Graham Holdings Company (GHC) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Shareholders of Graham Holdings Company. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Timothy O'Shaughnessy, President and Chief Executive Officer of Graham Holdings Company. Mr. O'Shaughnessy, the floor is yours.

Good morning, ladies and gentlemen. The meeting will please come to order. I'm Tim O'Shaughnessy, President and Chief Executive Officer of Graham Holdings Company, I will act as Chairman of the meeting. Also in attendance are Don Graham, Chairman of the Board of Directors; Wally Cooney, Chief Financial Officer of the Company; Nicole Maddrey, Senior Vice President and General Counsel and Secretary of the company, who will act as Secretary of the meeting; Andy Rosen, Executive Vice President of the Company and CEO of Kaplan; and Emily Barr, CEO of Graham Media Group. Let me welcome all of you to our annual meeting for stockholders for 2020. Due to the COVID-19 pandemic, we are conducting the annual meeting for the first time as a virtual meeting. Now let me describe briefly what is on the program this morning. First, we will dispense with the technical part of the meeting, which involves such matters as the submission of documents and the determination of a quorum. After my remarks and remarks from Andy Rosen, Executive Vice President of the company and CEO of Kaplan, we will proceed to the election of directors and the proposals to be voted on by the Class A shareholders related to executive compensation. After that, the meeting will be open for your comments and questions. Before turning to the opening formalities of the meeting, I would like to introduce those nominees for election as a director who are in attendance. Donald Graham, Chairman; Lee Bollinger; Chris Davis, Tom Gayner, Jack Markell, Anne Mulcahy, Larry Thompson, Rick Wagoner, Katharine Weymouth and myself. Also present from PricewaterhouseCoopers, the company's independent registered public accounting firm, are Scott Fuller and Jason Tuinstra. Will the Secretary please describe all supporting documents that have been presented for the meeting?

For purposes of this meeting, I have presented affidavits of mailing of the notice of meeting; proxy statements; forms of proxy and annual report for 2019 to each stockholder of record at the close of business on March 18, 2020, the record date for determining stockholders entitled to receive notice of and to vote at this meeting; a complete list of the holders of Class A and Class B common stock as of the close of business on March 18, 2020, which has been available for at least 10 days preceding this meeting; a copy of the certificate of incorporation and the bylaws of the company; and the minutes of the last annual meeting of stockholders of the company held on May 2, 2019.

[ Elisa Zagar ] and Elaine Wolff have been appointed to act as inspectors of votes at this meeting. I direct that an executed copy of their oath be filed with the records of the meeting. Will the Secretary please ascertain that a quorum is present?

Mr. O'Shaughnessy, the inspectors of votes have presented to me their first report, which shows that there are present 27 stockholders holding 964,001 shares of Class A common stock of the company, which is 100% of the Class A common stock entitled to vote at this meeting, and not less than 3,430,071 shares of Class B common stock of the company or 80% of the 4,284,294 shares of Class B common stock entitled to vote at this meeting.

