Lee Enterprises (LEE) Q2 2019 Earnings Call Transcript

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Lee Enterprises (NYSE: LEE)
Q2 2019 Earnings Call
May. 10, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, everyone, and welcome to the Lee Enterprises 2019 second-quarter webcast and conference call. The call is being recorded and will be available for replay beginning later this morning at lee.net. [Operator instructions] A link to the live webcast can be found at www.lee.net. And now I will turn the call over to your host, Jamie Seratt, corporate controller.

Please go ahead.

Jamie Seratt -- Corporate Controller

Good morning. Thank you for joining us. Speaking on this morning's call will be Kevin Mowbray, president and chief executive officer; and Tim Millage, vice president and chief financial officer. Also with us on today's call and available for questions are: Nathan Bekke, vice president, consumer sales and marketing; Paul Farrell, vice president, sales; and James Green, vice president, digital.

Earlier today, we issued a news release with preliminary results for our second fiscal quarter of 2019. It is available at lee.net as well as at major financial websites. As a reminder, this morning's discussion will include forward-looking statements that are based on our current expectations. These statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially.

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Such factors are described in this morning's news release and also in our SEC filings. During the call, we make reference to certain non-GAAP financial measures, which are defined in our news release. Reconciliations to relevant GAAP measures are included in tables accompanying the release. And now to open the discussion is our president and chief executive officer, Kevin Mowbray.

Kevin Mowbray -- President and Chief Executive Officer

Thank you, Jamie, and good morning, and thank you all for joining the call. Overall, we're pleased with the second-quarter operating results. Our total revenue trend was the best quarterly performance in nearly four years due to substantial revenue growth at TownNews, incremental revenue on our management agreement with BH Media Group and solid digital performance from our legacy businesses. Total digital revenue, which includes digital advertising and digital services revenue, was up 8% in the second quarter and totaled more than $117 million over the last 12 months.

This was fueled by continued strong digital advertising growth, especially from local retail accounts, and substantial growth in TownNews. We saw massive growth in digital services revenue due to TownNews, which is the leading provider of integrated digital publishing and content management solutions with more than seven new FTEs dedicated to digital product development. Revenue at TownNews on a stand-alone basis, which includes revenue earned from several new markets, increased 24.3% in the second quarter. Over the last 12 months, revenue totaled $20.9 million, with adjusted EBITDA margins of 40%.

In 2018, we made strategic technology investments, giving TownNews broadcast-quality video and streaming technology. And in 2019, we acquired additional broadcast customers, who we invested in a sought-after WordPress solution. These strategic investments fueled a 24.4% increase in digital services revenue in the second quarter, and in the first six months of fiscal-year 2019, attributed $1 million to our top line revenue. We believe the investments in technology, combined with TownNews' content management software, which is widely regarded as the best in class, will drive substantial future revenue growth.

This growth will come in three areas: first, dominating market share among print and digital local market operations; second, continued diversification of our customer base in broadcast radio and other market; and third, increasing average revenue per user from existing customers. Moving to the advertising side of our business. Local controllable retail accounts are the core of our business. This revenue category represents approximately 6% of advertising revenue and is comprised of SMBs and top local accounts.

Our local sales teams have direct contact and strong relationships with key decision-makers, which has allowed revenue from this category to outperform overall advertising trends. This means we're less reliant on national retail accounts today. We have a number of tactics aimed at growing local controllable revenue. One in particular is Edison, which is our go-to-market sales approach for small- and mid-sized local businesses.

The objective of Edison is to provide unmatched reach and frequency for advertisers through turnkey print and digital solutions. We know Edison is working,, as the local retail revenue trend over the first six months of 2019 is almost 700 basis points better than our total advertising revenue trend. Another tactic into growing local retail revenue is our Amplified Digital agency, a centralized approach to selling custom digital advertising and marketing campaigns. Our agency approach is anchored by agency-level creative, a complete suite of print and digital media and custom promotions and events, when appropriate.

