Charles Arms - Director, Corporate Communications Mary Junck - Executive Chairman Kevin Mowbray - President & CEO Ronald Mayo - VP, CFO & Treasurer.

Andrew Galvan - Odeon Capital Group.

Welcome to the Lee Enterprises' 2017 Second Quarter Webcast and Conference Call. This 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 through the website, and they will be answered during the call as time permits. Otherwise, you will receive a response later. A link to the live webcast can be found at www.lee.net.

Now, I will turn the call over to your host, Charles Arms, Director of Corporate Communications. Please go ahead.

Good morning, thank you for joining us. Speaking on this morning's call will be Mary Junck, 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 of Sales; James Green, Vice President, Digital; and Nathan Bekke, Vice President, Consumer Sales & Marketing. Earlier today, we issued a news release with preliminary results for our March quarter. It's 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 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 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. Finally, all financial comparisons discussed on today's call are same property comparison.

And now to open the discussion is our Executive Chairman, Mary Junck..

Thank you, Charles, and thank you all for joining our conference call this morning. The second quarter was highlighted by strong digital revenue growth across the board, operating cost reductions exceeding guidance and continued aggressive debt repayment.

While the overall revenue trend didn't improve from the first quarter, we saw gains in some key category. Digital advertising growth was the strongest we've seen in more than 2 years. Total digital advertising grew 11.3% in digital retail advance 14.1%.

Total digital revenue grew 10% in the March quarter compared to last year and totaled nearly $26 million. Classified posted its best quarter in more than a year and although it is still down year-over-year performance improved in automotive, employment and other classifies. Kevin will discuss the turns more in a moment.

Print advertising however remains a challenge particularly with the national big box retailers. Cash cost excluding unusual matters decreased 8.2% in the quarter. Based on this good cost performance, we are improving our cost guidance for the year. We now expect cash cost excluding unusual matters to decrease 6% to 6.5% compared to prior year.

Ron will provide more detail later in the call. With these significant cost reductions we have in place, we believe we will continue to report stronger adjusted EBITDA throughout the fiscal year. We believe aggressive debt reduction creates value for Lee shareholders and will continue to use available cash to reduce debt.

Debt payments totaled $14.5 million for the quarter and the principal amount of debt at the end the quarter was $584.9 million. Now I'll turn the call over to CEO, Kevin Mowbray to discuss the March quarter in more detail and our plans moving forward..

Thank you, Mary. As Mary mentioned second quarter marked another strong digital performance for Lee. Total digital revenue growth was 10% and digital advertising grew 11.3% including growth of 14.1% in digital retail advertising. Digital retail advertising accounts for 60% of total digital advertising.

For the March quarter digital advertising revenue represent 28.7% of total digital advertising revenue for the company. Unique visitors to Lee mobile, tablet, desktop and app sites averaged 26.7 million, an increase of 6.2% over the prior quarter, with page views up 4.4% to 228.9 million.

Developing new revenue streams and expanding our digital audience is essential to continue strong digital growth. This year we introduced digital connect a digital service package aimed for local businesses. Digital connect provides a more robust digital presence and enhanced search engine management for local businesses and turnkey packaging.

We also introduced performance based marketing on our digital platforms. These programs use our content connected businesses directly to qualify sales leads driving revenue based on an outcome. Performance space marketing is highly attractive to advertisers who will be a significant contributor to digital revenue growth moving forward.

As Mary noted earlier, we continue to see headwinds in print advertising and the challenges of big box retailers continue. In the March quarter, overall revenue declined 7.9%. Our print advertising was the largest contributor to the decline. At the same time, I'm encouraged by improving trends in certain categories of advertising.

In the second quarter classified posted its best quarterly trend performance in more than a year, new initiatives including the redesign of our arbitrary section contributed to the improving trends. On our last call we discussed the Edison project, a program which transforms the way we market the local SMB segment.

We've launched in 28 markets and remain confident that the programs focus on providing advertisers a stronger digital presence, increased frequency in print and extended advertising commitment will add value for our customers and drive revenue for the company.

Although subscription revenue decreased 2.5% for the quarter, I remain very optimistic for fiscal year 2017 will be similar to 2016 in this category. If we continue to implement our strategy of some pricing principle additional premium content revenue and reduced customer churn.

