New Media Investment Group (NEWM) Q2 2019 Earnings Call Transcript
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New Media Investment Group (NYSE: NEWM)
Q2 2019 Earnings Call
Aug 06, 2019, 10:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, my name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Media acquisition of Gannett and earnings teleconference. [Operator instructions] Thank you. I would now like to turn the call over to Ms.
Ashley Higgins. Ma'am, you may begin your conference.
Ashley Higgins -- Investor Relations Contact
Thank you, Ian. Good afternoon, everyone, and thank you for joining our call today to discuss New Media's acquisition of Gannett. In addition to the acquisition announcement, both New Media and Gannett today separately announced their second-quarter results. During this call, we will discuss the transaction as well as each company's financial results for the quarter.
Copies of the press releases as well as the slide presentation for this call and supplemental earnings materials are available on each company's website. I would like to remind everyone that this call is being recorded. In addition, statements made during this call with respect to future results and events, including the proposed acquisition and related transactions, are forward-looking statements that are based upon current expectations. Actual results and events could differ materially from those discussed today.
Also, please refer to the disclaimer slides in the presentation as well as the additional information contained in the regulatory filings through both companies. Presenting on today's call will be Mike Reed, chairman and CEO of New Media Investment Group; Jeff Louis, chairman of the Gannett Board of Directors; and Ali Engel, chief financial officer of Gannett. Also with us is Paul Bascobert, newly appointed president and CEO of Gannett. I would now like to turn the call over to Mike Reed, chairman and CEO of New Media.
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
Thank you, Ashley, and good afternoon, everyone. And thanks for joining us on such short notice this afternoon. As you can imagine, we are very excited to talk to you this afternoon about what we believe is an incredibly compelling transaction for our shareholders, our employees and our customers. We are very pleased to announce this afternoon New Media's acquisition of Gannett.
I believe the combination of these two leading local news, media and marketing services companies will transform the landscape in the print and digital news business in our sector and better position our combined company to not only preserve but actually enhance quality journalism in our local markets and across the country over the long term. Our two companies are strategically aligned, and we will leverage our combined scale and best practices to expand our comprehensive hyperlocal coverage for consumers, deepen our private offering for local businesses and accelerate our shift from print-centric to dynamic multimedia operations. Together, we will operate 263 daily local newspapers across 47 states in Guam, along with USA TODAY and the U.K. media company, Newsquest.
Our combined reach will touch over 145 million unique visitors every month as measured by Comscore, very powerful. Shareholders of Gannett will receive $6.25 in cash and 0.5427 of a New Media share for each Gannett share they hold for a total consideration of $12.06. The premium of approximately 18% to the 5-day volume-weighted average price of Gannett shares. After the close of the transaction, Gannett shareholders will hold approximately 49 and a half percent of the combined company, and New Media shareholders will hold approximately 50 and a half percent.
We are excited about this transaction for many reasons. It will enable us to accelerate our digital transformation as the breadth and depth of each company's digital offerings will make the combined company an important digital media player and a stronger partner for advertisers and small businesses. Approximately 25% of the combined companies' revenue will be digital. Importantly, we have a great opportunity to create value for shareholders.
This will be driven by significant cost synergies, which we anticipate to be approximately $275 million to $300 million annually across the combined company, and we expect to capture the majority of these synergies within 24 months of closing. And for context, seven and a half percent of our total combined expenses is what this synergy represents. When you think about it in terms of share price, it's $12 to $15 per share price in synergies, more than double New Media's current share price. The combined company will have a well-positioned balance sheet, and we expect to generate material free cash flow that will grow significantly over the next several years.
Further, shareholders will share in our strong free cash flow through a dividend. The annual dividend is expected to be $0.76 per share in year one, with an expected free cash flow payout ratio of less than 35%. Importantly, cash flows will also allow for aggressive debt paydown with target net leverage within two years of close -- of below 1.75 times EBITDA. We do expect the dividend will grow as we realize synergies and pay down debt.
