Katy Murray - Chief Financial Officer Robert Decherd - Chairman, President and Chief Executive Officer Tim Storer - President of Belo and Company.

Chris Mooney - Wedbush Securities Grant Moise - Publisher and President of the Dallas Morning News Jonathon Fite - KMF Investments.

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2018 Financial Results Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

[Operator Instructions] As a reminder, today's teleconference is being recorded. I would now like to turn the call over to Katy Murray, Chief Financial Officer of A. H. Belo Corp. Please go ahead..

Good morning, everyone. This is Katy Murray, Chief Financial Officer at A. H. Belo Corporation. Welcome to our second quarter 2018 conference call. I am joined by Robert Decherd, Chairman, President and Chief Executive Officer of A. H.

Belo Corporation; Grant Moise, Publisher and President of the Dallas Morning News; and Tim Storer, President of Belo and Company, who are all available for Q&A. Before the market opened yesterday morning, we issued a press release announcing our second quarter 2018 results.

We have posted this release on our website under the Investor Relations section. Unless otherwise specified, comparisons used on today's call measure second quarter 2018 performance from continuing operations against second quarter 2017 performance from continuing operations. Our discussion today will include forward-looking statements.

Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements. The Company assumes no obligation to update the information in this communication, except as otherwise required by law.

Additional information about these factors is detailed in the Company's press releases and publicly available filings with the SEC. Finally, today's discussion will include non-GAAP financial measures.

We believe that non-GAAP financial measures provide useful, supplemental information to assist investors in determining performance comparisons to our peers.

Reconciliations to the most directly comparable financial measures based on our segment reporting presented in accordance with GAAP are provided on our website under the Investor Relations section. Before I review the quarter, I wanted to remind everyone the two new accounting pronouncements we adopted effective January 1, this year.

The first its Topic 606 regarding revenue recognition, we adopted a modified retrospective approach which means we are not restating historical financials, but are adopting this prospectively starting with the first quarter of the year.

The primary impact for us is that we will now be reporting certain revenues on a net bases as opposed to a gross basis. I'll be calling out the impact to this quarter in my commentary below.

The second pronouncement changes where we record net periodic pension expense or benefit, we have adopted a retrospective approach and all prior period have been restated to reflect pension expense or benefit below operating income or loss versus including the expense or benefit above the line in operations.

For both of these items, we have provided detailed information in our GAAP to non-GAAP reconciliation again provided under our website under the Investor Relations section. Yesterday morning, we reported a net loss attributable to A. H.

Belo Corporation a $500,000 or a loss of $0.03 per share, compared to a net loss of $800,000 or $0.04 per share reported in the second quarter of 2017. For the second quarter of 2018, we reported adjusted operating income for A. H.

Belo Corporation of $2.7 million, compared to adjusted operating income of $2.8 million reported for the second quarter of last year. Starting with this earnings call, I will be covering the financial performance of The Dallas Morning News and Belo and Company separately. Beginning with financial highlights for the Dallas Morning News.

For the second quarter, we reported total revenue at the Dallas Morning News of $45.5 million, a decrease of $9.3 million or 17% when compared to the $54.8 million reported in the second quarter of last year.

Approximately $2.2 million of this decline is attributable to the new revenue standard requiring certain transactions to be reported net versus growth. Adjusting for this change, total revenue declined by $7 million or 12.8%.

Print and digital advertising revenue of $20.8 million in the second quarter of 2018 is down $7 million or 25.2% when compared to the $27.8 million reported in 2017. $2 million of the decline is due to the new revenue standard.

Excluding the impact of the new revenue guidance, print revenue declined $5 million or 18.2% when compared to the prior year period. In addition $800,000 of the year-over-year decline is related to the sale of the Denton Record-Chronicle in the fourth quarter of last year.

Circulation revenue of $17.9 million in the second quarter of 2018 is a decline of $1.2 million or 6.1% compared to the second quarter of last year. Approximately $300,000 of the decline is the result of the new revenue guidance.

Excluding the effect of new revenue guidance, home delivery revenue declined by $800,000 or 4.6% from the second quarter of 2017 and single copy revenue declined by $100,000 or 5.3% from the second quarter of 2017. The decline was primarily due to lower home delivery and single copy volumes partially offset by single copy rate increases.

Approximately 300,000 of the home delivery decline was related to the sale of the Denton Record-Chronicle. As we have stated before, one of our highest priorities is to grow the Morning News paid digital subscriber base and digital subscription revenue.

