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Edited Transcript of MNI earnings conference call or presentation 13-Nov-19 5:00pm GMT

Q3 2019 McClatchy Co Earnings Call

SACRAMENTO Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of McClatchy Co earnings conference call or presentation Wednesday, November 13, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig I. Forman

The McClatchy Company - President, CEO & Director

* R. Elaine Lintecum

The McClatchy Company - VP of Finance & CFO

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Presentation

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Operator [1]

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Good day. And welcome to The McClatchy Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Elaine Lintecum, Chief Financial Officer. Please go ahead, ma'am.

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R. Elaine Lintecum, The McClatchy Company - VP of Finance & CFO [2]

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Thank you, Chuck, and thank you all for joining us today for our third quarter 2019 earnings call. This call is being webcast at mcclatchy.com and will be archived for future reference. Our earnings release was issued this morning before the market opened, and I hope you've had a chance to review it. Joining me today is Craig Forman, our President and CEO.

Our press release and discussions this morning include information about actions we are taking to relieve liquidity pressures we face in 2020 and potentially rationalize our debt structure. We're early in our negotiations and cannot provide any more information than is in our public disclosures. Given these circumstances, we know some companies would have canceled their quarterly call, but we're a news company, and we believe this call is important to communicate our third quarter operating results with you, our investors. Even though you may have questions, we just cannot answer at this time. So while we're going forward with the call, we will not have a question-and-answer period at the end of the call. Instead, if you have more questions about our results, we encourage you to reach out to me at (916) 321-1846 or via e-mail at elintecum@mcclatchy.com. Again, first initial, last name @mcclatchy.com.

Our discussions today will contain forward-looking statements that are subject to risks and uncertainties that are described in our SEC filings. Actual results may differ materially from those described during the call. Also, our non-GAAP amounts discussed this morning are reconciled to the most directly comparable GAAP measures in schedules that are posted to our website or that are in the body of our press release.

Now I'll turn the call over to Craig.

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Craig I. Forman, The McClatchy Company - President, CEO & Director [3]

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Thank you, Elaine. Good morning from Sacramento, and thank you for joining us today. We're happy to share with you in detail our third quarter results. We're gratified to report the EBITDA trend improved sequentially, yet again, swinging to growth from ever-narrowing year-over-year declines in the 3 prior consecutive quarters. This result reflects our discipline in controlling costs while making strategic changes to accelerate our digital transformation. Of course, we cannot overlook the headwinds we faced in the quarter such as noncash impairment charges that relate to an acquisition made in another newspaper era. Those costs needed to be removed from the books, resulting in a noncash charge of approximately $295 million in the third quarter.

And you have all seen that we are considering a restructuring that will allow us to potentially find a long-term solution to our pension and debt structure. We are working hard to find solutions for the company and its more than 24,000 pensioners in a plan that was started 75 years ago, when such plans were seen as a popular way to provide retirement benefits to employees. We have voluntarily contributed nearly 44% of the 100 -- of the $1.3 billion of existing assets in the plan rather than limiting our support to the minimum required contributions. Still, the plan was underfunded by approximately $535 million as of March 31, 2019. Our workforce of nearly 2,800 employees today means that we have roughly one active employee working to support 10 pensioners. My McClatchy colleagues who joined the company in the last 10 years do not participate in a plan. They are working hard to support one that was frozen to new participants in 2009.

As Elaine will explain in detail later, we have commenced discussions with the Pension Benefit Guarantee Corporation, also known as the PBGC, as well as discussions with our largest single debt holder for the purpose of exploring other alternatives with respect to the pension plan and our outstanding junior debt that would provide a more permanent rather than a temporary solution to our pension obligations and capital structure. More to come on that shortly, and we certainly cannot assure you that these efforts will be successful. Still, our positive trends in adjusted EBITDA highlight the accelerated digital transition we are embarked upon and make these efforts worthwhile to our stakeholders.

