Tim Millage - Corporate Controller Mary Junck - Executive Chairman Kevin Mowbray - President and CEO Ron Mayo - VP and CFO

Welcome to the Lee Enterprises 2017 Third Quarter Webcast and Conference Call. This 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. Several analysts have been invited to participate. Also 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. And now I will turn the call over to your host Tim Millage, Corporate Controller. Please go ahead, sir.

Good morning, thank you for joining us. Speaking on this morning's call will be Mary Junck, Executive Chairman; Kevin Mowbray, President and Chief Executive Officer; and Ron Mayo, Vice President and Chief Financial Officer. Also with us today on today's call and available for questions, are Paul Farrell, Vice President, Sales; James Green, Vice President, Digital; and Nathan Bekke, Vice President, Consumer Sales and Marketing. Earlier today, we issued a news release with preliminary results for our June quarter. It is available at lee.net as well as at major financial websites. 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. Finally, all financial comparisons discussed on today's call are same-property comparisons. And now to open the discussion is our Executive Chairman, Mary Junck.

Thank you, Tim, and thank you all for joining our conference call this morning. Our third quarter was highlighted by an improved total revenue trend, the best year-over-year quarter this fiscal year, boosted by continued growth in digital revenue and improved subscription revenue. We also posted the best year-over-year adjusted EBITDA performance in the last seven quarters. On June 30, which is in our fourth fiscal quarter, Lee closed on the previously announced acquisition of the Dispatch-Argus, which we purchased for $7.2 million plus an adjustment for working capital acquired. The Dispatch-Argus of Moline and Rock Island, Illinois, is just across the Mississippi River from our operations in Davenport and Muscatine, Iowa, and is an ideal strategic fit offering substantial synergies. We expect the acquisition to be accretive to earnings and free cash flow in our September quarter. Our lower debt and leverage, now at 3.75x, and our strong adjusted EBITDA has enabled us to act on strategic acquisitions, and the purchase of the Dispatch-Argus bears this out. Also with lower leverage and the first-lien term loan amortizing quickly, we are evaluating the best uses of our free cash flow beyond debt reductions, including acquisitions such as the Dispatch-Argus, as well as other opportunities that will increase shareholder value. Also as you will hear from Ron in a moment, we are actively evaluating the timing and economics of refinancing all or a portion of the company's long-term debt. A couple of comments on how we evaluate possible acquisitions. Although we have been inactive recently, we have continued to routinely survey the landscape for properties that can be acquired at attractive multiples and be accretive to free cash flow. Another key criteria, solid midsized markets where the operation is the dominant provider of local news, information and advertising in both digital…

Thank you, Mary. As Mary mentioned, we closed on the acquisition of the Dispatch-Argus in our fourth quarter. The Dispatch-Argus serves Moline, Rock Island and the surrounding communities on the Illinois side of the Mississippi River in the Quad Cities with circulation of 25,000. We're extremely pleased with the purchase and the transition is well underway. We'll begin consolidating the results of Dispatch-Argus beginning in the September quarter. Getting back to the June quarterly operating performance. The third quarter marked an improved revenue trend, with total revenues down 6.6%. The improvement was driven by quarter-over-quarter revenue gains in both digital and subscription revenue. We are expanding our digital audiences, increasing our audience engagement and developing new digital revenue streams that are essential to continued strong digital revenue growth. Total digital revenue increased 6.4% in the June quarter and digital advertising grew 7.8%, including growth of 8.3% in digital retail advertising. Digital retail advertising accounts for more than 60% of total digital advertising. In the June quarter, digital advertising revenue represented 29.1% of total advertising revenue for the company. Our digital audiences and audience engagement continue to grow with monthly average page views up 6.5% in the June quarter and totaled 225.7 million. Pages per session, one metric we use to monitor audience engagement, increased in the low single digits in the June quarter. The fiscal year, we introduced digital connect, a digital service package aimed at growing digital revenue from local businesses. Digital connect provides local businesses a turn-key package for expanding their digital presence through enhanced search engine management. Digital connect has been the fastest-growing digital category this fiscal year and is expected to be a significant contributor to our digital revenue in 2018. We continue to see the positive revenue impact of our sound subscription pricing principles and…

