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spk03: Greetings. Welcome to the Gannett 1Q earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Tricia Gosser. Ms. Gosser, you may begin.
spk04: Thank you, Alex. Good morning, everyone, and thank you for joining our call today to discuss Gannett's first quarter 2021 results. Presenting on today's call will be Mike Reed, Chairman and Chief Executive Officer, and Doug Horn, 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 filing made with the SEC. In addition, we will be discussing some non-GAAP 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. 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 website and audio cast are copyrighted material of Gannett. They may not be duplicated, reproduced, or rebroadcasted without our consent. With that, I would like to turn the call over to Mike Reed, Gannett's chairman and CEO.
spk00: Thanks, Tricia. Good morning, everyone. Thanks for joining us this morning on our earnings call. I'm very pleased to report that our first quarter earnings highlights results and operations witness or show significant progress against our stated strategy in almost all respects. First quarter financial results were ahead of internal expectations, showing continued year-over-year growth in adjusted EBITDA. And after normalizing for some structural changes in our year-over-year comparisons, We also produced sequential improvement from Q4 to Q1 in same-store revenue and adjusted EBITDA trends. We're pleased to see that. March was our best month of the quarter, and we anticipate continued sequential trend improvement in Q2 as we start to cycle the largest impacts of the COVID-19 pandemic in 2020. We expect to post year-over-year total revenue growth of low to mid-single digits in the second quarter, along with more than 30% adjusted EBITDA growth in the second quarter. And that is expected to lead to significant adjusted EBITDA growth for full year 2021 as compared to 2020. And we've mentioned that on our last couple calls, and we're a little bit ahead of pace so far on our internal targets. Within the quarter, we also continue to improve the capital structure of the company, And we significantly lowered the cost of debt in the first quarter. For those that have been following the company for a while now, you know we refinanced our 11.5% term loan B with a LIBOR plus 700 term loan B during the quarter. And we also got shareholder approval for our converts issuance, which we did in the Q4 time period, and that was approved at the end of February 2020. In the first quarter, and the converts have a rate of 6%. So we have lowered our overall cost of capital from 11.5% to about 7.17%. Last point I'll make on our financial statements, and then Doug, of course, will go through them in much more detail. We're showing a loss of $142.3 million on our income statement, and you need to put that in perspective given the financing moves that we made in the first quarter, which significantly lower our cash outflows. That's part of the converts deal before shareholders approve it. Accounting rules require changes in the value of converts to be marked to market and run through the income statement because our share price went up significantly from the beginning of the year to the shareholder approval date. we had to take a non-cash charge of $126.6 million on the income statement. Now that shareholders have approved that deal, we won't have mark-to-market changes running through the income statement any longer. Also, in order to get the refinancing done, we incurred $19.4 million of non-cash charges related to the extinguishment of debt. And in order to get all those deals done, we incurred $10.2 million in non-cash associated with those transactions. If you take those three charges into account, your net loss actually goes from 142.3 million to a net gain before taxes of 13.9 million, so a net gain of 13.9 million. Thought that was worth noting for shareholders since that net loss is such a big headline number. Now, turning to operations, Our digital subscribers surpassed 1.2 million in the quarter. That was fantastic. And then, again, it outperformed our internal expectations. We grew over 37% versus the prior year, and we had our single largest quarter for new paid digital subscribers, adding over 120,000. Further, our digital-only circulation revenue grew by more than 45% year over year. Overall, in Q1, our digital revenues accounted for approximately 30% of total revenue, and print advertising was less than 25% of total revenue, making real progress towards our goal of being a digital technology company combined with having revenue streams primarily made up of subscription revenues. We are pleased with our execution on synergies as well, going back to the acquisition of Gannett in November of 2019. We've implemented a cumulative $300 million of annualized synergies now as of the end of the first quarter of this year, well ahead of our original goal of $300 million by the end of 2021. And we are confident in our ability to implement additional synergies by the end of 2021, resulting in a total of approximately $325 million or more of annualized synergies. When we spoke last on our Q4 earnings call in February, we outlined our commitment to a subscription-led digital business strategy that drives audience growth and engagement by delivering deeper content experiences to our consumers and while offering the products and marketing expertise our advertisers desire. We delineated five key pillars to our strategy, and I'd like to spend a few minutes updating you on the progress of each of those during the first quarter. Our first pillar is accelerating digital subscriber growth. As I mentioned, digital-only subscriptions surpassed 1.2 million in the quarter, up 37% year-over-year, And importantly, we