A. H. Belo Corporation
Q3 2013 Earnings Call Transcript

Published: 4 Nov 2013

[Operator:]

Ladies and gentlemen, thank you for standing-by and welcome to the A. H. Belo Corporation’s Third Quarter 2013 Financial Results. At this time, all participants are in a listen-only mode. And later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) And as a reminder, today's conference is being recorded. I would now like to turn the conference over to your host Ms. Ali Engel, Senior Vice President and Chief Financial Officer. Please go ahead.

[Alison Engel:]

Thank you, Keely. Good afternoon, everyone. Welcome to A. H. Belo Corporation’s third quarter 2013 conference call. Jim Moroney, our Chief Executive Officer, will lead today’s call. Then I will provide a brief look at our third quarter results leaving plenty of time for Q&A. This morning, we issued a press release announcing third quarter results. We have posted this release on our website under the Investor Relations section. Unless otherwise specified, comparisons used on today's call measure third quarter 2013 performance from continuing operations, against third quarter 2012 performance from continuing operations. In conjunction with the completed sale of the five-story office building and the pending sale of our newspaper operations, both in Riverside, California, The Press-Enterprise newspaper operations and the sale of such building and assets are now reported as discontinued operations in the Company’s financial statements. Our discussion today will include forward-looking statements. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements. Additional information about these factors is detailed in the company's press releases and in publicly available filings with the SEC. Finally, today's discussion will include non-GAAP financial measures. We believe that non-GAAP financial measures provide useful, supplemental information to assist investors in determining performance comparisons to our peers. Reconciliations to the most directly comparable financial measures presented in accordance with GAAP are provided in our press release and on our website under the Investor Relations section. Now, I will turn it over to Jim. Jim?

[James Moroney:]

Thank you, Ali, and good afternoon every one. Earlier today A. H. Belo Corporation announced third quarter net income of $0.09 per share from continuing operations. Earnings before interest, taxes, depreciation, amortization, or EBITDA from continuing operations was $7.9 million in the quarter. Increases in revenues from new businesses offset just under half of the core print revenue declines in the third quarter and strong expense management contributed to the positive results for the quarter. We are pleased to have completed the sale of a five-story office building and related assets in Riverside, California to the County of Riverside and we look forward to closing on the previously announced sale of the newspaper operations of The Press-Enterprise to Freedom Communications in mid-November. The cash proceeds from each of these transactions will allow the Company to continue to pursue opportunities to diversify and grow revenues and EBITDA and reduce our reliance on core print advertising revenues which remain challenged. A. H. Belo’s management team and its Board of Directors have reviewed A. H. Belo’s previously disclosed financial and operating strategies in anticipation of the sale of substantially all of the assets of The Press-Enterprise. The Company plans to explore further opportunities to invest in or buy advertising or marketing services companies with established financial performance and strong management teams in order to diversify and grow revenue and EBITDA, and in the future, consider modifying share repurchase programs after balancing the potential for acquisitions or investments with a possibility of generating additional cash proceeds. The Company’s acquisition and investment efforts are focused on businesses with products and services that complement the existing advertising and marketing services currently offered by its newspapers. Grant Moise, Senior Vice President/Business Development, who is with us on the call today, is leading an effort to identify and evaluate qualified businesses. While the level of investment is not currently known, the Company anticipates that it will exceed previous investments, which were in the $3 million to $5 million range. The Company remains focused on returning capital to shareholders, primarily through its quarterly dividend, which was increased to $0.08 per share in the third quarter of this year and through modest share repurchases. The Company will evaluate the ability to modify share repurchase levels in the future after balancing the acquisitions and investment potential with a possibility of generating additional cash proceeds. Ali will now provide more detail around third quarter financial results. Ali?

[Alison Engel:]

