Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Journal Communications (NYSE:JRN)

Q2 2014 Earnings Call

August 07, 2014 11:00 am ET

Executives

Ashley DeYoung -

Steven J. Smith - Chairman, Chief Executive Officer and Member of Executive Committee

Jason R. Graham - Chief Financial Officer and Senior Vice President of Finance

Andre J. Fernandez - President and Chief Operating Officer

Elizabeth Brenner - Executive Vice President, Chief Operating Officer of Publishing Businesses, President of the Milwaukee Journal Sentinel and Publisher of the Milwaukee Journal Sentinel

Analysts

Craig A. Huber - Huber Research Partners, LLC

Barry L. Lucas - G. Research, Inc.

Yehuda Miller

Operator

Good morning, and welcome to the Journal Communications Second Quarter 2014 Earnings Conference Call. As a reminder, this call is being recorded. And now, I'd like to turn the call over to Journal Communications' Investor Relations Analyst, Ashley DeYoung.

Ashley DeYoung

Thank you, operator, and welcome to our conference call and webcast to review our second quarter 2014 results. Our news release and detailed financial tables can be found at www.journalcommunications.com. Joining me today are Steve Smith, Chairman of the Board and Chief Executive Officer; Andre Fernandez, President and Chief Operating Officer; Jason Graham, Chief Financial Officer; and Betsy Brenner, Executive Vice President of Journal Communications and Chief Operating Officer of our publishing business.

Before we get started, I'd like to remind you that this conference call contains certain forward-looking statements related to Journal Communications' businesses and activities that are based on current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties, including the possibility that the proposed spin and merger transaction with Scripps do not close; disruptions from the proposed transaction, making it more difficult to maintain business and operational relationships; the risk that unexpected costs will be incurred during this process; and changes in advertising demand and other economic conditions that could cause actual results to differ materially from the expectations expressed in forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The written policy on forward-looking statements can be found in Journal's most recently filed annual report on Form 10-K and quarterly report on Form 10-Q as filed with the Securities and Exchange Commission.

Any discussion of EBITDA in today's conference call may be referenced back to our unaudited reconciliation of consolidated net earnings to consolidated EBITDA schedule, which accompanies today's earnings release. Unless otherwise indicated, all comparisons are to the second quarter ended June 30, 2013.

And now, I'd like to turn the call over to Steve Smith, Chairman of the Board and Chief Executive Officer.

Steven J. Smith

Thank you, Ashley, and good morning, everyone. As you know, last week, we announced a transaction where the E.W. Scripps Company and Journal Communications will merge our broadcast businesses to go forward under the Scripps banner and both spin our publishing business us to form a new public company called Journal Media Group. We believe this tax-efficient transaction will create value for both companies' shareholders and provide significant benefits to 2 very focused businesses in the future. Scripps will expand its broadcast footprint, notably in many active political markets to create significant retransmission revenue upside and digital revenue potential across a larger television and radio platform. Journal Media Group will focus on delivering compelling print and digital products and services in 14 markets. This group, which will launch without debt and free of any significant qualified pension plan obligations, will focus on stabilizing its revenue performance and continuing to enhance its operational efficiencies in order to maximize its cash flow going forward. Both companies will have strong balance sheets that will allow them to build and invest in their businesses. And of course, we're very pleased that the Journal Media Group will be based in Milwaukee, which will retain a public company headquarters of a meaningful multimarket media business. In the coming months, we, along with our colleagues from Scripps, will work as quickly as possible to satisfy all of the regulatory obligations that are necessary to hold our shareholder votes and complete this transaction. We will also begin our integration planning so we can be prepared when the closing occurs in 2015.

We're very excited about this milestone for both companies. If you're interested in learning more about the transaction, I'd like to direct you to documents we filed with the SEC at sec.gov or on the Investor Relations pages of both scripps.com and journalcommunications.com.

Today, we're here to focus on Journal Communications' performance in the second quarter. And once again, we had a solid quarter, driven by continued growth in retransmission and political revenue at our Television stations and overall increased revenue in Radio. Total revenue was $105 million, up 5% year-over-year, which drove an operating earnings increase of 34% in the quarter. For a closer look at the full financial results, I'll now turn the call over to Jason Graham, Chief Financial Officer. Jason?

