USA TODAY Co., Inc. (TDAY) Earnings Call Transcript & Summary

This is [indiscernible] Pablo here. I'm a Managing Director within the TMT industry coverage group at Deutsche Bank. I'm joined today by Mike Reed, CEO; and Doug Horne, CFO of Gannett. Hello, Mike and Doug, thank you for joining us today.

Good morning. We're happy to be here.

Good morning.

Good morning. It's almost hard not to look back almost a full year behind us as we sit here in March 10. And for every business, the pandemic has been -- has impacted the businesses differently. So I almost want to start out there. And from the perspective of your business, both on an operational level as well as employees and dealing with such large workforce, how have you -- or as a company, as a team felt that the challenges in the past year that the pandemic brought about, not at least talking about some of the transformation of the company has gone [indiscernible] sounds, and I'll try to touch upon those other aspects in a [indiscernible] it here, but really more from management of the company perspective, how has that been for you in the past year?

Yes. I -- thanks for that question. It's obviously, it's been difficult. The stress and anxiety that it's caused for our teammates across the country is real, just like it is for just about any other company. So we -- back in late March and early April, really mid-March started to first emphasize how are we going to keep our colleagues safe in the company. And so we very quickly went to a work-from-home environment, which we were not really set up to do. We had a very small percentage of our employees working from home, but the team did a fantastic job, both in our technology department and our HR department and of course, our managers across the country. And within a matter of 3 weeks, we had 95% of our workforce working from home that could work from home. Obviously, we have production crews that print the newspaper every day, distribution crews, so they can't work from home. And they've been in going into work every day since the pandemic started, and so you can imagine how proud we are of them, but we had to quickly make the work environment safe as well, which we were able to do. And we're proud to say that we haven't missed a publication date because of the pandemic. And we've been successful in keeping our press crews healthy and then also successful in keeping our employees safe and healthy and their families. So that was really priority #1 for us. And then a close 1a, I wouldn't call it 2, but a close 1a was we knew as we went into lockdown in the country that it was our responsibility to make sure that the citizens in the communities that we serve were informed. And that we were going to be one of the only voices, local voices that is going into their home every day. And so the folks that could see on a national scale what the pandemic is doing needed to know how it was impacting them locally. And so we were able to do great work on the news and information side through our journalism teams to make sure that our communities were informed. And so we saw significant bumps in audience and acceleration in digital subscription growth and things like that, which was good for the business. But our intention really was to keep communities safe. And we did take all content that was related to COVID down from being -- it wasn't put beyond paywall. So we did -- behind paywall. So we didn't use the pandemic as an opportunity to make more money. It was quite the opposite. But we did -- so we put our employees first in our community kind of 1a and did the things we needed to what we thought was right for our communities and for our employees. But on the -- more on the fiscal, on the business side, which we had to turn our attention too quickly, too. It was difficult to deal with because as the country shut down, revenues saw a material reduction. And that really had us focus quickly on cost structure things outside of operating expenses where we spent cash, like CapEx, pension, things like that. And we really altered our fiscal policies pretty quickly in response to what COVID was doing. And as we look back almost a year later, it was -- that was really a blessing because our company is so much stronger today. And Doug will talk about that later. I know -- with the future questions, but the cost structure is materially lower because of the work we did that became permanent. Our CapEx spend is lower, our pension spend is lower. Our interest costs are significantly lower. We accelerated some of the real estate asset sales that we had in place so that we could pay down debt and -- as we'll talk about this later, too, but our debt's been refinanced. So our cost of capital is lower. So our cost structure is a great -- is in a much better place today than it was a year ago. Our balance sheet's in a much better place today than it was a year ago. And that gives us a lot of encouragement that we're -- that our fiscal policies are -- they're working well right now. Our focus on debt repayment that became priority #1 as a result of the pandemic and -- has really helped us. And so we're -- blessing in disguise has been a little bit of alter of our fiscal policy to one where we're putting together a really pristine balance sheet, lower cost structure, lower outside costs beyond OpEx that positions us well to see revenues return and to see pretty significant growth in our EBITDA and cash flows in the business as our revenues return, which we have been seeing as well. So it was a tough year on the employee side, for sure, with all of our colleagues, but I think we did as well as we could have done. And we're now pretty excited about what lies ahead.

