TEGNA : Transcript of first-quarter 2021 earnings conference call

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EDITED TRANSCRIPT

TGNA.N - Q1 2021 Tegna Inc Earnings Call

EVENT DATE/TIME: MAY 10, 2021 / 1:00PM GMT

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MAY 10, 2021 / 1:00PM, TGNA.N - Q1 2021 Tegna Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

David T. Lougee TEGNA Inc. - President, CEO & Director

Doug Kuckelman TEGNA Inc. - Head of IR

Victoria Dux Harker TEGNA Inc. - Executive VP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Craig Anthony Huber Huber Research Partners, LLC - CEO, MD & Research Analyst

Daniel Louis Kurnos The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst

David Karnovsky JPMorgan Chase & Co, Research Division - Analyst

Douglas Middleton Arthur Huber Research Partners, LLC - MD & Research Analyst

James Charles Goss Barrington Research Associates, Inc., Research Division - MD

Kyle William Evans Stephens Inc., Research Division - MD

Steven Lee Cahall Wells Fargo Securities, LLC, Research Division - Senior Analyst

Vasily Karasyov Cannonball Research, LLC - Founder

P R E S E N T A T I O N

Operator

Good day, and welcome to the First Quarter 2021 TEGNA Earnings Conference Call. This call is being recorded. Our speakers for today will be Dave Lougee, President and Chief Executive Officer; and Victoria Harker, Chief Financial Officer.

At this time, I would like to turn the call over to Doug Kuckelman, Head of Investor Relations. Please go ahead.

Doug Kuckelman - TEGNA Inc. - Head of IR

Thank you, and good morning, and welcome to our first quarter 2021 earnings call and webcast. Today, our President and CEO, Dave Lougee; and our CFO, Victoria Harker; will review TEGNA's financial performance and results. After that, we will open the call for questions. Hopefully, you've had an opportunity to review this morning's press release. If you have not yet seen a copy of the release, it's available at tegna.com.

Before we get started, I'd like to remind you that this conference call and webcast includes forward-looking statements, and our actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. This presentation also includes certain non-GAAP financial measures, and we have provided reconciliations of those measures to the most directly comparable GAAP measures in the press release.

With that, let me turn the call over to Dave.

David T. Lougee - TEGNA Inc. - President, CEO & Director

Thank you, Doug, and good morning, everyone. As Doug mentioned, during today's call, Victoria and I will provide an overview of our performance in the first quarter, which was TEGNA's strongest first quarter since becoming a pure-play broadcasting company. We achieved record total revenues, record advertising and marketing services revenues, record subscription revenue, record net income and record adjusted EBITDA, all while making progress on our debt paydown and growing our free cash flows. And we expect continued growth as we look forward to the second quarter and remainder of the year.

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MAY 10, 2021 / 1:00PM, TGNA.N - Q1 2021 Tegna Inc Earnings Call

As you saw in our release today, advertising and marketing services were up 9.4% year-over-year. Growth was driven across markets from both traditional and digital advertising, including our innovative offerings such as Premion as well as continued expansion with more advertisers. Victoria will provide more color on performance of individual advertising categories during the quarter shortly.

Premion, our first-to-market,over-the-top advertising platform has continued to evolve and expand to best serve the needs of regional and local advertisers. With further acceleration of growth this year, we're now updating our projection for the full year with our new expectation that Premion will close out 2021, with revenues 45% to 50% higher than 2020. Our partnership with Gray is also helping drive Premion's already exceptional growth by expanding our local footprint and leveraging Gray's sales footprint.

Turning now to subscription revenues, which have been supported by the improvement of sub trends to levels we have not seen since 2019. It is down in the quarter less than 5% and closer to 4% in the most recent month. Subscription revenues were a first quarter record, up 16% year-over-year and are on track to grow mid- to high teens percent this year. The combination of contractual rate increases in our multiyear retrans agreements, strong renewal step-ups and improving subscriber trends has supported this continued growth. In 2020, we repriced approximately 35% of our subs and will reprice an additional 30% toward the end of this year, supporting our expectation for net subscription profits to grow in the mid- to high 20s percent this year, 2021.

And as a reminder, we reached a comprehensive multiyear affiliation agreement with NBC earlier this year for our 20 TEGNA NBC markets nationwide, including 10 of the top 25 NBC markets. We now have clear visibility into future expenses through multiyear network affiliation agreements, which cover 94% of our big 4 subscribers through the end of 2022 and beyond.

