Lee Enterprises - Earnings Call - Q2 2020

Transcript

Speaker 0

Thank Thank Participants accessing today. This call by webcast may submit written questions throughout 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, Jamie Serrett, please corporate controller.

Please go ahead.

Speaker 1

Good morning. Thank you for joining us. Speaking on this morning's call will be Kevin Mowbray, President and Chief Executive Officer and Tim Milledge, Vice President and Chief Financial Officer. Also with us today and available for questions are Nathan Becky, Vice President, Consumer Sales and Marketing and James Green, Vice President, Digital. Earlier today, we issued a news release with preliminary results for our 2020.

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 03/16/2020, and our second quarter results include approximately two weeks of operations from the acquisitions. Certain results and trends are presented on a pro form a basis, which assumes ownership of these acquisitions as of 10/01/2018, and include operating results from the acquisition for all 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 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.

Speaker 2

Thank you, Jamie. Good morning, and thank you all for joining the call. It's truly remarkable to think about what's transpired since the last time we spoke to you all. In just a few short months, we've experienced a global pandemic, government restrictions in our local markets, and economic meltdown and civil unrest. Truly, these are unprecedented times.

Before we discuss our operating results, I wanted to take a moment to recognize our nearly 6,000 employees across me for working tireless tirelessly to ensure our long term success, especially during these tumultuous times. The size and engagement of our audience during this time underscores the vital role we play in the communities where we operate. We're focusing on continuing to deliver outstanding local news coverage that our readers trust and maintaining strong partnerships with our advertisers, keeping our communities informed and engaged. We are grateful to our dedicated employees for being there when it matters most and reacting with incredible resiliency and creativity to deliver their best work under difficult circumstances. The March was a transitional quarter for Lee as we closed on a transformative transaction with Berkshire Hathaway.

The acquisition and financing nearly doubled the size of our operations and provided us with extended long term financing at highly attractive terms. The significance of this transaction cannot be overstated as the acquisition unlocks significant value through synergies and the financing reduces our cost of capital and extends our runway for twenty five years. Throughout the second quarter until the last two weeks of March, we demonstrated continued improvement in revenue and adjusted EBITDA trends each month. In the first two weeks of March, we saw favorable revenue trends at levels we haven't seen in more than a year. In the last two weeks of March, the decline in demand for advertising due to COVID nineteen were immediate and significant.

Despite the impact from COVID nineteen, pro form a advertising revenue in the second quarter was on par with first quarter trend. We took swift business and operational actions in the face of the COVID nineteen pandemic, and our focus on the advertising side was to solidify our relationships with our local advertisers. As an example, in April, we launched a local marketing grant program, which offers matching marketing funds to local businesses adversely impacted by the outbreak of COVID nineteen. More than 4,400 advertisers have applied for this program worth more than 26,000,000 in grants. We expect to earn more than 7,000,000 in revenue from this program by the July.

What is even more encouraging is that the majority of these advertisers are not currently active customers. This gives us a lot of optimism as our local markets begin and continue to ease restrictions. The customer feedback on this program has been over overwhelmingly positive, and I'm super proud of the impressive efforts of our sales teams. Subscription revenue on a pro form a basis was down 2.8% in the second quarter and represented 41.5% of total operating revenue. We expect this percentage to continue to grow as we continue to execute new strategies at legacy DH Media Group and Buffalo.

Growing our digital only subscriber base continues to be a significant priority for us. And at the end of the second quarter, we have nearly 200,000 digital only subscribers across the organization. At Legacy Lead, digital only subscribers increased 91.7% in the second quarter compared to the same quarter a year ago, a trend exceeding our expectations. Revenue at TownNews on a stand alone basis increased 11.1% in the second quarter as we continue to gain market share in print media as well as broadcast. While growth has slowed some due to COVID-nineteen, we expect strong revenue growth at TownNews in our third fiscal quarter.

