Lee Enterprises Inc (LEE) 2014 Q2 法說會逐字稿

Welcome to Lee Enterprises' second-quarter 2014 earnings conference call and webcast. The call is being recorded and will be available for replay beginning later this morning at lee.net and also by telephone at the same dial-in number. This is a listen-only call. Several analysts have been invited to ask questions at the end of the planned remarks. If you are accessing this call by webcast, you may submit typed questions on your screen. Those questions will be answered during the call if time permits. Otherwise, you will receive a response later.

Now I will turn the call over to your host, Carl Schmidt, Vice President, Chief Financial Officer and Treasurer.

Good morning. Thank you for joining us. As you may know, Lee has not previously conducted quarterly earnings calls. As this is our first one, we would appreciate any feedback that you have.

Joining us today are Mary Junck, our Chairman and Chief Executive Officer; Kevin Mowbray, Vice President and Chief Operating Officer; and Paul Farrell, Vice President, Digital Sales.

We issued our March quarter earnings release this morning before the market opened. It is also available on lee.net. Mary will cover highlights, and we will discuss details in just a moment. As a reminder, our discussion today will include forward-looking statements that are based on our current expectations, and are subject to certain risks, trends and uncertainties that could cause actual results to differ materially. Such factors are described in our news release this morning and also in our other SEC filings.

Also during the call, we will reference certain non-GAAP financial measures. Reconciliations to the relevant GAAP measures are included in tables accompanying our news release. Now to lead us in our presentation is our CEO, Mary Junck.

Good morning, everyone, and let me echo Carl's thanks for joining our first quarterly earnings call. As Carl noted, we'll be happy to hear your feedback on how we might improve these calls in the future.

Lee posted another good quarter, thanks to continued strong digital revenue and audience growth, as well as careful cost control. Preliminary earnings were $0.03 per diluted common share compared with a loss of $0.12 a year ago. Excluding unusual matters, adjusted earnings per diluted common share totaled $0.05 compared with a loss of $0.05 a year ago.

Revenue from digital advertising and marketing services increased 10.2% to $17.4 million, and now totals nearly 17% of total advertising and marketing services revenue. Total digital revenue, which also includes subscriptions and digital businesses, increased 13.1% to $20.5 million.

As we also reported this morning, total operating revenue for the quarter totaled $154.1 million, a decrease of 4.1% compared with a year ago. Combined print and digital advertising and marketing services revenue decreased 4.3% to $102.7 million. Print advertising and marketing services revenue on a standalone basis decreased 6.8%. Subscription revenue decreased 4.3%.

Our advertising results represent an improvement from recent trends. Also, we believe revenue may have been constrained to some degree in the quarter by the unusually harsh winter in many of our markets. As you may know, the March quarter is traditionally our smallest quarter; and, as a result, percentage changes can be magnified. Although unaudited daily circulation units decreased 5% for the quarter, our digital audiences continued to grow very rapidly.

Mobile, tablet, desktop, and app page views increased 16.2% to 235.9 million. And in March, monthly unique visitors increased a whopping 30.8% to 30.3 million. Sunday circulation increased 9.9% due to the addition of branded additions. Our average daily circulation for the six months ended March 31, 2014, as measured by the AAM, decreased 3.1%, and Sunday circulation increased 9.4%.

Now, Kevin will review one of our key initiatives, our launch of full-access subscriptions.

Thank you, Mary. In April, we began launching our paid digital subscription strategy. We call it full-access, because it provides every subscriber with full digital access, including desktop, mobile, tablet and replica editions through an easy single sign-on for all of our digital platforms. Subscription rate increases will reflect the expanded access. We expect meaningful new revenue, the majority of which should be realized in our 2015 fiscal year.

Madison and St. Louis launched in April. St. Louis previously provided free access to web, mobile, and tablet users, although replica additions required a separate subscription. In Madison, and in most of our other markets, we've required separate subscriptions for desktop and tablet access, but mobile has been free. We also have required separate subscriptions to access digital replicas, which present the actual layout of the printed newspaper.

We are executing an extensive marketing campaign headlined Connect Me Local. The campaign emphasizes how easy it is to activate your account, as well as the many benefits of both print and digital content. The Connect Me Local campaign includes full-page print ads, digital impression campaigns on social media, and Facebook and Twitter. We are also adding premium content for subscribers in certain markets. Our customer care service representatives have been trained on a comprehensive full-access training module that focuses on retention and customer activation.