Turning to strategic and content updates from the quarter. TEGNA is positioned to continue to leverage streaming growth in 2 distinct ways. First, through Premion, as I noted on the ad side; and second, by expanding our news and information, entertainment content through streaming platforms. Last week, we participated our first ever IAB NewFronts to showcase our digital marketing solutions, including Premion, to a large audience of advertisers and agencies. More than 1,000 people engaged with our NewFronts session including people watching live through the IAB's stream and those who have streamed it on demand and will continue to, which can be reached -- seen on tegna.com/newfronts.

During our presentation, we announced new attribution capabilities for automotive and tourism clients to help them understand consumer behavior throughout the buying cycle. For those unfamiliar with TEGNA Attribution, it connects TV and streaming-viewing habits with outcome metrics such as website visits, but also brick-and-mortar store visits. Now, for example, car dealers advertising through TEGNA and Premion, will be able to see how their media dollars are bringing foot traffic to their dealership and driving new car sales.

The second way we're leveraging streaming growth is through distributing our content across OTT platforms. In the quarter, we inked a new distribution deal with Amazon for all our stations to provide on-demand news on Amazon's news app on Fire TV. This is in addition to completing the rollout of Fire TV apps for all of our stations during the quarter.

We also began expanding Locked On's daily sports podcast to OTT platforms, which is one of the opportunities we saw as part of that acquisition. Specifically, we've launched video simulcast of some of Locked On's podcasts that are now available on our local stations OTT apps. We've also announced that we will launch a stand-alone OTT app for Locked On later this year. VAULT Studios' podcast content has also expanded through our Amazon partnership with the entire VAULT catalog now available on Amazon Music.

And last week, we debuted our national VERIFY brand, building on the substantial growth of VERIFY content on our station properties over the past few years. VERIFY is dedicated to helping the public distinguish between true and false information by fact checking claims through research and credible sources with our many talented journalists. Consumers can now text VERIFY to submit any story question they want verified.

Turning now to capital allocation, where we've continued to deliver on the actions we said we would take. Last year, we communicated that one of our top capital priorities was to pay down debt, following our temporarily increased leverage to finance our 2019 acquisitions. We've made considerable progress here ending the quarter at a net leverage ratio, almost a full turn lower than where we were this time last year. And as we've said before, we expect to end the year at low 3x, well below our 2020 year-end level of 3.95x.

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MAY 10, 2021 / 1:00PM, TGNA.N - Q1 2021 Tegna Inc Earnings Call

We've also communicated that we will evaluate the most appropriate use of capital given the current market environment, with an eye toward creating and returning value to shareholders. Again, we have delivered on this with the recently announced 36% increase to our quarterly dividend, which begins this July, which closely followed our Board's authorization of a 3-year $300 million share repurchase program, which provides us the option to buy back shares when we determine it's most appropriate.

TEGNA's strong business performance supports our growing cash flows, which provides us the ability to return value to our shareholders through these capital allocation actions. This flywheel is expected to continue as reflected in our second quarter and recently updated full year guidance, including our expectations for free cash flow as a percentage of 2020, 2021 revenues on a 2-year basis to reach 21% to 22%.

On the expense management side, we have remained diligent in cost containment efforts since the beginning of COVID-19, expanding on the efficiencies we'd established well before the pandemic. We're still on track to drive up $50 million of recurring annualized savings this year and will continue to generate increased savings through careful execution of cost and efficiency initiatives. Victoria will discuss our expense management initiatives in more detail shortly.

During our fourth quarter earnings call earlier this year, I provided you also with an update on some of the key actions that our Board and management have taken to further install diversity, equity and inclusion in our culture here at TEGNA. DE&I remains a top priority for our leadership team, and we've continued to take steps to ensure that our broader workforce both reflects the communities we serve and receives the support they need to grow their career at TEGNA.

With that focus in mind, last year, we developed a first of its kind, inclusive journalism program in partnership with diverse leaders at TEGNA and at the Poynter Institute, a leading nonprofit journalism organization. This program is specifically geared to address unconscious bias in news reporting, sources and content development through training and third-party audits. All newsroom staff inclusive of news, digital and marketing employees are currently taking part in this program and training throughout the year in 2021. Many of already have it, and by the end of the year, everyone will.

And notably, last Thursday, in recognition of our actions and commitment to coverage and storytelling around race and inequality, TEGNA received 6 regional Edward R. Murrow Awards for an inaugural award this year, Excellence in Diversity, Equity, and Inclusion.

We also took action at the beginning of this year to hold us accountable for making forward progress on inclusivity across TEGNA. As a reminder, we have established specific measurable 5-year goals to increase black, indigenous and people of color representation in content teams, news leadership and overall company management. You can find additional information on these goals as well as our broader DE&I efforts and accountability in our Social Responsibility Highlights report and website.

