New Media Investment Group, Inc. (NYSE:NEWM) Q1 2016 Earnings Conference Call April 28, 2016 11:00 AM ET
Sara Yakin - Investor Relations
Michael Reed - Chief Executive Officer
Gregory Freiberg - Chief Financial Officer and Chief Administrative Officer
Amy DeBone - Compass Point Research and Trading LLC
Patrick Sholl - Barrington Research
Good morning. My name is Heidi and I’ll be your conference operator today. At this time, I would like to welcome everyone to the New Media First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Sara Yakin, Investor Relations. You may begin your conference.
Thank you, Heidi, and good morning, everyone. I’d like to welcome you to New Media’s first quarter 2016 earnings call. Joining us today are Mike Reed, New Media’s CEO and President; Greg Freiberg, our CFO; and Kirk Davis, COO of New Media. I’d like to call your attention to the earnings supplement that was posted to the New Media’s website this morning. If you have not already done so, I would suggest that you download it now.
Briefly, before we begin, please let me remind you that statements made today are not historical facts and may be forward-looking statements. These statements, by nature, are uncertain and may differ materially from actual results. We encourage you to read the forward-looking statements disclaimer in the presentation as well as the risk factors described in New Media’s filings made with the SEC.
Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest in New Media. The webcast and audio cast is copyrighted material of New Media and may not be duplicated, reproduced or rebroadcast without our consent.
With that, I’d like to turn the call over to Mike.
Thanks, Sara. Good morning, everyone. Thanks for taking the time this morning to dial-in and listen to our first quarter’s call. Q1 marked an exciting start to 2016 for our Company with multiple completed acquisitions and strong financial results including the third consecutive quarter of revenue trend improvement. As Sara just mentioned we did post the supplement to our website this morning and I am going to reference that throughout the call.
Let me start on Page 2 of the presentation and with that I’ll start with the quick summary of the Company. As most of you know New Media is a portfolio of local media assets that are the longstanding dominant sources of comprehensive high quality local news in the communities they serve.
We own and operate 620 local publications, including 125 daily newspapers that are located in over 520 markets across 35 states in the U.S. We reach over 20 million people each week through all of our print and digital products. Our traditional media business continues to produce significant recurring cash flows supported by the relevant and valuable hyper-local content and advertisements we provide for consumers and businesses. Furthermore, we have remained value oriented acquirers of these types of local media assets, leading to accretive and strategic acquisitions that have driven tremendous and organic growth for our company.
Finally, as we continue to grow our business we remain committed to returning a substantial portion of our free cash flow to our shareholders in the form of a dividend. Since becoming a public company just over two years ago New Media has consistently executed on all facets of the strategy as communicated to shareholders. And we’ve generated total returns for our shareholders of over 40% during that time period.
Now turning to Page 3, I'd like to discuss some specific highlights for the quarter and subsequent to the quarter. Our Q1 performance represents another solid quarter for the Company with total revenues increasing 19.7% versus prior year and decreasing 5.1% on a same-store basis. Importantly it marks the third consecutive quarter of improving same-store revenue trends.
Tuck-in acquisition revenue was very small this quarter at $1.7 million and it came from Monroe a small daily newspaper in Michigan and a tiny bit from ThriveHive, which we acquired during the last week of March. Excluding these small tuck-in acquisitions our revenue was down 5.4% versus prior year, which is simply laid out for everyone on the last page of our supplement.
We were particularly pleased to see the Q1s revenues trend excluding tuck-in acquisitions improved by 30 basis points versus Q4s trend. And based on what we have seen in April we feel good that revenue trends will improve for a fourth consecutive quarter in Q2.
Propel our exciting and fast growing digital marketing services platform had another great quarter, generating nearly $10 million in revenue, which was up 71.4% versus prior year. It's valuable to note that as Propel continues to scale our growth trends are not slowing.
