Gannett Co Inc (GCI) 2019 Q1 法說會逐字稿

Good morning. My name is Zetania, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Media first quarter earnings call. (Operator Instructions)

I would now like to turn the call over to Ms. Ashley Higgins. Ma'am, you may begin your conference.

Great. Thank you, Zetania, and good morning, everyone. I'd like to welcome you to New Media's First Quarter 2019 Earnings Call.

Joining us today are Mike Reed, New Media's CEO and President; and Kirk Davis, COO of New Media.

If you navigate to the New Media website, you will find that we've posted an earnings supplement to accompany this call and our earlier press release.

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

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

Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in New Media.

The webcast and audio cast is copyrighted material of New Media and may not be duplicated, reproduced or rebroadcast without our consent.

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

Thanks, Ashley. Good morning, everyone, and thanks for joining our call this morning.

What I would like to do this morning is cover and provide updates to you on three primary areas of focus for us. Let me just highlight those three areas: one, our first quarter financial performance, along with a discussion around what we are doing to improve profitability and better position the company for long-term revenue growth, which includes diversification away from traditional print revenue; I want to give you an acquisition update, number two; and number three, discuss and kind of reiterate our view on capital allocation.

Let's start with the first quarter. Our results were largely in line with our expectations for revenue, EBITDA and free cash flow. In addition, our growth businesses continued to perform very strongly, and our shift in consumer marketing strategy is exceeding expectations in terms of subscriber volumes.

Our revenue on a reported basis was up 13.7%, driven by our acquisition strategy. On a same-store basis, our first quarter revenue decreased 7.4%, which was an 80 basis point decline from what we achieved in Q4 of 2018. However, we did see continuous improvement in our revenue trends during the quarter, and we expect to continue that improved trend performance in the second quarter and for the balance of 2019.

We are proactively taking several actions that we expect will improve the profitability of our company and further diversify our revenue streams away from traditional print. Some of these actions had a near-term negative impact on revenue as evidenced in our organic same-store revenue trend decline relative to Q4 and Q3 last year, but were worth pursuing because of the positive impact on EBITDA and cash flow and the diversification away from traditional print revenue.

Our most significant of these actions is the shift in consumer marketing strategy, which we discussed on our last earnings call. The shift is focused on creating long-term circulation revenue stability through growing our print and digital subscriber base rather than attempting to increase subscriber pricing as the sole means to grow revenue. This will provide a healthier, more stable subscription revenue base over the long term. This quarter is the second consecutive quarter that we achieved subscriber growth as compared with the prior year period, and we are very, very pleased with that trend. We also continued to grow our digital-only subscriber base, which was up 43.9% in the first quarter as compared to the prior year.

In addition to consumer marketing, we have initiated efforts to review our entire publishing portfolio of ancillary products to assess their profitability and whether they continue to fill the need they were originally created for. In the first quarter, we ceased publication on several unprofitable niche publications. This results in improving EBITDA and margins, but has had a short-term negative impact on revenue.

During the quarter, we also closed a high-cost printing facility, which improved profitability but hurt revenue due to the loss of a couple small commercial print jobs.

Another action item we began in the first quarter was to move away from offering single-copy newspapers through coin-based racks. This initiative lowered some single-copy circulation revenue. However, it improves our EBITDA and cash flow as many of our coin-based racks were unprofitable today. This circulation revenue from coin-based racks also had very high churn and was an overall declining revenue trend.

On the publishing side of the company, we are investing in our technology and centralized infrastructure to further streamline the business and maximize synergies across our broad portfolio. This will result in more cost reduction opportunity throughout 2019. We have nearly doubled the number of daily publications we own and also the number of markets that we operate in since 2014. And we know that as we continue to centralize many functions in our organization, we will produce better results and achieve higher margins. Lots of opportunity to come in 2019 in this regard.

The second area I'd like to mention this morning is acquisitions. As we noted last quarter, we closed on the acquisition of the publishing arm of Schurz Communications on January 31 for $30 million. This is a highly complementary addition for us with 10 daily newspapers that fit nicely into our existing footprint. We expect an ROI in 2019 and 2020 on this acquisition of around 30%.

We are focused on integrating Schurz as well as our 2018 acquisitions into the portfolio. And as I just mentioned, we are working on improvements to our infrastructure and technology on several fronts to further maximize synergies as well as better position the portfolio for long-term success. We continue to look for strategic acquisitions as well that would be good for our growth businesses and our publishing business.

Lastly, I'd like to reiterate our view on capital allocation. Our main goal remains to maximize long-term shareholder value, which is primarily accomplished through growth in our revenue, profitability and cash flow. We have been investing growth capital in both organic opportunities as evidenced with the successes of UpCurve and GateHouse Live as well as inorganic opportunities as evidenced by our $1 billion in acquisitions over the past 5 years.

