Second-Quarter Conference Call Remarks
July 21, 2010 at
11:00 AM 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 morning everyone. Welcome to Media General’s Conference Call and Webcast.
Earlier today, we announced second-quarter 2010 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 morning everyone.
We were pleased with our operating results in the second quarter. Total revenues increased approximately 2% from last year, which was in line with the guidance we provided on June 16. Broadcast revenues grew 13%, and Publishing revenues declined 7%, marking a continuation of the sequential improvement we’ve seen for several quarters running in Publishing.
Total operating expenses were flat with last year, which was better than our guidance (3-4% increase). The better-than-expected expense performance was mostly attributable to lower healthcare expenses and to intentional delays in hiring for certain open positions.
Reflecting both the benefit of revenue growth and the strong performance on cost containment, Segment Operating Income increased 24% from last year.
Our television stations generated higher Political revenues than last year and also benefited from increased automotive revenues (up 42%). Political revenues in the second quarter were $7 million, compared with approximately $800 thousand last year. Our Mid-South, Florida and Ohio/Rhode Island markets, in particular, benefited from increased Political revenues. Florida and Ohio have hotly contested gubernatorial and Senate races, and our Mid-South market has 11 television stations, the most of any of our Markets.
For the company overall, Local and National broadcast revenues increased 4.3% and 5.6%, respectively, in the second quarter, mostly reflecting the higher automotive spending. Cable and satellite retransmission fees were up 20%.
Local Publishing revenues declined 8.5% from last year, mostly due to the struggle many retailers are facing from continued constraints in consumer spending. National publishing revenues were down 8.5%, mostly because of lower spending by the telecommunications industry.
Print Classified revenues decreased 10%, a continuation of sequential improvement. Moreover, there are encouraging trends in this category in many of our markets. In North Carolina, the Classified category turned positive in the second quarter and grew nearly 3%. In our Virginia/Tennessee and Mid-South Markets, Classified revenues declined only 4% and 4.8%, respectively. The Florida Market, where the economy is still very weak, is the only Media General market where we continue to see Classified revenues decline significantly - in the second quarter they were down 22%. The print declines in Florida are being partially offset by increased online Classified sales and other new innovative advertising solutions.
Partially offsetting the overall decline in Publishing advertising revenues was a 9% increase in Printing and Distribution revenues. We have in place aggressive sales initiatives to fully leverage our printing assets and our distribution resources. We’ve generated substantial new outside business for commercial printing and for the distribution of other newspapers in our market places.
Last year, we put into place a new operating structure that was designed to significantly accelerate our Digital Media strategy by focusing all of the resources in a given market on multiple platforms. A major transformation of our sales culture has been one of the most significant outcomes. Now, all of our sellers are trained to sell all of our products to all of our customers. The benefit of this new approach is evident in the growth of our Digital Media revenues.
The Digital Media revenues line on our Income Statement includes revenues from our local media web sites and revenues from our three Advertising Services businesses (DealTaker.com, Blockdot and NetInformer). Total Digital Media revenues in the second quarter grew 8%, including a 16% increase at our local media web sites, partially offset by lower revenues from our advergaming business Blockdot.
Looking just at our local media web sites, every Market Segment generated a significant year-over-year increase in Digital revenues. In our Florida Market, Digital Media revenues increased 25%. In the other markets, Virginia/Tennessee was up 15%, North Carolina 14%, the Mid-South 11%, and Ohio/Rhode Island 10%.
A growing number of our web sites are profitable on a fully costed basis. As a reminder, the results of our web sites are reported within each of our geographic Market segments.
Looking at the components of local web site revenues, Local revenues grew 26%. The robust increase is entirely attributable to our aggressive sales approach. Online Classified revenues registered their second quarterly increase in a row and grew nearly 16%. This strong performance is also a reflection of aggressive sales pressure. We’re leading sellers of employment and real estate advertising to the desirable, large scale audiences of select Internet partners, including Yahoo! and Zillow.
We’re pleased to be the first member of the Yahoo! newspaper consortium to sell Yahoo! display advertising in our television markets, as we announced last month. Our early performance has been strong. In just 90 days of selling, we closed more than $1 million in four pilot markets. We are now applying the same success formula to additional TV markets.
Our digital audience growth continues as well. Unique visitors increased 19% in the second quarter.
We also continue to focus on our diversified digital Advertising Services businesses. In the second quarter, DealTaker.com, our online coupon and shopping site, continued to generate revenue and earnings growth. The DealTaker model is also enabling us to create new local deal promotions, offered on our local media web sites. We’re encouraged by the positive early response to these new products and services in the markets where we have tested them.
On the expense side, noteworthy savings in the second quarter also came from newsprint, which was down almost 30%. This decrease was due both to significantly lower average prices and reduced consumption. Depreciation was more than $1 million lower, mostly due to reduced capital spending in recent years. Also, as we’ve said previously, expenses are increasing selectively this year in support of revenue growth initiatives; that higher spending is reflected in SG&A.
For the second quarter, a loss from continuing operations before taxes was $638 thousand, compared with income of $2.4 million last year, reflecting higher interest expense this year.
