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Edited Transcript of SXL.AX earnings conference call or presentation 22-Aug-19 12:30am GMT

Full Year 2019 Southern Cross Media Group Ltd Earnings Call

Sydney, New South Wales Sep 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Southern Cross Media Group Ltd earnings conference call or presentation Thursday, August 22, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Grant Blackley

Southern Cross Media Group Limited - CEO, MD & Executive Director

* Nick McKechnie

Southern Cross Media Group Limited - CFO

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Presentation

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Operator [1]

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Good morning, and welcome to Southern Cross Austereo's full year results presentation. (Operator Instructions) Please note that this conference is being recorded today, Thursday, the 22nd of August 2019, at 10:30 a.m. Australian Eastern Standard Time.

I will now hand over to our first speaker for today, Southern Cross Austereo's CEO, Mr. Grant Blackley. Go ahead, Grant.

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Grant Blackley, Southern Cross Media Group Limited - CEO, MD & Executive Director [2]

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Good morning, and welcome to Southern Cross Austereo's full year results presentation. This morning, we will be taking you through our results for the 2019 fiscal year. I'm joined on the call today by Chief Financial Officer, Nick McKechnie.

I draw your attention to Slide 2, the disclaimer.

Moving to our executive summary on Slide 4. 2019 has been a good year for SCA with the delivery of a strong result in what has been a challenging media environment. The majority of SCA's assets and earnings are in the vibrant and growing audio sector, with SCA benefiting from growth in both its core radio operations and from the continuing expansion of our digital audio on-demand assets. In respect to television, SCA is also pleased to have delivered higher earnings. As a result, SCA is, therefore, able to report a good set of results across both our Audio and Television segments, outperforming the market in both cases.

SCA are always focused on delivering strong cost discipline to support earnings growth, and the recent announcements we have made regarding back-office outsourcing will provide us with a platform to further efficiencies in FY '20 and FY '21. In the last few years, cash generation has been high, highlighting the quality of the SCA asset base. Excess cash continues to be used to strengthen the balance sheet with net debt sitting comfortably within our target range.

Moving on to our results summary on Slide 5 for the full year to the 30th of June 2019. Underlying net profit after tax increased by 3.1% to $76.2 million. Group revenues were up 0.5% with growth in Audio revenues offsetting a weaker Television segment. Reported EBITDA of $147.4 million was impacted by 2 nonrecurring items: a $9.2 million noncash charge related to the outsourcing of SCA transmission services and a $3.3 million restructuring charge taken in the year as SCA streamlined its operations through outsourcing and internal restructuring.

Net debt reduced by 3.2% or $11.3 million. And I'm pleased to report that our Board has declared a final dividend of $0.04 per share fully franked. This takes the full year dividend to $0.0775 per share, fully franked, maintaining the dividend level from FY '18.

Headline achievements for the year are outlined on Slide 6. Sales performance remains a key focus for the group with SCA growing revenues by 0.5% in what was a challenging media market. Audio revenues increased by 2.4%, underpinned by a 9.2% increase in national revenues across both metro and regional radio, while Television revenues outperformed the market. And in Q4, they increased by 3.9% aided by the federal election.

We continue to invest in developing our product set and in positioning SCA for the future. As evidence, we recently introduced instream advertising, which delivers addressable audio advertising into live radio when a listener is streaming from an Internet-connected device. Combining SCA's existing digital inventory with the exclusive representation of SoundCloud's digital inventory in Australia, we have created a scaled proposition for advertisers in digital audio.

Digital radio, or DAB, also continues to grow and mature as a medium. And the rollout of a cohesive brand strategy encompassing 8 unique digital radio stations at this time in our capital cities is enabling SCA to provide enhanced reach across the suite of stations on both the Hit and Triple M networks.

Audio on-demand is also a high-priority growth platform. And SCA's owned and operated PodcastOne leads the premium original podcast market with listening continuing to accelerate and now being matched with increased monetization. This high-quality asset base continues to produce regular, recurring cash flow with free cash conversion of 91%.

Net debt has reduced to $293 million, further strengthening our balance sheet and increasing SCA's flexibility. I'll now pass over to Nick to run through the operational results in more detail.

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Nick McKechnie, Southern Cross Media Group Limited - CFO [3]

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Thank you, Grant, and good morning, everyone. Slide 8 provides the statutory results for the group. Revenues were up 0.5%, and underlying NPAT up 3.1% to $76.2 million. Group expenses were up 2.9%, but this includes $12.5 million of nonrecurring charges related to the outsourcing of our transmission facilities and restructuring costs associated with streamlining business operations.

Underlying expenses were flat year-on-year at $501 million. We recorded an impairment of our television licenses in the first half of the year following the separation of our regional business unit into the Audio and Television segments. Financing costs were 5.7% or $1.2 million lower on the back of reduced debt levels. The application of the new revenue standard impacted both FY '19 and FY '18 equally with a noncash adjustment to both revenue and financing costs.

