Greetings and welcome to Gannett Co., Inc. 1Q Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host Matthew Esposito with Investor Relations. Thank you, and over to you, sir.

Thank you. Good morning, everyone. And thank you for joining our call today to discuss the Gannett's first quarter 2022 results. Presenting on today's call will be Mike Reed, Chairman and Chief Executive Officer; and Doug Horne, Chief Financial Officer. During this call, we will discuss Gannett financial results for the quarter. If you navigate to the Gannett website, you will find that we have posted an earning supplement in addition to our earlier press release. We'll be referencing it today on the call as it provides you with additional detail on this quarter's performance. Before we begin, please let me remind you that this call is being recorded. In addition, certain statements made during this call are or may be deemed to be forward looking statements, including those with respect to future results and events, and are based upon current expectations. These statements involve risks and uncertainties that may cause actual results and events to differ materially from those discussed today. We encourage you to read the cautionary statement regarding forward looking statements in the earning supplement, as well as the risk factors described in Gannett filings made with the SEC. Except as required by law, we undertake no obligation to publicly update or correct any of the forward looking statements made during this call. In addition, we will be discussing non-GAAP financial information during the call including same-store revenues, free cash flow, adjusted EBITDA and adjusted net income attributable to Gannett. You can find reconciliations of our non-GAAP measures to the most comparable U.S. GAAP measures in the earnings supplement. Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in Gannett. The webcast and audio cast are copyrighted material of Gannett and may not be duplicated, reproduced or rebroadcasted without our prior written consent. With that, I'd like to turn the call over to Mike Reed, Gannett Chairman and CEO.

Thanks, Matt. Good morning, everyone. Thanks for joining us this morning on our first quarter call. The first quarter was slightly better than we expected despite the challenging macro environment. Our performance was in line with our plan and we believe consistent with providing the foundation for future growth as Gannett -- at Gannett as outlined in our last earnings call. In the quarter we exceeded 1.75 million digital only subscribers and experienced strong growth quarter-over-quarter with 118,000 new added net subscribers - digital subscribers. Year-over-year our digital subscriber base grew 44%, which is in line with the 40% CAGR we outlined in our long range guidance last quarter. In lockstep with the increase in our digital-only subscribers, our digital marketing solutions business has experienced year-over-year core revenue and core client growth of 14% and 13%, respectively, as well as we've seen now four consecutive quarters of double-digit adjusted EBITDA margins. As expected, we experienced the usual Q4 to Q1 seasonality in our DMS revenue, but still saw a strong year-over-year growth in our core platform revenue as I mentioned a 14%. Looking at our print business, we launched an evolved Saturday experience in the first quarter, which further embraces our digital future and caters to the evolving shift of our readers engaging with our content online. Through March of this year, 136 newspapers in the USA TODAY NETWORK transitioned from delivering Saturday additions in print to providing subscribers with access to our full Saturday e-editions portfolio across the entire network, including USA TODAY. We are seeing great traction with our Digital Saturday initiative and are excited to share our progress later in the call. Lastly, adjusted EBITDA decreased year-over-year as we expected and outlined in our last earnings call. The decrease reflects not only inflationary pressure on some cost…

Thank you, Mike, and good morning, everyone. For Q1, total operating revenues were $748.1 million, a decrease of 3.7% as compared to the prior year quarter. On a same-store basis, operating revenues decreased 2.5% year-over-year. Both our total operating revenues and same-store revenue declines were in line with our Q1 guidance expectations. If you step back and think about our journey over the last couple of years, prior to the pandemic, our pro forma same-store revenue declines were approximately 9%. The stabilization of print advertising, coupled with our growth in digital revenues highlights the significant progress we've made in the past two years and gives us confidence as we look ahead to an expected inflection point for revenue growth in 2024. The foundation of that inflection point is our digital revenue growth. And in Q1 2022, digital revenues were $251.1 million and represented over 1/3 of total revenues, increasing 9.7% on a same-store basis year-over-year. Adjusted EBITDA totaled $64.2 million in the quarter, down $36.3 million or 36.1% year-over-year, but above our Q1 guidance range of $55 million to $60 million. Adjusted EBITDA margin was 8.6%, down 430 basis points from the 12.9% recorded in the prior year quarter. Expenses included in adjusted EBITDA were $683.9 million, which increased 1.1% year-over-year. The decline in adjusted EBITDA year-over-year represents the secular pressures of print revenue declines along with approximately $29 million in expenses associated with investments in our strategic pillars as well as ongoing inflationary pressures related to raw materials and labor. To break that down a bit more, our Q1 results reflect approximately $14 million of investments in our strategic pillars across content, marketing, digital marketing solutions and data. In addition, we estimate that rising costs associated with newsprint, fuel, delivery and postage resulted in an incremental $15 million of…

[Operator Instructions] We have a first question from the line of Doug Arthur with Huber Research. Please go ahead.

