Tribune Publishing Company
Q1 2017 Earnings Call Transcript

Published: 4 May 2017

[Operator:]

Good day ladies and gentlemen and welcome to the Tronc Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this call will be recorded. I would now like to introduce your host for today's conference, Mr. Terry Jimenez, Executive Vice President and Chief Financial Officer. You may begin.

[Terry Jimenez:]

Thank you and welcome to our 2017 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, belief, 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 and the result from actions taken by the Company as well as from the risk and uncertainties beyond the Company's control. Some of the risk and uncertainty that could impact our businesses are included in documents publically filed with the Securities and Exchange Commission including our annual report on Form 10-K, in 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 margins and net debt. And we have provided definitions in reconciliations to most comparable GAAP measures in our earnings press release which is available on our website at investor.com. Joining me on today's call is Chief Executive Officer, Justin Dearborn, and our troncX President, Tim Knight. Now, I'd like to turn the call over to our CEO, Justin Dearborn. Justin?

[Justin Dearborn:]

Thank you, Terry. I would like to start by highlighting the core foundation of our Company, our people and our content. Content is important to the communities we serve, important to our mission and valued by our advertising partners. What set established news organizations apart from others is trust, credibility and accountability and our brands are built on this foundation. The Chicago Tribune and photographer E. Jason Wambsgans have been awarded the Pulitzer Prize for feature photography. The Tribune also had three finalists. Jason's photos gave readers profound sense of the physical and emotional harm suffered by Tavon Tanner, a 10-year old from Chicago, who thanks to extraordinary medical efforts survived the gunshot. Coupled with reporting by Mary Schmich, a Pulitzer winner in 2012, Jason's photos provided Tribune readers a riveting and ultimately inspiring story. The Pulitzer judges recognized the exemplary work of our newsroom and five other finalists. The Chicago Tribune was the finalist in public service for its investigation into dangerous interactions among commonly prescribed drugs, work led by Sam Roe, Ray Long and Karisa King. Michael J. Berens and Patricia Callahan of The Chicago Tribune were investigated reporting finalist for their work on abuse and neglecting group homes for developmentally disabled adults. [Devlin Glackin] of The Chicago Tribune was a finalist in commentary for bold columns on political and social issues. The [indiscernible] was a finalist in the breaking news reporting category for the team coverage of the horrific occurrence at the Pulse, nightclub. [indiscernible] Los Angeles Times was a future photography finalist for a work exposing the devastating effects on the Zika virus. We can all be proud and appreciate this outstanding public service journalism. Now let’s turn to our financial highlights. Total revenues for the first quarter were $366 million, down 8% in the same quarter in 2016, primarily due to anticipated declining advertising revenue. Adjusted EBITDA for the quarter grew to $34 million. We continue to show strong cost discipline in difficult revenue environment. On the troncX side, we continue to make progress in growing our digital audience. Our total number of digital only subscribers reached 180,000 at the close of the year, which represents a net increase of $20,000 or 12% versus the end of 2016 and an increase of 77% versus the prior year quarter. And for the first time ever, we finished the year with over 1 million total paid all access subscribers. The LA Times continues to be the group an absolute and growth digital only subscribers. Our average monthly unique visitors totaled 59 million in Q1 of 2017, which is up 5% year-over-year. We continue to make progress on leveraging video to make our content more visual and reach a major wider audience. We generate approximately 5,000 videos in the first quarter of 2016, but now we generate well over 30,000 videos per quarter. In addition of Tim Knight as President of troncX has helped provide added focus and discipline across the organization. With the addition of Tim and a number of our digital sales initiatives, we are confident that future of our digital business. We will continue to aggressively invest in the digital side of our business. To that end, we have made an additional investment in our artificial intelligence offerings and have hired Paul Blase to lead a new group. Paul most recently was the PWC, practice leader of global and U.S. consulting data and analytics practice. Paul will lead a team dedicated utilizing tronc's existing assets to develop data and analytic solutions to expand the Company’s portfolio of businesses and revenue streams by finding new innovative data solutions for industries like healthcare, financial services, travel and real estate. With that, I will turn over to Terry.

