U.S. Markets closed

Edited Transcript of TRNC earnings conference call or presentation 9-Aug-18 9:00pm GMT

Q2 2018 tronc Inc Earnings Call

CHICAGO Aug 28, 2018 (Thomson StreetEvents) -- Edited Transcript of tronc Inc earnings conference call or presentation Thursday, August 9, 2018 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Aaron Miles

tronc, Inc. - VP of IR

* Justin C. Dearborn

tronc, Inc. - CEO & Chairman

* Terry Jimenez

tronc, Inc. - Executive VP & CFO

* Timothy P. Knight

tronc, Inc. - President

================================================================================

Conference Call Participants

================================================================================

* Douglas Middleton Arthur

Huber Research Partners, LLC - MD & Research Analyst

* Lance William Vitanza

Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst

* Michael A. Kupinski

NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, and welcome to the tronc, Inc. Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Aaron Miles, Vice President, Investor Relations. Please go ahead, sir.

--------------------------------------------------------------------------------

Aaron Miles, tronc, Inc. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, and welcome to our second quarter 2018 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, intent, plan, will, continue, estimate, outlook or other similar expressions are forward-looking statements. Material 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 these risks and uncertainties that could impact our businesses are included in documents publicly filed with the Securities and Exchange Commission, including our annual report on Form 10-K. I should also mention that our remarks today will include references to non-GAAP financial measures, including adjusted EBITDA, adjusted total operating expenses, adjusted net income, adjusted diluted earnings per share, adjusted EBITDA margin and net debt. And we have provided definitions in reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investor.tronc.com. Also, the company is aware that reports have been published about tronc being in discussions about a possible sale of the company. The company has a longstanding policy of not commenting on market rumors. And hence, we will not entertain questions regarding those rumors during the Q&A portion of this call. Joining me today is Chairman and Chief Executive Officer, Justin Dearborn; Executive Vice President and Chief Financial Officer, Terry Jimenez; and tronc's President, Tim Knight.

I will now turn the call over to our Chairman and CEO, Justin Dearborn.

--------------------------------------------------------------------------------

Justin C. Dearborn, tronc, Inc. - CEO & Chairman [3]

--------------------------------------------------------------------------------

Thank you, Aaron, and thanks everyone for joining us today. I want to start off by commenting on a event that reminds us all of the important work our journalists do every day. In late June, our Capital Gazette newsroom based in Annapolis, Maryland was violently and senselessly attacked. The killer took the lives of 5 of our coworkers, Gerald Fischman, Robert Hiaasen, John McNamara, Rebecca Smith and Wendi Winters. Other colleagues who were in the office that day were able to escape the immediate physical impact. We continue to hold the fallen colleagues and their families in our thoughts and prayers as we support survivors in their attempt to move forward.

We are grateful to the journalism community and to citizens across the nation for support we received. I commend our committed staff, especially in Annapolis and Baltimore, who continue to drive our mission forward and inspire, inform and engage the communities we serve. I'm proud of the way we work together as a community to persevere during an extremely difficult time. Thank you again for the outpouring of support.

On June 18, we closed the sale of the Los Angeles Times, The San Diego Union-Tribune and other various California properties to Nant Capital, which greatly strengthened our balance sheet and significantly lowered our pension liability. The majority of the after-tax proceeds were used to retire our $342 million term loan.

In late May, we acquired all of the outstanding interest in the Virginian-Pilot Media Companies. The Pilot complements our operation in Newport News, Virginia. The purchase price of $34 million included the Pilot's real estate portfolio, comprised of almost 0.5 million square feet, consisting of its headquarters in downtown, Norfolk, its printing and distribution facilities in Virginia Beach, and a number of satellite offices in Norfolk and North Carolina.

Towards the end of the quarter, we completed our local market sales reorganization and rolled out a robust sales playbook, which leverages all the digital infrastructure that has been implemented over the past few years. We believe we have the people and strategy in place to grow our digital advertising and marketing services revenue while managing the print headwinds that exist.

I would now like to turn the call over to Terry.

