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Cumulus Media Inc. (NASDAQ:CMLS)

Q1 2010 Earnings Call Transcript

April 29, 2009 4:30 pm ET

Executives

Lewis Dickey – Chairman, President and CEO

J. P. Hannan – SVP and CFO

Analysts

Marci Ryvicker – Wells Fargo

Scott Van den Bosch – Navigare Partners

Operator

Hello and welcome to the Cumulus Media first quarter earnings release conference call. Please note, certain statements in today's press release and discussed on this call may constitute a forward-looking statements under Federal Security 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 results expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors.

I would like to introduce your host, Mr. Lewis Dickey, Chairman and CEO of Cumulus Media. Sir, you may begin.

Lewis Dickey

Thank you, Operator. And good afternoon everybody. I appreciate everyone taking the time today to receive an update on our progress. I'm joined today by our CFO, J.P. Hannan.

Today we're going to update you on our first quarter performance and briefly discuss our pacing for the second quarter. And let's begin.

Starting with Q1 results, our net revenue for CMI increased 1.8% to $56.3 million. This was slightly better than the revenue pacing data that I shared with everyone during our call – during the Q4 earnings call and it marks the renewed forward progress on our top line, after obviously a year of significant revenue decline.

We continue to see sequential improvements in the key revenue categories I outlined last month, such as auto and national business and now we're beginning to see slight increases on the local advertising as well.

As we've always said, the smaller markets generally take a little bit longer time to come out than the larger markets that we have in the CMP platform. But we are starting to see local rebound here.

Now we continue to reap the benefit of our Radio 2.0 initiative, which includes not only the extensive review and our overall fixed-cost structure that we conducted throughout, in early 2009, but also many years of investment in our proprietary technology platform that we are using very effectively to streamline every aspect of the business.

Now as a direct result, station operating expenses for the quarter were again reduced with a 6%, roughly reduction over the same period last year.

As a result of this revenue growth and strict cost control, our Q1 adjusted EBITDA was up substantially by almost 63% to $12.3 million. We continue to see substantial margin expansion with CMI's LTM EBITDA margin now in excess of 30%.

This ability to fund cash flow at CMI resulted in free cash flow for the quarter of just under $1 million and that was negative a year ago. We are particularly pleased to see our company perform at these levels in what is seasonally, as everyone knows, the weakest quarter of the year.

Now, our total debt is now $624 million and we paid down, that's after we paid down $12.8 million in the past quarter. Our current cash position is $13 million, which means our net leverage is now down to 7.8 times.

We fully expect to be in compliance with our leverage – when our leverage covenant returns in March of next year and that test resumes at 3/31/11. And again, we fully expect to be in compliance at that point and depending upon the strength in political advertising later this year, there's a good possibility that we will actually achieve that number a quarter early or by 12/31 this year.

And when we talk about political, just everybody's clear on that, it's political in 2008, it was $6 million for CMI. And keep in mind that we booked 5/6ths of that or $5 million dollars of that in the third and fourth quarter.

Our CMP platform continues to outperform as well. The revenue on our CMP platform was up 6.2% for the quarter, for Q1 over a year ago. And our EBITDA for the quarter was up 17.4%. So CMP stats are 6.2 revenue, 17.4 on EBITDA.

Now the LTM EBITDA margins for CMP are now up to 41%, including the management fees that are paid to CMI. So, again CMP continues to lead the industry in EBITDA margins and now by an order of magnitude.

So, looking ahead second quarter is currently pacing up 4% for CMI and about 10% for CMP. We continue to see the sequential revenue improvement that began in late Q4 in 2009, we continue to see that play out through 2010 and we look for sequential improvement quarter-over-quarter throughout the year in 2010.

And we're becoming increasingly more optimistic about the year again as we progress into the second quarter and obviously May is one of the largest months of the year.

Finally, during the quarter we announced a new strategic partnership called Cumulus Radio Investors or CRI. And we announced that partnership in conjunction with Crestview Partners, which is a $4 billion private equity fund with a strong media focus and a great deal of experience in the space.

CRI, Cumulus Radio Investors will seek to invest in premium radio broadcasting companies, again that present attractive opportunities for significant long term capital appreciation.