Before I turn the call over to Victoria to cover our financial results in more detail, I want to thank -- take a moment to thank all of our colleagues and journalists for continuing to deliver important, impactful news to viewers in our local markets across the country. As local markets, we play a critical role in convening and facilitating important discussions, including about race, inequality and systemic injustice in our communities. TEGNA journalists across the nation are helping us deliver on this role every day and making communities more tolerant of each other and making them more informed in every way, and we thank them again for their dedication.

I'll now turn the call over to Victoria.

Victoria Dux Harker - TEGNA Inc. - Executive VP & CFO

Thanks, Dave. Good morning, everyone, and thank you for joining us. As Dave discussed, this past quarter was our best first quarter since becoming a pure-play broadcast company in 2017. Our record performance not only reflects the strength of TEGNA's business model, but our focus on execution on all 5 pillars of our strategic plan.

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MAY 10, 2021 / 1:00PM, TGNA.N - Q1 2021 Tegna Inc Earnings Call

As you've seen, our disciplined M&A strategy has resulted in a strong portfolio of stations, delivering on current synergies while positioning us well to capitalize on future growth. That same thoughtful approach to other aspects of our capital allocation, ranging from our recently announced dividend increase as well as ongoing organic investments, has also served to strengthen our balance sheet while growing shareholder value.

Now turning to the first quarter consolidated financial results. As a reminder, my comments today are primarily focused on TEGNA's performance on a consolidated non-GAAP basis to provide you with visibility into the financial drivers of our business trends as well as our operational results. You'll find all of our reported data and our prior period comparatives in our press release.

As you saw in this morning's release, we provided guidance on key second quarter financial metrics, while reaffirming our full year 2021 guidance. In addition, we've shared our expectation for Premion revenues to be up on a full year basis between 45% and 50% over 2020. We've also added more detail on the operational drivers of our projections. I'll touch on our outlook on all of these categories later in my remarks.

For the first quarter, total company revenue was up 6% year-over-year, driven by record first quarter advertising and marketing services as well as subscription revenues despite being up against record first quarter political revenue last year of $47 million. Total revenues were up 41% compared to the first quarter of 2019, also driven by the impact of our acquisitions.

In terms of revenue stream growth, here are some additional details on drivers. As Dave referenced in his remarks, subscriber trends have continued to improve with the rate of year-over-year decline in February, the most recent month of reporting, the best it's been since 2019, down mid-4% below last year.

Subscription revenue increased 16% year-over-year this quarter, reflecting strong Big Four retransmission rates with approximately 35% of subscribers, which repriced in the fourth quarter of 2020. As a result of these rates, as well as subscriber trend performance, we continue to forecast positive net subscription profit growth in the mid- to high 20s in 2021 and growth well beyond that, too.

This growth in our high-margin subscription revenues, combined with our expansive political footprint, provides us with strong annuity-like EBITDA and free cash flows as well as a clear view of the strength of forecasted trends well into the future.

Now turning to advertising and marketing services revenues, which produced a record first quarter. As you know, our AMS revenues serve as a key growth driver to support our second quarter and full year 2021 guidance. AMS finished first quarter up 9.4% compared to the first quarter of last year. And notably, AMS was also above the first quarter of 2019 pro forma.

First quarter AMS year-over-year growth was driven by both traditional as well as digital advertising revenues, including Premion. We continue to see recovery in nonpolitical advertising in many categories with strong audience metrics in both traditional and digital platforms.

To provide some further color on specific advertising categories performance in the first quarter, most categories were up over last year, including auto, services, health care, home improvement, entertainment, gambling, insurance, banking and finance, packaged goods and education. Automotive, our largest ad category improved significantly, up low double digits relative to last year. Not surprisingly, advertising categories, which continue to struggle where retail, restaurants, travel and tourism, given the ongoing impacts of COVID. That said, with vaccination levels increasing across the country, we look forward to these categories continuing to improve over the balance of the year.

In addition to these positive first quarter trends, advertising improvement is continuing apace in second quarter as well, with AMS pacing significantly positive to last year with all categories up year-over-year. In the second quarter of 2020, advertising was particularly challenged given the pandemic and businesses being shut down across the country. That said, we expect second quarter AMS to be up low single digits relative to second quarter 2019 pro forma.

Turning now to expenses for the first quarter. Non-GAAP operating expenses were $528 million, up 5% compared to the first quarter last year, driven by higher programming fees, including reverse compensation associated with higher subscription revenues in the quarter.

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