Katy Murray – Chief Financial Officer Robert Decherd – Chairman, President and Chief Executive officer Grant Moise – Publisher and President-The Dallas Morning News Tim Storer – President-Belo and Company.

Chris Mooney – Wedbush Securities.

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2018 A. H. Belo Financial Results. At this time all participants are in a listen-only mode and later we will conduct a question-and-answer session and instructions will be provided at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I will now turn the call over to your host, Ms. Katy Murray. Please go ahead, ma’am..

First, beginning in 2018, Belo and Company's compensation and benefit expense increased as a result of the additional headcount being transferred from The Dallas Morning News to Belo and Company and an increase in healthcare cost. We moved all A. H. Belo employees into a single fully insured benefit plan this year to lower A. H.

Belo's overall cost of healthcare. However, for Belo and Company, this results 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 expenses would have been in accordance with the new revenue guidance had it been adopted in 2017.

The year-over-year decline in internally reported revenue of $1.1 million included in the reconciliation is predominantly attributable to the attrition of six accounts in late Q4 2017 and early Q1 of this year. These accounts would have generated quarterly pass-through revenue in 2018 of approximately $800,000 and quarterly revenue of $500,000.

We have experienced forward and anticipated replacement of these accounts, but feel that Belo and Company's sales teams are now making measurable headway in doing so. As a result, Belo and Company is on track to achieve year-over-year improvement in revenue and EBITDA in the fourth quarter of this year.

Internally reported operating expenses in Q3 declined by $900,000 with the majority of that improvement related to pass-through expense and the balance being a decrease in compensation expense on a year-over-year basis.

Internally reported operating income of $537,000 reflects a $161,000 decline from the $698,000 reported in the third quarter of last year. Internally reported operating margin for the third quarter was 10.1%, a slight decline from the 10.9% reported in the third quarter of last year.

Looking to the fourth quarter, we are confident that we will see substantial improvement in the adjusted operating income reported in the fourth quarter of 2018 compared to the fourth quarter of last year. Turning again now to A. H. Belo consolidated. As of September 30, headcount was 978, a decrease of 129 or 11.7% from September 30th of last year.

Most of this decrease is due to job eliminations in 2017. As of September 30, the company had approximately $58.5 million of cash and no debt. As of October 29th, we had approximately $61 million in cash and cash equivalents. For the balance of the year, we expect capital expenditures to be approximately $1 million.

On Monday, we filed a Form 8-K disclosing that we have entered into an agreement to sell the company's former headquarters at 508 Young Street in downtown Dallas for $33 million. This transaction is referenced in our earnings release that was issued prior to the market opening yesterday morning. We expect this transaction to close on December 28.

And while the transaction will generate a capital gain of approximately $23 million for federal tax purposes, net operating losses will fully offset the capital gains. After fees and expenses, net cash proceeds to A. H. Belo will be approximately $32 million. In regards to taxes for the third quarter, the company reported tax expense of $596,000.

We expect that cash taxes this year will be approximately $1.2 million with the majority related to Texas margin tax. So Wanda we are now ready for questions..

[Operator Instructions] And our first question will come from the line of Chris Mooney with Wedbush Securities. Your line is open..

Good morning..

Good morning, Chris..

Congratulations on the contracting of the headquarters..

Thank you very much. We are very excited about the opportunity..

Yes. On that in just one minor question. The acreage quoted in the press release was 7.2 acres? And the Dallas County Appraisal District shows it is being a little over 8 acres.

Is there – is that the easement difference? Or what is?.

Chris, that’s correct that's the – it is the difference of the lot that's just behind WFAA. And so that was called out..

Okay.

So you still own that? Or had you – are you giving it up to the broadcast station?.

No, the potential new owners will step into our role on that, so they will own that..

Okay, okay. Great. The question I've been asked multiple times in the last – since you all reported and made the announcement is what are they going to do with the cash.

So how would you like to address that on this call, at least?.

Chris, this is Robert Decherd. We have said – good morning, we said consistently, as you know, that the board is – has a strong belief about doing things in the proper sequence. This deal hasn't closed. As Katy said, we're very excited about the idea of having this resolved. It's an asset that's underutilized from our standpoint.

So once we have closed at the end of the year, the board will deliberate as it has in the past as to what our resource allocation should be in 2019 and beyond. We have a number of investments we've talked to you about. They certainly don't add up to the sum of $60 million and $32 million.

So we're going to look hard what those options are and have advisors regularly advising us, both internally and externally..

Okay, we’ll stand by. Robert, in the press release, you seem to give me the impression that you are more optimistic about the outlook for the paper in 2019 or the overall business of the news.

Can you reflect on that somewhat?.

Well, I certainly can. And both Katy and Grant can comment as well. We'll have some comparisons next year that are favorable. So that's one factor.

The most important factor, though, is that Grant and his team, together with Katy and our corporate team, have spent a substantial part of the last six months thinking about how the newspaper will look in the future, and that doesn't mean 2019 necessarily.

But what is the investment, which translates to our ongoing expense structure that yields a proprietary advantage in journalism, local news and information that also reflect the realities of the patterns we're seeing in print in terms of both advertising and subscriptions and the promise of the digital side of the business.

Grant can comment on the work we're doing in both sides of the circulation equation. We actually think there is some potential in print that we have not realized in recent years. And certainly, there is tremendous upside on the digital subscription front.

So we're seeing things as we go through this process that together with the comparisons I mentioned and some revenue opportunities make us feel pretty optimistic about moving in the right direction.

We are not going to resolve anything in 2019, but moving in the right direction, so that we can not only propose this structure to our board, we can implement in a way that's successful over time.

