Gannett Co Inc (GCI) 2017 Q1 法說會逐字稿

Good morning. Thank you for standing by, and welcome to the New Media First Quarter Earnings Conference Call. (Operator Instructions) I would now like to hand the floor to Ashley Higgins, Investor Relations for New Media. Thank you, Ms. Higgins, I hand the floor to you.

Thank you, Latanya, and good morning, everyone. I'd like to welcome you to New Media's First Quarter 2017 Earnings Call. Joining us today are Mike Reed, New Media's CEO and President; Greg Freiberg, our CFO; and Kirk Davis, COO of New Media. 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 audiocast is copyrighted material of New Media and may not be duplicated, reproduced or rebroadcasted without our consent. With that, I would like to turn over the call to Mike.

Thanks, Ashley, and good morning, everyone. Thanks for joining our call this morning. As Ashley mentioned, we posted a supplement to our website this morning, and I'll reference that throughout the call. And I'm going to start on Page 2 of the supplement, and I'd like to start this morning with a quick overview of our company, New Media.

New Media owns and operates long-standing, strong local media assets in small to midsize communities around the country. We leverage these local assets to provide print and digital content to consumers and premier marketing and technology solutions to small and medium-size businesses. We focus on being in smaller communities with these particular assets as they are stronger due to the less competitive environment that exists in a smaller market.

We play an important leadership role within each of our communities by providing award-winning, local print and digital journalism, and also by partnering with many small and medium-size businesses to provide them with products and solutions to help them grow their business. The assets we own and the manner in which we operate allows us to have both the B2C business and a B2B business opportunity in each of our local markets.

We think about our B2C business as one that drives long-term sustainable and growing revenues through subscription fees. We earn substantial fees from local consumers who pay for the unique and very relevant local content we deliver every day. This content impacts most consumers' lives in some way on a consistent basis. We are leveraging technology in the digital age to find opportunities to deliver our content in multiple, increasingly efficient ways to meet the needs and demands of our consumers.

Our B2B business is one that leverages our strong local brands, physical in-market sales force and technology to deliver many different services to local businesses to help them grow their own business. We know from years of operations in our markets that local business owners and managers want to partner with other local businesses like ours. They want to work with someone they know, trust and can meet with when looking for solutions for growth or for problems they encounter in running their own day-to-day business. This portion of our business, particularly Propel, is growing very rapidly with long-term sustainable revenues.

Going back to our B2C business for a moment. We deliver award-winning local content to our consumers on a daily basis. Our reach is quite large. We have more than 800,000 subscribers who pay for our Sunday newspaper in print, every single week.

We also have nearly 60,000 digital-only subscribers. Further, our digital platforms have 41 million unique visitors per month, and we reach over 23 million people per week, during the first quarter, across our digital platforms.

Recently, the Sarasota Herald-Tribune had its Bias on the Bench series awarded the Batten Medal for achievement in public service journalism by the American Society of Newspaper Editors.

It also received second place for the public service National Headliner Award. Dan Gearino, at The Columbus Dispatch, received the first place National Headliner Award for business news. Congratulations to all who were involved in both efforts in Sarasota and Columbus.

On the B2B side of our business, we have a massive opportunity. There are over 2 million small businesses in the markets we serve today. We have over 1,300 sales representatives in market across the country, and we are doing business today with more than 225,000 of those local businesses. We have a multitude of products we offer to help to solve a variety of challenges for our local business partners. These products are sold through subscription fees and advertising and marketing solutions, depending on the product or service purchased. With the variety of products we offer today, along with future growth in our product suite, we expect to increase our business penetration rates well beyond the 10% level we are at today.

We'll talk more about an example of that later in the presentation. Our best example of a fast-growing B2B business is Propel Business Services, which is uniquely aligned within our communities to best serve the needs of the SMBs, leveraging our large, in-market sales force and incredibly strong local brands. These trusted local salespeople are able to become a partner to each small business, helping to bring a wide range of products and services directly to their door.

