The New York Times Company
Q4 2008 Earnings Call Transcript

Published: 21 Apr 2009

[Operator:]

Good day, and welcome to the New York Times' First Quarter 2009 Earnings Conference Call. Today's call is being recorded. A question-and-answer session will follow today's presentation. (Operator Instructions). For opening remarks and introductions, I'd like to turn the call over to Ms. Catherine Mathis. Please go ahead, ma'am.

[Catherine J. Mathis:]

Thank you. And welcome to our first quarter earnings conference call. We have several members of our senior management team here today to discuss our results with you. And they include Janet Robinson, our President and CEO; Jim Follo, our Senior Vice President and Chief Financial Officer; Scott Heekin-Canedy, President and General Manager of The New York Times; Martin Nisenholtz, Senior Vice President of Digital Operations. All comparisons on this conference call will be to the first quarter of 2009 to the first quarter of 2008 unless otherwise stated. Our discussion will include forward-looking statements and our actual results may differ from those predicted. Some of the factors that may cause them to differ are included in our 2008 10-K. Our presentation will also include non-GAAP financial measures, and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our corporate website at www.nytco.com. An archive of this call will be available on our website as well a transcript and a version that's downloadable to an MP3 player. With that, I'd like to turn the call over to Janet Robinson.

[Janet L. Robinson:]

Thank you, Catherine. And good morning everyone. Like many companies across America and our industry, the challenges we face intensified in the first quarter. The effect of the global economic downturn coupled with secular changes affecting newspapers resulted in significant declines in revenues as advertisers pulled back on print placement in all categories

[James M. Follo:]

Thank you, Janet. We continued to tightly manage our expenses in the first quarter. As Janet said, operating costs excluding depreciation and amortization and severance declined 11.6%, as reductions occurred in nearly all major expense categories. This reflects our cost saving initiatives including the closure of C&S. With economy as weak as it is, we are putting in even greater focus on lowering costs. We plan to decrease our operating costs, excluding depreciation and amortization and severance by more than $330 million in 2009. Some of the components of this amount have already been announced, such as the $112 million with C&S, $80 million as a result of the changes in our benefit plans, and about $9 million in the second half of the year for the consolidation of the Globe's two printing plants. Severance costs were $0.11 per share in the quarter or $25 million, compared to $0.04 per share or $11.2 million in the same quarter last year. At the end of March, our head count was down 15.5% from the prior year. Depreciation and amortization decreased 12.3% to 36.8 million from 41.9 million in the first quarter of 2008, primarily because of lower accelerated depreciation. Newsprint expense increased 0.9%, with a 25.2% increase in prices nearly offset by a 24.3% decline in consumption. Newsprint transactions peaked last November and have been trending down. Forecasters believe that prices will continue to decrease as the decline in newsprint demand continues. In 2008, we reduced the size of the printed pages, page of sixth of our regional newspapers, which will benefit us this year. And at the end of March, we decreased the size of printed pages of some copies of the National Edition of the Times, go through... which will result in additional newsprint savings. Last month, we completed a sale-leaseback for $225 million for part of the space we own and occupy in our New York City headquarters. This is essentially a financing transaction. The rental payments will total approximately $25 million for the first year and will escalate to the term of the lease. The lease term is 15 years... as an option... repurchased our portion of the building with $250 million during the tenth year of the lease. The sale proceeds will be recorded as a financing liability and the rental payments associated with the sale-leaseback will be treated as interest expense for tax and accounting purposes. In addition, the difference between the purchase option price of $250 million and the sale proceeds of 225 million, as well as the transaction costs will be amortized over ten year period as an increase to the financing liability through interest expense. Interest costs increased in the quarter from 11.7 million to 18.1 million as a result of higher rates on our debt. At the end of the quarter, our debt totaled 1.3 billion. This includes the financing liability related to the sale-leaseback transaction that closed in early March. The proceeds in this transaction were held in an escrow account at quarter end, and subsequently used along with borrowings under our revolving credit facility to redeem $250 million of notes due in March 2010. After redemption of the notes, our total debt was approximately $1 billion. We remain in compliance with the minimum shareholders' equity covenant in our revolving credit agreements, and have a significant cushion over the maximum required. Quarterly interest expense for the remainder of the year is expected to be higher than it was in the first quarter because of the sale-leaseback occurred at the end of March. For the year, the company expects interest expense to be approximately $90 million. In the first quarter, we also repurchased $55 million of notes due in November, 2009. We have sufficient capacity under our revolving credit agreements to repay the balance of these notes at maturity. We had an income tax benefit of $1.1 million in the quarter. The tax provision was unfavorably affected by significant losses at the New England Media Group, which only at minimum setback tax benefit is recognized due to our recent Massachusetts law change and various non-deductible losses. These items were partially offset by a $12 million adjustment to reduce the company's reserve for uncertain tax positions. We have taken decisive steps to reduce capital spending and approve our flexibility. This year, we expect our capital expenditures will decrease from the 2008 level of approximately $127 million to approximately $80 million. As Janet said, in February, our Board of Directors suspended our quarterly dividend which was a difficult but necessary decision that we believe provides us with greater financial flexibility in these uncertain economic times. With regards to our pensions, at year-end the unfunded obligation for our qualified pension plans was approximately 535 million, as measured in accordance with ERISA. As we have said, we have carryover credits allowing us to offset required contributions to our plan in 2009. Recent guidance from IRS regarding funding calculations will provide additional flexibility on the timing of cash contributions. We believe, based upon this guidance that we will be able to offset a significant portion, if not all, of the 2010 required contribution with additional carryover credits. We may still make... I'd like to make contributions to the plans in 2010 based upon market and other factors, but have no plans to do so in 2009. We do expect to make contributions through a joint trusted pension for Guild employees of the Times in 2009. As always, we continued to value our assets to determine if they remain a strategic fit and given the outlook for our business in the financial performance make sense to continue to be part of the company. At the end of March, we sold the Times Daily, a newspaper in Florence, Alabama, to a strategic buyer in an adjacent market. As Janet mentioned, we are pleased by the interest we have seen in our interest in the New England Sports Ventures. With the moves we have made to refinance and pay down debt and the proposed asset sale, we have the financial strength to manage through this challenging time. And with that, we'd be happy to open it up for questions.

