Fourth-Quarter Conference Call Remarks
January 28, 2010 at
2:00 PM Eastern
by Marshall N. Morton, President and Chief Executive Officer, Reid Ashe, Executive Vice President and Chief Operating Officer, John Schauss, Vice President - Finance and Chief Financial Officer, and Lou Anne J. Nabhan, Vice President, Corporate Communications
Welcome from Lou Anne Nabhan
Thank you and good afternoon everyone. Welcome to Media General’s Conference Call and Webcast.
Earlier today, we announced fourth-quarter 2009 results. The press release has been posted on our Web site. The comments from today’s conference call will be posted immediately following the call.
Today’s presentation contains forward-looking statements, which are subject to various risks and uncertainties. They should be understood in the context of the company’s publicly available reports filed with the SEC. Media General’s future performance could differ materially from its current expectations.
Our speakers today are Marshall Morton, president and chief executive officer; Reid Ashe, executive vice president and chief operating officer; and John Schauss, vice president-finance and chief financial officer. Let me now turn the presentation over to Marshall.
Remarks from Marshall Morton
Thank you, Lou Anne, and good afternoon.
The fourth quarter of 2009 marked a welcome turning point in our business performance that was both gratifying and encouraging, and reflected the early positive returns of our reorganized, market-based, corporate focus.
Income from continuing operations before income taxes increased 40%, to $22.9 million, compared with $16.4 million in last year’s fourth quarter, adjusted for severance and impairment charges.
Our profit improvement reflected the benefit of the significant expense reductions that we implemented during the recession. Total operating expenses in the fourth quarter of 2009 were 22% lower than the prior year, excluding impairment.
In addition, the fourth quarter’s 14% revenue decline showed some improvement from the 18% decline we had experienced in this year’s third quarter.
In our third-quarter conference call, we reported that we had entered the fourth quarter seeing signs of strengthening in ad spending, especially on the broadcast side. I’m pleased to report today that business continued to improve as the quarter unfolded. In the month of December, total revenues were essentially even with the equivalent month in 2008, and four of our six market segments generated higher revenues (Virginia/Tennessee, Mid-South, Ohio/Rhode Island and Advertising Services). In Florida, December revenues were down only 5.3%, a sign that the severe depression of their economy has abated somewhat.
Looking at the performance of our major revenue categories in the fourth quarter, Political revenue decreased 84% - from $23.4 million in last year’s fourth quarter to $3.7 million this year. Our 2009 Political revenues were higher than one would normally expect in an off-election year —the result of the Virginia gubernatorial election, the election for Sen. Kennedy’s open Senate seat in Massachusetts (which benefited our Providence TV station), a special mayoral election in Birmingham, Alabama, and issues advertising related to health care reform.
Local revenues in the fourth quarter decreased 8.5% and reflected a robust double-digit increase in digital media sales, breakeven results in broadcast sales, and lower print advertising sales. National revenue decreased just under 5% in the quarter, reflecting a double-digit increase in digital media sales, a low single-digit increase in broadcast television sales, and lower print sales. Classified revenue decreased 18.5% (that’s print and online). Subscriptions, content and circulation revenues increased nearly 6% and reflected higher cable retransmission fees and higher circulation revenues, attributable to rate increases at all newspapers.
Total Publishing revenues in the fourth quarter decreased 14% from the prior year, a sequential improvement from the 18.5% decline in the third quarter of 2009. In addition to the category results I’ve just discussed, printing and distribution revenues from outside accounts are becoming a larger part of our print revenue mix. In the fourth quarter they grew 23%. We added accounts totaling almost $6 million in new business in 2009 and we look forward to further growth from these opportunities in 2010.
From a circulation perspective, in addition to our rate increases, we implemented new subscription sales pressure right after Labor Day. By early November, we were logging more starts than stops, and overall stops had decreased 21% from the previous year.
Total Broadcast revenues in the fourth quarter declined 17%, which was entirely a reflection of the lower political revenues this year.
Digital Media revenues increased 11% in the fourth quarter, a much stronger performance than the 2% increase generated in the third quarter of 2009.
