Entravision Communications Corporation
Q1 2009 Earnings Call Transcript

Published: 7 May 2009

[Operator:]

Welcome to the Entravision Communications Corporation first quarter 2009 earnings conference call. As a reminder all participants will be in a listen only mode and there will be opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions) For your information today’s conference call is being recorded and at this time I would like to turn the conference call over to Walter Ulloa, Chairman and Chief Executive Officer.

[Walter F. Ulloa:]

Welcome to Entravision’s first quarter 2009 earnings conference call. Joining me today is Chris Young, our Executive Vice President and Chief Financial Officer and Philip Wilkinson, our President and Chief Operating Officer. Before we begin I must inform you that this conference call will contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ. Please refer to our SEC filings for a list of risks and uncertainties that could impact actual results. In addition this call is the property of Entravision Communications Corporation. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Entravision Communications Corporation is strictly prohibited. Also this call will include certain non-GAAP financial measures. The company has provided a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures in today’s press release. The press release is available on the company’s website and was filed with the SEC in a Form 8-K. In addition with the announced sale of the company’s Outdoor Division at March 31, 2008 Outdoor was classified as a discontinued operation and the results of operations are separately reported for all periods presented. Our results in the quarter reflect the continued economic recession and the challenging environment for advertising supported businesses. Our focus remains on the factors within our control and we are aggressively managing our costs to ensure we are maximizing our cash flows and reducing debt. We continue to take a prudent approach to managing our expenses. We have implemented a number of cost initiatives which are expected to generate approximately $20 million in savings in 2009 versus 2008. These cost savings include an additional $9 million of expense reduction that we have made since our investor conference call in February and we will continue to review additional measures that will lead to increased efficiencies across our operations. At the same time we are ensuring our assets have the proper support with regard to delivering quality content and driving audience shares. Our television and radio properties remain well positioned with strong ratings in the Nation’s most dynamic Latino markets. We are aggressively pursuing new business and nontraditional opportunities such as distribution and interactive platform revenues both of which are expected to show growth this year. Turning to our financial results for the quarter our consolidated first quarter revenue fell 25% versus the same period in 2008 to $41.7 million. Consolidated adjusted EBITDA decreased 60% to $6.7 million versus last year while free cash flow per share decreased 120%. The first quarter of 2008 benefited from $1.7 million of political revenue versus $10,000 of political revenue in the first quarter of 2009. Turning to our television division excluding retransmission fees revenue decreased 27% in the first quarter versus the prior year period. The local and national revenue fell 24% and 30% respectively. The decrease is primarily due to continued softness in the automotive and retail categories as well as $1.5 million in non-returning political television revenue. Auto was off 64% in the first quarter with weaknesses from all major brands. Partially offsetting these were increases in the services, telecommunications and healthcare categories which grew by 4%, 2% and 18% respectively. Top advertisers for Entravision television in the quarter were McDonald’s, Verizon, Cricket Communications, Ford and AT&T Mobility. On a positive note the auto category stabilized in the second half of the quarter and that trend continued through April. One important factor for Entravision is that Nissan Regional has added our Univision affiliate in Denver to its list of priority markets in its new fiscal plans which started April 1. In addition Ford and General Motors have extended their Advantage and Total Confidence campaign in several key Entravision markets. Finally several manufacturers are offering generous new coop advertising incentives to their local deals to promote their parts and service departments which our Entravision’s sales force is actively pursuing. Our sales and marketing teams have adapted to selling in a new environment where creativity and results determine success. Our coordinated sales efforts are focused on today’s fastest