Tribune Publishing Company
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Good afternoon and welcome to the Tribune Publishing First Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kimbre Neidhart, Assistant Treasurer and IR. Please go ahead.

[Kimbre Neidhart:]

Thank you and welcome to our 2016 first quarter 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, intend, plan, will, continue, estimate, outlook or other similar expressions are forward-looking statements. Differences in our actual results from those described in these forward-looking statements may result from actions taken by the company as well as from risks and uncertainties beyond the company’s control. Some of the risk and uncertainties could impact our businesses are included in documents publicly filed with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly report on Form 10-Q. 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 and adjusted diluted earnings per share. And we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investor.tribpub.com. Joining today’s call is Chief Executive Officer, Justin Dearborn and recently appointed Chief Financial Officer, Terry Jimenez. Terry will address our Q1 financial results, and Justin will outline our vision and growth strategy. He will also address Tribune Publishing’s public response to Gannett’s unsolicited proposal to acquire all outstanding shares of Tribune Publishing common stock for $12.25 per share in cash. Please note that we will not be taking questions in the Q&A portion of today’s call on Gannett’s proposal or our response this afternoon. Now, I would like to turn the call over to our CFO, Terry Jimenez.

[Terry Jimenez:]

Thank you, Kimbre and good afternoon. I just want to say that I am glad to be back home with Tribune and I have previously spent 10 years in the industry, of which most was with Tribune. I have also had a chance to spend considerable time with Michael Justin and the broader management team and I believe that Tribune Publishing has tremendous prospects moving forward. As CFO, I will work with our team to ensure that we properly monetize our growing digital audience in a cost effective way. Additionally, I will focus on providing greater transparency in our publicly reported numbers and strategy, which we will touch on a bit later. In terms of our first quarter results, we generated adjusted EBITDA of $34 million, which is a significant improvement over the first quarter of 2015. We had $22 million in the first quarter. Total revenues were in line with expectations at $398 million. If you exclude revenues from The San Diego Union-Tribune, which we acquired in May of last year, revenues were $369 million. Advertising revenue was down 4.4% from the prior year quarter. Excluding San Diego, advertising revenues declined by 12.4% due primarily to softness in print advertising. Circulation revenue for the quarter was up 11.4%. Excluding San Diego, circulation was up 2%. This increase came from rate growth in digital subscriber gains partially offset by print volume declines. Other revenue declined 4.2% due to lower volume in direct mail, commercial print and delivery, but were partially offset from growth in content syndication. We saw good momentum in digital this quarter. Digital-only subscribers grew 51% over the prior year quarter and 15% since the fourth quarter of 2015 to 101,000. Our total unique visitors per comScore increased sequentially by 6 million from the fourth quarter of 2015 to 57 million. Additionally, engagement metrics, page views per visit and minutes per visits are also up in the period. Collectively, as a team, we see tremendous upside in monetizing more revenue per unique visitor as well as growing the overall unique visitor base. Now, turning to the expenses, in Q1, operating expenses were $402 million. On an adjusted basis, operating expenses came in at $340 million, which is a reduction of $36 million over the first quarter of last year. Putting all this together, including a restructuring and transaction cost and costs associated with the previously announced Employee Voluntary Separation Program, net loss was $6 million or diluted loss per share of $0.22. Excluding the after-tax cost just mentioned totaling $13 million adjusted net income is $7 million or $1 million more than the first quarter of 2015. We ended the quarter with an improved balance sheet, including $96 million of cash. And throughout the quarter, we have reduced debt and pension liabilities. This strength in balance enabled the company to execute on digital initiatives to pursue strategic acquisitions, which will continue to be a part of our capital allocation strategy. Now, as we look at the full year for 2016, we expect revenue will be at $1.6 billion to $1.625 billion. In terms of adjusted EBITDA, we are projecting $166 million to $172 million for 2016. As you can see, we are off to a strong start in adjusted EBITDA with Q1 results and we have a number of programs that will continue to carry out as well as new initiatives that drive profitable growth. Included in our EBITDA guidance are investments in digital and content. To continue to support our content-first culture, we plan to provide an allocated budget to each Publisher and Editor-in-Chief to execute pay increases for their editorial staff, which will be based on employee performance and overall contributions and will be effective in the third quarter of this year. Additionally, we will continue to up – continue to evaluate rewards and incentive plans across other groups within the company. Our employees are key to transforming the company and we believe this is only a first step in us reinvesting in our people. We know that all of our employees are critical to our success and rewarding them will be an important part of our strategic plan moving forward. Moving forward, we also look to expect to breakout our business into three different segments. The first segment will be Tribune Publishing, the second segment will be the LA Times, and the third will be Trunk. Trunk is our content monetization engine created by Michael and led by Malcolm and Justin will provide more color on this segment. Overall, strategy is centered on these three segments and this reporting structure will provide greater transparency into our strategy and results. I will now turn over the call over to our CEO, Justin Dearborn.

