Tribune Publishing Company
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good afternoon and welcome to the Tronc Inc. Second Quarter 2017 Earnings Conference Call. All participants will be in a listen-only-mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Aaron Miles, Vice President, Investor Relations. Please go ahead.

[Aaron Miles:]

Thank you and welcome to our second quarter 2017 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 may result from actions taken by the Company as well as from 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 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, adjusted diluted earnings per share, adjusted EBITDA margins and net debt. And we have provided definitions in reconciliations to the most comparable GAAP measures in our earnings press release which is available on our website at investor.tronc.com. Joining me on today's call is Chief Executive Officer, Justin Dearborn; Executive Vice President and Chief Financial Officer, Terry Jimenez; and troncX President, Tim Knight. I'll now turn the call over to our CEO, Justin Dearborn.

[Justin Dearborn:]

Thank you for joining us today. I’m going to start the call by sharing a brief overview of our Q2 results, highlight our progress towards achieving our long term goals for the company and I’ll turn the call over the Terry to review our financial results in greater detail. Reflecting our performance I’m pleased to share that we continue to manage the business more efficiently which resulted in strong bottom line performance. During the quarter we reduced our operating expenses by 10% compared to the same period last year which led to a robust year-over-year net income growth of 69% and earnings per share growth of 75% respectively. Entering the year we anticipated that the demand for our products could vary. And while our top line revenue results have been mixed to start the year. Adjusted EBITDA grew during the quarter year-over-year which shows of an increase of 100 basis points in adjusted EBITDA margin. We’ve now grown adjusted EBITDA as compared to respective prior quarters in five of the past six quarters. Overall, I believe that we’re executing on the right strategy, a strategy that is intended to reap the benefits of the digital transformation that is happening in our industry. We continue to build and look to inorganically add the right pieces to our existing portfolio that can leverage our trusted brands and accelerate our path to high margin digital solution offerings. Our tremendous tradition of journalism continues and we’re adapting to a new era of telling stories digitally. I’m proud to highlight some of our teams’ recent awards. OSGM, Andrus Lambada was named one of the diversity MBA magazines 2017 top 100 emerging leaders. The Sun Sentinel and Orlando Sentinel named winners of the society of professional journalists for the chapter 2017 Sun Shine state award. The San Diego Union Tribune was recently honored by the San Diego society of professional journalists winning 13 first place awards and special honors in three categories. The Los Angeles Times, Carolina Miranda was recently honored with a Rabkin prize for visual arts journalism. Chicago Tribune columnist, Candace Jordan was in the one of the Chicago Woman’s fierce 50. I mentioned in the last call that we added Tim Knight to the executive team as the President of troncX. In the short time he has been here, Tim has been instrumental in implementing our strategy. Here are some key areas we’ve focused on. Since 60% of our readers are consuming our journalism on mobile devices we’re keenly focused on improving the mobile user experience which has been lacking. From a product design built for a small screen to a subscription form that uses a buyer’s fingerprint. We’ve enhanced our efforts with the largest social media platforms, Facebook, incredible Q2 digital and majority of mobile advertising revenue provides us with optimism with the right content, traffic and experience mobile advertising revenue can be very material. We’re investing in our digital subscription acquisition capabilities to more precisely tailor our marketing messaging and pay well experience based on our user attributes like content patterns, referral sources, location and usage frequency. The digital subscription’s team has launched a series of premium digital newsletters in our ongoing mission to serve our customers vital information that informs and enriches their lives. These paid subscription products showcase exclusive expert coverage of important health and financial related topics for living longer and better. Our first three monthly titled Debut in Q2 and early customer responses have been encouraging. And finally, our digital advertising sales team is continuing to prioritize premium products like video, branded content and events and leveraging contemporary tools that manage and measure world class campaigns. To further strengthen our efforts and tackle additional initiatives we are continuing to build our team. We are pleased to announce that Craig White has joined as Senior Vice President reporting to Tim Knight. Craig is a sales and marketing executive with experience in multinational and emerging new media, technology and consumer packaged goods. He most recently worked at 20th Century Fox. We are glad to welcome his expertise to the team. Our total number of digital only subscribers passed the 200,000 mark with 220,000 at the close of the quarter which represents a net increase of approximately 40,000 or 22% versus the end of the first quarter 2017 and an increase of 89% versus the prior year quarter. We are further encouraged by the digital only subscribers the New York Times continues to add where we are five years behind them in terms of the focused effort and team, the digital adaption growth they continue to realize is encouraging. We also continued to gain momentum in the number of videos that are shared everyday alongside our content. We display approximately 35,000 videos per quarter. And as I said on last earnings call our growth in video advertising is meaningful and we believe there is tremendous upside similar to our digital only subscribers number. Overall, the transformation of our business demands an ongoing evolution and we intend to continue to focus and managing the organization as efficiently as possible while progressing with key long term strategic growth initiatives. Overall, we more quickly adapt to what our advertising partners and our readers want including a better digital experience to highlight our exceptional content. I continue to be very proud of all the colleagues as they work hard to conduct and drive our business in a way that delivers value to our readers, advertisers, employees and to our shareholders. And with that I will turn it over to Terry.

