Entercom Communications Corporation (NYSE:ETM)
Q4 2015 Earnings Conference Call
February 11, 2016 10:30 ET
Steve Fisher - Chief Financial Officer and Executive Vice President
David Field - President and Chief Executive Officer
Good morning and welcome to Entercom’s Fourth Quarter 2015 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.
Thank you, operator and good morning everyone and thank you again for joining us for today’s earnings conference call. This call is being recorded. A replay will be available in our company website shortly after the conclusion of today’s call and available by telephone at the replay number noted in our press release this morning.
With our notice of today’s call, we ask that you submit your questions in advance of the call to the e-mail address email@example.com. In addition, I am always available for any follow-up questions, if you would wish to call me directly at 610-660-5647.
Make this note, should the company make any forward-looking statements, such statements are based on current expectations and involve risks and uncertainties. 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. We assume 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 financial information.
So with that, I turn it over to David Field, President and Chief Executive Officer.
Thanks, Steve. Good morning, everyone. Thanks for joining our fourth quarter earnings call I am pleased to report that Entercom ended the year on a very strong note. 2015 was an outstanding year for the company and fourth quarter was the best quarter of the year. Fourth quarter revenues were up 16%, bolstered by our new acquisitions, but the real story is our organic sales growth. Same station revenues were up 2%. And excluding political advertising, they were up 5%. This follows a strong third quarter in which our same station revenues, ex-political, increased 4% and marks the third consecutive quarter of accelerating organic revenue growth for our company.
In addition, during the fourth quarter, adjusted EBITDA increased 7% and free cash flow increased by 9%. I will add that for the second half of 2015, our free cash flow was up 20%. For the full year, Entercom’s revenues were up 8%, while on a same station basis, 2015 revenues were up 2%, 3% ex-political. Adjusted EBITDA was up 3% and free cash flow up 9% again for the year.
Turning away from the numbers for a moment, 2015 was also a year in which we made great progress on a number of important fronts that significantly enhanced our prospects for the future, pleaded our acquisition of Lincoln Financial Media and our station exchange with Bonneville that enabled us to enter the Los Angeles, Miami, Atlanta and San Diego markets and improved our position in Denver. We could not be happier with these acquisitions, that has significantly improved our competitive position and provide us with terrific growth opportunities for the future. We acquired a strong footprint of quality brands with margins well below industry standards and significant upside both top line and bottom line. We have seamlessly integrated these stations driving very significant improvements across these new properties, without missing a beat. And notwithstanding the significant magnitude of these acquisitions, we ended 2015 with lower leverage than 2014.
2015 was also a year of significant organizational improvement as we bolstered our team with a number of highly talented new leaders that continue to drive innovation and enhanced capabilities across the company to bolster our future growth potential. As a result, we began 2016 in what is probably our strongest position ever with an expanded market footprint, a very solid balance sheet, a talented team across the country, enhanced digital and local customer marketing capabilities and an outstanding line of a leading and growing station brands. And our business is off to a great start in 2016, which I will elaborate on in a few moments.
But first, I would like to share some additional color on our fourth quarter results and some recent developments. Fourth quarter local revenues were up mid single-digits. This marks our third straight quarter of mid single-digit local revenue growth. National was also up by low single-digits. October was the weakest month of the quarter due to the difficult political comp. November and December were both up significantly. During fourth quarter, we gained substantial revenue market share across virtually all of our markets. In fact, in fourth quarter, all but four of our markets gained share. I would add that we also gained significant share for 2015 racking up solid gains in all four quarters.
Revenue growth was pretty comparable in both our recently acquired markets and our longer term properties. These strong organic results were driven by solid execution across our organization as our team continued to do a great job focusing on our core strategic operating pillars, building strong local station brands with compelling local personalities, working to make Entercom best local marketing solutions provider, driving business development and sales execution. We continue to make progress on all three fronts. Our best performing markets during the fourth quarter were Boston, Los Angeles, San Francisco and Seattle. Our best performing categories were health and medical, travel, telecom, professional services and home furnishings. And of course, political advertising was down significantly.
