Q2 2022 Lee Enterprises Inc Earnings Call
Okay.
[music].
Welcome to the Lee Enterprises, 2022 second quarter webcast and conference call. This call is being recorded and will be available for replay beginning later this morning at investors.
<unk> 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.
During the call as time permits.
Otherwise you will receive a response later.
A link to the live webcast can be found at investors.
Got that.
Now I will turn the call over to your host Josh.
Resident finance.
Good morning, Thank you for joining us.
This morning's call are Kevin Mowbray, President and Chief Executive Officer, and Tim Millage, Vice President and Chief Financial Officer and Treasurer.
Earlier today, we issued a news release with preliminary results for our second fiscal quarter of 2022. It is available at Lee net as well as at major financial websites.
We also refer to our earnings presentation bound at investors thought leader.
<unk> supplemental information.
As a reminder, this morning's discussion will include forward looking statements based on our current expectations. These statements are subject to certain risks trends.
And uncertainties that could cause actual results to differ materially.
Factors are described in this mornings news release and also in our SEC filings.
On the call, we refer to certain non-GAAP financial measures, including adjusted EBITDA and cash costs, 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 We'll open the conversation on slide three of the earnings presentation for those following along.
Good morning, everyone. I'm pleased you could join US we're incredibly proud of our second quarter results as our digital investments are paying off and driving recurring sustainable digital revenue growth.
Reported 59% growth in digital subscribers have been 8% growth in anti digital revenue and 33% growth in total digital revenue, putting US ahead of our plans to achieve our fiscal 'twenty two digital revenue targets. It gives us great confidence we have the right strategy the right team and.
We are executing with speed, we believe that Lee has a solid future and our potential to drive significant value for all of our stakeholders. Our three pillars digital growth strategy is the foundation of our investment thesis and the execution of this strategy is at the core of creating value for our shareholders.
Sustainable long term revenue growth from our three pillar initiative will transform the mix of our revenue base driving margin expansion and stronger free cash flow, which will fuel our continued debt reduction and balance sheet enhancements.
Enhanced operating cash flow and profits a strengthened balance sheet and multiple expansion fueled by increasing recurring high margin digital revenue creates a strong path to significant long term value creation for our shareholders.
Our strategy Leverages leaves key strengths, our local market expertise, our industry, leading digital revenue growth and our commitment to the highest quality local news to build a larger recurring revenue base and generate top top line.
Blind.
Digital revenue growth. This growth is expected to achieve $435 million of digital revenue in 2026, and it's being driven by increased digital subscriptions and increase digital advertising revenue.
Our three pillars digital growth strategy is guiding our transformation to a vibrant digitally centric company, we're focused on expanding digital audiences growing our digital subscription base and revenue and diversifying expanding our offerings for local and regional advertisers.
The other one is an expanding digital audiences with investments in user experience multimedia presentation formats enrich high value content, we are driving higher engagement.
<unk> traffic and monetization leveraging our trusted brands and strong market positions in house capabilities, we continue to make value added investments to drive additional growth.
Pillar two is the expansion of our base of digital only.
Revenue by converting more of our vast cyclical market to subscribers and it's paying off because we are the fastest growing digital subscription platform in local media.
Subscriber growth continued at a rapid pace in the second quarter up 59% over the prior year.
Now has 40 492000 digital only subscribers nearly achieving our fiscal year angle six months ahead of schedule at the same time, we are driving an increase in average rates for digital only subscriptions, which were up 22% in the second quarter compared to the first quarter.
We're leveraging cutting edge data and technology and expanding offerings for paid niche content on topics, where we have expertise and unique selling positions us extra shifts are two good. Examples. These tactics are driving an increase in total subscribers and positions us to achieve.
Our goal of reaching 900000 digital only subscribers by the end of 2026.
Reaching 900000 digital only subscribers and increasing our average digital subscription rates are important goals in these digital transformation as they increase the base of our subscription based digital revenue.
Our third pillar focuses on diversifying and expanding our offerings for advertisers and we're doing that in two ways.
<unk> digital our full service Omnichannel digital marketing agency that provides local and regional advertisers with sophisticated custom solutions, including consulting media buying and analytics.
By maximizing the revenue opportunity on these digital platforms are owned and operated properties attract massive audiences, we're offering more video inventory and branded content opportunities to drive more digital ad revenue.
