Q4 2019 Earnings Call

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Thanks for calling they have your conference I'd number.

Welcome.

67 90119.

Okay now the spending up your first philosophy and please.

First name, David the I'd and last name Brown Bureau double and.

Company named please.

[noise] A.I.E.R.A.

IR.

Okay, and the conferences somebody in progress I'll join you know.

Thanks.

Significant value for shareholders.

I would like to take a minute to thank all of our employees, who have been working tirelessly had or integration efforts, while also improving that business and the first quarter.

I noticed that an enormous amount of work, but the transaction better positions us for a faster path to revenue and profit.

Usually pretty much post closing post close we are making great progress on integration and synergies.

We previously guided to the high end of the cost synergy target of 275 to 300 million.

And we remain confident that we will implement the measures required.

Realize these savings by the end of 2021.

We are already reaping the benefits of cheerful integration planning that begin prior to closing.

By the end of this quarter, we expect to have implemented measures that we will result in over 60 million in annualized savings.

We expect these savings to ramp up each quarter until we achieve our 300 million sorry.

At the same time, we are laser focused on improving our revenue performance driven by growth. He didn't the digital marketing services and B bench categories.

We're also ahead of schedule with debt repayment, having paid down 45.2 million to date.

We will continue to prioritize debt payment.

We are targeting asset sales during the course of this year and next year that are expected to generate proceeds of between 100 125 million all of which will be used to prepay debt.

You didn't without these sales we have highly achievable plan to aggressively reduced leverage.

We are pleased with the progress of our integration and we are confident in our ability to meaningfully improve our posted annual performance.

We also expect to pay dividends in normal course, beginning with the first quarter of 2020.

And I'll touch further on that in a few minutes.

Now turning to our recent financial results.

I would like to point out that in addition to our GAAP results, which includes six weeks of legacy Tonight operations.

We have also provided pro forma financials to facilitate analysis of the consolidated Companys financial performance.

Pro forma financials represent the full quarter for legacy need media plus the full quarter for legacy Jeanette.

We've also provided revenue trends for each legacy company on a standalone basis as we believe it will be helpful for purposes of completing 2019 financial models.

Going forward. However, we intend to provide same store trends on a consolidated basis.

As we review Q4, and full year 2019 performance I'm going to focus on highlighting our pro forma performance for each period. Since this will serve as the starting point for future reporting in trends.

On a pro forma basis operating revenue was 1.054 billion for the fourth quarter and 4.182 billion for the full year 29 team.

A decrease of 9.7% in 5.9% respectively.

On a same store basis revenue declined 9.9% in the fourth quarter, which was attributable in part to the employee distraction caused by the acquisition and the announcement of our synergy target.

Also as expected we experienced a worsening trend in circulation in the fourth quarter, largely reflecting the run off of more aggressive subscriber pricing subscriber pricing initiatives that legacy can that enacted in Q4 2018.

However trends have improved in January and February to date.

With new leadership teams in place, we expect to see an improved improvement in revenue trends throughout 2020.

We also expect to drive meaningful EBITDA growth in 2020, as we realize cost reductions while improving revenue trends. Let me just repeat that we expect to drive meaningful EBITDA growth in 2020.

We have several key areas of focus in 2020 that will help drive an improved revenue trend.

The first is our digital marketing services business for Dms.

Which generated 466 million in revenue on a pro forma basis in 2019.

Digital marketing services is comprised of Reachlocal upped curve and word stream.

They sell products, both within our local markets via our local midmarket sales teams as well as nationally via both field and inside sales teams within these businesses.

Our Dms revenue benefited from robust double digit growth in the second half of 2019 in the legacy given that local markets.

This was partially offset by a slowdown experienced in the appeared business following the departure of that businesses CEO.

With the integration of our Dms business, well underway and with clearly defined sales and product leadership. We believe we are well positioned to achieve strong revenue performance in 2020.