Early results in Madison and St. Louis are promising. In the first three weeks, Madison has already activated more than 10% of their subscribers to full-access, and we are also very pleased with the early results from St. Louis in the first few days of their launch. We plan to launch an additional 26 markets by the end of September, focusing on our largest markets first. We are really excited to offer full-access and expect a successful rollout across all of our enterprises.

Thank you, Kevin. As I indicated earlier, total digital revenue increased 13.1% in the quarter. And here is Paul Farrell to highlight several key digital advertising initiatives.

Thank you, Mary. As Mary noted earlier, Lee has continued to drive digital revenue at a torrid pace. Three of our top digital initiatives are driving display, leveraging our rapidly-growing mobile audiences, and deepening our penetration among small and midsize businesses, SMBs. We are particularly excited about the expansive growth experienced in the digital display business. We attribute this growth to a more rigorous sales process, by driving both rate and volume; added reliance on premium-priced, high-impact ad units; and improved proficiency at closing deals with our larger local advertisers.

In similar fashion, we have also made significant progress at launching our audience and reach extension products. Our salespeople are increasingly adept at seizing new opportunities with these targeted and network media offerings. The most popular offerings include advanced audience-targeted display advertising, filtered by various behavioral groups, demography or job title. We are also seeing rapidly increasing customer engagement around various forms of network retargeting of advertising, including site, search, and contextual. Finally, our network mobile and mobile targeted by time of day, distance, or weather, continues to experience substantial growth.

Our mobile display business finished the quarter up nearly 10%, due to improved yield on existing business and a broadening acceptance of high-impact ad units, such as interstitials and other forms of rich media. We are experimenting with larger ad units that run within the mobile new stack or perhaps on our index pages. Initial indications are quite positive in terms of customer acceptance, pricing power, and performance.

Our SMB efforts centered on an amplified digital product line continue to expand. This segment saw modest growth in Q2. We look for continued improvement in Q3 with improved packaging, intensified sales pressure, and higher average value of orders. We have many more initiatives to drive digital advertising revenue, but these are three we wanted to highlight today.

Mary has asked me now to pass the speakers' phone to Carl.

Thank you, Paul. Mary, Kevin, and Paul covered the revenue highlights. I'll add a few details about cash costs, cash flow, and our recent refinancing.

Our successful business transformation efforts are continuing to show results. For the March quarter, our cash costs were down 5.7%. Year-to-date, these costs have decreased 4.7%. As a result, we feel comfortable improving our full-year cash cost guidance at this time to down in a range of 3% to 3.5%. The previously announced guidance was to be down 1.5% to 2.5%.

This improved range of cost reduction for the full-year is exclusive of the reclassification of revenue and expenses related to changing our form of newspaper carrier contracts in selected markets to a fee-for-service arrangement. This reclassification results in a grossing up of both subscription revenue and operating costs, with no impact on operating cash flow or operating income. In the March quarter and year-to-date, our cash costs without this reclassification were down by a slightly larger amount than reported, as detailed in the table in our news release.

The impact in the March quarter was $400,000, but we expect it will grow for the remainder of this year and extend into 2015. We'll continue to provide with and without comparisons for analysis purposes.

All of our applicable non-GAAP measures on a consolidated basis -- operating cash flow, adjusted EBITDA, unlevered free cash flow, and free cash flow -- were all up for the March quarter over the prior year. Operating income was up more substantially, due also to a decrease in amortization expense and non-cash gains on asset sales. These measures are also all up or nearly flat for the year-to-date period as well. We've now maintained our high level of cash flow performance for more than five years, and our operating cash flow and operating income margins continue to increase.

As we previously announced, we completed our $800 million refinancing on March 31, just after the end of the quarter. We decided not to incur the cost to refinance the Pulitzer notes, as that debt is amortizing rapidly. The balance of that debt on May 1 a year ago was $94 million and stands at $36 million today. We believe our refinancing sets us up well for future debt reduction from our cash flow, with a runway extending well into 2022, and with term loans that can -- and, we expect, will -- amortize.

