Tribune Publishing Company
Q3 2017 Earnings Call Transcript

Published: 2 Nov 2017

[Operator:]

Good afternoon and welcome to the tronc Inc. Third 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 third 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 risks and uncertainties 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 and 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; tronc President, Tim Knight and Los Angeles Times CEO and Publisher, Ross Levinsohn. I'll now turn the call over to our CEO, Justin Dearborn.

[Justin Dearborn:]

Thank you Aaron and thanks everyone for joining us today. I’m going to start the call by sharing some highlights and our progress towards achieving our long term goals for the company and then I’ll turn the call over the Terry to review our financial results in greater detail. I’m encouraged with the strategic actions we took in the third quarter to better align our company with industry trends. During the quarter, we announced the acquisition of the New York Daily News, which gives us the number one local paper in New York, re-establishes our presence in the media capital of the world, and adds to our already reputation with its 11 Pulitzer prices, bringing our total to 105. We now have a strong presence in each of the top three US markets, New York, Los Angeles and Chicago, which strengthens our ability to create more reach for advertisers. In addition, given our experience of large market printing operations, we are optimistic that our new world class production facility will continue to operator at near capacity. The New York Daily News has one of the largest newspaper websites in the country and reported 27 million unique visitors in the third quarter of 2017. Looking ahead, the daily news should benefit from investments we have made at tronc and we plan to drive growth by continuing to leverage our scale. We also continue to invest in our leadership team to help drive the digital transformation we have undertaken. We are pleased to announce Ross Levinsohn as Chief Executive Officer and Publisher of the Los Angeles Times Media Group. In this role, Ross oversees all aspects of the Los Angeles Times operations and related businesses. Ross is a digital media pioneer who has led the shift to digital at numerous media and content companies. He has significant experience in advertising, business development, partnerships and marketing in addition to multi-platform content expertise. Best known for his leadership roles at Yahoo and Fox, Ross has helped build and operate both complex large scale businesses and start-up endeavors. His unique product and innovation perspective and proven ability to effectively collaborate and drive growth will serve us well as we continue to transform the company. Also, subsequent to the close of the third quarter, we named Lewis D'Vorkin as Editor-in-Chief and Mickie Rosen, as President of the Los Angeles Times Media Group. As Editor-in-Chief, Lewis will draw on his considerable experience editing and leading global publication including Forbes, The Wall Street Journal, News Week and The New York Times to build upon the Los Angeles Times Pulitzer Price wining news and investigator reporting, while further expanding its coverage on significant political and cultural events. As President, Mickie will play an integral role in driving forward the Los Angeles Times Media Group strategy, as well as digital growth across tronc, as she has done with other diverse media companies. We continue to make progress in our efforts to grow new and creative way to drive traffic to our sites. Recently The LA Times produced the podcast in its editorial series Dirty John, which has amassed over 10 million listeners and was the number downloaded podcast on Apple for three weeks straight. We are hopeful this is the first of many successes via this platform. We also recorded 265,000 digital only subscribers at the close of the quarter, which does not include the contribution from The New York Daily News. This represents a net increase of approximately 45,000 or 20% versus the end of the second quarter 2017 and an increase of 95% versus the prior year quarter. We also had a record number of page views at around 595 million and achieved a record number of unique visitors at 66 million in September, which again does not include the contribution from The New York Daily News. For the quarter, including both tronc and The New York Daily News and after removing duplicate visitors, unique visitors totaled 81 million. Lastly, we have been video reviews closely and continue to gain momentum. We now display over 40,000 per quarter. Our growth in video advertising is starting to become meaningful and we believe there’s tremendous upside similar to our digital-only subscriber numbers. In the third quarter, revenue generated from video rose 74% over the third quarter of 2016. The market environment remains uncertain and fast changing. Innovation, agility and flexibility are more important than ever and we remain extraordinarily focused on executing our strategy to transform our business. With that I’ll turn it over to Terry.

