Q3 2019 Earnings Call
Good day and welcome to the Mcclatchy third quarter 220.
2019 earnings conference call, all participants will be in listen only mode. So you need assistance. Please signal conference specialist by pressing the Starkey followed by zero.
After today's presentation.
Please note that this event is being recorded I would now like to turn the conference over to Elaine Lintecum Chief Financial Officer. Please go ahead ma'am.
Thank you Chad. Thank you all for joining us today for third quarter 2019 earnings call. This call is being webcast at Mcclatchy Dot com and will be archived for future reference.
Earnings release was issued this morning before the market open and I hope you've had a chance to review it.
Joining me today, it's Craig for our President and CEO .
A press release on discussions. This morning include information about actions, we're taking to relieve liquidity pressures, we face and 2020.
Actually rationalize our debt structure.
Early in our negotiations I cannot provide any more information then is in our public disclosures.
Given the circumstances, we know some companies would have cancelled their quarterly call.
We're in news company and we believe this call is important to communicate our third quarter operating results with you our investors.
Even though you may have questions. We just cannot answer at this time.
So while we're going forward what the call we will not have a question and answer period at the end of the call. Instead. If you have more question about about our results. We encourage you to reach out to me at 9163 to 118 for six or via email at <unk> Lincecum.
At Mcclatchy Dot Com again first initial last name.
Glad to dot com.
Our discussion today will contain forward looking statements that are subject to risks and uncertainties that are described in are actually see filings.
Actual results may differ materially from those described during the call.
Also our non-GAAP amounts discussed this morning are reconciled to the most directly comparable GAAP measures in schedules that are posted to our website or that are in the body of our press release.
Now I'll turn the call over to crack [noise].
Thank you relate.
Good morning from Sacramento, and thank you for joining us today.
We're happy to share with you in detail our third quarter results [noise].
We're gratified to report the EBITDA trend improved sequentially, yet again swinging to grow from ever narrowing year over year declines in the three prior consecutive quarters.
This result reflects our disciplined in controlling costs, while making strategic changes to accelerate our digital transformation.
Of course, we cannot overlook the headwinds we faced in the quarter such as non cash impairment charges that relate to an acquisition made in another newspaper era.
Sunk cost needed to be removed from the books, resulting in a noncash charge of approximately $295 million in the third quarter.
And you have all season that we are considering a restructuring that will allow us to potentially find a long term solution to our pension a debt structure.
We're working hard to find solutions for the company and it's more than 24000 pensioners in a plan that was started 75 years ago. When such plans were seen as a popular way to provide retirement benefits to employees.
We have voluntarily contributed nearly 44% of the 100 <unk> the $1.3 billion of existing assets in the plan rather than limiting our support to the minimum required contributions.
Still the plan was underfunded by approximately $535 million as of March 31st 2019.
Our workforce of nearly 2800 employees today means that we have roughly one active employees working to support 10 pensioners.
My Mcclatchy colleagues, who joined the company in the last 10 years do not participate in a plan, they're working hard to support one that was frozen to new participant.
In 2009.
That's a wayne will explain in detail later, we've commenced discussions with the pension benefit guaranteed Corporation also known as the PBGC as well as discussions with our largest single debtholder for the purpose of exploring other alternatives with respect to the pension plan and our outstanding junior debt.
That would provide a more permanent rather than a temporary solution to our pension obligations and capital structure.
More to come on that shortly and we certainly cannot assure you that these efforts will be successful.
Still are positive trends in adjusted EBITDA highlight the accelerated digital transition we are embarked upon and make these efforts worthwhile to our stakeholders.
Let's look at the headlines.
We reported growth in adjusted EBITDA of 4.6% compared to Q3 2018, our first growth quarter in that key measure in eight years.
We grew digital only subscribers to 199200 and top 200000 subscriptions in early October .
And total paid digital subscriber relationships at the end of a third quarter surpassed half a million.
We have announced our expanded successful digital Saturday rollout and.
Accomplished experiment launched its first digital only newsroom in Youngstown, Ohio and is already making an impact in the community [noise].
Now for the details.
Despite continued headwinds in revenues around the industry and at Mcclatchy.
That's what I mentioned, we saw our first quarterly year over year growth in adjusted EBITDA since the fourth quarter of 2011.
This positive adjusted EBITDA trend also include improved sequentially swinging to growth for the third quarter from three consecutive prior quarters of erode ever narrowing year over year decline.
Yes, we achieved this improving performance by implementing stopped strong cost controls.
And it still hasn't impeded our progress towards the digital transformation that is required in today's news business.
Mcclatchys progress an interest in transforming our business is reflected in the growing number of our digital subscribers and engagement with our digital products.
Digital only subscriptions.
Grew 45.4% from the third quarter of 2018 to nearly 199200 subscribers.
And it was only a few days into October when we hit a milestone of more than 200000 digital only subscribers.
When coupled with the number of our combined to print and digital subscribers were print customers have activated their digital products total paid digital customer relationships were approximately 509400 at the end of the third quarter up 23.2% from your earlier.
This encouraging growth in digital subscribers came as we also expanded our digital Saturday rollout to include conversions or announcements to convert 12 of our markets to digital only additions on Saturdays.
We're seeing wide acceptance of digital Saturdays among our subscribers in the markets, where the change has been implemented and or announced and in those markets where implementation has occurred we're seeing an accelerated conversion to our digital products.
We expect to expand digital Saturdays to all of our markets. During the course of 2020 as we advance towards our digital future.
In looking at our third quarter 2019 audience results digital audience revenues were up 13.4% for the third quarter 2019 compared to the same period last year, reflecting strong growth in digital subscribers.
Digital or only audience revenues associated with digital only subscriptions were up 44.5%.
Total audience revenues were 78 million $78.3 million and represented 46.8% of total revenues.
For the first quarter in our history audience revenues contributed more to total revenues than did advertising revenues.
Digital advertising revenues continue to exceed freight revenues as they have for the past seven consecutive quarters.
This is an illustration of the absolutely fundamental digital transition that we believe mcclatchy and all other local newspaper companies must accelerate in order to succeed in the digital era.
That we are ahead of some others in this transformation despite the challenges posed by our debt and pension responsibilities and the headwinds in our industry.
As a reflection of the hard work of our colleagues in the 30 markets around America that together make mcclatchy.
Turning to our advertising business during the quarter, we saw a slight improvement in the year over year trend from our second quarter results as our newly restructured advertising department begins to execute.
There have been many changes in that functional area, including adding some great new digital talent and standing up a new call center to work with and provide advertising services for some of our smaller revenue accounts around the country.
Total digital advertising revenues were 46.8% of total advertising revenues and digital only advertising revenues exceeded print advertising in our home delivered and single copy newspapers.
Total digital advertising revenues were $35.9 million down, 15.9% compared to the 18.7% year over year decline in the second quarter.
Digital only advertising revenues were down 17.7% compared to a year over year decline of 20.6% in the second quarter. So while we certainly are not cheering yet we are seeing incremental improvement in light quarters.
Before turning the call over to a lean to review our quarterly results in more detail I'd like to focus on the cornerstone of our business local journalism.
We have mcclatchy remain firm and our commitment to independent local journalism in the public interest and that commitment goes beyond markets, where we own a master.
In October we launched a hunting matters, a digital only news outlets, serving Ohio's Mahoning valley as part of our Corpus experiment.
The conference experiment is a local news laboratory founded by Mcclatchy and funded by Google News initiatives local experiments project, where Mcclatchy is launching digital only news outlets in three localities with with 60000 to 300000 residents and limited sources of local news.
As you've seen highlighted in our press release Mcclatchy newsrooms continue to produce Reveller Tory an extraordinary journalism that is a central to the communities we serve.
