The McClatchy Company (MNI) CEO Craig Forman on Q3 2018 Results - Earnings Call Transcript

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About: The McClatchy Company (MNI)
by: SA Transcripts

The McClatchy Company (NYSEMKT:MNI) Q3 2018 Earnings Conference Call November 9, 2018 12:00 PM ET

Executives

Stephanie Zarate - IR

Craig Forman - President and CEO

Mark Zieman - VP, Operations

Elaine Lintecum - VP and CFO

Analysts

Leon Cooperman - Omega Advisors

Operator

Good day, and welcome to The McClatchy Third Quarter 2018 Earnings Call. All participants today will be in a listen-only mode [Operator Instructions]. Please note this event is being recorded.

And with that, I would now like to turn the conference over to Stephanie Zarate. Please go ahead.

Stephanie Zarate

Thank you, Brian, and thank you all for joining us today for our third quarter 2018 earnings call. I am Stephanie Zarate, Investor Relations Manager, and I'll be available to answer any follow-up questions you may have after our call this morning. My phone number is 916-321-1931, and you can also find my contact information on our Web site. This call is being webcast at mcclatchy.com and will be archived for future reference. Our earnings release was issued this morning before the market opened, and I hope you've had a chance to review it.

Joining me today is Craig Forman, our President and CEO; our Vice President of Operations, Mark Zieman; and our Vice President and CFO, Elaine Lintecum. This conference call will contain forward-looking statements that are subject to risks and uncertainties that are described in our SEC filings. Actual results may differ materially from those described during this call. Also, non-GAAP amounts discussed this morning are reconciled to the most directly comparable GAAP measures in our schedules posted on our Web site or in the body of press release.

Now, I'll turn the call over to Craig Forman.

Craig Forman

Thank you, Stephanie. Good morning and thank you for joining us today. Before we get started I would like to acknowledge the recent media coverage related to Tribune Publishing. We offer you the same reply we've given to many media outlets recently, which is that as a policy we do not comment on rumors or speculations.

So, now on to the business of discussing McClatchy; first I will recap a bit of news we shared last quarter. In mid-July we refinanced substantially all of our debt for overall terms favorable to the company. We also reported in the second quarter that our digital advertising revenue exceeded our print newspaper revenue for the first time. Now, in the third quarter, I'm pleased to announce that we have reached the point where both out total digital and our digital-only revenues exceeded our print newspaper revenues in the quarter.

Due to the print environment and growth in digital advertising we believe this will be the case for the fourth quarter of 2018 and for the full-year of 2019. While we reached this important milestone, the third quarter was not without its challenges we continue to face industry headwinds that are exacerbated by a calendar period that is historically our softest for advertising revenue. The third quarter decline reflects advertising slowing [ph] over the summer months. Our advertising revenue results were more in line with what was reported in the first quarter and the first half of 2018 slowing the momentum that we had gained in the second quarter. The good news is that our momentum will return in the fourth quarter of 2018 as both advertising and audience revenues improve over first-half trends.

Our digital drive doesn't stop at advertising. We also ended the quarter with impressive growth in our digital-only subscribers of 47.6% compared to the third quarter of last year. Our growth of 137,000 digital-only subscribers represents sequential improvement of almost 12% over Q2. In dollars, the growth in digital subscribers meant a 53% increase in our digital-only audience revenue compared to last year. We are pleased that our overall growth in digital subscriptions exceeds the outlook we provided at the beginning of this year.

Some of this growth is driven by new sports only subscription product branded as SportsPass which was launched in 10 markets. We first introduced this product in our Miami market just before the start of the NFL pre-season. The product offering was well-received, and by the beginning of September had been ruled out to nine additional McClatchy markets. Subscribers to SportsPass are likely readers who would not have subscribed to the entire content package, or our returning customers who value the sports coverage that our markets provide.

From a digital product perspective, we couldn't have built, productized and successfully launch SportsPass without the investments we've made in audience technology in the past 18 months. Last year, we told you about an investment in our new audience management platform, and that it would lead to dynamic product offerings geared toward consumer preferences, and here we are. There is demand for this type of customized news product that we are providing to our audience, and we will look to provide an analogous product for other community areas of interest as we gauge demand. The flexibility that our audience management platform provides, and the information that we are gaining through our project insight, audience understanding platform, strengthens our relationship with our customers, at the same time, it allows us to gain and monetize readership that we would not have otherwise tapped.

Now looking to the rest of our results, for the third quarter we reported adjusted EBITDA of $90 million, and adjusted net loss of $23.8 million. Third quarter trends were in line with the results in the first half of 2018. We believe our third quarter reflects cyclical factors that are inherent in our advertising environment, and that belief is bolstered by our view into October in the fourth quarter, which Mark will touch on in a few minutes.

