Entravision Communications Corporation (EVC) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Entravision's First Quarter 2020 Earnings Conference Call. [Operator Instructions]. 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.

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. Call is the property of Entravision Communications Corporation. Any redistribution, retransmission or rebroadcast of this call in any form without the express of written consent. 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 turndown arising from the pandemic.So we have undertaken an extensive review of our business efficiently align operations and reduce costs. I'll walk you through the various actions we have undertaken later on this call. And beyond this extremely difficult business environment, our balance sheet today continues to be solid approximately $134 million in cash and marketable securities on the books versus a total debt of approximately $217.5 million. Our financial performance, 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 $81 million last year. Free cash flow was up 304% to $5.2 million compared to $1.3 million 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. Fortunately, 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, television revenues in the first quarter were up 2%, $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, National down 9% and local down 3%. First quarter retransmission revenues were up 9%, $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 to 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 health care was up 7%.Turning to our ratings performance. Division, television affiliates built upon their market leadership in the February 2020 sweeps. Belts 18 to 49 in early local news, our Univision television stations finished ahead of their Telemundo competition in 12 of 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, 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. Our late local news cast ranks number one or number two against English and Spanish competitors in seven markets. Full week, our Univision and Unimás television stations combined have a cumulative audience of 4.1 million versus two plus compared to Telemundo's $3.2 million versus two plus. We have 25% more viewers in 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% and [indiscernible] revenue approximately $1 million in political sales in the quarter were 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. 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. Service is our largest advertising category for audio, improved 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 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, released for the winter book 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 and audio advertising platform from scroller-ads and optimize advertising marketplace, data expand and international data management platform and audience marketplace with consumer insights and our U.S. Hispanic marketing solutions for SMB, national advertisers.Entravision digital brings these businesses into a unified solutions offering that provides advertisers and agencies a single source to engage consumers globally. 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 component to our - 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 represents 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 when compared to the same quarter last year. Our demand side platform semantics also continues 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.As is the flexibility offered by having our own technology, we are working hard on expanding our sales force in the United States to accelerate growth. And less than a month, we've strengthened our U.S. sales grew, 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 most of our advertisers are also under locked down 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 minus 36%. Our radio business at pacing minus 50%, and our digital is pacing minus 33% for the second quarter.Taking several difficult steps to whether this helps and economic crisis. They include following: temporary reduction of our workforce by approximately 18%. Company-wide reduction of salaries for those still on the payroll ranging between 2.5% and 22.5% based on compensation levels. The cancellation of our stock buyback program, the 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. Right being negatively impacted by the COVID-19 pandemic. While there's no doubt, the second quarter will be extremely difficult to whether 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.

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 primarily due to approximately $5.3 million in political revenue for the quarter. Excluding political and $3.9 million in nonrecurring 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. Decrease in our radio segment was primarily due to decreases in both national and local advertising revenue. Core radio revenues, excluding $1 million - 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, 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 in 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 determine the 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 onetime noncash impairment charge totaling $39.8 million across all 3 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 was $145,000. Earnings per share for the quarter were a negative $0.42 compared to $0.02 per share in the same last year. Excluding the onetime 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 has decided to temporarily reduce the quarterly cash dividend by 50% to $0.025 per share to shareholders of the company's common stock payable on June 30, 2020. The total amount of cash to be disbursed for this quarterly dividend will be approximately $2.0 million.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 Instructions]. Our first question comes from Michael Kupinski with Noble Capital Markets.

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?

I think revenue as revenue.

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.

Well, the reason for the consolidation of the digital business was just to get an organized approach to our marketing of those businesses. But again we recently named as [indiscernible] our national digital business. Certainly, one of the people within the organization with the most experience and [indiscernible] take the role that he has. But we've also consolidated our U.S. business under the Entravision digital brand. But it was - our purpose was to have a robust multiplatform service, servicing our existing small and midsized businesses in the U.S. and complements our branding services by our television and radio tailor performance-based digital products. And so we're able to - by I'll say, integrating our better integrating our digital - U.S. digital assets, our broadcast assets. We're able to provide better solutions, marketing solutions for our clients. And then our international business, taking steps, as I pointed out, to accelerate the growth of that business in the U.S. with the Smadex product. So it's just a way of bringing everything under 1 umbrella and to create a more efficient platform for all of our digital business units.

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?

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

Got you. And then auto, obviously, a big category for you. You said it's 24%. I know that at 1 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?

Well, it's - we haven't - don't have the feedback right now that we'd like to have. It's - as I pointed out, we're just starting to see Texas and Florida and Colorado opening up. There's also steps being taken to open up California here this week and some capacity. But motive is difficult to really estimate. I think it's going to end up. I gave you some information that we were able to source about how the revised forecast for auto unit sales in the U.S. is about $12 million to $13 million as compared to almost $17 million in 2019 right there, there's been a major adjustment in forecasting by the auto industry in terms of [indiscernible] challenges that we're all going to face but anything, Chris?

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. And 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 a strong way.

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

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 in the second quarter? Can you just talk a little bit about your thoughts on political?

Well, we had a - just a huge political - certainly, we're very pleased [indiscernible] turned out, other important data point about the - our core business advertising categories. We're 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 review our numbers constantly. And what we're seeing is probably, we look to be at budget for the quarter. Expecting to be - we had forecasted to be above budget, but then everything feel fairly confident will be a budget for quarter. Now for Q3 and 4, it's still too early to tell. We have - you can imagine, Q3 is higher budget than Q2 then Q1. And then Q4 is pretty large budget. So we'll see.We still think one of the things I just read this week, and you probably read too, is this announcement by biding campaign that they're going to spend $55 million in 5 key states to mobilize the Latino voter. And of the five states, I think - I believe we're in 4 of those states with strong media assets, including ADA, Colorado, Florida and Texas. Anyway, but we're well positioned to take advantage of that rather impressive purchase by the binding campaign or investment in the Latino. And I still believe that in order to win the White House, you're going to need to buys Latino vote in the important to swing states.

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 like talking? Or are they just waiting to see how things shake out? And if you are looking at assets, is there a preference for you in terms of radio, TV or digital at this point?

Well, I don't think there's any - we haven't been [indiscernible] to any conversations on the M&A front. I think everyone is still in kind of a lingering state of what do we do now as far as this pandemic is concerned, covenants don't start to get tripped up until you start reporting Q2 numbers, and you're going to be in late summer before that happens. And then conversations with lenders about what to do about the covenant brakes starting in early summer, perhaps. So we're not kind of - we're not in that realm where those conversations start to be had. But that said, we're sitting here and we're 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 are concerned, I think digital continues to interest us. TV would also be opportunistic. Should it be kind of an end market tuck-in opportunity? And then, I guess, third, on the run would be radio.

And just 1 last question and a housekeeping item. I assume that there were some unusual items in the D&A, depreciation and amortization line, which was like $4.5 million. Is that number - is that a good number going forward? Or was there something in that number?

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

Got you.

Now the repack was came after the FCC auction and had to go and buy equipment on that front, and that's why that was a temporary spike.

[Operator Instructions]. 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.

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