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Edited Transcript of CMLS.OQ earnings conference call or presentation 11-May-20 8:30pm GMT

May 12, 2020 (Thomson StreetEvents) — Edited Transcript of Cumulus Media Inc earnings conference call or presentation Monday, May 11, 2020 at 8:30:00pm GMT

Cumulus Media Inc. – SVP of Corporate Development & Strategy

* Francisco J. Lopez-Balboa

Cumulus Media Inc. – Executive VP, Treasurer & CFO

* Mary G. Berner

Cumulus Media Inc. – President, CEO & Director

* Michael A. Kupinski

NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst

B. Riley FBR, Inc., Research Division – Associate

Welcome to the Cumulus Media Quarterly Earnings Conference Call. I’ll now turn it over to Collin Jones, Senior Vice President of Corporate Development and Strategy. Sir, you may proceed.

Collin Jones, Cumulus Media Inc. – SVP of Corporate Development & Strategy [2]

Thank you, operator. Welcome, everyone, to our first quarter 2020 earnings conference call. I’m joined today by our President and CEO, Mary Berner; and our CFO, Franc Lopez-Balboa.

Before we start, please note that certain statements in today’s press release and discussed on this call may constitute forward-looking statements under federal securities laws. Actual results may differ materially from the results expressed or implied in forward-looking statements. These statements are based on management’s current assessments and assumptions and they are subject to a number of risks and uncertainties.

In addition, we will also use certain non-GAAP financial measures. We believe the supplementary information is useful to investors, although it should not be considered superior to the measures presented in accordance with GAAP. A full description of these risks as well as financial reconciliations to non-GAAP terms are in our press release and SEC filings. The press release can be found in the Investor Relations portion of our website, and our Form 10-Q was also filed with the SEC shortly before this call.

management mantra is focus acutely, move decisively and execute efficiently. More importantly, because this mindset is deeply embedded into our culture, this has been our practice to focus acutely on what matters, move decisively where it will make a difference, and execute every effort with efficiency and attentiveness to get the payoff we’re looking for. These are practices that have always served us well, but that are particularly valuable during this challenging time. As such, we have taken swift and substantial actions to help us both weather the impact of the corona crisis and emerge in a strong position as this crisis abates.

Most importantly, we reduced our fixed cost by nearly $60 million through an array of actions, including reductions in executive comp ranging from 40% to over 50%, hiring freezes, furloughs and the elimination of our 401(k) and HSA matching programs.

We enhanced our cash position by drawing down $60 million on our ABL revolver. We generated additional cash by deploying several new tactics to manage working capital, lowering our planned CapEx for the year by more than 40% and taking advantage of the meaningful tax benefits provided by the CARES Act. And we’ve also identified other ways to improve our liquidity, including further cost reduction opportunities.

We led the industry in moving to remote operations for all but essential broadcast personnel, allowing us to protect our employees while continuing to serve our advertisers and listeners. And we developed a new normal sales strategy to optimize revenue performance. It’s also important to note that the meaningful cultural, operational and strategic shifts we’ve made over the past few years have positioned us well to deal with and navigate through this disruption. We have a battle-tested management team who shepherded the company through its turnaround and built a track record for disciplined execution of the company’s strategies, delivering consistently strong financial performance, including revenue growth for 2 consecutive years, adjusted EBITDA growth for 3 straight years ex political and significant free cash flow generation. We’ve expanded our portfolio of assets from our on-air radio foundation to become an audio-first media company comprised of broadcast, digital, mobile and voice-activated media solutions and integrated digital marketing services. And we’ve increased the portion of our revenue mix coming from higher-growth digital business lines to nearly 10% of total revenue from less than 3% just 3 years ago. We reduced costs through operational blocking and tackling as well as true business process reengineering, like the hubbing of our traffic function and centralization of digital operations. And we reduced debt by over $275 million and net leverage by a turn since restructuring in June of 2018 and refinanced the full balance sheet in 2019 with covenant like term loans and bonds and a 2026 maturity profile. Moreover, we have substantial additional liquidity sources, including our upsized $100 million ABL and a pipeline of noncore asset sales, like our D.C. and national real estate and potential to monetize our tower portfolio.