In addition to Propel’s solid quarterly results, I am very pleased to announce that Propel recently became a Google AdWords Premier SMB Partner. This program connects Google's trusted AdWords partners with SMB’s that want expert help in creating, managing, and optimizing their online advertising campaigns. There are less than 35 companies in the world that have this status with Google and this distinction recognizes Propel’s proven expertise, experience, and ongoing commitment to SMB owners and importantly provides a greater revenue and margin opportunity for Propel.
On the acquisition front, New Media remains committed to its strategy of acquiring undervalued local media assets. And our 2016 activity reflects our continued success executing on this part of our growth plan. During the first quarter we deployed over $58 million through three acquisitions Dolan, Erie and ThriveHive. And I am moving to those in a little more detail in just a couple minutes.
Subsequent to the quarter New Media also reached an agreement to acquire substantially all of the assets of Journal Multimedia, a multi-title publisher of business journals, trade and consumer magazines, digital products and a very exciting research and events division. This acquisition was $18 million. Once we closed the deal, which we expect to be in Q2, we will have deployed over $76 million thus far in 2016 and we are only four months into the year.
With $180 million of expected deployable cash over the next 12 months, New Media has the potential to increase pro forma free cash flow per share to nearly $3.90 through future acquisitions. If we use additional leverage of $180 million sticking to our stated goal of two turns of leverage, New Media is on track to grow free cash flow per share to $4.55.
We remain committed to finding great local media assets at very attractive prices and are confident in our ability to continue to execute on these transactions, which we believe will drive tremendous upside for our shareholders.
Now, let’s turn to Page 4, and take a moment to highlight something that we are really, really excited to talk about and very proud of. Last week, our very own investigations out there in the Sarasota Herald-Tribune, Michael Braga won a Pulitzer Prize for his role in a year-long investigation along with the Tampa Bay Times detailing the horrific conditions in Florida's mental health hospitals.
The winning, five-part series Insane, Invisible, In Danger, linked deep budget cuts within Florida's mental health system to a spike in systemic violence and abuse at its state-run hospitals. As a result of the investigation, lawmakers in Florida increased funding for mental health hospitals by $4 million. This story highlights the power of local journalism, which impacts not only its direct community, but also the region, state, and the country as a whole.
We are extremely proud of the work done by Braga and his team along with our editor at the Herald-Tribune and Bill Church and our publisher Pat Dorsey. And we believe this work is reflective of our Company’s belief and in commitment to quality local journalism. Our new teams around the country work tirelessly to make our communities a better place to live and we couldn't be more proud of their collective efforts.
Now let's take a little more detail look at Q1 acquisitions and for that I’m going to turn to Page 5 of the supplement. The first acquisition we closed in the first quarter was Dolan, a leading - specific news for the legal, financial, real estate, and government affairs sectors.
In addition to providing subscribers with the content relevant to their daily professional activities, Dolan also develops, organizes, and produces events centered on awards and education seminars. Today, Dolan serves 17 markets across the U.S. and we see a tremendous opportunity to leverage both its content strategy, its events business, and its subscriber base with New Media.
We see a great expansion opportunity for Propel through Dolan's audience of over 46,000 paid subscribers, who are predominantly service oriented business owners, ideal Propel customers. This business was acquired for $35 million or 2.8x the seller's 2014 pro forma as adjusted EBITDA, very attractive valuation for us.
In mid-January, we also close down the acquisition of the Erie Times-News for $11.5 million or 2.5 times the seller’s 2015 as adjusted EBITDA. This award-winning local newspaper was first published in 1888 and has been owned by its founding family for more than 125 years. The publication today reaches more than 90% of market over a 30-day period. And their website, goerie.com, has a 75% market share in local digital page views.
Today, the flagship newspaper has an average weekday circulation of over 39,000 and a Sunday circulation of over 55,000. We are proud that the family chose New Media as its home for its paper after 125 years of ownership, and we aim to carry on the tradition that the family has established in that community very exciting acquisition for us.