growing advertising categories including trade schools, recruitment, loan modification, attorney groups and insurance. These focused efforts resulted in the addition of 37 new advertisers within our TV division investing over $10,000 in the quarter. On another positive note our television division generated about $1.8 million in retransmission revenue in the first quarter as a result of our alliance with Univision in the pursuit of retransmission revenue from the cable and satellite providers. Univision and Entravision have now executed multi-year retransmission agreements with Comcast, DIRECTV, Time Warner, Dish, Verizon, AT&T and several other video distributors in Entravision markets. All of these retransmission agreements provide that the ensuing revenue is retroactive to January 1st, 2009. This is new incremental revenue for Entravision and this revenue increases significantly in the early years of the contract. Turning to our recent ratings performance at a time when English language television broadcast networks and their affiliates continue to experience audience erosion to new media and cable networks Univision Television continues the trend in audience growth and expansion. One of the most popular entertainment special to air on Univision Premio Lo Nuestro aired in the March survey and our Univision affiliates experienced a 7% gain over last year’s adults 18 to 34 for this annual music awards show. Most importantly in two of our media markets Tampa and Denver Premio Lo Nuestro beat American Idol head to head among all adults 18 to 34. In addition among adults 18 to 34 our prime time Novella block produced some of our strongest ratings with double and triple digit percentage increases in several Entravision markets including Washington, D.C., Orlando, Tampa, El Paso, Monterey Salinas and [inaudible] Central. Our early local newscasts were ranked number one regardless of language in 11 markets among adults 18 to 34 in the March survey. Our local news efforts added three of our Univision affiliates to the number one spot in this early news time period and the Univision early national newscast was also number one regardless of language in 11 Entravision markets among adults 18 to 34 also in the March survey. At our radio division revenues decreased 31% in the first quarter. National revenue was off 35% while local revenue declined 30%. We saw growth in two of our top 10 categories, healthcare increased 2% and grocery was up 1%, however, experienced decreased spending in each of our top five categories compared to first quarter of 2008 including travel and leisure, fast foods, telecommunications and automotive. Automotive declined 68% in the quarter. However despite a difficult quarter we saw increases in seven of our top 10 advertisers in the quarter. The largest increase came from AT&T that was up about 166% followed by Taco Bell that increased its spending by 90%. The other advertisers in the top 10 where we saw increases were McDonald’s, Burger King, Cricket, JC Penney, Adrianas Insurance, Beverly Hill Physicians and Safeway. In the quarter we added 20 new advertisers who spent more than $10,000 with our radio division. Our stations continued their solid ratings performance in the quarter. Overall with ratings that have been released as of May 1st in our key demo adults 18 to 34 we have seen an increase of 5% year-over-year and we saw an increase of 15% in 12 plus. We generated ratings growth in a number of markets. In Los Angeles on January 16th we converted Indie 1031 to be our first exclusive online radio station. This change allowed us to convert our 103.1 frequencies to a new format that we developed. We call the format El [Gotto] and it is a contemporary Mexican regional hit station that features our popular on air show [inaudible] y Chocolate. Since the switch our audience among adults 18 to 34 has more than tripled from the same period last year. When you look at our average quarter hour share we have increased 138% to a two from a .6 share for the same period last year. The switch to the El Gotto format on the 103.1 frequencies helped take the total average quarter hour share of the Entravision radio cluster in Los Angeles up 29% year to year from a 4.5 to 5.8 share. At the beginning of the first quarter we converted almost all of our Super Estrella network stations to our popular Jose format with the exception of El Paso we converted the station to the El Gotto format. The launch of the Jose format resulted in an increase in audience share in almost every market that has been released to date compared to the same period last year in adults 18 to 34. Denver saw an increase of 54%, Phoenix experienced a 60% increase, Sacramento was up 27% and KICS in Monterey Salinas increased 24%. Our Los Angeles Jose station that debuted on May 5th of last