Entercom Communications Corporation (NYSE:ETM)
Q4 2013 Earnings Conference Call
Date and Time ET
Steve Fisher - CFO and EVP of Operations
David Field - President and CEO
Good morning and welcome to Entercom's Fourth Quarter 2013 Earnings Release Conference Call. All parties 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.
Good afternoon everyone and thank you again for joining Entercom Communications for our fourth quarter and year end 2013 earnings conference call. This call is being recorded, and a replay will be available on our company website, shortly after the conclusion of today's call, and we will also be available by telephone at the replay number, noted in our press release, which was issued earlier this morning.
With our notice of today's call, we ask that you submit your questions in advance of the call; in addition, and I'd like to point this out again, I'm always available for any follow-up questions, if you'd wish to call me directly at 610-660-5647.
These notes, before we begin, should the company make any forward-looking statements, such statements are based on current expectation and involve risks and uncertainties. Company's actual results could differ materially from those projected. Additional information concerning factors that could cause 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 at entercom.com for a reconciliation of such measures and other pro forma financial information.
So with that out of the way, let me turn the call over to David Field, President and Chief Executive Officer.
Thanks Steve and welcome everyone. Thanks for joining today's call. We have a fair amount of good news to cover with you today. But I will start with a summary of the quarter's financial highlights, followed by some color on recent developments and Q1 revenue trends, before turning it back to Steve and your questions.
Up against a tough political comp in 2013, Entercom's fourth quarter revenues were down 2%. Excluding political advertising, revenues were up 2%. Station expenses in the quarter were down 1%, and as a result, fourth quarter station operating income declined 5%. However, free cash flow for the quarter increased 2%, as we benefited from further reduction in general interest expense. Adjusted net income for the quarter was flat.
Our interest expense benefited from our significant debt reduction during 2013, from the December repricing of our term loan-B, which cut our borrowing costs on this tranche of debt by 100 basis points. This rate reduction follows a similar repricing event last December, reflecting the strength of our balance sheet.
While 2013 was not a year we are particularly proud of from a revenue standpoint, it was a year, in which we made great progress with our brands, and our organizational capabilities.
As we discussed in our past couple earnings calls, we have made significant investments and changes in our sales organization over the past couple of years, and that caused some disruption to our sales performance. I believe at this point, we have turned the corner. While we still have plenty of room for improvement, there is no question in our mind, that Entercom ended the year in a materially stronger position than we started, and we are positioned for a strong 2014.
It is worth recalling, that on our November earnings call, I noted that we were pacing down 5% for Q4. Contrasting that with our final result of down 2%, illustrates the significant improvement we achieved over the past couple of months of a quarter. In addition, it was good to see most of our markets gained revenue share in the month of December. Now we still have way to go, to be hitting on all cylinders, but we are pleased with our progress.
Here are some additional data points on the fourth quarter; our best performing categories were insurance, professional services, home furnishings, health and medical, and retail. Automotive spending was also up for the quarter. local revenues were up low single digits for the quarter, while national revenues declined low single digit. Our best performing markets were San Francisco, Kansas City and Memphis.
We also had another set of great ratings results in the Fall Nielsen. In fact, our consolidated ratings have now grown in six of the last seven quarters. We have a large number of rating success stories across the country, as our programming strategies continue to bear fruit. I am most excited about some of the more interesting developmental situation, where we have recently bolstered our competitive position.
For example, The Wolf in Kansas City, has surged to become the number one Country station in that market, and ranks third among all stations with adults 25-54, and first among adults 18-34. Also in Kansas City, The Point, a relatively new brand, has steadily grown, and now ranks second with women 25-54.
But the big headline here, is the steady company-wide ratings growth we have achieved over the past several [bucks]. On a related note, we took this occasion to elevate our long term programming head, Pat Paxton, to President of Programming. Pat has done a wonderful job, leading our programming efforts for many years, and we congratulate him on his new title.
Turning to current business conditions, 2014 began on a solid note, with January revenues up moderately over the prior year. Our stations have continued to show gradual steady improvement over the past few months, due to a combination of business being booked later than in past years, and the better execution on our end. However, it is also worth mentioning, that first quarter has been somewhat affected by the unusually harsh and disruptive weather in much of the country, which has impacted a number of our markets.