A major benefit of our new market structure is that all of our properties in a given market now report to a single leader. Before, the different platforms reported through a separate chain of command. Today, all of the platforms in a market share responsibility and accountability for increasing market share by responding quickly to changing customer needs. Our new structure allows our market leaders to fully leverage all of the resources within the market without bias to platform. All of our sellers are now selling all of our products and services to all of our customers. This is a huge change and the benefit is evident in the Digital Media revenue growth we generated in the fourth quarter, when new online and mobile revenue initiatives that were put into place after we changed our operating approach came to fruition.
With our digital products and services, we’re able to pitch more advertisers than ever before. Advertisers are able quickly to see positive results from their online campaigns, especially from behavioral targeting, a service that is still new to a lot of our advertisers. As a result of successful online experiences, many advertisers are renewing with bigger and longer term buys. We’re also seeing gradual, but meaningful, increases in the rates for online advertising.
Digital Classified revenues in the fourth quarter were down only about 10%, compared with a 19% decline in print Classifieds. The online results showcase the benefit of our Internet partnerships with Yahoo! and Zillow. Because we are such a strong performer for Yahoo!, this year they are allowing us to be the first media company to test selling their products in four of our television station markets. We have every expectation of succeeding with the test program and extending the Yahoo! partnership to all of our television markets as soon as we can.
Unique Visitors to our web sites increased 43% in the fourth quarter. This robust performance is attributable to Yahoo! sending users to our sites when they link on the local headlines we provide to them. Three stories from tbo.com that appeared on Yahoo’s front page on unusual topics, such as an alleged sea monster sighting in a local canal, drove millions of page views.
DealTaker.com, our shopping and coupon web site had a very strong holiday season. Its revenues in the fourth quarter increased 37% and its profit was up 53%.
Before turning our presentation over to Reid, who will provide details on the performance of our five geographic markets, let me give you some details from the expense side of the fourth quarter. Total compensation decreased 22.5% from the prior year, which was the major contributor to our lower costs in the quarter. We had nearly 900 fewer employees at the end of 2009 than we did at the end of 2008, and we implemented a five-day unpaid furlough program across the enterprise in the current quarter.
The next most significant expense decrease in the fourth quarter was newsprint, which declined 57% from the prior year. This decrease reflected both lower prices and lower consumption, including the benefit of moving all of our newspapers to the reduced web width of 44 inches during 2009.
Our operations did an outstanding job controlling discretionary spending, and departmental expenses were down more than 12% from the prior year.
We entered the New Year with positive momentum. Be mindful that the first quarter is seasonally our weakest, and the economy is still struggling with high unemployment and constrained consumer spending. At the same time, major positives for Media General in the first quarter will be Winter Olympics advertising on our 8 NBC stations and Super Bowl advertising on our 8 CBS stations. We’re making very good progress selling both programs.
As I’ve stated many times, our future success cannot rely simply on riding the waves of an improving economy and special advertising that flows our way. Our future success will be sustained by our pursuit of, and integration of, new revenue initiatives, particularly in digital media.
I’ll now ask Reid to provide details on the fourth-quarter performance of each of our geographic market segments.
Remarks from Reid Ashe
Thank you, Marshall.
I’ll start with our Virginia/Tennessee market, which includes a metro newspaper, the Richmond Times-Dispatch, several community newspapers and two television stations.
Fourth-quarter profit in the Virginia/Tennessee market was $15.6 million, compared with $9.3 million a year ago. A 20.5% reduction in total expenses more than offset a 6.3% decline in revenues in the quarter. Revenue fell in the local, national and classified categories, partially offset by increases in circulation, printing and distribution revenues. There was little change, year to year, in this market’s political revenues because of the Virginia governor race in 2009.
Rate increases for all newspapers drove a 7.9% increase in circulation revenues. Printing and distribution revenue increased 67.5%. We added commercial printing customers at our new facilities in Bristol and Lynchburg and signed new delivery agreements in Charlottesville with the Washington Post and USA Today and in Richmond with the New York Times. Our two TV stations benefited from the Virginia Governor’s race and from advocacy advertising for health care.
The Florida market includes our converged trio of WFLA-TV, The Tampa Tribune and TBO.com, plus two smaller daily newspapers and a number of specialty publications.
Profit in our Florida market of $6.6 million compared with a loss of $960 thousand in the prior year. A 31% reduction in total expenses more than offset a 16% decline in revenues. Political revenue fell from $3.3 million in 2008 to $226 thousand in 2009. The 16% decline in overall fourth-quarter revenue was a nice improvement from the third quarter’s nearly 23% decline.
While advertising was falling, circulation, syndication, printing and distribution revenues grew in Florida. Our television station and web site were ahead of the prior year in local advertising, and television was ahead in national.
Sunday preprints have strengthened, too. The Tampa Tribune came very close to matching its 2008 Thanksgiving preprint revenue.
In November, The Tampa Tribune announced a groundbreaking agreement with Dow Jones & Company to distribute the Wall Street Journal and Barron’s, and to print and distribute the New York Post, in the Tampa Bay area. We won out over the St. Pete Times because of our unmatched ability to promote the Dow Jones publications, as well as our own, in multiple media.
The Dow Jones partnership brings us meaningful new revenue, but that’s not all. It also lets us resume home delivery of The Tampa Tribune in Pinellas County, the St. Pete Times’ home turf, without additional cost. The Tampa Tribune is testing a variety of different offers for bundled sales with USA Today and The Wall Street Journal in Pinellas County.
Our Mid-South market includes 11 television stations, two of which are paired with our newspapers in Florence, South Carolina, and in Opelika, Alabama. The market also includes our newspapers in and surrounding Dothan, Alabama.
Fourth-quarter profit in the Mid-south market was $8.7 million, compared with $7.6 million a year ago. An 18% decrease in total expenses more than offset an 11.8% decline in total revenues. Political revenue in the Mid-South fell from $6.2 million in 2008 to $391 thousand in 2009.
Local revenue in the Mid-South declined only 2.7% as gains in TV time sales and digital revenues offset decreases in print. Classified revenues were behind the prior year by only 7.3%.
We have new delivery agreements with The Wall Street Journal in Dothan and Opelika.
Our North Carolina market includes our metro newspaper in Winston-Salem, 4 community newspapers, and two television stations.
Profit in the North Carolina market of $3.4 million compared with $4.6 million in the prior year. Expenses and revenues were both down 26%. Political revenue in North Carolina fell from $4.5 million in 2008 to $203 thousand in 2009. Local and classified revenue fell especially hard in Winston-Salem and Raleigh, while national took a hit in telecommunications advertising.
Our Ohio/Rhode Island market includes TV stations in Columbus and Providence. We have no newspapers in this region.
Profit in this market was $5.3 million compared with $6.9 million last year. A 26.2% expense savings was not enough to offset a 24.7% decline in revenues. Political advertising swung especially far in this market, from $7.9 million in 2008, to $1.2 million in 2009.
Local transactional spending remained soft in Ohio, while our Providence station produced a 9% increase. National advertising finished 38% above the prior year in Providence, and Columbus saw a gain of 11.6%.
We’ve worked hard to improve our portfolio of advertiser services and to sell them more effectively, and it’s gratifying to see that our efforts are producing results. In the near term, we expect the broadcast side of the business to show the greatest improvement, thanks to this year’s special opportunities to sell Political, Super Bowl and Olympics advertising.
Classified advertising remains a challenge in a depressed economy, but we’re not waiting for it to improve. Next month, we’ll begin a total overhaul of classified as a centrally-managed, technology-driven, internet-based and print-augmented service that’s designed to delight both readers and advertisers.
As Marshall mentioned, the top job in our markets today is salesforce transformation. Digital media provide us an array of new selling opportunities, which require a skilled and motivated sales force. We’re overhauling our compensation, training, support and management systems, so that we can field the sharpest sales team in the business. We are going to make 2010 a great year for Media General.
And, now, I’ll turn the presentation over to John.
Remarks from John Schauss
Thank you, Reid.
Let me first cover a couple of below-the-line items.
Interest expense of $10.3 million was about 4% less than the prior year, due primarily to lower average debt levels. Our “all-in” cost of debt in the fourth quarter was approximately 5.6%.
A more than 40% decrease in acquisition intangibles amortization was the result of intangible assets written down in 2008 and 2009.
Corporate expense decreased 15.4%, as a result of the five furlough days in the fourth quarter and other cost reduction initiatives.
As we have previously announced, we recognized a tax benefit in the fourth quarter that resulted from a change in federal tax law that allows the Company to carry back its 2009 loss into years in which it paid income taxes. The amount of the tax benefit is approximately $25 million, for which a receivable has been established. The cash is expected in the middle of 2010, and we will use this tax refund for debt reduction.
The effective tax rate on income or loss from continuing operations was a negative 4.5% for the fourth quarter and 39% for the full year. This unusual relationship of tax benefit to pre-tax income for the quarter is due primarily to the NOL carryback benefit as well as limitations imposed by the intraperiod tax allocation rules. We can expect that those rules, along with our net deferred tax asset situation that requires a full valuation allowance, will produce an unusual relationship between our effective tax rate and pre-tax income.
We expect to pay zero cash taxes in the next four years, due primarily to significant tax deductions related to the amortization of our acquired intangible assets.
Capital spending in the fourth quarter was $6.8 million. For the year, total capital spending was $18.5 million, compared with $31.5 million in 2008. We funded necessary replacements and certain projects that will provide strong returns on our investment. In 2010, we expect our capital expenditures to be $28-29 million. We believe this level of investment is adequate to meet our needs given our strategic focus.
Free cash flow in the fourth quarter was $25.8 million, compared with $9.8 million last year.
Debt at the end of 2009 was $712 million, compared with $730 million at the end of 2008. The maximum leverage ratio allowed by our bank debt covenants in the fourth quarter was 6.0x. We came in at 5.72x. Debt and the leverage ratio were inflated slightly as the result of a $25 million money market investment at year-end.
Our pension plan had strong returns in 2009. Based on preliminary results, the unfunded status of our pension plans improved by $71 million from year-end 2008.
Our bank facilities do not mature until mid-2011, and there are no mandatory cash amortization payments prior to this time. We continue to evaluate refinancing opportunities, and we are optimistic about the options that are available to us. We expect to have more details for you soon.
I want to be sure you have taken note of an item that was discussed in our Form 10-Q for the third quarter, which explained an anticipated non-cash income tax expense in 2010 of approximately $30 million. This expense will be due to the requirements of accounting interpretations related to a valuation allowance against deferred tax assets. Our expectation is that this expense will be spread ratably over the four reporting periods of 2010.
For the full year, we expect our total revenues to increase in the mid-single digits, driven by the Broadcast television side of the business. We expect total operating expenses to also increase in the mid-single digits, mostly because we are not planning a furlough program in 2010. Our 2009 furlough program saved approximately $10 million that you should add back into your models for this year.
Our focus is on free cash flow generation and debt repayment. Our current budget contemplates free cash flow for 2010 of approximately $48-50 million.
And, now I’ll turn it back to Marshall.
Remarks from Marshall Morton
Thank you, John.
As we enter 2010, several of our television stations are reporting that automotive advertising is continuing to improve, driving up rates faster than expected in some places. Newspapers are reporting good results with annual contract renewals, with many significant gains in spending and very few reductions.
For the full year we have increased our forecast for Political revenues from the $32-34 million range we estimated in December to $42 million. We expect robust spending as a result of the Democratic response to the Republican wins in Virginia, New Jersey and Massachusetts. Our Florida and Ohio markets in particular stand to benefit. In addition, we believe last week’s Supreme Court decision will provide a positive impact as corporations and unions can more easily advertise to support or oppose candidates and also engage in issues advertising during the final days of a campaign.
As I mentioned last time, we reached agreement in the Augusta, Georgia, market for our ABC station to provide the NBC affiliate owned by Schurz Communications with sales, local news and other operational services starting this month and that arrangement is underway. Since announcing that joint operating agreement, we’ve been approached by broadcasters in other markets about similar arrangements. We will keep you posted of new developments in this area where we see good potential.
We expect to continue to derive significant strength from our reorganization from a product-based structure to market-based structure. As mentioned earlier, this change has enabled us to accelerate our digital strategy, engage more employees in innovation, and get to market faster with customer-focused solutions. Our re-aligned sales force will continue its focus on cross-selling among all platforms so as to provide a total media solution to advertisers.
That concludes our report. We will now be pleased to take your questions. Top of page |