[Terry Jimenez:]

Thank you, Justin. On the expense side, consolidated Q1 operating expenses were 354 million, which was down 48.5 million on a year-over-year basis. On an adjusted basis, operating expenses came in 32.6 million lower than the prior year period. As Justin mentioned, we have shown growth and adjusted EBITDA in Q1 2017 versus the same quarter in 2016. We have now growing adjusted EBITDA compared to the respective prior year quarters for the past five quarters. This is quite accomplishment given the headwinds, our industry is facing on the revenue front. Tronc generated adjusted EBITDA of 34 million in the quarter, which show growth of 90 basis points in adjusted EBITDA margin over the first quarter of 2016. Our last 12 months adjusted EBITDA now stand at 181 million. Our net loss for the quarter was 3 million or $0.08 per fully diluted share. In the same period last year, we had a net loss of $0.22 for fully diluted share. In the quarter, we bought back shares in a private transaction that resulted in a charge of 6 million. Excluding this charge, we would have net income of 3 million and what is historically a very challenging quarter from the seasonality perspective. Our balance sheet remains in very solid shape. We exited the quarter with 161 million of cash and during the quarter we have again reduced debt. Now I'd like to discuss the performance of each of our reporting segments. Total revenues for troncM for the quarter were 312 million which is down 9% compared to the first quarter of prior year. We continue to experience pressure in print advertising with total advertising down 16%. Retail advertising was the largest challenge for us given more broadly happening within the retail sector. Despite the revenue decline adjusted EBITDA for troncM was essentially flat to prior year. troncX had $55 million of total revenue which was down 3% versus the prior year quarter, stumping the revenue growth for declines in our classified advertising categories of recruitment, real-estate and auto. Adjusted EBITDA for troncX was essentially flat in the quarter versus last year. For the full year 2017, our guidance for total revenue is the new range of 1.54 billion to 1.56 billion and adjusted EBITDA will narrow to a new range of 187 million to 195 million for 2017. While we are clearly facing a number of challenges, we believe we have the ability to capitalize in several opportunities. We believe we have the right brands and distribution and the foundation to drive continues value. We are very excited about the prospects and future of tronc. Over the past 12 months we have grown adjusted EBITDA we have improved net income while we have substantially reduced our net debt position. Additionally both our stock price and market capitalization have approximately doubled since the beginning of the second quarter last year and most importantly we've assembled the digitally focused and enabled team that is set to execute. We will now open the call for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Michael Kupinski with Noble Capital Market. Your line is open.

[Michael Kupinski:]

Thanks for taking the question. So you guys beat my cash flow number, but obviously the revenues were a little light. And in terms of your guidance for the full year in terms of revenues, you're obviously looking for moderating trends and certainly in the first quarter we actually saw an acceleration and rate of decline a little bit from the fourth quarter I think. So where do you think that you'll start to see some moderating trends. Because certainly in your guidance for 1.54 billion to 1.56 billion revenue range you're going to look for some sort of moderation, where you're going to see it? Is it the rate of decline on the troncM side or just an acceleration and improvement in the revenues on troncX what are your thoughts?

[Terry Jimenez:]

Surem thanks for the question Michael. So, it's really going to come from both sides of the equation that you have mentioned. I think on the troncM side, there is definitely a challenging environment in Q1 especially in the retail side that accelerated given the holiday season for retailers. And so we think that that will moderate a slightly as we go throughout the rest of the year. On the digital side of the business, we think that there is number of things that muted, some really good performance and great results on the digital side that we think will also moderate and will be able to start showing better trend line on the digital side moving forward as well. And so from those perspectives, we think that's where the trends will wind up for the year.

[Michael Kupinski:]

On the digital side. Can you talk a little bit about, obviously your transition over to your own classified there? And so can you just talk about how those trends are going and I would assume that is part of your reasons for seeing better trends in troncX, can you add a little bit more color what your thoughts on that particular line item?

[Terry Jimenez:]

Sure. So, we lift partners at the end of Q3 last year. And so, we think between the transition in the slight lumpiness that we experience there as well as kind of where the core decline across the industry for the recruitment category we're going. We have made that which in light of the agreement that we have with the previous partner. So what we see happening as hopefully some improved performance on categories as we move throughout the year. And certainly, we will anniversary some of the challenge that we had kind of that the end of last year into first quarter this year as we move couple of quarters ahead.

