Tribune Publishing Company
Q4 2014 Earnings Call Transcript

Published: 4 Mar 2015

[Operator:]

Good morning and welcome to the Tribune Publishing 2014 Fourth Quarter and Year End Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jenni Gilmer, Manager of Investor Relations. Please go ahead.

[Jenni Gilmer:]

Thank you and welcome to our 2014 fourth quarter and year-end earnings conference call. Joining me on the call are Jack Griffin, Chief Executive Officer; Sandy Martin, Interim Chief Financial Officer and Michael Rooney, Chief Revenue Officer. 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 or 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 risks and uncertainties that could impact our business are included in publicly filed documents, including our quarterly reports on Form 10-Q and our registration statement on Form 10 as mended effective July 21, 2014 filed with the SEC. I should also mention that our remarks today will include references to non-GAAP financial measures, including adjusted EBITDA, pro forma adjusted EBITDA and free cash flow. And we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investor.tribpub.com. Now I’d like to turn the call over to Jack Griffin.

[Jack Griffin:]

Thank you, Jenni and good morning everyone. Welcome to our fourth quarter and full year earnings call. Before I talk about the fourth quarter, I’d like to take a few minutes to discuss 2014 and what we have accomplished at Tribune Publishing in our seven months as a standalone company. 2014 was a watershed year for Tribune Publishing. As you know, we completed the separation from Tribune Media on August 4. Since then we’ve been executing on an exciting strategy to transform our company. Some of the highlights are

[Michael Rooney:]

Thanks, Jack. First, let me begin by discussing digital ad revenue and national ad revenue. Excluding corporate transactions, total digital revenue was up 4% for the full year despite softness in digital display advertising. Total digital revenue was essentially flat in the fourth quarter versus the prior year. Since joining the company a little more than 100 days ago, I’ve worked with the local and national sales teams and we're taking a number of actions to demonstrate to marketers the full value of our offerings. We are integrating our national digital and print teams into one cohesive group ensuring that we go to market offering multi platform solutions to marketers. We are aligning talent to task and have appointed new leaders at the national level as well as at our major properties in Los Angeles and in Baltimore. We are increasing our custom content offerings. Our heritage in storytelling lends itself well to this emerging area and we now create custom content solutions for dozens of clients from every industry -- from finance and insurance to food and beverage and travel and tourism. In the first two months of 2015, we have already signed more than 22 custom clients which represents more than half of all clients served in 2014. This is an early indication of the demand for these services in 2015, particularly in video and mobile. We are enhancing our programmatic efforts allowing marketers to leverage the full digital scale of Tribune Publishing. Our brands collectively attract nearly 42 million unique users every month providing marketers the ability to target a wide cross-section of attractive demographics. And because we are a publisher of premium content we seek robust rates even in programmatic. We have a unique opportunity to demonstrate to the marketplace how our leading brands can engage and motivate consumers across all platforms. I look forward to sharing our progress in the coming quarters. At this point in time, I will turn the call over to Sandy Martin.

[Sandy Martin:]

Thank you, Michael. Turning to our 2014 full year performance. Revenues were $1.7 billion compared to $1.8 billion in 2013. Pro forma adjusted EBITDA for 2014 was $160 million compared to $179 million in the prior year. On a reported basis, operating expenses were essentially flat for the full year, including the impact of acquired properties, corporate transactions, spin and related items. Free cash flow for the year was $117 million, excluding capital expenditures of $22 million. With respect to our company's capital allocation strategy, we have three primary priorities

[Jack Griffin:]

Thank you, Sandy. Before we end, I’d like to take a few minutes to discuss our guidance for fiscal year 2015. This year, our first full year as a public company, we will remain vigilant and focused on executing our comprehensive transformation plan. Specifically for the full fiscal year of 2015, we are anticipating total revenue of $1.65 billion to $1.67 billion. Adjusted EBITDA is expected to be in the range of $160 million to $170 million. Our recently completed zero-based budgeting process is expected to produce in-year savings of $65 million to $70 million. Businesses acquired in 2014 are expected to deliver year-over-year incremental EBITDA contribution of roughly $20 million. We expect this to be offset by roughly $20 million less EBITDA contribution from commercial printing and delivery. Capital expenditures are planned at $30 million and one-time cash items related to restructuring are expected to be $10 million to $12 million for the year. And finally debt service, including interest, mandatory amortization and fees, is expected to be $40 million. The management team and I are excited about 2015, our first full year as an independent company. We are making meaningful changes to the structure and foundation of our company. We believe these changes will serve our shareholders, our customers and our employees well. Thank you very much for your attention. And now I will turn the call over to the operator for Q&A.

