Tribune Publishing Company
Q4 2018 Earnings Call Transcript

Published: 14 Mar 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to Tribune Publishing Company Fourth Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Amy Bullis, Vice President of Finance. You may begin ma’am.

[Amy Bullis:]

Thank you, and welcome to our fourth quarter 2018 earnings conference call. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call and our actual results could differ materially. Statements containing words such as may, believe, anticipate, expect, intent, plan, will, continue, estimate, outlook or other similar expressions are forward-looking statements. Material differences in our actual results from those described in these forward-looking statements may result in actions taken by the company as well as from risks and uncertainties beyond the company's control. Some of these risks and uncertainties that could impact our businesses are included in documents publicly filed with the Securities and Exchange Commission, including our annual report on Form 10-K. I should also mention that our remarks today will include references to non-GAAP financial measures, including adjusted EBITDA, adjusted total operating expenses, adjusted net income, adjusted diluted earnings per share, adjusted EBITDA margin and net debt. And we have provided definitions and reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investor.tribpub.com. Joining me today is CEO and President, Tim Knight; and Executive Vice President and Chief Financial Officer, Terry Jimenez. I will now turn the call over to CEO and President, Tim Knight.

[Tim Knight:]

Thank you, Amy. I'm excited to be here with you today for my first earnings call as CEO. I would like to start with my perspective on the business, our approach to capitalize on the opportunities that lie ahead and touch on the progress we have made thus far. Terry will then discuss our financial results for the fourth quarter and the year and provide our outlook for 2019. I rejoined Tribune just over two years ago because I recognized a terrific opportunity. I saw business with great assets that was in the early stages of a transformation in response to the rapidly changing media environment. We have made a lot of progress in capitalizing on those opportunities. For example, we have invested in and begun deploying the infrastructure necessary to place our award-winning journalism front and center before consumers in a digital world. In addition, our effort to reposition the business reached a critical milestone this year and that we grew our paid digital subscriber base to 250,000 at the end of 2018. This represents a 5x increase since the company began these efforts in earnest just three years ago. This past year was a pivotal one for Tribune Publishing as our portfolio underwent significant changes. We purchased a 60% interest in BestReviews and acquire the Virginian-Pilot Group while we divested the Los Angeles Times, San Diego Union-Tribune and ForSaleByOwner.com as well as restructured our affiliation agreement with cars.com. I am pleased with how our teams came together and remain focused on executing our plan during this year of change. During 2018, we also significantly reduced our debt and pension liabilities leaving us with a healthy balance sheet. As we enter 2019, we are optimistic about the strength of our business and the opportunities that lie ahead. We are pleased to announce that the board approved a new 25 million two year stock repurchase program. The program demonstrates the confidence we have in the strength of our business and our ability to generate cash flow. As part of our disciplined capital allocation strategy, we will continue to make the necessary investments in people and products and work to return capital to shareholders as we work to deliver shareholder value. Looking ahead, our management team is focused on four key areas to achieve our objectives. One, expanding and deepening our engagement with a digital audience that pays for our journalism; two, selling and delivering a range of digital advertising, marketing and commerce solutions; three, optimizing cash flow from our traditional print business; and four, ensuring we have the right team and organizational structure to execute our plan. Let me take a few moments to expand on each of these strategic priorities. Starting with our online strategy, across the entire company, we have come to embrace the vital importance of both growing our overall audience as well as more deeply engaging our digital subscribers. As we have mentioned on prior calls, we have partnered with the Washington Post’s Arc Publishing Group to better align our journalist roles and workflows in order to grow our digital audience. We successfully completed a full implementation of arc at the Hartford Courant in December and we will complete these rollouts in our other newsrooms over the next few months. In addition, our investment the last few years in our data and analytics organization has given us the tools to leverage real-time insights on audience tendencies. These insights have informed newsroom decisions on what to cover, how best to present our journalism and where to deploy resources. This data-driven approach directly leads to more engaged readers and subscribers. Next I want to discuss our advertising, marketing and commerce solutions groups. In addition – in line with our efforts to grow our audience, this past year we also accelerated the transformation of our advertising departments in each of our eight markets by aggressively recruiting sales leaders and associates with digital sales experience. In addition, we are continuing to invest in the portfolio of marketing solutions to make each of our local business units more valuable to our advertising partners. Two examples of these efforts. First is exemplified by the outstanding work of our Studio 1847 team in partnership with the Chicago Tribune. For these efforts, Studio 1847 was named a finalist for the International News and Media Association’s 2018 best execution of native advertising award. Second, following our investment in BestReviews, our local titles partnered with the site to promote the brand in our markets. This work led to increased direct revenue and a meaningful improvement in BestReviews’ site search performance. Another key priority for Tribune is continuing to optimize the cash flow generated from our traditional print business while growing our digital audience and revenue. We made significant progress in this regard during 2018. We launched our print design production studio to manage the layout of each of our newspapers. We have already transitioned three quarters of our main titles and we'll have the balance of the papers transitioned by the middle of 2019. In addition, under Terry's leadership, we entered into new agreements with union drivers in New York and Chicago as part of our plan to increase operational flexibility and reduce the financial obligations associated with applicable multi-employer pension plans. As you know, the industry has seen a series of significant and well-publicized headcount reductions to offset declines in traditional revenue. We certainly have not been immune to those reductions and controlling costs remains one of our key priorities. However, I think it is also important to highlight that we continue to invest in the business to fuel future growth. We are hiring talented journalist and sales associates in each of our markets. These roles are the lifeblood of our business and our new hires have the skills necessary to help us succeed in growing digital audience in revenue in order for us to deliver long-term shareholder value. We need sales, marketing, product and operational people at every level of the organization to effectively and profitably distribute our journalism where, when, and how audiences want to consume it. We are very focused on recruiting the right talent for every position. As I mentioned, this means investing in editorial talent to ensure our journalism remains a world-class. Quality editorial is the foundation for everything we do, and in 2018 the work of our talented journalist earned much recognition. A few examples include