New Media has historically been a strong dividend payer, raising its dividend in each consecutive year from 2014 to 2018, and we think this opportunity presents the combined company, and it puts it in a position to continue that. Additionally, we announced today that the external management agreement with Fortress has been amended, effective at the closing of this transaction, and it will sunset at the end of 2021. This change will allow the combined company to leverage Fortress' services to ensure a smooth transition and integration of the companies and to help realize synergies. The agreement has also been amended effective at closing to reduce the incentive fee rate from 25% to 17 and a half percent.
The amendment also reduces the number of options Fortress is eligible to receive. In exchange for this, New Media will grant Fortress 4.2 million shares and approximately 3 million options struck at a $15.50 price, and this all further aligns Fortress with shareholders over the next couple of years. We expect this transaction to close by the end of 2019, and upon closing, the board of the newly combined company will comprise five independent directors from New Media, three independent directors from Gannett and myself as chairman. The executive management team will be composed of myself as CEO, Ali Engel as CFO and Paul Bascobert of Gannett as CEO of the operating company.
After the closing of the acquisition, the combined company will assume the Gannett name. We expect to fund the cash portion of the purchase price through a combination of cash on the balance sheet and a new term loan facility to be funded at closing pursuant to a binding commitment from Apollo Capital Management, LP. Our expectations are that the significant cost rationalization opportunities and future cash flows of the combined company will enable us to rapidly delever the balance sheet while continuing to pay dividend to shareholders and, importantly, investing in the digital transformation of the business. To summarize, the combination of New Media and Gannett is a unique opportunity to reposition both companies for long-term growth and, importantly, to support quality journalism.
We take great pride in the work that we do every day, and we are thrilled to partner with such a quality organization as Gannett, like us, a recipient of multiple Pulitzer Prizes, among other accolades. We are excited to become a part of Gannett's story and history and a steward of their strong media properties. We also have an incredible opportunity to create significant value for our shareholders through our digital transformation, improving our local journalism efforts, realizing the cost synergies and delevering the balance sheet. We also expect to create value for shareholders as we grow the dividend as a result of all of these efforts.
I am personally excited to work with the incredibly strong management teams of both companies, and I welcome and look forward to working with Paul as the leader of our combined operating company upon the close of this transaction. I'm very pleased today that we have Jeff, the chairman of the Gannett board, with us. I want to personally thank Jeff and the Gannett board for seeing the logic and value in this transaction and agreeing to partner with us on what -- on a great combination. And with that, Jeff has a few remarks.
Jeff Louis -- Chairman of the Gannett Board of Directors
Thank you, Mike, and good afternoon, everyone. As Mike noted, this is a very exciting day for everyone at Gannett and New Media. As many of you may know, our board at Gannett have been thoughtfully considering how best to position our company for the long term, and we are very excited to align with New Media and the GateHouse team. The enhanced scale and financial strength of the combined company will enable the new Gannett to drive growth in the digital future.
We've worked with the team at GateHouse in the past, and we know that this is a strong, strategic and cultural fit for our organization. Together, we will deliver on our shared commitment to journalistic excellence. Together, we will serve our communities, our advertisers and our employees. Together, we will provide significant and immediate value to our shareholders, not to mention, the potential upside of the combined company.
The new Gannett will bring quality journalism at a local and national level to customers across 47 states and give us the scale to drive efficiencies, deleverage the balance sheet and accelerate our digital transformation. I'm also particularly pleased that our announcement today of the appointment of Paul Bascobert as the new president and chief executive officer of Gannett. Paul brings a unique set of skills to the role given his experience at both Bloomberg and Dow Jones and as president of XO Group, where he helped lead the company's transformation from a media business to a two-sided marketplace model. In addition, Paul previously served as president of local businesses at Yodle, a local Internet marketing and advertising solutions provider for small businesses.
