Lee Enterprises Inc (LEE) 2014 Q4 法說會逐字稿

Good day everyone and welcome to the Lee Enterprises fourth-quarter 2014 quarterly conference call and webcast. The call is being recorded and will be available for replay beginning later this morning at Lee.net. This is a listen-only call. Several analysts have been invited to ask questions at the end of planned remarks. (Operator Instructions).

Now I would like to turn the conference over to your host, Mr. Carl Schmidt, Vice President, Chief Financial Officer and Treasurer. Please go ahead, sir.

Good morning and thank you for joining us. With me on today's call are Mary Junck, our Chairman and Chief Executive Officer; Kevin Mowbray, Vice President and Chief Operating Officer; and Paul Farrell, Vice President Digital Sales.

Earlier today we issued a news release with preliminary results for our September quarter and 2014 fiscal year. It is available at lee.net as well at major financial websites.

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 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. We will also report changes in revenue in cash costs excluding the impact of a change to fee for service arrangements with our carriers that requires a reclassification of delivery costs resulting in a grossing up of both revenue and cost. This reclassification has no impact on operating cash flow or operating income.

Now to lead our discussion is our CEO, Mary Junck.

Good morning, everyone. We appreciate your interest in Lee and are pleased you could join our quarterly call.

As I noted in our earnings release this morning, Lee continues to drive revenue and audiences at an accelerating pace. Our rapid digital growth along with our many print and digital initiatives position us especially well for a strong 2015. Our successful introduction of full access subscriptions also continues to heighten our optimism and our unmatched local news gives us a powerful advantage in every Lee market.

As we noted in our news release, our total digital revenue increased nearly 25% in the fourth quarter compared with a year ago and the growth trend improved throughout fiscal 2014. Also in the fourth quarter digital advertising revenue climbed nearly 15% and now represents 18.5% of total advertising revenue. Mobile advertising increased 38%.

Overall revenue trends also improved over the prior quarter with total revenue down only 0.2% versus a year ago as reported and down 3% excluding the fee for service reclassification.

As you know, September is our fiscal year end and we wanted to share a few highlights from 2014. We achieved our sixth consecutive year of strong and stable adjusted EBITDA in unlevered free cash flow and we aim to go for seven. Through our business transformation initiatives, we have reduced cash cost 2.4% as reported and0 3.7% excluding the subscription related expense reclassification exceeding our previous guidance of a decrease of 3% to 3.5%. Since 2007 we have reduced cash cost by more than 37% totaling $297 million.

As we look to fiscal 2015, we expect cash cost excluding the subscription related expense reclassification to decrease 1% to 2% in the December quarter. Also because of our full access subscription model that Kevin will speak to in a moment, we expect subscription revenue in the December quarter excluding the subscription related expense reclassification will be flat to prior year.

Now here is Kevin with an audience update.

Thank you, Mary. Hand in hand with our accelerating digital revenue, our digital audiences also continue to grow by double digits, mobile, tablet, desktop and ad page views grew to $231.3 million in the month of September, up 10.6% versus the previous year. Unique monthly visitors totaled 30 million, a whopping increase of 29.2%.

Meanwhile our print and digital subscriber base continue to remain strong. The six-month average as reported by the Alliance for Audited Media showed steady totals with daily at 1.1 million and Sunday at 1.4 million. Our full access subscription initiative is on track and meeting expectations. The program provides subscribers with full access to our unique content across every platform, the daily and Sunday newspaper, our desktop and mobile sites as well as our unique digital content, archives and digital replica additions all via PC, smartphones, tablet or apps.

Since April we have launched the full access model in our 30 largest markets. We plan to complete the rollout before June of 2015. We are extremely pleased as activations have reached as high as 45% in our earliest launch markets with many others on their way to 40% activation goal in the first year. In total, digital activations recently reached 186,000 accounts.

