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Edited Transcript of TRNC earnings conference call or presentation 7-Nov-18 10:00pm GMT

Q3 2018 Tribune Publishing Co Earnings Call

CHICAGO Nov 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Tribune Publishing Co earnings conference call or presentation Wednesday, November 7, 2018 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amy Bullis

Tribune Publishing Company - Senior Director of Finance

* Justin C. Dearborn

Tribune Publishing Company - CEO & Chairman

* Terry Jimenez

Tribune Publishing Company - Executive VP & CFO

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Conference Call Participants

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* Lance William Vitanza

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Tribune Publishing Company Third Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Senior Director Finance, Amy Bullis. Please go ahead.

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Amy Bullis, Tribune Publishing Company - Senior Director of Finance [2]

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Thank you, and welcome to our third 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 in 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 and reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investor.tribpub.com.

Joining me today is Chairman and Chief Executive Officer, Justin Dearborn; Executive Vice President and Chief Financial Officer, Terry Jimenez; and Tribune Publishing's President, Tim Knight.

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

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Justin C. Dearborn, Tribune Publishing Company - CEO & Chairman [3]

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Thank you, and thanks to everyone for joining us today. I'm going to start the call by sharing some highlights on our progress toward achieving our long-term goals for the company, and I'll turn the call over to Terry to review our financial results in greater detail.

We're obviously aware of the rumors that have been circulating about Tribune Publishing's consideration of possible strategic alternatives for the company. We are not going to credit or discredit those rumors. As you know, we do not comment on market speculation. Consistent with that policy, we will not be discussing those rumors on the call today and we'll not be taking any questions on this subject. Thank you in advance for respecting our policy.

Just a few weeks ago, we announced a return to Tribune Publishing's historical name. We are proud to lead the way as a credible and primary new source in the communities we serve. I want to highlight a few accomplishments from the newsroom in our local markets. I would like to extend congratulations to the editorial team at the Orlando Sentinel on their recent Emmy nominations. This is an example of the hard work and dedication we see throughout Tribune, and it's a pleasure to see the great work being recognized across the journalism community. I also want to commend the Hartford Courant for being named New England Newspaper of the Year. The Courant was named Newspaper of the Year by the New England Newspaper & Press Association, the second straight year the Courant has won the top award among newspapers.

I'm also proud to share the National Press Foundation named editor of the Capital Gazette newspaper's Rick Hutzell as its Benjamin C. Bradlee Editor of the Year. Hutzell received the award for leading his newsroom through and beyond a tragic shooting in the Capital Gazette offices. Despite the attack on the Capital Gazette newsroom on June 28, the paper has only become stronger. As pledged, the staff has put out a paper every day since the tragedy and service to the community and their colleagues. We are very proud of Rick's leadership and the entire Gazette staff. We are grateful for the support received from our industry colleagues in this effort, particularly from those at the Baltimore Sun who helped share the load in this difficult time.

Lastly, the South Florida Sun Sentinel launched a new season of investigative true crime miniseries, Felonious Florida. This new 7-part season explores 3 all new stories and some of the Sunshine State's most notorious crimes. The state of Florida is rich with captivating stories, and the Sun Sentinel's archives are filled with high-profile crime stories. And we are pleased to bring you second season of compelling stories to listeners with a fresh perspective in affordable format. Felonious Florida is available on feloniousflorida.com, wondery.com, Apple Podcast and other listening platforms, and reached #1 on iTunes.

I also want to recognize each of our newsrooms for their outstanding coverage of the election cycle as there were tight races in nearly all of the markets we cover.

Meantime, we had 227,000 digital-only subscribers at the close of the quarter. This represent a net increase of approximately 15,000 or 7% versus the prior quarter and an increase of 92,000 or 68% versus the same quarter prior year. In a market environment that remains challenging, agility and adaptability are critical, and we remain focused on executing our strategy to transform our business, leveraging our strong balance sheet.

With that, I'll turn it over to Terry.

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Terry Jimenez, Tribune Publishing Company - Executive VP & CFO [4]

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Well, thank you, Justin. I will start with a few housekeeping items. As previously discussed, as a result of the California properties and the ForSaleByOwner.com sale transactions, we have classified the balance sheets and results related to these properties as discontinued operations for both the 2018 and 2017 reporting periods. Also, to aid in comparison purposes, I will make sure that I speak to with and without certain activities to give you a better view on same-store results. Same-store results will exclude 3 components. The first is activity from acquisitions of the BestReviews and the Virginian-Pilot, which are in the 2018 results but not in the 2017 results, along with the New York Daily News, which have 3 weeks of operations in Q3 of 2017. The second is the impact from the cars.com amended agreement, which, as discussed in the last 2 earnings calls, drives year-over-year comparison distortions for digital advertising revenue. And the third relates to the Transition Services revenue recorded for the services we are now providing the new owners of the LA Times and San Diego Union-Tribune. The exclusion of these elements is the basis for same-store comparisons. For segment reporting purposes, we will discuss our M and X segments. These segments are the same as reported in prior periods, though we have removed our old name in front of the M and X.