[Terry Jimenez:]

Thank you, Tim. Let me start with a few housekeeping items. As previously discussed, we've classified the balance sheets and results related to the California properties and ForSaleByOwner has discontinued operations for both in 2018 and 2019 reporting periods as a result of their divestiture. Also to aid in comparison purposes, I will make sure that I speak to with and without certain activities to give you a better view on organic results. I will refer to this as same business results and we'll exclude four components. The first is activity from acquisitions of BestReviews and Virginian-Pilot, which are in the 2018 results but not in the 2017 results. The second is the impact from cars.com amended agreement, which as discussed in previous earnings calls, drives year-over-year comparison distortions for digital advertising revenue but has minimal impact on profitability. The third relates to Transition Services revenue recorded for the services we are providing to the new owners of the California properties, which also has a minimal impact on the bottom line. Finally, the fourth item will be adjusting for the action week in our 2017 fiscal year. The fourth quarter of 2017 had 14 weeks of operations including the results and the fourth quarter 2013 had 13 weeks. So I will adjust by taking out the actual week where applicable. And the full year 2017 had 53 operating weeks versus 52 operating weeks in our fiscal year 2018. The exclusion of these outlooks is the basis for business comparisons. Total revenues for the fourth quarter of 2018 were $283.5 million, down 4.2% from the same quarter in 2017. On a same basis total revenue declined 7.6%, primarily due to continuing print advertising revenue declines. Our consolidated fourth quarter 2018 operating expenses were $287.4 million, down from $290.3 million versus the first quarter of 2017. Same business adjusted operating expenses were down $25.1 million or 12.3% on a year-over-year basis in the quarter as we continue to aggressively and thoughtfully manage our expenses. In the fourth quarter of 2018, our income from continuing operations totaled $4 million compared to a loss of $4.8 million in the same quarter of 2017. In the first quarter of 2018, we had net income attributable to Tribune stockholders of $2.4 million or $0.07 per share compared to a net loss of $400,000 or $0.01 per share in the fourth quarter of 2017. Adjusted EBITDA for the quarter – for the fourth quarter was $46.5 million compared to $35.2 million in the fourth quarter of 2017. Driving the increase year-over-year in adjusted EBITDA were due to the operating results in BestReviews and Virginian-Pilot assets, expense reductions outpacing the level of revenue declines on the core business, but partially meeting this year-over-year growth. Our increases in newsprint pricing, which are up 27% year-over-year resulting an expense increase of over $2 million, the actual week in 2017 and a partial impact from a cyber threat that occurred last week of the year, which I'll explain further. In December of 2018, the company was attacked by a ransom ware virus, which locked up certain company systems and data required implementation components of the company's business continuity plans and restoration of data from backups. The company investigated the incident and determined that it did not result in any unauthorized access to or acquisition of sensitive data stored within our systems. We are pleased and proud of how our organization and our people had rallied around to get newspapers to our customers and continue to serve our advertising and commercial plans. From a balance sheet point of view, we continue to have a very strong and stable position. We have $141.5 million of cash, made up of $97.6 million of unrestricted and $43.9 million as restricted cash. In April of 2019, we will pay the final taxes due of $6.2 million related to the transaction in California. We continue to have no debt with the exception of approximately $7 million in capital leases that are classified as debt. Our pension liability sits at $20.2 million, which is lower than the end of 2017's balance. And our asset performance adversely was impacted by the weak December performance in the equity markets, but those markets have since rebounded. In terms of capital expenditures, we have invested in our technology infrastructure as well as two office locations, one in Chicago and the other in Baltimore, both resulting in lower expenses on an ongoing basis. Gross CapEx was $4.2 million in the fourth quarter and $53.2 million for the full year. As previously mentioned, for reporting purposes, the tenant improvement allowance received, which effectively reduces our cash outlays for the office locations is amortized and offset against ongoing rent expense versus a net capital presentation. We anticipate a much lower capital spend in 2019 and moving forward. Now I'll touch on the performance of each of our reporting segments. Total revenues for M in the fourth quarter 2018 were $227 million, which was down 8.3% compared to the fourth quarter of the prior year. On a same business basis, total revenues were down 8.5% as we continue to experience downside pressure in print advertising. But we did see an improvement in this trend sequentially where we were down 11.2% in the third quarter. Print advertising was down 12% on a same business basis, which was also a significant sequential improvement where we were down 18.1% in the third quarter on a year-over-year basis. X had $49.4 million of total revenue in the fourth quarter of 2018, which was up 1.2% compared to the prior year quarter. The growth came from digital-only subscription revenue The Virginian-Pilot and BestReviews, partially offset by decline in cars.com revenue in the actual week in 2017. We continue to see solid traction growing in our digital paid subscribers. Now turning to our guidance. Given we are deep into the first quarter, we thought it would be helpful to provide Q1 as well as full year outlook. For Q1 2019, we anticipate total revenue to fall between $235 million to $240 million and for adjusted EBITDA we anticipate we will fall into the $18 million and $19 million range. This will show a year-over-year growth in adjusted EBITDA by approximately $10 million in the quarter. For the full year 2019, we anticipate adjusted EBITDA to be $100 million to $105 million for the full year. This guidance reflects the following items from an adjusted EBITDA perspective

