USA TODAY Co., Inc. (TDAY) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Gannett Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ashley Higgins from Investor Relations. Please go ahead.

Thank you, Marcella. Good morning, everyone, and thank you for joining our call today to discuss Gannett’s third quarter 2020 results. Presenting on today’s call will be Mike Reed, Chairman and Chief Executive Officer; and Doug Horne, Chief Financial Officer. During this call, we will discuss Gannett’s financial results for the quarter. If you navigate to the Gannett website, you will find that we have posted an earnings supplement in addition to our earlier press release. We will be referencing it today on the call, as it provides you with additional detail on this quarter’s performance. Before we begin, please let me remind you that this call is being recorded. In addition, statements made during this call with respect to future results and events are forward-looking statements that are based upon current expectations. Actual results and events could differ materially from those discussed today. We encourage you to read the forward-looking statements disclaimer in the presentation, as well as the Risk Factors described in Gannett’s filings made with the SEC. In addition, we will be discussing some non-GAAP and pro forma financial information during the call today. You can find reconciliations of our non-GAAP measures to the most comparable GAAP measures in the earnings supplement. The pro forma information presents Legacy New Media and Legacy Gannett on a consolidated basis. Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in Gannett. The webcast and audiocast, a copyrighted material of Gannett and may not be duplicated, reproduced or re-broadcasted without our consent. With that, I’d like to turn the call over to Mike Reed, Gannett’s Chairman and CEO.