[Operator:]

[Operator Instructions] Our first question comes from Lance Vitanza with CRT Capital Group.

[Lance Vitanza:]

Hi guys, a couple of questions here. I guess the first is obviously the secular pressures are very well documented but from a cyclical standpoint, gas price is up nearly 50% over the past nine months or so. Are you seeing any benefit at all from the rebound in ad spending that we’re hearing about in other media?

[Jack Griffin:]

So Lance, this is Jack. Thanks for the question. The holiday season, when gas prices started to descend, we actually expected retail sales for the clients we serve to be more vigorous and it turned out that they weren’t, which speaks to the ad declines in 2014. However I will say and I said this just a few minutes ago, in the early part of 2015 we’re seeing a bit of a moderation in the trend particularly at the local level, which as you know is driven mostly by retail. So early in the year we’re encouraged by what you see and we do a lot of business with companies like JCPenney and Kohl's and you’re probably even reading in the press about how their traffic and same-store sales are coming back and attributing a fair amount of that to gasoline prices. So we’re encouraged by what we’re seeing on the local level early in 2015.

[Lance Vitanza:]

Okay and I apologize if I missed this as well. But how is the CFO search going and does that process mean that you're taking a pause on the M&A front until that gets resolved?

[Jack Griffin:]

Sure. Thanks for the question. And in reverse order, it does not mean we’re taking a pause. And the first part of the question is we’re talking to internal and external candidates. I would say it's going well. We had a tremendous amount to do as you know to get ready for this call and finish our year-end audit and file the 10-K. So we have all hands on deck doing that. It's all going extremely well. And when we have news on the CFO front in the near future, we will be reporting it.

[Lance Vitanza:]

Okay. With respect to M&A, I mean I don't want to put you in a box here but is there a dollar amount that you’d like to deploy toward M&A each year if you could find the right targets?

[Jack Griffin:]

Sure. As Sandy articulated, we have the three priorities for our excess cash and we don't put an exact number on the acquisition scenario. But we do conform to our principles which are that an adjacent acquisition of a high quality product that allows us to leverage our infrastructure, we've proven we can execute well and they are highly accretive. So we look at them on a case-by-case basis and don't pin a specific number as we think about the year ahead.

[Lance Vitanza:]

Okay. Lastly for me, on the free cash theme, I mean if I'm doing the math right, if I take the low end of your EBITDA guidance, I am penciling out around $60 million in after-tax cash flow, although I don't know if I'm using the right cash restructuring number against that. But that works out to about 250 a share or 13% dividend – 13% free cash for you, it seems like you've got some room potentially to increase the dividend. Is that something that you would consider? I know obviously you have your three objectives and so forth but any clarity that you could provide on that.

[Jack Griffin:]

Sure. So in terms of our returning cash to shareholders, we had a dividend in the fourth quarter. Our board meets regularly and considers it on a regular basis. It’s the method by which we’ve decided to return cash to shareholders at least at this point. We’re only seven months into this. So we want to get a good run into 2015 and as I said before, it's our first full year as an independent public company. So we will always be looking at the combination of our usage of cash to benefit shareholders and pay down debt and keep enough dry powder to do acquisition. So at this point I can't be precise and answer your question but we feel good about where we stand in our ability to generate cash.

[Operator:]

[Operator Instructions] The next question comes from Barry Lucas with Gabelli & Company.

[Barry Lucas:]

I have several as well, Jack. On the revenue front, could you talk a little bit further about what you’re seeing in retail at the local level and we say extraordinary but the accelerated weakness in national and just definitionally are big-box retailers, national big-box retailers in your retail segment, whether they drop into national?