The board of Gannett believes that Paul's depth of experience in digital is a critical skill for our strategy moving forward and that he will be a strong leader for the company's -- the combined operating company upon the close of the transaction. With that, I'd like to turn the call over to Ali to briefly discuss Gannett's second-quarter results. Ali?
Ali Engel -- Chief Financial Officer
Thank you, Jeff, and good afternoon, everyone. Overall, we are very pleased with Gannett's second-quarter results. We delivered adjusted EBITDA in line with our expectations, and print, advertising and circulation trends remained stable. In our B2B business, we achieved a key milestone, reaching 50% of our advertising and marketing services revenue from digital sources, and our USA TODAY operations achieved their ninth consecutive quarter of advertising and marketing services revenue growth.
While our total digital advertising and marketing services revenues were a little softer than expected this quarter, we continued to see positive momentum in our client count and retention that should help future growth. On the consumer side of our business, we saw continued strong growth in our paid digital-only subscribers, up 34% year over year to 561,000, and delivered steady audience trends with Comscore uniques averaging 125 million for the quarter. Video and mobile web continued to be areas of growth. Overall, we continue to see tangible B2B and consumer results that evidence we are making progress with our digital transformation strategy.
With that short overview, I will quickly review the more detailed numbers. Consolidated revenues were $660 million compared to $731 million in the year-ago quarter. The revenue decline reflects the continued weakness in both print advertising and circulation revenue, partially offset by the WordStream acquisition, strong national digital media revenue growth and gains in paid digital-only subscriber revenue. On a same-store basis, total revenues declined 9.8%, in line with first-quarter results.
Adjusted EBITDA totaled $76.2 million in the quarter, down 11% versus the prior year quarter, reflecting lower revenues, offset in part by strong expense management. Despite the continued pressure on revenue, we were able to maintain adjusted EBITDA margins nearly flat to the prior year. Total second-quarter same-store operating expenses declined approximately 9%, reflecting the benefit of an early retirement program, continued production and distribution efficiencies and savings related to our call center outsourcing. Newsprint expenses also declined as a result of volume reductions.
Our GAAP net income for the quarter was $27 million, up from $16 million a year ago, reflecting a onetime deferred gain of $31 million from the sale of our national property. Turning to the balance sheet. We ended the quarter with $307 million in debt, including the $172 million liability portion of our convertible debt and $135 million drawn on our revolver. Our cash balance was $69 million at the end of the quarter, resulting in net debt of $238 million.
I know this is a truncated version of our second-quarter results in order to allow time to discuss the transaction. Stacy Cunningham, VP of financial planning and investor relations, is available to answer questions. Please feel free to reach out to her, and I can also make myself available as needed. Our contact information, as always, is available on our website.
That concludes my comments on Gannett's results for the second quarter. So now let me turn the call back over to Mike to touch upon New Media's second-quarter financial results and to wrap up our prepared remarks. Mike?
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
Thank you, Ali. I will similarly present a shortened version of our second-quarter results. Any follow-up questions can be directed to Ashley Higgins, whose contact info can be found in the press release or to our website. Our results this quarter were in line with our expectations and reflected a sequential improvement over the first-quarter inorganic same-store revenue trend by 50 basis points.
This was driven in part by GateHouse Live, which had its strongest quarter of the year, generating $22.4 million in revenue, an increase of 82.9% compared with the prior year. As you can imagine, this time of year is big for both our high school sports awards show and outdoor endurance races, which were part of our acquisition of Rugged Races last fall. We have seen strong success expanding races into our markets as well as with race offerings. For example, in our first year of owning and operating the Milwaukee Marathon, we saw an increase in runners of 77% compared with the prior year.
We continue to be very encouraged about the opportunity for revenue growth at GateHouse Live. Importantly, in the quarter, we also saw a stabilization in our circulation revenue trend. If you recall, that trend had gotten worse for the last several quarters based on the new strategy we implemented. We saw stabilization this quarter with revenue down five and a half percent same-store compared to prior year, the same as the first quarter.
