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

Please standby. Welcome to the Lee Enterprises’ 2018 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’ll be an opportunity for questions. Several analysts have been invited to participate.

Also, participants accessing this call may -- 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, 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 Nathan Bekke, Vice President, Consumer Sales and Marketing; Paul Farrell, Vice President Sales; and James Green, Vice President, Digital. Earlier today, we issued our news release with preliminary results for our fourth fiscal quarter of 2018.

It is available at lee.net as well as at major financial websites. Due to our fiscal calendar, our 2018 fiscal year and fourth quarter included an additional week of revenue and operating expenses. We also acquired and divested property over the last two years.

Certain trends are denoted as same-property which excludes the impact of the additional week of operations as well as the impact of acquisitions and divestitures. Unless otherwise noted, our results discussed below are on a GAAP basis.

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’ll 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. For those participating on the webcast, we’ve included slides to facilitate our discussion.

For those participating by phone, a slide will be posted to lee.net later today. And now to open our discussion is our Executive Chairman, Mary Junck..

Thank you, Tim. And good morning, everyone. And thank you for joining our call. We are very pleased with the operating performance in our fourth quarter and for fiscal year 2018.

In our Q4, total revenue was almost flat to prior year, due to strong performance from local advertisers, significant revenue growth at TownNews, revenue from the BH Media Group management agreement, as well as the extra week of operations in 2018.

On the cost side, cash cost on a same-property basis were down 4.9% in Q4, and down 6.1% in fiscal year 2018, hitting our previously announced cash cost guidance. We believe that we are at the top of the industry at managing the transition to digital.

We maintained our strong adjusted EBITDA totaling a $134.8 million in the fiscal year, and we have held our margins steady for more than a decade. In 2018, our margins were 22.6% more than twice the industry average. Also, according to third-party research, we capture more than twice the industry average in digital market share.

And according to Google, we have the highest programmatic rates in the industry. While our industry continues to face headwinds, we remain optimistic because we grew digital revenue at a compound annual growth rate of 8.1% over the last seven years, and our audiences remain huge. A few comments on our huge audiences.

We delivered large audiences across all age groups in both print and digital. Clearly, our audience growing strategies particularly in digital are paying-off. As shown on this slide, in our larger markets, we reach 79% of adults over a seven day period.

Of those 50% are print readers and 50% access our digital products, up significantly from 35% last year. And as you'll note, we are highly relevant across all age categories, including the millennials where we reach 77% of that group.

In our most recent quarter, average monthly digital unique visitors were up 12.4% in total 28.7 million and paid view per session, a metric we use to monitor engagement increased 11.6% in the fiscal year. Let me underscore here that our newsrooms are working hard to drive our digital audience in real time everyday.

We’re monetizing our best to engage audience in many ways. On a compound annual growth rate, over the last three years, subscription revenue was flat, digital national revenue was up 13% and digital retail advertising is up 8.1%.

The executives at Berkshire Hathaway recognized our industry leadership and selected us to manage their operations beginning in July of 2018. As a reminder, the agreement provides us with flexibility to implement our revenue initiatives and business transformation consistent with how we have managed our own local media operations.

We are working directly with BH operators to deploy the Lee playbook, which means that there is no additional overhead or cost burden to Lee. In other words, the revenue generated from the management agreement translates directly into EBITDA. This agreement is for five years with the option to renew at the end.

We receive a minimum fixed fee of $5 million per year plus a percentage of profits over benchmarks. The transition under the management agreement has been a success and we’re confident in our ability to achieve $50 million or more over the five-year period. We expect to recognize at least $9 million in 2019. 2018 was a successful year at Lee.

And while we recognize the industry headwinds, we remain steadfast in our optimism. We operate in attractive midsize markets with huge audiences. We’ve outperformed the industry in many key financial performance metrics, including digital revenue growth, subscription revenue performance and margin.

And we have a growth strategy aimed at achieving a digital inflection point when digital-related revenues exceed print-related revenue. At this time, I will turn it over to Kevin to further explain our growth strategy and discuss our operating results. .

consumers, local account and digital services. The key category of our growth strategy is to retain and grow revenue from consumers. We’re by far the dominant source of local news and information in the communities we serve. We have more reporting subscribers on the street than all of our competitors.

Our brands are well-established in the deep community groups. We publish breaking news and updates around the clock that is engaging to our large local audiences. We’re committed to driving audience growth by delivering valuable local news and information to consumers.