Total revenues for the third quarter 2018 were $256 million, up 8.3% from the same quarter in 2017. On a same-store basis, total revenue declined 9.6%, primarily due to continuing print advertising revenue declines. Of note, on an unadjusted level, print advertising revenue was less than 1/3 of our consolidated revenue. As our consumer and digital revenues become the majority of revenue, we believe this will provide more stability on the top line, given the ongoing headwinds for print advertising revenue.

Our consolidated third quarter 2018 operating expenses were $266 million, up from $238 million versus the third quarter of 2017. Same-store operating expenses were down $16.7 million year-over-year in the quarter as we continue to aggressively and thoughtfully manage our expenses. In the third quarter of 2018, our loss from continuing operations totaled $600,000 or $0.01 per share compared to a loss of $12.6 million or $0.38 per share in the same quarter of 2017. In the third quarter of 2018, we had a net loss of $4 million or $0.11 per share compared to net income of $2.1 million or $0.06 per share for the third quarter of 2017.

Adjusted EBITDA for the third quarter of 2018 was $16.6 million compared to $20.1 million in the third quarter of 2017. Driving the decline year-over-year were increase of the newsprint pricing, which were up over 30% on a year-over-year basis and resulted in an increase of $3.3 million; the financial implication of the Capital Gazette tragedy, which totaled $1.9 million in the quarter of this year; as well as select investments we've made in our digital teams. Newsprint prices hit nearly 20-year all-time highs. We are encouraged that the International Trade Commission overturned the tariffs levity against our suppliers. The ruling by the IPC to roll back the tariffs on newsprint specifically suggested that the tariffs that were effectively collected by the suppliers be returned to the customers that paid for those tariffs. At this time, it appears that our suppliers are planning to retain 100% of the affected tariffs they receive.

We believe our balance sheet continues to be very strong and stable. We had $141.5 million of cash, of which $44 million is restricted, leaving unrestricted operating cash at $97.6 million at the end of the third quarter. We paid over half of the estimated taxes due from the California transaction in September and have approximately $47.5 million to be paid for income tax purposes in December of 2018 and March of 2019. We continue to have 0 debt with the exception of approximately $7 million in capital leases that are classified as debt. Our pension liability now sits at $17.8 million, down from $21.1 million at the end of the second quarter.

Also of note, we had some considerable swings in working capital in the quarter. AR was up sequentially from the second quarter, all related to $29 million of accounts receivable due related to the service we provide the new owners of the California properties. Accounts payable was down $20 million due to catch-up payments from newsprint and ink and accrued CapEx for our facility build-outs. And $9 million related to payroll timing and other items.

In terms of capital expenditures, we have invested in our technology infrastructure as well as 2 new office locations, one in Chicago and the other in Baltimore. Gross CapEx was $18.5 million in the third quarter and $49 million year-to-date after 3 quarters. For reporting purposes, the tenant improvement allowance received, which effectively reduces our cash outlays, is amortized and offset against ongoing run expense versus a net capital expenditure presentation. The office location investments and the largest components of capital related to our content management system are substantially behind us, and we will be running at a much lower pace moving forward.

Now I'll touch on the performance of each of our reporting segments. Total revenues for M in the third quarter of 2018 were $207 million, which was up 4.6% compared to the third quarter of the prior year. On a same-store basis, total revenues were down 11.1% as we continue to experience downside pressure in print advertising. Print advertising was down 18.1% on a same-store basis. M circulation revenue increased 14.4% compared to the same period of the prior year, with effective price increases offsetting volume declines along with the addition of the New York Daily News and Virginian-Pilot circulation revenue.

Also, as 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 has historically been much more stable than print advertising revenue.

X had $41 million of total revenue in the third quarter of 2008 (sic) [2018], up 6% compared to the prior year quarter. The growth came from the New York Daily News, Virginian-Pilot and BestReviews, partially offset by decline in cars.com revenue. We continue to see solid traction growing in our digital paid subscribers. Digital-only subscribers grew by 92,000 to 227,000 at the end of the quarter, and that compares to 135,000 at the end of the same quarter last year. There's been some level of digital advertising impact with lower page views given the digital subscription model and a new CMS introduced in New York.

