USA TODAY Co Inc (TDAY) 2017 Q2 法說會逐字稿

Good morning. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Media Second Quarter Earnings Call. (Operator Instructions) Thank you. Ms. Ashley Higgins, you may begin your conference, ma'am.

Great. Thank you, Kayla, and good morning, everyone. I'd like to welcome you to the New Media's Second Quarter 2017 Earnings Call. Joining us today are Mike Reed, New Media's CEO and President; Greg Freiberg, our CFO; Kirk Davis, COO of New Media and Peter Newton, Chief Revenue Officer of GateHouse 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 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 reconciliation 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, Ashley, good morning, everyone. Thanks for joining our call this morning. As Ashley mentioned, we posted a supplement to the website this morning, and I will actually reference that throughout the call this morning. We were encouraged by the trends we saw in the second quarter and feel as though many of the initiatives we have been working on are starting to show up on the scorecard. We have a pretty good report for you this morning.

I'm going to start on Page 2 of the supplement with a quick overview of our company. New Media operates in small to midsize communities across the country, providing award-winning local journalism through its print and digital product portfolio reaching over 21 million people each week. We also leverage our products and market reach to provide product and service solutions to local businesses that help them grow.

Many of our local media assets have been serving their communities for more than 100 years and serve as the dominant and trusted source of local news and also as a trusted local business partner. Our content provides relevant hyper local news and information that our consumers value and desire, which drive sustainable long term revenues through subscription fees. This content impacts most consumers' lives in some way on a consistent basis.

Our footprint is focused on small to midsize markets because we believe in the value our unique, non-Commoditized content brings to consumers. We deliver comprehensive coverage of the local marketplace, and it's content they can get on a comprehensive basis anywhere else.

We have over 1.3 million pay print subscribers to our daily newspapers. And we attract 36 million unique visitors to our websites each month. We continue to leverage technology to find efficient opportunities to deliver our content in multiple ways that meet the needs and demands of our consumers. Our B2B business leverages our strong local brands and in-market sales force to deliver products and services that help local businesses grow.

Small and medium-sized businesses prefer to partner with other local businesses that they can meet with face-to-face. Our decades of operation in each of our markets positions us to be that strong local business partner. This portion of our business particularly UpCurve, which was formally Propel Business Services is growing rapidly with sustainable revenue streams.

Our opportunity in the small business services space is massive. We have over 2 million small businesses in our markets alone. With UpCurve, our salespeople become a partner to each small business, helping to tailor our products and services directly to their individualized needs and budgets.

The scale of New Media allows us to offer them a national top quality product offering from the same local highly recognized brand that provides their local news and brought to them by a team who lives and works alongside them in that community. This is a huge differentiator for UpCurve, and why we remain so excited about its growth trajectory.

And now let's turn to Page 3 and discuss some of the highlights from our second quarter. As I mentioned, we had a very productive quarter and I'm encouraged with the direction of our results. We saw improvement in trend for most of the important segments of our business. Our total revenues in the second quarter were up 2.6% to prior-year on a reported basis and down 5.4% to prior-year on an organic same-store basis. This is an improvement from our prior 2 quarters where the organic same-store trend was down 6.2%. We continue to focus on diversifying our revenue base away from the traditional print revenues, which remain under pressure. 54% of our LTM revenue now comes from stable or growing revenue categories. That's up from 52% in fiscal year 2016. In the quarter we saw our digital revenue grow 9% over the prior year to $34.8 million and that represents 10.8% of total Q2 revenue.

In June, we announced the rebranding of Propel Business Services, our small business solutions provider to UpCurve. And Propel Marketing was rebranded to ThriveHive. These brands are more distinctive in the marketplace and aligned well with our goal of helping small and medium-sized businesses grow by providing them with solutions to their greatest challenges.

UpCurve revenue grew 44% over prior year in the quarter. UpCurve LTM revenue is $63.1 million, which is roughly 5% of our total company revenue.

New Media was also active in the second quarter and the subsequent first couple of weeks of the third quarter with several deals. Our previously announced sale of our newspaper in Medford, Oregon closed for $15 million. Our sales price was over 7x LTM as adjusted EBITDA. We recognized again on the transaction of over 65%.

Medford was an isolated market for us, and we did not see a great opportunity to build a much bigger presence near there. That made the sale attractive both financially and strategically. We acquired Calkins Media for $17.5 million on June 30, and that expand our footprint in Pennsylvania. We also acquired the South Carolina Business News for $1.9 million on June 30, which expands our BridgeTower business into a new and very attractive market in Charleston, South Carolina.

