Lee Enterprises - Earnings Call - Q3 2020

Transcript

Speaker 0

Welcome to the Lee Enterprises twenty twenty Third Quarter Webcast and Conference Call. The call is being recorded and will be available for replay beginning later this morning at 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 www.lee.net. I will now turn the call over to your host, Jamie Serrat, Corporate Controller.

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 on today's call and available for questions is Nathan Becky, vice president consumer sales and marketing. 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 year to date period results include approximately fifteen weeks of operations from the acquisitions relative to the thirty nine weeks in the year to date period. 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 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, and 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, Jamie. Good morning, and

Speaker 2

thank you all for joining the call. We're pleased with our third quarter operating results as we exceeded the high end of our revenue outlook by $2,500,000 and exceeded the high end of our adjusted EBITDA outlook by nearly 3,000,000. We also had strong and stable revenue performance from subscription revenue in digital services. These revenue streams are predominantly contract based, which provides for reoccurring revenue streams and more stable revenue trends. In the quarter, more than 6% of our total operating revenue was contract based from subscriptions to our print and digital additions and digital services such as web hosting, CMS, and video streaming services through TownNews.

Subscription revenue was down 5% in the quarter on a pro form a basis, modestly down from the second quarter trend. Approximately 11% of subscription revenue was from single copy sales, which were down 26.9% in the quarter due to the significant negative effects from COVID nineteen and a difficult comparable to the prior year quarter. Last year, we earned 600,000 in one time revenue in the June from the Saint Louis Blues winning the Stanley Cup. Excluding single copy revenue, subscription revenue was down just 1.6% to the prior year on a pro form a basis, an improvement from the q one and q two trends. Growing our digital audience remains the top priority for us.

At the end of the quarter, we now have 222,000 digital only subscribers, a 35.1% annualized increase over the March. We expect to grow our digital audiences continuously. The demand for advertising has changed dramatically during the era of COVID nineteen. Virtual ceasing of advertising demand beginning in April created a significant negative impact on our advertising revenue. Despite the disruption, we remain optimistic as we've seen slow and steady trend improvement each month, and the trends in June were 15 percentage points better than in April.

And we're seeing the slow trend improvement continuing into July. We made swift and decisive action on the cost side to mitigate the impact of the decline of advertising demand on our adjusted EBITDA. Adjusted EBITDA totaled $26,300,000 in the quarter or 2,800,000.0 higher than the high end of our outlook provided in June. Strong execution on the cost side throughout the quarter helped generate 36,700,000.0 of excess cash flow. This amount was used to repay debt in the fourth quarter.

In addition to thoughtfully managing our business during the downturn and executing on our acquisition integration, we turned our focus to developing our on our post pandemic strategy. We're committed to remaining the leading provider of local news and information in our local markets, but believe that we need to transform the way we present our local news. This includes improving our digital presentations, providing best in class experience for consumers, creating new content channels, and leveraging our video content to drive engagement and monetization. We're also focused on transforming our print centric audience model to a digital centric audience model that allow us to rapidly grow our digital audiences and digital audience revenue. Our post pandemic operating strategy is to diversify and transform the services and products we offer advertisers.

We have strong relationships with local advertisers, an impressive array of printed digital audiences, and top notch digital talent that will help us turn the tide on our revenue trends. Before I turn the call over to Tim to discuss financial details, I wanted to reiterate that despite the significant negative impacts to our business from COVID nineteen, we remain very optimistic about the future of Lee Enterprises. With the right strategies, both from local news, information, and advertising, combined with a robust suite of digital products and the best operators in the business, We also secured a financing that all but eliminates our financing risk for twenty five years. While uncertainty remains, we're excited about the future of our company, and we're marching forward in confidence. And now, I'll turn it over to Tim to discuss additional financial highlights.

Speaker 3

Thank you, Kevin, and good morning, everyone. Total operating revenue on a GAAP basis was $182,500,000 in the quarter, exceeding our range of $177,000,000 to $180,000,000 provided last quarter. On a pro form a basis, total revenue was down 25% compared to the prior year due to the significant negative effects from COVID-nineteen. As Kevin mentioned, we took swift and decisive action on the cost side to mitigate the impacts of COVID-nineteen on our operating results. Cash costs on a pro form a basis were down 22.1% in the quarter due to a combination of temporary and permanent cost reductions.

