Welcome to Lee Enterprises 2024 Second Quarter Webcast and Conference Call. This call is being recorded, and will be available for replay at investors.lee.net. [Operator Instructions] A link to the live webcast can be found at investors.lee.net..

I will turn the call over to your host, Josh Rinehults, Vice President, Finance. Sir, please begin. .

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 second fiscal quarter of 2024. It is available at lee.net, as well as major financial websites. Please also refer to our earnings presentation found at investors.lee.net, which 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 in our SEC filings.

During the call, we refer to certain non-GAAP financial measures. Reconciliations to the relevant GAAP measures are included in the tables accompanying the release..

And now to open the discussion is our President and Chief Executive Officer, Kevin Mowbray. .

Good morning, everyone, and thank you for joining us and your interest in Lee..

I'm excited to share with you our solid second quarter operating results, as well as update you on our digital transformation progress. Tim will cover the quarter in more detail later on the call. But in summary, our second quarter operating results were strong as we improved our overall revenue trends, managed our costs well and grew adjusted EBITDA.

Lee is rapidly transforming from a print-centric to a digital-centric company, demonstrated by another quarter of strong execution of our Three Pillar Digital Growth Strategy..

Our focus is on expanding our digital audiences, growing our digital subscriber base and revenue, and diversifying and expanding our offerings for local advertisers. The long-term results of our strategy are expected to generate more than $450 million of recurring sustainable digital revenue within 5 years.

With our performance through the second quarter of FY '24, we're steadily becoming sustainable, solely through cash flow generation from our digital products..

I'm extremely encouraged by the progress of our strategy thus far and the pace at which we're transforming Lee into a vibrant digital-centric company. Lee continues to demonstrate digital leadership.

We are the fastest-growing digital subscription platform in local media, and was amplified with the fastest-growing digital marketing solutions agency by significant margins. Digital subscriber growth at Lee has outpaced our industry peers for the last 17 quarters..

We have now more than 745,000 digital subscribers, which is up 25% compared to prior year. We've also increased average rates for our digital subscriptions by an exceptionally strong 17% over that same period.

Growing digital subscribers in concurrence with successful price increases highlights the strong demand resilience and value the trusted local content we provide our markets. This consistent industry-leading performance gives us even more confidence in achieving our long-term goals, which we'll revisit later on this call..

Amplified Digital achieved 8% revenue growth over the last 12 months, despite the soft advertising environment. Revenue totaled $92 million and has grown an outstanding 35% annually over the last 3 years, far outpacing others in the industry.

Fueled by these industry-leading metrics, total digital revenue has grown to $285 million over the last 12 months, which is driving the rapid change in our revenue composition as evidenced on the next slide..

One key milestone of our digital transformation is reaching a digital inflection point, where more than 50% of our revenue is derived from digital sources. When we first launched our Three Pillar Digital Growth Strategy, digital revenue represented just 21% of our total operating revenue.

This significant growth of our digital revenue from our Three Pillar Digital Growth Strategy has transformed the composition of Lee's overall revenue over the last few years. Today, digital revenue represents 40% of our revenue, and we expect to surpass the inflection point next quarter. This marks a key milestone in our digital transformation..

And now I'd like to revisit our long-term outlook that we shared last year. This slide provides insight to the long-term trajectory of our digital subscriptions and associated revenue.

The acceleration in digital subscription revenue growth over the past few years is driven by investments we've 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, and we expect the results to continue to push us forward.

With these investments in action, we expect to achieve $150 million of recurring digital subscription revenue by fiscal year 2028, fueled by 1.2 million digital subscribers..

On the advertising side, Lee is the fastest growing digital marketing service provider, and our platform uniquely positions us to reach local advertisers, high demand for omnichannel advertising and marketing services.

We have strong relationships with more than 25,000 local advertisers across the U.S., and we partner with them to achieve their marketing goals. These owned and operated digital products, infused with our valuable hyperlocal content, remains a key advertising channel for our local communities.

Combining with the powerful app by digital agency, we can serve these local advertisers to high-quality, data-rich omnichannel campaigns they need to drive their business..

Through this approach, we are expecting to drive $300 million of digital advertising revenue by 2028.

Combining all of our revenue and digital revenue sources, including digital subscriptions, digital advertising and marketing services and digital services revenues from BLOX Digital, we expect to generate between $310 million and $330 million in digital revenue in FY '24. The midpoint of our guidance represents a 70% growth rate over FY '23.

With this level of execution, we're well on our way of achieving $450 million of digital revenue by 2028..

With that, I'll hand it over to Tim to discuss results for the quarter. .

Thank you, Kevin, and good morning, everyone..

Total operating revenue in the second quarter was $147 million. These results represent modest improvement in same-property trends over the first quarter of 2024. Starting on the print side, total print revenue was down 24% on a same-property basis.

The decline in print revenue was the result of continued secular trends away from print media from both an advertising and subscription perspective. As a reminder, we eliminated certain print products that did not meet our profitability standards.

While that decision improved cash flow, it did have an outsized impact on our GAAP print advertising trends..

Digital revenue growth continued at a strong pace, with total digital revenue up 11% year-over-year. As Kevin previously mentioned, the 48% growth in digital subscription revenue is fueling the total digital revenue growth. Amplified Digital revenue increased 5.2% in the second quarter.

And importantly, in the back half of the quarter, we saw improvements in digital advertising revenue on our owned and operated digital products. This is important as this category of digital advertising has the highest margin profile..

Cash costs were down 16% in the quarter, driven by actions we took in fiscal year 2023 and continued cost management this fiscal year. Due to the strong digital revenue performance and effective cost management, adjusted EBITDA grew 5% in the quarter and totaled $15 million.