And finally, in late March New Media announced it acquired ThriveHive, a turnkey proprietary software platform that enables SMB owners to run their own digital and contact marketing campaigns. We bought this business for $11.8 million. Their technology is the perfect complement to Propels do it for new approach. And it now allows us to meet the needs of the full spectrum of SMBs.
Further, we believe the acquisition will help us drive higher margins for the overall business by transforming Propel from a marketing services reseller company into a software and technology platform with a tremendous sales force and tremendous sales channels.
Subsequent to the quarter, New Media also have recent agreement to acquire Journal Multimedia, and for an overview of this transaction I’m going to quickly turn to Page 6 of the supplement. Journal Multimedia, is a multi-title publisher of business journals, trade and consumer magazines, digital products, and a research and events division. The purchase price of $18 million is at the midpoint of our acquisition range of 3.5x to 4.5x the seller’s LTM as adjusted EBITDA. We expect this acquisition to close in the second quarter and we will fund it cash on the balance sheet.
Today, Journal Multimedia is made up of the following assets. Regional business journals that serve as the leading source of local business news in their respective markets. The Best Companies Group, a rapidly growing research division that partners with local businesses and media outlets to create “Best Places to Work” publications and events. Regional and national magazines focused on parenting and the pet industry respectively and digital marketing company that produces video and web services for SMBs.
The acquisition of Journal Multimedia was extremely compelling and it allows us to further build-out the B2B media business we created with our acquisition of Dolan in the first quarter. Further, and similar to the acquisition of Dolan, we believe Journal’s print product subscribers are the ideal candidates for Propel’s services as they consist of SMBs that market themselves online to support and grow their businesses. This business will be operated inside of our Dolan Company, which will offer further synergy opportunities.
Including the Journal Multimedia transaction, total capital deployed in 2016 is now more than $75 million. We believe this demonstrates our continued commitment and ability to drive inorganic growth for our shareholders. As mentioned earlier, we remain committed to doing this through smart strategic and accretive acquisition that meets both our deal criteria and valuation parameters.
Given our continued success with inorganic growth, we thought it would be useful to walk through the pro forma size of the company today. And more importantly, look at the potential free cash flow per share growth we can achieve over the next 12 months deploying the liquidity that we have available to us.
For that I am going to turn to Page 7. Our core traditional media business continues to produce strong cash flows and healthy profit margins as demonstrated by our quarterly results. Using cash that we expect to generate in our business over the next 12 months.
In addition to the cash on the balance sheet today, New Media is capable of deploying capital that could generate another $0.92 of incremental free cash flow per share, substantial growth opportunity for the Company.
With additional leverage, while holding to our stated goal of two turns of leverage New Media can add approximately $0.66 of additional free cash flow per share bringing our potential total free cash flow per share to $4.55, a 53% increase from where we are today. Our liquidity positions us to be able to execute on highly accretive acquisitions that we believe will create substantial value for our shareholders.
On the organic side of the business we continue to be extremely pleased and excited with what Propels daily. And I’m going to give you a quick overview of our Propel is and for that I'm turn to Page 8 of the supplement. Propel is our national provider of digital marketing products and services for local businesses. And the business had another solid quarter with revenue of nearly $10 million and an increase of 71.4% over the prior year.
We believe the success we've experienced today can be attributed New Media's unique position in the market. Given our physical local presence full product suite, dedicated client services and experienced digital staff. Contract sales in the quarter were $15.5 million an increase of 72% over the prior year. And an annualized $62 million per year versus $48 million annualized contract sales at the end of Q4.
This is highlighting the real growth foreseeing this business. And just as a reminder to you out there the contract sales are a great leading indicator for future revenue performance. As a represent services that we’ve already sold but not yet fulfilled and subsequently not yet booked this revenue. Further with the acquisition of ThriveHive and the status we received from Google we expect nothing but greater results for Propel going forward.
Before I turn things over to Greg for a finance review I wanted to quickly look at the landscape of the acquisitions we've completed over the last couple of years for that and we turn to Page 9. Since our inception New Media as announced and close 14 acquisitions with purchase price of over $667 million. The majority of these deals have been purchased using cash on our balance sheet and incremental debt on our term loan which we also view is our two primary sources of capital for future acquisitions.
The local media assets today have been acquired at an average of 3.9 times the seller’s LTM as adjusted EBITDA and at unlevered yields of 24% and 32% respectively. After factoring in over $40 million of estimated net cost synergies which is also proving to be a conservative number based our execution. Our acquisition multiple reduces to 3.1 times as adjusted EBITDA and our unlevered and levered yields increased to 30% and 41% respectively.
Looking ahead we believe New Media will be able to execute on future acquisitions within these parameters and return thresholds given the fragmented and all favor nature of the traditional local media.
And now I would like to turn the call over to Greg for few minutes to give the full review of the Q1 financials. Greg.
Thank you, Mike, and good morning, everyone. I’m now turning to Page 11 of the supplement. Total revenues for the quarter were $300.1 million, an increase of 19.7% to prior year on a reported basis and a decrease of 5.1% on a same-store basis.
As Mike mentioned earlier Q1 same-store revenue trend represents the third consecutive quarter of improving revenue trends which is a very important indication that we're moving in the right direction and building momentum towards organic growth. When you remove the benefit of tuck-in acquisitions revenues were down 5.4%. The sequential improvement in revenue trends is 30 bps better than the down 5.7% that we reported in Q4. So we're definitely moving in the right direction.
Digital revenue continues to be a strong category for the Company growing 6.9% on a same-store bases to $27.5 million. With Propel contributing $9.8 million. Propel was up $4.1 million or 71.4% versus the prior year and that accelerating from the 68% growth we showed in Q4. So that's a great job there.
Contract sales are booked orders that are not yet fulfilled. So they're terrific leading indicator of future revenues. Q1 Propel contract sales came in at $15.5 million and annualized or $62 million. So this is a very nice increase from the $48.2 million of annualized contract sales in Q4 and it’s highlighting the tremendous acceleration we’re experiencing with Propel. And in demonstrates that we're still very early in the continuing growth cycle for Propel.
Traditional print revenue declined 11.2% on a same-store basis to $143.1 million impacted by continued pressure on local print advertising, preprints and classified print revenue which declined 14%, 11.3% and 6.9% respectively. The declines in print advertising and preprints reflect the ongoing secular pressure these traditional categories face. And specifically with preprints the decline is driven by major retailers pulling back on frequency, seeking rate concessions and closing stores in our markets.
We were very pleased to see Circulation, our largest revenue category at 35% of total revenues increased 1.4% on a same-store basis driven by promotions and methodical price increases leading to incremental revenue growth.
Lastly, Commercial Print and Other revenue decreased 4.9% to prior year on a same-store basis. Operating income was $7 million, an increase of $170.3 million to prior year. Net income of $5 million increased $11 million to the prior year.
Ads adjusted EBITDA was $29.1 million an increase of $3.8 million or 15.1% to the prior year. In Q1, same-store expenses were reduced by 6.7% to the prior year totaling $271 million. So despite the secular pressure on our print categories, we are clearly benefiting from our operating strategy leveraging the size, scale and resources to identify and drive expense reductions resulting in significant improvement in operating income, net income, and ads adjusted EBITDA to the prior year.
In particular, we are executing on achieving cost synergies from our highly accretive acquisitions, while still appropriately investing into the growth at Propel and other opportunities that are building our return to organic growth.
Free cash flow and free cash flow per share were $18.6 million and $0.42. It's important to note that free cash flow was negatively impacted in the period by $0.9 million one-time income tax payment as a result of the gain on sale of Vegas. In addition, the prior year had an interest timing benefit of $2.6 million, adjusting for these two items free cash flow increased 19.6% to the prior year. This is yet another demonstration of the benefit we are able to realize from our acquisition strategy and operational execution.
We ended the quarter with approximately $365 million of debt outstanding and have liquidity of $119.4 million consisting of $79.4 million of cash on the balance sheet and $40 million of availability under our revolver. Net leverage against our Q1 pro forma ads adjusted EBITDA is 1.7 times slightly lower than our long-term leverage level of 2.0 targets.
In summary, Q1 was a very strong quarter for New Media and we feel great about the assets we own, our strategy, our capital structure and our ability to continue to produce strong cash flow performance. We are in a very strong position from a liquidity standpoint, which positions us well to be able to continue to execute on all aspects of our strategy.
Operator, we’d now like to open the call up for questions.
[Operator Instructions] Your first question comes from the line of Amy DeBone from Compass Point. Go ahead your line is open.
Hi, thanks for taking my questions.
Hi. I noticed that you move the statement from the fourth quarter investment highlights about leaving that by year-end 2017 to join other revenue would provide enough same-store organic growth or same-store organic revenue growth to stabilize the topline. Does that mean as a reason that statement was removed as the timeline may be pushed back a little bit or can you comment on that?
No, no, not at all. We just had a lot of other things to highlight in the first quarter that were really great. So we didn't have it on that page, but it's in our press release, and it’s in our comments as well. So no change in that regard.
Okay. Great. And then regarding the potential growth pro forma, free cash flow 389, this assumes a cash conversion rate of around 90% I believe. It looks like it was 81% this quarter excluding cash taxes and 73% including integration and reorg costs, so that I guess my question is just what gets the cash conversion rate to 90%?
Hi, Amy. This is Greg. So the actual results are a reflection of our current balance sheet and when we're extrapolating forward, the first scenario of $180 million is organic cash. And so it's a very little incremental cost because we are using organic cash, so it's highly accretive that's why I said 90% conversion rate. And then the second scenario of $180 million that we modeled, we did assume that’s an old data and that's why it adds incrementally less. And so it was $0.92 to get to $3.89 and then a further $0.65 to get to $4.55.
That's really just a difference of having interest in your EBITDA, the free cash flow conversion, interest and amortization.
Okay, that makes sense. Was there any incentive income paid to fortress this quarter?
So it’s pretty small, okay.
And then, the interest expense include amortization of deferred financing costs. I felt that wasn’t broken out.
Yes, that's right. That's actually a change in accounting and that's working - we are the following the rules…
Okay. And that will just come with the Q.
Yes, that’s correct.
And then last question, just thinking about liquidity, do you have any plan to maybe invest the excess cash balance between now and when it is deployed. And then the second part of that question is would you consider prepaying the term loan I don't think there aren't any prepayment penalties there right?
There are no prepayment penalties, but the much more attractive return profile for our investors by deploy net capital in acquisitions where we're generating 40% levered return, so paying back debt is just from a capital allocation standpoint, producer of good result will offer shareholder. So right now our plans for the capital we have on the balance sheet is to pursue acquisitions and following the same parameters that we have been doing. That's where we can get the best return for our shareholders.
Got it. And so you are just holding excess cash in liquid investments for the time being, correct?
That’s correct, but we have been deploying capital at a rapid pace so as I mentioned in my remarks, when this journal deal closes in Q2 we’ll have deployed over $75 million already this year. So we have a great pipeline. We're being very selective about the assets we acquired and we feel very good that we can put this capital to work. And so moving it on the balance sheet in the very short term is the right thing to do.
Okay. Great. Thank you for taking my questions.
Your next question comes from the line of Jim Goss of Barrington Research. Go ahead. Your line is open.
Hello, this is Pat Sholl in for Jim.
Just couple of questions, with the advertising trends are you seeing anything different between some of like the Gatehouse and local media paper as opposed to some of the ones you’ve acquired more recently like Halifax and like - where you still have Stephens and Columbus?
Not particularly, our markets are pretty - not particularly by property or by geography, our results were pretty common across the country and pretty similar across the country I should say. And our papers are just not that dissimilar. We're not buying large metro market newspapers where I think the trends are worse. And so the markets that we're operating in intentionally have pretty consistent trends cross the country.
