Gray Media, Inc. (GTN) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Chris and I'll be your conference operator today. At this time I would like to welcome everyone to the Meredith Fourth Quarter and Fiscal 2017 Earnings Conference Call. [Operator Instructions] After the speakers remarks there will a question-and-answer session [Operator Instructions] Mike Lovell, Investor Relations Director. You may begin your conference.

Thank you. Good morning and thanks everyone for joining us. Our call today will begin with comments from Chairman and Chief Executive Officer, Steve Lacy; President and Chief Operating Officer, Tom Harty; and Chief Financial Officer, Joe Ceryanec. Then we'll turn the call over to your questions. Also on the line today are Local Media Group President, Paul Karpowicz; and National Media Group President, Jon Werther. An archive of the call will be available later today on our investor website. Our remarks today will include forward-looking statements, and actual results may differ from forecasts. Some of the reasons why are described at the end of our news release that was issued earlier this morning and in some of our SEC filings. And with that, Steve will begin.

Thank you, Mike and good morning everyone. I hope you've had the opportunity to see our earnings release issued earlier this morning. I'm pleased to report that we delivered record results for fiscal 2017. Financial highlights of the year included, earnings per share of $4.16, compared to $0.75 in the prior year. Excluding special items in both years, earnings per share grew more than 20% to $4, up from $3.30 in the prior year. Operating profit margin increased to 18%. Total Company revenues grew 4% to a record $1.7 billion and total advertising revenues grew 2% to $934 million including a record 63 million of political advertising revenue. In fiscal 2017, we generated outstanding digital performance across the Company. In our National Media Group, digital ad revenues accounted for more than 30% of total advertising and more than offset print advertising declines. I'm very pleased to report that our digital business continues to be highly profitable and of course contributes nicely to Meredith's shareholder value. We also continued to successfully execute our total shareholder return strategy. That strategy is anchored by the very consistent and strong cash flows generated by our portfolio of media assets. We're pleased to deliver total shareholder return of 18% in fiscal 2017. And now I'll turn the discussion over to President and Chief Operating Officer, Tom Harty for more detail on our fiscal 2017 operating Group performance.

