Third-Quarter Conference Call Remarks
October 11, 2006 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 Third-Quarter Conference Call and Webcast.
Earlier today, Media General issued two press releases. We announced earnings for the third quarter of 2006 and revenues for the month of September. Both press releases have been posted on our Web site. The comments from today’s conference call also will be posted on our Web site 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. We will begin with Marshall.
Remarks from Marshall Morton
Thank you, Lou Anne, and good morning ladies and gentlemen.
Our third-quarter profit reflects the impact of various components, including significant dollars related to acquisition and disposition activities.
We completed our acquisition of four NBC stations on June 26, the first day of the third quarter. In addition, during the quarter, we announced the sale of our CBS stations in Wichita, Kansas; Mason City, Iowa; Birmingham, Alabama, and Chattanooga, Tennessee as part of our financing plan for the acquisition.
We closed on the Kansas transaction September 24, the last day of our third quarter, and received the funds September 25, the first day of our fourth quarter. Proceeds of approximately $75 million were used to pay down debt, which will be reflected on our fourth-quarter Balance Sheet. We expect to close on the remaining two transactions this week. Projected proceeds of approximately $60 million will be used for debt repayment as well.
Including a net gain of $11.8 million, or 50 cents per diluted share, from the sales of the CBS stations, net income for the third quarter of 2006 was $20.6 million, or 87 cents per share. We realized a gain on the sale of the Kansas stations and small book losses on the other transactions. All of that is reflected in the third quarter.
Excluding the gain, and reflecting continued challenging business conditions throughout the industry, income was $8.8 million, or 37 cents per diluted share, compared with $9.8 million, or 41 cents per share in last year’s third quarter.
I’d like to note that the First Call Mean of 44 cents per share was based on a total of four earnings estimates. The range was 38 cents per share to 55 cents per share, and two of the four estimates were 38 cents. Because of the small number and wide range of estimates, the First Call Mean was not a particularly useful benchmark this quarter.
In the quarter, the impact of our purchase of the four NBC stations is reflected in higher Broadcast Division profits as well as higher interest expense and increased acquisition intangibles amortization. As expected, the acquisition immediately and significantly improved the Broadcast Division’s operating margin and drove meaningful growth in its revenues and segment cash flow.
Also as expected, while the acquisition is proving to be cash flow positive, it will not be accretive to earnings in the first few years. We continue to expect that the substantial free cash flow generated by the new stations will enable us quickly to reduce the debt we incurred to finance the acquisition. We anticipate reducing our leverage multiple from approximately 4.0 times at the end of this year to approximately 2.5 times by the end of 2008.
Other significant factors in our third-quarter results this year were lower Publishing Division profit and the addition of $1.4 million in non-cash stock option expense, partially offset by a nearly 50% improvement in the Interactive Media Division’s operating performance and a $2.6 million increase in equity income from our interest in SP Newsprint, which resulted from higher newsprint prices.
Total revenues in the third quarter increased 14.3% to $241 million, including the four new NBC stations. Excluding the new stations, total revenues increased 2.5%.
I’d like to provide some highlights of our divisional performance for the quarter, and Reid will provide more details in his report.
Publishing Division profits in the quarter declined 12%, as a result of a 0.8% decrease in total revenues and a 1.8% increase in expenses.
Newspaper advertising revenues were even with last year’s third quarter. A 1.8% rise in Retail revenues was offset by lower National and Classified revenues. We were pleased that the introduction of new products and services continued to drive Retail revenue growth.
National advertising in our newspapers has been soft most of this year, principally the result of lower spending in the telecommunications category.
Classified advertising continued to be affected by ongoing spending restraint in the automotive category. More recently, Classified advertising has reflected the unfavorable impact of decelerating job growth. Recent Bureau of Labor Statistics reports have shown that job growth in the U.S. has slowed since March and that the deceleration in September was much greater than anticipated, and our Classified employment revenues reflect those realities. On the other hand, real estate Classifieds continued to show solid growth.
Overall, while this year has generally been a disappointment for newspaper advertising throughout our industry, we are pleased that our Publishing Division has continued its track record -- of several years running -- of performing at the high end of its peer group for most key advertising metrics.
Broadcast Division profit, excluding discontinued operations, increased $9.9 million, or 83%, to $21.9 million in the third quarter, including the new stations. Gross time sales increased 55%, on target with our most recent forecast. Political revenues of $11.5 million were generated by races in markets where we’ve operated for some time such as Florida, Alabama, Georgia and South Carolina, and in our new markets of Columbus, Ohio and Providence, Rhode Island.
The Interactive Media Division improved its operating performance to a loss of $456 thousand this year, compared with a loss of $898 thousand last year. The improvement was driven by growth in all advertising categories, especially online Classifieds. Page views and visitor sessions both increased 29%.
Now, let me now ask Reid to discuss our operating performance for the third quarter. John will follow Reid with additional details about the quarter.
Remarks from Reid Ashe
Thank you, Marshall. I’ll start with the Publishing Division.
Early last summer it became clear that revenues weren’t coming through at expected levels. Let me provide some details regarding specific categories and markets. I’ll lead with the good news.
Retail revenues in the third quarter increased $930,000, or 1.8%. Much of this growth reflected the benefit of our programs to provide our advertisers with new products and services for reaching their target audience.
Our Florida Publishing Group, which includes The Tampa Tribune and a number of associated daily and weekly newspapers, generated a 2.3% increase in Retail revenues. This growth reflected higher spending in the grocery store and home improvement categories, increased revenues from a weekly Spanish language newspaper introduced a year ago, and special sections published during the quarter.
The Winston-Salem Journal generated a 9.3% increase in Retail revenues. Its growth resulted from new revenue initiatives, higher spending in the department store, home improvement and office supply categories, and a new large advertiser that has entered the market.
Retail revenues at The Richmond Times-Dispatch, on the other hand, declined 1.4%, reflecting lower spending in the medical, financial and travel categories, partially offset by new revenue initiatives.
Now, let’s look at National advertising revenues, which declined 6.4% in the third quarter. At The Tampa Tribune, National revenues were down 8.9%, reflecting lower spending in the telecommunications, financial and automotive categories. On the other hand, the Winston-Salem Journal generated an 8.7% increase in National revenues, attributable to increases in the telecommunications and financial categories. The Richmond Times-Dispatch was up slightly.
Classified advertising revenues declined less than 1% in the quarter. The Richmond Times-Dispatch generated a 2.2% increase in Classified revenues, while The Tampa Tribune and the Winston-Salem Journal posted declines of 1.9%, and 7.1%, respectively.
Real estate linage for these three metros increased 21.6% and revenue increased 31.2%. While real estate Classified advertising is starting to level out in comparison to last year, this category continues to perform well, especially in Tampa and Richmond.
Automotive linage for the three metros was down 25.1% and revenue was down by a like amount. Despite weak results in this category a year ago, we continue to see further cutbacks by auto dealers, and this curtailment is consistent across virtually all markets.
Employment linage at the three metros, which shifted downward in the quarter, declined 11.2% and revenue was down 8.1%.
Employment revenues declined 18.4% at The Tampa Tribune and 12.8% at the Winston-Salem Journal, while at the Richmond Times-Dispatch employment revenues increased 5.9% as the result of an increase in display advertising.
The revenue category that had the greatest impact on the Division’s lower total revenues in the quarter was Circulation. However, as we’ve previously reported, a substantial portion of our Circulation revenue decrease reflects the impact of a change in our wholesale rates to newspaper carriers, which, by the way, is offset entirely by expense reductions. Excluding the rate-change impact, circulation revenues were down 2.8% in the quarter. As of the end of June, all of our newspapers completed conversion to the new wholesale rate program, but it will take until next June to fully cycle through the comparisons.
