Q3 2019 Earnings Call
Kits and Investor Relations. Please go ahead Sir.
Thank you good morning, and welcome to our third quarter earnings call and webcast today, our president and CEO , Dave Lou Jeep and our CFO , Victoria Harker will review TECNIS financial performance and results after that we'll open the call for questions.
Hopefully by the opportunity to review this mornings press release, we've not seen a copy of the release, it's available at TEGNA Dotcom and.
Before we get started I'd like to remind you that this conference call and webcast includes forward looking statements.
And our actual results may differ factors that may cause them to defer are outlined in our SEC filings.
This presentation also includes certain non-GAAP financial measures, we have provided reconciliations of those measures to the most directly comparable GAAP measures in the press release and on the Investor Relations portion of our website and with that let me turn the call over to Dave.
Thank you John and good morning, everyone.
As you saw in our earnings release. This morning that segment team has been actively executing across a number of fronts to create shareholder value.
Our operating results reflect a positive trajectory and several of our key long term growth drivers and we're excited about the strong momentum we have going into 2020 and beyond we remain on track for our recently updated improved full year guidance, which now includes the dispatch purchase as well as the Nexstar divestiture stations. These two pivotal.
Actions, which both closed in the quarter not only strengthened our geographic diversity in portfolio of big four stations and key battleground states politically, but also reinforce the success of our thoughtful and disciplined approach to our M&A and broader capital allocation strategy. In addition premium continues its strong growth was significant upside.
I'll provide more details on our acquisitions and growth drivers later in the call.
For the third quarter TECNIS total reported a company revenue was $552 million up 2% year over year revenue growth was driven by acquisitions subscription revenue and advertising and marketing services, which more than offset $60 million reduction in political advertising compared with last year.
Our subscription business continues to generate growth and provide us with stable cash flow through contractually recurring revenues, notably the agreement that we recently reached with one of our largest distributors spectrum begins a process to which 85% of our subscribers will be white repriced by the end of 2020, increasing the visibility of future cash flows.
And finally as Victoria will discuss later, our advertising and marketing services revenues also continue on an improved trajectory in the third quarter, our second consecutive quarter with underlying growth on a year over year basis as demand from average.
Hi, as yours has broad across several categories.
We have.
Identified and executed on significant M&A opportunities in our industry and while it is early days, we will meet or exceed financial expectations. On these acquisitions just as we have in the past each of these stations come with unique characteristics culture and operations, but thanks to our experienced improving integration team we've been able.
To efficiently and seamlessly integrate each of them into the TEGNA network without any business interruptions.
Our M&A strategy continues to be proven through the multiple acquisitions, we have successfully completed.
As the mechanical synergies, we can generate increase with the growth of our already top of the market Big four retrans rates.
Through our commitment.
And to operational excellence and high quality local journalism, we have built a reputation as a partner of choice for independent broadcasters and still have ample headroom under the FCC cap due to the efficient.
Currency of our accretive acquisitions in terms of cap space used and after closing. These two most recent acquisitions the dispatch purchase and the Nexstar divestiture stations, we are on pace to de lever rapidly expecting to reach around 4.1 times leveraged by the end of next year.
With the support of our strong balance sheet and healthy free cash flow, we are positioned to benefit as a long term consolidator and we'll continue to analyze opportunities to create shareholder value through M&A when the right opportunities present themselves.
As I mentioned earlier subscription revenue continues to provide us with growing and increasingly predictable cash flows were particularly enthusiastic to enter this period in which the vast majority of our subscribers are up for renewal.
The 85% of our subs that will be renegotiated and repriced between now and the ex next year combined with the recently announced Fox agreement. We entered this process with clear visibility into all our affiliate relationships, having locked in all of our big for network affiliate agreements into 2021 and when.
Beyond.
Turning to the political front as you might expect we remain very bullish about 2020.
Through our recent acquisitions, we have strategically expand that our portfolio to include more key political markets on our prime to benefit from absolute record levels of expenditures broadcast TV remains a trusted vetted outlet for political advertisers to reach voters, a key differentiator relative to digital platforms and specifically.
Our high quality broadcast assets and stations paired with premium on our ODC AD platform with more than 100 publishers and unique targeting capabilities offers us the ability to offer political campaigns the ability to target voters across the country not just in TEGNA markets.
As a reminder, we still expect a subscription and political revenues I just discussed to make up approximately half of our totaled two year revenue beginning with the 1920 cycle and an increasing percentage thereafter, a dynamic that will allow us to drive shareholder value regardless of variability in the spot advertising market.
