Hello and welcome to the Cumulus Media second quarter earnings release conference call. Please note certain statements in today's press release and discussed on this call may constitute 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 and uncertainties or other factors.
I would now like to introduce Mr. Lew Dickey, Chairman and CEO of Cumulus Media. Sir, you may begin.
Thank you, operator, and good morning everybody. I appreciate everybody taking the taking the time to join us today on our second quarter update. I'm also joined today by our CFO, J.P. Hannan.
Today, we're going to update you on our second quarter performance and then briefly discuss the revenue outlook and our pacing for third quarter.
Starting with our Q2 results, our net revenue for all markets increased 6% to almost $70 million. This is better than the 4% revenue pacing data that I shared with everyone in April during our Q1 earnings call. And it continues forward progress on our top-line growth.
We continue to also see sequential improvements in national business and key local revenue categories such as auto, healthcare and restaurants. They’re all starting to come back in.
We also continue to reap the benefit of our significant investments in our proprietary technology platform that we’ve shared with you over the last couple of calls and the investments that we’ve made in this proprietary technology platform over the past couple of years.
As a result, our businesses are now running with increased efficiency across all functional areas and resulting in much stronger operating leverage and healthy cash flow.
Our station operating expenses increased just 3% in the second quarter over the prior year. That was largely driven by the variable sales commissions due to our 6% revenue growth. In fact if we normalized our operating expenses for the one week furlough that all of our employees took in the second quarter of last year, our operating expenses for Q2 2010 would have been up less than 1%.
As a result of our revenue growth and continued strict cost control, our Q2 adjusted EBITDA was up 6% to $25 million. When you factor out the unusual expenses such as the prior year furlough we just discussed and a one-time non-cash corporate charge, our adjusted EBITDA would have been up approximately 12%. And that really is reflecting inherent operating leverage in our business model.
And with this Q2 performance we continue to see substantial margin expansion and again increased operating leverage across our Radio platform. Our trailing 12-month EBITDA margin for 6/30 Q2 of this year is now over 30%.
Our team’s ability to maximize cash flow with CMI resulted in free cash flow for the quarter of over $17 million. That enabled us to make measurable progress as we work to deleverage our balance sheet.
As of June 30, we were sitting on a cash balance of approximately $12 million, which is after we paid down $8.4 million of debt in Q2. With this debt reduction we exceeded our first threshold figure and affected 25 basis points reduction in our interest rate going forward. And that as you all know will help create even more free cash flow or increase debt repayment in the future.
Over the past 18 months we’ve now paid down more than $80 million of debt in CMI. Quite a bit more than that CMP which we will talk about.
Looking ahead, July revenue appears to be finishing up approximately 2% and August and September both pacing up over 6% with very little Q3 political booked as of now. I think its interesting analysis is our Q2 political was up 36% from our Q2 political in 2008, which was the residential cycle everybody knows. Now, although the Q2 political total represents relatively small dollars, but the trend is clearly positive off of a record political year in 2008.
So as is customary, the bulk of the political spend really occurs after Labor Day when the general election campaigns are really kicked off in earnest. For example, this is at CMI now; we booked $4.9 million in 2008 from September through the election in November. Again, in 2008, we booked $4.9 million from September through the election in November. It’s really from Labor Day through the election.
So 36% increase that we saw just in the second quarter looking backwards is certainly encouraging for what potentially may lay ahead of you from Labor Day through the first week in November.
To that end we continue to expect steady sequential revenue improvement throughout 2010 and to-date we are pacing on the high side of our internal forecast for the year. As I mentioned the pacing for August and September really have no benefit of the political being layered in yet because we haven’t seen. It doesn’t really hit until after Labor Day.
As I said in our last call with this performance we feel very confident that we will be in full compliance when loan covenants reset at the end of March in 2011 and depending on the strength of political advertising, which we just discussed in Q3 and Q4, we could potentially reach this target a full quarter early by the end of this year.
Now, let me briefly report on our performance at CMP – Cumulus Media Partners. CMP also continues to outperform. Our Q2 revenue at CMP, which as everyone knows we’re in the larger markets in that particular platform. Our Q2 revenue in CMP was up over 13% and EBITDA for the quarter was up over 26%.
CMP’s trailing a 12-month EBITDA margin as of June 30th, continues to grow and is now approaching 43%. Again, that’s all in including the management fee of $4 million, this embedded in that paid to CMI over the trailing 12 months as of June 30.
Now, for CMP, these industry leading EBITDA margins revenue growth and EBITDA growth are all being driven in part by our technology platform which was developed in our CMP markets and has been in full use there, good six months to nine months ahead of where it is at CMI.
Now, lastly, I want to briefly update everybody on our recently completed bank amendment. And J.P. will have more color on it in his remarks. The purpose of the amendment was to ratify change of agency from B of A to GE Capital. And GE Capital continues to be one of our largest lenders in both CMI and CMP and they may have been a most constructive partner with us as we work to grow our company.
In addition, we sought some technical modifications in addition to the agency change that enabled us to do a couple of things. Number one was to close a longstanding swap transaction with Clear channel, several years old. And so, we’re able to do that now and complete that. It also gives us the flexibility to bring CMI and CMP together under the same holding company. So it’s the ability to be able to do that, again though, no deal is on the table today.
We’re extremely appreciative of all the time and the attention that our lenders gave to this amendment and for their continued support for both CMI and CMP.
I’m going to turn over to J.P. and he’s going to provide you some additional financial information and then we’ll open it up for questions. J.P.?
