Tribune Publishing Company
Q4 2015 Earnings Call Transcript

Published: 2 Mar 2016

[Operator:]

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

[Kimbre Neidhart:]

Thank you and welcome to our 2015 fourth 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, 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 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 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 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 website at investor.tribpub.com. Joining today’s call is recently appointed Chief Executive Officer, Justin Dearborn; and CFO, Sandy Martin. Now, I’d like to turn the call over to Sandy to discuss 2015 financial results. Sandy?

[Sandy Martin:]

Thank you, Kimbre, and good morning everyone. Earlier today, we reported our fourth quarter and full-year 2015 financial results. To summarize, our full-year adjusted EBITDA was $157 million at the high-end of our previously disclosed range. Q4 operating revenues, including the San Diego Union-Tribune, increased 1% over the prior year quarter. Advertising revenues were down 8.7% from the prior period, excluding San Diego revenues and the impact of the CareerBuilder reclassification that I will speak about in a moment. This was an improvement from the advertising trends experienced in Q2 and Q3 of low double-digit declines versus prior year quarters. 2015 fourth quarter adjusted net income grew by 35%, which produced adjusted diluted EPS of $1.34 after adjusting for restructuring costs in the previously announced Employee Voluntary Separation Program also known as the EVSP. Before the discussion of 2015 results continue, let me direct you to the information in our press release detailing reclassifications related to accounting items that reflected in the numbers. I want to synthesize these in three areas. First, we made the determination that digital marketing services revenue previously shown as the separate line under the other revenue category has evolved from primarily a subscription services business to more of a branded solution and is more appropriately included as a part of advertising revenue. The reclassifications totaled approximately $30 million in 2015 and $25 million in 2014. Next as some of our peers have previously recorded – reported the CareerBuilder agreement was structured in a way that more closely reflects a net accounting treatment, so affiliate fees are now recorded as contra revenue. We booked the full-year catch up of $5 million in Q4 and as we report quarterly results this year we plan to reclassify prior year quarter’s to enhance comparability. Finally, certain commercial print and distribution agreements more closely fit the accounting criteria for gross accounting as buy/sell versus a fee-for-service model. Again we booked the full-year impact of $12.4 million in Q4 and plan to reclassify 2015 quarters to enhance comparability. Our quarterly details of these reclassifications, you can reference our earnings press release and we want to remind you here that these adjustments had no impact on reported operating income, operating cash flows, net income, or diluted earnings per share for any period. The 2015 operating revenues in the fourth quarter were $462 million or 1% increase over the prior year quarter. Q4 total advertising revenues were down 2% from the same period. And as I mentioned at the opening, comparable advertising revenues declined 8.7%, when excluding San Diego and the impact of the CareerBuilder reclassification. Circulation revenues increased 10% over the prior year quarter, which included revenues for print and digital and incremental San Diego results. Excluding San Diego, Q4 circulation revenues were flat with the prior year quarter. Regarding digital metrics, we ended the year with total digital print bundle subscribers of 790,000, up 20% compared to last year, and up 10% from the prior quarter. Total digital-only subscribers grew to 88,000 at the end of the year, an