And our events business, we are planning significant expansion into the legacy can that markets. We are targeting 30% to 35% revenue growth in 2020 off of the snipping a significant base of nearly 70 million of revenue achieved in 2019 for the pro forma company.

We're also focused on growing circulation revenue by improving volumes through enhanced customer service retention efforts efforts in content.

A component of our circulation strategy is to grow digital only circulation revenue.

As at the end of 2019, we had over 800000 paid digital only subscribers and nearly 51 million and pro forma revenue.

The digital only circulation revenue category grew 46% on a pro forma basis in 2019.

We expect it will grow another 35% to 40% in 2020.

These focus areas will be key to improving our topline revenue trend.

And all of these areas stand to significantly benefit from the new media acquisition of legacy given that as we share best practices expand markets for events and key products share sales strategies and expand product suites.

Now for more more detail, both operational and financial and the integration I'd like to turn it over to Paul.

Thanks, Mike as mentioned in our released this morning integration kicked off shortly after closing and has continued into the first quarter by the end of the first quarter wheel implemented synergy savings totaling over 60 million on an annualized basis with the first quarter benefiting from approximately 10 to 15 million in savings will continue to execute under center.

She plans and are confident our stated goal of implementing at least half of the 300 million in synergies during 2020.

We discuss our synergies in four categories newspaper operations, corporate and procurement other operations and systems.

Well, we have implemented thus far has predominantly come from newspaper operations and corporate and procurement categories.

We've announced the consolidation of 14 printing facility, it's across the country. It reduced head count within the executive leadership in corporate support teams across all categories. The teams are imminent implementing thoughtful strategic plans to most effectively bring these two businesses together.

But more than just eliminating costs, we're working towards centralized in integrating all parts of our business onto a common platforms for things like content filling circulation web and mobile.

As a result, some of those actions will take longer lead time to implement but we'll give us the cost efficiencies of our scale and the ability to quickly launch digital businesses across our network [noise].

In addition integration the rest of the business continues to operate well as Mike mentioned, we're beginning to see some momentum in our sales organization, Kevin Gensel, Our Chief revenue Officer has moved quickly to close a after close to integrate or sales organizations and announced leadership roles for a sales teams could start the you're focused on delivering our twin.

The 20 targets, Kevin and his team has done a nice job, bringing every went together under new connect and Reenergizing sales.

On the product front, we completed a redesign of USA today on web and added several mobile features to modernize the design and significantly improved page load speeds. We also launched our first pilot of a marketplace business and Asbury Park, you can expect to see us launching more of these business models designed to directly connect our local buyers and sellers.

In the coming quarters.

In our news Division, we have recently announced senior leadership team led by Mirabelle wants birth, we're hard at work integrating and unifying our 260 daily newsrooms across the country together with USA today. The work of a journalist reached just shy of 150 million unique visitors in January according to Comscore.

Also in January the des Moines registered played a major role in the National stage mentored hosted the Democratic presidential debate in Iowa in partnership with CNN. The debate was watched by nearly 7.5 million people and featured the registers cheap political office treat political reporter brand fun and steel is one of the three moderators.

Journalists for also named to numerous prestigious awards recently, including 37 properties and 150 sports journalists being recognized by the associated press sports editors for outstanding entries in the U.S.P.E. contest, we're very proud to produce high quality comprehensive local news that our communities care about and depend on.

[noise], bringing together two companies or the size is no small task and can create a lot of distraction from day to day operations as such we've also been very focused on regular communication with their teams through monthly all hands meetings leadership visits and just candid conversation.

Actively organizations no we have a lots of change digest, but understand we're heading and what they need to do I've been incredibly impressed with the team and just how quickly and professionally they've responded and executed on our plan.

This is hard work and I can't think them enough and it's their commitment that energizes may just be such great confidence and our future now I'll turn it back to Mike to discuss capital allocation. Thanks, Paul.

So in the fourth quarter, we paid down 35.8 million in debt, which was earlier than originally expected that brought our our outstanding debt to approximately 1.76 billion.