The second half of the year revenue will benefit from a recent pricing actions and other growth initiative. And here is Ron Mayo, our CFO with some additional financial highlights..

Thank you, Kevin. The company continues to produce strong adjusted EBITDA. In the March quarter adjusted EBITDA totaled $28.8 million. As mentioned earlier, we will continue to aggressively reduce the company's debt. Debt was reduced $14.5 million for the quarter $32.2 million for the fiscal year to date and $71.6 million for the last 12 months.

The principle amount of debt at the end of the quarter is $584.9 million. Interest expense decreased 10.1% or $1.6 million in the quarter and has fallen $8.2 million in the last 12 months due to our substantial quarterly debt payments. We will continue to drive down interest costs with additional debt reductions this fiscal year.

With lower debt and strong adjusted EBITDA the company's leverage net of cash is now 3.89 times the last 12 months adjusted EBITDA. The end of the March quarter marks a significant change that we believe will accelerate the repayment of the second lien term loan.

Moving forward the entire quarterly excess cash flow from properties as defined much will be accepted for repayment of the second lien term loan at par. These excess capital payments will also accelerate interest savings in the future but the second lien is our highest cost of capital.

In the coming quarter in May, we will pay down the second lien term loan by $4.5 million at par. We continue to have real estate transactions in various stages and as I mentioned in the past, the timeline associated with closing these sales is somewhat difficult to predict.

As a reminder in the event of property owned by one of our subsidiaries are sold those proceeds will also be used to repay the second lien term loan at par. As Mary said earlier, the March quarter cost excluding unusual matters decreased 8.2% compared to the prior quarter. Compensation decreased 9.9% primarily as a result of reduced staffing.

The majority of which are associated with ongoing business transformation and outlook. We also saw significantly lower expenses associated with our self-insured medical benefits. Newsprint increased 2.4% for the quarter primarily as a result of the cumulative effect of several price increases throughout 2016 which we continue to pay.

These increases were partially offset by a reduction in newsprint usage. We will cycle most of the newsprint price increases by the end of the third quarter of 2017.

Other operating expenses decreased 7.6% in the quarter primarily driven by lower delivery costs postage and other print related costs which were offset in part by continued investment growth digital revenue. As a result of changes implemented on our business in the first half of 2017, we do have new cost guides that Mary previously mentioned.

We now expect cash costs excluding unusual matters will decrease between 6% and 6.5% in fiscal 2017. As we stated on our last quarterly call, we do not expect to make any material state or federal income tax payments or pension contributions in fiscal 2017. Capital expenditures are expected to be $7 million over the fiscal year.

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. As a reminder, we no longer include separate Lee legacy and filter financial data and our press release. An 8-K will be filed with its supplemental information..

This concludes this morning's remarks. The team will remain on the line for any question you may have and following questions asked on the telephone we'll answer any submitted during the webcast. Operator, please open the line for questions..

Thank you. [Operator Instructions] I do have a question. Please state your name and company prior to asking your question. Your line is now open you may proceed..

Hi good morning, this is Andrew Galvan from Odeon Capital. Thank you for taking my question.

Ron can you tell me whether there were any debt pay down subsequent to the quarter-end particular and second lien?.

As I mentioned in my remarks, we have not made any since quarter-end on the second lien, but we will be making that payment which is required 45 days after quarter-end of the $4.5 million. In addition to that we've also made the quarterly payment on the first lien term loan of $6.25 million has already been made.

So shortly the total would be you know close to $11 million on payment of net in the quarter..

Got it. Okay. And then in terms of tax that we should be modeling and you've had net operating losses that have shielded the company from paying taxes until now in addition to the large interest expense. But as debt comes down lower interest expense and kind of figure out how much tax we should be modeling in.

Are you going to be a taxpayer, a federal taxpayer in FY17?.

We will not be a federal taxpayer in FY17 beyond the alternative minimum taxes that we have to pay which are not substantial..

So we can model it for 2018?.

For 2018 we believe towards the end of the fiscal year, we will become a federal income taxpayer. So we'll continue to shield our taxable income with our net operating losses, but that shield will end in third or fourth quarter of 2018 according to our model right now..

Got it..

That could change depending on real estate sales. That assumes no real estate, and since most of our real estate that we do sell does not have substantial tax basis and that could be accelerate by real estate sales..

Got it. And then, I think one of the negative trends we're seeing so far this year is quantum subscription revenue and other revenue which has been positive this one-time obviously last year it had been positive for a number of years.