Because of the timing we expect the bulk of the positive revenue from this initiative to be realized in 2015. And as Mary noted, we expect the subscription revenue in the December 2014 quarter excluding the impact of subscription related expense reclassifications to be comparable to the prior-year level.

Back to you, Mary.

Kevin, thank you. To echo Kevin, we are extremely pleased with our full access rollout and now here is Paul Farrell to review key initiatives to keep driving digital ad revenue.

Thank you, Mary. Good morning, everyone. As Mary noted, Q4 was a very strong quarter for digital revenue. Total digital revenue increased nearly 25% compared with a year ago. Digital advertising climbed nearly 15% and now represents 18.5% of total advertising revenue.

Mobile advertising grew by 38%. Our gains are attributable to an ever-increasing appetite to digital solutions by our customers and the ability of our sales organizations to address that need with an unmatched an increasing array of digital programs. Our largest gains in digital were in display, amplified digital, which is our solution for small and midsize local businesses, mobile and national.

Our gains in display are due to strong management of sales performance through key digital metrics such as volume, rate and local sell through. The increased visibility and practice of inspection, local inspection, has accelerated performance by showcasing strong performances as well as identifying markets with additional opportunity.

Increases in our amplified digital suite are due to the continued expansion and acceptance of our SMB programs coupled with the rapid growth of our audience extension product. Audience extension is an exciting capability for our local sales team as the ability to sell and traffic digital media beyond our local desktop and mobile site creates a substantial short- and long-term growth opportunity.

We also continue to be encouraged at the pacing of our mobile revenue growth. Our mobile growth of 38% was up 13 points from our [weighted] growth in the third quarter. We attribute these sizable gains to our increasing mobile audiences, stronger pricing power and the launch of new formats which have improved both revenue and retention.

Finally, national revenue grew by more than 40% as our innovative data driven approach to optimizing the sale of non-local digital inventory continues to drive substantial growth.

Back to you, Carl.

Thank you, Paul. For the September quarter, our cash costs were up 2.7% as reported. Year to date our cash costs decreased 2.4%. In the quarter, our cash costs without the fee for service reclassification were down 0.8% and down 3.7% year to date as detailed in the table in our news release.

As Mary noted, the 3.7% reduction exceeds a range of 3% to 3.5% for cost reduction in our previous guidance. As Mary also noted, we expect cash cost excluding the subscription related expense reclassification to decrease 1% to 2% in the December 2014 quarter. The impact of the delivery expense reclassification in the September quarter was $4.4 million which will continue into 2015. We will continue to provide with and without information for analysis purposes until the reclassification has fully cycled.

In the September quarter, our operating cash flow decreased $3.8 million or 10%. For the full year, operating cash flow was off the prior year by 3.5%. Operating income for the quarter was $20.7 million and for the year operating income was more than $113 million. The prior-year results had an operating loss in the quarter and for the full-year due to impairment charges.

We also reported positive fully diluted earnings per share of $0.13 for the full year which were positive for the first time since 2010. Our adjusted earnings for the full year were $0.41 per share.

Unlevered free cash flow decreased in the quarter due primarily to the timing of receipt of our federal tax refund in the third-quarter this year versus the fourth quarter last year.

For the year, unlevered free cash flow totaled $159.2 million. This result continues a now six year stretch of strong results of at least $152 million per year. Free cash flow for the full year decreased compared to the prior year solely due to refinancing expenses in the current year. Absent those, free cash flow would have been flat.

Debt was reduced $10.3 million during the September quarter and was reduced $42.8 million for the full year. The $32 million we borrowed March 31 to pay refinancing costs was also repaid during the year bringing our total principal reduction to almost $75 million. Our debt at the end of the quarter net of cash on hand was 4.7 times our 2014 adjusted EBITDA. We remain committed to aggressive debt reduction and expect to continue to use substantially all of our cash flow toward that end. We have repaid an additional $12.3 million since the end of the quarter.

Cash interest also continues to decrease as the debt balance continues to reduce and was down $6.7 million for the year or about 8%.

