Earnings Call Transcript - EVC Q1 2020

Operator, Operator

Good afternoon, and welcome to Entravision's First Quarter 2020 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Walter Ulloa, Chairman and CEO. Please go ahead.

Walter Ulloa, Chairman and CEO

Thank you, Grant. Good afternoon, everyone, and welcome to Entravision's First Quarter 2020 Earnings Call. I hope everyone is staying healthy and safe in these difficult times. With me on the call today is Jeff Liberman, our President and COO; and Chris Young, our Chief Financial 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. 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 is prohibited. Also, this call will include 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 on Form 8-K. Our first-quarter results were affected by the COVID-19 pandemic and the resulting economic crisis late in the first quarter, which resulted in declines in our broadcast and digital segments compared to the prior year. However, we did achieve growth in our television segment compared to the first quarter of 2019 as we benefited from a healthy political advertising from residential primaries across the country. Expect a significantly greater adverse impact in future periods, depending on the extent and duration of the economic downturn arising from the pandemic. We have undertaken an extensive review of our business to efficiently align operations and reduce costs. I'll walk you through the various actions we have undertaken later on this call. Beyond this extremely difficult business environment, our balance sheet today continues to be solid, with approximately $134 million in cash and marketable securities on the books versus a total debt of approximately $217.5 million. Our financial performance shows that revenues decreased 1% to $64.2 million in the first quarter. Consolidated operating expenses were down 6%. Consolidated adjusted EBITDA was up 20% to $9.7 million compared to $8.1 million last year. Free cash flow was up 304% to $5.2 million compared to $1.3 million. It is interesting to note that in early March, we were forecasting 70% EBITDA growth for the quarter, our largest percentage growth in the quarter in our history. Unfortunately, our revenue started to unravel across all our platforms as we entered the second week of March and the COVID crisis accelerated. Turning to our television segment, operating results showed that television revenues in the first quarter were up 2%, to $9.2 million compared to the prior year period, primarily due to $5.3 million in political advertising in the quarter, slightly offset by the absence of approximately $3.9 million in nonrecurring spectrum-related revenue in the prior period last year. National advertising revenue was up 34%, while local advertising revenue was down 1%. On a core basis, first-quarter TV advertising revenue, excluding political, was down 6% during the quarter, with national down 9% and local down 3%. First-quarter retransmission revenues were up 9%, to $9.6 million compared to the same quarter last year. Taking a look at some of our major ad categories in the first quarter, automotive, our largest advertising category, was down 12% and represented approximately 24% of our total television advertising revenue. The impact of the COVID-19 virus has been significant on the automotive sector as U.S. manufacturing has been closed or production significantly reduced. Many dealerships have looked to navigate to online traffic to substitute for foot traffic. U.S. April auto sales are expected to be negative 43% compared to April 2019, and the full-year outlook has been revised to a range of 12.7 to 14 million auto units sold compared to 16.8 million in 2019. Unlike the 2008 recession, this crisis has not yet led to lower prices, but special financing and record-level incentives are expected to continue. Services, our second-largest category, was up 15% in the quarter, while media was down 9% and healthcare was up 7%. Turning to our ratings performance, division television affiliates built upon their market leadership in the February 2020 sweeps. In the 18 to 49 demographic in early local news, our Univision television stations finished ahead of their Telemundo competition in 12 of the 17 markets where we have head-to-head competition. In late local news, we finished ahead of our Telemundo competitors among adults 18 to 49 in 10 of the 17 markets where we compete. Additionally, our early local newscasts are ranked number one or number two against English and Spanish competitors in eight markets, while our late local newscasts rank number one or number two against English and Spanish competitors in seven markets. For the full week, our Univision and Unimás television stations combined have a cumulative audience of 4.1 million versus 2 million compared to Telemundo's 3.2 million versus 2 million. We have 25% more viewers than Telemundo in our television footprint. Turning to our audio division, audio revenues were down 2% during the first quarter compared to the prior year. Local revenues were down 8%, while national revenues were up 11%. Political revenue, approximately $1 million in political sales in the quarter, was down 11% in the first quarter. Entravision concluded our live audio coverage of the NFL with the broadcast of the Super Bowl live from Miami, Florida. This was the fifth season of our relationship with the NFL and our best-performing season. The 2019-2020 season saw an increase in audio revenue of 25% over our performance in the 2018-2019 season. Our NFL Spanish rights extend to the 2020-21 season. Services are our largest advertising category for audio, improving its spend with our audio platform by 18% over the prior year period and represented approximately 29% of our total audio revenue. The increase in services came from increased spending by several large law firms in the LA