Thanks, Ashley. Good morning, everyone. Happy Election Day. We have some very positive updates to share with you this morning as it relates to financial performance, the balance sheet, debt paid down, and our general operating performance, especially as it relates to our near-term and long-term growth categories. So we're excited to talk to you about all this, this morning. Let's start with the third quarter financial performance, which we were pleased to see showed a strong rebound from the second quarter, for both revenue and EBITDA, both from an absolute dollar perspective and a trend perspective. In the third quarter revenues were down 19.6% on the same-store basis to the prior year, pro forma for our acquisition of Legacy Gannett. This is a significant improvement from the second quarter which was down 28%. The improvement was driven predominantly by a resurgence in advertising revenue, with especially strong performance on the digital side. Our national sales team had a great quarter with 8% growth over the prior year, driven by strong digital display sales at the USA TODAY, and continued interest from national advertisers in reaching local customers across our network. At USA TODAY, our advertising revenue is now over 90% digital and has grown annually for the past three years. Additionally, we're very pleased to see our reach local core sales team return to year-over-year growth in revenue within the third quarter. One of the metrics we have been watching closely throughout the pandemic at the local level is the percentage of digital marketing campaigns, coming from our small business customers that have been paused. Pre-COVID this level was 3% to 4% of total campaign, so pretty small. At the high level lockdowns in the spring, we saw this percentage spike to as high as 23%. At the end of the third quarter, we're pleased to see that that percentage has fallen back to approximately 5%. And paused campaigns have continued to decline during the fourth quarter. We are very encouraged by this measurement and our ability to grow reach local digital marketing service revenues over the prior year in Q4 and beyond. Within the paid subscription category, we achieved an important milestone during the quarter, by surpassing over 1 million paid digital only subscribers. Growth was 31% over the prior year in the quarter. And as I highlighted on our last earnings call, Gannett is highly focused on transitioning to a subscription led business model for both B2C and B2B, and we continue to see a significant opportunity for further growth with our digital-only subscription business. We expect to accelerate growth in 2021 above the low 30% trend range we are seeing currently. I would also like to highlight the impressive performance of our events business in the third quarter. We hosted 63 virtual events during the quarter. We continue to see high engagement from our communities for these events, despite being virtual, with over 41,000 race registrations in the quarter, and over 18,000 paid viewers of our communities Choice Awards. While we continue to see many other events, companies announcing revenue impacts of 75% or more as compared to the prior year, our team's revenue is down less than 10% to the prior year, when comparing year-to-date revenue to the prior year comparable period. This demonstrates the quick pivot our events too made, as well as our ability to drive revenue through virtual events. We believe the necessary pivot to virtual will also benefit and enhance future growth as we return to live events, as we can combine the virtual experience with the live experience and create additional consumer and business revenues as a result. We believe this will increase our previous growth expectations in this category. Turning to expenses, we maintained our focus on expense management, which resulted in operating expenses being down over 19% of the prior year. This includes our synergies implementation, our regular way cost reduction efforts and additional COVID-19 specific measures. Over the course of the third quarter we replaced certain temporary measures, including furloughs and wage reductions with more permanent cost savings. The improvement we saw in the quarter from a revenue standpoint, however, did contribute to higher cost of goods sold than we saw in the second quarter. We remain vigilant and finding efficiencies in our cost structure and we continue to navigate the uncertainties of the current economic environment. It has been nearly a year since New Media acquired Gannett, and we are very pleased with the progress we've made on synergies implementation. Through the end of the third quarter, we have realized over $115 million in synergies year-to-date, within quarter savings of $54.5 million. This analyzes to over $200 million of savings for two-thirds of the target we set, when we announced the Gannett acquisition last November. We expect to realize $60 million to $65 million in additional cost reductions from synergies in the fourth quarter. We remain confident in our ability to exceed our stated goal of $300 million in annualized synergies, and we are well within our time for the stated timeframe of the end of 2021. The combination of improved revenue performance and continued rigorous expense management led to a strong EBITDA performance of $88 million in the third quarter, up from $78 million in the second quarter. Excluding a non-cash shrink adjustment taken in the third quarter EBITDA was actually $90 million. That represents 15% growth over the second quarter. And as many of you know the third quarter is typically smaller than the second quarter, driven by seasonality in advertising spend. We expect pretty significant uplift in Q4 from both the revenue and EBITDA standpoint, based on what we've seen through the first month of the fourth quarter. Turning to the balance sheet, we remain highly focused on fully paying down debt, both through non-strategic and real estate asset sales, as well as free cash flow. During the third quarter we paid down $8.6 million predominantly with proceeds from real estate sales. However, in the fourth quarter, we accelerated the pace of asset sales, with about $100 million of non-core and real estate asset sales through the first five weeks of the quarter. We'll use the proceeds from these asset sales to pay down debt. Looking ahead, we're targeting additional debt repayment from both asset sales and excess cash flow, and we expect to end the year with net debt of between $1.4 billion and $1.5 billion. Our liquidity position has remained very strong with $189 million of cash on the balance sheet at the end of the third quarter. Before I turn the call over to Doug, for some more detailed review, I want to highlight some of the incredible journalism work our newsrooms have produced during the third quarter. First, a few weeks ago, the USA Today launched deadly discrimination, a six part investigative series on policies that have fueled high COVID-19 deaths in communities of color. Second, the Detroit Free Press with contributions from reporters across Michigan and Wisconsin dominated coverage of the arrests of a group the FBI says plotted to kidnap Michigan Governor, Gretchen Whitmer, from her vacation home. 15 staffers contributed to a wide ranging investigation that drew 1 million visitors in the first weekend of recording. Third, to support newsroom elections coverage the video team partnered with USA TODAY to launch a weekly news and politics show called States of America, hosted by national political correspondent, Philip Bailey. Short-form clips from States of America premiere across our websites and on social accounts during the week, with the full length 30 minute program on Friday mornings, on YouTube, and our OTT, TV channels. And in an unprecedented partnership newsrooms from the USA TODAY Network and Lee Enterprises collaborated to publish Iowa Mourns, a project that tells the stories of more than 1,400 Iowans who died from COVID-19. In order to provide transparency around today's election results, our content and product teams have partnered to make results available real time for the presidential, congressional and state races, and our USA TODAY elections 2020 webpage, you should check it out today. For a broader list of newsroom highlights, you can find a listing with digital links in our investor supplement, published today on our Investor Relations website. In addition to the great journalism work in the quarter, a highlight in the quarter for Gannett was to have our USA TODAY's Washington Bureau Chief, Susan Page moderate the Vice Presidential debate, between Vice President Mike Pence and Senator Kamala Harris. I thought she did an incredible job and she was widely commended for incisive questions. We're very proud of Susan and her work on this very important debate. Relatedly, for the three debates this season, we ran real time on screen fact checking and attracted between 2 million and 3 million views per debate. Lastly, I wanted to welcome Mayur Gupta, our new Chief Marketing and Strategy Officer, who joined us early in September. He had previously served as a member of our Board of Directors and we are thrilled that he has joined our executive leadership team. His background includes marketing, leadership positions at Spotify and Freshly, and he brings a wealth of consumer subscription experience, which will help to guide us in our transition to a digital subscription led business model. I look forward to having him join us on future calls to discuss our strategy and vision for Gannett. Now, I'd like to turn the call over to Doug to discuss our financial performance in more detail. Doug?

