Q3 2019 Earnings Call
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Thank you the Tina good morning, everyone and thank you for joining our call today to discuss new Media's third quarter results as well as our pending acquisition of cannot during this call. We will discuss still sticking out transaction and immediate financial results for the core if you now to get to the New media website, you will find that we have posted an earning supplement in it.
Turning to our earlier press release.
We will not walk through to supplement on today's call, but it can provide you with additional detail on this quarter's performance should you have interest.
Actual results and events could differ materially from those discussed today, we encourage you to read the forward looking statements disclaimer in the presentation as well the risk factors described in new Media's filings made with the FCC.
In addition, we will be discussing some non-GAAP financial measures during the call today and the reconciliations of those measures. The most directly comparable GAAP measures can be found in the earning 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 rebroadcasted without our consent with that I'd like to turn the call over to Mike Reed you need.
As chairman and CEO .
Session and good morning, everyone. Thanks for joining this call this morning.
In addition to revealing that third quarter results. You do also will take the opportunity. This morning. This morning to update you on our pending acquisition of getting that.
How that's gone so far and I'll discuss the incredible opportunity, we think it brings for creating shareholder value.
And reiterate why we believe you should vote in favor of our transaction on November 14th starting with the quarter first.
And now checked Q3 dividend earlier this month on October 16th of 38 cents per share and that will be paid on November 12, two shareholders of record Tomorrow November 1st.
They were two factors that challenged our quarterly revenue performance first hurricane Irene impacted some of our southeast markets, which caused a loss of approximately 1.5 million to revenue as adjusted EBITDA and free cash flow.
Second market when we're in the eventual eventual amounts you got all just 50 of our agreement to acquire getting that inevitably pause some distraction from operations, which impacted our revenue primarily across print and digital advertising.
However, since the announcement, we have worked hard to refocus and have stabilized performance by the ended the quarter.
In the event side, we hosted the best of the Best communities Choice Awards during the quarter, which outperformed our expectations. We also had a great great quarter for the in direct choice is hosting over 66000 participants and on the promotion side September was the best month, yet for revenue.
It helps lives is on track and then over 60 million of revenue in 2019, <expletive> We had previously guided closer to 55 million earlier this year.
Keep in mind, we started this business from scratch zero revenue four years ago.
This home grown fast growing businesses meaningful to meaningfully contributing to our diversification away from declining revenue in traditional print advertising.
He will also really pleased with our subscriber growth trends in the quarter.
Our digital only subscriber growth again more than offset our print subscriber decline growing 64.9% to the prior year up to 217000 digital only subscribers.
Our ability to sustain subscriber growth is putting us on a path to a much more sustainable circulation revenue stream over the long term.
As I mentioned, a few minutes ago, as adjusted EBITDA and free cash flow through the quarter were very strong. These really really results reflect our efforts to further centralize our infrastructure much of which was implemented earlier this year.
Recap, we announced an agreement to acquire done that an obvious fifth subject to customary closing conditions, including regulatory clearances and shareholder approval.
As of last week, we have obtained all of our rig required regulatory approvals and are now focused on the shareholder meetings that both new media engine that will hold on November 14th.
We are financing the purchase price with financing that while expenses can be repaid without penalty at any time.
And I'll say more about the financing and just a minute.
Another important component of the acquisition is the changes to our management agreement with fortress and Independent Committee of our board negotiated an amendment to our management agreement effective as of the closing of the acquisition.
As part of the amendment, we were able to eliminate the cash termination payment otherwise payable to fortress upon termination.
In exchange for the issuance to fortress of about 4.2 million shares of new media common stock.
There will also be 3.2 million options issued to fortress struck at a premium to where new media's current trading prices.
Finally fortress will be restricted from selling its shares until after the termination of the management agreement.
As I've said before the opportunity to acquire given that there is an incredible opportunity to create value for our shareholders are companies will be much stronger together than either is today on the standalone basis.
There are several primary reasons for that before I go three goals reasons, one, though I would share with you is since new Media's inception in my tenure as CEO of the company since its inception. This is the single biggest and best opportunity. Our company has had haven't seen more upside associated.
Well the transaction for our shareholders, then I see the discipline I'm extremely excited about it.
Now first this acquisition creates the best best path for our combined company to stabilizing topline revenue trends and and then realizing growth.
We realized that we could pursue growth through other avenues, but.
But we strongly believe as I just said the acquisition again that is the best option with the most upside.
Second the acquisition presents significant cost reduction opportunities that can be achieved with greater size and a faster timeline than either company could she achieve on standalone basis.
We previously announced expected annual run rate synergies at 275 to 300 million.
Feel great about the synergies.
Third the acquisition creates the leading U S print and digital news organization with deep local roots and national scale.
Scales of necessity for digital business and our size will enhance our earnings potential.
Our ability to generate substantial cash flows will allow us to do leverage the balance sheet quickly answer return capital to shareholders through dividends. In addition to investing for growth that will drive revenues.
Before selecting this financing we did a comprehensive analysis of other financing options available in the market.
The financing we settled on has several positive features to it.
It has no financial covenants other than a minimum liquidity requirement.
And importantly, we can prepaid without penalty at any point.
We see a clear path to aggressively paying down this facility with Apollo and bringing our leverage ratio to under two times in 2021.
At this level, we believe we can refinance into a traditional bank financing at a much more attractive rate, while maintaining the flexible covenants.
[noise] as we've kicked off integration finding in earnest we are increasingly excited about the future prospects of the combined company.
Our teams have complementary strengths and experiences and are planning to leverage the best practices of both companies to help us transform our business model.
Create a more agile and dynamic organization.