marketplace. Auto was the second-largest ad category for audio, representing 17% of the total audio revenue, and was down 20% in the quarter compared to last year. Looking at our audio division's ratings performance for winter 2020 among Spanish language radio stations, the Erazno Electrocoat Show is ranked #1 in 7 of our 9 markets, including Los Angeles, among Hispanic adults 18 to 49, including ties. Across our 9 owned and operated radio stations, the Erazno Lacolite Show reached more than 619,000 Hispanics 18 to 49. Let's talk about our digital - our Entravision digital businesses. Earlier this week, we announced the launch of Entravision digital, which consolidates our digital media, consumer insights, and marketing technology businesses under the Entravision brand. As many of you know, we have prudently built a portfolio of digital assets over the past 5 years that possess digital reach, data insights, and creative and programmatic capabilities. This includes Smadex, a programmatic and mobile-first DSP solution; audio engaged, an audio advertising platform; scroller-ads, an optimized advertising marketplace; data expand, and an international data management platform; and audience marketplace with consumer insights and our U.S. Hispanic marketing solutions for SMB and national advertisers. Entravision digital brings these businesses into a unified solutions offering that provides advertisers and agencies a single source to engage consumers globally. These businesses have a successful track record of connecting content and technology with targeted audiences, and the performance and branding capabilities of this marketing technology platform will continue to be an exceptional complement to our television, radio, and digital media assets serving the United States Hispanic market. For the first quarter, digital revenues were $13.3 million, representing a decrease of 8% versus the same period last year. This decrease is directly related to the current COVID-19 pandemic. One bright spot during the quarter for digital was our digital audio business, which improved its performance during this crisis. We have been able to expand our offering to third-party distribution and gain momentum with our unique content offering. Digital audio has proven to be a solid business unit for Entravision over the past few quarters, boasting a 15% increase in both margins and revenue growth in the first quarter compared to the same quarter last year. Our demand-side platform semantics also continue to show growth as we have seen an increase in revenue of 41% from this product when compared to the same period last year. The COVID crisis is also affecting this business, and we have had to pivot in terms of our client base so we could serve clients and verticals less impacted by the pandemic. With the flexibility offered by having our own technology, we are working hard on expanding our sales force in the United States to accelerate growth. In less than a month, we've strengthened our U.S. sales team and it has already closed 3 new campaigns and created dozens of new opportunities. We see positive results from this business unit in the upcoming quarters as we continue to focus on mobile app promotion, value-added services, and programmatic. In short, while the digital division's first quarter was affected by the coronavirus outbreak, we are excited about expanding our footprint in our local markets as well as the new prospects and technology advancements led by Smadex in the United States. Turning to our outlook in the near term, it is important to remember that the majority of regions where Entravision operates have been in lockdown mode since the middle of March, while our digital operations in Spain have been locked down since February. On the positive side, our TV ratings are up significantly as the world shelters in place to combat the virus. The negative side, of course, is that most of our advertisers are also under lockdown, causing a significant dislocation of our advertising revenue across all our advertising platforms. While some regions globally have begun the process of gradually returning to the workplace, given the uncertainty of both the timing and the economy opening back up and the length of the recovery, we have extremely low visibility on our future operations. Today, our television advertising business is pacing at minus 36%. Our radio business is pacing at minus 50%, and our digital is pacing at minus 33% for the second quarter. We are taking several difficult steps to weather this economic crisis. These include the following: a temporary reduction of our workforce by approximately 18%, a company-wide reduction of salaries for those still on the payroll, ranging between 2.5% and 22.5% based on compensation levels, cancellation of our stock buyback program, a reduction of our dividend to shareholders by 50%, and lastly, the reduction or elimination of various expenses at our broadcast and digital units as well as corporate. The combination of these cost reductions will result in a year-over-year fixed cost reduction in the second quarter of approximately $6.2 million across our television, audio, and digital platforms, as well as corporate expense. Also, while we hope the world returns to work as soon and safely as possible, should it be necessary to maintain these cuts beyond the second quarter, the effective impact of doing so would result in an additional $14 million in fixed cost reduction over the third and fourth quarters versus the prior year period. In summary, our first-quarter results were modestly improved from a cash flow perspective, but negatively impacted by the COVID-19 pandemic. While there's no doubt that the second quarter will be extremely difficult due to the pandemic, we have taken the necessary steps to ensure survival in these difficult times. I will now turn the call over to Christopher Young.