When we ended the quarter and 3.6 turns of leverage.

So far during the first quarter, we have paid down an additional 9.4 million with the proceeds from real estate sales as I mentioned before we have identified an additional 100 to 125 million in real estate sales.

That we plan to sell throughout 2020 in 2021.

And we'll use the proceeds to accelerate debt pay down.

Our expectation is for leverage to be approximately 2.75 times by the end of this year 2020.

And we still expect to refinance this credit facility when we win win we reduce leverage to approximately two times, which we expect will occur by the end of 2021.

So we remain on track with our original plan.

Looking ahead to the first quarter, we expect to announce our fault first post acquisition dividends. When we report Q1 2020 earnings in early May.

Which is consistent with the timing of new media's past dividends with respect to the first quarter.

This is also in line with our credit agreement, which allows for dividend payments to begin after our first full fiscal quarter as a consolidated company.

We expect the them out of the first quarter dividend to be 19 cents consistent with what we've told our shareholders from going back to last summer.

Subject to approval by our board of Directors of course at the first quarter Board meeting.

Now I'd like to turn it over to Alley to give us a much more detailed review of our financial performance in the quarter.

Thank you, Mike and good morning, everyone.

GAAP operating revenues in the first quarter were $699.3 million up 68.1% to the prior year quarter due to the acquisition on a pro forma basis operating revenues.

$1.05 billion, which were down 9.7% to the prior year quarter.

On a same store basis.

Revenues were down 9.9%, which reflects continued weakness in both print advertising and circulation revenues, partially due to disruption from the transaction.

As we had mentioned last quarter pardon the weakness in the circulation revenue trend was due to the cycling of more aggressive pricing initiatives that legacy getting that implemented in the fourth quarter 2018.

GAAP adjusted EBIT EBITDA totaled $98.8 million in the quarter and on a pro forma basis totaled $141.2 million or down 19.4% versus the prior year quarter, reflecting lower revenues and higher than anticipated healthcare claims.

The adjusted EBITDA margin in the quarter was 13.3% on a pro forma basis.

In the fourth quarter pro forma expenses fell approximately 8%, reflecting payroll savings from various cost reduction initiatives. Each company already had underway on a standalone basis.

Significant newsprint savings from both lower volumes and prices.

And continued production and distribution efficiencies.

Turning to our segment.

GAAP publishing segment revenue in the fourth quarter was $653.9 million.

Or $964.7 million on a pro forma basis.

Print advertising revenues were down 20.1% on a same store basis for legacy going up.

And down 16.3% at legacy New media, reflecting continued secular pressures.

Digital advertising and marketing services revenues decreased 1.6% on a same store basis at legacy Getnet and 0.4% on a same store basis at legacy New media.

Strong gains in digital marketing services revenues, especially at legacy can that were offset by more muted results within digital media and continued weakness in digital classified revenues as expected.

Circulation revenues decreased 10.3% on a same store basis at legacy connect and 7.2% on a same store basis at legacy New media.

As mentioned earlier, the legacy getting that trend was expected.

And reflects the cycling of more aggressive pricing initiatives that were enacted in 2018.

Hey, digital only subscribers volume growth remained robust in the quarter up 25.3% to the prior year on a pro forma pro forma basis to approximately 812000 subscription.

Hey, digital only subscriber revenue grew 46.1 per cent compared with the prior year on a pro forma basis.

Turning to our marketing solutions segment.

Yep fourth quarter revenues totaled $69.3 million.

$136.8 million on a pro forma basis.

On a same store basis legacy get net revenues increased 1.8% year over year.

Similar to performance in the third quarter.

Legacy can that continues to see strong double digit gains in our local markets driven by an increase in the number of clients, which we expect to continue into 2020.

GAAP adjusted EBITDA for the marketing solutions segment was $4 million on a reported basis or a 5.8% margin.

Our GAAP net loss attributable to getting that for the quarter was $95.1 million as reported reflecting a $100.7 million of noncash write downs related to the revaluation of goodwill and intangibles.