[Terry Jimenez:]

Thank you Justin and Thank you for joining us today. I will review our overall company results for the third quarter, review the performance of our segments and then discuss where I see us finishing in 2017. Total revenues for third quarter of 2017 were 353.1 million, which was down 6.6% from the same quarter in 2016. This decline was primarily due to the anticipated decline in print advertising revenue, partially offset by the impact of The New York Daily News operation. Excluding the impact from The New York Daily News acquisition total revenue would have declined 8.7%. We continue to show strong cost discipline in a challenging revenue environment. Our consolidated third quarter 2017 operating expenses of 346.8 million, which was down 30.6 million on a year-over-year basis. Net income for the third quarter of 2017 was 2.1 million or $0.06 per share. That’s compared to a net loss of 10.5 million or a loss of $0.29 per share for the third quarter of 2016. Adjusted EBITDA for the third quarter of 2017 was 35.3 million compared to 36.6 million in the third quarter of 2016. The decline year-over-year is due to the impact of The New York Daily News operation and the impact from Hurricane Irma on our Florida operations. Our balance sheet remains in a very solid shape. We exited the quarter with a 185.2 million of cash, which grew 11 million sequentially from the second quarter of 2017. Debt was flat compared to the second quarter of 2017, as we inherited capital leases from The New York Daily News balance sheet which offset our term loan principal repayment. Pension liabilities were increased by 19 million in the third quarter of 2017, sequentially from the second quarter of 2017 as a result of stepping in to the single-employer pension plan from the daily news acquisition. Now I will discuss the performance of each of our reporting segments. Total revenues for troncM for the quarter were 297.3 million, which were down 8% compared to the third quarter of the prior year. We continue to experience in print advertising with total advertising revenue for this segment was down 18%. This decline was led by retail advertising declines. Circulation revenue experienced a 5% increase compared to the same period of the prior year, where we continue to see price increases offsetting volume requirements. Print circulation revenue nearly matched our print advertising revenue in the quarter, as our revenue distribution rebounces. Third quarter 2017 adjusted EBITDA for troncM was 28.7 million, which was down 2.2 million compared to the same period of the prior year, so we nearly offset the revenue decline with operating expense productions. troncX had 56.5 million of total revenue in the third quarter of 2017, down 1% compared to the prior year quarter. This was a sequential improvement from the second quarter of this year, from the year-over-year tronc perspective. The 1% decline in the third quarter of 2017 was primarily driven by declines in our Class 5 advertising categories of recruitment, real estate and auto which offset growth in other areas. Third quarter 2017 adjusted EBITDA for troncX was 10.9 million which was up 19% versus the third quarter of 2016, despite the revenue decline and despite the expense investments we’ve made in this segment. Let’s now turn to our outlook for 2017. Full year 2017 revenue guidance range is a total of 1.525 billion to 1.54 billion, and our adjusted EBITDA range is 189 million to 195 million. Overall we believe we have some of the most cherished brands which now include The New York Daily News. These brands operate in among the largest and most important markets in the US. We have a proven and a focused management team that became stronger with the additions Justin highlighted of Ross, Mickie, Lewis and The New York Daily News talent, among others blended with the existing tronc team. We’ve invested in sales, training system tools and infrastructure. We have stabilized our adjusted EBITDA performance and have expanded our margins. And finally we have showed off our balance sheet to set us up for a long term success with a net debt-to-EBITDA near one [term]. With that we’ll now open the call for questions.

[Operator:]

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

[Michael Kupinski:]

I was wondering in terms of revenue impact from the hurricanes hit, were you able quantify any of that in the quarter.

[Terry Jimenez:]

Sure. It was roughly about 0.5 million impact on revenue for the quarter.

[Michael Kupinski:]

And then in terms of The New York Daily News, have you noticed any increase in programmatic advertising as a result of the increase in unique spot by that paper?

