August 3, 2017 Last Updated 8:00 am

Lee Enterprises grows digital, cuts costs to increase bottom line

Operating revenue fell 7.7 percent as retail and classified print advertising levels fell over 10 percent

DAVENPORT, Iowa — August 3, 2017 — Lee Enterprises, Incorporated (NYSE: LEE), a major provider of local news, information and advertising in 50 markets, today reported earnings (1) of $6.3 million for its third fiscal quarter ended June 25, 2017, or 11 cents per diluted common share. For the same quarter a year ago, earnings totaled $4.4 million, or 8 cents per diluted common share. The analysis of third quarter results is presented on a same property basis unless otherwise noted(2).

Kevin Mowbray, Chief Executive Officer, said “Adjusted EBITDA(3) continues to be strong, totaling $35.8 million in the quarter, down 3.1% from the prior year, and $145.0 million in the last twelve months. Lee continues to focus on delivering solid cash flow and reducing debt. Debt reduction in the June quarter was $16.4 million and totaled $71.8 million over the last twelve months,” said Mowbray.

“On June 30th, which is in our fourth fiscal quarter, Lee closed on the previously announced acquisition of the Dispatch-Argus. The Dispatch-Argus of Moline and Rock Island, Illinois, is just across the Mississippi River from our newspapers in Davenport and Muscatine, Iowa, and is an ideal strategic fit offering substantial synergies. We expect the acquisition to be accretive to earnings and free cash flow in our September quarter. The transition is off to a good start and we are pleased with the contributions we are already seeing from the Dispatch-Argus,” Mowbray noted.

“We saw good growth in both subscription and digital revenue this quarter, which improved the total revenue trend,” Mowbray added. “Total revenue was down 6.6% in the quarter, the best quarterly trend performance of fiscal 2017,” he said.

“Subscription revenue increased 1.6% in the quarter fueled by the second quarter price increases and additional revenue from premium content. Our subscriber retention programs are also having a positive impact on subscription revenue. We continue to expect a strong performance in subscription revenue for fiscal year 2017,” Mowbray noted.

“Digital advertising revenue increased 7.8% in the quarter and represented 29.1% of total advertising revenue. Revenue at TownNews.com increased 5.5%.

“Cash costs(2)  in the quarter, excluding workforce adjustments and other, were down 8.0% compared to the prior year,” Mowbray  added. “We expect the cost reductions we made earlier in 2017 to have a significant impact on the fourth fiscal quarter and into 2018. Cash costs are expected to be down 6.5% for fiscal 2017, the upper end of our previous cost guidance.”

Mowbray also noted the following same-property financial highlights for the quarter:

Total digital revenue, including digital advertising and digital services, totaled $27.1 million, an increase of 6.4% over the prior year quarter. Monthly page views of Lee mobile, tablet, desktop and app sites averaged 225.7 million, an increase of 6.5% over the prior year quarter. Pages per session, one metric used to measure audience engagement, increased in the low-single digits.

  • Digital retail advertising, which represents 61% of total digital advertising, grew 8.3%, fueled mainly by advertising from local retailers.
  • Total advertising and marketing services revenue decreased 10.8% in the quarter.

“The company recognized a $2.6 million expense in the June quarter to record the estimated liability related to the partial withdrawal from one of the Company’s multiemployer pension plans. This partial withdrawal liability is not expected to materially impact free cash flow of the company. The liability, once finalized, will be paid in equal installments over the next twenty years, and is expected to be approximately $200,000 per year,” said Chief Financial Officer and Treasurer Ron Mayo.

“The company continues to significantly reduce interest expense through aggressive debt reduction,” Mayo said. “We have reduced debt by $48.7 million fiscal year to date and $71.8 million over the past twelve months, lowering interest expense by $7.4 million, or 11.1%, in the past twelve months.

“As of June 25, 2017, the principal amount of debt was $568.5 million,” Mayo added. “We will continue to reduce debt in 2017.”

THIRD QUARTER OPERATING RESULTS

Operating revenue for the 13 weeks ended June 25, 2017 totaled $139.4 million, a decrease of 7.7% compared with a year ago. On a same property basis, total operating revenue for the 13 weeks ended June 25, 2017 decreased 6.6%. Unless otherwise noted, revenue and operating expense trends below are presented on a same property basis.

Advertising and marketing services revenue combined decreased 10.8% to $81.0 million, with retail advertising down 10.6%, classified down 11.8% and national down 6.3%. Digital advertising and marketing services revenue on a stand-alone basis increased 7.8% to $23.6 million, and digital retail advertising, which represents 61% of total digital advertising, grew 8.3% in the quarter. Digital advertising represents 29.1% of total advertising revenue.

Total digital revenue, including digital advertising and digital services, was $27.1 million for the quarter, up 6.4% compared with a year ago. Mobile, tablet, desktop and app sites, including TNI and MNI(3), attracted monthly average page views of 225.7 million for the 13 weeks ended June 25, 2017, an increase of 6.5% over the prior year.