[Terry Jimenez:]

Thank you Justin and thank you for joining us today. I will take a few minutes to comment on our overall company results for the second quarter, review the performance of our segments and then discuss our 2017 outlook. Total revenues for the second quarter of 2017 were $369.8 million which was down 8.6% from the same quarter in 2016 and that's primarily due to an anticipated decline and print advertising revenue. As Justin mentioned, we continue to show strong cost discipline in a difficult revenue environment. Our consolidated second quarter 2017 operating expenses were $351.3 million which was down $38.8 million on a year-over-year basis. On an adjusted basis operating expenses came in at $35.2 million lower than the prior year period. Net income for the second quarter of 2017 improved to $6.8 million or $0.21 per share compared to $4.1 million or $0.12 per share for the second quarter of 2016. Second quarter 2017 adjusted net income of $11.9 million or $0.36 per share was up compared to the same period of the prior year. Adjusted EBITDA for the second quarter of 2017 grew to $44 million compared to $43.5 million in the second quarter of 2016. Our trailing 12 months adjusted EBITDA now stands at $181.6 million. Our balance sheet remains in very solid shape. We exited the quarter with $174 million of cash which grew $13 million from the end of Q1 and we continue to reduce our debt and pension liabilities by $7.9 million. Now I will discuss the performance of each of our reporting sectors. Total revenues for TroncM for the quarter were $312.4 million which is down 9% compared to the second quarter of the prior year. We continue to experience pressure in print advertising with total advertising revenue down 17%. Retail advertising continues to be the largest challenge for us given what is happening with that sector. Circulation revenue did experience an increase of 0.4% on a year-over-year basis. Despite the revenue declines overall, our second quarter adjusted EBITDA for TroncM was down just less than 2% compared to the same period of the prior year. TroncX had $58.2 million of total revenue for the second quarter of 2017 down 5% compared to the prior year quarter. And that's primarily driven by declines in our classified advertising categories of recruitment, real estate and auto which had offset growth in our other areas of digital. Second quarter 2017 adjusted EBITDA for TroncX was $12.9 million which is up 21% versus second quarter 2016 despite the revenue headwinds and [indiscernible] investments we had made in the quarter. Before moving on to our outlook I wanted to point out that subsequent to the close of the second quarter of 2017, we sold our 50% ownership interest in the CIPS marketing group. CIPS was a 50

[Operator:]

Thank you. [Operator Instruction] And our first question comes from the line of Michael Kupinski from Noble Capital Market. Your line is now open.

[Michael Kupinski:]

All right. Thank you and good afternoon. Can you discuss why you are -- a little bit about your unique visitors, can we see continued decline there and what you might be focusing on to turn that around a little bit?

[Justin Dearborn:]

Yes. Michael thank you for the question. We have for the second quarter of this year versus last year there was two unfortunate events but they were news worthy events in 2016 in LA there was the shooting on the UCLA campus that spiked up traffic in LA and then Pulse night club occurred in Orlando in June of 2016. So those two incidents kind of spiked up the unique visitors last year so we are comping against that and we are clearly focused on making sure we extract as much values we can from the unique visitors that we have.

[Michael Kupinski:]

And in terms of troncX we have seen a decline which appears to have kind of started in the third quarter and kind of accelerated a little bit from there. Can you just talk a little bit about the revenue decline and when we should see growth especially now that we are comping against using comparisons in third quarter this year?

[Justin Dearborn:]

Sure. So we had on each of the categories we will talk a little bit about what's happening there. So it's really the classified area that's driving it down. We have got some really good momentum on local and display and we see some of that momentum building up after we made a number of infrastructure investments in CRM training, sales plan rollout, new leadership etcetera. On the classified side there is a handful things happening so recruitment, we had switched out partners in September of last year so we are still cycling against that change. So that's kind of a component that's driving recruitment. On auto we are seeing a little bit of decline this year where we had seen increases last year. We have new leadership that's going to be driving the cars component of our business moving forward we are excited about that leader making a meaningful impacts in the market hopefully sooner rather than later. And then, on real estate we have a business that rolls in here called for sale by owner. We have made a number of structural changes to that business and we are in the process of really investment mode for that business. And so, we are very optimistic about the future of that business. We need little bit more time to try to dig it out of little bit of decline there.

