Q1 2024 Lee Enterprises Inc Earnings Call

Okay.

Welcome to the Lee Enterprises, 2024, first quarter webcast and conference call.

The call is being recorded and will be available for replay Adam Gestured Gottlieb Dot net.

The close of the plant planters.

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.

Link to the live webcast can be found at investors <unk> Dot net now I will turn the call over to your host Josh Winehouse, Vice President Finance. Please go ahead.

Good morning, and thank you for joining us.

For myself speaking on 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 first fiscal quarter of 2020.

It is available at <unk> dot net as well as major financial websites.

Please also refer to our earnings presentation found in the investors.

Dot net that included 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 such factors are described in this morning's news release and also in our SEC filings.

During the call we refer to certain non-GAAP financial measures reconciliations to the relevant GAAP measures are included in tables accompanying the release.

I'll now open the discussion is our president and Chief Executive Officer, Kevin Mowbray.

Good morning, everyone and thank you for joining US we will begin our time. This morning, demonstrating the success of our three pillar, our digital growth strategy and growing digital subscribers transforming the mix of our revenue and growing adjusted EBITDA will also discuss our first quarter operating results highlighting our IND.

History, leading digital performance will conclude by reiterating our confidence.

Our long term goal.

This fiscal year 2024 is off to a good start as we executed well on our three pillars digital growth strategy, we're concentrated on expanding our digital audiences growing our digital subscriber base and revenue and diversifying expanding our offerings for regional and local advertisers.

Our long term results of our strategy are expected to generate more than $450 million of recurring sustainable digital revenue within five years.

That level of performance legal be sustainable solely your cash flow generation from our digital products that is an incredibly important point.

<unk> of our three pillar, our digital growth strategy I'm extremely encouraged by the progress of our strategy, thus far and the pace by which we're transforming into.

Into a vibrant digitally centric company.

As a proof point of the progress on our digital transformation Lee continues to be the fastest growing digital subscription platform and local media by a significant margin digital subscriber growth at Lee has outpaced our industry peers for the last 16 quarters, we now.

We have more than 735 digital subscribers, which is up 30% compared to the prior year, what's even more impressive than our eyes that we increased average rates for our digital subscriptions by more than 20% or the same period said differently, we're growing digital subscribers at the fastest clip in the.

Free and we're doing that while we're executing increases in pricing.

Demonstrates our ability in a meaningful way to drive wanted this resiliency and value of our intensely local content, we provide in our markets. This industry, leading performance performance gives us even more confidence in achieving our long term goals, which we covered in detail in the last quarter.

MFA digital achieved 11% revenue growth over the last 12 months. Despite the soft advertising environment revenue totaled $91 million and has grown the staggering 50% annually over the last three years far outpacing others within the industry.

Fueled by these industry, leading metrics total digital revenue has grown to $279 million over the last 12 months, which is driving the rapid change in our revenue composition as evidenced in the next slide.

The significant growth of our digital revenue from our three pillars digital growth strategy has transformed the composition of <unk> overall revenue over the last few years. When we first launched our three fill our digital growth strategy digital revenue represented only 21% of our total operating revenue and today digital revenue rec.

Presents 46% of our revenue importantly, we expect to reach the inflection point in the second half of fiscal 2024 or more than 50% of our revenue will come from digital sources.

As an important milestone in our digital transformation.

As a result of the majority of our revenue coming from sustainable growing sources, our industry, leading growth in digital subscription revenue and digital marketing solutions will continue to drive lead to this point and now I'll hand, it over to tend to discuss our first quarter operating results.

Thank you, Kevin and good morning, everyone.

Total operating revenue was $156 million in the first quarter.

Digital revenue growth continued at a strong pace with total digital revenue up 11% driven by 60% growth in digital subscription revenue and continued growth at amplified digital.

Print revenue trends improved modestly from the fourth quarter trends, but remained a headwind to our total operating revenues.

Cash costs were down 18% in the first quarter driven by the actions we took throughout fiscal year 2023.

