Audacy, Inc.

David Field - President, Chief Executive Officer Steve Fisher - Chief Financial Officer, Executive Vice President

Davis Hebert - Wells Fargo Aaron Watts - Deutsche Bank Avi Steiner - JPMorgan

Thank you, operator, and good morning everyone. I'd to welcome you to Entercom Communications earnings conference call.

This call is being recorded. A replay will be made available on our company website shortly after conclusion of today's call and also available by telephone number at the replay number noted in our earnings release this morning.

With our release this morning of today's call, we ask that you submit questions in advance of the call to the email address [email protected]. In addition, I'm always available for any follow-up questions should you wish to call me directly at 610-660-5647.

Now a note on the call. Should the company make any forward-looking statements, such statements are based on current expectations, and involve risks and uncertainties.

The company's actual results could differ materially from those projected. Additional information concerning the factors that could cause results to differ is described in the company's SEC filings on Forms 10-Q, 10-K and 8-K.

The company assumes no obligation to update any forward-looking statements. During this call, we may also reference certain non-GAAP financial measures.

We refer you to our website at Entercom.com for a reconciliation of such measures, and other financial performance. By the way, as a footnote before I turn it over, we intend to file our 10-K or 10-Q, excuse me, tomorrow, on Friday.

With that, let me turn it over to David Field, President and CEO.

Thanks, Steve. Good morning, everyone.

Thank you for joining today's Entercom earnings call. This has been an active and highly productive quarter for Entercom.

This is also the first time we have spoken publicly since closing on our Lincoln Financial media acquisition and the announcement of our Denver for Los Angeles station swap with Bonneville, so we have a lot to cover. We are very excited about these two deals that we believe will enhance our competitive position, accelerate our future performance and generate significant shareholder value.

But that is only part of the story and there are a number of reasons to be enthusiastic about Entercom and where we are headed. Our core operating performance continues to accelerate as our pacings have improved significantly over the past couple of months.

We are also approaching the window where we may be able to refinance our expensive high yield notes and expect to achieve meaningful savings in annual interest expense. I'll start with a summary of the quarter's financial highlights, then review the Lincoln and Bonneville deals, cover a few other recent developments and then update you on current business conditions.

And in a few minutes, Steve will be providing you with a more detailed briefing on the various financial implications of our recent moves. Entercom's second quarter revenues were up slightly over the prior year.

We achieved significant market share gains, which offset sluggish advertising conditions. Ex-political, our revenues were up 1%.

These results are slightly better than the pacing information we provided on our last earning call when we were down 1% for the quarter. Our performance improved considerably in June, which was up 3%.

Station operating expenses increased by 2%, resulting in a 4% decrease in station operating income. Adjusted EBITDA decreased 5%.

Here are some additional data points for the quarter. Our local revenues were up mid single digits, significantly outpacing national, which was down mid single digits.

The strongest categories in the quarter were auto, retail, financial, health and medical and TV cable. Telecom continued to be our poorest performing category, although it is looking stronger as we look ahead to Q3.

Our best performing markets during the quarter were Boston, Kansas City and Greensborough. And we continue to perform well in the ratings across the station group, which we believe is a direct reflection of our focused commitment to investing in strong local brands and outstanding local personalities and content.

In fact, we are pleased to note that Nielsen data shows that Entercom ranked first among all radio groups in ratings growth over the past couple of years across the PPM markets. That is a terrific achievement and I'd like to congratulate Pat Paxton, our President of Programming, and our entire programming team across the country on their great work that made that possible.

As for expenses, core station expenses were up 1%. SmartReach digital costs drove total expense growth to 2%.

I'd like to turn to the Lincoln and Bonneville transactions and give you some deeper color. First, as I suspect nearly all of you are aware, we spent over seven months working with the anti-trust division of the Justice Department to gain their approval of the originally contemplated acquisition.

When it became clear that they would not approve that transaction because of our pro forma position in Denver, we began to pursue trade discussions with a number of other groups that would enable us to satisfy the DOJ and at minimum preserve shareholder value. Bonneville exchange satisfied that criteria by enabling us to enter the Los Angeles market with the acquisition of an outstanding radio station that is growing rapidly and is anchored by one of the market's leading personalities.