Some other color on fourth quarter performance, you may recall that on our November call, I mentioned that we were pacing flat for the quarter or plus 3% ex-political. What is worth noting that we accelerated by 2% from that point forward. Brands are strong and our ratings are growing. In fact, Entercom continues to lead all major groups in Nielsen ratings growth as we head into 2016. While there are many specific situations I could highlight, the important point is that our brands are performing very well across our markets. We also continue to make progress in a number of other areas. We continue to make a big investment in people and talent across the organization. We fundamentally believe in the importance of making Entercom a great place to work that attracts terrific, talented individuals who can thrive in their careers within our company. We just announced three new investments in our people and our culture that our team is excited about.
We are adding an employee stock purchase plan that offers Entercom stock at a small discount to our team plus a student loan payment plan, which provides $1,000 per year to recent college graduates to reduce their outstanding student loans. In addition, we are introducing an employee volunteer plan to enable any interested full-time employees to take a half day each quarter to volunteer for a charitable organization which they are passionate about. While it might be unusual to discuss these efforts on an earnings call, I think it’s an important illustration of our values and culture and what we are doing to distinguish ourselves and ensure that we attract and retain the most talented and energized leaders for today and for our future.
We continue to innovate and invest in new opportunities for growth and value creation. We made a number of improvements to SmartReach Digital, which like most startups suffered from some growing pains in early 2015. We remain very excited about this important addition to our product line and its future. And we continue to explore new and exciting ways to grow our brands and audiences and deepen listener engagement across multiple platforms.
We are also quite bullish on radio and its future and believe that sentiment is starting to turn positive. As we have noted on prior calls, radio’s relative value proposition continues to improve against competitive media. Radio has emerged as the number one Reach medium in the country. It’s the number one medium in 5 a.m. – from 5:00 a.m. to 5 p.m. daily and it is arguably the number one ROI medium in America with a number of outstanding recent studies demonstrating return significantly higher than TV, digital and other media. And despite all of its virtues, radio remains highly undervalued, continuing to garner a small 7% of the ad pie at a time when competitive media are suffering significant audience erosion and disruption. As advertisers become increasingly frustrated with competitors, we think the opportunities for radio to be revalued and grow its share of the pie are significant.
Turning to current business conditions, I am pleased to report that 2016 is off to a great start. First quarter was currently pacing up mid single-digits on a same station basis. We are experiencing strong growth in health and medical, auto, retail and other categories. So far, political advertising is de minimis in first quarter as we would expect, but as typical it should provide a lift as we get farther into the year. While it is way too early to mean much, we are also looking at double-digit pacings growth in second quarter. 2016 should also be a year of expanding margins driven largely by our new acquisitions.
In sum, this was a great quarter and a great year for our company. We are very well positioned for solid growth in 2016 and beyond. A very successful and accretive strategic acquisition, completed with seamless integration, strong organic revenue growth, growing brands and audiences, improving sales execution and significant progress across a number of initiatives to bolster our capabilities and growth potential. We are off to a great start in 2016 and are optimistic about our potential to deliver excellent results for our shareholders in 2016 and the years ahead.
With that, I will turn it over to Steve before we answer your questions.
Thanks, David. And it’s really great to wrap up 2015 with you today with results that beat expectations and highlight recent accomplishments. But better yet, if you just turn to see this positive momentum carrying over the 2016. I have got a little longer remarks to go with a lot of housekeeping today. I will give you some housekeeping color on recent quarter, some operating highlights from the fourth quarter and then I would like to also give you some insight into thinking on our 2016 business model where we have clear visibility.
Last July, we closed in our acquisition of the Lincoln stations. That same time, we traded stations in Denver to Bonneville for a station in Los Angeles, which we began operating under a time brokerage agreement. On November 24, we closed on this exchange and recorded a non-cash gain of approximately $1.5 million from the transaction in the quarter. We received time brokerage fee income of $540,000 in the fourth quarter prior to the closing on this transaction. Similar to the third quarter, we took actions to restructure operations in the new properties, including elimination of certain contracts, unneeded leases and selective staff reductions. This resulted in a restructuring charge of $1.1 million in the fourth quarter. We do not anticipate any further restructuring charges in 2016. We exclude time brokerage fee income, gain from our station trade and the restructuring charge from adjusted EBITDA.