Due to the strong digital revenue performance and effective cost management adjusted EBITDA grew 6% in the quarter and totaled $19 million.

A couple of major factors that give us confidence in our digital transformation are both the magnitude of the digital revenue opportunity as well as the profitability of these products. We have shared long term expectations with respect to the revenue opportunity from our digital products. However, equally important to.

Our confidence is the prop.

The ability of these revenue streams as well.

Our direct digital margin in the first quarter remained really strong at 72%.

This resulted in $51 million and digital direct margin an increase over the prior year.

As we aim to become sustainable and vibrant from a revenue and cash flow solely from our digital business. We are focused on maintaining the high margins from our digital revenue products.

Operator: Welcome to the Lee Enterprises 2024 first quarter webcast and conference call. The call is being recorded and will be available for replay at investor.lee.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.

Okay.

<unk> has a successful track record of effective cost management.

In fiscal year 2024, our business transformation efforts will yield between $45 million and $65 million of cost savings.

Most of those actions were taken last year.

While we remain focused on operational excellence and reducing the cost structure of our legacy print business and growing profit. Our main priority is to drive long term sustainable digital revenue growth.

Operator: A link to the live webcast can be found at investors.lee.net. Now, I will turn the call over to your host, Josh Weinholz, Vice President, Finance. Please go ahead.

Therefore, we continue to invest in talent and technology in areas of our business.

Two our digital future and our commitment to high quality local news remains steadfast.

Josh Weinholz: Good morning, thank you for joining us. In addition to myself, speaking on this morning's call are Kevin Mowbray, President and Chief Executive Officer, and Tim Millage, Vice President, Chief Financial Officer, and Treasurer. Earlier today, we issued a news release with preliminary results for our first fiscal quarter of 2024. It is available at www.lee.net, as well as major financial websites.

The targeted investments will drive our digital future and will impact our cash costs in fiscal year 2024.

We expect the investments, we're making in new talent and technology and the increased digital cost of goods sold to increase our total cash cost by approximately $20 million this year.

These costs will have a short term impact on our margin profile, but are expected to drive digital transformation.

Josh Weinholz: Please also refer to our earnings presentation found at investors.lee.net, which includes 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.

We continue to strengthen our balance sheet, the principal amount of debt decreased $2 million in the first quarter and totaled $454 million a reduction of 122 million since March of 2020.

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 at.

Josh Weinholz: Such factors are described in this morning's news release and also in our SEC file. During the call, we referred to a certain non-GAAP financial... Reconciliation to the relevant gap measures is included in tables accompanying the, And now to open the discussion is our President and Chief Executive Officer, Kevin Mowbray. Good morning, everyone, and thank you for joining us.

It allows us the ability to make the necessary investment in talent and technology that fuel our recurring sustainable revenue growth.

The agreement was executed in 2020 and has a fixed interest rate and a 25 year maturity.

Kevin D. Mowbray: We'll begin our time this morning demonstrating the success of our three-pillar digital growth strategy in growing digital subscribers, transforming the mix of our revenue, and growing adjusted EBITDA. We'll also discuss our first quarter operating results, highlighting our industry-leading digital performance. And we'll conclude by reiterating our confidence in our long-term goals.

These favorable terms have been incredibly helpful. In a rising rate environment, we have seen over the last couple of years.

In the quarter, we made no pension contribution that our pensions are overfunded in the aggregate.

Finally, we continue to identify opportunities opportunities to monetize our noncore assets, which facilitate accelerated debt repayment.

We closed $2 million of asset sales in the first quarter and we have identified an additional $25 million of non core assets to monetize which are in various phases of the sale process.

Kevin D. Mowbray: Lead Cisco Year 2024 is off to a good start as we execute well on our three-pillar digital growth strategy. We're concentrated on expanding our digital audiences, growing our digital subscriber base and revenue, and diversifying and expanding our offerings for regional and local advertising. The long-term results of our strategy are expected to generate more than $450 million of recurring sustainable digital revenue within five years. With that level of performance, we will be sustainable solely through cash flow generation from our digital products.

