A. H. Belo's (AHC) CEO Jim Moroney on Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: A.H. Belo (AHC)

A. H. Belo Corporation (NYSE:AHC)

Q2 2014 Results Earnings Conference Call

July 29, 2014 11:00 AM ET

Executives

Ali Engel - Chief Financial Officer

Jim Moroney - Chief Executive Officer

Analysts

Fred Nagle - Trowbridge International

Barry Lucas - Gabelli & Company

Richard Diamond - Strait Lane Capital

Dennis Leibowitz - Act II Partners

Chris Mooney - Esposito

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Second Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). And also as a reminder, today’s teleconference is being recorded.

At this time I will turn the conference call over to your host, Chief Financial Officer, Ms. Ali Engel. Please go ahead ma’am.

Ali Engel

Thank you, Tony. Good afternoon, everyone. Welcome to A. H. Belo Corporation’s second quarter 2014 conference call. Jim Moroney, our Chief Executive Officer will lead today’s call. I will provide a brief look at our second quarter results leaving plenty of time for Q&A. Dan Blizzard, Senior Vice President; and Grant Moise, Senior Vice President, Business Development and Niche Products are also available for Q&A.

Yesterday evening we issued a press release announcing second quarter results. We have posted this release on our website under the Investor Relations section. Unless otherwise specified, comparisons on today's call measure second quarter 2014 performance from continuing operations, against second quarter 2013 performance from continuing operations. In conjunction with the pending sale of our newspaper operations in Providence, Rhode Island which we announced last week, as well as the completed sale of our newspapers operations in Riverside, California, The Providence Journal and The Press-Enterprise newspaper operations are reported as discontinued operations in the company's financial statement. Accordingly, the results from continuing operations consist primarily of The Dallas Morning News and corporate operations.

Our discussion today will include forward-looking statements. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements. Additional information about these factors is detailed in the company's press releases and publicly available filings with the SEC.

Finally, today's discussion will include non-GAAP financial measures. We believe that non-GAAP financial measures provide useful, supplemental information to assist investors in determining performance comparisons to our peers. Reconciliations to the most directly comparable financial measures presented in accordance with GAAP are provided in our press release and on our website under the Investor Relations section.

Now, I will turn it over to Jim Moroney. Jim?

Jim Moroney

Thank you Ali and good morning everyone. A. H. Belo Corporation announced second quarter fully diluted net earnings of $0.85 per share from continuing operations. Second quarter 2014 net income include an 18.5 million net investment related gain from the sale of apartments.com by classified ventures.

Adjusted EBITDA or earnings before interest taxes, depreciation and amortization from continuing operations with net investment related gains excluded was $6 million in the second quarter. Total revenue in the second quarter of 2014 increased 0.2%, the first year-over-year quarterly growth since our spin-off in 2008. This reflects our continued growth in marketing services revenue and increased printing revenues.

Lastly, we announced the pending sale of the newspaper operations of The Providence Journal to New Media Entrainment Group, Inc. which is expected to close in the third quarter of this year. The cash proceeds from this transaction will allow the company to continue to pursue opportunities to diversify and grow revenues and EBITDA and reduce our reliance our core print advertising revenues which remain challenged.

In July of 2014, the company sold its remaining real-estimate in the Riverside, California comprised of land and a building that formally served as a commercial printing operation. The company received net sales proceeds of $1.6 million, generating an estimated gain of $0.3 million. In June 2014, the company amended an agreement with another third-party related to the sale of 97 acres of undeveloped land in Southern Dallas. Net sales of $1.8 million are expected to be received in the third quarter of 2014 upon the closing of this transaction, generating an estimated gain of $0.6 million.

The company plans to explore further opportunities to invest in or buy advertising or marketing services companies with established financial performance and strong management teams in order to diversify and grow revenue and EBITDA.

The company's acquisition and investment efforts are focused on businesses with products and services that complement the existing advertising and marketing services currently offered by our newspaper. Grant Moise, Senior Vice President, Development who is with us on the call today is leading this effort to identify and evaluate qualified businesses. While the level of investment is not currently known, the company anticipates that it will exceed previous investments which were in the $3 million to $5 million range. The company remains focused on returning capital to shareholders, primarily through dividends. In addition to the quarterly dividend of $0.08 per share in the second quarter, the company declared and paid a special dividend of $1.50 per share returning $35.6 million to shareholders.

Ali will now provide more detail around our second quarter financial results. Ali?