year grew to a 1.9 share from a .8 share. This represents a 138% year-over-year. I will now move to our digital initiative Entravision Interactive which includes both our television and radio dot com websites as well as the Entravision mobile platform. Interactive is an important port of our long term growth strategy. We continue leveraging the mass reach of our broadcast television and radio to drive traffic to our online and mobile Interactive properties. We have a total of 70 websites within Entravision Interactive all our sites in a single digital content platform built by our Interactive team. We offer industry standard online ad units and integrated sales opportunities for local, regional and national advertisers targeting US Hispanics. We have a sophisticated ad serving analytical and database capability for our entire platform including our mobile marketing capabilities which we launched in the first quarter. Our Interactive growth for the quarter was impressive. Traffic grew 60% over Q4 2008. We now are experiencing monthly more than one million visits and 10 million page views on combined websites. We see double digit growth every month. We are presently streaming the majority of our radio stations. During the first quarter we streamed more than three million hours of online radio programming with two million streaming sessions. This is an 88% increase over the same period in 2008 and our online streaming operation is one of the largest targeting US Hispanics. As I mentioned earlier with the conversion of 103.1 signals in Los Angeles to our hugely successful El Gotto format we launched our first exclusive online radio station Indie1031.com. Since the change our streaming numbers on Indie online have skyrocketed. We have seen an increase in streaming hours of 15.2% when you compare December ’08 to March ’09. This is an increase of more than 260,000 hours of listening. We saw a similar increase of 220% in unique listeners and 248% increasing connections with Indie103.1.com. Additionally at this time our Interactive revenue that we currently have on the books has surpassed all of the revenue that we generated online in 2008. In the quarter we also started selling our first local and national mobile campaigns as part of our integrated sales packages. We now offer our 360 advertising opportunities on air, online and mobile. We believe that the mobile marketing to Latinos is going to be an important growth driver for Entravision in the future because of our young demos when compared to the general market and the fact that survey after survey finds that US Latinos over index the general market in the use of mobile handsets especially data services. In the first quarter we launched our own iPhone streaming applications. Our Interactive team is developing other web enabled mobile platforms like Blackberry and Google Android. We also started the development of mobile apps and mobile customized sites for our TV stations. We are also preparing to launch our own online automotive marketplace exclusively targeting US Latinos. This marketplace will help us grow our automotive revenue by providing greater support and better qualified leads to our local dealers and auto category advertisers. We are planning to launch this Interactive product in the third quarter. Although this is initially a local solution we believe the ultimate potential scope of the project is complete national coverage even beyond our TV and radio footprint. In conclusion the environment remains difficult but we are aggressively focusing on managing our costs as evidenced by our year-over-year reduction in expenses of $20 million and maximizing our cash flows while reducing our debt. At the same time we are continuing to support our media properties in terms of the ability to deliver content and drive audience shares in the Nation’s fastest growing and most densely populated Hispanic markets. We believe we are taking the right steps to position our assets for growth once the economy begins to recover. We are delivering valuable audiences and the Hispanic market has continued to grow rapidly. We continue to expand, improve Entravision Interactive in order to provide advertisers and marketers with a broader platform in their quest to build greater share for their brands in the dynamic Latino community. In fact in 2007 the Latino population was estimated at almost 46 million people. With the 2010 census estimates are that the Latino population will total over 50 million people a 10% increase in the US Latino population in just three years versus an estimated 1.5% growth rate for non-Latinos over that same three year time period. So despite challenging times we remain optimistic about our long term growth for the company. I will now turn the call over to Chris Young for a review of our financials.