As a reminder, with solid execution of our three pillar digital growth strategy as well as our commitment to improving our balance sheet. Our goal is to achieve our long term leverage target of under two five times.

Last before I hand, it back to Kevin to wrap up I would like to revisit our outlook for 2024, which remains unchanged from what we shared in December call.

As I mentioned earlier, our cost actions made last fiscal year.

Kevin D. Mowbray: That is an incredibly important point, as is the objective of our three-pillar digital growth strategy. I'm extremely encouraged by the progress of our strategy thus far and the pace by which we're transforming Lee into a vibrant, digitally-centered company. As a proof point of the progress on our digital transformation, Leigh continues to be the fastest growing digital subscription platform in local media by a significant margin. Digital subscriber growth at Leigh has outpaced industry peers for the last 16 quarters. We now have more than 735 digital subscribers, which is up 30% compared to the prior year. What's even more impressive in our eyes is that we increased average rates for our digital subscriptions by more than 20% over the same period. Put differently, we're growing digital subscribers at the fastest clip in the industry, and we do it while we're executing increases in prices. This demonstrates our ability in a meaningful way to drive wantedness, resiliency, and value of our intensely local content we provide in our market.

<unk> are expected to provide a significant benefit this fiscal year.

With these cost actions and continued progress on our digital transformation, we expect adjusted EBITDA to be within our targeted range of $83 million to $90 million.

So with that I will flip it back to Kevin.

Thanks, Tim our three pillar digital growth strategy is guiding our digital transformation and is the foundation of our investment thesis as I mentioned previously our strategy will guide lead to become a sustainable environment solely from the revenue and cash flow from our digital products within five years doing so will allow us to incur.

Our shareholder value through continued debt reduction and multiple expansion our first quarter results demonstrate strong digital revenue growth with consistent execution of our three pillar digital growth strategy. The tremendous progress on our digital transformation continues to reinforce we have the right strategy and the right team in place.

To achieve our long term goals to wrap up I'd like to thank the entire <unk> team for their efforts in driving our transformation as we continue our journey and achieve our long term goals, we expect to drive significant value for our shareholders through converting debt to equity is the repositioning Lee is a digital first company.

Kevin D. Mowbray: This industry-leading performance gives us even more confidence in achieving our long-term goals, which we covered in detail in the last quarter. MPHI Digital achieved 11% revenue growth over the last 12 months despite the soft advertising environment. Revenue totaled $91 million and has grown by a staggering 50% annually over the last three years, far outpacing others within the industry. Fueled by these industry-leading metrics, total digital revenue has grown to $279 million over the last 12 months, which is driving the rapid change in our revenue composition as evidenced in the next slide. The significant growth of our digital revenue from our three-pillar digital growth strategy has transformed the composition of LEED's overall revenue over the last few years. When we first launched our three-pillar digital growth strategy, digital revenue represented only 21% of our total operating revenue, and today, digital revenue represents 46% of our revenue. Importantly, we expect to reach an inflection point in the second half of fiscal 2024, where more than 50% of our revenue will come from digital sources.

The guidance and oversight of our board of directors. Our leadership team's continued execution of our growth strategy sets. The stage for significant long term value creation, we have the right toward the right team and the right strategy to create long term value for our readers users advertisers and shareholders. This concludes our remarks the chemo.

On the line for any questions you may have operator, please open the line for questions.

Thank you at this time, we will conduct a question and answer session.

Reminder, if youre accessing this call by webcast you may submit typed.

Questions on your screen those questions will be answered during the call as time has permitted one moment. Please poll for questions.

Our first question is going to come from the line of Daniel <unk> with Sidoti <unk> Company. Please go ahead.

Okay and Tim good congrats on the results and also your progress in the digital space.

A couple questions excuse me and I'll start from the print perspective.

