Entercom Communications Corp. (NYSE:ETM)
Q4 2008 Earnings Call Transcript
February 24, 2009 11:00 am ET
Steve Fisher – EVP and CFO
David Field – President and CEO
Good morning and welcome to Entercom’s fourth quarter earnings release conference call. All participants will be in a listen-only mode. This conference is being recorded. I would like to introduce your first speaker for today’s call, Mr. Steve Fisher, CFO and Executive Vice President. Sir, you may begin.
Thank you operator, and good morning everybody, and nice to note the sun is shining here in Philadelphia. I would also like to note that we have started a new procedure today, effective with this earnings call, one that we noticed with our announcement of this call, and one that was also noticed in the release itself. And that is – the procedure is that we ask that you submit your questions to us by e-mail, and there is still time.
We had several comments already, and we ask that you send your questions on anything that you would like to know to firstname.lastname@example.org, again questions at entercom.com. And in addition to this call, I am always available for any follow-up questions should you wish to call me directly at 610-660-5647. Also as previously announced in those same two releases, I would note that the company is no longer providing guidance going forward in 2009.
Should the company make any forward-looking statements, such statements are based on current expectations and involve risks and uncertainties. The company’s actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially is described in the company’s SEC filings on Forms 10-Q, 10-K and 8-K. The company assumes no obligation to update any forward-looking statements. During this call, we may reference certain non-GAAP financial measures. We would refer you to our website at www.Entercom.com for a reconciliation of such measures and other pro forma financial information.
And with that, I’ll turn the call over to David Field, President and Chief Executive Officer.
Thank you Steve and good morning everyone. Thanks for joining us on our call today. I'm pleased to provide Entercom’s fourth quarter results, and provide you with an update on some recent developments. As you are all well aware, we have been facing and continue to face difficult economic conditions in our country. A significant portion of our customer base has been adversely affected by the recession, and this has impacted advertising demand for all media.
In the face of these conditions, during the fourth quarter, Entercom posted a 14% decline in net revenue. Adjusted net income decreased 19% to $0.33 per share, while free cash flow per share declined 20% to $0.64. For the year, adjusted net income was up 2% to a $1.27 per share, while free cash flow increased 8% to $2.56 per share.
Same station revenues for the fourth quarter declined 14%. Same station expenses declined 7% resulting in a 25% decline in same station operating income.
Here are a few operating highlights for the quarter. Despite the difficult environment, we were able to achieve excellent results in a few markets led by Buffalo, Milwaukee, Denver, Norfolk, Madison and Wichita. Local and national revenues were both down essentially in line with our overall results, while digital revenues were up significantly during the quarter.
Our strongest growing categories were political, digital/online, travel and hotel, and grocery. Our weakest categories were automotive, television, and financial. Ratings remained strong with solid results from the fall Arbitron books.
You're all quite familiar with the extent of the economic issues affecting our country. And as I mentioned earlier, no ad medium has been immune from the impact on ad spending. We have taken a number of steps to reduce expenses significantly, but have done so while continuing to increase our investments in new technologies, new revenue initiatives, and in our sales and marketing capabilities, in order to drive future growth.
We remain fully committed to pursuing our strategic growth initiatives. A few other observation and comments before I turn it over to Steve. I think it is well worth noting that even in a very challenging 2008, we generated close to $100 million in free cash flow, and were able to reduce our debt by $140 million.
In addition, while we were all understandably focused on the gravity of the cyclical challenges facing virtually all businesses, we may be missing an increasingly positive emerging secular story. At a time of unprecedented change in media usage, that is severely impacting a number of other media, radio posted an all-time number of listeners in 2008, and remind the most cost-effective major advertising medium in the nation.
235 million Americans 12 and over, listen to local radio weekly. Radio remains a robust, vibrant medium servicing listeners across the country. And the industry is rapidly reinventing itself through aggressive investments in new digital technologies and capabilities. We are significantly enhancing the ways we interact with and engage our audiences, and in addition we are dramatically enhancing our value to our customers, by enabling them to access our audiences across multiple platforms in ways we couldn't even imagine years ago.
And in just the past few months, we have seen major stars and personalities including Ryan Seacrest and Mike Huckabee launch new radio shows. In sum, we are optimistic as we look to the future. Radio’s strong underlying fundamentals and compelling value proposition should enable it to gain share from other media facing significant secular issues.
Despite the current issues facing everyone in today's economy, over the long haul radio’s future is quite bright.
With that I will turn it over to Steve.
Thanks David. Before we go to some of the questions, let me also remind you at this time that we had asked you to submit any questions to this call right away to email@example.com.