Thank you, Mike, and good morning, everyone. For Q3, total operating revenues were $814.5 million, up 116.3% as compared with the prior year quarter, as a result of the acquisition of Legacy Gannett in Q4 of 2019. On a same-store pro forma basis operating revenues were down 19.6%, as compared with the prior year quarter, due to the continued secular decline in print advertising and home delivery, as well as the economic slowdown brought on by the pandemic. Adjusted EBITDA totaled $88 million in the quarter. This reflects the impact of lower revenues, which was partially offset by cost reductions and synergy savings. Important to note that during the quarter adjusted EBITDA was burdened by approximately $2 million of a negative impact associated with a true up with a company's shrink reserves, related to a single copy distribution channel. The adjusted EBITDA margin in the quarter was 10.8%, which was slightly improved from Q2. And in the third quarter expenses were reduced by approximately 19% on a pro forma basis, reflecting ongoing expense measures taken in response to the pandemic, as well as continued synergies from integration initiatives, as well as regular rate of cost reductions. Notably, as Mike mentioned, we saw strong improvement in both revenue and adjusted EBITDA sequentially compared with the second quarter. Now moving on to our segments. The publishing segment revenue in the second quarter was $732.2 million, within that total, print advertising revenue decreased 30.9% compared to the prior year on a same-store pro forma basis, reflecting the continued secular pressures, as well as the disruption from the pandemic. However, we were very pleased to see approximately 14 points of year-over-year improvement from the second quarter to the third quarter. Digital advertising and marketing services revenue decreased 13.5% on the same-store pro forma basis, driven by the disruption from the pandemic. This is over 13 points of improvement as compared to the second quarter trends, and that reflects improved demand for digital display advertising and digital marketing services. Within Digital Display advertising we saw year-over-year growth in national digital as a result of premium digital sales, as well as the rebounding of programmatic demand. Circulation revenues decreased 13.2% compared to the prior year on the same-store pro forma basis. And this reflects the ongoing pressure of the pandemic on single copy sales during the quarter, which remain negatively impacted as a result of lower travel and consumer activity. Our home delivery circulation trends remained consistent with Q2 trends, and we still have not seen a negative impact as a result of the pandemic in terms of home delivery. Paid digital-only subscribers grew 31.1% year-over-year on a pro forma basis to approximately 1,029,000 subscriptions. Digital-only subscriber revenue grew 48.7% on a pro forma basis, as compared with the prior year. Adjusted EBITDA for the publishing segment totaled $108.8 million, representing a margin of 14.9% in the third quarter, which compares favorably to the 13.2% margin we saw in Q2. For the marketing solution segment, total revenue in the third quarter was $105.4 million, a decrease year-over-year of 17.4% on the same-store pro forma basis, which is a significant improvement from the 24% decrease we experienced in Q2. The Q3 improvement was driven by our core reach local business, where we continue to see clients reactivating their marketing campaigns, following the temporary pauses during the height of the COVID-19 lockdowns. Adjusted EBITDA for the marketing solution segment totaled $4.2 million, representing a margin of 4% in the third quarter, which is more than 100 basis point improvement from the Q2 margin. Our Q3 GAAP net loss attributable to Gannett was $31.3 million, which reflects $61.4 million of depreciation and amortization, and $18.3 million of non-operating pension income, both of which are non-cash items. The company's effective tax rate for the quarter was primarily driven by a small decrease to the company's annual effective tax rate, which had the impact of slightly reducing the benefit associated with the goodwill and intangible charges recognized in the second quarter. We ended the quarter with $1.732 billion of debt after paying down $8.6 million during the quarter. Our cash balance was $189 million at the end of Q3, resulting in net debt of $1.543 billion. Capital expenditures totaled $6.8 million during the quarter, reflecting investments related to digital product development, real estate projects, as well as ongoing facility consolidations. During the quarter, we paid approximately $51 million in interest, and our debt service burden will decline as we continue to pay down debt. And as Mike discussed earlier, paying down debt continues to be our top fiscal priority. Subsequent to September 30th, we successfully closed on approximately $95 million in non-core asset sales and approximately $5 million of real estate sales. And we will use these proceeds to pay down our debt. We also plan to pay off an additional $15 million during the fourth quarter under our debt facility. As a result of all of these actions, our debt outstanding under our credit facility will then reduce to $1.615 billion from the $1.728 billion as of the end of the third quarter. Additionally, we have over $50 million of real estate currently under contract, and we remain confident in our ability to sell $100 million to $125 million of property by the end of 2021. We are in strong liquidity position and we remain very confident in our ability to satisfy our obligations under our term loan. Operator, you can now open the line for questions.