increase of 43% compared to December 2014. Total unique visitors across all digital properties grew to $51 million per December’s ComScore report and over $53 million in January 2016. And our internal reporting indicates that 50% of our traffic is coming through mobile devices. Q4 commercial print and delivery revenue grew $7 million over the prior year quarter. However when we exclude the accounting reclassification discussed moments ago, like-for-like revenue declined by $5 million. This represents an improved quarterly trend as we cycled contractual changes with certain clients. We continue to attract incremental commercial fee-for-service clients to leverage our large print and distribution networks that include seven printing facilities throughout the United States. Q4 direct mail revenues declined as we cycle changes with two major accounts based in Chicago and one in L.A. Although content syndication and other revenues decreased in the fourth quarter, Tribune Content Agency’s Q4 revenues were flat versus prior year and the other declines were primarily event revenue. Shifting to expenses; total Q4 operating expenses were $452 million. On an adjusted basis, we reduced cash compensation by $13 million in the quarter, and total cash operating cost including compensation by $19 million. For the full-year of 2015 compared to prior year, adjusted cash operating expense savings were $90 million, even after removing newsprint rate and volume efficiencies for the year. Further 2016 in-year cost savings are expected to continue from these major procurement, outsourcing and EVSP initiatives started in 2015. Justin will speak more specifically about 2016 strategies and initiatives. After the February private placement with Merrick Media, LLC, our cash position, as of the end of February 2016, is over $80 million. As we previously stated, the private placement transaction is expected to enhance the Company’s position to execute on digital initiatives and pursue strategic acquisitions, which continues to be our capital allocation strategy this year. Our 2016 outlook includes continued pressure on advertising and circulation revenue trends and we will continue to carefully manage the organization’s cost structure. Other guidance includes cash, capital expenditures of $30 million to $35 million, depreciation and amortization in a range of $55 million to $58 million, single employer pension funding of $11 million, cash payments for the EVSP of approximately $46 million, which includes an EVSP charge of approximately $8 million primarily in Q1. The Company's effective tax rate is expected to be between 41% and 43% in 2016. And finally, severance this year not included in the EVSP is likely to be in a range between $6 million and $8 million. We are fortunate that Michael Ferro has joined Tribune Publishing's Board of Directors as a Chairman. Michael is a proven value creator and brings the right vision, background and resources to move the company forward. Michael invested in this company because he sees a tremendous opportunity to create value for all stakeholders. In 2011, after the untimely passing of Jim Tyree, Michael and a group of Chicago’s civic leaders created Wrapports to invest in and continue the important mission of the Chicago Sun-Times. This divestiture will create a very clear separation of ownership and avoid perceived conflicts of interest, while also providing millions of dollars for community programs and other charitable causes. Now, I would like to introduce Justin Dearborn, the Company's recently named Chief Executive Officer. Justin is a proven operator with significant public company experience. He most recently served as CEO of Merge Healthcare Inc, where he led the company through a period of sustainable growth until its acquisition by IBM for $1 billion in October of 2015. Merge was integrated into IBM’s Watson to deliver intuitive, cognitive, computing solutions. Now, I’d like to turn the call over to Justin.