Okay. And then in Propel which as you highlighted is growing really well. With B2B properties that you've been acquiring, you highlighted that you think Propel is and I feel for the customers of those obligation. We’ve seen that like a lot of those especially in the larger markets but they would already utilize some of those services is that, probably a function of getting a more up to date digital marketing, platform for the company’s or is it just not really having not really …
Interestingly that we found during the diligence process that most of the businesses that were customers of Dolan actually don't have the digital marketing services. They have very basic websites but beyond that. They are craving these types of services naturally one of the things that got us particularly excited about this Dolan acquisition during the diligence processes. We really want to think don't know do this already and they actually will craving it and Dolan sales force was seeking from its senior management a solution to be able to provide because they were being asked to provide it. So it’s really great opportunity for Propel.
Okay. Thank you. That’s all I had.
[Operator Instructions] Your next question comes from the line of [indiscernible]. Go ahead. Your line is open.
Just a question on the AdWords agreement if how meaningful do you expected to be for Propel in terms of just like traffic I guess is anyway we can kind of quantify the expansion to the market that Propel can graph here?
I don’t think we can quantify that for you yet Steve. It's so new to us I mean just happened in the last couple weeks. And so I don't - would be a lot of guess to try to quantify that for you now.
All right, fair. And then…
[Indiscernible] potential for us, but it would be hard to really quantify that with a number.
Okay. And then given the existing same-store sales - we’re seeing, still I guess mid single-digits and improving. But what is the path to organic growth and when you're referring to that you are saying that’s a flattening of the same-store sales am I right. So I guess what’s the path to get there in just over a year?
Well, it’s continued growth in subscription income, which is our largest revenue category - manage continued growth at the levels we see today with our digital business. And as Propel becomes a substantial piece of the revenue pie as it’s becoming with the growth trends that you see from a percentage standpoint. Thus turn into a dollar perspective, nominal dollar perspective into a meaningful number to offset the print advertising decline, so. We've obviously done a lot of work on a quarterly basis going forward with what we see for print declines modeled against subscription income growth and digital growth particularly from Propel and feel confident about when we cross that threshold to organic growth.
Hi, Steve, it’s Greg. What I would add to that as a reminder is in the first half of last year we more than doubled the size of our business with acquisitions and obviously even announcing four acquisitions to start this year, we're continuing to be busy. But my point is that more than doubling the size of the business last year those properties are now you know they were going through our process of benefiting from our platform. And they start to come on line get comfortable with the products and producing results that are better than what are the results in our actual quarter right now. And so we do see that benefits progressing and becoming a larger contributor as well.
So just to make sure I have the language right when you're referring to organic growth would that be let’s say for sales trends for excluding tuck-in acquisitions and for revenue over one year I guess the point you just made. Would that be how you measure it?
Yes. Certainly on anything we bought in the fourth quarter of 2017 would instantly be growing from an organic perspective. But certainly properties we own for more than a year and certainly excluding tuck-in acquisitions.
Okay. So that will be the number you would be looking to see I guess. Okay, I think that’s it from me. Thanks.
There are no further questions at this time. I would now like to turn the call back over to Mike Reed, CEO of New Media.
Thank you. Needless to say 2016 is off to a great start with our traditional media business continuing to produce strong cash flows and organic cash that can grow free cash flow per share to over $4.50 once deployed. We remain confident. New Media is well positioned to execute on its inorganic growth strategy.
Further as Propel continues to scale across current markets and new markets. And as new revenue streams are developed, we do see a path for the Company to achieve long-term organic growth and its revenues by year-end 2017. In the meantime with our stable free cash flow and dividend, we continue to believe New Media remains well positioned to create substantial returns for our shareholders. I'd like to thank you all for your interest in New Media and we look forward to updating you on our progress again next quarter. Thank you.
This concludes today’s conference call. You may now disconnect.
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