While we had to give up three FM stations and an AM station in Denver to make the deal happen, we believe the transaction represents fair value and provides us with a higher ceiling going forward. The transaction enabled us to move forward and emerge from the frustrating quicksand of the past several months of uncertainty and delay.

What are the implications on these two transactions on Entercom? Here are a few key headlines.

We have added four new outstanding top 20 markets to our line-up, Los Angeles, Atlanta, Miami and San Diego. We are now operating in every major market on the West Coast from Seattle down to San Diego, which gives us a strong leadership position in the region and should enable additional growth opportunities.

We acquired a strong footprint of quality brands that are well positioned for the future. We are very excited about the substantial opportunity to drive improved performance from each of the markets as we capitalize on the benefits of our scale and our pure play focus and implement certain best practices.

The stations have margins that are quite substantially below Entercom and industry norms and we obviously intend to fix that as quickly as possible. We replaced the market managers in each of the new Lincoln markets with terrific new leaders effective July 17 when we commenced operations.

As we noted in our December announcement of the Lincoln transaction and reiterated on our past earnings call, we expect the acquisition to be accretive to shareholders in our first year of operations and have only a minimal impact on our leverage. As for our new station in Los Angeles, The Sound has recently become a ratings leader among adults and men 25 to 54 and has considerable upside as its revenue share trails its rating share by a significant margin.

While its cash flow currently trails that of the four stations we are trading, we would expect those lines to narrow significantly in the upcoming quarters and to cross some time in late 2016 or early 2017. And in Denver, while our new position is smaller than we had originally anticipated, it still represents a net improvement over our existing footprint, leaving us with 6 stations, including some of the markets' best leading brands.

Bottom line, we believe these transactions will significantly enhance our competitive position and generate meaningful shareholder value with minimal balance sheet impact. Earlier I also alluded to the fact that our operating performance has accelerated.

After achieving solid 3% revenue growth in June, that trend has continued. In the third quarter we are currently pacing up 3%.

Now I want to make sure there is no confusion caused due to the new stations we have acquired during the quarter. To be clear, we are pacing up 3%, excluding any of the new acquisitions.

So that is a clean same station reflection of business at “old Entercom”. Our new acquisitions as a group are currently pacing up a bit better than 3%.

I should note that we did have political spending of about $1.5 million in the third quarter last year to comp against. It is also interesting to note the strong growth we are experiencing in certain key advertising categories.

Currently on a same station basis, we are pacing ahead by double-digits in auto, as well as health and medical, professional services and home furnishings. Finally, a few words on the industry.

Just last week, AT&T announced that it was adding activated FM chips to all of its Android smart phones going forward. This is a watershed industry event.

I want to give a shout-out to Jeff Smulyan of EMMIS, who has spearheaded the industry effort to gain direct distribution of FM radio and enhanced hybrid features over smart phones. His vision and tireless efforts have made this achievement possible.

Now with both Sprint and AT&T partnering with radio, we are very optimistic that FM radio will be universally distributed on smart phones in the not to distant future. This is a great event for broadcasters, AT&T and the American public.

But that is not the only great news for radio over the past few weeks. Nielsen recently issued a report showing that broadcast radio is the number one reach medium in the United States.

The Nielsen study revealed that 93% of Americans listen to radio weekly versus 87% for TV and 70% for smart phones. Coming on top of a number of recent studies demonstrating radio's outstanding ROI and strong usage trends, the case for radio continues to strengthen at a time when so many other media are facing increasing challenges and disruption.

So in sum, this is a great time for Entercom. Our core performance is accelerating and we are excited about our new acquisitions and very focused on capitalizing on each of the compelling opportunities we have to drive significant value for our shareholders.

And frankly, with our stock currently trading with a trailing free cash flow yield of 14%, and with opportunities to materially increase free cash flow in the months ahead, we believe our stock is significantly undervalued and that our shareholders will be well rewarded going forward. With that, I'll turn it over to Steve for some additional thoughts, before we turn to your questions.