These acquisitions were made within our stated range of 3.5 to 4.5x to seller's EBITDA. The way I think about these 3 transactions is that we deployed net cash of $4.4 million to pick up just over $2 million of annual cash flow, a pretty good trade from a return perspective. And the deals have better positioned our assets for growth within the existing portfolio.

We had about $194 million in deployable liquidity at the end of the quarter and have some nice deal opportunities we are working on. We hope to have some news on this front in the coming weeks. Subsequent to the quarter, we also extended our term loan through July 14, 2022, upsizing it by $20 million to $363 million and increasing the available accordion to $80 million.

Pro forma for the amendment, our net leverage is 1.3x LTM EBITDA. And finally, we announced this morning that our board approved the second quarter dividend of $0.35 per share. Overall this was a pretty productive quarter for the company on all fronts.

I'm going to turn to Page 4 and briefly review the investment thesis for New Media. We believe there is a very compelling shareholder value creation opportunity for the company, taking advantage of a fragmented and out-of-favor sector. At a summary level, there are 3 primary factors to our thesis: one, we generate strong and consistent cash flows; two, we are committed to investing in growth and have multiple avenues for growth and three is our strong commitment to returning capital to shareholders. Now let's go into a little more detail on each.

Our portfolio of trusted local newspapers has a long track record of strong cash flow generation with over 85% of our daily newspapers having been published for more than 100 years. These are long-standing businesses with strong brands and consumer subscription revenue, which is one of the main drivers of cash flow as our singular largest revenue category.

We are not currently a significant cash taxpayer, and we have more than $200 million of NOLs that will shield future income as well. We have pretty minimal CapEx requirements that amount to only about 1% of revenue per year. We have helped the EBITDA margins of more than 12% for the entire company, so that's net of our investments in organic growth. In other words, our newspaper margins are higher than that, helping us to fund our investments.

We also convert 74% of our EBITDA into free cash flow. With the traditional print advertising business in the state of decline, we have been committed to returning the business to organic revenue growth through investing in new products and revenue opportunities that leverage our strong local business attributes such as brand, sales force and our local presence. These are things that are not going away despite the Print Advertising declines.

UpCurve and GateHouse Live, our events business, are 2 good examples. We've also supplemented our organic growth with highly accretive and strategic acquisitions.

We believe in a balanced capital allocation strategy, which includes delivering a substantial portion of our free cash flow back to shareholders in the form of a dividend, as well as our newly implemented share repurchase program.

We've grown the dividend 30% since inception raising it once in each of the last 3 years since becoming public. Recently, we put a $100 million share repurchase plan in place to ensure we have all the tools at our disposal to create shareholder value. We repurchased about $5 million worth of shares in the second quarter at an average price of around $12.77. We have the strong foundation for the company with multiple avenues for growth and a solid capital allocation strategy.

Now I want to turn to Page 5 and discuss the execution we've had on our business strategy specifically. Since our spin in February 2014, we believe we have been pretty successful executing on all facets of our strategy, and we have remained constant with that strategy. It has 3 guiding principles: reverse current business declines to create sustainable organic growth: Complete highly accretive acquisitions at attractive valuations; and return a meaningful portion of free cash flow to shareholders. We have and continue to diversify our revenue base away from traditional print revenue through the creation of new businesses like UpCurve, GateHouse Live and BridgeTower. UpCurve was created in late 2012 from scratch, producing $6.4 million in revenue in 2013. And it has now grown into a $63.1 million revenue business for the June 2017 LTM period.

And another example, GateHouse Live, our events business, was launched in 2015 from scratch and is expected to generate approximately $15 million in revenue this year, growth of 100% over what it did last year. On the acquisition front, we've completed 20 local media acquisitions with a total purchase price of about $755 million and at an average multiple of 4x to seller's EBITDA. We are purchasing these assets at an average unleverage yield of 23% and at an average level -- leverage yield of 30%, that's before synergies.

Our most recent acquisition of Calkins Media is a great example of the high-quality family-owned assets that are our perfect fit for our strategy. We are expanding our reach in Pennsylvania with newspapers that have been the dominant source of local news in their communities and consistently recognized for their content and innovation. We are excited to expand UpCurve into these markets providing the local businesses in these communities with tools they can use to help them grow.

