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Cumulus Media Inc. (NASDAQ:CMLS)

Q2 2008 Earnings Call

August 11, 2008 4:30 pm ET

Executives

Lewis W. Dickey, Jr. - Chairman, President and Chief Executive Officer

Martin R. Gausvik - Executive Vice President, Chief Financial Officer and Treasurer

Analysts

Marci Ryvicker - Wachovia Capital Markets

Bishop Cheen - Wachovia Capital Markets

Leland Westerfield - BMO Capital Markets

Jim Boyle - CL King

Jim Goss - Barrington Research

Operator

Welcome to the Cumulus Media Inc. second quarter earnings release conference call. (Operator Instructions)

Please note that certain statements in today’s press release and discussed on this call may constitute forward-looking statements under the Federal Securities Laws. These statements are based on management’s current assessments and assumptions and are subject to a met 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 Lewis Dickey, Chairman and CEO of Cumulus Media.

Lewis W. Dickey, Jr.

. I appreciate your taking time today to receive an update on our performance. I’m joined by our CFO, Marty Gausvik. It’s nice to be interacting with all of you once again. As you know, we haven’t held a conference call since May 2007 due to our previously announced filed transaction. Quite a bit has changed since then, and there are many challenges for advertising-based businesses today. Though there are, I believe, even more opportunities for our company and for our medium as the competitive landscape continues to evolve. Digital age is impacting virtually every aspect of our lives and causing disruption and disintermediation in dozens of industries including media in general and in-home media in particular. Now, as an out-of-home medium, radio is relatively insulated of this fragmentation when compared to newspaper, yellow pages, and even local television. Till today, 94 out of every 100 Americans listen to fully local radio on a weekly basis. Though we’ve seen some erosion in total time spent with our medium due to this intense fragmentation, it is just a fraction of the impact that digital convergences had on traditional media. Consequently, radio’s value proposition to the advertiser in terms of reach, efficacy, and efficiency is stronger than ever before. As a result, I’m very excited about our company’s prospects as we continue to expand and strengthen our local client relationships. We’re working hard to leverage those important relationships by developing compelling new products designed to increase our share of the marketing dollars.

Now, this afternoon, we’re going to update you on our second quarter performance and provide guidance for the third quarter.

Starting with Q2 results, our pro forma cash revenue for all 58 markets was $79.8 million. That represents a 3.1% decrease over the second quarter of 2007. On the top-line in Q2, we had 9 markets which closed at double-digit revenue increases and two of our markets which grew their revenue in excess of 20%. Our strongest categories for the quarter in terms of year-over-year growth were telecommunications, insurance, healthcare, and entertainment. Weaker categories for the quarter were not surprisingly automotive, mortgage brokers, and construction and building.

And moving down the income statement, our Q2 pro forma EBITDA was down 7.2% to $27.4 million. Looking ahead, we’re currently pacing down 2.8% for Q3. However, to be on the safe side, we’re guiding for our Q3 revenues to be down 3% to 4%, and we do expect our operating expenses to be down 1.5% to 2%.

Now, I’m going to hand it off to Marty who is going to provide you the financial overview and then we’ll open it up for Q&A.

Martin R. Gausvik

Pro forma net cash revenues for the quarter were down 3.1%. Pro forma adjusted EBITDA decreased 7.2% finishing the quarter at $27.4 million. Actual station operating expenses decreased by 1.1% during the quarter, and on a pro forma basis, decreased by 0.5% to $52.9 million. We expect station operating expenses to decline by 1.5% to 2% during the third quarter. Over the quarter total corporate overhead excluding non-cash stock compensation expense decreased by approximately $0.8 million to $3.2 million. Primary factor contributing to the decrease was a reduction in professional fees and tiling of certain other costs. For Q3 we expect approximately $4 million in corporate overhead. Cash interest expense decreased by $3.3 million during the quarter to $9.2 million due to a low average cost of bank debt and decreased levels of outstanding debt. We expect the average interest rate on total outstanding debt for Q3 to approximate 5%.