delivered our largest quarter-over-quarter growth as a combined company with 120,000 net new subscribers. Our markets responded well to new and more consistent subscription offers and enhanced high-performing and localized creative, as well as the marketing of highly valued and unique content. We anticipate that new subscription and product launches in the coming months will accelerate this growth on our path to reach a target of 10 million paid digital-only subscriptions in the next five years. The second pillar is driving digital marketing services growth by engaging more clients in a recurring revenue relationship and aggressively expanding our digital marketing services business into our local markets, both domestically and internationally. We continue to see progress with our local IQ digital marketing platform. The platform enables subscription-like opportunities through our core product set, which we expect to drive higher recurring revenue, more stable billing cycles, improved client retention, and stronger marketing performance for our clients. Our core sales team continued with year-over-year growth in revenue, returning to double-digit growth in the quarter and achieving the highest productivity metrics since 2016. The significant growth and record productivity that our team drove in Q1 is a prime example of the superior results we believe we can drive for all local businesses worldwide. The third pillar is optimizing our traditional businesses across print subscriptions and print advertising. We continue to drive the profitability of our traditional print operations through economies of scale, process improvements, and optimizations. This includes maximizing the lifetime value of our print subscribers through newly implemented retention and loyalty programs and expanding on the content we know our subscribers value most. Our print subscriber base has been quite stable over the past year, and while we do not expect print subscriptions to grow over time, we are highly focused on retaining our current subscriber base. The fourth pillar is prioritizing investments into growth businesses that have significant potential and support for our vision. By leveraging our unique footprint, trusted brands, and media reach, we identify, test, and invest in opportunities for growth. We've highlighted a couple examples in the last quarter, and we have a couple new great examples to talk about this quarter. But going back to last quarter, we highlighted our USA Today Network Ventures, which is our events and promotions business. We've built this and continue to invest in it. We're slowly returning to live events. We had a few in the first quarter. And while our events and ventures revenue and activity was lighter than typical during the first quarter, it reflects an intentional delay of several events until later in the year when in-person events are anticipated to be more widely allowed and widely accepted. But I mentioned we have a couple new areas to talk about that we're particularly excited about. They could represent very significant opportunities for us. The first is in the sports gaming sector, and we're exploring a sports gaming partnership that we actually expect to announce in this second quarter, so very soon. Online gaming is a sector that is poised to grow substantially in the U.S. over the next five to ten years. as it continues to legalize across the country at the state level. We believe we are well positioned to grow our business in tandem with this sector by leveraging our unparalleled ability to reach consumers at both the local and national level in the U.S. with deep community reach, content, and brands. Our sports readers are some of the most engaged audiences And with our large network of dedicated and well-known sports journalists, we believe we offer access in local perspectives that many of our national counterparts cannot. And we plan to capitalize on that through a unique partnership. The second area we are exploring is leveraging our massive media archive to create non-fungible tokens or NFTs. One of our most important assets is our content. We are excited about the NFT market because we believe it creates several new opportunities for Gannett. First, it presents a new way for consumers to enjoy and experience Gannett's award-winning coverage of historical events, monumental moments, and areas of passion or special interests such as sports, current events, the arts, and pop culture. Second, it presents a new business opportunity for Gannett as we see how this space continues to develop and how our incredible archives could be monetized in new marketplaces. We are excited about this opportunity and we'll be launching our first NFT in the upcoming weeks. Finally, pillar number five, we are committed to building upon our inclusive and diverse culture to center around meaningful purpose, individual growth, and customer focus. Inclusion, diversity, and equity are core pillars of our organization. We have previously shared our inclusion goals for 2025, and we just published our first workforce diversity report in March, outlining the steps we're taking to reach those goals. During the quarter, we were also recognized for two awards that we are proud of. First, for the fourth year in a row, we received a score of 100 on the Human Rights Campaign Foundation's Corporate Equality Index. And for the second year in a row, Gannett has been recognized as one of America's best employers for diversity by Forbes. Gannett is highly intent and focused on becoming a more inclusive, diverse, and equitable workplace And while we still have work to do, we are very proud to be recognized for the steps we are taking to get there. With that, I'll turn it over to Doug for a more detailed discussion on our financial performance for the first quarter. Doug?