Our sales teams are working together to share best practices to provide advertisers the best service possible based upon their campaign goals, but advertising is not the only area where we see collaboration. This quarter, six McClatchy markets across the Carolinas and Georgia were affected by Hurricane Florence.

Our efforts to regionalize and centralize our newsrooms, technology, audience, and finance enabled us to keep these communities informed about the storm's path and provide the news and information that was vital to them even in the areas worst hit. And so, the storm date landfall, we had no idea how it would be impacted, but we were ready. Our teams developed contingency plans, and evacuated where necessary, and during that time our journalists and teams worked from safe locations, delivery plans were adjusted, and responsibilities were shared among the markets.

Our regionalization and centralization efforts are important organizational strategies to operate as a more digital company. These efforts are ongoing and continue to result in substantial savings. In the third quarter, our cost reductions, including moving the printing of our Belleville, Illinois newspaper to our Kansas City printing facility and a series of savings initiatives that began in September will largely impact our results in the fourth quarter.

The continuous funding of our digital transformation through cost savings is certainly a factor in our operating cost this past quarter. While we feel that these investments are important, we are also striving to generate cash flows and manage expenses to our decline in revenue. This is tougher in some quarters compared to others, especially in the third and fourth quarter when we are rolling over expense savings from last year that were down more than 9% compared to 2016.

In conclusion, this third quarter was a challenging quarter due to some short-term headwinds as unbudgeted at the start of the year newsprint cares and softness in such areas as well as the retail balanced by continuing momentum in our digital transformation, including digital-only advertising success and digital-only subscription gains paced by new product innovation exemplified by SportsPass. We are focused on returning value to all our stakeholders, while pursing our mission of muscular independent local journalism. We are focused on providing essential local news and information with national relevance that is more important than ever in our industry and to our long-term business strategies.

Now, I will turn the call over to Elaine to discuss our financial results for the quarter.

Elaine Lintecum

Okay. Thanks, Craig. I will briefly recap our refinancing, but since we dealt with it at length on our last call, I'll only cover the highlights and ask anyone with questions to call Stephanie or me, and we can go into as much depth as you would like.

On July 16, we issued 310 million of 9% senior secured notes due on 2026, and we entered into junior lien term loans with Chatham and its affiliates. The proceeds from these debt instruments allowed us to complete a full redemption of the remaining 22 notes that were outstanding. We also entered into a $65 million ABL revolver facility with Wells Fargo. As of the end of this quarter, we had $45 million of un-drawn availability under our revolver and 750.4 million of principal debt outstanding.

In September, we sold the remaining interest in our [indiscernible] investment for $5.3 million. To-date we repurchased that same amount of 2026 senior secured notes. So, after the repurchase our principal debt outstanding is 745 million with roughly 305 million in first-lien debt. As of the end of the third quarter, our first-lien leverage and total lien ratios were 2.3 times [technical difficulty] and 5.6 times our trailing 12-month EBITDA respectively.

Now I will move to our third quarter results. We reported net income of $7 million and an adjusted net loss of 23.8 million. Our adjusted EBITDA during the quarter was $90 million. Total revenues were down 10.1% compared to the same period a year ago in line with our first quarter and the first-half of 2018.

Advertising revenues in the third quarter were down 17.5% compared to the same quarter last year. The third and first quarters are typically our softest quarters for ad revenues, and this quarter our declines were similar to our first quarter results. However, we do expect advertising trends will improve in the fourth quarter, which of course is always our most significant quarter for advertising revenues.

Our revenue from sources other than print, newspaper, advertising reached just under 82% this quarter as we continually demonstrate each quarter how digital is becoming increasingly more important in our strategy. Our direct marketing business, which is mainly made up of preprints and niche products such as magazines, declined 23.6% when compared to the same period last year. This category is impacted by the same retail headwinds that we have discussed earlier.

Audience revenues decreased 3.6% in the quarter, which is an important of two percentage points from the first-half of 2018. We saw our strongest growth in 2018, and our digital-only subscribers as Craig mentioned, they reached 137,000, growth of 47.6%. While the sequential trend in audience has improved, print circulation attrition has not slowed to the point where our print losses are fully offset by our digital products.

We continue to be efficient in our operations and focus on cost controls, but here are some comparisons in the quarters, as you know, we have continuously sold off excess property plant and equipment as we have become a more digital company, including real property. In the third quarter of 2017, we had $5.6 million of gains on real estate sales, which reduced operating expenses. While we continue to sell excess facilities, in 2018, some of our excess real property sales were lumped into the first-half and others are expected to close later in the year.

So when adjusting the third quarter 2017 operating costs for these timing differences, we saw savings a 3.4% in cash expenses compared to the third quarter of 2017. We have also continued to reinvest in our digital infrastructure in sale side of the business. If you consider the $4.1 million in increased investments running through our cash expenses this quarter, base expense savings would have been 5.7%. I point these issues out to reinforce our ability and commitment to continue to optimize our business as we also invest for long-term growth.

And finally, as Craig mentioned, we launched a number of saving efforts in the third quarter of 2018 that will have a greater impact on expenses in the fourth quarter.

Now before I turn the call over to Mark, I'll take care of one housekeeping item. Our capital expenditures were $3.4 million in the third quarter and $9.3 million for the first nine months of 2018. And while we don't have an update on pension obligation since last quarter, we continue to believe our obligations are following as the 10-year Treasury rates move up compared to December 2017.

Mark will now provide more in depth and more in-depth update on our operations.

Mark Zieman

Thank you, Elaine, and hello again, everyone. I'll start with a look at advertising results. Digital-only advertising grew 8.9% in Q3 with total digital advertising up 1.4% and now contributing 45% of our total advertising revenue. As Craig mentioned, in the third quarter, we reached a point when both our total digital advertising and our Digital-only advertising revenues exceeded our print newspaper advertising revenues. And that's the first for us and while it's true that one factor in that equation is continuing printer clients, it's also true that we have continually and consistently growing Digital-only ad revenue every quarter since we first began tracking it about 8 years ago.

Within digital, we continue to see strong growth in our digital agency accelerate. This quarter now marks two years since our launch in those two years, the agency assigned multiple seven figure deals, stood up an auto vertical launched teams outside our newspaper markets and is now a solid contributor for us in both revenue and cash flow. In fact, it's poised to contribute more than 20 million in digital revenues to the company this year.

A big revenue driver for accelerated digital services such as search marketing, which grew 37% in the quarter versus last year and reputation management where revenue more than tripled. We also continue to see strong growth in video.

During the third quarter our video views reached 154 million across all sides and social platforms. Our growth of 47% compared to the same time last year; our best performance ever. Video revenues grew 47% in Q3 as well. In fact, as of the end of the third quarter, we have already exceeded the total video views across our platforms that we reported for all of last year and revenue has grown 52.2% year-to-date.

We saw both retail and national digital revenue softened in Q3 and together that compressed our total Digital-only growth into the high single-digits last quarter, versus the 20% run rate we posted in the first-half. Retail Digital-only revenues were flat in Q3 compared to single-digit growth in the first-half driven by Q3, seasonality and continued pressure on legacy retailers from pure play digital disruptors and national Digital-only revenues grew in the mid-single digits after posting strong double-digit growth earlier in the year. This was due in part to programmatic revenues, which slowed a bit in the quarter due to rolling over the launch of header bidding in Q3 of last year. And we also were fighting our strongest quarter last year for page views as a result of Hurricane Irma.

Nevertheless, our growth in national digital revenue was still enough to overcome our print declines and result in total national revenue growth for the third straight quarter. Our best performance in this category in several years in audience our third quarter revenues were down 3.6%, which as Elaine mentioned was a sequential improvement of two percentage points over the second quarter.

But digitalize subscriptions are down 137,000 up 47.6% compared to the third quarter of last year and up sequentially every quarter this year.

Digital-only audience revenues grew 52.8% in third quarter, up 30 points from the second quarter, and is now growing out of a similar page to a Digital-only subscription growth as subscribers cycle off introductory rates. Our total digital audience revenues were at 4.4% versus the same period last year and reflected the client or combo print and digital home delivery subscribers.

We continue to see increased audience engagement on our digital platforms. Those improvements include our growth and video views I just mentioned times span across our network, which increased 23% in Q3 compared to the same quarter last year, and the scroll depth on all devices, which was up in the high single-digit percentage across all platforms, mobile, tablet and desktop.

Before I turn the call back to Craig, I wanted to share a brief update on October. We generally don't comment as you know, in the current quarter. But given the interest in political ad spending around last Tuesday's important election, we thought we'd make an exception just once.

We are still closing the books on October but it does appear will be our strongest month this year in advertising revenue performance and in fact, perhaps since 2014 driven in part by a very strong month in political advertising. But even without that boost, it looks to be our strongest month so far this year.

Now it's just one month, but it has given us nice momentum going into the holiday season and what has traditionally our best quarter in both revenues and cash flow. Plus, we are cycling over some favorable comparisons from last year. So for those reasons and others, we believe are advertising revenues in the second-half of 2018 will be stronger than we have reported in the first-half of the year, despite our soft Q3.

And now I'll turn the call back to Craig to discuss our outlook and take your questions.

Craig Forman

Thank you, Mark. Over the last few years, we've stressed our commitment to our digital transformation. The growth in our digital advertising revenues in our success and driving digital subscriptions or evidence that we are on the right path. I'm excited by the adoption of the digital subscriptions by our readers and the opportunities for more unique and innovative product offerings that go beyond traditional subscriptions.

As Mark mentioned, we are already seeing that October is shaping up to be our best month this year in advertising revenue performance. We also expect that in the fourth quarter, we will be facing some easier advertising revenue comparisons to the fourth quarter of 2017 and that audience revenues will trend in a similar way to the year-over-year performance of the third quarter. As a result, we expect total revenues for the second-half of 2018 to fare better than the first-half of 2018, while we expect to continue to invest in the business to further our digital transformation, a runway that our refinancing provides us eight years of opportunity. We also expect to reduce legacy costs. Operating expenses in the second-half of 2018 are expected to decline in the mid-single-digit range compared to the same period last year when excluding gains from real-estate activity.

Further, investments in the company will include investments in news and sales infrastructure, as well as in technology and products to continue to generate new advertising and subscriber revenue.

In conclusion, in the third quarter, both total digital and Digital-only advertising revenue exceeded print newspaper advertising revenue, a major milestone in our accelerated transformation to a digital enterprise. We believe this will be the case in the current quarter.

Today, with our refinancing in place, we are excited for what lies on the road ahead to create a sustainable business model for local journalism and continued progress in accelerating our digital transformation.

And with that, we are happy to take your questions.

Question-and-Answer Session

Operator

We will now begin the question and answer session. [Operator Instructions] And looks like today's first question will be from Lee Cooperman with Omega Advisors. Please go ahead.

Leon Cooperman

Thank you very much. Maybe you can make an exception like you did discussing your October results. Your stock has been kind of brutalized, it has been also to rumors about your involvement with Tribune rather than as your comment on the rumors. Can I just ask you a simple question? If you entered into a transaction, would you only do it on a basis that was a creative to the existing shareholders?

Elaine Lintecum

Thank you for that question Leon. Look, we can't comment or speculate on rumors about acquisition.

Leon Cooperman

I'm not asking to you to come into rumors. I'm asking you simple question, is the philosophy of the board of the management to enter into transaction and only would be accretive to the existing shareholders? I'm not asking you to tell me -- are you talking to them? I am not asking you to give me any forecast, I'm just asking is the attitude that we would not do something that would dilute further the existing shareholders? That's the question.

Elaine Lintecum

Yes, Leon. I was trying to complete the answer.

Leon Cooperman

Okay.

Elaine Lintecum

So I heard your question. I appreciate you are repeating it for me. I would say that we always have our shareholders in mind in everything that we do in our business and we will continue to be good towards -- for our shareholders and that has always been our goal and it will continue to be our goal and I think for all going down this line, doesn't make a lot of sense. And if you'd like to talk offline, I'd be more than happy to chat with you. But, we are just not going to speculate on anything else. And we are going to say that we always have our shareholders best interests in mind.

Craig Forman

I just add. Leon, it's Craig Forman here, that in my time on the board and then in the last year-and-a half as the CEO. I think, you've seen accelerated delivering of a company whose leverage rate as you well know from your long relationship with the company was at times much higher than it is now and the successful refinancing also reflects the board it's interested in all stakeholders as well as all equity shareholders.

Leon Cooperman

I'll accept your answer but no honesty. Simple, the question is very simple, some managements would say we won't enter into a transaction we are dilutive to existing shareholders and that's policy, you don't have such a policy, so you just have to wait for this thing to play itself out. When you are saying, you have all your shareholders in mind, I can appreciate that but let's keep in mind in fact and I realized the challenge business our stock has better lowest prices ever sold there in history, so we are not doing all that well and shareholders have been in a very, very uncertain period for quite some time as the press is repair these rumors constantly.

I'm not asking you to come on the rumors that is where I see coming very simply that we have a philosophy that we are not going to do anything that will be diluted to shareholders. I would think that anything it contemplated will be highly accretive because the synergies and these deals are enormous, but we won't beat it to death. We'll just wait for the announcement. Thank you.

Elaine Lintecum

Thank you.

Craig Forman

We appreciate your comment and we appreciate the question here.

Operator

[Operator Instructions] At this time, we will conclude today's question-and-answer session. I would like turn the conference back over to Stephanie Zarate for any closing remarks.

Stephanie Zarate

Thank you. I just like to thank you all for joining our call today, and have an excellent Friday and weekend.

Operator

The conference is now concluded. We want to thank you for attending today's presentation. At this time, you may now disconnect.