Tribune Publishing Company
Q4 2016 Earnings Call Transcript

Published: 23 Feb 2017

[Operator:]

Good day ladies and gentlemen and welcome to the tronc Fourth Quarter and Full Year 2016 Earnings Conference Call. [Operator Instructions] As a reminder this conference call may be being recorded. I would now like to introduce your host for today’s conference Kimbre Neidhart, Assistant Treasurer and Investor Relations. Please go ahead.

[Kimbre Neidhart:]

Thank you and welcome to our 2016 fourth quarter and full year 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 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 and quarterly reports 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, 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.tronc.com. Joining today's call is Chief Executive Officer, Justin Dearborn and Chief Financial Officer, Terry Jimenez. Now, I would like to turn the call over to our CEO, Justin Dearborn. Justin?

[Justin Dearborn:]

Thank you, Kimbre. 2016 was a transitional year for our company. While we face some unexpected setbacks in 2016, we delivered on our financial commitments and are pleased with our overall results. We believe the company today is in the strongest position since the company became a standalone public company in 2014. Total revenues for the full year were $1.61 billion, down 4% from 2015. Excluding our acquisition in San Diego, total revenues were down 7%. Adjusted EBITDA for the full year grew to $181 million, which is well ahead of our November guidance and consistent with our January update. 2016 adjusted EBITDA was up 15% from $157 million in 2015. Today, the company has a strongest balance sheet since the spin-off and we reduced our net debt to $173 million at the close of 2016. On the troncX side, we continue to make progress in growing our digital audience. Our total number of digital only subscribers reached 160,000 at the close of the year, which represents a net increase of $24,000 or 17% versus the third quarter of 2016 and the increase of 82% versus the prior year quarter. In total, we finished the year with just under 1 million total paid all access subscribers. The LA Times was the largest contributor to our total digital volume subscription growth for the year, contributing 56% of our total growth. Total digital only subscriptions for LA were up 22% sequentially from the third quarter of 2016, and were up 118% versus the prior year quarter. During the week of the election, the LA Times achieved all time highs for new paid digital only subscribers with an increase of 61%. Overall, we saw an average increase of 29% in paid digital volumes subscriptions across all of our publications following the election. Revenue from digital only subscribers also strengthened in the quarter growing 16% sequentially from the third quarter of last year and up 76% versus the fourth quarter of 2015. Our average monthly unique visitors total $57 million in Q4 of 2016, which is up 16% year-over-year. We saw that number fluctuate a bit over the course of the year, which was driven by increases in traffic around search events as the Election, World Series coverage, and the Olympics to name a few. We continue to make progress on leveraging video to make our content more visual and reach a major wider audience. October was our strongest month of 2016 with total video views reaching $21 million and we are seeing the momentum accelerate in the first quarter of this year. In January, we logged more than 28 million views compared to 4.2 million in January of last year. For the quarter, we reported a year-over-year increase of 1% in total digital revenue, which was muted primarily due to our digital classified business, including recruitment. In the third quarter of 2016, when entered into a new arrangement with real match and launched their recruitment solutions across all of the publications, we understood that migrating platforms would result in some revenue disruption. We still believe that this was the right decision for the company given the unfavorable economics with our prior partner. We are also making critical investments and digital sales development for all of our sellers across the company. On top of it, winning a CRM at the end of last year, we are rolling out extensive digital sales training, as well as external partnership with interactive advertising bureau to train and certify each of us sellers, as well as build a digital standard for hiring sales talent. Training and development has historically been underinvested in this company and these actions will help transition our sales organizations to think and act digital first. With the unexpected distractions, 2016 behind us, the turnover rates which reached almost 40% in sales in 2016 are improving and we are focused on developing our sales organization. We also announced today that Timothy Knight, will rejoin the company as President of troncX. Tim is a former Tribune executive and was the co-founder of classified ventures, the digital business that created cars.com and apartments.com. Tim joins us from Advance Ohio, where he served as the President and Director of the overall strategy, sales, marketing and content of Cleveland.com, one of the largest news and information sites in Ohio. Prior to that Tim held senior leadership positions at Newsday and Wrapports. Tim has built a career in helping media companies effectively transition to digital. It is a proven operator will be instrumental in helping us advance the digital initiatives in place today. To be competitive in digital space we have to continue to grow our free and paid digital audiences. We must become a top digital site in terms of unique visitors and