Fourth-Quarter Conference Call Remarks
January 29, 2009 at
2:30 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 2008 results and December revenues. Both press releases have 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 will be 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 our presentation over to Marshall.
Remarks from Marshall Morton
Thank you, Lou Anne, and good afternoon.
As you’ve seen in our earnings release, our fourth-quarter results included a non-cash intangible asset impairment charge and a tax valuation allowance. John will discuss those items later in our presentation.
Excluding those items, and $6.1 million of pre-tax severance expense in the fourth quarter of 2008, income from continuing operations was $8.6 million, or 39 cents per diluted share, compared with $10.2 million, or 46 cents per share in the fourth quarter of 2007.
Total operating costs in the fourth quarter, excluding the impairment charge in 2008 and an amount for an insurance recovery in 2007, decreased 7.1% from the prior year, and reflected the benefit of the aggressive actions we have taken to improve the efficiency and effectiveness of our operations.
We began scaling back our workforce, outsourcing certain functions and centralizing others in early 2007, when our business began to feel the impact of the housing downturn in Florida. Our number of FTEs has decreased from approximately 6,900 at the beginning of 2007 to approximately 5,750 at the end of 2008. This 17% reduction provides more than $55 million of annualized savings. Approximately 20% of that amount benefited us in 2008 and the full amount will be realized in 2009.
For the year 2008, we will pay no profit sharing or executive bonuses. In addition, we recently announced a suspension of our 401(k) match starting April 1, 2009 through the end of this year. These steps will conserve additional cash that we will use for debt reduction. When our performance improves, we will reinstate the 401(k) match.
A short while ago, we announced that the Board of Directors, at its meeting today, determined that it was prudent to suspend the dividend on Media General’s Class A and Class B shares. While we regret having to take this action, it allows the company to direct additional cash flow to debt reduction.
While a portion of the revenue fall-off we’ve experienced is certainly cyclical, we have no doubt that a meaningful portion is secular and will never return in its old forms. That being the case, we’re adapting our expense structure to conform to the realities of these changed revenue streams.
For the fourth quarter of 2008, total revenues decreased 12% from the prior year.
Looking at our individual business segments, Publishing Division revenues declined 17% from the prior year. Publishing profits were down 57%, excluding severance expense from both years. Much of this reduced level of performance was driven by the recession in Florida, which is now entering its third year.
The Broadcast Division enjoyed the benefit of more than $23 million of Political revenues in the quarter, which largely offset a decline in Local and National advertising revenues. Broadcast profits, excluding severance expense, were 2.6% ahead of the prior year.
The Interactive Media Division benefited from new revenues from DealTaker.com, the online coupon and shopping business we acquired earlier this year. DealTaker is generating strong growth on its own and produced a doubling of its unique visitors in the fourth quarter, compared to its stand-alone performance in the prior year. Our local media sites generated a 43% increase in Local online advertising revenues.
I’ll now ask Reid to provide more details on the performance of our three operating divisions in the fourth quarter.
Remarks from Reid Ashe
Thank you, Marshall.
It was another tough quarter for our Publishing Division, with all major advertising categories in retreat. Overall Publishing revenues were down 16.8%.
Classified advertising revenue decreased 37.6% in the quarter. The largest shortfall occurred in Florida, followed by Richmond. For the three metro markets combined, employment revenues were down 60%, real estate revenues declined 50%, and automotive revenues decreased 46.2%. Compared with the metros, the shortfalls in Classified advertising were not as pronounced at our Community newspapers. The legal category grew due to foreclosure notices.
Retail revenue decreased 12%, as major advertisers significantly cut their advertising schedules. The weakness was pervasive across markets and categories.
National revenue declined 11%, mainly reflecting lower spending by automotive and telecommunications advertisers.
Circulation revenue rose 5.7% in the quarter, primarily as a result of price increases earlier in the year.
Total Publishing expenses in the quarter, excluding severance in both years and certain one-time costs to consolidate print sites in 2008, decreased 7.2%.
Compensation expense was down 11.7% from the prior year, excluding severance expense of nearly $3 million in the quarter and a small amount in the same 2007 period. FTE’s for the quarter, relative to last year, decreased by 550, or 13.5%.
With aggressive reductions in consumption, we held newsprint expense to a 1.5% increase for the quarter. The price per short ton increased $185, or 36.3%, but we reduced consumption by 25.6%.
For the full year, we reduced newsprint expense 10.4%, despite a 13.5% increase in price.
Many of our newspapers have re-designed or combined sections and eliminated less-essential content. Four of our community print sites, representing four community dailies and a number of weeklies, have trimmed their page width to 11 inches. All of our other newspapers will be converted to the 11-inch page by the end of the third quarter of this year.
In the fourth quarter, the Broadcast Division suffered the same recessionary drag as the Publishing Division, but political advertising helped us increase profits 2.6% over the prior year, excluding severance expense.
On the plus side, we billed $23.4 million of Political advertising in the quarter. At the same time, though, our largest customer category, the automotive industry, is in perilous straits. In the fourth quarter of 2007, automotive advertising accounted for 25.7% of our total time sales. In previous years, it had been greater still. In the fourth quarter of 2008 it fell to 15.3%.
Local TV ad revenues fell 25.6% for the quarter. The largest declines were in the automotive, furniture, grocery and specialty store categories.
National revenues were down 30.6%. Categories declining the most were automotive, entertainment and services.
As stunning as those declines are, Media General’s sales performance has exceeded that of the television industry. According to the Television Bureau of Advertising’s monthly Group Survey, through November – the latest reporting period – industry time sales decreased 4.7%, compared to Media General’s 2.8% decline. Those numbers include Political advertising, both for the industry and for us.
Broadcast expenses were down more than 10% in the fourth quarter, excluding severance, from the prior year. This reflects lower expense for salaries and benefits, lower cost of goods sold at our studio design and equipment subsidiary, and other cost containment efforts in sales, administration and promotion.
In the Interactive Media Division, an operating loss of $1.6 million for the fourth quarter compared with a loss of $1.2 million, excluding an investment write-down, in the same 2007 period.
Total interactive revenues increased 10% compared to last year, despite declines in Classified and National revenues, of 25% and 37%, respectively.
DealTaker.com, which we didn’t own a year ago, helped us. So did Local online advertising, which increased 43% compared to the prior year. Local advertisers are more aware and receptive now to online advertising. We’ve also invested in sales training, offered better incentives and put a new focus on online-only sales.
Because everyone wants to spend smarter now, our acquisition of DealTaker.com was especially timely. DealTaker.com finds the best prices on the Web for a wide variety of consumer items. It also provides coupons, product information and price comparisons. With its moderated forums, it’s a social network for shopping mavens who delight in sharing the deals they’ve found.
When a customer clicks through to a retailer’s site to complete a purchase, DealTaker earns a commission. It is highly profitable and growing fast. The fourth quarter was DealTaker’s busy season. On Black Friday, the day after Thanksgiving, visitors were up 90 percent from last year, and commission revenue increased more than 2-1/2 times. Traffic in December more than doubled over the prior year. In the nine months of 2008 that we owned DealTaker.com, revenues were $5.7 million.
The online audience of our local media sites grew nicely in the fourth quarter. Page views increased 10% and unique visitors grew 30% compared to the prior year.
Thanks to our Continuous News Initiative, local page views are up nearly 32 percent. The growth is even higher in our two largest markets: Richmond is up 38 percent, and Tampa is up more than 50 percent. Unique visitors are up 18 percent.
The added pages from Continuous News provide valuable local inventory, which appeals to local advertisers. We’re getting better at monetizing traffic, at the same time we’re creating more traffic to monetize.
Local entertainment is a hot topic for our Internet audience, and an area of high demand for several advertiser categories. Company-wide, we’ve enhanced our local entertainment sections and driven double-digit increases in page views and unique visitors and thus in salable ad inventory.
Blockdot, our advergaming and branded entertainment business, moves into the new year with great momentum and exciting new products. In December, Blockdot released an iPhone version of Chicktionary, one of the most popular word games on the Internet.
This month the game was named the Best iPhone Word Game at the 2008 Best App Ever Awards — beating even Scrabble. This game has been featured on the front of the iTunes store as a “What’s Hot” app. Both events have significantly boosted sales.
And, now, I’ll turn the presentation over to John.
Remarks from John Schauss
Thank you, Reid.
As with much of the rest of the country and the world, economic conditions in the company’s markets continued to decline in the fourth quarter. Additionally, the market’s perception of the value of media stocks remains negative. As a result of these factors, the company recognized a pre-tax, non-cash impairment charge of $130.4 million ($83.1 million after-tax) primarily to write-down the value of FCC licenses and network affiliation agreements in the Broadcast Division to their estimated fair values.
We were pleased to have reached agreement with our banks in the fourth quarter regarding debt agreement modifications that provide us with the financial covenant flexibility we desire at a cost that will be manageable. We were in compliance with all of our covenants prior to the amendment, and expect that we will continue to be in compliance with them as revised. The new agreement is posted to our web site in an 8-K dated December 19, 2008.
Debt at the end of 2008 was $730 million, down from $898 million at the end of 2007, reflecting concerted efforts under our delevering plan.
Interest expense was 26% below last year’s fourth quarter, due mostly to a substantial reduction in average debt outstanding and, to a lesser extent, a reduction in average interest rates. Interest expense for the full year was $43 million, compared with $60 million for the full-year 2007, again as a result of our delevering plan and lower interest rates.
The effective tax rate for the full year was a 31.6% tax benefit on our pre-tax loss as compared to a 35.4% tax expense on our pre-tax income in 2007. The decline in the tax rate was due primarily to certain non-deductible goodwill included in the impairment charges and $7.5 million of a tax valuation allowance that related to continuing operations.
Capital spending in the fourth quarter of 2008 was $12 million, compared with $23 million in the fourth quarter of 2007. For the full year, capital expenditures were $31.5 million, compared with $78 million in 2007. The 2009 capital spending budget is $30 million.
In the fourth quarter, the Publishing Division invested $5.5 million, mainly on converting press equipment to reduce web widths. The investments we have made in printing operations in the past few years have enabled us to consolidate the number of newspaper printing sites. We have gone from 25 sites to 11. Eight of those consolidations occurred in the past three years.
Broadcast Division capital spending in the fourth quarter was $6.5 million, mainly for the final phases of the digital television conversion at many of our stations, an upgrade to our Central Traffic Operation, and the continued replacement of analog equipment with more efficient digital technology.
Interactive Media Division and corporate expenditures were less than a half-million dollars, primarily for information technology.
We announced yesterday that we have signed a definitive agreement with Nexstar Broadcasting Group for the sale of our CW station in Jacksonville, Fla. The transaction is subject to regulatory approvals and is expected to be completed in the second quarter of 2009. We are pleased to sign an agreement for the sale of the last of the five stations we planned to divest. When the sale is completed, we will use the proceeds to pay down debt. As we have said all along, we will provide aggregated financial details on the group of five stations sold when the sale of WCWJ closes. We expect total proceeds of $95 to $100 million for all five stations.
And, now I’ll turn it back to Marshall.
Remarks from Marshall Morton
Thank you, John.
With the nation in recession, and our largest market, Florida, in a continuing depression, it won’t surprise you that we approach 2009 as a challenging year.
We remain vigilant in our efforts to align expenses with the business climate and, as you heard from Reid, we are aggressively pursuing new audience and revenue growth opportunities.
Our Interactive Media Division is focused on driving audience growth through new products and our highly successful Web-First/Continuous News initiative; capitalizing on mobile delivery with new advertising and marketing services, such as text messaging, mobile coupons and classified vertical applications; cultivating and executing on our partnerships with Yahoo! and Zillow; and accelerating growth in new revenue segments tapped by Blockdot and DealTaker.com.
The Broadcast Division is driving several initiatives to improve market share and develop new business. We’ve completed satisfactory agreements on cable retransmission fees for all contracts that expired at the end of 2008. When the revenue from these contracts is added to the satellite retransmission deals that were already in place, we will generate over $16 million in 2009.
The Publishing Division continues to reach new audiences through both new print products and new products in partnership with our Interactive Media Division. We recently announced the creation of a new production and distribution unit within the Publishing Division. A key focus for this new unit, even as it retains responsibility for the printing and distribution for our 24 daily newspapers and more than 275 weekly newspapers and niche publications, is to expand outside sales for commercial printing, including the pursuit of opportunities for high-speed offset web printing and co-distribution arrangements, primarily with other newspapers and specialty publications. Moving printing and distribution into a separate unit allows our publishers and managers to focus on content, sales and new products. We expect this innovative approach to provide operating efficiencies both internally and for third parties.
The Super Bowl on Sunday is being played in Tampa, our largest market.
Each of our Tampa-based operations is planning comprehensive coverage, including a Super Bowl Commemorative Special Section from The Tampa Tribune, live broadcasts direct from the NFL Experience on WFLA, and the most complete visitor’s events guide on TBO.com and m.tbo.com, the mobile Web site.
A new magazine that we co-own, an upscale lifestyle magazine for Tampa Bay, will launch with a special Super Bowl edition, just in time for the game.
In addition to being official sponsors of the Tampa Bay Super Bowl Host Committee, our Tampa operations will sponsor several events surrounding the game: The NFL Experience, Taste of the NFL, Pepsi Smash, and the 10th Annual Super Bowl Gospel Celebration. Sponsoring these events is an excellent way to showcase the power of our brands and highlight our exclusive content offerings. We also benefit from utilizing NBC coverage, game and event tickets to provide incentives for advertisers.
We are particularly pleased to have generated nearly $3 million in Super Bowl advertising spots on our 8 NBC stations.
That concludes our report. We will now be pleased to take your questions. Top of page |