Both of these initiatives are supported by <unk> vision platform vision is the proprietary sales enablement and execution software tool powered by amplified digital.
Industry wide omnichannel advertising for local advertisers is expected to continue its double digit growth in the next two years. The vision platform allows us to capture the significant growth in this category and the vision platform. This transform local advertising for Lee.
Our three pillar digital growth strategies aimed at advancing Lee is a vibrant and digitally centric company <unk>.
The strategy and execution are expected to achieve $435 million of recurring sustainable digital revenue by 2026 and with our second quarter results were nearly half way there.
We launched our three pillar strategy in early 2021 as you can see on slide five we've made tremendous progress throughout fiscal year 2021, including industry, leading growth in digital subscribers and digital agency revenue for fiscal year two.
21 total digital revenue grew to $189 million as you saw in the results. This morning, and as Tim will speak to in more detail is accelerating this momentum in fiscal 2022.
We're very pleased with our second quarter results as they demonstrate the investments in our three pillar digital growth strategy are paying off with tremendous digital revenue growth total.
Total digital revenue increased 33% in the second quarter to $58 million.
Revenue comprised of digital advertising and marketing services revenue, including amplified digitally subscription revenue and digital services revenue is one of the several metrics we provide to give you better transparency and clarity on our digital transformation progress.
The growth in total digital revenue was driven by the rapid growth of amplified digital and growth in digital only subscription revenue.
Digitally subscription revenue increased 45% and totaled $10 million in the second quarter. We now have over 492000 paid digital only subscribers up 59% in the quarter, which represents more than half of our long long term target of reaching 900000 digital only subscribers.
By 2026.
And as I mentioned earlier the remains the fastest growing digital subscription platform and local media a title at retail for the last nine quarters digital only subscription revenue over the last 12 months totaled $32 9 million nearly at our yearend target six months early.
Digital advertising and marketing services revenue increased 36% in the quarter to $43 million.
<unk> digital our full service digital marketing solutions agencies fueled that growth with revenue of $19 million in the quarter up 108%.
Anti digital revenue totaled $57 million over the last 12 months on pace to achieve our fiscal year end target of $65 million.
Digital advertising and marketing services revenue represents nearly half of our total marketing and advertising revenue at 49, and a half a percent our second quarter results have us on track to achieve all of our fiscal year 2022 digital revenue targets.
These early returns on our digital investments give us great confidence we have the right strategy the right team and we're executing with speed and now I will turn it over to Tim to discuss our second quarter financial performance in more detail.
Thank you Kevin.
Total operating revenue was $190 million in the second quarter as.
As Kevin mentioned digital revenue growth continued at an incredible pace with total digital revenue up 33% driven by 45% growth in digital subscription revenue and 108% growth and amplify our digital revenue.
Total print revenue was $132 million in the second quarter, an 11% decline compared to the same quarter a year ago due to continued secular declines and supply chain constraints.
Operating expenses totaled $195 million in cash costs were up 3%.
Increases in cash costs were attributed to strategic investments in digital talent and technology tied to our digital growth strategy increased digital cost of goods sold and a general overall, increasing prices due to the inflationary environment.
So we cycled onetime cost benefits received in the prior year principally medical.
We continued our business transformation efforts at reducing legacy print cost, which we will go into more detail on the next page.
Lastly, we had a net loss of $6 $7 million in the quarter with adjusted EBITDA of $16 9 million.
As Kevin mentioned earlier, our second quarter growth in digital revenue has us on pace to achieve our full year 2022 outlook for each of the digital revenue and digital only subscriber metrics, we have outlined with.
With additional cost actions taken early in the third quarter, we expect to also achieve our FY 'twenty two adjusted EBIT target.
We have a long history of responsibly, managing our cost structure and we aim to manage our costs directly with the associated revenue streams.
On the print side, we continue to reduce our cost structure to drive margin attributed to our legacy revenue stream.
With that and we recently completed a 14 week deep dive into all aspects of the print organization optimizing our cost structure and distribution manufacturing national content marketing finance and.
And other corporate services.
This process evaluated our external spending as well as human capital and we've done to better align our cost structure with our long term strategy.
As a result of the actions identified we expect a $45 million reduction in cash costs on an annualized basis.
Executing the various actions began early in the third quarter, and we expect to achieve more than $20 million reduction to our cash costs in the last two quarters of fiscal year 'twenty two.
Yeah.
While we will remain focused on maximizing our efficiencies and reducing the cost structure of our print business and growing profits. Our main priority is to drive long term sustainable digital revenue growth.
To that end, we continue to invest in talent and technology in areas of our business tied to our digital future and our commitment to high quality local news remains steadfast.
The targeted investments that drive our digital future will impact cash costs in fiscal 'twenty two.
We expect the investments youre, making a new talent and technology and the increased digital cost of goods sold increased total cash cost by approximately $36 million year over year.
With the investments, we're making in our digital transformation. The early returns we're seeing on these investments combined with the cost actions taken to optimize our cost structure, we expect to achieve our full year adjusted EBITDA guidance of $95 million to $98 million.
We continue to strengthen our balance sheet.
Total amount of debt at the end of the quarter was $463 million down $20 million year to date and $113 million since our refinancing in March of 'twenty two.
As a reminder, our credit agreement with Berkshire Hathaway, our sole lender has favorable terms that are incredibly important for us as we execute our strategy.
How's us the ability to make the necessary investments in talent and technology to fuel our recurring sustainable revenue growth.
We've made no pension contributions in the second quarter, and we do not expect any material contributions in fiscal year 'twenty two.
Pension plans are fully funded in the aggregate.
Finally, we continue to identify opportunities to monetize our real estate, which facilitate the accelerated debt repayment to.
We generated $25 million of proceeds from asset sales over the last two years and are targeting an additional $20 million to $30 million of asset sales in fiscal 'twenty, two with $14 million closed the first half of the year.
As a reminder, our goal to achieve our long term leverage target of under two five times.
End of 2006.
We shared on our first quarter call.
As we shared in the first quarter call, we are providing metrics to give better transparency and clarity on our digital transformation, which can be found on slide 10.
This table summarizes our fiscal 'twenty two outlook and beyond.
As you can see we expect to make significant continued progress on our digital transformation over the next several years.
We had already established a strong track record for accelerating digital subscription growth and.
And with the planned incremental investments we are on track to reach our goal of 900000 page digital digital only subscribers by 2026.
Continued execution of that strategy is expected to generate recurring sustainable digital subscription revenue exceeding $100 million.
Amplified digital dramatic growth trajectories fueling their five year digital advertising outlook R.
Our vision platform uniquely positions us to capitalize on double digit growth in Omnichannel and digital advertising.
With advanced data driven AD technology specialized cabinet category expertise.
Scalable cut in video content and powerful first party data access amplified as a strong partner for local and regional businesses looking to drive growth.
We're continuing to expand amplified capability, including building out our new E Commerce solutions to offer our AD partners in fiscal 'twenty two of our second quarter of 2002, and amplified revenue grew 108% year over year.
We continue to see significant growth runway as we execute our strategy.
Projecting $65 million of amplified revenue this fiscal year.
$100 million in 2024.
We expect to reach $310 million of annual digital advertising revenue by 2026 with about 200 million from amplifiers all.
All of that results in total digital revenue of approximately $435 million by 2026.
And with that I will turn it back to Kevin to wrap up.
Thanks, Tim under the guidance and oversight of our board of directors and our leadership team is continued execution on our growth strategy sets. The stage for significant long term value creation, we're very pleased with our second quarter results and the progress we're making on our three pillars digital growth strategy targets the <unk>.
Wrong presence as the trusted source for news and information in the communities, we serve combined with cutting edge digital capabilities.
The foundation of our digital transformation.
The success of our transformation as reflected in the continued rapid growth of digital subscriptions and digital only audience revenue as well as digital advertising and marketing services to wrap up I'd like to thank the entire lead team for their effort in driving our transformation, we have the right for the right team and the right strategy and I believe.
We are better positioned than ever to create long term value for our readers users advertisers and shareholders. This concludes our remarks. The team will remain on the line for any questions. You may have operator, please open the line for questions.
Thank you at this time.
A question and answer session.
If you are accessing this call by webcast you may submit typed questions on your screen.
Questions will be answered during the call as time permits one moment, please while we poll.
Fair question.
Do you have any color.
On the line your line is open.
Hi.
Yes. This is Michael Kaplinsky I just have a couple of quick questions.
