Charles Arms - Director of Corporate Communications Mary Junck - Executive Chairman Kevin Mowbray - President and Chief Executive Officer Ron Mayo - VP and Chief Financial Officer.

Andrew Gadlin - Odeon Capital.

Welcome to the Lee Enterprises 2018 First 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 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. .

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 today 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 first fiscal quarter of 2018.

It is available at lee.net, as well as at 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 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 thank you all for joining the call this morning. The December quarter marked another quarter of solid digital growth. Digital retail grew by 5.7% and national digital, mainly programmatic sales advanced 16.2%.

Our performance in national digital was our best year-over-year growth in nearly two years and was fueled by double-digit increases in page views across most of our company’s news sites, an affirmation of the immense appetite for local news and information.

To grow audience and audience engagement which translates the digital revenue growth, we’ve built a digital content center that develops and acquires high interest content. Further, our sweeps program drove more page views throughout the quarter when rates were at their highest.

Also, our newsrooms are routinely measuring reader interest tracking audience engagement in adjusting our content in real-time to maximize audiences and revenue.

Lee owns 82.5% of TownNews.com, which primarily provides digital services including webhosting and content management for web, print and mobile products to Lee properties, as well as 1600 other newspapers and some broadcast entities.

While TownNews.com’s primary source of revenue is content management its 12.7% revenue growth in the quarter was driven by its rapidly expanding advertising business. As we mentioned on our last call, TownNews is acquiring and developing new technologies to meet the evolving needs of its customers.

In addition to the OTT technology, we announced last quarter which expands TownNews video capabilities, we’ve acquired a new platform for our mobile app which improves the functionality of our app and creates additional revenue opportunities.

In January, TownNews announced a new strategic partnership with Brainworks Software aimed at providing revenue-driving business and technology solutions to media companies. We produced $40.4 million of adjusted EBITDA in the quarter, another solid quarter of adjusted EBITDA and industry-leading margins.

Our operating margin for the quarter was 25.5%, which is significantly higher than the margins of our publicly traded peers. With our strong adjusted EBITDA, we are aggressively reducing the company’s debt. Debt reduced $16.4 million in the quarter and since our 2014 refinancing debt has been reduced by $313 million.

Later in the call, Ron Mayo will provide overall expense guidance for 2018. Now I will turn the call over to our CEO, Kevin Mowbray to discuss the operating performance in the December quarter at more detail. .

Thank you, Mary. While advertising results in the past quarter started off softer than anticipated, we saw directional improvement in several key revenue categories with results strengthening as we move through the quarter. This was especially true in December, a result that bodes well for Q2 and beyond.

Clearly, there remains headwinds in our business and opportunities as well.

Big Box retailers have challenge so the shift to digital marketing creates unique and unprecedented opportunities in our local markets with heavy focus on reach across digital and print, our local audiences are powerful and unmatched which gives us a huge advantage over other traditional media competitors as advertisers shift to digital.

Local retail remains a strong focus of our sales organization and a substantial growth opportunity for 2018. This is a critical segment comprised of large and mid-sized local businesses, representing nearly 50% of our total advertising revenue with several key initiatives aimed at the category.

We are pleased with our year one effort at Edison in terms of total revenues, number of accounts, digital revenue growth and retention. These customers collectively grew by 20% in Q1 with 33% of that revenue coming in digital.

Digital retail advertising which accounts for more than 62% of total digital advertising in the December quarter, grew 5.7% and total digital advertising grew 2.8%. Digital advertising revenue represented 27.9% of total advertising revenue for the company in the first fiscal quarter, compared to 24.7% in the first quarter of 2017.

Total digital revenue including TownNews.com grew 3.2%. Our digital audience and audience engagement grew significantly in the quarter. Average monthly visits were up 6.1% and totaled 72.5 million. Page views per session increased in the low-single-digits in the quarter, a key indicator of increased audience engagement.

As Mary noted earlier, the 16.2% growth in national digital advertising represents our strongest performance in two years. We attribute these gains to smart and strategic pricing coupled with periodic implementation of our company-wide sweeps program, which drives maximum audience engagements during peak national advertising periods.

Subscription revenue continues to be strong and stable performer and an opportunity for our company through sound pricing models and premium content, subscription revenue on a same-property basis is down less than 1% since 2015. In the December quarter, total subscription revenue decreased 1.3% or 3.2% on a same-property basis.

And it’s important to note that we expect subscription revenue to improve throughout the year. In the last 12 months, the category represents 34.4% of total revenue for the company. In 2018, we will continue to adjust subscription pricing and add reader value through additional premium content.

In the December quarter, total cash cost decreased 6.6% or 8.9% on a same-property basis excluding workforce adjustments and other, as compared to the prior year quarter. Compensation decreased 9.8%, for the same-properties, primarily as a result of reduced staffing levels, and lower medical cost.

