to lower revenues and restructuring charges recorded in the quarter ended September 30, 2008. Briefly highlighting the nine month results, revenue decreased approximately 8.9%, adjusted EBITDA decreased approximately 52.6% and cash flow decreased approximately 24.6%. Local regional revenue for the nine-month periods decreased 15% and national revenue declined 2.2%.

Turning to our balance sheet. Some highlights on September 30 are, cash and marketable securities were $3.6 million, net accounts receivable was $88.7 million, working capital due to our reclassification of $32 million in bank debt from long-term to current was negative by $9.4 million, and outstanding borrowings pursuant to our loan agreements were $232 million.

Our debt to operating cash flow ratio on September 30 was approximately 3.8 times. Pursuant to our amended senior bank facility, our permitted operating leverage is 4.0 times through the end of the current agreement February 28, 2009. As of September 30, 2008, we had outstanding borrowings under the term loan of approximately $32 million.

Our bank facility also includes $75 million in a revolving credit facility and as a result of our lower operating performance our ability to access such resolving bank facility will be limited by the allowable debt.

As of September 30, we had approximately $10 million of availability under the revolving credit facility. In terms of business risk, it should be noted that the debt restructuring will likely require that the company raise additional capital amid a difficult market environment. Failure by the company to reach an agreement with its lenders and note holders to raise such capital, if needed would have a material and adverse effect on its ability to continue as a going concern.

In addition, the company is at risk in the near term of violating the NYSEs $25 million market capitalization requirement and potentially being delisted. While the company is assessing the potential of a reverse stock split and a possible alternative listing on the MX or NASDAQ exchange, there would likely be an interim period when the company is not listed on an exchange if a delisting occurs.

With regard to outlook, the company expects its full year revenue to decrease in the high single digit to low double digit range for 2008 and full year adjusted EBITDA to be $45 million plus or minus $2 to $3 million. The company expects its full year EBITDA to increase in 2009 compared with the 2008 level for the following reasons.

First, we are on track to realize $20 to $23 million of incremental annual cost savings for the full year 2009. We also expect to make investments in both the Network and Metro advertising sales statistics, as well as programming rights and content in our digital business next year. So we currently foresee half of the annualized cost savings will flow through to the bottom line.

The Network business should be up in 2009 barring an extremely soft advertising environment due to increased CBS and other station clearances, increased targeting opportunities for advertisers with multi-market locations, other programming content initiatives and specific network account strategies.

Our Metro traffic business will likely be somewhat soft next year due to the soft local advertising market being projected by industry observers and participants. However, our expanded capabilities and prerecorded commercials and 15-second ads are operational improvement initiatives including inventory management and compliance and extensive customer account plans should be a significant offset to industry levels and trends.

In summary, we believe we will have increasing financial flexibility next year and will build on the momentum that we have begun to establish this year with our revenue and other initiatives. We have the talent for the job but it is the people, the programming resources and content and our customer relationships and partnerships that will make the difference as we drive forward together to make this a more successful company.

So, with that I would like to turn the call back over to the operator and we would be happy to take any questions.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen, today's question-and-answer session will be conducted electronically. (Operator Instructions). We will take our first question from [Julie Lim].

Julie Lim

Yes, question. You mentioned that there is somebody trying to arrange a refinancing. What is the name of the company? I heard Wallace & Company?

Ron Sherwood

Well, I would say Wallace is our debt advisory partner in connection with the debt refinancing and negotiations. The lenders involved are JPMorgan is the lead administrative bank, and Bank of America is a leading participating banker or co-leading bank in the process and there is a number of other banks on a worldwide basis that are involved.

Then, the note holders are a number. I will not go into all the note holders but there is a very strong group of insurance companies and others that are present in the note holder group, and as we have said we have had very constructive discussions with the banks and note holders to date. We think that we will likely get a deal or refinancing done with them over time. The discussions are currently very active.

Julie Lim

Sorry, just one last question. So what does Wallace bring to the table? Just in terms of expertise or what do they add to this process? They define…?.

Ron Sherwood

It Moelis & Company and that is spelled M O E L I S, and they have significant experience in advisory work both on an investment banking basis and a debt advisory basis.

Julie Lim

Okay. Thank you.

Ron Sherwood

You are welcome.

Operator

Thank you ladies and gentlemen. (Operator Instructions).

Ron Sherwood

Okay. So if there is no further questions, we would like to conclude the conference call at this point. We want to thank you very much for joining us. It is a pleasure to talk to you today and look forward to following up over time with all of you. Thanks a lot. Bye-bye.

Operator

Ladies and gentlemen, that does conclude today's conference. We appreciate your participation and have a wonderful day.

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