Thanks for that, Mike. And I agree, I think people are one of the most important assets for a business like yours. You have the dual responsibility of managing not only people internally, but also communities that you serve. And so certainly a tough year as a management team to manage through all those challenges. You touched upon this a little bit as you spoke about the financial aspects of challenges that you dealt with. I do want you to elaborate a bit further, both you, Mike and Doug, as we looked into the past year, maybe extending into pre pandemic, this past 18 months have been quite transformational for the business. You completed your merger between New Media Investment Group and Gannett late 2019. Doug, you started in your current role in April, presumably virtually. The capital structure was refinanced that allowed you additional flexibility with your business and operations. And so there have been a number of key events for the business in the past year. Maybe one by one, if you can touch upon those events, how that has transformed the company and has put you on path to success looking forward? I think that would be helpful.

Yes. I'll start, and then ask Doug to give some thoughts on some of this as well. We really had the opportunity through the initiatives we were taking. Once we got comfortable that we were -- we had preserved ourselves through the crisis and we had built adequate liquidity. We had lowered our cost structure. We started to see some improvement in our revenues. And so -- and we had some asset sales and debt repayment. And so we were able to really start to then focus on the future. And we quickly turned towards the -- back towards the transformation. How are we going to set this business up for growth for the next 100 years, like it's seen for most of the last 100 years. And so we've really kind of heightened the focus we have on our strategy around transformation and the quality of our revenues. And those revenues coming primarily from digital and subscription-led businesses. And we feel like we have a great plan in place today that we're executing on. That we're starting to see the results in our numbers, and we'll continue to do so. In the fourth quarter of this year, we saw year-over-year growth in our key categories that are future growth despite the pandemic, like digital subscriptions, like our digital marketing services business that we're focused on from a growth standpoint, national, digital advertising was a growing category. So we were able to really hone in on strategy. We've brought in management from the outside that was not historical industry management but management that had been through transformations and had significant digital experience. So we feel like our leadership team is rounding out. And so on the operational side, we feel like during the last 6 months of 2020, we were really able to take some time to put pen to paper on our strategy to transform the business. And that primarily means improving the quality of the revenues. So there's significantly more value in those revenues because their annuity-like in more subscription led and digital led. So they come with a much higher valuation. So we were able to really put pen to paper on that and turn it into then an execution plan, bring management in around us and around the team to round out the team to have the expertise to do so. So I couldn't be more confident right now in our future outlook for the business and for its transformation. You also mentioned the merger that we had with Gannett, the legacy New Media Company and the legacy Gannett. I think it's worth pointing out because as I talk about execution going forward, you look backwards over the last 15 months, how did we execute what did we say when we completed that acquisition. And at the time in November of 2019, we told the market, look, we have a high priority on debt repayment through asset sales and cash flow repayments. We hoped to -- we viewed the loan that we took out at the time, which was a TLB, Term Loan B, 11.5%. And we had viewed that as a bridge loan and wanted to have that fully taken out and replaced by the end of 2021. We also told the market that we could do about $270 million of synergies within 24 months. And that we could sell close to $100 million worth of assets. We entered a pandemic, which obviously, you would think would slow us down. But 15 months later, the debt is fully refinanced. And we've lowered our debt from $1.8 billion to -- our new Term Loan B is just over a $1 billion, so $1.45 billion. We have $497 million of converts on the balance sheet as well that were issued at a price that was significantly higher than our trading price at the time. We've lowered our cost of interest from 11.5% to about 7.15% now. So our interest costs are going to be down over $100 million in 2021, and that will go down -- I mean, I'm sorry, over $90 million in 2021, and that will go down even further as we pay down debt. But so on priority #1 of debt repayment and refinancing the term loan that we talked about at the acquisition time, we were way ahead of schedule there. Second thing we talked about was the synergies. And we're now -- we've been publicly talking about the fact that our synergies are going to be well north of $300 million. And so -- and within the time frame we had originally laid out. So we're outperforming on the synergy expectations. And of course, we've sold -- in 2020, we sold almost $250 million worth of assets. And we far outperformed the asset sale forecast that we had given. So I feel like despite the pandemic and the shifts that we need to make as a result of that, we're far exceeding expectations from the original acquisition. And that also positions us well for 2021 because we have an improved balance sheet, lower cost of capital. And as I mentioned, a great operational team and a good plan to execute on to really change the nature of the revenues on a go-forward basis. So I think Doug can add to that, but those are some of the highlights of the last year since we completed that acquisition that I think we're pretty proud of. And sets us up well for the future.