I direct that the first report of the inspectors of votes be filed with the records of the meeting. I declare that a quorum is present and that the meeting may proceed to the transaction of the business for which it has been called. As stated in the notice of the meeting, the purposes of the meeting are: to elect directors of the company; for the Class A shareholders, on an advisory basis, to vote to approve the compensation paid in 2019 to the named executive officers of the company; to transact such other business that may properly come before the meeting or any adjournment thereof. At this point, I'd like to give a brief commentary on the company's operations. After that, Andy Rosen, the CEO of Kaplan, will speak about Kaplan's operations. Then we'll proceed to the nomination of directors. While the votes are being tabulated, we will respond to questions relating to business matters. Good morning. This is certainly not the usual annual meeting, but this is true of nearly every company holding this meeting this time of year. Although we are virtually gathering amidst the pandemic that has brought us great uncertainty to the world, we'll try to do what we always do at this meeting, give you an update on the operations of the business over the previous year, provide insights into future prospects, discuss capital allocation and allow for a Q&A period. Thank you all for joining. We know many of you have been impacted by COVID-19, and we hope that you, your families, friends and colleagues are all in good health. We also want to thank the frontline workers in the world and at Graham Holdings. We're helping to keep many of the essential businesses required for people to stay healthy, fed and keep supply chains running so society has the best chance to limit the damage of this horrible disease. I thought I would start by addressing a few high-level items about the business before getting into the meat of the presentation. First, we expect to generate meaningful operating cash flow in 2020. We don't issue guidance and won't here. The folly of guidance has never been more clear than now, but I want to make it abundantly clear, we expect to generate operating cash flow in 2020. Second, we have minimal near-term maturities of debt. We have GBP 60 million of U.K. debt due in July. We will either use cash on hand or our revolver to repay. Our $400 million in bonds are due in 2026, and any other debt is de minimis. Lastly, we have no plans to suspend our dividend anytime soon. The combination of our cash flow and balance sheet allows us to very comfortably maintain it. The above will not surprise shareholders who follow the company closely. However, for those who follow less closely, I'd like to specifically call out these items as the world has changed enough that it seems prudent to provide this reassurance. Next, I want to talk about our people. We are not unique in shifting where possible to a work-from-home environment. Graham Holdings Company and its businesses are learning new ways of working and serving our customers. This disruption is likely similar to what you've been experiencing in your own lives. For some, the shift has been seamless. For others, every day is now take your child to workday. Some of our businesses have been deemed essential, and workers cannot work from home. In these cases, we have taken as many reasonable precautions as we can provide our people, clients and customers a safe workplace environment. We will maintain vigilance around this no matter how the world unfolds. We have also had to lay off, reduce pay or furlough many employees. We are doing what we can for these folks. With layoffs, we have tried to be more generous than usual, understanding that these people will not be going into a normal job market. Our hope is to use furloughs in lieu of layoffs in as many cases as possible and bring people back to work as soon as demand warrants. Where we have reduced pay, our plan is to return pay to previous levels as fast as business results can justify. I'd like to thank all of our employees and particularly the managers of our businesses. They have been working tremendous hours with immense pressure to make the right decisions in a fast-moving environment. They have the interest of our employees and you, our shareholders, in mind as they think through both the present and the future. We will cover the impacts of COVID-19 in more depth shortly, but I thought it prudent to provide some color on our business upfront prior to our discussion on results. There have been several key updates since our last annual meeting. We purchased Clyde's Restaurant Group, the largest restaurant group in the Washington, D.C. area. Comprised of local institutions, CRG has a stable management team and a long history of profits. In our first 7 months of ownership through February, the business on a pretax basis generated approximately 6% of our purchase price. We were off to a good start, both in terms of business results and management acumen. While the length of COVID-19 impacts are obviously unknown, we believe we have great a infrastructure that will help us deliver strong business results when the world ultimately settles into its new normal. We repurchased just over 87,000 shares through March 31. In the U.K., Kaplan expensed a previously remitted VAT tax that it is seeking to recover under an ongoing proceeding. This led to charges of $23 million in 2019, an ongoing incremental VAT expense of $6 million to $8 million per year. In December, we transferred $212 million in liabilities and $217 million of assets in our pension plan to an annuity provider, which increased relative pension overfunding. We think of Graham Holdings as 4 primary operating units: broadcast, education, manufacturing and other businesses. Our operating results in 2019 were mixed. Q1 results were substantially ahead of our internal budgets through the first 2 months of the year before seeing COVID-related impacts in late February outside the U.S. and in March for our domestic operations. [indiscernible] Media Group had a fine year and continued to deliver strong results. Our market share in most markets continued to improve, driven by strong local news. While there was minimal political and no Olympic revenue in 2019, our digital revenue continued to grow nicely to help fill in some of the gap. The earnings of our digital businesses have now grown larger than the earnings of several of our stations. Q1 2020 results from Graham Media Group were once again strong. While we began to see some COVID impact in March, strong first few months of the quarter, combined with Democratic primaries in a few key markets, led to good results. Kaplan's armada of business lines had a few ships whose sails have fully caught the wind, while a few others have taken on water. Kaplan's international business ended 2019 in good stead. Pathways, Kaplan Business Schools and our U.K. and Australia professional businesses all drove meaningful results, and we're well positioned for that trend to continue. As Q1 of 2020 progressed, several of the Kaplan international businesses came under strain from the COVID outbreak. We will more fully discuss impact shortly. Kaplan Higher Education made real progress in 2019. As a reminder, the revenue line of Kaplan Higher Ed is reflective of our operating costs that are reimbursed from Purdue Global plus a booked fee. Reduced revenue is reflective of our lower cost base, not necessarily reduced operating results. We booked $14 million of fees in 2019 and invested heavily in marketing and academics in hopes of seeing increased enrollment in 2020 and beyond. In Q1, we've begun to see the fruit of that investment through increased enrollments and student census. Kaplan Test Prep is accelerating a transition from a centers-based business to an online one. The deterioration of the brick-and-mortar business progressed far beyond our expectations in 2019. And while we served a record number of students online, pricing pressure led to suppressed margins. In 2020, we expect to accelerate our exit from the brick-and-mortar business. This will simplify Kaplan Test Prep to become primarily an online business with a lower cost structure, that there will need -- as there will be less need to support 2 separate lines of business. A note about Q1 of 2020. These results reflect a revenue recognition change. With many standardized test dates rescheduled due to COVID, we extended the period through which a student could access materials paid