So can you talk about what's driving that and what the company can do to turn that around?.

Sure, this is Kevin. While we saw significant improvement in digital ads we've discussed already on the phone, we also saw very encouraging trends in some sub categories of retail advertising on the print side as well and we also mentioned increase we saw in our classified so that was all to the good.

What worsened was the result from big box retailers. I would also mention though as it relates to circulation it's pretty much a timing issue. We're going to see a lot of revenue improvement in the second half of the year and that's why I had mentioned that we are very confident that 2017 performance will be similar to 2016 in circulation revenue..

Got it. Okay. Thank you very much..

It appears there are no further questions. I will now turn the call back to your host. Charles Arms to discuss questions from the webcast..

Thank you. Our first question from the webcast relates to the February trends as compared to what we're seeing now in Q2..

And I think we pretty much just answered that. But I think we're good there..

Can you speak to what you expect in growth from amplified digital our full service market?.

What I would say is we are pretty pleased with the trajectory we're seeing in digital advertising and I would say an area of magnitude our results while they're not reported out the way that [indiscernible] our results are at par or better in the category..

Do we still intend to attempt to refinance the debt in April 2019 referring to the remarks at the 2016 conference call?.

I mean I think the remarks might have been slightly misinterpreted that we intend to refinance our debt in April 2019.

The remarks were relative to the fact that there is some substantial changes that occur in April 2019 and in April 2019 the call premiums on the bonds couldn't have from they would be in March of 18, go from 4.75 to a little under 2.5 times and with all premiums on the second lien go to 0.

So we also believe at that point in time that we will not have any outstanding balances on our first lien term loan it is due.

With reference to what we were talking about there on refinancing was that we would be opportunistically looking at whether it makes sense to refinance, but obviously the credit and our access to those credit markets will always determine whether and when we refinance our debt.

As a reminder both the notes in the second lien that would still be outstanding in April 2019 those are not due until 2022, so there's no absent a favorable interest rate market and access to those markets, there's no compelling reason to refinance at that point in time..

Can you give an update on the company's S-3 filing from February and how the company might use this filing to provide the cash?.

As I mentioned on the last call, the S-3 filing that we did was simply a replacement of an expiring S-3 filing that's required under our warrants that we have outstanding and company continues to evaluate its capital structure but the primary reason that S-3 is outstanding is for the warrants.

We believe that softwood lumber import tariff against Canada may affect newsprint cost. It's too early to tell what implication that may have.

Obviously, newsprint part of the lumber basket and I'm not sure how that will ultimately impact that we have had no communications from any of our Canadian suppliers that indicate it would impact us but again it's too early to tell..

Do you have any real estate transactions that you believe may close in the next few quarters?.

We have several real estate transactions that are in process, but as I mentioned on previous call it is very difficult to determine when and if these transactions will close. They're in various stages and we're hopeful we will have some close by the remainder in the remainder of fiscal 2017 but uncertain at this time..

Can you speak to the increase in newsprint and ink cost?.

I mean it's simple, part my earlier comment that prices increases greater than the volume reductions that we have in newsprint, ink is relatively stable and the costs and a little off the - primarily driven by newsprint.

But there were several newsprint price increases that began in January of 2016 and continued through June of 2016 and we continued to pay those cumulative effects of those price increases and the cumulative effect of those price increases seeded as a percentage, the 13% reduction that we had and usage and so that's the reason why.

Now we will, so I mentioned in my comments we will cycle those price increases assuming there are no more price increases forthcoming in the near term. But ultimately that's the reason why we do that so we expect for the remainder of the year they will be closer to flat and then down in the fourth quarter..

Well, this concludes our questions from our web participants. Now turn the call back to Mary for closing remarks..

Thank you once again for joining the call. We continue to be confident about our future and have found strategies and tactics in place to continue to transform the company. As we mentioned on the call, digital revenue growth remains on a strong trajectory.

We've improved our cost guidance for the second consecutive quarter and believe we will report strong adjusted EBITDA in fiscal 2017. Our steady cash flow has kept us and will continue to keep us ahead of schedule in retiring our debt.

We're among industry leaders in margins and other key performance measures and stay steadfastly focused on performing at a high level. Again, we appreciate your time and your interest in Lee. Thank you again for joining us today..

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