Good day, and welcome to the Lee Enterprises 2018 Second Quarter Webcast and Conference Call. Today's conference is being recorded and will be available for replay beginning later this morning at lee.net. [Operator Instructions]. Several analysts have been invited to participate. So 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. Now I would like to turn the conference over to your host, Tim Millage, Corporate Controller.

Good morning. Thank you for joining us. In addition to myself, speaking on this morning's call will be Mary Junck, Executive Chairman; and Kevin Mowbray, President and Chief Executive Officer. Also with us on today's call and available for questions are 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 second fiscal quarter of 2018. 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 will 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 Executive Chairman, Mary Junck.

Thank you, Tim, and thank you all for joining the call this morning. Before discussing our March quarter, I wanted to let you know that Ron Mayo, Lee's Vice President, CFO and Treasurer, is not on our call this morning. As we noted in yesterday's 8-K filing, Ron is taking a leave during his recovery from a medical procedure. Tim Millage, Lee's Corporate Controller, has been appointed to serve as the company's acting CFO during Ron's absence and prior to his return to work. You'll hear from Tim again later in the call. And now on to the March quarter. We're pleased with the financial performance in the March quarter. We made significant strides in improving revenue trends and growing audiences and audience engagement. We maintained our industry-leading margins and made strategic moves to accelerate the top line revenue growth at TownNews.com. Beyond improving financial metrics, we are proud to remain the leading provider of global news, information and advertising in all of the markets that we serve. As Kevin will discuss in a moment, revenue trends in March -- in the March quarter improved across the board. Total revenue was down 4.2%, which is our best quarterly trend in more than two years. Digital revenue continues to grow at a solid clip, and subscription revenue increased 2.1% in the quarter. We are upbeat that we can continue this solid financial performance in the remainder of fiscal 2018. Another reason for our optimism, our audiences remain huge with an average combined reach in digital and print of 74%. Monthly visits to Lee's sites averaged 77.5 million, an increase of 11.6% over the prior year quarter, and we reached approximately 3 million readers in print on a daily basis. To grow audience and increase engagement, we've created a centralized digital content…

Thank you, Mary. As Mary mentioned, revenue trends in the March quarter improved in many key categories. Total digital revenue, which includes digital advertising and digital services revenue, increased 3.6% in the quarter driven by a 6.5% increase in digital retail, a 25.5% increase in programmatic revenue and a 17% increase in revenue at TownNews.com. We're pleased with the financial performance in the March quarter. While we faced headwinds with big-box retailers in classified, we believe we're well positioned to compete for advertising dollars and have the unique and unprecedented opportunities in our local markets. As Mary mentioned, our audiences are huge, with an average combined reach in digital and print of 74%. Our local audiences are powerful and unmatched, which gives us a huge advantage over our traditional media competitors. We have been and continue to be, by far, the dominant media in the markets we serve. Opportunity also exists for our small and midsized local business partners, which remains a strong focus of our sales organization. We launched the Edison Project over a year ago to transform the way we go to market, extend the length of our contracts and expand audiences for our advertisers through a combination of print and digital advertising. In the March quarter, we increased the number of Edison contracts more than 15%. We increased contract length, and we increased digital advertising by -- among this group. These customers collectively grew by 20.8% in Q2, with 34% of the revenue coming in digital. Digital retail advertising, which accounts for more than 62% of total digital advertising in the March quarter, grew 6.5%; and programmatic revenue increased 25.5% in the March quarter. Total digital advertising grew 2.7% and represented 31.9% of total digital advertising in the second fiscal quarter compared to 28.7% in the second…

Thank you, Kevin. As Kevin noted, we are aggressively managing our costs, and we'll continue to transform the business in 2018. We expect that with the carryover impact from our fiscal year 2017 business transformation and additional changes currently underway, we will reduce cash costs between 6% and 6.5% for fiscal year 2018. As Mary mentioned, debt was reduced $15.6 million during the March quarter and has been reduced $68.6 million over the last 12 months. The principal amount of debt at the end of the quarter was $516.3 million. Interest expense increased 9.3% or $1.4 million in the quarter and has fallen $5.5 million over the last 12 months due to our substantial quarterly debt payments. In the March quarter, we paid down the second-lien term loan by $6.4 million from both sales of real estate and Pulitzer excess cash flow, both at par. We expect to pay down the second-lien term loan by an additional $6.3 million in the June 2018 quarter from excess -- from Pulitzer excess cash flow at par. With lower debt and strong adjusted EBITDA, the company's leverage net of cash is now 3.61x the last 12 months adjusted EBITDA. We continue to be actively engaged with our advisers evaluating an opportunistic refinancing. The first-lien term loan, with a balance of $18.4 million as of today, is amortizing quickly, and we expect to fully repay the loan before the end of the calendar year. The remainder of our debt is not due for another 4 to 5 years. As we look to refinance our debt, our priorities are to reduce interest rates and maximize deductibility under the new tax laws as well as to simplify our capital structure. We are weighing the benefits of refinancing with its costs, which today, includes more than $22…

[Operator Instructions].