Jason R. Graham

Thank you, Steve. Operating earnings increased $4.5 million to over $17 million as we continued to benefit from growth in retransmission fees, and $1.6 million in higher-margin political. Net earnings were just over $10 million, up 58%. EPS from continuing operations of $0.21 increased $0.08. Total debt was $158 million at the end of the second quarter. Year-to-date, we generated operating cash flows of nearly $38 million, which we used up on -- $4 million in capital expenditures and combined with proceeds from the sale of our Palm Springs station earlies this year, allowed us to pay down nearly $51 million in debt in the first 2 quarters.

Moving on. Total company expenses were up only 0.5% and down nearly 2% excluding the growth in network fees. We expect expenses, excluding merger-related costs, to be up in the low single digits for the full year, consistent with our previous guidance.

Andre and Betsy will discuss our segment operating results in more detail. However, I will quickly run through a few highlights. Television revenue grew nearly 13% in the quarter driven by political revenue of $1.5 million and retransmission growth of 81%. Local revenue, down nearly 1%, was impacted by softness in select markets, particularly in media and furniture.

National revenue also struggled in the second quarter, down 2%. Expenses were up 3% but were essentially flat excluding network fees and last year's acquisition costs. Earnings were $13 million, up 52%, driven by higher-margin political, retransmission and expense diligence.

Radio revenue returned to growth in the second quarter, up nearly 2%, where despite some struggles in national, we were pleased to see local, our primary revenue category, up 2%. Expenses were up a modest 0.5% that drove earnings up 6%.

Total Publishing revenue was down 2% in the quarter as advertising revenue, down 3%, was impacted by the loss of a key advertiser. Circulation was down nearly 3% as price increases were offset by volume declines and the continuing impact of the change in methodology to defer revenue during the subscription grace period that we referenced last quarter.

And now, Andre will share our operational highlights. Andre?

Andre J. Fernandez

Thanks, Jason, and good morning, everyone. I'll provide a few brief overall broadcast comments before turning it over to Betsy for detail on the Publishing segment.

First, in Television, revenue of $47 million was up $5 million or nearly 13%. Retrans and political drove the increase. Retrans revenue, as you know, is largely set for this year with over 80% of our subs having been renegotiated over the past 18 months. And this quarter's increase of 81% was comparable to last quarters. TV political revenue of $1.5 million was in line with our expectations, though coming from slightly different locations across our footprint than we expected at this point with slower starts to races in Wisconsin and Nevada offset by a brisk start in Nebraska, namely, the primary race for governor, as well as a stronger start to local primaries in Nashville. Core revenue excluding these 2 categories was down nearly 1%.

Now core national revenue was the culprit, down 2%, which, while down, appears to be better than the overall core national spot environment we've heard from both our rep firms and other industry sources as pullbacks in such categories as auto, telco and dining nationwide did not impact our specific markets quite as hard and with other advertisers making up the difference.

National performance across markets was mixed with as many markets down as were up and some meaningfully so. Telco and financials were gainers in national, while auto and dining declined. Auto was up 5% for TV overall in the quarter, driven solidly by local. Local spot was off nearly 1% with most of our markets reporting generally flat local conditions and also with as many markets down as were up. Now digital revenue was a standout performer on Television, up nearly 25% and with increases across every market. Most of our markets reported triple-digit increases in traffic. 65% of our traffic now comes from mobile. And mobile site and ad improvements, combined with audience growth in our content verticals, such as NowTrending.com, continue to drive revenue. In Q2, we also completed the launch of our recently announced relationship with Internet Broadcasting's digital agency services to support our digital ad sales and fulfillment in all of our broadcast markets.

TV ratings were encouraging in the second quarter. Highlights include Nashville, once again, winning the May sweep, Milwaukee winning key news day parts in its target demographic, and Las Vegas posting nice household gains following a strong ABC performance in May.

Now on the cost side, Television expenses remain very much in line with revenue with expenses up 5% excluding acquisition costs in 2013. Excluding network fees, expenses were down roughly 3%. Recall, we are managing the business to keep core expenses in line with core revenue and limiting expense growth despite rising network fees associated with retransmission revenue growth.