[Operator:]

The question-and-answer session will be conducted electronically. (Operator Instructions). And we'll take our first question from Edward Atorino with Benchmark.

[Edward Atorino:]

I'm never first. Turn me-off. Jim, on the staff reduction, the base then would be last year's cost and expenses, excluding depreciation and excluding charges?

[James Follo:]

I'm sorry Ed. I didn't follow that question.

[Edward Atorino:]

See, the cost base from which the 330 is coming down is last year's cost excluding depreciation and staff reductions.

[James Follo:]

And severance costs. That is correct.

[Edward Atorino:]

And severance costs, which are roughly $2.7 billion, I guess, something like that?

[James Follo:]

I don't have it --

[Edward Atorino:]

No, okay. And this one I guess not based. Okay.

[James Follo:]

That is the calculation.

[Edward Atorino:]

And I guess, I have to ask the question everybody else is going to ask, how is... do you see any light at the end of the tunnel or it sounds like second quarter is not going to be that great? Any increase about beyond the next couple of months?

[Janet Robinson:]

I think, Ed, this is Janet. I think that, what I said in the quote that it's trending similar to what we're seeing in the first quarter, is really what we're seeing right now. We do hear, of course, from advertisers that they are saving their marketing spend during this first quarter and second quarter. And traditionally, of course, particularly in the newspaper industry, third and fourth are stronger quarters for ad spending. That has been the case certainly in years past. But this economic climate certainly doesn't dictate any prediction by any stretch. But I think there is a saving of dollars in the first half of this year that hopefully we will see loosen up as the year goes on.

[Edward Atorino:]

Circulation revenues were up. How about volume for the three groups

[Janet Robinson:]

No, the volume was down as well. One thing we do see in the second half of the year though and even in the second quarter, due to the strong efforts in regard to cost reduction as outlined by not only this 330 that we just noted, but certainly things that we have done in past years that we're reaping the benefits of. We do expect to see in the remaining quarters of the year an improvement in our operating profit. I think this is really the benefit of what we've done in regard to being extremely proactive in regard to what and what we've done on the cost side, which includes client consolidations and staff reductions and a whole host of elements. We believe that this operating profit will be better in the quarters going forward excluding depreciation, amortization, severance and special items.

[Edward Atorino:]

Thank you.

[Operator:]

We'll take our next question from John Janedis with Wachovia.

[John Janedis:]

Hi. Good morning. Thank you. Janet, I'm not sure whether you can tell us, but can you talk more about the expense opportunities in Boston? It looks like ad revenues for the market in 1Q or about half of '05 level. And I'm just wondering based on how you think about the future of that market, what's the right level of expenses, and how much flexibility do you have given the composition of that workforce? Thanks.

