Q2 2019 Earnings Call
Welcome to the Mcclatchy second quarter 2019 earnings conference call.
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I would now like to turn the conference over to Elaine.
Lintecum. Please go ahead.
Good morning, everyone. This is the line of Mcclatchy CFO and thank you Ben.
Thank you all for joining us today for our second quarter 2019 earnings call. The call is being webcast at Mcclatchy Dot com and it will be archived for future reference.
Our earnings release was issued this morning before the market opened and I Hope Youve had a chance to review it.
You'll note that our Investor Relations director Stefani's Rodney is not on the call. This morning.
That's because just less than a month ago. She welcomed a new addition to her family and remains on maternity leave so I'm her understudy for the second and third quarter Conference calls this year.
Joining me today is Craig Scanlon, our president and CEO , and our vice President of consumer products, Scott manual and our vice President of operations Smart thing.
The call will contain forward looking statements that are subject to risks and uncertainties that are described in our S. You see filings actual results may differ materially from those described during the call.
Also non-GAAP amounts discussed this morning are reconciled to the most directly comparable GAAP measures in the schedules that are posted on our website or in the body of the press release and now I'll turn the call over to Craig.
Thank you Helane.
Good morning from Sacramento, and thank you for joining us today.
We're happy to share with you in detail our second quarter results.
We're gratified to report continued improving sequential trends and adjusted EBITDA from both the fourth quarter and full year 2018, and the first quarter of 2019.
And we're posting our best year over year quarterly performance with adjusted EBITDA since the fourth quarter of 2015.
In fact, adjusted EBITDA in the first half of this year, excluding the impact of real estate gains on equity distributions was down 4.2% and marks our best performance since 2010.
These positive trends highlight that the accelerated digital transition we embarked upon a little over two years ago, not only pointed our company in the needed correct direction, but also accelerated the positive pace of that digital transformation, despite unrelenting and in some cases intensifying industry headwinds.
Here are the headlines.
We achieved an improving trend in adjusted EBITDA over the past three quarters and to be clear that excludes the impact of real estate sales and distributions from minority investments.
We reduced our adjusted operating expenses by 15.3% from the second quarter of 2018 and have reduced adjusted operating expenses by more than $41 million in the first half of 2019 compared to the same period in 2018.
We grew the number of digital only subscribers by almost 52% over last year that is the 13th consecutive quarter of growth in this key area of driven digital transformation.
And we redeemed $32 million of our first lien 2026 notes at par on June 7th.
Thus, reducing the total amount of first lien debt outstanding to $268.1 million, we continue to focus on cash flow and asset sales is key metrics in de levering our balance sheet.
No other material tranche of debt matures in the rest of this decade.
Let's take a closer look at these results.
The trend in adjusted EBITDA is among the key milestones this quarter. It reflects our efforts to stabilize our operating results. Despite the continuing headwinds in the print newspaper business.
Excluding the impact of real estate gains recorded in the second quarter of 2019 and equity distributions from Careerbuilder in the second quarter of 2018, adjusted EBITDA improved sequentially to down 3.2% from down 5.7% in Q1, 2019 and down 8.2% in Q4 2018 compared to the same periods in the preceding years.
This is the company's best quarter over quarter performance since the fourth quarter of 2015, and we have done it the right way lowering expenses strategically to make our organization more efficient and effective while investing intentionally in digital opportunities.
We are encouraged by this stabilizing trend and remain steadfast in our focus on topline revenues, while managing our cost structure.
All the while making important strides in our digital transformation.
In fact, we removed $27 million of adjusted operating expenses versus Q2, 2018, a reduction of more than 15% of legacy costs from our business this quarter and more than $41 million in the first half of this year versus 2018, we achieved this through disciplined cost reductions that were put into place in the second half of last year and in the first half of this year.
We announced in the fourth quarter of 2018 that we were shifting our organizational structure to become a functionally organized company a more agile organization for the digital era common in Silicon Valley, but still a trendsetter for legacy media and in the second quarter of 2019, we extended our functional structure to our advertising department.
This move helped in reaching $4.9 million in savings in the advertising Department Q2, this year versus 2018.
