Lew Dickey – Chairman, President and CEO
J.P. Hannan – CFO, SVP and Treasurer
Marci Ryvicker – Wells Fargo
Cumulus Media, Inc. (CMLS) Q3 2010 Earnings Conference Call November 1, 2010 4:30 PM ET
Hello and welcome to the Cumulus Media third 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.
Thank you operator and good afternoon everybody. I appreciate everybody taking the time to join us today for our third quarter update and also joining with me today is our CFO J.P. Hannan.
Today we are going to update you on our third quarter performance and then briefly discuss the revenue outlook and pacing for the fourth quarter and share a little bit of an update on CMP as well.
Starting with our Q3 results in CMI, our net revenue for all markets increased 4% to $67.5 million. We continue to see the sequential improvements in national business and key local revenue categories such as auto and healthcare, and eating and drinking establishments that we have an experience in all year.
Political advertising this year was really more backloaded than in the past, certainly than in 2008, but it should end up basically flat with the last election cycle of two years ago in 2008. We will talk more about that in greater detail.
On the cost side, our station operating expenses increased a little less than 1% in the third quarter over prior year and year-to-date they are down 1% despite increased sales levels. Our management systems are directing scores of new sellers generating thousands of new advertisers across our platform, while keeping our cost of sales in check. This ongoing innovation of the radio business model and use of our technology platform to drive increased efficiencies continues to fuel our industry-leading EBITDA growth, both CMI and CMP.
Our LTM EBITDA margins improved again this quarter by 100 basis points to 31%. Our low cost of capital and these expanding margins continue to enable us to generate considerable free cash flow to accelerate our deleveraging program. We have now generated more than $36 million of free cash year-to-date as of 9/30 and paid down more than $30 million of debt since January. This is in addition to the $60 million of debt we paid down in 2009 as of 9/30.
As a result, our net leverage has dropped to 7.3 times by the end of the quarter and will be in the high 6s by the end of this month, but the end of October. Given this progress, we remain highly confident that we will be in total compliance with the terms of our credit agreement when our leverage covenants resume at 03/31 of next year.
More importantly that our financings are largely behind us until June of 2014. Further, our cost of capital continues to decline with the anticipated callback of 50 bips of rate, again in February of 2011. You may recall, we already called back 25 basis points last quarter. Additionally, we will see the roll-off of our 393 LIBOR hedge on $400 million of term loan in March of next year. These events will all contribute to an even more robust conversion of our EBITDA into free cash flow in 2011 to continue to do accelerate our deleveraging.
Now looking ahead, October revenue finished up at approximately 14%, and November and December, pacing up 15% and 7% respectively. I mentioned last quarter political advertising normally does not ramp up for the general election until after Labor Day. This cycle however, we saw it place even later than that with the bulk of it not really occurring until October, which ended up skewing our Q3 pacing a little bit lower.
Based on what we are seeing in Q4 that we will experience the full year political revenue that meets or slightly exceeds our 2008 and certainly right in line for our forecast for the year on political.
Now let me briefly report on our performance at Cumulus Media Partners or CMP. CMP also continues to outperform the industry with Q3 revenue growth at 6% and our EBITDA for the quarter at CMP was up 10%. CMP’s trailing 12-month EBITDA margin grew again as of September 30, and it’s now just about 43%. Again, that’s all in, including the $4 million of annual fees paid to CMI or Cumulus Media, Inc. for its management services.
For the fourth quarter, CMP is pacing up or finished up, excuse me, 13% in October and it is pacing up 16% in November and 13% in December. CMP currently has $64 million of cash in the bank and will repay the $50 million drawn on its revolver by year’s end. Similar to CMI, CMP’s financings are largely behind us until the maturity of its term loan at 2013. It’s the bank that has priced an L Plus 200 and again, it’s low cost of capital and also has a $200 million hedge that rolls off early next year and it’s low cost of capital and extremely high EBITDA margins enabled to generate tremendous free cash flow, which we will continue to use to delever the balance sheet.
With that update, I am going to turn it over to J.P., who will provide some additional financial information, then we will open it up, of course, for questions. J.P.?
Thank you, Lew. Good afternoon everyone. I am just going to take a few minutes to touch on a few key metrics and observations before we open it up for questions. In the revenue line, there are a couple of highlights I thought worth nothing. We are now seeing eight straight months of overall revenue growth this year. National and political have largely driven this growth year-to-date, which we laid out in our 10-K at the beginning of the year. We do not see this year being an overly robust year outside of those major categories. Going forward though, our local initiatives are really bearing fruit and setting us up nicely for 2011 and beyond.
We mentioned our sales systems are generating a tremendous amount of new local demand. In the past two months, we generated a couple of thousand new accounts nationwide. The result of this demand and the strict pricing disciplines deployed, we continue to see an uptick in our rates across all markets. In fact, our average unit rates across the platform have now seen six straight months of consecutive growth.
