Charles Arms - Director of Corporate Communications Mary Junck - Executive Chairman Kevin Mowbray - President and CEO Ron Mayo - VP and CFO James Green - VP, Digital Nathan Bekke - VP, Consumer Sales and Marketing.

Steven Isenberg - M Partners Barry Lucas - Gabelli & Company.

Welcome to the Lee Enterprises’ 2016 Fourth Quarter Webcast and Conference Call. The call is being recorded, and will be available for replay, beginning later this morning at lee.net. At the close of the planned remarks, there will be an opportunity for questions. Several analysts have been invited to participate.

Also, participants accessing this call by webcast may submit written questions to the Web site, and they will be answered during the call at time permits. Otherwise, you will receive a response later. A link to the live webcast can be found at www.lee.net. I will now turn the call over to your host, Charles Arms, Director of Corporate Communications..

Good morning and thank you for joining us. Speaking on this morning’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 James Green, Vice President, Digital; and Nathan Bekke, Vice President, Consumer Sales and Marketing. Earlier today, we issued a news release with preliminary results for our September quarter and for fiscal year 2016. It is available at lee.net, as well as major financial Web sites.

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 release and also in our SEC filings.

During the call, we will 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. Also, as previously announced, the Daily Herald and Provo Utah was sold in August of this year.

All comparisons stated in this morning’s press release and on today’s call include 11 month of results of the Daily Herald. Same-store comparisons for the fourth quarter and for fiscal 2016 are not materially different as the sale closed very late in our fiscal year. And now to open the discussion is our Executive Chairman, Mary Junck..

Thank you, Charles and thank all of you for joining our call this morning. Fiscal year 2016 marked another strong performance for Lee. We successfully implemented a number of new revenue initiatives, and executed on business transformation. This combined to produce a $153.8 million of adjusted EBITDA in the fiscal year.

As you've heard us say before, we believe debt reduction contributes directly to shareholder value; and we have aggressively paid down debt in each of the last 10 years; since 2006 Lee reduced its debt by more than a $1 billion; and in fiscal 2016, we paid down a $108.7 million, our largest annual reduction.

We're confident we can produce strong adjusted EBITDA going forward and continue our aggressive debt reduction. But here's an important reminder, two of our largest newspapers, Tucson and Madison, are not included in our consolidated operating revenues and expenses. However, we report our 50% share of EBITDA from these operations in adjusted EBITDA.

This is significant as it represents 7.6% of the total adjusted EBITDA in the last 12 months. We continue to transform the business and improve efficiencies resulting in significant cost reductions through centralized services, consolidation and outsourcing.

We've outsourced or consolidated many of our print operations, providing the opportunities to monetize numerous real-estate assets. In 2016, as in many past years, we not only produced significant cost reductions we also exceeded our cost guidance. Ron will discuss 2017 cost guidance later in the call.

As the media landscape has changed, we have adapted our business while remaining steadfastly committed to the indispensable and enduring role our enterprises play in each of our communities. Throughout Lee, our news organizations produced outstanding local news coverage.

A recent example is Madison’s Wisconsin State Journal with much of 2016 reporting on the area’s homeless population. The project questioned assumptions, exploded myths, and amplified public conversation.

But more importantly, it prompted city and county action, the community recently announced plans to allocate nearly $12 million for additional permanent housing, eviction prevention, and a daytime resource center.

Also this year, The Times of Northwest Indiana was named by the Associated Press Media Editors, as APME's Innovator of the Year for its community stability count initiative. This program to improve stability was adopted by five municipal councils, both Chambers of the Indiana Assembly, and recognized as part of the first World Stability Day.

The Times was also named the finalist for Editor and Publishers Community Service award. We believe that what we do matters for readers and advertisers in our communities as shown by the huge audiences that use our digital and print products.

Based on our latest research, our digital product and print publications combined to reach almost 74% of the adults in our largest markets, confirming our position by far as a leading source of news information and advertising in the markets we serve. Now here is our CEO, Kevin Mowbray, with more details on our September quarter results..

Thank you, Mary. The 2016, our enterprises again produced industry leading operating and revenue performance. We continue to aggressively transform the business, and as a result, adjusted EBITDA remained strong, resulting in debt reductions of more than $23.1 million in the fourth quarter; and as Mary mentioned a $108.7 million in the fiscal year.

Total revenue for the quarter decreased 5.1%, an improvement in the annual trend at down 5.3%. We’re positive on advertising revenue going forward, we’re totally focused on creatively and aggressively driving local revenue.

In past presentations, we’ve noted that 80% of our advertising revenue now comes from local and regional businesses, giving our sales executives the opportunity to pitch the power of our audiences directly to these local decision makers.