Majority of the staffing decreases is associated with our ongoing business transformation and outsourcing.

Newsprint and ink expense decreased 15.5% on a same-property basis for the quarter, primarily as a result of lower volume from unit reductions and a change to lower basis weight of newsprint both of which limited the impact of price increases in the quarter.

Other operating expenses decreased 7.1% on a same-property basis 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. Now here is Ron Mayo, our CFO for some additional financial highlights..

Thank you, Kevin. As Kevin noted, we are aggressively managing cost and we’ll continue to transform the business in 2018. We expect that with the carryover impact from our fiscal year 2017 business transformation, and additional changes currently underway, we will reduce cash cost on a same-property basis between 6% and 6.5% for fiscal year 2018.

As Mary mentioned, debt was reduced $16.4 million for the quarter and has been reduced $67.5 million in the last 12 months. The principal amount of debt at the end of the quarter was $532 million.

Interest expense decreased 8.7% or $1.3 million in the quarter and has fallen $6.2 million in the last 12 months due to our substantial quarterly debt payments.

In the December quarter, we paid down a second lien term loan by $5.2 million from Pulitzer excess cash flow at par and we expect to pay down the second lien term loan by an additional $5.6 million in the March 2018 quarter from Pulitzer excess cash flow at par.

With lower debt and strong adjusted EBITDA, the company's leverage net of cash is now 3.66 times its last 12 months adjusted EBITDA. The first-lien term loan with a balance of $33.9 million at December 2017 is amortizing quickly. While the term loan is due March 15, 2019, we expect to fully repay the loan before the end of the calendar year.

In addition, on March 15, 2018, the notes become callable at 104.75 and on April 1, 2018, the call premium on the second-lien term loan reduce to 103. Because of these factors, we are actively engaged in discussions and analysis with our advisors regarding the timing and economics of refinancing all or a portion of our long-term debt.

The decision and timing of any refinancing will be based on our ability to reduce our total cost of debt capital, extend the maturities of our debt, and maximize the deductibility of interest under the new tax law.

We currently have approximately $15 million of real estate listed for sale, of which $12 million is under contract and is expected to close in the first half of calendar year 2018. As a reminder, in the event a property owned by one of our Pulitzer subsidiaries is sold, those proceeds will also be used to repay the second-lien term loan at par.

In fiscal 2018, we expect to utilize all of our remaining Federal tax NOLs and become a cash tax payer in fiscal 2018. The recent changes in the Federal tax law reducing the Federal statutory rate from 35% to 21% is expected to reduce our total cash income taxes due in fiscal year 2018, and in the future.

The changes resulting from the 2017 tax act are complex and subject to interpretation. Our review of the impact on the company is ongoing. In 2018, we expect capital expenditures to be $10 million and expect to make pension contributions of $4.9 million.

Also, I would like to remind you that the public newspaper companies that were reporting their December quarter later this month will be reporting at 53-week year or a 14 week quarter as compared to our 13 week quarter, while we will also have a 53rd week, its 53rd week will not occur until September 2018.

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. An 8-K with supplemental Lee Legacy and Pulitzer financial data will also be filed tomorrow. .

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

Thank you. [Operator Instructions] Please state your name and company prior to asking your questions. Your line is now open. You may proceed with your questions..

Hi, this is Andrew Gadlin with Odeon Capital. Thanks for taking my questions. I was wondering if you could talk about the digital data room that’s been established that you mentioned it earlier in the call..

I am sorry, can you – on our end, we couldn’t hear the question very clearly. Do you mind repeating it? Thank you..

Sure, Mary. You mentioned the digital room initiative early on in the call. I was wondering if you could talk about that a little bit..

Sure, I’ll be able to talk about that. We’ve got a group that’s constantly looking at high quality created content and understanding how we want to put that out in the market when peak times for digital advertising rates are available across the networks from which we put that content. It’s worked out particularly well.

In addition to that, we give all of our editors a goal to make sure they are looking at their content in real-time, trend what stories are hot and making sure we have that out in the market as well and both of those programs, the digital content center and the sweep program have resulted in the – terrific results we had in programmatic advertising. .

And is there new initiatives, I mean, is this going to be something that’s going to be benefiting the company to the second half of the year or is this something that has been ongoing you are just noting it as part of the reason for the strong results?.

We’ll be benefiting from it for the rest of the fiscal year. .

And let me just add, we have been working on the sweeps program for a couple of years and we now are at the point where it’s extremely successful and we are learning how to drive traffic even more. So we’ve kind of built on our past success here, but as Kevin said, and we believe it’s going to help us in the future. .

Excellent, thanks.