The short lead observers dismissed theories focused on how north Carolina core to sandal weapons crimes and found that high numbers of repeat suspects with free time and again, even going on to commit murder North Carolina Governor really Cooper said, the investigation raised troubling issues and called for more funding to success.
We prosecute gun criminals.
In Kentucky, the Lexington, Harold leader exposed to pattern of brutality and overcrowded local presence.
As a result at the investigation Kentucky's Governor signed an executive order to move some of the state's prisoners to a private prison to address the overcrowding of local jails.
And while the series began last month, thus technically in our fourth quarter and we'd like to mention stricken meticulously reported multi month data journalism effort, highlighting the proportionately higher and growing incidence of multiple cancers, among our important and growing veterans community.
There are six months of reporting Mcclatchy is exclusive analysis of data from the Veterans' administration and the department of defense found a noteworthy and alarming spike in prostate urinary liver and blood cancers, among veterans who served.
Nearly two decades of war.
We've been gratified that the public response to this reporting is drawing a spotlight on this issue crucial to our military veterans community.
And speaking of crucial.
We believe that local journalism is crucial to the proper functioning of our society. There is evidence that where local media collapses community suffer polarization gross civic connections freight and even borrowing costs rise for local governments.
At Mcclatchy, we're resolute in our determination to continue the two keys traditions that have been the hallmark of our focus for the past two years or so since I became the CEO and for more than a century and a half prior maintaining our award winning record of credible urgent solutions oriented essential journalism in the public interest while it.
Celebrating the pace cadence and success of our efforts to advance our digital transition.
Now I'll turn the call over to a lean to discuss our specific financial results for the quarter.
Thanks, Craig.
We reported a net loss of three and $4.7 million on the third quarter, excluding the non cash impairment charges for goodwill in mass ads and other restructuring costs. Our adjusted net loss was 1.3 million in the quarter.
Adjusted EBITDA was 19.9 million up 4.6% from the third quarter at 28 chain.
Excluding real estate gains from the third quarter of 29 chain adjusted EBITDA was 19.4 million scale up 2% from the third quarter of 2018.
Greg gave the additional detailed review of revenues, but let me summarize them again.
Total revenues were down 12.4%, a third quarter compared to the same period last year very similar to what we saw into second quarter.
Total audience revenues were down 6.8% in third quarter compared to the same quarter in 2018 as print declines offset strong growth and digital audience revenues.
Advertising revenues and the third quarter were down 19.3% compared to the same quarter last year.
Our improvement in adjusted EBITDA during the quarter was the result of our focus on cost controls, even while we continue to invest in our business.
We reduced adjusted operating expenses by 14.2% compared to the third quarter 2018, and as usual we did it the right way focusing on legacy costs and process improvements and our business.
Our cost structure overall is benefiting from thoughtful reductions we have made in the first and second quarters.
Floating the outsourcing a printing and Tacoma, Washington, the voluntary intact early retirement program, we offered into first quarter and the restructuring of the advertising Department that was discussed last quarter.
And third quarter of 29 change the number of average fulltime equivalent employees declined 19.4%.
Third quarter of 2018, as we focus on strategically restructuring and running our business more efficiently.
As we transition to a more digital company, we continued to have savings and newsprint and third party printing costs.
Taken together, we reduced newsprint and supplement cost by 13.7% compared to the 2018 third quarter.
Newsprint expense declined 26.8% and savings are coming from volume declines as well as relief on pricing.
And the third quarter of 29 chain, our news print volume declined by approximately 22% well the average price decreased 6.4%.
Over the third quarter of 2018.
We expect to see average newsprint price declines in the fourth quarter as well and as I've reminded you in prior calls our newsprint costs are now only about 4% of our total cost structure.
Now turning to the balance sheet.
As of quarter end, our principal debt outstanding was $708.5 million with an average interest rate of 7.9%.
We finished the quarter with $11.4 million on cash, resulting a net debt of about $697 million.
As a result of selling two properties one in the third quarter and one in the fourth quarter, we expect to call land about $5.2 million of our 2026 first lien bonds in the fourth quarter.
