Tribune Publishing Company (NASDAQ:TPCO) Q1 2020 Earnings Conference Call June 5, 2020 8:30 AM ET
Amy Bullis - Vice President, Finance
Terry Jimenez - Chief Executive Officer
Mike Lavey - Interim Chief Financial Officer
Conference Call Participants
Doug Arthur - Huber Research
Michael Kupinski - NOBLE Capital Markets
Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 Tribune Publishing Company Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Amy Bullis, Vice President of Finance. Please go ahead, ma'am.
Thank you, and welcome to our first quarter 2020 earnings conference call. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call and our actual results could differ materially. Statements containing words such as may, believe, anticipate, expect, intent, plan, will, continue, estimate, outlook or other similar expressions are forward-looking statements.
Material differences in our actual results from those described in these forward-looking statements may result in actions taken by the company as well as from risks and uncertainties beyond the company's control. Some of these risks and uncertainties that could impact our businesses are included in documents publicly filed with the Securities and Exchange Commission including our Annual Report on Form 10-K.
I should also mention that our remarks today will include references to non-GAAP financial measures, including adjusted EBITDA, adjusted total operating expenses, adjusted net income, adjusted diluted earnings per share, adjusted EBITDA margin and net debt. And we have provided definitions and reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investor.tribpub.com.
Joining me today is Chief Executive Officer, Terry Jimenez; and Interim Chief Financial Officer, Mike Lavey.
I will now turn the call over to Chief Executive Officer, Terry Jimenez.
Well, good morning, everyone and thank you for joining today's call and for your interest in Tribune Publishing. I trust and hope you are all staying safe. I will provide a high-level perspective on our business and I will have Mike walk through our Q1 numbers.
A lot has changed in the world since our last update in my appointment as CEO. These are uncertain times that has come with a significant impact to; our communities, our people, our families, our advertising partners and our business.
The COVID-19 pandemic and the recent civil unrest are unprecedented in my lifetime. So despite these challenges, we remain optimistic about the long-term prospects for our company.
Like myself, many of us have never lived through times like this. However, our newspapers have seen it all. Our oldest title, the Capital in Annapolis, Maryland traces its roots all the way back to 1727. The Hartford Courant was founded in 1764; the Baltimore Sun in 1837; the Chicago Tribune 1847; the Virginian-Pilot 1865; Orlando Sentinel 1876; The Morning Call 1883; the Daily Press 1896; the Sun Sentinel 1910; and the Daily News 1919.
These storied brands have lived through and courageously covered everything from the American revolution through the current pandemic and civil unrest and they will continue to provide our readers meaningful journalism in the future illustrating their enduring value.
I'd like to make a special mention of the Baltimore Sun staff, which was awarded a 2020 Pulitzer Prize for local reporting related to its coverage of the Baltimore Mayor who had a lucrative undisclosed financial relationship with the public hospital system she helped oversee. We are extremely proud of the change brought about by that coverage and humbled by the recognition.
We are also proud of the award we received from the International News Media Alliance in the category of Best New Initiative to Enhance Corporate Culture. And we are honored by the recognition of our 1847 -- Studio 1847 agency received at the 2020 Telly Awards. Our team's creativity and effort is all appropriately recognized by these awards.
In my first four months as CEO, our strong leadership team and the organization has responded with resiliency, speed and urgency to all the challenges that we have faced and have helped to accelerate our digital transformation.
I'd now like to touch on our approach to navigating the pandemic. Our key priority was focusing on the safety of our employees and our communities. We continue to deliver a thorough news report on the impact of the virus and its physical, mental and economic implications. In addition to providing facts and visibility, we provided perspective from frontline workers in health care and in essential businesses. I would like to thank all individuals on the frontline in essential organizations including our team for helping guiding us through this extremely challenging period.
After ensuring the safety of our employees, we quickly assessed the potential impact to our business. We had to move rapidly to successfully navigate through turbulence without a lot of visibility. The first stream focused on liquidity. We entered this pandemic with no debt and sufficient operating cash but we still focused on preserving liquidity including the following initiatives: optimizing working capital to preserve cash and build cash; reduction of CapEx; take advantage of the CARES Act, where applicable and prudent; and suspending our dividend.
The second concurrent stream focused on reducing OpEx in the following areas: outside services; occupancy expenses; reconfiguring production schedules in order to streamline our workflow and reduce expenses; we halted or significantly reduced all discretionary spending; and we also made the difficult decision to reduce compensation through targeted staff reductions, pay reductions and furloughs, which are action similar to what other media companies have deployed.
Our third stream focused on the digital opportunity. Our traffic per comScore in March had 69 million users coming to our digital sites, which was up 48% year-over-year. We did open up paywalls for key stories vital to the public's health. We grew our digital-only subscribers by 36,000 in Q1 from the end of 2019 and we anticipate that we will significantly pass that level of growth in Q2 of this year.