Tim Millage: This is an important milestone in our digital transformation. As a result, the majority of our revenue is coming from sustainable growing sources. Our industry-leading growth in digital subscription revenue and digital marketing solutions will continue to drive leads to business. And now I'll hand it over to Tim to discuss our first quarter performance. Thank you, Kevin, and good morning, everyone.

Can you just update us and give us a little bit of a trajectory of the print decline youre expecting both from a subscriber and advertising perspective, both for fiscal 2024, and then what Youre seeing thus far in your fiscal second quarter and then on the digital side I know, Tim you mentioned the.

Investments that you're making and how margins may be impacted there, but are you continuing to see margin expansion within your amplified platform.

Tim Millage: Total operating revenue was $156 million in the first quarter. Digital revenue growth continued at a strong pace, with total digital revenue of 11%, driven by 60% growth in digital subscription revenue and continued growth at Amplified Digital. Print revenue trends improved modestly from the fourth quarter trends, but remained a headwind to our total operating revenue. Cash costs were down 18% in the first quarter, driven by the actions we took throughout fiscal year 2023.

And then what headwinds might you be seeing within digital advertising revenue for amplify it as well.

Yes, great questions, Danielle I'll kick it off campus.

Jumping on to address your first question on the print.

The trajectory is certainly an important aspect of our digital transformation is to develop a pathway of not being reliant on our print revenue streams to drive.

Cash flow improve our balance sheet and realize our investment thesis and the reason for that is obviously the print business is challenged and it's hard to predict it's harder to predict than what we see in other areas of our business.

Tim Millage: Due to the strong digital revenue performance and effective cost management, Adjusted EBITDA grew 6% in the quarter and totaled $19 million. A couple of major factors that give us confidence in our digital transformation are both the magnitude of the digital revenue opportunity as well as the profitability of these products. We have shared long-term expectations with respect to the revenue opportunity from our digital products. However, equally important to our confidence is the profitability of these revenue streams as well. Our direct digital margin in the first quarter remained really strong at 72%. This resulted in $51 million in digital direct margins, an increase over the prior year.

We did see modest improvement in our total print revenue a couple percentage points in the first quarter. The advertising environment. In particular is softer than we would like I do expect those trends to improve as we move to the back half of the year.

As you know we have a number of things aimed at improving the trend.

And as we get into the back half of 'twenty 'twenty four we will begin to be cycling quarters that were more challenged from the prior year.

And circling back to our strategy, we do aim to cycle the print volatility through rapid growth and scaling of our digital business. So as Kevin mentioned on the call. We do aim to reach your expect to reach this inflection point in the back half of 2024, where our digital revenue streams will be.

Tim Millage: As we aim to become sustainable and vibrant from the revenue and cash flow solely from our digital business, we are focused on maintaining the high margins from our digital revenue product. We have a successful track record of effective cost management. In fiscal year 2024, our business transformation efforts will yield between $45 million and $65 million of cost savings. Most of those actions were taken last year.

Larger than our print revenue streams, and so that will be an important milestone.

All right.

Switching to the digital margins.

And.

One of the things we talked about on the call was our solid.

Solid margins from the digital business.

What's great is that our digital businesses are already highly profitable.

Tim Millage: While we remain focused on operational excellence and reducing the cost structure of our legacy print business and growing profits, our main priority is to drive long-term, sustainable digital revenue growth. Therefore, 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 will drive our digital future and will impact our cash costs in fiscal year 2024. We expect the investments we are making in new talent and technology and the increased digital cost of goods sold to increase our total cash costs by approximately $20 million this year.

And this <unk>.

72% and direct digital margins.

And.

Just through scaling our digital business.

We'll see that.

<unk> positioned to.

The sustainable solely from the margin and cash flow from our digital products said differently, we don't need to see that margin improve we need to maintain that margin going forward.

That's very helpful. Thank you Tim and then just one more if I may.

Can you just talk a little bit about what sectors may be driving the digital advertising revenue growth and then obviously with the upcoming election cycle could you just give us an idea of the impact that that cycle will have on your digital advertising business.

