Tribune Publishing Company (TPCO) Q3 2020 Earnings Call Transcript

Tribune Publishing Company (TPCO)
Q3 2020 Earnings Call
Nov 04, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Tribune Publishing Company earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker, Ms. Amy Bullis. Ma'am, please go ahead.

Amy Bullis -- Investor Relations Contact Officer

Thank you, and welcome to our third-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, intend, 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 the 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 Michael Lavey.

I will now turn the call over to Chief Executive Officer Terry Jimenez.

Terry Jimenez -- Chief Executive Officer

Thank you, Amy, and good afternoon, everyone. Thank you for joining today's call and for your interest in Tribune Publishing. I will provide some perspective and insights on our performance in the third quarter and we'll then ask Mike to walk through our financials. We have now lived through eight months of the coronavirus pandemic.

And while we continue to adjust, I am grateful for the efforts and resiliency shown by Tribune Publishing employees and frontline workers across the country and the world. Our core journalism and marketing solutions continue to be incredibly important tools as we navigate through major national events, locally relevant news in times of uncertainty. I'd like to thank our news teams who have worked tirelessly to cover this election cycle. As results continue to roll in and votes get counted, our journalists remain committed to and focused on reporting the results and offering insight, analysis, and perspective.

Beyond the election, our journalists provide consequential information and perspectives on everything from ever-changing local regulations and civil unrest to sports and entertainment and everything in between, and our advertising teams continue to deliver meaningful results for our clients who are striving to maintain their businesses as the pandemic continues to impact our economy. Leveraging our large, growing, and engage audiences is ideal for these businesses to drive demand for their products and services. The first three quarters of this year have seen our leadership team and the rest of our organization step up to face this pandemic to help our communities navigate these difficult times and to ensure our company continues its path to a successful digital future. We have made great progress, although there's more to be had.

As mentioned in previous earnings calls, we continue to maintain our focus in four key areas. First, we took swift action to maintain and build the strength of our balance sheet. We entered into the pandemic with virtually no debt and a comfortable level of cash. To maintain and build upon that, we continue to build our cash position, which provides flexibility and a cushion against any future downturns.

We immediately halted or reduced capital projects with the exception of continuing to invest in the enhancement and development of our digital products, which in hindsight, more incredibly important investments, given the large audience we attracted and retained. We also continue to focus on reducing our long-term obligations, for which we have seen our real estate lease obligations decline by approximately $25 million since the end of last year, as well as, a reduction in pension obligations. The second concurrent focus was on operating expenses, where we looked at every expense in every part of our business. We took actions to reduce operating expenses in outside services, where we sought to save on contract costs across the company, occupancy costs, where we reduced our rent and related expenditures, which is especially relevant as most of us are not working in our offices, and outsourcing work to provide both a lower-cost model and a higher variable cost model.

In addition, we made difficult but thoughtful decisions to reduce compensation expenses through targeted leadership team reductions, broader staff reductions, pay reductions, and furloughs. Though difficult, these actions provided the ability to sustain ourselves over the long-term. Rightsizing our expense base in light of the revenue reality and outlook is a necessary step in the resulting margin expansion we experienced will provide lasting positive effects for the financial profile and sustainability of our business. Our third area of focus was on the digital opportunity.

In the third quarter, we saw 44% year-over-year growth in our total digital user base, driving us to nearly 60 million average monthly unique visitors. Our digital subscribers total ended at 427,000, representing a year-over-year gain of 36%, and importantly, digital subscriber revenue grew by more than 67% year over year. Additionally, we experienced substantial demand growth in our user traffic and engagement continuing into today surrounding the elections. It has been a great work by our team to provide prospective analysis and context around the results of the elections and all the other activities happening in and around our communities.

In terms of our BestReviews business, in which, as a reminder, the company has a majority stake in, the third quarter saw BestReviews post substantial revenue growth on a year-over-year basis on top of a very strong Q3 of 2019. Our fourth focus is on connecting with the businesses in our communities. We made concerted efforts to help the businesses in our communities recover from the negative business impact, they have suffered during -- or due to the virus and related consequences. Leveraging our strong print audience in our large growing and engaged digital audience, our advertising and marketing solutions continue to support the businesses that our readers and audiences patronize.

