USA TODAY Co Inc (TDAY) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and a welcome to the New Media fourth-quarter and full-year 2016 earnings call.

(Operator Instructions)

It is now my pleasure to hand our program over to Ashley Higgins of Investor Relations; the floor is yours.

Thank you, Kristin, and good morning everyone. I'd like to welcome you to New Media's fourth-quarter and full-year 2016 earnings call. Joining us today are Mike Reed, New Media 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 a 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 rebroadcasted without our consent.

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

Thank you, Ashley, and good morning, everyone. Thanks for joining New Media's fourth-quarter earnings call. As Ashley mentioned, we posted a supplement to the website this morning and I'll reference that throughout the call. I'm going to turn to page 2 of the supplement to get started. What I want to do is do a quick overview of the Company today and then I will jump into the highlights of the quarter as well as discuss many of the initiatives, both revenue and expense, that have us very excited, not only about 2017, but about 2017 and of course beyond this year.

So on page 2, New Media continues to be a leader in the large and fragmented local newspaper industry, owning a portfolio of award-winning local media assets that reach over 20 million people each week across 36 states and in more than 535 markets. We own and operate over 630 local publications including 125 daily newspapers, 85% of which have been published for more than 100 years.

Recently, the Sarasota Herald Tribune had its Bias on the Beach series named as 1 of 6 finalists for the Harvard Shorenstein Center's 2017 Goldsmith Prize for investigative reporting. It was also honored at the Editor and Publisher's 2006 Epy Awards for their Shortcut To the American Dream. Congratulations to our Sarasota team for these accolades. And just a reminder: that is where we won our Pulitzer prize this past year, so congratulations to the team and the great work we are doing down there.

We're so proud of the role our publications play within the communities they serve as the dominant sources of comprehensive, high-quality local news and information. These local brands are the cornerstone to our organic growth strategy, allowing us to leverage our strong community standing and ties, our highly recognized brands, and our large in-market local sales force, which is helping us further expand our digital and service offerings for small businesses. Our small business solutions platform is called Propel Business Services, as many of you know. Our goal with Propel is to partner with our local small business colleagues to bring solutions to them for problems they encounter every day in running their own businesses in today's world. And I'm very happy to report that our growth remains very strong in this division, growing at nearly 70% in the fourth quarter compared to prior year. And of course we're going off a much larger basis now, so the growth is really commendable.

A major factor in that growth is having trusted local staff in the community that can work directly with our local SMBs to help them grow their businesses. Because of the scale of New Media, we offer these local small business owners a national top-quality product offering through Propel, and that offering is from a local and trusted partner in the local newspaper business, which we have found to be a key ingredient to our success. We leverage our local sales force, which is over 1,300 feet on the street in our local markets: a real strategic advantage for us as when with dealing with our local business partners. I'm also excited to let you know that we recently invested further in our digital-only sales force, doubling it in size, by adding over 50 sales representatives that will focus entirely on Propel and our other digital initiatives.

Let's turn to page 3, because I'd like to call out a few highlights from the fourth quarter of 2016 and subsequent. New Media continues to diversify its revenue away from traditional print advertising. With our stable and growing revenue categories now making up 52% of our total revenue, digital grew in the quarter to $32.4 million, an increase of 9.6% over the prior year; and with Propel Business Services now comprising 48.7% of the digital categories. Propel continues to be a strong growth driver for us, as I just mentioned, growing nearly 70% in the fourth quarter over prior year and bringing in revenue of $15.8 million. Propel revenue now represents importantly 9.2% of our total stable and growing revenue in the fourth quarter. It is becoming very significant.

We grew our digital-only subscriber base by 55% in 2016 and it now stands at 55,000 digital-only subscribers. And we expect to see accelerated growth in this segment in 2017. We also have grown our overall audience reach and now reach more than 20 million people per week across our Gatehouse website network; and we have improved our digital ad performance thanks to our new strategic website redesigns that we undertook this past year. This is allowing us to offer our customers a stronger advertising product with a broader reach than ever before. And this is been a primary factor in allowing our digital advertising to grow to 23% of total advertising revenue in the fourth quarter.

