New Media Investment Group, Inc. (NYSE:NEWM) Q4 2018 Earnings Conference Call February 27, 2019 9:00 AM ET
Ashley Higgins - IR
Michael Reed - CEO, President & Director
Gregory Freiberg - CFO & CAO
Conference Call Participants
Jason Bazinet - Citigroup
Howard Brous - Wellington Shields
Good morning, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Media fourth quarter earnings call. [Operator Instructions].
And with that, I would now like to turn the call over to Ashley Higgins, Investor Relations. Please go ahead.
Great. Thank you, Julie, and good morning, everyone. I'd like to welcome you to New Media's Fourth Quarter and Full Year 2018 Earnings Call. Joining us today are Mike Reed, New Media's CEO and President; Greg Freiberg, our CFO; Kirk Davis, COO of New Media; and Pete Cannone, CEO of UpCurve.
I would like to call your attention to the earnings supplement that was posted to New Media's website this morning. If you have not already done so, I would suggest that you download it now.
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 their 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.
In addition, we will be discussing some non-GAAP financial measures during the call today and the reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement.
Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or 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 rebroadcasted without our consent. With that, I'd like to turn the call over to Mike.
Thank you, Ashley. Good morning, everyone. Thanks for joining New Media's Fourth Quarter and Full Year 2018 Earnings Call. Before I jump into our performance, I'd like to address the announcement in our press release this morning that, after 5 years with the company, Greg Freiberg, our CFO has decided that he would like to pursue other opportunities. Greg has been a fantastic partner to me since our spin in 2014. Together, along with a strong team here in New Media, we have executed over $1 billion of acquisitions during that time frame. Greg has built a really strong finance team, and we are extremely confident they will continue the excellence of our finance function. While tomorrow will be his last day as CFO for New Media, he will continue to assist with the transition to his successor, a search of which has been begun. Greg will address this a bit more later in the call, but I wanted to make sure I kicked off today's remarks reassuring our investors that this transition will be a smooth one. And that we wish nothing but the best for Greg in the future.
Moving on to our results. We made significant progress in 2018 against our stated strategy to create organic revenue growth, to drive inorganic growth through accretive acquisitions and to return a significant portion of our free cash flow to shareholders through a dividend.
Our organic same-store revenue trend improved 60 basis points in 2018 over 2017. In 2018, we decreased 5.3% adjusting for the impact of ASC Topic 606. And that was definitely in the right direction from a decline of nearly 6% in 2017. This was driven by a continued diversification of our revenue away from traditional print advertising. Print advertising made up only 41% of total revenue in 2018 and that compares to 48% just 2 years ago in 2016. The major drivers for this shift were our fast-growing, newer businesses, UpCurve, GateHouse Live and Promotions. You've heard us talk a lot about these on our previous calls. Each of those businesses had revenue growth of over 30% in 2018, and we closed the year with combined revenue of $141.5 million across these new businesses. They have now grown into a meaningful revenue stream for us, and we believe we will continue to see similar growth going forward from them. Importantly, all of these new businesses are also cash flow positive with margin-expansion opportunity ahead.
We are very upbeat about 2019 and expect to continue with the trend of improvement in organic same-store revenue. During 2018, we completed 10 acquisitions for an aggregate of $191.4 million in purchase price, which included our first investment in the Event space through our purchase of a majority interest in Rugged Events.
Since New Media's inception, we have completed just shy of $1.1 billion in acquisitions. With our local media purchases made at an average of 4.1x, the sellers LTM as adjusted EBITDA. In 2018, we were also pleased that both EBITDA and free cash flow increased over the prior year. We have many good cost restructuring opportunities underway, and we are very upbeat about EBITDA and free cash flow growth again in 2019. As a result of this, the board raised our dividend in Q3 this past year marking the fifth consecutive year with an increase. And bringing our annualized dividend to $1.52 per share, up 41% percent since inception.
Turning for a moment to the fourth quarter, I am pleased with New Media's financial performance during the quarter considering the increased headwinds we faced in traditional print advertising, and the natural disasters impacting several of our Southeastern operations. Our revenue increased 5.5% on a reported basis and decreased 6% on an organic same-store basis, adjusting for the $2.3 million impact from the Hurricanes.
