USA TODAY Co Inc (TDAY) 2016 Q3 法說會逐字稿

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

I would now like to turn the call over to Ms. Sara Yakin, Investor Relations. You may begin.

Thank you, Amy, and good morning, everyone. I'd like to welcome you to New Media's third-quarter 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.

Briefly, 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 re-broadcasted without our consent.

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

Thanks, Sara. Good morning, everyone. Thanks for joining our call this morning. I'm really glad to be able to update you this morning on all the exciting things we have going on at New Media. First though, I wanted to share some thoughts and observations with you before I get into the presentation.

Some of the great things we will talk about today include our continued improving revenue trends. In fact, Q3 marked the fifth straight quarter of improving same-store revenue trends.

And while mentioning revenue, I'm pleased to tell you that we remain confident in our ability to reverse the organic revenue declines that our business has experienced for years. And, as previously stated, we see a path to accomplish this by the end of 2017. And we remain on track with our own internal planning.

You'll also hear this morning more about our continued success with regard to attractive acquisitions. We now have completed more than $100 million in acquisitions this year alone.

And even more importantly, our pipeline for future deals looks great and our liquidity position to execute on these deals is sound.

With the optimism we have around the organic side of our business, combined with our attractive deal pipeline, I'm really excited to tell you this morning that our Board approved a 6.1% increase to our dividend. We declared a dividend this morning of $0.35 for the third quarter. Our dividend is now up 30% over the past two and a half years. And importantly, this has been driven by growing cash flow.

So we are not only confident in the sustainability of the dividend, but our goal is to continue to grow it as we grow the Company. We believe the dividend increase speaks to our optimism around the outlook for the Company.

Obviously, I think our equity is undervalued, given where the share price is today, and think the strategy and what we have done is currently misunderstood.

We took New Media public in February of 2014, and paid our first dividend in the second quarter of 2014. The strategy to create value was simple, take out-of-favor [hyper] local media businesses that produce great cash flows and use those cash flows to invest in organic growth opportunities, leveraging the unique and valuable assets we have in each of our local markets, as well as investing in organic growth through buying these out-of-favor assets at really attractive valuations, and, finally, returning a significant amount of the cash flow to investors with a dividend.

Just over two and a half years later, we have executed exactly on this strategy. And here are the numbers to back that up.

When we went public, we had $67 million in cash flow and 30 million shares outstanding. As I said, we paid our first dividend in the second quarter of 2014.

Today, we have approximately $122 million of cash flow and that does not include the $50 million in acquisitions we've completed in the recent three months. We have about 44.5 million shares outstanding today.

We have paid $3.17 in dividends in 10 quarters, and increased the dividend with this morning's announcement by 30% since inception.

We have done nearly $700 million in acquisitions at a value of four times the sellers as adjusted EBITDA.

Our pipeline for future deals looks great, and we are just over a year away from reversing the revenue declines our traditional business has faced for many years.

In my view, the strategy is great, our execution has been tremendous, and the growth we have created for the Company is very significant.

Considering we have a growing business and an annualized dividend at $1.40 per year, I believe our share price is significantly undervalued. And I'll touch on this more a little later this morning.

Now turning to page 2, I'll start with a quick overview of our Company today and reference some of the strong local assets we own and are leveraging to create long-term growth for the Company.

Today, New Media's portfolio of award-winning local media assets reaches over 20 million people each week across 525 markets in 36 states.

We own and operate over 600 local publications, including 121 daily newspapers, the majority of which have been published for more than 100 years, some for nearly 200 years.

Our publications are the long-standing dominant sources of comprehensive, high-quality, local news and information in the communities they serve.

And we're extremely proud of the content our journalists produce. Just this month, the Providence Journal was named the New England Newspaper of the Year by the New England Newspaper and Press Association. Great work to the entire team in Rhode Island. Congratulations.

Also want to take a moment to recognize the great work our teams did in Florida and the Carolinas during and after Hurricane Matthew.

We had 19 markets impacted by the storm, 5 fairly significantly. Fortunately, all of our folks are safe and we had very limited damage to our structures.

The work our teams did to cover the storm and aid their communities was nothing short of heroic. I'm proud to call these folks colleagues, and I wanted to send a big thank you to all of them.