Moving down the P&L, we continue to provide a full valuation allowance for NOLs arising during the quarter resulting in a tax provision of $8.1 million, all of which is non-cash. Moving on to free-cash flow, for Q2 we produced $17.5 million of free-cash flow compared to $16.9 million generated during the prior year. Free-cash flow is defined as EBITDA less net interest expense, less LMA fees, less maintenance CapEx, and less cash taxes. For those of you who calculate free-cash flow per share, our weighted average fully diluted share declined by 1.1 million shares to 43.1 million shares when compared to the prior year.

Moving on to CapEx, CapEx was $1.2 million for the quarter and was comprised of $0.3 million of maintenance CapEx and $0.9 million of facilities related projects. We expect CapEx to finish the year at approximately $6 to $7 million.

Moving onto the balance sheet, net leverage currently stands at 6.1 times while gross leverage is 7.23 times against the covenant of 7.75 times. Fixed charge coverage was 1.76:1 against the covenant of 1.1:1. In Q2 we also announced a share repurchase program of up to $75 million, which as of August 8th the company had repurchased 1.56 million shares at an average price of $3.13 per share leaving the outstanding share balance of approximately $42.5 million. One other item of note, during the quarter the company received a termination fee of $15 million related to the cancelled merger transaction, a one-time fee was recorded as a component of other income.

With that, I’d like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Marci Ryvicker with Wachovia Capital Markets.

Marci Ryvicker - Wachovia Capital Markets

Can you give us the normalized EPS in the quarter if you were to exclude the termination fee and the associated tax along with that, and then can you talk about for the third quarter how pacings are by month?

Lewis W. Dickey, Jr.

Marci, we don’t give the information out on a monthly basis, but suffice it to say that right now it’s more of a barbell with July and September looking stronger than August, obviously due to the Olympics and it’s not really anything which comes as a big surprise, it is going to be the softest month of the quarter.

Marci Ryvicker - Wachovia Capital Markets

Can you also talk about your interactive initiatives as we haven’t heard from you guys in a while, just wanted to know what you’re doing there.

Lewis W. Dickey, Jr.

Well as I mentioned in the prepared remarks, Marci, we’re working on developing new products that can help us leverage these existing relationships with our clients, and we’re doing a lot of incubating in a number of select markets right now, and so, when the time is right and we’re ready to roll it out company-wide, we’ll be talking more about it. We’ve got some exciting things though and we’re very optimistic about our ability to continue to create more products as I mentioned earlier that are going to give us an opportunity to leverage those relationships.

Martin R. Gausvik

Excluding that $15 million in tax affecting it, the normalized EPS would be $0.35. As you know, we had a big jump. One of the other items that had an impact was our interest expense as you can see; our derivatives, we have to mark that to market every quarter. Last quarter we had a huge, almost $10 or $11 million charge associated with that; this quarter we have a positive of about $11 million on our mark to market on our derivatives; so, that also kind of played heavily in the EPS for the quarter.

Operator

The next question comes from Bishop Cheen with Wachovia Capital Markets.

Bishop Cheen - Wachovia Capital Markets

You often give us a little color on CMP Media partners on this call and I’m wondering if you’d do that.

Lewis W. Dickey, Jr.

Bishop we’re going to be filing our Q here by the end of the week on CMP, and so, that’s the time Marty can take questions offline, yet to file the Q.

Martin R. Gausvik

At least we’re going to make sure that information has been fully disseminated.

Operator

We have a question from Leland Westerfield with BMO Capital Markets.

Leland Westerfield - BMO Capital Markets

Actually three questions from me; first one if you can add some color not on the media partners but rather on the core Cumulus properties, about performance during the quarter relative to market size and more specifically relative to the source where revenue is being generated, either agency driven or direct sales with your sales force. Other radio operators have reported some pretty meaningful differences in terms of the pricing the revenue trends relative to the sourcing of the revenue, and so wondering if you had an experience there you might be able to share. Secondly, your RSPM measurement systems, if you can update us; and thirdly, if you can remind me about your national rep contracts and when this comes around for anniversary and whether there are still guaranteed minimums on that contract.

