Good day, and welcome to the GTN Limited 2019 Half Year Earnings Conference Call. Today's conference is being recorded. Representing the company today are Bill Eady, Managing Director and Chief Executive Officer and Scott Cote, Chief Financial Officer and Chief Operating Officer. Before I turn the call over to Bill, I would like to remind listeners that this call is subject to the disclaimer and important information included in the company's last year earnings presentation. With that, I'll turn the call over to Bill Eby, Managing Director and Chief Executive Officer.
Bill?
Thank you, and thanks, everyone, for joining us this morning. As you are aware, for our revised guidance announced to the market in December, the first half of fiscal twenty nineteen 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% to 15% fall, but disappointing nonetheless. Group revenue from continuing operations increased 2.3 percent to $94,400,000 with all of our operating geographies outside of Australia being up over first half fiscal twenty eighteen, while Australia recorded 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 multiyear contracts, which fixes the expense under these agreements for a number of years. Should we 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 3 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 4th 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 twenty eighteen. The big story in the market was the company signing a multiyear 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 twenty nineteen when compared to the same period last year. However, we expect that the contract will generate additional revenue in the future and has significantly strengthened our network in Toronto, which is 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 a disappointing first half fiscal twenty eighteen. 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 UK 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 Australia dollar. EBITDA decreased due to additional costs related primarily to station compensation and operating 2 additional markets. Salvador, which opened in the second half of fiscal twenty eighteen and Campinas, which opened in October 2018. In line with our growth strategy, we intend to continue to invest in Brazil as we see the potential upside to be significant. In February, we opened our 7th market, Brasilia, the capital of Brazil.
We are now operating in 7 of the 10 largest Brazilian markets. These are also the 7 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 percent to $94,400,000 Revenue in all of our operating geographies outside of Australia was up over first half fiscal twenty eighteen. When compared to first half fiscal twenty eighteen, Brazil revenue was up 1%, Canada revenue was up 7%, U. K. Revenue was up 13%, while Australia revenue decreased 3%.
Canada and UK 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
under our
long term station affiliation agreement with Southern Cross Austerio and exclude transaction costs and foreign exchange gains and losses was $22,300,000 a decrease of 9.4% compared to the first half fiscal twenty eighteen. We consider it appropriate to add the financing component of our long term station affiliation agreement with Southern Cross Astero to EBITDA because EBITDA includes a large portion of non cash station compensation expense related to the agreement. And 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 and costs under these agreements should remain fixed for fiscal 2020 beyond.
Adjusted NPAT, which is defined as net profit from continuing operations after tax, adjusted to add back the tax affected non cash amortization expense related to acquired intangible assets fell 18.1 percent to $12,900,000 In addition to the EBITDA shortfall, adjusted NPAT was negatively impacted by $500,000 of additional depreciation expense in first half fiscal 2019 compared to first half fiscal twenty eighteen 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 $38,600,000 of cash, $63,200,000 of debt, including $3,200,000 of leases resulting from the adoption of NASB 16 and $24,600,000 of net debt at 31 December 2018. The company's gearing ratio for net debt to trailing 12 month EBITDA is 0.54x as of 31 December 2018. The Board of Directors has declared an interim dividend of $0.024 per share to shareholders of record on 13 March 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 $20,000,000 for a period of up to 12 months. The buyback, brought 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 twenty nineteen.
Thanks, Scott. Projected revenue in Australia for January February is expected to be flat compared to the same 2 months in 2018, thus reversing the trend from the quarter ended 31 December 2018. Overall revenue for the entire company is expected to be slightly up for the 2 month period. In local currency, we expect Brazil and Canada to exceed January 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 in 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's important to note that the company has relatively short sales cycle and therefore has a lack of visibility over forecast sales and the resulting EBITDA for 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 4 of our markets continue to be positioned to perform well with solid affiliate linings, 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 our potential. This ends our prepared remarks, and we will open the lines up to questions.
Your first question comes from the line of Sean Bate from Macquarie. Please ask
your question.