Publishing Division operating expenses increased $2.1 million, or 1.8%, for the quarter. Salary expense was only slightly above last year. While annual merit increases averaged 3-3.5%, FTEs were below last year, despite some additions for our new products initiatives. Employee benefits increased a modest 1.1%.
Newsprint expense was down from last year by nearly 1%, as higher prices were offset by lower consumption. The price per short ton increased $67 in the quarter, compared to last year. Consumption declined 3,760 tons, or 11.8%, from newsprint conservation efforts, the change to lighter basis weight newsprint, and circulation and advertising volume declines.
Other departmental expenses in the quarter increased $550,000, or 1.8%, primarily reflecting higher Circulation sales expenses at several newspapers and new product initiatives.
Depreciation and amortization expense increased 6.1%, mostly due to our new printing facility in Bristol, Virginia, and the installation of our new advertising system in Tampa and Richmond.
Bad debt expense in the quarter was higher than normal, up $930,000, mostly due to an adjustment at The Tampa Tribune, which occurred for a variety of reasons, which were temporary in nature. We’re continuing to collect on those accounts and expect to get much of the adjustment back in the fourth quarter.
For the rest of this year, the Publishing Division has implemented expense cuts in several areas and, more importantly, is accelerating new revenue initiatives in response to the softness we are experiencing in our traditional advertising business.
Let’s now turn to the Broadcast Division. Division profit, excluding the new stations, increased 33%, mostly as a result of higher Political advertising revenues.
Total revenues in the quarter grew 45%, including the new NBC stations. Excluding the new stations, total revenues increased 7.2%.
Political revenues were $11.5 million, including $5.1 million from our new NBC stations.
Local time sales, excluding Political, increased 29%, including our new stations. Excluding the new stations, Local time sales declined 2.3%. Categories showing increases included furniture, telecommunications and services. Categories showing declines included automotive and fast food.
National time sales, excluding Political, increased 55%, including our new stations. Excluding the new stations, National time sales increased 4.8%. Categories showing increases included automotive and services. The most significant category showing a decline was corporate.
Broadcast Division expenses, excluding the new NBC stations, rose less than 1%. This performance reflected the benefit of expense savings initiatives the division established earlier this year when it became apparent that transactional sales were softer than expected and Political revenues were coming in more slowly than anticipated.
Most of the increase was the result of higher amounts for salaries and sales commissions. Employee benefits expense increased nominally in the quarter, and production costs were down. Depreciation expense increased 9%, due to capital spending on digital TV conversion projects.
We’re making good progress integrating our new stations. We look forward to completing the sale of our CBS station in Birmingham because we will then have a full opportunity to become engaged in the management of our new NBC station there, which has been limited under FCC duopoly rules.
As we’ve previously indicated, we have conservatively estimated operating synergies of $3 million annually by 2008 for the new NBC stations. The synergies will come from enhanced revenues, which are expected to result from the implementation of Media General’s sales training and systems as well as its inventory management and pricing processes. Cost reductions will result from bringing the new stations into Media General’s Central Traffic Operation and from centralizing Master Control for all of its NBC stations.
Also in the Broadcast Division, we’ve launched new networks in four markets using our digital secondary channels. Those are CW+ in Charleston and Greenville-New Bern and My Network TV in Savannah and Myrtle Beach-Florence. We’ve not had enough experience to gauge their strength, but we are excited about the opportunity to expand our footprint in these markets. The new digital channels target a younger audience, they give us more inventory to sell and more opportunities to cross promote. Down the road, we hope they can help us expand local programming.
Now, let’s turn to the Interactive Media Division. Revenues of $7.3 million were up 39.5%, including the Web sites associated with our new NBC stations. All significant revenue categories exceeded the prior year, especially in the online Classified advertising category. Online Classified advertising revenues increased 14%, Local revenues grew 63%, and National/regional advertising revenues more than doubled.
During the quarter, the Interactive Media Division implemented several initiatives to continue to expand our online audience and increase revenues. Content programs included localized content, special features, and improved weather and business/financial information. Revenue growth programs included new classified products in the employment and real estate categories, and a continued emphasis on direct-sale banners, sponsorships and special features, such as video.
