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Cumulus Media (NASDAQ:CMLS)
Q2 2018 Earnings Conference Call
Aug. 20, 2018 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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 and strategy. Sir, you may proceed.

Collin Jones -- Senior Vice President of Corporate Development and Strategy

Thank you, operator. Welcome, everyone, to our second-quarter 2018 earnings conference call. I'm joined today by our President and CEO Mary Berner and our CFO John Abbot. We're glad to be back and appreciate all of you joining the call today.

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 are subject to a number of risks and uncertainties. A full description of these risks as well as financial reconciliation to non-GAAP terms can be found in our SEC filings, including our press release and Form 10-Q, both of which were filed today.

They can also be accessed through a link on our corporate website. After today's call, a telephonic encore recording and an archive of the webcast will be available for about a month. Details for how to access those replays can be found at www.cumulusmedia.com/investors. With that, Mary, I'll turn it over to you.

Mary Berner -- President and Chief Executive Officer

Thanks, Collin. Good afternoon, everyone, and thank you for joining us. We're happy to be back in the market after a nine-month absence and happy to report that excluding the impact of nearly $5 million in write-offs related to the well-publicized issues at the United States Traffic Network, we grew EBITDA for the quarter by 5.5%. June 4 marked the day we emerged from Chapter 11 and a new start for-- a start of a new phase for Cumulus Media.

The new Cumulus Media, not only has a $1 billion less debt, but is also well-positioned for the path ahead. The critical foundational work we've done these last two years had built the operational capabilities we need to meet the challenges we face in the core radio business and take advantage of the opportunities in front of us to create shareholder value. Our basic business model remains solid and we expect it to generate substantial free cash flow to pay down debt. The company also has several unique growth initiatives that will help offset the industry headwinds we all face, and I'll talk about those more today.

And lastly, with our new balance sheet and improved operational capabilities, we're also focused on optimizing the mix of our assets and our portfolio through disciplined approach to M&A. So, how to get to this point? For those of you not as familiar with the story, in late 2015, when this management team took over, what we found, no matter how you looked at it, was a broken company where virtually every operational and financial metrics heading in the wrong direction. At that time, we shared with you and launched a turnaround strategy to rebuild and stabilize the operations of the business as a prerequisite to financial success. We also undertook an effort to address our over-levered balance sheet, which is also critical to the company's ultimate financial success.

Fast forward to today, and it's evident how far we've come, we reversed the slides in the company's ratings and regained much of the rating share that have been lost, overhauled our sales execution capabilities, and made Cumulus Media a place where people want to work, by creating a strong culture. Collectively, these efforts have produced companywide revenue market share growth for the past six quarters and for the first time in five years, EBITDA growth in 2017 and EBITDA growth again through the first six months of 2018. At the same time, we addressed our excessive $2.3 billion debt load. After reaching a deal with our senior secured lenders, who are now our majority equity holders, we brought the company through a Chapter 11 process in 187 days, emerging with $1 billion less debt.

We were also able to use the process to eliminate or renegotiate certain unfavorable contracts and further improve our operating cost structure. So, we're excited about our fresh start with the new and supportive ownership, a new balance sheet, a new Board, and strong operational momentum, but with no less focus, effort, or sense of urgency in our mission to build this company's value. And despite the distraction of bankruptcy, our second-quarter results reflect that operational momentum and focus. Within the Cumulus Radio Station Group, while market weakness continued, we again grew revenue share in the quarter.

Our results in the segment were bolstered by strong digital, political, and national performances offset by local revenue weakness. In particular, our digital revenue outpaced the market by a considerable amount, growing at a rate of almost 30%, so far, this year. This growth is being fueled by C-Suite, our portfolio of digital products that we launched late last summer as well as improved execution on the sales of core digital products like streaming. On the cost side, our continued focus on cost management reduced expenses at the Station Group by 4%, allowing us to deliver EBITDA growth and margin expansion of over 100 basis points in the quarter.