Let's look at the headlines. We reported growth in adjusted EBITDA of 4.6% compared to Q3 2018, our first growth quarter in that key measure in 8 years. We grew digital-only subscribers to 199,200 and topped 200,000 subscriptions in early October, and total paid digital subscriber relationships at the end of the third quarter surpassed 0.5 million. We have announced our expanded successful digital Saturday rollout, and The Compass Experiment launched its first digital-only newsroom in Youngstown, Ohio, and is already making an impact in the community.

Now for the details. Despite continued headwinds in revenues around the industry and at McClatchy, as I mentioned, we saw our first quarterly year-over-year growth in adjusted EBITDA since the fourth quarter of 2011. This positive adjusted EBITDA trend also improved sequentially, swinging to growth in the third quarter from 3 consecutive prior quarters of ever-narrowing year-over-year declines. Yes, we achieved this improving performance by implementing strong cost controls, and it still hasn't impeded our progress towards the digital transformation that is required in today's news business.

McClatchy's progress in transforming our business is reflected in the growing number of our digital subscribers and engagement with our digital products. Digital-only subscriptions grew 45.4% from the third quarter of 2018 to nearly 199,200 subscribers, and it was only a few days into October when we hit the milestone of more than 200,000 digital-only subscribers. When coupled with the number of our combined print and digital subscribers, where print customers have activated their digital products, total paid digital customer relationships were approximately 509,400 at the end of the third quarter, up 23.2% from a year earlier.

This encouraging growth in digital subscribers came as we also expanded our digital Saturday rollout to include conversions or announcements to convert 12 of our markets to digital-only additions on Saturdays. We are seeing wide acceptance of digital Saturdays among our subscribers in the markets where the change has been implemented and/or announced. And in those markets where implementation has occurred, we're seeing an accelerated conversion to our digital products. We expect to expand digital Saturdays to all of our markets during the course of 2020 as we advance towards our digital future.

In looking at our third quarter 2019 audience results, digital audience revenues were up 13.4% for the third quarter of 2019 compared to the same period last year, reflecting strong growth in digital subscribers. Digital-only audience revenues associated with digital-only subscriptions were up 44.5%. Total audience revenues were $78.3 million and represented 46.8% of total revenues.

For the first quarter in our history, audience revenues contributed more to total revenues than did advertising revenues. Digital advertising revenues continue to exceed print revenues as they have for the past 7 consecutive quarters. This is an illustration of the absolutely fundamental digital transition that we believe McClatchy and all other local newspaper companies must accelerate in order to succeed in a digital era. That we are ahead of some others in this transformation despite the challenges posed by our debt and pension responsibilities and the headwinds in our industry is a reflection of the hard work of our colleagues in the 30 markets around America that, together, make McClatchy.

Turning to our advertising business. During the quarter, we saw a slight improvement in the year-over-year trend from our second quarter results as our newly restructured advertising department begins to execute. There have been many changes in that functional area, including adding some great new digital talent and standing up a new call center to work with and provide advertising services for some of our smaller revenue accounts around the country.

Total digital advertising revenues were 46.8% of total advertising revenues, and digital-only advertising revenues exceeded print advertising in our home-delivered and single-copy newspapers. Total digital advertising revenues were $35.9 million, down 15.9% compared to the 18.7% year-over-year decline in the second quarter. Digital-only advertising revenues were down 17.7% compared to a year-over-year decline of 20.6% in the second quarter. So while we certainly are not cheering yet, we are seeing incremental improvement in like quarters.

Before turning the call over to Elaine to review our quarterly results in more detail, I'd like to focus on the cornerstone of our business, local journalism. We at McClatchy remain firm in our commitment to independent local journalism in the public interest, and that commitment goes beyond markets where we own a masthead.

In October, we launched Mahoning Matters, a digital-only news outlet serving Ohio's Mahoning Valley as part of our Compass Experiment. The Compass Experiment is a local news laboratory founded by McClatchy and funded by Google News Initiative's Local Experiments Project where McClatchy is launching digital-only news outlets in 3 localities with 60,000 to 300,000 residents and limited sources of local news.