Well the change of this nature is temporarily disruptive we expected to result in improved revenue generation as we will discuss in just a moment.
Another positive trend in the second quarter with continued growth in digital only subscribers.
As I mentioned earlier, we accomplished nearly 52% growth in digital only subscriptions, reaching 185500 by the end of the second quarter of 2019.
And this is the 13th consecutive quarter of growth for our digital subscriptions.
Our focus on paid digital subscriber growth is a key performance measure in our continuing transformation and a contributor to the improvement in the audience revenue trend this quarter.
We also measure our print subscribers, who are digital users as well.
Digital access to our new sites as a valuable feature of a home delivery subscription.
We want to make sure that customers, who are paying for our products are getting the most value for their money by activating and using our digital products print and digital is a powerful in convenient combination for our customers.
At the end of the second quarter. This year total paid digital customer relationships, including those combo print digital customers totaled 483600 up 24.4% from a year earlier.
This growth is a direct result of the investments and functional reorganization in our product and customer team.
We discussed at length last quarter. The strategic work. This team is doing in data analysis and understanding our current and potential audience to optimize user experience and conversion opportunities.
Because of these efforts, we have improved our ability to convert visitors to paid subscribers and sharpened our targeting for digital products.
For instance, we saw after our analysis that tightening our pay walls to grow digital subscribers would be an intelligent tradeoff. Despite softer AD revenues associated with fewer free page views.
Significantly, while we grow and improve our platform and online offerings. We continue to see increased platform engagement, which is evidenced not only through our increased number of digital only subscribers, but also through more active print digital subscribers.
And such Great News stories as the Miami Herald The award winning investigation perversion of Justice.
Pre the good journalism, even showing light in the darkest corners can move our society in powerful ways and remind customers of the unique and essential value of our business.
The arrest and imprisonment of hedge fund manager and sex offender Jeffrey Epstein and subsequent resignation of former U.S. Labor Secretary Alexander Acosta.
Demonstrated the power of the Miami Heralds accountability journalism after a multi year investigation.
Such stories increase both our ability to grow digital subscriptions and engagement on our sites.
The impact of this story and the interest generated by it will be with our society for some time to come.
Economically this will have a slight but incremental impact in our third quarter.
More significantly in over the longer term it serves as a tremendous illustration of the type of news coverage. We at Mcclatchy are doing day in and day out journalism that serves our communities that underscores our mission to provide independent journalism in the public interest that spotlight spotlights, our commitment to a central and unique local news and information and that powers our digital transformation.
More on all of this in just a few minutes.
In looking at our second quarter 2019 audience results digital audience revenues were up 8.1% for the second quarter of 2019 compared to the same period last year, reflecting the strong growth in our digital subscribers.
Digital only audience revenues associated with digital only subscriptions were up 57.6%.
Total audience revenues were $80.3 million, 44.9% of total revenues.
Turning excuse me to our advertising business.
During the quarter, we invested in our digital advertising team, adding new leaders to manage our functional organizational structure with a dedicated focus on our customers to drive digital revenue and create new efficiencies in keeping with a more agile organization. These leaders are aligning the advertising organization into key functional channel structures.
While this process was substantially completed in the second quarter, we continue to bring on new talent and leadership for the new structure.
A change of this nature will obviously include disruption and that is reflected somewhat in our second quarter advertising results.
But we believe this is a step that will improve our results for the long run, creating a strengthened sales organization with a sharper and more strategic customer focus.
One that we expect to ultimately also drive new revenue.
And as we noted earlier it has also resulted in significant savings this year.
In the second quarter total advertising revenues were 85.5 million down 20.1% in the second quarter of 2019 compared to the second quarter of 2018.
Total digital advertising revenues were 44.2% of total advertising revenues and exceeded print advertising in our home delivered and single copy newspapers.
Total digital advertising revenues were $37.8 million down 18.7% over the same period in 2018, while digital only advertising revenues were down 20.8% compared to the 2018 quarter.
We are very focused on improving our digital results, we knew that we would face, particularly difficult headwinds this past quarter and the first half of this year as we discussed during our last call. The decline in digital only advertising was driven in part by lower audience traffic compared to the second quarter of 2018.