Hi, Bill. Hi, Scott. Just a couple of ones for me. Just I was hoping 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, 1, we got it going back in the right direction. We were 3% down and largely in the second quarter. 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 6 month periods.
But we feel like we're headed back in the proper direction.
Okay. Great. And then 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 begin 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. So 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 on where you're in terms of trading at a significant discount to underlying value and kind of how the Board is thinking about it?
Yes. I mean, I think right now, if we look at it as being undervalued. And so I think today, we define that. Obviously, the information is going to change every day, both from our performance and from the stock's performance. So you're not going to be able to put a long term definition.
But we think as of today, it meets that criteria.
Okay. I got it. Thanks, Doug. Thanks a
lot. Your next question comes from the line of Julien Mulcahey from Evans and Partners. Your line is open.
Hi, guys. I'm wondering whether you could talk about the loss of the several clients Australia in the December quarter. And I don't want to name them, but just talk about the sort of sectors and where that money has gone through instead of you guys?
Look, we have 605 clients on the air at various times during this year. It's not uncommon for sometimes 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 from more from traditional radio. We had some people that had technical problems and were not able to advertise.
But look, out of 605 clients, some go in, some go out, we can we know exactly who we lost and exactly know why we lost them, and we've implemented strategies. There were probably 6, not I wouldn't say our biggest clients, but 6 reasonably large clients that went off during that quarter or reduced during that quarter. 2 of those clients we already have back on the air. 2 of those clients we already have had discussions with and are likely to get a brief. And so a mass majority of the losses, we feel like we're in really good shape coming back.
The other strategy, Elyse, 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. So it's not we 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 the situation is. We're not at all uncomfortable.
This isn't the first time this has ever happened. I think this happened in 2,009, 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. And I'm confident that we'll do the same here. So 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 all our most of them back.
Okay. And on Canada, with the Rogers deal, I mean, I know Ingrid's own right, it doesn't have a lot of inventory or revenue, but more about the impact on timing of the market, because you're a share, I think, 80% 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, and Canada has a slower sales cycle than what the other 3 markets do. So when we announced that we have them back in November, we cautioned everybody not to expect to see anything until 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.
So 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 can see the growth. We expect this to have a strong impact on us. It's the biggest market, and it really has to do with our reach is now almost unmatched. Well, it is unmatchable by anybody there in the country now. So it's a powerful tool for us in the future.
Your next question comes from the line of Daniel Ireland from Farnam Investment. 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? And what kind of strategy to be implemented?
Has there been a change in sales staff? Just a bit more color around that.
Yes. We're probably ready to lay out our sales strategy into the open market. But we did we lost some clients, let's say, that were just technical because they had issues, they couldn't advertise their background. That was an easy one. We lost a couple of clients due to integration of other products and wanting to have a multiplatform 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. But 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. So 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.
Because the overall market for radio advertising hasn't been particularly weak. Is 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. And has that continued on? Or
We're finding our success easier right now than what it was in the second quarter.
Okay. And if you wouldn't mind just talking through, you said that this has happened previously back in, I think, you said 2,009 and 2013. Can you talk about how you got those clients back and how we would expect you to get those clients back now?
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. But very clearly, you have to understand, 1, identify all the clients you lost and then identify all the reasons why you lost them. And it's not that hard. And then you come back with an answer for that.
If the answer was select 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. And 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 or and so 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.
So Sydney and Brisbane were our weak points. Melbourne, Adelaide and Perth were strong. And 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. So if some of those guys went off, our regional sales would have gone down just automatically.
So getting those guys back on will bring some of the regional back. But it's not a countrywide thing or a business wide thing. Melbourne was up significantly. Adelaide was up significantly. Perth was up significantly.
And Brisbane and Sydney is where we needed work.
Okay. Thank you.
There are no further questions at this time. Presenter, please continue.
Thank you.
Ladies and
gentlemen, we intend to push hard in the coming months to improve revenue across all our markets, which should lead to increased profitability. And 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 that generate significant cash flow and a very, very strong advertising platform. So 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 your conference for today. Thank you for participating. You may all disconnect. Presenters, please stay on the line.