While we froze most discretionary spending in capital projects, we continue to make enhancements to our customer experience along with sophisticated marketing capabilities to further drive customer growth. Areas of investment were in, the digital-only subscriber experience, the mobile platforms and experience, site speed, recommender tools and heavy use of data and analytics to make informed product and marketing decisions to optimize our growth. Our journalism was highly sought after during this phase, as consumers sought out credible and reliable information.
Additionally our BestReviews business had a terrific quarter with revenue growth of nearly 50% year-over-year and continues to grow profitability significantly. We are very excited about the growth and prospects of this business. We believe the value of this business has grown significantly since we became 60% owners, a little over two years ago.
Finally, we made concerted efforts to help the businesses in our communities recover from the negative business impact they've suffered as a result of the virus. We look forward to helping our advertising partners emerge out of COVID-19 and the civil unrest stronger than ever.
We support the businesses in our communities and we are looking forward to helping them open their doors, as the economy begins moving in a positive direction again. We believe we have positioned ourselves to weather through the storm and we are confident in our titles and company succeeding as our nation and communities get to a better place.
Our unrestricted cash position of nearly [$50] [ph] million, along with our expectation to continue to generate positive cash in this year is a testament to the strength of our business and the ability to endure the most challenging of times.
With that I would like to turn the call over to Mike to speak to some of the specifics on our financial performance.
Thank you, Terry. The first quarter of 2020 was a pivotal quarter for the company. As a result of the pandemic, we did an assessment of our goodwill, intangible and long-lived assets. This assessment resulted in a $51 million non-cash impairment charge, which significantly impacted our GAAP earnings.
Now I'll speak to our financial results for the first quarter. As a reminder, for all of 2020, there will be no same business comparisons necessary, as we've cycled all of our prior year acquisitions. For first quarter 2020, revenue declined $28 million or 11.5% on a year-over-year basis. $5.4 million or 2.2% of the decline from the prior year is associated with the reduction in transition services provided to the California properties, as we complete that agreement in the next month.
Accordingly, core revenue declines excluding the TSA were 9.5% on a year-over-year basis, which is comparable with the fourth quarter of 2019. We also – also included in the current period decline is $1.7 million related to Cars.com. We'll see the impact of the Cars.com, driving down our digital revenue comparisons for the next four quarters, as we've concluded that agreement in the first quarter of 2020.
Regarding operating expenses, we continue to focus on managing expenses in the face of the pandemic and industry-wide revenue headwinds with total operating expenses excluding the non-cash impairment charges, down $24.4 million or 9.7% in the first quarter of 2020 versus the same quarter last year. Included in the current year operating expenses $16.9 million of severance expense, which increased $9.5 million year-over-year, primarily related to the voluntary severance program we executed in the first quarter of 2020.
For the quarter, we reported a net loss of $44 million compared to a net loss in the prior year of $4.7 million, driven largely by the $51 million of impairment charges. Net loss attributable to Tribune shareholders in Q1 of 2020 was $1.26 per share compared to a net loss of $0.13 per share in 2019.
Adjusted EBITDA totaled $13.3 million compared to $21.3 million in the prior year period. Despite softness of revenue related to the pandemic, we were able to offset revenue clients specific to the pandemic with expense reductions thus delivering above our previously guided adjusted EBITDA for Q1 2020.
Let me speak for a moment about the impairment charge. The COVID-19 pandemic impact on economy and our company in particular is considered a triggering event for assessment of impairment of goodwill, other intangibles including mastheads and long-lived assets. The impairment charge related to COVID-19 totaled approximately $42.9 million.
Additionally, actions we've taken to reduce our real estate footprint in Chicago and Los Angeles resulted in impairment of lease right-of-use assets and leasehold improvements totaling $7 million. In total, roughly half of the overall impairment charge was related to leases which the company is actively negotiating to terminate or restructure.
Turning to the balance sheet and cash flow. We ended the quarter with $86.1 million of cash of which $48.8 million was unrestricted and $37.3 million is restricted. As previously disclosed and Terry mentioned, the Board subsequently suspended the quarterly shareholder dividend payment program in May.
We are very actively managing our cash balances on several fronts including by extending terms, negotiating with vendors and landlords for more favorable terms, utilizing the CARES Act to defer remitting of the employer portion of Social Security taxes and assessing deferral of contributions due under the company-sponsored pension plan. We are closely monitoring proposed legislation for any additional items which may impact the company.
During the quarter, CapEx totaled $3.5 million, but was offset by $9 million in proceeds from the sale of our Virginian-Pilot office building. But cash from operations declined $7.5 million for the quarter versus the prior year, primarily due to lower collections on receivables. You may have noticed that there was no disclosure of segments in the earnings release.