[Michael Kupinski:]

And obviously you're building up a nice little cash position there. I would assume that your thoughts are probably more guided in terms of acquisitions and looking at media more marketing services, more digital, more things like that. Could you just give us a little color what your thoughts are, as you look at acquisitions and regular plan in terms of maybe deploying some of the cash at this point?

[Justin Dearborn:]

Thank you, Michael, its Justin. So as we state in the past, we really haven’t change to focus, really digital first, but we’ve been clearly point out that we’ll be opportunistic by traditional media company as well so I wouldn't roll out those. The focus of the team is really on digital assets that really expand our reach in a number of directions. So as we look to leverage the greater assets we have and take advantage of that and increase some new verticals. Part of that strategy, you’ll see through the new group, we created with the hiring of Paul Blase just really take advantage of all the data we collect and how create businesses around that.

[Michael Kupinski:]

Okay, great. I’ll let others to ask question. Thanks.

[Justin Dearborn:]

Yes, I think the one thing I’d add on there too, Michael, is that. From a discipline standpoint, we’re very focused on looking at the right assets at the right price. So we’re not just out going to spend cash, if we don’t think that it’s prudent for us to do that and the ROI that we needs. So, we’ve been very focused and disciplined as we look part of adjustments describe as well.

[Operator:]

Thank you. Our next question comes from Lance Vitanza with Cowen. Your line is open.

[Lance Vitanza:]

Thanks for taking the questions. I wanted to ask you. First, how was your share been relative to other print advertisers in your market?

[Terry Jimenez:]

The way that we’ve look at the markets, so historically, you would have a number of peers within our market that operate. I think overtime that I certainly shifted to a number of other digital players. So, I think broadly speaking from our traditional peer set. We think, we’ve performed on par not slightly better than some of our peers in each of the market. So, I think from a share perspective call it roughly flat to be maybe slight gain from a traditional peer point of view. From a digital side, clearly, I think everything that’s been written about the two largest players in the digital app space. They certainly have done great job by taking a lot of the incremental digital dollars out of the market into certainly we've lost some share relative to them, but relative to other smaller digital players we think we've held ground on market share there.

[Lance Vitanza:]

That's helpful. In terms of the retailers in particular, we know the environment is very tough. How much of the pressure that you're seeing, would you say is it related to retailer simply advertising less overall versus retailer shifting to other media like digital?

[Terry Jimenez:]

I think for this quarter, what we saw is certainly what was reported is the announced store closings in Q1 of this year was among the highest that's been in a very long time. And so I think what we're seeing there is just pure volume of stores that are coming out of the market. So that's kind of the key challenge there. I think as we may have talked about before from a retailer standpoint, our industry has had the long history of helping build value on both sides of the industry. And so our focus is and they need to focus more digitally we as an organization need to focus more digitally. And I think we can help each other move forward on the retail and digital front as well.

[Operator:]

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

[Barry Lucas:]

Thank you and good evening. Done a nice job on the expense side again, and so I was just hoping for a little color on what buckets where the savings are coming from and then how much headroom do you think you have to go further into cost reductions this year?

[Terry Jimenez:]

Sure. So on the expense side, it's really kind of cross all the key categories for the expenses. We had reductions in compensation, news prints, outside services and in particular real estate. And so we've been really focused on how do we operate the Company as efficiently as we can, how do we optimize the P&L and how do we have the right structure to make sure that we could succeed long term. And so through those reviews, we've effectively reorganized the organization in the different groups. And from efficiency metrics, we certainly improved the profit generated per FCE within the organization. And what we're looking at moving forward is there is certainly way that we can continue to optimize the expense side of the house. A lot of repayments that we're looking at are outside services real-estate and number of these things we've talked about before where we think just given the footprint that we have today that we could operate in smaller environments from the real-estate standpoint. And then we're continuing to look at each of our agreements with outside providers to see if we restructure those from when we started when we initially signed those agreements. So those are the two areas that we're absolutely focused on and then we have an ongoing review of what we're doing from a production facility standpoint and how could be as optimize as we can on the variable cost side of the house.

[Barry Lucas:]

Great thanks for that color. And if I could ask one mores since you did mention you would look at M&A in traditional legacy media. Opportunistically, there would you go back ink on paper and think about getting back into the broad aspect?