[Terry Jimenez:]

Yes, except for the third quarter Mike it’s still early days. We’ll see some improvement once we better integrate that unit along with the rest of our units, they have some really strong leadership at The New York Daily News in that regard and so combining that with a strong leadership we had at tronc, I think together we’ll have some great results across the company moving forward is our hope.

[Michael Kupinski:]

And in terms of the revenue guidance, you kind of reiterated the guidance it seems from the time before it, but with the revenue I guess being a little lighter in the quarter, although you guys over-achieved on the cash flow suggest that had you not purchased The Daily News it would seem like you might be a little bit below guidance on the revenues. But it seems like you’re still maintaining your cash flow for the year. Can you just talk a little bit about it seems like you are anticipating though significant sequential improvement in revenues in the fourth quarter. Can you kind of talk a little bit about in terms of tronc Express or troncM what that guidance kind of looks towards? Do you have any color that you can add there?

[Justin Dearborn:]

So we won’t give you the guide on each of the segments, but overall there are a couple of things happening in the fourth quarter. One is, we saw a sequential improvement in the third quarter on the digital side and so we’re looking for that to continue in to the fourth quarter, so that’s one element. The second element is from a fiscal calendar year, there’s actually a 14 weeks if you recall we’re usually on a 52 week basis for a full year, this year we’ll be on a 53 week basis and so there is 14 weeks in the fourth quarter of 2017 versus ’13 and 2016, and so those two factors are kind of the key drivers behind that.

[Michael Kupinski:]

And it seems like while retail was a little bit soft on the (inaudible) retail side, but it seems like it’s kind of become a little bit more predictable, it seems like it’s down 17%. It seems that it’s pretty much about the same decline than it was in the second quarter. Are you looking for it to be stabilized in that range or are you seeing any stabilization or still further deterioration in the retail category?

[Terry Jimenez:]

I think how you stated it is correct. It’s relatively unfortunately the same, roughly the same number. It moves up or down 1% here or there. I think over time we’re hoping for that to ease, but certainly we’re not building our business around that easing just year.

[Michael Kupinski:]

And just one [64,000] (inaudible) question and I’ll let others ask questions. It was an interesting move over the last quarter from a company that owns a newspapers and broadcast properties and now they’re merging operations together. It seems like a little bit of a shift than what we’ve seen over the course of the last 10 years or so where broadcasters were divesting with newspapers and so forth. Is there any benefit from owning broadcast properties in newspapers back again or do you see any potential benefit from that?

[Tim Knight:]

Mike its Tim Knight. I guess we obviously in the old tribune era did a number of initiatives around that in our markets. I think the one we were furthest along with was at Hartford where the organizations were co-housed together and that the (inaudible) the same operation. And it rather is the ability to share content and kind of bring up the video expertise, the news the TV group has and the TV groups typically have a lesser web presence than the newspaper. I don’t think we saw much growth revenue. So I think we’ll be looking at it, but I think we don’t see big opportunities there right now.

[Michael Kupinski:]

And I think in terms of this particular company, they claim to divest the duopoly market. So it was more of looking from the perspective more of a reach on these earnings benefit from getting a reach in to additional markets that maybe or are not able to maybe buy a newspaper in a particular market, but maybe there might be an opportunity on a TV station is that something that you will consider or you find value.

[Tim Knight:]

I think we’re not looking at that right now. We probably see if we have holes in a reach, there might be some pure digital opportunities that could be a little bit more interesting.

[Michael Kupinski:]

And then can you just describe the M&A environment at this point and what your appetite is at this point?

[Justin Dearborn:]

Mike this is Justin. So it hasn’t really changed. So if you look at our funnel, it’s still heavily weighted to digital only assets and Ross who is on the call as well is focused on that as well, and that’s where a lot of his relationships exists. So as we’ve said really from the start, we continue to look at legacy properties, but really focused heavily on the digital side.