And we are confident that our client partnerships will proactively assist in restarting our local economies. We saw a sequential improvement in the trends from Q2 into Q3 and cautiously are optimistic those trends will continue. Amid all of this change, we also made several key executive appointments. We have expanded the oversight of our top 3 sales leaders in our organization to allow them to have significant impacts and use their successful playbook across a larger scope of responsibility.

Separately, on our digital team, we have announced that Margaret de Luna has been named general manager of our digital subscription business, as well as, have oversight over our New York Daily News and the Allentown Morning Call businesses. Margaret has a strong and deep digital background and have worked -- and having worked extensively with her, I believe she'll be a great part of the team. Idalmy Carrera-Colucci has been named as vice president of audience engagement and retention. Idalmy will focus on the intersection of our news, data, product, and marketing efforts.

We have also named Paul Pham, the general manager of our Florida businesses, which includes the Orlando Sentinel and South Florida Sunset. Paul's energy and creativity, focus, and leadership style will join an already very strong news and sales leadership group in the markets. Our unrestricted cash position has grown to $90 million, which provides flexibility and long-term protection against any shifts in the economy or industry dynamics. The board continues to discuss capital allocation, but until we have more certainty of the near and lasting effects of the pandemic, we will likely not be in a position to announce any changes here.

While maintaining expenses tightly, we continue to look at strategic investments and content, adding news resources to meet or further drive demand, investments in data and analytics to drive key resource decisions, investment that allows our products to continually improve the user experience, and leveraging our in-house advertising agency, Studio 1847. We have developed really powerful brand messages about the strength of our assets. With that, I would like to turn the call over to Mike to speak to some of the specifics on our financial performance.

Michael Lavey -- Chief Financial Officer

Thank you, Terry. Although the third quarter of 2020 was a challenge for the company's revenues, we did see improvements in sequential quarterly revenue trends as Q3 2020 year-over-year revenue declined 20%, compared to 27% year-over-year decline in Q2. We expect further improvement in these trends in Q4. Improving revenue and continuing reduction in the costs allowed us to increase adjusted EBITDA by 9.9% over the prior-year quarter and outperform our adjusted EBITDA guidance for the third quarter.

We continue to take significant cost management measures in response to pandemic-driven revenue declines as we work to position the company for a post-pandemic digital future. While we are aggressively managing all expenses, our efforts are particularly focused in our fixed cost infrastructure. We completed outsourcing of printing and packaging at The Virginian-Pilot during Q3 and we announced a similar outsourcing at the Hartford Courant shortly after quarter end and we finalized early termination of three significant leases during the quarter. Additionally, several of our locations move to long-term remote work as we negotiate termination of those leases in an effort to reduce our real estate footprint.

Now I will address the financial highlights for the third quarter. As a reminder, there are no same business comparisons in 2020 as we have cycled all prior year's acquisitions. Additionally, as previously disclosed, Tribune began managing its business as one business and one reportable segment in the first quarter of 2020 and prior periods have been restated to reflect the change in reportable segments. In the third quarter of 2020, revenue declined $47.4 million or 20.1% on a year-over-year basis.

Advertising declined $35.6 million or 38.2% with retail advertising reflecting the biggest decline, off by $29.5 million or 46.3% from the prior year. Included in this decline is $3.3 million associated with the Carolside Comm agreement, which concluded earlier this year. National advertising decreased $1.7 million or 15.5% and classified advertising decreased $4.8 million or 28.1%. Circulation declined $2.3 million or 2.5%, as declines in home delivery and single copy were only partially offset by increased digital-only circulation, which increased $5.1 million or 67.4%.

Other revenue declined $9.5 million or 18.1%, with commercial print and delivery revenue, down $5.2 million or 23.4% as our customers' low services were equally impacted by the pandemic. An additional $4.2 million of the decline is related to transition services provided to the California properties in the prior year. We concluded that agreement in the second quarter of this year. These declines were partially offset by an increase in revenue exceeding 40% at BestReviews, which continues to satisfy the accelerating public demand for online shopping.