Thank you, Jim. A.H. Belo reported third quarter 2013 net income of $0.09 per share from continuing operations, compared to net income of $0.11 per share from continuing operations in the third quarter of 2012. Third quarter 2012 net income from continuing operations included a non-recurring credit of $2.5 million for a consent judgment related to past tax assessments of real estate by the City of Providence. Total revenue for the third quarter of 2013 decreased 2% compared to the prior year period. Revenue from advertising and marketing services, including print and digital revenues decreased 4%. Digital revenue increased 22% over the prior year quarter, primarily due to continued growth in automotive digital revenue at The Dallas Morning News and marketing services revenue associated with 508 Digital and Speakeasy. Increases in digital revenue were offset by declines in display, preprint and classified advertising revenues which decreased 11%, 3% and 13% respectively. Circulation revenue decreased 1% in the third quarter of 2013, compared to the prior year period due to home delivery and single copy volume declines, mostly offset by increased average rates for home delivery. Printing and distribution revenue increased 6% in the third quarter of 2013, primarily due to the expansion of the distribution of outside newspapers at The Providence Journal. Total consolidated operating expense in the third quarter was $88.9 million, a 1% decrease compared to the prior year period as headcount related expenses, newsprint, distribution, outside solicitation and depreciation expenses all decreased. In the third quarter of 2013, the Company made voluntary contributions to its pension plans of $4.6 million and required contributions of $5.1 million, which included the acceleration of the scheduled fourth quarter pension payment. No further pension contributions will be made in 2013. As of September 30th, we had $56.4 million of cash and cash equivalents and no debt. Now, I’ll turn it back over to Jim for some final remarks. Jim?

[Jim Moroney:]

Before I open up the call for questions, I want to give a brief update on our digital circulation strategy. In October, we took down our pay wall and launched a new premium digital experience for subscribers. Consumers can now opt to pay for their news in an online environment with enhanced design and navigation, limited advertising and access to unique subscriber benefits, such as tickets to attractive public events and exclusive access to Dallas Morning News events. The Morning News's research found that when seven day subscribers were offered digital access for a price that was as much as 90% less than the average print subscription rate, only 5% said they would be willing to give off their seven day print edition for digital access. From this research we concluded that subscribers were not paying so much for the content as paying for how they wanted to consume the content we published. In essence, they were paying for the print experience. Now we want to see if there are consumers who will pay for a premium digital experience. Since the launch of the new premium site, we have had over 7,300 comments from subscribers and non-subscribers. Overall the feedback has been positive. In response to some of the feedback we have made design changes to the premium website, which have improved things like navigation. The traffic on the site has improved every week since the launch, so early results are good and we’ll update you on the progress of this initiative further on the year-end earnings call in February next year. Keely, we're now ready for questions. Question-and-Answer Session

[Operator:]

(Operator Instructions) We'll go to the line of Dennis Leibowitz with Act II Partners. Please go ahead. Dennis Leibowitz - Act II Partners Two questions; one, the guidance you gave earlier in the year, I don't know what might have been included from Riverside, but wondered if you could update us on that?

[Alison Engel:]

Yes, Dennis when we’ve closed on that transaction, we're going to update everyone on the guidance and we'll do that later this month. Dennis Leibowitz - Act II Partners I assume it was profitable?

[Alison Engel:]

It was profitable to breakeven on an EBITDA basis, on a net basis with D&A no, but it was profitable on an EBITDA basis, yes. We’ve always said that it's been profitable, but to a much lesser extent than the Providence and Dallas properties. Dennis Leibowitz - Act II Partners So I wanted to know what's left in terms of your unfunded pension liabilities and is that likely to go down further because of interest rates at the end of the year partly to party pay?

[Alison Engel:]

Dennis we haven't updated what the unfunded is going to be because we haven't settled yet on the year-end discounted rates, but we’ve had obviously meetings with our actuaries and pension advisors all throughout the year. Discount rates have improved during the year. We have had good returns on our assets during the year, so I think we can expect a definite decrease in the unfunded liability. And at year-end we'll also give further guidance on cash contributions to the plan once we’ve presented our final budget and cash plan to our Board and gotten their approval on that. Dennis Leibowitz - Act II Partners If I could just add one more, I am sorry. When you talk about investments being more than they were, the investments you’ve made so far are in starting up businesses or aspects of the business, and what you are talking about the future, I am trying to see if we’re talking about apples and oranges in terms of investments and acquisitions as opposed to the P&L impact of startup businesses?

[Alison Engel:]

Yes, I think we’re talking about what -- our strategy has been in the past -- I’ll talk to that and let Jim talk to what we’re going to do in future. In the past what we’ve done is made minority investments in small or startup businesses. Some of those were newspaper initiatives across the country, like Wanderful Media, Cars.com. We’ve invested in some startups like Sawbuck, which is now HomeSnap and Response Logix, which is now Digital Air Strike. So we typically make small minority investments. Some of those products we resold, some we didn’t. And then we’re investing in those businesses. So, then we had what we did last year, which is where we started new businesses internally and developed the products or resold the products like 508 Digital. And I think we’re taking a real change in that direction. So I’ll let Jim talk to what we’re doing now.