We believe the Amplified Digital agency has competitive advantages with local advertisers for these many reasons, including: We partner with the best names in digital and our preferred partner with Google. We are the largest local media sales organization in the markets we serve. Furthermore, we staff a dedicated team of digital marketing experts for the pursuit of more sophisticated online marketing opportunities. We have the natural advantage of owning the largest local audience, where the level of customer engagement outperforms its exchange-based environments by at least six times.

We provide our customers with sophisticated analytics that enable us to refine campaigns and drive optimal results for our advertisers. Revenue from the Amplified agency is up 18% in the second quarter. We expect that trend to continue throughout FY '19. On the subscription side, revenue was down 1.9% in the second quarter, a 220-basis-point improvement from the first-quarter trend.

As we mentioned last quarter, we're transitioning our customers to a membership program called News+, which was launched in most of our markets in March and April. Over the next six months, we expect some quarter-over-quarter volatility to our subscription revenue trends as the impact of News+ is realized primarily due to timing. However, once the downs and ups are factored, we do expect strong performance in subscription revenue in 2019. The News+ membership model combines premium content and rewards program and offers more access to content for digital subscribers.

News+ has five tiers of benefits and rewards. Tiers for full access that include print and digital access in two of the tiers are digital-only. We believe that having different tiers of rewards and benefits as well as different price points, the News+ membership model will improve retention and provide continuing opportunities for strategic pricing actions. Our audiences are massive, reaching nearly 80% of all of the adults in our larger markets.

While nearly half of our audience reads our printed product, we continue to experience a significant increase in digital content consumption. Therefore, growing our digital-only subscriber base will continue to be a key area of focus. In the second quarter of 2019, our digital-only subscription increased 55.5%. In the second quarter, we earned $3.9 million of revenue from the BH Media Group management agreement.

Over the first 9 months of the agreement, we earned $7.8 million in fixed and variable fees with no added cost to Lee. We're very pleased with the partnership we have with Berkshire Hathaway. Total revenue for the quarter was down 4% and cash costs were down 2.6%. Adjusted EBITDA totaled $23.6 million in the quarter and totaled $125.9 million over the last 12 months.

While there are industry challenges, we believe we have the right core strategy that will continue to produce industry-leading performance because we operate in mid-sized markets with huge audiences and we've held our margin for more than a decade and our margins are nearly twice the industry average while we continue to outperform the industry in key financial performance metrics. Those metrics include total revenue, digital revenue growth and subscription revenue. Overall, we're pleased with our second-quarter operating results and remain optimistic about the future. And now here's Tim to add some additional financial highlights.

Tim Millage -- Vice President and Chief Financial Officer

Thank you, Kevin. We have a long track record of responsibly managing our cost structure through business transformation while maintaining high-quality, engaging local news, information and advertising. We've managed our cost structure through regionalization, centralization and outsourcing and held our margin constant for more than a decade. In the second quarter, cash costs were down 2.6%, with compensation costs down 3.2%.

FTEs were down 8.7% primarily due to staffing decreases associated with our ongoing business transformation and outsourcing. FTE reductions were partially offset by compensation increases as well as unfavorable claims experience associated with our self-insured medical plans. If medical costs were flat for the second quarter of '18, our compensation costs would have been down 5.2% in the second quarter. Newsprint and ink expense increased 3.3% in the quarter as we realized the impact of the newsprint price increases throughout 2018.

Lower print volume limited the impact of price increases. So far in fiscal-year 2019, newsprint prices have declined 7% from their peak, which will have a favorable impact on operating results for the remainder of 2019. Other operating expenses decreased 2.6% in the quarter, primarily driven by lower delivery costs. Year-to-date cash costs are down 3.5%.

For fiscal-year 2019, we expect cash costs to decline between 4% and 5% on a comparable basis to fiscal-year 2018. We attribute the reduction to the following: lower compensation and benefits cost predominantly due to voluntary buyouts offered late in the second quarter; continued business transformation through outsourcing and centralization; reductions in newsprint pricing; and reductions in print legacy costs. Adjusted EBITDA totaled $23.6 million in the quarter and $125.9 million over the last 12 months. As we have discussed over the past several months, we are having productive refinancing conversations with our advisors and our lenders.