Tim Millage: These costs will have a short-term impact on our margin profile but are expected to drive LEED's digital transformation. We continue to strengthen our balance sheet. Principal amount of debt decreased $2 million in the first quarter and totaled $454 million, a reduction of $122 million since March of 2020.

Yes.

Yes, I can kick off on digital advertising a number of categories.

That are driving growth.

In the first quarters specific legal medical higher education are a few categories that are helping drive growth.

Tim Millage: 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. It allows us the ability to make the necessary investment in talent and technology that fuel our recurring sustainable revenue growth. The agreement was executed in 2020 and has a fixed interest rate and a 25-year maturity. These favorable terms have been incredibly helpful in the rising great environment we have seen over the last couple years. In the quarter, we made no pension contributions as our pensions are overfunded in the aggregate.

As far as political.

Political advertising, we have a number of tactics that were aimed at growing our share of political advertising spend which historically has been low we do anticipate.

Political specifically as we get into the back half.

And certainly we operate in some key states, including Montana, where there'll be a lot of money spent in other areas like North Carolina in Wisconsin, and I would add to that we expect about $4 million to $5 million.

Next 12 months as a result of our political efforts.

Tim Millage: Finally, we continue to identify opportunities to monetize our non-core assets, which facilitates accelerated debt repayment. We closed $2 million in asset sales in the first quarter, and we have identified an additional $25 million of non-core assets to monetize, which are in various phases of the sale process. As a reminder, with solid execution of our three-pillar digital growth strategy, as well as our commitment to improving our balance sheet, our goal is to achieve our long-term leverage target of under two and a half times. Last, before I hand it back to Kevin to wrap up, I would like to revisit our outlook for 2024, which remains unchanged from what we shared on December's call. As I mentioned earlier, our cost actions made last fiscal year are expected to provide a significant benefit this fiscal year. With these cost-cutting actions and continued progress on our digital transformation, we expect adjusted EBITDA to be within our targeted range of $83 to $90 million. So with that, I will flip it back to Kevin. Thanks, Tim.

Okay, Great. That's all for me guys.

I didn't mean to cut you off I'm sorry.

No. It was down going to answer a question on the screen wise average digital advertising down year over year, and what I would say to that is there's some timing of some larger campaigns and anti digital that are happening later in the fiscal year.

For.

A piece of it but I would also remind everyone that we're well on track to the $100 million guidance Eventbrite visit all of that.

We communicated on the last earnings call.

I see no more questions from the web I'll flip it back to Kevin for any closing remarks.

Well, thanks, everybody for joining us on the call today as I mentioned earlier, we remain keenly focused on transforming our business model for the long term benefit of our shareholders our employees our readers and our advertisers. We appreciate your time and your interest in Lee. Thank you again.

Thank you ladies and gentlemen at this time, we have reached the end of our question and answer session. This concludes our call.

Kevin D. Mowbray: Our three-pillar digital growth strategy is guiding our digital transformation and is the foundation of our investment thesis. As I mentioned previously, our strategy will guide LEAD into becoming sustainable and vibrant solely from the revenue and cash flow from our digital products within five years. Doing so will allow us to increase our shareholder value through continued debt reduction and multiple expansion.

Okay.

Okay.

Kevin D. Mowbray: Our first quarter results demonstrate strong digital revenue growth with consistent execution of our three-pillar digital growth strategy. The tremendous progress on our digital transformation continues to reinforce that we have the right strategy and the right team in place to achieve our long-term goals. To wrap up, I'd like to thank the entire LEAD team for their efforts in driving our transformation.

Okay.

Yes.

Okay.

Yes.

Okay.

Okay.

Okay.

Okay.

Okay.

Operator: As we continue our journey and achieve our long-term goals, we expect to drive significant value for our shareholders through converting debt to equity and through repositioning LEAD as a digital-first company. Under the guidance and oversight of our board of directors, our leadership team's continued execution of our growth strategy sets the stage for significant long-term value creation. We have the right board, the right team, and the right strategy 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.