Our digital content center supports the local news operations due to syndication of recontent and other content including national and world news. In 2018, the DCC generated over 220 million pages released. For context, only [SCL] today generates more digital traffic.

In 2015, we rolled out our full access subscription model, where subscribers receive full print and digital access to all of our content. We also offer digital-only subscriptions in all of our markets. Nearly 50% of our full access subscribers have activated their digital subscription. In 2018, digital-only subscribers increased more than 70%.

We aim to drive significant increases in the number of digital-only subscriptions in 2019, doubling the number of digital-only subscribers we had in 2018. Subscription revenue on a same-property basis in the fourth quarter of 2018 was down 2.1% and was down 1.7% for the fiscal year.

Since 2015, subscription revenue, including the impact of acquisitions and divestitures, has remained strong and is a positive over that time period. The testaments are a trusted high-quality local content on our premium content strategies. Local control of retail accounts is a core of our business.

This revenue category represents 50% of our advertising revenue and is comprised of SMB and our top local accounts. It’s our sweet spot because we have a competitive advantage. In that, our local sales teams have direct content with key local decision-makers.

Over the last three years, the revenue trends in this category have been better than our overall results. In the fourth quarter revenue from SMBs was down 3.7% on the same-property basis. Our Edison program aimed at this category grew accounts by 58% and grew revenue by 44% in 2018.

We believe local controllable retail is a significant opportunity for us as our large, well-trained salesforce leverage our huge audiences to these local advertisers. Digital advertising programs are a key to growing our local controllable retail revenue category with an 8.1% compound annual growth rate since 2012, we lead the industry.

Going forward, we’ll move at an even more rapid pace to aggressively drive digital revenue. We’ll get there because the key to our success has always been our initiative-based operating talent combined with strong execution. We’ve a number of package aimed growing digital revenue.

One in particular is our Amplified Digital Agency with centralized approach to selling agency level digital campaign. It includes a full-service [SEM] campaign targeted programmatic display and email plus targeted digital display. Amplified Digital was very successfully launched at the St.

Louis Post-Dispatch in 2018 and they had the talent, resources and expertise to drive this business across Lee. We’ve already rolled out the Amplified Digital Agency to all of our largest markets.

While digital marketing services are becoming commoditized, especially programmatically, our key competitive advantage is that we drive strong strategy, great creative and data analytics that outperform the competition.

The Amplified Digital Agency has earned the preferred partner status with Google giving us another competitive advantage in the marketplace. TownNews represents a powerful opportunity to drive additional digital revenue providing state-of-the-art web hosting and content management systems in 1,700 other media organizations including broadcast.

Over the past seven years the compound annual growth rate of TownNews was 12% and is posed for more significant growth. In 2018 TownNews grew by 19.8% with margins in excess of 40%. Because our content management services are widely regarded as best-in-class, we expect to continue to substantially grow revenue in this category.

To expand in the broadcast, we made significant investments and enhanced video capabilities as well as over-the-top technologies in 2018. We recently signed with 40 television stations, including Meredith and [Golf]. TownNews’ technology, video capabilities and value propositions position us well to gain market share and grow revenue in broadcast.

To reiterate, we’re pleased with our 2018 operating results and we remain optimistic about our future. And here’s Tim to discuss additional financial highlights..

Thank you, Kevin. We have a long track record of responsibly managing our cost structure. Over the last three years, we have removed $84.5 million in cost from our operations, through the business transformation, including regionalization, centralization and outsourcing and that’s held our margin constant for more than a decade.

In the fourth quarter, cash costs on a same-property basis were down 4.9% and in fiscal year 2018 cash costs on a same-property basis were down 6.1%, achieving our previously announced cash cost guidance. Compensation on a same-property basis decreased 9.9% in the fourth quarter, primarily as a result of reduced staffing levels.

The majority of our staffing decreases are associated with our ongoing business transformation and outsourcing. Newsprint and ink expense on a same-property basis increased 15.1% for the quarter due to significant price increases. Lower print volumes limited the impact of the price increases.

Other operating expenses on a same-property basis decreased 2.2% in the quarter, primarily driven by lower delivery costs, partially offset by outsourcing. Favorable revenue trends and responsible cost management, in 2018, adjusted EBITDA totaled $134.8 million.

With strong adjusted EBITDA and limited other uses of cash, debt was reduced $15 million in the quarter, $63.5 million in the fiscal year, and has been reduced $360 million since our March 2014 refinancing. The principal amount of debt at the end of 2018 was $485 million.