So as I said, we focus acutely, we move decisively, and we execute efficiently regardless of whether the environment we are operating in is normal or not. And obviously, this coronavirus disruption is the furthest thing from normal that any of us have ever experienced. The full quarter financial results reflect that impact. Through February, on a same-station basis, both revenue and EBITDA grew, with revenue up low single digits and EBITDA up in the mid-teens. Political was a nice driver of those increases, and we were also seeing continued profitable growth across our digital businesses.

However, the heavily COVID impacted March results erased the January and February growth, causing revenue for the full quarter to fall 11.2% year-over-year and EBITDA to decline by 28.5%. Franc will provide more detail on the quarter, but I’ll note that the cancellation of the NCAA basketball tournament, for which we have the exclusive national rights, produced the biggest top line impact, accounting for the majority of the quarterly revenue decline. We also experienced broad-based revenue declines from a significant wave of pandemic-driven cancellations. That said, our digital businesses grew year-over-year in both revenue and contribution to EBITDA for the quarter, including in March, which underscores the importance of having built these businesses up over the last several years.

On the expense side, as I highlighted earlier, we acted expeditiously to reduce costs and with over $105 million of cash on the balance sheet at quarter end, our liquidity position is strong. While the trajectory and duration of the pandemic remain uncertain, we feel comfortable with our financial ability to weather this crisis and to take advantage of advertiser demand as it returns. As for how we see things evolving over the long term, our crystal ball is no clearer than anyone else’s. However, we do know many things will be different in the future, and those changes will generate both risks and opportunities for us. As with our execution of the company’s turnaround from 2015 to 2019, we intend on being proactive in mitigating those risks and taking advantage of the opportunities. And we’ve already identified multiple projects, which are in various planning stages that will allow us, among other benefits, to work more efficiently.

While we tighten up and reduce costs in many areas, we also expect to be leaning into areas where we see opportunities. For example, we are capitalizing on the shift in streaming listing to voice-activated device by developing a number of new voice-activated content and advertising solutions. We are also highly focused on leveraging the potential of our podcast business, which is proving to be especially resilient now, delivering substantial year-over-year revenue growth in Q1 and over 60% in March alone and that is continuing into Q2. Also, downloads in Q1 were up over 50% year-over-year with more than 260 million in the quarter. This is supported by our very strong news podcast portfolio, which, as of the end of April, had 4 of the top 20 and 8 of the top 40 news podcast on Apple.

With regard to the second quarter, specifically, our visibility is still limited. And given the highly fluid environment, pacing has become a particularly unreliable predictor of where we might finish. The cancellation wave, I mentioned earlier, impacted our Q2 bookings meaningfully. And as a result, April was a very tough month. For the full quarter, total pacing is currently down in the low 40s, but ultimately, the results for the quarter will depend heavily on how the business trends — how business trends play out for the rest of May and June.

On listenership, as you would expect, after the first week of March, broadcast radio listenership declined as a result of significant decreases in drive-time listening because of the shutdown directive. However, over the last 3 weeks, a variety of tracking sources report that there has been a substantial return of driving, and we see from Nielsen data a parallel steady increase in daily listenership.

So before I turn the call over to Franc, I do want to say a word about our new CFO. Franc has been with the company since late March, starting just a few days after we had instituted a work-from-home policy across the company. Although circumstances have forced him to be a virtual CFO since he joined, that hasn’t stopped him from hitting the ground running. He was previously EVP and CFO of Univision Communications, and prior to that, spent more than 20 years as a senior investment banker at Goldman Sachs. Franc has already contributed enormously to our decision-making and financial management. And as we navigate these uncharted waters, I could not be more pleased to have him on board.

Franc, over to you.

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Francisco J. Lopez-Balboa, Cumulus Media Inc. – Executive VP, Treasurer & CFO [3]

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Thank you, Mary. I’m pleased to be speaking with everyone today. These first couple of months have certainly been a world wind. While all of the onboarding has been virtual, I can attest to the strength of the management team and the efficacy of the Cumulus approach to challenges, both of which have helped me to get up to speed and to jump in very quickly.

As you know, the company executed a significant number of M&A transactions over the last year, including in this year’s first quarter, when we completed the sale of WABC-AM in New York City to Red Apple Media.