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Lance Vitanza from Cowen. Your line is now open.

[Lance Vitanza:]

Hi, thanks for taking the questions. I thought the quarter looked pretty good but it was a bit off from the guidance. I was wondering if you could start with just sort of a discussion of how the EBITDA – if you can bridge this from what you had been thinking at the end of the third quarter call in terms of what you got. And then likewise sort of as you think about 2018versus 2019, how we kind of get back to that higher-level EBITDA just in sort of in the big buckets that are just on the cost side and the revenue side, print versus digital, et cetera?

[Terry Jimenez:]

Yes, sure. So from a revenue point of view we came within guidance but we did come in on lower end of the range and we were more hopeful to be in the middle. So we had some slight softness while sequentially we saw some improvements. We came in a little bit softer where we thought. But we’ve seen some more momentum come into Q1, so we’re more optimistic there. And then from an expense point of view, there was a number of expense reductions that we were earmarking for to occur earlier in the quarter then we realized most of the reductions occurred really at the end of December or started to get realized in kind of the middle of December time frame and then into really January. So from a timing point of view, those savings shifted a little bit more than we initially had anticipated. And as we closed out the year, which happens from an accounting point of view as you look at reserves and adjustments, we had a reserve adjustment for several million dollars that we thought was prudent to take. And then workers’ comp was another area that we looked at the reserve and based on actuarial analysis we had to increase for some estimated exposure there. Typically, those things will come and go, sometimes it will help you, sometimes it will hurt you. And unfortunately we just had a handful of things that went against us, and now is much going for us. But again, over time, I think all that smooths out.

[Lance Vitanza:]

And putting the guidance aside, I mean, the EBITDA, if we take out the acquisitions, roughly $41 million versus $35 million a year ago. How much would that revenue, was it the $70 million of revenue – of extra revenue from the extra week, how much of that would have translated into EBITDA in the year-ago quarter?

[Terry Jimenez:]

Bear with us a second. We’ll get you the exact number. I recall, it was about – around $3 million, Lance.