Thank you, Lew. Good morning, everyone. As Lew covered in detail, this is another very solid quarter for us. We’re now seeing our EBITDA growth jeweled not only by continued expense control, but also steady top-line growth. Lew also mentioned we’re well ahead of our internal forecast for the year, the strong momentum going into the upcoming political advertising season.
Revenue growth and continued margin expansion has enabled us to accelerate our debt repayment estimates as well. As you will recall, in the third amendment to our credit agreement, put in place a year ago, our interest rate structure was adjusted to LIBOR plus 400 basis points.
As Lew briefly just touched on on an initial payment of 25 million following that amendment date we’re eligible to reduce that rate to LIBOR plus 375 basis points, threshold that we just achieved this past June. This 25 basis point reduction will equate to approximately a $1.5 million in savings interest expense over the next 12 months. Additionally, on a payment of another 25 million we will receive a 50 basis point reduction in that forward interest rate.
Based on the free cash flow generation we’re experiencing we now estimate we will reach that next threshold quarter earlier than I indicated to you in our last earnings call. Possibly as early as January 2011.
This will greatly reduce interest expense in 2011. Further, for purpose of your modeling into the next year, please note that our current interest rate swap agreement expires on March 13, 2011 and has LIBOR paid 393 million on 400 million of our term loan.
In addition to the aggregate 75 basis point reduction in rate derive from our principal repayments and the lower overall debt being carried on our balance sheet the expiration of this contract were the profound positive impact on our free cash flow generation throughout the balance of next year.
Also as it relates to our term loan, as Lew just mentioned, last week, we announced our fourth amendment to credit agreement. This was largely a technical amendment and has no impact to our rate structure or covenant. It was a small five basis point fee paid to concerning lenders which totaled about $233,000.
In addition to facilitating the agency switch to GE Capital, the amendment allows certain non-cash swap transactions to occur, including the pending deal in Canton, Ohio. Also allows sale leaseback transactions to our communication towers up to a $20 million threshold.
It should be noted that we have no pending sale leaseback transaction currently. But we now have the capacity to look at this should we decide an avenue we like to pursue in this relatively robust market for tower sales. This could be another cash generation activity that would further enable principal payments on our term loan, again, we have nothing pending in this regard at this time.
Final two aspects of the fourth amendment, as we said, relate to our investment in Cumulus Media Partners and its subsidiary CMP Susquehanna.
Under the CMP credit agreement there is a provision allowing for an equity tier by partners in the event of a default. However, before this last amendment, Cumulus had no ability to participate in this with our other partner. We now have the ability to make an equity investment of up to 1 million to cure an event of default at CMP should it become necessary.
To be noted that CMP to fall is now very unlikely given the similar deleveraging that has occurred in that company well over the past year. CMP has now deleveraged its balance sheet by over $215 million or 25% at the end of 2008.
Final provision of the fourth amendment related to CMP was the ability to invest to acquire the remaining portion of CMP that we don’t already own using CMI equity only. There’s no active discussion occurring on this front. And any transaction would be subject to Board and other approval by both companies. There’s a no guarantee that an acquisition of CMP will occur or even be attempted by Cumulus. With this latest amendment gives us the flexibility should it become advantageous for both companies to pursue this direction at some point in the future.
For anyone wanting more information on CMP Susquehanna Radio holdings, please see the investor section of cumulus.com you will find complete financial statements and other relevant data for that company.
Lastly, a couple of other items related to our balance sheet. In terms of capital expenditures, we continue to make great stride in this area throughout our routine maintenance programs and group buying strategies initiated by our engineering team. We spent $760,000 on capital expenditures in the quarter and have only spent 1.2 million year-to-date as a result.
We see full year CapEx coming in around $3 million which is consistent with last year spend. We continue to have nothing drawn on our $20 million revolver and we do not anticipate utilizing it in 2010.
With that I’d like to open it up the call for questions. Operator?
(Operator instructions) Your first question is from Marci Ryvicker with Wells Fargo.
Marci Ryvicker – Wells Fargo
Thanks. Good morning.
Marci Ryvicker – Wells Fargo
There’s really been no mention of local among most of the broadcasters that have reported so far. So can you tell us what’s happening with the local revenue side, what you saw in the second quarter and what you’re seeing in Q3?
Marci, local was basically flat in the quarter, and in Q3, we’ve seen a little bit of a pick-up there. Now, in CMP, it was positive. So, it was flat in CMI and positive in CMP.
Marci Ryvicker – Wells Fargo
And you gave pacing for August and September for CMI. How is CMP pacing?
CMP is pacing up double-digits for the third quarter.
Marci Ryvicker – Wells Fargo
And then is there any further commentary on CRI?
No, not at this time. Obviously, we’re in dialog with handful of targets and we’ll see how this plays out. So we’ve nothing to announce at this time.
Marci Ryvicker – Wells Fargo
Marci, one thing I would add to that. Local was flat at CMI, we’ve seen pockets of strength, particularly, healthcare, as a result of all the initiatives that we’ve done locally in our market.
Auto was a drag, Marci, in CMI on local. Ex-auto, we were positive in local on CMI. And as I say, if that starts to pick up and we expect to see some more movement in the fall, particularly, if you get in the fall, you got a lot of new model launches and it’s a big selling season and on top of that television is going to be bombarded with political, so it’s going to be difficult, crowding (inaudible) on the auto side in the fall. So we should see that pick up a little bit in September through the end of the year.
Marci Ryvicker – Wells Fargo
(Operator instructions) At this time, sir, there are no questions.
Okay. Well, appreciate everybody jumping on today, and it was overall good report for both businesses, we got a CMP call at noon for lenders. Talk to everybody in 90 days. Thank you very much.
This does conclude the conference call. We thank you for your participation. You may now disconnect.
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