[Janet Robinson:]

Well, as you know, we are working right now very closely with our union. So, we are in a situation where we're not going to comment and to integrate degree in regard to those negotiations than what we are looking for. I will say that there has been a very proactive effort on the part of Globe management to bring down costs than recent years. And that has included everything from staff reduction to plant consolidation, to circulation profitability moves. And there are certainly things before them that they have already announced in regard to circulation increases in that market. They took one in September last year, and they recently announced that they are taking another one as of May 4th, in regard to single copy. So, I think until we finish with our discussions with the unions, it's going to be very difficult for me to be precise in regard to what the cost base really will be. I will say that we are being extremely proactive in regard to lowering the cost base of the New England Group.

[John Janedis:]

Okay. And maybe as a follow-up to additional, when you look at 2Q related to 1Q, is there much variability on specific properties or regions or even categories from 1Q to 2Q?

[Scott Heekin-Canedy:]

John, this is Scott. Not a whole lot of variability, the whole first half seems to be characterized by the deep economic uncertainties and this is touching just about every segment of the economy. And as Janet has already mentioned, we're hearing a similar of expectation or maybe hope that some of the macro steps that are being taken to invest the economy will start to... will lead to some sort of moderation in the second half. And there is a general theme among advertisers that they are prepared to open up the loss we spend in something (ph).

[Janet Robinson:]

I think that's also true. It's somewhat in New England, particularly in the retail side and a little bit in regard to the same story that we're hearing in regard to the Regionals. But as you know, those two newspapers have been much more classified dependent than the Times.

[John Janedis:]

And a quick follow-up, on the movie studio side, there are obviously putting a fewer movies that here, a fair amount of sequels. Is the category still your largest or among the largest and what's the outlook there?

[Scott Heekin-Canedy:]

That continues to be the largest category for the Times. And the performance has through the first half is likely to carry on through the full year. We don't see a real change in the fundamentals of the studio advertising this year. There are other categories. I mean studios have performed better than our overall revenue base. There are other categories that have been performing quite better as well those include financial services which is up against incredibly strong comps for Q1 from last year. Our corporate is quite strong, telecom and techs are both showing some relative better performance, compared to the whole department stores in next market as well.

[James Follo:]

Hey Jim, I'm sorry, one last question, I'm sorry. But, Jim a few quarters ago, I think you would put out a number of total savings of 230 across the company, I think a 100 in '08 and then 130 in '09. Is today's number get us to 430 in total?

[James Follo:]

Just to clarify, the 230 we gave out kind of mid to late '07 was 130 million in 2008, and 100 million in 2009. And we had said that was excluding onetime charges severance inflation. We've taken the inflation formula out of it. We far exceeded the 130. I don't have the exact number, but we certainly exceeded the 130 by pretty wide margins in 2008. And what was left over in 2009 is a 100. And this number is 330 relative to that 100 and we've taken the inflation, qualify out of that. So it's quite much larger than that.

[John Janedis:]

All right. Thanks so much.

[Operator:]

And we'll take our next question from Craig Huber with Barclays.

[Craig Huber:]

Yes, good morning, few questions. The same questions Ed had please. What we should daily in Sunday percent change or circulation volume at your flagship paper also the Boston Globe in the first quarter please?

[Janet Robinson:]

We are releasing fast actions in regard to ABC number on Monday, April 27th.

[Craig Huber:]

Okay. So, you can't preview here then or you --

[Janet Robinson:]

No.

[Craig Huber:]

Okay. This $12 million that you briefly talked about, this also need income tax part of your press release here adds about 8 to $0.09 to your earnings. Was it mentioned in the first page or two like the exact same tax gain, was it helped by $0.03 a year ago? Is that to say that then just be all clear here that the underlying number excluding the lease write-off basically, severance and this 12 million tax benefit, the number was 42 to $0.43 lost in the quarter?

[James Follo:]

The 12 million reference here was a discrete item in the quarter. That's under the new relatively new tax rules on a quarterly basis to evaluate year-to-year tax contingency line. And it was an adjustment in the quarter of 12 million. So that is correct.

[Craig Huber:]

Okay. So we should treat it then, you're suggesting like what happened a year ago?

[James Follo:]

Certainly not. Certainly, we wouldn't treat as a recurring item, if that's what you're asking. It would not be recurring item.

