Cumulus Media Inc.
Q2 2020 Earnings Call Transcript

Published: 10 Aug 2020

[Operator:]

Welcome to the Cumulus Media Quarterly Earnings Conference Call. I’ll now turn it over to Collin Jones, Senior Vice President of Corporate Development & Strategy. Sir, you may proceed.

[Collin Jones:]

Thank you, Operator. Welcome, everyone, to our second quarter 2020 earnings conference call. I'm joined today by our President and CEO, Mary Berner; and our CFO, Frank Lopez-Balboa. Before we start, please note that certain statements in today's press release and discussed on this call may constitute forward-looking statements under federal securities laws. Actual results may differ materially from the results expressed or implied in forward-looking statements. These statements are based on management's current assessments and assumptions, and they are subject to a number of risks and uncertainties. In addition, we will also use certain non-GAAP financial measures. We believe the supplementary information is useful to investors, although it should not be considered superior to the measures presented in accordance with GAAP. A full description of these risks as well as financial reconciliations to non-GAAP terms are in our press release and SEC filings. The press release can be found in the Investor Relations portion of our website and our Form 10-Q was also filed with the SEC shortly before this call. A recording of today's call will be available for about a month and details for how to access that replay can also be found on our website. With that, I’ll now turn it over to our President and CEO, Mary Berner. Mary?

[Mary Berner:]

Thanks, Collin, and good morning, everyone. I'd like to start the call by reiterating a point we made on our last call. This company executed a turnaround before this pandemic crisis and built a track record of both delivering strong financial results and disciplined execution. Notably, we completed a wholesale transformation of the company's organization and culture. We achieved multiple years of revenue and EBITDA growth, including industry-leading digital revenue growth. We expanded our assets from our on-air foundation to become a multi-channel multi-platform media company with profitable beachheads in high growth segments of the audio ecosystem. We generated significant and consistent free cash flow. We paid down a material level of debt, and we established a strong and flexible balance sheet. As a result, the company entered the pandemic with significant momentum and in a position of strength and as such is well equipped to deal with and navigate through this disruption regardless of how long it takes. I also told you that to weather the impacts of the COVID-19 crisis we would rely on our core and well-honed management practices

[Frank Lopez-Balboa:]