So what are the assets we own in the local markets that are extremely useful? One, strong, highly recognized, and long-standing local media brands which opens up doors for us in the communities we serve.

Two, a large, decentralized, feet-on-the-ground sales staff capable of getting in front of millions of SMBs to sell new product and services that [solve pain] point for those local businesses. Those businesses look to work with local, trusted business partners, of which we are one.

Local infrastructure, staff, and real cash flow is the third asset. It gives us a significant advantage in new business initiatives versus a startup company entering the market new with no presence and no resource.

And what are the leveragable assets we have as a consolidated Company? Number one, real scale. We operate in over 525 markets across 36 states and can touch nearly three million small businesses in our markets. And, importantly, those small business owners know us.

Number two, we have over 1,300 local feet-on-the-street sales reps in markets where, in most cases, we have the largest local sales force.

And three, we have incredibly strong and fast-growing digital businesses, Propel being the primary one, that we can leverage across our expansive national footprint.

Those of you who have followed our Company know we have been investing some of our cash flows in these new digital businesses over the past few years in order to return our local media businesses to growth.

Most of these investments have occurred in Propel Business Services, which is predominantly made up of Propel Marketing and other digital services that we're starting to offer, ThriveHive as an example.

This Propel platform, we believe will be a very significant factor to drive overall organic revenue growth for the Company. In fact, Propel's revenue reached about 5% of total Company revenue this quarter, a milestone for Propel.

Now turning to page 3, I'd like to discuss some highlights for the quarter. Our Q3 revenue decreased 1.3% versus prior year on a same-store basis. And this marked the fifth consecutive quarter of trend improvement, increasing nearly 200 basis points versus the last quarter.

A big driver of our improving same-store revenue trends is the organic growth we're achieving with Propel. Propel generated $14.7 million of revenue in the quarter, an increase of 77.4% to the prior year.

Also of note this quarter, our digital revenue was very strong and saw an improved trend. Revenue was $32 million and increased 11%, 10.5% to 11% to prior year.

Excluding tuck-ins, our apples-to-apples revenue is down 4.9%, and that is flat with our Q2 trend.

As I mentioned, we are on track with our internal plans to reverse these declines by the end of next year.

Now back to sales, same-store sales, another meaningful contributor to our same-store sales improvement is our tuck-in acquisition strategy.

New Media completed the acquisition of the Fayetteville Observer for $18 million in the third quarter. This deal was actually announced last quarter, and we closed it during the third quarter.

Additionally, we closed two more acquisitions at the beginning of the fourth quarter, which were announced this morning with our press release, with a combined purchase price of $8.5 million. And these two acquisitions will assist with our same-store trend in the fourth quarter.

Year to date, we have deployed over $100 million into acquisitions, highlighting our continued success at purchasing high-quality, local media assets that fall within our previously stated financial criteria range of 3.5 to 4.5 times the seller's LTM as adjusted EBITDA.

And finally, with regard to the quarter, I'm excited to announce that our Board has authorized a $0.35 dividend for the quarter, representing a 6.1% increase versus last quarter. This action reflects the positive outlook for the coming quarters with regard to both our organic opportunities and our acquisition pipeline.

Since inception, New Media has remained committed to returning a substantial portion of our cash flow to our shareholders in the form of a dividend. And with the declaration of our Q3 dividend today, we have returned a total of $3.17 in cumulative dividends to date, and that's ever 10 quarters.

Also, we have grown the dividend, as I just mentioned, by 30% with this increase, in just two and a half years. We have been able to grow cash flows and grow the dividend over the past couple years, consistent with the strategy we have communicated to investors since inception.

Now let's take a look at the acquisitions we did at the beginning of the fourth quarter. And for that, I'm going to turn to page 4.

The Columbia Daily Tribune and its associated publications are located in Columbia, Missouri, home to the University of Missouri.

As the dominant and most well-known local media presence in central Missouri, the Columbia Daily Tribune has consistently been recognized for its quality news coverage, editorial content, printing quality, and digital news innovation.

First published in 1901 and owned by the Waters family for over 110 years, the Daily newspaper has an extensive history of producing strong journalism and has won hundreds of state and national awards.