[Justin Dearborn:]

Thank you, Sandy, and good morning. I'm privileged to join Tribune Publishing as CEO and lead this company in its next phase of innovation. While the media industry is a new vehicle for me, I believe that the fundamental challenges, that this industry faces, are similar to what most businesses confront in the digital world. How do we ensure our content and platforms are properly valued? Since arriving at Tribune Publishing, I’ve been relentlessly focused on evaluating the current business and partnering with senior leaders to determine the right go-forward strategy and execution steps. As Sandy mentioned, Michael is a visionary leader and has ambitious goals for the company. He brings to Tribune the right vision, talent and resources to assist with driving this business forward. I worked with Michael for nearly 20 years and have come to know him as an invaluable strategic partner. Mike will provide a creative voice and I will work with the management team to bring those and other ideas to life. I would like to provide some insights into where we are focusing our efforts. There are few pillars that are critical to driving our overall strategy, content, culture, commerce, and community. Our first step is we are implementing a content first organization to create a multitude of content for the largest global audience on all mediums. As part of that, we have announced several leadership transitions across the organization. Effective immediately, the editors across Tribune Publishing’s collection of award-winning brands have been named Publisher and Editor-in-Chief, assuming dual responsibilities. These managers are in a unique position of understanding their local communities, having the trust of their readers and maintaining the highest standards of journalistic integrity while implementing key initiatives that drive the business forward. To lead this new initiative, Tim Ryan has been promoted to the Office of President of Publishing, reporting to me. In his expanded role, Ryan will work directly with each Publisher & Editor-in-Chief to drive a content-first culture and achieve local market and company-wide business objectives. We also acquired LA.com and will launch a new channel to celebrate Los Angeles and extend the reach of the Los Angeles Times brand. Davan Maharaj will take on additional responsibilities as Publisher and Editor-in-Chief of the Los Angeles Times and will oversee the global launch of this new content vertical and will report to me. Creating exceptional content is core to Tribune Publishing’s civic mission and business strategy. By giving our newsroom leaders dual responsibilities, we are ensuring our local brands remain vital to the communities they serve with our journalists and creators producing premium, compelling content across all mediums. As part of its content-first strategy, we will begin to offer, millions of loyal print subscribers, free unlimited access to digital content across every Tribune Publishing property by April of this year. Additionally, Tony Hunter has been promoted to President of National Revenue and Strategic Initiatives, reporting to me. In this new role, Tony will be responsible for identifying national revenue opportunities and leads strategic initiatives and partnerships. We have also appointed Malcolm CasSelle as President of New Ventures, leading new technology initiatives to accelerate the Company’s digital and commerce expansion. CasSelle, the former CEO of Timeline Labs, who joined Tribune Publishing in February, will use his data and technology expertise to accelerate the Company’s organic digital growth, while also leveraging the valuable assets and technologies of our existing divisions like Tribune Content Agency, Tribune Content Solutions, Tribune Direct, and ForSaleByOwner to diversify and grow digital revenue. We have an opportunity to better leverage the digital content we are creating and command higher premiums for our valuable audiences. We must continuously find new ways to monetize our data and content and use technology to better serve all of our stakeholders. As of today, we are reclaiming the value of our data, further protecting user privacy and improving site performance by removing third-party tracking pixels on our network of sites. We will also leverage our powerful digital brands like ForSaleByOwner. This online real estate business has generated sizable traffic for buyers and sellers through its trusted content and expertise in local real estate markets. We will further monetize this valuable growing audience by enhancing our abilities to serve the community of brokers and financial institutions that seek real estate buyers. You will notice a more visible and powerful ForSaleByOwner site as we create more features including enhanced customization and personalization, improved ad quality and an improved user experience. ForSaleByOwner is a great example of a commerce channel that will create lasting enterprise value for all of our stakeholders. We remain committed to strategic cost management. For example, we are reviewing all of our real estate expenses. We’ve been settled with burdensome real estate leases since the company’s spin that not only place too high of a cost in the company, but also inhibit our ability to create a more collaborative and creative culture. We are working to improve those conditions and identify expense savings as quickly as possible. We also remain focused on consolidation within the legacy publishing industry and have ample acquisition pipeline to do so. We will continue to evaluate these opportunities that are only interested in transactions that will be financially accretive, and that will add strategic digital sockets. We are also focused on technology initiatives that will accelerate our digital and commerce expansion. We're looking at organic and inorganic opportunities to create sustainable enterprise value for all stakeholders. And with that, we’ll take a few questions.

[Operator:]

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

[Lance Vitanza:]

Hi, guys. Thanks for taking the questions. I wanted to start with the adjusted EBITDA, which included $46 million add-back for the Employee Voluntary Separation Program. But how should we think about the associated cash usage from the buyouts going forward? I saw obviously that you intend to make those payments over the course of 2016, but will that show up – will that be above or below the EBITDA line, will there be any incremental payments on account of this or subsequent programs next year and beyond? And if you could give us a sense for what the run rate savings associated with the buyouts ultimately will be?

[Sandy Martin:]

Great, Lance. This is Sandy. Thanks for the questions. It’s clearly an add-back to adjusted EBITDA for 2015, but its salary continuation. So it will be – it will show up in as a cash subtract throughout 2016. So the way I kind of walk the adjusted EBITDA taking out capital expenditures EVSP of about $46 million. And then the additional severance I had in my prepared comments said $6 million to $8 million. This sort of all-in gives us a run rate savings in the 50s. So if you want to conservatively say kind of the $52 million, $53 million range, it’s sort of the run rate savings. So the payback is basically a year, but it is for the next kind of 18 months or so going to be coming out as primarily salary continuation.

[Lance Vitanza:]

That’s great and I mean that makes a lot of sense to why you’d want to do that. On the real estate realignment that you mentioned should – I know you talked about potential cost savings, but also organizational efficiencies. And so, should we expect a meaningful impact on the bottom line there? Or is it really going to be more the collaborative benefits and so forth?