Our focus on growing subscriber volumes continues to gain momentum as evidenced by the 54.6% growth of digital subscribers over the prior year. Improving volumes will allow for more stability in this revenue line. Given that this is the largest contribution to revenue, we expect our consumer marketing efforts to remain a key focus for us for the foreseeable future. We continued our efforts in the quarter to centralize infrastructure to further streamline the business and maximize synergies across our portfolio from recent acquisitions.
This will result in additional cost reduction opportunities throughout the second half of the year that we expect will produce better results and allow us to achieve higher margins. To wrap up, we achieved $47.5 million in as-adjusted EBITDA and $33.6 million in free cash flow in the second quarter. For more details on the quarter, please review our posted press release and our earnings supplement available on the website. Turning back to the transaction for a couple of minutes and before we take questions.
Let me just briefly highlight some of the key points of today's announcement. We believe the combination of Gannett and New Media is a compelling opportunity to create significant value for shareholders in both the near term and over the long term. We are creating the leading U.S. print and digital news organization with deep local roots and national scale.
We intend to capture significant efficiencies and material synergies across the combined companies, with expected savings of between $275 million and $300 million annually, a majority of which we believe can be achieved within two years. We expect that transaction will strengthen our financial position, enhance our earnings potential and generate substantial cash flows, allowing us to deleverage the balance sheet, return capital to shareholders through continued dividends and invest in the growth of our combined company. We believe we are well positioned to succeed. We will draw upon the complementary strengths and experience of our extended teams and the best practices of both companies to create an agile and dynamic organization focused on seizing the opportunities before us.
This is an exciting day for all of us, and we look forward to sharing this bright future with all of you. With that, the team and I here will be pleased to take your actions on the transaction. Operator?
Questions & Answers:
Operator
[Operator instructions] Our first question is from the line of Jason Bazinet. Jason?
Jason Bazinet -- Analyst
Thanks so much. I just had a handful of questions, if you don't mind. The debt balance that you cited in the release, the $1.79 billion, that was a little bit higher than I had, and I was just wondering, does that include some assumption of pension liabilities? Is that the piece I'm missing?
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
It does not.
Jason Bazinet -- Analyst
OK.
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
It assumes the cash purchase price as well as the refinancing of all the debt on both companies' balance sheet, including Gannett's revolver.
Jason Bazinet -- Analyst
OK. And then is there any color you can provide on the interest costs related to this new Apollo line of credit?
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
The interest rate is 11 and a half percent.
Jason Bazinet -- Analyst
OK. And then the last question, in terms of phasing of the synergies, I got the majority within 24 months. For those on the buy side that are trying to sort of come up with a reasonable 2020 EBITDA or 2021 EBITDA, is there any color you can provide in terms of rough cadence of the savings and sort of cost to achieve?
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
Yeah. I think we will obviously start to integrate and realize synergies in the first quarter that the company is combined. So in the first year, you'll be at -- certainly be at less than 50% because you won't have the full run rate in given that you just started. So I think from a run rate perspective, you should think about year 2 as the year where you see a majority of the synergies start to run through the P&L.
And then by year 3, because you placed most of them during the -- or finished them in the second year, you'll see them all run through the P&L in the third year. So that's how we think about it.
Jason Bazinet -- Analyst
OK. Very helpful. Thank you.
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
Thanks, Jason.
Operator
[Operator instructions] Our next question is from the line of Kyle Evans. Kyle?
Kyle Evans -- Analyst
Hi, thanks. A few -- the first, and a follow-up to Jason's, the cost to achieve, the $275 million to $300 million, what do you estimate those to be?
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
About 30% to 35%. Those are one-time costs. They don't continue with the business. So that's what we've kind of pegged.