[Justin Dearborn:]

Thank you, Terry. As many of you know, our Chairman, Michael Ferro and I have successful track record in working together to transform technology companies. While the medium at Tribune Publishing is new for me, Michael and I both have been successful in leveraging innovative technology and content to create value for all stakeholders. We believe there is nothing more valuable than curated verified content. While the mediums will continue to change, we believe there will always be a premium placed on verified content. We have a tremendous opportunity with the Tribune platform. Content drives traffic which enables commerce. This is why content is at the core of everything we do. Our newsrooms across the company continue to create journalism of the highest caliber. And our journals across the company are being recognized for their work with dozens of awards. Among them, this year, two Tribune Publishing newsrooms were honored in the breaking news reporting category for Pulitzer prizes. The Los Angeles Times won its 44th Pulitzer for coverage of the San Bernardino terror attack and The Baltimore Sun was a nominated finalist for its coverage of Freddie Gray’s death and the subsequent civil unrest. LA Times’ columnist, Steve Lopez, was a finalist for a Pulitzer for his work to capture the struggles of working class in one of the country’s most stratified cities. And Andrew Green, Tricia Bishop, Peter Jensen and Glenn McNatt of The Baltimore Sun were also recognized as finalists in the category of editorial writing for their exceptional coverage of Freddie Gray. We have three exceptional content businesses at Tribune Publishing. The first is our traditional publishing business, which includes our important and geographically diverse brands, The Chicago Tribune, Sun Sentinel, The San Diego Union-Tribune, Orlando Sentinel, The Baltimore Sun, Hartford Current, The Morning Call and The Daily Press. We plan to continue to accelerate the transition to digital while also focusing on finding new ways to reach the widest audience across all mediums. We are working across all of our markets to find the best ways to represent our content in the digital space, targeting to key audiences and find new ways to deliver it globally through content syndication. We are focused on implementing technology that will enable growth and profit from these brands. We plan to implement cost effective solutions that will help automate our 1,000 plus sales teams’ customer interactions and our internal content management and publishing solutions. These are just a few examples where we can apply off-the-shelf solutions to increase efficiency and lower our costs, while not impacting the quality of the content we produce. Our second business is the Los Angeles Times and make a brand all by itself and one with tremendous growth potential. We are cultivating the powerful LA Times brand into a global revenue generator by launching strategic partnerships and creating even more content. The Los Angeles Times has 36 million unique visitors a month according to comScore and that only includes our U.S. audience. As part of our strategy, we plan to invest in global news bureaus when others are cutting back. We plan to open 7 news bureaus overseas in 2016. Davan Maharaj, Publisher and Editor-in-Chief of the LA Times will oversee the global expansion into Hong Kong, Seoul, Mexico City, Moscow, Rio de Janeiro, Lagos and Mumbai. Each of these cities represents vibrant entertainment-heavy cultures. And our third area of focus is on exciting business that we are calling Trunk. Trunk, which is a British term for pooling of resources is Michael’s vision conceived prior to joining Tribune. It is now being led by Malcolm CasSelle. Trunk will fuel the revitalization and investment across all of our publishing assets. Trunk combines Tribune Publishing’s existing assets, including Tribune Content Agency, ForSaleByOwner and its native advertising businesses, with the newly launched artificial intelligence technology wrapper to accelerate our organic digital growth and create additional value for our customers. Trunk is a transaction-based revenue business model that we believe allows us to leverage our massive content creation capabilities more effectively. We are installing new technology or widgets across our sites that are designed to increase the effect of CPM revenue we received from our growing audience. The CPM model is the price an advertiser pays per 1,000 impressions. As we understand our audiences better, we can relate to higher CPM. However, our goal is to actually move from selling on a CPM basis to a cost per click, or CPC basis like Facebook and Google. We just completed a 30-day pilot with Tribune sites representing about 1% of our traffic using the technologies mentioned above. We saw a 400% lift on yield on problematic ad revenues. This is even more significant than it sounds, because programmatic revenues are already the fastest growing part of our business. Over the next few quarters, we plan to rollout these technologies across all Tribune and partner sites. This technology also lets us build extensive audience profiles that allow us to collect unique data on what our readers like and what content they engage with most and when, which also results in more advanced programmatic monetization and provides superior yields. The software uses artificial intelligence to create customized content for consumers in each widget. Readers are served content that is completely artificial intelligence generated. And each time they click through, we learned more about the profile of that reader and can serve more customized and valuable ads and content based on their consumption habits. We have also installed a content recommendation engine to increase time spent on our sites. We will use this technology to better recommend content to readers. For instance, if you are reading an article about the Chicago Bulls, Los Angeles Lakers or the Los Angeles Clippers, AI will recognize that and recommend content on Michael Jordan, Derrick Rose, Kobe Bryant or Chris Paul or other NBA news that a reader might enjoy. We are also using social data and first and second-party audience profiling. We are leveraging data and targeting information from Facebook to better promote our storage and generate virility. Trunk not only drives organic revenue growth for Tribune, but it also helps our 2,000 media clients from Microsoft to McClatchy increase revenue. We have been active meeting with other CEOs in the industry and they are excited about the partnership and revenue-sharing possibilities with this business. We have been testing our technology and are already seeing momentum in the results. We believe we can monetize every unique visitor significantly more than we do today and grow our unique visitor base. Content drives commerce and by applying artificial intelligence, we believe we can capitalize on the $60 billion addressable market here. If we capture just the pieces of that using trunk, we could generate hundreds of millions of dollars in incremental advertising revenue. We know we have underinvested assets here. And that with the right focus and if we can capture a fraction of what Facebook, Twitter and Snapshot are generating, we have the opportunity to deliver significantly improved financial results. In an area where content is being coveted and beginning to be recognized as more valuable than the platform itself, we have a great position to once again be rewarded for creating original, curated or verifiable content. It has been reported that BuzzFeed raised money from NBC Universal at a $1.5 billion valuation. This is just one example of the billions of billions of dollars being invested in ad tech and content creation. BuzzFeed and other digital and native companies like them have innovated traditional publishers to-date, but we believe we have a fundamental advantage and that we create more original curated content. Our growth strategy for Tribune centers on three core businesses I have just described. We strongly believe in the value creation potential of these businesses. And as Terry mentioned, moving forward, we expect to report our revenue in three segments to provide better transparency and give you a better sense of how our strategy is working. I want to take a moment to thank our employees for their hard work and dedication. Gannett’s hostile proposal and disingenuous comments in their letters and in the press have been an unfortunate distraction for our nearly 7,000 employees, but we have a remarkably resilient team and it remained focused on delivering the award-winning journalism and marketing solutions that our customers and partners have come to expect from us. Our Board of Directors have carefully reviewed with the assistance of our financial and legal advisors that has unsolicited proposal to acquire all the outstanding shares of Tribune Publishing for $12.25 per share in cash. I want to be clear that we did not seek or encourage this proposal and the board has not been trying to sell the company. I also want to reiterate that Gannett’s repeated claims that our Board did not take this proposal seriously are misleading and disingenuous. Consistent with our fiduciary duties and past practices, we are always open to evaluating any credible proposal that we reasonably believe in good faith to be in the best interest of the company and our shareholders. In that context, our board thoroughly considered the Gannett proposal within a reasonable timeframe and responded with a letter this afternoon. We also distributed the letter via press release prior to this call. We believe that the price reflected in the proposal understates the company’s true value and is not in the best interest of our shareholders. The board and I remain confident in our ability to generate shareholder value in excess of Gannett’s opportunistic proposal to a focused execution of our strategy. The board has evaluated the unsolicited offer in this context and concluded that is not a basis for further discussion. As we have outlined on this call, we are in very early stages of an exciting strategic transformation and have a compelling plan in place to increase revenue through our award winning brands, capitalize on the global power of the LA Times and significantly accelerate our content monetization to Trunk. As Kimbre mentioned, we will not be taking questions in the Q&A portion of the call on this matter. Instead, we want to focus our time on our standalone strategy and the significant possibilities for our company. With that, we will open up the call for questions.