However, beyond investing for growth, we have also returned a significant portion of our cash flow back to our shareholders in the form of a dividend. To that point, we were pleased to announce this morning that our Board has approved a first quarter dividend of $0.38, which equates to $1.52 on an annualized basis. We will continue to evaluate all capital allocation options to determine the best opportunity for building long-term shareholder value.

I would like to spend a few minutes now running you through the details of our first quarter financials. As I move to this part of our call, let me update you on our CFO search. It is well underway and we have made great progress. We expect to have that seat filled within the second quarter. We are talking to a few really great candidates and feel good about the next step with regard to this process.

Now for the financial details. New Media total revenue was $387.6 million in the quarter as compared to $340.8 million in the first quarter of 2018. As I mentioned earlier, this is up 13.7% on a reported basis and down 7.4% on an organic same-store basis.

Within the quarter, traditional print revenues were $149.9 million, down 14.8% on an organic same-store basis. This trend is very consistent with Q4. Within this category, local print advertising was down 16.2%; classifieds were down 12.5%; and preprints were down 17.5%, all on an organic same-store basis.

Digital revenue increased 23.8% to $47.7 million. This category represented 12.3% of our total revenue in the quarter. UpCurve is the largest component of this category, generating $26 million in the first quarter, and that was up 34% to the prior year. We continue to see strong growth in our UpCurve business.

Circulation was $152.2 million, down 5.5% to the prior year on an organic same-store basis. I mentioned previously on the call this morning we believe the initiatives we have underway will improve the long-term prospects for this revenue category despite causing some short-term decline. The early results on this strategy shift with regard to subscriber volumes have outperformed our expectations.

Commercial Print, Distribution and other revenue was $37.9 million, up 1.4% on an organic same-store basis.

As adjusted EBITDA was $33.1 million and free cash flow was $21 million in the quarter, our operating loss was $1.4 million and our net loss attributable to New Media was $9.1 million. However, this resulted from $8.3 million in onetime expenses, of which $4.2 million were noncash. Excluding these onetime items, results would have been operating income of $6.9 million and a net loss attributable to new media of only $800,000.

New Media ended the first quarter with $24.6 million of cash on the balance sheet and $31.5 million of available undrawn revolver. Debt outstanding at the end of the quarter was $451.1 million at an average blended rate of 8.6%. Net leverage against our LTM as adjusted EBITDA is 2.3x. We do expect total debt outstanding at the end of the second quarter to decline by $18 million to $433 million.

And with that, operator, I would please open the call up for questions?

(Operator Instructions) Your first question comes from the line of Jason Bazinet with Citi.

Yes. I just had two questions. One, would you guys take actions like closing that high-cost printing facility or shutting titles down or eliminating coin-based racks? I'm assuming you don't -- you've sort of removed that from the year ago period so it doesn't make your organic revenues look worse. Is that true?

It's not. It's still included in the year ago number, so it does make our organic decline worse.

Okay. Is there any -- in rough numbers, how much do you think that sort of penalized you?

If we hadn't been taking these actions that you just noted, Jason, along with the circulation actions we've taken, our same-store revenue trends would be more in line with where -- we would be slightly better than where we were actually early last year when we were down in the low to mid-4s.

Okay. That's great. And then my second question, as you talked about your use of capital, does the Board consider whether or not the equity seems to reflect the high dividend payout in its consideration of how to use your cash flow? Or is it more just a function of here are the opportunities that we could use to deploy our cash organically or with M&A versus a dividend?

Yes. The latter. I mean the Board looks at how can we use the cash to produce the best opportunity to grow and produce long-term shareholder results. Certainly, the Board is not happy with where the share price is or the dividend yield. However, we can't change a strategy that we believe is working and is best for the long-term opportunity for shareholders simply because the share price traded off for a quarter or two. So I believe we're executing on the right long-term strategy and returning capital to shareholders in the form of a dividend is part of that strategy, and the share price will properly reflect that in the long term. It's misunderstood right now.

As we wrap up today's call, I would like to congratulate our newsrooms on winning several significant awards during the quarter. Editor & Publisher named two of our papers to their 2019 10 Newspapers That Do It Right list, the Columbus Dispatch and the Cape Cod Times.

Christian Sheckler at the South Bend Tribune was named a 2019 Goldsmith Prize finalist for his investigative journalism piece in partnership with ProPublica on the criminal justice system.

And the Columbus Dispatch won the Print Journalism Award from the National Institute of Health Management Foundation for their ongoing series addressing the cost of prescription drugs.

We remain committed to high-quality journalism and the importance of providing hyperlocal news and investigative reporting to the communities we serve.

We are optimistic about our ability in Q2 to improve upon our organic same-store revenue trend and as adjusted EBITDA trends.

We thank you for joining our call today and look forward to updating you again in 3 months.

This concludes today's conference call. You may now disconnect.