I'll shift now to Radio, where we returned to growth in the quarter. Revenue of $20 million was up nearly 2%, driven by a 2% increase in core local spot and helped by such categories as home products and auto. National was the culprit again for Radio with core national spot down just over 6% and continuing the trend we saw in the first quarter, though the quarterly pace is improving. Solid gains in national retail and financials were more than offset by such category as auto and restaurants. We expect local will continue to drive modest growth in Radio, while national, while improving, continues to lag.

Now similar to Television, Radio digital grew 14%, led by such products as Right Wisconsin in Milwaukee and streaming, traffic and weather sponsorships in Tulsa. We're also encouraged by recent spring ratings performance in select radio markets that have reaffirmed our strong market positions and will also drive revenue. For example, in Knoxville, our Q100 Country station just broke into the top 5 in adults for the first time ever, helped by the new signal we acquired there last year. We retained solid leadership positions in Wichita and Springfield. Additionally, WTMJ-AM in Milwaukee continues to gain share and rank not only on the strength of Milwaukee Brewers baseball this year but also as the station continues to broaden its programming lineup. And WTMJ was just named a Marconi Award finalist for large-market Station of the Year.

Furthermore, following the split of Radio from Television earlier this year, we're excited to have named new dedicated general managers in 3 of our Radio markets in the second quarter. These leaders are already bringing greater operational focus to our Radio group.

Radio expenses were up less than 1% as higher sports rights fees were offset by lower research and promotional spending. Similar to Television, we're working to keep expense growth in Radio in line with core revenue.

Now looking ahead to the third quarter, as we've said in our release, we expect total Television revenue to be up in the low to mid teens excluding political. Much like we saw in the first half, retrans will continue to be the primary revenue driver. However, we also have a slightly easier comp this year due to revenue loss from Time Warner Cable this time last year. Additionally, as we approach the fall, higher-than-expected political, if it occurs, could displace core revenue. On the Radio side, we're hoping for low-single-digit revenue gains excluding political and driven once again by local.

I'll shift now to our Publishing segment. While advertising revenue and retail ROP in particular slipped in the second quarter as compared with recent quarters, Q2 ad revenue compares favorably to other publishers who've reported to date, and the segment still turned in a solid earnings performance.

I'll turn it over to Betsy to provide some additional color on Publishing's operating results.

Elizabeth Brenner

Thank you, Andre. As Jason mentioned, total revenue for the Publishing business was down 2% year-over-year driven by moderating declines in circulation as well as challenged advertising revenue. Total Publishing operating earnings were down 14%.

Advertising revenue, down 3%, was impacted by the loss of a major advertiser, American TV, a large local retailer that went out of business in April. Retail advertising revenue, our largest ad revenue component, was down 2% primarily due to the loss of American TV. Our teams are now focused on efforts to replace lost customers with new programs from new and current spenders throughout the remainder of the year. Our in-house agency model team has been hard at work doing what they do best, pitching tailored print and digital campaigns to customers that help them reach local audiences as only our daily newspaper and strong digital products can do. This quarter, we've already seen new programs sold to local hospital systems and department stores.

Meanwhile, established promotional events only got bigger last quarter. Our Top Workplaces Awards from the Land the Big Gig talent competition at Milwaukee Summerfest music festival grew revenue substantially in their fifth and third years, respectively. Classified, which only represents 18% of our ad revenue, was down by nearly 7%. The major drivers of the daily newspaper were decreases in employment, down 15%, and real estate down 33%. We, again, saw gains in classified auto, however, which was up 3% with the digital auto advertising up 7%.

Digital revenue was up 5%, driven primarily by an increase in sponsorship revenue, particularly mobile and retargeting revenue. The segments offset are classified employment declines. Retargeting programs also helped drive digital CPMs at the daily paper, which rose by nearly 15% over last year. We reached an on-loan audience milestone in the second quarter when we saw our highest digital page views ever, 2.1 million in a single day. Traffic was propelled by a JSOnline story about the stabbing of a young girl in Waukesha County by 2 friends trying to impress a fictional online character. We pushed that story out through social media links and references, which built throughout the day, reflecting an important new traffic pattern reality for us. Once again, Journal Sentinel's digital and print reach was confirmed as the best among the nation's top 50 largest markets. Our combined weekly, daily, Sunday and online reach ranked first, as did our weekly print and average issue reach, daily and Sunday, according to the latest report on market penetration released last month by Scarborough Research.