[Operator:]

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

[Doug Arthur:]

Just one on housekeeping thing for Terry, the gain in the investor line of 4.9 million, can you just break that down in terms of the composition?

[Terry Jimenez:]

Sure. So that came substantially from we had – I think we had mentioned on the call last time, although the transaction occurred in Q3 was we had sold a distribution business out in California called [Sips] and so that gained, and effectively was recognized in the quarter, which was north of 5 million. So that made up substantially the number that you’re seeing there Doug.

[Doug Arthur:]

And then I got a little confused on the revenue guidance. Did you say that the 14 weeks was taken in the third quarter and not the fourth quarter?

[Terry Jimenez:]

I had mis-spoke. So 14 weeks will occur in the fourth quarter of this year. So provided a full year guidance number.

[Doug Arthur:]

So it looks like you did not change your full year EBITDA guidance, that’s still 180 to 195. You have trimmed your revenue guidance that’s with the extra week and it’s with the deal I knew. So is that a fair way of looking at it?

[Terry Jimenez:]

So the extra week was in, when we had built a plan and the guidance from the start of the year. That actual week was already factored in, and so really the only new information was really the daily news that’s come in to play here recently.

[Doug Arthur:]

And I thought I’ve been real out very quickly here. Did you quantify the impact on the daily news in the fourth quarter or not?

[Terry Jimenez:]

We have not, no.

[Doug Arthur:]

And then finally, I’d be interested in just hearing a couple of bullet points from Ross on his – he hasn’t been there very long, but his sort of initial plan particularly on the digital side of the LA Times, if that’s not too broad a question.

[Ross Levinsohn:]

Yes, sure. What I found is a really tremendous brand and asset in Los Angeles, I think best exemplified may be by the success we’ve had with Dirty John where I think you have tremendous IP and great journalism and marketed effectively in (inaudible) partnerships, although sky is the limit. And it’s a bit of a luck in to it frankly. I did it; at least it was put in motion well before I got in it. But we really embraced it, marketed it within. We didn’t spend a dollar in marketing per say. We used our own assets to market it and we’ve seen just tremendous success. So what I love to do is focus our energies on building off the assets we have, and really thinking specifically on what the Los Angeles Times can stand for and more broadly the opportunity we have across tronc in the digital space. And I think that starts with great journalism and in very specific vertical categories. And I’ve been on record already and saying, I think The Los Angeles Times needs to focus a lot of energies around entertainment in that space and that’s an area where we think we can prosper and win in and we have to devote the right resources to it. In any business it’s not just about what you do, but it’s also about what you start with the resources you have. So we are in the midst of putting together a very specific strategy and help over the next few weeks and months that really crystallize in and we’ll be able to be a lot more specific.

[Doug Arthur:]

Just one follow-up on that and maybe you can answer this yet. But is there really change in slot of your go-to-market strategy in terms of digital subscriptions of daily times and do you see, having been there briefly, did you see a lot of upside or not?

[Ross Levinsohn:]

Well I don’t want to quantify it because it’s too early, but we certainly have seen as Terry and Justin have said over the last couple quarters we’ve seen really strong growth overall in individual subscription (inaudible) for a month that how much The Los Angeles Times has grown. We’re also seeing, again driven off of the journalism we have that when we have something, for instance like Dirty John, we’re seeing a real uptick in digital subscribers. We’ve just finished here in Los Angeles, Jonathan Gold, who is our Pulitzer Prize winning food columnist. We just held the annual event where we unveiled his 101 top restaurants in Los Angeles and we saw a pretty good uptick during that week specifically tied to that story, and people signing monthly subscriptions. So again tying it to the work we do in journalism seems to be something that’s driving digital subscriptions.

[Operator:]

[Operator Instructions] our next question comes from the line of Lance Vitanza from Cowen. Your line is open.

[Lance Vitanza:]

I guess two areas, the first on tronc and then specifically in other category. I know it’s the small segment, but it’s still 14%, 15% of total revenues, obviously a bigger piece of tronc. And I’m just wondering the trends there, looks like they grew a little bit worse. Now this is commercial printing and I can’t remember what else might be in there. But could you talk a little bit about what’s in there and what we should be expecting as we think about modeling that segment going forward?

[Justin Dearborn:]

Under the troncM segment and the other revenue category, substantially that’s the commercial printing and commercial delivery businesses that we have. So for the quarter that was down 7.7% year-to-date actually a little bit higher. So this quarter it was a little bit easier than the first half of the year. And so essentially what we’re seeing there is over from a macro point of view, there is the ability to have more consolidation in the markets overtime. I think what you’re seeing without winning new accounts over; you’ll see the trends of all the other clients in our industry of having kind of the pressure of the clients on circulation and ad revenue. And so as those declines happen, that will decline naturally overtime. But within each of our larger markets there is an opportunity even consolidates further with more clients to bring in in-house. So it’s a little bit of a steady decline line item, but there is a chance for that to jump up periodically as we win new business.

[Lance Vitanza:]

And then lastly, just on the daily news, I saw on the release included 7.6 million of revenues for September. Simplistically and maybe this isn’t the right way to think about it. I know their seasonality obviously, but is that like a $90 million run rate or is September particularly sort or strong month?

[Terry Jimenez:]

So I think seasonality wise it’s actually pretty spot on, I would say. We own the daily news, we report in kind of fiscal weeks, and so we owned the daily news for three weeks in the third quarter. And so if you were to extrapolate it out on that basis of the 52 or 53 week basis it would be a little bit higher than the number you said.

[Lance Vitanza:]

Got you, and it’s helpful. Thank you. And then what about the negative EBITDA? I mean I assume that they were negative EBITDA. When you acquired them you mentioned something about that plus Irma kind of resulting in the EBITDA decline. I’m just trying to get a sense for, were they burning million or two a month or is it less than that or more than that.

[Terry Jimenez:]

So we’ll have actually more disclosure and better disclosure on that business coming up in a few weeks when we file an amended 8-K.

[Lance Vitanza:]

And then going in to this quarter though, the sort of organic EBITDA trend had actually been a bit favorable, did you see a reversal on that or should we still be thinking about this as, you got business where you’ve been able to kind of eke out a little bit of EBITDA growth if anything?

[Terry Jimenez:]

Lance can you repeat the first half of your question?

[Lance Vitanza:]

Coming in to this quarter, you’ve done a surprisingly good job maintaining at least some EBITDA growth on an organic basis, and I’m wondering if that’s changed.

[Terry Jimenez:]

So this quarter we had the two events that we talked about. Still early days on integration from New York Daily News, so we’re hoping to have that to be a positive contributor longer term. And our goal is to look across organization that we get back to where we have been performing in terms of our guidance and what we’ve guided for the full year that would imply that we would be delivering on that as well.

[Lance Vitanza:]

And then lastly on this [video] cap, can you remind me how much cap lease or other balance sheet debt did you take on as part of the transaction and then also you mentioned taking on the pension obligations. Could you refresh my memory on what that adds to the unfunded liabilities that you have?

[Terry Jimenez:]

So on the single-employer pension, its roughly about 25 million, which is close to what we had talked about when we closed the transaction. The capital lease is roughly about 5 million that’s come in. And there is a multi-employer which isn’t on our balance sheet, but we do have contributions that we make there that are relatively normal.

[Operator:]

I’m showing no further questions at this time. I would now like to turn the conference back to Justin Dearborn.

[Justin Dearborn:]

Thank you, and thank you everyone for you interest in our company. We’ve made meaningful progress in building the foundation of our strategy, and we continue to make such [opportunity] ahead with our brands and our platform and we look forward to updating you on our progress next quarter. Good day.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may now disconnect.