Thanks, Steve and good morning everyone. Fiscal 2017 was characterized by aggressive execution of our strategic initiatives which were designed to increase shareholder value overtime. In fiscal 2017, we continued to grow our already powerful consumer connection across Meredith's media platforms. Magazine readership increased to more than 100 million adults. Traffic to Meredith's digital properties grew 8% to average 86 million unique visitors per month. Additionally, sales of our branded products at retail increased. Second, we took steps to expand our media portfolio. In our Local Media Group, we acquired the broadcast assets WPCH in Atlanta from Turner Broadcasting, strengthening our position in one of the nation's largest television markets. We also added news casts in several markets, further increasing our competitive position. In our National Media Group, we launched the Magnolia Journal, an extension of Joanna and Chip Gaines popular Magnolia brand. It quickly became the strongest selling newsstand title in Meredith's recent history and we're currently selling more than 900,000 copies of each issue. Third, we successfully renewed several key revenue generating agreements. In our Local Media Group, we renewed our CBS affiliation agreements for stations in Atlanta, Phoenix, Kansas City and Flint/Saginaw into fiscal 2021. We also extended for FOX affiliations in Portland, Las Vegas, Greenville, Mobile and Springfield into fiscal 2019. In our National Media Group, we renewed our licensing program with Walmart. This program features more than 3,000 SKUs of Better Homes & Gardens branded products available at 5,000 Walmart stores and on walmart.com. In addition, we launched new licensing programs based on other Meredith brands, including a very well-received line of EatingWell branded frozen entrées and a Shape line of apparel for women. Turning to the Local Media Group, our fiscal 2017 performance set records across the board. Operating profit grew 36% to 215 million. EBITDA increased 27% to 250 million. And revenues increased 15% to 630 million. Operating profit margin was 34% and EBITDA margin was 40% Looking more closely at the breakdown of that performance, total advertising revenues grew 7% to a record 414 million, driven by strong demand for political advertising. Political advertising revenues were 63 million, with Meredith generating significant revenues from our stations in Los Vegas, St. Louis, Phoenix, Kansas City and Atlanta. Non-political advertising revenues were 352 million, compared to 374 million, due primarily to political advertising displacement, the Super Bowl moving to FOX from CBS and the Summer Olympic games on NBC. Digital advertising revenues grew more than 15%. Performance was driven by initiatives to drive traffic to our stations digital properties and stronger consumer engagement. This included the re-launch of mobile news, weather and traffic apps across our portfolio, which generated record app opens and unique page views. Other revenues and operating expenses increased, primarily due to growth in retransmission revenues from cable and satellite television operators, partially offset by higher programming fees paid to affiliated networks. Finally, ratings for our news cast remain strong. During the May ratings period, our stations ranked number one or number two in morning or late news in 10 of our 12 markets. We were number one or number two in sign-on to sign-off in six of those markets. Turning to our National Media Group, fiscal 2017 operating was 147 million, compared to a loss of 18 million in the prior year. Excluding special items, operating profit was 142 million, compared to 150 million. Revenues were 1.1 billion. Looking more closely at fiscal 2017 performance compared to the prior year, Total advertising revenues were 520 million, off 1% and up slightly on a comparable basis, which excludes MORE and Siempre Mujer magazines. This performance was driven by strong 21% growth in digital advertising which offset declines in print advertising. Digital advertising accounted for 31 percent of total National Media Group advertising revenues. Strong brands, premium ad products, proprietary first party data and our technology platforms are the foundation of our strong and profitable digital business. Our magazine grew their share of total industry advertising to 13.3% from 12%, according to the most recent data from Publishers Information Bureau. The Better Homes & Gardens, Family Circle, Martha Stewart and Midwest Living brands were particularly strong. The food, media and entertainment, household supplies and beauty advertising categories were growth leaders. Circulation revenues were 322 million, off 2%, but flat on a comparable basis. Expenses declined 16% and were down 1% excluding special items in both years as Meredith continued to pursue operational efficiencies. Finally, we took steps to generate more revenue from the individual consumer in fiscal 2017. As many of you know circulation related revenues have long been one of our most consistent revenue streams. We're leveraging our relationship at the consumer level to expand its new paid products such as membership programs, meal plans and booking items. We're also expanding into e-commerce. This includes our ShopNation affiliate marketing business, where we earn a revenue share out of promotion of third party products. Additionally, in fiscal 2017 we expanded into the performance marketing business, where we earn a revenue share for leads we generate in the Home Services arena. Now I'll turn ask Joe to provide a look at the company-wide financial highlights and our fiscal 2018 outlook.

Thanks, Tom and good morning everybody. So, start looking at our fiscal 2017 metrics. Cash flow from operations was 219 million. Total debt at June 30 was 698 million and our weighted average interest rate was 2.8%, with 350 million effectively fixed at low rates. Our debt-to-EBITDA ratio, as defined in our credit agreements, was 1.9 to1 for the trailing 12 months. We continue to focus on our successful total shareholder return strategy in fiscal 2017. We're committed to delivering top third returns and we specifically outlined our path to delivering those returns on our Investor Day in early June. And these include continuing to increase organic revenues and expand margins. In fiscal 2017, we reached the inflection point with digital ad revenues offset print advertising declines. Margins increased due to continued pursue of operational efficiencies. Ongoing dividend increases. We raised our dividend by 5.1% to $2.08 on an annualized basis in January. This marked a 24th straight year of dividend increases for Meredith, which has an annual dividend for 17 consecutive years. During fiscal 2017, we're pleased to have been added to the S&P high-yield dividend aristocrat index. An acknowledgement to our consistent track record of annual dividend increases. Our dividend is now yielding above 3.5%, making it one of the highest yields in media. We're pursuing strategic investments to scale our business and increase shareholder value. We've invested approximately 1 billion to acquire a leading broadcast, digital and print properties in the last several years. We also have an opportunistic share buyback program in place and have 68 million remaining under current authorizations as of June 30, 2017. Now, turning to our outlook, for full fiscal 2018 we expect earnings per share to range from $3.20 to $3.50. As a remainder we'll be cycling against a record 63 million of political advertising revenues recorded in our Local Media Group and that translates to $0.85 per share. Looking more closely at our first quarter of fiscal 2018 compared to the prior year, we expect total Company revenues to be flat to up slightly, National Media Group revenues to be flat to up slightly and Local Media Group revenues to be flat to down slightly. We expect first quarter fiscal 2018 earnings per share to range from $0.60 to $0.65. And again, we'll be cycling against 16 million or $0.22 per share of political ad revenues we recorded in the prior year period. Let me close my comments with what we continue to believe is a compelling investment thesis for Meredith. First, we have a great portfolio of media assets to deliver consistent and strong cash flow. We're executing a balanced capital allocation strategy that reinvest approximately half of our cash generation into our business and returns the other half to our shareholders. Our goal is to continue to deliver top third total shareholder return. We're well positioned to continue as an industry consolidator and we're consistently evaluating strategic acquisitions, both large and small. And finally we have a strong and proven management team that consistently delivers results. With that I'll turn it back to Steve for some closing comments.