Interest expense decreased 4.8% or $700,000 in the quarter and has fallen $4.7 million over the last 12 months due to our substantial quarterly debt payment. With lower debt and strong adjusted EBITDA, the company's leverage net of cash is now 3.56 times the last 12 months adjusted EBITDA.

We continue to be actively engaged with our advisories in evaluating an opportunistic refinancing. In November, subsequent to the end of the fiscal year, we repaid the remaining $6.3 million of our first lien term loan almost five months ahead of its maturity. The remainder of our debt is not due for another three to four years.

As we evaluate the timing and economics of an opportunistic refinancing, 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.

Currently, we have approximately 10 million of real-estate listed for sale at various stage of the sale process. As a reminder, in the event of property owned by one of our Pulitzer subsidiaries sold, those proceeds will be used to repay the second lien term loan at par.

In fiscal year 2018, we used all of our remaining federal tax NOLs and will become a tax payer in 2019. 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. Lastly, we expect to file our 10-K with the SEC later today.

And as always, it will include additional information on our results and expectations. An 8-K with supplemental financial information will also be 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 phone, we will answer any submitted during the webcast.

Operator, please open the line for questions. .

[Operator Instructions]. And we have no one queuing over the phone lines to ask a question. So I will hand the call back over to our host Tim Millage to discuss questions from the webcast. .

Great. Thank you.

The first question on the webcast is, I'm hearing the company remain in the high boot and they offer superior digital marketing solution, can you comment on Lee views?.

Yes, I will jump in. We have over 75 vendors that we work with to drive the digital results that we spoke to on the phone and we are pretty pleased with the efforts we have regarding our Amplified Digital Agency rollout across Lee. With that said I'm not myself personally familiar with it and certainly when we look into it.

James anything you would like to add?.

No, I’d kind of mention, I think probably key is to making sure that you’re on the forefront of digital marketing services which we believe our Amplified Agency has some of those figures, making sure that you translate value and performance for advertisers and valuing those, and so I think that’s part of what we’re looking at and I tune that into and I believe we can do it..

Next question over the webcast is when you will be able to start repurchasing stock?.

This is Mary and the answer to that is, we have limited ability in our covenants to buy back -- repurchase shares, buy back stock. But it’s something that we talk about at every single Board meeting and we will continue to do that. .

The next is, as you transition to digital, what do you specifically see within your current digital business that could be a huge win for a few years out?.

A couple of things, we see significant growth in our ability to drive digital revenue, tied to our Amplified Digital Agency rollout that just begun in this current quarter. Secondly, we know we have a lot of upside through TownNews as we spoke to in our release and they are poised for significant growth.

And then thirdly, we have under development a couple of new digital initiatives that will be rolling out in Q3 and Q4 that will substantially increase our digital results. And I would also say digital revenue that we’re looking at right now in the current period looks to be very promising..

The next question comes, why does through a webcast and why does we wait so long after the quarter into a quarterly results?.

This is our fiscal year-end, fiscal year ended at the end of September, so this is our annual filing in conjunction with the filing of our 10-K, which is later today. Typically our normal quarter would be out of normal reported cycles relative to our peers.

Can you comment on the revolver that expires at the end of December? We’re working with our advisors right now to amend and extend our revolver as we have it and we expect to get that amended and extended before the maturity at the end of December. The next question, Lee has been talking about an opportunistic refinancing for several quarters.

Can you provide initial clarity on refinancing?.

This is Mary again and yes I can. As we note and we have been talking to our advisors and our decision to refinance is going to be based on our ability to reduce the total cost of our debt capital to extend the maturities of our debt and to maximize the interest under the new tax laws.

And at this point, as we've noted, we have a very good runway three to four years. So we are going to treat this very opportunistically..

The next question is, can you give us an idea of how much of the adjusted EBITDA in the quarter came for the Berkshire Hathaway agreement? We recognized $1.3 million in adjusted EBITDA in revenue from the BH management agreement and as we’ve talked about all of that was EBITDA. .

That concludes the question we have over the web. I will turn it back -- I will turn it over to Mary for closing remarks..

Well thank you so much for your continued interest in Lee. As we noted we’re the industry leader in financial and digital performance and we’re steadfastly focused on performing at a high level. We believe we’re at the top of the industry at managing the transition to digital.

We’re optimistic about our future as we aim to grow our business through consumers, local retail accounts, and digital services. Top-line execution combined with our keen focus on cost structure will produce strong adjusted EBITDA and we’ll continue to make significant reductions in our debt.

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’ve reached the end of our question-and-answer session. This concludes our call..