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Cumulus Media (NASDAQ:CMLS)

Q2 2009 Earnings Call

August 05, 2009 11:00 AM ET

Executives

Lewis W. Dickey, Jr. - Chairman, President and Chief Executive Officer

J.P. Hannan - Vice President, Controller and Interim Chief Financial Officer

Analysts

David Bank - RBC Capital Markets

Peter Gingold - Angelo, Gordon & Co.

Operator

Ladies and gentlemen please stand by, we are about to begin. Hello and welcome to the Cumulus Media 2009 Second Quarter Earning Release Conference Call. At the request of Cumulus Media to conference is being recorded for instant replay purposes.

Please note that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the Federal Securities Laws. These statements are based on management's current assessments and assumptions and are subject to a number of risks and uncertainties.

Actual results may differ materially from the result expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors. I would now like to introduce Mr. Lewis Dickey Chairman and CEO of Cumulus Media. Sir you may begin

Lewis W. Dickey, Jr.

Thank you operator and good morning everybody. I appreciate everyone taking the time to receive an update on our performance. I'm joined today by our interim CFO, J.P. Hannan.

This morning we're going to update you on our second quarter performance and briefly discuss our results for July. Starting with second quarter results our revenue for all markets was down 21.1%; $66 million. This is slightly better than the revenue pacing data that I shared with you during our Q1 earnings call which at the time was down approximately 24%. Revenue weakness continue to be fairly broad based across all categories however and automotive represented about 35% of our total decline on a dollar volume basis.

As I've mentioned in the last two calls going into the year we undertook an extensive review of our fixed cost structure in the face of this declining revenue picture. Consequently we sought to reduce our overall fixed cost during the year or for the year by 15%, primarily through the implementation of a proprietary technology platform that we've been working very hard to develop over the past two years. That platform is now being rolled out and consequently it’s enabled us to reduce headcount and increase operational efficiency, even to a greater degree that our original estimates had set out.

Due to the revenue results in the first couple of quarters, we continued on this on our fixed cost analysis and implementing this technology platform taking additional measures again through the first half of 2009. As a result of these efforts we finished Q2 with total operating expenses down 25.9% for the quarter, again this was ahead of our expense guidance which was down 15 to 20%.

And this was -- and again this is primarily the result of this technology platform actually proving to be more powerful and robust than we originally anticipated. Moving down the income statement our Q2 adjusted EBITDA was down 14.7% to $23.4 million. And it resulted in free cash flow for the quarter of $14.4 million. The resulting EBITDA margin of -- which would be an LTM EBITDA margin of 35.4% for CMI which remember has a medium market size of about a 100-150, which we believe is the second highest EBITDA margin in the business today; behind only our sister company Cumulus Media Partners, which is at 40.5%.

And for our lenders we'll go -- and for CMP lenders we'll go into more detail about CMP on our quarterly call for those constituents coming up at noon today.

Now as of June 30, we are sitting on a cash balance of approximately $13 million after making a $32.5 million voluntary debt repayment that accompanied the closing of our amendment to the credit agreement. The major points of the credit agreement which we had indicated in the previous filings in essence is a covenant suspension period until March 31, 2011. Our lending covenants -- when the covenants resume from the credit agreement back at 6.5 times.

Also included in that is the minimum EBITDA requirements of 60 and $66 million that phase-in throughout the period of that extension, and minimum liquidity requirements of $10 million. This amendment provides us with greater operating flexibility as we continue to navigate through this challenging economic environment and again it was the product of a very constructive and mutually beneficial process with our lenders.

The sole purpose and priority of Cumulus Media right now is to repay its credit agreement and we're working diligently to make progress on that on a monthly basis.

Now looking ahead our July revenue finished down approximately 19.8%, we continue to see some sequential improvement. And operating expenses for the quarter, again our guidance is going to be the same as our guidance was in Q2, which is down 15 to 20%.

Consequently we expect Q3 to improve upon Q2's performance on a year-over-year basis. Our team is highly focused on executing our strategy and implementing our technology platform and I want to commend our team for their ability to lead the industry in EBITDA margins and most importantly in defending our cash flow which remains our top priority at this point in the business cycle.

Now I'm going to turn over to J.P. Hannan our Interim CFO is going provide you with financial overview and then we'll open it up for questions, thank you

J.P. Hannan

Thanks Lu and good morning everyone. As Lu discussed the second quarter of 2009 made for a challenging economical climate. It was also a period of hard work and shared sacrifice in almost all constituencies here at Cumulus, to preserve our shareholder value and to position the company for future opportunities.

In the quarter Cumulus made stride in three strategic areas. We advanced the re-engineering of our local sales strategy, we implemented a number operational efficiencies, as Lu has already detailed and greatly reduced our fixed cost and then amended our credit agreement to strengthen the company's capital structure going forward.

This was an important quarter, and the actions taken over the past few months should have a lasting impact, not only on the second half of the year, but also as we move in 2010. And with regard to our financial results and reiterating some points already touched on by Lu; on our top line the total net revenue for the quarter were down 21.1% almost $66 million.