With the scale of New Media, we offer SMBs a national, top-quality product offering through Propel from the same local, highly recognized brand that provides their local news and brought to them by a salesperson who lives and works alongside them in that community.

This is the largest differentiator for Propel and while we remain very excited about its growth trajectory, we are very optimistic about both the B2B and the B2C opportunities we have for growth in each of our markets. As we leverage our local assets and technology, we are confident, in our ability to create organic growth.

Moving to Slide 3, let's discuss some of the highlights from the first quarter of 2017. New Media total revenues in the quarter were $307.5 million, up 2.5% to prior year on a reported basis, but down 6.2% to prior year on an organic same-store basis. This 6.2% decline is flat to our Q4 trend despite the increased pressure on traditional print revenues, which is being driven by the well-documented struggles of the brick-and-mortar retail sector. Despite -- or with the increased pressure on the print trends, we were still able to hold trends and are encouraged, as you'll hear more in the presentation today, about the trends as we go forward this year.

We continue to diversify our own revenues away from the traditional print category and away from these major retailers with our stable and growing business lines, which now account for 53% of our total LTM revenue. Propel continues to perform very well and is helping to drive diversification on our revenues. The business grew 55.9% over prior year to $15.3 million in the first quarter. On an LTM basis, Propel now has $57.6 million of revenue and is growing at more than 60% year-over-year. Our total digital revenues grew to become more than 10% of total revenue in the first quarter, with $31.3 million in total digital revenues, up 13.8% to prior year.

GateHouse Live, our events business, is also an exciting business segment for us and is on a great growth trajectory as well, with expected revenues of $15 million in 2017, which will be more than double 2016 performance.

As previously announced on our last call, we closed our first acquisition of 2017 with the purchase of the publishing division of the Ohio-based Wooster Republican Printing Company for $21.2 million. This acquisition was a great strategic fit for us and has been integrating nicely into our existing Ohio cluster.

We continue to evaluate a strong pipeline of potential acquisition opportunities and are very well positioned to take advantage of attractive deals with over $175 million in deployable liquidity. Our capital structure remains very solid and helps position the company for future growth, both organically and through accretive acquisitions.

In addition to our strong liquidity position, we reduced our debt by $11 million in the first quarter and our net leverage stands at only 1.4x LTM EBITDA. And finally, we are pleased to announce that our board approved a dividend of $0.35 per share for the first quarter. This will bring our cumulative dividends paid since inception to $3.87.

Moving to Slide 4, I'd like to review our business strategy and talk about why we feel very confident that this will lead to solid returns for our shareholders in 2017 and beyond. Our strategy is simple and has remained consistent since our inception back in February of 2014. And it can be looked at in 3 parts: one, reverse declining traditional media trends and organically grow both revenue and cash flows; two, inorganically drive growth through strategic, accretive acquisitions; and three, return a substantial portion of cash to shareholders in the form of a dividend. We have been executing on all facets of the strategy and since inception, total returns for our shareholders are 43%, evidence that the business strategy has and more importantly, we believe, will in the future, create compelling returns.

I'll touch on each of these 3 parts quickly now and then go into more detail on each of them in the next four slides. As I mentioned a few minutes ago, we are focused on diversifying our revenue away from the traditional print category and have invested in new businesses and products that we believe will help us to achieve organic revenue and cash flow growth.

Propel and GateHouse Live, both growing rapidly are two great examples of these investments. On the acquisition front, the local publishing sector remains fragmented, out of favor and with poor operating performance and the pressure from the bricks and mortar retailers, all of which is creating a strong pipeline of opportunities of which we can make acquisitions at very attractive valuations. We continue to actively evaluate deals, staying disciplined to our stated acquisition criteria and goals. An important one of which is our valuation range, which continues to stand at 3.5 to 4.5x the seller's LTM EBITDA, so that's before synergies.

Our acquisition in the first quarter of the Ohio newspaper group is a great example of the kind of asset that fits into all parts of our acquisition criteria. A perfect fit into an existing cluster, immediately accretive to free cash flow and within our stated valuation range.

This quarter marks our 12th consecutive quarter issuing a dividend. Over these past 3 years, we have raised the dividend 30% with 3 increases to the quarterly amount, evidence that we have been able to create growth with our acquisitions. We remain committed to returning capital to our shareholders, with a strong dividend.

Turning to Page 5, let's dig further into the revenue growth initiatives. We have invested in new business lines and products over the past few years that we believe will grow at a pace that will be greater than our traditional print revenue declines. We believe this will lead to overall organic total revenue growth.

We also continue to work to find efficiencies and remove costs from our infrastructure to ensure that our cash flow is not only to remain strong, but grow, which is especially important given the current declining revenue environment, combined with the investments we're making in these new products and businesses. The company has several revenue and cost initiatives, some of which are detailed here on this slide, which have been performing quite well, giving us confidence that we are on the path to both organic revenue and cash flow growth. As I briefly mentioned, Propel has been central to this strategy and continues to grow at a substantial pace. In the first quarter, Propel generated over $15 million in revenue and was up about 56% to prior year. LTM revenue for Propel has grown to nearly $60 million and is up over 60% to the prior LTM period.

Our events business, GateHouse Live, is also targeted to double not only in the number of events this year, but revenues as well. In the first quarter, GateHouse Live hosted 28 events and has over 150 booked so far throughout the remainder of the year.

We are also very encouraged by our subscription revenue in our B2C business, which continues to grow. In the first quarter, subscriptions brought in nearly $111 million in revenue, an increase of about 0.5% to prior year on an organic same-store basis. With our investments in targeted marketing efforts and strategic pricing actions, we are confident in our ability to accelerate this growth.

Our commercial printing category is on track for strong growth during the remainder of 2017 due to securing over $15 million in new annualized revenue from contracts in the last couple of months. We also have a pipeline for future incremental Commercial Print contracts that we believe will generate an additional $5 million in annualized revenue.

In BridgeTower Media, our business publications division, has also continued to provide strong synergy for Propel, given our business publications subscribers are small business owners who are the ideal customer for our Propel products and services. In addition, this business segment is not exposed to the major brick-and-mortar retailers and therefore is experiencing much more stability in its traditional revenue base. We expect BridgeTower revenues to grow slightly on an organic basis throughout the remainder of 2017.

In order to preserve and grow our cash flow, New Media remains committed to finding ways to operate more efficiently and will continue to evaluate our expenses throughout the remainder of the year. Many of the efforts have been put in place for a while now and we believe will continue to contribute to cash flow growth, year-over-year and we believe that growth will begin in the second quarter. It is great evidence that our strategic initiatives are now not only working, but coming to fruition on the scoreboard.

The graph on this page at the bottom is meant to depict for you more detail on why we see a path to organic growth despite having a 6.2% apples-to-apples decline over the past 6 months. Starting on the left side of the graph is our actual LTM Q1 2017 revenue, just over $1.25 billion. Using the traditional print decline that we experienced in the first quarter of 13.7%, we can expect the decline in traditional print revenues of about $80 million over the next 12 months. Using historical assumptions and our own internal estimates on the performance of the new initiatives, many of which I just spoke about, we expect to generate approximately $72 million of new revenues. This would bring the illustrative LTM Q1 revenue to $1,254,000,000 or within $8 million of our current LTM revenue, essentially flat for the next year.

Now let's turn to Page 6 to discuss more about the primary contributor to this growth, which is Propel. Propel Business Services help small and medium-size businesses grow and thrive by providing premier marketing and technology solutions. Our range of products can be tailored for each SMB, meeting their changing needs and demands and integrated a la carte or as a suite of bundled services. We have several differentiators that are helping us to provide a superior level of product and service to our SMBs. The first is that Propel is a Google premier SMB partner for both the Google AdWords and G Suite product lines. As a premier SMB partner, Propel gives customers access to cutting-edge Google products with top-tier operational support. Propel is the only Google premier SMB partner who has the selective designation for both the digital marketing and IT services product lines, the only one.

The second factor is ThriveHive, our low-priced DIY marketing solution. This software as a service platform gives small businesses access to all the marketing tools and automation they need to grow and create a strong presence online. ThriveHive achieved a major milestone in early April with the launch of our new platform, enabling complete self-provisioning, including do-it-yourself website building.

We are excited to see their continued growth throughout the second half of the year. In the first quarter, Propel revenues grew 55.9% over prior year to $15.3 million. The business served 9,300 active customers in the quarter, an increase of 22% to prior year.

We have seen continued diversification of our customer base inside of Propel as well with a near-even split now across home services, professional services, automotive, and health care and education. Outside of the automotive vertical, those segments were not traditional customers of our Local Print Advertising products historically, and we are excited to be reaching a wider set of the small business community in each of our markets, through our Propel offerings. And as I mentioned earlier in the call today, this is what gives us confidence that we will increase our current 10% local business penetration rates.

Turning to Slide 7. Let's take a look at the current revenue diversification of the company. Since 2014, our revenue coming from stable or growing categories has increased from 48% to 53%. Our focus on new business and revenue growth initiatives, combined with further declines in traditional print advertising have driven the diversification of our revenues away from the traditional print category.

Subscription income is our largest single revenue category at 36% of total Q1 revenue. And as I mentioned, that revenue grew at about 0.5% on an organic same-store basis in the first quarter. Digital revenue also continues to be a bigger contributor to the growing category, and in the first quarter was over $31 million and up nearly 14% to prior year.

And as I mentioned earlier in the call, we are very encouraged and excited about the pace of growth for both the events division and Commercial Print revenues for the second half of 2017.

As I've highlighted this morning, we have continued to invest in our growing digital business platforms with the intention to create scale and ensure that we are positioned to deliver our customers a superior product and experience. Two projects that we have made strong progress on in Q1 are the Garcia website redesign and our additional digital-only sales representative hiring.

Our online websites have now been redesigned by Garcia Media, a leading media design company, and they now allow for a more seamless user experience and more impactful advertising outcome for our clients. We're also excited to report that we have hired 43 of the 50 additional digital-only sales representatives that we announced we would be adding. We anticipate hiring the other 7 in the next few weeks.

Digital revenue was up 13.8% in the quarter. However, with these projects, we believe, we are well positioned to post even stronger digital revenue growth through the remainder of the year.

Let's talk about our acquisition strategy for a second and for that, I'm going to turn to Slide 8. As mentioned, we closed the acquisition of the Wooster Republican Printing Company, an Ohio-based publishing division of Dix Communications in January for $21.2 million. With that acquisition, we have deployed $735.4 million on acquisition since inception, with a purchase price on average of 4x the seller's LTM as adjusted EBITDA.

We remain disciplined with regard to our acquisition strategy. New Media is approached on a regular basis with a decent amount of acquisition opportunities because of our successful track record of purchasing and integrating those assets as well as our strong commitment to supporting the local newsrooms and delivering high-quality editorial content. However, we do review all opportunities very carefully and we're very selective in those we pursue. With over $175 million in liquidity, we believe New Media is very well positioned to act on future compelling opportunities in this space.

Our acquisition strategy thus far has yielded great results, with 30% average leveraged yields and it's the primary contributor to the 30% growth we've seen in our dividend. That's our strategy. And let's turn to Page 9 and look at the score card for how our strategy has worked thus far.

With our Q1 dividend announced today, we have returned $3.87 to investors and have grown the dividend, as I mentioned, 30%, over the last 3 years. The dividend, combined with our stock performance has generated 43% in total return to shareholders since our inception. And as you can see from this slide, that has outperformed both the S&P 500 and the Russell 2000, and it's outperformed our newspaper peer group by a very wide margin.

Despite this strong performance, our dividend yield remains high at over 9.5%, which is inconsistent with our newspaper peers who have an average dividend yield of 6.3%. Our LTM free cash flow is $112 million and we have deployable liquidity, as mentioned, of about $175 million to add to that. With an annual dividend of $75 million, we are extremely confident not only in the sustainability of the dividend but in the potential for growth.