[Christopher T. Young:]

The company sold the Outdoor Advertising business in May, 2008 to Lamar Advertising for $101.5 million including an adjustment for working capital and no longer has Outdoor operations. In accordance with FAS 144 accounting for the impairment or disposal of long lived assets the company reported the results of the Outdoor operations in discontinued ops within the consolidated ops statements of operations. As the Outdoor unit has been included in discontinued ops the following results do not include the Outdoor segment. As Walter has discussed net revenue for the quarter was $41.7 million down 25%. Operating expenses decreased $3.6 million to $31.8 million and consolidated adjusted EBITDA decreased 60% to $6.7 million. Free cash flow which we define as consolidated adjusted EBITDA minus cap ex, cash interest, cash taxes plus interest income was negative $1.1 million or negative $0.01 per share. Operating expenses for the quarter decreased to $31.8 million from $35.4 million a decrease of $3.6 million or 10%. The decrease was primarily attributable to a decrease in variable expenses associated with a decrease in revenue and a decrease in salary expense due to a reduction in personnel. Corporate expenses for the quarter decreased to $3.9 million from $4.5 million a decrease of $0.6 million. The decrease was primarily attributable to the elimination of bonuses paid to executive officers and a decrease in employee benefits. As Walter mentioned earlier the company continues to execute cost cutting measures to better position itself for a difficult business environment. As a result annual fixed expenses are now expected to be reduced by approximately $20 million in 2009. This is an update from the previous quarter when we announced approximately $11 million in expense cuts for the year. Budgeted cap ex for 2009 has also reduced to approximately $5 million. We will continue to evaluate additional cost cutting measures in 2009 as the operating environment warrants. EPS for the first quarter of 2009 applicable to common stockholders was negative $0.17 a share compared to an EPS applicable to common shareholders of negative $0.08 per share in the first quarter of 2008. Turning to our balance sheet during the first quarter we made a $40 million debt pay down to our senior credit facility. Accordingly as of March 31st, 2009 our total debt was $365.5 million and our trailing 12 month EBITDA as adjusted was $64.2 million. Our total debt to EBITDA as adjusted was 5.7 times versus a maximum leverage covenant as defined in our recently amended credit agreement of 6.75 times at 3/31/09. Cash on the books was $16.8 million at March 31st, 2009. The company also announced that it repurchased 0.4 million shares of Class A common stock for approximately $0.5 million in the first quarter of 2009. On January 12th, 2009 the company stopped repurchasing its shares. As of May 1st, 2009 the total shares outstanding for Entravision was 84,461,010 shares across all classes of shares. This concludes our formal remarks. Walter, Philip and I would be happy to take your questions.

[Operator:]

(Operator Instructions) Gentlemen, our first question comes from James Dix – Wedbush Morgan Securities.

[James Dix:]

Just a couple for you, first any color you can provide. Some operators are talking a little bit about the nature of the ad market in the second quarter versus the first and whether it’s stabilizing or improving or declining. If you could give any outlook on that, that would be of interest. Second, that first quarter retransmission revenue number, is that a good run rate for the rest of this year? I know Walter you mentioned that it’s going to ramp over the period of the multi-year agreements, but is that a good run rate for the first quarter? I have two follow ups but I’ll just stop with those.

[Walter F. Ulloa:]

I can address the first part as to the current status of the ad market as we see it. The run rate or the amount of revenue that we received from our retransmission negotiations in the first quarter, the run rate will be a little higher as we go into Q2, 3 and 4. As I said earlier it does ramp up significantly after that in the subsequent three, four years.

[Philip C. Wilkinson:]

We all feel here at corporate at Entravision we think we’re seeing the bottom of this thing. The first quarter was atrocious but we saw improvements in the service category in April over our first quarter average. We saw improvement in telecom. We saw improvement, a big jump, in healthcare category which has become a very active and competitive category for us. FSR improved and that was off double digits the first quarter. It was nice to see retail improve in April so our auto businesses, Walter had mentioned it’s such a big part of our overall business but it seems to have flattened out in terms of the decline and we are cautiously optimistic over here into May and looking forward to June. All that said, services, healthcare, fast service restaurant retail all improved in April over Q1. Auto seems to be bottoming out in terms of the decline so we’re a little bit more optimistic now than we were.

[James Dix:]

Just so I understand, so it seems like now the pacings for the second quarter are still down substantially but they’re not as bad as the first quarter results were?