We remain confident in our digital transformation, as the magnitude of the revenue opportunity is significant and the digital products and services we sell are incredibly profitable..

Our digital direct margin in the second quarter remained strong at 70%. This resulted in $49 million of digital direct margin and represents a $2.5 million increase over the second quarter of last year.

We are focused on driving high-margin digital revenue, and as a result, we are steadily becoming sustainable, solely from the revenue and cash flow generated from our digital products..

Lee has a successful track record of effective cost management. In 2024, our business transformation efforts will yield between $45 million and $65 million in cost savings, most of which is a result of actions taken in FY '23.

While we remain focused on operational excellence, reducing the cost structure of our legacy print business and growing profits, our main priority is to drive long-term sustainable digital revenue.

Therefore, 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..

As an example of the digital investments we are making, we announced yesterday the hiring of a Chief Transformation and Commercial Officer. Les Ottolenghi is a seasoned Fortune 500 executive with a lifelong passion for media, technology and innovation, and brings world-class expertise in harnessing the transformative power of technology to Lee.

Les is responsible for developing and directing accelerators to our digital transformation in the areas of artificial intelligence, IT modernization, cybersecurity and data monetization. We are incredibly excited to have Les join the Lee team..

Moving to the balance sheet. The principal amount of debt decreased by $2 million year-to-date and totaled $454 million. That's a reduction of $122 million since March of 2020. 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 the ability to make the necessary investments in talent and technology that fuel our Three Pillar Digital Growth Strategy. In the second quarter, we made no pension contributions as our pensions are overfunded in the aggregate..

Finally, we continue to identify opportunities to monetize our non-core assets, which facilitate accelerated debt repayment. We closed $3 million of asset sales year-to-date, and have identified an additional $25 million of non-core assets to monetize.

While we cannot be sure these deals will close, we do expect approximately $10 million of sales to close by the end of the fiscal year. As a reminder, with the solid execution of our Three Pillar Digital Growth Strategy, as well as our commitment to improving our balance sheet, our goal is to achieve our long-term target leverage of 2.5x..

Last, before I hand it back to Kevin to wrap up, I would like to point everyone to our 2024 outlook for total digital revenue, digital subscribers, cash costs and adjusted EBITDA. Our outlook remains unchanged..

And with that, I'll turn it back to Kevin. .

Thanks, Tim..

To recap, our Three Pillar Digital Growth Strategy is guiding our digital transformation and is the foundation of our investment thesis. As I mentioned previously, our strategy will guide Lee into becoming sustainable and vibrant, solely from revenue and cash flow from our digital products within 5 years.

Doing so will allow us to increase our shareholder value through continued debt reduction and multiple expansion. Our second quarter results demonstrate strong digital growth, with consistent execution of our Three Pillar Digital Growth Strategy.

The tremendous progress on our digital transformation continues to reinforce we have the right strategy and the right team in place to achieve our long-term targets..

To wrap up, I'd like to welcome aboard Les and thank the entire Lee team for their efforts in driving our transformation. As we continue our journey and achieve our long-term goals, we expect to drive significant value for our shareholders by converting debt to equity and through positioning Lee as a digital-first company.

Under guidance and oversight of our Board of Directors, our leadership team's continued execution of our growth strategy 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 have. Operator, please open the line for questions. .

[Operator Instructions] Our first question on the phone line comes from the line of Daniel Harriman with Sidoti & Company. .

Congrats to Les on the new role. I have just a couple of questions, and I'll go through them relatively quickly. But just starting off, obviously, the print decline seems like it was a little bit more pronounced than you were expected.

Can you maybe go into a little bit more details about what you're doing on the cost side that seems to be kind of offsetting that decline?.

Yes. Thanks for the question, Daniel. I can answer that. So as context on the costs, cash costs were down 16% year-over-year on a reported basis in the second quarter. That represents about a $25 million impact on the quarter. Of that $25 million, about 1/4 of that relates to managing our print product portfolio.

That's one thing I mentioned in our remarks is that we evaluate our product -- print product portfolio in order to manage the cash flow from those products. And we pulled some levers and eliminated some of those products that obviously had an impact on revenue, but it had a greater impact on cost.

So, that's something that we're constantly evaluating..

Another item that impacted our costs for the quarter relates to a decision we made in the middle of last year to transform our print products in many of our smaller markets by publishing digital editions every day, but a robust print edition only 3 days a week. This resulted in significant cost savings.

And while it did have an impact on print subscription revenue, it did drive cash flow. That's another lever that we pull. And the remaining reduction in our costs in the second quarter relates to the business transformation efforts, most of which were executed in the middle of fiscal year 2023.

And so with our second quarter results, we are still cycling some of those changes. .

And then just one final one. This is a little bit more, I guess, high level, but you've got -- digital revenue is about 48% of the total operating revenue of the company right now. And I think you and everyone else expect you to surpass 50% in Q or your fiscal third quarter.

Could you just talk a little bit about how surpassing this benchmark affects the way you think about cash costs and maybe margins as we end fiscal 2024 and go into '25?.

Yes. So as we talked about on our direct digital margin, that is one thing that's really important as we think about the inflection point of having the majority of our revenue coming from digital sources. We think that the revenue opportunity from digital is significant.

And importantly, the cash flow and margin contribution of that revenue is highly profitable as well. So the more we get -- the more digital revenue that we continue to drive and the more high margins that we continue to drive, the less volatile our operating performance will be because of the prints business.

And so as we look going forward, the volatility of print will have less impact on our future operating results..

We have no questions on the web. So, I'll turn it back to Kevin for any closing remarks. .

Thank you, everyone, for joining the call. I appreciate your interest in Lee and look forward to talking to you again in the near future. Thanks. .

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day..