Total revenue in the quarter was flat with prior year at $333.6 million. Our fourth quarter revenue was down 0.6% on a same-store basis. And without the benefit of tuck-in acquisitions, our revenue in the quarter was down 6.2% to prior. The decline in Q4 was a bit worse than the 4.9% decline we saw in Q2 and Q3, which only reinforces the importance and speed with which we're executing on our strategy to diversify our revenue streams away from traditional print media. We are no less bullish on that part our strategy today than we have been over the last several quarters. We continue to be very optimistic about our ability to grow our new revenue streams and we are particularly encouraged by our growth trends in Propel, Gatehouse Live, which is our events division, and BridgeTower Media, our business publications division. We also continue to see solid growth from our largest revenue contributor, and that's subscriber revenue or circulation revenue.

We also continued to execute on our inorganic growth strategy in the fourth quarter announcing and closing on our acquisition of the family-owned Harris Enterprise newspaper business for $20.4 million. We also closed on our previously announced acquisitions of the Columbia Daily Tribune and the Rochester Business Journal, both family-owned businesses. We ended 2016 with eight acquisitions and total purchase price of $123.2 million. Further to this part of our strategy, we continue to see a very robust pipeline for more attractive acquisition opportunities at nice valuations, and we will be able to execute on those in 2017. In fact we've already announced and closed on a $21.2 million acquisition of an Ohio-based family newspaper business.

With over $200 million in liquidity today, New Media is well positioned to take advantage of the compelling opportunities that exist and we are confident in our ability to continue to create value for our shareholders through this segment of our strategy. Finally, we're pleased to announce this morning that our Board of Directors approved a dividend of $0.35 this quarter. This brings our cumulative dividends paid since inception to $3.52; and just as a reminder, our dividend has increased over 30% since first announced less than three years ago. Our capital structure remained sound, with liquidity of over $200 million and net leverage of just 1.2 times our LTM EBITDA. Further, and you'll hear more about this from Greg in his part of the presentation this morning, we do not expect to be a significant federal income tax payer over quite a few years, a result of our large tax basis and net operating losses. And as I mentioned, you'll get a more detailed update from Greg later this morning on that part of our business.

Now flipping to page 4 of the supplement, I'd like to focus a bit on how our revenue mix is changing in a favorable way, and why we feel confident that this will lead eventually to organic revenue growth and solid returns for our shareholders in 2017 and beyond. Since 2014, our revenue coming from stable or growing categories has increased from 48% to 52%. As I just mentioned, Propel is one of the key drivers of this growth, having increased to $53 million in annual revenue in 2016. That was an increase of about 70% to prior year. In the fourth quarter, Propel became 9.2% of total revenue coming from stable and growing categories. Revenue growth actually accelerated in our Propel division through the second half of 2016, setting us up for very meaningful growth in 2017. To further scale our platform and increase the penetration of Propel we, as I mentioned, we're doubling our digital-only sales staff by hiring over 50 new sales representatives. Propel is now a very meaningful contributor to our overall revenue performance, with $53 million in annual revenue; and we expect to see our current growth rates of nearly 70% to continue again in 2017, obviously making it a more meaningful contributor because the base is so much higher at $53 million.

Commercial print, distribution, and events revenue increased 22% in the fourth quarter to prior year with the help of our fast-growing events business called Gatehouse Live. We started this division in 2015 and it has grown to host 120 events in 2016, with high demand from our communities for even more events. This division generated about $7 million of revenue in 2016; and in 2017 we expect to double the business, both revenue and events, with 240 events in 2017 and approximately $15 million in revenue.

In 2016 we also grew our business publications division, BridgeTower Media, through our acquisitions of the Dolan Company, Journal Multimedia and the Rochester Business Journal. We now have 44 print and digital publications and we are able to provide business and marketing services in addition to high-quality and trusted journalism for all the businesses in those communities. BridgeTower Media has now grown to become a $75 million division for us. These assets have more stability than their sister newspaper peers, a result of no exposure to major and national retailers. These business publications also provide a tailor-made customer base for Propel, as our business publications' subscribers are small business owners, the perfect customers for Propel. We couldn't be more excited about the growth prospects for our business publications division, BridgeTower, in 2017.

Total circulation revenue in the fourth quarter increased 2.8% to $108.8 million, driven by targeted promotions and systematic price increases. For 2016, circulation remained our largest individual revenue category, and it increased by 2.5% percent over the prior year for the full year and it now is a $421.5 million revenue category for us. And we're excited that we have recently taken strategic pricing actions across the country, which we believe will lead to further growth in this category in 2017. As you can tell, we have many new and exciting growing divisions inside of our Company, which has us very encouraged and confident that we will be able to reverse the revenue declines our industry has seen for more than a decade. The shift in where our revenue comes from that's shown here on slide 4, shows the path we are following to accomplish this.