Ali Engel

Thank you, Jim. A.H. Belo Corporation announced second quarter fully diluted net earnings of $0.85 per share from continuing operations, an improvement of $0.78 per share compared to the second quarter of 2013. Second quarter 2014 net income includes an $18.5 million net investment related gain from the sale of Apartments.com by Classified Ventures.

Total revenue in the second quarter of 2014 increased $0.2% from the prior year period to $69.3 million. Revenue from advertising and marketing services including print and digital revenue decreased 4.7%. Digital revenue increased 3.8% over the prior year quarter, primarily due to continued growth in marketing services revenue associated with 508 Digital and Speakeasy. Increases in digital revenue were offset by declines in display, preprint and classified advertising revenues of 7%, 5% and 9%, respectively.

Circulation revenue remained flat in the second quarter of 2014. Printing and distribution revenue increased 38% in the second quarter, primarily due to the impact of the previously announced contract to print the Fort Worth Star-Telegram and additional printing of local community newspapers in Dallas.

Total consolidated operating expense decreased 1.3% in the second quarter to $66.9 million as employee compensation and benefits, newsprint and depreciation expenses all declined. In the second quarter of 2014, the company may require contributions of $2.2 million to its pension plans.

Early in the third quarter of 2014, the company accelerated payments of its remaining 2014 required contributions and paid $5.8 million in the plan. Note further pension contributions will be made in 2014. As of June 30th, we have $59.8 million of cash and cash equivalents and no debt.

That concludes our remarks. Tony, we are ready for questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). We have a first question will take from Fred Nagle with Trowbridge International. Please go ahead.

Fred Nagle - Trowbridge International

Jim, good morning.

Jim Moroney

Good morning, Fred.

Fred Nagle - Trowbridge International

One thing I saw in a little bit surprising is sold the Providence Paper, but you retained the real estate. Is that indicate it's you're going to rent it to the people or what's going to happen?

Ali Engel

Jim, I'll take that Jim.

Jim Moroney

Okay. Go ahead.

Ali Engel

Fred, thank you. When we put the paper up to auction, we offer the real estate as optional to all the people in the process. And the reason, but we did require that in order to include all the real estate we wanted to realize a full market value, New Media was not interested in the headquarter still being or the two downtown parking lots or the former Sunday inserting building, so that is not included in the transaction. We expect New Media to lease back the headquarters building and the parking lot a year after we closed the transaction and we will continue to market all four of those properties for sale even if New Media or while New Media is a tenant and we will actively work to monetize those hopefully within the next year.

Fred Nagle - Trowbridge International

What kind of income as that lease back can generate?

Ali Engel

I don’t have the numbers on the top of my head and we haven’t concluded that final lease arrangement but I think it would be fair to say we would expect to cover our cost spread so its likely be rather neutral to us.

Fred Nagle - Trowbridge International

Okay thank you.

Operator

Thank you. (Operator Instructions) And next in queue is Barry Lucas with Gabelli & Company. Please go ahead.

Barry Lucas - Gabelli & Company

Good morning and thank you I have a host. So Ali maybe you could provide the pro forma cash assuming that we get in the proceeds from Providence journal and the other parcels which were completed in Riverside and or the land which by the way does not include the south plan alright that’s still…

Ali Engel

That’s correct, Barry. I don’t have that in front me a table adding all that up but we ended the year with just around or ended the quarter around $60 million Providence growth 46 million there are cost associated with that we are working we are going to be in a taxable position on that transaction and I think that’s going to be in the $4 million to $8 million range. And then obviously the two real-estate transactions we have mentioned here which net another approximately $3 million. So I mean it's going to push us probably right around the 100 billion, between 90 million and 100 million I would say.

Barry Lucas - Gabelli & Company

And so do you have the small parcels in providence the South Play and you still have some other property downtown around….?

Ali Engel

We have the parking lot, that's right. So we've got the four parcels in providence which I think could net anywhere between I would say 10 million, 11 million at the lower end of the range to may be 15 million, 16 million at the high end of the range. Then the four parking lots downtown and the South Plan.

Barry Lucas - Gabelli & Company

Okay. And on the pension side so you've completed a total of $8 million in pension contribution. Those are all required, right? The…

Ali Engel

They are all required there is no voluntary contributions this year Barry.

Barry Lucas - Gabelli & Company

Okay. So and what would the pension obligation contribution that might be contemplated in '15?

Ali Engel

It's probably in the same $10 million range. It might be a little higher, might be a little lower as we go into the fourth quarter and sort of finalize all the assumptions around that. But it doesn't drop off significantly in '15.

Barry Lucas - Gabelli & Company

Okay. That will depend either on asset performance and or what the discount rate which is the working against us at least for the moment, is that correct?