Thank you, Mary. As Mary mentioned, we're pleased in how our actions this quarter have set us up to work through these current challenges, and favorably position the company for future success. I’ll start with some more detail in the second quarter. And I'll speak on the same-station basis, followed by some more color on our outlook, liquidity position, and the Tower deal. In Q2, total revenue was $146 million, down 46.6% from Q2 2019. As Mary noted, the quarter was very challenged by both advertiser and sports cancellations. But on a monthly basis, however, we did see sequential improvement as April finished down 51%, May was down 50%, and June was down 39%. The impact of Professional play-by-play Sports disruption accounted for about 400 basis points in decline in the quarter driven by national rights for the NCAA, NHL, and the Masters shifting from April to November, as well as local rights predominantly for the Major League Baseball. From an advertiser standpoint, as you would expect, except for political and government, which finished up in the quarter, every other category was weak. Although categories like general services and financial held up relatively better than did the categories that were most directly impacted by the pandemic, such as entertainment, travel, and beauty. As Mary noted, political is not a huge factor in the quarter given shifting primaries and digital was the bright spot for us, growing overall 3.6%, with our podcasting business growing on an entirely organic basis by more than 25%. Moving down the P&L, expenses declined by $59 million or 28% driven by both reductions in variable costs related to revenue declines, and active fixed cost reductions. We now expect to realize approximately $85 million in benefits from our fixed costs actions. Of these, about $36 million were achieved in Q2 and approximately $40 million will be achieved through the balance of the year. If we break this down between temporary and permanent, approximately $19 million of the $85 million relate to permanent actions, which have an annualized benefit of approximately $36 million. The amount of temporary costs that will return over time will largely depend on revenue recovery in 2021. Putting revenues and expenses together for the quarter, EBITDA finished at negative $6.3 million. As Mary discussed, we generated $28 million of cash from operations despite the EBITDA decline through rigorous management of working capital. We cut our original 2020 CapEx spend projections of $30 million by more than 40% or approximately $13 million and are focusing only on items that are mission critical. This resulted in CapEx spend in Q2 of about $2.5 million. Our cash taxes this year have been materially reduced both as a result of the operating performance and also benefits from the CARES Act, which has allowed us to file for approximately $2.5 million of refunds for amounts paid in 2019. Additionally, we continue to expect to get an approximately $8 million benefit from the deferral of our payroll taxes in 2020, and we saw $1 million reduction of payroll taxes in Q2 from the employee pension tax credit. On June 24, we completed and announced the sale of land we owned in Bethesda, Maryland. The total proceeds for this deal was $74.1 million, but since we had already received $5 million in 2019, and after netting transaction expenses, we received $66 million in the quarter. All told, our free cash flow generation, and the M&A proceeds increased cash in the quarter by $91 million, allowing us to finish with a balance of $197 million as of June 30. This liquidity and the expected proceeds from the monetization of the Tower portfolio which I'll discuss in a minute, gives us confidence in our ability to withstand a number of economic scenarios. For the first half of the year, our net debt decreased slightly over $1 billion to $884 million, a reduction of approximately $124 million. As a reminder, we do not have financial maintenance covenants in either our term loan or bonds; they do not mature until 2026. Now, to the announcement this morning, as we mentioned on previous calls, we had been exploring strategic alternatives for our Tower portfolio. On Friday, we entered into a definitive agreement to monetize substantially all of our Tower portfolio and related assets for $213 million. In summary, we're selling 250 towers locations, broken down between a sale leaseback with the assets that we need to run our business, and outright sale of the other assets of these sites, including land and intangibles. The sale portion of the transaction represents about a third of the value, while the sale leaseback portion represents the other two-thirds. Considering our new lease costs of $13.5 million in year one, foregoing current third-party Tower rental income of $2.3 million, and eliminating associated cash expenses of $800,000, the transaction is an effective multiple of 14.25 times. The sale leaseback transaction will be accounted for as a financing lease. And as a result, lease payments will run through interest expense and amortization of financing lease liability. For the assets we're selling, our approximate tax basis is $40 million, the majority of which relates to the assets that are being sold and not leaseback. We do expect that the gain on the sale for tax purposes will be largely sheltered by NOLs generated this year. The final amount available to offset gains will be determined based on our performance for the balance of the year. If the entire sale occurred in one closing under our credit agreement and indenture we will be required to repay approximately $95 million of that debt closing on a pro rata basis as a result of the sale leaseback, with the balance of the net proceeds of the sale required to be paydown debt as well as subject to our 12-month reinvestment rate. We expect to close at least 85% of the transaction in an initial closing in Q4 with subsequent closings to the extent necessary. Pro forma for this transaction, we anticipate this debt or debt will be in a net in the range of $700 million. In sum, this is a fantastic transaction to the company and will allow us to make further progress against our goals of reducing debt, increasing liquidity, and growing shareholder value. We're also still working to the potential monetization of the valuable piece of property in Nashville that we hope to bring to market once commercial real estate activity approaches more typical levels. Given the current environment, our expectations are that a transaction with this property will not occur until sometime in 2021. Lastly in the quarter, we finally received the SEC's order on a petition for declaratory ruling is favorable. The lifting of the foreign ownership cap is really a mechanical exercise that we needed solely for the purpose of simplifying our share class structure. As a result of the SEC order during the quarter, we were able to convert all of our outstanding Series 1 and Series 2 warrants entitled Class A or Class B shares. We now have 17.7 million Class A shares outstanding and 2.6 million Class B shares outstanding. With that, we can now open the line for Q&A. Operator?

[Operator:]

Thank you. [Operator Instructions]. Your first response is from John Janedis of Wolfe Research. Please go ahead.

[John Janedis:]

Thanks. Good morning. Two quick ones for me. Thanks for the monthly color on advertising, related to the comments on sales was down in the low 30s for the quarter, was that -- was July at that level as well and then shifting to digital advertising, when you think about longer-term planning, are the incremental opportunities there larger for you going forward than you thought pre-pandemic?

