Tribune Publishing Company (TPCO) Q3 2019 Earnings Call Transcript

Tribune Publishing Company (TPCO)
Q3 2019 Earnings Call
Nov 07, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Tim Knight

Good afternoon, everyone, and thank you for joining today's call. I'm pleased with the progress Tribune Publishing made throughout the third quarter. The leadership team and I continue to focus on achieving the operational and financial objectives we outlined earlier this year to best position Tribune for our digital future, and I would like to touch on a few of those achievements. I'll start off by highlighting the continued success of our digital subscription efforts.

We ended the quarter with a total of 314,000 digital-only subscribers, up 38% over the same quarter of last year. The sustained growth of this important consumer revenue stream is a key marker in the company's ongoing digital transformation and inspires my confidence in Tribune's long-term outlook. Related, we have begun increasing our efforts around the platforms where we see the most consumer engagement, specifically our mobile app and enewspaper. These valuable tools engage readers with our brands and our journalism on a deeper level when compared to desktop and mobile web.

We believe improving both our mobile app and enewspaper experiences will increase our digital consumer engagement. As it relates to our people and our navigation of new challenges in the industry, we continue to hire top talent across Tribune Publishing. In the third quarter, we paid special attention to the areas of consumer experience, privacy and national sales, and we hired new leaders assigned with crafting our strategy in each of those categories. We also are making significant investments in our sales teams across all of our markets with state-of-the-art training programs.

While it is still early, we have seen these programs start to contribute to improved advertising revenue trends. Our world-class journalism remains at the heart of our business, and I am proud that the company made 58 full-time editorial hires in the third quarter, the most of any quarter in the last three years. Amid all of our efforts to serve and engage our audiences, a special call-out goes to our Florida properties and their coverage of Hurricane Dorian in August and September. Sun Sentinel and Orlando Sentinel journalists informed more than 10 million readers, and the reporting delivered not only on our public mission, but also drew significant traffic to our sites.

Operationally, our greatest achievement in Q3 was completing the deployment of our new content management system across all our markets. The implementation of this market-leading technology was a cross-departmental project spanning many months that required significant effort and cooperation to complete. We are very pleased with our initial results, and we expect to recognize additional benefits with our consumers and marketing partners over the next year as the platform helps accelerate our digital transformation and improves the quality of our online products. Tribune Publishing has been an independent company for five years.

And while we continue to face industrywide headwinds, I believe we are in a very strong position to be successful. Operationally, we are in a better position now than any time since we became independent, and the successes we enjoyed in the third quarter allow us to confidently take on the challenges facing the industry. With that, I'd like to turn the call over to Terry.

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

Thank you, Tim. Overall, we delivered another solid quarter with income growth, significantly higher adjusted EBITDA and a much expanded adjusted EBITDA margin. For this quarter, there are no same-business comparison necessary as we have cycled all acquisitions for the quarter. With that, I will speak to our financial highlights.

Revenue trends have been relatively stable throughout the year with third-quarter revenue down 7.7% on a year-over-year basis. 1.6% of this decline is associated with providing the California properties with fewer transition services and thereby revenue. Thus core revenue declines are 6.1% on a year-over-year basis. This is better than our same-store performance in the first two quarters of the year.

I'll add some color on each of our segments in a moment. In terms of operating expenses, we continue to focus on managing expenses in the face of industrywide revenue headwinds, with total opex down 14.7% in the third quarter of 2019 versus the same quarter last year. Turning to net income from continuing operations. As just mentioned with focused expense management, where expense reductions exceed revenue declines, we have driven to a $6.9 million net income, which is $7.5 million -- a $7.5 million positive swing in net income on a year-over-year basis.

As you will see, we have a large charge in our discontinued operations. As previously disclosed, in the third quarter, we took a reserve related to a judgment in a lawsuit brought by a former employee of The Los Angeles Times from the period when we still owned the business. We intend to fight this decision. We were successful modifying a previous negative decision to one that was more favorable, and we are optimistic we can persuade the court to reduce the jury's award based on the fact pattern of the case, which we believe does not warrant the current judgment amount.