So I’ll speak to the financials, as Mary did, on a same-station basis. In Q1, total revenue for the quarter was down $28.6 million or 11.2% from Q1 2019. As Mary noted, the quarter was on track through February, with revenue growth of 1.1% and EBITDA growth of 15.1%. Political in the quarter was a nice tailwind, a bit more than expected, thanks to the heavy spend from the Bloomberg campaign. This year, we received $4.9 million as compared to $0.9 million in the quarter last year.

Drilling down a bit, as Mary mentioned, more than half of the revenue decline in the quarter was attributable to the loss of the NCAA tournament. There’s an offset to that on the expense side with the rights fees, production and other costs. However, the loss of the tournament had a negative impact to EBITDA versus last year. We also saw a significant decline in spot business across both local and national channels, while digital grew in the quarter.

Moving down the P&L. Expenses declined by $17.2 million or 8%, largely driven by reductions in variable costs related to the revenue declines, reduction of sports-related expenses, lower compensation costs and lower trade expenses. Also, as mentioned on the last earnings call, there are several onetime items that created negative comparisons for the quarter of approximately $3 million. Included in that is a onetime industry-wide BMI settlement, which was a $1.8 million hit that largely relates to prior periods and the loss of certain credits that we had benefited from in the prior year. Putting revenues and expenses together, EBITDA finished on $11.3 million or 28.5% in comparison to Q1 of 2019. As Mary noted, we took swift action to mitigate the revenue declines and boost our liquidity position. On the fixed cost side, our actions taken to date plus reduced sports fees, will reduce expenses by approximately $60 million over the entire year when compared with 2019. We will also experience variable cost declines that naturally occur with declining revenue. Additionally, we’ve been laser-focused on the nonoperating items that affect our free cash flow. We’ve cut our 2020 CapEx spend projection of $30 million by more than 40% or approximately $13 million and are focusing only on items that are mission-critical. Although we are only in the second quarter, our expectation is that cash taxes this year will be minimal compared to last year’s cash taxes of $18.6 million.

Additionally, the CARES Act has allowed us to file for approximately $2.5 million of refunds for amounts paid in 2019, with potentially more refunds to be received in 2021. We expect to get an approximately $8 million benefit from the ability to defer our payroll taxes in 2020.

Lastly, we are concentrating intensely on working capital management and have seen significant benefits to date from those efforts. The company has made great progress with its balance sheet over the last 1.5 years, fully recapitalizing it with a new term loan and senior secured notes that don’t mature until 2026 and covenant light. In early March, we completed a refinancing of our ABL facility and upsized it to $100 million.

Given the uncertainty of the economic environment, in mid-March, we drew $60 million in the ABL facility to add liquidity to the balance sheet. Q1 finished at 4.8x net leverage on a trailing 12-month basis. While we are focusing on ensuring we have the appropriate liquidity to weather the fallout from the pandemic and its impact on the economy, we remain very committed over the long term to continue to reduce leverage to sustainable and more attractive levels.

Given all of the actions to date, we do feel comfortable without liquidity but we will continue to monitor economic and business conditions and evaluate ways to prudently enhance it, if it makes sense to do so. To that end, I remind you that, as we’ve discussed on earlier calls, we have several opportunities to monetize noncore assets. In D.C., our land sale closing was delayed because of the government shutdown in Montgomery County. We expect to be able to close that once the court’s open back up.

As mentioned on our last call, we’re also exploring strategic alternatives for our tower portfolio and have a robust marketing process already underway. We also have a potentially valuable piece of property in Nashville that we may be able to monetize once commercial real estate activities approaches more typical levels. Given the state of the environment right now, we wouldn’t expect to take this to the market in the very short term. However, we’re preparing to do so, and we will be ready to realize the value from the property when the market stabilizes.

Finally, we’ve been waiting for the SEC to issue a final order and our petition for declaratory ruling related to a lift in the cap foreign ownership in our stock. And that as well has delayed given the government shutdown.

With that, we can now open the line for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of John Janedis with Wolfe Research.

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John Janedis, Wolfe Research, LLC – MD & Senior Media Analyst [2]

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Just 2 for me. First, of the $60 million in fixed cost savings, can you just tell us how much of that was realized in the first quarter? It sounded like there may have been some sports in there may have been some sports in here and as the cadence of the saving is similar for the remaining quarters this year. And then separately, I assume the declines in network were largely driven by the NCAA tournament, but can you talk about incremental sports exposure for the next couple of quarters?