for, and that affects the corresponding recognition of revenue. This change did not affect cash flow, and the vast majority of this revenue will be recaptured in later quarters. Kaplan U.S. Professional has similar pressures in parts of its business as Kaplan Test Prep, most notably within the CFA exam preparation line. While volumes continued to be strong in 2019, pricing pressure from increased competition eroded margins. The more niche pieces of Kaplan Professional, such as its financial planning and engineering certification, have been less impacted. Our manufacturing segment had a steady year in 2019. Revenue was down largely due to lower wood prices at Hoover. As a reminder, wood is a pass-through cost for the business and does not meaningfully affect the gross profit line. Adjusted operating income was down from the prior year, although results improved as the year progressed. The manufacturing P&L was modestly burdened as Hoover opened a new plant in Florida, and Dekko launched a new branded line of commercial lighting called [ Lux ]. Both of these initiatives incurred start-up costs that have begun to dissipate with scale. Q1 of 2020 showed a promising start as adjusted operating income was up 39% over prior year, even as demand began to trail in March. We believe our manufacturing segment is very well positioned to emerge stronger when the COVID crisis passes. The other businesses segment grew tremendously in 2019, with revenue up 125% over 2018, largely due to the acquisitions of the 2 automotive dealerships and Clyde's Restaurant Group. Operating cash flow for the company as a whole was $287 million in 2019, down substantially from 2018, due primarily to no Olympics and minimal political revenue at Graham Media Group. Total company capital expenditures were similar to 2018. And after 2 elevated years, we expect CapEx to meaningfully decline from 2019. While we previously disclosed we expected a decline of $20 million to $30 million in 2020 from prior year, we expect COVID will result in further reductions. Q1 of 2020 generated $61 million of operating cash flow and $36 million of free cash flow as compared to $72 million and $44 million in the prior year. I will note the anticipated reduction in CapEx began to flow through materially in Q1. Total liquidity for the business remains strong and greatly exceeds funded debt. As of March 31, cash, marketable securities and our undrawn revolver totaled $953 million in liquidity. Because marketable securities are a large portion of this liquidity, we want to provide an update. At 12/31, marketable securities and other investments were $600 million. In February of Q1, we sold $48 million of securities, and at March 31, our marketable securities and other investment balance totaled $451 million. We sold another $46 million of securities in April and as of market close yesterday, our estimated marketable securities and other investment balance now totals $420 million. I now want to address a key question many of you are undoubtedly asking. How is the pandemic and economic shutdown impacting the economic prospects of Graham Holdings' businesses? Well, to borrow from a famous Clint Eastwood movie, I'd like to categorize our outlook into 3 buckets: the good, the bad and the ugly. The good. A few of our businesses have seen or expect to see increased demand due to COVID. Kaplan Higher Education and Purdue Global. This is twofold. When future employment options look less optimistic, people turn to education to further their prospects. In previous economic downturns, we have seen demand for some of our employment-oriented education businesses grow. Additionally, many higher education institutions are preparing for the possibility of teaching classes and providing core administrative functions remotely in the fall. Kaplan's university partners business is answering many phone calls these days. Graham Media Group's digital business. Our engagement and traffic is through the roof, and we expect to be able to monetize some of this increased traffic. Pinna. While one of Graham Holdings' smaller companies, parents at home with kids are currently quite interested in finding non-screen time solutions. Pinna, an audio subscription product for kids ages 3 to 12, is rich in exclusive podcast, audio books and music for $7.99 per month. New subscriptions have jumped substantially since mid-March and appear to be somewhat sustained. Megaphone. A fast-growing part of our company, Megaphone provides 2 products for podcast publishers: first, infrastructure services in the form of a SaaS product offering; and second, a programmatic monetization platform called Megaphone Targeted Marketplace. The SaaS business continues to be an essential service for the industry and grows along with the medium's usage. MTM is seeing continued growth as more and more publishers look to monetize their unsold inventory, as advertising spend in other parts of their business declines. The bad. Graham Media Group advertising demand. Local advertising is down substantially as are key national categories such as automotive and retail. While we expect a vibrant 2020 election season to be somewhat of an offset, we are still planning for a material decline overall. Our advertising-dependent media companies. In addition to Graham Media Group, our smaller businesses, Slate and Foreign Policy, also have diminished advertising revenues. But overall, they will be less impacted because of a more -- because of more diversified business models with meaningful subscription revenue. Manufacturing. We've seen manufacturing demand decline and expect it to in 2020. We expect our manufacturing businesses will be able to scale down variable costs to offset some of these declines. Kaplan's non-higher education domestic businesses. Uncertainty and postponements of exam dates, combined with the pullback on corporate training expenditure, will lead to lower results at Kaplan Test Prep and U.S. Professional. The ugly. International education related to global travel. Global travel has virtually shut down. Our English, French and German language programs either have moved online or have shut down. Additionally, our Pathways and our international higher education programs have been affected and may be further impacted if limitations on travel extend through the fall enrollment period. SocialCode. Many partners have pulled down media spend substantially as a result of the pandemic. SocialCode's agency business has seen 20% to 30% decline in aggregate advertising spend since mid-March. Clyde's Restaurant Group. While shifting to a takeout and delivery business at incredible speed has helped, this can only replace a subset of normal operations. Our scale and infrastructure is a real help in being able to operate in the current environment, but the immediate prospects for Clyde's are poor. Automotive. Our 3 automotive dealerships have been able to maintain limited operations but have seen demand declines in both sales and service. A small silver lining is our market share over the last few months has grown due to past investments. Our 2020 efforts to leverage technology -- our 2019 efforts to leverage technology to build a more convenient experience for customers via home delivery and valet service pickups turn out to be tailor-made for a COVID world. We have a larger share of a smaller pie, and we hope these gains hold whenever we return to a more normal world. Two key tenets of how we operate our business: keeping a conservative balance sheet and having diversified income streams have put Graham Holdings Company in a strong position to weather the current storm. We'd like to share a brief case study on some of our capital allocation. The largest capital deployment in M&A over the last 5 or 6 years has been building our manufacturing segment. Total invested capital in our manufacturing segment has been $540 million. In the last 12 months, this segment provided $61 million in operating cash flow and $50 million of unlevered operating cash flow -- operating free cash flow. Total free cash flow return for this segment is $198 million. As of March 31, we had a net investment of $342 million. We view these results as satisfactory to date with good long-term prospects ahead. Additionally, while not a rate of return calculation, we believe this segment has improved the anti-fragility of our company and strengthened the long-term prospects of all of Graham Holdings Company. Now I will turn it over to Andy Rosen for an update on Kaplan.