In the third quarter, we executed a temporary compensation reduction equal to two weeks for all employees. Executives received a 20% compensation reduction in addition to a reduction taken earlier in the year. These temporary cost actions reduced our costs by $10,000,000 in the quarter. We managed our operating expenses and liquidity during the quarter through thoughtful cost management, limitations on capital spending, and using certain benefits from the CARES Act. This helped us exceed our adjusted EBITDA outlook provided last quarter.

Adjusted EBITDA totaled 26,300,000 in the third quarter or $2,800,000 higher than the high end of our outlook. We ended the period with $56,700,000 of cash on the balance sheet, creating excess cash flow as defined in our credit agreement of $36,700,000. This excess cash flow was used to repay debt in our fourth fiscal quarter at par, reducing our total outstanding debt to 539,300,000.0. As a reminder, the credit agreement has a low fixed annual interest rate, a twenty five year maturity, no fixed mandatory principal payments, and does not have financial performance covenants. That means we do not have events of default tied to leverage or other maintenance ratios derived from financial performance of the company.

Also, the debt is with a single lender who knows us well and is committed to our success. As we mentioned on our last call, we expect to achieve more than $100,000,000 in cost synergies due to business transformation initiatives and acquisition integration. As

Speaker 1

part

Speaker 3

of our transformation, we desire to become a leaner organization that is more capable of responding to the dynamic dynamic operating environment we live in today. We expect to achieve synergies in the following areas. The organization of our operating structure, the market based structure, and vertical operating lines, creating significant efficiencies across all of our departments. This transformation reduces layers across our company, empowers employees, and drives efficiencies. Evaluation and execution of our day of week print transformation initiative in certain markets is another item.

This project will reduce the number of days we print and deliver our print editions in certain markets by one, two, or three days depending on the market. We'll also focus on acquisition integration of back office functions, including HR, finance, and IT, consolidation of our technology systems, and business transformation initiatives in newspaper design and advertising design. We have executed nearly 50% of the cost reductions as of the June and are on track to achieve our target by the 2021. 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 remarks. The team will remain on the line for any questions you may have. Operator, I'll turn it over to you to begin our Q and A.

Speaker 0

Thank you. At this time, we will be conducting 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 permits. Participants on the phone will not have the opportunity to ask questions.

One moment, please, while we poll for questions.

Speaker 1

Our first question from the web, what's the difference between EBITDA and excess cash flow? Can debt reduction continue at this pace going forward?

Speaker 3

Yeah. I I can answer that. So adjusted EBITDA is a non GAAP financial performance measure that we use to monitor the operating results of our of our company. We have defined this term in our SEC filings, and we've reconciled it to net income. Excess cash flow is a defined term in our Berkshire credit agreement that's defined as cash on the balance sheet in excess of 20,000,000.

Excess cash flow is a required payment at par in our credit agreement. While we benefited with certain one time items this quarter, we do expect to continue to generate strong EBITDA adjusted EBITDA going forward.

Speaker 1

Our next question, did we buy back any stock in the past quarter or the past year?

Speaker 3

We we did not buy back any stock in the past quarter or past year. That is not something we are able to do under our current credit agreement.

Speaker 1

Our next question, did Lee make any asset sales in the quarter?

Speaker 3

We are still focused on our real estate monetization program. It did slow down a little bit in the quarter for obvious reasons due to, you know, government shutdowns and things like that in our local markets, but we're still very active in the process. We have $34,000,000 of real estate for sale, and we did, just after the quarter end, monetize part of our private equity investment that we believe is worth $10,000,000, and we've monetized 3,900,000.0 of that. You'll see that in the fourth quarter.

Speaker 1

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

Speaker 2

thank you for joining the call today. We appreciate your interest in Lee, and have a great week.

Speaker 0

This concludes today's call. Thank you for your participation. You may now disconnect.