Operator: At this time, we will conduct a question and answer session. As a reminder, if you are accessing this call by webcast, you may submit typed questions on your screen. Those questions will be answered during the call as time permits.

Operator: One moment, please, while we pull for questions. Our first question is going to come from the line of Daniel Harriman with Sidoti and Company. Please go ahead. Kevin and Tim, good congratulations on the results and also your progress in the digital space. I have a couple questions, excuse me, and I'll start from the Prince perspective.

Tim Millage: Can you just update us and give us a little bit of a trajectory of the print decline you're expecting, both from a subscriber and advertising perspective, both for fiscal 2024 and then what you're seeing thus far in your fiscal second quarter? And then on the digital side, I know Tim, you mentioned the investments that you're making and how margins may be impacted there, but are you continuing to see margin expansion within your amplified platform? And then what headwinds might you be seeing within digital advertising revenue for amplified as well? Yeah, a great question, Daniel. I'll kick it off, Kevin; feel free to jump in.

Tim Millage: To address, you know, your first question on the print trajectory is certainly an important aspect of our digital transformation is to develop the pathway of not being reliant on our print revenue streams to drive cash flow, improve our balance sheet, and realize our investment thesis. And the reason for that is, obviously, the print business is challenging. It's hard to predict.

Tim Millage: It's harder to predict than what we see in other areas of our business. We did see modest improvement in our total print revenue by a couple percentage points in the first quarter. The advertising environment, in particular, is softer than we would like.

Tim Millage: I do expect those trends to improve as we move to the back half of the year, as we have a number of things aimed at improving the trend. And as we get into the back half of 2024, we will begin to see quarters that were more challenged from the prior year. In circling back to our strategy, we do aim to cycle the print volatility through rapid growth and scaling of our digital business. So, as Kevin mentioned on the call, you know, we do aim to reach, or expect to reach, an inflection point in the back half of 2024, where our digital revenue streams will be larger than our print revenue streams. And so that will be an important milestone.

Tim Millage: Switching to digital margins, and one of the things we talked about on the call was our solid margins from the digital business. What's great is that our digital businesses are already highly profitable, and this 72% of direct digital margin, and just by scaling our digital business, we will see that we're in position to be sustainable solely from the margin of cash flow from our digital products. Said differently, we don't need to see that margin improve; we need to maintain that margin going forward. That's very helpful.

Tim Millage: Thank you, Tim. And then just one more question, if I may, could you just talk a little bit about what sectors may be driving digital advertising revenue growth? And then obviously, with the upcoming election cycle, can you just give us an idea of the impact that that cycle will have on your digital advertising business? I can start off with digital advertising. A number of categories that are driving growth in the first quarters, specifically legal, medical, and higher education, are a few categories that are helping drive growth.

Tim Millage: As far as political advertising is concerned, we have a number of tactics that are aimed at growing our share of political advertising spend, which historically has been low. We do anticipate some political advertising, specifically as we get into the back half. And certainly, we operate in some key states, including Montana, where there will be a lot of money spent, and other areas like North Carolina and Wisconsin. And I would add that we expect about $4-5 million in the next 12 months as a result of our political campaign.

Tim Millage: Okay, great. That's all from me, guys. I didn't mean to cut you off, I'm sorry. I'm going to answer a question on the screen: why is digital advertising down year over year? And what I would say to that is there's some timing of some larger campaigns in Amplify Digital that are happening later in the fiscal year that account for a piece of it.

Tim Millage: But I would also remind everyone that we're well on track to the 100 million guidance for Amplify Digital that we communicated during the last term. See no more questions from the web. I will flip it back to Kevin for any closing remarks. Well, thank you everybody for joining us on the call today. As I mentioned earlier, we remain keenly focused on transforming our business models for the long-term benefit of our shareholders, our employees, our readers, and our advertisers. We appreciate your time, and if you're interested in LEAD, thank you again. Thank you, ladies and gentlemen. At this time, we have reached the end of our question and answer session. This concludes our call. Jayoverse I Want Home cover by Justin Bieber