Reasons for the decline included a strategic tightening of website paywalls that accelerated page paid digital subscriptions and to a lesser extent a change in algorithms by large platform company in the last half of 2018 that impacted us as well as the rest of the industry. We're cycling over the impact of that algorithm change in the third quarter.
The recent restructuring of our advertising Division also impacted sales in the second quarter as part of that reorganization dozens of our key sales employees took on new rules and we transferred thousands of accounts to our new classified call Center, we stood up a centralized small business team to hand or handle smaller transactional advertisers and make outbound sales calls and we revamped our sales tracking reporting and forecasting tools to reflect this new functional structure.
Well it was definitely a heavy lift the bulk of that effort is now behind us and we're confident it will improve our digital focused productivity and most importantly, our revenue trends.
In fact, we expect to see improving digital only revenue trends in the second half of 2019.
Even during our reorganization. We've also continued to see improvement from accelerate our digital marketing agency, whose revenues improved 81% in Q2 and 112% in the first half of 2019, and we will also benefit from easier comparisons in the second half of 2019 compared to 2018.
Before turning the call over to Elaine to review our quarterly results in more detail I'd like to focus on the cornerstone of our business local journalism and a significant new leader added to the senior ranks at Mcclatchy to oversee this important part of our business.
In May we elevated Kristen Roberts to VP of news.
Kristen was formerly our executive editor for politics, and regional editor for our East Coast News rooms, including the Miami Herald and seven other users. She is the first woman to lead news at Mcclatchy and the Companys 162 year history. Although she is by no means a loan pioneer.
Afterall, Hi today lead the company in a role once occupied by one of the genuine pioneering female leaders of a major American media company, our storied President Eleanor Mcclatchy.
Today, our corporate executive team is evenly balanced by Gen gender and our focus on diversity as a priority and continues through the 30 communities throughout America that together make mcclatchy.
But back to Kristen.
She is a great journalist with a strong digital track record before joining us. She served as national editor at Politico, where she guided that online sources coverage of the 2016 presidential race. She came to politico from National Journal, whereas managing editor she oversaw newsroom wide operations.
Kristen has hit the ground running adding key editorial talent and leadership throughout our communities.
Mcclatchy newsrooms continue to produce extraordinary local journalism with national impact I've already mentioned, the Miami Heralds accountability journalism and years long investigation per version of Justice and its impact.
It is but one example of our investigative journalism.
Collaboration was a feature of the second quarter in many of our 30 markets in California. For example, the Sacramento Bee joined other news outlets in our state to relate to release destined to burn a multimedia examination of the risk posed by wildfire to the lives of millions of Californians.
Another hallmark of our journalism in the second quarter with data driven reporting.
The Charlotte Observer helped to uncover how the city found itself in an affordable housing crisis.
And the data team in our Washington Bureau helped five local newsrooms unearth new information that showed for the first time, the White house had reversed transportation spending to benefit rural communities.
With the addition of a military and Veterans Affairs correspondent Mcclatchy produced incisive reports examining issues affecting service men and women the threat of rising cancer deaths among veterans how immigrant serving in the U.S. military are being denied citizenship at a higher rate than for unborn civilians.
And then through called the call to surf series.
Took a look at why small towns rank high in military recruitment efforts.
We could not be prouder of the work that our newsrooms are produced and congratulate all of our reporters and editors for their tireless work and contributions to local journalism that strengthens the communities we serve.
Finally in the first quarter Mcclatchy partnered with the Google News initiative to launch three local news outlets in communities that have limited sources of local news to test sustainable models for local journalism.
The compas experiment, we'll share with the industry what works to scale sicknesses successful new approaches this quarter, we announced that the compass team will start its work in a city that will soon soon lose its daily newspaper Youngstown, Ohio.
Now I'll turn the call over to Elaine to discuss our specific financial results for the quarter.
Thanks, Craig.
We reported an adjusted net loss of $11.4 million in the second quarter, adjusted EBITDA was $28.6 million and our adjusted EBITDA margin improved by 1.3 percentage points to 16% versus 14.7% in the second quarter of 2018.
