Charles Arms - Director of Corporate Communications Mary Junck - Executive Chairman Kevin Mowbray - President & CEO Ron Mayo - Vice President, Chief Financial Officer and Treasurer James Green - VP, Digital.

Andrew Gadlin - Odeon Capital.

Welcome to the Lee Enterprises 2016 Third Quarter Webcast and Conference Call. [Operator Instructions]. Now, I will turn the call over to your host, Charles Arms, Director of Corporate Communications..

Good morning. Thank you for joining us. Speaking on today's call will be Mary Junck, our Executive Chairman; Kevin Mowbray, President and Chief Executive Officer; and Ron Mayo, Vice President and Chief Financial Officer.

Also with us on today's call and available for questions are Paul Farrell, Vice President, Sales; and Nathan Bekke, Vice President, Consumer Sales and Marketing. Earlier today, we issued a news release with the preliminary results for our June quarter available at lee.net as well as major financial websites.

As a reminder, this morning's discussion will include forward-looking statements that are based on our current expectations. These 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 Executive Chairman, Mary Junck..

Thank you, Charles and good morning everyone and thank you for joining the conference call this morning. We're upbeat about our company's digital transformation and our performance in the June quarter in the overall improvement of our revenue trends.

Digital revenue growth was very good in the quarter and digital retail and digital national were especially strong up 8.3% and 15.8% respectively and as we predicted last quarter subscription revenue bounced back in the quarter and was nearly flat to prior year. Kevin and Ron will provide more details on the quarter later in the call.

As a reminder we are the leading source of news information and advertising in all the markets we serve. Our most recent research confirms our strengths and we continue to reach more than 76% of the adult in our largest market through a combination of our digital product imprinted newspapers.

Our reach is even higher in our smaller markets our newsrooms are committed and totally focused on covering local news and we write about it in a astonishing array of local events and happenings including city council meeting, school board meeting, high school football games, recreational activities, cultural reviews, the annual town parade and who made the [indiscernible] just to mention a few of the topics.

Did I mention that Donald Trump was in Davenport last week for a rally, throughout his visit our newsroom delivered continuous coverage of the event on our mobile app, our website and on social media including video interviews and Twitter updates live from the venue.

And of course the next day's newspaper featured comprehensive coverage on page one and throughout the edition. This Trump example of comprehensive cross platform coverage exemplifies our approach to local news, because of our huge local audience we get excellent results for our advertisers in the local advertising is in great demand by our readers.

As in the past years we have thoughtfully managed cash cost in 2016 and the results in the June quarter and year-to-date have been very good. Ron we'll announce new cash cost guidance for the call later in the call this morning. Lee, continues to produce strong adjusted EBITDA and industry leading EBITDA margins.

Adjusted EBITDA for the quarter was 36.9 million in the last 12 months it was a 156.6 million.

Two of our largest newspapers Tucson and Madison are not included in our consolidated operating revenues and expenses and in order to get an accurate understanding of our cash flows you should note that adjusted EBITDA includes our 50% share EBITDA from these operations and this is significant.

It represents 7.6% of the total adjusted EBITDA in the last 12 months. We’re committed to using all available free cash flow to reduce our debt, debt was reduced 16.2 million in the quarter and 85.6 million year-to-date. We paid down a 104.7 million over the last 12 months and we believe that debt reduction contributes directly to shareholder value.

For example based on the current number of shares each 10 million in debt reduction represents $0.18 in share value. We're confident we'll continue to generate substantial free cash flow which we will use to aggressively reduce debt and drive value for shareholders.

Now here's Kevin with more details on our June quarter results and our revenue strategies.

Thank you, Mary. In the third quarter our revenue trends improved from the prior quarter, you will primarily by [indiscernible] subscription revenue, digital growth, our intense focus on driving revenue at the local level. For the quarter overall revenue decreased 4.9%.

As Mary mentioned subscription revenue is nearly flat down just 0.5% compared to the same quarter last year. We said on our last call we expected subscription revenue to rebound and through your strategic pricing and our premium day program we have significantly improved the trend from Q2. We expect similar performance in Q4.

We continue to drive strong digital growth. Overall digital revenue grew 6.2% in the quarter in total 25.8 million. Digital services primarily talentnews.com [ph] grew 15.3%. In digital advertising mobile increased 22.2% and National increased 15.8%, digital retail advertising which makes up more than 60% of total digital advertising increased 8.3%.

Our strength in digital retail is fueled by our keen focus on local advertising. We believe our greatest opportunity to drive revenue in both digital and print is at the local level we’re seeing better results in this category as a result of our strategy.

Year-to-date spending among active local retail accounts is up 5% as a result of our strategic initiatives. Our big pitch effort which we've mentioned in the past is driving spending with larger existing advertisers and our activate program is aimed at acquiring new advertisers.