Christopher Young, Chief Financial Officer

Thank you, Walter, and good afternoon, everyone. As Walter has discussed, net revenue for the quarter was down 1% to $64.2 million, compared to $64.7 million in the same quarter of last year. Operating expenses decreased 6% to $40.3 million, and consolidated adjusted EBITDA increased 20% to $9.7 million. For our TV division, revenues in the first quarter increased 2% to $39.2 million, primarily due to approximately $5.3 million in political revenue for the quarter. Excluding political and accounting for the $3.9 million in non-recurring spectrum-related revenue in the prior year period, core TV ad revenue was down 6% for the quarter. Retransmission consent revenue for the quarter was $9.6 million and was up 9% over the prior year period. Radio net revenue for the quarter was down 2% to $11.7 million compared to $12 million in the same quarter of last year. The decrease in our radio segment was primarily due to decreases in both national and local advertising revenue. Core radio revenues, excluding approximately $1 million in political revenue in the first quarter, were down 11%. Digital net revenue for the quarter declined 8% to $13.3 million compared to $14.5 million in the same quarter of last year. The improvement was primarily due to declines at our international headway unit, offset by a 13% increase in our U.S. digital unit. Operating expenses decreased 6% to $40.3 million for the 3-month period ended March 30, 2020, from $42.7 million in the prior year period. The decrease was primarily due to an 18% decrease in our audio expense, an 11% decrease in our digital expense, slightly offset by a 5% increase at our TV division arising from an increase in commissionable revenue and severance costs. Corporate expenses for the quarter were down 1% to $6.8 million compared to $6.9 million in the same quarter of last year. The decrease was primarily due to a decrease in audit-related fees from the prior year, partially offset by an increase in legal fees. Consolidated adjusted EBITDA improved 20% to $9.7 million over the prior year. Free cash flow, as defined in our press release, increased 304% to $5.2 million. During the quarter, due to the onset of the current economic crisis, we updated our internal forecast of future performance and determined that triggering events had occurred that required interim impairment assessments related to goodwill, SCC assets, and fixed assets. As a result of these assessments, we recognized a one-time noncash impairment charge totaling $39.8 million across all three of our business segments in Q1. As a result of the impairment, income tax expense was actually a benefit of $1.7 million for the quarter, while cash taxes paid were $145,000. Earnings per share for the quarter were a negative $0.42 compared to $0.02 per share in the same quarter last year. Excluding the one-time impairment charge, EPS was $0.02 per share. During the quarter, the company paid a cash dividend of $0.05 per share to shareholders of the company's Class A, B, and U common stock. The total amount of cash dispersed for the dividend was $4.2 million. The company announced today that due to the ongoing pandemic and the related economic uncertainties that have impacted our business, directors have decided to temporarily reduce the quarterly cash dividend by 50% to $0.025 per share payable on June 30, 2020. The total amount of cash to be disbursed for this quarterly dividend will be approximately $2.0 million. The board intends to revisit this temporary dividend reduction next quarter as we continue to review economic conditions. Also during the quarter, we repurchased approximately 259,000 shares at an average price of $2.02 per share. Given uncertainties around the current economic crisis, the company has ceased all buyback activity for the foreseeable future. Cash interest expense was $1.9 million for the quarter compared to $2.3 million in the same quarter last year. Cash capital expenditures for the quarter were $2.7 million compared to $6.1 million in the prior year period. We anticipate that our capital expenditures will be between $6 million and $7 million. Turning to our balance sheet, as of March 30, 2020, our total debt was $217.5 million, and our trailing 12-month consolidated adjusted EBITDA was $42.8 million. Cash and marketable securities on the books was $128 million as of 3/30/2020. Net of $75 million of unrestricted cash on the books, our total leverage, as defined in our 2017 credit agreement, was 3.3x as of 3/30/2020. Net of cash, total cash, and marketable securities, our total net-net leverage was 2.1x. This concludes our formal remarks. Walter and I will now take your questions. Grant, I'll hand it over to you.