[Craig Huber:]

Okay. It is $0.03 a year ago. Okay. And then also investors were asking me, what is your estimate of how much your cash severance costs to be for this year? I know you said it would be a lower rest of course in the first quarter, what do you anticipate here in spend of cash severance for the total year? Thanks.

[James Follo:]

Well, look Craig, as you know we adjust our spending as we go and we make regular changes to our plans as we need to. I mean, I think, first being buyouts we had in the first quarter that's 25 million reducing is a what is substantially higher than anything we have forecasted for the rest of the year. But to be precise on that number is very difficult. I can tell you will say this though, we feel highly confident that we won't come anywhere close to approaching what we did last year. Last year, our severance number was somewhere in the 80 million range. And we don't see number coming in anywhere closer to that. But... I do think, I believe right now our severance is behind us. We had, the C&S closure contributed that was kind of onetime event here is, a number of things happening at Boston which we don't see at the same level, current for the rest of the year. But it's a hard number to be very precise on.

[Craig Huber:]

And then also by clear about your equity investments, I mean given the average should be above water recent bankruptcy here. What does that mean for your 49% stake in JV you have with them in the Canadian newsprint company?

[James Follo:]

The bankruptcy was avid to the above water (ph), this is a joint venture in which they are partners and which is unaffected by the bankruptcy. So there was no change at all, we don't see any impact on that at all.

[Craig Huber:]

Okay, very good. Thank you.

[Operator:]

And Alexia Quadrani with JPMorgan has our next question.

[Alexia Quadrani:]

Hi. Thank you. It's just a quick follow-up on your comments on Boston earlier. Do you think you can get back to profitability at the Globe, which is the other savings initiative that you're doing? Or do you... have to... is it really assuming some concessions from the unions there?

[Janet Robinson:]

As I said earlier, we are not really in comment mode, primarily because of our negotiations that are ongoing with the unions. As I will... as I did say and I will say again the Globe management has been very proactive for a number of years in regard to cost reductions. They are being very proactive in regard to rate increases, particularly in regard to circulation. They have moved in regard to the consolidation of funding facilities there. They are working very hard in regard to circulation profitability, in regard to the zones that they distribute the paper. All of those moves are going to help the Globe move to a stronger financial position. And our discussions that are ongoing with our unions hopefully will help in that regard as well.

[Alexia Quadrani:]

And we've seen some other companies talk about closures of certain properties, where they've just become so unprofitable or they feel they can't get significant improvements even stability returns. Do you... I guess do you confidently look to your portfolio and see if that's an option for you?

[Janet Robinson:]

We have always said that we don't comment on acquisitions and divestitures, and we don't comment on business closures as well. We are constantly evaluating what our portfolio contains and certainly the financial performance of all of those... all of the units within our portfolio.

[Alexia Quadrani:]

And then just lastly, I think Jim, you talked about paper pricing obviously coming down. Could you give us a sense about how much sort of what you're budgeting for paper pricing in the second half?

[James Follo:]

Well, I can say that... in the first quarter, price had a negative impact on our business, somewhere in the 11 to $12 million, and I think we actually see kind of for the full year. We see... we kind of see the impact of prices. It's somewhat neutral for the full year. So, towards... you need to get to the back half of the years before you start seeing the positives to offset this negative $12 million. So, it's kind of the way we think about it for the full year. So, certainly back half benefit, first half will not be.

[Alexia Quadrani:]

Thank you.

[Operator:]

(Operator Instructions). Ed Atorino with Benchmark has a follow-up question.

[Edward Atorino:]

Actually Craig answered it. Thanks. I mean asked it, right.

[Operator:]

And Craig Huber with Barclays has another question.

[Craig Huber:]

Yeah. This is Craig Huber again. Just on your bank line, it's my understanding that this trout of $400 million that's coming due May of this year is the same bank group as your $400 million credit line that comes due to in 2011. Given, I understand, as you were not able to renew the May 2009 credit agreement, how confident are you when we get out to June 2011 that you can actually re-do that bank line that somewhat favorable terms in the advantage point?

[James Follo:]

Well, let me just address. We issued the $400 million that expires... that expired unused and unneeded that we never had an intention on renewing that. And I don't think it's a fair cauterization to say the bank wasn't interested. I mean we had discussions with banks, the bank group and many others. We just... we wanted directionally what was best for the business at that time. But as you look forward, as the margin we had $220 million under the line, where we find ourselves from a debt structure perspective is we have largely unsecured debt. We expect to be generating cash from our business. We are executing on certain assets sales which we talked about. So, I think as you look... we are still more than two years away from what's $220 million. We have... really we have substantial if needed security. So, I don't... as I sit here today and anticipate that that issue whatever it may be, I mean it could be nothing. We could have no borrowings under that. It's just chipping us... it's a little speculative now that we are saying what the intensions are, what the credit markets are. But we just don't see that two and half years out is something that really hangs over ahead in the way and we think it's hard to deal with.