Thank you very much, Joe. Looking ahead to fiscal 2018, as Joe just mentioned we'll be cycling against record political advertising revenue of $63 million. But we're executing a series of strategic growth initiatives that will increase shareholder value overtime. In our Local Media Group these include, continuing to strengthen and expand our local broadcast programming and converting those audience gains into higher advertising revenue. Monetizing our fast growing local digital platforms, where we doubled digital ad revenue in our Local Media Group in the four years and believe there is room for continued growth as we look to the future and third, renegotiating retransmission agreements with cable, satellite and telecom providers to increase revenue overtime. In our National Media Group, these growth initiatives include, continuing to create vibrant and relevant content and growing our reach Millennials. We now reach 70% of female US Millennials, many of these women are getting married, starting families and buying homes right in our real house; second, growing total advertising revenues and increasing our share of market. In Print, our advertising market share amongst our competitive set is at an all-time high of 41%. Our digital growth strategy focuses on delivering premium branded contents, accumulating rich and differentiated first party data and using ad technology to put the right message in front of the right consumer at the right time. And finally, generating more profit from the individual consumer. This includes maximizing our already highly profitable circulation activities, growing our industry leading brand licensing business and ramping up our e-commerce initiatives. With those remarks we'd now like to open it up for the Q&A and we'd be happy to answer any questions that you might have.

[Operator Instructions] Your first question comes from the line of Kyle Evans from Stephens. Your line is open.

Hi, good morning. Thanks for taking my question.

How are you, Kyle?

I'm great. You guys lapped the negative impact of MORE and you've got the benefit of Magnolia in this quarter of the one you just reported, but circulation revenue was down a couple of million dollars. Can you help us think a little bit more clearly about that trend?

Yeah, Kyle. This is Tom Harty. We've made some additional investments in circulation acquisition in the quarter, in the fourth quarter to set us up for the coming year, so that was part of the increase in the expenses.

The other normalized, Kyle, is CMP Rey [ph] move here was in last quarter was not in fourth quarter '17 on the revenue side. So, if you normalize for CMP Rey would have been flat.

Okay. That's super helpful. Could you give us an update on the auto renewal percent of the base there? I know that's been an initiative and I just want to get an update.

I could say - I don't have the exact number, but I know it's right hovering around 15%, I believe is the number. Okay, it's 15%.

And a year ago at this time that was probably 12 or 13, Kyle.

Great.

Okay.

One more and then I'll get back in queue. In Local Media Group, can you help us think about the Peach TV acquisition, lapping the Olympics and lapping political as we try to back into your trends for the current quarter? Thanks.

I think, Joe - I think Joe can help you with that.

Yeah. We had Peach in the fourth quarter I think for two months. If you took Peach out the fourth quarter organically, we would have been down 2% to 3% without Peach. I can't tell you what exactly the impact of the Olympics was. We are thinking, Kyle, as we look at this quarter, we'll probably be flat to down a little bit organically obviously with Peach and we'll report up as we look at the first quarter and visibility beyond that point is really tough.

But on the Olympics you only had one NBC station, so it was negative.

Sure. Yeah, yeah.

Okay. Okay. Great. Thank you so much.

Thank you, Kyle.

Your next question is from Eric Katz of Wells Fargo. Your line is open.

Good morning, guys.

Hi, Eric.

First I wanted to ask in the fiscal '18 EPS guide, we've noticed your last couple of full-year guides seemed to be conservative relative to at least our street expectations. Can you maybe tell us some areas of your business where you feel most confident heading into fiscal '18?