[Philip C. Wilkinson:]

We’re down still double digits but there’s so little visibility. For example this week we moved 10 points in May on pace in our local business for TV. So that’s a significant move but it’s coming in so late that it’s really hard to gauge. But we’re seeing a tough second quarter, if that answers your question. A tough second quarter.

[James Dix:]

Do you have a sense as to how the stations are doing relative to what you’re hearing on the network and if there’s a difference why would that be?

[Philip C. Wilkinson:]

As you know on the up front they locked in most advertisers through second quarter and there were penalties for cancellations on the network side, general market events, television network so they had this going into May, June last year locked up and now as they come into the new up front, that may be a different case as you I’m sure are reading. As far as what we try to do is gauge our properties, our stations vis-à-vis the market the local market overall. As you may know we subscribe to Hungerford and Miller Kaplan, other services will tell us how we’re doing, how we’re faring relative to the markets overall and I can tell you that we are outperforming, not only overall outperforming in TV versus the TVV number for the whole country but we’re outperforming in several markets. In San Diego we’re down 23%, the market was down 34%. In Las Vegas we were down mid 20s, the market was down 36%. In Boston we actually were up and the market was down significantly double digits. We have some good stories and I think we told you last February we were significantly impacted in geographical areas where we operate that had the toughest local economies in the country and those were Nevada, Arizona, California for the most part. But even despite that we seem to be outperforming the overall industry number in those markets.

[Walter F. Ulloa:]

James, just want to comment as Philip said we’re carefully cautiously optimistic. It feels like the bottom right now but again we’re just kind of slugging it out here, moving through to the midway point of the quarter and hoping things start to turn.

[James Dix:]

Is the amount that you have on the books now comparable to prior quarters or is it much lower? You talked in the past about your percentage that you’ve booked to budget.

[Walter F. Ulloa:]

Visibility as Phil pointed out is certainly more difficult this year than last year. The business comes in even later than last year and last year we were just amazed at how late it was coming in but this year has surprised us in that contracts are being booked even later. A lot of that has to do with technology both in the advertising agency’s ability to book the contracts as well as the technology by which they measure their case lot sales.

[James Dix:]

Just one last one on TV, any sense now that we’re about a month from the digital transition, what the potential impact could be on your audience if any? I’m thinking in particular in the border markets where the signals from Mexico can also be reached.

[Philip C. Wilkinson:]

We converted four markets early, February 17th, and we haven’t seen any significant changes in the ratings that we had prior to the switch as opposed to the month trailing the switch. The information and research that we have on those markets that we did convert we have no concerns vis-à-vis the ratings. It’s hard to tell along the border. There’s fewer as a percentage wired homes along the border than there are in the rest of the country. But we are doing everything possible vis-à-vis our awareness campaign among our viewers. I can honestly say that we’ve had such a strong effort n terms of digital awareness and this coming conversion in June 12th that we think that our audience will be ready. Kind of an interesting phenomenon we saw in one or two markets that according to the Nielsen research that there were 3%, 4% of the homes unready and then sure enough on the conversion on June 12th where we went early with the rest of the market they’re 100% ready. Some may wait until the last minute to get either wired or a digital set top box or digital tuner on their set but we’re pretty confident that we’ll be okay vis-à-vis the ratings.

[Operator:]

We have an additional question. This question comes from [Mark Presley – Health and Safety Group].

[[Mark Presley:]

Just getting in on the call here and I know that I probably missed a couple key points but just a brief question on the debt issue that you had, I think it was at the end of last year and I don’t think it was as severe as the market thought it was and I think you guys had something about it in the report. Could you elaborate on the debt and are you guys still positive in cash flow and I don’t know if you had touched on commercials, if you’re going to be able to get more commercials back in the second quarter and are your waiting mostly on the automotive to go ahead and make up for the shortage on the commercials and if you guys think that you’re going to be able to do better. I work in radio as well and I understand completely that the advertising has shut down a lot and as far as that goes as well as collections that we’ve received, we haven’t received everything that has been aired as well. I understand completely what you’re saying. As far as profitability do you think there’s a way the company could get back into profit by the third or fourth quarter of the year and as far as commercials go are we waiting on the automotive industry to put you back where you want to be? Again as far as debt and positive cash flow, where you stand there? I haven’t had a chance really to go over the report. That’s all I have.