Total operating revenue on a pro form a basis was $207,300,000 a 10 decline compared to prior year and 100 basis point improvement from the first quarter trend. The company does not generally provide an outlook for future operations. Given the delay in our release of our second quarter results, we wanted to provide an outlook on our third quarter results, which ends in just two weeks at the June. We do not anticipate the rising outlook of our operating results in future quarters. We expect total operating revenue of $177,000,000 to $180,000,000 in the third quarter.

By end of our range, it's down 24.9% compared to the prior year on a pro form a basis. Advertising revenue was hit the hardest due to COVID-nineteen as the decline in demand for advertising was significant in the media beginning the last two weeks of March. These negative trends continued throughout April and began a slow trend improvement throughout the balance of the third quarter. We expect trends to improve more than 15% throughout the quarter. Subscription revenue has been strong and stable revenue stream for Lee.

However, we do expect a modest worsening trend in third quarter due to the decline in single copy sales due to the COVID nineteen pandemic, as well as incremental revenue in the prior year in St. Louis due to the Blues winning was normally topped last June. Adjusted EBITDA in the third quarter is expected to total between $21,500,000 and 23,500,000.0 To combat the negative impacts of COVID nineteen on our operating results, we took significant and immediate action by implementing various initiatives, including a reduction in force, reduced compensation for executives, furloughs and reductions in capital expenditures. These actions will reduce our third quarter cash cost by more than $10,000,000 and provide us with sufficient liquidity. As of today, we have more than $15,000,000 of cash on our balance sheet.

Before I turn the call over to Tim to discuss the financial details, I wanted to reiterate that despite the significant negative impact to our business from COVID-nineteen, we remain very optimistic about the future of the enterprises. And there are several reasons for this beyond having the right strategy and the best operating in the business. First, our mix of advertising revenue is favorable compared to others in our industry. 47% of our advertising revenue is from local retailers, and we have a strong relationship with these advertisers. Additionally, 12% of our advertising revenue is from national retailers, and only 4% of our advertising revenue is from programmatic, two of the hardest hit areas during this pandemic.

Due to our strong local advertising base, we exited the pandemic with a pipeline of new customers built through our support local initiatives into fortifying our local partners and helping them to survive and thrive during this challenging time. We're also optimistic because 44% of our total revenue is subscription or contract based, including our subscription revenue and revenue at TownNews. Subscription revenue at Legacy Lee has consistently been a top industry in financial performance, and we're now deploying those strategies across Beach Media Group and the Buffalo News. Additionally, revenue of TownNews continues to grow at a double digit clip, and we expect that trend to continue as well. Also, we have a long successful track record of business transformation.

As we evaluate the new normal post pandemic in the combination with the acquisition of BH and E Group and the Buffalo News, we expect to achieve more than $100,000,000 in cash cost savings by the 2021. Tim will walk through these in more detail later in the discussion. And last, we just completed a comprehensive refinancing of our outstanding debt at favorable terms, including a low interest rate, no performance covenants and a '25 maturity with a single lender who's committed to our long term success. While no one knows how the pandemic, consumer behavior and more broadly the general economic environment will ultimately play out, we have a lot going on at Lee that we're very proud of and that gives us confidence in our future. And now here's Tim to discuss additional financial highlights.

Speaker 3

Thank you, Kevin, and good morning, everyone. Total operating revenue on a GAAP basis was $121,400,000 in the quarter and included $14,600,000 of acquired revenue. On a pro form a basis, total operating revenue was $207,300,000 or down 10% compared to the same quarter a year ago, largely consistent with historical trends and include the significant and immediate negative impacts from COVID-nineteen. Operating expenses were down 2.6% in the quarter and cash costs on a pro form a basis were down 9.8% in the current year quarter as a result of continued business transformation initiatives and acquisition integration already underway. On a pro form a basis, compensation decreased 10.7%, newsprint and ink decreased 35.2%, and other cash costs were down 4.7%.

Kevin mentioned a number of points that give us optimism, and I'll take a few minutes to go into more detail on a couple of them. We are thrilled with completing our comprehensive refinancing in the second quarter. We cannot overstate the benefits of this transaction, so let me take a minute to go through some of the details of our credit agreement. On 03/16/2020, we closed on a comprehensive refinancing of our debt with a single lender in Berkshire Hathaway. Borrowing totaled $576,000,000 and has a fixed interest rate of 9%, reducing our weighted average cost of capital by 100 basis points.

The reduction in interest expense saves us nearly $5,000,000 annually on our refinance debt. Also, the refinancing repaid all of our outstanding debt, which had maturities in calendar year 2022 and replaced it with a term loan that matures in twenty five years on 03/16/2045. The reduction in interest rate and the significant runway allows the company to deleverage more quickly and over a long period of time before we expect to need to refinance again. Completing the credit agreement required no lender fees, saving the company millions. As a comparison, in 2014, in conjunction with our prior financing, we paid more than $30,000,000 in fees to complete the financing.

The deal this year was also timed to avoid nearly $9,000,000 in breakage costs associated with our previous credit agreements after the step down. The credit agreement has no fixed mandatory principal payments as the required payments are predominantly from the excess cash flow the company generates. This is beneficial in economic downturns as we are experiencing now the significant and immediate impacts from COVID-nineteen and allows us to help preserve liquidity. The credit agreement has no financial performance covenants, meaning we do not have events of default tied to leverage or other financial maintenance ratios derived from financial performance of the company. But to recap, the credit agreement was executed with virtually no fees.

It lowered our cost of capital, extended debt maturities to twenty five years, does not require fixed mandatory principal payments, has no events of default tied to financial performance metrics, and is with a single lender who knows us well and is committed to our success. As Kevin mentioned earlier, we expect to achieve more than $100,000,000 in cost synergies due to business transformation initiatives and acquisition integration. The baseline for this target is on a pre acquisition basis or pro form a total cash cost as of the last twelve months ended December 2019. We expect to achieve

Speaker 0

reduction by the end of fiscal year 2021. One

Speaker 3

We expect to achieve synergies in the following areas: reorganization of our operating structure from a market based operating structure to vertical operating lines creating significant efficiencies across all of our departments evaluation and execution of our day of week print transformation initiative in certain of our markets. This project will reduce the number of days we print and deliver our print edition in certain markets by one, two, or three days depending on the market. Acquisition integration of our back office functions including HR, finance, and IT, centralization of technology systems, and business transformation initiatives in newspaper design and ad design. Of the $100,000,000 in synergies, nearly 40% has been executed to date. We posted strong pro form a adjusted EBITDA in the second quarter totaling $24,000,000 For the last twelve months, form a adjusted EBITDA totaled $152,100,000 To supplement our strong adjusted EBITDA, we sold $17,700,000 of assets in the second quarter, consisting of real estate and four of our small business operations.

Our asset monetization program remains active, and we currently have $30,000,000 of real estate listed for sale and an additional investment worth approximately $10,000,000 With strong adjusted EBITDA, good execution on our asset monetization program and the completion of our comprehensive refinancing, we have maintained a strong liquidity position throughout the pandemic. As of today, we have more than $50,000,000 of liquidity that consists of cash on the balance sheet, which provides us with sufficient liquidity in the near term. Last, we expect to file our 10 Q with the SEC And as always, it will include additional information on our results and expectations. This concludes our remarks.

The team will remain on the line for any questions you may have. Operator, please open the line for questions.

Speaker 0

Thank you. At this time, we will be conducting a question and answer session. I will now turn the call back over to your host, Jamie Serrett, to discuss questions from the webcast.

Speaker 1

Thank you. Our first question from the web. How much of the $17,700,000 received from asset sales came from the sale of the Oregon and California newspaper publications?

Speaker 3

I I can take that that question. We sold four business operations out west. The total for that was less than $4,000,000. So the majority of the $17,700,000 came from real estate sales. But we did sell, like I like I mentioned, the four properties for less than $4,000,000.

Speaker 1

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

Speaker 2

Well, thank you for joining the call with us today. We appreciate your time and your interest in Leaf. Thank you again. Have a great week.

Speaker 0

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