In the second quarter, our digital subscriber base grew by a net of 6,407 subscribers or 31.6% from the second quarter of 2017, ending this quarter with 26,677 paid digital subscribers. In the second quarter, we recorded approximately 900,000 of digital only subscription revenue, an increase of 300,000 or 46.5% over the same period in 2017.

Other revenue decreased $1.1 million or 14.1% to $6.9 million for the second quarter of 2018. $600,000 of the decline is due to event related revenue and $400,000 related to declines in commercial printing volumes.

Total consolidated operating expense for the Dallas Morning News for the second quarter of 2018 was $47.3 million, a decrease of $9.6 million or 16.9% compared to the prior year.

Excluding the $2.2 million decrease related to the adoption of the new revenue guidance, consolidated operating expense decreased $7.4 million or 13% when compared to the prior year period.

The decline was primarily due to improvements of $4 million in employee compensation and benefit expense, $1.6 million in distribution expense, $1 million in advertising and promotion expense, $500,000 in newsprint expense and $300,000 in temporary service expense.

Reflecting the new revenue standard, pension benefit, severance expense, depreciation and amortization expense and asset impairment, adjusted operating expenses for the second quarter of 2018 was $45.7 million, a decrease of $7.4 million or 13.9% compared to $53 million of adjusted operating expense reported in the second quarter of last year.

The significant year-over-year improvement in adjusted operating expense was a result of cost reduction initiative enacted early in 2017 that are now being fully realized.

Adjusted operating income for the Dallas Morning News was $2.1 million in the second quarter of 2018, an improvement of $294,000 or 16.6% when compared to the $1.8 reporting in Q2 of last year.

Turning now to financial highlights for Belo and Company, First, I'm going to review our GAAP and non-GAAP results and then provide some additional operational metrics on how Belo and Company is reviewed internally. For the second quarter, we reported total revenue of $5.6 million, a decrease of $2.6 million or 31.7%.

Approximately $900,000 of this decline is attributable to the new revenue standard requiring certain transactions to be reported net versus growth. Adjusting for this change, total revenue declined by $1.7 or twenty 20.3%.

Total consolidated operating expense at Belo and Company for the second quarter of 2018 was $5.3 million, a decrease of $2.2 million or 29.5% compared to the prior year.

Excluding the $900,000 decrease related to the adoption of the new revenue guidance, consolidated operating expense decreased $1.3 million or 17% when compared to the prior year period. The decline was primarily due to improvements of $200,000 employee compensation and benefit expense and $1.1 million in digital cost of goods.

Reflecting the new revenue standard; pension benefit, severance expense, depreciation and amortization expense, and asset impairment, adjusted operating expenses for the second quarter of 2018 was $6, a decrease of $1.3 million or 17.8% compared to the second quarter of last year.

The year-every-year reduction in adjusted operating expenses was a result of lower digital cost of sales due to lower revenue. Adjusted operating income for Belo and Co for the second quarter of 2018 was $619,000, a decline of $390,000 from the $1 million reported last year.

As mentioned at the start of the call, we have updated our GAAP to non-GAAP reconciliation posted on our website under the Investor Relations section to include a reconciliation of segment reporting in addition to the consolidated reconciliation.

To provide more clarity within regards internal operational performance of Belo and Company, we have provided an audited 2017 and 2018 quarterly operational metrics reconciling revenue and expense for the 10-Q with an adjusted internal operating income metric. The internal operating view includes two items in the reconciliation.

First, beginning in 2018, Belo and Company compensation and benefit expenses have increased as a result of the additional headcount being transferred from the Dallas Morning News to Belo and Company and an increase in healthcare costs. In 2018, we made a decision to move all employees into a single fully insured benefit plan lower A. H.

Belo Corporation's overall cost of healthcare. However for Belo and Company that resulted in an increase in benefit burden since Belo and Company had a self-insured plan in 2017. Second, we have included what the gross down for revenue and expense would have been in accordance with Topic 606 had been adopted in 2017.

The year-over-year decline and internally reported revenue of $1.2 million included in the reconciliation is predominantly attributable to the attrition of six accounts and late Q4 2017 and early Q1 2018 that would have had quarterly pass through revenue of approximately $800,000 and quarterly revenue of $500,000 in 2018.

While Q2 revenue on a year-over-year basis declined due to this attrition. Q2 revenue grew sequentially by 4% or $204,000 over the first quarter of this year.

Internally reported operating expenses in Q2 declined by $1.2 million with the majority of that improvement related to pass through expenses and the balance being a decrease in compensation expense on a year-over-year basis. Internally reported operating income margin increased year-over-year from 9% to 11%. In regards to headcount as of June 30, A. H.