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Mary G. Berner, Cumulus Media Inc. – President, CEO & Director [3]

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Yes. I’ll turn it over to Franc. Go ahead, Franc. Sorry, this is the perils of of virtual earnings call. Go ahead, Franc.

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Francisco J. Lopez-Balboa, Cumulus Media Inc. – Executive VP, Treasurer & CFO [4]

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Okay. So on the sports fees and the costs, you look at the employment actions we took started early in the second quarter in terms of furloughs and employees reward, some cost that came out of the NCAA tournament in the first year — in the first quarter. And so the balance of that will be spread over the balance of the year, most of it falling into the second quarter and some naturally in the third and fourth quarter.

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Operator [5]

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Your next question comes from the line of Michael Kupinski with NOBLE Capital Markets.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst [6]

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I just got a couple of quick questions here. Can you talk a little bit about the current headcount, where you stand now? Can you give us a sense of the employee, I guess, compensation? How that run rate might look like as we go into the third quarter? Just kind of give us a little bit more color there.

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Mary G. Berner, Cumulus Media Inc. – President, CEO & Director [7]

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I would start by just giving kind of bird’s-eye view of how we approached actions that affected employees. We did not do layoffs as it relates to COVID. We did furloughs and most employees — every single employee was affected, but most employees took 3 weeks within a 3-month period. We — as you know, we have always run a very lean shop. And so we felt like the first thing we should do is spread the pain over the next couple of months as we see how this unfold.

With regard to headcount, we have approximately 4,500 employees. Franc?

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst [8]

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Got you. And then — I’m sorry, go ahead Franc.

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Mary G. Berner, Cumulus Media Inc. – President, CEO & Director [9]

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Franc, if you want to add anything. Yes.

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Francisco J. Lopez-Balboa, Cumulus Media Inc. – Executive VP, Treasurer & CFO [10]

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(technical difficulty)

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Mary G. Berner, Cumulus Media Inc. – President, CEO & Director [11]

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We don’t have, I would say, a better view on the revenue trajectory than anyone else. We look at the same data you do. The point for us is to be ready, market by market, category by category as well as by ad channel. And so that’s how we’re looking at it. And all of the actions and all the things we might do, could do, should do, won’t do, it’s uncertain. We look at this — it’s an ongoing and a very fluid situation.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst [12]

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Got you. And can you just give us a sense in terms of some of your key advertisers, how things are progressing like — obviously, you’re having conversations with them. And how are they seeing things? Are you getting a sense that things are getting better? Pacings are looking a little bit stronger as you head into June? Are you seeing very short lead times? I mean can you just kind of give us a sense on how things are at this point looking?

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Mary G. Berner, Cumulus Media Inc. – President, CEO & Director [13]

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It really depends on the ad channel. And as I said, it’s a very, very fluid market. As we said in the prepared remarks, pacing is not a — is more unreliable now than it ever was. It always was just a moment in time. I’d say in the second quarter right now, business on books is flat. We have small ads offset by cancellations. And so we’re seeing some small improvement, modest, but it’s in the right direction. Pacing in the third quarter is better at this point. But again, it’s not a good indication of where we might finish because we, like everyone else, lack visibility into the shape of the recovery.

I would say, with the one thing that is — we are hearing from advertisers is — and I think it bodes well for radio, in general, is that those that are thinking about returning to marketing, understand that it’s a different world and that consumer expectations of the companies that want their business have to acknowledge that. And more specifically, there’s a lot of research out there that says that it’s not going to be enough to simply let customers know that you’re reopening, that advertisers are focused on how do they let their customers know what they’re doing to ensure their safety. And that’s a huge shift.

And I think radio is well positioned because of our flexibility with regard to creative execution and the speed with which we can get spots on the air. We’re in a good position to help and support the advertising community.

The other thing I would mention is that by necessity, what we’re hearing is advertisers are going back to basics, which is focusing on reaching as many potential customers as they can, as cheaply as they can and as effectively and efficiently as they can. And radio, obviously, checks all the boxes better than any other media, just as frankly we did before any of us knew what coronavirus was. So when you say, are they optimistic or not, it depends — it runs a gamut.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division – Director of Research and Senior Media & Entertainment Analyst [14]

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Got you. And then one last question. Political is much stronger in the first quarter than I expected. Was that driven by Bloomberg? And then secondly, if you can just talk about whether or not you have much visibility on the political for the year at this point.