Can you hear me?

Yes, we can hear you, Doug.

Yes. Okay. Two quick questions, and unfortunately, I got to hop on another call. Mike, it looked like the digital sub number exceeded your initial expectation in Q1, not by huge amounts, but modestly. So I guess the question is, do you feel better or worse about the 2 million plus by year-end goal for digital subs? And then Doug, just on the cost side, this inflation pressure in newsprint fuel, et cetera, should one assume that, that will continue at least through the Q2 and then we'll see about the second half. So those are my two initial questions.

I'll start with the inflation point. I think right now, as we sit here today, we're expecting many of those pressures to continue throughout the year, and that's been baked into our outlook and what we're expecting in terms of performance, especially when you look at the commodity of like newsprint, we don't see any immediate relief in terms of the market dynamics that are driving that year-over-year price increase. So that's something that we're planning for, for the remainder of the year. Although I think it's an important -- we started to see some of this in Q4 of last year. And so the year-over-year impact will start to cycle in Q4. So the variance won't be as significant.

And Doug, to your first question, yes, given the outperformance in the first quarter on digital subs and expecting to surpass 1.85 million by the end of Q2, which we announced this morning. Obviously, that does make us feel much better about our year-end targets. So the answer is yes.

We have next question from the line of Lee Cooperman with Omega Family. Please go ahead.

I just wanted to double check a couple of numbers. You said net debt was now about $1.22 billion. Can I assume that the free cash flow that you gave of $160 million to $180 million or something like that, $165 million, $180 million, plus the asset sales minus whatever you spend stock repurchase will result in net debt at year-end closer to maybe $1 billion? And then secondly, if the stock stayed at this price, would you think you'd spend most of the $100 million on repurchase this year?

So in terms of the first question, I mean, right now, for Q1, the principal remaining on first lien debt was $882.1 million, and we had $152.2 million of cash on the balance sheet. We are projecting the $160 million to $180 million of free cash flow as well as we increase the asset sale target. So -- and all of that will either go through to debt repayment or some portion of that could be used for share repurchases. So outside of...

My question, should I assume the net debt will go down by the amount of free cash flow plus asset sales, minus whatever you spend on stock repurchase?

Yes.

Yes.

Right. Okay. And then the question that follows on is I was surprised, I guess, you had a short window, but the stock seems very underpriced relative to your expectations. Do you think you'll spend $100 million, which would be -- represent 15% reduction in the share count. Do you think you -- as you plan to use it all, assuming the stock stays at these approximate levels?

I think it's important from our perspective, just given the broader macroeconomic environment that I think everybody is facing right now that we maintain an appropriate level of liquidity for Gannett. I think having some flexibility in our liquidity is important. Also debt repayment does remain our first priority. And we're focused on debt repayment. We're also focused very much on making sure we're investing appropriately in our strategic pillars. But as I mentioned earlier, we absolutely will be opportunistic where we see opportunities where we believe our share price is trading below its kind of implied fair value.

And Lee, this is Mike. I would add to Doug's comment that I just want to make sure everyone understands that the share repurchase plan is not optics, it's not promotional. We are going to be opportunistic in repurchasing shares when we see the opportunities. It's hard to -- we're not prepared to commit to the exact dollar amount of what we'll do this year. But I do want to assure everybody that this is not optics, it's not promotional. We do intend to take advantage of the opportunities when we see the share price significantly mispriced to where we see fair value.

We have next question from the line of [indiscernible] with Citi. Please go ahead.

How are the trends in Q2 for live events looking given the economy has opened quite a bit? And then if you could touch a bit on the margins on that segment, that would be helpful. And then I have a second one as well.

So in terms of events, I mean, we are continuing to see live events return in a really strong fashion. I would say we're not back at levels we saw pre-pandemic. And specifically, the endurance and obstacle course races, which involve a lot more kind of contact between participants. Those are probably seeing kind of a slower return to what we consider normal. But we see upticks kind of across the board, which is great. From a margin perspective, we don't break out separate margins necessarily. But I would say that those events run at margins which are multiples of our overall margins. So two to 3x what our overall margin is.