[Operator:]

[Operator Instructions] The first question comes from Lance Vitanza with CRT Capital Group. Please go ahead.

[Lance Vitanza:]

Hi, guys. Thanks for taking the questions. I guess I really have two. The first is regarding the Union Tribune acquisition, you spent $85 million of capital to acquire that if I remember correctly. Yet, since that acquisition has closed, revenues have been flat year-over-year for three straight quarters. So, I guess I am wondering when do we start to see the benefits of that acquisition from the standpoint of any kind of gain in national advertising sales and circulation or whatever other metrics you would feel are appropriate?

[Terry Jimenez:]

Sure. This is Terry. Thanks for joining, Lance and thanks for the question. So, we have had just across the industry, obviously, there has been some softness on the print revenue side and so we have seen, excluding San Diego, if you exclude that out, we have seen declines in our overall revenue base for our existing businesses. San Diego has helped keep the overall revenue line flat. We are going to cycle past that in the second half of the second quarter. And so we will start seeing some softness blend through. However, I think we have got enough synergy that we have generated on the San Diego side on the cost side of the business, where that’s actually been a pretty healthy EBITDA generator for us. And in this quarter alone that was roughly about $5 million, $6 million of EBITDA attributable just to the San Diego business. And as you know, Q1 is generally a softer quarter for this industry.