And a $145.6 million of onetime charges related to restructuring and trends action related costs.

Turning to the balance sheet, we ended the quarter with $1.76 billion in debt as we paid down $35.8 million during the quarter.

Our cash balance with 156 point million dollars at the ended the quarter, resulting in net debt of $1.6 billion.

Capital expenditures totaled approximately $6.7 million for the fourth quarter, reflecting investments related to digital product development as well as projects supporting our ongoing facility consolidations and real estate transactions.

Operator, I think we're now ready for questions.

[noise] at this time I'd like to remind everyone in order to ask a question. Please press star number one on your telephone keypad.

Your first question comes on line of Kyle Evans from Stephens. Your line is open.

Hi, good morning. Thanks.

Oh.

Mike that the two legacy companies had pretty different dividend strategies, I know you're going to wait for board approval for the one canineteen nine.

19 cents cents non official but maybe you could talk at a high level about how this new entity is going to think about return of capital.

Versus the leverage the expense of that you have and then more specifically kind of what the Brett right brackets are around what percent of free cash flow payout expect going forward.

Yeah. So we set the dividend that 76 cents a year targeting in the first year about a 30% payout ratio.

And.

<unk> in an ideal world, we'd like to continue with a 30% payout ratio. So you would grow the dividend as you grow free cash flow over the years to come. However, you bring up did poised from a capital allocation standpoint, we have expensive debt.

I have a very low stock price and so with our stock price is low it is as it is now it would the yield as high as it is now from the capital allocation standpoint, both buying back shares.

And paying down debt, 11.5% death is more beneficial to the company and its shareholders than just raising the dividend. So you know were full attention to to pay our current dividend as announced but as we go forward in two years to come we do have several levers to look at and so part of it will depend on where our share price.

Isn't that Didnt do we trade that better on fundamentals, because we're not trading on fundamentals today.

Right.

You mentioned.

The expectation for <unk>.

Improving revenue trends and I think on page five it it says.

Excuse me I'm, a significant same store revenue trend improving 2020 can you can you bracket kind of what you expect pro forma revenue to look like.

In the cadence of that going across the upwards of 2020, and then and then behind that.

The biggest moving parts that makes you confident enough to put that in the deck.

About 150 basis points.

Oh total pro forma revenue improvement in 20 versus 19, yes.

And how how are we going to get there.

Improvement in the Dms revenues improving in the events revenues.

Stabilize print while down not of a worsening print trend and then some slight improvement in circulation revenue towards the back half of the year.

National It's a good category for us as well that will help us and 2020.

Got it your circulation comment is a good segue into the thing that you guys are sick of me asking I'm sure, but you know I'm obsessed with the circulation unit economics.

You talked a little bit about well not a little bit three times about the rolling off the aggressive pricing strategy and legacy can that and you're you're kind of aiming at those negative 10% number to explain that but I also see legacy new media kind of going from 5.5% to 6% in the first three quarters to 70 per se.

Yep.

Just kind of wondering if you could talk a little bit about that 7% dip at new media and then kind of talking about what you think pricing interplay between pricing and volume will look like in 2020.

[noise], Yeah, we Oh.

Well not as a us with all this.

Bulky Kyle it's not significant we are at new media had done some price increases in Q4 2018 to that cycled off.

In Q4 of 29 team and we also had done more premiums.

In the second half of 18 premium additions that we did in 2018. So those are.

Those on that's all part of the pricing strategy and you know as we go forward our strategy is much more around.

Volumes through up.

Retention for better retention efforts better customer service better marketing.

And better content.

Not pricing.

And we use and when those five and a half six declines turn into seven in 10, New media and get that did you see better do you see unit volume improvements on a year over year, yes, yes, we did.

Okay.

And I guess, but to be specific and put a finer point on this line of questions do you expect to be doing any aggressive rate hikes in 2020 for any of them either side of the business.

We do not.

