Entercom Communications Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 8.13 | About: Entercom Communications (ETM)

Entercom Communications (NYSE:ETM)

Q1 2013 Earnings Call

May 08, 2013 4:30 pm ET

Executives

Stephen F. Fisher - Chief Financial Officer and Executive Vice President of Operations

David J. Field - Chief Executive Officer, President, Director and Member of Executive Committee

Operator

Good afternoon, and welcome to Entercom's First Quarter 2013 Earnings Release Conference Call. [Operator Instructions] 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.

Stephen F. Fisher

Thank you, operator, and thank you, everyone, for joining us this afternoon. As mentioned, this call is being recorded, and a replay will be available on our company website shortly after the conclusion of today's call, and it's also available by telephone at the replay noted in our release, which was put out this afternoon at 4.

With our notice of today's call, we asked that you submit your questions in advance of the call to the e-mail address, questions@entercom.com. In addition, I'm always available for any follow-up questions, if you'd wish to call me directly, at (610) 660-5647.

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 is described in the company's SEC filings on Form 10-Q, 10-K and 8-K. The company assumes no obligation to update any forward-looking statements. By the way, I may note that we intend to file our 10-Q tomorrow morning.

During this call, we may reference certain non-GAAP financial measures, and we refer you to our website at entercom.com for a reconciliation of such measures and other pro forma financial information you might find of interest.

So with that, let me turn it over to David Field, President and Chief Executive Officer.

David J. Field

Thanks, Steve. Good afternoon, everyone. Thanks for joining today's Entercom earnings call.

I'll start with a summary of the quarter's financial highlights followed by some color on recent operational developments and then address current business conditions before turning it back to Steve and your questions.

I'm pleased to report that Entercom posted growth in adjusted EBITDA, adjusted net income and free cash flow during the quarter. First quarter revenues were down 2% to $78.4 million, but this was offset by a 3% decline in station expenses to $57.9 million. As a result, Entercom's adjusted EBITDA rose 1% to $15.3 million. Adjusted net income rose by $0.05 per share. And free cash flow increased from $1 million to $4 million.

As we indicated in our previous earnings call in early February, the year started with sluggish business conditions that generally persisted throughout the quarter. In fact, total radio market revenues across our markets finished the quarter down 3% in Q1 as reported by Miller Kaplan.

Having just completed a very strong fourth quarter on the top line and, now, a softer first quarter, it is worth taking a look at our results over the past 12 months, as perhaps a more indicative and smoother look at our performance.

For the 12 months ended March 31, our revenues grew by 2%, expenses were down 4% and our adjusted EBITDA was up 16%.

Turning back to first quarter. Here are a few other insights. Local and national revenues were essentially the same with both down low-single digits. Our best-performing markets were Indianapolis, Kansas City, Memphis and New Orleans. Top-performing categories were financials, travel, telecom, home improvement and drugstores.

As I noted earlier, through prudent expense management, we were able to continue to achieve meaningful sustainable reductions in our costs and improve our margins during the quarter. This comes on top of a 4% reduction in expenses during 2012. In addition, we drove interest expense down 20%, as a result of the savings we achieved during our fourth quarter bank loan repricing and our ongoing debt reduction, as we continue to apply the vast majority of our substantial free cash flow to repaying our outstanding bank debt, further strengthening our healthy balance sheet. And with trailing 12-month free cash flow per share now at $1.74, our stock trades at a 20% free cash flow yield based on yesterday's closing price.

It is important to reiterate that our efforts to pursue smart ways to reinvent our business model have not come at the expense of reinvesting in our future. To the contrary, we continue to boost our investment in new brands and content, expanded distribution, better operating systems and enhanced digital platforms to strengthen our value proposition to our listeners and customers and create new revenue opportunities. And we are very pleased with the state of our brands. We had a very solid set of winter ratings results and like how we are positioned in our markets across the country.

We believe we have a significant opportunity to improve our revenue performance by capitalizing on our strong competitive positions and driving higher shares in a number of our markets. We also continue to look for opportunities to enhance our brands. For example, just last week, we announced a new multi-year agreement with the Oakland Raiders to become their flagship broadcasting partner on our San Francisco sports station beginning with the upcoming 2013 season. Adding NFL play-by-play to 95.7 The GAME will be a great addition to a lineup that already includes the Oakland A's and a great team of highly talented and award-winning personalities.

Perhaps, most significantly, industry fundamentals are improving. Broadcast radio listener shift continues to grow within the thriving and dynamic audio landscape. While new entrants are expanding the pie of audio consumption, AM/FM radio continues to grow its listenership and holds the lion's share of the audio market.

Recent research studies from Arbitron and Edison Research, Nielsen and USA Touchpoints demonstrate local radio's robust listening levels and deep audience engagement.