Thanks, David. And as you said, we've been pretty busy lately and have a lot of data to provide you this morning.

So my remarks will be a little longer than usual so I can give you a little more detail on data that will be helpful in thinking about changes to our business model. Second quarter station operating expenses were up 2% over the prior year, as David covered.

Now I should note this better than my expense guidance provided in our last call with the improvement primarily from a one-time vendor credit realized in the quarter. Consistent with what I've guided you to over the past few quarters, I expect expense growth, now this is important, so I'll pause, expense growth in our core operations, that is Entercom before the acquisitions, increased by 2% to 3% in the coming quarters.

Our corporate G&A expense in the quarter was basically flat with prior year. You'll notice in our P&L that we had $2 million in costs for the quarter in legal expenses.

This is primarily dealing with the Department of Justice. These are shown in a separate line item on our financials labeled merger and acquisition costs.

We exclude this item from adjusted EBITDA. Net interest expense for the second quarter was $9.3 million, which includes about 800,000 in amortization of non-cash interest items.

Non-cash compensation expense was $1.4 million. I expect this to increase to about $1.7 million in the third quarter due to a one time adjustment to this non-cash line item.

Then non-cash compensation expense should drop to about $1.5 million in the fourth quarter of the year. Turning now to the recent transaction and the impact on our balance sheet and business model.

We closed on our Lincoln acquisition on July 16, paying $77.5 million in cash and we issued $27.5 million of perpetual convertible preferred securities to the Lincoln Financial Group. The tax portion was funded from cash on hand and a portion of our revolver.

Now to give you a better feel of our balance sheet now after the close, today we have the following capital structure. $260.5 million in term loan B, $220 million in senior notes.

A $42 million balance on our revolver drawn, and $12 million in cash on hand or approximately $510.5 million in total net debt, net of cash as of today. Plus we have the 27.5 in newly issued convertible preferred that was given to Lincoln Financial Group.

This perpetual convertible preferred is held only by Lincoln and not transferable. It may be called in whole or in part by us at par.

We will pay a dividend on the preferred at a rate of 6% annually that will increase in the first few years if we've not yet redeemed this paper. There's no put option of the holder.

Convertible preferred does not count as debt under the company's credit facilities or our financial covenant calculations. So let me tell you how we view our new pro forma leverage ratio.

Our credit facility calculation includes certain allowed pro forma expense adjustments for the trailing acquired results. So with that, we see our pro forma leverage at September 30, at the end of this current quarter at about 4.7 times or only a slight increase from our June 30 leverage prior to the transaction close.

Looking forward, in the third quarter, we expect to report net interest expense of about $9.8 million on our outstanding debt and a new separate line item for the preferred dividend of about $340,000, representing that partial period given the July mid month issuance of the preferred. Just to help you in your models, the ongoing quarterly run rate for over the next year would be about 420,000 per quarter in preferred dividends.

As previously covered in our press releases, at the July close we initiated a station swap with Bonneville effective the same date. Our respective traded properties in Denver and Los Angeles are now operated by a time brokerage agreement until we receive final SEC approval.

Effectively, this means we'll still record revenue and expenses for the Los Angeles TBA station until we close the swap transaction which is expected early in the fourth quarter. Until the close, Entercom will receive a time brokerage fee payment from Bonneville or a benefit to us of about 300,000 per month.

This will be recorded in a separate line item TBA fee income on our financial statements. This also will not be included in adjusted EBITDA.

The Bonneville transaction is structured as an exchange, so there'll be no cash changing hands at close. But Bonneville, excuse me, Entercom will receive $5 million in cash over the next few years from Bonneville.

Now this is not a P&L impact item, I just note it as a value consideration coming to Entercom. That $5 million, plus a working capital credit in our favor of $2.7 million from Lincoln, effectively lowers the overall purchase price to around $97 million versus the headline number that you saw in our initial release of $105 million.

What does all this mean to our P&L going forward? Well, as David said, the brands are solid, and as previously noted, there's great upside in Los Angeles revenues.