In terms of adjusted EBITDA, we've delivered $24.8 million in the third quarter, which was an improvement of $8.1 million year over year driven by lower expenses in growth and digital subscribers and our BestReviews business, partially offset by lower advertising revenues. Restructuring and transaction expenses that we adjust out to come to adjusted EBITDA included charges of $1.7 million in the third quarter this year, which are down $9.8 million year over year. Adjusted EBITDA margins continue to considerably expand. Year-to-date, we have seen a 330-basis-point margin expansion year over year.

Now turning to the balance sheet and cash flow. For capex, we had $4.6 million in the quarter and $13.9 million year-to-date. We should end up in the neighborhood of $20 million in capex for the full-year 2019. We exited the quarter with $93.8 million in cash, of which $37.3 million was restricted and $56.5 million unrestricted.

As a reminder, we paid out $1.50 per share dividend in early July for an approximate $54 million cash outlay. We generated $8 million of cash in the quarter. Now let's take a look -- take a closer look at our segments. For the M segment, total revenue declined 9.5%, of which print advertising declined 15%.

Print advertising was approximately 30% of our total revenue in the third quarter compared to nearly 33% of total revenue in Q3 of last year. Our revenue reliance on print advertising continues to be less. Although we are relying less on advertising, we do believe we can continue to optimize our performance of advertising sales across all platforms and are making investments in training, tools and performance. Now turning to the X segment.

Total revenue was up 9.1% in the third quarter this year versus the same quarter last year. Content and e-commerce revenue were strong due to digital subscription growth, which were up 38% in volume and over 50% in revenue. And we continue to see significant growth at BestReviews as well on a year-over-year basis. We have discussed the success of digital subscription in a year-over-year basis and all the effort and focus there.

In terms of BestReviews, we continue to see strong organic growth, along with realizing revenue synergies utilizing the full asset base of Tribune Publishing. Site visits are up 50% year over year. Partially offsetting this growth was digital advertising, which was down 15.2%, which was substantially a result of lower advertising revenue from Cars.com. As a note, we should see an impact of Cars.com driving digital advertising down for the next five to six quarters as we cycle the agreement that ends Q1 2020.

Operating expense for X was up at the segment as we saw a shift in allocations for newsroom costs from the M segment, as a result, income from operations which was positive, but was down year over year. In terms of guidance, for the fourth quarter, we anticipate $250 million to $254 million in revenue. For adjusted EBITDA, we are reconfirming our previous guidance of $102 million to $106 million for the full year. When we report our full-year 2019 earnings, we will provide 2020 guidance at that time.

In closing, we continue to manage costs effectively as we transform to a digitally focused company where we are still making key investments in the company. We continue to deliver strong operating performance across all of our key metrics as we navigate this transformation journey, and we are continuing to enhance the foundation and platform for our future success. And now, we will open up the call to questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Lance Vitanza with Cowen.

Lance Vitanza -- Cowen and Company -- Analyst

Thanks, guys for taking the questions and nice job on the quarter. Could you -- Tim, maybe to start, could you talk a little bit more about positioning the company for consolidated revenue growth? And in particular, can you offer any thoughts on when you might achieve -- is that, all else equal?

Tim Knight

Lance, the last part cut out. When we achieve what?

Lance Vitanza -- Cowen and Company -- Analyst

Top line growth, consolidated top-line growth.

Tim Knight

We're continuing to look at the growth of our digital subscriptions, and we believe, as I had mentioned, that we can improve, and as Terry mentioned, improve the trends in our advertising. The investments we've made in our sales organization, while very early on, we're seeing our ability to sell multiproduct packages. We continue to look for other products that would allow us to achieve top-line revenue. As Terry alluded to, we've seen nice progress with our BestReviews business.

And as we -- I don't have a timetable yet as to when we would see the growth, but it is top of mind for us.

Lance Vitanza -- Cowen and Company -- Analyst

OK. The EBITDA performance in the meantime looked, I thought, even more impressive than the headline given a sharp reduction in restructuring add-backs. A year ago on $17 million of EBITDA, you had to add back north of $11 million to get there versus the $25 million of EBITDA this quarter, only a couple million of add-backs. That said, could you walk me through the bridge from $25 million of EBITDA in the quarter to only $8 million of free cash flow.