The table on Slide 9 provides a reconciliation of reported to underlying results. In the second half, we recorded a $9.2 million noncash loss relating to the sale of existing transmission assets across to Broadcast Australia as part of the outsourcing agreement as well as the restructuring costs of $3.3 million that we incurred during the year. Both FY '18 and FY '19 were impacted by noncash impairment charges net of an associated release of a deferred tax liability.

Moving to Slide 10. Consistently high cash conversion is a recurring feature for SCA, highlighting the quality of the asset base with cash conversion above 90%. Capital expenditure increased in the year to $27 million, but it is expected to reduce across FY '20 and FY '21. Over the past 3 years, SCA has completed a number of major property refurbishments, increasing overall CapEx spend. Respecting that all major properties are now in good order, the cycle of ongoing investment will reduce. In addition, the outsourcing of playout and transmission services will reduce the required level of spending on technical equipment that had naturally reached end of life.

Slide 11 provides a 3-year view of the growth in cash flow generated each year during the ongoing transformation of SCA's assets. Audio earnings now represent 86% of EBITDA compared to around 75% 3 years ago, with growth in the core Audio earnings of FM and DAB whilst also enabling investments in new and emerging audio on-demand platforms, that is, podcasting and digital instream advertising assets. Television comprises a smaller part of SCA's earnings, particularly following the sale of Northern New South Wales TV in May 2017. Pleasingly, the adverse impact to cash flow of around $4.5 million triggered by the sale has been fully recovered by growth from the expanding Audio business.

The continued improvement in the balance sheet is highlighted on Slide 12, with net debt continuing to reduce through the application of free cash flow to debt reduction. The leverage ratio remains comfortably in the target range, and the interest cover ratio is now over 13x. The strong balance sheet positions SCA well with reducing financing costs and with flexibility to fund future growth.

Slide 13 shows that SCA's full year dividend has been maintained at $0.0775, fully franked. The dividend is within the policy range of 65% to 85% of NPAT, and the strong cash generation of the group is enabling consistent shareholder returns.

Slide 15 breaks out the revenue, cost and EBITDA performance for the 3 segments of Audio, Television and Corporate. Both the Audio and Television segments delivered a favorable cost outcome relative to revenue, resulting in EBITDA growth. Corporate costs were slightly higher as SCA deployed new software tools to further improve management information systems and workflows.

Moving to Slide 16 and the performance of the Audio segment. Underlying EBITDA increased by 3.4% to $152.7 million on the back of a 2.4% increase in revenue. Employee costs were lower, led by positive outcomes from the workforce planning project, and partially offset by contractual salary inflation. Broadcast and production costs increased due to the inclusion of DAB radio transmission costs covering SCA's expanded radio offering.

Moving to Slide 17. SCA increased metro radio share in every quarter of the year with full year revenues increasing by 4.1% in a market which is marginally back by 0.5%. Our revenue growth was led by an increased 8.7% investment from the national advertiser market, a result of the combination of improved audiences coupled with the effective monetization of the new digital radio audiences sold through the digital stack of FM and DAB. Local advertising was adversely impacted by general economic uncertainty, including in the housing and auto sectors, coupled with a traditional retail contraction around the state and federal elections.

Slide 18 shows that regional radio revenues grew by 1.5%, again, led by increased national revenues, up a healthy 10.6% or $7.1 million. Over the past 2 years, SCA has dedicated increased resource to educating national advertisers on the gross disparity of investment into regional markets, and this is paying dividends. To further this agenda, SCA and its media peers launched Boomtown, a trade marketing campaign designed to drive ever-increasing knowledge and appreciation of regional communities and audiences across the entire media ecosystem with the aim of driving higher levels of inquiry and investment.

Slide 19 shows the continued growth and evolution of SCA's audio on-demand asset, the PodcastOne network. SCA has invested in creating the leading commercial podcasting network in Australia. During FY '19, SCA focused on growing the content side of the business, which now enjoys over 65 original creators producing over 2,500 episodes per annum. As a result, audiences continued to grow, evidenced by a 260% increase in downloads over the prior corresponding period. PodcastOne is expected to create a positive return on investment with a forecast of achieving cash flow breakeven during the second half of the current financial year.

Slide 20 provides an illustration of the leading titles or creators on the network. SCA will continue to develop new content in key genres that have strong audience and commercial appeal.

Turning now to Slide 21 and the rapidly expanding universe of smart audio fueled by mobile and smart speaker devices. The growth in mobile and voice-enabled services is accelerating and becoming meaningful. SCA is continuing to lead and develop new on-demand audio products to grow and satisfy market demand for this content and to improve SCA's reach and capacity to monetize these growing audiences.

