Welcome to the Lee Enterprises 2023 Third Quarter Webcast and Conference Call. The call is being recorded and will be available for replay at investors.lee.net. At the close of the planned remarks, there will be an opportunity for questions. [Operator Instructions] A link to the live webcast can be found at investors.lee.net.

Now, I will turn the call over to your host, Jared Marks, Senior Director, FP&A..

Good morning. Thank you for joining us. In addition to myself, speaking on this morning’s call are Kevin Mowbray, President and Chief Executive Officer; and Tim Millage, Vice President, Chief Financial Officer and Treasurer.

Earlier today, we issued a news release with preliminary results for our third quarter of 2023, which is available at lee.net as well as at major financial websites. Please also refer to our earnings presentation found at investors.lee.net that includes supplemental information.

As a reminder, this morning’s discussion will include forward-looking statements 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 refer to certain non-GAAP financial measures, including adjusted EBITDA and cash costs, 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 President and Chief Executive Officer, Kevin Mowbray.

Kevin will open the conversation on Slide 3 of the earnings presentation for those following along..

Good morning, everyone and thank you for joining us. Our third quarter results represent solid digital growth, especially revenue growth tied to our digital subscription offerings as well as strong revenue growth at Amplified Digital as we continue to grow our digital businesses and an industry-leading [clip] [ph].

Later in the call, Tim will review our third quarter results, including our updated FY ‘23 guidance. And lastly, I’ll discuss how we continue to accelerate our digital transformation tied to our three-pillar digital growth strategy.

Our third quarter digital subscription results continue to lead the industry by a significant margin, continuing our streak for the last 14 quarters. We now have 606,000 digital subscribers, which represents a 44% compound annual growth rate over the last three years.

This long-standing outperformance gives us even more confidence in achieving our goal of 900,000 digital subscribers and more than $100 million of digital subscription revenue.

While the soft advertising environment impacted all aspects of our advertising revenue stream, Amplified Digital grew revenue 15% in the third quarter and has grown 35% over the last 12 months.

Revenue at Amplified Digital over the last 12 months totaled $89 million and has grown 40% annually over the last three years, far outpacing the industry performance.

The growth in digital subscription revenue and Amplified Digital revenue fueled the growth in total digital revenue which totals $265 million over the last 12 months, an 18% increase over the prior year. The solid performance is on track to achieve our FY ‘23 guidance for total digital revenue.

The significant growth of our digital revenue from our three-pillar digital growth strategy has transformed the composition of Lee’s overall revenue. When we first launched our three-pillar digital growth strategy, digital revenue represented only 21% of our total operating revenue.

And after two and a half years of execution, digital revenue now represents 41% of our revenue. As we continue our transformation, we expect that by 2026, more than half of our revenue will be in digital, allowing for more consistent overall top line revenue performance.

Our industry-leading growth in both digital subscriptions and Amplified will continue to drive Lee to this inflection point. And now I’ll turn over to Tim for more details on our third quarter results..

Thank you, Kevin, and good morning, everyone. Total operating revenue was $171 million in the third quarter. Digital revenue growth continued at a strong pace with total digital revenue up 15%, driven by 43% growth in digital subscription revenue and 15% growth at Amplified Digital.

The acceleration in digital subscription revenue growth is driven by investments we have made in top talent in the areas of content, branding and consumer marketing. These investments are producing strong results through engaging local content, effective branding campaigns and KPI-driven marketing campaigns.

On the advertising side, digital advertising revenue increased 8% compared to the third quarter last year. As Kevin previously mentioned, we are encouraged by this level of growth given the soft ad market. Our strong performance is driven by 15% growth at Amplified Digital, our full-service agency.

Revenue at Amplified totaled $24 million in the quarter as we have seen an increase in Amplified’s average revenue per customer over the past quarter. Our print revenue performance continues to be challenged.

The broader industry is experiencing a pullback in local advertising spend, and that has accelerated the declines of our current revenue streams. Additionally, we eliminated a number of advertising products that no longer meet our profitability standards.

These decisions adversely affected print advertising revenue trends that had a favorable impact on adjusted EBITDA. Excluding the impacts of these decisions, print advertising trends would have improved by 8 percentage points.

On the print subscription side, we are seeing continued higher than historical unit attrition, which is keeping our full access revenue trends down closer to industry trends. We do expect these to continue for at least the remainder of the fiscal year.