dwell time. While not set a timeline, we are focused on achieving and maintaining a steady monthly unique visitor average of greater than 100 million. In the late fall of last year, we began the implementation of new data tools and infrastructure. We now collect, analyze, and take action on nearly 3 billion first party data points per month. These data points provide a more sophisticated analysis for our audience, traffic, and head monetization opportunities. For each piece of content that we publish, we now have the ability to sort and surface top performing content by market, device, subject matter, and referral source, as well as analyze the monetization and revenue opportunity for that content. With this information, we can rapidly identify popular, high-value content, and then ensure it has prominent placement on our sites, social feeds, newsletters, and search campaigns, increasing our monetization opportunity for every piece of content produced. The first step was to implement the infrastructure that collects and analyses our traffic. The next step is to build more sophisticated models of our audience which we expect to deliver in the first quarter of this year. These data points will provide us with detailed insights into our consumers, including what type of content they engage with and how they interact with it. And importantly, we will be able to provide these data points to our sellers, so they can present compelling measurable campaigns to our advertising partners. We are also building a recommendation engine based on machine learning that will use this data to target the right content to key audiences on our sites in real time. Right now this is, or handled without the benefit of machine learning. Ruling of these new data driven products, we will improve the experience for our users, increase engagement, and create new revenue opportunities. Great content drives traffic and we are fortunate to have award winning brands that create exceptional curetted content every day. With set established news organizations apart from others is trust, credibility, and accountability. And our brands are built on this foundation. Our newsrooms produce stories that inform, inspire, and entertain. They also produce investigative work that brings issues and injustices to light and make an impact. The Chicago Tribune's investigation and the dangerous prescription drug interaction was recently named a finalist for the 2017 Goldsmith price for investigative reporting. In response to the investigation, the Governor of Illinois unveiled new plans that direct inspectors to place more emphasis on adverse drug reactions and including mystery shopper program to test how well pharmacists comply with the law. The Los Angeles Times investigative report revealed that thousands of soldiers in California have been forced to repay enlistment bonuses, sometimes a decade after serving. Within a few days of our report, the Secretary of Defense ordered the Pentagon to halt her repayment activity. Also in the quarter, the Baltimore Sun were in the three-part series shoot to kill, which encompass more than a year of a reporting by the sons Justin George and included interviews of more than 80 people to review how urban violence had become more lethal in recent years. In Hollywood awards season began in October, and the LA Times has been covering everything from Hindi films to Red Carpet fashion to how the industry itself is evolving. On Oscar Sunday, Times Reporters will cover the Academy Awards like no one else can. Live coverage on the LA Times.com will take readers from the rivals to the acceptance speeches to the after parties, the breaking news, backstage insights, and expert analysis throughout. These are just a few examples that demonstrate that depth and breadth of our content our portfolio offers. At the end of 2016, we completed the acquisition of the Spanfeller Media Group. While revenue is not significant currently, we believe this platform has significant consumer reach and engagement with great growth potential. SMG’s portfolio of digital brands includes a Daily Meal in the active times. The Daily Meal has a large evergreen content portfolio, including millions of recipes and reviews. We have already integrated the Daily Meal into the websites across each of our top brands and we see more opportunities share content and drive traffic between the different sites. Also, on the content side, we recently launched 8 topic specific newsletters that curate related content from all of our newsrooms. Ranging from political opinion to real estate advice these newsletters introduce readers who previously only interact with a local brand to our nationwide network of expert journalists. In just three months, we reached 112,000 releases and recorded very high engagement metrics. We also understand that social media platforms represent an important opportunity to help our journalism broadly reach our dedicated followers, as well as a wider and younger audience hungry for trusted news. Our editors are keenly focused on optimizing the types and frequency of news post to best serve all of our readers needs and maximize referrals to our own sites. We are also leveraging social media channels to convert anonymous readers to subscribers. This includes the acquisition of paying subscribers and newsletter and release. Following Apple news re-launch last year, we started publishing nearly all of our stories with a mix of both premium and free content on the platform. This initiative helps expose our content in the growing ecosystem and represents an opportunity to drive subscription and advertising revenue. With that, I will turn over to Terry Jimenez.