Ali Engel

That’s right.

Barry Lucas - Gabelli & Company

Okay. So for Jim if you could, looking at the operating performance and I know digital numbers were up, looking at the print number raw print number, given the fact that you operate in one of the best economies if not very best in the country. What do you attribute the ongoing weakness to in terms of the performance and does it signify or might it signify that the secular shift has accelerated.

Jim Moroney

Barry most of our decline if you really look at what when you take the whole mix is still coming from large retailers so either big box retailers or other national advertisers who are basically planning their media at a national level, they don't single out Dallas because it's a healthier economy than some other there, basically spending on a pattern across the country that is the same.

And so when they plan down newspaper, whether that's display and or pre-print we could take it down with it. And when I look at the other markets around the country that are in the top 30 there are some differences that we actually performed better, believe or not in some across these -- a lot of them frankly.

But I am not seeing in the top 30 metros any real acceleration but I am not seeing any improvement either in the print categories for the newspaper parts of these companies, they're continuing to be down in the mid single-digit to low double-digit range depending on the market and the particular category.

Barry Lucas - Gabelli & Company

Okay. And it was alluded you think the pace of investment in these new initiatives could increase or it sounds like a bit larger in size and…

Jim Moroney

I think the both of those things are more than likely, but nothing is definitive. So, we I think we could build it, see some acceleration in the acquisition of some businesses as we described in the script, those kind of characteristics. And if those happen to come through then the actual investment will be greater as well.

Barry Lucas - Gabelli & Company

Okay. I’ll pass it on to the next person in the queue. Thanks.

Jim Moroney

Thank you, Barry.

Ali Engel

Thanks Barry.

Operator

Thank you. (Operator Instructions). Next in the queue is Richard Diamond with Strait Lane Capital. Please go ahead.

Richard Diamond - Strait Lane Capital

Good morning everyone. Jim and the team given that private multiples for marketing services businesses are extraordinarily high right now and The Dallas Morning News imply valuation is negative. How will you remain disciplined acquirers and execute accretive investments in this environment?

Jim Moroney

Richard, I can only tell you that I believe when you -- if we’re successful in acquiring some things that are, say closer to the ended the Q than in the beginning of it, if once we are able to make these if we are I think you’ll see that they’re smart investments. They are investments as we describe that are related to our current business. They allow us to leverage our strength into theirs to give them a better competitive advantage in the marketplace and they have a track record of performance and the owner operator will stay on for a minimum the three years which I think is also critical. And right now in the discussions where none of these would qualify as over reaching based on any kind of market comps that we can find.

Richard Diamond - Strait Lane Capital

That's terrific. Thank you very much.

Jim Moroney

You bet. Thank you, Richard.

Ali Engel

Thanks Richard.

Operator

Next question will come from Dennis Leibowitz with Act II Partners. Please go ahead.

Dennis Leibowitz - Act II Partners

Yes, two questions, first a follow-up on that. Are you saying that the investments you are making now will accelerate; and separately that there will be acquisitions?

Jim Moroney

Okay. So maybe if I’m not misunderstanding, we will be making, we are attempting to make acquisitions and we will hope that we would have at least two that would close this year and therefore that's an acceleration of the investment that we've been making since we really haven't made any significant investments in these kinds of acquisitions to-date other than very small things that we announced in the event marketing space. So yes, we’d expect some acquisitions and yes it would be more capital invested than we have today.

Dennis Leibowitz - Act II Partners

And would these likely be things when you sort of have a track record, does that mean that they would likely already be profitable?

Jim Moroney

That's correct. Both of the businesses that we're looking at are EBITDA positive.

Dennis Leibowitz - Act II Partners

Would they be accretive?

Jim Moroney

They I believe would be accretive and everything that we've looked at so far.

Dennis Leibowitz - Act II Partners

Okay. The second question, did you or could you say what the level of pension liabilities you’re retaining in Providence?

Ali Engel

Dennis, it’s Ali. I believe at the end of last year, the last kind of measurement date that we talked about when we were underfunded about $15 million of that was related to the Providence Journal plan.

Dennis Leibowitz - Act II Partners

Okay, alright thanks.

Ali Engel

Thanks Dennis.

Operator

Thank you. Our next question will from Chris Mooney, Esposito. Please go ahead.

Chris Mooney - Esposito

Ali one simple for this non-accounting types; can you get me from $82.5 million in cash at the beginning of the quarter to the almost $60 million at the end? What I am saying it as you had cash come in of $18.5 and you end up EBITDA maybe of $8 million but you spent 35 something million and you had pension plan contribution of $2.2 million for other 10 or so go? And that may all be in the Q when it’s filed.

