Charles Arms - Director of Corporate Communications Mary Junck - Executive Chairman Kevin Mowbray - President and CEO Ron Mayo - VP and CFO.

Analysts:.

Welcome to the Lee Enterprises 2017 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 through the Web site, 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..

Good morning and 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, Sales; 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 our 2017 fiscal year.

It is available at lee.net as well as at 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 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 the tables accompanying the release.

Finally, all revenue and cash comparisons discussed on today's call are same-property comparisons as described in our news release. Adjusted EBITDA reflects the impact of 2017 acquisitions and 2016 includes adjusted EBITDA associated with a disposition in 2016. And now to open the discussion is our Executive Chairman, Mary Junck..

Thank you, Charles, and good morning, everybody, and thank you for joining our conference call this morning. The September quarter was highlighted by an improved adjusted EBITDA trend. For the fourth quarter, adjusted EBITDA totaled $36.7 million, down just 1.1% from prior year.

This is the best quarterly adjusted EBITDA performance as compared to prior year quarters in two years. We maintained our industry-leading margins in the quarter and in fiscal 2017. For the fiscal year, adjusted EBITDA was $144.6 million, a decline of 6% from the prior year. We believe, we will continue to report strong adjusted EBITDA in fiscal 2018.

We are focused on driving cash flow performance, reducing debt and evaluating strategic and accretive acquisitions, as well as other opportunities to drive long-term shareholder value. A word on digital revenue. In 2017, we saw continued strong growth in digital revenue posting our best annual performance in digital advertising since 2014.

Also in 2017 we closed on the previously announced acquisition of the Dispatch-Argus in Rock Island Moline, Illinois adjacent to our operation in Davenport Iowa.

We purchased the Dispatch-Argus for $7.2 million plus an adjustment for working capital acquired in the acquisition was already accretive to earnings and free cash flow in our September quarter. Our leverage as of September 2017 was 3.72x and we continue to reduce our debt.

Strong adjusted EBITDA has enabled us to act on strategic acquisitions such as the purchase of the Dispatch-Argus.

Also we continue to routinely survey the landscape for properties that can be acquired at attractive multiples and be accretive to free cash flow, focusing on solid midsized markets where the operation is the dominant provider of local news information and advertising in both digital and print.

Also with lower leverage in the first lien term loan amortizing quickly, we are evaluating all possible uses of our free cash flow that will increase shareholder value. We also regularly evaluate the timing and economics of refinancing all or a portion of the company's long-term debt, and Ron will comment more on refinancing in a moment.

In the September quarter, total revenue decreased 6.8% on a same property basis primarily as a result of declines in print advertising. Print continues to be a challenge, particularly with national big-box retailers. These declines were partially offset by a 6.1% increase in digital ad revenue and a .6% gain in subscription revenue.

For the fiscal year, total revenue finished down 7.1%. Total digital revenue which includes revenue from digital services primarily TownNews.com increased 6.7% for the fiscal year.

Lee owns 82.5% of TownNews, which provides digital services including web hosting, content management for web print and mobile products to Lee properties as well as 1,600 other newspapers and some broadcast entities.

In fiscal 2017, TownNews revenue on a stand-alone basis, that is including Lee intercompany revenue totaled $16.3 million, a 3.1% increase over prior year. Since 2011, the compound annual revenue growth at TownNews was 8.7% with margins consistently in the 40% range on a stand-alone basis.

We expect to continue to see strong revenue and EBITDA performance from TownNews as we expand our customer base in technology solutions. And to expand our revenue base we are acquiring and developing new technologies to meet the evolving needs of TownNews customers.

I'm pleased to announce that TownNews has acquired OTT technology to expand its video capabilities enabling TownNews to move beyond traditional print publishers and provide services to broadcasters.

We are also in negotiations to acquire additional technologies to further expand and grow the TownNews suite of products and we expect to announce those in the coming quarter. Cash costs, excluding workforce adjustments and other costs decreased 8.8% in the quarter.

For fiscal 2017, cash costs decreased 7.7%, exceeding guidance that we announced earlier this year of 6.5%. We expect the carryover of these cost reductions will positively impact 2018. Additionally, we expect cost reduction from our 2018 business transformation initiative.

Now, I'll turn the call over to our CEO, Kevin Mowbray, to discuss the operating performance in the September quarter in more detail..

Thank you, Mary. As Mary mentioned, we closed on the acquisition of the Dispatch-Argus in our fourth quarter. The Dispatch-Argus serves Moline, Rock Island and the surrounding communities on the Illinois side of the Mississippi River in the Quad Cities with circulation of 25,000. We are pleased with the purchase and the transition.