Our programs such as The Big Pitch, Edison and our Lee Local Sales group are all aim directly at driving this category of business local controllable revenues.

Total digital revenue, including digital advertising and digital services, totaled $25.9 million for the quarter, up 6.7% compared to a year ago, driven by the strong performance of TownNews.com and by digital retail and digital national revenue. In 2016, total digital revenue exceeded $100 million.

Digital services revenue, primarily TownNews.com, increased 22% in the quarter and 13.7% in the fiscal year. Digital services revenue in 2016 totaled $14.2 million.

Total digital advertising revenue increased 4.4% in the quarter and 5.6% in the fiscal year; digital advertising account for more than 25.3% of all advertising revenue in the fourth quarter. Mobile advertising revenue, which is included in digital advertising, increased 25.1% in the quarter and 19.6% in the fiscal year.

Total advertising and marketing services revenue decreased 10.8% in the quarter and 9.4% in the fiscal year. Subscription revenue increased 2.4% in the quarter and was virtually flat in the fiscal year due to strategic marketing and pricing initiatives. We expect a strong performance in 2017.

Now here is Ron Mayo, our CFO, with some additional financial highlights..

Thank you, Kevin. Cost management remains a high priority. Cash costs, excluding workforce adjustments, decreased 4.3% in the September quarter and 4.8% for the fiscal year. Contributing to this cash cost reduction, was compensation decreased 4.2% in the quarter and 3.9% for the fiscal year.

Primarily as a result of reduced staffing levels, which was offset in part by higher medical claims from our self-insured medical plan. We’ve taken steps to address our self-insured medical planned expenses going forward.

News print and ink expense increased 6.8% for the quarter, primarily as a result of the cumulative effect of several price increases throughout the year, which was partially offset by a reduction in news print volume.

For the year, news print and ink expense decreased 13.7% due to reduction in news print volume and lower prices in the first half of the year.

Our operating expenses decreased 5.6% for the quarter and 4.6% for the fiscal year, primarily driven by lower delivery and print related costs and offset in part by ongoing investment in growing digital revenue.

As Mary noted, through improved efficiencies in production and other areas, we have significantly exceeded our expected cost reductions in 2016. Our business transformation plans are ongoing, and in 2017, we expect cash costs, excluding unusual matter, will decrease between 2.5% and 3.5%.

As previously discussed, we paid down $108.7 million in debt in fiscal year 2016, which included using $30.6 million received from an internal settlement to reduce debt. The principal amount outstanding as of September 25, 2016 was $617.2 million, and net of cash, it was $600.2 million.

Because of these significant debt reductions, interest expense decreased $2.1 million in the fourth quarter and $8.2 million for the fiscal year. We expect further debt reductions and significant interest savings in 2017 that we will continue to use all available free cash flow to reduce debt.

As a reminder, after March of 2017, the holders of the second lien term-loan must accept all excess cash flow payments at par. The Company's leverage, net of cash, is now 3.9 times for last 12 months adjusted EBITDA. Lastly, we expect to file our 10-K with the SEC today.

And as always, it will include additional information on our results and expectations. As a reminder, we will no longer include separate Lee legacy and future financial data in our press release. An 8-K will be filed with the supplemental information later today..

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

Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions]. Please state your name and company, prior to asking your questions. And your line is open, please proceed with your question..

It’s Steven from M Partners. Just a question, so I know you guys have excluded the un-levered free cash flow numbers from the press releases there.

Could you give us that number for the quarter?.

Well, it's going to be included in our -- just because of the changes in the way the SEC has made this report, we don’t actually have that number any more. You can calculate it, and that will be included in our supplemental 8-K later today..

And then on the real-estate, I guess, there wasn’t really much you've mentioned of it.

Is that review still ongoing, and where is that process at?.

As I've previously discussed on that, it's a long-term process. I mean, we have several things that are currently in place and we have some transactions that are likely to close here in the next six to nine months. Again, none of these are huge numbers, but we're looking at continuing to sell real-estate as it becomes available.

I mean, we have a large number that are out there. But again, they are not a huge number or one way or the other. This is going to roll-out over the next two to three years as the market what we can get -- what we believe is the correct market price for some of our real-estate assets..

And then just some of your peers have specifically targeted top line funding, and things like that, if you look in the media for example, which is good comp to you guys. I mean do you have a similar view for Lee and when you see an inflection in your top line, and if not.

I guess, what do you think of it from the other industry players? And having some reasonably near-term targets, the only end of calendar next year or beginning the year after that.

I guess, what's your view on those trends?.

This is Mary. My view on that is that, and I think we’ve talked to you about this before. Our goal is to, once again, have either flat revenue or positive revenue. And we’re working pretty hard to make that happen. And the ways that ultimately will happen is the digital continue growing, and the print declined, it will soften a little bit.

