Emmis Communications Corp (OTC:EMMS) Q1 2020 Earnings Conference Call July 11, 2019 9:00 AM ET
Kate Snedeker - Media & IR Contact
Jeffrey Smulyan - Chairman & CEO
Ryan Hornaday - EVP, CFO & Treasurer
Conference Call Participants
Welcome and thank you all for standing by. [Operator Instructions]. This call is being recorded. If you have any objections, you may disconnect at this time.
I will now turn the call over to your host, Kate at Emmis, you may begin.
Good morning. Thank you, and thank you for joining us for today's Emmis Communications conference call regarding first quarter earnings. I want to extend a special welcome to all the Emmis' employees joining us and listening in this morning. We'll begin in just a moment with opening comments from Emmis' Chairman and CEO, Jeff Smulyan; and Ryan Hornaday, EVP, CFO and Treasurer. After opening comments from Jeff and Ryan, we'll respond to the questions that have been submitted via e-mail to email@example.com. A playback of the call will be available for the next week by dialing 402-998-0454.
This conference call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to Emmis' public filings with the SEC for more information on the various risks and uncertainties. Additional disclosure related to non-GAAP financial measures have been posted under the Investors tab of our website, emmis.com.
Jeff, we're ready to begin.
Kate, thanks. This really has been a remarkable quarter. A lot of the quarter numbers we sort of previewed in our call couple of months ago, Q1, just for housekeeping, pro forma radio revenues per Miller Kaplan were up 3%, matching our markets that were also up 3%, but what's really the most compelling story is the business that we've now seen since that call. Q2 started strong with a record-setting Summer Jam. Our concert in New York, on June 2, those were the highest ticket revenues we've had in the 26-year history of Summer Jam. We're just ecstatic.
And along with Summer Jam, advertising at our stations remains robust. Q2 was currently pacing up double-digits. So we're seeing very encouraging trends not only obviously in June -- May and June that have finished, but in July and August and September. So considering this is a nonelection year and non-Olympic year, we're very encouraged by what we're seeing.
The quarter also obviously have marked several major transactions. We announced the sale of our Austin partnership interest on June 2. Gross cash proceeds, that will be $39.3 million. And then last week, we announced the transaction involving HOT 97 and WBLS in New York, which actually announced July 1. In that agreement, we'll receive $91.5 million of cash at closing plus more in the form of working capital and a note receivable after closing. We're forming a new public company Mediaco with Standard General. In that new company we will own 23.7%, very excited about working with Mediaco. Their focus will be on media. We're already talking to them about projects where we will be involved in the oversight and the management. We think that's going to be a wonderful relationship, very exciting for the future.
In addition to that, and I think this is the one thing people have been confused about. Core Emmis will remain as it is today, and I want to make sure a lot of people don't understand that. Core Emmis will remain, and it will control the following assets. It will control our Indianapolis radio stations, our Indianapolis Monthly magazine, our dynamic pricing business Digonex, our headquarters building in Indianapolis, our 70 acres of land in Whitestown, WLIB in New York City and the interest that we own -- the ownership interest we have in WEPN, which is 98.7 in New York which is currently leased to ESPN in a lease that lasts another 4.5 years or so.
In addition to all those things, we will have about, I think, after taxes and fees and everything about $88 million in cash to invest in new businesses and we're very, very excited about that.
We think that this is the transformation of Emmis that we've been working on. Make no mistake, we love the radio business. We love the business we've been in, but we also would like to tackle businesses that we think may have higher growth profile. And that's what we're looking for. We're already in discussions. Nothing is imminent, but what we believe and I believe for a long time is the culture of Emmis, the people of Emmis, the management of Emmis are pretty good at transforming businesses. So what we would like to do is find businesses that are growing in sectors that may grow a little bit faster than we've seen in radio and we would like to tackle some of those and use our capital and the capital of our partners and people have come to us and see if we can sort of create a new Emmis with a higher growth characteristic. So I'm very excited about it. It's been a long transition. As you all know, there is not a lot of capital in the American radio space, but we have been fortunate to find people with capital who have allowed us to create this transition and we're very excited.
So with that, I want to turn it over to Ryan, and he will give you all the financial details.
Thanks, Jeff, and good morning, everyone. This morning, we released earnings for our first fiscal quarter ended May 31, 2019. During the prior fiscal year, we sold our 4 radio stations in St. Louis. This sale causes our current period reported results do not be comparable with prior year results. We encourage those on the call to refer to the supplemental financial information we have posted under the Investors tab of our website, www.emmis.com.
Pro forma for the sale of our radio stations in St. Louis, our radio revenues, as reported to Miller Kaplan, which excludes certain barter and other revenues, were up 3% in Q1, in line with the collective performance of our radio markets during the quarter. Excluding nonrecurring political revenues in the prior year, our Q1 pro forma radio revenues would have been up 4%.
Looking ahead to Q2, we are currently pacing up double digits. The quarter started strong, thanks to record-setting ticket sales for our largest concert Summer Jam in New York, which was held June 2. We are seeing sustained advertising strength for the balance of our second fiscal quarter.
Returning to Q1, automotive was our largest category for the quarter, representing 9% of our revenues. And automotive was up 3% for our stations in Q1. Each of our top 10 categories was up year-over-year in Q1. Pro forma for the sale of our stations in St. Louis, radio station operating expenses, excluding depreciation and amortization were up 9% in Q1. Expense growth was normally high in Q1 due to several factors, including unusually high healthcare claims in Q1 as compared to the prior year, nonrecurring bad debt recoveries in Q1 of the prior year and costs associated with supporting digital revenue growth.
We expect radio expense growth to moderate in Q2. The significant expense decline in the all other line relates to the scaling down of our NextRadio operations, which took effect in Q4 of the prior fiscal year.
During Q1, we completed a refinancing of our credit facility debt. Our new secured debt consists of 3 instruments: $23 million mortgage secured by our corporate headquarters building and land on the Northwest side of Indianapolis; a $12 million revolver principally secured by our accounts receivable in New York and Indianapolis; and a $4 million term loan secured by our 50.1% controlling interest in the Austin radio partnership.
As a result of this refinancing, our weighted average cost of capital for our secured debt decreased from 10.5% to 5.8%. Subsequent to quarter end, we announced 2 significant transactions, the sale of our controlling interest in the Austin radio partnership for $39.3 million in cash and the sale of two of our New York radio stations, HOT 97 and BLS for $91.5 million in cash. A $5 million note receivable on approximately 23.7% of the common equity of a newly formed public company that will own the stations.
Both of these transactions are subject to regulatory approval. But once both closed, Emmis expects to have approximately $88 million of cash on hand after settling all tax obligations and closing costs. This estimated cash on hand assumes $13 million remains outstanding under the mortgage on our corporate headquarters, which would be our only material secured debt outstanding.
Finally, we invested $244,000 in capital expenditures in Q1, and we expect to invest approximately $0.7 million in the current fiscal year.
With that, Jeff, we have some questions investors submitted in advance to the call.
A - Ryan Hornaday
Emmis has made it clear that it intends to use the net proceeds from the Austin and New York sales to aggressively pursue new business opportunities. We have multiple questions from investors about the future of Emmis. We'll enter the rapid fire round here of several of these questions. The first one is, is there anything imminent on the acquisition front?
No, nothing is imminent. Obviously, we have to -- we're now ramping up discussions, but there is absolutely nothing imminent.
Are there any industry do you find particularly compelling?
Well, we have both obviously the long history of media and there may be some things that are peripheral to media that are intriguing to us, but we're really casting a wide net. We really want to find -- our parameters are -- we like to find businesses of certain scale and that have a history of growth where we believe with the skill sets we bring to the table can help enhance that growth. One thing I'm proudest about this company in all these years and we've really gone into all sorts of businesses, we've been in radio, international radio, TV, magazines, major league baseball, dynamic pricing, research. I think I said magazines, but in every area that we've entered into, we've always said, here is what we know, and I think we're smart enough to know we don't know. And we've always been able because of our culture to attract people who fill in those gaps. And while there certainly have been a lot of missteps in four years, we've gotten it right probably more often we've gotten it wrong, which is probably why we're sitting here today. So I think what we're finding here is a company -- an industry where we find our skill sets are a logical fit. I'm certain there will be gaps and we will fill those gaps with people who also can come to our team and bring needed skills to the table.