Operator, Operator

Our first question comes from Michael Kupinski with Noble Capital Markets.

Michael Kupinski, Analyst

So in terms of the cost cuts that you've done for the second quarter, is that in addition to the cost cuts that you've done or began, I guess, in the third and fourth quarters of last year? So this would be incremental or is that in total? Okay. And the - okay. I'm sorry. And what are the metrics that you are going to use in terms of trying to determine whether or not to keep those costs in place for the third and fourth quarters? What are the triggers that you may back off on some of those cost cuts?

Walter Ulloa, Chairman and CEO

I think revenue as revenue.

Michael Kupinski, Analyst

So just be in general, that revenues would increase, then you can start layering back the cost, okay? And then in terms of the digital business, can you talk about what was involved in doing the consolidation of what are the cost savings associated with that move? And what does it mean for your digital strategy going forward? I mean, can you just kind of expand upon the reasons why you went through the consolidation and what that means for your strategy? And it sounds like you're trying to still develop your strategy to expand in the U.S. and the U.S. footprint. So I was just wondering if you can just add a little bit more color there.

Walter Ulloa, Chairman and CEO

The consolidation of our digital business was aimed at creating a more organized approach to our marketing efforts. We recently appointed someone from within our organization, who possesses significant experience, to lead our national digital business. Additionally, we have unified our U.S. operations under the Entravision digital brand. This move is intended to establish a strong, multiplatform service for our existing small and midsized clients in the U.S., enhancing our branding services through television and radio with performance-based digital products. By better integrating our U.S. digital and broadcast assets, we can offer improved marketing solutions to our clients. In terms of our international operations, we are also implementing measures to boost growth in the U.S. through our Smadex product. Overall, this consolidation streamlines our structure into a single entity, creating a more efficient platform for all our digital business units.

Michael Kupinski, Analyst

And Entravision U.S., for instance, your Entravision digital U.S., does that have the full suite of products at this point? Or is that something that you're going to be layering in as you go?

Walter Ulloa, Chairman and CEO

It has the full suite of products, just the latest consolidation that we just made.

Michael Kupinski, Analyst

Got you. And then auto, obviously, a big category for you. You said it's 24%. I know that at one point it was 29%, almost 30% of your business. Can you talk about that category, and whether you believe it will come back? What are you hearing from your dealerships and so forth, if you could just kind of give us a flavor of what you're starting to see as the economies are starting to open a little bit here?

Walter Ulloa, Chairman and CEO

We haven't received the feedback we would like to have at this time. As I mentioned, we are just beginning to see Texas, Florida, and Colorado starting to reopen. Additionally, steps are being taken to open California this week in some form. However, it is challenging to accurately assess the motives behind these changes. I shared some information regarding the revised forecast for auto unit sales in the U.S., which is expected to be between 12 million and 13 million, compared to nearly 17 million in 2019. The auto industry has made significant adjustments to its forecasts due to various challenges we will all face.