We will begin consolidating the results of Dispatch-Argus in the September quarter and we expect its contributions to cash flow to steadily improve in 2018 once the transition into Lee's operation is completed. And we are well into the integration.

We’ve completed the migration of the Dispatch-Argus to our digital content platforms, our design center and several other key business systems. We expect the transition to be completed and the Dispatch-Argus to be fully integrated by the end of the March quarter.

Regarding the September quarter, the total revenue trend was similar to our improving trend in the June quarter with total revenue down 6.8%.The improvement was driven by revenue gains in both digital and subscription revenue. For the fiscal year, total revenue declined 7.1%.

Digital advertising grew 6.1% in the September quarter including growth of 7.9% in digital retail advertising. Digital retail advertising accounts for 61% of total digital advertising. In the September quarter, digital advertising revenue represented 29.7% of total advertising revenue for the company.

Total digital revenue grew 6.7% in fiscal 2017 and digital advertising grew 8% for the year. As Mary mentioned earlier, this is the best in performance in digital advertising since 2014. In 2017, digital advertising accounted for 27.8% of total advertising revenue.

Our digital audiences and audience engagement continue to grow with monthly average page views up 11.6% in the September quarter, totaling $244.2 million. Page views per session, one metric we use to monitor audience engagement increased in the low single digits in the September quarter.

Expanding our digital audiences, increasing audience engagement and developing new digital revenue stream are essential to our continued strong digital revenue growth. As the percentage of digital audience using mobile devices continues to grow, we are taking steps to optimize the mobile users experience and drive revenue.

Last year we revamped all of our news Web site templates to improve the display content for mobile users and this year we’re working to improve our local news and other apps to improve our app user engagement and experience with our content.

We're not only improving the look and feel of our apps, we’re also improving our ability to provide timely, broad deep content feed [ph] in all mobile apps. To promote this high-quality content, we are significantly increasing local news push alerts and live event notification across all of our digital platforms.

In 2017, we introduced digital connect a digital service package aimed at growing digital revenue in the SMB segment. Digital connect is a turnkey package designed to provide local businesses a greater detail -- digital presence through enhanced search engine management. Digital connect was the fastest-growing digital category in 2017.

We expect it to be a significant contributor to the digital revenue growth in 2018. Subscription revenue increased 0.6% in the September quarter and as we anticipated we finished the year very similar to the solid performance in fiscal 2016, down to 0.6%.

Moving forward, we will continue to thoughtfully evaluate subscription pricing and add value to our readers through additional premium content, our retention program will remain a top priority in 2018. We continue to face headwinds in print advertising, especially with big-box retailers and classified.

For the September quarter, total advertising revenue declined 10.2% as a result of softer print advertising. For the fiscal year, total advertising was down 10.6%.

However, we are seeing favorable results in the local SMB segment of the market through our Edison program, which focuses on providing advertisers a robust digital presence, increased print advertising frequency and longer advertising commitments. Edison continues to gain traction.

For the second quarter in a row, the SMB segment was down only about 1% and in several markets including some of our larger enterprises, revenue in the SMB segment increased from the prior year quarter.

Over the past several quarters, we’ve experienced and demonstrated the greatest revenue opportunities with local advertisers and our ability to influence the local decision-makers. Our results with Edison confirm that.

We continue to develop new creative strategies to drive revenue for the company and as we transform our business and deliver on cost reductions at the upper end of our cost guidance, we look forward to another year of producing strong adjusted EBITDA in 2018. Now here is Ron Mayo, our CFO, with some additional financial highlights..

Thank you, Kevin. The company continues to produce solid adjusted EBITDA. In the September quarter, adjusted EBITDA totaled $36.7 million, a 1.1% decrease from the September quarter last year. As Mary said earlier, the September quarter cash costs, excluding workforce adjustments and other, decreased 8.8% compared to the prior year quarter.

Compensation decreased 9.6%, primarily as a result of reduced staffing levels, and lower medical costs. The majority of the staffing decreases are associated with our ongoing business transformation and outsourcing.

Newsprint and ink expense decreased 16.2% for the quarter primarily as a result of reduced volume from our unit reductions and a change to lower basis weight newsprint.

In 2018, newsprint prices are expected to increase as suppliers have announced three price increases for a total of $60 per metric ton on 30 pound newsprint, which are being implemented in October 2017 through January 2018.

Additional increases are possible later in the fiscal year depending on the outcome of the United States Department of Commerce decision on tariffs on newsprint imported from Canada.

Other operating expenses decreased 6.9% in the quarter, primarily driven by lower delivery, postage and other print related costs, which were offset in part by continued investments to grow digital revenue.

As a result of the changes implemented in our business, cash costs savings for 2017 fiscal year declined 7.7%, which exceeded the high-end of our previously announced cost guidance of 6.5%.

