Tribune Publishing Company
Q3 2015 Earnings Call Transcript

Published: 7 Nov 2015

[Operator:]

Good morning, and welcome to the Tribune Publishing Third Quarter 2015 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kimbre Neidhart Please go ahead.

[Kimbre Neidhart:]

Thank you, and welcome to our 2015 third 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, believe, 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 risk and uncertainties that could impact our business are included in documents publicly filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K and our 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, pro forma adjusted EBITDA, adjusted net income and adjusted diluted earnings per share. And we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our Web site at investor.tribpub.com. Yesterday evening, the Company received an adverse jury verdict in a pre-spin employment litigation matter. Although not probable or estimable before this jury verdict was announced, the Company in accordance with GAAP, expects to record an after-tax charge estimated at $5 million in its financial statements in the Form 10-Q to be filed with the Securities and Exchange Commission for the quarter ended September 27, 2015. Given the timing of this verdict, the preliminary financial results included in our earnings release and presented on this call do not reflect this GAAP charge. The after-tax effect of this charge is estimated at $5 million or $0.20 per share for both the third quarter of 2015 and the year-to-date period ended September 27, 2015, the Company plans to appeal this verdict. Now, I’d like to turn the call over to Tribune Publishing’s Chief Executive Officer, Jack Griffin.

[Jack Griffin:]

Thank you, Kimbre and good morning everyone and thank you for joining us for review of third quarter of 2015 financial results. Joining me on today’s call is Denise Warren, President of Digital and Sandra Martin, our Chief Financial Officer. Our third quarter results demonstrate that we continue to make meaningful progress against our strategic plan. Our team is working diligently to deliver tangible results and accelerate progress as we go forward into our second full year as a standalone public company. Since separating from Tribune Media a little over a year ago, we have structured our teams and leadership talent around our strategy to support and monetize our content in ways both new and traditional. We are squarely focused on delivering financial results as we transform Tribune Publishing. Our results for the third quarter track to a full year 2015 financial guidance, which we have reaffirmed today. For the third quarter Tribune Publishing generated total revenues 404 million, up slightly versus the prior year quarter. We delivered pro forma adjusted EBITDA of $28 million in the quarter, up 9% versus the prior year quarter. Adjusted net income was 3 million and adjusted diluted earnings per share was $0.12. When we look at performance in our core publishing business, excluding the recently acquired San Diego Union-Tribune and our commercial print and delivery business, we grew adjusted EBITDA in the quarter slightly versus the prior year. We are seeing increasing strength in key areas including digital, cost management and national advertising sales, which I will now discuss in greater detail. Starting with digital, we generated 52 million of digital revenue in the quarter, up 7% year-over-year. This translates to total digital revenues of 200 million over the 12 month period ending September 2015. Digital advertising and circulation trends improved during the quarter, we continue to see strength in programmatic revenues and we secured new significant advertising campaigns in Q3 from leading companies spanning food and beverage, transportation, retail and healthcare. We are accelerating our transition to digital and our focused on the products, technology and talent with Denise Warren leading the charge. Since joining the Company in June Denise and her team has developed a compelling plan to monetize our content on all platforms. Denise will walk you through these latest developments in a few minutes. Turning to the cost side, our team again did an excellent job managing costs, as they have all year. We are reshaping the Company's cost structure and driving efficiencies by capitalizing on our scale and purchasing power. We generated 24 million in adjusted cash expense reductions in the third quarter which totals to more than 70 million year-to-date versus 2014. In early October our Company announced an employee voluntary separation program. Initial results indicate that the Company will reach its internal targets for the program which we will fund through salary continuation. We will disclose the estimated outcome and financial impact of the program in the 10-Q, which will be filed next week. Turning to national advertising sales, we are making significant progress in this area of the business. Our Chief Revenue Officer, Michael Rooney continues to transform our go-to-market and create direct relationships with major marketers at the national level. We announced last week the creation of Tribune Content Solutions, this team of strategists, marketers and technologists produces native advertising and custom content campaigns. Tribune Content Solutions is now part of our national sales team to drive innovation and offer our marketing partners the full range of marketing solutions. Turning to our acquisition strategy and performance, acquired properties contributed positively to our financial performance in the third quarter. Acquired properties contributed 40 million of incremental revenue and 10 million of incremental adjusted EBITDA year-over-year. Yesterday we signaled our intention to bid for the assets of Freedom Communications, publisher of the Orange County Register and Riverside Press Enterprise. Our proposal is to provide a $3 million refundable deposit that would help freedom fund its operations during the bankruptcy proceedings. Our goal is to have a meaningful seat at the table during the process. Before I close, I want to mention that we are extremely pleased with the progress that Tim Ryan has made since becoming Publisher and CEO of the California Newsgroup, roughly 2 months ago. Tim has streamlined the organizational structure, acted swiftly on digital monetization and forged close working relationships between the business teams in California and the rest of Tribune Publishing. This is producing early beneficial impacts, especially in national advertising sales, digital and cost management. Our Company has a strong foundation for which to drive our transformation. Journalistic excellence and premium content are at its core. We are the number one source of local news and information for more than 3 million print subscribers in attractive markets around the country. And we have significant digital scale with more than 43 million unique visitors every month. We are building on both of these pillars and we have the people and the brands that matter across the platforms that matter. We are confident that our third quarter results demonstrate that our strategy is working and that momentum is building. With that I would now like to turn the call over to Denise Warren to discuss our digital progress and plans.