spk02: Thank you, Mike, and good morning, everybody. For Q1, total operating revenues were $777.1 million, a decrease of 18.1% as compared to the prior quarter. On the same store basis, operating revenues decreased 16.5% as compared with the prior year quarter due to the continued secular decline in print advertising and home delivery revenue, as well as the continued economic slowdown brought on by the pandemic. First quarter revenue trends were also impacted by the cessation of certain industry-wide digital marketing incentives in 2020. The incentives generated through the digital marketing solution segment totaled $13 million for all of 2020, with $9.2 million of that in the first quarter last year. That negatively impacts the Q1 same-store trend by approximately 90 basis points. So on a comparable basis, the Q1 2021 same-store trends improved slightly from the levels we saw in Q4 of last year. Adjusted EBITDA totaled $100.5 million in the quarter, which is up 1.4 million or 1.4% year-over-year. This performance reflects the impact of lower revenues offset by cost reductions and synergy savings. The adjusted EBITDA margin was 12.9%, growing 250 basis points over the prior year. In the first quarter, expenses were lower by 20.4%, reflecting permanent expense savings put in place in response to the pandemic. regular way cost reductions, as well as the continued synergies from the merger integration. Now moving on to our segments. The publishing segment revenue in the first quarter was $699.6 million. Print advertising revenue decreased 24.9% compared to the prior year on a same store basis, reflecting the continued secular pressures as well as the disruption from the pandemic. However, print advertising revenue continues to show improvement each quarter. with 200 basis points of improvement in Q1 as compared with the Q4 trend. Digital advertising and marketing services revenues decreased 10.4% on a same-store basis, reflecting the ongoing impact of the pandemic, as well as cycling against strong comparisons in the first quarter last year. Digital media declined as compared to the prior year as we experienced record audience metrics in Q1 of 2020 tied to the onset of the pandemic and Q1 2020 also benefited from certain large national digital media campaigns that did not recur in the current period. Additionally, we continue to see declines in digital classified, reflecting both secular trends as well as the tough comparison against the prior year period, which still benefited from our historical relationship with cars.com. Digital marketing services revenue in the segment continued to show improvement year over year on a same store basis, improving 460 basis points from the Q4 trend as a result of ARPU growth year over year. Circulation revenues decreased 12.9% compared to the prior year on a same store basis, which compares favorably with Q4 same store trend of down 13.6%. Home delivery trends declined slightly in the first quarter of 2021, reflecting the impact of more moderate pricing strategies. Single copy, while still significantly impacted by the ongoing pressure of the pandemic as a result of lower travel and consumer activity, started to show improvement in year-over-year trends in the first quarter. Digital-only subscribers grew 37.2% year-over-year on a pro forma basis to approximately 1,219,000 subscriptions. and the digital-only subscriber revenue grew 46.3% on a same-store basis as compared with the prior year. Adjusted EBITDA for the publishing segment totaled $102.2 million, representing a margin of 14.6% in the first quarter, an expansion of 170 basis points on a year-over-year basis. For the digital marketing solutions segment, Total revenue in the first quarter was $102.3 million, a decrease year-over-year of 12.7% on a same-store basis. The decline of 230 basis points from the Q4 trend can be attributed to the termination of the industry-wide marketing incentive programs mentioned earlier. That was worth $9.2 million in Q1 of 2020. The otherwise improving trend quarter-to-quarter was driven by our core REACH local business, where we saw double-digit growth year-over-year, with March yielding the best new client productivity month in over five years. Despite these strong performance metrics, client count declines slightly quarter over quarter, primarily driven by planned system conversions as clients are being migrated onto a single platform, as well as the sunsetting of certain product offerings. Long term, we expect our core product set to drive higher recurring revenue and client retention while creating stronger performance for our clients. Adjusted EBITDA for the digital marketing solution segment totaled $9.2 million, representing a strong margin of 9% in the first quarter, in line with our fourth quarter results and well above margins in Q1 2020 of 6.5%. In terms of our Q1 net loss attributable to Gannett, it was $142.3 million, which reflects a a $19.4 million non-cash loss on the early extinguishment of debt in connection with our term loan refinancing, and a $126.6 million non-cash loss in the derivative associated with the 6% convertible notes due 2027. This non-cash impact was driven by the increase in the fair value of the derivative liability as a result of the increase in the company's stock price from year-end levels. And as Mike mentioned, given the fact that we received shareholder approval in February of 2021, there will not be any future mark-to-market activity related to the convertible notes and our operating results. Our net loss also reflected $58.1 million of depreciation and amortization. The company's effective tax rate for the quarter was primarily driven by the impact of the Derivative loss, which is not deductible from a tax perspective, partially offset by valuation allowances associated with deferred tax assets related to interest expense. Turning now to the balance sheet, as we outlined in our last earnings call, the company has fully refinanced our original 11.5% term loan earlier this year, putting our blended rate of debt outstanding at just over 7%. We ended the quarter with approximately $1,540,000,000 of total debt and made $41.2 million of debt repayments in the quarter, including $8.6 million of repayments post our refinancing. These repayments were funded through cash on hand and $10.9 million of asset sales in the first quarter. We expect to generate an incremental $90 to $115 million of asset sales this year with the intention to reach first lien net leverage below one times adjusted EBITDA by the end of 2022. Our cash balance at the end of the quarter was $163.5 million, resulting in net debt of approximately $1,374,000,000. Capital expenditures totaled $7.6 million for the quarter, reflecting investments related to digital product development, technology, and operating infrastructure. From a cash perspective, please keep in mind that we will expect to make our first interest and principal payment on the new term loan on September 30th, and then we'll be making payments quarterly thereafter. Lastly, in connection with the CARES Act, subsequent to March 31st, 2021, the company has received approval for approximately $16.2 million in PPP funding in support of certain of our locations that were meaningfully affected by the COVID-19 pandemic. At the appropriate time, we intend to apply for forgiveness of the PPP loans in accordance with the program guidelines. As Mike indicated earlier, we are pleased with our Q1 performance and believe that we are well positioned for Q2 as well as the second half of 2021. That operator, you can now open the line for questions.