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Mary G. Berner, Cumulus Media Inc. – President, CEO & Director [15]

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Yes. I mean we see a lot of activity. Most of it is — a lot of it’s placed at the last minute. We believe we’re well positioned. But I would say that with a caveat that when you comp it against the 2018, that was a better year for us. We had $20 million in revenue. We’ve said this publicly in 2018. So that was a high mark for us.

We have good overlap against the number of contested U.S. senate races. We also — we think that the strength of our news talk platform positions us well and of course, our reach. But I also would note, as it relates to Cumulus, our pricing and inventory initiatives, which we’ve talked about a lot on these calls, should allow us to manage the pricing and inventory utilization in 2020, much better than in past years. So we should be able to minimize spillage and maximize rate across the platform. And that’s going to be really important, especially in this uncertain environment.

Yes. So go first full circle, Bloomberg was a very, very — a lot of — winded our back, and the industry winded our back in the first quarter as well. As we said, it was — I’m not going to break it out, but the increase in quarter-over-quarter was big.

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Operator [16]

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Your next question comes from the line of Zack Silver with B. Riley FBR.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division – Associate [17]

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The first for me, Mary, you mentioned in your prepared remarks a new normal sales strategy, trying to optimize revenue performance in this strange environment. And I was just wondering if you can expand on that. And then somewhat related, when you think about — or if you have sort of view on markets that have been more open or have just started to reopen versus those that remain more shot. Can you talk about the ad trends within those markets?

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Mary G. Berner, Cumulus Media Inc. – President, CEO & Director [18]

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I would say the ad trends were not actually seeing much of a difference yet in those markets that are — for example, Georgia, for example, that are extensively more opened. We — it does seem that certain local businesses who are still very much needed in their communities, they have fewer problems with social distancing may have a shallower bottom. For example, the professional services category. We saw that, that was a little bit more resilient the last couple of months than other categories. But others, which involve denser aggregations of people, obviously, travel, entertainment, we’ve seen more pressure on them from a category standpoint.

But we’re not actually — we spent a lot of time searching for definitive trends, but we haven’t seen anything that appears to be meaningful, except for slightly more negative performance from our larger denser markets. But even that isn’t really uniform at this stage. So I’d say, we just don’t know. We’re not seeing patterns yet.

That was one part of your question, and the other was — oh, the new normal. Yes. I think just at a very high level, it includes a range of new training and sales support initiatives to address what I had just spoken about previously that the actual — how people go back into the market is different. We’re starting — it’s different than it was before. So we are training and supporting our sales organization with — to help them, to help our partners. And it also includes an update of our automated creative customization capability. We’ve spoken about that on prior calls, called CCC, which allows us to customize each and every campaign to reflect these new rules of engagement. So many, many parts, but it’s an acknowledgment and a strategy that focuses on what is effectively a new normal both for us and any marketer in the country.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division – Associate [19]

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Got it. That’s helpful. And then one more, if I could. Just on the tower monetization potential initiative there. Is that something that you guys could get done this year? Or is it — I mean could there be — I guess is it something that’s more long term in nature?

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Mary G. Berner, Cumulus Media Inc. – President, CEO & Director [20]

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I’ll let Franc or Colin take that.

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Francisco J. Lopez-Balboa, Cumulus Media Inc. – Executive VP, Treasurer & CFO [21]

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Okay. So we’re early on in the process. But we do have a calendar that it could be possible to get something done this year. It just depends on how the process unfolds. And if it’s attractive, we’ll pursue it aggressively.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division – Associate [22]

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Franc, welcome aboard.

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Francisco J. Lopez-Balboa, Cumulus Media Inc. – Executive VP, Treasurer & CFO [23]

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Thank you.

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Operator [24]

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This concludes our Q&A session. I will now turn the call back to the presenters.

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Mary G. Berner, Cumulus Media Inc. – President, CEO & Director [25]

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Thanks, everybody. Appreciate your time. And we look forward to speaking with you again soon, and have a good day and good rest of the week. Thank you for your time.

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Operator [26]

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And thank you for joining us today. This concludes today’s conference call. You may now disconnect.

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