And under the terms of the partnership, Crestview will lead an investor group that will invest up to $500 million in equity together with debt financing that is expected to be available through the capital markets and with that CRI could target acquisitions totally in an excess of $1 billion.

Now this unique combination joins the synergies available from CMI, which again as one of the largest radio broadcasting companies with the highest margins in the space, along with the backing of a very strong and media savvy financial sponsor.

We believe it provides us an opportunity at CMI to bring liquidity to the market, while most other strategic buyers have either limited balance sheet flexibility or they're currently restructuring. We look forward to bringing you additional news regarding our progress at Cumulus Radio Investors, or CRI in the coming quarterly updates.

With that, I'll turn it over to J.P. Hannan and he's going to give you and update on basic financial information for the quarter and then we'll open it up, of course for questions. J.P.?

J. P. Hannan

Thanks, Lew. Good afternoon everyone. As Lew detailed, this is a very solid quarter for us. Our EBITDA growth was largely fueled by continued expense control, but we're extremely pleased to see the top line grow once again year-over-year, especially since our initial forecast for 2010, as we detailed in the 10-K anticipated just flat revenues for the first two quarters of the year.

We are seeing, as Lew pointed out, the gap between revenue growth in the larger and smaller markets tightened as local becomes much more robust, it's much more of a factor in the smaller markets, in addition to the ongoing strength in national advertising.

Political advertising was a modest driver of revenue in the quarter. We said it's largely an end of the year scenario, but the dollars are small, but on a percentage basis, the category pays extremely well, in excess of the amount we achieved at this point in the last mid-term election cycle.

We've said success in this category; late 2010 could be a tremendous driver in helping us achieve our leverage goals, perhaps a quarter earlier than previously planned. Automotive was another category that we identified as a strong driver of revenue ahead of 2010. It has now resumed its status as our top category of advertiser for the company, comprising approximately 12% of revenue in the quarter.

We do continue to diversify our revenue base through our category penetration initiative though. And now count non-traditional clients, such as hospitals and colleges, amongst our top ten advertisement categories.

On the expense side, we continue to streamline and find efficiencies wherever possible, through the Radio 2.0 initiative that Lew detailed. So the significant year-over-year expense saving comparisons will start to dissipate in Q2 as we largely had the fixed cost restructuring programs in place by the end of Q2 last year.

Expenses should remain flat, up slightly for the balance of the year, due only to variable commissions paid on increased sales levels. In terms of CapEx, we continue to make great strides in this area through our routine maintenance programs and group by end strategies initiated by our engineering teams. We spent just $400,000 on capital expenditures in the quarter as a result.

Interest expense rose in the quarter over the prior period. This was driven by higher spreads being paid resulting from our June 2009 amendment. This was partially offset by a drop in the reliable rate and lower levels of debt being carried as we continue to de-leverage the balance sheet.

This should begin to level out at the end of Q2 2010 and slowly decrease through the balance of the year, assuming liable remains fairly steady. We currently pay a rate of liable plus core and anticipate that this will drop by 25 basis points in early Q3, triggered by additional debt repayments in excess of the $25 million threshold since the amendment last year.

We currently have nothing drawn and still have full access to our $20 million revolver and we do not anticipate utilizing it in 2010. All total, we're off to a great start for 2010, meeting or exceeding all of our key internal financial goals for the quarter.

And with that, we'll open up the call for questions.

Lewis Dickey

Operator?

Question-and-Answer Session

Operator

Certainly. We will now have the question-and-answer session. (Operator Instructions) Our first question comes from the line of Marci Ryvicker with Wells Fargo. You may proceed.

Marci Ryvicker – Wells Fargo

Thanks. Good afternoon. A couple of questions first on operations. How are the months trending specifically in the second quarter, both for CMP and for CMI? And can you also talk about how much is on the books for May and June?

Lewis Dickey

Well, Marci, in terms of how the months are pacing which would actually be a better, I think a better metric overall, it is – the months are for CMI, April is pacing up about 2.5 which is it should finish slightly, we're right about there now so we don't expect too much movement.