On the expense side, we continue to aggressively manage expenses in the face of the pandemic and industrywide revenue headwinds with total operating expenses, excluding non-cash impairment charges, down $50.4 million or 22.2% in the third quarter of 2020 on a year-over-year basis. Reductions in current year operating expenses include $18.2 million or 21.9% in compensation expense, $15.6 million or 20.1% in outside services, $4.9 million or 39.2% in newsprint and ink, and $9.8 million or 23.2% in other. For the quarter, we reported net income from continuing operations of $8.5 million, compared to $6.9 million in the prior year, a 23.5% increase, all of this in spite of declining revenues. Net income attributable to Tribune shareholders in Q3 of 2020 was $0.18 per share, compared to a net loss attributable to attribute to Tribune shareholders of $0.61 per share in prior-year Q3.

Adjusted EBITDA totaled $27.3 million in the third quarter, compared to $24.8 million in the prior-year period. Strong cost control allowed us to deliver above our previously guided adjusted EBITDA for Q3 2020 and resulted in a nearly 400-basis point year-over-year increase in adjusted EBITDA margin. Turning to our cash flow and balance sheet. Cash flow remained strong with cash flow from operations of $12.2 million for the quarter and $42.5 million for the year-to-date, compared to $14.4 million for the prior-year quarter and $32 million for 2019 year-to-date.

We are actively managing our cash balances on several fronts, driven primarily by significantly lower overall spending. We are also closely managing vendor payment terms. We've reduced rent payments as we terminate leases and negotiate with landlords for more favorable terms, and we continue to take advantage of the CARES Act to defer remitting the employer portion of Social Security taxes. We're also closely monitoring proposed legislation, which could impact the company.

We ended the quarter with $121.4 million in cash, of which $90 million is unrestricted and $30 -- $31.4 million is restricted, a $9.5 million increase in unrestricted cash during the quarter, and capital expenditures totaled $2.1 million in the quarter. With respect to guidance, for the fourth quarter of 2020, the company expects total revenues of $203 million to $208 million and adjusted EBITDA of $36 million to $39 million, which will result in full-year revenues of $791 million to $796 million and full-year adjusted EBITDA of $95.4 to $98.4 million. In closing, in a challenging quarter, we were able to report strong financial results driven by cost -- aggressive cost control. We saw a sequential quarterly revenue trends improve and our year-over-year profitability for the quarter improved.

However, we remain cautious about the continuing impact and duration of pandemic on the overall economy and on our business. That said, we believe we are well-positioned to withstand the challenges of the coronavirus pandemic and be successful in the future due to excellent journalism and marketing solutions we provide, the strength and character of our team, and our solid balance sheet, featuring strong liquidity and minimal debt. While mindful of managing expenses, we continue to make appropriate investments in digital products, digital subscriber growth, and in our newsrooms in order to ensure we have the right products for our advertisers and consumers. And now we will open up the call to questions.

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] And sir, your first question comes from Michael Kupinski for Noble Capital Markets. Sir, your line is open. Please ask your question.

Michael Kupinski -- Noble Capital Markets -- Analyst

Thank you for taking the questions. Congratulations on over-delivering on cash flow. You guys are doing a great job and I know in a very difficult environment. The expense reductions that you did in the second quarter, can you kind of give us a flavor of how much did you -- do additional cost cuts in the third quarter as well? That's -- I'm just trying to get a sense of the expense reductions, maybe on a quarterly or even an annualized basis and how that flowed through in Q3 as it relates -- as we go forward into Q4 as well?

Terry Jimenez -- Chief Executive Officer

Yeah. Mike, this is Terry. You know for us, as we think about the revenue, as we're going through Q2 the situation with the pandemic, we certainly had taken some cost actions that were quite dramatic and significant, and that happened throughout the second quarter. So we've got the full-quarter benefit of those actions.

But as we entered into the third quarter, we saw the lasting effect of the pandemic and the revenue trends continuing to be very mellow versus what you'd ordinarily anticipate. You know, we had to continue to take some additional actions. And mostly, those actions were on some of the fixed cost areas that Mike had alluded to, outsourcing our production in Virginia, which will get a bigger benefit in Q4 and ongoing, as well as, a few other areas that we looked at, our in-house costs and thought it would be less expensive to do that outside the company.