And as I said, we’re working very hard on that. However, as opposed to some of the other players in the industry, we’re not predicting precisely when that’s going to happen, but it certainly an aspirational goal for us..

And we’ll take our next question in queue. Your line is open..

It's Barry Lucas of Gabelli. Mary, I want to come back to the top line issue, and appreciate what you just said. But maybe if you could provide a little bit of color about what’s going on deeper down in some of the retail categories.

Any sense as we move into the Christmas selling season that your advertising clients are a little bit more upbeat, and by that mean maybe spending a little more money with you?.

Sure, this is Kevin, I’ll jump in. Our focus is on local controllable revenue. Those are the mom and pop decision makers we have in our market. One of the things we’ve done recently with all of our publishers to really highlight the difference of the stratification of those accounts.

So we’ve got programs that are aimed at in our largest accounts, and then different programs aimed at customers based on their size. And what I would say is our largest local retailers are still fair to upbeat about the prospects of their business, and our smaller customers that have an issue what they are selling feel the same way..

And maybe one numerical question for Ron, if you have available and before the case filed.

But the unfunded pension liability at fiscal year-end?.

It’s about $53 million, the GAAP unfunded..

And there are no further questions from callers. And we’ll now turn the call back over to our host, Charles Arms, to discuss questions from the webcast..

Thank you. We do have several questions from the webcast, which I will read.

The first question is your digital business ahead, behind or tracking to expectations? And do you anticipate this accelerating?.

This is Kevin. I’d say, while we’re pleased with our digital business, we have many plans in place to accelerate our digital growth..

Second question, when do you expect print revenue decline since its slow?.

This is Mary, again. I think we tried to address that in an earlier comment, and we have a lot of efforts underway to do just that..

The next question, can you speak to the recent insider sales of stock..

This is Ron. The insider sales stock related to restricted stock program, those shares became fully vested by the individual who were granted those three years ago. This was the normal course of paying income taxes that were due on those. So, the shares that were sold were shares related to paying the income taxes..

Is there a possibility of dividends or share repurchases in fiscal year 2017?.

Well, let me give the broad answer, and Ron might want to speak to some specific covenant issues. In a word, no, that we don't believe that is going to happen in 2017..

As Mary said there, looking at the covenant restrictions and looking at what's best for the Company, that's currently not what our belief is, is it buying back stock or paying the dividends is the best use of our capital.

We continue with our message that we have been saying for quite some time now is we're using all of our free cash flow to reduce debt. And we believe that yields to greater shareholder value..

Next question, are there any prepayment restrictions on the debt? And if so, will some of those restrictions be lifting in 2017?.

Well, the prepayment restriction is what I was referring to in the second lien, and it's not really necessarily restriction that allowed the second lien holders to reject the excess cash flow, paying quarterly excess cash flow payments that we offer them.

Their ability to reject that goes away at the end of March, so they will be able to reject the excess cash flow payment to the extent there is one as of December, and that will be, which will offer that in the middle of February and that will be the last one they would be able to reject.

And to give you the order of magnitude of what that would mean is that we had about $10 million, in 2016, of which about $5 million was accepted. So, we believe that this is going to provide us the opportunity to accelerate the reduction of the second lien debt on that as well.

So, a positive for us and that's obviously our highest cost of debt capital..

Do you actively repurchase your own bonds on the open market?.

We constantly evaluate, whether it makes economic sense for us. So I think, as many of you on the phone know, they're trading well above par right now. And what we're looking at that is not advantageous to us. We did make $15 million of purchases in 2016. Those were all substantially below par.

And were a good purchase for the Company, but we'll continue to evaluate that in light of our other capital..

Next question, can you please breakdown the growth of 2.4% in subscription revenue between price and volume?.

The price increase is driving the subscription revenue, and our volumes are down industry averages..

And what do you expect for interest cost and capital expenditures in 2017?.

Well, we're not giving any guidance on interest. But I will tell you that the vast preponderance, depending on what excess cash flow payments are on the second lien. But the vast preponderance of the debt reduction will be in the first lien term loan, which is the 7.25% loan.

And so I think we will pay-down debt in 2017 consistent with what we paid down in 2016, excluding the $30 million insurance proceeds. So, I'll let you do the math on figuring that out. But it'll be a substantial reduction and capital expenditures will be -- in 2017 are expected to be in line with 2016, and they were roughly $7 million..

Can you quantify the growth rate of subscription revenue in 2017?.

As I mentioned in our earlier remarks, we expect strong performance in 2017, and we don’t reveal that information..

What impact do be election have on your results?.

