Good day, welcome to the GTN Limited 2019 half-year earnings conference call. Today's conference is being recorded. Representing the company today are William 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 the disclaimer and important information included in the company's half-year earnings presentation. With that, I will turn the call over to William Yde, Managing Director and Chief Executive Officer. Bill?
Thank you. Thank you everyone for joining us this morning. As you are aware, per our revised guidance announced to the market in December, the first half of fiscal 2019 was challenging. While there were some real positives, including revenue increases in Brazil, Canada, United Kingdom, and the signing of Rogers in Toronto as a network affiliate, Australia did not perform as well as we had hoped, and this was the key driver of the 9% decrease in adjusted EBITDA. The drop was better than our revised guidance of 10%-15% fall, but disappointing nonetheless. Group revenue from continuing operations increased 2.3% to AUD 94.4 million, with all of our operating geographies outside of Australia being up over first half fiscal 2018, while Australia reported a 3% drop in revenue.
Group EBITDA and adjusted EBITDA were down from fiscal 2018 due to higher costs, primarily increases in station compensation expenses. Much of the increase in station compensation is related to multi-year contracts, which fixes the expense under these agreements for a number of years. To be able to continue to increase revenue, these contracts will become more profitable over time. Australia, our most established and profitable market, struggled in the second three months of the half-year period. The 3% drop in Australia revenue was due to a combination of difficult economic environment, the loss of several key clients who changed our advertising strategy for the fourth calendar quarter of 2018. We are working diligently to recapture the clients we lost and have made some inroads. Our network continues to have a strong position in all the major metropolitan markets in Australia.
Our expectation is that Australia will generate solid results in the future. Canada revenue was up over 7% over first half fiscal 2018. The big story in the market was the company signing a multi-year contract with Rogers in Toronto to become a radio and television affiliate. Due primarily to the additional cost for this contract, EBITDA was lower for first half fiscal 2019 when compared to the same period last year. We expect that the contract will generate additional revenue in the future as it significantly strengthens our network in Toronto, which was the largest and most important market in Canada. During the period, we have also added valuable inventory from our existing affiliates as well as entering new affiliation agreements, and we continue to working on adding new inventory from all sources to our network lineup to help fuel future growth.
Our U.K. operations had a nice bounce back after disappointing first half fiscal 2018. Revenue was up 13%, 7% in local currency, on inventory increased utilization, leading to a strong increase in EBITDA for the period. Despite a challenging environment, our U.K. operations continue to be a steady, reliable source of cash flow for the company. Brazil continues to be our fastest-growing market, and we have made great strides in our market rollout. Revenue increased 13% in local currency, but due to unfavorable currency exchange movements, revenue only increased 1% when reported in AUD. EBITDA decreased due to additional costs related primarily to station compensation and operating two additional markets. Salvador, which opened in the second half of fiscal 2018, and Campinas, which opened in October 2018.
In line with our growth strategy, we intended to continue to invest in Brazil as we see the potential upside to be significant. In February, we opened our seventh market, Brasília, the capital of Brazil. We are now operating in seven of the 10 largest Brazilian markets. These are also the seven largest markets with respect to advertising dollars. I will now turn the call over to Scott for a complete review of the financials.
Thanks, Bill, and good morning, everyone. Revenue from continuing operations grew 2.3% to AUD 94.4 million. Revenue in all of our operating geographies outside of Australia was up over first half fiscal 2018. When compared to first half fiscal 2018, Brazil revenue was up 1%, Canada revenue was up 7%, U.K. revenue was up 13%, while Australia revenue decreased to 3%. Canada and U.K. revenue was aided by favorable foreign currency fluctuations, while FX acted as a significant headwind with regard to Brazil's reported revenue.
Brazilian revenue was up 13% in local currency, but only 1% in AUD. Adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, and amortization, adjusted to include the non-cash interest income generated by the financing component of our long-term station affiliation agreement with Southern Cross Austereo and excludes transaction costs and foreign exchange gains and losses, was AUD 22.3 million, a decrease of 9.4% compared to first half fiscal 2018. We consider it appropriate to add the financing component of our long-term station affiliation agreement with Southern Cross Austereo to EBITDA, because EBITDA includes a large portion of non-cash station compensation expense related to the agreement. By including both amounts in adjusted EBITDA, we believe it provides a clearer view of the financial impact of the agreement. Adjusted EBITDA was negatively impacted by increased costs during the period, primarily additional station compensation costs.
Most of these costs are associated with multi-year contracts, costs under these agreements should remain fixed for fiscal 2020 and beyond. Adjusted NPAT, which is defined as net profit from continuing operations after tax, adjusted to add back the tax effect of non-cash amortization expense related to acquired intangible assets, fell 18.1% to AUD 12.9 million. In addition to the EBITDA shortfall, adjusted NPAT was negatively impacted by AUD 500,000 of additional depreciation expense in first half fiscal 2019 compared to first half fiscal 2018, due to the early adoption of AASB 16 leases during the period. The adoption of AASB 16 had a positive impact on EBITDA and adjusted EBITDA for the period of a similar amount.