On the expense side, a very little cost escalation from the realignment we performed last year. We continue to find efficiencies across the platform. On total, our station operating expenses are down year-to-date at 9/30 and we are expected it to finish the year down overall by 1% to 2%. Corporate expenses are expected to finish the year down by even larger margin, much of this directly attributable to the technology platform we rolled out early last year.
On our balance sheet, capital expenditures in the quarter were $937,000. It should bring us comfortably under the $3 million guidance we gave earlier in the year. This will match our CapEx spend last year as well.
We made an excess cash flow payment to lenders in July of $7.6 million based on our Q2 performance. Just last week after the quarter ended, we made our Q3 excess cash flow payment of $11.2 million. This brings total outstanding debt today to just over $595 million. As we have touched on based on recent performance and its lower debt level, our net leverage at the end of October should be in the high six times range. This is relevant as we exit our covenant expansion period next spring. We are now comfortably inside of that 6.5 hurdle at March 31, 2011. That 6.5 covenant stays constant thereafter until the term loan matures in 2014.
In the meantime our main leverage covenant is currently a minimum trailing 12-month EBITDA requirement of $64 million. This increases to $66 million next quarter. However, this metric, we have a comfortable cushion of more than $17.7 million right now, finished Q3 at $81.7 million.
Current interest rate on the term loan is LIBOR plus 375 basis points. Given our performance and subsequently leveled excess cash flow payments, we are making the lenders, we are now about halfway to our next callback threshold. We touched on, should happen after we make our Q4 payment in early 2011.
For your cash modeling going forward, thereafter we revert to our annual excess cash flow payment only when we exit that covenant suspension period in March.
So with that we can open up the call for questions.
(Operator Instructions) Your first question comes from the line of Marci Ryvicker.
Marci Ryvicker – Wells Fargo
First I wanted to drill down on Q3, then talk about Q4. So first, can you talk about performance by month in the third quarter? And then also, any commentary on local would be great. It was on the press release you had growth in national, political, and Internet but it didn’t say anything about local. So that’s the first thing. And then secondly, in terms of Q4, it sounds like October and November have very comparable performance for both CMP and CMI, but December is different. So just wanted to know what is going on there. Is it due to the exposure of national versus local comps, any color would be great.
I am going to take them in a reverse order. The difference in December, it’s pretty early at this stage of the game. It’s very volatile, so pacing can fluctuate. So I really wouldn’t read too much into it other than there is little more strength in national, which has been the case all year long in the larger market. So short of that, I think it’s a little bit premature to try and reading anything into certainly by category other than revenue typing, national being a little bit stronger in the month of December. Otherwise they are lining up pretty well, both businesses in the fourth quarter.
In terms of the quarter, I think the high watermark for the month, or for the quarter for us was the month of August and then September was the low point. We just didn’t see political come in like we had anticipated. And all the months that J.P. said were positive but August was the top performing month but they are all within a few hundred basis points of each other with September slightly underperforming August and July.
Marci Ryvicker – Wells Fargo
Then what about local?
Local was pretty much flat for the quarter, which is not atypical from what we thought – our initiatives in terms of driving local business and pushing rate across our platform have been such that we have turned down business and there has been some local agency business that we have not taken as a result of – trying to push our rates. And as J.P. mentioned, our rates have continued to grow. We are working hard to exhibit rate leadership in our markets, and that has come in in a bit of cost as we work with our staffs respectively across the board to drive higher rate and price for value, not for share here. So but local was just about flatter or within 50 basis points being flat for the quarter and then the rest of the growth came in national.
Marci Ryvicker – Wells Fargo
Could you say the same thing for CMP and CMI in terms of local versus national?
Local was slightly more positive in CMP than it was for CMI.
Marci Ryvicker – Wells Fargo
Just one last question. Did you say that you are seeing new advertisers?
We are. We have a disciplined program as we are hiring a lot of sellers who have discipline – just one program to increase coverage across the board and penetrate categories. And we talked about this in the past like healthcare and education and legal or professional services and recruitment. And so, this push on – within our organization to do so has lent to some. It’s starting to bear some fruit in those – and particularly as we see in the healthcare category, which has been our strongest individual growth category, obviously expenditures-political, it’s been our strongest individual growth category across the board in both CMI and CMP.
(Operator Instructions) And there are no further questions at this time.
Our system had showed that there were other questions in queue but I guess they are not coming up. All right, well, with that we appreciate everybody’s time today and CMP call will follow at 5:15 PM. Thank you very much and we will provide an update in 90 days. Have a good day.
Thank you. This does conlude today’s conference call. You may now disconnect.
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