[Justin Dearborn:]

Lance, this is Justin. I will comment on your national question. So, you might have seen a couple of weeks ago, we issued a press release. We helped form an organization called Nucleus, which will be going after national both print and digital. And we actually formed that with Gannett, Hearst and McClatchy as the four founding members of that. So, that’s really where we think we are getting uplift on the national side. It just was formed literally weeks ago hiring a sales team, hired a CEO few weeks ago. So, that’s just launching, but we feel like we can really hit the national market collectively a little bit better there. So, we can reach DMAs that we couldn’t get to, we couldn’t go in and offer that to national advertisers.

[Lance Vitanza:]

That’s helpful. I was encouraged to see the guidance for the full year EBITDA. It’s quite a bit higher than we had expected going in. But I did want to ask you with I mean, if I have got these numbers right, I think legacy advertising revenues, ex-Union Tribune were down about 9% in the fourth quarter and down about 12% in the first quarter, so not going the right way. The guidance on the other hand suggests that EBITDA will be flat over the balance of the year despite as you guys pointed out the fact that we are lapping the Union Tribune acquisition kind of as we speak here. So, how should we be thinking about the bridge from the trend in advertising that we are seeing today to flat EBITDA from here on out, which is I believe what the guidance suggests flat year-over-year?

[Justin Dearborn:]

Correct. So, we have actually – it’s actually going to be growth on a year-over-year basis. So last year, we had ended with $157 million. Our guidance is $166 million to $172 million on adjusted EBITDA. We will see overall revenue. We will be a little bit lower than where it was last year. But on the expense side, there has been a number of initiatives that the previous management team was executing. So, certainly, we are going to continue to carry those through. Also there has been a number of other reorganizations that have taken place here in the first quarter that you will see the benefit and flow-through of that. And one way to kind of think about it, Lance, is that if we ended last year with $157 million, first quarter on a year-on-year basis, we are up about $11 million in EBITDA. And so that tells you our 12 months is at $168 million and we think that we have got programs and opportunities to offset any revenue decline as we look at the balance 9 months of the year.

[Lance Vitanza:]

Thanks very much. Appreciate it.

[Terry Jimenez:]

Thank you.

[Justin Dearborn:]

Thank you.

[Operator:]

[Operator Instructions] The next question comes from Doug Arthur with Huber Research. Please go ahead.

[Doug Arthur:]

Yes, thanks. The adjusted circulation growth of 1.7%, I think it was flat in the fourth quarter, take me through the metrics how between price and units and I guess some digital help as well in that, you just lay that out for me? Thanks.

[Terry Jimenez:]

Sure. So overall, we saw – so, if you take out San Diego, which you are looking at the adjusted line, we had rate increases that were about 10%, 11% and volume declined about 9%. So, that’s on the print side. And then on the digital side, we saw growth was about 50% in revenue on a year-over-year basis. Now, that’s a smaller basis. So between the combination of rate increases on print that were more than offsetting the volume and then the digital growth driving the overall number up 1.7%.

[Doug Arthur:]

So as the year progresses, do you think you will hold on to most of those gains?

[Justin Dearborn:]

We do. There are some of those increases we are going to cycle past throughout portions of this year, but we think generally we should be close to that number on a quarter-to-quarter basis. It may move up or down a couple of basis points.

[Doug Arthur:]

Okay, great. Thank you very much.

[Justin Dearborn:]

Thank you.

[Operator:]

[Operator Instructions] The next question comes from Michael McCaffery with Shenkman Capital. Please go ahead.

[Michael McCaffery:]

Thanks. I am sure it will be more obvious to me when you publish your Q, but can you walk me through how you ended up with such a high cash balance for the quarter?

[Terry Jimenez:]

Sure. Relatively straightforward there, so we ended the year, last year, at 40s, but essentially what we had, we had a capital injection from an investment by Merrick. That was on a net basis of about another $42 million. So, it’s a combination of, from a seasonality standpoint, we had a higher collection period in Q1, which is historically kind of a higher collection season given Q4 such high end on the revenue front. Then the cash injection is what propped up that balance.

[Michael McCaffery:]

Alright, thank you.

[Terry Jimenez:]

Thank you.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Justin Dearborn for any closing remarks.

[Justin Dearborn:]

Thank you. The interest in the Tribune Publishing Company underscores the power of our brands, team and unique position within the industry and this is because of the great work that our employees do everyday. We have a focused strategy and unrivaled collection of award winning content and brands and the right leadership and team in place and we are well-positioned to create value for shareholders. We are all excited about the significant opportunities ahead and thank you for your interest in the company.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.