[James Moroney:]

Yes, Dennis there were two small acquisitions last year among the five that -- the other three were things we started up. We did acquired DG Publishing, which had two magazines that were published each twice a year, that was a small acquisition. And also Pegasus, which was a go and do entertainment site that was arguably the second most trafficked site in Dallas. So when combined with our GuideLive.com site really gave us the two top tier destinations. So those were two very small acquisitions. What we’re looking at and going forward are more ways to complement the marketing channels that we already own and operate. So we’re looking for things that give us new ways to reach audiences for our customers, but we’re looking for businesses with a proven track record and a good management team and typically those come at a higher cost and something that’s just in a startup phase.

[Alison Engel:]

Whereas, minority investment, which is a very small investment compared to potentially making a much larger investment.

[James Moroney:]

That’s right. We’ll be looking at things that we either can buy all of or buy at least a controlling interest in.

[Operator:]

We’ll go next to the line of Barry Lucas at Gabelli & Company. Barry Lucas - Gabelli & Company I have a couple as well, if I may. Firstly, on the pension, is it at least fair to assume that with rising rates and descent asset returns and the potential with the voluntary contributions to see a lower unfunded that the cash contribution for ’14 should be less than the roughly 20 million that you put in this year?

[Alison Engel:]

Yes, those are fair assumptions. We’ve put in 12 million this year, Barry. We put in about 8 and required 4 in voluntary roughly. So I think contributions -- they'll be less than 20 on a required basis for sure, they’ll be less than the total 12 on a required basis likely. What we decide to do on a voluntary basis, we haven’t talked to the Board about and finalized that yet, if we decide to do anything. So, yes, they will be less than what we had done this year or relatively close, but yes and the unfunded will go down, absolutely. Barry Lucas - Gabelli & Company And just on a housekeeping side, there was a note and changes to the way you calculate or describe adjusted EBITDA. And just wondering what the variance would when you -- versus past quarters?

[Alison Engel:]

Well, we used to -- adjusted EBITDA is EBITDA adjusted for pension that withdraw from the pension plan. In the tables we have in this press release, we didn’t have any periods where any of those adjustments were presented, so we just presented EBITDA. We’re not adjusting EBITDA for pension expense anymore. We made that change a quarter or two ago. So the EBITDAs for these periods that are presented is clean and doesn’t have any adjustments. For year-end we’ll still have -- wouldn't look at the year-to-date for ’10 and ’11, they’ll have some of those still that withdraw from the pension plan items that we’ll adjust for. Barry Lucas - Gabelli & Company Two more quickies, if I may, one on the pay wall. Jim, this was a fairly expensive launch not that long ago. So other than your conclusion that it’s the way your subscribers want to consume the content as opposed to the content, what else was kind of either triggered this or motivated or what kind of feedback were you getting that said well, wait a second, we’ve got a -- maybe get back to square one or two and rethink this strategy?

[James Moroney:]

Sure, so Barry if you recall, we actually launched our sort of pay wall initiative back in March of 2011, slightly ahead of the New York Times, so I think we were among the major metros about the first one in. So we’ve had as much or more experience with this than any of our other metro brother. And we had still not seen digital-only subscriptions rise to a level, say greater than 10% of our print subscriber base. And as I’ve talked to my colleagues around the country I haven’t really come across any for the New York Times, while the Wall Street Journal out as exceptions when I get back into just the general metro large market newspapers, I am not finding any that have sort of really shown a steady and growing trajectory that's getting through even at 10% level. So, while there are plenty of other newspapers out there trying the metered model and again not yet, still not certain that they won't, but not seeing the kind of progress or trajectory that I hope to see and we weren't seeing it either, we decided to try something new. So that led us to this single URL, so that everything's free at dallasnews.com. If you want to pay for a better design, navigation, less ads and some loyalty incentives, then we're going to see whether we can coax our users into paying for that experience. We want to experiment and try something different and I think the industry would benefit from more experiments, not everybody trying the exact same thing. Frankly because we'll have dallasnews.com at the basic level free, we'll probably increase page views and that will add some digital advertising revenue back into our ad bucket. And the cost of launching this has actually not been that great, so we neither have spent a lot of money to make this change and in fact probably have helped our ad revenue by doing it. Whether it drives the digital subscriptions that we want, both in number and growing trajectory, obviously way too early to tell, but that's what we're looking for, that's how we'll measure success with this effort. If it works that's great, if it doesn't and the metered model proves to work because of the way we have this setup, we already have a meter deployed, we could switch over to a metered model very quickly. If the metered model isn’t working and this one isn’t working, we'll try to figure out some other experiments to do. I think we’ve got to be out there trying different things. Barry Lucas - Gabelli & Company Last item would be the, may be going back to Dennis's question and I know if you can put your arms around, either the size of the acquisition, any kind of metrics you might throw out in terms of what you might pay in terms of valuation or even I don’t know proportion of revenues if we were to put marketing services as a standalone as opposed to the advertising related to the papers and their websites. I mean is there a portion of overall revenues that you would like to see that become, because -- I know it's in my sensors, but we've had an awful lot of M&A activity over the last 12 to 20 months and just wondering is it a little bit late to get involved in strategic shift at this point?

[James Moroney:]

So, if we look at the first three quarters this year for Dallas Morning News, those five businesses that we acquired last year, their incremental year-over-year revenues were within 80% of the decrease in print ad revenues for The Dallas Morning News. Clearly, we need to get top-line growth started. We are assuming that print ad revenues will continue to decline since that's been the case for close to seven years. And if we’re going to do that we're going to have to find complementary businesses. We're trying to do ultimately is provide a growing top-line revenue with EBITDA following right behind it growing EBITDA, so that we can get this Company growing again and instead of continuing to cut expenses to align with the decline in the core print ad revenues. I'm going to let Grant describe to you some of the categories that we're looking at, but I think it’s safe to say that the businesses for the most part we’re looking at would be more local or regional based, these are not national size companies level, so I believe that begins to bring in some of the possible acquisition price but of course it will still depend on what kind of track record they've built up, how profitable they are and the particular categories have different multiples. And just to give you a sense of what we’re looking at, to show you how these businesses would complement what we already do which is try to give our customers a way to sell goods and services through different channels, I'm going to have Grant just talk about these -- the five that we're looking at.

[Grant Moise:]

Sure, thanks Jim, Barry to your question, we can put them into a couple of buckets, I would say the first one obviously is growth being in digital. Two of the businesses that we've launched with 508 Digital and Speakeasy, we have found some needs in the areas of video production, as well as website, as well as apps development. So those are web and app development companies are of interest to us, as well as video production companies those are obviously experiencing large growth still at this point and we see as very complementary to some of the things we've already built. The other three categories that we're focused on; first would be anything targeting the growing Hispanic demographic, as we know the Hispanic demographic is growing widely across the country, but especially here in North Texas and that includes both media assets that have Hispanic focus, as well as media services companies serving Hispanic, both advertisers focusing on that demographic. The other two areas are the outdoor space. We are interested in the outdoor and out-of-home space, as well as direct marketing, which many of those companies have a focus on direct mail. And especially the growing niche within that space, which is considered to be digital variable printing, is just of a special interest to us within the printing and direct mail area.

[James Moroney:]

And Barry some people like what -- arch an eyebrow a little bit and say gee outdoor and direct mail those are kind of traditional businesses and aren’t they having the same problems that you have with newspaper print advertising or radio or magazines. But I am you and others on the call know that not only does direct mail continue to have the largest share of the overall U.S. advertising budget, but they’ve been able to hold on to most of that even through this last six-seven years when businesses like ours have seen decline in traditional advertising. The same could be said also for outdoor, it’s great limited supply, high demand business, and they have been able not only to keep their share, but actually grow it a little bit as they have been taking traditional poster boards and taken them to digital. So, we’re looking for those kinds of businesses that we can leverage our strength into and provide them a competitive advantage here in the North Texas marketplace.

[Operator:]

We’ll go next to the line of Richard Diamond with Strait Lane Capital. Richard Diamond - Strait Lane Capital Jim not to beat you up over this, but in a lot of ways it feels today like 1998 and the only thing we learn from history is we learn nothing from history. I mean if you do buy an app company or a web company, how do you ensure that it’s not value destructive. Outdoor marketing, direct mail, Natina Marketing that makes perfect sense to me. But on some of the other companies, they are very expensive, it’s to be determined if the valuations are realistic or not?

[James Moroney:]

I think Richard it’s a good point, you’ll be happy to know that our order of interest is probably direct mail, outdoor, Hispanic and then app and then video. So, the two that you brought up are on the bottom of our list of five and we are actually focused on the top-three, right now. We are not actively really looking too hard at the other two. I think the real answer to your question though is that we would not be looking at some of the companies that have already developed a good track record in, if you will long track records I should say in app development or in the video production business. There are still some closer to startup companies here in the North Texas area that are doing great work, but have a track record where they could if they get a large multiple it’s off a very small base. But those come obviously with more risk, because they haven’t really demonstrated they can kind of stand the competition that already is in this market. We have one of the best app development companies in the country here Bottle Rocket, that’s not a company I mean where even if they were for sale they wouldn’t be on our radar screen because they are already doing too well and as you point out the multiple is very, very high. So, I think may be my best -- yes go ahead.