Moving on to Slide 22 and a focus on SCA's Television assets. We were pleased to deliver underlying EBITDA of $33.7 million, up 1.2% on the prior period. While revenues were back 3.2%, SCA maintained a tight control on expenses, which were back $7.3 million or 4%. Our sales team also outperformed the market, delivering a stronger share of the regional television market.

Slide 23 highlights the benefits of our affiliation with Nine. Since the change in affiliation, SCA has continually delivered a power ratio above 1, resulting in a consistent premium to market as we further monetize improving audiences.

Slide 24 shows Television advertising revenues for the year of $191 million. National revenues were flat year-on-year, helped by the federal election in Q4 and by the national trade marketing campaign Boomtown. As with other mediums, local advertising was impacted both by general economic uncertainty and the retail contraction in and around the election period.

On Slide 25, we've set out a time line which shows the progressive actions management has taken across the last 3 years to optimize return for our Television assets. After switching affiliation in 2016 from Network Ten to the Nine Network with its commensurately higher ratings, we simplified workflows by adopting the brands of our affiliate partners. The organization of regional television for media buyers was streamlined by selling our Northern New South Wales license to WIN Television, a Ten affiliate, and SCA then taking on both local and national sales representation in the Northern New South Wales region on behalf of Nine to create a holistic East Coast media buy.

We progressively streamlined back-office operations, first, through the sale of transmission towers and, subsequently, through the outsourcing of playout and transmission services to specialist operators. This leaves SCA with a simplified and operationally efficient television asset with a single focus on maximizing revenues.

On Slide 26, we provide a further illustration of how SCA is strategically focused on growing its front-of-house activities of creating compelling content and effective sales monetization. During FY '20, SCA will move to complete the transition of television playout to the National Playout Centre and to migrate transmission services to Broadcast Australia. These outsourced contracts enable the parties to benefit from economies of scale in procurement and in the provision of maintenance services. In both cases, the CapEx upgrade cycle has been transferred to the provider, and the overall contracts will provide cash flow benefits across the life of the contract. Further detail on the financial impact of these contracts for FY '20 has been provided in the appendix.

Corporate costs are provided on Slide 27, noting the earnings from radio and television joint ventures have been now moved to those respective business units. Overhead increases during the year included increased software licensing costs from the rollout of enhanced content and sales systems, unlocking greater operating efficiencies. Insurance market premiums also increased notably.

I'll now hand back to Grant to run through the outlook statement and the key priorities for the year ahead.

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Grant Blackley, Southern Cross Media Group Limited - CEO, MD & Executive Director [4]

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Thanks, Nick. Focusing on Slide 29, and we have set out our key priorities for the year ahead. In Audio, SCA will continue to maximize the value of SCA brands with a focus on growing audience and reach. In fact, we will soon announce the addition of 2 more stations in our digital radio stack. After 2 years of targeted investment in PodcastOne, we are expecting to achieve cash flow breakeven during the second half, which will set this important growth asset as a positive earnings contributor thereafter. We will also continue to innovate in the development of on-demand and smart audio experiences for audiences, with an aim of leading and developing this ever-expanding Audio segment.

In Television, we will continue to leverage the success of Boomtown and grow national investment into regional markets. We also aim to successfully transition to our new outsourced contracts while effectively monetizing Nine's premium investment in events such as the Australian Open tennis, now in its second year with Nine, as well as monetizing investment in new programming initiatives.

In transforming our business, we will continue to deploy new audio revenue streams and expect to invest around $5 million of operating and capital expenditure in the development of new audio products. We continue to evaluate ways to grow our asset base but will remain financially disciplined in assessing every potential opportunity.

Operational performance remains critical, and our focus will remain on ensuring high cash conversion, in parallel with targeted investment in systems and processes to improve our existing and future workflows while reducing costs.

On our final slide, 30, we set out a trading update for the group. The challenging operating environment seen in the lead-up to the federal election has rolled into the start of FY '20 with an expectation that the overall market could be back around mid-single digits in July and August. Forward pacing indicates a stabilizing positioning in September and a return to growth in October. Pleasingly, podcasting and digital audio are both continuing to grow strongly year-on-year. As a result of the current trading environment, group expenses are tracking below FY '19.

Thank you for your time, and I'll now hand back to the operator for questions. Thank you, operator.

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Operator [5]

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(Operator Instructions)

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Grant Blackley, Southern Cross Media Group Limited - CEO, MD & Executive Director [6]

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Thank you, Eddie. I'll take that as a sign that we've hopefully delivered a very concise and informative update today.

To that end, ladies and gentlemen, thank you for your time, and we look forward to talking to you again shortly. Thank you, operator.

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Operator [7]

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Thank you very much. Ladies and gentlemen, that does conclude our teleconference for today. Thank you for participating. You may all disconnect. Thank you.