--------------------------------------------------------------------------------

Terry Jimenez, tronc, Inc. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Justin. A couple of housekeeping items to start with. First, as a result of the California assets and the ForSaleByOwner transactions, we have classified the balance sheets and the results related to these properties in discontinued operations for both the 2008 and 2017 reporting periods. Unless otherwise noted, the results of what I refer to will be in regards to the continuing operations of the business. Also, for comparison purposes, I will make sure that I speak to with and without certain aspects to give you a better view on same-store results.

This will include New York Daily News, BestReviews and the Virginian-Pilot, which are in the 2018 results but not in the 2017 results. And as discussed on our first quarter call, the Cars.com agreement provides year-over-year comparison distortions for revenue. As a reminder, this amended agreement results in a reduction of revenue and expense for the Cars.com business in 2018, as we agreed to move that business to the Cars.com enterprise.

While revenue has declined, the impact for tronc is flat to slightly up for adjusted EBITDA. The exclusion of these elements will be referred to on a same-store basis. Total revenues for the second quarter of 2018 were $253 million, up 3.9% from the same quarter in 2017. On a same-store basis, total revenue declined 11%, primarily related to continuing print advertising revenue declines.

Our consolidated second quarter 2018 operating expenses were $254 million, up from $239 million in the second quarter of 2017. Adjusted operating expenses were $231 million in Q2 of 2018 versus $216 million in the same period in 2017.

On a same-store basis, Q2 2018 adjusted operating expenses decreased $16 million or 8% compared to the prior year. In the second quarter of 2018, we had net income of $265 million or $7.51 per share compared to net income of $7 million or $0.21 per share for the second quarter of 2017. The quarter benefited from $281 million of an after-tax gain from the California and FSBO dispositions, partially offset by a noncash termination expense related to the debt extinguishment.

Adjusted EBITDA for the second quarter of 2018 was $22.2 million compared to $27.6 million in the second quarter of 2017. On a same-store basis, the year-over-year decline would have been $3 million, of which $2.5 million relates to the increase in newsprint pricing due to the tariffs in Canadian suppliers as well as select investments we've made in our digital teams.

We believe our balance sheet is in very solid position. We had $257 million of cash, of which $42.6 million is restricted, leaving available operating cash at $215 million at the end of the second quarter. We estimate that approximately $110 million to $115 million will be paid for income tax purposes in September of 2018.

We have eliminated $342 million of debt. This also saves us more than $2 million per month in cash interest payments and fees. We've also reduced our pension liabilities by $83 million and the liability now sits at $21 million at the end of the second quarter.

Now I will touch on the performance of each of our reporting segments. Total revenues for troncM for the quarter were $212 million, which is up 3.6% compared to the second quarter of the prior year. On a same-store basis, total revenues were down 9.3% as we continue to experience downside pressure in print advertising. Print advertising was down 14.1% on a same-store basis. TroncM circulation revenue experienced a 19.8% increase compared to the same period of the prior year as we continue to see price increases offsetting volume declines along with the addition of the New York Daily News and Virginian-Pilot circulation revenue. Also of note, print circulation revenue was again greater than print advertising revenue in the quarter, which is important to highlight, in that our print circulation revenue historically has been much more stable than print advertising revenue.

TroncX had $40 million of total revenue in the second quarter of 2018, up 1.7% compared to the prior year quarter. The growth came from the New York Daily News, Virginian-Pilot and BestReviews, partially offset by a decline in Cars.com revenue. Digital-only subscribers grew 100,000 new subscribers to 212,000 at the end of the quarter.

In terms of capital expenditures, we've invested in our technology infrastructure as well as 2 new office locations, 1 in Chicago and the other in Baltimore. Under U.S. GAAP, CapEx of $30.4 million year-to-date is not reduced for tenant improvement allowance, and a significant portion of the CapEx was substantially onetime related. While we will have some additional CapEx in Q3 associated with our office moves and technology infrastructure, we anticipate a much lower run rate prospectively.