Additionally, we experienced impact across-the-board from changes in social media and search company changes in strategy. Social media and search companies continue to be focused on how to better monetize our content for themselves. We believe that our valuable and credible content have and will last throughout many changes in the ecosystem. In terms of BestReviews, we are seeing good progress. Visits to our BestReviews site in the third quarter is up 29% year-over-year, which is attributable to strong organic growth from the BestReviews team as well as integrating across all of our Tribune Publishing properties. This sets us up for strong momentum heading into the holiday season.

Now turning to our full year guidance. For the full fiscal year 2018, for continuing operations, our updated guidance range for consolidated revenues has narrowed to a range of $1.03 billion to $1.05 billion. Adjusted EBITDA, again for continuing operations, is expected to be $106 million to $112 million for the fiscal year 2018. We continue to be excited about the future, and we believe with investments to grow organically, layered with future potential acquisitions, we will remain 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 goals: consolidated revenue growth, which we experienced this quarter; margin expansion, of which we are still in transition and investment mode; and growth to 1 million digital subscribers. Our end of Q3 2018 number of 227,000 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Lance Vitanza from Cowen.

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Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [2]

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Obviously, a difficult time with the shooting and other things. EBITDA down $5 million sequentially. I think -- can you tell us how that sort of compared to your budget sort of as you laid that out toward the beginning of the year and how you're tracking that way?

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Terry Jimenez, Tribune Publishing Company - Executive VP & CFO [3]

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Yes, in terms of where we stood for the quarter, we're down roughly $3.5 million on a year-over-year basis for adjusted EBITDA, of which $1.9 million which was not something we certainly had anticipated. In terms of newsprint prices, while we did reflect an increase of newsprint prices, it did touch a little bit higher than we thought the peak would be, given the combination of both tariff increases as well as supplier increases on top of those. And so I think that $3.3 million hit on a year-over-year basis also was a little bit higher than we had anticipated.

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Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [4]

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And what about the Daily News acquisition? Is that sort of tracking in line? Or is that been a little bit delayed? I know you obviously have made a lot of cuts there and so forth. Are you getting the benefit of that? Is that contributing positive or negative at this stage?

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Terry Jimenez, Tribune Publishing Company - Executive VP & CFO [5]

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Yes, we have a couple of things happening around the expense side. We've been very focused on making sure that we lean the organization and we reallocate the resources to drive the best value both short and long term. In terms of the revenue side of things, we had a couple of things that we think are -- the right answer is long-term, but certainly have some short-term impacts. So the first was, we'd moved to a digital subscription model earlier in the year, which certainly sets us up for the future very well. But near term, that reduces how much traffic comes to your site and how many users are using your site, and the ad revenue thereby that you get from those users, and so we experienced some impact in that regard. And then the second is we switch to a new CMS, which, again, we think is the right answer from a user experience point of view, and we think that has certainly played out well for us, but there has been an impact in traffic, we think, is a short-term situation for us. So we think we'll get it right back on track from an adjusted EBITDA loss in the quarter. It was roughly flat year-over-year. So 3 months of operation for that business, loss the same the 3 weeks of the business did last year. We're confident in this direction, but certainly there's a lot of challenges that we're navigating in the ecosystem as well.

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Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [6]

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Right. Okay. So just a question on the cash. The $97 million unrestricted, I think, $43 million restricted. That's what is set aside to handle the upcoming tax payments, is that right?

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Terry Jimenez, Tribune Publishing Company - Executive VP & CFO [7]

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No, so we have the -- restricted cash is tied to our letter of credit. Prior to the California sale, we had a term loan which we terminated and we also had an ABL line that effectively allowed us to pledge our letter of credit against our ABL line. And so once we terminated both of those agreements post transactions, we now have our cash restricted. We're certainly looking at alternatives to free up that cash.

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Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [8]

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Right. Okay. That's right. And then maybe just if I could, just to sort of a corporate governance 101 question, and I apologize I don't remember this. But if the company were running a formal process and bids were received and being considered by the board, at what point would it be required to file an 8-K disclosing that a process was either underway or had taken place in the past?

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Justin C. Dearborn, Tribune Publishing Company - CEO & Chairman [9]

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Lance, it's Justin. So I think when you have a definitive material agreement, you're required. So if it's not definitive, there is no requirement.

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Operator [10]

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And I'm showing no further questions at this time. I would like to turn the call back over to CEO Justin Dearborn for closing remarks.

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Justin C. Dearborn, Tribune Publishing Company - CEO & Chairman [11]

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Right. Thank you, everyone, for joining. And thank you for your continued interest in Tribune Publishing.

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Operator [12]

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Ladies and gentlemen, thank you for participating. This does concludes today's program, and you may all disconnect. Everyone, have a great day.