The biggest driver for the weaker revenue performance was print advertising, which declined 15% to the prior year. A modest decline from the 12% to 14% range that we saw during the first 3 quarters of 2018. And as everyone on the call knows, retail sales continue to migrate away from brick-and-mortar stores to online retailers and that forces them to contract their advertising spend, and we saw that in the fourth quarter. Also impacting us in the fourth quarter, as we saw several high-profile bankruptcies among retailers during the quarter, which dampened preprint revenues.
While we can't control the pressures in the retail sector, we can hold ourselves highly accountable for how our growth initiatives are performing. And we were very pleased with the performances, I just mentioned of UpCurve, GateHouse Live and Promotions and Commercial Printing in the fourth quarter. In the quarter, GateHouse Live revenue increased 37.3%, as we hosted over 100 community events in the quarter inclusive of 13 races through Rugged Events. The fourth quarter is a quieter quarter for endurance races given the colder weather in many of our markets. So we are very excited to see more impact of -- more of the impact of the Rugged Events acquisition in 2019 as we turn to spring. UpCurve revenue in the quarter grew 37.5%, adjusting for the impact of ASC Topic 606. ThriveHive increased 33.7% and UpCurve Cloud increased 57.5%.
We also had some very exciting announcements recently as well. ThriveHive has entered into a digital partnership with the Las Vegas Motor Speedway, which includes the renaming of the Speedway Media center as the ThriveHive Digital Center. The facility is one of the most impressive media centers in all of professional sports, and it is the nerve center of the Las Vegas Motor Speedway's Race Week operations. Housing hundreds of credential media during its national
[Technical Difficulty] the track also hosts over 1400 events per year, which equates to over 200 days that ThriveHive is going to be in front of major corporations with its products. It's going to be a great sales channel for us.
UpCurve also launched a pilot program with Comcast, bringing their 1 million SMB customers to ThriveHive suite of marketing guidance tools and services. We have many projects like that underway at UpCurve and are very excited about this continued strong growth we're going to see in 2019.
Promotions revenue grew 8.8% in the fourth quarter and 49% for the full year. Though Q4 was our smallest growth quarter of the year due to some natural seasonality for our events, we expect continued strong growth in 2019, much like we saw for the full year of 2018. As we continue to expand our existing events, and launch new events across the country.
And lastly, Commercial Print was up 1.5% on an organic same-store basis, as we continue to win new third-party printing contracts. With a robust pipeline for new printing work, we anticipate continued growth in 2019, as we further optimize our printing facilities to capacity.
In the consumer marketing business, we did experience a more challenged quarter for revenue, however, this was largely anticipated due to the investments we've been making into consumer marketing this year. And we've talked about those on previous calls. We created a centralized consumer agency with dedicated talent who are investing into customer acquisition, customer experience and retentions. This refocuses our efforts on driving volumes instead of relying on pricing to build our circulation revenue. We believe this will position us for long-term sustained growth of both paid subscribers volumes and revenue for the category leading to a healthier and more stable business over the long term. For each of the past 20 weeks, we've increased our paid circulation volumes by over 1000 subscribers. This is a drastic change from the last decade of volume trend declines. We are so excited to see our new strategy starting to gain traction.
Our same-store digital subscription growth in the quarter was up 35%, bringing our digital-only subscriber count to 145,000 at the end of 2018. It would not be possible to execute on all these new business growth initiatives if it weren't for our strong local media brands, and our award-winning journalists. This serves as the foundation for our company in our respective communities. We recently had 3 markets: Columbus Ohio; Cape Cod; and Wilmington, North Carolina, named to the 2019 Editor & Publisher List of the 10 Newspapers That Do It Right. This was the sixth consecutive year that at least one of our newspapers made that list.
We also just found out last night that GateHouse Live, our Events business, won the Innovator of the Year Award at the Mega Conference, which is the major annual newspaper industry conference going on in Las Vegas right now. This award identifies and rewards those companies that are successfully transitioning their businesses to take advantage of the emerging trends in media and marketing. It would have been exciting enough just to win it, but we actually had 2 of the 3 finalists for the award. GateHouse live, and our Austin 360 studio sessions, the Austin statements live video concert series. It is always a huge honor to see our businesses, and our employees celebrated by awards like these. And it reinforces our focus on creating topline organic revenue growth, so that we can innovate and also do great local journalism for our communities for many years to come.