[Lance Vitanza:]

Okay. So call it $41 million versus low 40s versus low 30s, that’s a pretty good at year-over-year improvement. I guess, the question is, given the restriction charges went up quite a bit in the quarter, at least year-over-year, I don’t have the sequential numbers in front of me but you know it does beg the question, is adjusted EBITDA – is that the right metric to gauge the performance trends here? And how much – what do you expect to see if we look out over the course of 2019 both on sort of the cadence faces and then just sort of full year outlook just sort of baked into the guidance in terms of restructuring add-backs?

[Terry Jimenez:]

Yes, so we don’t guide specifically to where the restructuring will fall. I’d say, what we experienced there is definitely a number of onetime items, the transportation unit restructuring that occurred really at the end of December, benefiting financially 2019 but hurting from a onetime charge point of view in 2018. That was significant north of $10 million, that won’t be an ongoing, recurring charge. And then there was a number of other things like our voluntary program, which is going to generate roughly $16 million of savings, we spent a lot less that on severance but also it was a big chunk of change. And so I think as we move forward, I think we’re going to be operating in a much lower level of researching charges from what we had in 2018.

[Lance Vitanza:]

If I could just get one more in. Just a bigger-picture question on pay wells. I’m curious to get your sense for how they’re progressing not necessarily with respect to your titles only but I certainly feel like I’m much more frequently prompted to subscribe on a trial basis, provide a user ID, credit card information, what have you, when I’m on the web looking for new stories. What has your experience been? What inning are we in? Do you see this being an additional tailwind or a headwind before we get to the tailwind? How should we be thinking about that?

[Tim Knight:]

Hey Lance, it’s Tim. We look at it as extraordinarily important for the industry and for us in particular to continue to get consumers to pay for our quality content. I think consumers are acknowledging that the quality content is worth paying for. The investments we have been making in the product portfolio, especially around – and we continue to make around mobile, will be important to capture people. And decrease the challenges we have on having them pay real easily. I think it’s early on still. We’ve got a 0.25 million digital-only subscribers who pay us, we’ve seen nice growth on that, we anticipate continued growth this year both on the volume, and we’re seeing – as I mentioned in my comments, our data and analytics investments have helped us to understand the consumers’ needs more and we’ve taken that data and used in our – continue to use it with the news rooms to make sure that they're pursuing the content that the audience in each of our markets really is valuing and is willing to pay for. So short answer is, important, very important, kind of a big shift towards that across all major media operations early on and a lot more opportunity going forward.

[Lance Vitanza:]

Thanks very much.

[Operator:]

Thank you. And our next question comes from Michael Kupinski from Noble Capital Markets. Your line is now open.

[Michael Kupinski:]

Thank you. Thanks for taking the questions and good afternoon. Your revenue guidance and cash flow guidance for the first quarter and full year is better than what I would've expected. And I was wondering, you mentioned that you're seeing sequential improvement in revenue trends that I was wondering if you could just talk a little bit about where you're seeing the moderating revenue trends in the first quarter.

[Terry Jimenez:]

Yes. So for us on the advertising side, there's certainly a number of challenges without question, but I think we're seeing some of the cycling of some of the big time, one-time events of bankruptcies and others that we've cycled against. So there's a little bit of easing of the pain there. There's also some national advertising programs that have been running, that have also given us a little bit of a boost on the print side of things. And then in terms of digital efforts, we continue to make sure that we're moving that in the right direction and we're again cycling against some issues that we had earlier in the 2018.

[Tim Knight:]

And Mike, let me just add on also is that, in past year we essentially 15 months changed out the ad VP in each of our markets and have hired what we call digital general manager. So people who specialize in digital advertising sales for each market. So a lot of it is building the right team to be able to execute on the opportunities that we see out there.

[Michael Kupinski:]

Got you. And regarding your transportation restructuring, that I assume was mostly in New York and Chicago, is that right?

[Tim Knight:]

Correct. Just those two markets.

[Michael Kupinski:]

I got you. And then in New York, are those now – is that publication now profitable or is it on a path to be profitable? What was it like in the fourth quarter?

[Terry Jimenez:]

Yes. So we've made significant progress. When we look at, obviously the business itself and the stand alone profitability as well as there were some synergies that we experienced in the northeast. So for instance, our Allentown publication, the Morning Call. And so when you factor all that in as well as the standalone performance, it exited the year up.