Martin R. Gausvik

Le, taking those in reverse order; the national rep contract, we signed a 5-year deal that has several years left to go on, so there’s nothing coming up in terms of an anniversary there. Guarantees we’ve long since passed the …

Lewis W. Dickey, Jr.

Guarantees were basically, we had averaged the guarantees throughout the life of the contract, so there are no peaks and valleys really on the guarantees there; that’s the way we account for them; I don’t know that everyone else accounts for them in that fashion, but whatever guarantees that occur, those were averaged out through the life of the contract, and actually I think we signed this deal 3 years ago, I think we have about 7 remaining.

Leland Westerfield - BMO Capital Markets

That was particularly helpful, thank you and the others?

Lewis W. Dickey, Jr.

And on the RSP, probably in the next 30 days, we should have some more news there. We’re talking to, we’re down a couple people and we’re having serious discussions with them, so we’ll have a better sense of where we are within the next 30 days on that, and we’ll be communicating with the street at that time. And then in terms of various categories of revenue, obviously our local revenue outperformed our national revenue, this again should be no surprise; national was much softer during the quarter than was local, and we don’t have Miller Capital in these markets, we cancelled that at the beginning of the year; don’t really have any color for you in terms of how we’re doing vis-à-vis our competitors. We know in the CMP markets, year-to-date we are slightly ahead of our markets when we take a look at the six markets in total that have Miller Capital in those markets; we really don’t have it in any other markets of CMLS with the exception of Nashville.

Operator

And the next question comes from Jim Boyle with CL King.

Jim Boyle - CL King

Could you give us some color perhaps on how this summer is compared to even just 6 months ago in terms of sell-out ratio, average cost, or average add-weight per spot?

Lewis W. Dickey, Jr.

Jim, the rates are challenging particularly on the national side. We’re seeing a reduction in rates across the board. Some of this is due to shorter lying spots that are being sold and being priced accordingly and others is due just I think to a general lack of demand on the national side. It is, I would say that, if you take a look at our cash revenue being down 3.1%, that was probably a fairly even mix of lower number of units sold and lower pricing across the board in our markets, in our stations in particular which are more dependent upon national business than the rest of the group is where we suffered a greater rate decline due to the pricing on national business. So, that’s been the biggest problem, but when you think about, say the, auto business, which auto advertises about $24-billion category, where at least it was back in 2004 and last year was about $18 billion, this year it is going to be $15 billion; and in 2004 at the peak, I think we sold about 17 million plus cars domestically, and this year it’s going to be in the 12.5 to 13 million car range. That category has come down pretty demonstrably and even year-over-year it’s down high double digits; it’s 17%, 18% year-over-year total auto advertising spend, and at Cumulus we believe for the year we’re going to be off less than 5% in auto, which is our single biggest category. And remember our revenue was up 3% in the first quarter, and so, we’re hanging in there pretty well and our guys are doing on the local level a pretty good job of again keeping those relationships we have with those local dealers who are just simply large retailers in our markets and making sure that we’re able to command our fair share of the spend. That’s why I mentioned earlier that I think when you look at the digital convergence and how it’s impacting all media, we really do have a story to tell here and it’s been one that, when you look at it in a vacuum, it’s easy to malign the space, but when you look at it in context of all media, in-home and out of home, and you look at the loss of consumption of all media, the fragmentation of it I should say, when you compare that to radio, we really are in pretty good shape vis-à-vis the rest of the competitors; and so, with auto spend coming down that much across the board, it’s something that I think we’re doing a pretty good job of competing for particularly in our size markets and we look for that trend to continue through the rest of this year for us to be down less than 5% in auto even though the category will be down closer to 20.

Jim Boyle - CL King

And with business being placed even later than ever before, are you also seeing shorter campaigns typically bought?

Lewis W. Dickey, Jr.