For example, the new Arbitron/Edison Infinite Dial Study shows that despite significant competition, AM/FM radio remains totally dominant in the car, with 58% saying they listen to AM/FM most or almost all the time in the car versus 15% for CDs, 11% for iPod and just 4% for online. And the pace of industry innovation is rapidly accelerating, as groups work collaboratively and independently to expand distribution, enhance the listening experience, bolster industry research and marketing and develop new revenue growth opportunities.

Turning to the Q2 business climate. April revenues finished flat. Second quarter pacings are currently down 1%. It is worth noting that there has been some acceleration in business conditions and pacings over the past few weeks.

So to summarize, while our Q1 revenues and market conditions fell short of what we had hoped for, prudent expense management enabled us to drive margins and achieve modest EBITDA growth. Significant interest expense savings from debt reduction and a repriced bank deal drove meaningful growth in adjusted net income and free cash flow.

Our balance sheet is solid, and station ratings are strong. We're enthused about our competitive positions in our markets and the opportunities we are creating through our initiatives that will enable us to drive improving performance in future quarters. Meanwhile, radio listening levels are robust and the significant expansion of industry innovation efforts and positive industry developments are emerging as potential catalysts for industry acceleration.

With that, I'll turn it over to Steve for some additional thoughts before we turn to your questions.

Stephen F. Fisher

Great, and thanks. As David mentioned, first quarter results, again, demonstrated our commitment to managing our operating costs -- station operating costs, which declined by 3% in the first quarter, which allowed us to grow our adjusted EBITDA and free cash flow versus the prior year. And then, as I mentioned, you've seen that history of expense management throughout last year that continues into this year.

Now as we look to the second quarter, for the second quarter, we would expect station operating expenses to be relatively flat versus prior year, as we cycle through comps -- comparisons to last year's actions.

And for the third quarter, it's important in your models that you note, we will have a unique bump in expenses. For the third quarter, we expect station operating expenses will increase by 6% to 7% over prior year, as the last year's third quarter included large, one-time benefits of retroactive credits we received as part of the radio industry's industry-wide music licensing contract renewal. This third quarter increase will be a one-time speed bump in our progress on reporting expenses versus prior years.

Our non-cash compensation expense of $1.1 million in the quarter, and we would expect that, that would be fairly similar in the second and third quarter, that similar range. And then, we'd bump up to about $2 million in non-cash equity compensation expense in the fourth quarter, as we true up for our grants and forfeitures at year end.

Our first quarter net interest expense decreased by over $2.5 million versus last year to $11.5 million. This reduction in interest expense reflects the impact of our November 2012 amendment, reducing interest rates on our term loan B tranche, as well in -- as reduction in overall borrowing.

I should note as well for your notes that our quarterly reported interest expense includes $1.1 million of non-cash deferred financing costs.

And as we look to the future, we do believe that we have additional opportunities later this year to, again, lower our borrowing costs, which will benefit shareholders.

Our GAAP book tax rate for the first quarter is unusually high, and you'll note that. But it reflects certain expenses that are not deductible for tax purposes. These adjustment items distort our book/tax provision, especially during our typically, seasonally lower first quarter pre-tax earnings results. So it really is quite distortive and not a true reflection. We believe our expected book/tax rate for the full year, excluding the impact of any discrete adjustments, is in the low-40% range. But an important reminder, as I always like to point out, we do not pay cash taxes and do not expect to pay cash taxes for quite a few years, as we enjoy future tax shields and net operating loss carryforwards to apply to future profits.

As David said, we continue to prioritize our operating cash flows towards repaying debt, and we reduced outstanding debt by $18 million during the first quarter. We dipped below the $550 million threshold, kind of a psychic line I enjoy pointing out; and ended with -- the quarter with net outstanding debt of $543 million, which left our bank leverage as calculated under agreement in the facility of 4.7x versus the covenant of 6.75x. And it's really helpful to step back and look at this in totality over the past several years. I like pointing out that our reduction in overall debt, that's been achieved over the past few years.

Let's take it from 2007, the end of 2007. Prior to the recession, we had a high of $964 million. And today, less than $550 million, so a reduction of well over $400 million even while we added a few tuck-in acquisitions over those years.

And as David pointed out, our trailing free cash flow generation over the past 12 months of $1.74 is a real testament to the business model.

So with those comments, let me now go to your questions, which were submitted in advance via e-mail. I believe our remarks address several detailed questions, but a few, perhaps, that maybe we did not touch on.

Question-and-Answer Session

Stephen F. Fisher

David, maybe this one is for you.

Several people asked about local and national trends for the first quarter and you addressed that in your remarks as saying they were basically the same. Several people asked, including Marci Ryvicker, how the local and national trends look for the second quarter?

David J. Field

Yes. We see national, really, accelerating in the second quarter and performing significantly better than local as of this point in time.

Stephen F. Fisher

Let me go to a question from a shareholder. David, would you remind us what political revenue did you have last year in the second quarter?