It's the operating margins that represent the greatest near-term opportunity for value improvement. David noted that we've been doing a restructuring to the LFM properties, bringing in – to bring their margins in line with industry averages and Entercom expectations.

In the beginning we had a clear vision of what needed to be done and we've been quite busy in the past few weeks and will over the next few weeks to implement these plans. Besides new station leadership in the new LFM markets, we've already moved to cancel or trim certain unneeded vendor contracts and will renegotiate others to realize and benefit from our larger bargaining position, and we envision other expense moves as well.

We intend to address the majority of these items in the third quarter and as a result we plan to take a restructuring charge below the line. We'll also have legal expenses related to the wrap up on this transaction that occurred in July.

So as a result I expect about $1 million to $1.5 million in M&A and restructuring expense. This will be reflected in a separate line item apart from operating expenses, and again, excluded from adjusted EBITDA in the third quarter.

Now let me give you some color on the business model. And as I do so, I treat the Lincoln acquisition and then the swap of the Denver stations for Bonneville's LA station collective.

That is, all netted together. As a result of the acquisition and the trade, all of the transactions combined, we've added approximately $55 million of net revenue on a trailing 12 month basis.

I'm now going to give you some color on the four quarters trailing. The trailing LTM revenue breakout is for the third quarter of 2014, $13.6 million net revenue, for the fourth quarter of 2014, $13.7 million, for the first quarter of 2015, this year, $12.6 million, and for the second quarter of 2015, $14.6 million.

There could be some minor adjustments to these numbers as we finalize accounting treatment for trade revenues in the acquired properties in the coming weeks. Looking at the current or third quarter, keeping in mind we did not begin operations until July 17, we expect the impact on your business models from these new stations, less the Denver station including in the trade to Bonneville, to be an incremental $11 million to $12 million in revenue and about $2 million in BCF, broadcast cash flow, for this stub period.

We anticipate sequential margin improvement for our new markets in the fourth quarter and throughout 2016, and we'll give you more color on our progress and outlook in future calls. We do not see any significant increase to our corporate G&A expenses as a result of these additional markets.

For depreciation and amortization, I suggest you model an incremental 500,000 per quarter. We'll be doing a full acquisition appraisal of these assets before the end of the year, so it's possible this number will get refined.

Our tax rate has been in the low 40% range for GAAP financial purposes. We do not see a change of that tax rate as a result of this deal.

But as I always love to point out, we don't pay cash taxes and have significant NOLs in future tax shields to shelter future earnings. And this transaction only enhances our significant future tax position.

I'm sure before we go to their questions there'll be interest in our thoughts on the capital structure and our current credit facility, so I'll anticipate that question. We are aware that given our outstanding free cash flow generation and moderate leverage we can improve on our overall interest expense.

With our high yield notes now callable later this fall, we're now in a very favorable window. I'm encouraged that there are multiple options available to the company and that they are all good.

Any avenue we take should enhance free cash flow per share and by a meaningful amount. We won't comment on specific timing or structure at this time, other than to say we are on it.

So in conclusion, you've heard more details and color on the transaction. Our excitement on the improving business conditions in recent months and pacings for the current quarter and our belief in the revenue opportunity and margin improvements represented in our new markets, our current balance sheet strength and future free cash flow enhancement opportunities.

So that's a lot of prepared remarks. Now let me go to the questions that were submitted in advance.

David, I'll lead with kind of a macro one from Davis Hebert at Wells Fargo. First, let me note that he said local revenue improved, no, local revenue up 4% is impressive.

That was an editorial comment. Now his question.

David, can you give a state of the union on radio, noting the divergence in performance between iHeart, Entercom and Town Square doing fairly well versus CBS, Cumulus and others not doing so much. What does that say about Entercom, are we taking share, how should we think about the industry?

Great. Well that's the material questions submitted in advance.

Let me remind you of my direct phone number, Steve Fisher, 610-660-5647.

Thanks all. Appreciate everybody's time this morning.

I know it's a busy time for everybody. We're delighted again with where we're headed and look forward to reporting back to you as we go forward.

Thank you.