On the revenue side, the impact of election was fairly modest. Newspapers don’t tend to get a lot of presidential ad revenue, although we did received advertising for local raises, as well as some state wide raises. On the audience side, however, it was a very good situation for us, both on the digital side as well as the print side.

We saw our audiences really grow nicely. Because we, as you would guess, reported what was going on the political front, as well as on election. And we were updating constantly, single copy in fact was up 40%. So, that was great..

In line of the current political environment, are there any changes planned and how the Company will operate in the coming years?.

In terms of news coverage, I am taking this question means. The answer is the absolutely not. We, as you’ve heard us say a lot of times, are committed to strong local news coverage, and really strong journalism. And we are going to do that going forward.

I think some of the issues that came out during the election underscore what I said earlier in our presentation that what we do, we believe really matters in our communities and we’re going to continue to do a great job of covering the local markets..

Can you offer any forward guidance?.

I mean, the forward guidance that we’ve offered is what we believe cash costs we’ll be able to reduce, and that’s the 2.5% to 3%. We do not provide guidance on either revenue or adjusted EBITDA, or EBITDA..

Can you speak to the margin differential between digital and print?.

The margin differential and it's difficult to get the exact numbers, because this is one business it's not two separate businesses.

So, we believe we have very high margins on our digital business, but that’s looking at the digital business as the revenue minus the cost of generating that digital business, and does not include the infrastructure, which would be the editorial components, the corporate components and that’s sort of stuffs.

So, I think it's best to look at this business as an integrated business, that’s how we go to market. We sell integrated print and digital packages. And we have extraordinarily high margin, the highest margins in the business by a long shot compared to any of our competitors.

But, I don’t think it's appropriate, at this point in time, because so much of our revenue still comes from print. And what we’re growing digital to the segment it in the print and digital operating margins, if you will..

Digital revenue growth was a little softer than some in the industry.

What are the initiatives that have increased the rate of growth in digital?.

This is Kevin. We have many initiatives in place to drive digital revenue. Some of the new things are digital native, digital video, digital lead-generation and digital connect, which is our directory program. So we feel pretty good about that..

After we tired some first-lien term loan, what we’d be able to do to retire its remaining debt while avoiding call premiums.

Ron?.

The call premiums are still going to be in place. So if you followed back to where our predictions were that we will pay down something in the neighborhood of $70 million, and debt in 2017, knowing that we have 101 outstanding as of September. You can probably do the math really quickly, and figure out in sometime in ’18 if we hit our projections.

We will pay-off of the first lien term. And at that point in time, in March of ’18, the no call goes off of the bonds. And shortly thereafter, in April of 2018, the call premium on the second lien goes down to 103. So there is virtually, unless you buy them in open market, no way to avoid the call premiums.

But once we do pay off the first lien term loan, we will be actively looking at what is the most economical thing for us to do, whether that's to repurchase them in the open market or potentially look at even paying the call premium.

But it will depend on what we believe the best use of cash at that, This will hard to predict because we don’t know what industry markets will look like at that point in time, and where our bonds would be trading at..

What is the pension contribution in 2017?.

It is currently estimated to be zero. We will not make pension contributions right now, and in 2017..

Just to propose cut in corporate taxes by the incoming administration going to help the bottom line and by how much?.

Well, this is kind of timely question, because we actually were talking about this very topic yesterday. The answer is, if this would go through, yes, it would help our bottom line. I think, and I'll turn it over to Ron. We of course are reluctant right this minute to predict by how much, but we would be completely in favor of this..

And to clarify what this would ultimately mean to Lee. Lee has not been a significant tax payer. We've paid de minimis amounts of taxes on an annual basis, because we've had significant NOLs. At the end of ’15, we had a $136 million NOL. We’ve a significant reduction in our NOL this year.

We’re about a little over $150 million and -- $50 million in NOLs right now. And we expect over the next 18 to 24 months that those NOLs will be utilized. So we will become a tax payer in the latter half of ‘18 to ’18. So this does become a material number for us. And it does make a material difference in the amount of cash taxes we pay.

So, just speaking from a corporate level, we would be in favor to significantly improve our free cash flow..

And that include the questions from the webcast. And I'll turn the call over to Mary for closing remarks..

Well, I think if you’ve heard us saying before, and I will now say it again. We continue to be on a positive transformational path here at Lee. And we’re confident about our future.

Our primary focus has been, and as is going to continue to be, to maintain our high level of performance and leave the industry and margins, and other key performance metrics.

Our steady free cash flow has and will continue to fuel aggressive deleveraging, keeping us ahead of schedule and retiring our debt, which we believe translates to increased shareholder value. We appreciate your time today and your interest in Lee, and thank you so much for joining our call..

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