Overall, our first quarter pacings are currently down 1%, and we expect that to improve, based on recent trends and our internal forecast. Obviously, whatever impact the weather is having, it will be short term and limited in nature. We are optimistic about 2014, based on a number of factors, which we think will positively impact our performance.
First, our consistent recent ratings growth; second, we have spent the past couple of years retooling our sales organization to bolster our effectiveness. The change has cost in disruption in 2013, which should now begin to bolster our competitiveness in 2014 and beyond.
Third, we should benefit from incremental revenue growth opportunities in digital events and 2014 political spending; and finally, we have meaningful headwind to grow in a number of our markets, as we capitalize on our enhanced competitive position. With our interest expense reduced, we have the potential to post solid free cash flow gains in the year ahead.
Meanwhile, industry-wide listenership remained strong, and we continue to get number of powerful, positive research reports, demonstrating radio's vibrancy and efficacy. In fact, Nielsen recently released a report, noting that radio was the single dominant medium in the country from 5 a.m. to 5 p.m. daily, [advancing] television and the internet during those critical hours, and that is huge.
So in summary, we ended 2013 on a strong note, accelerating our performance in the final months of the year, to drive positive core revenue and free cash flow growth in Q4. We have enhanced our brands and our sales capabilities and lowered our interest expenses, and we have improved our execution, and are well positioned for a solid 2014.
With that, I will turn it over to Steve for some additional thoughts, before we turn to your questions. Thanks.
Thanks David. As Dave mentioned, we were really pleased to again reprice our term loan B facility, just last month in December, I guess two months ago, which reduced our overall borrowing costs on that tranche facility by 100 basis points, and should result in annual savings of $2 million to $3 million per year in net interest.
Our floating rate, term loan B is now at LIBOR plus 300 basis points for the 1% floor. This is the second year, which we have been able to reprice this portion of our capital structure, and achieve significant interest savings, which benefit our shareholders.
We ended 2013 with $505 million of debt. Now let me make a note, that that figure is net of cash on hand; and it is a new data point, not in the release. As of this call, we are now below $500 million of net debt, but just a nice data point showing continued progress in the free cash flow generation of the Entercom platform. Our bank leverage at year end was 4.8 times, versus a covenant of 6.5 times.
Turning to the financial results, David noted that revenues were down in the fourth quarter, primarily due to comparisons with political revenues in the prior year. Just as a reminder, for those of you analyzing it, our fourth quarter 2012 political revenues were $4.7 million. Back to this quarter, our non-cash equity compensation expense in the fourth quarter was $1.3 million. Fourth quarter interest expense decreased by over $2 million from last year, to $11 million for the fourth quarter.
Our fourth quarter tax provision was a little higher due to certain non-deductible items and adjustments in the quarter. As you have seen in the past, our quarterly tax rate is often subject to these types of fluctuations. Capital expenditures in the quarter were $800,000 and for the full year 2013, $4.3 million.
Now let's look ahead; as we enter the new year, I though it'd be helpful to communicate to you, some of our thinking on financial statement line items, for which we have visibility, which might be useful in your modeling.
First, a little color on first quarter revenue; one fact to bear in mind, looking at our first quarter 2014 performance, revenue performance, is that prior year numbers included revenue from the Boston Celtics basketball games, which we no longer carry in Boston. Those revenues accounted for roughly 1% of last year's first quarter revenue. So when David noted that our pacing is currently down 1% for the first quarter, but really essentially flat on a apples-to-apples basis.
With 2014 an election year, we would expect to see the benefits of political revenue, primarily in the second half of the year. Based on the trends of past similar election cycles, we would expect between $6 million to $7 million of political revenue, with most of this falling into the fourth quarter.
Looking at our expenses, we see our core station operating expenses up about 1% for the full year. However, we also planned some additional incremental new investments in brands, events, and digital, so that total operating expense growth should be in the 2% to 3% range for the year. Corporate expenses should again be approximately $21 million for the year, and our non-cash equity compensation should be about $5 million for the year.