In the first quarter of 2020, the company realigned its operations combining its print and digital operations of its media groups together. The desegregation of the digital business triggered an evaluation of the company's operating and reportable segments and we've determined the financial statements should reflect one reportable segment. Prior periods have been restated to reflect the change in reportable segments.
With respect to guidance in light of the uncertainties related to the COVID-19 pandemic, the company is not providing full year 2020 guidance at this time, but we do believe the company will be cash flow positive for the year. For the second quarter of 2020, the company expects total revenues of $172 million to $175 million and adjusted EBITDA of $10.5 million to $12 million.
In closing, the pandemic has provided a boost to our transformation to a digital company as demonstrated by the growth we experienced in digital-only subscribers in Q1 and on into Q2 of 2020. However, in order to sustain ourselves in the long run, we must position the company as a smaller more nimble operation. Accordingly, we have taken and are taking steps to reduce our cost base in many areas including reducing our fixed cost infrastructure, such as the recently announced transition of printing of the Virginian-Pilot from our plant to an outside printer; reducing our real estate footprint by ending or restructuring leases and monetizing our owned properties; reducing compensation by flattening our management organization; reducing headcount; eliminating incentive and discretionary bonuses; and implementing pay reductions and furloughs. Many of these changes were introduced late in the first quarter thereafter, so we have not yet seen the full benefit of these and many other profitability actions we have taken.
Certainly these decisions were very difficult, particularly the plant closure and the compensation-related items as they directly impact the livelihood of our team members.
However, all the expense actions we have taken are necessary, to ensure both the short- and long-term ability of the company to achieve its mission. And produce meaningful journalism.
And now we will open up to questions.
Thank you. [Operator Instructions] Our first question comes from Doug Arthur of Huber Research. Your line is now open.
Yeah. Thanks. Can you hear me?
Yeah. I'm wondering if you can give a little bit more color around the second quarter revenue guide, in terms of underlying print advertising circulation. And some of the moving parts in digital advertising. I mean, I think, I had advertising down 48%, in the M segment I guess, may it rest in peace. And I was coming out overall with a revenue figure, a look quite a bit higher than one -- the guidance you've given. So I'm wondering if you can just give some color on that. Thank you.
Sure. Yeah on the print advertising side, our number is probably going to be a few points higher than that. That's where we were pacing in April and May. And preliminarily, that's what we're looking like for June. So we're a couple of points, higher decline there.
And then on the digital advertising side, we also obviously have seen declines given -- while our traffic is up significantly the rates for programmatic are down considerably. And then the direct sales that we have from our teams are also down, just given what's happening with our advertisers' businesses.
And then we also have Doug, as we've talked about the Cars.com agreement which we had rolling through the first quarter of this year. Come Q2, that will be gone on a year-over-year basis altogether. So that's...
That's about $3.3 million -- $3.2 million, in Q2.
Okay, okay. See, because I was assuming, digital advertising. Now we've seen a lot of guidance, in the sector on digital. I had you guys down 35%. It sounds like, that's not severe enough, in digital advertising.
Yeah. So, we won't guide specifically to digital. But yeah, I think overall print is probably a little bit worse. And I think mathematically, yeah digital would imply to be a little bit worse as well.
And then you called out the growth of digital circulation subs and revenues. What's going on in the print side of circulation?
So there we are seeing declines. So there's, the two components of print circulation. So, the home delivery subscription we had see our customers as they're sheltered in place still hold on to the paper and engage with the paper. So in terms of the number of call ins for cancellations versus trend, that had slowed down, especially during the first part of the shelter-in-place provisions.
What we had on the flip side of that, is we weren't able to kind of have a strong marketing campaign, new pressured starts as we call them to bring new subscribers in. So we saw a little bit of a slippage in print subscribers not significant, but a little bit of a slippage.
And then, on the newspapers that are sold, in newsstands and retail outlets, given most of those locations were closed down, especially in heavy transit and high foot traffic areas, we saw some negative impact to that. That was partially offset. We did see sales at grocery stores and drugstores, definitely outperformed what it had been trending.
So it partially offset some of the bigger drops there. So I think on balance, it's a decline. The home delivery is a little bit slightly worse than trend. And then single copy was definitely worse than what we have been trending.
All right. And then just finally, I sort of missed what you said on the TSA with the LA Times. Is that 100% wound down now, or is that fading out in Q2? I'm not clear on that.
Fading out in Q2.
Okay. Okay, great. Thank you.
And our next question comes from Michael Kupinski of NOBLE Capital Market. Your line is now open.
Thank you. I was wondering, if you can talk a little bit about the compensation cost savings that you said that was mostly implemented in the first quarter. I was wondering, if you can quantify that as we go into the second quarter and maybe for the balance of the year?