Kyle Evans -- Analyst
Great. And could you provide maybe a little bit more detail around the newspaper operation synergies of $115 million, maybe some of the bigger moving pieces in there and, especially, if it's in there, kind of taking redundant print presses out of the equation?
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
Yeah. So Kyle, both companies have done an extensive review to look at synergies in this transaction, and obviously, we see a significant opportunity for efficiencies and cost reallocation across the combined companies. We really need, over the coming months, to finalize our plans and, importantly, discuss them with our employees before we get too into the details with the public. So remember, both companies, Kyle, have done this extensively for the past so we're both extremely confident in our ability to deliver or overachieve on our synergy number.
Kyle Evans -- Analyst
Got it. The new dividend yield is a pretty big shift downward for your New Media holders. If I look at the net leverage goal for three years out of onetimes, where do you think the payout on free cash flow to dividend goes in that third year?
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
We're pegging a payout ratio per se. We love the opportunity we have to deploy capital right now among the dividend, among deleverage and among investing in growth, especially digital growth as well as our enhanced opportunity to improve local journalism around the country. So -- and as -- and with regard to capital deployment, my philosophy has always been deploy capital in a way that creates the most value for shareholders. Right now, this company will throw up a significant amount of cash flow and will be able to pull all those levers in the -- going forward.
And as I mentioned on the call, in my opening remarks, I do think it's worth mentioning again that we do think as we realize synergies and pay down debt, we'll increase earnings per share and free cash flow significantly, and that will allow us to increase the dividend.
Kyle Evans -- Analyst
Got it. And lastly, what kind of regulatory hurdles do we need to clear to get this done this year? Thanks.
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
Regulatory, the HSR filing in the U.S. and then there's a filing in the EU merger regulations as well, so those are the two regulatory filings. And of course, both companies are subject to shareholder approval as well.
Kyle Evans -- Analyst
Great. Thank you.
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
Thanks, Kyle.
Operator
And our next question is from the line of Doug Arthur. Doug?
Doug Arthur -- Analyst
Yeah, thanks. I guess, from the Gannett side, Jeff, I'd be curious to get your thoughts about why you felt the need to do this now. I mean, obviously, it's been interesting for you guys. You had a hostile that you had to fend off.
Is this about scale? Is it about digital? Is it about cost cutting? I mean, what was the pressing need on the Gannett side to do this? And then as a follow-up, I mean, it's kind of a curious time to bring in a new CEO. I'd love your thoughts on that as well. Thanks.
Jeff Louis -- Chairman of the Gannett Board of Directors
Thank you. So I wouldn't describe it as a pressing need but a very attractive opportunity. So we said some time ago that we would always look at any bona fide offer, and our board has consistently looked at strategic options. And when Mike approached us earlier in the year and it was when we were in the proxy fight mode, I think what was interesting was the degree to which Mike saw the value of the USA Today Network, the degree which we were aligned on digital transformation, and I think something he saw that was very attractive in Gannett was the progress we had made there.
Our strong management team, the strength of the Gannett name and I think just the fact that we aligned on our journalistic mission and our values generally and, of course, digital transformation. So that's where the conversations began. He also obviously brought credible financing to this. And when you start to look at the synergies, it was clear there was big upside in putting these two companies together.
So on the CEO question, our future was uncertain, and we have been in terms of whether we do a deal or not, and we have always been focused on digital transformation. And we were in the midst of a CEO search. And so we really had two tracks. We had one track that was to combine these two companies, and the other was stand-alone.
And until today, we weren't there. So we felt it was really important that we not let off our CEO search at all. And we had very attractive candidates in that process, and we're delighted that Paul was able to work his way through some of the noise here as we were looking at all these different options and that he was embraced by the New Media side. So it was, to some degree, just a wonderful aligning of the stars for us.
