Tim Millage – Vice President and Chief Financial Officer Mary Junck – Executive Chairman Kevin Mowbray – President and Chief Executive Officer James Green – Vice President-Digital.

Andrew Gadlin – Odeon Capital Group.

Welcome to the Lee Enterprises’ 2018 Third Quarter Webcast and Conference Call. The call is being recorded and will be available for replay beginning later this morning at lee.net. [Operator Instructions]. Several analysts have been invited to participate.

Also, participants accessing this call by the website 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, Tim Millage, Vice President and Chief Financial Officer..

Good morning. Thank you for joining us. In addition to myself, speaking on this morning’s call will be Mary Junck, Executive Chairman; and Kevin Mowbray, President and Chief Executive Officer.

Also with us on today’s call and available for questions are James Green, Vice President, Digital; Paul Farrell, Vice President Sales, and Nathan Bekke, Vice President, Consumer Sales and Marketing. Earlier today, we issued a news release with preliminary results for our third 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 of our – is our Executive Chairman, Mary Junck..

Thank you, Tim, and thank you all for joining our call this morning. Before we get started, I wanted to acknowledge Tim Millage, who earlier this week was named our Vice President, CFO and Treasurer. So big congratulations to Tim. Also, before discussing our June quarter, I wanted to give you a quick update on our agreement with BH Media Group.

As we discussed on our June investor call, we entered into agreement to manage Berkshire Hathaway’s 30 newspapers in digital operations beginning July 2. In exchange for managing the BH Media Group, Lee will earn $5 million per year in fixed fees in a percentage of profits over agreed-upon benchmarks.

While we will not disclose financial results of BH Media Group in our public filings or on our conference calls, we anticipate earning $50 million over the five-year agreement. We are early in our relationship and the transition is well underway.

We are extremely optimistic about the opportunity to partner with Berkshire Hathaway and the team at BH Media. Now turning to Lee’s financial performance for the quarter. The June quarter marked another quarter of positive momentum on the top line.

Revenue trends were driven by strong performance in subscription revenues, local retail advertising, including digital and national programmatic. TownNews also continued to perform well in the June quarter.

As we’ve mentioned in the past, Lee owns 82.5% of this rapidly growing digital company, while the primary source of revenue at TownNews.com is content management is quickly expanding advertising business contributed to the 13.7% revenue growth in the quarter.

Also, we experienced another strong quarter with $31.8 million of adjusted EBITDA and industry-leading margins, which has led to continued aggressive debt reduction. Debt was reduced $16.5 million for the quarter, and since our 2014 refinancing, debt has been reduced by more than $345 million.

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

Thank you, Mary. Revenue trends in the June quarter improved in many key categories. We’re especially encouraged with the improvement in our local retail category. This segment representing nearly 50% of ad revenue is comprised of small and midsized businesses that have responded favorably to our Edison program and our top local accounts.

Our results for this entire segment improved substantially from the prior quarter with the largest gains being realized in the SMB category. We launched the Edison Project over a year ago to transform the way to go to market, extend the length of our contracts and expand advertiser’s audience through a combination of print and digital advertising.

And we’ve done exactly that. In the June quarter, we increased the number of Edison contracts more than 24%. We increased the contract length, and we increased digital advertising amongst this group. Retail revenue from local advertisers declined just 4.3% in the June quarter.

This is the best quarterly performance for this category in more than two years. Digital revenue which includes digital advertising and digital services revenue increased 5.5% in the quarter. This was driven by an 8.6% increase in digital retail or 14.4% increase in programmatic revenue and a 13.7% increase in revenue at TownNews.com.

Total Digital advertising grew 4.7% and represented 33.7% of total advertising revenue in the third fiscal quarter compared to 29.1% in the third quarter of 2017. As noted earlier, programmatic revenue or national digital advertising increased 14.4% in the June quarter and totaled more than $10 million over the last 12 months.