And then, in terms of the $12 million of real estate that’s for sale, expect to close in the first half, what will be the initial use for those proceeds? I understand there could be refi before some of these transactions close, but as we sit here today, would that go to pay down the second-lien or the first-lien?.

It will go to pay down both. Some of those properties that are under contract are actually Pulitzer properties and some of them are non- Pulitzer properties. So, the mix is more heavily towards the non- Pulitzer properties, but it will go to pay down debt in both cases. .

Okay, great. All right. Thank you very much..

Thank you there are no further questions from callers. I will now turn the call back to our host Charles Arms to discuss questions from the webcast. .

Thank you.

The first question comes from our webcast, can you please provide your thoughts regarding the capital structure as the first and second-liens become callable in March and April respectively? Do you expect or intend to address them simultaneously or in steps?.

What we mentioned in our prepared remarks, we are actively engaged with our advisors in performing analysis as to whether it makes sense for us to refinance our debt in whole or in part. Our preference is to refinance the entirety of our debt.

As you are probably aware, we have a bifurcated capital structure meaning that our first-lien is our Lee legacy and our second-lien as collateral of the Pulitzer assets. We’d like to have all our collateral in one roof and so the ultimate goal here is to have one collateral and one debt. So, not having the current bifurcated capital structure. .

Can you speak to the recent sale of the Kentucky newspaper and why you saw it was worth selling?.

Let me lead off with that and then I’ll hand it over to Ron. As you might guess, we are periodically approached from interested parties who want to talk about sale of various locations and we always take these inquiries seriously, but I think it’s important to note here that Maysville is our smallest daily newspaper with circulation of about 3000. .

As we – Maysville is also – since it was our smallest newspaper, and we were able to get a very attractive price for us.

I mean, we have not disclosed what the total value of the sale is nor the multiple that we get nor do we intend to disclose what the multiple is on this, but it was a very attractive offer for us and we decided to sell the newspaper. .

And what was the newsprint volume in tons?.

We are not disclosing that. But it was down approximately 16% on a year-over-year basis. .

Could you speak more to the 9% decline in revenues for the quarter?.

Yes, you bet. In the past four years, retail and national digital categories have grown about 8.3% and 35% on an average rate respectively. It’s really the classified segment that has become more challenged and that’s what impacted the trend this quarter.

I would suggest that we expect to continue to grow digital revenue on pace with our past performance meaning that we expect it to improve. The other thing I would add is, rest assured that we have tons of revenue initiatives underway and our early forecast reflected improving trends. .

Do you plan to consider any digital-only acquisitions in the future, such as blog and content sites that are not connected to legacy print media?.

Yes, we would consider that. We don’t have anything on the docket at this time. But, our Vice President of Digital is looking at opportunities like that and if one came about that we thought makes sense for us, we’d certainly make that investment. .

Lee’s annual cost of debt is nearly 10% versus 6.5% for Tronc and 8% for McClatchy and to media.

Will Lee be able to reduce its annual process set refinance into a level in line with its peers and when?.

Well, one of the reasons that we are actively engaged in looking at refinancing some or all of our debt is because of our current cost to capital is approximately 10%. And it’s been increasing as we continue to pay down the term loan which is our lowest cost of capital.

So, ultimately, what the refinancing will yield in terms of rate, I can’t say at this point in time, but our goal is to be more in line with the public company peers that you have mentioned. .

But what can you do to make the market more aware of Lee’s discounts to its peers which has become more substantial in recent months?.

Well, what I would say to that is we aim as we have these calls, as well as speak at investor conferences and speak to our investors and potential investors, we work very hard to tell our strong story in terms of performance in current quarters as well as over the last several years.

We believe like apparently the person who asked this question that we are undervalued and we work very hard to tell our story. .

Are you at the point where you would consider repurchasing shares?.

Currently, we have and this is under our current credit terms, we have very limited ability to repurchase shares in the open market. That is one of the things that we are – that put on our list of things that we would like to improve upon what the covenants around that are as we look to refinance our debt.

But currently, we have very limited ability to do that just because of the current debt covenants. .

Well, just that conclude the questions from our webinar and I’ll now turn the call back over to Mary for closing remarks. .

As you've heard us say before, and earlier on this call, we are an industry leader in margins and we stay steadfastly focused on performing at a high level. We are confident that we have sound strategies and tactics in place to continue to transform our company, produce strong adjusted EBITDA and continue to make significant reductions in our debt.

Also as Ron explained and as we mentioned on, when we were answering questions, we are in discussions with our advisors, and our Board of Directors regarding the timing and economics of refinancing all or a portion of our debt.

As we noted, the decision will be based on our ability to reduce the total cost of debt, which was another question, extend the maturities and maximize the deductibility of interest under the new tax law. We very much appreciate your time and interest in Lee and thank you for joining the call..

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