We also added to our local media market footprint in the fourth quarter, closing two acquisitions with total purchase price of $47.5 million. The Oklahoman, a daily newspaper in Oklahoma City, and Progressive Business Media, the leading B2B marketing solutions provider to home-furnishing companies, gift companies and interior designs. A great fit within our BridgeTower, B2B publication business.
Subsequent to the quarter, we closed the acquisition of the publishing arm of Schurz Communications for $30 million. We are very excited about all 3 of these businesses becoming a part of our portfolio, and we see expansion opportunities for UpCurve and GateHouse Live in these new markets. Our board approved, and we announced this morning a Q4 dividend of $0.38 per share. This brings our 2018 dividends to $1.49, and our cumulative dividends paid since inception to $6.46. While the fourth quarter of 2018 was a bit challenging on the surface, when you consider the impact of the natural disasters, the temporary impact of circulation revenue trends driven by our change in strategy and a very large commercial print job we cycled in the quarter, our performance was actually quite good. We continue to execute well on our organic revenue growth strategy. We continue to reduce and reallocate cost to both improve cash flow and invest in growth, and we continue to find highly accretive acquisitions. I remain confident about the future for New Media, and our ability to create outside -- create outsized returns for our shareholders. With that, Greg, I'll hand it to you to discuss our financial results for the fourth quarter and the year.
Thank you, Mike. And good morning, everyone. I want to start by thanking Mike and Fortress for the trust and confidence they've placed in me as CFO. New Media has been my work, my team and my purpose for the last 5 years. Mike and Kirk's leadership and insight in defining a new business model to underpin the critical service that community newspapers provide is inspiring. I believe in it and that these changes are great for New Media and the communities we serve. I'm grateful, I had the opportunity to help define this structure and strategy. I am very proud of the outstanding team we have built, and the strong momentum this team has created towards returning our business to organic growth. I will continue to root hard for this team every day.
I'll now be speaking to Page 14 of the supplement. Before I begin, I want to remind you that we adopted the ASC Topic 606 revenue from contracts with customers in 2018. This standard impacted the revenue treatment of certain UpCurve Cloud services to net versus previously being at gross.
The prior year results do not reflect this adoption thus a comparison is not on an apples-to-apples basis. So when we speak about excluding the impact of ASC 606 that gives a representation of the results to the prior year on the same basis. This change affects UpCurve Cloud, UpCurve and Digital. Thankfully, this is the last quarter we have to explain ASC 606, as we cycle the implementation following this quarter.
We delivered total revenues of $416 million in the quarter compared to $394.4 million in the same period last year, up 5.5% on a reported basis and down 6.6% on an organic same-store basis, excluding the impact of ASC 606.
Adjusting for the impact of hurricanes, we were down 6% and Mike covered earlier some items within the quarter that impacted our same-store trend. The full year 2018 organic same-store performance is minus 5.3%, a 60 bps improvement over 2017. We expect further improvement in this trend in 2019. Within the quarter, traditional print revenues were $172.3 million and decreased 15% on an organic same-store basis. Within this category, preprints were down 17.8%, Classified Print was down 14.2% and Local Print Advertising was down 13.7%, all on an organic same-store basis. Digital increased 16.4% to $48.4 million. UpCurve is our largest components of the digital and generated $26.9 million in the quarter, up 37.5% to the prior year, excluding the impact of ASC 606. Circulation, which comprises over 37% of New Media's total revenues was $154.5 million, down 3.3% to the prior year on an organic same-store basis.
Turning to Commercial Print, Distribution, Events and other. Revenue in the quarter was $40.8 million, up 1.7% on an organic same-store basis. GateHouse Live and third-party commercial printing wins contributed to this growth. Overall, we're pleased with our revenue performance in the quarter. One important category that gives us encouragement regarding future revenue trend improvement is that circulation revenue continues to become a larger portion of our revenue pie and it will soon surpass all of traditional print advertising. This is an important milestone in our drive to return the topline back to positive growth.
As adjusted EBITDA was $56.4 million. Free cash flow was $42.7 million. As a reminder, revenue, as adjusted EBITDA and free cash flow were all negatively impacted by $2.3 million in the quarter due to Hurricane Florence. We had net income of $13.3 million in the quarter and operating income of $25.2 million. We ended the quarter with $48.7 million of cash on the balance sheet and $39.5 million of available undrawn revolver. Debt outstanding at the end of the quarter was $445.3 million, at an average blended rate of 8.48%. Net leverage against our LTM as adjusted EBITDA is 2.2x.