We attribute these gains to smart and strategic pricing coupled with the periodic implementation of our company-wide Sweeps program which drives maximum audience engagement during peak national advertising periods. We’re especially pleased with our digital pricing power, particularly in the retail and national segments.

We believe this is an affirmation of the value and the efficacy of our local audiences and sites relative to the generic below the fold advertising available from local competitors. Subscription revenue continues to be a strong and stable performer, and an opportunity for the company.

Through sound pricing models, premium content and acquisitions, subscription revenue increased 1.6% in the June quarter. Over the last 12 months, subscription revenue represents 35.5% of total revenue for the company. We expect 2018 subscription revenue to remain strong and stable.

Our digital audiences and audience engagement grew significantly in the quarter. Average monthly visits were up 14.7% and totaled 73.7 million. Pages per session increased 17.3% in the quarter, a key indicator of increased audience engagement. We continue to change the way we do business to drive operating efficiencies.

On a same property basis, cash cost excluding restructuring cost were down 4.5%, and we expect FY 2018 cash cost to be down between 6% and 6.5%. Now here’s Tim with some additional financial highlights..

Thank you. As Kevin mentioned, we are continuing to transform our business in fiscal year 2018. In June quarter total cash cost excluding the restructuring cost decreased 4.5% on a same property basis. Year-to-date, cash cost are down 6.5% on a same property basis.

Compensation decreased 8.5% on a same property basis, primarily as a result of reduced staffing level. The majority of the staffing decreases are associated with our ongoing business transformation and outsourcing.

Compensations to cost in the current quarter were adversely affected by higher cost associated with our self-insured medical plans, which increased 12.9%. Newsprints and ink expense increased 5.3% on a same property basis for the quarter.

The impact of price increases, including the impact from tariffs on Canadian newsprint is having a significant effect on our business. Lower volume from unit reductions and a change to lower basis weighted newsprint limited the impact of price increases.

Other operating expenses decreased 1.4% on a same property basis in the quarter, primarily driven by lower delivery cost.

As part of our business transformation efforts, we have outsourced certain functions, and while the outsourcing efforts have yield a favorable result overall, the reclassification of cost from outsourcing adversely affected this expense category in the third quarter.

We also made significant investments to our distribution channels in 2018, which drove advertising revenue in the third quarter. We believe these investments will continue to be fruitful in future quarters.

Despite one-time items, significant investments to our distribution channels and significant increases in newsprint prices, we are reaffirming our cash cost guidance. We expect cash cost in FY 2018 to decrease between 6% and 6.5%.

As Mary mentioned, debt was reduced $16.5 million during the June quarter, and has been reduced $68.7 million over the last 12 months. The principal amount of debt at the end of the quarter was $499.8 million.

Interest expense decreased 9.9% or $1.4 million in the quarter and has fallen $5.5 million over the last 12 months due to our substantial quarterly debt payments. In the June quarter, we paid down the second-lien term loan by $6.3 million from Pulitzer excess cash flow. This payment was made at par.

We expect to pay down the second-lien term loan by an additional $3.6 million in the September quarter on Pulitzer excess cash flow at par. With lower debt and strong adjusted EBITDA, the company’s leverage net of cash is now 3.57x last 12 months adjusted EBITDA.

We continue to be actively engaged with our advisers in evaluating an opportunistic refinancing. The first-lien term loan, which has a balance of $14.4 million at the beginning of the June quarter is amortizing quickly and is expected to be repaid before its maturity in March of 2019.

The remainder of our debt is not due for another four to five years. As we evaluate the timing and economics of an opportunistic refinancing, the decision we based on our ability to reduce our total cost of debt capital, extend the majorities of our debt and maximize the deductibility of interest under the new tax law.

Currently, we have approximately $14 million of real estate listed for sale, of which $6.7 million is under contract, although there can be no assurance that all or any of these transactions were closed.

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 year 2018, we expect to use all of our remaining federal tax net operating losses and become a taxpayer.

The recent change to the federal tax law, reducing the federal statutory rate from 35% to 21%, is expected to reduce the total cash income taxes we owe. We are still reviewing the changes to the tax law and its impact on our payment of income taxes in 2018 and beyond.

In 2018, we anticipate capital expenditures to total up to $8 million, and expect to make pension contributions [indiscernible]. Lastly, we expect to file our 10-Q with the SEC later today. And as always, it will include additional information on our results and expectations.

In 8-K with supplemental Lee Legacy and Pulitzer financial data will also we filed 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. [Operator Instructions]. And caller, your line is now open. You may proceed with your question..

Hi, good morning. It’s Andrew Gadlin from Odeon Capital Group..

Good morning..

Good morning..

I wanted to ask you if this quarter reflected any expenses from the new Berkshire contract? And the follow-up question is, if you could help us, Tim, in understanding what – where revenues will fall within the model going forward, as well as where will the expenses fall?.

So with respect to Berkshire expenses in the quarter, there were no significant increases in expenses as we had talked about at the announcement of the agreement.

In terms of revenue and cost associated with the agreement going forward, any revenue that we generate from the management agreement will roll into the other revenue line in our income statement. And again, we do not expect any significant increases in expenses as a result of the agreement..

Got it. And then as TownNews gets larger and you think about the growth opportunities there.

Does being a part of Lee Enterprises, help that growth or hurt that growth? Would it make sense almost to think about spinning that out so there is no – so that there is a sense that this can be a completely independent partner to all your newspaper partners in that venture?.

Well, I’ll jump in then I’ll turn over to James Green, who manages TownNews for us. What I would say is, we benefit as, as TownNews by the relationship, because we’re the first that they work with as they develop tools for CMS and advertising programs for us and other papers. And we run them pretty independently to begin with.

James, is there anything you’d like to add to that?.

No. the only thing that I’ll add is the relationship between Lee and TownNews is pretty strong. As Kevin mentioned, on the programs that TownNews comes up with and Lee comes up with testing [indiscernible].

So, really we do run them completely independently now that’s may be something that we address down the line, but now we see the relationship is really strong and no need to change that relationship at this point..

Got it. Okay, very helpful. All right, guys. Thanks very much..

Thank you..

There are no further questions from callers. So I will now turn the call back over to your host Tim Millage to discuss questions from the webcast..

Great. Our first question on the web is, can you provide an update as to the status of their refinancing? And as we discussed in the remarks, we continue to have ongoing discussions with our advisers on an opportunistic refinancing, and again, we’re looking at the terms compared to call premiums that we currently have.

And considering that we’re rapidly paying down the first-lien term loan, and we’ll not have substantial majorities for another four to five years. So all those things considered – we’re considering and we’re looking at refinancing our debt. The next question relates to pension contributions.

Can you – what are the pension contributions expected for this year? And we expect pension contributions to total $4.9 million for FY 2018.

The last question that we see is what effect of newsprint tariffs – what effect will they have on Lee’s operating results? And as you saw in our third quarter results, newsprint expense was up 5.3%, largely due to significant price increases.

Yesterday, there was some announcements that there may be some pull back on that, but we’re going to continue to evaluate that as we think about our expense in the future. And that wraps up the questions that we have on the web. And I’ll turn it back to Mary for closing remarks..

Great. Well, thank you, everyone for your continued interest in Lee. As you know, we are the industry leader in financial and digital performance. And we are steadfastly focused on performing at a high level.

We’re confident that we have sound strategies and tactics in place, including our recent agreement to manage Berkshire Hathaway’s newspaper and digital operations. We expect to continue to produce strong adjusted EBITDA and continue to make significant reductions in our total debt.

As Tim noted and as we discussed during the Q&A, we are in discussions with our advisers and Board of Directors regarding the timing and economics of refinancing all or a portion of our debt.

The decision 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. Again, we appreciate your time and your interest in Lee, and thank you 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 call..