[Michael Kupinski:]

And on the TroncM you had obviously a significant acceleration in the rate of decline and how much of that was related to [indiscernible] if you can just maybe if you could pass vertical out and how much was it down in the quarter. And given the fact that we are kind of heading back to school stuff like that do you see any moderation in the revenue trends for a retail there is some other broadcasters and things starting to say that they’re seeing some moderation but I was just wondering if you can give your thoughts on the retail category?

[Justin Dearborn:]

Sure. So there is some pockets that are certainly difficult environment given the store closings and so I think we are seeing that trend continue. There is a number of exciting things that we are doing on the digital front to try to embrace those advertisers and move them and help them along their digital transformation along with our transformation. And so I think we are excited about the opportunity there. I think near term it's still roughly tough environment for retailers, but we are all committed to be strong partner for them to help them transform into digital units as well.

[Michael Kupinski:]

Is it possible to give me what the percentage decline was in retail in the quarter?

[Justin Dearborn:]

Yes we don't disclose that level of detail Michael sorry.

[Michael Kupinski:]

Okay, got you. Alright that's all I have. Thank you.

[Justin Dearborn:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Lance Vitanza from Cowen. Your line is now open.

[Lance Vitanza:]

Hi, thanks for taking the questions just to pick up on the TroncM side I think we are pretty familiar with the problems in the retail category, but could you talk a little bit about what you are seeing in other categories there? Has that been obviously the challenging I would assume but could you talk about what the ebb and flow that you have seen in those other categories?

[Justin Dearborn:]

Sure. So I will talk pretty high level about what's happening in the other categories. So we have got national classified really the other two large buckets of categories that we classify or add revenue into. On the national front it's a pretty big mix from telcos to entertainment and movie providers and there is some seasonality components that get embedded with those categories and there is also especially as it relates to movies it depends on what the outlook and what kind of launches are happening on the movie side and what kind of draw there is for those movies. So there is a little bit of mix bag that's happening I think across all those other categories. On the classified front we are seeing this hasn't been a surprise to us at all, but we are seeing recruitment and real estate and auto being challenged much like we are seeing on the X side but really to a lesser extent because of what we have effectively shifted to the digital side for those agreements has been pretty substantial. So it's, what's left in print is not as large as it once was many years ago.

[Lance Vitanza:]

Right, sure. Okay. On the EBITDA you did a great job there with the margin up to 12% that's higher than I can recall for you guys in a long time. It looks from the press release that most of the cost sales were on the comp line and I know you had the buyout, the employee buyout sometime ago. Have we lapped that yet or is that really what sort of driving that line item and could you talk a little bit about headcount today and attrition versus people leaving the company and where you sort of see that number going over the long term, not the long term but over the coming years?

[Justin Dearborn:]

Sure. So the EVSP which was the large program was really kind of Q4, 2015 the implementation of that program did take several months of rollout so we are seeing still little bit of a benefit, small amount in second quarter a little bit more of a benefit in Q1 of this year on a year-over-year basis related to that program. We had also outsourced our IT organization, substantially outsourced our IT organization that started rolling out throughout last year. And that really culminated by the end of the first quarter we were at a full outsourced mode for IT. So that's why you are seeing decline there. So those are the two biggest areas. We do have fair amount of large number of open positions that we have. We are actually, you see the comp line decrease we are looking to make sure that we are bringing the right talent and the right kinds of talent to help fill the scales that we need to operate the business moving forward. We did make some investments also in the quarter and in the first quarter as well especially on the digital side and so we are focused on making sure we are bringing in the right talent and resources to help drive that business moving forward.

[Lance Vitanza:]

Great. A question on cash. The $8 million reduction in pension liabilities that you called out in the press release was any of that related to a cash contribution or was that more of just an interest rate driving lower liabilities?

[Justin Dearborn:]

Yes so that was all cash.

[Lance Vitanza:]

It was all cash okay.

[Justin Dearborn:]

Yes we make cash contributions throughout the year.

[Lance Vitanza:]

Great. And then the marketing group sale to JV, you mentioned a $6 million after-tax. I just wanted to confirm, is the $6 million your share or is that the total?

[Terry Jimenez:]

Yes, no. good question. So, it is our share of the proceeds.