Although market conditions will dictate final terms, our goals in the refinancing remain to reduce the cost of capital, have less restrictive covenants than we have today for such things as stock buybacks and to extend our maturities of debt. Also of consideration is our breakage cost of our current debt, which totaled $9 million today. As of the end of the second quarter, the principal amount of debt totaled $476.5 million. With the repayment in full of our first-lien term loan in November, we can use our free cash flow to repay the bond at a price of 102 3/8% or we can buy the bonds back in the open market.

Also we can use excess cash flow from Pulitzer to repay the second-lien term loan at par. The payment on the second-lien term loan from Pulitzer excess cash flow in the March quarter is expected to be $7.3 million, which will be paid in our June quarter. Excluding our revolving facility, our nearest maturity is March of 2022. And outside of an excess cash flow sweep on our Pulitzer assets that allows us to repay our highest cost of capital debt at par, we have no mandatory principal payments.

With lower debt and strong adjusted EBITDA, our leverage net of cash is 3.6 times the last 12 months' adjusted EBITDA. Over time, we have worked to monetize non-core assets, including excess real estate and investments. Currently, we have identified approximately $23 million of excess real estate. And we have a private equity investment worth approximately $10 million that we are working to monetize.

As a reminder, in the event assets owned by one of our Pulitzer subsidiaries is sold, those proceeds will also be used to repay the second-lien term loan at par. In fiscal-year 2018, we used all of our remaining federal tax NOLs and we'll become a taxpayer in 2019. In the second quarter of this year, we repaid -- we paid $3.9 million in federal and state income taxes. For the entire 2019 fiscal year, we expect to pay between $9 million and $11 million in federal income taxes.

Last, we expect to file our 10-Q with the SEC later today. And as always, it will include additional information on our results and expectations. An 8-K with supplemental Lee Legacy and Pulitzer financial data will also be filed. And this concludes our remarks.

The team will remain on the line for any questions you may have. And following questions asked by phone, we will answer any submitted during the webcast. Operator, please open the line for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions]

Andrew Gadlin -- Odeon Capital Group

It's Andrew Gadlin from Odeon Capital Group. Good morning guys.

Tim Millage -- Vice President and Chief Financial Officer

Good morning. How are you?

Andrew Gadlin -- Odeon Capital Group

Good. Thank you. Thanks for taking the question. Looking at the TownNews, you reported about $21 million, $20.9 million of revenue over the last 12 months.

Could you give us a sense of how big the addressable market is for TownNews?

Tim Millage -- Vice President and Chief Financial Officer

Yes. So you're right, we had $20.9 million of revenue over the last 12 months at TownNews. And that's a substantial revenue growth. As Kevin talked a little bit about, we see growth area of TownNews in a few different areas.

One, increasing ARPU from existing customers, and we think there's a substantial amount of revenue to grow there. The majority of the TownNews customers are on one side of their core CMS products. The other CMS product is a higher-value product that does have significant ROI to those customers. We do think there's additional room to grow in the broadcast space as well.

So we do think there's substantial growth for TownNews.

Kevin Mowbray -- President and Chief Executive Officer

Yes. I would agree with that.

Andrew Gadlin -- Odeon Capital Group

Maybe asking the question a different way, do have a sense for what your market share is? I'm just trying to understand. I mean the business is growing very nicely in a difficult advertising backdrop. I'm trying to understand really how big this can get.

Kevin Mowbray -- President and Chief Executive Officer

Yes. Well, we think it has a lot of upside. To help you maybe assess it a little bit further is we have pretty significant market share in print, and as Tim just mentioned, an opportunity to sell them our more sophisticated total management system. However, our movement into broadcast and radio has a lot of room for growth.

