Earnings Call: Q3 2021

Aug 5, 2021

Good day, and welcome to the Lee Enterprises Third Quarter 2021 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 the live webcast can be found at investors. Lee.net. Now, I will turn the call over to your host, Josh Reinholtz, Vice President of Finance. Good morning. Thank you for joining us. Speaking on this morning's call is Kevin Mowbray, President and Chief Executive Officer and Tim Millage, Vice President, Chief Financial Officer and Treasurer. Also with us on today's call and available for questions is Nathan Bekke, Vice President, Consumer Sales and Marketing. Earlier today, we issued a news release with preliminary results for our 3rd fiscal quarter of 2021. 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 in the Buffalo News on March 2018, 2020. Certain results and trends are presented on a pro form a basis, which assumes ownership of these acquisitions for the entirety of the 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. Thank you, Josh. Good morning and thank you all for joining the call. I'm extremely proud of the significant progress we continue to make on our 3 pillar growth strategy and the impact of that strategy is clearly seen in our financial results. We achieved our 2nd straight quarter of year over year adjusted EBITDA growth as well as a return to year over year Revenue growth in the 3rd quarter. Our results clearly demonstrate that we're on a strong path forward in our effort to generate recurring sustainable Revenue Growth. Before we go too deep into our operating results, I do want to take a moment to recognize the incredible news and editorial staff we have throughout Z. I'd like to thank them for their efforts. We're committed to serving our communities by providing trusted, relevant and timely local news and information. I'd also like to recognize Michael Paul Williams in particular, a columnist at the Richmond Times Dispatch, who in June was awarded the Pulitzer Prize for distinguished commentary. We're very proud of Michael Paul, The Richmond Times Dispatch editorial team and our entire news teams And getting back to the 3rd quarter operating results, Total operating revenue grew 7.6% over the prior year in Q3 due to the acceleration of total digital growth with strong execution on our 3 pillar digital growth strategy and from cycling the Q3 last year, which was significantly impacted by the pandemic. Total digital revenue increased 48.3% in the 3rd quarter and totaled nearly 66,000,000 More than 1 third of our total operating revenue is digital revenue, up from just 23% in the Q3 last year. Our digital revenue growth is exceeding our expectations in every category, including digital advertising, digital services and digital subscriptions. Almost 55% of our total operating revenue was annual recurring revenue are subscription based and includes audience revenue, antidigitalagency revenue and revenue from our TownNews subsidiary. The 2 pillars, the first two pillars of our 3 pillar digital growth strategy focused on driving audience growth and engagement, Improving the user experience on our digital platforms and accelerating digital subscriptions and revenue. Our audiences are strong reaching monthly averages of nearly 49,000,000 unique visitors and 400,000,000 page views. We have now achieved 6 straight months of year over year growth in total paid subscribers. This means that the growth of our total digital only subscribers is outpacing the decline of full access subscribers. Returning to total paid audience growth is a significant milestone for Lee As we continue to drive our digital transformation efforts, full audience growth in the 3rd quarter helped drive the flat revenue We now have 337,000 paid digital only subscribers, which is helping drive audience revenue performance. These metrics demonstrate we remain the fastest growing digital subscription platform in local media today. TownNews, which is our software as a service content management platform, is the digital backbone of our operation and that of over 2,000 other media partners And revenue at TownNews continues to perform well, up 8.7% on a standalone basis with revenue of $26,700,000 Over the last 12 months, growth in revenue at TownNews combined with our audience revenue streams and Amplified's agency growth is driving the increase in annualized recurring revenue. The 3rd pillar of our 3 pillar digital growth strategy is to diversify the products and services we Digital advertising revenue increased 48% in the quarter fueled by a 90% growth in revenue from our full service agency, We continue to make significant investments to diversify the products and services we offer our local advertisers. And just this past week, we announced A new strategic partnership with Amazon to bring over the top video to our customers. These new revenue streams combined with strategies to develop e commerce and first data revenue streams are laying the foundation for significant digital advertising revenue growth as we close-up this fiscal year and move to 2022. Our strategy and execution resulted in a 17.2% Increase in total advertising revenue in the 3rd quarter were up $13,400,000 over the same quarter a year ago. Our Q3 results clearly demonstrate that we've turned the corner and are headed in the right direction to generating more recurring sustainable revenue. We're very excited about the progress we've made on our digital transformation and we're very optimistic about our future. We believe we have the right team and the right strategies And we are better positioned than ever to drive long term value for our shareholders. And now I'll turn it over to Tim to give more financial details. Thank you, Kevin, and good morning, everyone. We continue to diligently manage our legacy cost structure, Aggressively invest in talent and technology to fund our 3 pillar digital growth strategy and at the same time strengthen our balance sheet. Debt was reduced $14,000,000 in the 3rd quarter with the principal amount of debt at the end of June totaling $485,000,000 Since our refinancing in March of 2020, debt has been reduced by $91,000,000 Also, while not seen in our balance sheet yet as we revalue liabilities at the end of the fiscal year, our pension and post retirement benefit obligations at the end of June As a reminder, our credit agreement has a low fixed annual interest rate, A 25 year maturity, no fixed mandatory principal payments and does not have financial performance covenants, meaning we do not have The debt is with a single lender who knows us well and is committed to our success. The credit agreement also has no prepayment The favorable debt structure is incredibly important for us as we execute on our 3 pillar digital growth strategy as it allows us The ability to make the necessary investments in talent and technology that fuels recurring sustainable revenue growth. As a result of the revenue performance Kevin walked through, combined with strong cost management, adjusted EBITDA totaled $27,000,000 in the 3rd quarter, up for a 2nd straight quarter. Over the last 12 months, adjusted EBITDA totaled $115,000,000 We're committed to making the necessary investments to fund our strategy. Total cash costs were up 9.2% due to the significant temporary cost actions taken in the Q3 last year in the onset of the pandemic. Excluding these one time measures, cash costs Compensation was down 5.8% after adjusting for the temporary measures due to business transformation and acquisition integration initiatives. Newsprint and ink expense was down 6.9% due to a reduction of our print units, partially offset by increases in pricing. Other cash costs includes print related costs like print production expenses and delivery expenses, and it also includes digital costs of goods sold. Other cash costs were down 0.3% after adjustments in the quarter due to a reduction of print related costs, partially offset by incremental digital investments. In June of last year, we laid out a target to achieve $100,000,000 in cost synergies by the end of pacing ahead of our year end 2021 target. Our strong foundation and well defined long term strategy puts Lee on a clear path As we execute and approach our target leverage ratio of 2.5 times, we expect to create significant value for our shareholders through conversion of debt to equity. Also, our 3 pillar digital growth strategy positions us to unlock the full value of Lee's platform and achieve multiple expansion that is in line with In summary, we are really encouraged with our 3rd quarter results as they clearly demonstrate that we have turned the corner and are on the right path towards creating recurring sustainable revenue growth and long term value for our shareholders. One last thing before we open the line for questions, 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 Operator, please open the line for questions. Thank you. At this time, we will open the floor for questions. Participants accessing this call by webcast may submit written questions through the website. While we gather your questions. Okay. We have no questions on the web. So I'll turn it back to Kevin for closing remarks. Well, thank you all for joining us on the call today. As I mentioned earlier, This concludes today's call. Thank you for your participation. You may now disconnect.