Michael Kupinski -- Noble Capital Markets -- Analyst

And I know, Terry, that you recently closed some newspaper offices in New York. Can you talk a little bit about how much that saved the company on an annualized basis? And maybe does this accelerate the prospect of monetizing some of your real estate assets in New York? And then also, are there other papers that -- you know now that everybody -- a lot of people are working from home, are there other newspapers that could follow the similar model? Or have you introduced that in other markets? Just give us a sense of that aspect.

Terry Jimenez -- Chief Executive Officer

Yeah. We've made the determination for offices where we have leases that are expiring in the next few years, knowing that we're still, at this point in time, six to nine and who knows if much longer out from being able to access those offices in a safe way for our employees. So we had made the determination in New York, Orlando, Allentown, and Virginia that we would not have an office to return to. And so we've made those decisions in, call it, about half of our markets.

And you know, we continue to look at, as the pandemic evolves, as the status of a vaccine is still a little bit elusive, we're obviously looking at how do we -- are there other opportunities for us to reduce our footprint, which gives us a more flexibility long-term but also saves us some money along -- along the way.

Michael Kupinski -- Noble Capital Markets -- Analyst

And BestReviews seems to be performing well. Certainly, the pandemic is kind of probably one of those that's seeing some benefit from people staying home and so forth. Can you give us a sense of how the revenues are performing as the economies are opening up and people are kind of filtering back to work and things like that? And what your thoughts are about BestReviews and the outlook? Is it still elevated revenues at this point with the pandemic and everything?

Terry Jimenez -- Chief Executive Officer

Yeah. It certainly had a benefit as e-commerce really kicked in significantly in the second quarter and then continued into Q3. You know I think, just outside of pandemic, e-commerce would, over time, just continue to grow in bigger proportion of commerce, generally. And so I think being tethered to e-commerce is helpful from that event.

And while things kicked up significantly in Q2 and Q3 for e-commerce, we don't see e-commerce going down at any time in the future. So we see it continuing to grow and grow healthily on a year-over-year basis, and we've got a lot of optimism for that business.

Michael Kupinski -- Noble Capital Markets -- Analyst

And I know that you've said in the past that you're kind of disappointed that you got this great asset -- great digital asse and the value of the stock doesn't really reflect that, and you're not getting it there. Can you just give us a sense about what you think the value of that asset might be? And then is there a prospect that you might monetize the asset? And then if you were, you kind of gave us some thoughts about where you might redeploy capital and looking at M&A acquisitions. But are there significant other opportunities out there that might warrant you to take a look at maybe selling BestReviews and redeploying the capital elsewhere.

Terry Jimenez -- Chief Executive Officer

Yeah. In terms of value, I'm not going to able to answer all of that. But in terms of the value question, when we bought it, it had an enterprise value of and $10-ish million that we felt was the right value and that's when we made the investment. Since that time, the revenue has grown significantly.

The EBITDA of the business has also grown commensurate with the revenue growth. And so you know the value that we got into this asset two and a half years ago, a little more than two and a half years ago, we think has grown quite considerably. In terms of dispositions, etc., you know it's something that we always talk at the board to see if there's an opportunity, but there's been no -- nothing that we can speak to on any dispositions.

Michael Kupinski -- Noble Capital Markets -- Analyst

And the last question. In terms of looking at M&A, are there other newspaper assets or publishing assets that are on the market that might make sense in terms of looking at cost synergies or anything like that that would make sense at this point?

Terry Jimenez -- Chief Executive Officer

You know there's always things that we would look at, if it's a really good opportunity for us. If there's adjacencies within the markets that we operate or if it's in an area that we think could add overall value to the company. So we're always open-minded to those things. I think most companies are just really focused on as we've gone through the pandemic, survival mode, and being able to do what we can to keep head above water.

And so I think as you think about individual assets, companies that have one newspaper, those are the ones that are struggling the most and so those tend to be a little bit more problematic at this stage given the headwinds. So we're always open to the right opportunities at the right value, but that's all I can say on that.

Michael Kupinski -- Noble Capital Markets -- Analyst

And if I may just ask one more. It -- what would be the hurdle or what would you see as a benchmark that would determine whether or not the board might be -- might consider reinstating a dividend?