As we have highlighted in our press release, McClatchy newsrooms continue to produce regulatory and extraordinary journalism that is essential to the communities we serve. The Charlotte Observer's Dismissed series, focused on how North Carolina courts handle weapons crimes and found that high numbers of repeat suspects went free, time and again, even going on to commit murder. North Carolina Governor Roy Cooper said the investigation raised troubling issues and called for more funding to successfully prosecute gun criminals.

In Kentucky, The Lexington Herald-Leader exposed a pattern of brutality in overcrowded local prisons. As a result of the investigation, Kentucky's Governor signed an executive order to move some of the state's prisoners to a private prison to address the overcrowding of local jails.

And while the series began last month, thus, technically, in our fourth quarter, I would like to mention Stricken, a meticulously reported multi-month data journalism effort highlighting the proportionately high and growing incidence of multiple cancers among our important and growing veterans community. After 6 months of reporting, McClatchy's exclusive analysis of data from the Veterans Administration and the Department of Defense found a noteworthy and alarming spike in prostate, urinary, liver and blood cancers among veterans who served in nearly 2 decades of war. We have been gratified that the public response to this reporting is drawing a spotlight on this issue, crucial to our military veterans community.

And speaking of crucial, we believe that local journalism is crucial to the proper functioning of our society. There is evidence that where local media collapses, communities suffer, polarization grows, civic connections fray and even borrowing costs rise for local governments.

At McClatchy, we are resolute in our determination to continue the 2 key traditions that have been the hallmark of our focus for the past 2 years or so, since I became the CEO, and for more than 1.5 centuries prior, maintaining our award-winning record of credible, urgent, solutions-oriented, essential journalism in the public interest while accelerating the pace, cadence and success of our efforts to advance our digital transition.

Now I'll turn the call over to Elaine to discuss our specific financial results for the quarter.

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R. Elaine Lintecum, The McClatchy Company - VP of Finance & CFO [4]

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Thanks, Craig. We reported a net loss of $304.7 million in the third quarter. Excluding the noncash impairment charges for goodwill and mastheads and other restructuring costs, our adjusted net loss was $1.3 million in the quarter. Adjusted EBITDA was $19.9 million, up 4.6% from the third quarter of 2018. Excluding real estate gains from the third quarter of 2019, adjusted EBITDA was $19.4 million, still up 2% from the third quarter of 2018.

Craig gave additional -- a detailed review of revenues, but let me summarize them again. Total revenues were down 12.4% in the third quarter compared to the same period last year, very similar to what we saw in the second quarter. Total audience revenues were down 6.8% in the third quarter compared to the same quarter in 2018 as print declines offset strong growth in digital audience revenues. Advertising revenues in the third quarter were down 19.3% compared to the same quarter last year.

Our improvement in adjusted EBITDA during the quarter was a result of our focus on cost controls, even while we continue to invest in our business. We reduced adjusted operating expenses by 14.2% compared to the third quarter of 2018. And as usual, we did it the right way, focusing on legacy costs and process improvements in our business.

Our cost structure overall is benefiting from thoughtful reductions we have made in the first and second quarters, including the outsourcing of printing in Tacoma, Washington; the voluntary early retirement program we offered in the first quarter; and the restructuring of the advertising department that was discussed last quarter. In the third quarter of 2019, the number of average full-time equivalent employees declined 19.4% from the third quarter of 2018 as we focus on strategically restructuring and running our business more efficiently.

As we transition to a more digital company, we continue to have savings in newsprint and third-party printing costs. Taken together, we reduced newsprint and supplement costs by 13.7% compared to the 2018 third quarter. Our newsprint expense declined 26.8%, and savings are coming from volume declines as well as relief on pricing. In the third quarter of 2019, our newsprint volume declined by approximately 22%, while the average price decreased 6.4% over the third quarter of 2018. We expect to see average newsprint price declines in the fourth quarter as well. And as I've reminded you in prior calls, our newsprint costs are now only about 4% of our total cost structure.