[Denise Warren:]

Thanks, Jack. Good morning everyone, it's good to be back with you all. As Jack highlighted, we saw significant improvements on the digital front in the third quarter. Revenues accelerated by 7% over the prior year quarter. Digital-only subscriptions reached 81,000, up 28% organically from the year ago period and including the San Diego properties were up 37% from the year ago period and up 15% sequentially. Total digital subscribers grew to 715,000, up 19% from the prior year quarter and up 6% sequentially. While improvement, we want faster growth in top-line digital subscription and advertising revenue. In the third quarter we took significant steps in our digital revamp which we expect will accelerate growth in 2016. This plan includes creating a solid flexible and agile technology platform and product development process, developing consumer led data-driven local and national product platforms, growing audience reach and engagement across our portfolio and finally ensuring we have the best talent and appropriate organizational structure to support our digital transformation. Specifically in the third quarter, we implemented several enhancements to our mobile and Web products, steps that have resulted in higher engagement numbers across our digital properties. Of note average time spent per visit is up 21% and paid views per visit are up 17% from Q2. We believe engagement is key to monetizing digital traffic and are very pleased with this result. While digital advertising in the quarter was flat on an adjusted basis trend lines improved, demonstrating that our product enhancement efforts and our national ad sales initiatives are working. On the product front we made many improvements to our advertising map, resulting in more ads being served. As a result, in October our site had the highest level of ad impressions since our spin off in August of last year. In the quarter we introduced many updates to our suite of mobile news products including redesigned section fronts, new navigation features and enhanced customization features driving higher levels of consumer engagement. Additionally content from all of our markets was seamlessly integrated into the recently debut Apple news app and yesterday we launched our first in-app vertical with a guide to LA’s 101 best restaurants appearing in the LA Times news app. These actions and the resulting monetization demonstrate that we are making significant progress. In a relatively short time we have taken the steps to unlocking the value of our digital assets as we move into 2016. Now I would like to turn to digital subscriptions. In our last earnings call I mentioned an in depth top to bottom analysis to optimize our digital subscription approach. This review and accompanying consumer research validates the opportunity to significantly grow digital consumer revenue at a much faster pace. Our current penetration of digital only subscribers is less than 0.2% of our 43 million unique visitors every month. As a result we have a sizeable opportunity to grow our digital subscriber base and capture a market penetration that is on par with the best performance in the industry. We've identified several new initiatives that we expect will catalyze top-line digital subscription growth. Specifically our first major decision is to switch to a metered approach at all of our properties. Our research shows that visitors are almost twice as likely to purchase via a metered pay approach, than the premium models deployed at most of our properties. The metered approach has left friction in the premium model and metering content enables more frequent content sampling and greater content virility. We believe that this in turn improves reach and frequency of consumption both of which correlate to increased purchase. We plan to implement this change in the first quarter of 2016. Second while we are committed to driving digital only revenue at scale we are equally focused on optimizing our print digital bundle and are redoubling our effort. Our research uncovered a latent demand for a bundled print digital offer. We can better leverage our strong print product to our built in captive audience of 43 million unique monthly visitors. Third is improving content discoverability. We believe our brands deliver unique and differentiated content across all platforms. We are working to be more effective to ensure that users interact with the content that is most relevant to them and that we optimize the frequency with which they interact with that content. A meter helps here yet the real effort centers on user experience, product design and investment in features and content. Fourth is price optimization. Our early research suggests a need to change the price and offer terms to optimize overall revenue and profitability in each market. You will hear more on this front from us in the next year. Finally the last point I want to touch on is emphasizing value versus price in our consumer marketing communication. Our messaging will focus more on the benefits consumers receive from our content and our convenient delivery platforms not solely on the cost or offer terms. We believe our subscription messaging is an important opportunity not only to raise awareness, but also to improve retention and build our connection with consumers. I hope this deeper dive into our digital subscription strategy provides you with a good understanding of our approach and our efforts to-date. I'm excited about the momentum we are seeing and I look forward to sharing much more with you next quarter. Now I'd like to turn the call over to Sandy Martin.

