Q4 2021 Lee Enterprises Inc Earnings Call
Please standby.
Welcome to the Lee Enterprises, 2021 fourth quarter webcast and conference call. The call is being recorded and will be available for replay. Beginning later this morning at investors thought Lee Dot 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.
Linked to the webcast can be found at investors thought Lee Dot net now.
Now I turn the call over to your host Josh Reinhart Vice President of Finance. Please go ahead.
Good morning, Thank you for joining us on this morning's call is Kevin Mowbray, President and Chief Executive Officer, and Tim Millage, Vice President and Chief Financial Officer and Treasurer.
Also with us on today's call and available for questions as Nathan Becky Vice President audience strategy.
Earlier today, we issued a news release with preliminary results for our fourth fiscal quarter of 2021.
Is available that we got in that as well as at major financial websites.
We will be walking through an earnings presentation on today's call can also be found at <unk> dot net.
One housekeeping item to start we closed on the acquisition of BH Media group and the Buffalo News on March 16 2020.
Certain results and trends are presented on a pro forma basis, which assumes ownership of these acquisition, but 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.
Kevin will open the conversation on slide three of the earnings presentation for those following along.
Thank you Josh good morning, everyone, I'm, Kevin Mowbray, President and CEO Lee Enterprises, and I'm pleased you could join US before we dive into our results I wanted to make a brief statement on the recent developments you'd likely see regarding Alden global capital. This morning, we issued a press release announcing the LIBOR to a directors has unanimously reached.
Adjusted the unsolicited proposal received from Walden on November 22021 to acquire leave for $24 per share in cash after careful consideration with our financial and legal advisers. The board determined that all of those proposals grossly undervalued Glee is not in the best interest of the company and its sure.
Shareholders. If you haven't already I would encourage you to review our press release.
As I'm sure you'll understand that's always have to say on this matter and we won't be taking any questions about alden during our Q&A.
I appreciate your cooperation and with that let's dive in.
We will start the discussion this morning with an overview of reason investment thesis and then discuss our strategy and our fourth quarter and 2021 operating results.
Our strong foundation and a well defined long term strategy puts Lee on a clear path to value creation for our readers users advertisers and our shareholders.
Our execution of the three equal our digital growth strategy is already delivering increased subscription and advertising revenue strengthening our base with annual recurring revenue. It is the pathway to replacing legacy revenue generating long term growth of total operating revenue.
Achieving revenue growth combined with strong cash flow allows us to achieve our long term targeted leverage ratio of two five times within five years.
And our three pillar of digital growth strategy positions us to unlock the full value of <unk> platform and achieve multiple expansion that's aligned with our digital first peer companies, creating more value for the shareholders.
Okay.
At least quarters are stressed.
Basket Amendment, so local news and providing the 77 predominantly midsized communities that we serve with valuable intensely local original news and information.
Recent events over the last year and a half of proving that our mission is more important than ever.
These rooms have been providing the crucial actual coverage that our readers and users need to understand the impacts of the pandemic and related guidance and their communities.
Louis publications closely covered the local political races in issues that matter most in our markets during the 2020 election cycle.
Our focus outside of major Metropolitan markets provides us with key competitive advantages.
We operate these publications are platforms are the dominant source of local news and information on our well established brands and trusted content has allowed us to plant deep roots in our communities.
Our readers and users are engaged with our content and small and midsized businesses as well as a growing number of regional and national accounts rely on Lee as a results driven advertising partner.
Paired to news media players in major Metro markets, we faced significantly less competition for reader advertiser attention and our business is more resilient to the impact of macro economic trends.
Yeah.
As the media landscape continues to evolve and the audience and advertising dollars have shifted from print to digital Lee has been forward thinking nimble at rethinking repositioning and redevelopment of our business with a digital first mindset as evidenced by our digital subscription platforms and our video E Commerce.
And first party data solutions.
We have a strong digital presence in all of our markets and we're proud to have the fastest growing digital subscription platform in local media, our digital only subscriptions grew 65% in 2021 and eight consecutive quarter industry leading metric.
Yeah.
Growing our base of recurring sustainable revenue is important to our digital transformation and totaled 53% of our 2021 total operating revenue recurring revenues were $424 million in fiscal year 2021 and include our sticky revenue streams with audience revenue and digital revenue.
<unk> and revenue in town news, our SaaS content platform.