Our fourth quarter core expense growth rate was a little higher than prior quarters due to the timing of certain events and sports rights, but it’s important to note that our full year same-station expense on core stations was only up about 2.5%. For our new Lincoln properties as you heard, we are well on track to achieve the savings originally envisioned. Collectively, the margins on those properties were in the low-teens in July when we began operation. And we have seen steady progress since. With our cost actions and improved sales execution, we will experience solid margin improvements in 2016. And so we bring these assets up to Entercom and the industry norms.
An item impacting our fourth quarter year-over-year results was the July trade of KOSI-FM and other stations in Denver for an exciting station, The Sound, in Los Angeles. Our fourth quarter was uniquely impacted by the summer trade of KOSI in Denver as their prior year results were extraordinarily high in the fall of 2014, primarily due to heavy political during that time. On our prior calls, we indicated this trade resulted in minor near-term broadcast cash flow dilution, but with the rapid acceleration of our Los Angeles results and future potential, we see this trade is being solidly accretive by the second half of this year, which is consistent with our narrative to you over the past few quarters. And as David just indicated, Los Angeles continues to be one of our stronger markets for revenue growth.
Our corporate G&A expense for the quarter was $5.7 million, which was consistent with what I guided you to on our last call. Net interest expense for the fourth quarter was $9.6 million, which includes $800,000 of amortization of non-cash interest related items. Non-cash compensation expense was $1.4 million for the quarter and depreciation and amortization increased to about $2.3 million in the quarter, primarily due to the acquisitions.
Turning to the balance sheet, we had net debt of approximately $478 million net of cash at December 31. This resulted in pro forma leverage at year end of 4.4x as defined in our credit agreement. This represents a nice reduction in leverage and brings us below 4.5x for the first time in many years. Also new this year in our capital structure, we have $27.5 million in convertible preferred, which was issued to Lincoln Financial Group in July as part of the transaction. We currently pay a dividend on the preferred security at the rate of 6% annually. This is shown as a separate line item on our financial statement. The preferred dividend rate will increase in July to an annual rate of 8%. We can call this paper in whole or in part at par.
The convertible preferred does not count as debt for our financial covenant calculations. A related note on this convertible preferred. As a result of certain future conversion features of this security, under accounting rules, we have to include the potential impact of a conversion in our fully diluted share calculation, even though we never expect to leave this small instrument outstanding long enough to ever allow conversion. Therefore, you will see a higher fully diluted share count in our results as compared to prior quarters with the addition of about 1.9 million shares due to this accounting rule.
Looking at our free cash flow generation, you might recall that last quarter I pointed out that there were some timing differences on selected items between the third and fourth quarter. So that way we look at it, our free cash flow growth in the second half of the year accelerated to a healthy 20% growth rate, following our summer transaction, bringing our annual increase to about 9% for the last year. While we don’t provide revenue guidance, as we look to the full year 2016, there are a few line items for which we have better visibility for our – so I will share our thinking to assist you in your modeling. First, on operating expenses, consistent up with the past year or so, we envision low single-digit operating expense growth this year. And for the full year 2016, corporate expenses should be between $22 million and $23 million, non-cash equity compensation should be about $6 million and depreciation and amortization should be about $10 million for the year.
Our capital expenditures were a little light in the fourth quarter as some projects carried over to 2016, plus we have some possible studio relocations this year to save on lease expenses, so we envision CapEx expenses this year of about $9 million. Our convertible preferred coupon will be $413,000 for the first two quarters of the year and then increase to $550,000 per quarter for the last two quarters. Our GAAP tax rate for the year should be about 40%, but could be subject to quarterly fluctuations and as I love to point out on these calls, that is a non-cash tax provision as we do not currently pay income taxes. With over $290 million of net operating loss carry-forwards at the end of last year, plus ongoing tax shields from amortization of intangibles, primarily from recent acquisitions, we should not pay cash taxes for many years.
An update on our capital structure thinking. Yes, we had hoped to refinance our debt facility the last fall, reducing overall interest expense. But then in the fall, the credit markets deteriorated, reducing the return on investment of any opportunistic refinances. Frankly, to-date this year we have seen no significant improvement yet in market conditions. So meanwhile, we continue to pay down debt, lower our leverage ratio to even more attractive rate levels, which we think positions us for even better execution when the credit markets do eventually improve. For your models, I would assume no refinancing, although that could always change for the better, if conditions allow.