Belo Corporation had headcount of 1,030, which is a decrease of 159 or 13.4% from June 30 of last year. Most of those decrease was due to job eliminations in 2017. Turning to the balance sheet, as of June 30, the Company had approximately $56.8 million of cash and no debt. As of August 3, we had approximately $55 million in cash and cash equivalent.

For the balance of the year, we expect capital expenditures to be approximately $2 million. In regards to taxes in the second quarter, we reported tax expense of $58,000. We expect that cash taxes this year will be approximately $1.2 with the majority of that related to the taxes margin tax. Brad, we are now ready for questions..

[Operator Instructions] And we do have a question from the line of Chris Mooney with Wedbush Securities. Please go ahead..

Good morning..

Hi Chris, good morning..

Good morning.

The question that I get it's not an operational question, but every time I talk to somebody related to AHC is an update on the sale of headquarters and why is it taking so long?.

Hi Chris. Chris, good morning, Robert Decherd. I think it's following the normal course of a commercial real estate transaction of this size and complexity.

As mentioned I think perhaps to you and other is that we hit the pause button for about eight weeks as we undertook the transition from Jim to me in the CEO role, but we are fully engaged in the sale process now.

Same folks are involved JLL jail as a very expert team on the field, Todd worked with us for years in real estate is helping us coordinate this. We would expect to see expressions of interest by the end of the third quarter.

And then the question becomes what are those expressions of interest will look like, are they straight cash deals, we are looking really only for those kind of offers, but we can't predict how potential buyers will come forward.

And then as it complexity earlier, as you know our campus has certain easements to enable technics television station which is co-located on the campus to continue operating. There will be some issues to work out around that and it may be that this closing takes longer than would be typical but not by much.

So we're looking still optimistically to the end of this year, it may spill into 2019 and of course all of that presumes that the strong real estate market we've experienced in Dallas in recent years holds up through that timeframe..

And any thoughts, the higher guidance I guess had been $30 million or so, is that still a good baseline?.

That's a good base line. Sure, it is..

Okay. On an operational basis, the revenues the last couple of quarters seem to be declining at a faster rate than the other public newspaper companies.

Is there something going on inside of AHC see that's different, I mean we're in a fairly robust at least region of the country?.

Chris, let me pick up on that first and then I'll ask Grant and Tim to amplify. First of all anecdotally, we are under the impression that other traditional media companies in Texas have experienced a little bit of a slowdown in 2018 relative to some peer companies.

But it you tie back to the earnings releases yesterday and today, you have a mixed picture, New York Times has seen a little bit of weakness compared to the very strong revenue patterns they had comparatively. Carnet announced today it's mixed.

I think what's happening is the entire industry on the newspaper side at least is experiencing the transitions to a more digital world, it's not just be emphasis we and others are putting on digital subscribers, it's the reality that a lot of consumer products companies and certainly newer Internet based consumer products sites go to market a different way and consumers are following that pattern.

So it just underscores the urgency of our making this transition, we are very focused on that as you know. Grant of course is leading the charge on the newspaper side, Tim's doing great work on the digital marketing side. And I'm very encouraged to see margin growth that Tim's recorded in the second quarter.

I think that's a precursor of some more good news as we go forward with Belo and Company.

Grant, you want to add anything?.

Yeah, sure, Chris. I would say the only thing that Robert did not mention is that I think we've mentioned in the first quarter is we have also hit the loss of our largest account at the Dallas Morning News with a one of the major grocery change that have moved their TMC revenue from us to another vendor.

And that alone has been about $1 million just in this quarter, second quarter alone. So I think you know with us being a smaller company than some of the other peers, I think what happen based on when you lose accounts like this magnitude, I think it's just gets a little bit more pronounced effect on our financials.

But you know I think there's kind of that one account has just had a little bit of a bigger drag on us than others..

Which by the way was a national shift in strategy on the part of that company. So it wasn't just the Dallas Morning News.

Tim, you want to comment on your world?.

Yeah, I mean as previously discussed, you know we experienced some attrition early in the year. That said we've continued to see strong sales performance and we've replaced that net booking revenue loss with deal sold in late Q1 and early Q2. Now those accounts take time to on board, so we didn't get a full quarter of revenue from them.

But we do continue to expect to see stronger performance in the second half of the year compared to 2017..

That will all those new clients and can you describe widely sort quantify how many new clients or something that will be on boarded with the third quarter or still are we still on boarding that?.

There are few that just recently launched literally as of last week, we've been boarding them I would say through the back half of Q2 and obviously in Q3. Sometimes the on boarding of these accounts don't necessarily go as quickly as you'd like.

