Morgan Stanley

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode for the duration of today's call. This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host, Kate at MS. Ma'am, you may begin.

Dale, thanks. Good morning, everyone. Thanks for joining us for today's MS Communications conference call regarding second quarter earnings. I want to extend a special welcome to all the EMIS employees who are joining us and listening in this morning. We'll begin in just a moment with opening comments from EMIS Chairman and CEO Jeff Smullyan and Ryan Hornaday, EVP, CFO, and Treasurer. After opening comments from Jeff and Ryan, we will respond to questions that have been submitted via email to ir.emis.com. A playback of the call will be available until Thursday, October 20th by dialing 402-998-1734. This conference call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to MS's public filings with the SEC for more information on the various risks and uncertainties. Additional disclosure related to non-GAAP financial measures has been posted under the Investors tab of our website, MS.com. Jeff, we're ready to begin.

Okay, thanks. There's not much to say about this quarter other than in one word, and that is it was disappointing. It was disappointing for us for several reasons. According to Miller Kaplan, our radio revenues were down 3.8 while our markets were up 1%. So, is encouraging the industry was up a bit. We had several particular things that affected that. In New York, our largest event, Summer Jam, was impacted by a very severe storm, and that sort of skewed New York's quarter. At the same time, we were finally ending the anniversary of the challenging comps for our new competitor in Los Angeles. So we knew that we would be challenged. The good news is, obviously, is that the next quarter is – is pacing flat to up slightly. And also, I think a shout out to our people in St. Louis. They had a spectacular quarter, actually beating the market by, I think, 12 or 13 points. So very good news there, but generally challenging and disappointing. I won't get on to the asset sales or the go private because I know that we have questions on that Q&A, so I'll deal with that later. The other thing I want to say is it was a landmark quarter for Next Radio. During the quarter, we added Samsung phones on every carrier, and that includes Verizon. So at this point, we now are on every carrier in the United States, Sprint, T-Mobile, AT&T, U.S. Cellular, and Verizon. In addition, unlocked phones, Alcatel has joined Blue in now that fast-growing part of the market. We've also had very, very good interest globally. We launched this quarter in Canada and in Peru and coming launches also in Mexico and Colombia. And I think the most gratifying thing is that the unity that I've seen in the industry coming out of our radio convention, that this is really, really important. And to underscore that, when you look at what's happening with Hurricane Matthew, and you see the rallying that we've had for broadcasters in Florida and Georgia to say this is a very, very important initiative because when that storm hits and the power grid goes out, radio will be the only answer. And it underscores what really we've been saying for quite a while and what just about every regulator, every safety official, just about every member of Congress that we know has said this is an important initiative and we're very proud to lead it. So, Even in quarters that are challenging, our people provide leadership. We are pleased that our third quarter looks better. But to summarize, this one was a challenging quarter. So with that, I'll turn it over to Ryan. Ryan?

Thanks, Jeff, and good morning, everyone. This morning we released earnings for our second fiscal quarter ended August 31, 2016. We encourage those on the call to refer to the Supplemental Financial Information and we have posted under the Investors tab of our website, www.ms.com. Our results for Q2 were disappointing and a step backward from our progress in Q1. Our radio net revenues reported to Miller Kaplan during our second fiscal quarter, which excludes certain barter and syndication revenues, were down 4%, compared to markets which were up 1%. Our relative underperformance was primarily due to two factors. First, our largest summer outdoor concert, Summer Jam in New York, was negatively impacted by severe weather the day of the concert, forcing the cancellation of pre-concert festivities and dramatically lowering same-day ticket sales as compared to the prior year. Second, our Los Angeles radio station continues to be negatively affected by a new direct competitor that launched in the prior year. Digital remains our strongest line of business, up 32% in the quarter. National spot was down 15%, local spot was down 3%, and NTR was down 8%. Looking at the monthly results, June was down 4%, July was down 7%, and August was down 1%. We recorded approximately $300,000 of political advertising revenue in the quarter. During Q2, our number of minutes sold was down 4.5%. compared to the prior year, with average minute rates down 1.8%. Automotive remains our largest category, representing 14% of radio revenues in Q2, and automotive advertising was up 7% in the quarter. Healthcare and education were our strongest categories in the quarter. Cellular and beverages were the weakest of our top 10 categories. Revenues for our publishing division were down 13.5% in the quarter. While some of the decline relates to the timing of custom publications, the business had a challenging first half of our fiscal year. In August, we announced that we are exploring strategic alternatives for our publishing division, with the exception of Indianapolis Monthly, which we will retain. Radio and publishing station operating expenses, excluding depreciation and amortization, were down 3% in Q2. primarily due to the cost reductions we implemented in January 2016. We continued to invest in our two emerging technologies, Next Radio and DigiNEXT, and combined expenses for these businesses were up $550,000 in Q2. Looking ahead to Q3, our radio division is currently pacing flat to the same quarter of the prior year. September finished down 3%. October is pacing up low to mid single digits and November is pacing down low single digits. As of August 31, 2016, excluding debt that is non-recourse to EMIS, we had $185.3 million outstanding under our senior credit facility with a weighted average borrowing cost of 7%. Our leverage was 5.62 times EBITDA as defined in our credit agreement in compliance with our covenant of 6.25 times EBITDA. Finally, we invested $0.3 million in CapEx and Q2, and we expect to invest approximately $3.5 million for the full year. With that, Jeff, we have some questions that investors submitted to us in advance of the call.

And, Ryan, before we do, I want to – and I'm derelict in mentioning the remarkable performance that our digital team, led by Angie May Cook, have put out. It's really terrific, and it – Once again, this is a digital group that I think has set the pace for quite a few years in our industry, and I just want to highlight how remarkable her and her team's performance has been.