[Justin Dearborn:]

Yes. So, nice to meet you, Lance. This is Justin, so both. We’re obviously still working through and going into week number two, but – and many of our larger properties, we have too much space just to be blunt and it’s not conducive to a good work environment. So we do want to move some office space. We want to reduce the space we have, and put people together to work more interactively. So, definitely, we can tackle the culture piece, and hopefully the real estate cost savings comes as well.

[Lance Vitanza:]

Just two more if I could. The first is just on the cash pension funding guidance of $11 million. That’s a bit higher than we had been modeling, but I think the difference maybe that that’s the pre-tax number. And I assume is there a tax benefit and should we be really thinking about that as sort of $7 million kind of after-tax or am I wrong on that?

[Sandy Martin:]

You’re exactly right on that. We want to give you sort of pre-tax numbers on all the cash, but we clearly get a tax shield for the pension funding. So it is closer to $7 million on net cash.

[Lance Vitanza:]

Okay. And then, lastly for me the $80 million of cash that you mentioned on – I think you said that was the end of February or thereabouts. You mentioned potential strategic acquisitions. Could you update us on what if anything you have in mind for Freedom Communications, Justin, and I apologize if I missed this during the prepared remarks?

[Justin Dearborn:]

Yes, no problem. We didn’t really address it head-on. So, we are still active in the process, so that should unfold in March, but we are still active. Maybe to state the obvious, there is a price where we would walk away. So we’ve been running some numbers and the team prior to me coming here of course has some financial models to support a purchase price that make sense for the Company, but we are active still.

[Lance Vitanza:]

Okay, thanks very much.

[Justin Dearborn:]

You’re welcome. Thank you.

[Operator:]

[Operator Instructions] The next question comes from Michael Kupinski with Noble Financial. Please go ahead.

[Michael Kupinski:]

Yes. My question is outside of Freedom, what kind of size of acquisitions does the company really contemplate at this point?

[Justin Dearborn:]

Sure, hi, Michael. This is Justin. So, we obviously have some natural restrictions based on our balance sheet and where our stock is trading, reluctant to use stock at this point. So we have some restrictions. So I think acquisitions for the legacy publishing business would be kind of in the range of Orange County or smaller. And then, as I tried to note on my prepared remarks, we will be looking at technology business as well because we do have a mixed strategy of organic and inorganic growth there.

[Michael Kupinski:]

And in terms of the revaluation of your real estate holdings and things like that, how many of your newspapers are actually outsourced at this point?

[Sandy Martin:]

The print and distribution – this is Sandy. The print and distribution, one of them; the rest of them, we do our own – for the daily titles, we do our own print and distribution.

[Michael Kupinski:]

In terms of your print and distribution and then your reevaluation of real estate, is any of that related to the prospect that you might outsource print and distribution at other newspapers then?

[Sandy Martin:]

That’s not what’s currently on the plan. Of course, we will continue to do cost benefits as markets consolidate and so forth, but right now we’ve got open capacity and we think that commercial print and delivery business is a good one. So that’s not on the plan so far.

[Justin Dearborn:]

So, I could have been more clear. My comments are directed for the office side of the real estate portfolio. So we’re in a couple iconic buildings, but with iconic buildings, you get some disjointed space. So if we can move to open floor space and a little more collaborative environment, I think that’s going to be a huge positive for the company from a cost perspective, but really from a culture perspective.

[Michael Kupinski:]

Okay. Thanks for that clarification. I appreciate it. That’s all I have.

[Justin Dearborn:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Justin Dearborn for any closing remarks.

[Justin Dearborn:]

Thank you. And I’ll take the only few questions as attest to the fact that we did a great job providing the content. Proactively, I’d like to conclude by saying there is a lot of work to be done, but I’m confident there is a significant opportunity here to enhance value to the benefit of not only our content with new digital initiatives, but for all of our stakeholders. And it starts with a commitment to great journalism and a dedication to informing and being active members in the communities we serve. Thank you everyone.

[Operator:]

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