And we've had a lot of beginning success based on the investments I mentioned earlier that we've made in video broadcast and the streaming technology as well as WordPress plug-in that television stations want. And were hot in pursuit in pursuing those industries, and we've had good track record as we've moved that direction.

Andrew Gadlin -- Odeon Capital Group

OK. And then in terms of the -- you've talked in the past about debt refinancing. I missed it if it was in your prepared remarks. But I was wondering if you could talk about your latest thinking on that.

Tim Millage -- Vice President and Chief Financial Officer

Yes. So thanks for the question, Andrew. We have talked a lot about our continued conversations with our advisors and our lenders on a potential refinancing. We have a lot of productive feedback as part of the conversations we've had.

I'm sure -- I trust that you can respect that we can't provide any more information on details of that process. But I'll walk through our objectives again because this certainly is how we're thinking about the refinancing, given that we do have three years' runway currently. But -- so we're approaching this from an opportunistic perspective. And our objectives in the refinancing are to: one, lower our cost of capital; extend our runway well beyond the three years that we have today; third, to allow for a larger restricted payment basket immediately than we have today, today we have a $15million basket that grows as leverage improves; fourth, we want to allow us to use our cash flow to repay debt at par.

Right now, we're in a situation where our -- the first-lien term loan is paid off and our notes are under call protection. Our second-lien term loan has an excess cash flow sweep. So we don't have any debt that's payable at par. And last, we want to clean up our capital structure.

So right now, we have the split collateral baskets between Lee Legacy and Pulitzer. We want to work to clean that up and then have one collateral basket. So hopefully, that gives you some framework as to how we're thinking about it.

Andrew Gadlin -- Odeon Capital Group

Yes. And is it the type of thing where we'll just wake up one day and there'll be a press release? Or do you have a particular time frame where you think all this comes to a head?

Tim Millage -- Vice President and Chief Financial Officer

Yes. Well, I think certainly we're evaluating it based on the objectives that we laid out. And if there's something that meets our objectives and we can execute on, we'll certainly announce that when the time comes.

Operator

[Operator instructions] And it appears there are no further questions from the callers. I will now turn the call back over to our host, Jamie Seratt, to discuss questions from the webcast.

Jamie Seratt -- Corporate Controller

Thank you. Our first question from the webcast: When will Lee pay investors a quarterly dividend?

Kevin Mowbray -- President and Chief Executive Officer

I'll go first and I'll turn it over to Tim for additional feedback. As we said many times, we're going to be using all of our additional cash flow to pay down debt, and as we have done recently, make smart, strategic acquisitions for TownNews and other print tuck-ins that we've done. And so dividend would fall below those priorities.

Tim Millage -- Vice President and Chief Financial Officer

I think the only thing I would add just as our capital allocation decisions for dividends and stock buybacks, I mean right now, we've talked about our leverage target of 2.5 times. Right now, we're in excess of that. And this quarter, our leverage remained relatively consistent from where it was last quarter. And so our focus is going to be to continue to deleveraged until we can get closer to that 2.5 times target leverage point.

With that being said, we do have the authorization out there from our Board to buy back up to $10 million of stock over two years and would deploy that if broader market conditions continue to weigh in on our stock. If we have no more questions from the webcast, back to Kevin.

Kevin Mowbray -- President and Chief Executive Officer

Well, thank you. Thank you for your continued interest in Lee. We remain steadfast in our optimism about our future as our digital transformation continues. We aim to grow our business through subscriptions, local retail accounts and digital services, top line execution, combined with a keen focus on our cost structure, while continuing to produce strong adjusted EBITDA will continue to reduce our total debt, which we believe will increase shareholder value.

We appreciate your time and your interest in Lee. And thank you for joining us today.

Operator

[Operator signoff]

Duration: 24 minutes

Call participants:

Jamie Seratt -- Corporate Controller

Kevin Mowbray -- President and Chief Executive Officer

Tim Millage -- Vice President and Chief Financial Officer

Andrew Gadlin -- Odeon Capital Group

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