Thank you, Kevin. The company continues to produce solid adjusted EBITDA. In the June quarter, adjusted EBITDA totaled $35.8 million, a 3.1% decrease from the June quarter last year. As Mary said earlier, the June quarter cash costs, excluding workforce adjustments and others, decreased 8% compared to the prior quarter. Compensation decreased 9.1%, primarily as a result of reduced staffing levels, a majority of which are associated with our ongoing business transformation and outsourcing. Newsprint and ink expense decreased 7.4% for the quarter, primarily as a result of reduced volume from unit reductions and a change to a lower basis weight of newsprint. The declines were partially offset by the cumulative effect of several price increases throughout fiscal 2016, which we continue to pay. However, we will cycle the 2016 price increases in the fourth fiscal quarter of 2017. Our operating expenses decreased 6.8% in the quarter, primarily driven by lower delivery, postage and other print-related costs, which were offset in part by our continued investment in digital revenue growth. In the June quarter, one of our union contracts expired and caused us to record at $2.6 million estimated long-term liability and expense in the current quarter to reflect the partial withdrawal from one of our multiemployer pension plans. As I will explain, this partial withdrawal is not expected to materially impact free cash flow of the company. Once the partial withdrawal liability is finalized by the pension plan administrator, it is not expected to change and it will be paid in equal installments over a 20-year period. The current estimate is that these payments will total approximately $200,000 per year and, as I noted, we do not believe that, that will be material to our free cash flow in the future. As a result of the changes implemented in…

This concludes our remarks. The team will remain on the line for any questions.

From the webcast, what was the multiple you paid for the Moline acquisition?

Well, we have not disclosed what the multiple was, but to give you a sense of what it was, it was a very good multiple for us and much, much lower than what our current stock trading multiple is. So it was a very good value, and we're going to drive a lot of synergies and some good cash flow given the price we paid.

Next question is, how do we feel about subscription revenue in the fourth quarter?

Well, we feel pretty good about it. We're going to have the flow-through of our pricing initiatives. They'll continue, and as result we expect subscription revenue, as I mentioned in my remarks, to be as strong as they were in 2016.

The next question is, what are you expecting for cash costs in the fourth quarter and in the fiscal 2018?

Well, the flow-through of our cost reduction, as we talked about in today's call, flowing through into Q4. In addition to that, we have identified more cost reductions tied to our business transformation initiatives, so we continue to experience more cost reductions throughout 2018 as well.

And then last question, what is the company doing to change that trend in traditional advertising revenue?

Well, we're doing lots of things. We've got the Edison program that I talked about earlier aimed at traditional print advertising. We've added more print to all of those packages aimed at SMB local advertisers, both small and midsize. For our larger traditional local print advertisers, we've got what we call the big pitch and the quick pitch. We've got a team of artists here in Davenport that developed a high-end presentation and campaign aimed at driving business from our largest local print accounts.

One thing I want to make I read properly on the call script is, the real estate that we have under contract is $7 million and we expect it to close in fiscal 2017, but again, no assurances that these transactions will close.

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

As you've heard, we're confident about Lee's future and we have sound strategies and tactics in place to continue to transform the company. As we mentioned earlier on the call, revenue trends are improving and we continue to transform our business. We believe that we'll report strong adjusted EBITDA in fiscal 2017. We're among the industry leaders in margins and other key performance measures and stay steadfastly focused on performing at a high level. With our lower leverage and strong EBITDA, we are evaluating, as we noted earlier, the best use of our free cash flow beyond debt reduction, including additional acquisitions as well as other opportunities that increase shareholder value. We also are actively evaluating the timing and economics of refinancing all or a portion of our debt. We appreciate your time and your interest in Lee, and thank you for joining us today.

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