[Sandy Martin:]

Great, thank you Denise, and good morning everyone. As Jack reported total revenues in the third quarter were $404 million slightly ahead of the prior year. Third quarter advertising revenue excluding the San Diego Union-Tribune declined 9.6% these results were in line with peer performance for the third quarter. Reported digital advertising revenues post-spin as we have discussed in previous calls was impacted by our modified agreements with CareerBuilder and Cars.com. We fully cycled all of these affiliate agreement changes during the 2015 third quarter. Excluding the impact of these modified agreements and acquired properties digital advertising revenues in the third quarter were essentially flat versus the prior year quarter. We were pleased to see improvements in both digital and circulation revenues during the quarter with circulation revenue up 12% including the San Diego Union-Tribune and up 1% on an organic basis. Commercial print and delivery revenues were impacted by two major contract changes that we have communicated earlier this year related to the changes with OCR and the Sun-Times agreement after the Wrapports acquisition. This commercial services category is driven by our ability to attract incremental print and delivery clients into TPUB’s existing seven printing facilities and our distribution network we successfully added a new client in Chicago market during the quarter albeit small this is a profitable category and supports leveraging cost across the printing business. Direct mail revenues experienced softness during the 2015 third quarter as retailers experimented with other forms of advertizing. Regarding pre-print advertizing revenue trends recovered somewhat closer to Q1 trends that remain under pressure. We did see an acceleration of many of our digital revenue categories in the quarter and delivered double-digit growth in both digital marketing services and content syndication and other revenue. It’s worth noting that Q3 is our smallest revenue quarter of the year and Q4 is our largest seasonal revenue quarter. Turning to expenses, we reduced adjusted cash operating expenses by $24 million in the quarter of which 16 million represented adjusted cash compensation savings. We added new tables in the release this quarter to provide transparency into our adjusted cash operating expenses and compensation. On an adjusted basis, quarter-over-quarter we reduced total cash operating expenses by 7% and cash compensation expenses by 10%. Our pro forma adjusted EBITDA improved $2 million from the prior year. Our commitment to manage current advertizing declines by maintaining a disciplined cost structure, while folding in accretive acquisitions this year has resulted in pro forma adjusted EBITDA growth for the third quarter. As Jack mentioned, we are reaffirming our 2015 financial guidance of total revenue between 1.645 billion and 1.675 billion and adjusted EBITDA between 145 million and 160 million. Turning to the balance sheet and our priorities for cash, we ended the third quarter with 54 million of cash and total available liquidity of approximately $103 million. The revolver was undrawn at the end of the third quarter and remains undrawn through today. We invested $8 million in capital expenditures, paid down our debt by $5 million and returned 5 million to shareholders through a cash dividend for the quarter. We also announced in August, the Board’s authorized $30 million share purchase program and today the remaining authorized stands at 28.6 million. In addition, key company executives bought TPUB stock during the quarter, demonstrating management’s belief that our stock remains undervalued given our strong cash flow generation capabilities, competitive position in the marketplace and industry consolidation opportunities. As we move forward we plan to continue to prioritize the utilization of our cash flow from operations and solid balance sheet by first, continuing to invest in our digital business, second, continuing to consider accretive acquisitions that leverage our scale and large audience reach and finally continue to pay down debt and return cash to shareholders. With many opportunities to deploy our financial resources, we do not plan to build cash on the balance sheet. Now this concludes our prepared remarks. And Kate I would like to open up the line for questions with analysts.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Lance Vitanza of CRT Capital Group. Please go ahead.

[Lance Vitanza:]

I’ve got a few questions, but could you provide some color on the performance at the regional level, and talk maybe a little bit about what’s going on in LA versus Chicago versus the East Coast titles?

[Jack Griffin:]

Okay, Lance, this is Jack. Thank you for joining us and thank you for the question, as you know we don’t breakout our business or report by segment, but I think we can give you a little bit of color on the question you asked. So we’ve been at this a little over year and I thought may be the right way to frame it was talking about revenue performance during that period. So in the Chicago business and the East Coast business in the aggregate year-over-year for the trailing 12 months ending in September, our revenue decline was mid single-digits. There was a little bit of acquisition there is some acquisition revenue in there, but even if you pull that out it is still a mid single-digits kind of story. Contrast that with the California business the LA Times specifically that trailing 12 months revenue change year-over-year was more low to mid double-digits. So you can see the contrast and it underscores how important it is for Tim Ryan and his team to execute here and we are very confident about what they’re doing.