[Jack Griffin:]

Most of them drop into the national side of the business. So you take a CVS or Kohl’s or Sears or JCPenney and they tend to show up in national. The local retailers would be more like a Menards here in Chicago for example. But I would say as a general theme what we're finding from the retail community is that notwithstanding the secular print declines, preprints are vital to their business. They drive store traffic, they bring people in for sales and promotions and we don't see that changing, if anything we see it more acute than ever. So we think that's good for our business. I pointed earlier to, I think, one of the major national papers had a story this week about the turnarounds that are happening at the big-box retailers that serve sort of the upper-middle-class and the middle class and that’s right now wheelhouse. So we’re very encouraged about what we’re seeing from that score and as a General statement, we’re able to offer more and more in terms of solutions to these retailers here in Chicago. We have a big program with Jewel which is the leading grocer in the market that’s social and video and custom content and not just preprints. So as we expand our offerings, as Michael said, we’re getting more and more encouraging signs from retailers about the value of our audience.

[Barry Lucas:]

If we just go a little bit deeper and shift maybe to the regional differences to the extent there are any, were there material differences, if you look geographically or I am thinking were the largest papers LA and Chicago hurt a little bit more than say Orlando, Fort Lauderdale, Hartford, Baltimore?

[Jack Griffin:]

So as you know we don't break out our papers as business segments. But we do obviously track the peer group and try to compare our papers of kind of similar size to others. We have two of the biggest metros in the country in Chicago and LA, the number two and number three markets. So I think we’ve been sort of – we’ve been forthcoming about this that the declines in the industry at the big metros on the print side tend to be larger in size than at smaller metros. And I would say it's fair to say we've experienced that, we experienced that in the second half of 2014. But on the contra side of that, the digital opportunity is bigger in those businesses, in those markets. So we’re looking to Los Angeles and Chicago to drive our digital growth as a function of their scale, size and audience.

[Barry Lucas:]

Okay. Thanks, Jack. One last area -- excuse me -- for me. When I look at the guidance and you were kind enough to break out some of the details. But if I look at essentially revenues off 2% including some of the acquired properties and the EBITDA kind of flattish may be down a bit depending on where you come in, but with 65 million to 70 million in cost savings, would -- adjusted EBITDA could have been a little bit better. Is that a function of timing and if it is, when do the bulk of the savings, those cost saves kind of roll through the P&L?

[Jack Griffin:]

Right. So thanks for that question. When you think about our expense savings that we put in the guidance and any sort of modeling that would go on, the critical factor to consider is that in 2014 we had seven months as a division of Tribune Company and our cost structure was meaningfully different in terms of the affiliate agreements with CareerBuilder and Cars.com, the public company costs and the rent that we now pay to our former parent. So when you think about the cost reduction we had a big step up in the cost base in the last five months of the year as a function of those adjustments. So you have to build it up before you take it down by the $65 million to $70 million and then of course we have the acquired expenses, we call them, from the businesses that we bought in Chicago, so we only had that for two months of 2014, and the Baltimore properties which we had for seven months of 2014. So it’s a lot of normalizing that goes on in terms of what’s the base for 2014 but in subsequent calls, I am sure we can help you get clarity on that.

[Operator:]

[Operator Instructions] The next question comes from Hamed Khorsand with BWS Financial.

[Hamed Khorsand:]

First, apologies for those background noise. First off, I wanted to ask – the movie industry played a role last year as far as the Q2, Q3 went. What kind of assumptions are you making this year with the calendar that’s poised to come out especially the summer?

[Jack Griffin:]

Yes, great question and thank you for the question. So the movie and entertainment business is largely for us in Los Angeles, at the Los Angeles Times. And as we said on the third quarter call, the box office was very weak in 2014 and that reflected itself in our second half 2014 results at the Los Angeles Times. We essentially get two kinds of entertainment advertising in LA. We get the box office on the one hand and then we get for your consideration which precedes the Oscars. And early in 2015 we've had very encouraging experience in LA on the for your consideration front as you watch the Oscars reveal themselves. It was a big horserace in essentially every category and that drives business at the LA Times. So we’re happy about that. As we think about 2015, the box office assumptions that we've made, I would characterize, as somewhat better than 2014 but somewhat lower than 2013. In the second half of 2013 it was kind of a barnburner experience at the box office which helped the LA Times. So I would say we budgeted closer to 2014 than we have 2013.

[Hamed Khorsand:]

My other question is -- what is that causing some softness as far as digital ads go, especially given that you’re saying that your subscriber numbers are increasing?

[Jack Griffin:]

So I would say – I’d go back to the remark I made in the earlier part of the call, that this transformation takes time. And we only launched our digital products pretty much midyear to Christmas time. And we were playing catch-up and it's a new suite of products. It's a new leadership team. As I said on the call we’ve put in place new units in the business to take advantage of monetizing these products but we’re in early days. And so we’ve got a lot of work to do in 2015. My entire management team is highly focused on digital monetization and as you know I listed the five tenets of our transformation plan and accelerating the transition to digital is number one. So that's what we’re focused on in 2015 and as we go through the year we will keep you updated. But we see a large opportunity for us to catch up to our peers and ultimately transcend that.

[Hamed Khorsand:]

Is there like certain customer feedback you're getting so far? Is there anything that more granular you could share with us on that front?

[Jack Griffin:]

You’re talking about on digital?

[Hamed Khorsand:]

Yes.

[Jack Griffin:]

So I guess the general characterization that I would make about digital is that it's -- think of a barbell, it’s bifurcated. On one end of the barbell you have programmatic. Michael spoke about that. And we're making lots of moves to increase our ability to monetize our inventory through programmatic. We’re setting up private exchanges with agencies and with retailers and taking the best advantage of that. And then on the other end of the barbell is the multiplatform activity that Michael was talking about, that’s idea driven, that's driven by not so much online inventory as it is by being able to push out a big program or a big idea across all the platforms in the big markets that we cover. And in the middle just the typical digital display advertising business, I think as you know looking at the industry and our peers it's a weak business. So we’re looking at optimizing our impact on both ends of the barbell and doing the best job we can to optimize the middle part of the display business. But I think what Michael said is critical, is the scale that we offer to marketers. We have the number two and number three markets in the United States. In the automotive business we have the number one, number two and number three car markets in the United States. So we have a great opportunity in front of us but as you all know on the call it's about execution and we look at 2015 as an execution year capitalizing on all the pieces that we put in place.

[Operator:]

[Operator Instructions] The next question comes from Michael Bee with Boyd Watterson Asset Management.

[Michael Bee:]

Hi thanks for taking the question. Can you give us a little bit of an idea how you’re targeting the growth in the digital subscriptions as a traditional call center or are you using digital email programs and what kind of success are you seeing?

[Jack Griffin:]

So thanks for the question and it's a multifaceted approach. We've, as I said, established a full team of people to drive this activity and work with the leadership in our markets. But I would say it starts with the basics which is asking the consumer for the order. And if you go back to the early part of this year and even on our old websites there in many cases wasn't even a Subscribe button. So we’ve redesigned all that, we’ve built new landing pages. We’ve built new connective tissue between the online and the off-line databases. We've taken what used to be a seven or eight step process for the consumer to order to down to two or three and we’re on our way to one or two. So it's art and it’s science but we're very happy and excited about the progress that we've made. We have a lot of offers out in the marketplace. So we do AB testing on a regular basis to find out what's the price point and what's the offer that drives the consumer behavior that we’re looking for. And I would say we're seeing progress that’s very encouraging, as I talked about the number of paid digital users at 659,000, a year ago that was de minimis. And we have a companywide rallying cry to get all of our print customers to authenticate their digital account and to use the website and use the mobile apps and to make the product experience much more part of their daily lives and we’re receiving early progress. We’re highly dedicated to this. We see it as central to the growth story that we’re articulating. And now in 2015 as I said before we have to execute on the investments that we've made. End of Q&A

[Operator:]

[Operator Instructions] As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Sandra Martin for any closing remarks.

[Sandy Martin:]

Great. Thank you very much for dialing in today. We hope to have continued conversations with you and have a good afternoon. Thanks.

[Operator:]

Ladies and gentlemen this concludes today's conference call. You may now disconnect.