Now I'd like to share some updates on our strategic content in programming initiatives.
In the third quarter, we continued to see growth and recognition for our high quality content initiatives, including TEGNA is vault studios fourth podcast production called Bardstown reached number two on apples podcast charts and number one an apples to crime category. After a successful launch this quarter a category that is among the most popular.
Among packed and podcast our daily lives syndicated show called Daily Blast lie continue to achieve strong year over year growth throughout its markets and target audiences now spending 61 markets, including 15 is a top 25, and adding 15, new non second the markets. This year, because we own and produce they show back to.
My earlier point about mechanical synergies, we add daily blast programming to our new newly acquired stations at zero additional costs.
Second was the only local station group this year to receive news and documentary Emmys, which recognize our outstanding regional news efforts the Wx I in Atlanta, and investigative reporting at King TV in Seattle.
By leveraging our existing assets to drive innovation and utilizing disciplined acquisitions of closely adjacent assets such as multicast networks Justice network inquest, we continued to monetize growth in various forms of TV viewership and distribution, we remain committed to investment and high quality Mont.
Sizable content and are pleased with the value of these initiatives have delivered thus far to our shareholders as well as to our local and national advertising client clients.
In closing.
I'd like to highlight several key milestones that we've achieved since we last spoke we closed on two significant acquisitions now, reaching nearly 1.5 billion of acquisitions for the year that are immediately accretive to free cash flow and are expected to be EPS accretive within one year of the clothes and as I mentioned earlier very efficient in terms of.
Use of cap space.
We reached an agreement on a multiyear carriage agreement with spectrum.
We extended our affiliation with Fox per six stations in a multiyear agreement.
We announced and executed the creation of an integrated in house National Salesforce part of our plan to embrace automation for the more commoditized side of our business and create more high touch solutions for our national clients and finally, we strengthened our balance sheet and added financial flexibility by issuing $1.1 billion of senior notes.
As well as amending and extending our $1.5 billion revolving credit facility, both with very favorable terms as you can see our strategy is working and we are executing across our business to achieve organic growth and acquire value, creating assets and although we have demonstrated is through our performance to date. We also have the ability to delay.
Over additional value going forward with significant repricing of our subs as I mentioned earlier anticipated record political.
Total revenues and accretion of our recent acquisitions beginning to flow through this is an exciting time at segment as we look to next year and beyond we remain on track to hit our financial and leverage targets remain very well position for continued profitable growth and value capture going forward I'll now pass the call over to victory.
The cover our financials in more details Victoria, Thanks, Steve Good morning, everyone and thanks for joining.
As Dave mentioned, we're excited about both our strong operational execution as well as the smart decision in high value acquisition closed during the quarter.
In my remarks, I'll cover the impact is both update you on our plan capital allocation going forward.
Before I cover our consolidated financial results I'd like to review just a few essential items with you.
For the quarter. These include acquisition related fees of $20 million and one time costs related to taking our national sales effort in him.
Including third party contract terminations and transition costs and $5 million.
These onetime operating expenses were partially offset by FCC spectrum Repacking reimbursements Thats currently Don.
Lastly, we also reported about $6 million in tax related one time benefit.
Now onto the third quarter consolidated financial results.
Keep in mind that most of my comments today are focused on Texas better performance in the consolidated non-GAAP basis, resulting the result of our base business in the newly acquired station groups for the period of time during the quarter.
This provides a clear insight into our financial drivers our business trends and operational results.
Finally on an ongoing consolidated basis, you'll find all of our results and prior period comparative.
Personally.
Now for our third quarter revenue result on an as reported basis.
Total company revenue for the third quarter.
2% year over year as you've seen from our press release. This was primarily driven by acquisitions as well as continued growth in subscription revenue as well as advertising and marketing services.
Excluding political advertising impact.
Revenue on an as reported basis.
14% year over year.
As a reminder, revenue were fully results reflects results in the third quarter 2018, which includes $60 million include advertising revenue, creating high year over year comparison not.
Terry even to argue are cyclical trends.
As Dave mentioned.
Scriber trends continued to be relatively stable producing high margin newly subscription revenues.
The clear forecasting visibility.
Notably retransmission here you grew increasingly reached the spectrum, we have our largest distributors kicks off of renewal cycle for about 85 has never subscribers, which we repriced by the end 2020.
Serving as a key revenue growth driver and cash flow driver in the years ahead.
Now turning to advertising marketing services.