[Operator instructions] Your first question comes from the line of Jason Bazinet from Citi. Your line is open.

Good morning, guys.

Hey, Jason.

I just had a quick question. I got the commentary on the debt reduction target by the end of the year, by the end of '21 down to that, and I think you said $1.4 billion to $1.5 billion. What do you think happened there?

By the end of this year. Yes.

And then you talked about this $100 million and $125 million of potential asset sales and real estate sales in '21? Should we just assume that the debt reduction just continues and you just keep chipping away at the debt balance? Or do you think something else is [multiple speakers]

Yes. Jason, great question. So we think we're going to be closer to $1.4 billion, as we said, $1.4 billion to $1.5 billion net debt by the end of this year. We have an additional $100 million to $125 million in real estate sales that will pay down debt next year. But we'll also have cash flow debt pay downs, as well. So our plan for the year ago to refinance the current term loan B in 2021 remains our plan. The asset sales have been ahead of pace for us, which is great. And with the combination of excess cash flow and liquidity sweeps, we still feel confident in our ability to refinance, which as we lower our leverage we’ll also lower our cost of interest expense as well. So, it should be a big boost for 2021 as we get to a refinancing, and we have a lower debt absolute dollar number as well as the lower cost to that debt.

Yes. And can I just ask one follow-up. In terms of the circulation trends, and we all understand what's going on with the ad market? But can you just provide maybe a little bit of color in terms of the same store circulation trends? It seems like those didn't improve as much as ads did sort of sequentially. Can you just provide a little bit of color in terms of what you think is reasonable as we move into next year?

Yes. So on the digital side, digital paid grew about 30%, 31%, and our revenue, as Doug mentioned, grew closer to 50%. We expect those trends to accelerate in 2021 on the digital side, that's where our primary investment goes. But, we're also focused on retention and customer service on the print side to moderate those trends. What had the biggest impact from a negative standpoint, Jason, on print trends is single copy. So the traffic it out picking up single copy has been down, especially with the USA TODAY, which is a big reliance on airports and on the hotels. So, I think you'll see our circulation trends, I think we said on the print side, we were down 13% in the third quarter. I actually do think you'll see those trends come in and get better in 2021, as we cycle the downturn we've seen in single copy, primarily from the USA TODAY. And we'd like to try to get those trends inside of down 10% in 2021.

Right. Super helpful. Thank you.

There are no further questions at this time. I'll turn the call back over to the presenters.

Yes, thank you. So in closing, we're pleased with our third quarter results and the rebound we saw in revenue EBITDA and our improved EBITDA margins. We ended the quarter as just mentioned in a good liquidity position with $189 million of cash on the balance sheet. And also, as just mentioned, we've made very good progress with debt repayment especially early in the fourth quarter. We see a clear path to reducing our net debt to approximately $1.4 billion to $1.5 billion by yearend. This is a significant reduction since New Media acquired Gannett only one year ago. We see enormous potential to continue to grow our digital subscriptions and digital marketing service businesses, accelerating growth trends and vastly increasing our current paid digital subscriber base, which is mentioned earlier, is a significant contributor to next year's growth. And as mentioned earlier, we see growth opportunities for our events business in the future, based on retaining a virtual realm, while also returning to live events. We look forward to sharing more with you about our vision and strategy for 2021 and beyond. But just to kind of recap, huge growth drivers for us, subscription and digital, digital subscriptions, our digital marketing services business, our national digital advertising business and our events business, they are all starting to grow nicely now and we see significant upside in 2021 and beyond. So, I just want to take a second to thank all my colleagues at Gannett for their continued commitment to our communities, and their resilience during this incredibly difficult year. So thanks for joining us today. I wish everybody on the call a safe and healthy holiday season and happy Election Day, and look forward updating you as we close the year and get into the first quarter of next year. Thanks everyone for joining.

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