But again, we're very optimistic in regards to the back half of the year in regards to not only on boarding those accounts but obviously growing those revenues.

And I'll tell you Chris, as Robert alluded to the market the digital marketing spend and budgets just continue to go up due to the strong performance that's being garnered out of moving money into the digital marketing sector. So it's certainly there's no lack of opportunity for us to go after. And as you alluded to, we the Dallas market is strong.

We are very focused on the mid-market space and Dallas ranks as one of the largest bid market cities in the country. So we're very optimistic about the future..

Chris, as a number of accounts I think it's a conservative way to think of it is just numbers of counts. Tim's replaced what a try to do in the fourth quarter and first part of this year and we're not well have but end of the third quarter. Not necessarily revenue but the number of accounts..

The number of accounts has been that typical number of six at in the play, I think the other - yeah..

That's what I mean, yeah..

I think the other thing is important Chris is the account that left in this is one of the reasons why we're trying to give more to it more visibility and the additional schedule that we've given out is part of that also was the customers that left the larger account had a large amount of pass through revenue and had that been on a comparable basis, it would've been a little bit of a different, look at how the revenue is I am pleased that we are finally in a net revenue basis.

I think that's going to help everybody and that's why we're giving visibility back to 2017 to get more clarity on that to be a lot of call that out, so you can see how we're looking Belo and Company internally..

And one last thing I would just add to, obviously not all sales are considered equal but obviously we track the number of sales that we experience from a quarter-to-quarter basis.

And we've experienced double-digit growth in the number of sales comparative to Q2 of 2017 and Q2 of 2018?.

Great.

And the margin profile of these new businesses opportunities versus the ones that you asked, is they are difference?.

You know I will tell you I think the margin is better on the new accounts that we're bringing in compared to the accounts that we had in the back half of last year or early of this year. So we that's where I think that you're starting to see that margin improvement that Robert alluded to earlier..

And one of the things Chris we had talked about at the end of last year was, these large accounts are great but they demand a lot and then you can also experience other operating expense increases around bad debt, timing and just alike.

And I think the replacing of these account that we generate higher margin but the lack of some of these operating expenses that you get into with bad debt and the like so..

And are they tend to be more local and regional versus you had served a couple at least in the ones the accounts lost that were sort of nation?.

Yes, I will tell certainly we continue to focus in our backyard. Again it's one of the richest number. It's one of the cities that have the highest number of midmarket companies that we're focused on, that said I will say that we do have a few of the accounts that we broaden brought up on, that are much more national in scope as well.

So we do continue to look to expand our footprint outside the DFW market and actively doing so..

Right. And I look forward to your success..

Thank you..

Thanks, Chris..

[Operator Instructions] And we do a question from the line of Jonathon Fite with KMF Investments. Please go ahead..

Hey, good morning.

I was wondering if I could just clarify what I thought occurred through the last exchange even with the loss some in the major accounts on the digital side in second half revenue growth through that segment?.

Yes. When you're comparing it on year-over-year basis, the same type of expansion that we saw when you look at from where we were in the second quarter, we showed sequential growth over Q1 as Tim mentioned the on boarding if you can and should put it in if it's put us in a position to where the second half growth over 2018 will be better than 2017..

Can you just talk about the strategic dynamics that kind of saw the acceleration of growth kind of through 2017 early 2018 and how that growth is now starting to build again? It what were some of the drivers just because with a large account or there are some other the dynamics going on?.

Well I think it is a combination of factors within some of the large one, very large account that we had through last year just made a business shift in regards to their business from a marketing and sales strategy perspective ironically in after one of those businesses that actually started to move money more out of digital and into back into a more traditional type of means just based upon some business changes that they underwent so that's one factor that we felt was a little bit out of our control.

There were some accounts that through consolidation they were acquired by other companies and anytime that that happens the previous partners and vendors certainly are in flux so that was an issue.

But for the most part it was just a combination of factors across all the accounts there is no any specific trend that we noticed within those accounts that allude to any kind of issues on our end or anything that we could have really controlled..

To do those factors impact any earn outs associated with the DMV or Speakeasy kind of incremental ownership and acquisition over the last couple years?.

That on Jonathan and I think if you recall we actually acquired the remaining entries at both Speakeasy which was 30% and DMV at 20% in the first quarter of 2017, both of those entities are fully own subsidiaries of A.H. Belo. Speakeasy have actually been consolidated in to be Belo and Co.

which is not only just the DMV holding entities but other business units that were once part of the Dallas Morning News that have more of a marketing service digital focus. So Belo and Co, operate separately now fully on subsidiary of A.H.

