Lee Enterprises, Incorporated

to the Lee Enterprise 2022 third quarter webcast and conference call. The call is being recorded and will be available for replay beginning later this morning at investors.lee.net. At the close of the planned remarks, there will be an opportunity for questions. Participants accessing this call by 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 this live webcast can be found at investors.lee.net. Now I'll turn the call over to your host, Mr. George Reinhold, Vice President, Finance. Go ahead, sir. Thank you.

Good morning, and thank you for joining us. Speaking on this morning's call are Kevin Mowbray, President and Chief Executive Officer, and Tim Milledge, Vice President, Chief Financial Officer and Treasurer. Also with us on today's call and available for questions is Nathan Becke, Vice President, Audience Strategy. Earlier today, we issued a news release with preliminary results for our third fiscal quarter of 2022. It is available at Lee.net as well as at major financial websites. Please also refer to our earnings presentation found at investors.lee.net that includes supplemental information. As a reminder, this morning's discussion will include forward-looking statements 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 file. During the call, we refer to certain non-GAAP financial measures, including adjusted EBITDA and cash costs, which are defined in our news release. Reconciliations to the relevant gap measures are included in tables accompanying the release. And now to open the discussion is our President and Chief Executive Officer, Kevin Mowbray. Kevin will open the conversation on slide three of the earnings presentation for those following along.

Thank you, Josh. Good morning, everyone, and I'm pleased you could join us. I'm really encouraged at the pace by which we're transforming Lee into a vibrant, digitally-centric company. Our third quarter results clearly demonstrate we have the right strategy, the right team, and we're moving with velocity towards LEED's digital transformation. With our third quarter results, we've exceeded many of our digital revenue metrics a full quarter early, and we're on track to achieve our full year adjusted EBITDA guidance of 95 to 98 million. In the third quarter, we reported 49% growth in digital subscribers, 5% growth in digital subscription revenue, and 74% growth in amplified digital revenue. For all three metrics, we exceeded our year-end guidance, putting us a full quarter ahead of schedule. This impressive performance is a testament to our operational efficiencies and our team's ability to execute on our strategic initiatives. Our three-pillar digital growth strategy is the foundation of our investment thesis, And the execution of the strategy is at the core of creating value for our shareholders. Sustainable long-term digital revenue growth from our three polar initiatives will transform the mix of our revenue base, driving margin expansion, stronger free cash flow generation, which will fuel debt reduction and enhance our balance sheet. The stronger balance sheet and improved operating cash flow combined with multiple expansions fueled by increasing digital revenue creates a strong path to significant long-term value creation for our shareholders. Our strategy leverages these key strengths, our local market expertise, our industry-leading digital revenue growth, and our commitment to the highest quality news to build a larger recurring revenue base and generate long-term top-line growth. This growth is expected to achieve 435 million of digital revenue in 2026 is being driven by increased digital subscriptions and increased digital advertising revenue. Our three-pillar digital growth strategy is guiding our transformation to a vibrant digitally-centric company. We're focused on expanding our digital audiences, growing our digital subscription base and revenue, and diversify and expanding our offerings for local and regional advertisers. Pillar one focuses on expanding digital audiences with investments in user experience, multimedia presentation formats, and rich high-value content for driving higher engagement, outsized traffic, and monetization, leveraging our trusted brand, strong market position, and in-house capabilities. We continue to make investments that add significant value and drive additional growth. Pillar two is about the expansion of our base of digital-only subscriptions