Annual recurring revenue grew 370 basis points in 2021, and we see significant opportunity to accelerate growth as we expand our total subscriber base and drive greater market share of local advertising dollars through amplified our full service digital marketing agency.
He has a proven track record as an excellent operator, we delivered $117 million and adjusted EBITDA in our 2021 fiscal year. Despite the continuing impacts of that been done that we have an established track record of outperforming our local media peers on revenue.
Those qualities of some of the reasons Warren Buffett, Berkshire Hathaway team and trusted Lee to manage their portfolio of local media operations, which we took over in 2018, we expanded that relationship with with the completion of our acquisition of BH media group's portfolio.
As part of that transaction BH made a 576 million investment into our capital structure through the comprehensive debt refinancing in March of last year.
This transformational transaction doubled our audience and significantly enhanced financial position.
Scott will discuss the transaction and our capital structure.
Later in our presentation.
Slide five is an overview of our three business areas to drive our revenue and our growth our consumer business offers readers and users subscriptions for our leading portfolio of 350 print and digital platforms. These include marquee local news products like the Buffalo news in the St. Louis.
It's just that as well as other highly engaging niche platforms. Our content is strong and our model is very sticky once you convert a reader or user towards subscriber either to our digital only our full access subscription that revenue becomes recurring although subscription revenue.
And in 2021 was greater than $58 million up slightly from fiscal year 2020 on a pro forma basis and supported by a strong 65% growth in digital only subscriptions.
It's worth noting that our total paid subscribers grew in the last nine months digital subscribers grew to more than 400000, and we are well on our way to achieving our long term goals.
Our second segment is advertising and marketing services is an exceptional partner able to provide complex marketing solutions to a vast addressable market of local businesses in our communities. We've also been successful in capturing more advertising dollars from large out of market regional and national account.
Yeah.
Advertisers are attracted to our platform for two reasons first we have a large engaged audience across 77 markets in the fourth quarter of fiscal year 2021 recaptured a monthly average of 50 million unique website visitors.
Second we have deep in house capabilities to activate sophisticated digital campaigns for advertisers through our full service digital marketing agency amplified, including custom video ecommerce and first party data campaigns.
Syed runs about 6000 active campaigns per month and this capability.
This capability presents a tremendous opportunity to drive revenue within and outside of our local markets.
The third revenue platform as town news digital services, Toni is the leading web hosting service provider and the number one content service providers and local media in the country, telling US clients include more than 2000, and other media organizations, including broadcast Pablo.
And radio and magazines or the past 10 years <unk> has grown at a 10% compound annual growth rate contributing and growing recurring revenue and maintaining an attractive 47% margin.
Despite a smaller contribution to our total revenue town news is the digital backbone of our local markets and is responsible for video and OTT expansion as well as in the development of products and technology that will help us reach our advertising and audience targets.
These three revenue centers drive our business our goal is to leverage our highly talented executives and cutting edge technology to grow our base of annual recurring revenue in order to achieve sustainable year over year revenue growth.
On slide six we address our approach to accelerating our digital transformation, our three pillar of digital growth strategy Leverages. These key strengths, our local market expertise industry, leading digital revenue growth and commitment to the highest quality news to build a larger recurring revenue base.
And generate long term topline growth this growth will be driven by increased digital subscriptions and digital advertising revenue.
Our three pillars are first to transform the presentation of local news and information will continue to provide best in class reader and user experiences with enhanced digital presentation that emphasize video and other multimedia formats and rich high value content to drive enhanced engagement outside.
Traffic and monetization.
Okay.
The second pillar, we aim to further accelerate our growth of digital only subscribers by converting more of our vast addressable market to subscribers, leveraging our cutting edge data and technology and expanding our offerings for paid in niche content on topics, where we have expertise and unique selling positions.
Yeah.
Finally, our third pillar is to diversify and expand offerings for advertisers. We have launched a portfolio of video advertising initiatives and E. Commerce sales strategies through our in house digital agency amplified, enabling advertisers to reach consumers in new ways leveraging lease.
Rouse data rich digital audience and with our large local and highly trained sales force over 900 sellers, we're well positioned to drive new revenue.
We expect to achieve three key goals within the next five years five years as we execute on our plan first enhanced engagement traffic and monetize monetization across our platform and grow total paid subscribers such that our subscriber base printed digital grows.