Christopher Young, Chief Financial Officer

Well, they're going to come back and offer a ton of incentives when the world finally opens up. They've got a ton of inventory. They have to start unloading. Those incentives are going to be record-breaking, and they're going to need to advertise and message those incentives. So we expect auto to come back fairly robustly when it does come back. The question is when that actually happens, but we're pretty confident that when it does come back, it will be in a strong way.

Walter Ulloa, Chairman and CEO

I also think that because of the systemic change in attitudes among younger demographics and millennials who hadn't entered the vehicle market due to ride share programs and public transportation, the pandemic is going to change that, and we're going to see more younger demographics looking to buy vehicles.

Michael Kupinski, Analyst

Got you. And then do you have any - obviously, political was very strong for you in the first quarter. Any thoughts on how that shakes out as you trend toward the stronger third and fourth quarters? And are you seeing political advertising in the second quarter? Can you just talk a little bit about your thoughts on political?

Walter Ulloa, Chairman and CEO

Well, we had a huge political advertising turnout, and certainly, we're very pleased with how it turned out. Another important data point is that our core business advertising categories were also performing quite well. In our second-quarter advertising categories, we're looking very - the outlook was very positive. As far as political is concerned in the second quarter, we constantly review our numbers, and what we're seeing is probably we will meet budget for the quarter. We expected to be above budget, but we feel fairly confident we will be at budget for the quarter. Now for Q3 and Q4, it’s still too early to tell. We can imagine that Q3 has a higher budget than Q2 and then Q1. Q4 is a large budget as well. We still think that one of the things I just read this week is this announcement by the Biden campaign that they’re going to spend $55 million in 5 key states to mobilize the Latino voter. Of the five states, I believe we're in 4 of those states with strong media assets, including ADA, Colorado, Florida, and Texas. We are well positioned to take advantage of that impressive purchase by the Biden campaign or investment in the Latino vote, and I still believe that in order to win the White House, it's important to buy the Latino vote in those crucial swing states.

Michael Kupinski, Analyst

Got you. And you have a large cash position, and it appears that there are a lot of distressed companies out there that may trip some covenants. What is the M&A environment like right now? Are people talking, or are they just waiting to see how things shake out? If you are looking at assets, is there a preference for you in terms of radio, TV, or digital at this point?

Walter Ulloa, Chairman and CEO

Well, I don't think there's any - we haven't been in any conversations on the M&A front. I think everyone is still in a lingering state of what to do now as far as this pandemic is concerned. Covenants don’t start to be tripped until you begin reporting Q2 numbers, and you're going to be in late summer before that happens. Then conversations with lenders about what to do about the covenant breaks will start in early summer, perhaps. So we're not kind of - we're not in that realm where those conversations have begun. That said, we're sitting here and watching, and we'll wait and see what shakes out. But to your point, we do have a cash cushion, and we'll wait and see how things turn out. As far as platform priorities, I think digital continues to interest us. TV would also be an option if it were an end-market tuck-in opportunity. Third, on the run, would be radio.

Michael Kupinski, Analyst

And just one last question and a housekeeping item. I assume that there were some unusual items in the D&A, depreciation, and amortization line, which was about $4.5 million. Is that number a good number going forward, or was there something unusual in that number?

Christopher Young, Chief Financial Officer

That was related to the repack assets depreciating. So it’s a slightly accelerated number, but that will smooth itself out.

Michael Kupinski, Analyst

Got you.

Operator, Operator

At this time, I'm showing no questions in the question queue. So this will conclude our question-and-answer session. I'd like to turn the conference back over to Walter Ulloa for any closing remarks.

Walter Ulloa, Chairman and CEO

Thank you, Grant, and thank you, everyone, for participating in today's call. We look forward to reporting our second-quarter earnings results on an investor call in early August. Stay safe. Thank you.