Good day, everyone, and welcome to the Lee Enterprises 2019 Second 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]. A link to the live webcast can be found at www.lee.net.

And now I will turn the call over to your host, Jamie Seratt, Corporate Controller. Please go ahead..

Nathan Bekke, Vice President, Consumer Sales and Marketing; Paul Farrell, Vice President, Sales; and James Green, Vice President, Digital. Earlier today, we issued a news release with preliminary results for our second fiscal quarter of 2019. 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 relevant GAAP measures are included in tables accompanying the release. And now to open the discussion is our President and Chief Executive Officer, Kevin Mowbray..

first, dominating market share among print and digital local market operations; second, continued diversification of our customer base in broadcast radio and other market; and third, increasing average revenue per user from existing customers. Moving to the advertising side of our business.

Local controllable retail accounts are the core of our business. This revenue category represents approximately 6% of advertising revenue and is comprised of SMBs and top local accounts.

Our local sales teams have direct contact and strong relationships with key decision-makers, which has allowed revenue from this category to outperform overall advertising trends. This means we're less reliant on national retail accounts today. We have a number of tactics aimed at growing local controllable revenue.

One in particular is Edison, which is our go-to-market sales approach for small- and mid-sized local businesses. The objective of Edison is to provide unmatched reach and frequency for advertisers through turnkey print and digital solutions.

We know Edison is working as the local retail revenue trend over the first 6 months of 2019 is almost 700 basis points better than our total advertising revenue trend. Another tactic into growing local retail revenue is our Amplified Digital agency, a centralized approach to selling custom digital advertising and marketing campaigns.

Our agency approach is anchored by agency-level creative, a complete suite of print and digital media and custom promotions, and events when appropriate.

We believe the Amplified Digital agency has competitive advantages with local advertisers for these many reasons, including we partner with the best names in digital and our preferred partner with Google. We are the largest local media sales organization in the markets we serve.

Furthermore, we staff a dedicated team of digital marketing experts for the pursuit of more sophisticated online marketing opportunities. We have the natural advantage of owning the largest local audience, where the level of customer engagement outperforms exchange-based environment by at least 6x.

We provide our customers with sophisticated analytics that enable us to refine campaigns and drive optimal results for our advertisers. Revenue from the Amplified agency is up 18% in the second quarter. We expect that trend to continue throughout FY '19.

On the subscription side, revenue was down 1.9% in the second quarter, a 220-basis-point improvement from the first quarter trend. As we mentioned last quarter, we're transitioning our customers to a membership program called News+, which was launched in most of our markets in March and April.

Over the next 6 months, we expect some quarter-over-quarter volatility to our subscription revenue trends as the impact fromNews+ is realized primarily due to timing. However, once the downs and ups are factored, we do expect strong performance in subscription revenue in 2019.

The News+ membership model combines premium content and rewards program and offers more access to content for digital subscribers. News+ has 5 tiers of benefits and rewards, tiers for full access that include print and digital access, and 2 of the tiers are digital-only.

We believe that having different tiers of rewards and benefits as well as different price points, the News+ membership model will improve retention and provide continuing opportunities for strategic pricing actions. Our audiences are massive, reaching nearly 80% of all of the adults in our larger markets.

While nearly half of our audience reads our printed product, we continue to experience a significant increase in digital content consumption. Therefore, growing our digital-only subscriber base will continue to be a key area of focus. In the second quarter of 2019, our digital-only subscription increased 55.5%.

In the second quarter, we earned $3.9 million of revenue from BH Media Group management agreement. Over the first 9 months of agreement, we earned $7.8 million in fixed and variable fees with no added cost to Lee. We're very pleased with the partnership we have with Berkshire Hathaway.

Total revenue for the quarter was down 4% and cash costs were down 2.6%. Adjusted EBITDA totaled $23.6 million in the quarter and totaled $125.9 million over the last 12 months.

While there are industry challenges, we believe we have the right core strategy that will continue to produce industry-leading performance because we operate in mid-sized markets with huge audiences, and we’ve held our margin for more than a decade and our margins are nearly twice the industry average while we continue to outperform the industry in key financial performance metrics.

Those metrics include total revenue, digital revenue growth, and subscription revenue. Overall, we're pleased with our second quarter operating results and remain optimistic about the future. And now here's Tim to add some additional financial highlights..

lower compensation and benefits cost predominantly due to voluntary buyouts offered late in the second quarter; continued business transformation through outsourcing and centralization; reductions in newsprint pricing; and reductions in print legacy costs.

Adjusted EBITDA totaled $23.6 million in the quarter and $125.9 million over the last 12 months. As we have discussed over the past several months, we are having productive refinancing conversations with our advisers and our lenders.

Although market conditions will dictate final terms, our goals in a refinancing remain to reduce the cost of capital, have less restrictive covenants than we have today for such things as stock buybacks and to extend our maturities of debt. Also of consideration is the breakage cost of our current debt, which totaled $9 million today.

As of the end of the second quarter, the principal amount of debt totaled $476.5 million. With the repayment in full of our first-lien term loan in November, we can use our free cash flow to repay the bond at a price of 102 3/8% or we can buy the bonds back in the open market.

Also we can use excess cash flow from Pulitzer to repay the second-lien term loan at par. The payment on the second-lien term loan from Pulitzer excess cash flow in March quarter is expected to be $7.3 million, which will be paid in our June quarter. Excluding our revolving facility, our nearest maturity is March of 2022.