A little over the five year period, and digital only subscriptions reached 900000 within five years second January a 100 million in annual revenue from them by digital agency and three in three years and third achieve a long term leverage target of under two five times in five years.
Yes.
As I mentioned digitally subscriptions continue to grow at a rapid rate up 65% compared to prior year and up 19% consecutively over third quarter results. We now have over 420000 paid digital only subscribers, which is helping to drive audience performance.
We are well on our way of reaching 900000 digital only subscribers and generating more than 100 million in high margin annual recurring revenue based on the strong performance, we remain the fastest growing digital subscription platform.
In local media.
Our ancillary digital agencies saw very strong growth in 2021 with revenue of 43% over last year.
Over your growth was 71% in Q4, as we continue to gain momentum.
<unk> continues to diversify and expand its suite of products for local advertisers were providing robust custom video offered offerings leveraging our relationship with local advertisers to build or enhance their e-commerce capabilities and leveraging our first party data to better monetize our digital inventory.
Video continues to be a major growth driver with revenue more than double that of last year as we better monetize our sponsorship and branded content and now I'll turn it over to Tim to discuss our fourth quarter and full year financial performance.
Thank you, Kevin and good morning, everyone.
In fiscal 'twenty, one we made excellent progress in strengthening our balance sheet and reducing our costs, while continuing to provide readers with high quality local journalism.
We paid down 56 million in debt in 2021, reducing the principal balance to $483 million at year end.
We have paid down 94 million since the refinancing in March of 2020.
One of the targets we set earlier this year was to achieve a net leverage ratio of two and a half times in five years.
Through our strong adjusted EBITDA performance and debt reduction we closed the year with a net leverage ratio of three nine times adjusted EBITDA.
Our credit agreement with Berkshire Hathaway has a low fixed annual interest rate 25 year maturity no fixed mandatory principal payments and does not have financial performance covenants, meaning we do not have events of default tied to leverage or other maintenance ratios derived from financial performance of the company.
Most importantly, the debt is with a single lender, who knows us well and is committed to our success.
The credit agreement also has no prepayment penalty, which affords us the ability to evaluate credit market conditions for an opportunistic refinancing to further improve our debt structure.
The favorable debt structure is incredibly important for us as we execute on our three pillar of digital growth strategy.
How's the us the ability to make the necessary investments in talent and technology that fuels the recurring sustainable revenue growth.
Also our pension and post retirement benefit obligations at the end of September remains a net overfunded position. This is a significant improvement in our balance sheet since September of 2020, or the net underfunded position was 95 million.
And moving to our fourth quarter in 2020, one financial performance, we're very proud of our results.
We finished the year with year over year revenue growth for two straight quarters, and adjusted EBITDA growth for three straight quarters.
Our strong fourth quarter and full year results clearly demonstrate the significant progress we have made since we launched our three pillared digital growth strategy.
Total operating revenue was up 1% in the fourth quarter and totaled $194 million.
The revenue growth was attributed to our digital transformation.
Total digital revenue increased 37% in the fourth quarter totaling $67 million.
The increase was driven by the 71% revenue growth and amplified 28% growth in digital only subscription revenue and 8% growth at town news.
More than one third of our total operating revenue was digital revenue up from just 25% in the fourth quarter last year.
Digital revenue growth is exceeding our expectations in every category, including digital advertising and marketing services digital services and digital subscriptions.
Almost 55% of our fourth quarter total operating revenue was annual recurring revenue or subscription based as we have discussed. This revenue is sticky in nature and provides us with a very strong sustainable revenue base that we will continue to grow as we move into 2022.
Adjusted EBITDA totaled $25 8 million in the fourth quarter up for the third straight quarter.
For the full year, adjusted EBITDA totaled $116 $6 million.
Cash costs were up 2% in the fourth quarter due to one time favorable cost impacts in the prior year, resulting from the pandemic as well as investments made in the current year and talent and technology to fuel digital growth.
Excluding the onetime cost impacts in the prior year cash costs were down 1% in the fourth quarter.
Compensation was down 3% after adjusting for the temporary measures taken last year due to business transformation and acquisition integration initiatives.
Newsprint was down 1% due to reduction in our print units, partially offset by increases in pricing.
Other cash costs include print related costs like print production expenses delivery expenses as well as digital cost of goods sold.
Other cash costs were up one 5% as a result of the incremental digital and it investments.
Overall, we are really pleased with our fourth quarter and 2021 operating results and the progress we have made in our digital transformation.