Excluding real estate gains from second quarter of 2019 and equity distributions from a career builder and the second quarter of 2018, adjusted EBITDA was 26.3 million down 3.2% from the second quarter of 2018 and as Craig noted earlier. This was a sequential improvement over both the first quarter of 2019, and the fourth quarter and full year of 2018.
Total revenues were down 12.6 in Q2 compared to the same period last year, while Craig has covered our two major sources of revenues and detail that is audience and advertising I'll recap briefly.
Total audience ramp revenues declined 5.3% in the second quarter compared to the same quarter in 2018 as print declines offset growth in digital audience revenues.
Advertising revenues in the second quarter were down 20.1% compared to last year, while trends in print and direct marketing advertising remained relatively unchanged digital only advertising declined due to the headwinds Craig reviewed earlier.
Our improvement in the trend of adjusted EBITDA. During the quarter was a result of our focus on cost controls, even while continuing to invest in our business, we reduced adjusted operating expenses by 15.3% compared to the second quarter of 18.
And we did it the right way focusing only like legacy costs and process improvements in our business.
During the second quarter, we rolled out the new advertising structure aligned around channels to reduce redundancies create more digital focus standardize and streamline our processes and procedures and generally make us more efficient and effective.
These changes resulted in some workforce reductions, but they've also created additional positions and capabilities, including standing up a new centralized call center.
To date, the changes coupled with the impact of an early retirement program and the AD Department hovers around resulted in $5.6 million in savings most of which came in the second quarter as Craig mentioned earlier.
We expect full year 2019 savings related to the AD department reorganization to be in the high single digit millions of savings.
We continued to benefit from an early retirement program and the outsourcing of our printing operations in Tacoma, Washington, both of which were implemented in the first quarter of this year.
In the second quarter of 2019, our average fulltime equivalent employees declined 22.3% to approximately 2800 ft East.
From the second quarter of 2018, as we focus on restructuring and running our business more effectively and efficiently.
And while we have reduced our ranks over the years, we've done so strategically for instance.
At the end of the second quarter, our editorial staff made up 31% of total ft.
Not only are they the largest department within the company. They are extremely efficient our page views per news from dollar spend is up 71% from when we began measuring this capex in 2015.
As we transition to a more digital company. We continue to have newsprint have new savings in newsprint and third party printing costs.
Our newsprint savings are coming from volume declines and.
Strategic changes, we have made such as reorganizing our print product and moving to digital only additions on Saturdays in some small markets in the second quarter of 2019, our newsprint volume declined by approximately 22%, while the average prices increased 27% to I'm, sorry, 2.7% over the second quarter of 2018.
That price differential reflects the holdover of tariffs that drive up prices in 2018, but are clearly reversing now.
We expect to see average newsprint price declines in the third quarter as we abuse.
The higher price newsprint bought during the time period and as I have reminded you in prior calls our newsprint costs are now only about 4% of our total cost structure.
Now turning to the balance sheet.
On June seven 2019, we completed a partial redemption of $32 million of R. 20, 226 notes at par.
As of quarter end, our principal debt outstanding was 708 million and our average interest rate is 7.9%.
We finished the quarter with 19.6 million in cash, resulting in net debt of approximately $689 million.
As of the end of the second quarter, we had 39.4 million of total borrowing capacity under our revolving credit facility and no amounts were outstanding.
Our capital expenditures were about $1 million in the second quarter and about $1.2 million for the first half of 2019.
I'd like to briefly touch on pension efforts and our expected contributions before turning the Mike back to Craig.
We expect to make a required pension contribution of approximately $3 million in the fourth quarter of 2019.
Our funding requirements are currently subject to pension funding legislation that expires next year.
And while we are a couple of while there are a couple of different propose legislative reforms being considered in DC currently.
Given the level of expected contributions that will likely be required from the company without legislative relief, we decided would be proactive just as you've come to expect of Mcclatchy.
Accordingly, and as previously disclosed we filed an application for a waiver of minimum required contributions to our defined benefit pension plan with the IRS.
Specifically requesting a waiver of the minimum required contributions for fiscal year, 2020, which are estimated to be approximately $120 million.
This would be paid in installments beginning in April 2020 that was the bulk of those payments to September 15, 2020 or afterwards.
There can be no assurance that the IRS will grant the requested waivers and we did not expect to provide periodic updates prior to a definitive ruling by the IRS, which is expected to take some time.
As we noted in our press release at the waivers are not granted are we do not see legislative relief before mid 2020, you could have a material adverse effect on our liquidity.
I know a number of you I'm going to ask me to handicap, the likelihood of getting a waiver the passing of legislation or both.
And I cannot to pine on either on their deliberations on either of those or the outcome of it.
What I can say is that we plan ahead at Mcclatchy and we try our best to control our own destiny.
And that's why we have applied for the waiver a full year before this becomes an issue for the company we want to be sure. We have sufficient time to work with the IRS and provide all of the information they need for their determination.
And now I'll turn the call back to Craig to discuss our outlook and take any of your questions.
Thank you Elaine.
As we look to the second half it's important to note that our mission to produce public service journalism has a direct correlation to our results.
The Miami Heralds award winning investigation into the secret plea agreement secured by serial sex abuser Jeffrey upstream.
Proved accountability increases audience as the community sought to understand the logo impact.
We believe the boost to our digital audience and subscriptions that had been aided by the interest in this story and others.
Other local stories that have national impact will fuel both the advertising and audience revenues as we look to the second half of 2019 and beyond.
In the full year 2019, we expect digital subscribers to continue to grow and largely offset continuing declines in print circulation, resulting in low single digit total audience revenue declines for the full year 2019.
We expect digital only advertising to improve in the second half of the year and total digital and digital only advertising revenues to surpass newspaper print advertising, we'll look for the full year 2019 as print advertising becomes a smaller percent of total revenues.
While product offerings and collaboration efforts in digital advertising have steadily grown we will continue to adjust news and advertising content paywalls strategies, and our mix of advertising and audience revenue initiatives as we pursue the best experience for our digital customers.
We will be persistent in reducing operating expenses to align expense and revenue performance, while making additional investments in our news and sales organization.
Over the last three quarters, we have shown continued progress in improving the trend in adjusted EBITDA and we continue to work toward stabilization of EBITDA.
We are focused on improving revenue trends and the continuing transformation of our business to become a more digital media company, while continuing to support our loyal print customers, who remain a profitable part of our business.
We will continue to monetize assets that are not strategic to our business.
Elaine has several buildings being marketed or that are under contract for sale and though the timing of real estate sales is hard to predict we are hopeful that we will see more real estate transactions during 2019.
We plan to use those proceeds from any asset sales as well as free cash flow to reduce debt and debt service costs in the second half of 2019 or depending on timing in early 2020.
In summary over the past two years, we have maintained a disciplined an unrelenting focus on accelerating the pace and cadence of our digital transformation at a time of fears headwinds for local media companies.
And we're making progress.
We're making headway in stabilizing our operating results. Most recently through cost controls, we're moving forward aggressively putting revenue growth is our top priority.
The investments and strategic changes, we've made to strengthen our capabilities in customer audience and advertising.
Our seeing green shoots digital subscriptions are growing our advertising team is reaching new customers and serving loyal one's a new and more efficient ways.
While building a pipeline connecting national advertising to our local news brands.
Local journalism has never been more important to our communities across the country and to our democracy.
Note that with our editorial staff representing on average 31% of total ft ease at the end of Q2 2019.
It's the highest percentage of total head count since before the great recession.
This is not by coincidence.
It's because we know that a solid product is the most critical asset of any business. We remain steadfast in our purpose to provide local news and information that is essential to the distinct communities we serve.
And with that we're happy to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone soon.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Michael Kupinski with Noble capital markets. Please go ahead.
Thank you for taking the questions and congratulations on beating.
Adjusted EBIT number I know you guys have been going through a lot of cost cutting there and.
And it really really is pretty remarkable that.
You are able to get that type of margin.
On a on the week revenues.
Regarding the on the expenses I was just wondering if you can.
Give us some thought on.
How this trends for the second half of the year in particular.
You commented that lane about the Saturday edition digital Saturday additions and that you rolled that out so some of the smaller markets. What was the impact of that in Q2 first of all and then secondly, what are the prospects that you might.
Continue to roll that out into other papers as you go forward and if theres any insight on the types of expense savings that you get there versus the revenue contributions that would be great.
Michael Thank you for the the commentary on on the.
Extend to which our focus on cost control has resulted in stabilization of adjusted EBITDA, even amid these revenue headwinds and of course, you among others have commented on the scale of the transformation at Mcclatchy, which is now approaching a 50 50 split print and digital and that I think puts us near the top of the league tables for similarly, situated companies there may be one.
Or to other public companies that have slightly more digital than print, but I think we're at the top.
Or near the top of the league tables as that continues to be the underlying fundamental structural change in our industry.
On the Saturday additions I think at a high level. What you have to note is that you want to make sure that you retain your customers at a high LTV, even as they transition to being both print and digital customers and this year has been a story of experimentation in several markets as we move to a much more robust Friday Saturday print offering a Saturday digital only offering connecting to the same customers and then a robust Sunday offering and you've seen that rollout gradually as we've tested and learned in some of our smaller markets I'm going to throw it over to Elaine to discuss what we can release about those in terminals, which as you know we don't really report publicly sure.
And first we'll take the question about Ed.
The additions and then we'll talk a little more broadly about the second half in terms of cost savings.
So we've rolled it out the four markets.
And it has been what we would consider to be a very strong success.
And as Craig mentioned in that we have provided more robust.
Additions on truck print additions on Friday, and Sunday, we have had only two customers.
Subscriptions that have cancelled as a result, and weve seen no meaningful change in advertising at all and so net net. This is this is really positive no. These are small markets that we've rolled them out too and so.
The savings are not huge because they are the small markets, but we have seen it be successful and so as we go forward, we might roll out to other smaller and maybe even some medium sized markets. We don't have any intentions at this point have rolling them out to our major metro markets, but it hasn't been successful and we take it on a market by market basis.
And ER and our.
Doing a I think I, good job and tracking it for our customers and finding out where it can be successful I think as we look to the second half we would expect that cost savings will continue to be in the high single digits.
And so we'll continue to control those costs and I think that will be very helpful. As we go forward into the second half and expect to see improved digital only advertising.
Which will help.
Complement those cost savings as we look to the bottom line.
I hope that answered your questions I know as a multi question I'm not sure if I.
No answered everything.
Yes. Thank you on the company on the employee compensation expenses, particularly.
That number came in lower than expected were there additional.
Severance agreements and things like that that happened in the second quarter.
I believe you I know that there were some in the first but how can you just tell me in terms of.
The FTD reduction kind of remind me what you did.
Maybe the first half of this year.
Sure.
So the early retirement incentive program that we implemented in the first quarter.
Was quite successful, but it occurred in the last month of the first quarter. So most of the impact of that.
Is found in the second quarter and then the advertising reorganization that we talked about where we have $5.6 million in savings in the advertising department through June but $4.9 million of that came in the second quarter and a large piece of that although not all was less compensation. So those are the two big moves that we've made and then finally lets not overlook the fact that we did.
Outsource to call not which is a a good size one of our larger kind of medium sized markets.
And at the beginning of the year and so those savings will also roll through and have full effect in the second quarter and all of these things that I'm talking about will continue to benefit us in the second half of the year Mark did I Miss anything I think thats right Yep. So those those are the big savings and the compensation area.
And then on the real estate sales what is currently on the market right now.
We are under contract with a couple of properties.
One and Tri cities, Washington, and the other in Beltsville, we are the largest property that we are marketing right now is the building in Tacoma.
That is on the market and then there is a couple of other smaller properties being marketed.
Only to the two smaller ones I mentioned are under contract a coma, if not yet, but we haven't got a lot of interest in it.
Gotcha and then just a quick comment my final question here I was wondering if you can comment regarding the prospective merger between good net new media.
What your thoughts are on that merger how this might affect you what you're what it might affect in terms of the industry are just your general thoughts about.
The merger.
Michael We appreciate the question, but obviously, we really can't comment.
No.
For obvious reasons.
We'll we'll just have to see.
How the the industry continues to evolve but that actually is a transition just to wrap this up I very much appreciate your comments and the question about Saturday I will just try to extrapolate move out to the 5000 foot level and talk about how it shows the change at Mcclatchy over the last two and a half years theres three points to be a successful digital company that this successful transformation shows first you have to be a digital company that understands data and your customer and to a liens point about actually losing solely to customers. Okay. Its albeit for smaller market, but the number of win backs with something higher and the win backs come because you actually have the data that allows you to understand how to win back those customers who can be walked through the online acquisition funnel that they may have been intimidated by because they might not be digital native customers and in the case of transitioning to digital print combo customers. You also need to have a strategy to invest in product. So.
So that your product is actually robust enough to be worthy of retaining those customers and then finally and this is where it really gets nuanced and tricky there was some temptation to actually lower expense around some white glove service that we put into place in those markets because we didnt have a high call volume in the initial week. The temptation would have been to take even additional cost savings and just move on but you realize that it's actually in the second we grew third week. The coal volume increases are longtime customers say, hey, what's going on and you remind them when they call in what we told you. This was going to happen and let's stay with you as we migrate you to being a print and digital user. That's the kind of thing that has been typical of sophisticated digital enterprises, including those in the telco world in other worlds that have gone through these kind of migration path, but hasn't always been in the case of legacy newspaper companies. That's the kind of digital company that were leading now and that's one of the reasons why I don't want a pattern ourselves too much.
On the back of these are small markets, we continue to test and learn but thats why the revenue split is increasingly reflective of a very mixed revenue.
Model.
Thanks Scott.
All right I appreciate the color. Thank you.
As a reminder, you can press star then one to enter the queue.
Your next question comes from Craig Huber with Huber Research partners. Please go ahead.
Yes, hi, Thank you I guess a few questions.
Maybe if we could start with the big picture.
Just given the trends you talked on the advertising here in your various cross for various 30.
Product you have in the marketplace are you seeing any material difference in the local economies out there, but when you talk to your.
Various large advertisers or is all the pressures just long term secular pressures just curious any change in the economy.
Discussions he now versus roughly six months ago. So.
Yes, so thats a very good question, Craig and we watch it pretty acutely as you do I think in general at a high level you'd have to say no that in fact, well theres always of course huge differences. When you have 30 different markets as diverse as Miami, Biloxi and Tri cities in eastern and Central Eastern Washington, and these are very different markets and we.
If you're going to be successful is because your essential locally which means you need to understand the local the local equivalent I mean, it's sort of the same response. If you asked all the governors of the various different regional feds, what's the difference in your local economy of course their local economic differences, but at a high level I would say, we don't see profound local economic differences that that that would be a response that we have secular challenges in region. A region B of course, we move to a regional structure, which allowed us to rationalize costs and also reflects our kind of digital repositioning. So I think we get a pretty good insight as to whether or not there's one in particular and sometimes we see it although that hasn't been a characteristic of the most recent quarter.
We'll have.
A big weather event that might actually change things in one place or another that was not a characteristic of Q2.
Okay Thats helpful. Thank you and then just talk a little bit further about the retail advertising trends, obviously, they got worse here year over year in the quarter, just help us maybe department stores versus grocery stores just on the sub segments from there with some of the extra pressure maybe coming from.
Sure, let me throw that over to Mark for the detailed analysis sure.
In Q2, we saw retail our LP and preprint revenue actually improve by three points over Q1 and that was actually their best levels.
Since Q4, 2014 digital retail revenue declined by that same amount.
In Q2 versus last year due to some declines that we're seeing on the digital side and political banking and some grocery accounts.
<unk> retail still volatile category for us we've seen lots of bankruptcies in this space over the past few years still struggling sector. Our top 60 advertisers are so we're down about 24% in Q2 that trends about the same as our run rate for Q1, and they make up about 15% of our total AD revenues.
Those trend lines improved for many of those accounts and several actually showed year over year gains from last year.
Bob well I won't go into it specifically, but we had some.
Drug stores, we had some.
Homebuilders and others that were up.
But we also saw cuts from many and.
And some of those were in the grocery categories.
Hello.
That's pretty much the retail luck.
Thank you for that and also.
Okay, let's talk about pricing for a couple of minutes on your home delivery pricing out there and also for digital only or are there any markets you could talk about where maybe you've raised price or just also curious your overall comment about we've sort of out with pricing for digital only.
And also just print home delivery in terms of do you feel you have the room to raise prices are I know, there's a volume elasticity issue here of course.
So so Craig this is Elaine and and I can turn it over to Scott for some additional detail if needed but.
Generally we have an econometric model that we use and so we rather than looking at kind of markets. We look all the way down to the household level as it relates to pricing the print product and then as it relates to the right pricing the digital product, but we have intro rates.
Those those move up pretty quickly. So if you look at the underlying statistics in terms of digital only subscribers. They grew 51% almost 52% in the quarter, while the digital only revenues grew nearly 58% in the quarter, which reflects the fact that.
Those those enterprises move up and then they began to amortize over the period that the subscribers, taking and so I think while while there are.
Pricing strategies that happen all the time, we don't look at it as much by Mark to market as we look at it by household and individual. So is there anything that I think that that pretty much covers how we how we look at that.
My last question Elaine.
If I heard you right I think you said you thought costs in the second half would be down high single digits. I guess, if you can confirm that.
I'm just looking at my model here if that plays out.
If I look at my model here looks like in the second half of last year taken out the one time items that you're down say high single digits.
Absolute dollar amount of cost millions that one for like in the third quarter is up versus what you reported.
In the second quarter.
So I don't I don't have your model and I haven't looked at that I. What I can tell you is that we do expect that costs will be aligned with revenues, we expect improving digital only advertising revenues in the second half, we do think clearly because of the reorganization on the advertising department. The rep outsourcing that we've done other things that we've talked about.
That we will see.
Declines in cash expenses.
In the high single digit range now if needed there may be other cuts again, we tend to align that with where things are going in advertising and so we think that we are working towards continued stabilization of operating cash flows.
I don't have the ability to discuss your model with you on the call, but if you want to call up follow up with me later, we can we can do that but by the way if I could just ask is it seem correct to you that cost sequentially third quarter versus what you reported in the second quarter would actually be up sequentially. The cash cost put aside DNA therapy, not one time items.
No no. It does not so I don't know I don't know if that's okay looking out Fred.
Okay. So you are saying that you think the third quarter cost should be down first the second also down high single on your base from a year ago understood. Thanks.
Yes, I think it will be down on a quarter over quarter year over year basis is what I'm telling you.
Okay. Thank you.
Yeah, I just wanted to confirm that thank you.
Yes, so Craig just to wrap up on that so I think the takeaway is look.
Obviously state stabilization on the adjusted EBITDA line has been a key priority and I even mentioned in their very early call. It transforming business such as our sector and also with the changes in technology and consumer adoption local media as you move to a more digital enterprise. It takes a number of quarters to reach a normalized operating environment and we're still on the trajectory to reach that but if you look at the key milestones.
Stabilization on that operating line, coupled with total paid digital customer relationships approaching half a million slightly under those are those are key milestones other business in in transition.
And so.
We we continue to execute against that and maybe I'll just wrap it up by saying you know Alain used the word proactive and I think thats been the case certainly in our time here together and wanes three decades of service to Mcclatchy and I'd just remind people on the call that this is a company that has de levered billions of dollars in debt. We gave you the net numbers, including that tranche, which is the sole tranche that matures in the 20 twentys. So substantial maturities don't incur until the next decade and with $1.3 billion set aside in the pension. It's also a reflection of the company that's been proactive in funding its defined benefit plan and so maybe I'll just wrap up I'd say I think you can be certain that this company will continue to be proactive both management team and the board of directors as we continue to work forward on this transformation which has.
All of you know is not easy, but one that were very committed to.
Great. Thank you for all that.
This concludes our question and answer session I would like to turn it back over to management for any closing remarks.
Thank you then we'd like to thank all of you for joining us today and for your continued your continued interest in Mcclatchy and should you have questions that you were unable to ask during the.
Cast our end this call. Please reach out to me at 9163211846, our via email you can reach me at any Lintecum at Mcclatchy Dot com. Thank you and have a great day.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.