At the onset of my remarks this morning, I talked about how we see our business as both a B2C and B2B business. Leveraging technology solutions and our long-standing strong, local media assets to create opportunities for future growth. We remain extremely bullish about this opportunity. As our revenue mix changes, we are highly confident in our ability to grow both revenues and cash flows. Our growing revenue categories continue to make up a larger portion of total revenues and this will be the key factor to creating organic growth.

Propel is also becoming a significant contributor with nearly $60 million in annualized revenues and a very strong pace of growth. We also continue to work hard to find ways to operate more efficiently and believe that we are well positioned to grow cash flow organically beginning in the second quarter this year on a go-forward basis.

Our dividend is strong and secure, and as I just mentioned, we believe our cash flows will grow organically. On top of that, we have about $175 million of deployable capital. We believe, considering all these factors as we look out into the future, we believe our dividend payout ratio will be less than 40%. With our ability to grow organically as well as through acquisitions, we remain very optimistic about the opportunities to create substantial value for our shareholders in the future.

With that, I'd like to turn things over to Greg for a more detailed review of our first quarter results. Greg?

Thank you, Mike, and good morning, everyone. I'll now be speaking to Page 11 of the supplement. I want to start by pointing out that we've renamed our revenue metric. Same-store revenues, excluding the benefit of tuck ins, is now called organic same store.

This metric gives an apples-to-apples view of asset performance in the current period versus the prior year period. In the past, we have only given this metric for total revenue. We have expanded the use of this metric to several additional revenue subcategories.

First quarter revenue was $307.5 million, up 2.2% to the prior year on a reported basis and a decrease of 6.2% on an organic same-store basis.

This is the same organic same-store decline that we reported in the fourth quarter. The challenging environment for brick-and-mortar retail stores that we reported last quarter continued into the first quarter. For the moment, these increased headwinds in traditional print are offsetting the gains from our growth areas, which is why our organic same-store results were flat sequentially at 6.2%. Total traditional print revenues were $135.8 million and decreased 13.7% on an organic same-store basis. Within this category, Preprints, Classified Print and Local Print Advertising categories declined 12.1%, 12.0% and 15.9%, respectively, on an organic same-store basis.

Digital, our consistently growing revenue category, increased 13.8% to $31.3 million. Digital now represents 10.2% of our total revenue performance. Propel Business Services is the primary driver of this performance and generated $15.3 million in the quarter. And despite an increasingly larger base, it still increased 55.9% to the prior year.

Circulation, which comprises approximately 1/3 of New Media's total revenues, was $110.8 million, and increased 0.4% on an organic same-store basis. Digital-only subscribers were up 25% to over 54,000 in the quarter.

Turning to Commercial Print, distribution and events. This category decreased 3.7% on an organic same-store basis. Unpacking this, the first quarter is a low point for events. So commercial printing, which, by far, is the largest component in this category, is driving the performance. As Mike mentioned in his remarks, commercial printing will have a much stronger performance in the second half of the year due to contract wins and a strong pipeline.

Live events, another revenue stream in this category, will significantly ramp up as well beginning in the second quarter and continue to grow at a strong rate through the rest of the year. So this category is about to do much better, as adjusted EBITDA and free cash flow were $26.7 million and $17.2 million, a decrease of $2.4 million and $1.4 million, respectively to the prior year.

Our previously mentioned expense reduction plans are delivering the expected savings and we continue to identify and reduce appropriate expenses to preserve cash flow. Importantly, we continue to fund the high-growth areas that underpin our revenue returning to growth as well.

Operating loss was $2.8 million and was negatively impacted by $6.5 million of noncash write-downs for consolidating printer press facilities, part of our cost-reduction strategy.

Net loss in the quarter was $3.7 million and was burdened by these same write-downs. We ended the quarter with $135.9 million of cash on the balance sheet and $40 million undrawn on the revolver. In addition, we have $33 million of availability to upsize the existing term loan using an accordion feature built into the agreement. Debt outstanding at the end of the quarter was $351.9 million at an average blended rate of 7.25%.