Sure. Yeah. We took a number of actions at the beginning of the year before the pandemic. So in January, we had announced the voluntary program and then become – coming in the beginning of February, we were realizing those savings. We had also – with the change in leadership at the company, we also had reduced the size of the executive team as well. And so that was kind of mid-quarter, first quarter happened all before the pandemic.
And then as the pandemic came into play, we started making more changes throughout Q2. So I think what you'd see is, the decline year-over-year in adjusted expenses for comp in Q1. We'll see an improvement in Q2. But I won't guide you to a specific number there Mike.
I got you. I'm just trying to kind of quantify, because your guidance for Q2 adjusted EBITDA is a little bit better than what I was looking for. And I was just trying to understand that – the magnitude of those savings, if it was from the compensation cost savings, or maybe if you can talk a little bit about the newsprint. I would imagine with the circulation declines the print circulation declines you're getting something there. I was wondering, if you have – can talk outside of volume. Are you seeing a little pricing there as well?
Yeah. So, on the newsprint side, we've seen the volume decline both in number of copies. And without sports taking place the amount of sports pages that our papers print are also fewer. So we've got fewer pages and fewer copies. So that's helping on the volume – help reducing the cost, because of the volume drops there. And then on the pricing, we are seeing prices ease up quite a bit. And so we are seeing a benefit year-over-year for price decline, which is also helping us navigate through these tough times.
And I'm just kind of going back to the expenses again. How much of the expense savings in the second quarter are related to what you would consider to be permanent expense savings versus temporary? I mean, certainly some of the actions that you've had in the quarter related to maybe lack of sports the reformatting of papers, your vendor agreements, the types of things may not be considered to be permanent expenses especially if sports comes back you may have to do some of that. So, can you just kind of give us a sense of, what you consider to be permanent versus temporary?
So I'd say, while we're – there's going to be some temporary expense reductions, we're continuing to make sure that we're driving out as Mike had referred to our fixed cost of the business. So we've just announced in Q3, we'll transition instead of printing in-house in Virginia we'll outsource that to another provider. So we'll see some layer of savings come through in Q3. So as some of the temporary actions essentially bounce back to normal, we're going to continue to make sure that we're focused on reducing the cost structure in line with where revenue trends will be in the future.
So I think, I won't size the temporary, but what I would say is you won't see a significant bounce back in expenses as those temporary actions come back in, because we're going to take other actions to help reduce the expense side of the business, and shaping the expenses in line with where revenue is.
Got you. And then in terms of BestReviews you highlighted the fact that, it was growing so rapidly obviously benefiting maybe from the shelter-in-place actions and so forth. Was wondering as we kind of see the economy opening up whether or not you're still seeing similar trends. Or can you kind of give us some sense of how that is performing?
Yeah. So that is a business that's tethered to e-commerce. And so as shelter-in-place provisions came in, while grocery stores and drugstores were open, and we're seeing some level of traffic, I think those that typically would like to go to stores had really kind of changed their behaviors during this pandemic to buy more online. And so with more buying online our BestReviews business, which is a support of e-commerce, has saw a significant benefit of that. And I think the big question is, for those customers that would normally go to physical store that their behaviors had to change, because of the pandemic will they forever be changed at some level.
And so I think, we'll see some ongoing benefit from e-commerce. Just generally speaking, obviously it was growing tremendously before the pandemic, but it just kicked up a huge notch during the pandemic. And so I foresee e-commerce being a really good growth story generally. And then for our business BestReviews being tethered to that we'll see significant growth for that future as well.
Got you. And obviously, there's some – a lot of newspapers that are struggling right now not in the best financial position as you are, but can you just talk about the M&A activity, your appetite to make acquisitions, or is it just kind of like kind of bunker down at this point and just kind of manage through this crisis? And what are your thoughts whether or not to be opportunistic at this point?
Yeah. I think on one hand from where the business has said that, we would like to acquire – look to acquire generally speaking, the valuations are at pretty affordable prices – or very affordable prices. So I think that's interesting to us. I think the flip side of that is while we're getting a little bit more clarity about the future there's still a level of fogginess that, I just don't think, it'd be prudent to go out and start buying up a bunch of things until we really have a better sense of what the future could mean.
And I think while we're very optimistic about the businesses that we own, any time you buy something new, there's a number of other unknowns there that we just don't want to have factored in. And for us, I think the other element that comes into M&A is there's a great deal of focus and energy that goes to integration, implementation and transition from one company into another, and that distraction is probably not time that we can afford as we need to focus on our core assets at this time.
Great. Thanks for that question. Appreciate it.
Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Terry Jimenez for any closing remarks.
Well, we – as I had mentioned throughout the call and in the question period, we continue to manage our cost effectively as we transform to a digitally focused company, but we're still making investments in the company. We recognize the impact that both the pandemic and the civil unrest have had on our employees, our customers and our communities and we are eager to be part of the solution for all those impacted.
Thank you for your interest in Tribune Publishing. Stay safe and be well.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.