Earnings Labs

Lee Enterprises, Incorporated (LEE)

Q4 2021 Earnings Call· Thu, Dec 9, 2021

$8.55

+0.83%

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Transcript

Operator

Operator

Welcome to the Lee Enterprises 2021 Fourth Quarter Webcast and Conference Call. The call is being recorded, and will be available for replay beginning later this morning at investors.lee.net. At the close of the planned remarks, there will be an opportunity for questions. . A link to the webcast can be found at investors.lee.net. Now, I will turn the call over to your host, Josh Rinehults, Vice President of Finance. Please go ahead.

Josh Rinehults

President

Good morning. Thank you for joining us. Speaking on this morning's call is Kevin Mowbray, President and Chief Executive Officer; and Tim Millage, Vice President, Chief Financial Officer and Treasurer. Also with us on today's call and available for questions is Nathan Bekke, Vice President Audience Strategy. Earlier today, we issued a news release with preliminary results for our fourth fiscal quarter of 2021. It is available at lee.net as well as at major financial websites. We will be walking through an earnings presentation on today's call that can also be found at lee.net. One housekeeping item to start. We closed on the acquisition of BH Media Group and the Buffalo News on March 16, 2020. Certain results and trends are presented on a pro forma basis, which assumes ownership of these acquisitions for the entirety of the periods presented. 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 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.

Kevin Mowbray

Chief Executive Officer

Thank you, Josh. Good morning everyone. I am Kevin Mowbray, President and CEO of Lee Enterprises. And I'm pleased you could join us. Before we dive into our results, I wanted to make a brief statement on the recent developments you'd likely see regarding Alden Global Capital. This morning, we issued a press release announcing the Lee Board of Directors has unanimously rejected the unsolicited proposal received from Alden on November 22, 2021 to acquire Lee for $24 per share in cash. After careful consideration with our financial and legal advisors, the Board determined that Alden's proposals grossly undervalued Lee and is not in the best interest of the company and its shareholders. If you haven't already, I would encourage you to review our press release. As I'm sure you'll understand that’s all we have to say on this matter, and we won't be taking any questions about Alden during our Q&A. We appreciate your cooperation. And with that, let's dive in. We'll start the discussion this morning with an overview of Lee's investment thesis and then discuss Lee, our strategy and our fourth quarter and 2021 operating results. Our strong foundation and well-defined long-term strategy puts Lee on a clear path to value creation for our readers, users, advertisers and our shareholders. Our execution of the Three Pillar Digital Growth Strategy is already delivering increased subscriptions and advertising revenue, strengthening our base of annual recurring revenue, and it is the pathway to replacing legacy revenue generating long-term growth of Lee's total operating revenue. Achieving revenue growth combined with strong cash flow allows us to achieve our long-term target leverage ratio of 2.5x within five years. And our Three Pillar Digital Growth Strategy positions us to unlock the full value of Lee’s platform and achieve multiple expansion that's in line…

Tim Millage

President

Thank you, Kevin. And good morning, everyone. In fiscal 21, we made excellent progress in strengthening our balance sheet and reducing our costs, while continuing to provide readers with high quality local journalism. We paid down $56 million in debt in 2021, reducing the principal balance to $483 million at year-end. We have paid down $94 million since the refinancing in March of 2020. One of the targets we set earlier this year was to achieve a net leverage ratio of 2.5x in five years. Through our strong adjusted EBITDA performance and debt reduction, we closed the year with a net leverage ratio of 3.9x adjusted EBITDA. Our credit agreement with Berkshire Hathaway has a low fixed annual interest rate, 25-year maturity, no fixed mandatory principal payments, and does not have financial performance covenants, meaning we do not have events of default tied to leverage or other maintenance ratios derived from financial performance of the company. Most importantly, the debt is with a single lender who knows us well and is committed to our success. The credit agreement also has no prepayment penalties, which affords us the ability to evaluate credit market conditions for an opportunistic refinancing to further improve our debt structure. The favorable debt structure is incredibly important for us as we execute on our Three Pillar Digital Growth Strategy, and it allows us the ability to make the necessary investments in talent and technology that fuels the recurring sustainable revenue growth. Also, our pension and postretirement benefit obligations at the end of September remained in a net overfunded position. This is a significant improvement in our balance sheet since September of 2020, where the net underfunded position was $95 million. And moving to our fourth quarter and 2021 financial performance, we're very proud of our results. We…

Kevin Mowbray

Operator

Thanks Tim. Our strong foundation of well-defined long-term strategy puts Lee Enterprises on a clear path to value creation for our readers, users, advertisers and our shareholders. We're very pleased and excited about the next phase of our growth and we're confident about our future. We believe we have the right team and the right strategies aimed at growing revenue year-over-year. We believe we are better positioned than ever to drive long-term shareholder value creation. One last thing before we open the line for questions. We expect to file our 10-K with the SEC tomorrow, and as always, it will include additional information on our results and expectations. This concludes our remarks. The team will remain online for any additional questions you may have. Operator, please open the line for questions.