Congratulations first of all your digital growth. It seems like now digital is what 31% of total revenues up from 27% in the first quarter.
I have a couple of questions on digital.
Your digital businesses did beat my expectations that I was wondering if you can provide some color on the successes you had in the quarter, particularly on your digital only subscription revenue where their changes in paywall.
And going on there and also it seems like you're decreasing discount promotions, which is driving rate I was just wondering if you can comment on that.
Yes, I'll jump in and Tim you're welcome to jump in Anthony.
Obviously need to dynamic meter and then adjusted EMEA overtime at the same time, we really use data and technology to make sure. We're doing the right targeting to drive digital subscribers and as noted in our remarks are digitally subscription rates were up in the.
The mid 20%. So it's really all of those things that are attributed to that growth.
Gotcha and amplified.
Obviously growing really well can you give us some color on the types of businesses that you're having success with what why are these coming customers coming to you are they new to digital marketing or are you winning customers from other digital agencies.
But winning customers from other digital agency and we're really upped our game on calling on and making the investments that we noted in our presentation to higher digital talent.
<unk> into the company that can drive.
Higher customer account over prior year.
Got you and then on the print advertising was a little weaker than I expected.
What are you hearing from customers at this point I know you mentioned the prospect of.
Supply chain issues and just typical secular challenges in that area, but I was wondering if are you hearing any concerns about in place in a recession.
They are affecting the print side, a little bit more so than what I was looking for.
Well I would say, it's a combination of three things.
Certain late inflation has a bit of an impact on us we hear more typically though is supply chain initiatives and hiring talent to work at these various businesses.
Gotcha, and then you mentioned about the cost cutting and savings of $45 million on an annualized basis with $20 million in the second half of this year.
How should we think about those savings because as you said you're planning on investing as well. So can you kind of give us some thoughts on the aggregate cost savings that you expect in the upcoming quarters.
Yes, so as we mentioned.
Have done cost actions of approximately $45 million on an annualized basis.
And we expect the FY 'twenty two impact to be around $20 million. So that gives you some frame of reference as to the impact for this fiscal year and certainly you were committed to making digital investments.
$15 million of digital investments as well as the increase in cost of goods sold from the the growth rate on the amplified. So that gives you some semblance of a walk in terms of where we expect our cost structure to date.
Great and Tim.
Looking at the expenses the biggest variance in my estimate.
The other category can you talk about some of the cost pressures that you have in that line item.
Yeah, I'd say that.
The biggest piece there is going to be the outperformance on the amplified revenue, which does have some cost of goods sold tied to it.
That's also the category, where we're going to see the biggest impact from inflationary environment impacting our distribution costs. For example are going to be running through there.
Provided the main driver.
Gotcha, Alright, that's all I have congratulations.
Thanks.
I will move to your questions from the web.
Alright.
Our first question from the web is what is driving the decreases to unique visitors, yes, I'll jump in and it's really one time visitors that has declined quarter over quarter that doesn't really get us much pause because as we've noted.
We've tightened our meter and really dragging people download funnel to purchase and as I mentioned in my remarks, we're seeing the quarter over quarter.
Increase in our average digital subscription rates. So we still have a huge vast addressable market and we feel we're on the right track to continue to lead the industry in driving digital only subscribers.
Going forward.
Our second question is can you provide more information on what is included in restructuring costs.
Yes, so there's a number of things that run through our restructuring cost from severance.
Costs associated with exiting our facility.
Cost of legal defense of a couple of lawsuits that we add as well as advisor costs to assist our board in evaluating the unsolicited office opens an envelope of thing is going to do that back in line.
Okay.
Question is how much debt reduction do you expect to achieve this fiscal year.
Thank you.
With our committed digital investments and an increase in expected income tax payments in fiscal 'twenty two.
We anticipated a small reduction in free cash flow in FY 'twenty, two and as a result of temporary slowdown in debt reduction with the growth of our digital revenue stream combined with the actions that we've taken to reduce our cost structure and we do expect to achieve our full year adjusted EBITDA guidance and keeping us on track with our deleveraging plan.
To achieve our target leverage ratio of two five times by 2026.
We have no more questions from the web.
Well. Thank you for your continued commitment and interest in Lee and I. Appreciate you joining our call today.
Thank you ladies and gentlemen at this time, we have reached the end of our question and answer session. This concludes our call.