Now turning to the balance sheet. As of quarter end, our principal debt outstanding was $708.5 million with an average interest rate of 7.9%. We finished the quarter with $11.4 million in cash, resulting in net debt of about $697 million. As a result of selling 2 properties, 1 in the third quarter and 1 in the fourth quarter, we expect to call in about $5.2 million of our 2026 first lien bonds in the fourth quarter. As of the end of the third quarter, we had $33 million of total borrowing capacity under our revolving credit facility and no amounts were outstanding. Our capital expenditures were about $670,000 in the third quarter and $1.9 million for the first 9 months of 2019.

I'd like to briefly touch on our efforts related to pension obligations and our overall debt structure. We made a required $3.1 million pension contribution on October 15, and we remain in compliance with all ERISA requirements. As we've previously disclosed, we submitted an application for a waiver of the minimum required contributions to our defined benefit pension plan with the IRS for plan years 2019, 2020 and 2021. As of March 31, 2019, the latest measurement date of the plan, it held assets of $1.32 billion, of which approximately $580 million or 44% came from voluntary contributions made by McClatchy over and above minimum required contributions. Still, the plan was underfunded by approximately $535 million as of March 31, 2019, with approximately $124 million of contributions due over the course of 2020, the majority of which are due September 15, 2020, and thereafter.

The IRS indicated that they will not grant a 3-year waiver. We continue to explore other means of pension relief, including working productively with many members of Congress in search of legislative relief that would mitigate the burden of the minimum required contributions in 2020. We have seen similar legislative solutions over the past decade, but a solution has yet to pass Congress in 2019.

Since there can be no assurance of a legislative solution to the company's liquidity challenges, we have commenced discussions with the PBGC and our largest debt holder for the purpose of exploring other alternatives with respect to the pension plan and our outstanding junior debt that would provide a more permanent rather than temporary solution to our pension obligations and capital structure. We are in discussions with the PBGC regarding a distress termination while continuing our ordinary business operations, allowing us to reach payment terms with the PBGC that will relieve the current liquidity pressures of the minimum required contributions. Should the PBGC and the company reach such a solution, the assets and obligations of the qualified plan would be assumed by the PBGC, which would continue to pay the company's pensioners their benefits.

The company believes under current regulations, such a solution would not have an adverse impact on qualified pension benefit for substantially all of its retirees. There can be no assurance that the ongoing discussions with the PBGC and our debt holder will result in any restructuring transaction that the company will obtain any required stakeholder consent to consummate a restructuring transaction or that the restructuring transaction will occur on a timely basis or at all. We do not have any other information to share on this development at this time.

Now I'll turn the call back to Craig to discuss our outlook for the fourth quarter.

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Craig I. Forman, The McClatchy Company - President, CEO & Director [5]

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Thank you, Elaine. We are cycling over a relatively strong fourth quarter from 2018 when we reported an uptick in political advertising for the midterm elections and took some very strong expense initiatives that helped the fourth quarter of 2018 and the first 3 quarters of this year, so we are not expecting our sequential improvement in EBITDA to continue in the fourth quarter of this year. But our hard work in the fourth quarter of last year and the first 9 months of 2019 have helped improve results that would otherwise have been shown in our EBITDA.

We expect the rate of decline in advertising revenues in the year-over-year comparisons will be impacted by the heavy political advertising that helped the fourth quarter last year and will not be repeated in the fourth quarter of 2019. In the fourth quarter, digital subscriptions are expected to continue to grow and partially offset continuing declines in print circulation, resulting in mid-single-digit declines in total audience revenues for the full year of 2019. As expected, we will be steadfast in reducing operating expenses in the fourth quarter of 2019 to align expense and revenue performance while making additional investments in our news and sales organization.

Today, we announced actions we are taking to deal with an acquisition made in another newspaper era. And that brings me to a final thought to share about our company and its mission, one thing that doesn't change, the importance of local journalism at McClatchy and the community news organizations around America. That importance is measured by the priority assigned to free expression in our constitution. It is our nation's very first amendment to our Bill of Rights. I described a moment ago the price communities and we all pay as a society when local media collapses. At McClatchy, we are determined to accelerate our digital successes while maintaining our 162-year track record of essential journalism in the service of our communities.

I want to thank you for joining us on the call today. And if you have any questions on our financial results, please do reach out to Elaine.

Operator, you can now end the call.

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Operator [6]

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