We expect first quarter interest expense to be approximately $9.7 million, this represents a 15% reduction from last year. Represents over $1 million reduction from our fourth quarter and represents a 30% reduction in interest expense in the first quarter of 2012 two years ago, reflecting the two repricings Dave mentioned, and continued debt paydown.
Our 2014 capital expenditures should be about $7 million to $8 million. As we phase in some capital replacements in special projects. Now this is a little higher than the past few years, and is higher than what we see as a normalized annual CapEx run rate of $3 million to $5 million. We would expect our CapEx expense to come down in 2015, to that $3 million to $5 million range. We expect our GAAP tax rate to be about in the mid 40s for the full year 2013, subject to periodic fluctuations.
While we reflect income taxes in our financial statements, this a tax provision for accounting purposes, not actual taxes paid. We do not expect to pay cash taxes for quite a while, with significant ongoing amortization of intangibles, plus over $250 million of NOLs at the end of 2013, which we can apply going forward.
So the Entercom investor story remains about free cash flow. For the year 2013, we reduced outstanding net debt by nearly $60 million and since 2007, right before the recession, we have repaid more then $450 million of debt. It’s a great testament to the free cash flow business model, and the discipline of the company.
So with that, let me go to your questions submitted in advance. Several of them had a consistent pattern, so I have bundled them together. But David, let me first go back to the first quarter. Quite a few people asked about, any additional color you can give on first quarter outlook in pacings, and then a related question from Aaron Watts, Deutsche Bank. Which I know you've covered, but you might want to expand on, has weather hurt first quarter pacings?
I think there are a couple of things going on in the quarter, and I think the headline is that, we are doing better. We have turned the corner. Execution has improved, our capabilities have gone from being a disruptor to an enhancer, and I think that, we are still hitting on all cylinders. As I said, I would expect us to continue to improve our performance as we go through the year.
Its also worth noting, again, on the weather side -- I don't want to make too big a deal of it, but it’s a factor. We have seen an unusual number of markets, and markets that typically don't get impacted by winter weather. Shutting down for periods of time in the southeast, the mid-Atlantic and also in the West Coast, the drought has had an impact. So for instance in Sacramento, the ski industry is normally a pretty big category for us, and because of the drought, that business has really gotten significantly impacted.
So, weather is a factor. Again, I don't want to overstate it, but to put some damper on the quarter. And then the point that you touched on, which is that, last year we had bought some Celtics revenues in Boston, that's worth about a point. So we are pacing minus 1 for the quarter, expecting that to improve. But on an apples-on-apples basis, we are really flat, as we sit here today.
How's that for a segue? Because David, couple of shareholders asked, can you provide more color on operations and results in Entercom's two largest markets, San Francisco and Boston?
Let's start with Boston. It has struggled a bit of late. We have some work to do there, but its interesting. We have a new leadership there now, which we are very excited about, and I believe, we are starting to turn the corner there. And if you look at the fundamentals of Boston, WEEI, our flagship in the market, remains one of the top rated sports station in United States. It’s a top three player in Boston among men. We are about to enter baseball season with the world champion, Boston Red Sox, and what's little noted too is, our digital play there. We have a major platform there, with a team of writers, who work for that, and it has become sort of a much visited site for fans.
And to put it into context, we do about 1.5 million unique visitors each month, just on the digital side there. So we have a ton of opportunities in Boston, and I would expect better things to come in the not too distant future there, and again, I think the future's bright.
San Francisco is doing great. We have a brand, they are really performing well. KOIT is a dominant brand right now, leading ratings gainer. KBLX, a recent acquisition has really emerged and become a ratings [blinker] as well; and even The Game, our sport station in the market, continues to steadily improve its ratings, and it's really -- from dramatically in the last couple of months, into becoming a force to be reckoned with, among men in the market. May be most importantly for this call, our revenues have dramatically accelerated there, and we are feeling very-very good about 2014.
Let me take a question from Marci Ryvicker at Wells Fargo, and that's related to something we all read about everyday in the headlines, including today. But what are we seeing, in terms of the Affordable Care Act, Obamacare, in terms of advertising in the quarter, both fourth quarter, first quarter?