In regards to return on capital, our second quarter dividend, announced this morning, brings us to $4.22 in dividends paid to shareholders over the past 13 quarters since instituting our dividend in Q2 2014. Also this quarter, as I mentioned, we deployed $5 million through our share repurchase program, and we have $95 million remaining available under that program.

We believe our investment thesis and business strategy are solid and will lead to attractive future shareholder returns. So long as we continue to execute well against these plans.

Now let's turn to Page 6 to take a quick look at the scorecard for our historical performance. As you can see, we've been able to grow substantially since we went public in February 2014, growing revenue at a 25% CAGR and as adjusted EBITDA at a 20% CAGR. With our business strategy and liquidity position, we believe we are very well positioned to continue to grow at this strong pace over the next several years.

What I'd like to do now is turn to Page 7 and talk more about what is driving our improved organic performance that we saw in the second quarter. We are excited about the new business lines and products that we have developed over the past few years. We expect growth from these new areas to outpaced the traditional print revenue declines and lead us to overall organic total revenue growth in the future. We believe we are getting close to the finish line on this most important initiative.

UpCurve is leading the way. It's our biggest growth initiative, and in Q2 it had an increase of 44.4% to prior-year reported revenue. As I mentioned, the LTM revenue for this business is $63.1 million and that grew at about 60% over the prior LTM period. An exciting development for us in the quarter was to recently be named the SugarCRM global partner of the year for 2017. We also continue to be recognized by Google as the senior SMB partner for AdWords and G Suite, the only company who has obtained that role for both products. These accolades speak to the superior customer experience that we are able to provide for our SMB customers when they utilize these products.

GateHouse Live, our events business, held over 60 events in Q2, which brings the total events hosted for the year to 93. We expect them to hold 240 events in total for 2017, and we expect them to double their revenue from last year to approximately $15 million. These events are building an incredible amount of goodwill in their communities. In addition to being very impactful for our newspapers and the events' sponsors, every sponsor from our signature Best of Preps 2016 events renewed the sponsorship for 2017, which is a testament to the strength and impact these local events are having.

Consumer revenue continues to be our largest single revenue category and has shown steady to modest performance on an annualized basis due to our targeted price increase as well as our growing digital subscriber base. We have been working to grow that digital subscriber base and saw 37% growth in the second quarter and now have over 59,000 digital-only subscribers. As mentioned earlier, our print and digital products are reaching more than 21 million consumers each week across the country.

BridgeTower Media, our business-to-business publications division, achieved organic year-over-year growth in Q2 as we forecasted it would last quarter. They continue to innovate in the B2B space through products like [Top Specific Webinars], Best Places to Work programs as well as creating specialized events around world such as Diversity Officers. This is a $75 million business for us today, and we are excited about its potential.

Another feature we love about this segment of our business is that it is not exposed to the brick-and-mortar retailer industry. This quarter, we were also pleased to report free cash flow growth of 15.8% over the prior year. This was achieved primarily from our efforts to reduce expenses. Our organic same-store expenses declined by 6.3% to the prior year. The continued strong performance across all of these initiatives has us encouraged that our strategy is working, starting to show up on the scorecard, and leading us down the path to top line organic revenue growth.

What I'd like to do now is turn to Page 8 and take a little bit more of an in-depth look at UpCurve. As I mentioned, we rebranded our SMB solutions provider as UpCurve this quarter. We believe this new brand will help differentiate us in the market from the competition and help customers to recognize the unique offering that we have.

We offer a full suite of products and services that support stronger growth, greater productivity and company-wide efficiency. Our products can be tailored for the needs of each SMB and integrated à la carte or as a bundle. Previously known as Propel Marketing, our digital marketing service offering, is now known as ThriveHive. ThriveHive offers a range of services from do-it-yourself guided marketing software to do-it-for-me marketing agency services. We are recognized as a Google Premier SMB Partner for AdWords and can help SMBs with lead generation and getting found online.

As we have mentioned in previous quarters, we have been also building out our IT services offering, which we've now branded as UpCurve Cloud. These products are all cloud-based and help to bring efficiency, automation and productivity to our small business customers.

Let's turn to Page 9 and look at the second quarter performance for UpCurve. Total revenue grew 44% to more than $17 million in the quarter. ThriveHive active customers grew 12.5%, and we are still seeing the highest penetration within the professional and home service verticals. Importantly, these are not high penetration categories for our newspaper, so this business is allowing us to expand our customer base.