Small balance sheet item for your information, we recently completed a deal to sell an AM station in Denver for $3.8 million in cash, which may close this first quarter. This AM station was part of the Lincoln acquisition and not strategic to our Denver portfolio. As I wrap up over the past few years on these February calls, I have provided a look-back to the highlights and accomplishments of the past year. Today instead, I would like to leave you with a few observations for the year ahead before we go to your questions. Entercom clearly has stepped up this past year to be a top performer with revenue growth exceeding our markets and our industry. It’s a tribute to our company focus, our brand strength and our sales execution. The recent expansion of our footprint to four major markets, the accretive transaction, which we financed primarily with internal cash flow, is notable. This transaction will be a nice contributor in 2016 and beyond as we capture margin actions and drive revenue performance.
And while market conditions did not allow for our desired refinancing this fall that opportunity still remains as a possibility for future benefit of our shareholders. With a business model and focused strategy that provides outstanding free cash flow generation, the benefit of our significant NOLs towards future earnings and a potential future reduction in cash interest, coupled with high insider stock ownership, Entercom is and remains an attractive platform for both debt and equity investors.
So with those comments, David will go to quite a few questions which came in this morning. I will first maybe go to the top line, the revenue line, I am going to do a mash-up, if you will allow that term of questions between Marci Ryvicker at Wells Fargo and Jeff Parks, a shareholder. And again, I will take the liberty to kind of mash up both their questions. Of course, station trends were really nice in the fourth quarter, particularly what drove those results and then let me add on a related question, which came from several shareholders noting what’s driving the outperformance versus our radio peers.
Yes, what’s nice is that if you take a look at the body of work over the course of 2015, there is a steady pattern of improvement quarter to quarter as we continue to accelerate through the year. And again, as you look at our pacings to go into 2016, we see great strength going forward. And I think it’s because – and we have talked about this. It’s a strategic focus on certain core principles that we are executing really well against, namely, building great local radio brands with great local content and achieve solid ratings growth build-out a strong local marketing solutions portfolio to work with our customers. And it’s also about people, investing in people and bringing in talented folks who can thrive in Entercom in a culture in which they are motivated and energized. And I think we are doing all those things well and that’s enabling us to achieve the results we have been achieving and which again we feel good about 2016 to continue.
Let me stay on that theme and do a follow-up that I think fits well and this comes from Davis Hebert also at Wells Fargo. How sustainable do you envision that growth – that differentiation versus peers into the future?
We feel very good about the sustainability of continuing to put up solid growth numbers, and we – that’s not a – you don’t say that based on hope, we work very hard to building a pipeline of drivers and development opportunities to enable us to seed our future. And it goes to a number of different things within the organization, but primarily our core radio business and the opportunities for growth and development we see across our portfolio and capitalize on our ratings growth and brand improvements, it’s SmartReach Digital, it’s our events business, and it’s also the macro question of being getting better at business development on both the local and national level taking advantage of the competitive weakness we see in so many of our media competitors. And radio has just such a strong relative value proposition today that it creates a very compelling opportunity for us to drive share shift and shift the media mix to provide higher levels of revenue for Entercom and frankly our radio peers all share that opportunity as well. So, we feel very good in a number of areas about sustainability of solid revenue growth going forward. And while that may not fit the convenient narrative of the past, I think if you mark-to-market on where we are as a company and where the industry is today relative to other media, I think there is really an interesting opportunity here going forward.
I will direct the next question to myself. It’s a housekeeping question that came in asking for color on political revenues in the fourth quarter. This year, fourth quarter 2015 was $600,000 versus prior year, 2014, $3.9 million, so about a $3.3 million lift – or excuse me, negative comp year-over-year. I will stay on the revenue theme from Kyle Evans at Stephens Company. David, what do you think is the political outlook for 2016?
Yes, I mean, we are – I think it’s pretty consistent with what we have seen in the past in political years, which would yield about a $7 million or $8 million level with political for Entercom in 2016. Certainly, the results in – over the course of Iowa and New Hampshire bode well for this to be a vigorous, robust competition on the Presidential level. And we will see the normal with litany of state and local races across the country as well. So that would be our expectation at this point.