Now turning to our full year guidance. For the full fiscal year 2018 for continuing operations, we are increasing our guidance range for consolidated revenues to $1.02 billion to $1.06 billion. Adjusted EBITDA, again for continuing operations is expected to be $106 million to $112 million for fiscal year 2018. This guidance reflects the following items from an adjusted EBITDA perspective: newsprint prices are at historically high prices, substantially due to the tariffs imposed on Canadian suppliers. We are cautiously optimistic that this unfair rule that penalizes our industry, U.S. businesses, U.S. employees and U.S. consumers is in the process of being overturned. We have reduced our headcount in Q3 to realign our expenses with the revenue base line of the business, and those ongoing savings are factored into our guidance. We also rewarded a substantial portion of our nonunion team with a salary or hourly rate increase as an investment in our outstanding talent.

We anticipate continued investments in our digital team to drive long-term growth. Again, our guidance relates to continuing operations and does not include the revenue or adjusted EBITDA from our California operations for any part of 2018, although we did enjoy additional profitability [up until] the close of the transaction.

We continue to be excited about the future, and we believe with investments in organic growth, layered with future acquisitions, we'll remain in a solid financial position over the next 3 to 5 years. As previously discussed, on a longer-term outlook, we are focused on 3 core (inaudible)

Consolidated revenue growth, which we experienced this quarter; significant margin expansion, of which we are still in a transition investment mode; and growth to 1 million digital subscribers. Our end of Q2 2018 number of 212,000 is more than 3x higher than the same quarter in 2016, just 2 years ago. We are organizing our company to achieve these goals and we are excited about the future.

With that, we will now open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Michael Kupinski from NOBLE Capital Markets.

--------------------------------------------------------------------------------

Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [2]

--------------------------------------------------------------------------------

Heart goes out to your newsroom family. In terms of the outside service cost, just speaking to the model first of all. Seems like it was significantly lower in the quarter. Is that a good run rate for the rest of the year?

--------------------------------------------------------------------------------

Terry Jimenez, tronc, Inc. - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Yes. We've been focusing on all expense line items, and in particular outside services. And so we should see some benefit on an ongoing basis on that line item as well as some of the other cost line items as well.

--------------------------------------------------------------------------------

Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [4]

--------------------------------------------------------------------------------

Got you. And in terms of New York Daily News, obviously, it's been in the news regarding a lot of staff-type cutbacks there. And I know that you had profitability targets for New York Daily News when you purchased it. Can you give us some updates on where you are in that process at this point?

--------------------------------------------------------------------------------

Terry Jimenez, tronc, Inc. - Executive VP & CFO [5]

--------------------------------------------------------------------------------

Sure, yes. So we had made some cost reductions in the third quarter last month. And essentially our focus is really to drive that business to profitability. It's been challenged from a profitability perspective from a very long time. And just given the industry headwinds, newsprint prices, et cetera, we had to make some difficult decisions, but we think the right decision is to navigate that business long-term. And our focus is to return that business to profitability by the end of this year.

--------------------------------------------------------------------------------

Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [6]

--------------------------------------------------------------------------------

Got you. And then, troncX seemed a little light in terms of revenues. And I was just wondering what is it that we could maybe see in terms of how to accelerate that revenue growth rate for troncX? I mean, I know that you're investing in some infrastructure. But what is it that would kind of, ignite the growth rate there?

--------------------------------------------------------------------------------

Terry Jimenez, tronc, Inc. - Executive VP & CFO [7]

--------------------------------------------------------------------------------

Yes. So the distortion on the Cars.com, you have to factor out. I think if you back that out, we did see some good experience on CPMs across the direct sell as well as programmatic. And then in terms of, kind of, the execution, Justin talked about rolling out, kind of, a sales playbook that Tim can touch on.

--------------------------------------------------------------------------------

Timothy P. Knight, tronc, Inc. - President [8]

--------------------------------------------------------------------------------

Sure. Mike, it's Tim. So we spent the second quarter executing on a playbook, looking at best practices around the country. And we had not historically leveraged some of our digital marketing services' resources. We package those up better. We've hired digital sales directors in each of our markets, the last one started this past week. So we have essentially a specialist in each of the markets, leveraging the sales teams we have there, and are very focused on using our CRM and the playbook to just make sure we are making more calls and pitching our full suite of marketing services -- products and services.