[Terry Jimenez:]

Thank you, Justin. Total revenues for the fourth quarter of 2016 were $425 million, which was down 6.9%, compared to the fourth quarter of 2015. On the expense side, consolidated Q4 operating expenses were $384 million, which was down $63 million on a year-over-year basis. On an adjusted basis, operating expenses came in at $27 million lower than the prior year period. On a full-year basis, adjusted expenses were down $123 million year-over-year. There has been good progress in staying ahead of the revenue declines with reduced expenses, thus driving our full-year adjusted EBITDA up along with the meaningful uptick in adjusted EBITDA margins. tronc generated adjusted EBITDA of $66.8 million in the quarter, which showed growth of 70 basis points in adjusted EBITDA margin over the fourth quarter of 2015. Net income for the fourth quarter was $19 million or $0.53 per fully diluted share. The same period last year was zero cents per fully diluted share. Throughout 2016 our balance sheet continued to grow healthy or sequentially each quarter. We exited 2016 with $198 million of cash, and during the quarter we have again reduced our debt level. We believe that the strength and balance sheet positions the company well in order to execute our digital initiatives. Now, I’d like to discuss the performance of each of our reporting segments. Total revenues for troncM for the quarter were $367 million, which was down 8%, compared to the fourth quarter of the prior year. We continue to experience pressure on print advertising with total advertising revenue down 16%. These declines were partially offset by a 5% increase in circulation revenue. Despite the revenue declines, adjusted EBITDA for troncM was essentially flat. troncX had $60.2 million of total revenue, which was up 1% versus the prior year quarter. It is something the revenue growth for declines in classified advertising categories. Adjusted EBITDA for troncX was flat in the quarter versus last year as we are continuing to make key investments in our troncX business building for the long-term. We outperformed our adjusted EBITDA guidance range for 2016, exceeding the top end of that range by $3.5 million. For the full year 2017, our guidance for total revenue as a range of $1.57 billion to $1.6 billion and we anticipate our adjusted EBITDA increase with a range of $185 million to $195 million for 2017. After four solid quarters in a row, we believe we have a number of initiatives and programs that will continue to drive profitable growth moving forward and a balance sheet that provides flexibility to navigate and execute our transformation strategy. We believe that we have transitioned to a stronger company. I would like to take a second to thank all of our employees across the company for their tremendous effort this past year, not only where we able to continue to drive growth in adjusted EBITDA, but we're a stronger organization financially and operationally as we begin 2017. We are very excited about the prospects and future of tronc. I now would like to open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Lance Vitanza from Cowen. Your line is now open.

[Lance Vitanza:]

Hi guys thanks for taking the questions. And tell me if I need to get back in the queue here, but I have quite a few. I wanted to start with troncM, print ad revenue as you pointed out ended the year seemingly on a particularly weak note, I’d have to go back a long time to find that kind of a decline for you guys, is there anything special we should know about that occurred in the quarter or is that just the state of the environment right now?

[Terry Jimenez:]

I think it is the state of the environment. I think our peers have reported similar type trend for the quarter. The retail environment continues to be difficult for our side, as well as our clients on the retail side of the house. There is definitely some categories with the retail that continue to perform strongly for us, I think like in grocery and drug, but the general retail market is in a tough place and we're seeing that in our revenue.

[Lance Vitanza:]

I know that over the past few quarters you had actually been outperforming your peers, now it seems like you are more in line, if that’s fair? And I’m wondering if there is anything that we should take from that or action steps that you’ve noticed that you might want to implement to sort of regain the edge?

