Earnings Call Transcript - LEE Q1 2023

Operator, Operator

Welcome to the Lee Enterprises 2023 First Quarter Webcast and Conference Call. The call is being recorded and will be available for replay at investors.lee.net. A link to the live webcast can be found at investors.lee.net under the event section. Now, I’ll turn the call over to your host, Josh Rinehults, Vice President, Finance.

Josh Rinehults, Vice President, Finance

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, Chief Financial Officer, and Treasurer. Earlier today, we issued a news release with preliminary results for our first 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 filings. During the call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA and cash costs, 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. Kevin will open the conversation on Slide 3 of the earnings presentation for those following along.

Kevin Mowbray, President and Chief Executive Officer

Thank you, Josh, and good morning, everyone. I’m really encouraged by the pace at which we’re transforming Lee into a vibrant, digitally centric company. We’re pleased with our strong digital subscription growth, and digital subscribers now total 564,000, an increase of 25% compared to the prior year. We’re also driving higher rates, as revenue from digital subscriptions increased 56% compared to the prior year. Digital advertising revenue increased 12%, with Amplified Digital revenue growing by 45%. Our first quarter results demonstrate strong digital growth with consistent execution of our Three Pillar Digital Growth Strategy. This execution is the foundation of our long-term investment thesis. Sustainable long-term digital revenue growth from our Three Pillar initiatives will transform the mix of our revenue base, driving margin expansion and stronger free cash flow generation, which will fuel debt reduction, enhancing our balance sheet. A stronger balance sheet and improved operating cash flow, combined with multiple expansion fueled by increasing digital revenue, creates a strong path to significant long-term value creation for our shareholders. Our Three Pillar Digital Growth Strategy guides our transformation into a vibrant digital-centric company. We’re focused on expanding our digital audiences, growing our digital subscriber base and revenue, and diversifying and expanding our offerings for local advertisers. The strategy and execution are expected to result in $435 million of recurring sustainable digital revenue by 2026. Digital subscriber growth at Lee has outpaced our industry peers for the last 13 quarters. Lee is the fastest-growing digital subscription platform in media, with more than 564,000 digital subscribers, up 25% from the first quarter. Anti-digital agency revenue continues to significantly outpace the industry as well, with an impressive 74% growth over the last 12 months. Total digital revenue has grown to nearly $250 million in the last 12 months. Our digital transformation is driving a rapid change in the mix of our revenue in the first quarter. Total digital revenue now represents 35% of our total operating revenue. Before we get into the first quarter operating results, we’re excited to share about a new brand identity within our portfolio. TownNews will begin its next chapter as BLOX Digital as announced last month. The name BLOX Digital celebrates a rich history and is a testament to the success of the flagship software-as-a-service solution, BLOX CMS. With a refreshed mission and new modern look, BLOX Digital is even better positioned to deliver valuable integrated digital solutions. Supporting the expansion and modernization of BLOX Digital is a priority for Lee as we execute our enterprise-wide digital transformation and enhance value for our customers, subscribers, and Lee shareholders. Moving to the first quarter operating results, we delivered strong digital growth with consistent execution of our Three Pillar Digital Growth Strategy. Total operating revenue was $185 million in the first quarter. Digital revenue growth continued at a strong pace, with total digital revenue up 17%, driven by 56% growth in digital subscription revenue. At the end of the quarter, we had 564,000 subscribers to our digital-only products. This is a 25% growth rate after many consecutive quarters of significant growth. On the advertising side, digital advertising revenue increased 12% compared to the first quarter last year, driven by a 45% growth in revenue at Amplified Digital. Amplified revenue now totals $21 million in the quarter. We have been presented with challenges in the first quarter. Total print revenue was $120 million, an 18% decline year-over-year, as cyclical headwinds accelerated the pace of decline. However, I couldn’t be more proud of this team for their smart thinking, steadfast commitments toward our Three Pillar Digital Growth Strategy, and the rapid execution of our plans to drive industry-leading digital revenue growth and a commitment toward achieving our adjusted EBITDA goals. These efforts have importantly kept us on track to reaffirm our full year guidance for adjusted EBITDA. And now, I’ll turn it over to Tim with more details on our first quarter results.

Timothy Millage, Vice President, Chief Financial Officer, and Treasurer

Thank you, Kevin, and good morning, everyone. In addition to driving industry-leading digital revenue growth, we are focused on maximizing the profitability of our legacy business and achieving our long-term leverage target. Operating expenses totaled $176 million, and cash costs were down 5%. Decreases in cash costs were attributed to continued business transformation efforts, partially offset by strategic investments in digital talent and technology tied to our digital growth strategy, increased digital costs of goods sold, and general rising prices. For the quarter, we reported adjusted EBITDA of $18 million. As Kevin mentioned earlier, we faced a number of headwinds to begin fiscal 2023, largely driven by uncertain market conditions. One way we are addressing this is by focusing on managing the profitability of our print business, as cyclical headwinds have accelerated the changes in demand for these products and services. We continue to identify opportunities to further optimize our cost structure in distribution and manufacturing as well as corporate services. To that end, we executed an additional $60 million of annualized cost reductions early in the second quarter, $40 million of which will be realized in fiscal year 2023. Executing the various actions began early in the second quarter, and we expect to achieve more than $40 million reduction to our cash costs in the remainder of the year. Over the last two years, we have identified and implemented over $130 million of annualized cost actions. 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 2023. We expect the investments we are making in new talent and technology and increased digital costs of goods sold to increase our total cash costs by approximately $25 million in the fiscal year. These costs will have a short-term impact on our margin profile but are expected to drive Lee’s digital transformation. We continue to strengthen our balance sheet. The principal amount of debt at the end of the first quarter was $463 million. 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 digital revenue growth. We made no pension contributions in the first quarter, and we do not expect any material pension contributions in fiscal 2023. Finally, we continue to identify opportunities to monetize our non-core assets, which facilitate accelerated debt reduction. In the first quarter, we closed $4.1 million of asset sales, and the net proceeds from that sale were used to pay down debt in the second quarter. We have identified an additional $30 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 2.5 times. On Slide 10, we are summarizing our fiscal 2023 outlook. To account for the current market conditions, we are widening the range of our total digital revenue guidance, lowering the midpoint of the range with expected growth between 13% and 19% year-over-year. At the same time, we implemented a significant cost reduction focused on costs that support our print business. With these cost actions and continued progress on our digital transformation, we’re reaffirming our adjusted EBITDA fiscal year target of $94 million to $100 million. And with that, I will turn it back over to Kevin to wrap up.

Kevin Mowbray, President and Chief Executive Officer

Thanks, Tim. 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. Our Three Pillar Digital Growth Strategy is the foundation of our investment thesis, and the execution of that strategy is at the core of creating value for our shareholders. To wrap it up, I’d like to thank the entire Lee 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, our users, our advertisers, and shareholders. This concludes our remarks. The team will remain on the line for questions you may have. Operator, please open the line for questions.

Operator, Operator

Thank you. At this time, we will be conducting a question-and-answer session. Our question comes from the line of Michael Kupinski from NOBLE Capital Markets. Your line is open.

Michael Kupinski, Analyst

Thank you. Good morning. And thanks for taking my questions. A couple of quick questions here. Can you provide us a sense of how print advertising is pacing in the current quarter? What are you hearing from advertisers? Any specifics in terms of what is driving the current decline? We’re comping against easing comparisons from last year, so what are we seeing in print right now?

Timothy Millage, Vice President, Chief Financial Officer, and Treasurer

Yeah. Thanks, Mike. Thanks for the question. What we’re seeing is some of the cyclical headwinds that we saw in the first quarter. We’re seeing some of that in the second quarter as well, which is what prompted us to take the quick action that we did. At the same time, we feel good about the digital guidance that we have out there. We believe our digital subscription guidance is strong, and the performance there is pacing with our expectations. We also have some opportunity on the digital ad side for trend improvement.

Michael Kupinski, Analyst

Great. And on the cost actions you’ve taken on the print side, can you provide some sense of the types of cost reductions you're doing there? Can you give us a sense of what you’re actually doing at this point in terms of those cost reductions? And are you expecting restructuring charges?

Timothy Millage, Vice President, Chief Financial Officer, and Treasurer

Yeah. That’s a good question. We continue to evaluate all departments of the organization as part of our digital transformation. We still have a lot of costs that are tied to our print business. It’s still two-thirds of our revenue, and we have a lot of costs that are directly related to that revenue. As the revenue trends and cyclical headwinds we’re facing have affected those revenue trends, we’ve got some levers to pull because of the costs that support there. So a lot of it was on the compensation side. We’re also looking at many of our vendor costs as well to manage those, including production, distribution, and some of our other vendor costs. Therefore, we still have a significant amount of cost tied to our print business, given it is a sizable percentage of our revenue. Regarding your question on the restructuring charges, we are looking at restructuring charges in the mid- to high-single digits, in millions, for the fiscal year. That’s a little less than what we were projecting last year.

Michael Kupinski, Analyst

At this point, you’re not decreasing the print days or anything like that? Can you provide us with a sense of what you’re doing on that front?

Timothy Millage, Vice President, Chief Financial Officer, and Treasurer

Yeah. We’re looking at many options on levers that we can pull on the print side. All options are on the table.

Michael Kupinski, Analyst

Can you give us a sense of what newsprint costs are doing? I know they have moderated a little bit.

Timothy Millage, Vice President, Chief Financial Officer, and Treasurer

After a pretty wild ride over the last 18 months of rapidly rising prices, we are seeing them moderate and level off at the current base.

Michael Kupinski, Analyst

On the digital side, can you give us a sense of how digital revenue growth is pacing in the current quarter?

Timothy Millage, Vice President, Chief Financial Officer, and Treasurer

It's very consistent with what we saw in the first quarter. Our total digital revenue was up 17%, and we’re pacing around that in the second quarter.

Michael Kupinski, Analyst

Were there any specific changes in marketing in the quarter or changes in paywalls that might account for some of the growth we’re seeing?

Timothy Millage, Vice President, Chief Financial Officer, and Treasurer

No, nothing specific. It’s just all part of the strategy. The foundation of that is local content that our users enjoy. Simultaneously, we’re mining data that’s informing our marketing decisions. That’s just part of the grind we’re going through and part of the tactics we are deploying to drive digital subscription growth. As you noticed in the quarter, there was great growth from a unit perspective, with a 25% growth year-over-year, which marks 13 consecutive quarters of industry-leading growth. At the same time, we’re growing average rates, which is seeing revenue grow 56% year-over-year with units up 25%. So we’re really happy with what we’re seeing on the digital subscription side.

Michael Kupinski, Analyst

What was the reason for rebranding TownNews? Can you give a sense of what led you to the rebrand?

Kevin Mowbray, President and Chief Executive Officer

We’ve been pleased with the performance of TownNews, which has primarily focused on the media sector in terms of its BLOX CMS services. I really believe we have a great opportunity to go beyond providing those services outside of the media landscape, hence the name change from TownNews to BLOX Digital.

Michael Kupinski, Analyst

Okay. Thanks. That’s all I have. Thank you.

Josh Rinehults, Vice President, Finance

That is all we have for questions. I will turn it back to Kevin for closing remarks.

Kevin Mowbray, President and Chief Executive Officer

Great. Well, thank you. As I mentioned earlier, we remain keenly focused on transforming our business model from the long-term benefits for our shareholders, our employees, our readers, and advertisers. We appreciate your time and your interest in Lee. Thank you again for joining the call.

Operator, Operator

Thank you. Ladies and gentlemen, at this time, we have reached the end of our question-and-answer session. This concludes our call. Everyone, have a great day.