Yeah, you are, simply because people think they can buy shorter; the analogy that I always use with our guys and have used it in industry gatherings you may have heard it is, if we went to the movie theater and were able to gain half price admission to a movie, if we showed up after the start of the movie, who would be there for the trailers, and so it’s the same sort of situation here. It’s been the behavior of the industry to allow steep discounting once in-month, and therefore it’s encouraged everybody to delay bookings. So, I think some of this is behavioral, that is in essence, the catalyst has been on our end, and so, it just preserves optionality for the buyer in that case; so, that’s just something that we have done a very good job of as an industry and as we do a better job of firming our pricing and doing a better job of selling value rather than using price stimulated demand, I think some of these things are going to naturally fall away.

Jim Boyle - CL King

And what is your sell-out ratio now compared to either 6 or 12 months ago?

Lewis W. Dickey, Jr.

Our sell-out ratio would be fairly similar to where it was. If anything, down, it’s less than 5% down, and it really varies by market. In some of our markets, a lot of it, Jim, is really a function of how well we’re executing our own initiatives on a local level, and in markets where we’re executing in the upper quartile of our company, the sell-out is actually greater than where it was a year ago, and as I mentioned, we’ve got several markets, 10 markets alone I guess, that were in the double-digit club in the last quarter, and we expect to have more than that in the double-digit club in the third quarter, so meaning up more than 10%.

Jim Boyle - CL King

So, maybe on average might be an 80% sell-out ratio now?

Lewis W. Dickey, Jr.

Well, again if you’re talking about Monday-Sunday 6 a.m. to midnight, you really got to look at it in terms of the prime demand day part. If you’re looking at Monday to Friday 6 a.m. to 7 p.m., it’s higher than 80%; even if you include Saturdays, mid-days, yes it is higher than 80%.

Jim Boyle - CL King

Well, that’s historically been the case. Final question, given the very challenge in the economy, given auto, can you see the radio industry pulling out of the negatives in the near to mid term?

Lewis W. Dickey, Jr.

I think we’re the last company to go this quarter to have our conference call, and based on the guidance that I have seen in the schedule prepared that has all of the other companies, I think it’s going to be pretty tough in Q3 based on where everybody is guiding, it looks like it’s going to be worse in Q3 than it was in Q2 based on the guidance that we’ve seen. Q4, I think it’s too early to tell. I don’t know what kind of a lift the industry is going to get from political, still a little early to try to forecast that. So, it’s hard to say, I know Q3 is going to be off than Q2, and so we’ll have to see where it goes, but I definitely think on balance it’s going to be very difficult to have a positive year based on where you’re seeing Q2 and Q3 guidance and Q1 already being in the bag. So, I think this year is going to be difficult and then it is going to be a question of do we start to see some economic rebound in 2009 or what point do we start to see some economic rebound, and I certainly don’t want to sit here and make that forecast today.

Jim Boyle - CL King

With an economic rebound, if it occurred in ’09, but auto is still cutting way back on the spending, could radio pull into the positives even in that situation?

Lewis W. Dickey, Jr.

Jim, it depends, you have to have, it’s pretty difficult when you have housing and auto that are both conspiring against you, and between mortgage brokers and auto it’s a significant piece of your revenue; so, if they’re off as dramatically as they have been, financial services and auto, which is auto and auto-related industries, it’s pretty tough for any add-based business to show real growth. We’re optimistic that we’re going to start to see a bottom here at some point in the housing market and the credit market again has been conspiring against this whole turn around as well; so, if we start to see some sort of ease in credit, housing starts to bottom, people realize there truly is value in this collateral there and they’re able to start lending against it, then you might start to see that category of advertising come back, and as I mentioned, when you take a look at auto and construction and financial services meaning mortgage brokers, it was a pretty tough quarter, pretty tough headwinds that we saw for it to be down 3.1%. I take my hat off to our team, we’re working very hard to, as I mentioned, at the outset to expand the business that we are doing business with and develop new relationships and strengthen the ones that we have; so, it’s offset an awful lot of those headwinds which happened, but it’s hard for me to sit here and speak for the industry. We’re working very hard to run our company and we know that the key to our success into showing real year-over-year growth is going to be increasing the number of businesses and industries that we’re able to do business with and help the market. So, that’s one of the things that our local sales staff is committed to, and as you know, we’ve been extremely focused and have had a very good track record in local sales growth for a number of years now and that’s really at the root of it.