As of the ended the third quarter, we had $33 million of total borrowing capacity under our revolving credit facility and no amounts were outstanding.
Our capital expenditures were about $670000 and the third quarter and 1.9 million for the first nine months of 29 team.
I'd like to briefly touch on our efforts related to pension obligations and our overall debt structure.
We made a required 3.1 million dollar pension contribution on October 15, and we remain in compliance with all Arista requirements.
As we previously disclosed we submitted an application for a waiver of the minimum required contributions to our defined benefit pension plan with the IRS for plan years, 2019, 2020, and 2020 watt.
As of March 30, 129 chain. The latest measurement date of the plan into held assets of 1.32 billion of which approximately 580 million or 44% came from voluntary contributions made by mcclatchy over and above minimum required contribution.
And.
Still the plan with underfunded by approximately 535 million as of March 31 2019.
With approximately 124 million of contributions due over the course of 2020, the majority of which are due September 15, 2020, and thereafter [noise].
The IRS has indicated that they will not grant a three year wafer.
We continue to explore other means a pension relief, including working productively with many members of Congress in search of Legislative relief that would mitigate the burden of the minimum required contributions and 2020.
We have seen similar legislative solutions over the past decade, but a solutions has yet to pass Congress and 2019.
Since there can be no assurance of a legislative solution to the company's liquidity challenges, we have commenced discussions with the PBGC and our largest at holder for the purpose of exploring other alternatives respect with respect to the pension plan and our outstanding junior debt that would provide a more permanent.
Rather than temporary solution to our pension obligations and capital structure.
We're in discussions with the PBGC regarding its stress termination, while continuing our ordinary business operations.
He has to reach payment terms with the PBGC that will relieve the current liquidity pressures of the minimum required contributions.
Sure the PBGC and the company reach such a solution.
The assets and obligations of the qualified plan would be assumed by the PBGC.
I would continue to pay the companys pensioners their benefits.
The company believes under current regulations, such as solution would not have an adverse impact on qualified pension benefits are substantially all of its retirees.
There are going be no assurance that the ongoing discussions with the PBGC and our debt older well result in any restructuring transaction that the company will obtain any required stakeholder consent to consummate a restructuring transactions are that the restructuring transaction will occur on a timely basis our at all.
We do not have any other information to share on this development at this time.
Now I'll turn the call back to cracked and discuss our outlook for the fourth quarter. Thank you Elaine.
We are cycling over a relatively strong fourth quarter from 2018, when we reported an uptick in political advertising for the midterm elections and took some very strong expense initiatives that helped the fourth quarter of 2018 and the first three quarters of this year.
So we're not expecting our sequential improvement in EBITDA to continue in the fourth quarter. This year.
But our hard work in the fourth quarter of last year and the first nine months of 29 team have helped improve results that would otherwise have been shown in our EBITDA.
We expect the rate of decline in advertising revenues in the year over year comparisons will be impacted by the heavy political advertising that helped the fourth quarter last year and will not be repeated in the fourth quarter of 2019.
In the fourth quarter digital subscriptions are expected to continue to grow and partially offset continuing declines in print circulation, resulting in mid single digit declines in total audience revenues for the full year 2019.
As expected, we will be steadfast in reducing operating expenses in the fourth quarter of 2019 to align expense in revenue performance, while making additional investments in our news and sales organization.
Today, we announced actions, we're taking to deal with an acquisition made in another newspaper era.
And that brings me to a final thought to share about our company and its mission one thing that doesn't change the importance of local journalism at Mcclatchy and a community news organizations around America.
That important as measured by the priority assigned to free expression expression in our constitution. It is our nation's very first amendment to our bill of rights I described a moment ago the price our communities and we all pay as a society when local media collapses at Mcclatchy, we're determined to accelerate our digital successes.
Maintaining our 162 year track record of a central journalism in the service of our community.
I want to thank you for joining us on the call today and if you have any questions on our financial results. Please do reach out to Alain.
Operator, you can now in the call.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.