[Michael Kupinski:]

Got you. And then in terms of you're putting in production facilities, are you pretty much stable now or there are opportunities – further opportunities to consolidate those?

[Terry Jimenez:]

So we have conversations with a number of our peers within the markets that we serve. We've got where we still have those facilities Chicago, New York being the two largest, we're certainly more the aggregator. And we think that there's more opportunities within those markets. And then some of our other mid-markets, we do think that there's even more consolidation opportunities as well. So we're looking at each of them to help drive some revenue growth there.

[Michael Kupinski:]

And in terms of a newsprint prices, you mentioned it was up strongly in the fourth quarter. Are you seeing any rollbacks from the big price increase in the fourth quarter?

[Terry Jimenez:]

I wouldn't call it rollback because that would be a substantial decrease. There's definitely really easing of it and so we're seeing, where the peak of it really occurred kind of mid to late third quarter in terms of the pricing after the tariffs were reversed. We saw some easing right away, not a huge jump or drop down. But we continue to see month to month, a little bit of easing in the pain. But we're still up on a year-over-year basis. I think in the third quarter, we were up around 32% year-over-year price wise and fourth quarter we were up 27%. So, we're hoping to get back down to flat and at some point and hopefully the foreseeable future we'll see newsprint prices hopefully lower on a year-over-year basis. But I'm not sure when and how that'll happen.

[Michael Kupinski:]

Got you. And final question. Can you talk a little bit about your thoughts regarding the acquisitions at this point? Maybe the market environment, your appetite for maybe some acquisitions?

[Terry Jimenez:]

Well, Mike, we don't comment on anything in particular, but as we've said every quarter and we continued to look at things that might be opportunistic. So, we have a strong balance sheet and we have key markets and we take a look at opportunities where we can strengthen our position and make sure we deliver on shareholder value.

[Michael Kupinski:]

Got you. Thanks.

[Terry Jimenez:]

Thank you.

[Operator:]

Thank you. And our next question comes from Doug Arthur from Huber Research. Your line is now open.

[Doug Arthur:]

Yes. Thank you. Terry, I'm just trying to reconcile the second to last schedule where you reconcile your operating expenses with the adjustments, I guess without DNA and impairment it's about – there's $92 million of adjustments to get to adjusted comp, newsprint, et cetera for the fourth quarter. Obviously that's considerably higher than what you're showing in the segment results. So these restructuring, the transportation, et cetera, can you sort of break those out or is that something we should do offline. I'm just trying to understand what the underlying comp number is.

[Terry Jimenez:]

Yes. I think, what we – I can clarify certainly getting a little bit deeper offline is the adjustments. What we're trying to get you is also a same business view as well. And so we're taking out any expenses associated with the Virginian-Pilot and BestReviews. So that when you get to the adjusted column on a year-over-year basis, you're comparing the same businesses. So it looks a lot higher than in the actual restructuring charges are.

[Doug Arthur:]

Okay. So you're trying to same store that, okay.

[Terry Jimenez:]

Yes.

[Doug Arthur:]

Okay. Understood. And then in terms of print ad trends, if I heard you correctly, 18% down in Q3, 12% in Q4. Is that all print or is there something else in there? That's a pretty significant improvement.

[Terry Jimenez:]

Yes. So that's all print.

[Doug Arthur:]

And that goes back to what you just said to Mike about some national programs and some easing comps. I mean, it was already particular property that drove that or was it more across the board?

[Terry Jimenez:]

No, it was across the board.

[Doug Arthur:]

Okay. And then I guess finally on the 250 of digital paying subs, I mean, do you have 1 million sub potential within your universe in your view or is that something that might come through more acquisitions?

[Terry Jimenez:]

So I think that the 1 million from my view is, when we look at a five year timeframe, personally we've got, I think a really good team. We've got a data team that's helping – really helping drive this as well and support this. I think the 1 million is achievable, more of the five year timeframe. I think that can get accelerated through acquisitions. And that's where the three year window is probably more likely.

[Doug Arthur:]

Okay. All right, great. Thank you very much.

[Terry Jimenez:]

Thank you.

[Operator:]

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Tim Knight, CEO and President for closing remarks.

[Tim Knight:]

Thanks everyone for joining us on today's call. 2018 was a transformative year for Tribune Publishing Company. Throughout our organization, we laid new groundwork for sustained success. We look forward to building on the momentum we gain last year as part of these transformations and anticipate a successful 2019 through the continued execution of our strategy. Thank you very much.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect.