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Edited Transcript of NEWM earnings conference call or presentation 2-Aug-18 2:00pm GMT

Q2 2018 New Media Investment Group Inc Earnings Call

New York Aug 13, 2018 (Thomson StreetEvents) -- Edited Transcript of New Media Investment Group Inc earnings conference call or presentation Thursday, August 2, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ashley Higgins

New Media Investment Group Inc. - IR

* Gregory W. Freiberg

New Media Investment Group Inc. - CFO & CAO

* Kirk A. Davis

New Media Investment Group Inc. - COO

* Michael E. Reed

New Media Investment Group Inc. - CEO, President & Director

* Peter Newton

GateHouse Media, LLC - Chief Revenue Officer

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Conference Call Participants

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* Jeffrey M. K. Bernstein

Cowen Inc. - VP

* Kyle William Evans

Stephens Inc., Research Division - MD

* Leon G. Cooperman

Omega Advisors, Inc. - President, CEO & Chairman

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Presentation

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Operator [1]

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Good morning. My name is Imani, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Media Second Quarter 2018 Earnings Call. (Operator Instructions)

I would now like to turn today's call over to Ms. Ashley Higgins. You may begin.

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Ashley Higgins, New Media Investment Group Inc. - IR [2]

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Great, thank you, Imani. And good morning, everyone. I'd like to welcome you to New Media's Second Quarter 2018 Earnings Call.

Joining us today are Mike Reid, New Media's CEO and President; Greg Freiberg, our CFO; Kirk Davis; and Peter Newton.

I would like to call your attention to the earnings supplement that was posted to New Media's website this morning. If you have not already done so, I would suggest that you download it now.

Before we begin, please let me remind you that statements made today are not historical facts and may be forward-looking statements. These statements by their nature are uncertain and may differ materially from actual results. We encourage you to read the forward-looking statements disclaimer in the presentation as well as the risk factors described in New Media's filings made with the SEC.

In addition, we will be discussing some non-GAAP financial measures during the call today, and the reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement.

Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in New Media. The webcast and audio cast is copyrighted material of New Media and may not be duplicated, reproduced or rebroadcasted without our consent.

With that, I would like to turn the call over to Mike.

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [3]

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Thanks, Ashley, and good morning, everyone. Thanks for joining our Q2 earnings call today. And as Ashley mentioned, throughout the call I'll be referencing the supplement that we posted on our website this morning.

Overall, I think we had a very solid quarter. Financial results were in line with our expectations led by solid revenue results, particularly, our new business initiatives, which saw significant growth this quarter. We also had a very active quarter on the acquisition front, moving into some great markets.

We made some key personnel changes that strengthen the senior management team, and our capital structure remains very sound. One headwind for us in the quarter, however, was the impact we saw from the rapid rise in newsprint cost. That was a bit of a setback. And this was driven by new tariffs, and we'll touch on this a bit later on the call.

So I think we have a very good report to share with you this morning and to begin, I'm going to jump to Slide 2 of that presentation. In the second quarter, we grew revenue 20.4% over the prior year to $388.8 million. This was driven by our acquisitions and the continued investment we have made in new business lines, primarily UpCurve and GateHouse Live.

Our top line organic same-store revenue trend of negative 4.9%, however, was slightly behind our first quarter trend, which was down 4.5%. This very slight decline was caused by a slip in traditional Print Advertising, which declined 13.3% in Q2 as opposed to 12.3% in Q1.

Importantly, however, our Q2 trend was still materially improved from our 2017 performance, increasing 70 basis points over the Q4 2017, and a 150 basis points over the Q3 2017. So we still feel very good about the direction our revenue trends are heading in 2018.

Digital revenue in the quarter totaled $45.6 million and grew 35.5% to the prior year, excluding the impact of ASC, Topic 606. As a reminder, this accounting rule change went into effect at the beginning of 2018 and impacted how we recognize a portion of our IT services revenue earned through UpCurve Cloud. Excluding that impact UpCurve, which now represents more than half of our digital revenue, grew to $24 million in the quarter, up 47.2% to the prior year.

On an LTM basis, UpCurve now represents over $82 million in annual revenue. The business is really moving in a great direction, and we will touch on more on that business later in the call.

In addition to our strong digital revenue performance, we had an exceptional quarter for GateHouse Live and promotions, with both categories growing revenue over 65% to the prior year quarter. On a combined basis, revenue for the GateHouse Live and promotions categories was $13.4 million in Q2. This now has also becoming a very sizable revenue stream for us. We're excited about the future.

On the acquisition front, we have remained very active, closing 4 deals in the second quarter for a $117.8 million at an average multiple within our stated range of 3.5 to 4.5x to sellers LTM as adjusted EBITDA. So that's before synergies.

We also completed the sale of our GateHouse Media Alaska properties with the $2 million valuation. Those properties had year-to-date EBITDA loss of $600,000. So we are pleased to get that small group sold. We acquired this group as part of the Morris deal last year in Q4, and our intentions from the beginning was to spin them, because of their geographic distance and operating losses.

In the quarter, we successfully raised over $110 million in net proceeds from an equity offering. This allowed us to quickly close our Q2 acquisition pipeline and maintain liquidity for future investment. Our pipeline for opportunities remains strong. Our capital structure remains sound as well. We close the quarter with $113.3 million of liquidity, including our revolver. Our net leverage stands at 1.9x LTM EBITDA, and we announced a Q2 dividend of $0.37 this morning, which annualizes to $1.48 per share.

Also, reference some organizational changes we made during the quarter that we're excited about. Peter Newton has moved into the role of Chief Operating Officer for GateHouse Media. Prior to this role, Peter was the interim CEO for UpCurve and also the Chief Revenue Officer for UpCurve -- or Chief Revenue Officer for GateHouse Media. Peter has been instrumental in helping us build the UpCurve business, but also to integrate the UpCurve business into the newspaper business, scaling it across the country. We're really excited about the broader responsibilities Peter will have in GateHouse with the newspaper portfolio and excited about his contributions to the company on that broader basis.

Also, Pete Cannone, who previously was the CEO of ThriveHive is now has been promoted to the CEO of UpCurve, and we're very excited about that as well. Pete has done a fantastic job growing ThriveHive over the last few years and giving him the reins on the broader UpCurve business, we think is going to lead to a substantial growth in new revenue categories for our company. So we're excited about these changes for these 2 guys and the impact that they're going to have on our company in the future. We think this alignment of responsibilities best allows us to focus on all of the initiatives we have underway and better positions us for success.

I'm going to turn to Slide 3 to review the New Media portfolio. We operate today in over 570 small to mid-sized communities across the country. We now own 145 daily newspapers, making us the largest owner of daily newspapers in the United States. And we have a focus on operating in small to mid-size communities, where we have more robust business opportunities in a less competitive environment.

Our newspapers are long-standing and dominant local news sources for the respective communities, which leads to very strong local brand recognition. We operate both the B2C and the B2B business in each of our markets. Our B2C business provides unique hyperlocal news and information to each of our respective communities. Consumers pay for our content because of the relevant and value of this noncommoditized and comprehensive local news has to them. We believe, this gives our consumer oriented-content business, long-term viability and sustainability.

At the end of the second quarter, we had nearly 2 million paid print subscribers to our daily newspapers and over 121,000 paid digital-only subscribers. Our reach is now over 23 million people per week, and we have over 41 million unique visitors to our websites each month.

We were also recognized in the quarter for several journalism awards. In Florida, the Society for Professional Journalists announced our Florida Properties as finalists for nearly 40 awards, as part of their 2018 Sunshine State awards, including 2 of the 3 journalists of the year finalists. And in Ohio, Columbus Monthly was named the best city magazine for its size, and The Columbus Dispatch was named as the best newspaper and the best website by the Society for Professional Journalists. We are very proud of all of our journalists across the country, and we are 100% committed to our local journalism efforts.

The strength of our reach and audience, driven by our local content creates our B2B opportunity. New Media is able to leverage its long-standing in local communities and its status as a trusted local business partner to provide a variety of advertising and service-oriented products to small and medium-size businesses or SMBs. As we build out a robust local events business. With over 5 million SMBs in our markets, we have a very large opportunity to meaningfully grow this side of our business, leveraging our unique in-market footprint.

Now what I'd like to do is turn to Slide 4 of the presentation, if you're following along and do a very quick review of our investment thesis. And this is not new to any of you who have been with us for a period of time now. Our investment thesis has 3 primary drivers: one, we own and operate businesses that produce strong cash flows; two, we put that cash flow to work to grow the business organically and inorganically; and three, we consistently return capital to shareholders, creating very compelling overall returns. The strength and longevity and scale of our portfolio of local media businesses is the foundation of this investment thesis.

Over 80% of our media brands have been published for more than 100 years. Our LTM as adjusted EBITDA is now $177.4 million, with about 75% converting to free cash flow. Our Capex requirements are low, generally only 1% of revenues, and we do not expect to be a significant cash taxpayer in the near-term due to more than $220 million in NOLs shielding future cash flows.

Our commitment to grow organically and inorganically can be seen from our track record of developing new revenue streams, such as UpCurve and GateHouse Live as well as through our roughly $1 billion in highly creative acquisitions over the last 4 years.

Further, we leveraged our local and regional printing and distribution capabilities to grow third-party Commercial Print and distribution contracts, realizing extra revenue and cash flow from these local assets.

Lastly, we are committing to having a balanced capital allocation strategy, accessing the debt and equity markets when and where it makes sense for growth, while remaining committed to delivering a portion of our organic free cash flow back to shareholders via our dividend. We also maintain a share buyback plan in the event that at a given time that is the most sensible use of cash.

Our execution on this thesis has achieved a total return for shareholder sense inception of about 87%. Further, the total return for shareholders over the last 12 months as of July 26, the end of our fiscal second quarter, was about 50.5%.

Now let's turn to Slide 5 to discuss the most important revenue categories for our company's future. As a reminder, these 5 areas are where our primary investments are focused, in order to diversify our revenue streams. Moving our business away from traditional Print Advertising and positioning ourselves for future steady organic revenue growth. We do not expect traditional print revenue trends to reverse, therefore, growing these new revenue streams is a key component to the organic segment of our investment thesis. We are very excited about performance in these categories over the first half of the year, and particularly in the second quarter. So let's drill in a bit more on each.

GateHouse Live revenue grew 68.2% over the prior year quarter to $7.7 million. The second quarter is an active quarter for us as our Best of Preps events are in full swing. Celebrating high school athletes around the country at the close of their respective school years. Each event has a celebrity guest that the students get to hear from and take a picture with when receiving their awards. Some of our guests in the second quarter were Pedro Martinez in Providence, Rhode Island; Jason Whitman in Sherman, Texas; and Grant Hill in Daytona, Florida.

Overall, we completed 100 local Events in the second quarter with 38 of those being Best of Prep -- Preps events. As I mentioned earlier, UpCurve had a fantastic second quarter, growing 47.2% after effecting the accounting change to the prior year. Both ThriveHive and UpCurve Cloud, the 2 main components of UpCurve, saw not only strong revenue growth but strong growth in active customers and licenses. We'll discuss more details on these businesses in a later slide.

Promotions also had a standout quarter, growing 65.7% over the prior year. This product generates both brand recognition as well as consumer data for its advertisers since it can be designed as a contest or a quiz that has promoted in print, online and via social media. Its popularity also stems from the fact it can be customized for a single sponsor or shared across several sponsors, allowing for lots of flexibility. We often run promotions in conjunction with GateHouse Live Events, which brings sponsors additional opportunities over the life cycle of the event. We are excited about the growth that we expect from these combined efforts as well as our expansion plans for promotions across our footprint this year.

The second quarter brought growth of 11% on an organic same-store basis to the prior year within our commercial printing business. We continue to reap the benefits of the new printing contracts that were closed throughout 2017, and we are actively closing new deals where we have capacity within our facilities. In the second quarter, we closed over $1.5 million in new Commercial Print contracts, and we have a pipeline we're working on right now for more than $10 million in additional opportunities.

Consumer revenues saw slightly weaker performance in the second quarter than we experienced in the first quarter. However, we remain confident in our ability to keep this line item stable. We have built a strong management team to lead this revenue category, and we have made and continue to make significant investments into initiatives that will strengthen our consumer marketing and customer retention efforts in our local markets. We are building an in-house agency that will handle marketing and retention for the local markets, allowing them to tap into expertise, ideas and specialists that most of our markets could not afford on their own. We are investing in and building this agency and have been for the last several quarters, and we expect to see the results of that in the coming quarters and years.

We also remain highly focused on growing our paid digital audience, which is now over 121,000 digital-only paid subscribers at the end of the second quarter.

As a reminder, and as I've mentioned on previous calls, we do not expect the individual quarters for these revenue categories to necessarily match the full year targets that we show here on Page 5, due to both seasonality as well as ramp time from investments we continue to make.

Now let's flip to Slide 6, and discuss UpCurve's performance in a bit more detail. As mentioned earlier, second quarter revenue was $24 million, up 47.2% to the prior year, excluding the impact of the accounting change. UpCurve offers a suite of products and services that bring technology and automation to our SMB customers to support their growth, productivity and efficiency. These products can be tailored to the needs of each SMB in integrated à la carte or in various bundles. We have 2 primary business segments today within UpCurve and they are ThriveHive and UpCurve Cloud.

ThriveHive grew revenue to $20.1 million in the second quarter, up 40.4% over the prior year. Active customers grew 33.4% in the quarter. And we saw the automotive customer vertical become one -- become our largest contributor. Our investment earlier this year in online automotive services has brought a robust video and data product to our already large dealership customer base. We are beginning to see the impact of this investment, which is both unique and very user-friendly, creating significant efficiency for dealers to both manage and market their inventory.

UpCurve Cloud revenue grew to $3.9 million in the quarter and that was up 79.1% over the prior year when excluding the impact of the accounting change. We fulfill and service nearly 115,000 licenses for both SugarCRM and Google G Suite and continue to see very low churn in this category for customers, and importantly over 65% of our revenue is recurring. We remain a key partner of both Sugar and Google, and are excited about our growing partnerships with Vonage, offering voiceover IP services, and Prodoscore offering sales management and efficiency tracking to our SMB customers.

Now turning to Slide 7, we'll take a quick look at our recent acquisition activity, which has been quite robust. We completed 4 acquisitions in the second quarter for a $117.8 million. Within our stated range of 3.5 to 4.5x of the sellers LTM as adjusted EBITDA. The Austin, Palm Beach and Akron acquisitions were discussed on our first quarter earnings call. So I'm not going to go back over the details of those 3 today. But the latest acquisition, The Pueblo Chieftain was -- is a newer one, and we haven't talked about that. That was a smaller deal for us, but one that fits very well into our acquisition criteria. It was a family-owned daily newspaper in Southern Colorado, and it happens to be the oldest daily newspaper in the state, really serving all of the southern portion of the state. It has daily circulation of 27,000. We believe that all of these Q2 acquisitions will strengthen our overall portfolio and be highly accretive for our shareholders.

And if you turn to Slide 8 quickly, you can see the full record of our acquisitions, since our spin. We have completed 29 local media acquisitions to-date for roughly $1 billion at an average of 4.1x the sellers LTM as adjusted EBITDA. In 2018, we have completed over $133 million in acquisitions across 7 transactions. As I mentioned, we have a $113.3 million in liquidity at the close of the second quarter, so we are well positioned to take advantage of further opportunities over the balance of the year in the first half of next year.

Please turn to Slide 9 now to allow me to do a brief update on our capital structure. In the second quarter, we completed an equity raise for a $110 million in net proceeds. This was important. Though, we are generating substantial free cash flow, accessing the equity markets allowed us to execute on the 7 transactions that we have closed thus far this year and to get them closed in quick succession. And as a result, positively, we'll see the benefit of these deals in the second half of 2018. Also, in several of these acquisitions, New Media was not the highest bidder, but having a strong track record of closing and having available cash on the balance sheet, made us the preferred counterparty for the seller.

This morning, we announced our second quarter dividend of $0.37 per share, which is $1.48 on an annualized basis. The dividend has been raised 4x since our inception as a public company, and cumulatively, we have paid out $5.70 per share inclusive of this dividend. As I mentioned earlier, total return over the last 12 months for our shareholders has been about 50%.

With our business thesis and compelling execution over the last 4 years, combined with our exciting growth initiatives and our deal pipeline, we will remain very optimistic about the future and believe, we can continue to create meaningful returns for our shareholders.

Thanks to all of you on the call this morning for your continued support. And with that, I will turn things over to Greg for further discussion on our second quarter financial performance. Thanks.

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Gregory W. Freiberg, New Media Investment Group Inc. - CFO & CAO [4]

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Thank you, Mike, and good morning, everyone. I'll now be speaking to Page 11 of the supplement. And before I begin, I want to remind you that we adopted the ASC's Topic 606 revenue from contracts of customers beginning last quarter. The standard impact of the revenue treatment of certain UpCurve Cloud services to net versus previously being reported at gross. The prior year results do not reflect this adoption, thus a comparison is not on an apples-to-apples basis. So when we speak about excluding the impact of ASC 606, that gives a representation of the results to the prior year on the same basis. This change affects UpCurve Cloud, UpCurve and Digital.

Second quarter revenue was $388.8 million, up 20.4% to the prior year on a reported basis, and a decrease of 4.9% on an organic same-store basis, excluding the impact of ASC 606. The organic same-store performance took a 40 bps step backwards from Q1, but this performance is still 70 bps better than Q4 and a 150 bps better than Q3. Excluding the first quarter, it's our best performance since the third quarter of 2016.

Traditional Print revenues were $159.2 million and decreased 13.3% on an organic same-store basis. Within this category, Preprints were down 18.2%, Classified Print was down 12.1% and Local Print Advertising was down 11.7%. All of those are on an organic same-store basis.

Digital, our consistently growing revenue category, increased 31.4% to $45.6 million. UpCurve is our largest component of Digital and generated $24 million in the quarter, up 47.2% to the prior year, excluding the impact of ASC 606.

Circulation, which comprises over 37% of New Media's total revenues was $144.5 million, down 2.1% to the prior year on an organic same-store basis. We continue to invest in the development of a fully centralized consumer marketing agency and in growing our audience. Our Digital-only subscriber base in the second quarter grew to 121,300 customers, that includes 32,200 digital-only subscribers from 2018 acquisitions, excluding those acquired subscribers, our growth in this category was strong at 51.9%.

Turning to Commercial Print Distribution, Events and other. Revenue in the quarter was $39.4 million, up 9.6% on an organic same-store basis. Within this category, Commercial Printing, which by far is the largest component, grew 11%, while Events grew 68.2%. As adjusted EBITDA was $48.8 million, an increase of $5.5 million or 12.7% to the prior year. These results were negatively impacted by an approximately 30% increase in newsprint cost due to tariffs recently put in place, which in dollar terms is about a $20 million annualized cost increase. To mitigate a portion of this, we're moving to lower weight newsprint, moving more buying to U.S.-based mills and passing through the tariff costs for third-party Commercial Print customers.

Free cash flow was $35.7 million, up $2 million or 6% to the prior year. This represents a 73% conversion rate of our -- as adjusted EBITDA into free cash flow, demonstrating the strong and consistent cash flow generation that we produce.

Net income for the quarter was $11.7 million, an improvement of $33.4 million to the prior year. This is a solid operational quarter for us, as you see in the numbers I just shared. On a reported basis, revenue and EBITDA are up by double digits to the prior year.

We ended the quarter with $73.8 million of cash on the balance sheet and $39.5 million of available undrawn revolver. During the quarter, we raised $110.6 million net proceeds from our equity raise in April, and we dispersed $117.8 million for the acquisitions of Austin, Palm Beach, Akron and Pueblo. We also disposed of our non-core and unprofitable operations in Alaska and monetized a non-core web domain. Putting this all together, we have pro forma liquidity of $113.3 million, which is substantial liquidity to continue our pursuit of highly accretive acquisitions.

Debt outstanding at the end of the quarter was $416.3 million at an average blended rate of 8.22%. Net leverage against our LTM as adjusted EBITDA is 1.9x. We continue to find and execute on highly accretive acquisitions, and we continue to successfully raise capital in support of our strategic plan. We have net leverage just below our target of 2.0x, and we have significant liquidity and debt capacity available to continue executing on highly accretive transactions. We've now reported 5 consecutive quarters with an adjusted EBITDA and free cash flow ahead of the prior year.

Operator, we'd like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have our first question from the line of Kyle Evans with Stephens.

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Kyle William Evans, Stephens Inc., Research Division - MD [2]

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I'm predictable and reliable, I wanted first to spend a few minutes on circulation revenue. Down 2% in the period, the guide is for up 1% to down 1%. Is that guide still realistic for the year?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [3]

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Probably on the lower end of the range is realistic for the year. In the second quarter, Kyle, we had a -- it wasn't a broad-based setback from 1.5% to -- or 1.6% to 2.1%, it was actually some shakeup we had in 3 markets, and we're all over the work on those 3 markets. But it's not a reflection of a broader or fundamental thing in the company. It was more something that happened in 3 of our markets where we've had to make some changes and put some different plans in place.

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Kyle William Evans, Stephens Inc., Research Division - MD [4]

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If that's a common problem in those 3 markets can you lay out what that problem is for us? Or is that something you prefer not to discuss?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [5]

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Yes, it's little -- well too detail.

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Kyle William Evans, Stephens Inc., Research Division - MD [6]

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Okay. And maybe the unit volume and unit pricing trends that drove that down too?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [7]

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Very similar to what we discussed last quarter with down 1.6%. We're less aggressive this year on pricing. We feel like, we're doing the right things at the agency level at the centralized level to have better consumer marketing efforts across the company, to acquire new subscribers as well as better retention efforts to retain a higher percentage of our current subscribers. So our focus has definitely shifted from that of pricing driving all revenue growth to volume really being the primary driver. And so very similar -- but very similar to the first quarter where pricing was -- pricing and volumes were, kind of, high single digits -- mid to high-single digits.

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Kyle William Evans, Stephens Inc., Research Division - MD [8]

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Mid to high single?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [9]

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Yes.

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Kyle William Evans, Stephens Inc., Research Division - MD [10]

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Okay. And you mentioned that you've been building the centralized consumer marketing function for several quarters now.

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [11]

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Yes.

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Kyle William Evans, Stephens Inc., Research Division - MD [12]

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What's the outlook there? How much are we talking about in terms of absolute dollars of investment? And when do you expect to see it, kind of, hit a tipping point?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [13]

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Well, I'm going to turn it over to Kirk to get a thought from him. As he sees more driver of this, but it started really in the second half of last year when we hired Denise from the New York Times to really help us build this agency. And then she has really been doing the groundwork over the last, call it, 2 to 3 quarters and has really developed the plan, and we're now starting to execute on that plan. You know as far as the investment and timing, Kirk's a little closer to those numbers. I know, it's in the millions, but Kirk, do you want to give us a little more exact science on the investment and timing?

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Kirk A. Davis, New Media Investment Group Inc. - COO [14]

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Sure. As of July 1, we were about 50% of our consumer revenue had been brought under our centralized management, and that will grow to 90% by the end of the year. So this represents the phases of how we're bringing in properties and being served by our agency. With that said, we're still moving on other initiatives in the quarter, we're really bringing.

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call centers into one high-quality call center, initial weeks of having done that, we are seeing about

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improvement in our cancellation rate, meaning that we are addressing concerns of subscribers providing a better customer experience, resolving their problem, seeing 16% less defections. In terms of the dollars, at this point, we've earmarked about $5 million of investment on an annualized basis, which is a combination of dedicated staff and various specific roles, particularly, for example, with an expertise in subscriber acquisition through digital channels. And then a lot of the money also is being devoted to external media where we'll leverage social display in page search, which is where a lot of our traffic comes to us from online is through search. So all of these are, kind of, more -- the modern-day marketing tactics for consumer subscription building, and we're

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the progress as we noted, we're up 120,000 subscriptions and very excited about

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there. So that's a little more color.

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Kyle William Evans, Stephens Inc., Research Division - MD [15]

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Great. One more on circulation and I'll switch over paper cost and get out of the way. Can you talk a little bit about, whether or not there's any significant difference in volume of pricing in your larger markets, your Providence, Columbus, Austin, Palm Beach versus your smaller?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [16]

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There's a little more pricing opportunity today in our larger markets than our smaller markets. We see that for sure. And so, more of our pricing increases are focused on our larger markets. However, the other thing that I think's worth noting, Kyle, is that.

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with our acquisitions, we're able to deploy the pricing strategies we've had historically with our properties into these new properties, and as you know from previous calls, that's using data to really drive pricing more at the neighborhood or household level. And so we're able to apply those to our acquisitions, and sometimes we find the acquisitions as well that where the family has not been active in price increases, and so we have opportunities there. And to put a nail in that point, our same-store report of down 2.1% reflects the newspapers we've owned for a year. But our real same-store trend in the second quarter was actually down 1.4% when you, include the papers that we've acquired within the last year. And that reflects the revenue growth we've been able to achieve through some pricing efforts. And as you know, by our acquisition history the last year, many of those acquisitions are larger markets. So I think that answers your question.

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Kyle William Evans, Stephens Inc., Research Division - MD [17]

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It does. We'll switch over to paper cost and then I'll get out of the way. The 30% number you mentioned in the release, is that the blended effect of the Canadian tariffs and price hikes by U.S. providers? And how much of the quarter has that cost increase? And that -- given that you run with 1.5 month of inventory?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [18]

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Yes, it definitely had less of an effect on the second quarter than it will have all the rest of the year because we do run with the inventory, 30 to 45 days of inventory. And yes, it's a blended impact on pricing from the tariffs and general price increases due to supply and demand. Our 30% is reflective of the actual price per ton that we were paying a year ago this time versus now, 30% is now, what you should expect as actual cost increase going forward. There are lots of things, Greg mentioned that we have done and we will continue to do, you can move to lighter weight basis -- lighter basis weight newsprint, which lowers the volume of newsprint you buy, there are page count reduction opportunities especially for house ads that can lower your newsprint consumption. Some of your consumption is tied to your circulation volumes, so as those dip you'll see some less consumption. And then we are actually moving most of our tonnage that we buy from Canadian suppliers to U.S. suppliers, and so that we think will provide a little bit more price stability. So we're doing a lot of things, Kyle, to mitigate the price increase we've seen driven by the tariffs. I think worth noting, there's hearings on the hill in the fall here August and September, and we'll see what happens with the tariffs. There are more than 20 congressmen who are behind eliminating the tariffs, but I don't want to make a promise that eliminating the tariffs will automatically lower pricing, now that it's up. The supply-demand will have an impact on that as well. But we're doing the things we need to do to mitigate the cost increase. And so, while I would say it's a -- it's an obstacle and something we have to deal with on a very, very quick basis. It's not something that scares us in the long term or changes our view of anything in our investment thesis. It's just something we got to deal within the interim, we'll deal with it, we'll get it behind us and go from there.

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Kyle William Evans, Stephens Inc., Research Division - MD [19]

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Is the $20 million number that Greg provided us with, is that adjusted for the lower weight more U.S. producers and passing through on the commercial side?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [20]

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It's not.

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Kyle William Evans, Stephens Inc., Research Division - MD [21]

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It's not, so that's a -- if we took the third -- roughly 5% your revenues that is paper and increased to 30%, that's what equals that $20 million?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [22]

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Yes, we spent about 70% -- $70 million on newsprint right now. So 30% of that's about $21 million. We'll do everything we can to mitigate that. We saw about $2 million of cost bump in the second quarter, and -- but that -- we really had very limited time to react to all of this, this year. So as I said, we have a lot of things in motion to mitigate this. It stinks, but we're not worried.

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Kyle William Evans, Stephens Inc., Research Division - MD [23]

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It is unfortunate. But what -- how much plays in the $20 million annual number given the moves you have available? Roughly speaking.

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [24]

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We think we'll get it -- we'll get the actual dollar increase below $10 million.

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Operator [25]

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Your next question comes from the line of Lee Cooperman with Omega Advisors.

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [26]

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In the last 2 years, October was a month where you bump a dividend like a, patterned like C corp. Given the fact that cash flows run $2.30 a share, roughly an annualized rate, and the dividend currently, I guess, is about $1.48, I know you don't want to jump your board, but what is the prospect of a dividend bump come October, that be question number one. Number two, you talked about UpCurve as a potential freestanding operations spin. How far or near is something like that in our future? And, I guess, I just want to make sure I heard you correctly, it seems like you seem optimistic about the deal pipeline it in terms where you're looking at? Those 3 questions.

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [27]

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Yes. I'll take the last one firstly, thanks. Because it's easy. The deal pipeline remains robust, we're looking at several pretty active and decent-sized opportunities. So we're pleased with the pipeline. The dividend free cash flow question, one thing, Lee, to think about is you mentioned we're running at about $2.38 or $2.40 per share free cash flow. We have done $250 million in acquisitions within the last 9 months, and almost half of that or $118 million was done just in the second quarter. So that $2.38, $2.40 you cite really doesn't reflect all the stuff we've acquired. I mean, 25% of the acquisitions we've done since our inception have been within the last, call it, 9 months. So that's a lower number than what you'll see as we run out these acquisitions over the next several quarters. We...

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [28]

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That would argue for a greater probability of distribution because I assume that the acquisitions were accretive?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [29]

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Yes, the acquisitions are accretive, and we believe our future acquisitions will be accretive. And so we see that free cash flow per shared number that you cited being -- moving, obviously in the right direction for shareholders in the coming quarters as we realized the benefit of all the acquisitions we've done recently. You know, we do pride ourselves on the fact that we've had 4 consecutive years of dividend increases, if we do a bump again this October, it would be our 5th consecutive year. It's definitely a goal of ours, but I don't want to pre-jump the board. The board will discuss it, but it's been a goal of ours. It's been a part of our business thesis, Lee, to do a creative acquisitions for shareholders and as we grow free cash flow, we also grow the dividend.

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [30]

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Got you. And UpCurve?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [31]

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Yes. And so the UpCurve business is now -- just based on the Q2 on a standalone basis, if you annualize it, it's about $100 million a year. Growing at almost 40%. So I think, we will definitely look at all the options for that business, as we've said on previous calls, and we'll do what's best for our shareholders. It's taken about 5 years to build that business to where it is today. So we're probably only -- we're actually much closer to the time frame where we could figure out how to better position that company for -- from a capital structure standpoint that will allow them to grow faster, and also bring more benefit to our shareholders. It's hard to be more specific on timing on that, but we definitely...

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Operator [32]

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Your next question comes from the line of Jeff Bernstein with Cowen.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [33]

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Just a couple of question for you. Can you talk a little bit about Digital subscriptions and what kind of strategies you are using there to grow that part of the business?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [34]

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Yes, I'll turn that over to Kirk for information on the strategies. What I would say is it's about 120,000 digital-only subscribers today. The organic same-store growth is about 40% year-over-year, so it’s growing nicely. And we don't see that slowing down. And actually, the digital-only subscribers are -- now that it's a material number at 121,000, and growing at 40% to 50% clip. There's sizable growth there, which is going to help mitigate prints sort of decline, which back to Kyle's question earlier on the call, gives us confidence when we talk about the long-term future, and our ability to keep this revenue category stable. We're seeing enough growth on the digital side that we will be able to weather any small print decline. So -- but I'll turn it over to Kirk for more specifics on what we're doing to grow that category.