All right. So on August 18th, an affiliate of yours, eAcquisition Corporation, made an all-cash offer to purchase the outstanding common stock of MS. You don't currently own for $4.10 a share. Are there any updates you can share on the status of the GoPrivate offer?

Just that negotiations are continuing with the special committee. It's been a very productive, professional discussion. And I think that we are making very good progress. But, you know, it's one of those things where until you have something to announce, you don't have anything to announce. So I would just say this. Let me just say one more thing. There's been an awful lot of speculation, comments about this or that. We even had one shareholder said, gee, I don't know why you issue earnings during this tenancy. Well, we issue earnings and we have earnings because under SEC rules, as we are a public company, we have to. So there's just been a lot of speculation. And what we've said is we believe that it makes more sense for this company to be private because of all the costs and because of some of the other issues with being a public company of this size. But we said, look, we'll negotiate in good faith with the special committee. If we reach an agreement with them, it will be up to our shareholders. They'll decide whether they want the liquidity and they want the ability to cash out or they don't. And, you know, we have chosen not to respond to some of the wild statements that we've made, and we feel that that will be our stance. So, yeah. We'll keep doing our job, whether we're public or private, and we'll continue, and when there are announcements to make, we'll make them.

All right. Okay. Also on August 18th, MS announced it was exploring strategic alternatives for its publishing division, excluding Indianapolis Monthly, as well as its Terre Haute radio stations and WLIB-AM in New York. Jeff, we've got a few questions along those lines. The first one, is there any update on the sales you can share?

I would say, again, nothing is done yet, although we have had very constructive negotiations for both Terre Haute and Texas Monthly. But again, there's nothing to say there yet until they're done. We have also had very significant interest in the other assets. It's been I think very gratifying. I think it's a tribute to the products that our people have created that there has been an awful lot of interest. But again, nothing to say until we reach agreements. And for everything else, we really haven't even started soliciting bids yet. Or I shouldn't say that. We're talking to bidders, to interested parties now, but we have no concrete plans bids yet on anything.

There was a question around expectation for asset sale proceeds. Anything additional you can say on that?

No, there really isn't. Like I said, the discussions for Texas Monthly have been very constructive, and that's at a different stage. But we have no, absolutely not one indication of valuation of the other publications.

And then the last question is, will these asset sales occur whether the go-private transaction is successful or not?

We've said that we would because we've said that we think that either as a public company or as a private company, given the constraints in our core radio business and given the challenges of having two startups like Next Radio and DigiNext, that we just need to get our leverage down. we believe that deleveraging this company is important in whatever status it has.

Okay, so moving on to a different topic. What's the outlook for radio political advertising as we enter the last four weeks of the campaign?

Well, I think it's been a little disappointing. I don't think any of us ever expected that radio advertising would be a primary medium. We wish it were, but historically radio is not. I think all of us, and I've talked to other broadcasters, keep saying, well, we hope it ramps up. We know that the primary time are the last three weeks of October and those last eight days of November. And a lot of this is late-placing stuff. But I would say generally it's the reason that instead of our third quarter being up quite a bit, it's just flat to slightly up, is that political has been slow. And living in a state like Indiana where you see so much TV, it's a bit disappointing.

A question on Next Radio. As you noted, Next Radio is making its product available in Canada, Mexico, and Peru. Are you contemplating additional countries, and why pursue international expansion?

Well, because we've talked to people and we believe that this is an idea as time has come. We also have noted that the affinity for radio in other places is significant and maybe more significant in Latin America than it is in the United States. And we felt that it just makes a lot of sense, especially when we know that many of the negotiations are with OEMs, and there are some carriers that are across a number of countries, but most importantly, manufacturers. And by being able to roll this out elsewhere, it really strengthens our relationships with manufacturers in the United States because all of these manufacturers, for example, Samsung. Samsung is the largest seller of smartphones all over the world. So being able to say to them, we want to do Next Radio not only in the United States, but make it available elsewhere, is very helpful in our discussions with them.

The last question then is around S&P's recent downgrade of MS's corporate credit rating to CCC. And the question was along, does it have any practical impact on MS's business operations?

No, it doesn't, Ryan. That was based on the fact that we have a step down of our credit arrangement to next year. It's a year out, but I think they said, well, you have to do something. What we've just said is that we are going to sell some assets to make sure that we, listen, we are in an industry where there's an awful lot of leverage concerns, and we want to make sure that MS has been considered on the lower end of leverage in the American radio industry, and We understand that that's the most important thing is managing that balance sheet. So whether a public company or private company, we're going to do everything we can to get our leverage down.

That's all we have in terms of questions. Jeff, do you have any closing remarks?

Just to thank our people. I wish this had been a better quarter. There were a lot of things that conspired to make it challenging. But, again, I think the thing that I'm proudest of is that the innovation, um, whether it's in the digital group or next radio or in our, in our market operations, or especially in the, in the quality of the publications that our magazine people have had. And I, um, obviously people who know me know that selling things is very, very difficult. Uh, I think the fact that there's been so much interest in these magazines is a tribute to the remarkable content and the remarkable entities that our people have, um, even in challenging times. So I always thank them, um, We've been a company for over 35 years now, and every day I have recognized that the reason we've been able to make it 35 years is that it's always due to the dedication and the passion and the commitment and the skills of our people. And so just about every one of those 35 years I've thanked our people, and I want to thank them again today.

Thanks, Jeff. Just a reminder, everyone, that this call, a replay of the call is available until Thursday, October 20th by dialing 402-998-1734. Thank you very much.

Thank you. That concludes today's conference. Thank you all for your participation. You may now disconnect at this time.