After owning the newspaper for over a century, we are truly honored that the Waters family has entrusted New Media to carry on its tradition of providing quality content and products to the residents of Columbia and its surrounding regions.

In addition to our acquisition of the Daily newspaper in Columbia, we also completed the acquisition of the Rochester Business Journal, which we believe is a perfect asset to add to our growing B2B business publications platform, Bridge Tower Media, which was formerly Dolan Media.

And in our press release this morning, we announced the rebrand of Dolan Media to Bridge Tower Media, our B2B platform.

This acquisition marks our third B2B media acquisition in the past nine months, and accelerates our expanding commitment to providing exclusive business information at a local level.

We also believe these B2B publications present a great opportunity for Propel expansion, as the very customers of our B2B publications are our typical Propel small business customers as well.

Year to date, New Media has deployed over $100 million of capital through seven acquisitions, demonstrating both our commitment and ability to drive inorganic growth for our shareholders through strategic accretive acquisitions.

With a robust pipeline for future acquisitions and capital to deploy, we believe our Company has tremendous opportunity to continue to create value for shareholders through this channel.

Now, the exciting part of our Company is Propel. And for the most recent developments on that, let's turn to page 5. Propel Business Services, which is predominantly made up of our marketing services platform, generated $14.6 million of revenue in the quarter, a 77.4% increase to the prior year, and a 22.5% increase sequentially from the second quarter of this year.

As mentioned on previous earnings calls, we believe Propel's success to date can be attributed to New Media's unique offering, given our physical local presence, full product suite, dedicated client services, and our experienced digital staff.

On the business side, we continue to build out ThriveHive, our low-priced, automated marketing solution, which, as a reminder, is a unique all-in-one software-as-a-service platform, where small businesses essentially get three things. One, automated and customized marketing recommendations. Two, tools needed to act on those recommendations. And three, an easy to understand dashboard to track the results of those marketing actions.

As the needs of an individual small business owner change, our dynamic platform can be adjusted to evolve with the maturing business customer.

Our Propel business continues to grow at an amazing rate, even though it is a much larger business today. We see this business continuing to grow at a fast pace for several years to come, and being a primary contributor to overall organic revenue growth for our Company.

As I mentioned a little while ago, Propel reached approximately 5% of annualized total Company revenue for the first time, an exciting milestone for the Company.

Now turning to page 6, let's take a look at the growth we've been able to achieve from our acquisition strategy.

Since inception, New Media has remained committed to acquiring dominant providers of local news in small to midsize markets, with a strong established brand and at very attractive prices.

To date, we have announced and closed 16 local media acquisitions, plus one digital acquisition, ThriveHive. Gross purchase price for these transactions is approximately $694 million, and all but two of these deals have been purchased using cash on our balance sheet and incremental debt on our term loan.

We view these as our two primary sources of capital for future acquisitions as well.

In 2016, we have closed seven acquisitions with a purchase price of more than $100 million. And as you have heard on the call this morning, our pipeline for future deals looks great.

We have $85 million of deployable liquidity at the end of the third quarter, and we believe our M&A strategy will continue to be a major driver of growth for our Company for the next several years.

Importantly to note also, the acquisitions we have completed to date have been done at an average of four times the seller's LTM as adjusted EBITDA. So that's before synergies. And they've been done at unlevered yields of 23% and levered yields of 30%, respectively.

We have not seen an increase in the valuations for the assets that we're purchasing, and we remain disciplined and vigilant with regard to our strategy around acquisitions.

Finally, before I turn the call over to Greg for a review of our financials this quarter, I wanted to quickly touch on the valuation of our stock and the substantial upside we see from where we trade today. For that, I'm going to turn to page 7.

Today New Media's stock trades at a nearly 10% dividend yield and 20% free cash flow yield. In my view, and as I said on the onset of our call this morning, our equity is very misunderstood by the investment community at the moment.

Our strategy has not changed since becoming a public company. And, more importantly, we've remained committed to execution, as evidenced by our improving revenue trends, $694 million deployed on acquisitions at the midpoint of our stated purchase price range - that includes over $100 million this year - and the return of $3.17 of capital to shareholders with our dividends.

Further, our view about future organic growth and continued robust M&A has not changed.

Using the dividend yield of our newspaper peer group as one data point, which I would argue we should trade better than, shows substantial upside to our share price.