Let me primarily cover a few highlights for the year 2008 to put things in perspective. Clearly the economy had an impact on the ad environment, especially in the latter half of 2008. Entercom’s revenues for the full year were down 6%. We were able to decrease our operating expenses for the year by 3%, but I would note that as you will see in the fourth quarter release, we took significant extra cost initiatives in the fourth quarter. These actions will yield more significant savings throughout the year 2009.
The business model for Entercom reminds one of robust free cash flow with almost $100 million in 2008 as David said, which actually was an increase the prior year and what was by all measures are very challenging environment. Last year, we also took advantage of the disruption in the bond markets to repurchase approximately 66 million of our senior subordinated notes at a discount. This lowered our interest cost and also reduced our overall debt outstanding.
Our free cash flow, those bond repurchases and a few other sources of cash enabled us to reduce overall debt by $145 million for the year 2008, a significant reduction. And besides the significant debt pay down during the year, we were also able to return cash to shareholders with $8 million of dividends in the first half of the year, and $14 million in share buybacks throughout the year.
This resulted in our year-end debt leverages defined in our bank agreement of 5.2 times at year-end, which was sequentially down from the prior quarter. And I would note that Entercom’s interest coverage ratio at year-end stood at 3.7 times.
Moving from the balance sheet to a few items on the P&L, all companies including Entercom are required to periodically evaluate intangible assets and write them down to estimated current market values. As a side note, accounting rules require companies to write down these assets, but then do not allow them to later make adjustments to increase any values. You can only write down, and you can't write up.
In the fourth quarter, we did a periodic review of these intangibles, our goodwill and our FCC [ph] values. The result was to take a non-cash write-down in the quarter of approximately 650 million pre-tax or 395 million net of taxes.
Factors included in this evaluation include the significant reduction in the second half of the future growth outlooks for ad revenues, the reduction of comparable private market transaction multiples, and the obvious pullback in public stock valuations for all media companies. Again this is a non-cash accounting charge much like you have seen with most other media companies over recent quarters.
Regarding station operational expenses, early in the fourth quarter we took some significant actions to adjust our business model in light of the revenue outlook. In the fourth quarter, our operating expenses were reduced by 7% and we anticipate this focus of operational efficiency to continue over into 2009. And with that we will ask some questions.
I will serve as moderator. So this is a strange role for me, but – and I will actually directs the first question to myself. Bishop Cheen of Wachovia, and David Bank of RBC, Royal Bank of Canada, both had two questions on the leverage. David wanted to know if we had any leverage target levels. That question has come up in the past and the simple answer is, no. We are not chasing a certain debt rating, but obviously I think in light of the economy we are looking to reduce our leverage, and that is what you have seen the company through the steps I outlined earlier.
And the Bishop Cheen wanted to know about covenant languages defined in the credit agreement. Let me try and walk you, Bishop, through the mechanics here, I would direct you to our debt facility, which has been filed. So you will probably have a copy for those of you who want to see that. That was filed last summer or summer 2007. It was in section 101 on Page eight of our debt agreement that has been publicly filed.
David several questioners including Marci Ryvicker and several others have asked the question about quarter one pacings?
Look, you are all familiar with business conditions being pretty rough out there today, and we are essentially dealing with a client base, which has been disrupted by what is going on in the world. In the month of January, we were down 18% and I would also add that as we look forward in the year, we take – we have a certain degree of optimism on the second half of the year, when we will begin to comp against a significant deterioration that occurred last year, when a number of our core customers due to economic issues affecting their business began to reduce their demand on advertising.
So that is the way we look at it right now, again down 18 in January, and dealing with the obvious choppy climate that we all find ourselves.
This question comes from Fortress Investments [ph]. The company performed an impairment test in Q4. And I outlined that in my earlier notes. When is it due its next impairment test, and that test will be in the second quarter of 2009? Second quarter of 2009, then we would do another test most likely at year-end 2009?
This question, David why don't we both address, it comes from Marci Ryvicker, Wachovia. How do we think about expenses, both operating expenses and capital expenses for 2009?
We jumped on this early in the fall and made a number of moves internally to our cost structure, and Steve already mentioned, and I guess I've mentioned as well, our expenses were down 7% in the fourth quarter. The number – I guess the bulk of the changes we have made roll into 2009 where we will begin to feel the effects of that, and so we will continue to look to significantly be reducing our expenses over the course of the year. Now we're going to continue to look at ways to refine our business model without harming our ability to continue to grow in the strategic areas that we think are so important to a future. What is really important to us from a macro standpoint is we need to hunker down as we have done to make certain that we maximize our results in 2009, and for the duration of this economic malaise, but that going forward we want to make sure that we have the engines in place, and maintain the strategic focus in the areas that are going to drive our success and our value creation for the long haul.