[Terry Jimenez:]

Yes, so there is a number of things that we’ve implemented and Justin touched on a number of these. We have got a new CRM that we are rolling out in phases. So we've got, the first phase is complete, we’re moving into the second phase. So that’s going to be helpful. We reorganized the sales organization in the third and fourth quarter of last year, and so I think that will become more stable as we move into 2017, and then essentially the incentive plans within those sales environments are also - were changed at the end of last year. And so we should see some stability in the fact that the results coming out of those changes this year.

[Lance Vitanza:]

Great. And then on the cost side, and I am still at troncM here, it looks like at 8% reduction in OpEx, that’s a lot of money $27 million in a quarter. And I apologize if I missed some of this in your prepared remarks, but could you talk a little bit about where that came from and should we be expecting that will cost us revenues next year?

[Terry Jimenez:]

Sure. We’ve made a number of actions throughout the year, mostly on real estate, some outside service work and then we had previously announced reductions at the end of 2015 that translated into expense reductions throughout the year of 2016. We also, as we have previously announced had outsourced our IT organization, a chunk of our IT organization and so we are realizing some savings and those were starting to ramp up as we got towards the end of 2016. So those are the drivers behind it. As we've said before on the content side, we continue to invest there and we're focused on that side. And with some of the structural changes we have made in sales, we feel very confident that that scenario that we would like to make sure that we continue to focus on and invest in moving forward as well. So, we're looking for hopefully limited impacts on the sales side as a result of the expense reductions that we’ve experienced.

[Lance Vitanza:]

Great. Okay. I have some other questions, but perhaps I’ll get back in the queue and let somebody else take a shot.

[Terry Jimenez:]

Great, thanks Lance.

[Operator:]

Thank you. Our next question comes from the line of Michael Kupinski from Noble Financials. Your line is now open.

[Michael Kupinski:]

Thank you. Just a couple of quick questions. Regarding the retail adverts, I think going back to that for a second, a number of other media companies were indicating that retail, department store was kind of continue to be weak in December, but it sounded like it was coming back a little bit in March of this year, was wondering if you are starting to see a little bit more moderating trends as we get into throw the quarter so far?

[Terry Jimenez:]

So, I want to touch on specifics year Mike, but I will say some of the changes that we saw last year on the retail front started impacting us and kind of the end of the first, beginning of the second quarter and so we're going to be cycling against a couple of those changes, so we should see those moderate at this point.

[Michael Kupinski:]

Okay. That's what I thought. And in terms of your investments in digital, have you framed the amount of dollars you are planning to spending, or maybe give us some idea about staffing headcount, just overall cost that you will be investing in that this year.

[Terry Jimenez:]

Sure. We're not prepared to disclose that level of detail just yet, that’s something as we move throughout the year, we look to provide some more transparency on as we move forward.

[Michael Kupinski:]

So while t troncX - I'm sorry.

[Terry Jimenez:]

No, I was just going to say it is not an insignificant amount; it is definitely a significant investment that we are making across the number of fronts on the digital side.

[Michael Kupinski:]

And in terms of your, going back to your revenue guidance for the year, I would assume that that is already factoring in some sort of retail moderation in terms of the rate of decline and that I would assume that right? You're not looking on the worst case.

[Terry Jimenez:]

Yes.

[Michael Kupinski:]

Okay. And in terms of going over to troncX again, is there anything outside of the changes and recruitment that you're talking about, was there anything else in the numbers that may have been a little bit disappointing like for instance is your AI Technology performing as well as you had hoped or anything else that we could look at there that might need some tweaking to kind of rev up the revenue growth there a little bit?

[Terry Jimenez:]

Sure. The AII side that’s a growth on a year-over-year basis, so that piece is fine, we have the auto category and the classified side was also soft from a trend standpoint and we also had a, we’ve got a marketing agency that rolls up into our troncX business and that had an account that was lost and so we're cycling up against that kind of the second, third quarter of 2017.

[Michael Kupinski:]

Got you. Okay that's all I have for now. Thank you.

[Terry Jimenez:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Doug Arthur from Huber Research. Your line is now open.