and revenue by converting more of our vast addressable market to subscribers. And it's paying off because we're the fastest-growing digital subscription platform in local media and have been for 10 straight quarters. Digital-only subscriber growth continued at a rapid pace in the third quarter, up 49% over the prior year. We now have 501,000 digital-only subscribers, exceeding our fiscal year-end guidance a quarter ahead of schedule. At the same time, we're driving an increase in average rates for digital-only subscribers, which were up 7% in the third quarter compared to the second quarter. We're leveraging cutting-edge data and technology and expanded offerings for paid niche content on topics where we have expertise and unique selling positions. These tactics are driving an increase in total subscribers and position us to achieve our goal of reaching 900,000 digital-only subscribers by the end of 2026. Reaching 900,000 digital-only subscribers and increasing our average digital subscription rates are important goals and leads digital transformation as they increase the base of our subscription-based digital revenue. Our third pillar focuses on diversifying and expanding offerings for advertisers, and we're doing that in two ways. First, through AppSci Digital, our full-service omni-channel digital marketing agency that provides local and regional advertisers with sophisticated custom solutions, including consulting, media buying, and analytics. Second, by maximizing the revenue opportunities on Lee's digital platforms. Our owned and operated properties attract massive audiences. We're offering more video inventory and branded content opportunities to drive digital ad revenue. Both of these initiatives are supported by Lee's Vision platform. Vision is a proprietary sales enablement and execution software tool powered by amplified digital. Industry-wide, omnichannel advertising for local advertisers is expected to continue its double-digit growth in the next two years. The Vision platform allows us to capture that significant growth in this category, and the Vision platform has transformed local advertising for leads. Our strategy and execution are expected to result in $435 million of recurring sustainable digital revenue by 2026, and with our third quarter results, we're more than halfway there. We've launched our three-quarter digital strategy in early 2021. We've made tremendous progress since the launch, including industry-leading growth in digital subscribers and digital agency revenue. Digital subscriber growth at Lee has outpaced our industry peers for the last 10 quarters and counting, And as I mentioned earlier, we have the fastest-growing digital subscription platform in media with more than 500,000 digital subscribers, up 49% in the third quarter. And by digital agency revenue, it's significantly outpacing the industry as well, pacing 69 percentage points ahead of our next closest industry peer. As a result of our industry-leading digital growth, total digital revenue over the last 12 months grew to $224 million, up 24% compared to the prior year. We are rapidly changing the mix of our revenue, and in the third quarter, total digital revenue now represents 32% of our total operating revenue. 2022 is shaping up to be a successful year at Lee. We certainly have been presented with many challenges year to date, and like the team has done year in and year out, We've had to overcome many headwinds, including supply chain shortages that impacted local and national advertisers for much of the fiscal year, accelerated declines in demand for print advertising, shopping and national advertising demand, and significant inflation affecting all aspects of our cost structure. But I couldn't be more proud of this team for their smart thinking, their steadfast commitment toward our three-pillar digital growth strategy, and the rapid execution of our plans to add value for our shareholders. The efforts of this team have driven substantial growth in digital revenue, putting us ahead of our plan on digital revenue targets, and importantly, keeping us on track to achieve our full-year guidance of adjusted EBITDA. Our third quarter results clearly demonstrate the success of our three-pillar digital growth strategy to transform Lee into a vibrant, digitally-centric company. And now I'll turn it over to Tim with more details on the results from third quarter and the outlook for FY22.

Thank you, Kevin, and good morning, everyone. To reiterate Kevin's sentiment, we're pleased with our third quarter results and the progressing digital transformation at LEAD. In our Throats report, we have achieved our full-year targets on many of our digital revenue metrics ahead of schedule. In the third quarter, total operating revenue was $195 million, down less than 1% to the prior year. as the growth of our digital revenue streams almost offset the declines in our print revenue streams. Total digital revenue increased 27% in the third quarter to $61 million, driven by rapid growth that amplified digital and in digital-only subscription revenue. 32% of our revenue in the third quarter was digital revenue, up from 25% a year ago. Digital-only subscription revenue increased 50% and totaled $11 million in the third quarter. We now have 501,000 paid digital-only subscribers, up 49%, and that exceeds our year-end target of 495,000. As Kevin mentioned earlier, we remain the fastest-growing digital subscription platform in media, a title we have held for the last 10 quarters. Digital-only subscription revenue over the last 12 months totaled $37 million, facing well ahead of our full-year target of $33 million. Digital advertising and marketing services revenue reached the inflection point and now represents 51% of our total advertising and marketing services revenue in the third quarter. Digital advertising revenue increased 27% and totaled $46 million in the quarter. Amplified digital our full-service digital marketing solutions agency fueled the growth with revenue of $20 million and $21 million in the quarter, up 74%. Amplified digital revenue totaled $66 million over the last 12 months, exceeding our fiscal year-end estimates of $65 million. Total print revenue was $134 million in the quarter, a 10% decline compared to the same quarter a year ago due to continued secular declines supply chain constraints affecting national advertising. Operating expenses totaled 190 million and cash costs were up 1%. Increases in cash costs were attributed to strategic investments in digital talent and technology tied to our digital growth strategy, increased digital cost of goods sold, and a general overall increase in prices due to the inflationary environment. Lastly, Net income totaled $0.2 million and adjusted EBITDA totaled $23 million in the third quarter. As Kevin mentioned earlier, we faced a number of headwinds so far in fiscal year 22, including dealing with rising prices that are impacting our cost structure. For example, newsprint prices increased several times in the fiscal year, in total a 30% increase that will have a $4 to $5 million annualized impact on our cost structure. And that's just one example. One way we are addressing this is we are focused on managing the profitability of our print business as secular changes affect the demand for these products and services. As we discussed last quarter, early in the third quarter we completed a 14-week deep dive into all aspects of the print organization, optimizing our cost structure and distribution, manufacturing, national content, marketing, finance, IT, and other corporate services. This process evaluated our external spending as well as human capital and was done to better align our cost structure with our long-term strategy. As a result of this review, we executed on expense actions that we expect to reduce cash costs on an annual basis by $45 million. Execution on these various actions began early in the third quarter and we are on track to achieve more than $20 million reduction for our costs in the last two quarters of FY22. While we remain focused on maximizing our efficiencies and reducing the cost structure of our legacy print business and growing profits, our main priority is to drive long-term, sustainable digital revenue growth. We aim to invest in areas that are aligned with our three-pillar digital growth strategies, Local content, development of our digital products, and digital talent to drive results are the key investment areas for Lee in this fiscal year, as well as throughout our digital transformation. This year, we expect $36 million of incremental investments in our strategy. These investments will have a short-term impact on our margin profile, but are expected to have a great return and drive Lee's digital transformation. As we mentioned earlier, our solid digital revenue growth in the third quarter resulted in us achieving our previously communicated year-end guidance for digital subscriptions, digital subscription revenue, and total digital revenue a quarter early. We wanted to provide some additional thoughts on our fourth quarter expectations as we finish our fiscal year in September. We expect continued growth in digital-only subscribers, earning $11 million in revenue in the fourth quarter, This will result in $39 million in digital-only subscription revenue for the fiscal year. On the advertising side, we expect $47 million of digital advertising and marketing services revenue in the fourth quarter, and about $22 million of that coming from amplified digital. For the fiscal year, we expect $179 million of digital advertising and marketing services revenue, and more than $75 million of amplified digital revenue. Both of these expectations are improvements from our previous outlook. From a cash flow perspective, we are reaffirming our full year adjusted EBITDA guidance of $95 to $98 million, which results in fourth quarter adjusted EBITDA of $29 to $32 million, or 13% to 25% over the prior year. Our results through the first three quarters of the fiscal year, combined with the tactics we continue to execute, give us the confidence to improve our expectations for many of our digital revenue metrics and to reaffirm our adjusted EBITDA outlook. Moving to the next slide, the principal amount of debt at the end of the quarter was $463 million, down $113 million since our refinancing in March of 2020. As a reminder, our credit agreement with Berkshire Hathaway, our sole lender, has favorable terms that are incredibly important for us as we execute our strategy. as it allows us the ability to make the necessary investments in talent and technology that fuel our recurring sustainable revenue growth. Our pensions are in the aggregate overfunded, so we do not expect any pension contributions in the fiscal year. Finally, we continue to identify opportunities to monetize real estate, which facilitates accelerated debt repayment. We generated $25 million of proceeds from asset sales over the last two years, and have already closed $14 million of real estate in the first nine months of the year. As a reminder, our goal is to achieve our long-term leverage target of under two and a half times by the end of 2026. As we have shared in the last two quarterly calls, we are providing metrics to get better transparency and clarity on our digital transformation progress. This table summarizes our improved fiscal 22 outlook demonstrating our progress towards our 26 goals. As you can see, we are making significant continued progress on our digital transformation, and we expect this to continue over the next several years. We have already established a strong track record for accelerating digital subscription growth, and with the planned incremental investments in talent and technology, we're on track to reach our goal of 900,000 paid digital online subscribers in 26. Continued execution of that strategy is expected to generate recurring, sustainable digital subscription revenue exceeding $100 million. Amplify Digital's dramatic growth trajectory is fueling our five-year digital advertising outlook. Our vision platform uniquely positions us to capitalize on double-digit growth in omnichannel digital advertising. With advanced data-driven ad tech, specialized category expertise, scalable custom video content, and powerful first-party data access, Amplified Digital is a strong partner for local and regional businesses looking to drive growth. We expect to reach $310 million of annual digital advertising revenue by 2026, of which about $200 million will come from Amplified Digital. Total digital revenue is expected to be $435 million in 2026. And with that, I'll turn it back to Kevin to wrap up.

Thanks, Ken. Under the guidance and oversight of the Board of Directors, our leadership team's continued execution of our growth strategy sets the stage for significant long-term value creation. We're very pleased with our third quarter results and the progress we're making towards the targets in our three-pillar digital growth strategy. The strong presence as a trusted source of information in the communities we serve, combined with cutting-edge digital capabilities is the foundation of our digital transformation. The success of our transformation is reflected in the continued rapid growth of our digital subscription, digital-only audience revenue, and digital advertising and marketing services results. To wrap up, I'd like to thank the entire lead team for their efforts in driving our transformation. We have the right board, the right team, and the right strategy. And I believe we're better positioned than ever to create long-term value for our readers, users, advertisers, and shareholders. This concludes our remarks. The team will remain on the line for any questions you may have. Operator, please open the lines for questions.

Thank you. At this time, we'll be conducting a question and answer session. As a reminder, if you're accessing this call by webcast, you may submit typed questions on your screens. Those questions will be answered during the call as time permits. One moment, please, while we poll for questions.

Hi, this is Mike Kapinski. I have a couple of questions. First of all, I want to congratulate you on your quarter. I mean, you did a great job. And then also the guide for Q4, I can't tell you how much of a relief it is to hear someone actually beating my expectations for the quarter in this environment. A couple of questions. Your guidance on Amplified is obviously a little better than what I was looking for. It seems like, and maybe correct me if I'm wrong, that you're anticipating almost 80%, over 80% growth in Amplified and Q4. Can you talk a little bit about the progress you've had with Amplified, what you're seeing with the customers, what they're talking about, why you're seeing such very strong growth, and just give us a little color there. And I have a couple other follow-up questions.

Yeah, I'll start, and anybody that wants to add, please do. You know, I think the key to our success is the vision platform. We've talked a lot about on a couple of calls. You know, it really gives a local sales rep the ability to create an omni-channel marketing campaign that for an advertiser really with the push of a button and in real time generate a pretty sophisticated campaign. And then we've got the analytics to back up that campaign that drives results for advertisers. And what we're finding is wrong retention at the local and regional advertising level because of the success of what the campaigns deliver for the advertisers.

Gotcha. And you obviously implemented some cost reductions in the quarter. I was just wondering when did those actually start, like what month, and when we will start cycling against those. And where did most of the cost cutting come from? If you can just give us a little color on that.

Yeah. So we made a number of actions throughout the third quarter. They began in April. A lot of them took place in May. So really it affected the entire organization in terms of departments for the cost structures. I think the one thing that I'd say that the focus was on the print revenue streams. Anything that supports the print revenue streams was our focus as we continue to drive from profitability as those revenue streams continue to mature. Significant areas of cost reductions were looking at our real estate portfolio, looking at cost tied to distribution of our print products, and other areas like that. One area where we want to remain focused on investing is areas like local content generation, digital product development, Those areas, those are our moat, and so those are the areas where we're really focused on continuing to invest, but at the same time focused on driving profitability for print products by managing the cost.

Thank you. And the digital-only subscribers, you mentioned the rates were up 7%. What is the average rate now? And then can you talk a little bit about if there were any particular – promotions, changes in promotions, decreases in promotions, increases in paywall, things like that that may have accounted for not only the rate growth, but the growth you saw in digital only.

In terms of the rates, I can comment on the rates. So we're a little under $7 a month for digital-only subscriptions. And so continuing to focus on using data to drive our decisions on go-to-market on how we market our products has been successful. And then my last – I'm sorry.

Oh, I was going to say, Michael, one of the great things about that is that's a very high-margin piece of business for us.

Right. And I was just going to ask about the margins. And, you know, the key thing here, obviously, in driving your cash flow growth will be to improve digital margins. Can you talk a little bit about your expectations of margins and expansion as you kind of go into fiscal 23? Sure.

Yeah, yeah, I can do that. So we came into 22 with our eyes wide open with respect to what we were thinking in terms of margin and the impact of making the digital investments that they would have that have a short-term, temporary impact on our margins. But we do expect, as we move into the latter part of 23 and into 24, that we will start to see some margin expansion as we get returns on those investments we're making.

Okay, great.

Congratulations again. Thank you. That's all I have. Well, that wraps up questions. I really appreciate your interest in Lee, and thank you for joining us on today's call. Thank you, ladies and gentlemen.

At this time, we have reached the end of our question and answer session. This concludes our call.