We're also offering special incentive to encourage former advertisers return through our we want you back program.

On our call last quarter we introduced Edison our initiative to reinvent the way we sell local advertising, in our test markets we've completely restructured local sales team and simplified advertising packages to offer bigger ads with more frequency across our digital and print products.

Early results are very promising and we will expand Edison into other markets in the first quarter of fiscal year 2017. Now here is Ron Mayo with some additional financial highlights..

Thank you, Kevin. Cost management continues to be a high priority. Cash cost excluding excluding workforce adjustments, decreased 4.3% in the June quarter. Compensation decreased 2.1% in the quarter and is down 3.8% year-to-date. The average number of full time equipment employees decreased 8.7% in the quarter and has decreased 8.2% year-to-date.

These savings are partially offset by higher self-insured medical cost. News print and ink expense decreased 11% in the quarter and is down 19.2% year-to-date due to a combination of lower newsprint prices and a reduction in newsprint volume. Other operating expenses decreased 5.6% in the quarter.

Excluding workforce adjustments we anticipate cash cost to decline by 3.75% to 4% for the fiscal year, previous guidance for the year was 3.5% to 4%. Moving forward we see more opportunity to create efficiencies and lower cost for the company. We have discussed the daVinci projects several times and Phase 1 is now complete.

The annualized savings associated with Phase 1 of daVinci is more than a $1 million. Phase 2 is now underway, we’re further consolidating ad layout production by centralizing non-local content such as National news pages features, comics and puzzles and we expect to see improved quality combined with additional cost savings.

Mary discussed Adjusted EBITDA early, she needed that adjusted EBITDA includes our 50% share of EBITDA of the operations in Madison and Tucson. It is important to mention that the revenue and cash cost associated with G&I and M&I are not included in the company's consolidated revenue and cash cost.

Net income from these operations are shown in the separate line on the income statement labeled equity and earnings of G&I and M&I. If you’re calculating EBITDA based on consolidated operating revenues and cash cost are substantially understating adjusted EBITDA as these properties combined provided EBITDA of $12 million to Lee in the last 12 months.

As of June 26, 2016 the principle amount of debt was $640.3 million and as Mary noted we have reduced debt by 104.7 million in the past 12 months. We expect to make significant debt reductions in future as we will use all our free cash flow to reduce debt.

These debt payments have reduced interest expense by $2.3 million for the quarter and year-to-date interest reductions totaled $6.1 million. Moving forward we expect to direct all list savings towards additional debt reductions. We also continue to evaluate our real estate and seek to monetize those assets where appropriate.

Lastly we expect to file our 10-Q with the SEC tomorrow and as always it will include additional information on our results and expectations. Just this last quarter we did not include separate Lee legacy and future financial data in our press release. An 8K will be filed with this supplemental information later today.

This concludes our remarks the team will remain on the line for an questions you may have. Following the questions after telephone we will answer any submitted during the webcast. Operator, please open the line for questions..

[Operator Instructions]..

This is Andrew Gadlin from Odeon Capital. Couple of quick questions. Regarding the debt pay down cash balances have actually grown through this year quite a bit, company was running at close to about 10 million for most of FY ‘15 and just under 22 million.

Can you talk about why you’re building that cash balance and not just directing that money to debt pay down right now?.

Andrew, really what you’re seeing with the cash building is really more of a timing difference. You will see by the end of the September quarter that we will back in that 9 million to 10 million range where we have historically been.

The reason for the cash on the balance sheet is this is the quarter that we have some particularly large debt payments beyond the normal 6.25 million that we’re required to make each quarter. You will see that we have approximately $6 million excess cash flow payment been made on the term.

We have another 1.6 million roughly of excess cash flows and hopefully the second lien vendors will accept, well we’re not sure about how much that is and we also have substantially interest payments for the biggest piece being that our semi-annual interest payments on the bond about $18.3 million.

So we built a little cash coming in to the end of the quarter so that we wouldn’t have to borrow any money under the revolver during this quarter and so you will see that we pay down debt likely higher than we paid down in Q3 and in Q4 and get back to more normal level..

In the past you’ve been willing to share with us where the debt stands today? Have you paid down debt since the end of the quarter?.

The only thing that we have pay down is the required payments of 6.25 million. And just a reminder the 6 million is going to go out here in the next 10 days here because that’s going to be with the excess cash flow payment and the excess cash flow payment on the second lien will learn how much of that will be accepted. Last week of August..

Your press release calls out real estate sales.

Can you talk a little bit about progress there and any timing that we can expect?.

I mean we're making progress. I mean I think we are getting a lot of interest in the real estate that we're marketing, you know we've signed some letters of intent but you know as I said on previous calls you know this is an all long process, it's going to take numerous months and quarters to see substantial movement in this.