[Terry Jimenez:]

It's not something that we have focused on it's certainly not in our pipeline. There is obviously our former sister companies in mess quite a bit. So there is kind of quite the speculation there, and you won't see our name emerge on that. I think over you'll able to see how those industries will evolve and where they can provide some efficiency. I would say, what we’ve seen historically, we obviously with together with the broadcast and there has been a trend to see broadcast and legacy print companies to split apart. So at this time, we don’t see value moving on broadcast. Now, having said that, we have focused internally on driving more video within our operation, and so that certainly is an area that we’ve really have focus on driving not just a level of content, but also the monetization from that content, from a digital standpoint. So we are focused essentially how many category, but you’re not looking at broadcast assets at this time.

[Operator:]

Thank you. Our next question comes from Michael McCaffery with Shenkman Capital. Your line is open.

[Michael McCaffery:]

Thanks. There will be apparent when you put out the 10-Q. But can you just comment, how much was -- what is the cash spent on the share buyback in the first quarter?

[Terry Jimenez:]

Sure. So, we have 57 million transaction related to the buyback.

[Michael McCaffery:]

And is that outside of the $30 million buyback authorization previously had outstanding?

[Terry Jimenez:]

Yes. It was a unique separate private transaction that we have reviewed with the Board and the Board is authorized.

[Michael McCaffery:]

And I guess just more generally obviously that was the unique situation that presented itself. But as you move forward with your cash balance in the free cash, you’re going to generate. With your guidance, your stock trades in the mid-three. How do you view just paying down the term loan versus buying back share as create equity value?

[Terry Jimenez:]

So I think as you look at over the past all four quarters. We have been paying down debt each quarter. We have principal repayment that’s focused as part of that. And so we’ll continue to do that, we think from a leverage standpoint. We think, we’ve improved, especially when we look at from a net debt perspective where we situated it's much healthier and flexible point today and then we have in the past.

[Michael McCaffery:]

I guess just a follow-up on that. Are you open to debt repayment that you’ve done in the required quarterly and more payment? But are you contemplating additional term loan principal payments beyond the required quarterly pay down?

[Terry Jimenez:]

So we have not had that discussion with the Board at this time.

[Operator:]

Thank you. [Operator Instructions] And we have a follow-up from Michael Kupinski with Noble Financials. Your line is open.

[Michael Kupinski:]

Thank you. Just a quick one. I just want to go back to the retail for a second. And I know that retail as a percent of total revenues is come down. But what is retail currently as a percent of total truck and advertising revenues? And then historically, I know retailers would negotiate annual contracts. I was just wondering how has that changed over the years that it has and what I guess -- how much visibility do you have in the retail category as you go to the next several quarters?

[Terry Jimenez:]

Sure. So I’ll take the second one first. So for me management perspective and working with our clients on the retail side as well as broader advertisers. And we do have contracts that we work with each of the larger retail client that we have. And so certainly we try to manage to that, they try to manage to that as well. And so we have some visibility through that process, and we also see from a trending perspective how we can grab what likely could happen in current, in the space given historical point of view, and how we apply that to the future. On the first question, right now on an overall basis, print retail advertising is about quarter of our overall revenue stream. So, it's certainly becoming a smaller proportion in terms of the importance of the overall revenue of our company.

[Michael Kupinski:]

Thanks a lot.

[Terry Jimenez:]

It's just built on retail and kind of where it's going. One of the thing that we have in the Company that we believe can be leverage further doing really well is essentially that branded content agency, which has had success over the last few years working with some of our large national retail partners and developing new ideas that bring together video, text, digital prints to really drive new ideas for them with the heavy focused on digital and video. And we believe that continues to be an opportunity to help these partners as they try to connect with their audiences in different ways.

[Michael Kupinski:]

Okay. And just to be clear, the retail was 25% of the overall advertising revenue for truncM?

[Terry Jimenez:]

Correct.

[Operator:]

Thank you. And I'm showing no further questions at this time. I'd like turn the call back to Mr. Dearborn for closing remarks.

[Justin Dearborn:]

Thank you. And thank you everyone for your interest in our company. We have made meaningful progress in building the foundation of our strategy. And we continue to have exceptional opportunity ahead with our brand and our platform. And 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 concludes today's program. You may all disconnect. Everyone have a great day.