[Alison Engel:]

I mean I would also add that there would be a lot synergies, because we outsource and pay for a lot of that work with these types of companies. And so we do think there are in that space some internal cost savings and synergies by having that in-house rather than outsourcing them.

[James Moroney:]

I think the best answer Richard though is likely in the near-term we’re going to be in that top-three more than likely than in the app or video production space.

[Operator:]

We’ll go next to the line of John Kornreich with J.K. Media. Please go ahead. John Kornreich - J.K. Media Yes very quickly, what’s the nine months of that corporate overhead and can you give us, should we just annualize that and assume that it’s going to wind up for the year?

[Alison Engel:]

Yes, it was about 4.5 million for the third quarter, I don’t have it here for the nine months John I can email it to you, but I mean I think you can annualize that. John Kornreich - J.K. Media Is the 4.5 after any special credits because that sounds low?

[Alison Engel:]

No. John Kornreich - J.K. Media I thought you were running like 7 or so at the quarter, no?

[Alison Engel:]

No, no we have wheeled it down over the past years it’s been running in the 4.5 million to 5.5 million. John Kornreich - J.K. Media Yes, so you are in this slightly sub 20 million range?

[Alison Engel:]

Yes that’s correct. John Kornreich - J.K. Media I look forward to hearing updates in November, because like Dennis my overwriting question is, what the hell happened to 37 to 41? So we’ll wait on that.

[Operator:]

We’ll go next to the line of Chris Mooney, Esposito Global. Chris Mooney - Esposito Global Let’s switch just back to dispositions for a second. Jim in the interview post the announcement of the sale of Riverside in The Dallas Morning News, you were quoted I believe as saying that The Providence newspaper would not be for sale?

[James Moroney:]

That’s correct. I said The Providence Journal was not for sale at the time of that interview, that’s what I said. Chris Mooney - Esposito Global So at the time of that interview?

[James Moroney:]

Yes. Chris Mooney - Esposito Global Then can you update us on where we are in real estate, because you still have quite a number of potential sales in the future?

[James Moroney:]

Yes, I am going to let Dan take that.

[Dan Blizzard:]

Chris, in California we still have a industrial property that we think would produce net proceeds of $1.4 million to $1.6 million. Here in Dallas, we have unused assets in Southern Dallas, our former South Plant facility that’s been on the market for a couple years and we continue to see broad activity and interest in prospective buyers, as well as a 98 acre piece of vacant land nearby that site that’s also for sale. We then have properties in Providence, that couple of parking lots in Downtown, Providence and we continue to pursue a sale leaseback on The Providence Journal building itself. And then we have a vacant piece of land which across the street from production plant in Providence, that’s also on the market that would be a kind of a mid-rise or a mid-box retail usage. Chris Mooney - Esposito Global And Dan are you still comfortable, I think if I take the math from the Investor Day and back out what has been sold, we’d still have like $40 million worth of potentials?

[Dan Blizzard:]

That’s correct.

[Operator:]

(Operator Instructions) We’ll go to the line of Fred Nagle with Trowbridge International. Please go ahead. Fred Nagle - Trowbridge International There was an article on The Wall Street Journal on the 31st about -- the title is, Cuts in State Aid Leave Cities Reeling. And it talked about Providence and what they’ve described is not terribly attractive. And looking forward in terms of your strategies, what does that mean and clearly the other side of the coin is that Texas is a great economy, unlike the rest of the country and where does that also lead you?

[James Moroney:]

Well, Fred just I think the analogy here, Southern California, LA market, we very much believe was and is going to continue to rollup. And I don’t think we want to be the last sort of single newspaper standing in that marketplace after a lot of them rollup might have already finished. So, we were fortunate that we were reached up to by Aaron Christner and Freedom and we look forward to closing that transaction on the 15th of this month. Providence still is a good financial contributor to our Company and that’s really where we are, of course we love being in Texas, it is a great market and certainly have plans to stay here.

[Operator:]

(Operator Instructions) And ladies and gentlemen, there are no further questions on the phone at this time.

[Alison Engel:]

Alright, Keely.

[James Moroney:]

Thank you, Keely.

[Operator:]

Thank you. And ladies and gentlemen, today’s conference call will be available for replay after 4 PM Central Time today, running through November 11th at Midnight. You may access the AT&T Teleconference Replay System by dialing 1800-475-6701 and entering the access code of 304953. International participants may dial 320-365-3844. Those numbers again are 1800-475-6701and 320-365-3844 with the access code of 304953. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.