Yes. I would just add to that. I mean, I did start in April of last year. And so I started virtually just a few months after the merger had been completed. And for a moment, setting aside, obviously, there's been the negative top line impact that Mike referenced. But I actually think that having the pandemic and having the virtual environment, somewhat leveled the playing field in terms of the integration and having everybody kind of participate equally. And I think that's one of the interesting things about being able to kind of everyone be online and be on these Zoom meetings. It is a very level playing field. And I think also, the pandemic, I would say, rallied the company in a super positive way. I came in April when the company had done really a lot of execution and planning already in terms of the COVID response. And they, in a matter of days, had planned out a significant amount of temporary cost savings in Q2. But that also allowed us to kind of implement more permanent cost savings towards the back half of the year that I think were as a result of having that pandemic and that challenge ahead of us. And so I think that put us further ahead, similar to what Mike mentioned. Also, I think it gave us an opportunity to revisit, like Mike said, some of the capital structure, and some of the capital decisions. And so we were able to kind of revisit our dividend policy. And so we're no longer paying a dividend right now. And as Mike mentioned, our #1 priority is debt reduction. And because of those incremental cost savings and the focus on making sure we were hitting our integration targets and really exceeding our integration targets, I think it positions us really well for next year or for '21 on an operating basis. And as Mike walked through, from a capital structure perspective, we're in a much improved position from a debt interest rate, cash interest perspective. And so absent the top line impact, the company is in a much stronger position than when we entered the pandemic.

That's helpful. Thank you, Mike, and thank you, Doug. I think on one of the points you made, and maybe that was you, Mike. I see a question from the audience, and I'm trying my best to read through what the question is. It talks about an announcement of getting to 10 million subscriptions until the end of 2025. And so I think the question is just asking about your viewpoint on that. Is that too optimistic to get to that level?

Yes. Thank you for that question. No, I don't think it's too optimistic when you put it in context. Are -- as rated by Comscore, our audience that this is our unique visitors every month here in the U.S. is about 150 million, and we have another 40 million visitors in the U.K. So we're reaching 190 million people every month around the world. And so when you think about 10 million, you have a pretty small penetration of 190 million. To give further context to that, we've surpassed 1 million already. And we're well on our way. And I would -- our great colleagues that have done a wonderful job at the New York Times. If you look at their digital subscription strategy, they're at or above 7 million today. And just a few years ago, they were at 1 million. So -- and I referenced them in context because their unique visitors was rated by Comscore, about 100 million a month. So -- and their goal is 10 million. And so their goal is to basically penetrate 10% of their digital audience. Our goals are actually much lower than 10%. But I think we had a unique content advantage over some of our peers in that we have this unique, comprehensive, very necessary local content on top of award-winning national content. So when we think about appealing to a broad audience across the country from a subscription led orientation we have something nobody else has and -- this extremely valuable local content that's very unique. And so I hope that I'm not overly optimistic with the goal of 10 million. Hopefully, I'm being realistic or even a little bit pessimistic because our audiences are significant, more significant than just about any other digital subscription business here in the U.S. And we're growing quite nicely today. And we've brought in, as I mentioned, management of that -- from outside the industry that has significant experience in growing consumer subscription-led businesses. And so we're thinking about marketing differently. We're thinking about product differently. We're thinking about content -- paid content verticals differently. So I see tons of opportunity there. And I hope that we're -- I hope much like we talked to 15 months ago about how synergies would be $270 million, and they're well over $300 million. We've refinanced the debt. By the end of 2021, we were 10 months ahead of schedule on that. We'll sell $100 million of real estate. We sold $250 million of assets. So I hope that we're telling the same story on the 10 million, too, is that we set a goal, but we far outperformed it. And I think the numbers that we see give us a lot of confidence that we'll outperform that number.

Thanks for those comments, Mike. Doug, I have one for you, and you touched upon this a little bit. But maybe further elaborate on the refinancing of the capital structure as you went into it, what sort of operational flexibilities were you looking for? Was there certain aspects of the refinancing that are critical for you as you talked about the refinancing?

Yes. I mean, broadly speaking, I think our focus was mainly on lowering the cost of debt and getting to what we would consider a more traditional structure in terms of the terms and the restrictions in the facility. And I think what we achieved with the term loan refinancing hit on all those. We lowered our interest rate significantly. We're -- as opposed to 11.5%, we're down to kind of LIBOR plus $700 million with a 75 basis point floor. There's only one financial covenant in that facility, which is a minimum cash requirement of $30 million. And kind of all of the other kind of terms and provisions are very in line with what you would see in terms of a market-based facility. And so we're very happy with that. And I think, like Mike said, we've -- we feel good about the fact that we were able to execute on that early, ahead of schedule.

Thanks, Doug. Mike, over to you. Just maybe taking a step back and looking at your outlook for the industry as a whole. Being a very important player as part of an industry that has gone through decades of transformation. How do you sort of see that going forward? Is the industry doing all the right things? Or are there aspects of it that need to looked at it differently? But just generally, your view also from your audience and customers and clients as to what that outlook looks like?