Station operating income for the quarter declined 3.9 million or 12.8% to $26.7 million for the quarter. Adjusted EBITDA decreased by 4 million to 14.7% in comparing to the prior year, finishing the quarter at $23.4 million. Turning (ph) to free cash flow -- during the quarter we produced free cash flow of 14.4 million compared to $17.5 million generated during the prior year. A decline of 3.1 million related to the decrease in EBITDA during the quarter.

For reference, free cash flow is defined as EBITDA less net interest expense, less LMA fees, less maintenance CapEx and less cash taxes.

As for our capital expenditures, year-to-date CapEx $1.2 million. We maintain our previous projection for total capital expenditures for 2009 to be approximately $3 million. Moving onto our balance sheet our leverage ratio as defined in our credit agreement was 8.05 times at the end of Q2. So the covenant suspension period detailed in our recent amendment suspends this test through the fourth quarter of 2010.

And so at a minimum trailing 12 month EBITDA level on the amended credit agreement of $60 million must be maintained through March 31, 2010. Thereafter the covenant increases $2 million per quarter to a maximum of 66 million trailing four month EBITDA at December 31, 2010. In addition a minimum cash balance of $7.5 million is also required during the covenant suspension period.

Now with that I'd like to open up the call for questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll take our question from David Bank with RBC Capital Markets.

David Bank - RBC Capital Markets

Thanks, good morning guys.

J.P. Hannan

Good morning.

David Bank - RBC Capital Markets

Last quarter you actually gave us a fair amount of visibility in terms of how the quarter actually trended on a inter-quarter basis, and I was wondering if you could kind of humor us again with April, May, June and then your sense of July, and giving us a little bit more color into sequentially how the quarter went and how its feeling.

And I guess Lu, you're -- just more of your general color about there's been a sense in some of the newspaper, radio and TV operators that maybe we haven't turned positive, certainly but there's been kind of a material improvement between 2Q pacings and or 2Q results and 3Q2 pacing. Just kind of wondering what your overall commentary is on that?

Lewis Dickey, Jr.

Well let me try to answer those in reversed order David. The overall feeling going into the back half of the year. Lets start with some lets start with the most important category which is automotive.

The second quarter in essence represented a run-rate of car sales, in essence some 10 million. And we expect -- we are already seeing that starting to rebound, I think it’s -- in the month of July it was closer to it was north 10 million, closer to 11 million. And with the cash conquers (ph) program it’s continuing to improve. And so we 're seeing that market starting to firm up. And the automotive business really hit the scale September, October of last year; and so we'd like to say they can't cancel you twice.

So we do expect to start to see some firming in that category in the -- starting in the fourth quarter maybe the last month of this quarter. And plus on top of that I think you're starting to get a little bit of wind at their back based on the government stimulus to help move that sector of our economy along.

So I think that's going to be a help. Whether or not I think overall the May was a very difficult month in the quarter just giving you the phasing. We talked about April being down 19%, May was down a large number, 25%; and then June was down under 19% -- at 18.8% as we talked about July as a sub-20% as well. So its too -- everything is booking so late David its very-very difficult to try and forecast where everything is coming, which is why we really don't even want to get guidance for the quarter on the top line.

As I mentioned we are doing I think an excellent job of defending our cash flow and as a result of our technology platform. In that sense, think about what we're doing is we are re-engineering the P&L of the business to make it more variable-based than traditionally it has been in the industry. And that's mitigating a lot of the negative operating leverage that most of the companies are wrestling with right now so, and we look for that trend line to continue in our business and the cash flow to continue to be as I say aggressively defended, and we don't know when the turn is going to happen in terms of the top line. What I can say is that we are incredibly geared for it, when it does and we're just working very diligently in the mean time covering all the bases.

David Bank - RBC Capital Markets

I guess just one follow up; is there an annuals process like -- I know its not necessarily an huge part of your business, but is there kind of annual buying process right now or is that not really going on -- when does it usually take place?

Lewis Dickey, Jr.

The, well annuals obviously are generally -- they start to go to -- they start to be vented (ph) in September generally. So, everything's is different but September, October and November is we have a lot of annuals. But that being said remember you've been in Media, Media has been a deflationary economy. And so it has behooved the buyers of time to wait until the last minute. Because -- they are incensed to do so because they've been favorably treated by doing so.

And so as a result I think planners have changed the way they buy and you saw some of that happening upfront in network television.

David Bank - RBC Capital Markets

Yep.

Lewis Dickey, Jr.

And they are looking for much larger concessions from the networks. And so it has truly been a deflationary cycle in media and that's why the buyers have been very aggressive and taking their best hole (ph). And so that's why you're not seeing a lot of advance purchase at time, people are waiting until the last possible minute.

David Bank - RBC Capital Markets

Okay. Thanks Lu.

Operator

(Operator Instructions) We'll go to Morris Cohen (ph) with CIT.

Unidentified Analyst

Hi guys this is Morris. Just wanted to see if we can get any color on terms of rate. Have had buyers been negotiating rates down, how sticky have those rates been from Q1 to Q2, going to Q3 any color you can provide there?