Ali Engel

Yes we are going to file the Q today, I am looking at the cash flow statement here Chris, so sort of try to roll that for, if you’ve other questions, so I kind of digest that.

Chris Mooney - Esposito

Sure. Jim, you all did make some a bit of couple of changes strategically during the quarter which was the -- I think the closing of the pay? Can you walk us through what happened there?

Jim Moroney

Yes. Sure. We initiated back around October the 1st of last year what we called a premium option. So we reopened dollarnews.com without any kind of pay wall at all. And we at the same time put up a premium option so that if you wanted a better experience that had things that you couldn't get on the free side, it had a different design, a different user interface, different navigation that we thought was a superior experience and we offer that for pay to people. We just work getting the uptake, Chris that made since to keep a, putting resources behind it b, not just focusing on making a better free experience.

So about maybe six to eight weeks ago, we began a total redesign of all of our major websites, starting this time with mobile. So, we’re going to start not only where the traffic is going, which is to the smartphone even much greater than to the tablet, but we’re also going to start with the smallest of the screens and build for that and then build out as the screen gets larger which is a much better way to approach design and to start with something large and try to cramp things down and do the smaller screen and the smartphone.

We think this is going to take as much as 18 months to work through the principal three screens. So starting with the smartphone, I think sometime around maybe first quarter, maybe early second quarter next year, we’ll have that completed, then we'll move to the tablet, then we'll move to the desktop.

And I think this will be a really very different design and you’ve seen from us and I think even to some degree then you'll see from say what most of the newspapers today still do which tends to have somewhat similar look and feel. We've gone with outside vendor called [White Blue]. They really come at things from the pure play side, not from just media side and so far I've seen some of the work they've executed that would make kind of our sign up part of our sight very different and I find it to be much cleaner, much more intuitive and therefore much easier to navigate.

So we're going to focus right now Chris on the free side and making it even more engaging bringing more people in and drive traffic up. While on the other side we've been building out what I would refer to as more of a pure play sales organization after hiring Joe Weir who ran all of Belo television stations websites across the country for -- on the revenue side and he is doing literally an overhaul of how we go to market and we'll be very heavily invested in a private exchange with our own site and then very heavily into the programmatic RTB real time bidding space.

So we're -- that's the direction we're heading. Outside this again though Chris if we find a general interest, major metropolitan newspaper and by that way I am excluding the WallStreet Journal, The New York Times. If we find one that's having real success and I mean something in excess of 10% to 15% of their print subscriber base. If they're doing better than that on the digital subscriber bas and not basically giving it a way for $2 a month, we have a pay wall meter that's already been that's installed on our side and we can go on and turn on.

I am just not seeing today a real upward and sustainable upward trajectory on the major general interest metros for subscriber only subscriptions. It seems to be getting into the low double-digit range and then beginning to slow down dramatically. So we’re going to try to put more of our resources to open website, drive greater traffic and see if we can do a better job of monetizing at higher CPMs.

Chris Mooney - Esposito

Okay. I look forward to observing.

Jim Moroney

Right.

Chris Mooney - Esposito

Al Dia announced joint venture I guess with one of our local Hispanic television stations as they’re more of that type of interest coming in the future?

Jim Moroney

Well you may also remember Chris shortly after the Gannett purchase of the deal television stations we actually announced an alliance with the English side of our house with NBC 5 affiliate in Dallas Fort Worth. And so now Al Dia has aligned themselves with their Telemundo affiliate. So we’re now working with NBC 5 and Telemundo which of course are jointly owned by NBC Comcast and we think that provides for even more synergies.

Chris Mooney - Esposito

Okay. Print contract presumably is going pretty well with the Fort Worth Star-Telegram?

Jim Moroney

Yes. We’re doing very well now I think I speak to Gary Wortel once in a while he works a lot with Bill May who runs our production facility and I think he would tell you that we’ve got off to a little bumpy start that’s a complicated printing job not so much the printing of the tape packaging all the inserts and so forth but I think we had a pretty good steady state and I think both parties feel really good about the relationship today.

Chris Mooney - Esposito

Is the North plant now full or is there…

Jim Moroney

Yes, really Chris I mean you could wedge in some small live deadline jobs and in course we have capacity due imparts the day when is not a live deadline publication but for that sort of I don't know 10.30 or 2 AM window, we're full across all of our six TKS presses and the one (inaudible) press?

Ali Engel

But let me add on that Jim even if we add capacity, I mean were printing the both of the big work Dallas Forth Worth any way and I think there is another big drop.