I guess I would have thought that free cash flow would have been a little bit better. And obviously, I'm talking about, exclusive of the dividend payment, just the $25 million to the $8 million that you called out during the call.

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

Yeah. So sure. Then in the quarter, we had capex relatively minor, about $4 million. We had, I think, some cash taxes that we had to pay.

And then the quarter itself, from a working capital point of view, we didn't see a huge upswing in, well, working capital shift that would drive a lot of cash generation in the quarter.

Lance Vitanza -- Cowen and Company -- Analyst

OK. If I could, just on the digital-only subscription front, obviously, it's a big part of the business, growing 38% year over year, as you mentioned. That's great, but it does, I think, suggest some slowing over the past few quarters, some slowing growth over the past few quarters just in terms of the year-over-year trends. Is that just to be expected as this business matures? Or do you think there are moves that you can make or other issues that could, in theory, see that growth reaccelerate?

Tim Knight

You can take the first part of his question.

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

So in terms of digital subs, so as we have a larger base, I think what we'll see is, from a percentage point of view, we'll see that percentage growth slow down as the base grows, and we think that there's a lot of opportunity for us to continue to grow that number. We've got a team that is not only just focused on the digital sub number, but also in the newsrooms, they are the ones that's driving the content to drive that number forward. And then we have a product team that's really focused on where we can make some right enhancements into, now that we've got that CMS live, how we can drive the consumer experience even more so. So we think that there is revenue opportunity as well as volume growth in digital subs there.

Lance Vitanza -- Cowen and Company -- Analyst

OK. And then maybe just last for me. As your business becomes increasingly digital-only, could you discuss the relative importance of the inserts business in terms of years past, what you're seeing today and what you expect going forward?

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

Yeah, so we won't guide specifically this number. I think when you look at the overall print revenue -- print ad revenue that we talked about, when we talked about the overall print ad revenue of 30% total revenue, that includes both the ads that are in paper as well as the inserts that go inside the paper. So it's really a subset of that 30%. I think we're doing what we can to kind of optimize that through making sure there's a lot of value-add to our clients by making those placements, and they're getting the right ROI on those investments.

And so we're focused on the team delivering what we can to clients, not just on the insert side, but also what we can bring them into the digital world as well.

Lance Vitanza -- Cowen and Company -- Analyst

OK. Thanks, guys. I appreciate the time.

Operator

Your next question comes from the line of Doug Arthur with Huber Research.

Doug Arthur -- Huber Research -- Analyst

Yeah, I guess, on print advertising, I mean, the 15% looks pretty stable relative to Q1 and Q2. It's sort of right in the middle, if I have Q2 down 14.4% and Q1 down 16.2%. So that looks like kind of a steady-state run rate for the moment. Is that fair? And that's better than some of your peers, by the way.

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

Yeah, we've been -- I think we've been outperforming our peers for the last few quarters because I think it has been, as you have highlighted, it's been within kind of a tight band this year where we've seen the declines so far this year. So we're pleased with where we're at through the first three quarters. Albeit it's down, it's nothing relative. It's better than others.

Doug Arthur -- Huber Research -- Analyst

And on print circulation, I mean, down, I think, 5.3% in the quarter. Are you -- obviously, I would assume the strategy is higher prices, lower volume.

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

Yeah, so there's -- just in terms of the kind of the two categories, you've got the home delivery subscribers as well as the single-copy outlets. We've been focusing on where it's feasible to increase rate -- increase prices on consumers, especially those that are at the lower end of the pricing schedule. We still think that there's opportunity there. I think where we've seen a little bit -- at least in the third quarter, we didn't take many new actions on the single-copy price increase.

And so we've seen really just the volume declines and really no price action in the quarter. So I think on a blended basis, you see it down 5.3%. Our home delivery number is a little bit better than that.

Doug Arthur -- Huber Research -- Analyst

And just to stay with M for a second, your newsprint number year over year is down pretty substantially. Can you sort of highlight volume versus print -- versus price?

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

Yeah, bear with me a second. As you recall, we had kind of, I'd say, close to 20-year peak pricing newsprint in the third quarter of last year. I think where we ended for this quarter, we're down about -- in terms of price, down in the kind of the mid-teens, and the volume is down closer to 20%.

