Entercom Communications (NYSE:ETM)
Q2 2013 Earnings Call
August 05, 2013 5:00 pm ET
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
Good afternoon, and welcome to Entercom's Second 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 good afternoon, everyone. I'd like to welcome you to our Second Quarter Earnings Conference Call. This call is being recorded. A replay will be available on the company's website shortly after the conclusion of today's call and is available also on the telephone number at the replay number noted in our release this afternoon. With our notice of today's call, we ask that you submit your questions in advance of this call to the email address, email@example.com. In addition, I'm always available for any follow-up questions if you wish to call me directly at (610) 660-5647.
Before we begin the call, I'd like to make this note that should the company make any forward-looking statements, some -- 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 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 refer you to our website, entercom.com, for a reconciliation of such measures and other pro forma financial information. So with that, we'll turn it over to David Field, President and Chief Executive Officer.
David J. Field
Thanks, Steve, and 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 over to Steve and your questions.
Second quarter revenues were down 3% to $101.2 million, partially offset by a 3% decline in station expenses to $65.7 million. As a result, adjusted EBITDA decreased 4% to $30.7 million. Adjusted net income rose 8% to $0.26 per share, while free cash flow is decreased by 2% to $19 million.
On our last earnings call in early May, we noted that second quarter pacs were down 1%, so obviously, we saw business conditions weaken later in the quarter, particularly in June. April ended flat, while May was down 3% and June down by 8%.
Here are a few other insights on the quarter.
Local was down 3% while national revenues were flat. Political fell by $700,000. Overall, total radio market revenues in the markets in which we compete declined by 1.5%, so we lost share for the quarter. Our best-performing markets were Kansas City, New Orleans, Indianapolis, Portland and Memphis. Top performing categories were telecom, department stores and travel.
As I noted earlier, we continue to prudently manage expenses and achieve meaningful, sustainable reductions to our cost structure. This past quarter's 3% decline in expenses comes on top of a 4% reduction in expenses during 2012 and a 3% drop in Q1. As Steve has pointed out in past calls, and we'll touch on in a few moments, we will be reporting an increase in reported cost versus prior year for the third quarter due to a large one-time credit in last year's third quarter. That said, we expect our cost to once again decline in fourth quarter. I also want to note that this morning, we announced that we have completed a new 4-year agreement with Arbitron across all of our markets. The agreement runs through mid-2017.
Now I want to focus the bulk of my remarks today on our current sales performance. Our second quarter results lagged our peer group and are unequivocably unsatisfactory. To some extent, it is due to the relative weakness in our markets versus radio in general. As you may have seen, New York and Los Angeles radio ad spending are up significantly this year, which, by the way, is an important positive indicator for the industry. In contrast, our markets have been a bit weaker, down 1.5%. That said, and let's make no mistake about it, we did not get the job done in executing on sales in Q2. To be blunt, we did a poor job in driving our revenues. It is totally unacceptable. And just to be clear, our expectation is to deliver upper echelon performance, not just to pace in line with the peer group. That has been our track record over the years and we have every intention and confidence that we will deliver upper tier results again in the not-too-distant future.
Unfortunately, I expect that our relative weakness will persist in Q3. We are currently pacing down 5% in third quarter. The month of July was down 3%, with August and September off a bit more at this time.
National pacings are currently stronger than local. We have seen some recent firming of our pacing trend, but it is premature to draw any meaningful conclusions from this data point. So let me try to put all of this in context.
Our poor top line performance is essentially all due to a single cause, poor sales execution. We believe the problem is entirely fixable. We are executing well against our plans in every other facet of the business. Our brands and ratings are generally in terrific shape; more in that in a moment. We have a strong and growing arsenal of impactful digital assets and sales resources and we have invested millions of dollars in new personnel and capabilities in a number of areas to further bolster our opportunities and growth potential. In fact, in recent months, we have made significant new investments in a new CRM platform, launched a revenue management team and enhanced our digital platforms.
So what is the sales execution problem? Over the past year or so, we have made significant changes in our sales strategies, systems and practices. The changes we are making will make us a stronger and more successful selling organization. But in the short run, they have caused a bit of disruption and our performances, obviously, suffered. Nothing that can't be fixed, but clearly, there has been an adverse temporary impact on our sales productivity.
So how do we fix this and how long will it take? The good news is that the problems are manageable and our management team is taking corrective actions to get us back to the high standards of sales performance that we have sustained over many years. Our team has great confidence in our ability to get back on track quickly. We believe that we are well-positioned to accelerate our performance later in the year based on our excellent ratings and our strong competitive position that has been further bolstered by a number of recent operational and strategic enhancements.
Let me elaborate a bit on the strength of our brands.
Our ratings performance has been excellent. We have gained aggregate ratings share from our peers in 4 of the past 5 quarters. Here are just a few of the highlights from the most recent ratings reports.
Our stations ranked first and second among women, and second and third among adults, in Denver. We have 4 of the top 5 stations with adults in Greensboro. We have all of the top 3 stations with adults in Kansas City. We have all of the top 4 stations with adults in Sacramento. We have all of the top 3 stations with adults in Rochester. In San Francisco, we have the #1 station with adults in women. And our 2012 acquisition, KBLX, which was outside of the top 10 when we acquired it, has climbed to fourth with women. And again, the seminal point here is that when you aggregate the ratings across all of our brands and compare them to our peers, we have gained share in 4 of the past 5 quarters, we just haven't yet converted that into greater revenue shares.
I think our sales performance will be insignificantly better shaped in fourth quarter, and we are positioned for an excellent 2014 when we should be able to fully capitalize on our powerful brands in all of their various organizational enhancements and growth initiatives. And in fact, we are already seeing significant acceleration in our largest market, San Francisco, which is poised for substantial growth as we capitalize on our enhanced ratings position. So while we are currently enduring a few insignificant bumps on the road, I'm quite confident about where we are headed.
With that, I'll turn it over to Steve for some additional thoughts before we turn to your questions.
Stephen F. Fisher
Thanks, David. The press release really contains the key financial headlines for the quarter, so I'll try and focus my comments on a few additional insights before we go to your questions. Importantly, I think, as David mentioned, we were able to partially offset the decline in revenues with a prudent cost management, which drove our station operating expenses down 3% versus the prior year. Important to note that this continues a trend of expense management, which we've demonstrated in recent years.
Let me give you a little background on a few separate line items in our financial statements on the release this quarter. Our second quarter results include a separate line item for an accounting gain from the completion of the sale of our non-core tower assets to American Tower back in late 2009. Now, as a result of the leaseback of some of these towers for our needs, accounting rules required us to keep these tower assets on our balance sheet over the past few years and treat the sale as if it were debt financing until the earn-out provision was settled. With this now finalized, we recognized a net gain of $1.6 million from this 2009 sale in this quarter and we'll have additional gains throughout future periods. This was an accounting item, not a cash item. We received the sale proceeds in 2009.
Also in this quarter, we put some excess land up for sale at a transmitter site in one of our markets. As a result of this, we wrote down this asset to what we consider fair market value and moved this asset to the category of assets held for disposition on our balance sheet. This resulted in a noncash impairment charge of $800,000 in the quarter. We would hope to, or expect to, complete this sale and receive the proceeds from this sometime in 2014.
Second quarter net interest expense decreased to $11.3 million, which included $1.1 million of noncash deferred financing costs. We ended the quarter with $539 million of total net debt on our balance sheet and our bank leverage calculation for the quarter puts us at 4.7x leverage, and that compares to a covenant of 6.3 -- 6.75x. Noncash equity expense was about $1 million in the quarter and we would expect that quarterly equity compensation expense to be about the same for the remaining quarters of the year.
Now David highlighted earlier, and I'll highlight it again, that as you look at our station operating expenses for the third quarter for your models, it's important to note that we would expect station operating expenses in the third quarter to show an increase of about 5% to 6% versus the prior year. However, this is a result of prior year credits, which we booked last year, not a change to our business model. Last year, you may recall that we included a significant one-time expense credits we received as part of radio industry settlements with one of the music rights organization we licensed with. And as David said, we would expect to return to slightly favorable expense comparisons in the fourth quarter of this year as we constantly work on improving our operational efficiency.
So with those few highlights, let me go to the questions that you submitted in advance.
Stephen F. Fisher
As has been our practice, I'll try and moderate and combine questions. Again, if there were specifics that you don't feel were adequately addressed, please feel free to give me a call.