Jim Moroney

There aren’t any big jobs available today.

Chris Mooney - Esposito

And since you now have active I guess relationship with the Star-Telegram. Are there other potential things that you due together that would help reduce costs overall for both papers?

Jim Moroney

We've had a good dialogue with Fort Worth Star-Telegram particularly starting with Gary that runs it. And I think we are always open to both finding ways to benefit each other from cost reduction standpoint. As you know we both deliver each others’ papers sort of depending on who has the bulk of the distribution in a particular zipcode or geographic area he has more, he delivers us in vise versa. We've from time-to-time look at even possible joint revenue opportunity. So I think as things makes sense and we can do them within the compounds if any sort of justice department type issues then we're trying to do them.

Chris Mooney - Esposito

Okay. I think that's all for me, except the…

Ali Engel

We'll take Chris, let me just roll this cash down from year-end for you okay.

Chris Mooney - Esposito

Sure.

Ali Engel

Are you ready?

Chris Mooney - Esposito

I am.

Ali Engel

I just did that a high level. So there is rounding in a few other things. So if you look at year-end, you start to 82 million approximately about 37 million total pay in the first six months in dividends, so that could share 45 million, you've got about 2 million on share repurchases, about 3 million on CapEx and $2 million that we invested in Wanderful Media that gets to $37 million; I took off -- added back $19 million for apartments that gets you to $56 million. We have contributed through the first six months $6 million to the pensions that gets you to $50 million and the rest of it’s just working capital and other balance sheet changes.

Chris Mooney - Esposito

Okay. I don’t think I was typing fast enough but I will call you later today, if you are around.

Ali Engel

I will go slower, I am sorry. I can do one more time. Did you get the dividend $37 million?

Chris Mooney - Esposito

I did.

Ali Engel

Then share repurchases 2 million?

Chris Mooney - Esposito

Yes.

Ali Engel

CapEx 3 million

Chris Mooney - Esposito

Yes.

Ali Engel

Wanderful Media 2 million.

Chris Mooney - Esposito

Okay.

Ali Engel

That will net you $37 million. Okay? Then add $19 million for apartments that gets you to $56. Take out $6 million for pension that gets you to $50 million, and then the rest is working capital.

Chris Mooney - Esposito

Thank you much all.

Jim Moroney

Thanks Chris.

Operator

Thank you. (Operator Instructions). And we do have a follow up in queue from Barry Lucas. Please go ahead.

Barry Lucas - Gabelli & Company

Thanks. I have two. Jim, could you possibly address the cost of redesign of the website? I mean you just doing it on the paper and there is not a lot of leverage or juice there even presuming you’re successful.

Jim Moroney

Are you talking about the investment to do the redesigns of the different mobile tablet and desktop?

Barry Lucas - Gabelli & Company

Yes, exactly.

Jim Moroney

I think the number is going to be very between $3.5 million and $4 million.

Ali Engel

And some of that Barry capitalizable, the majority of it’s capitalizable.

Barry Lucas - Gabelli & Company

Okay. And then finally, other than the accretion part perhaps, as you were describing potential investments or M&A accounts like cars.com which is fairly strategic to the remaining newspaper partners yourselves, McClatchy and Gannett, so what might be the appetite in the possible cars.com transaction?

Ali Engel

Cars.com transaction meaning what Barry, something like cars.com?

Barry Lucas - Gabelli & Company

No, I mean specifically cars.com presuming that it is for sale which I don’t know that there is anything official that has been disclosed, just the speculation.

Ali Engel

Yes. I mean this is Ali, I have to say that I don't think we really have anything different to say; I mean it's a strategic part of our business, it's not just an investment the way may be some other investments we have are like home HomeSnap or Digital Air Strike and so looking at that we have to consider along with our partners, those impacts on our business and they're material and significant. So there is just no easy answers there.

Barry Lucas - Gabelli & Company

Okay. That was sort of the point.

Ali Engel

(Inaudible).

Barry Lucas - Gabelli & Company

Thank you.

Ali Engel

Have a great day.

Unidentified Company Representative

Thank you very much. At this time there is no additional questions in queue. Please continue.

Ali Engel

Okay, great. Jim do you have any final thoughts?

Jim Moroney

No, I think that just again very glad that we could post even though it was as quicker a very small quarter-over-quarter increase, year-over-year, quarter-over-quarter increase in total revenue that's a good milestone for us to hit. We would keep hitting them in the quarters to come.

Ali Engel

Thanks everybody for all your great questions. Thanks Tony.

Operator

Thank you. And ladies and gentlemen that does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!