Yeah I mentioned that insurance was up -- one of our up categories, one of our leading up categories for the fourth quarter, and there is a little bit of that money there. But frankly, it has not emerged yet. They dig faster in our revenues, and so while we are seeing small dollars in Q1, not material right now to our performance.
Let me circle back, you mentioned Boston and WEEI.com, so let me then segue through a related question from Mike Kupinski at Noble Financial. Can you provide more color on the company's digital strategy?
Sure. And really, there are sort of two buckets there. One is distribution of our content and the other is the -- more of a -- engagement of our audiences and the related revenue strategy. So on the distribution side, we continue to look for distribution opportunities across multiple platforms, and have our content being deployed on multiple players, such as HD radio, then into Sprint Next Radio platform, TuneIn and so forth. Not to mention our own customized station approximately. So feeling very good about that.
And on the other side, a really important part of our business now, we very much believe in building very strong local digital assets, engage our audiences deeply in our brands, and to provide additional opportunities to work with their advertisers to touch our audiences in effective ways. So whether that's a cross in our [approach], ecommerce platform, or email or text or social or station apps and so forth, we are continuing to make investments to drive that engagement in those opportunities.
One other point to make here, which I want to make sure is noted is, you alluded in your comments to some incremental spending that we are going to be doing in 2014 across our brands and events and digital. And the digital side of that is, making investments in adding to our product suite level -- suite level products, to make sure that we are providing a full and competitive suite of digital services to our customers. So a lot going on in digital, and an important part of our (inaudible).
Okay. Now for something completely different, as Monty Python once said, we will turn to a balance sheet question that I will take from Aaron Watts at Deutsche Bank. Please confirm the December 31st, 6.5 times leverage?
Yes, and Aaron, that was in our remarks; and then additionally, you note that our covenant does step down, where the covenant is 6.5 times at the end of 2013, stepping down; but 5.5 times at the end of 2014, and your question was based on current covenant step downs, and outlook are you comfortable with the remaining covenant compliance going forward. The short answer is, yes.
Let me take another balance sheet question from Avi Steiner at JPMorgan. Does the company review a possible refinancing of its 10.5% notes in the current (inaudible) high yield market, and possibility of cloning those ahead of the call date.
Fair question Avi; as you notice, we have been doing a lot of chopping on the term loan B side and repricing that over the last two years. We are very cognizant of those notes, which were issued in 2011, at the time of general economic and credit turmoil. So the angle of 10.5% is quite high on that. We know, we can get much more effective rates. As we look at the cost of doing that, we are constantly looking at that, just a data point for everyone, the first call and that was just December 2015. we will continue to look at that.
I don't think, frankly, as we run the ROI you'd expect to see anything in the short term, I think that will probably be more a 2015 event.
And I have -- staying on the balance sheet side, quite a few people, David, I am going to bundle, because I probably guess that we are five or six people, ask about thoughts on overall leverage and return of cash to shareholders. Let me kind of coalesce all those questions into one. That the company has previously stated, it'd like to get leverage to 4.5 times, before considering a wider range of capital allocations. Is that still the target, and what's the company's thinking on timing?
Yeah. It is still the target, and as we get into that (inaudible) here, it enables us to begin to consider options here, in terms of dividends or share buybacks or other ways to repatriate cash to shareholders, and I would say that opportunity is sort of rapidly approaching, based on our continued progress (inaudible).
And last, I think it comes up about every time, and its fair that it comes up, and how does the company view mergers and acquisition opportunities specifically in the radio industry?
First of all, if you look at our platform, we are really strong in the markets that we are in, by and large. And so, there really is no must have M&A strategy for us at this point in time. That said, we do believe, that if there are opportunities to add additional markets, and to create shareholder value, without impairing our balance sheet, that is something that we would certainly take a look at and certainly be interested in discussing. So I'd say that our mindset on M&A is opportunistic and something that actually we keep on top of.
Okay, before David concludes, let me again say, if you have any specific questions, feel free to give me a call, Steve Fisher, 610-660-5647.
And thank you all very much for listening in today, and we look forward to getting back to you with more news down the road.
And this concludes today's conference. Thank you for your participation. You may now disconnect.
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