Thanks, Tim. As you indicated, like so many businesses across the economy, Kaplan has been significantly impacted by COVID. You saw some of that impact in our first quarter results, and we anticipate the pandemic will continue to affect our results, at least through the rest of the year. I will take you through what this looks like and what we're doing about it, but it might be useful first to remind everyone what it is that Kaplan does. Kaplan is a large organization with a number of underlying businesses and customer groups, but they're primarily structured around 4 priority areas. First, we help students qualify for, access and succeed in school from high school through to graduate and professional schools. So this includes our traditional test prep, admissions and tutoring programs where Kaplan has been the leader for more than 80 years. It also includes our language schools and programs that we run in partnership with universities. Second, we help students and working professionals qualify for, access and succeed in jobs. Here, we offer a wide range of programs, preparing people for licensure or certification exams and as well as other types of professional training. Kaplan is a leader in medicine, financial services, accountancy, wealth management, real estate, law, technology, analytics, IT, engineering, architecture and more. We partner with more than 4,000 corporations and businesses globally. We help them upskill their workforces, improve employee performance and ultimately become more competitive. Third, we help universities identify, access and enroll highly qualified students and help them ensure their students are successful and ready to work. We bring tens of thousands of international students to universities in the U.S., the U.K., Australia, New Zealand, Canada, Singapore, Hong Kong and other locations, or at least we do when students are able to travel. We help universities serve tens of thousands of students online, and we help them identify and impress qualified candidates for on-campus admission. And increasingly, we help ensure that students graduate with an industry-recognized credential as part of their education. Kaplan enjoys relationships and partnerships with more than 2,000 universities, colleges, schools and school districts worldwide. And fourth, we help companies hire highly qualified candidates, and we help ensure their employees have the skills necessary to make them successful. You see this in our thousands of corporate relationships around the world. Companies depend on us not only to ensure that employees pass the licensure exams that are required but also to find the right candidates and ensure that employees perform well in their jobs, providing an important competitive edge. Each one of these 4 priority areas enables us to exceed -- to excel at the others. While we have competitors in individual market segments, few, if any, of those competitors can work with students over their lifetimes, connect them with universities and companies and help those universities and companies promote their success. We have been and will continue to invest significantly in developing this interconnected suite of offerings. Each of these underlying market segments has been very dynamic over the last few years, even before the emergence of COVID. The current crisis is accelerating trends that we've been anticipating for some time. In some ways, that will play to our strengths. For example, there will be an expanded openness to the kind of online and digital education solutions we've been pioneering for decades. There will, we believe, be more focus on the work readiness of college graduates, an area where we have a lot to offer. And there will be an expanded push to deliver education in a less expensive, more practical fashion. As painful as the current crisis is, we think these developments will, over time, be good for education as well as good for us. That said, in the short to medium term, the pandemic has had serious negative impact on Kaplan. First, just under 30% of our revenue over the last few years has come from helping tens of thousands of students travel each year to English-speaking countries to study with us in our partner universities. Examples. In our Pathway business, we had 21 university partners, including 9 of the world's top 200. Typically, we teach international students for their first year before they matriculate into the university's own programs. In our language schools, we help 42,000 students each year experience life in a foreign country while they study English, French, German and Spanish. In Singapore, we host and operate the branch campuses of 11 universities, serving both Singaporean and international students. And in our Test Prep business, many of our international medical licensure students are students from outside the United States hoping to get licensed to practice here in the U.S. All of these efforts have one baseline requirement, students have to be able to travel. Students from Jakarta or Beijing or Lagos, really from any country in the world, come to our 65 international student-focused locations, from Brisbane to Berlin, from Boston to Bournemouth. And in that respect, our economics for these businesses during this crisis resemble that of a travel business. Fortunately, we don't go immediately to near 0 like in an airline or hotel because many of our students have committed to multiyear programs on campus. Many of these students are now studying with us online, and the reviews of our online programs have been very strong. But we can't currently bring new students in, and we're not able to offer the full experience our existing students are seeing today. All of those 65 study locations for international students are currently closed. While demand persists, we continue to enroll new students for future studies, we can't predict when they will be able to arrive. In the meantime, our financial performance for these businesses will suffer materially. Second, Kaplan is, of course, synonymous with test preparation. We're not only the leader of U.S. academic programs like ACT, LSAT and MCAT, but also the leader in U.S. professional tests for financial services, real estate, insurance, medical licensure and other areas, for global designations like the CFA or CFP, for the U.K.