Okay, Lastly, and then I'll quit harden the microphone here.

You know 300 million in cost synergies that you plan to get you talked about consolidating 14 print facilities are there more print facility consolidations coming and can you talk about the cost to achieve <unk> cash cost to achieve synergies in 2020. Thank you yeah, well that's the back half of that question cost to achieve a bit.

And about 20%.

Of our of our synergies the we're about halfway done with the plant consolidation project. So there's a lot more to do there that of course, there's a lot of long lead time items that you know help us get to 300 million synergies that roll into 2021, that's why the two year project, but don't don't.

Hey, good also tile both companies had had been doing regular way cost reductions.

You know before the merger and even after the merger so those regular way cost reductions will roll into 2020 as well so our costs will be down.

So a lot more than just the synergies.

Great and maybe maybe sneak one more in here a lot of discussion around digital only and the growth you're seeing there solid growth, but still quite small as a percent of total I'm I'm sitting here in little rock at the smaller market than most of the legacy connects but do you made 57, but it's a lot bigger than a lot of the legacy Newell.

He is our local paper here's printed only on Sundays and digital the other six days a week how much your mind would print advertising haptics to decline from where it is today before you start to consider something fairly radical on the distribution side of the business model. Thanks.

Hello.

You know, we still makes a lot of money off the proof the dish, we really do and print circulation print circulation in print advertising. So print subscribers are highly profitable it would have to decline, although a lot from from where it is today.

Okay, maybe we don't have any plans in the near future to do anything like that.

Okay, but basically what are you, saying is you'll be refinancing your line and a half percent data at the end of next year before you're thinking about doing something radical.

As we sit here today as we sit here today I would say, yes, that's the that's it that's correct.

Okay, great. Thanks, Mike.

Thanks, Phil.

Your next question comes from the line Ryan's I'm from Needham. Your line is open hi, Thanks for taking my my question. So just a couple of here one encouraging to hear that you're seeing some improvement in January and February would you say, that's just more kind a the industry advertising backdrop.

GAAP is improving or some of the merger initiatives that you guys have been highlighting that are starting to play out that I have one follow up.

Sure. This is Paul a couple of things one that I think we've pulled together the team now a across both companies they've got some really strong momentum we've done some salix sales rallies around the country. The team has a lot of energy we've gotten the restructuring done early and so I think were often running so operationally I think we're just seeing a live.

From that we also had the benefit now have a much broader base on which we can sell national programs and so we've got to a lot more properties that we can digest large buys from national advertisers, which were starting to see some nice lift from that so the combination of those two plus just some overall strength and the advertising market here as we look towards Oh.

Political advertising and just a I think a nice come back in the AD spend.

Got it. Thank you and then just on the comment about expect a meaningful EBITDA growth in the press release appreciate all the pro form it I think there was a $485 million pro for whatever is that a good starting point for us to use when you say expect meaningful EBITDA growth for.

2020, yes. It is.

Excellent and Scott I'll take one more Mike I always appreciate your thoughts on the capital allocation, we've talked about this in the past, but to your point with where the stock is today and obviously your full and touch and you're committed to the dividend. It can you just to remind me or clarify the comment that you made before that.

Probably a better use of capital to be buying back shares at the you know plus or minus $5 level versus paying a dividend can you just.

Extrapolate on that comment that you made.

Well part of our part of our overall strategy is to return capital to shareholders. That's why we have a 19 cents per quarter dividend My my point on capital allocation was.

Do you increase that as you improved financial performance or do you buy back shares or pay down debt.

With where our share prices today the yield on the dividend is so high we're not really getting credit for it. So it's going to make more sense in the near term to take capital and pay down debt and buy back shares. So that's what I meant by that and also just just to clarify on the second question, though.

You know the significant EBITDA growth will come primarily as we continue to realize synergies in every single quarter those synergies will continue to ramp up.

So you don't expect to see the same percentage every quarter throughout 2020 that would indicate that all the synergies were already in place. So everything will continue to ramp up as the year goes on.