At Westwood One, after normalizing for the USTN impact, we grew revenue, revenue share and EBITDA. Our rapidly expanding podcast business supported Westwood One's digital revenue growth of over 90% in the first half of the year. Westwood One also benefited from our ability to offset weaker local demand in our Station Group by monetizing some of the unsold inventory in the national network marketplace. In the third quarter, the overall market trends we saw in Q2 appear to be continuing.

Local revenue in particular is challenging and in total across both platforms our pacing for the quarter is down around 1%. Turning to the company's future. While the industry will likely face ongoing challenges, it still offers compelling value for advertisers at attractive potential returns for investors. As the industry has matured, radio has been among the most resilient of all traditional media because, among other reasons, it continues to deliver a remarkable value proposition for advertisers with a well-documented 10:1 return on investment.

And with a robust growth of stream listening, podcasting, and in-the-home smart speakers, the broader audio marketplace continues to grow. And as you'll hear, we're pursuing ways to take advantage of that growth. Against that industry backdrop, we believe that the new Cumulus Media is particularly well-positioned to drive shareholder value. At the most fundamental level, through continued and relentless focus on core radio operations including rating share, sales execution, and expense control, our business model generates a substantial amount of free cash flow.

With an improved interest expense profile and a return to more of a maintenance level of capital expenditures, we expect to generate as much as $100 million of free cash flow per year over the next several years. We also believe we'll have opportunities to add to that free cash flow by monetizing noncore assets like land, where it make sense. Finally, while our leverage levels are much improved after the restructuring, our priority will be to use free cash flow to pay down debt and generate increased equity value by simply delevering the balance sheet. Beyond that fundamental operational focus and free cash flow generation, there are several current opportunities unique to us that are important to offset market challenges and position us for future growth: First, our digital initiatives at the Cumulus Radio's station group.

Second, pricing and inventory management within and across business segments. And third, the Westwood One Podcast Network. Starting with digital, the Radio Advertising Bureau estimates that today digital radio-- revenue for radio broadcasters in aggregate is approximately 8% of revenue. With approximately 5% of our revenue at the Cumulus Radio Station Group coming from digital, we're behind that contribution level but are making great strides toward catching up.

And while simply reaching digital parity with our peers will generate sizable financial benefits in and of itself, we believe that our particular digital assets and initiatives can drive long-term growth beyond the levels experienced by the industry today. For example, while the rapid growth of our current C-Suite offering speaks for itself, we expect to continue to add to our portfolio of digital products. On the streaming side of the business, we recently expanded our distribution of both Station and Westwood One content through a new multi-year partnership with TuneIn. With a focus on streaming and C-Suite, as I said earlier, we've grown digital revenue at the Station Group by almost 30%, so far, this year.

And moreover, given our results, we believe that the C-Suite program can serve as a template for effectively launching other new products, digital or otherwise, to drive additional revenue streams in the future. We also see unique upside at Cumulus Media in pricing and inventory management. Historically, this company operated off platforms at both the station side and network that were outdated, ineffective, and undersupported. With those systems, we were essentially flying blind.

Imagine knowing your revenue pacing, but not knowing if that pacing was driven by pricing or by sellout, or not having a clear picture of what inventory you had left to sell. That's been the day-to-day life of our sellers and sales managers for many years. As glaring as this deficiency was, replacing such mission-critical systems is a heavy and risky executional lift. And it was only after we improved our fundamental operating capabilities that we could undertake such a project.

We are now almost half of the way through the rollout of our new traffic and billing systems, and inventory and revenue management tools. And just as important, last summer, we created our new revenue management function to ensure that we achieve the desired benefit of those new systems and tools. As I mentioned before-- I mentioned before our monetization of station inventory in the national network marketplace in Q2. And that's an excellent example of the early gains we are already starting to see just for the partial installation of our new pricing and inventory systems and tools.