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Kirk A. Davis, New Media Investment Group Inc. - COO [35]

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Thanks, Mike. So first, when we talked about the centralization of our consumer marketing efforts across the enterprise, basically that allows us to take the successes and the learnings from our most successful markets and quickly apply them across the portfolio. So through our talent and experience, we can bring a level of sophistication that just didn't previously exist in those markets. And further, creating a more consistent customer experience, that leverages.

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of our customers we're able to scale

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experience not only for our paying subscribers but for those that we determine have a higher propensity to pay, which not only improves retention but also our ability to convert new paid subscribers. And then we're just a bit more agile, but

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was in our media spend, strategy and customer

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and one in, sort of, collaborative agency. Better equipped to pivot our strategy in

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take advantage of the opportunities to optimize our strategy. And, I guess, married up with that, I would just point out that we're making a tremendous effort in building our

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by growing the audience that would

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to serve our social

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and paid search strategies against. So very, very important in the Digital subscription space. Obviously, they have increasingly larger addressable market of people, who are interacting with our content, and we're driving that aggressively. And some of our recent acquisitions have really bring us greater funnel building capabilities, particularly Austin and West Palm Beach, where they have really, really strong audience development hubs. And over time, our goal will be to leverage more and more spend -- media spend into supporting all of our subscription revenue, [hoping] better content, more touch points with consumers, more e-mail products, and our newsroom becoming more sophisticated about the kind of content that drives most local traffic. So that sort of a better sense.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [36]

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Is there anything to say about, kind of, demographics of the digital-only subs versus the traditional demographic? And if there's, sort of, a handoff of subscription to the local paper from the older generation to the newer generation?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [37]

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Well, you definitely would see with our installed, sort of, home delivery subscriber base increasing trends of them, engaging more with the content digitally, which we think is really a great migration benefit. So you do see that, but there's still very much like the home-delivered product and the experience that comes with the advertising and the familiarity, their habit and such. Obviously, when we talk about our digital-only base, that's just folks who are doing nothing, but strictly.

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with our content through digital means. Our home delivery base vastly activated on digital and interacts with content due to printed product and digital. And that's a huge

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to us. And increasingly they become more probably inclined to be digital

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To your point, I'd say, we can't quantify this exactly, but our experience and we're getting increasingly more sophisticated. This is how we do reach and attract younger audience is through the digital subscription model, and that's a great benefit because it's always been somewhat of an elusive audience for us given just the traditional newspapers.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [38]

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That's great. And then I just wanted to see if you guys could elaborate, you mentioned partnership with Vonage now in the Propel business, I guess. And another company, I don't know, if it was called, [Product Score], what it was called exactly. Can you just talk to those 2 opportunities a little bit and the products?

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [39]

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Yes, sure. Peter Newton, do you want to take those?

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Peter Newton, GateHouse Media, LLC - Chief Revenue Officer [40]

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Sure. So Vonage, we're selling their voice over IP or Internet telephony services to small and mid-size businesses. But not only selling just those services, we're also integrating Vonage with G Suite, with SugarCRM and with other platforms, which is an important part of the value that we provide. And along those lines, Prodoscore is a new productivity measuring and

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service platform.

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information from your (inaudible) platform like G Suite from your CRM platform like SugarCRM and from your phone system, compiles all of that and tracks it both for salespeople and for service. And then benchmarks across your entire staff. Very valuable for call centers for a larger sales forces service centers. so we're seeing good early traction from that service as well.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [41]

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Got you. And then I know the SMB market for unified communications that Vonage market is a great growth market right now. Do you have any idea what the penetration currently is in your customer base, what it's like?

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Peter Newton, GateHouse Media, LLC - Chief Revenue Officer [42]

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What the penetration is -- I'm sorry for overall unified communications?

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [43]

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Yes, of Vonage or competitive VOIP products.

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Peter Newton, GateHouse Media, LLC - Chief Revenue Officer [44]

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I don't know the exact percentage, but I do know that it's relatively low. So it's a huge opportunity for us.

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [45]

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And you have to remember there that we're in more smaller -- in small, midsized markets and more rural markets. And so obviously the penetration there is lower than it is in your biggest metro markets.

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Operator [46]

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Okay. We have no further questions at this time.

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Michael E. Reed, New Media Investment Group Inc. - CEO, President & Director [47]

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Thanks, everyone.

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Operator [48]

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This does conclude today's conference call. Please disconnect your lines at this time and have a wonderful day.