And, now, I will now turn our presentation over to John.
Remarks from John Schauss
Thank you, Reid.
Total debt at the end of the third quarter was $1.1 billion and represented 52% of total capital. The acquisition of the NBC stations was financed initially through existing capacity under our $1 billion revolving credit facility.
On August 29, 2006, we borrowed $300 million under a bank term loan with a syndicate of banks that had closed earlier in the month. The purpose of the loan was to redeem $200 million of senior notes that matured on September 1, 2006, with the incremental $100 million used to pay down revolver debt. This bank term loan has a non-amortizing 5-year term, is fully pre-payable without penalty, and has a structure and covenants similar to the revolving credit facility. The LIBOR + margin interest rate of the term loan has been fixed through a series of interest rate swaps.
Our debt outstanding at the end of the third quarter included $971 million in bank debt and $95 million in consolidated variable interest entity debt.
Let me next discuss Capital expenditures for the quarter, which totaled $25.2 million.
Of that amount, Publishing Division capital expenditures of $12.5 million were invested mainly in new production facilities and an integrated advertising system. Our press projects have long-term benefits and solid returns on investment. We are nearing completion of the new facility for the Opelika-Auburn News in Alabama.
The Broadcast Division spent $10.8 million, mostly for the continued conversion to high-definition digital television and for automated news production systems, including a Central Master Control Operation for our NBC stations. We’re also building a new facility for our Myrtle Beach station, which will enable us to expand our viewership in this growing market.
Interactive Media Division expenditures were approximately $250 thousand, primarily for infrastructure and software. Corporate capital spending totaled $1.6 million, principally for information technology.
The effective tax rate for the third quarter was 38.1% compared with 37.1% last year.
Let me now review EBITDA, After-tax Cash Flow and Free Cash Flow for the quarter. The results shown in the table in our press release are based on continuing operations and, therefore, do not include income from Discontinued Operations.
EBITDA for the third quarter of 2006 was $48 million, compared with $38.7 million in 2005.
After-tax cash flow was $26.4 million, compared with $25.5 million in the year-ago period.
Free cash flow in the third quarter was $1.2 million, compared with $9.5 million last year, reflecting a $9.2 million increase in capital expenditures in the 2006 period.
And now I will turn our remarks back to Marshall.
Remarks from Marshall Morton
Thank you, John.
Before turning to Q&A, I’d like to give you an update on the status of the newspaper/broadcast cross-ownership rule at the FCC. As expected, the Commission commenced the review of its ownership regulations this past summer, just as soon as Commissioner McDowell got on board after his Senate confirmation. We’re obviously pleased this proceeding is finally under way. Media General will participate actively, and we expect to file our first-round comments later this month. We know and have confidence in Chairman Martin, and we anticipate a proper deregulatory result. We think that is most likely to occur in the second or third quarter of 2007.
Let me also comment on our outlook for the fourth quarter of 2006. As you know, visibility is limited when economic conditions change as rapidly as they have this year, and that makes forecasting for us – and estimating for you – something of a challenge. The outlook provided today is our best estimate at this time, but, obviously, it could quickly change depending on economic conditions.
That said, I would like to add that, the impact of economic conditions notwithstanding, we are not satisfied with the level of performance delivered in the third quarter. Our divisions have all been instructed to accelerate their new revenue development initiatives and focus on expense management.
For the fourth quarter, the Publishing Division currently expects revenue growth in the range of 5-7% compared to last year, mostly the result of this year’s 53rd week, which occurs the last week in December. Retail will continue to be the strongest growth category.
For the Broadcast Division, gross time sales are expected to increase approximately 70%, including the 4 new NBC stations. Gross time sales for our previously owned stations are expected to increase approximately 20%. Political revenues are projected to be approximately $25 million in the fourth quarter, including the 4 new stations.
That concludes our formal remarks. Now, we will be pleased to take your questions.
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