As we improve our visibility into pricing and inventory dynamics across the platform and become more adept at moving quickly in response to those dynamics, we will realize benefits from optimizing inventory across sales channels. Over time, we expect to become agnostic as to which sales channel, local, national or network that we sell our most-- our Station Group inventory into, it's all about maximizing price and minimizing unsold inventory. Another key growth initiative is the Westwood One Podcast Network which is a business that we've been incubating within our network groups. Podcast listenership growth continues to outpace expectations, and the IAB estimates the podcast revenue will exceed $650 million in 2020.

With our enormous promotional reach, advertiser and agency relationships, sales capabilities, and multiple distribution outlets, including within the Station Group, the Westwood One Podcast Network is very well-positioned to become a leader in this space. It's already home to major political talkers, Ben Shapiro and his networks, the Daily Wire, Dave Rubin, and Mark Levin; Season 2 of popular true-crime drama In the Dark, in partnership with American Public Media; leading professional wrestling podcast, anchored by Chris Jericho, Jim Ross, and Eric Bischoff; and new podcast created by Westwood One, Opie Radio and the Westwood One Daily News. And we're seeing strong results from our efforts. Last month, the Westwood One Podcast Network generated 35 million downloads, more than double what it was delivering at the beginning of the year.

From a revenue standpoint as well, the growth had been significant. For the whole of 2016, Westwood One podcast revenue was only a $100,000 and now, 18 months later, our current trajectory has us on track to see $10 million in revenue this year. We are shifting resources to invest in this business to grow it into a market leader, and we'll be speaking more about this in quarters to come. Finally, we're also focused on optimizing the collection of assets in our portfolio.

And with our improved balance sheet, we're also better situated to take advantage of accretive acquisition and divestiture opportunities, both in today's regulatory framework and also when, or if, more substantive deregulation occurs.Wrapping all these together, as I noted earlier, we believe the Cumulus Media is well-positioned to deliver strong shareholder returns. While the broader challenges in a maturing industry like radio are obvious, with continued an unyielding focus on day-to-day operating fundamentals, the attractive free cash flow profile of the business can generate strong, levered equity returns, particularly when supported by our actionable growth initiatives. So, once again, we're glad to be back and we look forward to sharing more in the upcoming quarter. And with that, I'll turn it over to John to go through a more fulsome financial update.

John?

John Abbot -- Chief Financial Officer

Great. Thanks, Mary. I'd first like to echo your opening remarks. We're definitely glad to be back on a more normal footing and out of Chapter 11.

While the restructuring required a heavy lift by many people, we're certainly pleased with the outcome, including how quickly we were able to complete the process. Just to sum it up. We were able to reduce our debt by over $1 billion and extend the maturity of our debt to May 15, 2022. Our new $1.3 billion term loan carries an interest rate of LIBOR plus 4.50 with a 1% LIBOR floor, which at today's interest rates results in a reduction in our annual interest expense of roughly $30 million to $40 million per year.

Also, our new term loan allows us to put in place a $50 million ABL revolving credit facility, which we just closed on Friday. That facility, combined with our unrestricted cash balance and the free cash flow that we will continue to generate, gives us a very solid liquidity profile. Turning to our financials for the quarter, you'll notice that the presentation of our results in both the press release and the 10-Q reflect the fresh start accounting we were required to follow as a result of our emergence from Chapter 11 on June 4. Under this accounting, we effectively closed out the predecessor company by presenting its results, which are those prior to June 3, 2018, separately from those of the new or successor company which occur from the emergence date to the end of the quarter.

In the press release, we tried to make this presentation as user friendly as possible by providing a column titled Combined Predecessor and Successor, which adds the predecessor and successor numbers together where it made sense to do so, to give you a picture of the entire second-quarter 2018 results for easier comparison to the predecessor company's results for second quarter last year. The next major item you'll note, and that Mary mentioned, is the impact of the well-publicized financial troubles of United States Traffic Network or USTN. I'll spend a minute on that before walking through the financial statements themselves-- the financial results themselves. Given the number of indicators we had about USTN's eroding financial position, we had no choice but to take a full reserve against our USTN exposure this quarter.