Now let's go a bit deeper on Propel and for that I'm going to turn to page 5 of the supplement. Propel Business Services continues to build upon its digital marketing services platform to help small and medium-sized businesses solve their most pressing challenges, from navigating their digital marketing needs to managing their current and targeted customer base, among other things. In the fourth quarter revenues grew to$ 15.8 million, an increase of nearly 70% over the prior year. With the increased investment of 50 new digital-only sales representatives, we're committed to investing in this division to continue to accelerate its growth and its penetration within our local markets in 2017 and of course beyond that.

We continue to scale the Propel platform, growing our Propel marketing active customers in the fourth quarter over 25% from the prior year to 9,400. We've captured more customers from service verticals like home service providers, who were not traditional customers of our local print advertising products historically. ThriveHive, our lower-priced, do-it-yourself marketing solution, continues to tailor its software-as-a-service platform, offering to give small businesses access to all the marketing tools and automation they need to grow and create a stronger presence online. Propel Marketing's dynamic suite of products can be tailored for the needs of each SMB to grow and change as they do. We also expanded our suite of Propel Solution products with the addition of IT services. Propel now offers Google Cloud and G Suite as a Google Premier SMB partner, as well as a CRM solution that is a very attractive and lower-priced alternative to salesforce.com.

We were particularly excited to see our revenue growth trends accelerate during the second half of 2016 inside of Propel, and of course we're growing off a much larger revenue base now. As I mentioned earlier, this business will be a major contributor on our path to organic top-line revenue growth. We couldn't be more excited about where this business is today in its prospects for the future.

Now let's shift to page 6 and talk about the inorganic growth or the acquisition side of our strategy. In November we closed our deal with Harris Enterprises, acquiring six newspapers and multiple weeklies and niche products. These papers are a great complement to our footprint in Kansas and Iowa, and we're excited to enhance the partnership the publications have with their respective communities. Dating back as far as 1837, these publications have been serving their communities with quality local news and information, and we were honored that the Harris family chose us to carry on their legacy. We are also pleased to recently announce and close our first deal for 2017, the acquisition of the publishing division of the Wooster Republican Printing Company, a family-owned newspaper group in Ohio. Our purchase price was $21.2 million, and the acquisition was done at the midpoint of our stated acquisition range.

So in the past couple months, by investing just over $40 million, we have added more than $10 million of EBITDA and more than $9 million of free cash flow. We expect with synergies to improve both EBITDA and free cash flow from these deals by $2 million to $3 million. We remain very excited about this segment of our strategy in terms of being able to do accretive, attractive acquisitions that create value for our shareholders.

Now turning to page 7 to look at the commitment we have to driving inorganic growth for our shareholders through acquisitions, we look a little bit more at what we've done overall. I am now on page 7. With the Dix acquisition I just mentioned, we have now completed over $735 million worth of transactions since inception. Those deals are comprised of 18 local media assets plus 1 digital acquisition, ThriveHive. As I mentioned earlier, we completed eight acquisitions in 2016 for $123.2 million, using cash on our balance sheet for each of these deals. In fact, this was the largest number of transactions we have actually done in any given year since inception, evidence that our deal flow is not slowing down. But even more importantly, we have remained disciplined by making our acquisitions all within our stated acquisition range of 3.5 to 4.5 times the seller's LTM EBITDA, averaging 4 times with an average unlevered yield of 23% going into the deal and a levered yield of over 30% going into the deal. With over $200 million of liquidity at year-end 2016, we believe New Media is the best-positioned newspaper company to take advantage of the compelling acquisition opportunities that we see out there and in the pipeline for 2017.

Now I'd like to close my remarks by turning to slide 8 in the supplement. I want to touch on the great returns New Media have created for investors over the last several years, and talk about why we believe our strategy continues to offer the potential for very compelling future shareholder returns. Our strategy is simple and it has remained consistent since our inception three years ago: grow organic revenue and cash flow in the businesses we own to date. You've heard lots of things and the initiatives we have underway to make that happen. Drive inorganic growth through strategic and accretive acquisitions. We have a great history and great track record here, and we're still scratching the surface with what is possible. And we want to return a substantial portion of our cash to shareholders in the form of a dividend, which we have done with $3.52 in dividends paid in less than three years, with the dividend growing by 30% since we first put it in place.