And we're all very excited about both having a new CEO and the combination of these two businesses and the upside it brings. And it's -- so you're constantly, as a board member, looking at short-term value for your shareholders and long-term value. This is both for us. So there's short-term component in the cash.
There's huge upside on the longer-term component in the 49 and a half percent that the Gannett shareholders will own in this business. So it's a wonderful combination of both of those things.
Doug Arthur -- Analyst
Great. Thank you.
Operator
[Operator instructions] Our next question is from the line of Michael Kupinski. Michael?
Michael Kupinski -- Analyst
Thank you. Thank you and congratulations. My question is more of a 64,000-foot view question. Obviously, this merger brings a lot of unique visitors.
You have a lot of cost cutting opportunities as you consolidate facilities. My question is more on a longer-term revenue track. Does this combination give you more heft to kind of negotiate with Facebook and Google in terms of opportunities for them paying for content? Are there other revenue opportunities that could happen from having such a larger newspaper group?
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
Yeah. This is Mike. My belief is yes. The scale and the significant cash flows that we generate on a combined basis give us the ability to not only invest in our digital business but be able to do the things you just mentioned.
I mean we'll have more than $1 billion of revenue in this company, and we'll be combining two really strong digital teams that can help bring these two businesses together and improve the digital product mix and the opportunity we have to grow digital. So we do, both companies, believe, and this is where one of the places we are aligned, is that a digital transformation is critical to reverse the revenue declines we've seen in the past. We think this transaction puts both companies in a position to get there faster. And a side benefit, which is really great, is we have a lot more cash flow to deploy to invest in that opportunity, so.
Jeff Louis -- Chairman of the Gannett Board of Directors
So if I could add on, I think from the Gannett board perspective, the conversations we've been having for some time is the fact that it's not just replacing revenue from the print side of business with digital revenue, it is ultimately about moving the multiple. And we believe that if you can grow this, the digital side of this business, we will not only obviously move into a growth mode, but we can dramatically move the multiple of the business.
Michael Kupinski -- Analyst
And the newspaper industry for many years have been saying that Google and Facebook have been getting content for free for many years off of the backs of newspapers. Are there opportunities that you could get more favorable terms from Facebook and Google for the content itself?
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
That remains to be seen. We have a lot of work to do in front of us over the next four to six months to get this transaction closed and to work on our combined strategy, both on the top line and the bottom line. So I'd say stay tuned on that.
Michael Kupinski -- Analyst
Gotcha. OK. Thank you.
Operator
Ladies and gentlemen, this does conclude our Q&A session. I would now like to turn the call back over to Mike for closing remarks.
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
Thank you. And I just wanted to reiterate thank you, everybody, for taking the time on short notice this afternoon to dial in, listen to our opportunity here. I hope that you are as excited about it as we are. I think it's a really unique combination with -- unparalleled within our industry.
Our two companies are strategically aligned, both in terms of the future of journalism and how this combination allows us to improve our opportunity there. And we're aligned with regard to the critical nature of the digital opportunity and how important it is to the transformation of our top line. And this transaction improves both of our companies' opportunities there as well. We also get the great benefit of the synergies, and we also get to combine two great management teams and also share the -- share the best practices of the two companies.
So we think the future is bright for both of our companies. We look forward to getting this transaction closed over the next four to six months and coming -- getting a chance to come back to you guys and talk to you on a regular basis. So thank you again for dialing in, and we look forward to updating on your progress at a later date, our progress. Thank you.
Jeff Louis -- Chairman of the Gannett Board of Directors
Thank you.
Duration: 34 minutes
Call participants:
Ashley Higgins -- Investor Relations Contact
Mike Reed -- Chairman and Chief Executive Officer of New Media Investment Group
Jeff Louis -- Chairman of the Gannett Board of Directors
Ali Engel -- Chief Financial Officer
Jason Bazinet -- Analyst
Kyle Evans -- Analyst
Doug Arthur -- Analyst
Michael Kupinski -- Analyst
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