[Lance Vitanza:]

Could you the cash that you wound up with the 55 million at the end of the quarter that was a good bit ahead of where we had estimated despite your EBITDA was only a little bit better than ours. And I’m wondering if you could help bridge me to that, I mean when I just sort of take the EBITDA and start backing out interest expense and CapEx and the 11 million of charges in cash outlays and so forth. I’m getting a much smaller number it looks like your cash have only been up a couple of million bucks. So I’m actually missing was it a big working capital swing or something else what I am missing there?

[Sandy Martin:]

A couple of things, this is Sandy, good question. Over the summer, we sort of rounded out and cycled against our insurance renewals. And we were, we I think did a good job of sort of supporting the collateral and release 10 million of the restricted cash on the balance sheet. So you will kind of see the balance sheet restricted cash go down and that came into cash. We also received a little bit of a working capital adjustment for San Diego which added a few million dollars as well there so that's kind of the delta I think that you are probably looking forward Lance.

[Lance Vitanza:]

One other question I think from me you talked about the acquisitions and I guess just from a high level perspective does given the amount of focus that you need to deploy in Southern California right now and the integration that is going on there does that kind of keep you away from the M&A market for the time being or if an opportunity presented itself are you in position to take advantage of that from a -- more from a manpower perspective than a capital perspective and then I guess specifically could you talk at all about your potential interest if any in the Orange County register I mean it's sitting right between San Diego and LA and which seem to be a good fit?

[Jack Griffin:]

Sure. This is Jack, Lance so I'd be happy to address that. So from a capacity standpoint in terms of being able to contemplate acquisitions we’re very confident about where we stand we've done a very good job in the Midwest in Chicago and notably Tim Ryan in the leadership position here in California Tim was the architect of our first acquisition out in Maryland so he is a very skilled operator, knows exactly what to do in these circumstances and has a very good grasp now of the operation in Los Angeles and in San Diego and I think if you remember back to my prepared remarks yesterday we sent a very strong signal about our intent by proposing to the bankruptcy court in Santa Ana, California that Tribune Publishing be the provider of funds to fund the Freedom business which of course owns Orange County during the bankruptcy with an amount of cash that would be sufficient to carry them through the bankruptcy period which would have the effect which is our intent we hope of giving us a seat at the table during the bankruptcy process so I think that statement speaks for itself in terms of both our financial wherewithal our commitment as well as the capacity of the team to take decisive action.

[Operator:]

The next question is from Barry Lucas of Gabelli & Company. Please go ahead.

[Barry Lucas:]

And I've got few as well. Jack you talked a bit about national and the efforts you are making there and I won’t say it is a surprise but it does appear that retail even with the acquisitions on the print side was a little bit better than I might have thought so if there is any color you can provide there in terms of what's happening at the retail level I'd appreciate that?

[Jack Griffin:]

Sure. Without being too specific I think that we’re seeing nice performance in retail from the national sales group and that's Michael Rooney's group and retail cuts both ways from local and national and these products that we produce they really matter to retailers and the number of experiments that retailers have done to move away from promoting price and item is well known and it gets proof positive that newspapers work for promotions and that's what business retailers are in and then I think also contributing to the strength in retail is what we're doing in content marketing and if you go back a year ago when we spun we weren’t even in the game and now we have this group called Tribune Content Solutions that I referenced and they are extremely active in developing and providing need of advertising and custom content campaigns for retailers big and small at both the national and the local level I think that's also the strength that you are seeing in the numbers on a year-over-year basis because a year ago we weren’t even in the business.

[Barry Lucas:]

Let me just try two others as you've now touched twice on the OC register and with the acquisition in San Diego what might if any the antitrust implications in the Southern California wine market?

[Jack Griffin:]

It's hard for us to say Barry we’re obviously attuned to all those issues I can't say much more than that because it's not up to us, but we’re as I said we’re there and we have a specific intent and we are going to manage it appropriately.

[Barry Lucas:]

Okay. Last one from me you were good enough to highlight some of the differences in terms of performance between the Southern California papers and the rest of the country it seems like when you talk about Chicago and East Coast and I know Ryan's been there relatively short period of time can you point to specifics that what it changes there providing the confidence that he is going to will deliver the goods in terms of the performance of Southern California?