EBITDA in the second quarter was $30 million, a 5% increase from last year.
I’ll now ask Reid to provide details on the second-quarter performance of each of our geographic market segments.
Remarks from Reid Ashe
Thank you, Marshall.
I’ll start with the Virginia/Tennessee Market, our largest in terms of revenues and profit in the quarter. Second-quarter profit was $10.5 million, compared with $11.3 million last year. Revenues were down about 3%, and expenses decreased 2%.
National revenues declined 19%, mostly in Richmond, due to cutbacks in telecommunications. Classified revenues declined 4% region-wide, but the Lynchburg-Roanoke group bucked the trend and gained nearly 9%, due to strength in automotive and legal. Local revenues were down only 1%, with gains in Richmond and the Lynchburg-Roanoke group offsetting small decreases elsewhere.
The region’s political revenues were $214 thousand this year versus $343 thousand last year, when Virginia elected a new governor. Tennessee is electing a governor this year, to the benefit of our TriCities station.
Richmond is the largest media group in the Virginia/Tennessee Market, and it contributed more than half the profits. Digital operations in Richmond were profitable in the quarter, on the strength of timesdispatch.com.
Without last year’s political revenue, our Virginia and Tennessee operations found other sources to shore up profit. Printing and distribution revenue, notably, grew 25% as we continued to gain customers for our modern printing plants.
The Mid-South Market was the second largest in terms of revenues and profit in the second quarter. Profit increased to $9.6 million this year from $6 million last year. This is a broadcast-heavy region for us. It’s also the one where we recorded our best performance in newspaper revenue, down only 3.8% from last year. Broadcast revenues increased 17.3% and total revenues were up 12.3%.
Political revenues in the Mid-South grew from $311 thousand last year to $4.4 million this year, thanks to primaries in South Carolina, Alabama and Georgia.
The automotive sector has been especially productive for us in the Mid-South. We’ve built strong customer relationships and offered special promotions and sponsorships to boost our shares in a recovering category.
Our joint sales and programming arrangement with the Schurz-owned NBC affiliate in Augusta, which began in January, also contributed to profit. So did new third-party newspaper distribution agreements.
The Ohio/Rhode Island Market consists of two NBC stations, one in Columbus, Ohio, and the other in Providence, Rhode Island, and their associated interactive operations. They’ve done a particularly good job seizing opportunities in the improving market for television spots.
Profit in the Market grew to $3.7 from $2.6 million last year. Revenues increased nearly 10%, while expenses were roughly flat.
National revenues increased 20.4%, as we sold more automotive, entertainment, health care, furniture and home improvement spots.
Political revenues were $708 thousand, from gubernatorial and Congressional races in Ohio and a gubernatorial race in Rhode Island.
Profit in North Carolina Market was $1.5 million, up slightly from last year. Total expenses declined 3.8%, while revenues fell only 2.4%.
Political advertising ran on both our North Carolina television stations, and the Raleigh station boosted National revenue, as well.
Classified revenues increased 2.8%, thanks to growth among our community newspapers. Legal advertising was up, and, despite high unemployment, help wanted Classifieds increased over last year. A decline in Winston-Salem’s Classified partially offset the community newspapers’ strong results.
Local revenues in North Carolina declined 6.2% in the quarter, primarily at the newspapers. We’ve installed new leaders and intensified efforts to improve our local sales in print and online.
In Florida, profit increased to $1.5 million this year from $193 thousand last year. Total revenues were down slightly, and expenses decreased 4.4%. We took advantage of political advertising on television and advocacy ads related to the oil spill in print to overcome a 22% drop in Classified advertising and a 3% decrease in Local revenues.
Political revenues were $1.6 million, from the gubernatorial, senate and house races, as well as issues advertising. This is shaping up as a particularly vigorous political year in Florida. The state is electing both a governor and a Senator, with no incumbents in the running. With Charlie Crist now running as an independent, there’s a hot 3-way race for Senate.
National revenue increased 10.6% in Florida, with BP spill-related ads offsetting declines from other advertisers. Some of our properties in Alabama and Mississippi received spill-related advertising as well.
Florida’s Local revenues declined 3% in the quarter. WFLA and tbo.com exceeded their prior-year performance while print fell back.
Classified revenues were down 22%, reflecting continued weakness in the Florida economy. Within that classified total, though, we’ve driven impressive growth in digital revenue, up 9% year-to-date and 18% in June. Real-estate ads, sold with Zillow, are running four times last year’s level. Employment advertising is nearly double the year-ago level.
Looking ahead, the goal in all our markets is to seize whatever opportunities an improving economy hands us, but never to wait for them. Through new products, productive partnerships and a better trained, managed and motivated sales force, we’re increasingly creating our own opportunities for growth.
And, now, I’ll turn the presentation over to John.
Remarks from John Schauss
Thank you, Reid.
I’ll comment first on a few key below-the-line items.
Corporate expense increased from last year mainly because of the absence of last year’s furlough days and certain other cost containment measures.
“Other” expense on the segment report mainly reflects an increase in expense for stock-based compensation, as a result of the rise in the company’s stock price.
Higher interest expense is due to our debt refinance package, completed in February. Together, our restructured debt and our lower company-wide cost structure provide greater financial flexibility for the coming years.
The previously estimated second quarter non-cash income tax expense of $7.5 million was partially offset by a $1 million favorable adjustment related to a court ruling received in connection with a state income tax issue as well as $2.8 million tax benefit resulting from the intraperiod allocation of tax to other comprehensive income items. Thus, Income tax expense in the second quarter was $3.7 million.
Last year’s second quarter included an income tax benefit of $11 million on continuing operations, including $3.6 million from a favorable determination concerning a state tax issue and $7.5 million of tax benefit attributable to our first-half results.
For the third and fourth quarters, you should model the ratable $7.5 million non-cash tax expense and also be aware that there could be other tax adjustments/intraperiod tax allocations that are difficult to estimate, but still non-cash.
For cash-flow modeling purposes, we do not anticipate making any significant cash tax payments in the near term. Therefore, it is appropriate to assume a zero percent tax rate for cash flow purposes.
Capital spending in the second quarter was $6.7 million, compared with $3.8 million last year. The current-year investments were mostly for high-definition local origination equipment at some of our television stations and to replace a roof in Tampa. For this year in total, we expect our capital expenditures will be approximately $26 million. We believe this level of investment is adequate to support our strategies.
Debt at the end of the second quarter was $673 million, compared with $693 million at the end of the first quarter. This reduction mostly reflects a tax refund received in April of approximately $26 million that was used to repay debt.
We ended the second quarter well within our new covenants. Debt to EBITDA was 5.07x.
Free cash flow in the second quarter was $6.4 million, compared with $13.6 million last year.
Our focus is on free cash flow generation and debt repayment. We continue to expect free cash flow for 2010 of $58-60 million (including the cash received for the income tax refund).
And, now I’ll turn it back to Marshall.
Remarks from Marshall Morton
Thank you, John.
On July 1, we completed the first full year of our new market-focused operating structure. Our new approach recognizes that our value is in our markets. Therefore, the purpose of the new structure is to focus our people first on markets and customers and not on particular media platforms.
One year in, our folks are working more collaboratively across platforms in every market and we’ve made important strides in advancing our digital strategy as a result. We’re able to take new customer-focused solutions to market faster than ever before. We’ve let go of outdated approaches. We’re seizing new opportunities and developing new revenue streams.
The way we sell advertising now represents a huge and critical change for the better. Starting last July 1, we began a sweeping sales culture transformation. It has paid immediate dividends. We’ve achieved terrific success in selling the digital products that have been a focus of our multimedia approach – Local online ads, Yahoo! Display, Yahoo! HotJobs and Zillow online real estate ads.
Our content staffs are attracting new audiences. Our Web site and mobile unique visitors have grown rapidly and robustly, as a result.
During the past year, we’ve launched a multitude of new initiatives, including state-wide and multi-market sales and content projects. We’ve reignited newspaper circulation sales. We’re the first company to launch Yahoo! Display ads in our television markets. We’ve overhauled our Classified advertising approach. Along with 11 other companies, we’ve formed a national mobile television content service. All of our Web sites will soon operate on a new content management system that will improve the user experience.
We believe our newspaper and broadcast customers will be with us for many years to come; however, we all know that the future is unquestionably digital. We have to build a sustainable business in the digital and mobile worlds, and that is what we are working to create.
We’re proceeding as scheduled with our consolidated editing and design center for our three metro newspapers. We’ve selected a Managing Editor for the operation and have begun producing prototype designs. We’re on track to start up the center around the end of the third quarter. Two similar consolidated centers that serve our 20 community newspapers are already up and running.
We were pleased to be part of a recently announced joint venture for a national mobile television service along with 11 other broadcast companies. The participating companies plan to provide content to mobile devices, including live and on-demand video, local and national news from print and electronic sources, and sports and entertainment programming. We plan to begin testing our Mobile DTV technology late in the third quarter in Tampa, Fla., and Columbus, Ohio. Over the next 12 – 24 months, we’ll launch Mobile DTV in six additional markets. Offering Mobile DTV is important because that’s where the customer will be – today’s audience isn’t sitting still.
Before moving to Q&A, let me provide some guidance for the third quarter of 2010. We expect total revenues to increase 6-8%, compared to last year. Broadcast revenues are expected to increase more than 20%, mostly reflecting significant Political revenues, but also a firming in our underlying business, especially for automotive advertising. The rate of decline in Publishing revenues is expected to continue to moderate, and we expect the amount to be better than what we experienced in the second quarter – our current view is a 3-5% decrease. Total operating costs are expected to increase 7-8%. This growth reflects the absence of last year’s furlough days as well as certain cost reductions achieved in the 2009 third quarter, plus this year’s increased support of new revenue initiatives. We continue to expect free cash flow for the full year 2010 of $58-60 million, including the tax refund John discussed.
That concludes today’s report on our second-quarter results. We will now be pleased to take your questions. Top of page |