With that I will turn it back to Kevin to wrap up thanks to our strong foundation, a well defined long term strategy with Lee enterprises on a clear path to value creation for our readers users advertisers and our shareholders. We're very pleased and excited about the next phase of our growth and are confident about our future we believe.
We have the right team and the right strategies aimed at growing revenue year over year. We believe we are better positioned than ever to drive long term shareholder value creation. One last thing before we open the line for questions. We expect to file our 10-K with the SEC tomorrow, and as always and with additional information on our results and expectations.
This concludes our remarks, the team or making online for any additional questions. You may have operator, please open the line for questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please pick up your handset and make you make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question and we'll pause briefly to assemble.
Q.
And we take our first question from Michael Pinsky. Please go ahead Sir.
Thank you.
First of all congratulations on your strong quarter couple of questions. Obviously your plans are to in bags.
Or enhance your growth in your digital media businesses that I was wondering if you can give us the number of Ftes you had the quarter and if you can give us some thoughts on the expectations of our you know the.
Your staffing growth as you kind of invest in these artificial businesses.
Yeah. Thanks for your comments, Mike appreciate that your FTE counts are are are down in the quarter, mostly because of the the transformation initiatives that that we have made in managing the legacy business are partially offsetting that are some of the investments that we've made in digital.
You know when the digital sales talent as well as on the consumer front as well.
Gotcha, and then obviously changes in your paywall appears to be a.
Significantly enhancing your digital only subscription growth can you talk a little bit about the prospects of further opportunities or adjusting your paywalls.
For subscriptions and things like that.
Yeah. So it was one of the things that we did this year was we reduced our paywall throughout 2021 and as you mentioned that did have a big impact on our digital only subscriber growth you know we will continue to leverage technology to help you.
Things like a dynamic meter that.
It can help leverage our growth even more and because obviously, there's a lot of other tactics that we have deployed to help drive our digital subscription growth.
And then in terms of FERC kind of gone through the.
The fiscal first quarter.
You know so far is there any box in terms of like like as we look back with it.
Fiscal fourth quarter digital revenue can you kind of give us a thought I know you've talked a little bit about this but what was the total.
Revenue for our control all in L. A in the quarter.
Our fourth quarter, our digital only revenue was $16 $5 million.
And Ah you know would be moving into it that's been a strong category for us and we expect that to be.
We expect that to be a continued strong performer in the future as well.
Gotcha, and then in terms of your thoughts there.
The leverage two five times.
Is your target that does not include asset sales or does it.
That would include asset sales, so any asset sale and it's a good point you mean asset sale that we have and we have you know roughly $30 million of assets for sale right. Now are any asset proceeds from asset sales, we will use to reduce debt and that would help achieve our target leverage ratio of two and a half times.
But that $30 million is what you're already factored into the two and a half million are there are there other additional asset sales and embedded in that number.
Yeah 30 million is what we have embedded in there. We do think that there are other opportunities over and above that.
That as we continue to move through our digital transformation, we will evaluate opportunities for further real estate monetization.
Gotcha, Great. That's all I have thank you.
Great. Thanks, Mike.
Thank you at this time.
We haven't.
We have no further questions, we turn back to management for closing remarks.
We do have a couple of questions over the web that we will we will answer.
Yeah. So our first question from the webcast is can you walk through the conversion of EBITDA to debt reduction.
Yeah. That's a good question, so we had $117 million and adjusted EBITDA in 2021, and just walking that down to kind of a free cash flow metric a $45 million of interest expense around $8 million in capital expenditures and around $8 million in our income.
Taxes that were paid out and that gets to about what our debt reduction was for the fiscal year. So it gives you a little bit of a bridge from our walk from our adjusted EBITDA down to our debt reduction.
Our second question from the webcast is how much do you anticipate we deal with advertising contributing to revenue in 2022.
We're very excited about our deal with them that advertising as you know when we made that announcement, a least a digital backbone for all of their digital campaigns they saw across the country.
We believe that business will only continue to grow really.
In 'twenty two.
Yeah.
And we have no more questions from our web participants I'll turn it back to Kevin for closing remarks. Thank.
Thank you all for joining the call today, we really appreciate your interest in Lee and the time to hear our story this morning.
Again.
Thank you ladies and gentlemen at this time, we've reached the end of our question and answer session. This concludes our call you may disconnect.
Okay.
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