As expected advertising American services revenue increased 12% year over year on it.
40 basis, primarily due to the impact of acquisitions this year.
Putting this impact advertising marketing services revenue was.
Year over year for the second consecutive quarter.
Driven by stronger demand from advertisers across the broader range of categories.
As always there are puts and takes across sectors in our advertising so.
Another category this quarter, which reflected growth year over year included professional services insurance.
Working media and telecom home improvement traveling tourism and utilities.
Other categories, such as auto retail and restaurants were a bit softer in the quarter.
Moving now to expense.
Our operating expenses were 12% higher this quarter on a year over year basis, driven primarily by the newly post acquisition and higher programming fees.
This is partially offset by lower year over year expenses related to lower political AD spending this year as well as the ongoing streamlining of our business processing.
As a reminder programming fees also include reverse compensation paid to networks.
Excluding programming and incremental expenses related to acquisitions. This year all other operating expenses were down 4%.
During the third quarter corporate expense was $10 million down $2 million from last year, reflecting ongoing work to streamline back office operations.
As a result.
As reported adjusted EBITDA for the third quarter was $157 million, producing a very healthy 28% margin.
On this we can read $105 million or free cash flow roughly 19% of revenue in line with our recent recently increased annual free cash flow guidance and 18% to 19% of revenue on a two year basis.
As previously discussed we continue to use our free cash flow and $1.5 billion revolving line of credit for events, such as new products and initiatives as well to fund acquisitions.
Including the dispatching Nexstar divestitures stations.
Our debt during the quarter increase by approximately $1.2 billion to 4.2 billion, reducing that leverage and 4.9 times.
On a related note on September 13, we successfully completed 1.1 billion dollar offering of a 10 year senior notes senior notes at a historically low 5% interest rate.
The net proceeds were used to repay approximately $320 million of our October 2019 maturities.
$290 million over 2020 nodes.
Replenished nearly $400 million of the drawn revolver, which we also extended one year on August 20.4, with no change to its 1.5 billion dollar capacity.
With this financing we created flexibility and with this enhance coupled with the strength of our cash flows in 2020 from our new stations as well as political we're well prepared for significant acquisitions as well as organic investments.
Turning now to M&A.
As Dave noted we've been actively participating in industry consolidation. This year reflected in the acquisition of two leading TV stations and to radio stations from distress for instance group for $535 million and the mixed our divestiture stations for $740 million during the quarter.
In addition, we successfully close to 77 million dollar acquisition of multi carrier networks Genesis Inquests last quarter.
As a reminder to dismiss transaction provides us with number one rated TV stations in both Indianapolis and Columbus.
We were eight.
That is 7.9 times multiple including run rate synergies.
The next or divestitures stations contribute 11, local television stations, including eight big four affiliates, which we acquired 2018 2018, EBITDA multiple of 6.7 times, including run rate synergies and tax savings.
All of these transactions are immediately free cash flow accretive and are already well on track to be EPS accretive within 12 months, reflecting our strong financial discipline and the value of investing in opportunities, which are both financial and strategic the cornerstone of our M&A strategy.
In fact, as a result of our recently completed transactions, we now project free cash flow of 18% to 19% of revenue on a year basis. A notable increase from the 17% to 18% range previously provided and 18% to 19% of revenue for 2019 2020.
Lastly, we have a long term rack track record of meeting or exceeding synergy targets reflected in our purchase price and we'll continue to make investments that are attractive from a both evaluation and operating synergy perspective.
Now turning to fourth quarter and in Relook at our full year 2019, guys.
In an effort to help forecast the balance of the year, we're comparing several key quarter had financial guidance metrics and updating previously your projection.
We expect total fourth quarter company revenues to be up mid single digits.
However, excluding the $140 million political revenue from last year's fourth quarter, we expect revenue growth to be up in a high twentys range.
From an expense perspective, we expect fourth quarter operating expense to increase in the mid to high twentys driven by acquisitions and higher programming fees.
Net of programming expense, we projected expense to be up.
To be up.
Mid 20% range.
Beyond this we have now up these are full year 2019 key guidance metrics. Following the close of the dispatch for a purchase and acquisition at Nexstar divisions divestiture stations.
As a result, I'm pleased to say, we're well on track for a very strong year, here's some additional color, reflecting those projections for 2019.
We expect to see full year subscription revenue up high teens.
Corporate expenses are expected to be lower by $2 million to approximately $43 million decrease.
I have $2 million from the prior guidance of 45.
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