Publishing circulation revenue was down nearly 3%. As Jason mentioned, much of this decline is the result of a change in our methodology to defer revenue during the subscription grace period. In addition to the methodology change, volume declines were partially offset by price increases initiated in late March. Our other revenue category, which includes commercial print and delivery, was up 4% primarily due to new business. Expense controls continue to be an important part of our operations, and in the second quarter, total Publishing expenses were down nearly 1%. We completed the offer of a voluntary separation plan in early second quarter, for which we recorded $600,000 in workforce reduction charges.

And with that, I'll turn the call back over to Steve for his concluding comments.

Steven J. Smith

Thank you, Betsy. Now looking ahead to the third quarter, excluding political, we expect total Television revenue to be up in the low to mid teens as compared to the third quarter of 2013. In Radio, also excluding political, we expect revenue increases in the low single digits. In Publishing, we anticipate revenue declines in the low single digits.

Now I'll turn the call back to Ashley for reminders on where to find more information on the transaction as well as to begin the question-and-answer portion of today's call. Ashley?

Ashley DeYoung

Thanks, Steve. Operator, this concludes our prepared remarks. As a reminder, participants can find more details on information about the transaction announced on July 30 by visiting the SEC's website at www.sec.gov on the -- or on the Investor Relations pages of both scripps.com and journalcommunications.com. And now, operator, you may begin the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Mr. Craig Huber.

Craig A. Huber - Huber Research Partners, LLC

A few questions if I could, a general question. I noticed your national advertising costs, Radio, TV and Publishing, was weaker than your local advertising I saw. Just at least a little bit more color on that of why you think there's [indiscernible] standpoint?

Andre J. Fernandez

Yes, I think it's -- Craig, it's Andre. It's continued to trend, we've seen for the last few quarters. First quarter, actually, there some weakening in the fourth quarter. It was weak in the first. It was weak in the second, but I think, sequentially, it's improved. And then actually looking into third, we're seeing some -- too early to say if it's going to be up year-over-year on either TV or Radio, but sequentially, it is improving. Listen, I think in our case, it is -- there are some stories, I think, unique to every market, whether it was a local advertiser -- or, excuse me, a national advertiser who went to local, a specific category that now is down. So it's hard to, I think, to generalize, but at least what we've seen is there's been national weakness, again, not only in Television, Radio and Publishing, as you've pointed out, but weakness we've observed throughout the industry.

Elizabeth Brenner

And Craig, this is Betsy. I'll just jump in. National is such a small part of our overall revenue spending. For the most part, we saw some gains, actually, in national ROP from some drug campaigns. And actually, business communications was up strongly. It was on the national preprint side that we saw some softness in the quarter.

Craig A. Huber - Huber Research Partners, LLC

How was your auto tracking the third quarter, which, you said it was up, I think, in the second quarter? Can you talk about your TV and Radio separately?

Andre J. Fernandez

Auto trending. I'm not sure if I have auto trending here for the -- I think our overall trends here into P7 and early P8 are very comparable to what they were in the second quarter. I'd have to go check auto, but I don't think auto is any different than it was, but I will check that for you as we speak. Do we have it?

Unknown Executive

Yes.

Andre J. Fernandez

Okay. But overall -- well, overall, I'll -- we'll check that here. Overall, though, beyond auto, we're seeing very similar trends here into P7 and P8, our core being up just -- up slightly here on Television in P7. P8 is flattish, and P9 is up a little bit, although we'd expect -- we expected that to be up a little bit more, as I mentioned in my prepared remarks because we're coming up against that comp with Time Warner last year. And on the Radio side, we were also up a little bit slightly in P7. Flattish here in 8, and looking pretty good into P9.

Craig A. Huber - Huber Research Partners, LLC

Okay. You mentioned 80% of your retrans contracts were redone over the last 18 months or so. What's the average length of those contracts? Are they about 3 years?

Andre J. Fernandez

I don't think we disclose that. I -- we've never disclosed the terms. I know those terms, those are confidential and they do vary in length.

Craig A. Huber - Huber Research Partners, LLC

And then also, I guess, on the newspaper side, Betsy, I was just curious, how much does it cap the costs up year-over-year, and what's the difference between usage versus average products, please?