David, let me circle back and probably go right back to the elephant in the room here, from Mike Kupinski at Noble Financial Group.
Revenues seemed light relative to the rest of the industry, can you give us any further color as to categories, markets, local, national? Anything that would account for that weakness? I know you addressed it in the comments, David, but I think so many asked about it, I thought it's worth repeating the question.
David J. Field
Yes, it’s fair. I mean, our revenues are light relative to the peers this quarter. And are going to be light relative to peers in third quarter, it appears. So let me elaborate a little bit more on that. Again, we covered that extensively on the -- in my earlier remarks. But let's subdivide that between the industry and Entercom. And first, on the industry side, I think it's worth noting, radio is doing pretty well here. If you look at peer results across the space, we're pretty much the last ones to report here. I think the reports were pretty solid for both Q2 and Q3. We have New York and L.A., the 2 most important bellwether market in the country doing well this year. We have radio usage, listener usage, very strong, continuing to grow in terms of the number of people listening to local radio stations each week. And I think the industry is innovating and initiating and developing new products and developing business in an accelerated fashion that, again, bodes well for the future. So I think there's reason to be pretty optimistic and feel good about things from the industry standpoint. Obviously, we didn't pull any punches in our remarks. We didn't get the job done in second quarter. But we'll get past it. We'll get past the short-term sales execution issues and then be positioned to grow nicely, both top line and bottom line going forward. To reiterate, there is nothing fundamentally broken. To the contrary, we think we're in a very strong, competitive position, and if you look at our brands and our ratings as we talked about, our local digital assets, our capabilities, our resources, our people, our initiatives, I think we are very well-positioned going forward. I think we have significant upside opportunities in multiple facets of our business. And again, I'm pretty optimistic about where we're going once we get past this period.
Stephen F. Fisher
Let me stay with that theme, David, and I'll stay on the question list that Mike had set before I go to some other questions. And let's look ahead. How are the various format changes that were made last year doing as you look ahead? And in particular, you mentioned in your remarks, KBLX, the station that was acquired last May, now coming up on it's -- just past its first anniversary.
David J. Field
Right. And I want to be clear here, our sales execution issues are discrete from the performance of our new formats. So 2 separate issues. I want to make sure nobody confuses the 2. But in, so far as our new formats are concerned, I think we're doing very well. KBLX, you mentioned, Steve, let's start with that. When we acquired it, we talked about the synergies we were able to capture on the cost side right away, which made the acquisition highly-accretive for us. And we noted at the time that our next job was to elevate the brand, improve the ratings and then begin to monetize the enhancements to the brand, and we're executing very well against that plan. We have taken the brand from being a non-top 10 player in San Francisco to now, what is the #4 brand with women, which we're very pleased with and is beyond, frankly, what we had hoped for. And we're now seeing strong acceleration of revenues in the third quarter and expect this to be a nice growth engine for us going forward. Now in addition to that, some of the other highlights, we launched AC radio stations in Kansas City, The Point, and also Star in Sacramento, both of which are doing very well in the ratings game and have dramatic upside on the revenue side as they grow into their market positions. And another station I'll give a shout out to is WMFS, our sports station in Memphis, which is now up to #2 with men. Again, a station, which was barely on the map just a couple of years ago. So we feel very good, of course. We're never perfect and we have our hits and we have our misses, but overall, I think we're doing very well with growing our new format portfolio.
Stephen F. Fisher
Okay. Let me change gears from revenues and brands. A question from Marci Ryvicker at Wells Fargo. What's the impact of the new deal with Arbitron that was announced earlier today?
David J. Field
Right. So unfortunately, we can't speak publicly to the terms of that agreement. I think it's worth noting that, unlike some of our peers, we have had all of our radio stations covered under the Arbitron agreement. So this is essentially an extension of the prior agreement. But we feel very good about the terms and feel good about our relationship with Arbitron and where we're headed.
Stephen F. Fisher
Why don't I take the next question from Marci. It's when do we anticipate we'll start to see the benefits from the Affordable Care Act, Obamacare? Marci, good question. We are beginning to talk about that, but nothing significant, to date, inbound from clients and advertisers, other than we're aware that this, obviously, is an issue of national concern affecting a lot of people, and we think radio, obviously, provides a great platform to reach. So I think probably more on that on the next call. And I guess, while I have the plate, let me go to a question David that I'll ask. Avi Steiner at JP Morgan asked, as a reminder, what political revenue was in the third and fourth quarter for 2012 as we think about the model, for comparison purposes? Yes, obviously, last year, Q3, Q4, had significant political revenue that totals for Entercom. Q3, $1.2 million; Q4 2012, $4.5 million. Again, 2012 Q3, $1.2 million; Q4 $4.5 million. David, there's quite a few questions related to the balance sheet. I'll ask a few in a moment on the prospects of refinancing. But I think, fair for you leading the company to say, as the balance sheet's in good shape, what's the thoughts on the company's use and deployment of cash? And any updates on the M&A market? Coincidentally, there was an inbound that we looked, that Entercom looked at the Sandusky radio properties. So I think there is, in general, a batch of questions on the balance sheet and on M&A. Why don't you address that, and then I'll address thoughts on refinancing.
David J. Field
Sure. So I think everybody who's followed us over the years knows that we have spent the past several years deploying, virtually, all of our free cash flow towards reducing debt, and as a result, we've been able to reduce our debt by hundreds of millions of dollars over that period of time and have emerged with a pretty strong balance sheet. That said, we have also consistently noted that our goal was to get our leverage down to 4.5x or a bit lower at which point in time, the Board would consider various uses of the balance sheet in the line of a possible dividend or I suppose also possibly, buybacks. So -- and I think we're reasonably close to that threshold level where the Board can begin to look at that, albeit, I don't think we will hit that threshold in this calendar year. Looking at M&A, you asked specifically about Sandusky, no, we did not look at that asset. I would add on a more general note that we remain open to looking at acquisitions. They would have to fulfill the criteria, which again, we've been pretty consistent about, that it must create value for our shareholders, and we're not going to do anything that harms our balance sheet. And I think it's also important to put it in context, we are very strong in the markets in which we compete. And therefore, we don't feel any -- feel compelled to acquire any stations to complete our portfolio in the markets we serve. The KBLX example in San Francisco is a good illustration of where we opportunistically made a deal that didn't hurt our balance sheet and materially -- was materially accretive to the company. And again, I would not expect us to, again, look at anything that, as I've -- well, I've already laid out -- I've already answered the question, I suppose. So Steve, I don't know. You want to touch on the other part of it?
Stephen F. Fisher
Yes, maybe, just let me add one, a question from Steve Roberts at NorthPointe Capital, of what the level can the company start paying dividends. Well, there's 2 issues, can and will. And I think David just questioned the will, which is at lower debt levels than what we have today, most likely next year as we look to return cash to shareholder and do something else with the balance sheet. But just to answer the technical question, at below 5x leverage, which we are today, the company can. Let me go to a related question of that which came in, as we look toward the end of the year, what's the thoughts on refinancing some or all of the debt? Let me remind listeners that our high-yield notes are out, no call through 2015, our Term Loan B tranche, approximately $330 million, which was refinanced last November, has a 1-year no call, or soft call, if you will. So you would expect us to relook the debt markets for that Term Loan B tranche sometime this fall, most likely November, December. David, I think the last question, and I think you've kind of touched on it, but I'll throw it out there as a way to segue out looking ahead. Question's on, as you look at the third quarter, what are you seeing in terms of firmness or trends in advertising?
David J. Field
We touched on that. We've seen a little bit of firming over the last couple of weeks. But again, I don't think we've seen enough to be able to assert any fundamental change one way or the other. I think we've, more or less, answered what our expectations are in terms of the path forward here. And again, pretty optimistic about where we are headed based on our fundamental strengths once we get through these bumps in the road.
So with that, Steve, I think -- were there any other questions, or...
Stephen F. Fisher
No, I think, you've covered them. Again my reminder, if you'd like any specific follow up, my number is (610) 660-5647. David, your wrap-up comments?
David J. Field
Yes, we look forward to reporting back again in 90 days. And hopefully, reporting back a more positive direction of the company, and are looking very much forward to that. So thanks all for being with us this afternoon, and we look forward to getting back to you all in 90 days.
Thank you for joining today's conference. That does conclude the call at this time. All participants may disconnect.
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