-based accounting exams, for Australia's wealth management designations and so on. In all cases, these exams have been postponed indefinitely. And since students typically study for a specific test date, that has removed the primary trigger for students to begin studying, leading them to defer enrollment. As Tim mentioned, for those who are already studying, we have responded by extending our support, granting most students an extension of time to study with us. This ensures that their Kaplan program is still available to them when their tests resume, a move that's been greatly appreciated. From an accounting standpoint, again, as Tim noted, we are required to stretch out revenue recognition over the period the program is available to students, which has led us to shift substantial revenue out of the first quarter into the rest of the year. Much, though not all, of that decline in revenue from the first quarter will be picked up later this year. This was the majority of the miss you may have seen in Kaplan Test Prep's first quarter, for example. You'll see a similar impact in the second quarter. Third, all 145 of our total student locations around the world are currently closed. We have shifted the vast majority of these students to online study. And fortunately, that's something we're good at. But there are students who really want a place-based experience and we can't provide that now. And fourth, our businesses are responsive to the economy. For some, like our professional businesses, a faltering economy is a drag on our revenue as companies pull back on training. And our consumer-based businesses depend on families having the funds to pay. As I've noted, there are positive impacts alongside the negatives, particularly in the longer run. Over the course of 2020, though, I'm afraid the negatives will greatly outnumber the positives. One place where we could see some upside over time is at Kaplan Higher Education and our work with Purdue, but also with some of our newer university relationships. You will recall that 2 years ago, we sold Kaplan University to Purdue University. We retained a long-term contract to provide support for the resulting new institution, which became Purdue University Global. We are compensated via a fee that is linked to the overall revenue of the institution. I'd like to conclude my comments with a short update on how it's going. At the time of the transaction, Kaplan University had 29,000 students. We were hopeful that by bringing the institution under the strong academic leadership and overall control of Purdue, and by becoming part of a deeply admired state university system we'd see a rapid increase in the number of students. It turns out we were naive. As respected as Purdue is, it was, at the time, less well-known for online offering than Kaplan University was. For the first 12 months after the transaction, new student enrollments actually dropped by 5%. To be clear, this wasn't any reflection of the reputation of Purdue in the marketplace. At the same time, applications to produce traditional campuses were continuing to grow. It's just that we collectively needed to educate the market about the merits of this new institution, even as Purdue's academic leadership was evolving the new university. Under the terms of our contract, Kaplan effectively assumed the financial responsibility for an incremental $51 million investment to raise awareness for the new institution and to make the academic, operational and policy changes necessary to place it firmly within the overall Purdue system. Our arrangement with Purdue has a waterfall or prioritization. It describes how cash that comes into the institution, primarily in the form of tuition payments, gets distributed. First to be reimbursed are the expenses that Purdue Global incurs. Second is a priority payment we make to Purdue for the first 5 years, which will be reimbursed to us in later years. Third are expenses incurred by Kaplan. Fourth, and only to the extent the institution has available cash, is Kaplan's compensation, which is a combination of the Kaplan fee at a deferred purchase price currently totaling 12.5% of revenue. All revenue after payment of Kaplan's compensation belongs to Purdue. This waterfall ensures that Purdue is protected from losses, particularly in the early years when investment has been needed. In the first 2 years, because of the incremental investment in marketing, academics and operations, there has not been sufficient cash available to pay Kaplan's full fee. This is no surprise. We knew we would need to fund these incremental investments and are happy to do so to help build an institution we think can become very valuable to students, to Purdue, to Kaplan, to the country and ultimately to students globally. While you don't yet see it in the Kaplan P&L, we're seeing good signs of that value manifesting. First, the decline of students that I mentioned has very much reversed. While we don't intend to disclose student counts on a regular basis, it's worth noting here that starts were up strongly in the first quarter, leading to a student population of 32,000, a 9% jump from the previous first quarter. In Indiana and some parts of the Midwest, where Purdue's brand is particularly strong, enrollments have been up much more. Equally significant, the student census profile has strategically shifted to higher-value bachelor and graduate degrees and to business and technology programs that lead to better student outcomes. We are seeing steady improvement in the academic preparedness of students. That's important, not just because it indicates that better-prepared students are choosing Purdue Global. These students are also much more likely to stick with their studies. And sure enough, the retention rate for students at Purdue Global has seen steady improvement, which is good for students and good for the institution. While it's far too early to draw any firm conclusions about the impact of COVID or a resulting economic downturn, inquiries to Purdue Global were up in April after a short drop during the second half of March, when students seem to have been distracted by the convulsions in the economy. Historically, economic downturns have led to more students seeking out higher education. So how closely this particular crisis adheres to historical precedence is uncertain. But overall, we are optimistic about the long-term future of Purdue Global. One additional footnote, our transaction with Purdue has also served to open up what is becoming an array of partnership possibilities with other universities. Our partnership with Wake Forest is just a beginning. We can apply our relationship and certain academic assets from Purdue Global, along with our 100-plus professional certification programs, student recruitment and online enablement capabilities in myriad ways to serve other universities interested in long-term partnerships. I've been at Kaplan a long time, and we have never had as much uncertainty about a year as we have now. We know it will be tough. But we've been through tough times before, and we will navigate through this year as we have in the past. As always, we will continue to focus on making sure students are well served, living up to commitments we've made to partners, prioritizing the safety and well-being of employees and ensuring that our economic return is preserved as much as possible under the circumstances. I'm proud of the Kaplan team, which not only transitioned with perfection from offices and centers to homes and online but also acted forcefully and quickly to significantly reduce expenses. That includes temporary pay cuts for employees earning over $50,000, and it includes some appropriate operational and organizational shifts. We have now turned to aggressively preparing for all scenarios as the world emerges changed by this crisis, including a number of ways that could be very good for Kaplan long term. Tim, back to you.