Thank you very much like.

Right.

Your next question comes from the line of Lee Cooperman from I'll make a family office.

Thank you.

Good morning.

I think I know the answers to all these questions because you've been very transparent and you've been very consistent but I I got to I, just don't believe where the stock is trading so I got to ask the question again.

In January early January this year, you had it interview in Las Vegas, I think with Jason bets in a he actually some interesting questions. One was you know you bought a lot of stock.

What are you thinking about valuation I think your response was as you looked at a few years you see a company is going to have evaluations somewhere between four to 5 billion I see a debt pay down to approximately 1 billion. So I see a bargain kept the three to 4 billion, which gives me 25 $30 stock, which is a good six times, where we are trading currently there was one.

You made the second come you made was on the dividend at that time was a 12% year. This now 15, the epicenter yield would you and I had a third observation.

That is when you put at the S. Four in connection with the merger you had a lot of projections out the 2022 other projections in the S. Four of your comment to Jason in early January still operatives in your view.

Yeah, well my comments to Jason are still operative that's still the way I feel you're right I do on a lot of shares I see significant value over the next three years as we grow EBITDA substantially and pay down debt.

I think.

We're not changing our our mindset at all in terms of what we put in the US for the board has discussed at length, whether we give specific guidance for 2020 in the decision was no specific guidance for 2020, but but I, but I am saying that our revenues are going to improve and our we're going to have significant EBITDA growth and.

All of the things I told Jason Bazinet in January still stand today.

I figured going to say that you know if you take if you if the dividend was set at roughly 30% of free cash flow. The implicitly to take 76 cents divide that by 0.3, you're talking about two and half, though this year free cash flow is targets like less than two times free cash flow mean, so to 50 of free cash flow is what you're thinking for this year.

Yes, so I'm not that's what I said the.

The stocks not trading on fundamentals today, and I think what's what's happening is there's a ton of shorts in the stock and there's a wait and see approach for a couple of quarters to see how to wanting to to actually do can we grow EBITDA and can we improve revenue trends and if we deliver on both of those into one in Q2, I think we'll start to squeeze.

The shorts out and I think we will start to trade on fundamentals right. The you made some because of for his comments about the dividend that's where it make sure your comments, where maybe we though this is my interpretation. So just tell me if and when they will attract 76 cents dividend is secure what you're saying is we may not.

Grow the dividend as cash flow grows if that stocks trades down here that may be a better use of the capital to pay down debt for poor buy back stock, but you're not talking about the vulnerability of the existing dividend you just talking about the growth of the dividend is that correct I'm talking about the growth of the dividend, okay. So things that well good luck.

Yeah, I've never seen said to disconnection from fundamentals, but hopefully after the opportunity.

Thank you have good luck nicely.

I'll now turn the call over to Mike Reed for closing remarks.

[noise]. Thank you.

Closing I'd like to highlight that in the short time since the closing of our acquisition.

As mentioned earlier, we have made substantial progress on the integration we have begun implementing measures that will result in significant cost savings both the first quarter and beyond we remain very confident in our ability to implement over 300 million of synergies and we target that by the end of next year 2021.

We have already pre paid over 45 million of our term loan and we remain highly focused on deleveraging.

We have identified 100 to 125 million of real estate that we expect to sell by the end of 2021, which will also accelerate or de leveraging plan.

Our revenue trends so far in the first quarter are looking stronger than the fourth quarter and we are optimistic about our ability to continue to improve same store revenue trends this year.

We're also very optimistic about our ability to grow EBITDA in 2020.

I want to say, thank you again to our employees. We appreciate your hard work to date your dedication your motivation and commitment to.

To a successful 2020.

I also want to thank our shareholders for your support of the acquisition and your trust as we work to achieve our goals that we've laid out today.

Look forward to speaking to the good than just a couple of months with Q1 earnings. Thank you.

This concludes today's conference call you may now disconnect.

Oh.

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