Got it. That's helpful. And then on my second question, what kind of retention are you seeing on the digital subs post the promotion you're running? I guess, the runoff of subs material, how is that looking?

We are -- from a digital subs perspective, we are constantly testing different offers and tracking how different offers perform. Over time, like through the step-up period in terms of introductory pricing stepping up to more full rate pricing, we're in that 65% to 70% retention range depending upon the cohort...

We have next question from the line of [Greg Lewin with Lewin Capital Partners]. Please go ahead.

Just a quick perspective for me, please. So your goals of midpoint $170 million of free cash flow. Your projection of $65 million, just the midpoint of additional asset sales, $235 million. Your share count is still below 150,000. If it was 150,000, we're dealing with something like $1 of free cash flow per share of -- for equity holders, which is what I'm focused on. So we're dealing with some multiple that's in a sense almost 3x, which is kind of insane by any metric. Would you please describe to me the financial justification you have for buying back sub 6% debt versus using money on the stock?

Yes, Greg, Part of the rationale there -- a big part of the rationale there is the -- we believe, and this is through experience over the last 10 to 15 years that a traditional media company carrying two to three turns of leverage creates a lot of additional overhang on the equity. And so there's a material overhang that gets reduced as we continue to repay that debt. But bringing that net debt below 1x, which Doug indicated we plan to do by next year. We think that actually relieves burden the leverage creates and allows us to take all of EBITDA and trade a couple of points higher from a multiple perspective. Also, Greg, the reason that we are paying down debt is we are significantly increasing free cash flow as we move our total debt from $1.3 billion gross to $400 million gross over the next few years, we're going to save close to $60 million a year in interest payments, which is then available for free cash flow. And our capital allocation strategy can start to shift at that point. So we believe repaying debt is going to be great for not only near-term but long-term shareholder value creation.

In just in that point, Mike, and I don't want to belabor it, but I'm just going to -- I just want to bring it out. Why do you care about an overhang when you can retire equity at prices such as they are today, which, by any metric, benefit the shareholders extraordinarily? So why are you talking about getting a multiple improvement in the future for other shareholders when you can have a financial boondoggle for current shareholders by buying in shares excessively?

We don't agree that there's necessarily a boondoggle. And I think that -- look, we have to be mindful of the company's liquidity position, right? We -- what if we're in a recession later this year? What if we're in a recession in the first quarter of next year? We can't -- once you buy back shares, the capital is gone. And so we have to be mindful. We can't run liquidity down to 0. So we have to be as smart as we can be on capital allocation. Having said that, we are going to be opportunistic. So it's not like we won't be in the market buying back shares, but it's not an all or nothing proposition. And we are running the company to create the most upside for shareholders. Middle term, long term is the investment in the organic side of the business and creating organic growth, which has to continue to be one of the top priorities of the company. We can't manage the company for the share price tomorrow. We have to manage it for the share price 6 months and 6 years from now. So we believe our capital is being allocated the right way right now.

Okay. I do not have any issue with the way you're running your business and you are investing in the future and to just make one further comment, and then I'll just leave it be, you were not a traditional newspaper company. You don't intend to be. Your largest, most profitable businesses, not even in the newspaper business. And so I'm only bringing up those points to never -- I love the way you're running the business. I love the way you're investing in the business. You're not skimping on any of those things. You're driving the business in the right direction. I just have an argument about how you're using capital, free capital. Not necessary capital, free capital. That's my only contention, but everything else, I'm very appreciative of the way you're running the business and I think you're doing your great job. So appreciate it. Thank you.

Thanks, Greg.

Ladies and gentlemen, we have reached the end of the question-and-answer session. Now I'd like to turn the call back to Mike Reed, CEO, for closing remarks. Over to you, sir.

All right. Thanks, everyone. I'd like to close today by thanking, first of all, our teammates here at Gannett for the consistent execution against our strategic plan and for allowing us to hit the ground running in 2022. We are incredibly excited about our operating progress that we've made and consistent with transforming the business. If you look back at where we were a year ago or at the time of the acquisition and where this business is today, it is in a fundamentally different place, and we believe we are positioned to be a growing business that generates significant free cash flow. We have created solid building blocks for future growth and believe we have positioned ourselves to nicely capitalize on this momentum moving forward. Our long-standing commitment to empowering communities to thrive by delivering impactful, trusted content and best-in-class marketing solutions for our customers is expected to enable us to continue to grow and achieve our long-term financial targets. We look forward to updating you on our progress on our next earnings call. Talk to you soon. Thank you all for joining us today.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.