And outside of an excess cash flow sweep on our Pulitzer assets that allows us to repay our highest cost of capital debt at par, we have no mandatory principal payments. With lower debt and strong adjusted EBITDA, our leverage net of cash is 3.6x the last 12 months' adjusted EBITDA.

Over time, we have worked to monetize non-core assets, including excess real estate and investments. Currently, we have identified approximately $23 million of excess real estate. And we have a private equity investment worth approximately $10 million that we are working to monetize.

As a reminder, in the event assets owned by one of our Pulitzer subsidiaries is sold, those proceeds will also be used to repay the second-lien term loans at par. In fiscal year 2018, we used all of our remaining federal tax NOLs and we'll become a taxpayer in 2019.

In the second quarter of this year, we repaid -- we paid $3.9 million in federal and state income taxes. For the entire 2019 fiscal year, we expect to pay between $9 million and $11 million in federal income taxes. Last, 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. An 8-K with supplemental Lee Legacy and Pulitzer financial data will also be filed. And this concludes our remarks. The team will remain on the line for any questions you may have.

And following questions asked by phone, we will answer any submitted during the webcast. Operator, please open the line for questions..

[Operator Instructions].

It's Andrew Gadlin from Odeon Capital Group. Looking at the TownNews, you reported about $21 million, $20.9 million of revenue over the last 12 months.

Could you give us a sense of how big the addressable market is for TownNews?.

Yes. So you're right, we had $20.9 million of revenue over the last 12 months at TownNews, and a substantial revenue growth. As Kevin talked a little bit about we see growth area of TownNews in a few different areas. One, increasing ARPU from existing customers, and we think there's a substantial amount of revenue to grow there.

The majority of the TownNews customers are on one side of their core CMS products. The other CMS product is a higher-value product that does have significant ROI to those customers. We do think there's additional room to grow in the broadcast space as well. So we do think there's substantial growth for TownNews..

Yes. I would agree..

Maybe asking the question a different way, do have a sense for what your market share is? I'm just trying to understand. I mean the business is growing very nicely in a difficult advertising backdrop. I'm trying to understand really how big this can get..

Yes. Well, we think it has a lot of upside. To help you maybe assess it a little bit further is we have pretty significant market share in print, and as Tim just mentioned, an opportunity to sell them, our more sophisticated total management system. However, our movement into broadcast and radio has a lot of room for growth.

And we've had a lot of beginning success based on the investments that I mentioned earlier that we've made in video broadcast and streaming technology as well as WordPress plug-in that television stations want, and we’re hot in pursuit in pursuing those industries. And we've had good track record as we've move that direction..

Okay. And then in terms of the -- you've talked in the past about debt refinancing. I missed it if it was in your prepared remarks. But I was wondering if you could talk about your latest thinking on that..

one, lower our cost of capital; extend our runway well beyond the 3 years that we have today; third, to allow for a larger restricted payment basket immediately than we have today, today we have a $15million basket that grows as leverage improves; fourth, we want to allow us to use our cash flow to repay debt at par.

Right now, we're in a situation where our -- the first-lien term loan is paid off and our notes are under call protection. Our second-lien term loan has an excess cash flow sweep. So we don't have any debt that's payable at par. And last, we want to clean up our capital structure.

So right now, we have the split collateral baskets between Lee Legacy and Pulitzer. We want to work to clean that up and then have one collateral basket. So hopefully, that gives you some framework as to how we're thinking about it..

Yes.

And is it the type of thing where we'll just wake up 1 day and there'll be a press release? Or do you have a particular time frame where you think all this comes to a head?.

Yes. Well, I think certainly we're evaluating it based on the objectives that we laid out. And if there's something that meets our objectives and we can execute on, we'll certainly announce that when the time comes..

[Operator Instructions]. And it appears there are no further questions from the callers. I will now turn the call back over to our host, Jamie Seratt to discuss questions from the webcast..

When will Lee pay investors a quarterly dividend?.

I'll go first, and I'll turn it over to Tim for additional feedback. As we've said many times, we're going to be using all of our additional cash flow to pay down debt, and as we have done recently, make smart, strategic acquisitions for TownNews and other print tuck-ins that we've done. And so, dividend would fall below those priorities..

I think the only thing I would add just as our capital allocation decisions for dividends and stock buybacks, I mean right now, we've talked about our leverage target of 2.5x. Right now, we're in excess of that. And this quarter, our leverage remained relatively consistent from where it was last quarter.

And so, our focus is going to be to continue to deleverage until we can get closer to that 2.5x target leverage point. That being said, we do have the authorization out there from our Board to buy back up to $10 million of stock over 2 years and would deploy that if broader market conditions continue to weigh on our stock.

If we have no more questions from the webcast, back to Kevin..

Well, thank you. Thank you for your continued interest in Lee. We remain steadfast in our optimism about our future as our digital transformation continues.

We aim to grow our business through subscriptions, local retail accounts, and digital services, top line execution, combined with a keen focus on our cost structure while continuing to produce strong adjusted EBITDA will continue to reduce our total debt, which we believe will increase shareholder value.

We appreciate your time and your interest in Lee, and thank you for joining us today..

And thank you, ladies and gentlemen. At this time, we have reached the end of our question-and-answer session. This concludes our call. You may now disconnect..