Do you expect to buy multiple businesses or focus on one large acquisition?
I would think it would be probably not many businesses, but probably a couple of businesses. I would doubt if it would be one giant business, but of course, I have learned in life you never say never. So if there is something that's just monumentally big, and -- we might even bring in partners. We've been fortunate enough people come to us and said, "Look, we want to do something, we'd like to do with you." So we'll see, but my sense is, there will be several relatively smaller businesses.
Are there any parameters for target business that you can share?
Well, I think, certainly I did size. I think businesses with probably $10 million to $25 million of cash flow. That would be probably the target size. Again that's -- I think we don't want startups. I think we've seen a lot of startups, we've done some startups, but I think we would really like to find businesses that are up and running that are mature where we think we see something that might make them a little bit better.
What do you expect the timetable to be on these acquisitions?
Well, we hope to have identified some certainly this year and be on our way by the end of this year that's a hope you never know.
That will end the rapid fire session of the Q&A.
You got any other questions?
We got a couple more. A question around the New York transaction, why did you structure the New York transaction the way you did as opposed to simply selling the two stations for cash without ongoing involvement?
Well, we've known Soo Kim. And Soo and I have -- I like Soo a lot. He is a very, very bright guy. And Soo was intrigued by our corporate structure, our businesses and had talked to me over the years about doing something together. So we thought this was a natural thing. This solves some issues for him. It solves some issues for us. It allows our management team led by Charlie Morgan and our people in the New York to keep running the stations, which they have done a pretty remarkable job. And so we'll keep our people in place, we'll keep our oversight in place. We will develop a working relationship with Soo and his people, and we're pretty excited. Soo would like to build a major company out of Mediaco. And for us to be involved in the management and oversight of that, very exciting. I think the one thing we've demonstrated in all these years is we are capable of attracting people that are good managers. They work hard. They are very adept. They build good cultures, and I think that's our core strength. At my age you sort of say, "What am I good at? What am I not good at?" but I think building teams and solving problems and managing businesses we're good at. We would like to -- we have a chance now to really do that on several stages, at Mediaco with our core business and hopefully we'll be finding some things that grow a little faster and we're thrilled about that prospect.
The last question is, if there is any update on the land sale in Indianapolis or any other potential asset sales?
No. It's no secret, we are in discussions with people like WLIB. I have been saying that for quite a while, and there have been ups and downs in that process, but we think we're getting little bit closer to some thoughts on that. And land sale, we're considering, we talked to our brokers yesterday, and they are -- they have had some interesting inquires, but it's like anything else. Until it's done, it's never done.
Great. That's all we have in terms of questions. Jeff, any closing remarks.
No, that's it. Again as always, we celebrated our either 38th, 39th or 40th birthday last week. It depends on how we measure the start, but if we start from the start of our first radio station, is supposed to be acquisition of our first radio station, it would be 38 years. And in all of those 38 years, this has been certainly a roller coaster as life usually is. We've seen great times. We've seen tough times. We've seen times where the world was our oyster, there were times -- and it seemed like we were not likely to survive. I have a favorite saying, if any one of the 10 things would happen, this company would be 100x bigger. And if any one of the 10 other things would happen, I'd be sweeping the streets somewhere. I have been blessed to have the experience I've had and I've had it because of the people that I've been with. We are now at a transformation where we have a chance to sort of reinvent the company and going to where it is. I could not be more excited. It is always painful to sell things, to leave people that have been with us and been so great for us. But I think for this company to get to the next level, we have to make the transition and we've made it. It has not been an easy transition, but I'm very proud that we got through it and that we're now on the way that what I hope to be pretty exciting future. So again, I end with thanking all of our people.
Thanks, Jeff and Ryan. Just a reminder, a playback of the call is available for the next week by dialing 402-998-0454. Thank you.
Thank you. That concludes today's conference. Thank you all for joining. You may now disconnect.