--------------------------------------------------------------------------------

Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [9]

--------------------------------------------------------------------------------

Got you. And yes, obviously, you have a great balance sheet. A lot of strong cash flow, a lot of cash. What about -- can you talk a little bit about capital allocation at this point? And maybe the M&A environment, and what types of acquisitions might you be looking at?

--------------------------------------------------------------------------------

Justin C. Dearborn, tronc, Inc. - CEO & Chairman [10]

--------------------------------------------------------------------------------

Sure. Mike, it's Justin. So -- and consistent with all the calls, we remain very active in the M&A market. Heavily skewed towards digital assets. Again, kind of, pointing to the BestReviews transaction. Businesses that provide a transaction revenue and a little bit of diversity in the revenue stream. But we will remain opportunistic on what I'll call legacy assets that we think are going to be accretive and add to the overall plan. But heavily skewed towards digital assets. And from a capital allocation perspective, as Terry noted, although we did end the quarter with quite a bit of cash on the balance sheet. We do have a pretty good sized payable to the government from taxes due from the divestiture. So we will hopefully use that capital we have available and the, kind of, dry powder we have from a leverage perspective to accelerate the growth inorganically.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

And our next question comes from the line of Lance Vitanza from Cowen.

--------------------------------------------------------------------------------

Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [12]

--------------------------------------------------------------------------------

I thought I'd start with a couple of housekeeping items. The first being the pension. I think you mentioned that the net liability is $21 million now. And I'm wondering if you can provide the, sort of, the gross benefit obligation at this point?

--------------------------------------------------------------------------------

Terry Jimenez, tronc, Inc. - Executive VP & CFO [13]

--------------------------------------------------------------------------------

So our single-employer pension liability, that is essentially the net as you described. I do not have the gross asset or liability handy, Lance.

--------------------------------------------------------------------------------

Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [14]

--------------------------------------------------------------------------------

Okay, no problem. And then on the tax payment. That's a bit larger than I had expected. And I think suggests -- doesn't it suggest literally 0 taxable basis in the assets? And I guess I'm surprised given it wasn't that long ago that you bought the Union Tribune. So I would have thought that there'd at least, if nothing else, be some basis there?

--------------------------------------------------------------------------------

Terry Jimenez, tronc, Inc. - Executive VP & CFO [15]

--------------------------------------------------------------------------------

Yes, so we did have basis with San Diego. There was a little bit of basis with the Los Angeles Times as well. The taxes due are both federal, which is a 21%. And then California which is almost 9%. So the effective tax on the transaction is -- the effective rate is closer to about a 29% tax rate.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from the line of Doug Arthur from Huber Research.

--------------------------------------------------------------------------------

Douglas Middleton Arthur, Huber Research Partners, LLC - MD & Research Analyst [17]

--------------------------------------------------------------------------------

And I echo my (inaudible) condolences on the events in the second quarter. The -- just to go back to basics on the sale of the LA Times. So it was $500 million of cash. You're looking at a tax liability, I think, you said of $110 million to $115 million. Remind me again of how much pension liability was offloaded there?

--------------------------------------------------------------------------------

Terry Jimenez, tronc, Inc. - Executive VP & CFO [18]

--------------------------------------------------------------------------------

So we had, at the beginning of the year, when we announced the transaction, the balance of the liability was roughly $90 million. By the time that the sale closed it was $83 million. And so it's roughly $83 million is what transferred over.

--------------------------------------------------------------------------------

Douglas Middleton Arthur, Huber Research Partners, LLC - MD & Research Analyst [19]

--------------------------------------------------------------------------------

Okay. And then, just in terms of unpacking the revenue dynamics at troncX in the quarter, I mean, it was -- on a reported basis it was up. You talk about the impact of Cars. So I'm just trying to, sort of, get a -- and then the impact -- the positive impact of The Daily News. Sort of what -- what's sort of the underlying trend there? I think you said advertising was up underlying 2% or something in the press release?