Well, first of all, Eric, it's pretty early in a long ways to June 30 of 2018. So, I understand what you're saying. But obviously there is parts of the business that are already quite well locked and loaded. So, if you go on the local side, obviously we have excellent visibility into retransmission revenue. We have excellent visibility into what we will be paying for our affiliate fees and there's probably some upside there. If you go to the national side, our circulation business and you can see that line item very, very solid, very consistent with, some upside opportunities and brand licensing business is not perfectly to the third decimal point locked in, but we have a pretty darn good sense of how much revenues that that will generate and how much profit. And you followed us for a while and you know we have worked really hard to diversify and be somewhat less dependent on advertising over time. But having said all that, advertising is still the largest driver of revenue and with - on all sides of the business, those decisions being made later and later, as Joe just said, we don't have tremendous visibility beyond kind of the mid part of this quarter. Does that help at all?

That does help. And since you mentioned retrains and having some visibility there, hopefully you can, I guess, open our eyes a little bit. As far as the cadence we look out, I guess, first off, were there any new deals that you signed in fiscal Q4 and would you be able to share any or how many deals you expect in any particular quarter? In fiscal '18, is there one quarter that's particularly strong?

Fiscal Q4, Eric, we had the DirecTV come up. I would say we're still working on that. We have not finalized the contract. We're working with them on an extension…

Yeah. That DirecTV, which is the largest one that is still kind of in the queue is pending and is actually very close to closure. So, we feel very good about how that negotiation has gone and we have an expectation that we'll be able to wrap that up in the relative near-term.

I would say as we look through the rest of fiscal '18, there's not a lot coming up. I mean you've seen the chart we put together that shows what percentage of our subs are coming up for renewal, as well as what networks are coming up. And '18 is actually a fairly quiet year and then basically we'll restart the cycle in a big way in '19. We do have some smaller ones, Mediacom, Frontier, Cox et cetera, but not what I'd say is our largest five.

Right. And there are no network deals that will kick in until '19.

Okay. That's helpful. Thank you very much.

Thank you.

[Operator Instructions] Your next question comes from Jason Bazinet of Citigroup. Your line is open.

Thanks. I just had two questions. In your prepared remarks, you talked about looking at acquisitions both small and large and historically when you've talked about - when I think about the acquisitions you've done, you've done digital properties like Allrecipes. You've done small tuck-in magazines. You've done TV station acquisitions that sort of run the gamut. Has anything changed in terms of the assets that you would or would not look at? Or is all of the rhetoric you've articulated in the past still true, meaning trying to scale business and TV stations or not? That's my first question. And then my second question… Yeah, go ahead.

Go ahead Katz with the other question. That's fine.

My second question is you guys have done a great job sort of getting that crossover point in terms of advertising on the national side. And I'm just wondering once you begin the lap sort of that CPM strength that you've seen on digital, will we look back and sort of say that was a transitory phenomenon where we had crossover and then we go back to negative or do you feel like now that you've hit crossover, you can keep sort of dollars sort of flattish assuming the economy doesn't be real.

Hey, Jason. This is Tom. I'll take the first one and maybe I'll have Jon Werther who is on the line take the second one. But to your question on the acquisition or strategy, it really hasn't changed. We're still looking at a diversified acquisition kind of platform. We're looking at digital. We're looking at print and we're looking at broadcast. And I always like to say that something has to be for sale and it has to be at the right price for us to make a move, but we are sticking to our strategy and looking at all the alternatives to come our way.

Okay.

And, Jason, I will just pile on. I would say in the queue right now and I won't name names, but there are print/digital assets that are active. We expect a pretty decent size broadcast group to come to market and we're always looking at specific digital assets. So, frankly I'd say it's somewhat of an active time on the M&A front right now.

Okay. Helpful.

And, Jason, this is Jon. I'll answer your second question - answer your second question. Obviously, our goal is to continue to take share in print advertising. We've successfully I think successfully been able to do that over an extended period of time as Tom and Steve alluded to at the beginning of the call and then obviously we continue to grow digital in line with the market. And we think as long as know we're able to continue to do that, that we should - our goal is to grow total advertising revenue and not have this be a transitory moment in time as you suggested, but to be a sustainable one. Now, obviously we need to execute against our strategy in order to do that, but that is the goal of total ad revenue growth for us as a business.

Okay. Very helpful. Thank you.

Okay. Okay, go ahead.

There are no further questions at this time. I am not turning the call to Steve Lacy.

Yeah, we certainly appreciate you dialing in this morning. And obviously we are available for any follow-up calls and thank you for your continued support and have a good day everybody. Thank you.

This concludes today's conference call. You may now disconnect.