Lee Enterprises, Incorporated

Welcome to the Lee Enterprises 2024 first quarter webcast and conference call. The call is being recorded and will be available for replay at investor.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 the live webcast can be found at investors.lee.net. Now I will turn the call over to your host, Josh Weinholz, Vice President, Finance. Please go ahead.

Good morning. Thank you for joining us. In addition to myself, speaking on this morning's call are Kevin Moberg, President and Chief Executive Officer, and Tim Millich, Vice President, Chief Financial Officer, and Treasurer. Earlier today, we issued a news release with preliminary results for our first fiscal quarter of 2024. It is available at lee.net as well as 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 violence. During the call, we refer to certain non-GAAP financial measures. Reconciliation 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.

Good morning, everyone, and thank you for joining us. We'll begin our time this morning demonstrating the success of our three-pillar digital growth strategy in growing digital subscribers, transforming the mix of our revenue, and growing adjusted EBITDA. We'll also discuss our first quarter operating results, highlighting our industry-leading digital performance. We'll conclude by reiterating our confidence in our long-term goals. Lead fiscal year 2024 is off to a good start as we executed well on our three-pillar digital growth strategy. We're concentrated on expanding our digital audiences, growing our digital subscriber base and revenue, and diversifying and expanding our offerings for regional and local advertisers. The long-term results of our strategy are expected to generate more than $450 million of recurring sustainable digital revenue within five years. With that level of performance, Lee will be sustainable solely through cash flow generation from our digital products. That is an incredibly important point, as is the objective of our three-pillar digital growth strategy. I'm extremely encouraged by the progress of our strategy thus far and the pace by which we're transforming Lee into a vibrant, digitally-centric company. As a proof point of the progress on our digital transformation, Lee continues to be the fastest growing digital subscription platform in local media by a significant margin. Digital subscriber growth at Lee has outpaced our industry peers for the last 16 quarters. We now have more than 735 digital subscribers, which is up 30% compared to the prior year. What's even more impressive in our eyes is that we increased average rates for our digital subscriptions by more than 20% over the same period. Said differently, we're growing digital subscribers at the fastest clip in the industry, and we're doing it while we're executing increases in pricing. This demonstrates our ability in a meaningful way to drive wantedness, resiliency, and value of our intensely local content we provide in our markets. This industry-leading performance gives us even more confidence and achieving our long-term goals, which we covered in detail in the last quarter. Amphidigital achieved 11% revenue growth over the last 12 months despite the soft advertising environment. Revenue totaled $91 million and has grown a staggering 50% annually over the last three years, far outpacing others within the industry. Fueled by these industry-leading metrics, total digital revenue has grown to $279 million over the last 12 months, which is driving the rapid change in our revenue composition as evidenced in the next slide. The significant growth of our digital revenue from our three-filler digital growth strategy has transformed the composition of these overall revenue over the last few years. When we first launched our three-pillar digital growth strategy, digital revenue represented only 21% of our total operating revenue. And today, digital revenue represents 46% of our revenue. Importantly, we expect to reach the inflection point in the second half of fiscal 2024 where more than 50% of our revenue will come from digital sources. This is an important milestone in our digital transformation. as a result of the majority of our revenue coming from sustainable growing sources. Our industry-leading growth in digital subscription revenue and digital marketing solutions will continue to drive LEED to this point. And now I'll hand it over to Tim to discuss our first quarter operating results.

Thank you, Kevin, and good morning, everyone. Total operating revenue was $156 million in the first quarter. Digital revenue growth continued at a strong pace with total digital revenue of 11%, driven by 60% growth in digital subscription revenue and continued growth at Amplified Digital. Print revenue trends improved modestly from the fourth quarter trends, but remained a headwind to our total operating revenues. Cash costs were down 18% in the first quarter, driven by the actions we took throughout fiscal year 2023. Due to the strong digital revenue performance and effective cost management, adjusted EBITDA grew 6% in the quarter and totaled $19 million. A couple of major factors that give us confidence in our digital transformation are both the magnitude of the digital revenue opportunity as well as the profitability of these products. We have shared long-term expectations with respect to the revenue opportunity from our digital products However, equally important to our confidence is the profitability of these revenue streams as well. Our direct digital margin in the first quarter remained really strong at 72%. This resulted in $51 million in digital direct margin, an increase over the prior year. As we aim to become sustainable and vibrant from the revenue and cash flow solely from our digital business, We are focused on maintaining the high margins from our digital revenue products. We have a successful track record of effective cost management. In fiscal year 2024, our business transformation efforts will yield between $45 million and $65 million of cost savings. Most of those actions were taken last year. While we remain focused on operational excellence 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. Therefore, we continue to invest in talent and technology in areas of our business tied to our digital future, and our commitment to high-quality local news remains steadfast. The targeted investments will drive our digital future and will impact our cash costs in fiscal year 2024. We expect the investments we are making in new talent and technology and the increased digital cost of goods sold to increase our total cash cost by approximately $20 million this year. These costs will have a short-term impact on our margin profile, but are expected to drive LEED's digital transformation. We continue to strengthen our balance sheet. The principal amount of debt decreased $2 million in the first quarter and totaled $454 million. a reduction of $122 million since 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. It allows us the ability to make the necessary investments in talent and technology that fuel our recurring sustainable revenue growth. The agreement was executed in 2020 and have a fixed interest rate and a 25-year maturity, these favorable terms have been incredibly helpful in the rising rate environment we have seen over the last couple years. In the quarter, we made no pension contributions as our pensions are overfunded in the aggregate. Finally, we continue to identify opportunities to monetize our non-core assets, which facilitates accelerated debt repayment. We closed $2 million of asset sales in the first quarter, and we have identified an additional $25 million of non-core assets to monetize, which are in various phases of the sale process. As a reminder, with solid execution of our three-pillar digital growth strategy, as well as our commitment to improving our balance sheet, our goal is to achieve our long-term leverage target of under two and a half times. Last, before I hand it back to Kevin to wrap up, I would like to revisit our outlook for 2024, which remains unchanged from what we shared in December's call. As I mentioned earlier, our cost actions made last fiscal year are expected to provide a significant benefit this fiscal year. With these cost actions and continued progress on our digital transformation, we expect adjusted EBITDA to be within our targeted range of 83 to 90 million. So with that, I will flip it back to Kevin.