Operator

Operator

. And we take our first question from Michael Kupinski.

Michael Kupinski

Analyst

Thank you. And first of all, congratulations on your strong quarter. A couple of questions. Obviously, your plans are to invest -- to enhance your growth in your digital media businesses. And I was wondering if you can give us the number of FTEs you had in the quarter? And if you can give us some thoughts on the expectations of your staffing growth as you kind of invest in these digital businesses?

Kevin Mowbray

Operator

Yes, thanks for your comments, Mike. Appreciate that. FTE counts are down in the quarter, mostly because of the transformation initiatives that we have made in managing the legacy business. Partially offsetting that are some of the investments that we've made in digital talent -- in the digital sales talent, as well as on the consumer front as well.

Michael Kupinski

Analyst

And then, obviously, changes in your paywall appears to be significantly enhancing your digital-only subscription growth. Can you talk a little bit about the prospects of further opportunities on adjusting your paywalls for subscriptions and things like that?

Kevin Mowbray

Operator

Yes. So one of the things that we did this year was we reduced our paywalls throughout 2021. And as you mentioned, that did have a big impact on our digital-only subscriber growth. We will continue to leverage technology to help implement things like a dynamic meter that can help leverage our growth even more. And obviously, there's a lot of other tactics that we have deployed to help drive our digital subscription growth.

Michael Kupinski

Analyst

And then in terms of -- you’ve kind of gone through the fiscal first quarter so far, is there any thoughts in terms of like as we look back a little bit into the fiscal fourth quarter digital O and O revenue, can you kind of give us a thought -- I know you talked a little bit about on this, but what was the total revenue for digital O and O in the quarter?

Tim Millage

President

Fourth quarter our digital O and O revenue was $16.5 million. And moving in through, that’s been a strong category for us and we expect that to be a continued strong performer in the future as well.

Michael Kupinski

Analyst

Got you. And then in terms of, your thoughts of the leverage of 2.5x as your target, that does not include asset sales or does it?

Tim Millage

President

That would include asset sales? So, any asset sale -- it’s a good point. Any asset sale that we have -- and we have roughly $30 million of assets for sale right now, and any assets -- proceeds from asset sales, we would use to reduce debt, and that would help achieve our target leverage ratio of 2.5x.

Michael Kupinski

Analyst

That $30 million is what you're already factored into the $2.5 million, or are there other additional asset sales embedded in that number?

Tim Millage

President

Yes. $30 million is what we have embedded in there. We do think that there are other opportunities over and above that, as we continue to move through our digital transformation, we will evaluate opportunities for further real estate monetization.

Operator

Operator

Thank you. At this time, we have no further questions. We turn back to management for closing remarks.

Kevin Mowbray

Operator

We do have a couple of questions over the web that we will answer.

Josh Rinehults

President

Yes. So, our first question from the webcast is, can you walk through the conversion of EBITDA to debt reduction?

Tim Millage

President

Yes. It's a good question. So, we had $117 million in adjusted EBITDA in 2021, and just walking that down to kind of a free cash flow metric of $45 million of interest expense, around $8 million in capital expenditures and around $8 million in income taxes that were paid. And that gets to about what our debt reduction was for the fiscal year. So, it gives you a little bit of bridge or walk from our adjusted EBITDA down to our debt reduction.

Josh Rinehults

President

Our second question from the webcast is, how much do you anticipate Lee's deal with Mudd Advertising contributing to revenue in 2022?

Kevin Mowbray

Operator

We are very excited about our deal with Mudd Advertising. As you know, when we made that announcement, Lee's digital backbone for all of their digital campaigns they sell across the country and we believe that business will only continue to grow for Lee in '22.

Josh Rinehults

President

And we have no more questions from our web participants. I'll turn it back to Kevin closing remarks.

Kevin Mowbray

Operator

Thank you all for joining the call today. We really appreciate your interest in Lee and time you took to hear our story this morning. Thanks again.

Operator

Operator

Thank you, ladies and gentlemen. At this time, we've reached the end of our question-and-answer session. This concludes our call. You may disconnect.