The weighted average cost of cash interest will initially be 9.25%, nearly identical to the 9.2% rate we were paying before. Given the absence of maintenance covenants, the long extension in maturities, and the elimination of much of our future interest rate risk with a largely fixed rate structure, we view the overall results as favorable. Our debt will remain secure, largely as it was before.

On a pro forma basis, our debt increased from $813 million, at the end of the March quarter, to $845 million, due to the financing of fees and expenses related to the refinancing process. As you may be aware, we've maintained cash at a low level, necessitating the additional debt. Since the refinancing and through the release date, we've already repaid $15.25 million as well as most of the related fees and expenses related to the debt issuance. We are committed to aggressive debt reduction, and expect to continue to use substantially all of our cash flow toward that end.

Finally, you may have noticed in the release we provided selected separate financial information for Lee Legacy and Pulitzer. This is an outcome of the refinancing process. And, as a result, we expect it will continue.

That concludes our remarks. Now we are ready for questions. Operator, please open the line for questions.

(Operator Instructions) Andrew Gadlin, Odeon Capital.

Thanks for taking my question. I wanted to ask about some of the underlying performance in the advertising market. There's some very different trends we are seeing here in terms of employment, real estate, and automotive. Can you talk about how those markets, those end markets, are shaping up as we look forward to the rest of the year?

This is Mary. Let me take that, and Paul and Kevin can chime in. And, as you know, we don't generally provide forward-looking statements, but here's a little bit of local color for you in the classified category. And as you've observed, some of the categories were kind of tough for us in this quarter and actually year-to-date.

We have seen a little bit of life in employment, and we think we'll make some progress there. And, as you know, on the real estate side of classified, spring is a good time to be buying a home. And we have a home resurgence project underway. And so, that's sort of two bits of local color on classified.

Great, thanks. And how is automotive doing?

Well, as you can observe in our numbers, automotive has been a tough category for us. We have another big initiative underway in automotive as well, which entails making big pitches on our biggest auto dealers in our largest markets. And we haven't seen that bear fruit, but we are hopeful that it will.

Great. And then on digital, you guys have -- are continuing to do very, very well. I was wondering if you could just talk about, as you -- the rollout, which you expect to finish with half of your markets essentially by end of September, how quickly do you think we'll start seeing that translate into financials -- financial results?

Well, we'll see a small portion of that translate into the fiscal year of 2014. And, as I mentioned, the majority of it will fall into 2015.

And so is there a dynamic here where we are recognizing some of those costs this year but the real benefit will hit us next year?

There are some front-end costs that we have that are related to technology, customer notification, and such. Call centers have been staffed up to handle increased volume. But there's not a serious mismatch. And there is -- a fair amount of the revenue from this process will be incremental, and to the point that we haven't even tried to quantify -- publicly, anyway -- the incremental cost.

Got it. All right. Well, thank you very much.

Okay. Thank you.

Avi Steiner, JPMorgan.

Thanks for taking the questions. To start off, I just wondered if you could talk about results a little differently by the silos? Once again, Legacy Lee seems to be doing better than Pulitzer. And if you could just talk about maybe what you're seeing on the ad sales line for both. And then I've got some follow-ups. Thank you.

Well, the primary difference historically, and what seems to be continuing, is market-related. Pulitzer is dominated by the St. Louis market, which is the closest thing we have to a major metro market. And Pulitzer also includes several markets in California, which, for us, have not been as strong; they're smaller and, with the exception of Napa, are not the strongest markets we have. But -- so, the trends really, we don't think, are significantly different than they have been historically.

Okay. Was there an impact at all from Easter this year in your numbers, just it being later versus where we were last year?

We have not tried to quantify any Easter impact. It's been our impression that, over the years, it's gotten to be less and less of a factor. So we have stopped trying to measure it. But there is conceivably some impact, but it's hard to quantify.

Fair enough. And on the expense side of the better expense guidance, could you just drill a little deeper into where that's coming from, and how much of that is just from the change in the circ recognition?

Well, the guidance we've given is exclusive of the circulation change. So if -- the reported number will be a little bit less than the 3% to 3.5%, because of the circulation reclassification. So, that -- but -- so, that 3% to 3.5% is more apples and apples with what we've shown historically in prior years. That's what we tried to quantify.