Doug Arthur -- Huber Research -- Analyst

OK. And then on -- just to clarify on X advertising. I mean that's kind of been all over the place. And I think you had the CareerBuilder thing a while ago and now it's Cars.

Did you say that the impact of the Cars deal will continue for another five to six quarters? Because I thought you also said something about Q1 of 2020.

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

Yeah. So the way that the Cars agreement was structured is that we were receiving kind of revenue, advertising revenue, from them after we essentially gave them the rights to sell in the markets that we had previously had a right to do so. The revenue recognition that we received from them was on a declining basis through Q1 of 2020. And so in Q3, you see a little bit more or a significant piece of decline on digital ad revenue because of the Q3 revenue just for Cars alone in Q3 of '19 versus '18.

And then we'll see that continue to cycle through all the way until we get to kind of Q1 2021.

Doug Arthur -- Huber Research -- Analyst

OK. So if you adjust for that, I mean, what's kind of everything else doing?

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

So overall -- yeah, overall, digital advertising was still going to be down in the low single digits, excluding the Cars impact. Most of that is really driven -- we've got this tension with trying to drive digital-only subscribers, and so we're no longer in a period where we're just focused on growing total audience and page views for the hope for digital advertising. And so now we're very focused on limiting how much consumers can access, which has an impact short-term to digital advertising but gives us a boost long-term on a recurring revenue stream from the digital-only subscriber. So we're seeing that play out a little bit further -- across our properties now.

Doug Arthur -- Huber Research -- Analyst

OK. Terrific. Thank you.

Operator

[Operator instructions] Your next question comes from the line of Mike Heim with NOBLE Capital Markets.

Mike Heim -- NOBLE Capital Markets -- Analyst

Thanks, and I've been sitting for Mike Kupinski here who had to be on another call. He wanted to ask about the recent store closing, specifically talking about companies like Penneys and Bed Bath & Beyond. He just wants to know if that is significant to the overall business. And is that reflected in your fourth-quarter guidance and how it might affect 2020?

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

Yeah. So we'd look at -- historically, retail has always been a big proportion of our print advertising revenue, especially on the insert side. It's just like Lance had asked. I think, for us, we've seen kind of a -- while the closings continue to happen, I think the rate of closings, obviously, there's one-offs.

But at an overall basis, the rate of closings has been relatively stable. There hasn't been any large wholesale changes. There's been a couple of bankruptcies that we haven't had business with, so the Forever 21s of the world and others. So in terms of what we see moving forward in the fourth quarter, I think there will be a strong push for all retailers to try to maximize and sell out as much inventory as they can as they move into next year.

And so we don't think -- we don't foresee a large impact in Q4 of this year from any specific actions.

Mike Heim -- NOBLE Capital Markets -- Analyst

OK, thank you. And secondly, Mike wants to ask, as Tribune has started considering reduced publications, he points out that the other publishers have canceled Sunday business, of how an impact as business has moved toward Sunday. Is that something you guys are thinking about? And could that be a potential source of savings?

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

I think, for us, we look at really the overall profitability by day, and I think we're really in a good position across each of our markets that publish each day. And so there's really no, I'd say, near-term decisions that we need to make on reduction of days for our core products. Certainly, there are some other period -- there's other products that we have that are noncore outside of the large nameplates that we have in each of our markets. So we look at those periodically.

But I'd say, for the core products, we're really in a good position as we move into 2021 and don't foresee any of those actions in the near term.

Mike Heim -- NOBLE Capital Markets -- Analyst

OK. Thank you for your time.

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

Thank you.

Operator

At this time, there are no further questions. I would like to turn the call back over to Tim Knight.

Tim Knight

Thank you, everyone, for joining us on today's call. The third quarter was a strong one for Tribune Publishing, and we look forward to using the momentum we have built throughout the year to finish 2019 strong. Have a great day.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Tim Knight

Terry Jimenez -- Executive Vice President, Chief Financial Officer, Investor Relations

Lance Vitanza -- Cowen and Company -- Analyst

Doug Arthur -- Huber Research -- Analyst

Mike Heim -- NOBLE Capital Markets -- Analyst

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