The company has a strong balance sheet with AUD 38.6 million of cash, AUD 63.2 million of debt, including AUD 3.2 million of leases resulting from the adoption of AASB 16, and AUD 24.6 million of net debt at 31 December 2018. The company's gearing ratio for net debt to trailing 12-month EBITDA is 0.54 times as of December 31st, 2018. The board of directors has declared an interim dividend of AUD 0.024 per share to shareholders of record on March 13th, 2019. This dividend will be 100% franked. The company announced today that it has initiated an on-market share buyback of up to 10% of its outstanding shares, up to AUD 20 million, for a period of up to 12 months. The buyback, flagged to the market in January, is a capital management initiative aimed at maximizing shareholder value. No target share price or minimum repurchase amount has been set.
Macquarie Securities Australia Limited has been appointed by the company to act as its broker for the buyback. I will now turn the call back to Bill for an update on second half fiscal 2019.
Thanks, Scott. Projected revenue in Australia for January and February is expected to be flat compared to the same two months in 2018, thus reversing the trend from the quarter ended December 31st, 2018. Overall revenue for the entire company is expected to be slightly up for the two-month period. In local currency, we expect Brazil and Canada to exceed January and February 2018, while we anticipate United Kingdom will be lower. The company's expenses are mostly comprised of fixed costs. This means we have significant operating leverage as relatively small changes in revenue lead to much larger changes in profitability on a percentage basis. This model has served the company well for over 20 years as revenue has almost always caught up with and then outpaced the expenditure, leading to healthy operating margins and significant profits.
During the current fiscal year, expenses have grown faster than revenue, largely due to higher station compensation. Increased fixed station compensation under new and renewed agreements have historically led to short-term pressure on margins and profitability. It is important to note that the company has a relatively short sales cycle and therefore has a lack of visibility over forecast sales and the resulting EBITDA for the second half of the financial year. Importantly, the company continues to generate significant amounts of free cash flow, which can be used for share buybacks, dividends, and/or debt reduction. All four of our markets continue to be positioned to perform well with solid affiliate lineups, strong sales staffs, and virtually no direct competitors. While disappointed with first half results, we continue to be excited by the opportunities in each of our markets and plan to continue implementing our growth strategy to maximize their potential.
This ends our prepared remarks, and we will open the lines up to questions.
Ladies and gentlemen, we will now begin the question-and-answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Shaun Weick from Macquarie. Please ask your
Hi, Bill. Hi, Scott. Just a couple of ones from me. Just was wondering if you could provide any commentary or color around the Australia trading performance in January and February in terms of what you've seen there from, I guess, the market and then more specifically from an account basis.
Look, we feel very positive that, one, we got it going back in the right direction. We were 3% down largely in the Q2. we've done a lot of changes, implemented a lot of strategies. Some of these have already taken root. Some of them will take root over the next quarter and six-month periods. We feel like we're headed back in the proper direction.
Okay, great. Maybe just on the Canada and the Brazil market, just in terms of what you've seen, recent trends in those markets and how you're thinking about things there.
Look, I'm still very positive about both Canada and Brazil. Brazil continues to grow in revenue. We continue to reinvest and open more markets, and we keep becoming bigger and bigger portion of that advertising market. Canada, as we've always felt, will start to take off as we have added Rogers into Toronto, which is very, very important being the biggest market. Very positive on both Canada and Brazil.
Okay. Maybe just one final one with respect to the buyback. Can you just talk about the commentary or where you're at in terms of trading at significant discount to underlying value and how the board is thinking about it?
Yeah, I think, right now, we look at it as being undervalued. I think today would define that obviously. Information's going to change every day, both from our performance and from the stock's performance. You're not going to be able to put a long-term definition, but we think as of today, it meets that criteria.
Okay, great. Thanks, Scott.
Thanks, Shaun.
Your next question comes from the line of Julian Mulcahy from Evans & Partners. Your line is open.
Hi, guys. I wonder whether you could talk about the loss of the several clients in Australia in the December quarter, and if you don't want to name them, but just talk about the sort of sectors and where their money has gone to instead of you guys.
Look, we have 605 clients on the air various times during this year. It's not uncommon for some time for a client to go off for a couple of months and then come back on. In this last quarter, we lost for a number of different reasons. Some people had changes in their strategy and moved away more from traditional radio. We had some people that had technical problems and were not able to advertise. Look, out of 605 clients, some go in, some go out. We know exactly who we lost and exactly know why we lost them, and we've implemented strategies. There were probably six, I wouldn't say our biggest clients, but six reasonably large clients that went off during that quarter or reduced during that quarter. Two of those clients we already have back on the air.
Two of those clients we already have had discussions with and are likely to get a brief. A vast majority of the losses, we feel like we're in really good shape coming back. The other strategy always that helps bulletproof you from these types of things is to continue to farm more new clients. We have gotten a couple of new clients in that are significant. One even happens to be now our largest client. You don't go up forever, and a train comes off the track in a few seconds, but it takes months to put it all back together sometimes, and that's kind of what this situation is. We're not at all uncomfortable. This isn't the first time this has ever happened.