And it's coming from business transformation. As we roll out our various initiatives further through our Company, we get more comfortable with the amount of benefit that we are going to be able to see from those. And so, as we've done historically, we've been -- upped our guidance as we've gotten more comfortable with the number.

And I'd also point out that there is a tail from these initiatives that we'll run into next year. And, also, there is the prospect of other initiatives, which we haven't even begun to implement yet, just because there's only so much that we can accomplish at one time with the staffing that we have. So, we feel pretty good about business transformation for the foreseeable future. And that's not to say that there won't be other cost pressures that will offset it; but we think that the process itself still has some room to run.

Excellent. And just a last quick clarification for me. I think I heard you say -- but I want to doublecheck -- the Pulitzer note balance is $36 million today. And then should we assume all the other components are the same as from the refinancing last month? Thanks a lot.

All right. Actually, there was a $6.25 million payment made on the first lien term loan as well. That's the difference between the $15.25 million that we paid in full for the quarter so far -- the third quarter -- and the $9 million difference in Pulitzer from the end of the quarter. So, both have gone down.

Perfect. Thank you very much.

Thank you.

Barry Lucas, Gabelli & Co.

I have a few. And I just want to stick to the expense side of the ledger for a moment. And trying to gauge how sustainable are cuts if we were to look forward? I mean, can you -- Mary, can you just keep chipping away at this, given the excellent job that you've done thus far in reducing the cost burden of the business?

Well, Barry, we've been asked that question a few times. And the way we look at it is this, that we have a pretty good track record on being able to reduce our costs. And the biggest way that we've done it is through these business transformation projects that Carl referenced. And even though we have completed some, we have a list of some projects that we haven't even started that we think will bear fruit in the future.

So, we are reasonably optimistic that, going forward, this is something we can do. I think the thing to remember is that the business is transforming too. So, of course, how we go to market, how we think about what we do, changes as the business changes. And I think that's kind of the energy behind what we've been able to do.

Great. Two revenue questions, if I may. They're -- I don't want to say it's a disconnect, since you're doing so well on the digital side, but I thought I had heard or read that the mobile advertising revenues were up 10% versus your overall digital of a couple-hundred basis points higher than that. So, given the proliferation of mobile devices, if there is a disparity there, why and how do you close -- how do you monetize that broader base of mobile devices?

Barry, just to be clear, the total digital revenue would include subscription revenue and would also include our TownNews subsidiary, which provides services to other publishing companies. Total digital advertising grew at pretty close to the same rate as mobile.

Okay, helpful. Thank you.

But one point that I would make on mobile is that we have, over several years, actually been pretty aggressive on monetizing mobile, and encouraging our local sales staff to present it to their customers. And one of the things that we've been able to do in the last six months or so is to sell out even more of our mobile inventory, as well as we've been able to get a little stronger -- well, actually quite a bit stronger CPM. So, that's helped us a lot on the mobile side.

Okay. Last one for me. And maybe this is going a little too deep, but if we come back to the automotive classified vertical, any way to distinguish -- one, what's happening in the digital part of that business versus traditional print? And two, even though your markets are very small, and I don't think there are any competitors in the partnership there, is a portion of that business going to online sites, whether it's cars.com or KBB? And how do you -- so, how do you combat that? And what would a change in ownership of cars.com -- what kind of impact might that have, if any?

Well, just to touch on digital in particular, we are continuing to gain real traction on the various reach extension products that we have in the automotive space. And this is a new capability for our organization in the past nine months, and one we are getting quite a bit of traction with. And this involves selling ad impressions in highly targeted ways across our sites and other sites in our market, and actually in other markets outside of our historical footprint.

And to your cars.com question, if I understood it properly, we are moving to a new auto portal in our top markets, and beginning to get a significant amount of traction in our test market right now. And we'll be moving quickly through our other large markets on this new auto portal in the coming months.

Great. Thanks very much.

Thank you. Ladies and gentlemen, at this time, we've reached the end of our question-and-answer session. I would like to turn the floor back over to our management team for any closing remarks.

Well, thank you. Again, Lee has posted a good quarter, and we are quite pleased about our progress and where we are headed. We appreciate very much you joining us today, and we look forward to future conference calls. Thank you.