That concludes our remarks. One final note, we expect to file our 10-K with the SEC tomorrow and as always it will include additional information on our results and expectations.

Now we are ready for questions. Operator, please open the line for questions.

(Operator Instructions). And we will take our first question. Please state your name and company.

Avi Steiner, JPMorgan. I apologize, I had to hop off for the last couple of minutes so if some of this is repetitive I apologize and a little bit all over the place. But first off, the fee for service adjustments, was that all on the legacy Lee side and just how do we think about that rolling out going forward? Thank you.

Actually, it would impact both the Lee legacy and Pulitzer sides of the business. We hadn't thought about separating that out for purposes of the disclosures we make for Lee legacy and Pulitzer but your question prompts a good thought and we will have to think about doing that.

I don't have the numbers right now but it would in fact impact both. It does not though, to remind everybody, does not impact operating cash flow or operating income, it is only a revenue and expense reclassification.

Okay, that would be helpful going forward. Next up for me and I think I have asked this in past calls, but legacy Lee continues to outperform the Pulitzer silo and obviously there is marked size differences and maybe it is an unfair conversation but if you can just maybe point out what you are seeing that at least on the top line continues to auger well for the legacy Lee part of the business. Thank you.

In our legacy Lee markets, they are terrific markets as Mary mentioned in the past. They have deep penetration in the markets and they tend to be the main driver for local news and information. Some of the Pulitzer markets, they are more competitive in nature and certainly the major metro and St. Louis while performing to our expectations, performs at a different level than a community newspaper like you have in Lee.

And then I think the guidance you gave on the subscription revenue ex the reclassification should be flat for the current quarter we are in now. But should we expect that to turn positive as we kind of roll through 2015?

We have talked about in general terms our expectation on full access and I think what you are seeing here in our first quarter is delivering on what we have talked about. Overall we believe that the full access will enable us to show positive subscription revenue.

Excellent. And then the very last one for me, kind of housekeeping. If I missed this and it is repetitive I apologize. The debt repaid during the completed Q4 and subsequent the $12 million you called out, can you tell us what was repaid specifically and the exact debt balances? And again apologize if it was already mentioned and I just happened not to be on that portion of the call.

We did not talk about it. We repaid the $6.25 million under the term loan that is required for this quarter and I believe the balance was split between term loan and the Pulitzer notes.

I apologize, were those numbers for the current December quarter we are in?

I misspoke. We had a $5 million balance on the revolver at the end of September. That was repaid along with the $6.25 million term loan payments and I honestly don't remember where the last $1 million came from.

Okay, I will follow-up. Thank you very much for the time.

Thank you, Avi. We do have a question that came in over the Web. The question is can you comment on the difference in profit margins which are generated from digital advertising as opposed to traditional news prints?

The answer to that is that really at the margin, all products are profitable. We have a pretty significant fixed cost structure. Over time of course we have been able to alter it but in the short term most of our costs are relatively fixed and an incremental preprint or an incremental ROP ad or classified ad in the newspaper and the same with some sort of digital product whatever it may be, all have very high margins at the margin.

The only thing I would add to that is sort of an antidote around it is that across Lee although we have digital specialists on the ad side and we in our newsroom have a few digital specialists, we basically expect all of our ad salespeople to be very good at selling print as well as digital. And the same pattern is true in our newsrooms where we expect our journalists, both print and photo journalists to be able to produce great content for all of our platforms that is print, mobile, desktop, tablet. So our folks are cross platform for sure.

Operator, do we have any other questioners?

There are no other questions in the queue.

Great. This is Mary again. I want to thank you all for joining us on this call today. This is our third quarterly call and we would appreciate any suggestions you might have for next time to make these calls more useful and helpful to you.

Again, thank you so much for joining the call and we look forward to future calls and we are wishing you all very happy holidays.

Ladies and gentlemen, this does conclude today's presentation. We do thank everyone for your participation.