Thank you, Andy. While the future is unclear, we are steadfast in running the company in a way that will see us through these health and economic crises, while also preserving future optionality and the ability to play offense, even in the midst of 2020. Our balance sheet, industry diversification and geographic diversification are showing their merits in 2020. We will continue to operate opportunistically and believe we can emerge from the crisis with strengthened positions across many of our businesses. Should strategic opportunities present themselves, our balance sheet allows us the flexibility to act quickly. Make no mistake that 2020 will be challenging, but we believe we have the team and resources to meet that challenge. We're taking it day-by-day at Graham Holdings with an ever-present eye on the future. We know some of you may have substantial portions of your net worth invested in the company. We are very aligned, as Don and I, along with many members of management, do too. We will continue to run the business like owners because we are owners. I hope you have found this update on Graham Holdings Company useful in understanding the impact of COVID-19, but also equally useful in confirming that we will continue to run the company with the same values in which it has been run for decades, even in a time of crisis. We enjoyed the spirit of partnership we have with many of you who have come along for the ride. After we handle a few business matters, we will move to the Q&A portion of the session and open it up for questions. Thank you. The meeting is now open to nominations for election of directors. We will then have the voting on directors and on the proposal before the Class A shareholders. Following the vote, we will open the meeting to any questions on business matters or comments you may have for us today. It is now in order to proceed with the election of directors. There are 10 directors to be elected, 7 by the holders of Class A common stock and 3 by the holders of Class B common stock. The chair recognizes Mr. Cooney, who is a holder of Class B common stock and who is also a substitute proxy for a holder of Class A common stock.