[Lance Vitanza:]

Okay, thanks. And last one from me is actually on the M&A front. The Chicago Sun-Times deal, it seems like that's just the latest strong deal to not get done. I'm sure you're frustrated by as we are. And it's surprising for a key player in an industry so desperately needs to consolidate. Could you talk a little bit about where we go from here, are there other targets out there, do you rekindle discussions looking at what sort of the strategy there?

[Justin Dearborn:]

Hey Lance, it's Justin. So, yes I would say we've had our fill of the DoJ activity. So, between Orange County and the Sun-Times to really bizarre outcomes but we're happy to see the Sun-Times continue, which was the main goal we had in mind to continue a second independent voice in the city. And it's not secret we have a distribution printing contract with them. So, we're happy to see them continue on. Don’t understand the process but that's probably a longer discussion. As far as M&A goes, we remain active in the market and really heavily focused on digital opportunities. We, as you saw with the Sun-Time, we're opportunistic, we wouldn’t rule out any traditional newspaper asset but really focused on digital.

[Lance Vitanza:]

And I think you kind of answered the question as to whether or not the distribution agreement survives the change of ownership over there sounds as no it has?

[Justin Dearborn:]

Correct.

[Lance Vitanza:]

Great, okay. Thanks, that's all, guys.

[Justin Dearborn:]

Thank you.

[Terry Jimenez:]

Thanks, Lance.

[Operator:]

Thank you. [Operator Instructions] I'm showing that we have a question from the line of Doug Arthur from Huber Research. Your line is now open.

[Doug Arthur:]

Yes. I got a couple of questions. Terry, what when you get to adjusted earnings-per-share, what kind of tax-rate will you look? It looks like it was quite high after all the adjustments to get to $0.36. Is it upper 40's, is that a fair number?

[Terry Jimenez:]

The effective tax rate, we generally uses around 40%. I'll look, I'll double check for the quarter if we had a different effective rate.

[Doug Arthur:]

And then, in terms of the course, a lot of my question has been asked already, but when you talk about outsourcing IT, does that go into outside services or is that coming in out or where does that get, where is that outsourcing benefit get realized.

[Justin Dearborn:]

Sure. So, you'll see the drop in comp and you'll see an increasing outside services as it relates to that. There is a net delta is a pretty decent amount of savings between the two. But you'll see outside services go up. We have taken out other cost in outside services as well. And so, you won't necessarily see the full impact of that increase from the IT outsourcing, if that makes sense.

[Doug Arthur:]

Yes, that makes sense. And you talked about the surgeon video, what kind of level of output and I know it depends on CVM's and everything else. Did you think you need to get to where it becomes kind of a critical mass form of ad revenue growth?

[Tim Knight:]

Hey Doug, it's Tim Knight. You are -- explained a little of our asset question that will further --.

[Doug Arthur:]

Well, I think you talked about 35,000 videos of output in the quarter and I'm thinking about that number in terms of where does it need to go where becomes a significant revenue contributed troncX?

[Tim Knight:]

It's been fairly stable the last two quarters. We see and we are implementing a variety of initiatives to increase that number. It's up substantially, couple of 100% versus Q2 of the prior year. So, we see the opportunity to increase it. As we move to our new content management system first in Los Angeles at the end of the year and then the rest of the market, we think we'll be able to very efficiently increase that number.

[Justin Dearborn:]

And then we continue to see video advertising both direct and our team has been trained to sell direct more and we're leveraging Nucleus for national opportunities and there is a good pipeline there. And then a programmatic both the PMPs primarily are providing a lot of good opportunities for us.

[Doug Arthur:]

I mean, I guess it's just with the context and this has been asked already, TroncX ad revenues were down 9%. You cited the tough comp and unique visitors, I would assume you don’t see the 9% as a long-term -- as a near-term trend per se or intermediate trend that the comps and uniques will get easier and you've got initiatives in place to drive that and particularly once you'll have the switch it in recruitment.

[Tim Knight:]

Right. As Terry mentioned, the biggest challenges for us on the revenue side, the TroncX revenue side have been declassified categories. And it's essentially the strong work that we did over the last couple of years, the Cars and CareerBuilder and switching out CareerBuilder and then continuing to make improvement around Cars and as Terry alluded to, we have a new leadership structure in place for automotive. And we're confident that is going to improve across all line of the markets.

[Doug Arthur:]

Okay, great. Thank you, very much.

[Tim Knight:]

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 over to CEO, Justin Dearborn for any 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 an exceptional opportunity you had with our brands in our platform. And we look forward to updating you on our progress next quarter. Thanks, again.

[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 nice day.