While we have less exposure to USTN and some others in the industry, we did have to record a $4.1 million bad debt provision against receivables as of May 31, and we're not able to recognize approximately $700,000 in revenue in June. Both of these were reflected in Westwood One's financials, which is where we report the USTN business. In total, between the receivables write-off and the non-recognition of June revenues, the full quarter impact on Westwood One from USTN came to $4.8 million. With that said, we believe this USTN impact is a limited duration event for our business.

The inventory that we have associated with this traffic content is very valuable. And we're pleased to announce that we've already signed a new multi-year deal with another provider in this space who will be supplying us with traffic content starting in September. We expect the revenue from this new deal to largely offset the go-forward impact of the loss of revenue from USTN, starting in Q4. However, we do expect the effects of this to spill over into the third quarter where Westwood One's results will be about $2 million lower as a result of the termination of the USTN deal.

So, moving now to our second-quarter 2018 results. Revenues in the second quarter were $285.2 million, a decline of $5.3 million or 1.8% from Q2 2017. Excluding the impact of USTN and the revenue at WLUP in Chicago last year, revenue declined $2.9 million or 1%. Total expenses declined $4.2 million from last year or $8 million excluding USTN.

As a result, consolidated EBITDA, as reported, declined $1 million or 1.5% from Q2 last year. However, excluding the impact of USTN, consolidated EBITDA grew by $3.7 million or 5.5%, as Mary said earlier. Looking at the numbers by business unit, then starting with the Cumulus Radio Station Group. The themes are consistent with recent quarters with the Station Group in the aggregate gaining revenue share in a tough market environment.

According to Miller Kaplan, in the markets where we operate and that they measure, total industry revenue was down 3.1% in the quarter and 3.3% year to date. These numbers aren't normalized for the increased political spend this year. So, excluding political, the year-over-year comparisons would be worse. For the Cumulus Radio Station Group, total revenues declined 2.5% or $5.1 million to $203.5 million from second quarter last year.

In addition to the market impact, our year-over-year revenue performance at the Station Group was also affected by the loss of Chicago's WLUP-FM, which we were operating under an LMA last year but are no longer operating, and the rejection of the sports rights contracts we had with the Chicago White Sox and Chicago Bulls. While the overall effect of these changes on EBITDA was positive, they did negatively impact revenues by almost $3 million in the quarter. We'll continue to see the impact of these changes flow through the financials in the next three quarters as well. Adjusted for these impacts, our revenue at the Station Group declined only about 1% in the quarter.

While we continued to see weakness in the local market, that was partially offset by growth in digital, political and to a lesser extent national revenue. As Mary shared with you earlier-- or already, digital revenue at the Station Group driven by our C-Suite of products is now significantly outpacing the marketing growth, more than 3 to 1 year to date. Political also provided a nice lift of about $2 million over last year. But as many of you know, most of our political revenue in election years usually hits in late September through election day.

Moving to expenses. Station Group expenses were down approximately $6 million or 4% in the quarter, driven by personnel expense reductions and cost savings from contracts that were renegotiated or terminated prior to or during the bankruptcy. The combined impact of the revenue and expense changes yielded Station Group EBITDA down-- yielded Station Group EBITDA growth of $800,000, or 1.4%, and margin expansion of 110 basis points in the quarter. Turning to Westwood One.

Normalized for the USTN impact, revenue grew by approximately $700,000 or 1% in the quarter. This increase was driven by growth in both podcasting and the core ad sale business, which more than offset the negative revenue impact of certain contracts we chose to exit prior to our bankruptcy in 2017. As Mary discussed, the Westwood One Podcast Network is starting to meaningfully contribute to the top line. We believe we have all the elements necessary to play an increasingly significant role in this space and we'll continue to invest in the business to support the revenue growth we expect to generate from podcasting in the future.On the expense side, excluding the impact of USTN, operating expenses declined at Westwood One by $1.3 million or approximately 2%, driven by contractual and content cost reductions, partially offset by increased digital costs required to support growth in our podcasting business.