I nominate the following persons for election as directors of the company to hold office until the next annual meeting of stockholders and until their respective successors shall be elected and shall qualify or as otherwise provided in the bylaws. For election by the holders of Class A common stock: Lee Bollinger; Tom Gayner; Donald Graham, Jack Markell, Tim O'Shaughnessy, Rick Wagoner, Katharine Weymouth. For election by the holders of Class B common stock: Chris Davis, Anne Mulcahy, Larry Thompson.

I second the nominations.

There being no further nominations, I declare the nomination closed. The polls are open for voting for the election of directors and for the proposal before the Class A shareholders. I have been informed by the inspectors of votes that the holders of all the Class A common stock have voted their shares. With respect to the Class B common stock, many of you have already sent in your proxies for this meeting. If you have already sent in or voted your proxy by phone or electronically, your shares will be voted as you have instructed. If you have not already voted or if you wish to change your vote, you may now cast your vote online. We will now open the floor to any questions or comments you may have. We received several questions prior to the meeting, many of which were addressed in our remarks. [Operator Instructions] We will take as many questions as time allows. Ms. Maddrey, would you please read the first question submitted by a shareholder?

Certainly. The first question submitted in advance of this meeting is as follows: How do you think about the current intrinsic value of the business? In the context of this unprecedented uncertainty and the total absence of guidance from analogies to the past, I would like to know how you are now thinking about the intrinsic value of the enterprise.

Well, the intrinsic business is -- the intrinsic value of the business is certainly down from 3 months ago. I do think our balance sheet and diversified income streams make long-term impairment in aggregate less likely on a relative basis compared to other businesses. But it does feel like it could take some real time to recover, based on the economic reality we're seeing. So we just don't know how long that world will take. But it's certainly down and down not insubstantially from, call it, 3 months ago.

Thank you. All right. The second question from the shareholders submitted in advance. While it is too early to predict the shape of the economic recovery ahead, roughly speaking, how much levered free cash flow do you expect to burn in 2020?

This is an easy one. We don't expect to burn cash in 2020. We expect to generate cash.

Okay. The next question. It seems to me that for a well-capitalized company with strategic M&A agendas like Graham Holdings Company, the current environment presents an opportunity to position for transactions as and when the crisis abates. Historically, you have done a remarkable job focusing on liquidity, balance sheet strength and understanding access to financing. Could you please describe how you are viewing your potential strategic target list, both tuck-ins and green deals? How have your views changed over the last year?

Well, we'll operate how we always do in terms of M&A, which is we'll look for businesses that fit our criteria, and we'll be opportunistic on that front. We don't wake up and say, we must get into a category. There certainly are businesses that we have kept track on over the years that we think are interesting and good businesses. But thus far to date, the world is still kind of settling at this point in time where those have not turned into opportunities that we can really look at. But we will -- we do expect over the coming next year or 2, there will likely be opportunities for us, and we'll evaluate those as they come along. Certainly to date, larger deals, nothing we have seen right now the price looks right. There's one smaller deal that we're -- that we have been looking at a little bit right now. But I do think the world is still stabilizing a bit. But we do have our -- we have a balance sheet, and we expect to generate cash flow. So we'll evaluate things how we always do. And if the price is right on something that we think makes sense, we do feel like we have the capability to do things still.

Thank you. All right. This next question, are you worried at all about the gross amount of debt at Graham Holdings Company?

I believe this is one that was submitted in advance specifically for Don. And so I -- we did reach out to him and -- to get his response. So his answer was short, which was -- and are you worried at all about the gross amount of debt at GHC? His answer was no.

Okay. Thank you. This next question, would you please tell us about the new relationship on the investment side for the pension plan?

Yes. So we took a portion of the pension plan in recent months and moved some assets to a new investment partner, which is Durable Capital Partners. So that's a firm run by Henry Ellenbogen and several other folks who had previously been at T. Rowe Price who we've known for a long time and we really respect their culture and acumen and investment process. So that is where some portion of the pension funds have moved to in recent months.

Okay. Next question, what is the best counterargument to spinning off Graham Media Group? This would seem to significantly improve Graham Holdings Company's strategic optionality with little to no cost.

Well, before you even think about specific scenarios of asset structures or taxation or anything like that. We tend -- that tends to be a second-order type of evaluation for us. And really, the first order is doing something like that with Graham Media Group, whatever structure you wanted to talk about. The lens we look at is a simple one, which is, do we believe it's the right long-term move for shareholders? And it certainly is something that the Board and management have looked at and considered and thought through, what is the right term thing to do -- right long-term thing to do for shareholders. And I can tell you today, we're very glad that Graham Media Group was part of Graham Holdings. The cash flow being provided is very useful to Graham Holdings. And I believe, in 2020, it will actually pretty drastically reduce the overall risk at Graham Holdings for shareholders. That world -- who knows what the future holds, that world could change, of course. But we're really glad that we have Emily and team working for shareholders today.

Okay. Next question. Without asking for any specific numbers, can you talk about how you approach valuing the company, particularly in regards to how you determine that share repurchases are a wise use of capital at a particular share price? And can you discuss whether or not you account for the overfunded pension plan and your determination of value?

