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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Good day, and welcome to the GTN Limited Financing and Trading Update. Today's conference is being recorded. Representing the company today are Bill Yde, Managing Director and Chief Executive Officer; and Scott Cody, Chief Financial Officer and Chief Operating Officer. Before I turn the call over to Bill, I would like to remind the listeners that this call is subject to disclaimer and important information, which is included in the 22 May 2020 ASX announcement. With that, I will turn the call over to Bill Yde, Managing Director and Chief Executive Officer. Please go ahead.
Thank you for joining us this morning. As we announced last week, we have successfully completed the refinancing of our bank's facility, which was set to expire in February 2021. We would like to thank Commonwealth Bank of Australia for their continued support of the company as they recently invested over $21 million additional dollars to become our sole lender and have been our lead lender since 2011. I will turn the call over to Scott to give you an overview of the new facility.
The new facility is for $60 million and has no scheduled mandatory debt repayments prior to the 30 September 2023 repayment date. This is the same amount of debt as we had outstanding under the old facility. We believe this structure is important to the company during the current pandemic as cash will be critical to riding out the storm. The new facility could be repaid and drawn down under the term of the facility. As of 30 April, the company had $59 million of cash and net debt, including leases under IFRS 16 of only $5.8 million. The current interest rate on the new facility is BBSY plus 2.5%, which is the same as the previously facility. We believe that our strong balance sheet will allow us to come through the pandemic without raising additional capital. Bill?
The pandemic has been extremely hard on media companies, and GTN is no exception. GTN was on a path to achieve solid growth for the quarter ending 31 March before advertising cancellations in the millions started pouring in the last 2 weeks of March. Due to the uncertainty caused by this pandemic, we have had to adjust our strategies. What we do know is that the pandemic will end. What we don't know is when it will end. We also don't know or have any control over when companies will return to normal levels of spending and activity. Consequently, we have to pursue and balance 2 conflicting goals at the same time. The first goal is to maintain our strong balance sheet and preserve as much cash as possible. This will give us the best chance to endure this crisis to its end. The second goal is to preserve as much of our staff and product as possible so that post crisis, we are in a position to return to high profitability. This is a balancing act as these goals are not in perfect alignment with each other. To accomplish the first goal, we have reduced expenses where we can. Our largest expense, station compensation, which accounts for 55% of our year-to-date revenue as of 31 March 2020, is largely contractual and cannot be reduced enough to be profitable during the crisis. However, we are reviewing certain contracts that because of their short-term nature have potential for reduction. Sales commissions and bonuses, our next largest category of expense, have automatically been reduced because they are based on revenue, which is down significantly during this period. Eliminating positions is difficult because we are a very efficient company already. We do not have a lot of extra bodies, and we generate more revenue with fewer people than most traditional media companies. However, we have eliminated a number of salaried sales positions. Over the past 20 years, we have constantly invested in new sales reps to help ensure future growth. However, with the workplace restrictions and poor market conditions, spending in this category will now not be fruitful. In current times, preservation of cash becomes more critical goal. Our strategy in this area has had to switch from growth to preservation. We expect that -- resuming the recruitment and development of sales talent once our markets return to a more normal state. We have also reduced costs in various other ways, including research, mandatory vacation, aviation reductions, temporary cost relief from various vendors. With the cost reductions and our strong balance sheet, we believe that we have put our company in as good a position as we can to endure the pandemic without the need for additional capital. No one has a crystal ball, and these are the most difficult economic times in our history. Projections are impossible at this point. We believe that market conditions in April, May and June will be at their worst. We hope to see some modest improvement in market activity in July, August and September as the restrictions in our markets are expected to loosen. Our current modeling shows that we will still have a significant amount of cash through the remainder of the calendar year. Again, this is not a projection. This is merely a guide to measure our sustainability through the pandemic. Because of the fixed cost nature of our business, generally a high percentage of revenue increases and decreases directly impact adjusted EBITDA and net profit before tax. This is why a strong balance sheet is important to the company's long-term success. To continue to maintain a strong balance sheet during the pandemic and its likely aftermath, we have focused our expenditures on those that have the best chance of success and pared back those areas that may be considered more speculative growth initiatives. We believe that we have put the company in a good position to endure the pandemic, and our veteran sales staff remains in place and ready to take advantage of future revenue opportunities. This ends our prepared remarks, and we now open the line to questions.
[Operator Instructions] The first question comes from Callum Sinclair with Macquarie.
Maybe just starting, if you could give us a bit of an understanding around the geographic performance that makes up this April revenue number that you provided in the update.
I'm sorry, could you repeat that?
Yes. Could you just give us a little bit of color around the geographic variances for the April revenue number, so the minus 55% for the April month, maybe by country or some indication of the variance between countries.
Look, all of the countries had a significant drop. In local currency, in approximate dollars, April dropped off in Australia from around $6.7 million to $3.9 million, a pretty significant drop. Brazil had a very significant drop from about 4 million in local currency to about 589,000 in local currency. Canada dropped from about 3.1 million in local currency to 872,000 in local currency. And the U.K. dropped from about 2.1 million to about 900,000 in local currency. That shows you that it was widespread across all countries, and virtually, everybody kind of performed very, very similarly. I think and we expected Brazil to get hammered the worst because we expected the pandemic to hit there more seriously. Fortunately, Brazil's currency is so low that having a worse performance in Brazil was not as tragic as had Australia had that kind of performance.
And is it...
Callum, I'm just going to add that Australia was actually the strongest on a comparative basis of the markets, and Brazil was the weakest of the markets in terms of comparison to last April.
That helps. And maybe just to clarify, have you maintained the existing pricing rate cards so far and expect to continue to hold them? So is it fair to assume the revenue decline is pretty much or entirely sellout?
The decline was predominantly volume. We have been able to maintain rates in a lot of situations, but we also are not turning away any revenue. We -- given that we have a massive amount of unutilized spots, we are able to bonus significantly to attract advertisers where they may not normally be attractive. So we're doing whatever we can to bring revenue in. At this point in time, unlike any other time in our history, maintaining an effective rate is not our major goal.
Okay. And just in terms of the April adjusted EBITDA number and the cost-out you mentioned, are you expecting some more sort of cost benefit as time goes on from the notice period if you're sort of deferring or ending or renegotiating some of those regional stations that are sort of short term in nature? Is that captured in the April adjusted EBITDA? Or is that likely to sort of slow down in the next couple of months?
Most of the bigger cost reductions will come after June 30. But yes, look, we've made a lot of cost reductions that we can. We have -- we are constantly analyzing to see signs of improvement. We are prepared to make deeper cuts if we have to, but we think we have made substantial enough cuts to get there. We are -- we have reduced some contracts that were not under long-term agreements. We are negotiating others, but none of those will impact April, May -- likely to impact April, May or June, and more likely to start with cost reduction in a big way -- bigger way in the -- beginning in July.
[Operator Instructions] The next question comes from Julian Mulcahy with Evans & Partners.
Just a question to when the market does start to recover. Where do you see your form of advertising in the pecking order from your advertiser's point of view and coming back? Is it early stage? Or is it the later stages as they get more confident in the market themselves?
Again, nobody's got any real crystal ball. Advertising kind of came to almost a complete stop starting late in the last 2 weeks of March. Everybody was canceling all media virtually anywhere that existed. We kind of are -- like I said, we don't know, but we kind of believe that the worst of it was April, May and June. We -- as things loosen up, we kind of expect to see more activity picking up in July into the next quarter. But we have -- we can't predict. We can't -- we have no way of knowing. Marketing directors and top executives at all of the biggest companies around the world have all come up with their plan, and there's not going to be a lot that we can do to change that plan. It's going to be determined by the openness of the Australian economy and the other countries that we're in.
How did -- what was the sort of pattern back in the GFC? Was there like a period of cancellations and then it got turned back on again?
No. GFC, we didn't even have a drop in -- we didn't even have drops. We had increases during the GFC. We grew quite well during the GFC. But the GFC was nothing compared to this. I mean this is like a complete shutdown of economies, and during the GFC, there -- a lot of large segments still were viable and operating. So this is way worse than the GFC.
And just on the cost sort of run rate. I mean if you look at in Q3, it looked like $6.5 million per month. But then you look at the month of April, and it was $10 million in a month. So was there something else in the April numbers, new contracts starting up or one-off costs or what?
Scott, do you want to take that one?
Sure. Actually, I didn't quite understand your question. So basically -- okay. So the...
Just revenue minus adjusted EBITDA sort of in Q3 was $6.5 million per month, whereas for April it was -- the gap was $10 million.
Okay. Are you just talking about the operating expenses? Because I'm not -- because I'm looking here at...
Just everything between revenue and adjusted EBITDA.
Okay. Well, revenue was -- so for third quarter or fourth quarter? I mean because...
Third quarter, and then comparing with the...
Third quarter. Okay. So basically, you had a $41 million of expenses. And yes, so that's almost $13 million a month. And then it went down to roughly less than $11 million. So you probably -- you had about a $2 million drop.
And I do reckon that's now the run rate. So...
I'm just looking at April as actual. I mean April -- yes, I mean, I would say April is the run rate. We think that it's kind of a fluid situation. We think that, clearly, there are cuts we've made that have not kicked in yet at April because of the lag time and things like that and contract periods. Having said that, there's also stuff that kind of -- is temporary that kind of flows back in as well. So it's really hard to like put a stake in the ground, so to speak. But clearly, our expenses were running up about 6%. And then they were down significantly in April because they went -- I just said they went from roughly 10 8. They were 10 8, and they have been 13 4 the previous year. So there's a pretty significant drop. A lot of that is commissions because, obviously, revenue dropped 55%. So a lot of commissions and bonuses and things like that are in there. And that's probably the biggest number. The other number that we probably sometimes forget about is that, remember, the U.K. has a variable compensation. So that was probably actually -- that and the sales costs were probably the 2 biggest drops over the period.
Yes. Scott's description of being fluid is correct. We started making expense cuts. Clearly, the U.K. variable model had part to do with it. We did start eliminating expense cuts in February, March and April, paring down our sales staff, a number of those, and we eliminated some fairly expensive research, which won't affect us until later. But April should have been -- the expense levels in April should have been less than the prior quarter. And sorry, I didn't understand your question because I thought you were saying April went up.
Yes. I made a miscalculation or the [indiscernible] that's good. So it's going for third, and then [indiscernible]. When you...
Yes, I'm glad to hear that. I thought I woke up in the wrong -- looking at the wrong statements or something here.
Let me go into the next quarter. Are there any -- is there any cost inflation other than what's going to come back as variable costs? I mean are there new contracts that are due to step-up or anything like that?
Not that...
Yes. I mean, the -- I think the -- obviously, as revenue comes back, the commissions are going to come back, and the variable compensation will come back for sure. There is probably a couple of things that we've eliminated that will stay eliminated. So we probably have adjusted our overall cost base a little bit, which is kind of appropriate, because as we pointed out, it was up in the third quarter, which kind of normalized. It was up about 5%. And I think we've been running year-to-date about 6%, if I recall. So there's a couple of things that we have -- as we've gone through this process, we've said, "You know what, these are permanent." But quite frankly, we're not really tracking the difference between permanent and timing. We're kind of just looking at where we get to and what that means in our modeling.
Right. And with the tail of radio stations that you're looking to cut compensation, could you put a figure on that number?
I think it's a little too early to put a figure on it, which we have the -- we've done very -- and the April numbers is very, very limited other than to set the variable compensation. It could be a really wide range of numbers because, for example, one that people were talking to, if it doesn't go the right way, it could become 0. But it -- or it could be somewhat less than it is today. There's -- that's kind of the range. So I guess all I'd say is that we are looking at everything very hard, and we're trying to balance what the future looks like versus what today looks like and structure agreements that bridge those 2 realities the best we can.
