Lee Enterprises Inc (LEE) 2021 Q1 法說會逐字稿

Welcome to the Lee Enterprises 2021 First 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 will be found at www.lee.net.

Now I will turn the call over to your host, Josh Rinehults, Vice President, Finance, FP&A.

Good morning. Thank you for joining us. Speaking on this morning's call are Kevin Mowbray, President and Chief Executive Officer; and Tim Millage, Vice President and Chief Financial Officer and Treasurer. Also with us on today's call and available for questions is Nathan Bekke, Vice President, Consumer Sales and Marketing.

Earlier today, we issued a news release with preliminary results for our first fiscal quarter of 2021. It is available at lee.net as well as at major financial websites.

One housekeeping item to start. We closed on the acquisition of BH Media Group and The Buffalo News on March 16, 2020. Certain results and trends are presented on a pro forma basis, which assumes ownership of these acquisitions for the entirety of the periods presented.

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.

And now to open the discussion is our President and Chief Executive Officer, Kevin Mowbray.

Thank you, Josh. Good morning, and thank you all for joining the call.

We're off to a great start with fiscal year 2021 as we dramatically improved our operating results, helping to mitigate the effects of the pandemic. We're pleased with the revenue trend improvement with strong cost management. We're most excited and optimistic about our post-dynamic strategy that is well underway.

We remain keenly focused on our local operations with an emphasis to drive local audience and advertising revenue, and the results are paying off. We achieved significant revenue trend improvement in the first quarter with total operating revenue down 10.8% on a pro forma basis compared to the third and fourth quarter of fiscal year 2020 trends that were down 16.9% and 24.7%, respectively. With strong cost management, adjusted EBITDA totaled $40 million in the first quarter.

We made significant progress on our digital transformation strategy already. Total digital revenue in the quarter totaled $62.5 million or 29.5% of our total operating revenue, a 26% improvement to prior year. Digital-only subscriptions continue to grow at a rapid rate, up 69% to the prior year, and we grew digital-only subscription revenue 69% as well, both industry-leading metrics. We now have 286,000 paid digital-only subscriptions, which is helping drive audience revenue performance. The growth in digital-only subscriptions and digital-only revenue contributed to the 1.9% quarter-over-quarter growth in subscription revenue, again, a leading metric in the industry.

Consistent with our overall revenue trend, advertising revenues significantly improved in the first quarter. We've achieved continuous advertising revenue trend improvement since the trough of the pandemic last year and posted strong quarter-over-quarter comparisons in the December quarter. Advertising revenue trends improved 690 basis points compared to the fourth quarter trends.

In advertising, top local accounts and SMBs are our focus. Revenue from these advertisers comprise nearly 50% of our total advertising revenue in the quarter, and we believe this segment of our revenue will continue to improve and grow. Our strategy to drive advertising revenue from the local retail segment leverages the 70% audience reach in our markets and contributed to the 690 basis point sequential trend improvement from the fourth quarter advertising revenue trend in fiscal 2020.

Additionally, we've made significant investments to diversify the products and services that we offer to local advertisers. We're seeing significant growth in Amplified Digital Agency, our full-service digital market agency. We also posted significant growth in video revenue in the quarter. Revenue from these categories increased 16.5% in the quarter compared to the prior year, and we believe these categories will continue to improve and grow.

Leveraging on our strong relationships in our local markets, we earned $3 million from our company-wide focus to capture political advertising from state and local campaigns, nearly all of it in digital revenue, while this revenue is tied to political campaign to demonstrate the power of our local market relationships that can be leveraged into future opportunities.

TownNews is a digital backbone of our operation and that of over 2,000 other media partners and continues to perform well with revenue up 8.5%. On a standalone basis, revenue of TownNews totaled $25.6 million over the last 12 months. With growth in revenue at TownNews, combined with our audience revenue streams, 45% of our revenue is reoccurring revenue or subscription-based. That's a powerful metric as we transform to a digitally-centric business.

At Lee, we have intense focus on executing on our post-dynamic strategy to drive new revenues for the company. We've also significantly transformed our company on the cost side, exceeding our annual cost target nearly 9 months early.

And now I'll turn it over to Tim to give you more details on the cost side.

Thank you, Kevin, and good morning, everyone.

In June 2020, we laid out a target to achieve $100 million in cost synergies by the end of fiscal year 2021. We established plans and executed quickly, and we are excited to report that at the end of the first quarter 2021, we have realized $103 million in cost synergies, exceeding our goal 9 months ahead of schedule.

Total cash costs were down 10.1% in the first quarter compared to the same quarter last year. Compensation was down 5.9% due to our business transformation and acquisition integration initiatives. Newsprint was down 34% due to a reduction of our print volume as well as pricing. Other cash costs includes print-related costs like outsourced printing expenses and delivery expenses and also includes digital cost of goods sold. Other cash costs were down 11% in the quarter due to a reduction of print-related costs, partially offset by incremental digital investments.

As a result for the revenue performance Kevin walked through, combined with the strong cost management, adjusted EBITDA totaled $40 million in the first quarter. The principal amount of debt at the end of the first quarter totaled $523.6 million or down $52.4 million since the refinancing last March. Excess cash flow in the quarter totaled $17.1 million and was used to repay debt in our second quarter at par.

As a reminder, the credit agreement of a low fixed annual interest rate, a 25-year maturity, no fixed mandatory principal payments and does not have a financial performance covenant, meaning we do not have events of default tied to leverage or other maintenance ratios. The debt is with a single lender who knows us well and is committed to our success.

Additionally, we have several noncore real estate assets that we are looking to monetize. As of today, we have $30 million that remain available for sale that once sold will be used to further reduce debt.

Last, we expect to file our 10-Q with the SEC tomorrow. And as always, it will include additional information on our results and expectations.

This concludes our planned remarks. The team will remain on the line for any questions you may have. Operator, please open the line for your questions.

(Operator Instructions)

Okay. Our first question from the web is are there further opportunities for cost synergies in the second quarter?

I'll go ahead and answer that. And certainly, we talked about achieving our $100 million cost synergy target, and managing our cost structure is something that the management team has a proven track record of doing over the last several years -- over a decade. So we're committed to continuing to manage our cost structure, drive efficiencies, reduce our print legacy cost structure, at the same time, making the required investments to grow revenue, especially transform our business and grow digital revenue.

Our next question is what are the company's expectations for digital revenue growth?

Well, obviously, that's an important metric for us. And as we mentioned in our opening remarks, our 3 pillars are really focused on our digital growth in the company. Tripling our digital-only subscriptions between now and 2025 is a key metric for us that we're well on the way to achieving. And then really moving into new revenue achievements related to video sales, e-commerce and first-party data are 3 big categories for us to grow digital advertising and digital revenue for the company.

Okay. Our next question is what is the company's debt reduction target for fiscal year '21?

We haven't provided any guidance as to where we think we will go. We have considerable debt reduction since the refinancing in March of last year, $52 million. We've provided some incremental free cash flow information in our release to help bridge the gap from adjusted EBITDA to free cash flow. We do have outstanding pension obligations with the required pension contributions. We've given some guidance as to what we expect for CapEx, income taxes as well. So it helps bridge the gap. But we do expect to use especially all of our cash flow and excess cash flow to repay our debt.

We have no more questions from our web participants. I'll now turn the call back to Kevin for any closing remarks.

Well, thank you for joining the call, and thank you for your interest in Lee. Have a great day.

Thank you, ladies and gentlemen. At this time, we have reached the end of our question-and-answer session. This concludes our call.