To give some additional color on UpCurve Cloud, we broke out revenue and also wanted to highlight our current size from a metrics perspective. We service over 8,600 SugarCRM licenses today and nearly 77,000 Google licenses. Our churn in this business is less than 10% annually and over 60% of total revenue is recurring. This is a very attractive stable revenue stream that we are excited about from a growth potential.

As both the SugarCRM partner of the year and a Google Premier SMB Partner for G Suite, we are uniquely well-position among our competitors and able to deliver not only these great products but with exceptional execution for our SMB customers. We have a very distinct advantage as well of being in market with a local sales presence.

Turning to Page 10, you could see the fantastic growth that this business has had since we formed it. With expected full-year 2017 revenue of $75 million, UpCurve has had a CAGR of 85% since 2013. The biggest driver of our overall total company growth, however, over the last few years has been our acquisition strategy. And for a review of that strategy, let's turn to Page 11.

We believe, we have a compelling acquisition opportunity due to operating in a fragmented out-of-favor sector along with a solid business plan for organic growth. We consider acquisitions of 3 main types: larger strategic local media assets; tuck-in acquisition; and strategic digital businesses that will enhance our growth potential.

To supplement our local media portfolio, we look for similarly dominant providers of local news in growing small to midsize markets that will expand our reach and geographic diversity. We'd like to see an underinvested digital opportunity that allows us to plug UpCurve in and of course, we look for significant synergy opportunities, leveraging our regional and national platform.

We look for a unlevered yields going in of 20% and leverage cash yields of 25% to 30% or greater in some cases. We also look for tuck-in acquisitions that would be strong fits for either our BridgeTower business publication division or our existing newspaper clusters. And lastly, we look for digital acquisitions that will support or accelerate the growth of UpCurve.

If you could -- If you turn to Page 12, you can see that our historical acquisitions have met our criteria. And probably even more importantly, we do see compelling future opportunities on the acquisition side of our business plan across all 3 areas, we just spoke about, on Page 11.

Let's quickly on move to Page 13 to discuss our capital allocation priorities. Our goal is to optimize the deployment of free cash flow to create the absolute best shareholder returns including supporting our organic growth initiatives. I have mentioned all of these during our presentation today, but we wanted to highlight the focus we put on capital allocation as I wrap up my remarks this morning.

We look to do strategic local media acquisitions at very attractive valuations. And we look to complement those with strategic tuck-in acquisitions for both our media and digital portfolios. We are committed to paying out a significant portion of free cash flow in the form of a dividend to shareholders. And we have a share repurchase program in place.

We continue to maintain low leverage, targeting growth debt of 2x EBITDA and we currently have net leverage of just 1.3x LTM EBITDA. All the levers are available to us from a capital deployment standpoint. Our goal is to allocate capital across organic investments, acquisitions and returns of capitals to shareholders in a manner that will lead to the best overall long term shareholder value creation.

With that, I will turn things over to Greg, for a more detailed Q2 financial review.

Thank you, Mike, and good morning, everyone. I'll now be speaking the Page 15 of the supplement. First quarter revenue was $322.9 million, up 2.6% to the prior-year on a reported basis. And a decrease of 5.4% on an organic same-store basis. As a reminder, organic same-store is a metric that compares the performance in the current period versus the prior period for the same assets. This is an 80 bps improvement over the performance in Q1, and it's an important inflection point back to positive momentum and our drive to return the top line to positive organic growth. Traditional print revenues were $145.6 million, and it decreased 12.3% on an organic same-store basis. Within this category free print, classified print and local print advertising categories declined 9.5%, 12.7% and 12.5%, respectively, on an organic same-store basis.

Digital, our consistently growing revenue category, increased 9% to $34.8 million. Digital now represents 10.8% of our total revenue performance. UpCurve is the primary driver of this performance and generated $17.3 million in the quarter, up 44.4% to the prior year and now comprises 52.2% of our total digital revenue. Circulation, which comprises approximately 1/3 of New Media's total revenues, was $110.6 million, flat to the prior year on an organic same-store basis. Digital-only subscribers were up 37% to over 59,000 in the quarter while overall volume declines were down in the mid to high single-digits.