Right. And in terms of the management teams, you had a bit of a change in Canada. Brazil has been really strong. Do they all hold together during this crisis?
Yes. Look, Canada has held together. And it's one of the bright spots, actually, despite all -- if you look at the way Canada was starting to perform, they were up significantly in January, about even in February. March, despite significant cancellations in the last 2 weeks, was still almost an all-time record of revenue for March. So we were pleased with the -- we're very pleased with the progress Canada was making. We're very pleased with the progress Brazil was making. Brazil actually had 9 months in a row. We've never seen it happen. We're 9 months in a row of all-time records for Brazil. Every month was an all-time record, and they were pacing to get 12 months in a row, which we have never seen in any country. So it was extremely disappointing. But both Brazil and Canada were doing well. And U.K. has always kind of continued to perform better than we think it's going to perform. So the quarter is shaping up well for us.
And just finally, with the new facility, are you still able to do buyback?
Able to do what? Julian, I'm sorry.
The share buyback. Are there any restrictions on that?
Look, the restrictions are -- our distributions are based on 100% of adjusted NPAT, which is obviously NPAT plus the tax-effected amortization from the intangibles. So that would be the limitation on the share buyback and dividends combined. And -- but in terms of the buckets, there's not a limitation one way or the other.
The next question comes from [ Andrew Moffett ] with [ Colosa Capital ].
Just a quick question. You've set out in your announcement the -- and indeed, we've discussed this morning, the cost reductions in April. I appreciate that it's difficult or near or impossible to estimate income in the next couple of months. But I'm assuming that given the actions that you've taken since March, you'd have a reasonable handle on the costs in May and June, and perhaps an estimate of the type of step down cost reduction you are seeking to achieve from July onwards. Could you give us some color around the costs in the near-term months versus what's achieved in April?
Yes. I think there's difficulty with that because a good deal of those cost reductions are variable. So unless we know what the revenue -- if we knew what the revenue is going to be, then we could put kind of a stick in the ground and tell you roughly what the savings would be. But without knowing what the revenue would be, it's very, very difficult to do so.
So you were to assume a static revenue number?
No, there's about 3 different categories. We have, since January, reduced payroll by several million -- by a couple of million dollars. We've eliminated reimbursements and parking reimbursements that were about $0.5 million. And on top of that, then we have contracts that are being negotiated that have a huge range, which could be anywhere from a couple of million to $4 million. It's just a wide, wide range of what we might save on those. We've reduced research by about $1.25 million. And those we expect kind of to stay stable as we go through the time. But the biggest one is renegotiating new contracts, which the outcome is -- we're certainly trying, but the outcome of that is no way certain. That's about as good as I can do on that. The variable costs we refer to are really sales commissions based on if revenue goes -- if revenue stays where it's at and the sales commissions will stay where they are at and will stay low.
And also the compensation in U.K.?
Yes. It works almost like sales commissions. So in U.K., we're basically just almost like an advertising agency, where a big portion of the revenue goes back to the stations. So if we don't sell much, they don't get much and we don't lose as much.
Yes. Historically, it's north of 70% of the revenue, which is why that segment always has a lower operating margin than the other segments.
Yes. I guess what I was looking for was if you take April revenue numbers as a constant, how does May and June costs look given the work that you've done to date in cost -- cutting the cost back and the time lag effect?
We would expect April, May and June to be very similar months with...
So there's been no time lag effect beyond April?
Yes. Most of the costs are in. Most of the cost reductions are in, with the exception of the bigger ones that we're working on, which would be a July-type reduction.
There are no further questions at this time. I'll now hand back to Mr. Yde for closing remarks.
Thank you all for joining us today. I think that we have put our company in as good a position as we can to endure this pandemic, and we're going to continue to do what we can to drive whatever revenue is available across all of our markets. But the fundamentals of GTN remain positive. We have a strong balance sheet, a lot of cash, low leverage. And we have operations that have historically generated significant cash. We've taken the actions that we deem necessary to put us in the best position to endure this pandemic, and we look forward to speaking to you guys again after our full year fiscal 2020 results. Thank you very much.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.