Thanks, Tim. Our three-quarter digital growth strategy is guiding our digital transformation and is the foundation of our investment thesis. As I mentioned previously, our strategy will guide we into becoming sustainable and vibrant solely from the revenue and cash flow from our digital products within five years. Doing so will allow us to increase our shareholder value through continued debt reduction and multiple expansions. Our first quarter results demonstrate strong digital revenue growth with consistent execution of our three pillar digital growth strategy. The tremendous progress on our digital transformation continues to reinforce we have the right strategy and the right team in place to achieve our long-term goals. To wrap up, I'd like to thank the entire lead team for their efforts in driving our transformation. As we continue our journey and achieve our long-term goals, we expect to drive significant value for our shareholders through converting debt to equity through repositioning Lee as a digital-first company. Under the guidance and oversight of our board of directors, our leadership team's continued execution of our growth strategy sets the stage for significant long-term value creation. We have the right board, the right team, and the right strategy 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 line for questions.

Thank you. At this time, we will conduct a question and answer session. As a reminder, if you are accessing this call by webcast, you may submit typed questions on your screen. Those questions will be answered during the call as time is permitted. One moment, please, while we poll for questions. Our first question is going to come from the line of Daniel Herriman with Sidoti and Company. Please go ahead.

Kevin and Tim, congrats on the results and also your progress in the digital space. I have a couple of questions, excuse me, and I'll start from the print perspective. Can you just update us and give us a little bit of a trajectory of the print decline you're expecting both from a subscriber and advertising perspective, both for fiscal 2024 and then what you're seeing thus far in your fiscal second quarter. And then on the digital side, I know, Tim, you mentioned the investments that you're making and how margins may be impacted there. But are you continuing to see margin expansion within your Amplified platform? And then what headwinds might you be seeing within digital advertising revenue for Amplified as well?

Yeah, great questions, Daniel. I'll kick it off. Kevin, feel free to jump in. To address your first question on the print trajectory, certainly an important aspect of our digital transformation is to develop the pathway of not being reliant on our print revenue streams to drive cash flow, improve our balance sheet, and realize our investment thesis. And the reason for that is obviously the print business is challenged and it's hard to predict. It's harder to predict than what we see in other areas of our business. We did see modest improvement in our total print revenue, a couple percentage points in the first quarter. The advertising environment in particular is softer than we would like. I do expect those trends to improve as we move to the back half of the year, as we have a number of things aimed at improving the trend. And as we get into the back half of 2024, we will begin to be cycling quarters that were more challenged from the prior year. In circling back to our strategy, we do aim... to cycle the print volatility through rapid growth and scaling of our digital business. So as Kevin mentioned on the call, we do aim to reach or expect to reach this inflection point in the back half of 2024 where our digital revenue streams will be larger than our print revenue streams and so that will be an important milestone. Switching to the digital margins, um and we one of the things we talked about in the call was our uh solid margins from the digital business that you know what's great is that our digital businesses are already highly profitable um and you know this the 72 percent in direct digital margins and uh you know just through scaling our digital business you know we will see that uh we're in position to be sustainable solely from the margin and cash flow from our digital products said differently. We don't need to see that margin improve. We need to maintain that margin going forward.

That's very helpful. Thank you, Tim. And then just one more, if I may. Can you just talk a little bit about what sectors may be driving the digital advertising revenue growth And then obviously with the upcoming election cycle, could you just give us an idea of the impact that that cycle will have on your digital advertising business?

Yeah, I can kick off on digital advertising. A number of categories that are driving growth in the first quarter, specifically legal, medical, higher education, are a few categories that are helping drive growth. As far as the political advertising, we have a number of tactics that were aimed at growing our share of political advertising spend, which historically has been low. We do anticipate some political, specifically as we get into the back half, and certainly we operate in some key states, including Montana, where there'll be a lot of money spent, and other areas like North Carolina and Wisconsin.

And I would add to that we expect about $4 to $5 million in the next 12 months as a result of our political efforts.

Okay, great. That's all from me, guys. I didn't mean to cut you off. I'm sorry.

No, I was going to say I'm going to answer a question on the screen. Why is digital advertising down year over year? And what I would say to that is there's some timing of some larger campaigns in anti-digital that are happening later in the fiscal year that account for a piece of it. But I would also remind everyone that we're well on track to the 100 million guidance events by digital that we communicated on the last earnings call.

I see no more questions from the web. I will flip it back to Kevin for any closing remarks.

Well, thanks, everybody, for joining us on the call today. As I mentioned earlier, we remain keenly focused on transforming our business models for the long-term benefit of our shareholders, our employees, our readers, and our advertisers. We appreciate your time and your interest in LEED. Thank you again.

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