David, we have had several questions and I guess I'm going to add at least one for answering. We have got several questions on political in the fourth quarter.
For those analysts out there or shareholders of interest, we had 4 million – 4 million in political in the fourth quarter 2008 and approximately 7 million for the full year. I would point out that that probably does represent a high in terms of political level activity just given the overall intensity of the political environment this last year. That last statement was an editorial comment.
David several questioners are calling in. You would address pacing and that would be the difference of local and national.
Yes, I think I mentioned in my remarks earlier they are essentially the same, we are essentially the same in the fourth quarter and not terribly dissimilar as well as we look into the first quarter.
I am looking – we've got several questions that just came in. One, I guess it is directed to me is what additional capacity do you have to buy back more bonds. Basically, we have significantly reduced revolver in our bank agreement that is our senior bank agreement. Our overall leverage test is a total debt agreement. So, if we were to buy back bonds, we are just moving debt from one pocket to another pocket. So, it doesn't change our overall leverage covenant and we have plenty of capacity within our revolver.
Let us see, anything you care to comment on pricing trends, in terms of overall activity for pricing.
You know, pricing is a buyers' market right now, and I think that we are all aware of that. And what I take a lot of comfort for is the fact that the radio is the low-cost provider relative to other media. And when advertisers look to what it costs to run a radio campaign and compare that to television, newspaper, or a host of other media, we are extremely attractive in that comparison. So we are focusing our people on that, I think, very important distinction, and I think more and more advertisers over time will gravitate to radio, because not only of that price differential, but also of the production cost differential, the simplicity of producing a radio commercial versus a TV commercial is meaningful.
This next question I guess, is probably one for me, how does your bad debt expense look, and are any of your clients in bankruptcy?
That is a good question. That is from Marci Ryvicker of Wachovia. I think, as you read in the Wall Street Journal and New York Times and whatever your local paper is, you are seeing an up-tick in bankruptcy, and the answer is yes. We have had – probably that is more on our radar screen today than it ever has. The company will file its 10-K at the end of the week. When you see that you will note that included in our operating expenses for the fourth quarter, we made a significant reserve for potential bankruptcies that we might account for in 2009. So, we are seeing that. It is a trend I think we are on top of, and one that we will continue to focus on. So a good question.
Next question is, we have had a question come in from Inside Radio [ph] that says some groups are seeing changes in things like sales commissions and sales staffing, how is Entercom handling that?
We are continuing to monitor that – those areas. We have not made any across-the-board changes in our strategy vis-à-vis our team. Our sales team remains a very, very important strategic part of our organization. We continue to rely on them to drive business development, which we think is an increasingly important part of our model going forward, and as I mentioned earlier we believe that there are great opportunities to grow radio’s share of the pie. And we will continue to look at strategies to make sure that they are focused in that area, and rewarded accordingly.
This question, the next question I guess is for me. Can we buy back bank debt below par? This comes from Avi Steiner, JP Morgan.
Effectively no Avi, and another question came in to ask if we had any of our bank debt trading and the answer to that is no. We have had a bank agreement in place. It is primarily with the large institutional banks as opposed to hedge funds and all. We have only had only one small trade on that last fall. So there is really no current pricing and Abi to your question on, could we buy back our bank debt back below par. That would require 100% vote of the holders of the term loan A and B. So I don't anticipate that. That is not in our current plans.
Next plan – next question David is regarding stock buyback, both for you and the company. The question was, does the company intend to, and I should note that Form 4 have noted that you and the chairman have also been buying back shares, do we intend to do that is the question.
Rather than look forward, let us just let the facts speak for themselves. And as you just mentioned Steve, we have been regularly filing Form 4s, and indicate that both Joe Field and I have been acquiring shares in the company, which we believe are undervalued, and you may want to comment on the company's activities.
Well, the company as I mentioned earlier, will be filing its form 10-K at the end of this week. You will see in that that the company has repurchased shares in the first quarter, and again I'd agree with David, we don't comment on any forward-looking comments on that. So with that David, I will turn it over to you for any closing comments.
We appreciate everybody’s time this morning. Obviously these are challenging times. You can be rest assured that there is a 24x7 focus among this management team to ensure the success of this company both this year and in the years to come, as we focus on the opportunities, which we believe are there for our organization we look down the road.
Thanks all again for turning up this morning, and we look forward to reporting back to you soon.
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