And for CMP, it's at 104. And for May, it's at 105 for CMI and 112 for CMP. And then for June, it's a little over – it's pretty close to May, 104 and change about 104.5 and about 124 for CMP.

Marci Ryvicker – Wells Fargo

And then for CRI, are you targeting any specific markets or clusters and how do you think about private market multiples since there's been so little action in the M&A market?

Lewis Dickey

Well, good question. We're – the primary focus in CRI is going to be Top 100 markets. And so, in terms of, I guess your question is what is the multiple? There hasn't been a lot of trading and so I think every transaction is going to be different. But I would say that the multiples are somewhere in the 7 to 8 times range.

Marci Ryvicker – Wells Fargo

And then just one last one, how – can you talk about how CRI benefits Cumulus shareholders specifically?

Lewis Dickey

Well, again, very simply as with CMP it benefits Cumulus Media, Inc. shareholders, the public company shareholders in really in three principle ways. Number one will be the management fees. Number two will be the promote and number three will be the increased leverage from increased scale.

Marci Ryvicker – Wells Fargo

Great. Thank you.

Operator

Thank you Ms, Ryvicker. Our next question comes from the line of Scott Van den Bosch with Navigare Partners. You may proceed.

Scott Van den Bosch – Navigare Partners

Just a question about your sales effort. I know you had, you've been aggressive at cost, but you're also kind of working in revamping being your sales effort. How happy are you with that effort? Is that what's driving it or is it just the market, if you could just kind of comment on that?

Lewis Dickey

Well, it's a little bit of both, to be honest with you. We're seeing good improvement in some of the key categories that we're working very hard to increase penetration. Things like healthcare and education are categories that are making their way up the list in terms of importance that were really no-shows a few years ago in our company.

So, we're starting to make real progress in some key focus categories in our company. And then overall, clearly the market is improving across the board. I don't think it's, I think what we're looking at here is a slow, steady improvement, particularly in the smaller markets from here and the larger markets are seeing some, a bit of a quicker bounce back and that – none of this is really a typical in what we've seen in past downturns. The larger markets generally lead out and then over time that gap narrows.

Scott Van den Bosch – Navigare Partners

And just one last question out here, if you could just kind of comment on the pricing discipline. I know in the past radio operators haven't been that disciplined about price. To your frustration, has that picture changed at all?

Lewis Dickey

Well, there are, in some of the larger markets, some of the Top 50 markets; they're seeing real pressure on inventory in the month of May and probably in June based on some of the pacing that we see. So, you're going to see, I think the industry is going to end up and generally again, this is not atypical the industry will leave money on the table in May and June because people didn't respond quickly enough on pricing.

And people will start to get religion based on sell out and leaving money on the table in May and June and I think will be more vigilant about their pricing and capturing greater value out of the inventory. So, again, none of this is atypical in terms of what we've seen in past cyclical recoveries and I think that's what we're dealing with here.

Scott Van den Bosch – Navigare Partners

Okay. So it's more the CMPs getting religion. There's more benefiting from that versus that CMI is maybe still behind that.

Lewis Dickey

Well, in the larger markets that are more transactionally based, you're going to see that. And as I say, that's really in and I was speaking about the markets, not about our company. But in general, the larger markets that are more transactionally based, that's what's happening.

And I think they're getting an extreme amount of pressure on inventory in May and June. And as a result, yields will not be optimized because there wasn't – people weren't on it early enough, but then people generally learned from that and it becomes self-correcting as the year goes on.

And we expect to see continued strong demand, sequentially as time goes on, I think political and the crowding-out effect, it will ultimately have on the ad markets is going to be very beneficial. So, I do, I think that it will be a bit of a, like I say, we'll leave money on the table in May and June and then it'll start, we'll start to do a better job of capturing full fair value as the year goes on.

Scott Van den Bosch – Navigare Partners

That's all I have, thank you.

Lewis Dickey

Thank you.

Operator

Thank you, Mr. Van den Bosch. (Operator Instructions) There are currently no additional questions waiting from the phone lines.

Lewis Dickey

Alright, fair enough. We appreciate everybody's time today and we will provide a full update again in 90 days. And we have a CMP call that will start at 5:30. Thank you everybody. Have a good day.

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