I will do a balance sheet question. So, I guess I will direct this to myself. This comes from Aaron Watts at Deutsche Bank. They are asking for any color on the breakdown of our debt outstanding. So, let me walk you through the components. And this is all year end December 31 we had about $26 million outstanding against our revolver, $26 million against the revolver. Term loan B outstanding $243 million, 2-4-3 and net bonds outstanding of $218 million, 2-1-8 and we had cash on the balance sheet at the end of the year of $9 million. So, some color on that. Maybe I will stay with that. And inbound from a shareholder noting our revolver expires this fall, you weren’t unable to refinance that’s fall 2016. Entercom did not refinance last fall. What are your thoughts on the revolver?
Now, I will put on the CFO hat. Yes, we are in fine shape obviously with great free cash flow. You have heard the robustness of the model. We are obviously having several conversations on various opportunities to extend or replace our revolver are connected somewhat to how should we think about the timing of refinancing given the unknown market conditions. But clearly, there is tremendous free cash flow generation to pay down the revolver outstanding as we have been doing since December 31.
Let me – I guess while I am staying on a cash flow item, I did get a good follow-up question from Aaron Watts also with Deutsche Bank on thinking about CapEx. I did note in my remarks earlier that we think 2016 will be about $9 million, which is a little higher than the norm as we envision, one, some carryover projects from 2015. And also we have some possible office relocations to capture some return on investment in lease costs though it could be $9 million. I think as we envision beyond 2016, what’s important to know I think that does fall off to a normalized run rate, we think for maintenance CapEx of somewhere near – in the $4 million to $5 million, $4 million to $5 million for 2017 and beyond, obviously somewhat lumpy. David, let me go back on this continuing theme of free cash flow. And I am going to use this is a mash-up that came from several different parties. How should shareholders think about future free cash flow and return of cash flow to shareholders?
Look, we have communicated on past calls that we would consider returning cash to shareholders when our leverage approached 4.5x. We have now dropped below that level and expect to reduce our leverage further by the end of this quarter. So we are clearly in the zone where a prudent return of cash to our shareholders could make some sense. I would expect our Board of Directors to consider this option in the months ahead as we monitor ongoing business trends and also continue to further reduce our leverage.
Now saying that – having said that, let’s go back to the question of dividends versus buyback and how we would think about that. And as always, we are open-minded about that option based upon the facts and circumstances. As you would expect, we are weighing a couple of factors there. Number one, our stock we believe is highly undervalued and trades that are ridiculously high free cash flow yield. And we think that creates opportunities. On the other hand, we also recognize that our float is smaller than we would like it to be and so buying back more stock would only exacerbated that. And therefore, that needs to be factored in as well, plus of course the desirability of the dividend that many shareholders have expressed. So we will consider all those factors. But again, I would expect our Board to consider the option here in the months ahead.
Let me stay on the theme and this will be the last question. And again, before I do the last question, let me again note, if there any follow-up questions, my number is 610-660-5647. So let’s stay on that theme of future free cash flow, David given the reduced leverage and tremendous performance of the company, do you anticipate further acquisitions in 2016?
So look again, I always like to look at our track record when answering this question. And I think as everybody has seen over the years, we have been very particular in terms of the deals that we have done and the deals we haven’t done. And we are I think, perhaps created as much shareholder value in the deals that we have not and the deals we have done. So we are thoughtful about that and we maintain the same basic criteria. Deal has to make strategic sense in terms of assets we would be adding. It needs to be accretive and create value for our shareholders. And it also needs to be sensitive to our balance sheet and can impair our balance sheet. Lincoln Financial obviously, we thought was a terrific opportunity that met all that criteria and as we have expressed, we are delighted about that. There aren’t a lot of other opportunities out there right that could fit that screen and we are perfectly comfortable adding no additional acquisitions here in the years ahead and love our footprint and the strength we have in the markets we are in. So we will continue to be opportunistic. And if something comes along that fits the criteria, we will take a serious look at it. But we feel no compulsion to do it. And in the meantime, we just continue to crank out great free cash flow that gives us the opportunity to have really interesting conversations like this one knowing that we will continue to de-lever this company from what is already a very strong position with our balance sheet. So we are in a great place.
I think with that, we will wrap up. We are done. Again that was a great quarter, off to a great start this year and looking forward to reporting back to everyone here in another three months. Thanks.
That concludes today’s conference. Thank you for your participation. You may disconnect at this time.
[No Q&A session for this event]
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