[Frank Lopez-Balboa:]

Yes, so our actually July results were down about 32%. So we did see improvement. And then in August, we continue to have more orders in the books and we're constructive in the quarter. But as Mary talked about, there's a lot of uncertainty. On the digital side, I'll pass it back over to Mary.

[Mary Berner:]

I'm sorry, could you repeat the questions? You asked a question on digital, I couldn’t hear you?

[John Janedis:]

Yes, sure. Just given the growth you saw in the second quarter, when you think of that longer term planning, are the incremental opportunities are larger for you going forward than you thought possibly pre-pandemic?

[Mary Berner:]

That’s a good question. I would say the opportunities remain strong. If you look at the podcasting, which we talked about, we're very proud of our performance. Right now, as we said, the pacing continued strong for Q3. But to give you an idea for the year, we've already booked more than 20%, we booked 24% more than we finished all of 2019, 2019 with. On our streaming business, it's looking forward, it is performing significantly better than spot, down low-single-digits at this point, but there's a lot of upside there. And our local digital services, we call it C-suite, again is performing twice as well as broadcast. So we were -- I don't know that we're surprised, but we were heartened that our focus was paying off and that that those channels continue to grow.

[Operator:]

Thank you. The next response is from Zack Silver with B. Riley. Please go ahead.

[Zack Silver:]

Okay, great. Thanks for taking the question, actually three for me. On the Westwood One news closure this quarter, if you could just talk through the decision on that and what impact that may have to the P&L going forward? The second one is just around which specific Fall sports exposure you have in the fall? And the third is around whether you would ever consider licensing some of your higher profile podcast titles to others for in turn -- or like exclusive deals? Thank you.

[Mary Berner:]

Okay, so I'll take one and three and Frank, you can take two. So with regard to Westwood One news, the radio news business has always been one that's expensive, from both a production and a rights fee standpoint and it's somewhat difficult to monetize. That's the reason why in the past, we got out of representing ABC News and CBS News. So even with a dramatically reduced cost base, the business model was tough and we were coming up on a decision to continue in the business. And it made more sense from an EBITDA perspective to move on from that this quarter. I would say it's not huge in terms of top-line or EBITDA pickup though. And so that's Westwood One news. And then I think your question was about licensing our content, I think you talk about podcast and content?

[Zack Silver:]

Yes, so just licensing, so I guess sub-licensing some of your higher profile podcast and not having that content on the platform, but actually getting like license payments, and somebody else would put that on their platform on an exclusive basis?

[Mary Berner:]

Well, first of all, I would say we've been very, very disciplined in our approach to this space. And we'd like to reiterate a lot that we've been profitable from day one, and our growth is totally organically driven. But I would say we're concentrating on an ad supported model. And so our business models that we leverage sales or sales execution and our marketing capabilities and strong relationships with national advertisers and agencies to monetize and grow the podcasts of our content partners and our own homegrown podcasts that we see through our radio station. So we're not a -- a -- our distribution is, we distribute -- our podcasts are distributed across multiple platforms already. We -- our play is an ad monetization play and the model allows us to operate without the cost of the risks of unproven content creation and production.

[Zack Silver:]

Yes, that makes sense.

[Frank Lopez-Balboa:]

And then moving to sports. Look, we're obviously focused on the NFL which is our largest property and appeared in the fourth quarter in sports and the NCAA, you've read as well as we have, that their plan is to move forward with opening. I would say our sports exposure in the third quarter, I'm not going to give you specific numbers, but I'd say it is larger than our sports exposure was in the second quarter. Having said that, if sports are canceled or delayed the assertion expenses will go away with that. And so, there will be an EBITDA impact but hopefully it didn't, but the top-line could be impacted like it occurred in the second quarter.

[Operator:]

Thank you. [Operator Instructions]. There are no further questions in the queue at this time.

[Frank Lopez-Balboa:]

Thank you. That concludes our call.

[Operator:]

Okay, this concludes -- go ahead. I'm sorry.

[Mary Berner:]

I'll say just thank you all for joining us today. And of course, we look forward to speaking with you again soon. Have a great day and week. Thank you.

[Operator:]

Thank you all for joining us today. We hope you found this call very informative. This concludes our webcast. You may now disconnect.