Subscription revenue increased 1.6% in the current year quarter due to second quarter price increases and additional revenue from premium content.

Average daily newspaper circulation, including TNI and MNI and digital subscribers, totaled 0.8 million in the 13 weeks ended June 25, 2017. Sunday circulation totaled 1.1 million.

Operating expenses for the 13 weeks ended June 25, 2017 decreased 4.7%. Cash costs, excluding workforce adjustments and other, decreased 8.0%. Compensation decreased 9.1%, primarily as a result of a reduction in staffing levels. Newsprint and ink expense decreased 7.4%, due to volume declines from unit declines and using lower basis weight newsprint increasing copies printed per ton of newsprint. Other operating expenses decreased 6.8%, primarily driven by lower delivery and other print-related costs offset in part by higher costs associated with growing digital revenue.

Workforce adjustment and other costs totaled $3.9 million in the 2017 quarter compared to $0.4 million in the 2016 quarter. The 2017 quarter includes a $2.6 million expense to record an estimate of a partial withdrawal liability from one of our multiemployer pension plans.

Including equity in earnings of associated companies, depreciation and amortization, gain on sales of assets, curtailment gains, as well as workforce adjustments and other in both years, operating income totaled $20.6 million in the current year quarter, compared with $24.7 million a year ago.

In the 13 weeks ended June 25, 2017, interest expense decreased 9.2%, or $1.5 million, due to lower debt balances.  The company recognized non-operating income of $3.0 million in the current year quarter compared to non-operating expense of $0.4 million in the same quarter of the prior year due to a change in fair value of stock warrants. Lee recognized $1.4 million of debt refinancing and administrative costs in the current quarter and $1.2 million in the same quarter of the prior year. The vast majority of the debt refinancing and administrative costs represent amortization of refinancing costs paid in 2014.

ADJUSTED EARNINGS AND EPS FOR THE QUARTER

The following table summarizes the impact from warrant fair value adjustments on income attributable to Lee Enterprises, Incorporated and earnings per diluted common share. Per share amounts may not add due to rounding.

YEAR TO DATE OPERATING RESULTS(4)

Operating revenue for 39 weeks ended June 25, 2017 totaled $426.7 million, a decrease of 8.5% compared with the 39 weeks ended June 26, 2016.  On a same property basis, total operating revenue for the 39 weeks ended June 25, 2017 decreased 7.2%.  Unless otherwise noted, revenue and operating expense trends below are presented on a same property basis.

Advertising and marketing services revenue combined decreased 10.8% to $251.6 million, retail advertising decreased 10.0%, classified decreased 12.2% and national decreased 10.8%. Digital advertising and marketing services revenue on a stand-alone basis increased 8.6% to $68.8 million. Digital advertising represented 27.3% of total advertising.

Total digital revenue was $79.2 million year-to-date, up 7.6% compared to the same period a year ago.

Subscription revenue decreased 1.0% in the 39 weeks ended June 25, 2017 compared to with a year ago.

Operating expenses for the 39 weeks ended June 25, 2017 decreased 5.5%. Cash costs, excluding workforce adjustments and other, decreased 7.4% compared to the same period a year ago. Compensation decreased 8.0% primarily as a result of a decrease in the average number of full-time equivalent employees of 8.0% and lower self-insured medical costs. Newsprint and ink expense decreased 0.7%, due to a reduction in newsprint volume partially offset by several price increases in 2016. Other operating expenses decreased 7.5%.

Including equity in earnings of associated companies, depreciation and amortization, gain on sales of assets, curtailment gains, as well as workforce adjustments and other in both years, operating income was $70.8 million in 2017, compared with $79.8 million a year ago.

The change in non-operating income (expense) in the 39 weeks ended June 25, 2017 compared to the 39 weeks ended June 26, 2016 is primarily due to the $30.6 million gain on an insurance settlement in the prior year period.  Interest expense decreased 10.7%, or $5.3 million, due to lower debt balances, and we recognized a  $1.3 million gain on the extinguishment of debt in the prior year.  We also recognized non-operating income of $10.4 million in the 39 weeks ended June 25, 2017 compared to no impact for the change in fair value of stock warrants in the prior year. The fair value of the warrants fluctuate with the market value of our common stock. In the current year to date period, $3.5 million of debt financing and administrative costs were expensed compared to $4.6 million in the prior year to date period, the majority of which were non-cash expenses. Debt financing and administrative costs are mainly amortization of costs paid as part of our refinancing in 2014.

Income attributable to Lee Enterprises, Incorporated for the year totaled $24.3 million, compared to income of $34.6 million a year ago.

Adjusted EBITDA for the 39 weeks ended June 25, 2017 was $107.9 million.

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