Combined, the revenue increases and expense decreases normalized for USTN produced another EBITDA growth quarter at Westwood One, up just over $2 million or 12%. Turning to some non-operating items. First, on CAPEX. Year to date we've spent $16 million on capital expenditures as compared to just $13 million in the first six months last year.

As many of you know, we ramped up our CAPEX last year and this year to catch up with some of the under-investment in facilities, equipment, and systems from prior years. You shouldn't read too much into the higher year-to-date spending, which is really just timing. We still expect this year's spend to total $25 million to $30 million. And next year, we expect CAPEX will return to more normal maintenance levels of closer to $20 million.As it relates to our tax profile.

The implications of the restructuring transaction are fairly complex, so I thought I'd spend a minute on those. The transaction was structured as a partial stock, partial asset sale. And as a result, we receive the benefit of a stepped-up basis in certain assets. Those assets will be depreciated and/or amortized over 1 to 15 years, but weighted toward 15 years, because most of the step up in basis is attributable to the SEC licenses and other long-lived intangibles.

Although much smaller, we'll also get the benefit of an immediate expense in the near term of the tangible assets that qualify for that treatment under the new tax rules. Lastly, the transaction creates a gain from the cancellation of indebtedness, which will use up all our existing federal NOLs, but that would have happened under almost any structure we might have used. From a leverage and liquidity standpoint, at June 30, we had $1.3 billion in debt and $37 million in unrestricted cash. Our leverage or net debt to LTM EBITDA was 5.8 times.

In addition to $37 million in unrestricted cash at June 30, we now also have $50 million available under the new ABL revolver, which we believe provides ample liquidity for the business. Finally, I wanted to provide an update on what in prior calls we've referred to as the D.C. land sale. We've had this large property in Bethesda, Maryland under contract with Toll Brothers since 2015.

Under that contract, the sale doesn't actually close until we receive final unappealable approval of Toll Brothers' preliminary plan to build. Unfortunately, the process of getting that approval has drawn out longer than anticipated as a result of significant community opposition to the project. Even though the Planning Commission unanimously approved the preliminary plan in July of 2017, its opponents pursued an appeal of that approval. That appeal was also unsuccessful and in April of this year, the court ruled in our favor again.

Unfortunately, those counterparties have pursued a second appeal that they have available to them, which they filed on July 3. So, at this point, there are a number of potential outcomes to the process including additional appeals after this one, and we're exploring all of our options to monetize this property efficiently and for the best value possible. We continue to view this property as a valuable opportunity to raise cash and pay down debt, and we'll keep you updated on our progress as we have more to share. Independent of the timing and outcome of the D.C.

land sale, we expect to generate substantial free cash flow for debt paydown over the next several years. And as Mary said, we also believe that there will likely be opportunities to optimize the mix of assets on our portfolio through selective acquisitions and/or divestitures. Combined with the continued focus on the day-to-day operations of our core business and the potential upside from our growth initiatives, we're excited about the company's future prospects. With that, we received a handful of questions from analysts and incorporated what we put into our prepared remarks.

And some of the more factual questions are picked up in the press release and in the 10-Q, so we'll end the call here. As you get further up to speed, please don't hesitate to reach out to Collin or me with any questions you may have on the quarter or otherwise, and we look forward to speaking with you again next quarter. Operator, you may now disconnect the call. Thank you.

Operator

[Operator signoff]

Duration: 28 minutes

Call Participants:

Collin Jones -- Senior Vice President of Corporate Development and Strategy

Mary Berner -- President and Chief Executive Officer

John Abbot -- Chief Financial Officer

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