We have a little bit but these are relatively small ones, we have some larger pieces that potentially can happen in the next 12 months but they have long due diligence period because most of these properties that people are looking to purchase from us they are looking to do substantial modifications to the properties and in some cases tear them down to do their stuff.

So it requires a long good diligence period on the part of the purchaser to make sure that mostly it's getting city permits to do exactly what they want to do with the property. So we're working the thing as fast as we can but bear in mind this is not a quick process..

Would it be accurate to say that.

Real estate sales would be a bigger contributor in the second half of calendar year 2017 than the first half?.

I would say you should expect to see stuff maybe in the next 9 to 12 months and you might if things go really well on the due diligence period maybe in the second half of the year but it's more likely in the 9 to 12 months period..

Meaning the second half of this year? Next year, okay, got it. Then question on the taxes and the tax rate, there has been some up and down in the tax rate over the last few years.

What's the normalized tax rate we should be thinking about?.

I mean normalized it should be in the high 30s to low 40s number there and we get some unusual amounts in there as a result just some transaction that we have going on but the normal rate if you're building a model should be you know upper 30s to low 40s..

Okay. And then in terms of the NOLs that have been shielding the company from making tax payment.

How much longer before it becomes a full federal taxpayer?.

Well I mean obviously it depends on our results but assuming our results continue to perform well you know it will shield it for '17 and '18 as what we’re currently looking at and then maybe some small payments in '19.

And by the way that will all depend on real estate because most of our real estate will have impact basis and so if you see an acceleration in real estate sale that changes that answer..

And we will move to our next questioner. Your line is open. You may proceed with your questions..

So just a question on free cash flow, I know for a couple of reasons you guys had to omit the free cash flow numbers from the press release this time around. Did you’ve those handy against the unlevered free cash flow and then the free cash to equity or free cash to interest that you provide as well typically..

Well you will find we’re going -- and this is in 8K that will come out shortly and it should give you all the information that you need to calculate what free cash flow is but given what comments we are getting about our from the SEC, we have -- we’re not going to disclose the actual numbers because they have given has a brief about that but everything we believe you need in order to calculate those numbers should be in an 8K we’re filing later today..

And then on talent news, can you just [indiscernible] little more color on how that growth looks and as the business grows the growth rate seems to stay the same, I guess what kind of opportunities are you seeing there and I know I guess we saw the reach local transaction from [indiscernible] and the media is propelling kind of these digital businesses are [indiscernible] lot of value to them so.

What are you seeing on that front as that business grows?.

We’re really pleased with our results through talent news [ph] as you know we’re partners with 1600 newspapers across the countries who really value our total CMS platform which allows them to put their content across all their print digital platforms.

We continue to see growth through talent news so by picking up partners down the road as well as some opportunities to enter into some programmatic advertising strategies that we have on the table and here is James Green to tell you a little more detail..

Yes so as Kevin mentioned we really have two opportunities here, we continue to technology for existing partners so there will continue to be growth in existing partners and we’re looking for opportunities to expand newspapers at this point but we think that given the nature of our technology and the cost savings that is brought to Lee over the last few years that we will be able to bring that type of capability to other newspaper companies and perhaps beyond..

And one thing to point out on this Steven I mean, you mentioned propel and reach local by internet and the media. This is a totally different business model right now than what they are.

What James just referred to is getting more into the advertising side of the business but the lion share of the revenue today is really coming from content management that we do for a large number of newspapers across the country and I don’t want to call it annuity type of business, it is regular and the revenue coming in and the cash flow coming out of that and it's not dependent upon advertising although we’re trying to direct more advertising into that business but we see that as a big opportunity to continue to grow revenue on our [indiscernible] subsidiary..

And this concludes our question and answer session today for phone participants. At this time I would like to turn the floor to Charles Arms for any questions submitted to the web..

Yes we do have a question from the web. Would we consider a stock buyback.

The short answer to that is no, and we've discussed it, not to be blunt, but we have discussed it at the Board level and we think the best use of our cash flow is to pay down debt..

Well that does conclude our questions from the web and for closing remarks I will turn it back over to Mary..

Well let me close saying we appreciate your interest in Lee and we are happy that you were able to be on the phone with us today. As I noted earlier we are on a positive transformational path and are confident about our bright future.

We know that what we do matters for our readers, for our advertisers our communities and even though the media landscape is changing. We fill an indispensable enduring role in each of the communities that we serve.

Our primary focus has been and will continue to be to maintain our high level performance and leave the industry in margins and other key performance metrics. Our steady cash flow has and will continue to fuel aggressively deleveraging keeping up us ahead of schedule in retiring debt and we believe this translates to increased shareholder value.

Again we very much appreciate your interest in the company and thank you so much for joining us today..

This concludes today's webcast. Thank you for your participation. You may now disconnect..