Grant, you want to elaborate on that a little bit?.

Yeah, Chris, I mean, part of what – just to expand a little bit on what Robert is talking about is the optimism that I see is predominantly on the subscription side, both in digital and print right now. As we announced last quarter, we hired Sue Kerr from Tribune, which – she had led all of customer service at Tribune and had been very successful.

And her print, circulation and subscription revenue initiatives, specifically in Hartford, where we saw someone who knew the fundamentals of the business that we could change in order to go see the print line of subscriptions improve.

And Dan Sherlock, who we brought on almost a year ago, now has continued to show outstanding work in his leadership of digital subscriptions, as we just announced, obviously, a 45% digital subscription growth. I'm very – I really like the trends we're seeing.

Print – sorry, digital subscriptions remaining consistent in that 40% growth range now two quarters consistently. And we're already starting to see some early signs of – even early work on the print side of subscriptions improving due to a lot of the fundamental changes that Sue is leading for the company.

So a lot of optimism there and obviously, I'd be remiss to say that the print challenges that the whole industry have seen and advertising have been challenging, but I also have a little bit of optimism there of seeing, especially in the area of ROP, some improvement, as this year goes along.

But obviously, with the types of declines that we're talking about in print advertising, we still have work yet to do..

Okay. On the Belo and Company side, there was – the second quarter conference call, there was a fair amount of optimism that the second half or the back half of the year would show significant improvement, and now Katy seemed to be indicating that profitability in the fourth quarter would show improvement.

But the revenue side is still a relative drag.

Is there optimism that, that's going to change in this quarter?.

Chris, I think it is in the fourth quarter. We're talking about this quarter to find a support. The third quarter was bumpy. There is no question about that. Tim will comment in a minute on the efforts he's made to get pass that and ensure that the fourth quarter is an improvement, a noticeable improvement over 2017.

The most important thing to reinforce from my standpoint is this is a real business. Digital marketing is a fast-growing, yes, complicated business, but there is great opportunity to serve a very large number of companies in this $5 million to $100 million revenue range. Who, frankly, can't do this themselves.

They really don't have the horsepower in terms of talent or brand bandwidth, and they're looking for the kind of expertise that Tim has established and nurtured at what is now Belo and Company.

So we – we're not taking lightly the underperformance in the third quarter, but we think we now have smoothed things out, and we're looking at a good fourth quarter and a promising 2019.

Tim, you want to elaborate on some of the accounts we're dealing in?.

Yeah, absolutely. Good morning, Chris. As Robert said and as Katy mentioned as well, certainly, Q3 did not meet our expectations. Replacing revenue from some of those contracts that we lost last year, did not materialize and happen as quick as we would have liked in Q3. That said, we are very confident. We're moving in the right direction.

We remain, as Robert said, very excited about the opportunity in front of us and our ability to deliver better results in subsequent quarters. I do feel that the summer months contributed a bit more than usual to delays in larger contracts we sold in Q2 getting fully implemented and ramped up in combination with new contracts getting executed.

That said, we have certainly seen a nice uptick in activity and things getting back on track, certainly starting in September and that trend has definitely continued into the fourth quarter where we remain optimistic in regards to our fourth quarter results.

So I definitely do believe that we are heading in the right direction and certainly, remain very optimistic. And as Robert alluded to, we are certainly in a target-rich environment. There is a massive amount of demand for what we are dealing, the space we operate in and again, we remain very excited about the opportunity..

And Tim, could you reflect on who your competition is for those contracts?.

Yeah, I will tell you. We are as Robert alluded to, we are very focused, Chris, in the midmarket space. Midmarket is really defined as $10 million to $1 billion range. I will tell you that's a very underserved market. Businesses that are larger than $1 billion typically are going to deleveraging a lot of large external agency type relationships.

And then you've got businesses that are smaller than $10 million that are going to be being serviced by smaller agencies, which really leaves this midmarket an underserved market from the digital marketing solution space.

So if you are $10 million to $1 billion organization, I will say that it's been from a competitive perspective, because there are just not that many businesses that are really focused in that space. So we are very excited about the opportunity that remains in front of us.

I would say that our biggest competition, Chris, in that space is more insourcing than outsourcing. Organizations are trying to develop or bring those types of teams in-house. But I will tell you in these kind of economic environment, it's very difficult to do right now. So it remains a strong demand for our services..

Thank you.

If I may, Katy, could I ask two sort of housekeeping questions to you?.

Absolutely, Chris..

One, who's going to pay the property taxes on the headquarters for 2018….

Yeah, for 2018, Chris, that would be, based on the closing date, those property taxes are our responsibility with the exception of the handful of days at the end..

Okay. And second, could you just reflect on the status of the pension plan? And where we are? It seems to be declining every quarter..

So, the pension plan, we actually will be having an update in this next month that we have a regular update with our advisors. The last update we had at this point, still do not expect any mandatory cash contributions in the next ten years. I don't anticipate that to change.

And from an overall funded percentage, I'm not able to give an updated number right now, but where have been historically was around 89% to 90% funded rate. So I still feel like even though we've seen some market volatility, we've also seen the interest rate side on the other side.

So I think, from an overall perspective on the pension, I'm seeing some headwinds but also seeing some favorability and look forward to the update that we'll be getting. But I don't expect to see any significant or material changes to our position..

I’ll let somebody else to come in. Thank you..

Thanks, Chris..

[Operator Instructions] And there are currently no questions in queue..

Okay, well, Wanda, thank you. Thank you everybody for joining our third quarter financial. We look forward to updating everybody after the close of 2018, next year. Have a great day and happy Halloween. Good-bye..

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