Cash costs were down 14% as we responded quickly to the soft revenue environment through a series of permanent and temporary cost reduction efforts. Adjusted EBITDA totaled $23 million in the quarter with year-over-year growth of 1%.

Our rapid digital growth and strong cost management is expected to drive solid adjusted EBITDA growth in the fourth quarter. As a result of the continued secular decline of print revenue, combined with a soft advertising environment, we continue to be keenly focused on identifying opportunities to further optimize our legacy cost structure.

For the fiscal year, we expect to realize between $86 million and $96 million and cost benefit from business transformation initiatives executed midway through last year and new initiatives executed midway through this year.

These actions will include reductions to our base of costs that are directly tied to print, particularly in distribution, manufacturing, corporate services as well as print advertising.

The $76 million of annualized cost reductions executed partway through this fiscal year, had a significant impact on Q3 adjusted EBITDA and that is expected to continue in our fourth quarter as well as in fiscal year ‘24.

While we are focused on managing the decline of our print businesses as those revenue streams mature, our main priority is to drive long-term sustainable digital revenue growth.

With that in mind, we continue to invest in talent and technology in the areas of our business tied to our digital future and our commitment to high-quality local news remains steadfast. These targeted investments will be the catalyst that drives our digital future. However, they are impacting our costs in this fiscal year.

We expect the investments we are making this year to total approximately $25 million. Costs will have a short-term impact on our margin profile but are expected to drive these digital transformation. Moving to Slide 9. Principal amount of debt at the end of the third quarter was $460 million.

As a reminder, our credit agreement with Berkshire Hathaway, our sole lender has favorable terms that are incredibly important for us as we execute our strategy. It allows us time to transform Lee by making the necessary investments in talent and technology that fuel our recurring sustainable revenue growth.

The agreement was executed in 2020 and has a fixed interest rate and a 25-year maturity. These favorable terms have been incredibly helpful in the rising rate environment we have seen over the last few years.

We made no pension contributions in the third quarter, and we do not expect any material pension contributions in 2023 as our pensions are fully funded. Finally, we continue to identify opportunities to monetize our non-core assets, which facilitates accelerated debt repayment.

We closed $7 million of asset sales this fiscal year through the third quarter. We have identified an additional $30 million of non-core assets to monetize, which are in various phases of the sales process with nearly $5 million expected to close in the fourth quarter.

As a reminder, with solid execution of our three-pillar digital growth strategy as well as our commitment to improving our balance sheet, our goal is to achieve long-term leverage target of under 2.5 times. Slide 11 provides an updated look at our fiscal year 2023 outlook.

With more visibility into the impact of persistent inflation and a soft macro environment, we are updating our 2023 adjusted EBITDA guidance to be $85 million and $90 million. It’s worth noting, our cost actions have grown adjusted EBITDA in the second half of the year, and these actions are expected to provide a benefit heading into 2024.

Despite the near-term impact of the broader economic conditions on adjusted EBITDA, the strong performance of our digital revenue streams this fiscal year position us well to reaffirm our 2023 guidance for total digital revenue and digital subscribers. We expect total digital revenue to be in the range of between $270 million and $285 million.

Digital-only subscribers are expected to total $632,000. Despite the soft macro environment, this team continues to move with velocity in managing print revenue streams as they mature and grow our digital businesses at an industry-leading clip. With that, I’m grateful and encouraged in this team and continues to produce industry-leading results.

And now, I’ll turn it back over to Kevin..

Thanks, Tim. Progress on our digital transformation continues to reinforce we have the right strategy and the right team in place. Our three-pillar digital growth strategy is guiding our digital transformation and is the foundation of our investment thesis.

We’re focused on expanding digital audiences, growing our digital subscription base and revenue and diversify and expanding our offerings for local advertisers. Slide 14 highlights some key takeaways for our digital transformation. Lee is the fastest-growing digital subscription platform in local media.

We have 606,000 digital subscribers and a vast addressable market sufficient to achieve our goals of 900,000 digital subscribers and more than $100 million of digital subscription revenue by 2026.

On the advertising side, we as the fastest-growing digital marketing service provider and our vision platform uniquely positions us to reach local advertisers high demand for omnichannel advertising and marketing services. To wrap up, I’d like to thank the entire Lee team for their efforts in driving our transformation.

As we move through our transformation and achieve our long-term goals, we expect to drive significant value for our shareholders through converting debt to equity through a repositioning of Lee as a digital-first company.

Under the guidance and oversight of our Board of Directors, our leadership team’s continued execution of our growth strategies sets the stage for significant long-term value creation. We have the right board, the right team and the right strategy to create long-term value for our readers, users, advertisers and shareholders.

This concludes our remarks. The team will remain on the line for any questions you may have. Operator, please open the line for questions..

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Michael Kupinski of NOBLE Capital. Please proceed with your question..

Thank you and good morning, everyone. A couple of things. You decreased advertising print products, as you stated in your remarks, I was wondering, I assume that those were mostly [TMC] [ph] products.

But did you decrease the number of print days for papers in the quarter as well? And then, I was wondering if on a same-store basis, would you be able to give us some idea of what print advertising would be down? And if you can kind of give us a sense of the trajectory of print decline in the coming quarter, given the prospect that you may be you know as you decrease the number of you know print advertising products heading into the fiscal fourth quarter?.

Yeah. Thanks for the question, Mike. So I’ll hit that in a few different parts. So we did eliminate some of our TMC products in the quarter.

Trends with and without from a print advertising perspective you know as reported number was down 33%, without down 25%, total advertising as reported was down 13%, excluding some of the product events were down 7%. And then from a total revenue perspective, as reported was down 12% with – excluding those products, we were down 10%.

Your next part of your question with respect to you know elimination of print days in some of our smaller markets, we have looked at reducing the number of print days.

Just as additional context to that, you know over the last three to four years, we’ve done a really good job of maintaining and managing the maturity of our print subscription revenue and really outpacing you know the industry and that performance. Certainly with what we have seen in 2023, we’ve kind of reverted closer to the industry norm.

And as a result, some of our markets have reimagined our print product and providing a high-quality print product three days a week. And that’s a great product from a reader’s perspective, and at the same time, has a cash flow benefit to us as well.

Third part of your question with respect to trajectory for the fourth quarter, you know what we’re seeing is very similar trends that we saw you know late in the third quarter will carry forward into the fourth quarter from a print advertising perspective..

Thanks for all the color there. I really appreciate that.

Are there markets whereby the company no longer prints paper has in markets where they just moved all to digital at this point or no?.

No..

Okay. And then you have a very favorable digital trajectory. I know that the company continues to invest there.

But can you kind of give us a sense when you know thought about the margins and when they will begin to improve maybe a sense of level of investments as you go into fiscal 2024? And what type of margins might be sustainable in that – in digital?.

Yeah, I think that’s a great question. You know what I would say is, our digital market margins are expanding you know closer to what we would have expected. And our product – our digital products you know we put off good margins, particularly on the digital subscription side.

You know incremental digital subscription revenue is very, very profitable for us. So as that revenue stream continues to grow, it was up 43% in the quarter. And we’ve got you know good growth prospects in the fourth quarter as well, and we expect that to continue to expand margins.

Amplified you know is something that we grew from the ground up a few years ago, and we’re seeing some nice margin expansion there. So, I think from a digital perspective, we’re very pleased with respect to how we’re seeing the margins expand and grow..

And on the digital side, can you just kind of give us a sense of what’s driving the revenue growth? Are there particular industry sectors? What are the key drivers that you know kind of give us a color on that?.

Sure. I’ll jump in and Tim, you can add color commentary. Health care, universities, grocery are all really big categories for Amplified Digital..

Yeah. I think from a revenue perspective, Amplified as well as the digital subscription piece is a big piece of the driver..

Great.

And then in terms of, you mentioned some asset sales, I was just wondering in terms of the proceeds, all of that earmarked for debt reduction then?.

Correct. Correct. That’s required debt payment..

Okay, perfect. That’s all I have. Thank you..

Thank you. Now we’ll post some questions from the webcast.

Tim?.

Seeing no questions coming through the web, I will kick it back to Kevin for closing remarks..

Well, thank you all for joining us today. As I mentioned earlier, we remain keenly focused on transforming our business model for the long-term benefit of our shareholders, our employees, our readers and our advertisers. We really appreciate your time today and your interest in Lee. Thank you again 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. You may now disconnect..