Lee Enterprises Inc (LEE) 2018 Q4 法說會逐字稿

Welcome to the Lee Enterprises 2018 Fourth 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) Several analysts have been invited to participate.

Also, participants accessing this call may -- via webcast may submit written questions through the website, and they will be answered during the call as time permits.

Otherwise, you will receive a response later.

A link to the live webcast can be found at www.lee.net.

Now I will turn the call over to your host, Tim Millage, Vice President and Chief Financial Officer.

Good morning.

Thank you for joining us.

In addition to myself, speaking on this morning's call will be Mary Junck, Executive Chairman; and Kevin Mowbray, President and Chief Executive 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 of Sales; and James Green, Vice President, Digital.

Earlier today, we issued our news release with preliminary results for our fourth fiscal quarter of 2018.

It is available at lee.net as well as at major financial websites.

Due to our fiscal calendar, our 2018 fiscal year and fourth quarter included an additional week of revenue and operating expenses.

We also acquired and divested property over the last 2 years.

Certain trends are denoted as same property, which exclude the impact of the additional week of operations as well as the impact of acquisitions and divestitures.

Unless otherwise noted, our results discussed below are on a GAAP basis.

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.

Such factors are described in this morning's news release and also in our SEC filings.

During the call, we will make reference to certain non-GAAP financial measures, which are defined in our news release.

Reconciliations to the relevant GAAP measures are included in tables accompanying the release.

For those participating on the webcast, we have included slides to facilitate our discussion.

For those participating by phone, our slides will be posted to lee.net later today.

And now to open our discussion is Executive Chairman, Mary Junck.

Thank you, Tim, and good morning, everyone, and thank you for joining our call.

We're very pleased with the operating performance in our fourth quarter and for fiscal year 2018.

In our Q4, total revenue was almost flat to prior year due to strong performance from local advertisers, significant revenue growth at TownNews, revenue from the BH Media Group management agreement as well as the extra week of operations in 2018.

On the cost side, cash costs on a same property basis were down 4.9% in Q4 and down 6.1% in fiscal year 2018, hitting our previously announced cash cost guidance.

We believe that we are at the top of the industry in managing the transition to digital.

We maintained our strong adjusted EBITDA, totaling $134.8 million in the fiscal year, and we have held our margins steady for more than a decade.

In 2018, our margins were 22.6%, more than twice the industry average.

Also, according to third-party research, we capture more than twice the industry average in digital market share.

And according to Google, we have the highest programmatic rates in the industry.

While our industry continues to face headwinds, we remained optimistic because we grew digital revenue at a compound annual growth rate of 8.1% over the last 7 years and our audiences remain huge.

A few comments on our huge audiences.

We delivered large audiences across all age groups in both print and digital.

Clearly, our audience-growing strategies, particularly in digital are paying off.

As shown on this slide, in our larger markets, we reached 79% of adults over a 7-day period.

Of those, 50% are print readers and 50% access our digital products, up significantly from 35% last year.

And as you'll note, we are highly relevant across all age categories, including the millennials, where we reached 77% of that group.

In our most recent quarter, average monthly digital unique visitors were up 12.4% and totaled $28.7 million, and page views per session, a metric we use to monitor engagement, increased 11.6% in the fiscal year.

Let me underscore here that our newsrooms are working hard to drive our digital audience in real-time every day.

We're monetizing our vast engaged audience in many ways.

On a compound annual growth rate over the last 3 years, subscription revenue is flat, digital national revenue is up 13% and digital retail advertising is up 8.1%.

The executives at Berkshire Hathaway recognized our industry leadership and selected us to manage their operations beginning in July of 2018.

As a reminder, the agreement provides us with flexibility to implement our revenue initiatives and business transformation consistent with how we have managed our own local media operations.

We're working directly with BH operators to deploy the Lee playbook, which means that there is no additional overhead or cost burden to Lee.

In other words, the revenue generated from the management agreement translates directly into EBITDA.

This agreement is for 5 years, with the option to review -- renew at the end.

We receive a minimum fixed fee of $5 million per year plus a percentage of profits over benchmarks.

The transition under the management agreement has been a success, and we're confident in our ability to achieve $50 million or more over the 5-year period.

We expect to recognize at least $9 million in 2019.

2018 was a successful year at Lee.

And while we recognize the industry headwinds, we remain steadfast in our optimism.

We operate in attractive mid-sized markets with huge audiences.

We've outperformed the industry in many key financial performance metrics, including digital revenue growth, subscription revenue performance and margins, and we have a growth strategy aimed at achieving a digital inflection point when digital-related revenues exceed print-related revenue.

At this time, I'll turn it over to Kevin to further explain our growth strategy and discuss our operating results.

Thank you, Mary.

As Mary mentioned, we're optimistic, and we're pleased to be leading the industry in key revenue metrics and margin.

To build on our strong position, we aim to grow our revenue through 3 main categories: consumers, local accounts and digital services.

A key category of our growth strategy is to retain and grow revenue from consumers.