[Doug Arthur:]

Yes, thank you. Three questions. In terms of the revenue guidance for 2017, what kind of underlying print ad decline are you sort of assuming in there? I assume it is not down at the rate we saw towards the end of the year that you talked about a little bit of moderation against easy comps, I’m wondering if you could frame that, it is the first question.

[Terry Jimenez:]

Sure. It is roughly in line with the trends that we have seen in the back half of last year. Q4 certainly was a little bit greater than what Q4 was in terms of rate of decline and so pretty much between the Q3, Q4 trend is what we’ve extrapolated out for the troncM business. There is a number of things that we're working on that we're working to outperform where the trend rate was headed. So we certainly are focused on not just living with the declines, but also trying to reduce the level of decline on the troncM side.

[Doug Arthur:]

Great, thank you. And then the circulation increase in troncM, I know we talked a little bit about this on the third quarter conference call, is that mostly pretty significant price increase, I would assume volume trends are still down on the print side?

[Terry Jimenez:]

Correct. The volume trends continue to be down, but the price increases - effective rate that consumers are paying is more than offsetting the volume declines.

[Doug Arthur:]

Is a double-digit on the price side?

[Terry Jimenez:]

Yes.

[Doug Arthur:]

Okay. And you feel that you are not, the churn that emanates from those price increases your thing at the net, net obviously is paying off because your revenues are up nicely.

[Terry Jimenez:]

Right. We are focusing on the right changes. We are looking at kind of the - all consumers are valuable. So, I’m trying to figure out the best way to describe it, but the lower end of the value chain and so those that have very historically low rate, we've been taking them up at a much higher clip than just a low double digits, it’s mid-double digits. And so certainly we are seeing some churn of some of the lower value consumers that are engaging with us may be a day or a weekend package. And so historically have very low rates relative to others and so we’re essentially just kind of cycling through some of the low rate consumers and so that is driving a lot of that rate and the churn. We're still retaining a lot of our valuable consumers and so we're very proud that we still have the MS customers and they engage with us both print and digitally and so we want to make sure that we’re retaining them as long as we possibly can. It is churning the lower end of the spectrum consumers.

[Doug Arthur:]

Okay got it. And then finally, I think you threw out a target of 100 million unique's, so is that obviously - that would compare to the 57 million you saw in the fourth quarter, which I assume was driven by a little bit by the election.

[Justin Dearborn:]

That’s correct.

[Doug Arthur:]

Okay, any timeframe on that target or as soon as possible I guess is the bottom line.

[Justin Dearborn:]

As soon as possible, I try not to get pinned down on timeline, but we circled that number to rank high on comp score obviously as - get you something with advertisers and we feel like we need to do 100 million to really be a full national digital platform.

[Doug Arthur:]

Okay great, thank you.

[Justin Dearborn:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Barry Lucas from Gabelli & Company. Your line is now open.

[Barry Lucas:]

Thanks and good evening. Just hoping to get a little bit more color on how you expect to manage the expense declines in 2017, you did an excellent job in the back half - certainly in the back half of 2016 and your predecessors were cutting cost pretty aggressively, prior to that so where do you go from here in terms of cost reductions.

[Terry Jimenez:]

Sure, certainly mentioned the back half of the year, we have made some good progress incremental from where that previous team was and so what we will see is the number of things that we’ve implemented last year, you are going to have a role forward effects and benefit in 2017. So, again we're focused on the non-people side of things, so real estate we're looking aggressively at and we’ve made some actions there that would benefit us in 2017. Outside services will continue to look at each of our suppliers and vendors to make sure that we’re managing that side of it very efficiently. And so that’s what we are really focused on at the moment and we’re very confident and feel that we can continue to navigate the expense decline relative to where the revenue will go.

[Barry Lucas:]

Great, thank you for that.

[Terry Jimenez:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] And I’m not showing any further questions at this time. I would now like to turn the call back over to Justin Dearborn.

[Justin Dearborn:]

Thank you everyone for joining today and for your interest in the company. Well it’s a transitional year, we delivered solid financial results, made meaningful progress in building the foundation of our strategy, and we continue to have an exceptional opportunity ahead of us with our brands and our platform. We look forward to updating you on our progress next quarter. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.