[Jack Griffin:]

So I will give you a couple of points that I think are reflective of the general point that I made in your question. One of the themes that we and I've been stressing is that we're are a platform company and all the business units and functions working together is integral to our success. So, here in Los Angeles, we're seeing now in the current period for the first time in a very long time national ad revenue year-over-year being up. And that is very telling and so, Michael Rooney and his team are deeply embedded with the team here in Southern California and we've produced numerous important wins during the last couple of months that I think reflect the strength of the franchise, the capability of the people and the commitment to the collaboration that is so essential for our company to succeed. And then the second point I would made, that is emblematic of this is when Tim came into the job, one of the immediate steps was to put a meter on the LA Times mobile app and it was a significant hole in the paid digital ecosystem for the LA Times and half the traffic comes from mobile. So, the numbers are small, but the installation of the meter on the LA Times’ mobile app has produced a very important uptick in digital subscriptions here at our largest property. And we're doing this call today from the Los Angeles Times, so, we've all eyes focused on pivoting the business here and across the country and I think our comments are full in that respect.

[Operator:]

[Operator Instructions] The next question comes from Hamed Khorsand of BWS Financial. Please go ahead.

[Hamed Khorsand:]

Could you talk about the, how much gains you've got from digital over this past quarter being associated with the new change or any of that you were talking about as far as meter being implemented in Q4 versus Q3, just trying to get a measurement here, of how the progress will go?

[Jack Griffin:]

And I think as Denise articulated, we plan to give greater visibility into the specific metrics when we do our call at the early part of next year our year-end call. But we're as you can tell the metrics we’re focused on are total digital subscribers, digital-only subscribers, digital consumer revenue in the aggregate, digital ad revenue and the activities we have underway that Denise I think was quite articulate about will yield us to give be able to give much more transparency on them when we speak to you next year.

[Hamed Khorsand:]

And just talking about digital advertising, are you seeing a change there as far as the composition of the advertisers and given that you revamped the whole digital front end as far as the consumer goes, so has that provided you with any increase as far as rates go?

[Jack Griffin:]

So, I would say that the composition of our revenue on the advertising side is in transition in a very positive way, I talked about Tribune Content Solutions, a native advertising custom content and that all runs through the digital advertising line and those are bigger commitments, they're not spot commitments but they're strategic commitments on the part of marketers and we think that they are much more beneficial to our company because they are predicated on a deeper relationship as opposed to just by an advertising on a spot basis. So as Tribune Content Solutions establishes itself further we think it has lots of beneficial impact for our for advertising and of course we think we have one of the best in class programmatic functions in the industry and we are doing a much better job, doing yield optimization with our private exchanges through the programmatic function and as Denise said we're producing more inventory with the ad map and we're very confident that that's going to produce very positive result as we cycle into 2016.

[Hamed Khorsand:]

And my last question is, on this quarter there seems to be an increase in OpEx compared to prior quarters, was that acquisition related or were there some one-time expenses in the quarter other than the litigation you were talking about?

[Sandy Martin:]

Definitely, acquisition, deal cost associated with the San Diego acquisition, we continue to have restructuring charges that we're working on with the procurement and strategic sourcing that we talked about in the past and then where our first year stocks, so I think the remediation, so that's why we tried to give you the extra table, Hamed, so you can kind of sort of look at truly the numbers and we're down 7% sort of on a like-for-like basis and then compensation we're down about 10%. So I think it matters in the third quarter that you look at it that way versus having a little bit of the restructuring embedded in the income from operation numbers.

[Hamed Khorsand:]

And the path I was trying to take is as if I look at the higher upper-end of your adjusted EBITDA guidance of 160 million. For Q4, you would need to put up almost a 10% year-over-year increase in adjusted EBITDA just to come close to 160 million. I’m just trying to get a sense of how that is going to come from right, if you have increased expenses like that in Q3?

[Sandy Martin:]

So our range is 145 to 160. Clearly last year, we had quite a few spin related things that washed through there as well. Jack do you want to add that is that kind of in the fourth quarter just looking at EBITDA?

[Jack Griffin:]

Sure. So we reaffirmed our annual guidance today, we’re well into the fourth quarter now into the second week of November very soon here. So we feel like we have a very good fix on the performance of our respective businesses. And we’re reaffirming our guidance and we understand how the quarterly math works and we’re very confident about our ability to deliver on that commitment.

[Operator:]

[Operator Instructions] There are no other questions at this time. I would like to turn the conference back over to Sandy Martin for closing remarks.

[Sandy Martin:]

Great. Thank you very much for calling today. We appreciate your interest in the business. We’re very excited about the fourth quarter. We’re also very excited about 2016. We’re doing our zero-based budget process as we speak and we’ll look forward to talking to you in the near future. Have a good day.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.