[Christopher T. Young:]

I think if I understand your question correctly on the debt issue, we amended our credit facility during the first quarter of this year to get us covenant relief basically that pushes out or we basically reset our maximum leverage covenants to 6.75 times our EBITDA and we came in in first quarter at 5.7 times. That 6.75 applies for the balance of the year through 12/31 of this year. It then steps down to 6.5 times for the first and second quarter of the following year in 2010. We’re pretty comfortable with that. The newly negotiated limits are going to get us necessary headroom to get through the time period without issue. With respect to cash flow, if I understand your question correctly, in the first quarter we actually were not a positive free cash flow. Our cash flow was actually negative $1.1 million. With respect to your fourth question on profitability, we’re not in the business in giving out guidance for the balance of the year so it’s not really appropriate to talk about what we see as our prospects to turning to a positive net income scenario. I know you had a third question in there.

[Walter F. Ulloa:]

I think he asked a question about the second quarter and as you pointed out we don’t give guidance. The way the revenue comes in Mark is that second quarter’s is always much bigger than first quarter’s so we certainly expect our revenue and EBITDA to be greater in second quarter than in the first quarter. That’s just the way the business comes in. As far as automotive is concerned we continue to be challenged by automotive and all the changes that are taking place in that industry. We’re also looking to replace that business that we’ve lost form automotive from other new advertisers. Certainly the telecommunications industry has been advertising with the Latino market and with our Univision and radio stations now for, that investment continues to increase. We are also looking for other revenue streams to combat the sluggishness in automotive including our Interactive revenue. We’re doing everything we can here to continue to build our business despite the downturn in automotive and frankly we don’t know when that business will return to former size.

[Operator:]

Our next question comes from [Abbey Steiner – JP Morgan].

[[Abbey Steiner:]

On retransmissions, did you say it was $1.8 million this quarter?

[Walter F. Ulloa:]

Correct.

[[Abbey Steiner:]

Should we think about that as a run rate going forward? I know you don’t want to give guidance but just roughly for this year on a quarterly basis.

[Walter F. Ulloa:]

As I said to James Dix, he asked earlier.

[[Abbey Steiner:]

I apologize if I missed that.

[Walter F. Ulloa:]

That’s okay and we said that we believe that going forward the revenue from our retransmission agreements will increase through the year and that in subsequent years we expect it to increase as well particularly in the early years of the contracts.

[[Abbey Steiner:]

I assume that Univision takes a little bit of that retransmission fee so is that number you have of $1.8 million is that post what they’ve taken? Does that make sense?

[Walter F. Ulloa:]

That is post.

[[Abbey Steiner:]

Is there a way to get a sense, do they take 50% or plus or minus?

[Walter F. Ulloa:]

It’s very complicated but there’s no real formula. It’s just a very complicated series of contracts between Univision, us and the cable and satellite providers.

[[Abbey Steiner:]

Very last question on this topic and I appreciate the time, but when you talk about the early years increasing significantly and I don’t want to put words in your mouth but should I think about it generically as something better than 5%?

[Walter F. Ulloa:]

You could think about it like that, sure.

[Operator:]

At this time I’m showing no additional questions. We’d like to turn the conference call back over to management for any closing remarks.

[Walter F. Ulloa:]

Thank you everyone for participating on our first quarter investor conference call. We look forward to reporting our second quarter results in August and we look forward to talking to all of you again. Thank you.

[Operator:]

Thank you for participating in the Entravision Communications Corporation conference call. this concludes today’s event. You may now disconnect your telephone lines.