We are by far the dominant source of local news and information in the communities we serve with more reporters and photographers on the street than all of our competitors.

Our brands are well established and have deep community roots.

We publish breaking news and updates around-the-clock that is engaging to our large local audiences.

We're committed to driving audience growth by delivering valuable local news and information to consumers.

Our digital content center supports the local news operations through the syndication of Lee content and other content, including national and world news.

In 2018, the DCC generated over 220 million page views for Lee.

For context, only SDL today generates more digital traffic.

In 2015, we rolled out our full-access subscription model, where subscribers receive full print and digital access to all of our content.

We also offer digital-only subscriptions in all of our markets.

Nearly 60% of our full access subscribers have activated their digital subscription.

In 2018, digital-only subscribers increased more than 70%.

We aim to drive significant increases in the number of digital-only subscriptions in 2019, doubling the number of digital-only subscribers we had in 2018.

Subscription revenue on a same property basis in the fourth quarter of 2018 was down 2.1% and was down 1.7% for the fiscal year.

Since 2015, subscription revenue, including the impact of acquisitions and divestitures has remained strong and is positive over that time period, a testament to our trusted, high-quality local content and our premium content strategies.

Local controllable retail accounts is the core of our business.

This revenue category represents 50% of our advertising revenue and is comprised of SMBs and our top local accounts.

It's our sweet spot because we have a competitive advantage in that, our local sales teams have direct contact with key local decision makers.

Over the last 3 years, the revenue trend from this category has been better than our overall results.

In the fourth quarter, revenue from SMBs was down 3.7% on a same property basis.

Our Edison program aimed at this category grew accounts by 58% and grew revenue by 44% in 2018.

We believe local controllable retail is a significant opportunity for us as our large well-trained sales force leverage our huge audiences to these local advertisers.

Digital advertising programs are key to growing our local controllable retail revenue category.

With an 8.1% compound annual growth rate since 2012, we lead the industry.

Going forward, we'll move at an even more rapid pace to aggressively drive digital revenue.

We'll get there because the key to our success has always been our initiative-based operating style combined with strong execution.

We have a number of tactics aimed at growing digital revenue.

One in particular is our Amplified Digital agency, the centralized approach to selling agency-level digital campaigns.

It includes a full-service SEM campaign, targeted programmatic displayed email plus targeted digital display.

Amplified Digital was very successfully launched at the St.

Louis Post-Dispatch in 2018, and they had the talent, resources and expertise to drive this business across Lee.

We've already rolled out the Amplified Digital agency to all of our largest markets.

While digital marketing services are becoming commoditized, especially, programmatically, our key competitive advantage is that we drive strong strategy, great creative and data analytics that outperform the competition.

The Amplified Digital agency has earned the preferred partner status with Google, giving us another competitive advantage in the marketplace.

TownNews represents a powerful opportunity to drive additional digital revenue providing state-of-the-art web hosting and content management systems to 1,700 other media organizations, including broadcast.

Over the past 7 years, the compounded annual growth rate of TownNews was 12% and is poised for more significant growth.

In 2018, TownNews grew by 19.8%, with margins in excess of 40%.

Because our content management services are widely regarded as best-in-class, we expect to continue to substantially grow revenue in this category.

To expand into broadcasting, we made significant investments in enhanced video capabilities as well as over-the-top technologies in 2018.

We recently signed up 40 television stations, including Meredith and [KPHO].

TownNews' technology, video capabilities and value propositions position us well to gain market share and grow revenue in broadcast.

To reiterate, we're all pleased with our 2018 operating results, and we remain optimistic about our future.

Now here's Tim to discuss additional financial highlights.

Thank you, Kevin.

We have a long track record of responsibly managing our cost structure.

Over the last 3 years, we have removed $84.5 million in cost from our operations due to business transformation, including regionalization, centralization and outsourcing, and have held our margin constant for more than a decade.

In the fourth quarter, cash costs on a same property basis were down 4.9%, and in fiscal year 2018, cash costs on a same property basis were down 6.1%, achieving our previously announced cash cost guidance.

Compensation on a same property basis decreased 9.9% in the fourth quarter, primarily as a result of reduced staffing levels.

The majority of our staffing decreases are associated with our ongoing business transformation and outsourcing.

Newsprint and ink expense on a same property basis increased 15.1% for the quarter due to significant price increases.

Lower print volumes limited the impact of the price increases.

Other operating expenses on a same property basis decreased 2.2% in the quarter, primarily driven by lower delivery costs, partially offset by outsourcing, favorable revenue trends and responsible cost management.

In 2018, adjusted EBITDA totaled $134.8 million.

With strong adjusted EBITDA and limited other uses of cash, debt was reduced $15 million in the quarter, $63.5 million in the fiscal year, and has been reduced $360 million since our March 2014 refinancing.

The principal amount of debt at the end of 2018 was $485 million.

Interest expense decreased 4.8% or $700,000 in the quarter and has fallen $4.7 million over the last 12 months due to our substantial quarterly debt payment.