At a 5.6% dividend yield, our share price would be north of $25, more than 75% higher than where we trade today.

In my view, given the growth we have demonstrated we can achieve and have shown over the past two and a half years, combined with our robust outlook, we should probably trade at a better yield than our peer group, I would argue.

With that, I'd like to turn the call over to Greg, who will review our Q3 results.

Thank you, Mike, and good morning, everyone. I'll now be speaking to page 9 of the supplement.

This quarter, revenue was $306.8 million, a decrease of 1.7% to the prior year on a reported basis and a decrease of 1.3% on a same-store basis.

Q3 is the fifth consecutive quarter of improving same-store revenue trends. The prior-year comp included $20.2 million of revenue from owning the Las Vegas Review Journal, which we sold in December for a $57 million gain.

Total traditional print revenues decreased 8% on a same-store basis, to $143.6 million. The decline was primarily driven by continued pressures across our preprints, classified print, and local print advertising categories, which declined 10%, 9.2%, and 4.6%, respectively.

Similar to past quarters, the declines reflect the ongoing secular pressure these categories face. But this performance was in line with our expectations.

Digital, our consistently growing revenue category, increased 10.5% on a same-store basis, to $32 million. This is acceleration from the 6.7% of growth we reported in Q2. And we're very pleased with the improved growth rate, and that digital now represents 10.4% of our total revenue performance.

The primary driver of our digital revenue performance is Propel Business Services, which generated $14.7 million this quarter, an increase of 77.4% on a same-store basis.

In addition, we are in the midst of rolling out new newspaper website designs, and early feedback is very positive that we're significantly improving the consumer and advertiser experience.

Circulation, which comprises over one-third of New Media's total revenues, increased 3.8% on a same-store basis. Strong performance in this category was driven by content initiatives such as premium editions and daily newsletters, promotions, and the strategic price increases.

Turning to commercial print and other revenues, this category increased 6.4% on a same-store basis, driven by our highly successful expansion of live events. We are leveraging our trusted and well-known local brands, our significant ability for promotions through in-house marketing, and our longstanding leadership role in local community relations in our markets.

We have 12 new large scale events over the course of the second half of 2016, and we're very excited about continuing to grow this category into 2017.

As adjusted EBITDA and free cash flow decreased $3.1 million and $3.5 million to $37 million and $26.9 million, respectively, the Las Vegas Review Journal contributed $2.7 million up as-adjusted EBITDA in free cash flow in the prior year.

So the year-over-year decline would have been less than $1 million for each item respectively, when adjusting the prior year to exclude Las Vegas.

These results were also negatively impacted by $2.6 million of higher healthcare costs that we do not expect to repeat at this level.

Operating income was $10.6 million and decreased $4 million to the prior year, and net income of $2.8 million decreased $3.3 million to the prior year.

We ended the quarter with approximately $364 million of debt outstanding, and have liquidity of $94.5 million, consisting of $54.5 million of cash on the balance sheet and $40 million of availability under our revolver.

Net leverage against our Q3 pro forma, as adjusted, EBITDA, is 1.9 times, slightly lower than our long-term target leverage level of 2.0 times.

In summary, we're very pleased with performance of the Company this quarter and what we've accomplished year to date. We continue to invest, position ourselves for long-term growth, and execute well across our business.

In particular, as we look to the final months of the year, we remain confident that New Media is well positioned to create substantial value for our shareholders, given our ability to acquire great local media assets at attractive valuations, commitment to invest in revenue growth initiatives, and dedication to pay a substantial portion of our free cash flow to shareholders in the form of a regular growing dividend.

Operator, we'd now like to open the call up for questions.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Kyle Evans of Stephens.

Hi. This is Tommy in for Kyle. Thanks for taking our questions.

I wanted to ask about circulation. I see it was up almost 4% on a same-paper basis and a little above 4% on an as-reported basis.

Can you give us any insight into the underlying unit volume and pricing trends that drove those comps?

Yes. So the volume declines are mid-single digits. And then pricing, combined with our tuck-in acquisitions, is driving the growth that you see reported.

Great. Okay. If I could ask one follow-up. Are you seeing any fundamental differences in advertising and circ trends between your larger markets like Columbus and Providence, and your smaller markets?