This is Andrew Gadlin from Odeon Capital Group. Kevin, my question -- my first question is on the revenue line. On advertising, there's definitely been a bend in the curve and some real improvements. Where do you think this goes? Would we -- would you expect to continue seeing improvement through the back half of fiscal year? And where do you think you can get this thing longer term?

You bet. Well, we do expect this continue through the second half of fiscal year. We're seeing improvement, as we mentioned in the release, in almost all categories. What's really working for us is our Edison program, which is aimed at small and midsized local businesses where we know we can grow it dramatically and have -- continue to see nice success there. All of our digital categories are performing very well. We've seen key accounts, which are the big-box stores, improve over Q1. And as we look at what's on the horizon there, we don't see that category declining. Circulation, remember, remains to be a big driver. While not advertising, that'll be a factor towards total advertising -- or total revenue.

Got it. And then TownNews has been getting a lot more focused in recent quarters as it grows. Can you just remind me from a reporting standpoint, where are TownNews' revenues embedded? Are the advertising revenues of Town included in the overall advertising and marketing revenue line item that the company reports?

Yes, this is Tim. We consolidate the results of TownNews with the rest of the enterprise.

So it doesn't go through the other line, though. It goes through advertising and marketing. So some of this benefit we're seeing -- or the better trend year-over-year in advertising and marketing is really TownNews becoming a bigger piece of that overall?

Yes. What I would say is that the vast majority of TownNews' revenue is in the other line. When we're looking at the 17% increase in TownNews revenue, some of that is attributed to advertising. But that's not driving any Lee advertising trends in a significant way.

[Operator Instructions].

It's Barry Lucas at Gabelli. Kevin, you talked and described fairly positive trends on the digital side. But overall, digital was only up 2.2% versus stronger growth in retail. So what's not working in digital?

What's not working, what's depressing that growth to a degree is digital advertising associated with our classified categories.

In other words, digital retail was very strong, as was our programmatic digital. So as Kevin said, it's classified as a drag on it.

And even if we drilled down a little bit deeper, whether it's real estate or employment or auto, is it -- that's the major online services, whether it's Cars.com or the classified ventures or what have you, not helping?

The biggest decline in the classified category for digital is employment. On the bright side, what we characterize as almost all other classified, which is obituary, classified revenue was actually up. So the downdraft is employment and then auto.

Great. And if we just flip to the balance sheet and -- because I think this is at least the second call you've said you're discussing refinancings with your advisers. So we've gone past the first call date, 1 04 and change and not that far away from 1 02. So how do you balance the call premium, the leverage? And how available additional -- or how open the credit markets are against a rising interest rate environment? How do you kind of balance that or think about it?

Well, let me lead off, and then Tim can add. That's exactly what we have to balance is rising interest rates, the markets open, but at the same time, we have what we believe are pretty substantial call premiums. So we need to be able to balance those things off and see a deal that would be good for the company.

Yes. I think I would just echo what Mary said. You're exactly right, looking at all of those things and seeing what sort of return there is on a refinancing. And again, once we pay off that first-lien term loan this year, we are in a position where we have a 4-year runway. So that is another factor we're considering, along with the call premiums and is now the right time and what sort of rates we could get.

There are no further questions from callers. I would now like to turn the call back over to our host, Tim Millage, to discuss questions from the webcast.

Yes. So the first question from the web is the breakdown of advertising in our filings has been more summarized. We're not breaking out retail, classified, et cetera. And do we expect to continue to do that? I think I would answer that we have changed our level of detail just to be more consistent with what others in our industry are doing. Yes. The next question from the webcast is how much real estate has Lee sold this year. We have sold approximately $2 million of real estate in the first six months of the fiscal year. We have no more questions from our web participants. Now I'll turn the call back to Mary for closing remarks.

Well, as I said earlier, we are the industry leader in margins, and we have remained steadfastly focused on performing at a high level. We are confident that we have sound strategies and tactics in place to continue to transform the company, produce strong adjusted EBITDA and continue to make significant reductions in our total debt. As Tim noted and as we discussed on the Q&A session of the call, we are in discussions with our advisers and the Lee Board of Directors regarding the timing and economics of refinancing all or a portion of our debt. The decision will be based on our ability to reduce our total cost of debt capital, extend the maturities of our debt and maximize the deductibility of interest under the new tax law. We very much 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. This concludes our call.