During the quarter, $10 million of acquired debt from our Halifax transaction came due and was paid. And we also paid an additional $1 million on our regular term loan as part of regular amortization. Net leverage against our LTM as adjusted EBITDA is 1.4x. So we have significant liquidity and debt capacity available to continue executing on highly accretive transactions. Operator, let's open up the line for questions.

(Operator Instructions) And your first question comes from the line of Kyle Evans with Stephens.

In for Kyle. I wanted to start with circ in Q1. Good to see a slightly positive same-paper comp. I wondered if you could give us underneath that, the price and volume trends?

Yes. Volume trends are declining in that slightly more than 5%. So I'd say high single digits and that's [embedded] with price increases that are closer to 10%

Great. And then in the press release, you called out you're looking for modest revenue growth for circ in the second half of the year. Is that on an organic basis? And what price and volume assumptions are underneath your expectations?

It is on an organic basis. And yes, very similar trends to what we had in the first quarter for the remainder of the year. Although, some of the pricing actions we've taken as well as the marketing actions we've taken, we think, will favorably move the volumes slightly to the good and pricing slightly to the good. So we should have some improvement to that 0.5% organic growth trend in the first quarter.

Kyle, it's Greg. I also want to add that, that also reflects how we've performed over the last 4 quarters. So that's not a change, that's sort of performance on an on organic basis we've seen from that category.

Okay. And to shift gears a little bit to organic advertising pacing. On the print side, do you have any visibility into what 2Q might look like?

We're not going to give specific guidance. But I would say that from an overall perspective, our Q2 trends, we would expect to have some improvement versus the last 6 months.

Okay. And then lastly, I wanted to talk about SEC regulations, which we now know are going to be reviewed this year. Specifically, on the cross-ownership for radio -- excuse me, for newspapers and television within a market, do you have any thoughts on reg reform in that area and if the rules were relaxed, how do you think your business might be impacted?

Yes. With our focus on smaller markets, the regulation -- potential changes in regulation won't have much of an impact on us because we don't have a lot of broadcast television in our markets. Only in our largest markets do we have that. We don't see a huge impact on us even in those larger markets. There are many examples of companies over the last 20 or 30 years that have actually, through grandfather rules, been able to own newspaper and broadcast in the same markets and the crossover from a revenue standpoint as well as the synergies have proven not to be meaningful to the business. So we don't really see the changes in cross-ownership as meaningfully impactful to us. I would also further say that the broadcast assets right now, we think, are pretty expensive, so wouldn't be all that attractive from an acquisition standpoint.

Your last question comes from the line of Jason Bazinet of Citi.

So I really appreciate the bridge that you provided in the appendix on Page 14, or 13 -- excuse me, to get to your sort of flat revenues on an organic same-store basis. And I guess, I have a two-part question: one is, is the timing still the same? You're still targeting for that cross-over point in the fourth quarter of this year; and then second, am I right that this is new commentary that you provided that you think free cash flow will sort of increase on a go-forward basis? I know you definitely said that in the second quarter, it will improve. But is that...

Yes. Jason, yes, that's new commentary from us. Based on what we see internally, based -- beginning in the second quarter of this year with the initiatives we've taken on the cost side combined with the initiatives on the revenue side, we do think free cash flow will start to grow year-over-year beginning in the second quarter. So that's new commentary. The declines that we see in traditional print advertising, which accelerated by about 300 basis points from Q3 last year into Q4 and Q1, it caused a slight delay by a couple of quarters in terms of when we actually see the inflection point of organic revenue growth. So our new growth initiatives remain on track and on pace with what we've been thinking about for the last year and expecting. The print stuff has gotten, about 300 basis points were switches throwing us out a couple of quarters in terms of when we had organic growth, but nothing more substantial.

Thank you for your participation in today's New Media first quarter earnings conference call. You may now disconnect.