With lower debt and strong adjusted EBITDA, the company's leverage net of cash is now 3.56x the last 12 months adjusted EBITDA.

We continue to be actively engaged with our advisers in evaluating an opportunistic refinancing.

In November, subsequent to the end of the fiscal year, we repaid the remaining $6.3 million of our first-lien term loan almost 5 months ahead of its maturity.

The remainder of our debt is not due for another 3 to 4 years.

As we evaluate the timing and economics of an opportunistic refinancing, the decision will be based on our ability to reduce our total cost of debt capital, extend the maturities of our debt and maximize the deductibility of interest under the new tax law.

Currently, we have approximately $10 million of real estate listed for sale at various stages of the sale process.

As a reminder, in the event a property owned by one of our Pulitzer subsidiaries is sold, those proceeds will 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 will become a taxpayer in 2019.

The recent change to the federal tax law reducing the federal statutory rate from 35% to 21% is expected to reduce the total cash income taxes we owe.

Lastly, we expect to file our 10-K with the SEC later today, and as always, it will include additional information on our results and expectations.

An 8-K with supplemental financial information will also be filed later today.

This concludes our remarks.

The team will remain on the line for any questions you may have.

Following the questions asked by phone, we will answer any submitted during the webcast.

Operator, please open the line for questions.

(Operator Instructions) And we have no one queuing over the phone lines to ask a question.

So I will hand the call back over to our host, Tom Millage, to discuss questions from the webcast.

Great.

Thank you.

The first question on the webcast says "I'm hearing a company named Hibu that may offer superior digital marketing solutions.

Can you comment on Lee's views?"

Yes, I'll jump in.

We have over 75 vendors that we work with to drive the digital results that we spoke to on the phone.

And we're pretty pleased with the efforts we have regarding our Amplified Digital agency rollout across Lee.

With that said, I'm not myself personally familiar with it, but certainly willing to look into it.

James, anything you'd like to add?

No.

As Kevin mentioned, I think one of the keys to making sure that you're on the forefront of the digital marketing services, which we believe our Amplified agency out of St.

Louis is, is making sure that you're constantly evaluating the performance for advertisers and evaluating those vendors.

So I think that's part of what we're looking at, and I too am not familiar with Hibu and we will look into it.

The next question over the webcast is, "When will you be able to start repurchasing stock?"

This is Mary.

And the answer to that is, we have limited ability in our covenants to buy back -- repurchase shares to buy back stock.

But it's something that we talk about at every single board meeting and we'll continue to do that.

The next question is, "As you transition to digital, what do you specifically see within your current digital business that can be a huge win for a few years out?"

A couple of things.

We see significant growth in our ability to drive digital revenue tied to our Amplified Digital agency rollout that's just begun in this current quarter.

Secondly, we know we have a lot of upside through TownNews, as we spoke to in our release, and therefore we expect significant growth.

And then thirdly, we have under development a couple of new digital initiatives that we'll be rolling out in Q3 and Q4 that'll substantially increase our digital results.

And I would also say digital revenue that we're looking at right now in the current period looks to be very promising.

The next question comes, "Why does" -- from the webcast, "Why does Lee wait so long after the quarter end to report its quarterly results?" This is our fiscal year-end.

So our fiscal year ended at the end of September, so our -- this is our annual filing in conjunction with the filing of our 10-K, which is later today.

Typically, our normal quarterly would be at a normal reporting cycle similar to our peers.

"Can you comment on the revolver that expires at the end of December?" We are working with our advisers right now to amend and extend our revolver as we have it.

And we expect to get that amended and extended before the maturity at the end of December.

The next question, we have: "Lee has been talking about an opportunistic refinancing for several quarters.

Can you provide initial clarity on the refinancing?"

This is Mary, again, and yes, I can.

As we've noted, we have been talking to our advisers, and our decision to refinance is going to be based on our ability to reduce the total cost of our debt capital, to extend the maturities of our debt and to maximize the interest under the new tax laws.

And at this point, we've -- as we've noted, we have a very good run rate, 3 to 4 years.

So we are going to treat this very opportunistically.

The next question is, "Can you give us an idea on how much of the adjusted EBITDA in the quarter came from the Berkshire Hathaway agreement?" We recognized $1.3 million in adjusted EBITDA in revenue from the BH management agreement.

And as we've talked about, all of that was EBITDA.

That concludes the questions we have over the web.

I'll turn it back -- I'll turn it over to Mary for closing remarks.

Well, thank you so much for your continued interest in Lee.

As we've noted, we're the industry leader in financial and digital performance, and we are steadfastly focused on performing at a high level.

We believe we are at the top of the industry at managing the transition to digital.

We're optimistic about our future as we aim to grow our business through consumers, local retail accounts and digital services.

Top line execution combined with our keen focus on cost structure will produce strong adjusted EBITDA and will continue to make significant reductions in our debt.

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

Thank you.

Ladies and gentlemen, at this time, we have reached the end of our question-and-answer session.

This concludes our call.