In the most recent quarter, our trends in the larger markets were worse than the rest of our smaller markets. That's just a recent trend in the last three months, and it's relative to our largest retailers cutting back in those markets.

Great. Thank you for taking our questions. That's all I've got.

And just one thing I'd add is, I mentioned in my comments that we're doing a website redesign that we feel great optimism about the potential there for further upside as that implementation finishes.

Thank you.

Jason Bazinet of Citi.

Thanks. I just had two quick questions. I just want to confirm, when you guys talk about getting back to flat revenues, that's relative to the 4.9% decline you reported this quarter, correct?

That's correct, Jason, yes.

Okay. Is there just a qualitative way that you could sort of --

Yes.

-- dimensionalize how you're going to get there? Because I get Propel is part of it. But it's very hard for me to sort of take the underlying trends of a business, layer in the Propel trends and get there.

So what is it that you expect to change materially to sort of alter the trajectory of the sort of mid-single-digit same-store sales declines?

Yes. So print advertising. Our total print advertising categories represent about 47% of total revenue today.

Yes.

And we expect those trends to decline 10%.

Okay.

So just using rounded numbers, that's about 60 million bucks.

Okay.

Our subscription income is 34% of our business today. We expect that to grow 2% to 3%.

Yes.

And that will be about 10 million bucks to the upside, using rounded numbers.

Yes.

And our digital and other is about 19% of the business.

Yes.

And we expect that to grow 25% next year, which would be $55 million to $60 million.

Okay, great. That's very helpful. And then my second question is -- if you disclosed, I missed it.

But I think you guys used to talk about same-store expenses. And I didn't see that in there. And I think we had sort of down 1%, something like that. Is that in the right ZIP code?

Yes. We actually stopped with the same-store revenue. And so that's not a metric that's out there. What -- I think you're probably in the right ZIP code there, but --

Okay. And then the $2.6 million health-care cost you said that would not repeat, is that --

That's right. That's a level we don't expect to repeat. That's exactly right.

Okay. And that was $2.6 million in the current quarter?

That's right, $2.6 million in the quarter.

Okay. Perfect.

And, Jason, your expense number's pretty dead on.

Okay. Thank you very much.

Steven Salz of M Partners.

Just one question here. On the integration of your reorganization cost, it was higher than we expected. Is the $5.2 million what we should expect going forward or it's going to revert back to kind of the ones and twos that we were seeing in the previous quarters?

And can you add some color on why the number was a little higher this quarter?

Yes. So we did a large voluntary severance program across the Company, and that contributed almost $3 million. So that's really what the increase you saw was, Steven.

So the integration and reorg pieces that are more closely tied to acquisitions was pretty consistent with what you've seen in the past and you should expect that going forward. And the increase you saw this quarter was tied to a very isolated event we undertook as a Company. The VSO program that we undertook, we expect to reduce costs beginning in Q4 going forward by $10 million a year.

Got it. Perfect. Thank you.

Jim Goss of Barrington Research.

This is Pat Sholl on for Jim. I was wondering if you could provide any more color on the size of your B2B operations just in terms of like its relative size in some of the advertising and circulation categories and whether or not you guys were planning to sort of break that out as a separate, I guess thing to identify.

Right now it's about, just about $70 million a year in total revenue with decent 20% margins.

We haven't thought about breaking it out at this point. I think if it becomes more significant and is a central driver in growth, we most certainly would. But at this point, it's about a $70 million business with about a 20% margin.

Okay. And then there was a pretty significant improvement in local print advertising, well, improvements relative to in terms of this decline to 4.6 on a same-store basis.

Yes.

I'm just wondering what were the key drivers of that relative to the Q2 decline?

Yes. So we sold more stability in the smaller markets this quarter. And so that really benefited us probably to what a lot of our peers will report who are more exposed to the larger markets, and that helped us a lot.

And then our expansion into the B2B businesses helped us a lot because we're seeing great local, much better local ad trends there than some of our newspaper peers are seeing.

So really it's the strategy we've undertaken as a company, which we would expect to have us see improved local revenue trends. So focus on small markets and our expansion into the B2B space both helped those in the third quarter.

Okay. Thank you.

And this concludes today's conference call. You may now disconnect.