Lewis Dickey, Jr.

I have to say that, this has got to be -- every company is going be slightly different but this has got to be in the range of 80 plus percent rate driven and not unit driven. And so as a result the advisers have been I think the negotiating very effectively, as we talk about. It takes a -- it really hasn't been a robust market, there has not been and an ask -- there has been primarily a bid and an acceptance and that's caused a lot of problems.

And so you've seen buyers and each time they come back they are looking for a lower rate. And they are doing their job doing and doing it very effectively as broadcasters, I think we have do a more effective job of selling the value of our product and negotiating with a little more backbone. And so these are things that haven't been -- as a result I think people have been very focused on just trying take business put on the table and it has truly been a buyer's market.

And that will start to firm as times goes on and there is more demand and you start to see, various sectors of economy start to improve on demand, particularly automotive and it starts to pick up some inventory. But I don't think that it's a cycle that's going to reserve itself any time soon.

And I do think that -- again as broadcasters on the sales side we've got to do a much better job of not pricing for share, but pricing for value and learning the value of the word no, and negotiating more forcefully and its something that we're working hard to do inside our shop and actually passing on business and its cost us some money in the short term to do that but we've got to start to sustain afore here for the value of these products.

Unidentified Analyst

Thanks a lot, I appreciate the color.

Operator

We'll take our next question from Peter Gingold with Angelo, Gordon.

Peter Gingold - Angelo, Gordon & Co.

Hey Lu. Just want o follow up I know in the past you've spoken about Atlanta being through the tech market, I think Atlanta might be part of the CMP portfolio but as it related to the stride (ph) of system, I guess you guys have been implementing there for some period of time you've seen lot of good results from the ability to sell to your new, local sort of advertisers and your outperforming in the market. I was wondering how far along you are in your other markets and that you see anything given a sort of success story to sort of share that you've implicated this I think in Atlanta?

Lewis Dickey, Jr.

Well Peter we're -- Atlanta is has been our test kitchen there being we're a good six to nine months ahead of everything else there and so we continue to show a good progress in Atlanta is out performing the market by 2200 bps, in terms of its growth rate and we expect to do so through the rest of this year and beyond.

But in terms of our other market again we are down 21% our local is starting to gain some traction we're seeing penetration in a number of key focus categories that we're endeavoring to compete more aggressively for and so consequently it is just slowly starting. We've reorganized our entire sales department across the board and we do something like this and we witnessed this in Atlanta

You generally take a half step back before you can start to take a step or two forward. And this location is difficult and you lose some people and you have to change accounts around, you have to redistribute accounts and you have to and you are in essence instituting a different structure in place and again with sales organization, this can be this can have a dislocating impact that can cause some harm in short term as you may miss a business and so this is some of the things that were in essence working our way through on all of our markets right now.

As I say I look for -- we have an offence and a defense strategy and I look for a revenue to become increasingly more competitive and industry leading as we get through this year into next year when it really takes. We are certainly holding our own at this stage of the game on the top line and competing very aggressively on the bottom line with the transformation the P&L due to our technology platform.

Peter Gingold - Angelo, Gordon & Co.

Great, and I guess a little following question are there any geographic differences in performances we look out in your markets, meaning that in some areas you must be flat or up versus other areas that were down. I'm just trying to understand what would -- if there is any differences what's driving that and another question is, is this a uniform sort of performance across all market probably?

Lewis Dickey, Jr.

Well, every market is different people, what you see is that -- and surprisingly we have some markets in Michigan they are performing very well and we have what you would think they would be in very difficult straits there. We've got some markets in Michigan that are performing very well and some markets -- some other markets that in the Northeast that are herding right now.

So I think its we're broadly diversified, we're in 30 states and we are in 68 cities. And, so we really are seeing a mixed bag across. And there is a degree of variance but a lot of it is based on individual market conditions, and the make up of a particular market and what went on a year ago versus -- you don't see in essence a steady 21% down across 68 markets. You do see some variance emerging from growth, some markets are down twice the performance of the entire company.

So that's why you want to be diversified, that's why it's important to have that both in market size and geographically. Clearly we have great formatted diversification across the platform. But it's really -- we look at this and try to understand, are we seen anything regionally, but the answer is we're really not. I would say that, if anything Texas is holding up a little bit better than some other parts in the country but by and large I can't really put my finger on anything that looking at the data that's says there is clear regional pockets of strength.

Peter Gingold - Angelo, Gordon & Co.

Great, and I appreciate the comment, thanks.

Lewis Dickey, Jr.

Thanks.

Operator

It appears that's all the questions we got time for. I'd like to turn the conference back over to Mr. Dickey for closing remarks.

Lewis Dickey, Jr.

And operator, thank you very much and I appreciate everybody taking the time today to hear our update and we'll be back in touch with you in 90 days and the CMP call will start at noon today. Thank you very much.

Operator

This concludes today's Cumulus Media Second Quarter 2009 Earnings Release Conference Call. Thank you foe attending, you may disconnect at this time.

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