spk03: Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Doug Arthur with Huber Research. Please proceed with your question.
spk01: Yeah, good morning. So $23.2 million in digital circulation revenues in Q1, so roughly $100 million annualized. A, if I do the quick math, it looks like your average, your ARPU is around $6.50 monthly, give or take. And, Mike, I'm wondering if you can just sort of expand on kind of what's the – how do you execute the strategy on digital circulation? I mean, you have so many different markets. Some are large. Some are small. Some are rural. Some are urban. I mean, what's sort of the – What's the game plan to really jack this number up?
spk00: Yeah, Doug. Well, there's actually several initiatives that we are undertaking that over the next five years we believe will allow us to hit 10 million or more in paid digital subscribers. First of all, the million two we have today are all local, so this is – This is, you know, in those markets you're referencing, whether they're cities or rural. And we are developing best practices right now. We've gone to more consistent metering, which I've mentioned, and we're going to develop best practices based on size of market, geography, that will allow us to optimize the continued growth in those markets based on First of all, best practices for when the meter clicks, but also the type of content that goes behind the meter and the type of content consumers are actually demanding. So it's really a data-driven approach combined with the data will really drive our best practices to grow our local subscriptions. We also will – we are in the process of rolling out a paid strategy for the USA Today program. And that is just in its infancy stages, and that we think will present significant upside to our current 1.2 million paid digital subscriber number. We also are implementing a paid digital strategy for our subscribers in the U.K. It's part of our NewsQuest business, and that's in the first inning as well. And then finally, we are... are going to roll out paid subscription offerings for more category content, and those things are in development, sports being one of the first ones we're focused on. So we see growth really coming from $1.2 million to $10 million over the next five years through higher penetration locally, everything driven by data, Doug, but higher penetration locally. turning USA Today into a paid product digitally, growth in the UK, and then growth in other specific categories, specific areas.
spk01: I mean, obviously it's early days, but if you look at the $1.2 million today, is it more concentrated in your larger markets than your smaller markets? Is that a fair description?
spk00: Yeah, that's fair. Okay. Yeah, I'd say across our top 50 markets is where the majority of that is. It's not our biggest, biggest. It's not like the top five. It's not concentrated like that. It's one of the top 50 or so markets. Okay.
spk01: Okay, that's helpful. And then, Doug, just on the balance sheet, I think you mentioned 90 to 115 million of potential asset sales still to come this year. In addition to that, in terms of the free cash flow, for 2021, what's your additional capacity, you think, looking ahead to pay off more debt from operations in 2021?
spk02: Yeah, I think given kind of our current outlook and kind of the both between the mandatory amortization that we'll start making in Q3, as well as kind of there's an excess cash sweep at the end of the year in terms of all cash in excess of $100 million goes to amortization on the term loan. I think between those two things, as well as the asset sales, we expect significant, really significant debt pay down by the end of the year.
spk01: Okay, great. Thank you.
spk03: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Mike Reed for closing remarks.
spk00: Okay, thank you. And in closing, I'd like to reiterate the solid performance of the first quarter. As I mentioned at the onset, we did exceed our internal expectations, and so we're ahead of our plan for the year. And we do expect our results for the year to be substantially better than 2020. We're also pleased with our first quarter results and that our ability to expand our EBITDA margins while also investing in our long-term subscription-led digital strategy. We have clearly defined that strategy with five pillars. And we believe that will transform or evolve our company over the next few years and create sustainable long-term revenue and cash flow growth. We are leveraging our unparalleled reach, trusted media positioning, and longstanding SMB relationships to drive our digital offerings and create growing recurring revenue streams with both consumers and businesses. And we are already making great progress in executing on our strategy as demonstrated by our largest ever quarter for adding new digital subscriptions. With our restructured balance sheet and performance momentum, We're well positioned to create meaningful shareholder value in 2021 and beyond. And we are highly optimistic that our new business opportunities in the sports gaming and the NFT space will create additional significant value for shareholders over the years, over the quarters and years to come. So we're quite excited and quite optimistic. And we appreciate you joining us today. And we look forward to updating you in three months on our Q2 earnings call. Thanks, everybody. Have a great weekend.
spk03: This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a great day.
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