Terry Jimenez -- Chief Executive Officer

Well, I think there's a lot of factors that go into that. So it's -- what's happening outside of the company and outside of the company's control in terms of the economy, as well as, what's happening broadly with the industry. And so I think we've got to make sure that we're considering those external factors. And then as we think about internal factors is, what is the ability for us to continue to generate positive cash flow over the long-term? And I think as we kind of combine all those things together, there's a fair amount of uncertainty on the external factors.

I think we've got more confidence on the internal factors. So I think really, until we get a little bit more sense of when some of the clouds will start disappearing on the lasting effects of the pandemic, that's probably when we'll be at a point to speak more about what the future could be.

Michael Kupinski -- Noble Capital Markets -- Analyst

Great. Thank you. Have a great evening.

Terry Jimenez -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] And your next question from Doug Arthur of Huber Research. Sir, your line is open. You may ask your question.

Doug Arthur -- Huber Research -- Analyst

Yeah. Great. Just a couple. Terry, the -- looking at the digital subscriber number in the third quarter, sequentially, you added, it looks like 8,000 subscribers.

So you've come off quite a bit from Q1 and Q2. Obviously, the stay-at-home probably boosted that in Q1 and Q2. Is there any pricing action you took that may have slowed the growth? Or is that just post stay-at-home and some seasonality in the third quarter, that -- sequentially, it slowed so much?

Terry Jimenez -- Chief Executive Officer

Yeah. So when we look at the third-quarter growth, what we saw was we had in terms of the new starts and new acquisitions that came in, it kind of looked a little bit more like a regular normal cycle for us. But a lot of the acquisition that we had in the first half of the year as they were coming up for a pricing increase after their trial period, we saw a normal churn percentage. But because we acquired a really large lot of them, especially in Q2, we saw them come off of the trial period and what we also did is, we did look at the pricing for new starts, as well as, sustaining customers.

And we felt that there was an opportunity from a value equation to increase the rates. And so while that translated into fewer subscribers, generating a significant amount more of revenue and so that's where the dislocation is on. We grew year-over-year digital subs, 36%, but the revenue grew in the high 60% range. So we saw some revenue increase there associated with the rate increase.

Doug Arthur -- Huber Research -- Analyst

OK. That's helpful. Thank you.

Michael Lavey -- Chief Financial Officer

Our average rate per subscriber is up about 22% year over year.

Doug Arthur -- Huber Research -- Analyst

OK. And in terms of the kind of ins and outs of digital advertising, you still got the cars issue going on. Sort of on a pro forma basis, are you a little disappointed you're not seeing more growth there, particularly, given the growth in your audience? Or is that just kind of a post-COVID issue with advertisers? How would you sort of frame your digital advertising performance?

Terry Jimenez -- Chief Executive Officer

Yeah, there's a couple of factors. One, from an advertiser demand, you know, they've had an impact to their businesses and their slower demand for their products. And so that translates to lower demand for advertisements. And while we've had the great growth in the digital audience in Q3, what you see is the average rate that comes in for those ads are also lower because you've got so much more volume.

There's more supply in the market and a little bit less demand from the advertiser base. And so I think, it's really a -- it's a more of a COVID dynamic than anything sustaining. I think we've been able to hang on to a large chunk of the audience longer than I think we were initially anticipating and so I think that's the good news. And so I think as the rate equation and the advertiser demand kicks back up, we'll be able to be rewarded quite handsomely.

And as you had alluded to, we have the headwind with cars that will continue for a bit that we'll also fight against as well.

Doug Arthur -- Huber Research -- Analyst

OK. Thank you very much.

Operator

And speakers, that would be all for our questions today. So I'll turn the call over to Mr. Terry Jimenez.

Terry Jimenez -- Chief Executive Officer

Great. Thank you. Well, we continue to be focused on engaging our audience and managing the resources aligned with the revenue stream that we have. And we thank you for your interest in Tribune Publishing, and everyone stays safe.

Thank you all.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Amy Bullis -- Investor Relations Contact Officer

Terry Jimenez -- Chief Executive Officer

Michael Lavey -- Chief Financial Officer

Michael Kupinski -- Noble Capital Markets -- Analyst

Doug Arthur -- Huber Research -- Analyst

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