[Craig Huber:]

Okay. Thank you.

[Operator:]

And Barry Lucas with Gabelli & Company has our next question.

[Barry Lucas:]

Thank you and good morning. Just a quick here. I mean you back out the resources at C&S and the News Media Group at 16.4 million. What was the operating loss? So in Q1 of 2010, what would the variance be?

[James Follo:]

I am sorry. You asked about 2010?

[Barry Lucas:]

Well, no. Just trying to get a handle over the operating loss in Q1 '09 for C&S was?

[James Follo:]

Of the C&S?

[Barry Lucas:]

Yeah.

[James Follo:]

The operating... we said about $30 million in improved operating results, so about $80 million in per year in revenues and that's pretty equal over the quarter. So, we're going to lose about $20 million of quarter in revenues. And we're going to benefit by about 30 million in operating. And that's pretty straight lined over the entire year.

[Barry Lucas:]

Great. Thanks Jim.

[Operator:]

And Scott Davis with JPMorgan has our next question.

[Scott Davis:]

Hi. Good morning. So about our comment, I guess is somewhat small in the great schemes of things. But I was looking for little color on it. When you said that the second quarter felt like its training similar to the first quarter, was that for newspapers or for about our comment? And second, when you mentioned higher cost for quick advertising, I was wondering if somebody could give a little color on that, is it better quick through rates because of more relevant ads, is it pricing, just a little color into this?

[Martin Nisenholtz:]

Sure. Taking the CPC question first, it's basically... first of all the gains are fairly modest on. But it's basically that the pricing levels in the option seem to be holding up and that volume has increased just a little bit. So we feel that the numbers are on trend to perform roughly as they have. With respect to the second quarter, I think the characterization that Janet provided applies to about as well. We have seen relatively anemic display advertising results at about. And that by the way started fairly early in 2008, and that was a bit of canary in the coal mine with respect to internet display advertising. It started to show trends that other websites began to show sort of toward the fourth quarter. The good news is that NYTimes.com has not been subject to those trends. And that's something that I think Janet points out as well in her introduction. But CPC is obviously an accountable form of advertising, it's a form of advertising that should remain reasonably good in a recession.

[Scott Davis:]

Thank you, Martin.

[Operator:]

And Edward Atorino with Benchmark has our next question.

[Edward Atorino:]

Hi, Janet. Sort of a big picture question, as you or your advertising people talked to advertisers, do you get the sense that the sort of learning to live with less, do you know what I mean in a recovery might we see a muted recovery at least early on as advertisers get courageous with cash?

[Janet Robinson:]

I think that they are learning certainly in the first half to live with less, because they are either force to or they are saving dollars. For the second half of the year particularly in regards to some of the categories to spend more heavily in the third and the fourth quarter. I think that there is so much fragmentation that's going on in the advertising market. I think that their spend will reflect that in regard to what works best for them. And we have to be there to offer them alternatives in regard to what if, where they spend their dollars. This isn't just a print company anymore as you well know it. This is definitely much more diversified in regard to our advertising offerings. And we intend on being there for them. But I think advertisers as the economy improve will understand that they have a strong need to advertise. Those ones that are more successful I believe that are going to spend more during a downtime primarily to gain more share and benefit from that. And I think that would bodes well for stronger third and fourth quarter, and certainly what we may see going into 2010. But I think there will economic conditions and the unpredictability of what we are dealing with. It's very difficult for anyone to predict what an advertiser is going to do right now. But we do see signs and we hear comments from advertisers that lead us to believe that they are saving dollars in the first half to do possibly more in the second half if indeed they are able to. But they will be utilizing a variety of streams and advertising options in doing some.

[Edward Atorino:]

Thank you very much. I appreciate that.

[Operator:]

There are no further questions at this time. Ms. Mathis, I'd like to turn the conference back over to you for any additional or closing remarks.

[Catherine Mathis:]

Thank you all for joining us today. And if there any other questions, please give me a call.

[Operator:]

Thank you for joining The New York Times conference call. That does conclude our presentation. Have a nice day.