Turning to Commercial Print, Distribution and Events. This category increased 1% on an organic same-store basis. When I unpack this, commercial printing, which by far is the largest component in this category, is negative in the mid- to high-single digits while Events is more than doubling their performance to the prior year.

Commercial printing will have a much stronger performance in the second half of the year due to contract wins and a strong pipeline. In addition, live events will more than double the number of events in the second half of the year. So this category is going to perform much stronger in the second half of 2017.

As Adjusted EBITDA and free cash flow were $43.3 million and $33.7 million, an increase of $3.2 million and $4.6 million, respectively, to the prior year. We disclosed a new metric this quarter called organic same-store expenses to illustrate our cost-reduction performance. This metric compares the level of expenses in the current period versus the prior period for the same assets. The organic same-store expenses were down 6.3% to the prior year, which was more than enough to offset the decline in organic same-store revenues, thus driving the increase in as adjusted EBITDA and free cash flow.

We said that the second quarter performance was going to be above the prior-year, and we were ahead on EBITDA by 8% and free cash flow by 15.8%. So we're very pleased to deliver against this expectation. Net loss for the quarter was $21.7 million, which was negatively impacted by $36.6 million of noncash charges. Excluding these items, the company's result was $14.9 million in net income.

We booked a $27.4 million impairment to our non-amortizing intangibles and $8 million of booked tax expense. The impairment is calculated at the level of each of our 4 reporting units where 2 units have impairment, but in total, there is more than $175 million excess of fair value over book value. It's unfortunate, we have a $27.4 million in impairment when we have so much excess value in total. But this is a noncash charge, and we feel great about our momentum heading into the second half of the year and further into the future.

Subsequent to the quarter end, we sought and achieved an amendment to our existing term loan B to extend the maturity to July 2022. In addition, we upsized the term loan by $20 million and increased our available accordion to $80 million. We were very pleased to receive 100% support from our lenders for this amendment, a strong vote of support. In addition, we brought new lenders into our story, which is an important feeder for supporting future potential capital needs. We ended the quarter with $154.3 million of cash on the balance sheet and $40 million undrawn on the revolver. In addition, we have $80 million of availability to upsize the existing term loan using the accordion feature.

Debt outstanding at the end of the quarter was $343 million at an average blended rate of 7.29%. Pro forma for the incremental debt closed subsequent to the quarter, net leverage against our LTM as adjusted EBITDA is 1.3x. So we have significant liquidity and debt capacity available to continue executing on highly accretive transactions. Operator, we'd now like to open up the call for questions.

(Operator Instructions) Our first question comes from the line of Kyle Evans from Stephens.

A quick housekeeping question. Greg, you ripped through those organic declines in this segments of print and advertising. There were 3 of them, would you mind repeating them please before I ask my question?

So traditional print in total was down 12.3% on an organic same-store basis. Within that category, preprints were down 9.5%, classified print was down 12.7% and local print was down 12.5%. All of those were on an organic same-store basis.

Great. You gave a circulation volume number that was down mid- to high-singles. That's number seems like it's ticked up a little bit. Could you give us some insight there?

No, that's consistent with how we've been performing in the past. We don't give a spot number, but it's in that single-digit mid- to high range. That's and -- there's not an alarm, it's not new for us. And that's part of why we do that tactical strategic price increases, they're not new.

So that's in line with the modeled price increases that you implemented prior 12 months.

You got it, yes.

Okay. You give a down organic for the Preprints insert business. Could you give us a rough sizing of that, I'm just trying to gauge how much is left of that business?

On the Preprint side, it's about -- it's just under 1/3 of the total traditional print, right? And so we -- total traditional print's running $145 million.

Okay, that's super helpful. And I know you guys haven't historically done this in the past but any commentary you might want to give on current quarter pacing for print circulation, not actual numbers or even high mid-single or anything, but just kind of same, better or worse, for how the big pieces of the business are trending?

They're about the same Kyle, right now.

Okay. And Mike you made a lot of encouraging commentary about the deal pipeline. You actually used the word, "coming weeks."

I can't really say much more than that other than weeks. We have been talking all the year about having a pretty good pipeline, and we've been working on some opportunities that are getting pretty close now to coming to fruition. We're pretty excited about it. We don't have anything to talk about yet but feel like we will pretty soon.

And there are currently no more questions in queue.

Great. Thank you, everybody, for coming to our call this morning, and we look forward to talking to you again at the end of the third quarter. Thank you.

This is the end of today's call. You may now disconnect and have a great day.