Yes. It's a good question, particularly because at times we have done repurchases, and as I think most shareholders that follow the company closely know, we don't have a set repurchase program. We do it when we think that there's a material discount to intrinsic value. So I talked to you a little bit how, without specifics, which wouldn't be appropriate, but talk through a little bit how I think about the company. There are really 4 primary buckets of value that would go into an intrinsic valuation -- or intrinsic value calculation. There is a net cash position, there's our marketable securities portfolio, there's the operating businesses and then there's pension. So on the operating businesses, I can tell you something that we -- and the way that I think about it is when thinking of value there is if we had to acquire those businesses on the open market, what would we pay? And that goes into our calculation. So on marketable and on cash, I think those are relatively straightforward. And then on the pension, we think there's certainly value there. There's value in the sense that we offer good retirement benefits to our employees. We can use it largely instead of funding matches of defined contribution plans. But there's also real value on option value as part of M&A. And we have done transactions before where we have assumed pension liabilities. And that's something that certainly could happen again. But in terms of value calculation as part of an intrinsic value, it's hard for me to answer other than we think there's value because of those things. There is also a floor value. There's a liquidation value of some overage that could be done. There's some pretty heavy taxes associated with it. But that number, it's certainly less than 100% tax. So there is a kind of floor valuation on overage depending on what your perspective was. So we -- I really go and I take those things together and then realize we might be wrong, and so apply a pretty material discount to whatever value comes from that assessment. And material, in this case, is usually a 25% to 30% discount.

Okay. A follow-up question to that. Could you talk about any potential methods of using the overfunded pension plan to increase shareholder value? I believe, in the past, a part of the consideration for the acquisition of 2 television stations was the acquisition of pension liability. Is that a possibility as well for future acquisitions?

Yes. So this obviously ties into the last question. It certainly could, and we would like to continue to explore that path and have continued to explore that path. And so there's nothing that prohibits that from happening again, other than finding a willing partner with a business that we like that we can agree to terms up.

Okay. Another question from a shareholder. At the end of the first quarter, the company's common stock portfolio was about $450 million, which is roughly 1/4 of the market value of Graham Holdings. Are there any plans to disclose more information on these securities? And if not, what would be the harm of doing so?

It's a good question. And it's something we should probably go back and discuss. So I was going to -- the marketables have gone up, and when we've spun out the cable business several years ago, the ratio has changed pretty substantially. So it's a good question, something we should go back and evaluate.

Okay. This last question from shareholders. With the corporate ad spending depressed and sporting events delayed, what actions are the broadcast TV stations taking to maintain their position with advertisers and protect share of revenue when advertising spend eventually rebounds?

Emily, are you on the call and available? I think you're probably best positioned to answer this one.

Yes, I am. Thank you. So what we're doing right now is we're staying very, very close to our advertisers who largely are weighted more towards local advertisers, and they're keenly aware of how important coverage of local news is. We've seen ratings rebound in a huge way on the -- in all of our markets. So what we've done is we've stayed close to our advertisers. We're converting as much of the sports money, things like the NBA Finals and money that would have gone to the Olympics. We're trying to convert that into local news, local specials. We've increased the amount of local programming and local news that we've been producing. And we have found that it's resonating pretty well with these advertisers who see a keen interest in what's going on in our markets and want to be a part of that. So we've been pretty successful so far in converting at least some of those dollars to what we're doing in news.

Great. Thank you, Emily. There are no further questions.

Okay. Thank you for shareholders that submitted questions. Very much appreciate it. We'll move back to the formal part of the meeting to -- and then adjourn shortly. So the polls are now closed and the votes for the election of directors and the proposal before the Class A shareholders have been tabulated.

Mr. O'Shaughnessy, the inspectors of votes have presented their second report showing the following preliminary results. On the election of directors to hold office until the next annual meeting of stockholders and until their respective successors have been elected and shall qualify or as otherwise provided in the bylaws, the following directors have been elected by the holders of the Class A common stock and all received 964,001 votes: Lee Bollinger, Tom Gayner, Don Graham, Jack Markell, Tim O'Shaughnessy, Rick Wagoner and Katharine Weymouth. The following directors have been elected by the holders of Class B common stock and all received at least 3,129,105 votes: Christopher Davis, Anne Mulcahy and Larry Thompson. On the proposal to approve the compensation paid to the named executive officers of the company in 2019 and on an advisory basis, the holders of all 964,001 shares of Class A stock or 100% of the outstanding Class A stock voted for the proposal.

I hereby declare that based on the preliminary report of the inspectors of votes, individuals nominated by the Board of Directors and named in the report have been duly elected directors of the company. In addition, the proposal for the Class A shareholders has been duly adopted by the holders of all outstanding shares of Class A stock entitled to vote thereon. I direct that a final report of the inspectors of votes be filed with the record of the meeting. Is there any further business to be brought before the meeting? If not, I suggest we adjourn.

I move that this meeting be adjourned.

I second the motion.

All those in favor of the motion? Opposed? Motion carried. I hereby declare the meeting adjourned.