David J. Field

I think we had about $1 million in political revenue last year. And I think it's just -- as a point of clarification, the pacing numbers I gave of flat in April and down 1 for the quarter ignore that. So in other words, core pacings will be closer to flat, but we've chosen to ignore that and give you an all-in number of minus 1 in terms of our current pacings for the second quarter.

Stephen F. Fisher

Okay. A question from Avi Steiner at JPMorgan.

Can the momentum the industry is seeing in the second quarter be kept up in the back half of the year to overcome political? So I think, in essence, the question is what kind of impact do you see on political in the second half of the year?

David J. Field

Yes. Look, it's hard -- that's, of course, a speculative question. As to where we can go, I will say we are encouraged by what we're seeing around the industry in terms of pacings for the quarter, as we've heard peers report. But I would say this, if you look at our -- the headwinds we'll face in the second half of the year, it's roughly 3% of revenues, as we get into the political season. And by all means, we certainly have the potential to grow positively through that if we execute well and if the economy stays reasonably healthy.

Stephen F. Fisher

A couple of questions from Marci and the others on new stations.

You bought KBLX-FM in San Francisco 1 year ago. Actually, for the questioners, it was May 1, so good observation. How is that acquisition working out for Entercom?

David J. Field

Great. We were able to capture the synergies early on that we expected, and the ratings have performed beautifully over the past several months. The station has significantly increased its share of both women and adults in the market, frankly, above and beyond our expectations. And it's positioned us to have a dramatic revenue growth on that station going forward, if we're able to hold that position, which we fully expect to.

Stephen F. Fisher

Let me address this question to myself.

Are we still expecting $5 million to $6 million in capital expenditures for the year? Q1 appeared to come in pretty light on the run rate.

And the answer to that is yes. There's a couple of projects we have in mind for the second half of the year that are a little lumpy. It's possible those -- that accelerates. It's possible that it could even push into 2014, just from the timing of it. But I think, for a run rate for your models, that would still be what I would direct you to.

David, an operational question. What's the impact on Entercom from the recent launch of the CBS Sports Network?

David J. Field

Well, I think, as most of you know, we are very invested in the sports format. We have a lot of sports stations across the country. It's important to note that most of our content is local, meaning local personalities doing sports talk shows. That said, we do work with -- we do have significant relationships with the networks. And I will tell you, it's a good time to be an operator in the sports business because, of course, not only you have ESPN and now CBS, but you also have NBC and the full -- and others. So it just provides us with a lot of opportunities and options to make sure we're providing the best, both local and syndicated content, for our listeners.

Stephen F. Fisher

Several -- you got 4 or 5 questions were submitted by various people about opportunities for refinancing. Let me just address that broadly. I think I did that in my remarks that we see that -- this more as a "late year this year" event. And if you look at the markets and our trading ranges, we think there's opportunities there that will yield benefits. But we think the benefits will flow more to 2014. Obviously, we'll always look. And if we think there's an opportunity on an ROI basis to address that earlier, we will.

David, perhaps, several questions from Aaron Watts, from Avi Steiner and several others, looking at the balance sheet, have asked questions about target leverage and kind of how do we think about the use of free cash flow on our balance sheet.

David J. Field

Yes. I mean, look, we've been pretty consistent and straightforward about that for some time now. Our goal has been, first and foremost, to bring down leverage and to repay debt, and that is essentially where all of our free cash flow has gone over the past few years. And you've touched on that here in your remarks earlier today, and that is what our plans are for the foreseeable future. We've given a target range of leverage of -- to low to mid-4s in terms of the point at which we would consider repatriating some cash to shareholders. I mean, I think that remains the same. It's -- that threshold where the Board would begin to seriously look at the possibility of dividends to shareholders. And then, of course, there's the possibility of acquisitions. And our view at this point in time is, our portfolio is very strong in the markets we serve with strong cluster positions. And we'll look opportunistically at acquisitions, but not at the expense of our balance sheet.

Stephen F. Fisher

Well, you may have just answered the question I was about to ask.

Mike Kupinski asked, can you update us on the M&A market and whether we'd be interested in making any more acquisitions. I think you touched on it. But maybe why don't you touch more broadly on your view of the radio industry M&A market and then Entercom, specifically, which I think you just answered.

David J. Field

Yes. I mean, look, there have been some one-off transactions that you've seen over the course of the last few months, nothing dramatic. We continue to believe that the industry would benefit from further consolidation on a number of levels, and we are open to, again, doing deals, which makes sense, which create value for shareholders and which don't impair our balance sheet.

Stephen F. Fisher

So with that -- and I've done my best for you all to kind of sort through and eliminate duplicate questions. That's, I think, the conclusion of this. If anyone has a question that we did not address, feel free to give me a call.

And with that, David, do you like to wrap it up?

David J. Field

Yes. Thanks, everybody, for tuning in to today's call, and we'll look forward to reporting back to you in about 3 months. Thanks.

Operator

Thank you for participating in today's conference call. You may disconnect at this time.

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