As you can see here on slide 8, since our spin in February 2014, we just had our three-year anniversary last week, New Media has generated a total return for investors of 51%. We have significantly outperformed the S&P 500 and Russell 2000 industries during this time period. Our annual dividend is now $1.40 per year per share, and importantly it has grown by 30% since first put in place. Even given the returns we have been able to generate over the past three years and the growth in our dividend, our yield still remains quite high at around 9%. That happens to be inconsistent with our newspaper peers, who have an average yield of 6.1%.

As you heard this morning, we have launched several new businesses over the past couple years that are now becoming very meaningful contributors to revenue, and they're also poised to be meaningful contributors to EBITDA and cash flow in 2017. We couldn't be more excited and optimistic about our business from an organic perspective for 2017 and of course well beyond that. In addition, we have undertaken a new and significant cost reduction initiative that will lead to $27 million of cost reduction in 2017. This plan was executed on in the first quarter.

Finally, with our solid liquidity position and the attractive acquisition opportunities we're looking at, we are equally bullish on growth we can create on the inorganic side of our business. As mentioned just a minute ago, we have created total returns of more than 50% over the past three years and the dividend has grown 30% since we put it in place. We're very optimistic about our opportunity to create even better growth in the quarters and years ahead.

Thanks for your time this morning and let me turn things over to Greg.

Thank you, Mike, and good morning, everyone.

I'll now be speaking to page 10 of the supplement. This quarter, revenue was $333.6 million, flat to the prior year on a reported basis and a decrease of 0.6% on a same-store basis. We were excited to see digital, our consistently growing revenue category, increase 9.6% on a same-store basis to $32.4 million. Digital now represents 9.7% of our total revenue performance. Propel Business Services is the primary driver of this performance. It generated $15.8 million this quarter and that is against an increasingly larger base; it still increased 66.9% on a same-store basis.

Circulation, which comprises approximately one-third of New Media's total revenues, increased 2.8% on a same-store basis. Strong performance in this category was driven by content initiatives such as premium editions, in daily newsletters, promotions, and strategic price increases. Total traditional print revenues decreased 7.7% on a same-store basis to $161.7 million. The decline was primarily driven by continued pressure across our preprints, classified print, and local print advertising categories, which declined 7.5%, 8.3%, and 6.2% respectively. As Mike said in his opening remarks, our strategy is not built upon traditional print advertising improving or even being flat; rather, our strategy has been to grow new products and services, and we had another great quarter of results regarding those efforts.

Turning to commercial print distribution and events, this category increased 22% on a same-store basis, driven by a very strong quarter for our live events division. We're leveraging our trusted and well-known local brands, our significant ability for promotions through house marketing, and our long-standing leadership role in the local communities in our markets. New Media is seeing growth acceleration across our top 25 markets, hosting 120 events in 2016 and expecting 240 events in 2017. We believe this division will generate approximately $15 million in revenues in 2017, as adjusted EBITDA and free cash flow were $49.7 million and $38.8 million, a decrease of $4.6 million and $6.8 million respectively to the prior year.

Subsequent to the quarter close, we have implemented a cost-reduction program that is expected to reduce expenses over $3 million in the first quarter of 2017 and over $27 million for the full year of 2017. The Company continues to find ways to operate more efficiently and to reduce expenses to offset the declining traditional print revenues. We continue to fund, however, the high-growth areas that Mike outlined earlier in the call, in particular doubling our digital-only sales staff with 50 new representatives to further scale our platform and increase the penetration of Propel in our local markets.

Operating income was $61.4 million, a decline of $42 million from the prior year; however, there's actually a small underlying improvement when you exclude the net $43 million gain on the sale of Las Vegas in the prior year's quarter. Net income in the quarter was $14.5 million. We ended the quarter with $172.2 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 fiscal year was $362.8 million at an average blended rate of 7.2%. Net leverage against our Q4 as adjusted EBITDA is 1.2 times, so we have significant liquidity and debt capacity available to continue executing on highly accretive transactions. Subsequent to the end of the fiscal year, $10 million of acquired debt from our Halifax transaction came due and was paid on December 30, which does not change the net leverage ratio I just gave you.