We announced on Tuesday, the members of our combined board.
And they bring a strong understanding of the media industry and our legacy companies.
Marketing and business development.
We believe this acquisition is the single best path for creating significant shareholder value over many years to come.
We are extremely excited about the future and hope that we have your support for this transaction. So that we can take advantage of the opportunities we see before us.
Now, let me turn did talk about a very important part of our business our journalism.
Sustaining local journalism is the reason that we are fighting so hard to transform our business model. So that we can ensure our local communities have trusted high quality journalism for the next 100 years.
In the quarter, we have a new partnership with the Midwest Center for investigative reporting that is funding and agricultural data journalism Fellowship.
It will allow our reporters to access the centers datasets and allow us to further develop products targeted at our rural audiences.
The Austin American Statesmen was awarded first place for best Digital presence and best section by the society for features journals.
And our reporter Alex Kuffner from the Providence Journal one of the first place award from the Society of environmental journalists for his coverage of invasive jellyfish in Rhode Island waters.
Congratulations to you all and thank you for your continued service commitment and hard work on behalf of our communities.
Now I'd like to open the lines for questions.
The Teeny you can go ahead and open up the Q.
As a reminder, if he would like to ask questions you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compared to Q1 day roster.
Your first question comes from the line of Jason Bazinet with Citi.
Thanks, So much I guess in your prepared remarks, you mentioned you received all regulatory.
I can't remember when it came out around the FCC sort of questioning the Apollo financing given the cross ownership of TV stations and newspaper assets and I was just wondering if you could.
Well the FCC as no jurisdiction in our transaction Jason. We're we don't have licenses that are being reviewed for transferred by the FCC and so we have.
Committed financing from the Tal that's not subject to the FCC review and approval in our transaction is not subject to any reviewer approval. So I think that was more.
Rumor than that in fact based and we have there's been no alterations our plans for November 14th vote and closing shortly thereafter.
Your next question comes from the line of Lee Cooperman of Omega family Office. Thank you very much.
No I listen to you Mike on the call I'm reminded the Ses comedian Rodney Dangerfield used to complain he gets though respect.
The it's for the proxy statement came and connected the merger.
And this assumption so nobody believes numbers note on the recites dividends stock gives 9%.
2.7 times EBITDA in 2021, you're going to fix the financing.
He believes it and I think part of the problem is.
Media's revenues have been declining around 7% effect I think the Q3 was seven night.
Post merger, you're projecting declined 3.5% 20, 21.5% 2021, and Dan 0.4% 2022.
As regards margins, they're running 11% to 12% currently post merger you're expecting 15.6, 18.6, 21.3, 2020 122 now I can understand the margin expansion stemming from the synergies, but I don't understand how we go from revenue declines.
Yeah. Thanks, Liam I'm highly confident that it's going to be the case and what's really driving the historical declines, which you'll see reverse as we go forward is print advertising and then the combined company over the next three years print advertising is projected to go from over 30% to less than 15%.
Total revenue so 85% of our revenues will be driven by categories that we feel we can have either stable or growing so we feel very confident over the three year period that the biggest driver of declines print advertising will be.
Very small portion of our overall business and that leads to the continuous revenue improvement you see.
On the page you noted in the proxy that's why we feel confident you're exactly right on margin as we stabilize the top line the synergies that we realize will improve our margin how quickly into New York 2020 will you be able to generate asset sales or become clear to the public that the budget.
Actions that you have a realistic and that you could start paying down debt dramatically.
What kind of asset sales order of magnitude you anticipate and 2020 .
You know, where we're working on those things right now leads so I would expect that you would see asset sales throughout the entire year beginning in the first quarter and continuing through the fourth quarter will begin to realize synergies.
I know, we're happy to get rid of fortress, but I got to tell you I, probably shouldn't say this but I will say it because that's my nature of speaking so my mind basically.
I wasn't headphone business for 26 years I only got paid when I made money for investors to kind of money to fortress is walking away here with and I know, it's not your that you're doing no. They brought this public in 2014 at $16 a share stock is eight and half goes negative walked away with hundreds of millions of dollars. It's just morally wrong.
They shouldn't even take the money given what they've done here, but.
Pass on that question. So next person I just want to get there in the record. It's this terrible.
That's it.
Thank you.
Your next question comes from the line of Jeff Bernstein of Cowen.
Yeah could you just talk a little bit about that business.
I'd like to see in the digital side in the combined entity.
Yes. Thank you. The this the third quarter's a one snapshot in time, so I wouldn't read too much into that.
You look at the first half of the year, we produce much better revenue growth on the digital side, and we expect that going into fourth quarter. As my remarks indicated. This morning, there are definitely with some distraction in the third quarter.
Due to the rumors about the transaction and then of course, the announcement of the transaction synergies and so forth. We also had a management turnover in the up their business during the second quarter.
It's a very it was a very small snapshot in time I wouldn't read anything into it. The overall digital trends. We have produced we think we will continue to produce you know as we look forward. We would expect to continue to go digital revenues at more than double digit pace in the combined company.
Thanks, very much yes.
There are no further questions.
Mr. Randy you May proceed with any closing remarks.
So just to reiterate we are excited and confident about the future and believe bringing together the best of management from both companies as well as best practices in products will greatly enhance our ability to grow revenues and cash flow.
This deal also gives both companies a stronger in longer bridge to cross as we transform our business. This results from a more significant structural cost reduction opportunity. When combined then either company could create on a standalone basis.
We are much stronger together with a viable path for growth for our shareholders our employees and for sustaining journalism, we hope you'll be supportive.
This concludes today's conference call you may now disconnect.