I think this happened in 2009, and it happened in 2013, and both times we did a heavy evaluation, came back with a stronger product, and had a number of years of very, very substantial growth in each case. I'm confident that we'll do the same here. It's not comfortable, it's not fun, but it will happen from time to time. We've done a very deep dive into every single reason that we were not selected on some of these buys, and we feel that we have a very strong strategy implemented to get most of them back.
Okay. On Canada, with the Rogers deal, I know in its own right, it doesn't add a lot of inventory or revenue, but more about the impact on tightening up the market with your share, I think 80% or above now. How do you sort of see that playing out in terms of increasing prices, sellout rates, that sort of thing?
Well, look, initially the sellout rate will drop because we have more inventory. Canada has a slower sales cycle than what the other three markets do. When we announced that we had them back in November, we cautioned everybody not to expect to see anything till March. We are starting to sell some of it now. The TV portion of the Rogers contract just started just a few weeks ago because it took a while to get the helicopters and the cameras and everything to fit their configuration that they have at their television station. We have sold a little bit of the TV already, even though it's only been on for a week. I think you can go back in history and look at from the IPO date when we added a couple of major affiliates and you could see the growth.
We expect this to have a strong impact on us. It's the biggest market. It really has to do with our reach is now almost unmatchable by anybody there in the country now. It's a powerful tool for us in the future.
Okay. Thanks you .
Thanks, Julian.
Your next question comes from the line of Daniel Ireland from Farnham Investments. Your line is open.
Hi, guys. Just coming back to the Australian business. I wanted to get a bit more information on just the issue there. Was it to do with sales execution, what kind of strategy to be implemented? Has there been a change in sales staff? Just a bit more color around that.
Yeah, we're probably reticent to lay out our sales strategy into the open market. We lost some clients, as I say, that were just technical because they had issues. They couldn't advertise. They're back on. That was an easy one. We lost a couple of clients due to integration of other products and wanting to have a multi-platform solution. We have been working on some of those solutions ourselves for quite some time now. Some of it was sales execution that was our fault. Somebody who might have had a client on for 15 straight years may have just taken them for granted and assumed that they were going to be on for 16 straight years.
Due to all the rapid changes at agency levels and people, sometimes the new people coming in aren't as familiar with you as they should have been, and our people should have been in and out of the agencies with more contact and with the client and the agencies. There were a lot of reasons, and like I say, we've examined every one of them. We've put in place changes. There have been some changes to the sales staff. There have been a number of additions to the sales staff and a reinstatement of some processes which we believe will let us target better.
The overall market for radio advertising hasn't been particularly weak. Has that been your experience so far for the half year?
The radio market for the last quarter was not strong at all. I don't know what the exact numbers are. We don't tend to follow what the market is. We tend to measure our success by what we do, not what the market does.
Has that continued on or?
We're finding our success easier right now than what it was in the Q2.
Okay. If you wouldn't mind just talking through, you said that this has happened previously back in, I think you said 2009 and 2013.
Yes.
Can you talk about how you got those clients back? How we would expect you to get those clients back now?
Well, like I said, we already have some of them back on, and we're already in discussions to get some of the others back on. Again, it's really not in your best interest or my best interest to go through the strategy as to how we're going to do that. Very clearly, you have to understand, one, identify all the clients you lost and then identify all the reasons why you lost them. It's not that hard. Then you come back with an answer for that. If the answer was the number of stations or the markets or the volume or those types of things, or in a few cases even pricing, then you go back with solutions for those. Different plans.
At the end of the day, the advertiser only cares whether you reach their audience and whether you have an impact, whether those people come in the stores or not. We have a number of things, weapons that a lot of people don't have. We have a neural research project that basically tests ads before they go out on the air. That's been in the market, utilized heavily in Melbourne, not as well in Sydney and Brisbane. Sydney and Brisbane were our weak points. Melbourne, Adelaide, and Perth were strong. The other thing to keep in mind, regional was kind of weak for us this time because a lot of times we don't sell regional at all. It's an accommodation to large national advertisers. If some of those guys went off, our regional sales would have gone down just automatically.
Getting those guys back on will bring some of the regional back. It's not a countrywide thing or a business-wide thing. Melbourne was up significantly. Adelaide was up significantly. Perth was up significantly. Brisbane and Sydney is where we needed work.
Okay. Thank you.
Once again, if you wish to ask a question, please press star one and wait for your name to be announced. Again, that's star one to ask a question. There are no further questions at this time. Presenter, please continue.
Thank you.
Ladies and-
We intend to push hard in the coming months to improve revenue across all our markets, which should lead to increased profitability. Despite the underperformance to date for fiscal 2019, it's important to keep in mind that the fundamentals of GTN are still very, very positive. It's a great company supported by a strong balance sheet, low leverage. Operations generate significant cash flow and a very, very strong advertising platform. We are comfortable that we will improve performance in the future, and we look forward to speaking to you again after the full-year fiscal results. Thank you.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect. Presenters, please stay on the line.