On page 11 of the supplement, I've included an updated look at the significant tax assets that the Company enjoys. New Media has approximately $205 million of tax assets, with more than half of them now unrestricted. In addition, we have over $900 million of tax basis, which shields the first $122 million of taxable income in 2017. The graph on the bottom right-hand corner of slide 11 illustrates the way that we think about our tax assets, which is that the first $122 million of taxable income is shielded by the tax basis. Then we would draw upon the next $17 million to be shielded using the annual portion of our restricted NOLs; and then we could draw up to $112 million of the unrestricted NOLs. Clearly, and given those significant tax assets that we enjoy, New Media does not expect to be significant federal income tax payer in the near future. One final note here, with New Media's 2016 dividends, will not be treated as taxable dividends as they are returned to capital.

We're very excited and optimistic about 2017. 52% of our revenue now comes from growing categories and we are particularly excited about Propel, events, and circulation revenues. We also have undertaken a meaningful cost-reduction plan in the first quarter, so we're very encouraged about the outlook and performance for 2017. With a solid liquidity position and a robust pipeline for acquisitions, we are equally excited about the value creation opportunities we have from this as well.

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

Our first question today comes from the line of Kyle Evans with Stephens.

Hi, thanks for taking my questions. Can we start with unit volume on the SERP side? Could you give us the unit vol for circulation on a same-store basis for the fourth quarter and give us the assumption that you have embedded in your 2017 guidance for modest circulation revenue increases and then I've got a follow-up. Thank you.

Hello Kyle, this is Greg, on the unit volume which is the underlying subscribers for circulation, we're down in the mid- to high-single digits, as a percentage. And, as I called out, on the financial side we're actually up in the low single digits; we were up 2.8% and so we see a continuation of those trends as we look forward.

Great thank you. And you ticked down the components of traditional? I want to make sure I got those right. You had local down 6.2%, classified is down 8.3% and preprint down 7.5%. First off, did I get those right? And then I have a quick follow-up on that.

You got all of those correct.

Then preprint looks like it's easing up a little bit on the declines. Could you give us the trends-- even though you cited some weakness on the retail side in that specific category. Could you give us what you think that looks like going forward in 2017? Thanks.

We expect it to still be a pretty unstable category going forward. There's just a lot of trouble as you know in the major brick and mortar retail sector, so while we had maybe a little bit of a better trend in the fourth quarter, we are not confident enough to say that is here to stay. So I think our normal assumptions of down 10% for the total traditional category is probably safe.

Okay great, thank you.

Thank you.

Our next question comes from the line of Jason Bazinet with Citigroup.

Slide 4, where you talk about stable and growing revenues versus traditional, I think if my notes are right, you reclassified preprint back into the -- from the stable growth bucket over to the traditional side. I just want to confirm that is true?

Yes, over the last three years, that is true, Jason. We don't feel confident enough to feel good. Preprint has had a pretty stable run for quite a few years, but the status of the bricks and mortar retailers both regional and national has us feeling unsecure enough that we're putting it in traditional not in a stable category.

Okay. And then your goal, which it sounds like you are sticking with in terms of total revenue ex tuck-ins, are getting to flattish by year end this year. It seemed like -- or at least over the last three or four quarters, those trends were getting better until this last quarter where they got a smidgen worse. I was just wondering if you could -- I'm going to ask the same question I asked last quarter. Can you just bridge us from where we are today at year-end 2016 in terms of how you've seen getting to flat. Because you gave a few of the items I think in there in terms of events and what you expect for Propel; I think you said 70% growth, but any sort of color in terms of how you actually see this playing out? Because it seems like a Herculean effort on your part.

Sure, Jason. On the 48% of our revenue comes from the traditional category and we expect that to decline about 10%. So call that $55 million and then the 52 % of our revenue, the biggest one is circulation at $420 million that we think will grow about 2%, so call that $8 million plus. Propel is a $53 million revenue category that we think will continue to grow at 70% or 75%. And then we have our events business which we think is a double from 7% to 15% and then a few other smaller things like our business publications division. So when you take the pluses that we have in each of the revenue categories, in our 52% of stable to growing revenue, you come up with more than $55 million that we expect the decline to be on the traditional print side.

Okay, thank you very much.

Thank you, Jason.

We've reached the allotted time for questions. Thank you for joining the New Media 2016 fourth-quarter and full-year earnings conference call. This concludes today's conference call; you may now disconnect.