Operator

The next question comes from Jim Goss with Barrington Research.

Jim Goss - Barrington Research

I was wondering first what your current share of national versus local is, and if there are any particular large accounts, I think Home Depot used to be a fairly big swing factor; are there any like that right now?

Lewis W. Dickey, Jr.

We are about in the 89 range, give or take a few bits or 89:11 on our local-national ratio which has come down quite a bit from where it was almost twice that much at one point, certainly in the high teens. In terms of Home Depot, Home Depot as you probably know, has shifted a great portion of their ad budget into network radio, and though we do get some spot buys from Home Depot, it certainly is not what it was in the past and their rates are certainly not what they were in the past with us. So, does anybody replace that, while you can see that some of the largest national advertisers, Giko is one of the largest out there, and that certainly has been a strong client, they’ve used radio very well and they’ve been very smart radio advertiser and advertiser affiliate, but have used our medium extremely well, talking to obviously drivers as they are in their car about car insurance and I think they’re now the third largest auto insurer, and so, they’ve grown their business nicely and they’ve been very effective users of our medium; that’s a very important national advertiser today.

Jim Goss - Barrington Research

A couple of others; you mentioned $0.35 as the adjusted EPS number and then I think you mentioned the $11 million; does this include or exclude the $0.35 before $11 million has to be taken out too?

Martin R. Gausvik

Yes $11 million, there are no taxes on that $11 million, so you just kind of divide that by the 43 million shares outstanding.

Jim Goss - Barrington Research

And then maybe if either of you could talk about the market for stations right now and whether it depends on size of market or strategic value either on the buying or selling side, what are you seeing right now?

Lewis W. Dickey, Jr.

We don’t have anything for sale right now, so I can’t comment on that, but in terms of the M&A market out there today, multiples have come down principally because of the lack of financing available, and a year ago, 18 months ago, 2 years ago, you were seeing deals, look at the leverage on the clear channel buyer; you were seeing deals where leverage could be pushed into the high single digit and you had senior leverage. We have a senior leverage covenant in our credit agreement that was up to 8.5 times for whole bank debt, and so that is not possible today, and so you’re looking at leverage that’s virtually half that today that’s available, that means a much bigger slug of equity is required, and obviously in a challenging growth environment, it puts a lot of pressure on returns. So, it’s very difficult to get the kinds of returns that private equity is looking for to meet their hurdle race, so that’s why you’re not seeing a lot of private equity investment right now in our space or investment, and a lot of the strategics that are out there today, everybody has got a modicum of leverage here that with declining EBITA they’re concerned about step-downs and technical defaults on covenants, so, you’re not seeing a lot of strategics stepping up and writing big checks to do acquisitions either, and certainly, people don’t like to issue equity in this environment. We have been buying back our own shares as Marty mentioned to you, we’ve bought back 1.5 million shares at $3.13 a share, and you do the math, you saw we did $17.5 million of free-cash flow in second quarter and annualized even with a smaller Q1, and you’re talking about a business that’s throwing off $60 million of cash and with the share count at 42 change and shrinking, so, you’ve got an essence close to $1.50 share of free cash this business is generating and we’ve been buying stock back around 3 bucks; that math works out pretty well; that’s a 50% free-cash flow yield and we’ll continue to make those investments all day long, and that’s why we’ve been buying and that’s why my family has been purchasing stock as has been disclosed; so we think that the most attractive thing that we can do with our capital right now when our share price is where it is, is to buy back our stock, and so that’s why we’ve been very focused on that and have not been competitive for acquisitions at the moment.

Operator

It appears that’s all the questions we have time for.

Lewis W. Dickey, Jr.

Again I want to thank everybody for joining us today. It’s nice to be back with you and we look forward to talking with you again in 90 days.

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Source: Cumulus Media Inc. Q2 2008 Earnings Call Transcript
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