Lee Enterprises, Incorporated (LEE) Q3 2020 Earnings Report, Transcript and Summary

Welcome to the Lee Enterprises 2020 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. [Operator Instructions] A link to the live webcast can be found at www.lee.net. I will now turn the call over to your host, Jamie Seratt, Corporate Controller.

Good morning. Thank you for joining us. Speaking on this morning's call will be Kevin Mowbray, President and Chief Executive Officer, and Tim Millage, Vice President and Chief Financial Officer. 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 third quarter of 2020. Its 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 March 16th, 2020, and our year-to-date period results include approximately 15 weeks of operations from the acquisitions relative to the 39 weeks and the year-to-date period. Certain results and trends are presented on a pro forma basis, which assumes ownership of these acquisitions as of October 1st, 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. 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 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 $2.5 million and exceeded the high end of our adjusted EBITDA outlook by nearly $3 million. We also had strong and stable revenue performance from subscription revenue and 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 60% of our total operating revenue was contract-based from subscriptions to our print and digital editions 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 forma basis, modestly down from the second quarter trend. Approximately 11% of subscription revenue is from single-copy sales, which were down 26.9% in the quarter due to the significant negative effects from COVID-19 and a difficult comparable to the prior year quarter. Last year, we earned $600,000 in one-time revenue in the June quarter from the St. Louis Blues winning the Stanley Cup. Excluding single-copy revenue, subscription revenue was down just 1.6% to the prior year on a pro forma basis, an improvement from the Q1 and Q2 trends. Growing our digital audience remains a 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 2020 quarter. We expect to grow our digital audiences continuously. The demand for advertising has changed dramatically during the era of COVID-19. 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 are seeing this slow trend improvement continue into July. We made swift and decisive action on the costs side to mitigate the impact of the decline of advertising demand on our adjusted EBITDA. Adjusted EBITDA totaled $26.3 million in the quarter or $2.8 million higher than the high end of our outlook provided in June. Strong execution on the costs side throughout the quarter helped generate $36.7 million 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 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 print and 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 due to COVID-19, we remain very optimistic about the future of Lee Enterprises with the right strategies focused on local news, information and advertising combined with a robust suite of digital products and the best operators in the business. We also have secured a financing that all that eliminates our financing risk for 25 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.

Thank you, Kevin. And good morning, everyone. Total operating revenue on a GAAP basis was $182.5 million in the quarter, exceeding our range of $177 million to $180 million provided last quarter. On a pro forma basis, total revenue was down 25% compared to the prior year due to the significant negative effects from COVID-19. As Kevin mentioned, we took swift and decisive action on the costs side to mitigate the impacts of COVID-19 on our operating results. Cash costs on a pro forma 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 million 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 $26.3 million in the third quarter or $2.8 million higher than the high end of our outlook. We ended the period with $56.7 million of cash on the balance sheet, creating excess cash flow as defined in our credit agreement of $36.7 million. This excess cash flow was used to repay debt in our fourth fiscal quarter at par, reducing our total outstanding debt to $539.3 million. As a reminder, the credit agreement has a low, fixed annual interest rate, a 25 year maturity, no fixed mandatory principal payment 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 million in cost synergies due to business transformation initiatives and acquisition integration. As part of our transformation, we desire to become a leaner organization that is more capable of responding to the dynamic operating environment we live in today. We expect to achieve synergies in the following areas. Through reorganization of our operating structure from market-based structure to 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 and 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 1, 2 or 3 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 end of June and are on track to achieve our target by the end of FY '21. 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&A.

Thank you [Operator Instructions]

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?

Yeah. I can answer that. So adjusted EBITDA, the non-GAAP financial performance measure that we use to monitor the operating results 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 million. Excess cash flow is the required payment at par in our credit agreement. While we benefited to certain one-time items this quarter, we do expect to continue to generate strong EBITDA - adjusted EBITDA going forward.

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

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.

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

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 government shutdowns and things like that in our local markets, but we're still very active in the process. We have $34 million of real estate for sale. And we did, just after the quarter end, monetized part of our private equity investment that we believe is worth $10 million, and we've monetized $3.9 million of that. You'll see that in the fourth quarter.

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

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