--------------------------------------------------------------------------------

Terry Jimenez, tronc, Inc. - Executive VP & CFO [20]

--------------------------------------------------------------------------------

Yes. So on a total revenue basis, there's essentially 4 ins and outs. The 3 new things coming in are the New York Daily News, BestReviews and the Virginian-Pilot. Altogether, those 3 assets are roughly $10.5 million, $11 million of total revenue. And then the Cars.com switch for the quarter was roughly about an $8 million hit for the quarter. In revenue; adjusted EBITDA was actually a slight benefit on adjusted EBITDA.

--------------------------------------------------------------------------------

Douglas Middleton Arthur, Huber Research Partners, LLC - MD & Research Analyst [21]

--------------------------------------------------------------------------------

And is the Cars impact likely to hang around for the last 2 quarters of the year?

--------------------------------------------------------------------------------

Terry Jimenez, tronc, Inc. - Executive VP & CFO [22]

--------------------------------------------------------------------------------

Yes. So that will go through next year. And we'll cycle through that in the first quarter of next year.

--------------------------------------------------------------------------------

Douglas Middleton Arthur, Huber Research Partners, LLC - MD & Research Analyst [23]

--------------------------------------------------------------------------------

Okay, all right, that's very helpful. And then in terms of the acquisition of the Virginian-Pilot. I mean what was, sort of, the thinking there? It's sort of -- I mean obviously, opportunities pop up (inaudible) that make sense or not. But sort of strategically, how did that sort of fit into your grand plans?

--------------------------------------------------------------------------------

Timothy P. Knight, tronc, Inc. - President [24]

--------------------------------------------------------------------------------

Doug, it's Tim. The Virginian-Pilot is the largest paper in the state, and is right across the James River from our Newport News daily press publication. So -- and essentially it's one simply large market that was just divided by the waterway. They serve different print audiences, but there is a very large overlap in the readers online. And so we're very well underway in our integration plans to have a single newsroom that supports the entire market, a single sales organization that supports the entire market. And we look to figure out how we serve the audiences as effectively as possible.

--------------------------------------------------------------------------------

Douglas Middleton Arthur, Huber Research Partners, LLC - MD & Research Analyst [25]

--------------------------------------------------------------------------------

Okay. So it was very geographically strategic, I guess this is...

--------------------------------------------------------------------------------

Timothy P. Knight, tronc, Inc. - President [26]

--------------------------------------------------------------------------------

Yes. Geographically strategic. And as Justin mentioned, we acquired it for $34 million, which includes a lot of real estate that we have -- can evaluate our options in how to monetize that.

--------------------------------------------------------------------------------

Douglas Middleton Arthur, Huber Research Partners, LLC - MD & Research Analyst [27]

--------------------------------------------------------------------------------

Okay. And then I guess finally just going back to the LA Times. I was sort of under the understanding that there were a lot of systems that were cross-pollinated between corporate and the LA Times. Is there any on -- any continuing ongoing service arrangement there on certain aspects of the website or any operational issues at the LA Times? Or is it a clean break at this point?

--------------------------------------------------------------------------------

Terry Jimenez, tronc, Inc. - Executive VP & CFO [28]

--------------------------------------------------------------------------------

Yes. So we've entered into an agreement, a typical transition service arrangement with the buyer to make sure that their operation is stable post the closing of the transaction. So we are continuing to help support their systems and their infrastructure until they get up to speed and are able to take that over themselves.

--------------------------------------------------------------------------------

Douglas Middleton Arthur, Huber Research Partners, LLC - MD & Research Analyst [29]

--------------------------------------------------------------------------------

Okay, great. Okay.

--------------------------------------------------------------------------------

Terry Jimenez, tronc, Inc. - Executive VP & CFO [30]

--------------------------------------------------------------------------------

And there is a limit to the term of that agreement.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

And I'm not showing any further questions at this time. I would now like to turn the call back over to Justin Dearborn, CEO, for any closing remarks.

--------------------------------------------------------------------------------

Justin C. Dearborn, tronc, Inc. - CEO & Chairman [32]

--------------------------------------------------------------------------------

Thank you. And thank you, everyone for your interest. We have and we'll continue to strategically position our organization while remaining focused on the consistent execution of our strategy. And look forward to updating you on our progress in the near future.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a nice day.