In 2018, we expect the carryover impact of these cost reductions to have a positive impact as well as additional cost reductions we will make as part of our 2018 business transformation initiatives. Debt was reduced $20.1 million for the quarter and $68.8 million for the fiscal year.

The principal amount of debt at the end of the quarter was $548.4 million. Interest expense decreased 9.1% or $1.4 million in the quarter and declined $6.7 million in the 2017 fiscal year due to our substantial quarterly debt payments.

As a reminder, the March '17 quarter brought about a structural change in our second lien term loan and that the entire quarterly excess cash flow from Pulitzer properties as defined must be accepted for repayment at par. In the December 2017 quarter, we paid down the second lien term loan by $5.2 million from Pulitzer excess cash flow at par.

With lower debt and strong adjusted EBITDA, the company's leverage net of cash is now 3.72x the last 12 months adjusted EBITDA.

As I mentioned in the previous quarter, with lower leverage and our first-lien term loan amortizing quickly, we’re working with our Board and advisors to evaluate the best use of our free cash flow beyond debt reductions, including additional print and digital acquisitions and other opportunities to increase shareholder value.

Each quarter our company with the help of its financial advisors, updates our evaluation of the timing and economics of refinancing all or a portion of our long-term debt. This evaluation includes the fact that the first-lien term loan balance is $45.1 million that continues to amortize quickly and must be paid off by March 15, 2019.

On March 15, 2018, the notes become callable at 104.75 and on April 1, 2018 the call premiums on the second-lien term loan reduced to 103. Based on our most recent evaluation, we don't anticipate refinancing any of our existing debt until after the second quarter of 2018.

We will continue to evaluate the ROI of refinancing our debt each quarter and we will act as soon as we’re confident that it represents a good value for our shareholders. We have real estate transactions in various stages and as I had mentioned in the past the timeline associated with closing these sales is difficult to predict.

We currently have approximately $16 million of real estate listed for sale, of which $10 million is under contract and is expected to close in the first half of fiscal 2018, although there can be no assurances that all or any of these transactions will actually close.

As a reminder, in the event property owned by one of our Pulitzer subsidiaries is sold, those proceeds will be used to repay the second-lien term loan at par. We do not make any material state or federal income tax payments or pension contributions in fiscal 2017, and capital expenditures totaled $4 million for the fiscal year.

In 2018, we anticipate capital expenditures to be $10 million and expect to make pension contributions of $4.9 million. We also expect to become a cash tax payer sometime in the latter half of fiscal 2018 as the balance of our NOLs are completely utilized during the fiscal year 2018.

Lastly, we expect to file our 10-K with the SEC tomorrow -- not tomorrow on Friday and as always we will include additional information on our results and expectations. As a reminder, we are no longer including separate Lee Legacy Pulitzer financial data in our press releases and an 8-K will be filed with this supplemental information..

Well, thank you, Ron and this includes the -- this concludes this morning's remarks. The team will stay on the line for any questions you may have. Following the question to ask by telephone, we will answer any submitted questions during the webcast. Operator, please open the line for questions..

Thank you. [Operator Instructions].

[Technical difficulty] to immediately deduct capital expenditures and you’ve noted, you’ve listened to our calls in the past we are not a big capital expenditure investor each year.

We only have $4 million last year and expect $10 million and while that will be benefit us by taking immediate deduction, it's not hugely material to Lee, and those were the highlights of what will impact us from the tax [indiscernible]. And again, it will reduce our total overall taxes, but it's not as big as the headline numbers..

Our next question from the webcast, do you think the recent SEC rulings on cross-ownership will have an impact on Lee?.

Well, this is Mary, and we [indiscernible] a recent SEC ruling on cross-ownership with great interest and we are studying here at Lee the possibilities of how that might impact us in a positive way, but at this point we’re unsure. But it looks at least I would think somewhat promising..

And our next question, when do you expect to pay off the first-lien term loan?.

That will be somewhat dependent upon the $10 million of proceeds that I mentioned from the real estate, but it will be and billed [ph] later half of Q3 or in our fiscal Q4 is to when that happens. But some of that again will be based on the timing of one of the real estate transactions..

And our next question, can you repeat again the value of the real estate holdings currently on the market?.

It is $16 million of real estate transactions that are currently on the market and $10 million of those are under contract to be sold, and we expect to close in the first two quarters of '18..

And lastly, will Lee be able to reduce its debt costs next year?.

Lee will be able to reduce its debt cost primarily as a result of paying down its debt and to the extent that -- we paid down our highest cost of debt capital which is the second-lien term loan faster than, yes, our costs will continue to reduce. So I expect them to reduce in a manner similar to what we had in '17 or greater..

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