Belo Corporation and there are no impact from an urn out, earnings or anything along that line, everyone is on normal compensation plans..

Okay.

And another two just quick things, are there any pro forma updates regarding pension given the current straight environment and could you provide some color commentary around the share class consolidation just kind of be intend strategy behind that?.

So on the - I mean any more clarity on your question around those shareholder consolidation and are you referring something specific?.

So I thought I saw some filings last quarter around resolution of the two types of share classes and consolidation and digital to a single common class?.

No. That was not A.H. Belo Corporation. What you may have seen at the end of June regarding any filings that were out there that might have been unique is we actually did after our shareholder approval we did actually we incorporate A.H. Belo Corporation to Texas from Delaware.

So you may have seen some filings related to certain of our pension saving plans just fading out but nothing around the share class..

Jonathan, Roberts I could hear you may have picked up the word classify we declassify the board, so it's now all directors we elected annually that might have been what you saw..

Okay.

I follow-up with you up on that, appreciate that clarity in any kind of pro-forma commentary on the pension?.

So I think from a pension perspective, I'll get some clarity on that. As you know over the last several years we've been very successful and de-risking our overall pension plans.

At this time, as I mentioned last quarter, we do not anticipate any required pension contributions between now and the next 10 years obviously that is based on market conditions and interest rate but at this point, we still do not have any required pension contribution if that were to change we would update the market.

But we feel very good and very positive about where we are with our pension plans overall and their fund and stuff..

Jonathan just to pick up on your question about interest rate environment as you know, as interest rates rise that actually helps plans like ours.

So the dynamic is between the market itself, so the investments held by the plan and those interest rates which our calculated annually and we as Katy said and de-risking the plan, we have continued to move funds not significantly but very gradually in to more risk protected assets..

Great. Thanks a lot, update appreciate it..

Thank you..

[Operator Instructions] And we do have a question from the line a follow-up question from the line of Chris Mooney of Wedbush Securities. Please go ahead..

Robert. I know you're you've been with this company a long time and on the boarding, now the CEO again. You must have given some thought you have quite a pile of cash already relative to the market cap. You have a share repurchase which is somewhat active 50,000 something shares acquired in the second quarter.

And you're about to bring on another potential $30 million or so from the sale of what do you expect to do with the cash?.

Chris, we're going to be discussing this with the board, at its next several meetings, it has is as you know and has been a regular topic for the board because they and I are very intent about how capital excuse me how capital is allocated and how we make sure we are attentive to shareholder value in a very uncertain industry environment.

We're not happy about the fact our stock is traded down this year I think there's plenty of good news in this update today but we are going to look at all of the potential uses of cash, using here example if we have $55 million in cash today, we have $30 million to that, we're not going to sit on $85 million of cash, but we're also going to be very pothole and choice will about what and when the board decides to make capital allocation decisions.

But we've, we're not very preferred position here Tim and the team have done a great job bringing this company down to excuse me a very simple platform. We're able to articulate what our purposes and objectives are and shareholders are at the top of the priority list..

Okay.

And one other asset it seems to me that are they newspapers have decided to monetize and that's their printing and distribution businesses which in your case also comes with some fairly significant real estate assets and by now, any ever give any thoughts to monetizing that business?.

Chris I don't think I would put that in a model in the near to intermediate term. Again as you know, newspapers generally are experiencing declines in not only circular print circulation but the size of the Daily and Sunday products.

That impacts the relationships we have with our customers in the commercial printing business because while each contract differs all of them are sensitive to those two factors, just as we are bringing down the number of copies and the number of pages printed to the Dallas Morning News so or our 4 or 5 largest newspaper commercial customers.

So what's very difficult to project is you have noted is that pace at which that occurs.

We don't have a really clear picture of that or a clear idea so for the sports future what we're focused on is making sure that that business contributes to the company's overall profitability put the Dallas Morning News first in terms of its product being printed in the most timely fashion possible at the highest quality level, that's our duty to shareholders in the company and we'll I guess as we go along.

Yes, the North plant is located on a piece of real estate that ultimately will be valuable to us. But as long as we're printing the Dallas Morning News and we're printing these other newspaper customers we're going to be in the north plant.

So it really just comes down to your own scenario for when and how newspapers reduced their printing acquirement sufficiently that we would have choices that are available today..

Thank you..

[Operator Instructions] And it does appear at this time there are no further questions from the phone lines, please continue..

Great. Brad, thank you. Thank you everyone for joining us on the call and we look forward to talking with you after our third quarter earnings. Thank you..

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