On Page 15 of the supplement, I've illustrated here the very valuable tax assets that New Media has available to shield future cash flows. We have total tax basis of approximately $1 billion, which generates about $130 million of annual shielding of taxable income. Beyond this, we have $262 million of net operating losses with $203 million comprising unrestricted NOLs. Putting it all together, this is a very important asset when you consider we can shield our strong and consistent cash flow from taxes for many years to come.
We continue to find and execute on highly accretive acquisitions, and we continue to execute on initiatives that are improving our topline performance. We have net leverage just above our target of 2.0x. We continue to generate significant cash flow. We have significant liquidity and debt capacity available to continue executing on our highly accretive transactions.
Operator, we'd like to open up the call for questions.
[Operator Instructions]. Your first question comes from Jason Bazinet with Citi.
Just got quick question. In your release, you talked about the date that the quarter ended. And I noticed that 2018 ended on December 30 versus last year December 31. Is there any sort of favorable adjustment that we need to make to account for one less day in the quarter or did both, last year's quarter and this year's quarter, actually have the same number of operating days?
So Jason, this is Greg. It has the same number of days because we follow that 5-4-4 but the prior year did have a 53rd week because every 7 years, in the 5-year -- 5-4-4, you're going to have a 53rd week. When we report that OSS number, we actually account for that and give you back an OSS performance on an apples-to-apples basis.
[Operator Instructions]. We have no -- sorry, we do have another question from Howard Brous with Wellington Shields.
The 10-K will be out tonight?
So Greg, what's stuck in my mind was allowance for doubtful accounts was up a couple of million dollars year-over-year. Can you -- how do you account for that? My question.
The bankruptcies you saw with Toys "R" Us, Sears and ShopKo, all those bankruptcies forced us to reserve at the end of the year for the amounts they owed us.
I assumed that was it. A year or so ago you announced a stock buyback. I haven't actually looked at the numbers, but did you do any buyback during the quarter?
We did not do any buybacks in the quarter.
And the reason for that? What would be the rate of return buying stock at, say $12 a share versus making -- using that cash for acquisitions?
The rate of return at $12 a share is below the rate of return we get buying newspapers at 4x, which going in you have a 25% unlevered yield and with synergies that yield -- unlevered yield jumps above 30%. And the rate of return on buying back shares at $12 is actually below that.
So then for my edification and some of my friends, why did you announced the stock buyback at a higher price a year or so ago? And actually, put stock at higher than $12?
At the particular time we bought stock, it was the best use of capital. We have to look at our acquisition pipeline and understand whether we can deploy capital in the near term on acquisitions or whether if we can't, we have to look at other options, which includes the repayment of debt and/or stock buyback. We always tried to do what's best in the -- both the near term and the long term with regard to capital allocation. And I think we have a very balanced strategy.
All right. Let me to go to question we have talked about in the past. You've consolidated a good number of printing plans over the last couple of years. What are you doing with those assets, and have you plans to sell any over the near-term?
The printing facilities themselves, the actual presses owe me that scrap value.
I'm not talking about the press, I am talking about the real estate.
Yes. So the real estate, we look to monetize as we can. We sold about I think $10 million worth of real estate last year. And we have in the pipeline to sell this year approximately another $15 million worth of real estate.
That's right, Mike.
We have now reached the time limit available for questions. I will now turn the call back over to the presenters.
Great, thank you. As we wrap up today's call, I'll leave you with a few closing thoughts. We are very pleased with the progress we have made on our strategy in 2018. And we believe that we are well positioned entering 2019 to further execute on our plans.
We are committed to continuous revenue improvement in our core business and expect to achieve further progress on reaching the inflection point to positive growth. We will continue to enhance growth and profitability with the acquisition of quality media publications as well as digital and experiential assets. And we are committed to quality journalism in our local markets across the country.
We are very upbeat about further improvement in 2019 to our same-store revenue trend and for growth in EBITDA and free cash flow. We sincerely appreciate your interest in New Media, and we look forward to keeping you apprised of our progress on our next call. Thanks for joining this morning.
This concludes today's conference call. Thank you for your participation and you may now disconnect.