Elizabeth Brenner

Our price is pretty flat in the second quarter, Craig. Price was actually down about 0.5%. Consumption was down about 4%. So overall, the total was down 4.6%, close to 5%. As you add up the change, price was 11% of the decrease and consumption was 89%.

Craig A. Huber - Huber Research Partners, LLC

Okay. And then also, Betsy, may I ask, for your flagship newspaper, what's the daily and Sunday print volume percent change year-over-year?

Elizabeth Brenner

Print volume on Sunday for the second quarter was down 3.5%, down 5% daily.

Operator

[Operator Instructions] Your next question comes from the line of Mr. Barry Lucas.

Barry L. Lucas - G. Research, Inc.

Just a couple of odds and ends. On that account loss in print, Betsy, is there any bad debt related to that, that flushed through in Q2?

Elizabeth Brenner

There was, and we took most of it in the first quarter, Barry, when the advertiser actually announced their closing. I think it was close to about $170,000.

Barry L. Lucas - G. Research, Inc.

Okay. And just switching gears to political side. Andre, you had a little bit of color. And I think you said a little bit slower start in Wisconsin, which, I thought a little bit -- may have been a little bit surprising given the contentious nature of that race, at least to outsiders. I was hoping you could expand the discussion a little bit to Florida's station in Fort Myers and what you're seeing down there?

Andre J. Fernandez

Sure. Why don't I just recap? On -- recall on the last call, and I think even previous, we talked about our outlook for the year. And the way we had budgeted '14 was we -- I don't think any of us expected we'd get back to '12, but we weren't sure we'd get back to 2010, where we did, I think, roughly $16 million, and we budgeted less than that. And at least the results in the first quarter, I think, confirm that. And the second quarter still confirms it. I went back to check our political year-to-date, which, I think, is about $2.2 million adjacent. Jason, you have to confirm that. And I think we did $2.6 million in 2010 year-to-date. So we're lower than 2010. So we are where we thought we were going to be. The markets that have been a little lighter are those that you said. Milwaukee, I think that race is just getting underway now. So the nice thing is we're starting to see spending in the governor's race in particular, but we haven't seen much to date. Also, we thought we would have seen more now in Las Vegas than we have seen, and we haven't. And I think their -- the governor's race. And I looked a couple of days ago, I think the governor, the incumbent is ahead by about 20 points. So it appears that there's going to be less spending in that race. There's also, I think, some congressional races. There's also a ballot initiative there, which I think is a margin tax. It's a 2% tax on businesses' revenue, I think, in excess of $1 million to fund education initiatives. We thought and had planned for to be additional spending related to that, and it hasn't appeared yet. We're hoping that it might, but it just hasn't. Also I thought, the lieutenant governor's race there maybe could heat up, and as, I think, a Secretary of State seat. So you've got Milwaukee and Las Vegas, 2 markets that come in -- that have come in less. And then where -- in my prepared remarks, I mentioned Nebraska, particularly Omaha, where there's been good amount and higher-than-expected spending on the governor's race, and that continues. We even saw more spending than we had thought in Tennessee and Nashville. I think, actually, the Republican primaries are today, if I'm not mistaken. And we saw good -- pretty good political there in the second quarter, and that now continues here into the third quarter. I think looking across the other markets, you mentioned Florida, in particular. Obviously, we've got the governor's race there, which, at least, for us is -- really hasn't gotten going yet, but that's still out there in addition to a congressional seat, and, of course, issue spending. I think another market, we're probably optimistic about also is Michigan. As you know, we've got the station in Lansing, and there's a governor's race as well.

Operator

Your next question comes from the line of Mr. Miller.

Yehuda Miller

This is Yehuda Miller from Cedarview. We have a question very similar to Barry. I was trying to back in to the political number based on the commentary both on last week's call about the merger as well, but I think you guys just give me some color. So thank you for that. That's all.

Operator

As there are no more questions, this concludes this morning's call. As a reminder, a replay of the call and an archive of the webcast will be available today through August 14. Please, refer to this morning's press release for the dial-in information for the replay of the call or visit the website at www.journalcommunications.com/investors for the archived webcast.

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!

Source: Journal Communications' (JRN) CEO Steven Smith on Q2 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts