Third-Quarter Conference Call Remarks
October 21, 2009 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 third-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 morning.

In the third quarter, we were encouraged by the fact that the decline in total revenues, 18%, was an improvement from the 20% decrease we experienced in the second quarter of this year, especially when taking into account that we had $12.5 million of Olympics revenues in the 2008 period, and this year we had $6 million less in Political revenues than we did last year. 

In addition, our total operating costs in the third quarter decreased 18% year-over-year, excluding this year’s impairment charge and insurance gains in both years.  While the overall advertising environment remains challenging, we are encouraged that most economists have called an end to the recession. 

We believe we’ve found equilibrium between revenues and expenses and that we are in a strong position to benefit from an advertising recovery.  We have also strengthened our operations by more deeply engaging in the digital and mobile worlds, realizing robust audience growth and creating new revenue streams - I’ll review some key successes later in my remarks.

Now, I’d like to briefly review the new segment reporting we’ve introduced this quarter.  A major reason for this change was to enhance the ability of our properties to engage in the digital and mobile worlds as effectively as possible. 
With our new operating structure, all properties, products and services in each market are managed by a single, accountable market leader. 

Our new structure also recognizes that the customer is firmly in charge.  He or she sets our product and packaging priorities.  Our former divisional structure was derived from our history.  As the market has changed, we determined that the silos resulting from that approach impeded our ability to serve today’s market needs in ways that best served the customer. 

Therefore, effective at the beginning of the third quarter, Media General changed its management structure from three platform-based divisions to the five geographic markets.  We also have a sixth segment that includes interactive advertising services – Blockdot, Dealtaker.com, and NetInformer.

We’ve worked with, and fine-tuned, a geographic approach to managing operations in Tampa for a number of years and have found it to be very effective in expanding our total audience share.  In Tampa, our network of TV, print and online products and services reaches well north of 80% of the total audience every week.  Our main web site there, tbo.com, has one of the highest shares of local audience of any site of its kind in the country - approximately 17.5%.  These are the kinds of results we’re after everywhere, and, of course, we continue to drive further audience growth in Tampa as well.

In the third quarter, income from continuing operations, absent an impairment charge, which John will discuss, and applying a tax rate of 39%, was $4.4 million, or 20 cents per share, compared with $5.7 million, or 25 cents per share a year ago.   

Our third quarter results included a number of other atypical items, such as pretax gains of:

• $1.9 million related to an insurance recovery on a damaged TV transmission tower,
• $910 thousand from a favorable tax ruling related to the sale of our former share of SP Newsprint,
• $2 million from the final freeze on a retirement plan, and
• $617 thousand from selling a web domain name that we didn’t need and some real estate in North Carolina.

Partially offsetting these gains was a $2.2 million increase in expense, related to two stock-based compensation plans, which resulted from a higher stock price in the third quarter.

Lower employee compensation costs contributed significantly to the decrease in total operating costs in the quarter.  Salary expense was down nearly 17% from a year ago.  We have 770 fewer FTEs this year than we did last year.  Except for promotions and certain other circumstances, there have been no salary increases in 2009.  We suspended the match on our 401(k) plan effective April 1 of this year, and we completely froze our pension plan as of May 31, 2009.  

We implemented a furlough program this year.  Our original plan called for employees to take 10 furlough days by the end of the third quarter.  However, as the quarter unfolded, we experienced last-minute advertiser cancellations and deferrals of planned spending in some markets. 

As a result, we found it necessary to implement an additional furlough day in the third quarter, bringing the total for that quarter to four days per employee.  We also deemed it prudent to continue the furlough program in the fourth quarter.  For the year, the total number of furlough days for each employee will be 15.

We hope to enter 2010 with furlough days behind us, and I am committed to restoring the match on our 401(k) plan as soon as market conditions allow.  The furlough days will generate a total savings in 2009 of $9 million by the end of the year, while the 401(k) match savings will be more than $10 million for the year.
 
Other significant expense decreases in the third quarter included a 14% reduction in various operating expenses and a 54% decrease in Newsprint expense.  Newsprint consumption was reduced 36%, from both lower volumes and conservation efforts such as our web-width reductions, and newsprint prices dropped 27% from a year ago.

Remarks from Reid Ashe

Thank you, Marshall.

I’m going to review our five market segments, in declining order of size. Before I get to individual cases, let me remind you of the macro-level trends that affect all of them. Individual results vary largely because of their different exposure to these trends:

First, this remains a very challenging advertising environment. Every major category – national, local and classified, is down this year.

Next, newspaper circulation revenue is up an average 11%, because of rate increases.

Cable and satellite retransmission fees are up nicely, to $4.2 million in the quarter that just ended, from just under $1 million last year.

Staffing costs are down everywhere because of the steps Marshall just reviewed with you.

Our newsprint cost is down significantly, too, due both to lower prices and to reduced usage.

So let’s look at the markets.

The Virginia/Tennessee market contains five operating groups: Richmond; Roanoke/Lynchburg; Tri-Cities in southwest Virginia and Upper East Tennessee; Charlottesville; and Northern Virginia. It includes two television stations, a metro newspaper and a lot of community newspapers.

Segment profits for the third quarter were $10.7 million, a 2% decline from a year ago. Revenues of $48 million declined 14.7% from last year, and expenses were down nearly 18%. Classified and Local drove the revenue declines, while payroll and newsprint accounted for the largest shares of expense savings.

Classified was down everywhere in the region, 29.5% overall. So was Local, down 15.8%. National was down 29%, mainly in Richmond.

As you’ve likely noted from our press release, the Virginia/Tennessee market segment reported the smallest profit decline of any of the five market segments. Because of the small television component, this market had less political advertising to lose. We also enjoyed relatively strong Local sales in Charlottesville and Northern Virginia, as well as new commercial printing clients in our Bristol and Lynchburg plants. The Charlottesville region also picked up new delivery contracts with USA Today and The Washington Post.

The Florida market segment includes our combination of WFLA-TV, The Tampa Tribune, TBO.com and a number of associated publications.

Profit for the quarter was $524,000, a 56.5% decrease from a year ago. Total revenues of $36.5 million were down 22.7%, mainly because of the state’s depressed economy. Also, we lacked the $2 million in political and $2.7 million in Olympics ads that ran on WFLA last year. Excluding those non-repeating revenues, our Florida segment profits would have improved significantly year-over-year.

Classified revenue in Florida decreased 38% from last year. The greatest falloff was in real estate, followed by recruitment and automotive. Local revenue was down 24%, mainly in automotive and telecommunications. National revenue declined a more modest 3%. Expenses fell 22%, due mainly to payroll and newsprint.

The Mid-South market includes six operating groups spread across South Carolina, Georgia, Alabama and Mississippi. This is a television-heavy market, with newspapers in and around Florence, South Carolina, and Opelika and Dothan, Alabama.

Our profit in the Mid-South was $5.5 million, a decrease of 12% from a year ago. Revenue was $35.5 million, a decline of 13.8%, including the near absence of $1.2 million in political and $2.1 million in Olympics revenue from last year’s quarter.

Local advertising was down everywhere, 15.4% overall. National declined 25.8%. Classified revenue in this market was down only 7%. Smaller newspapers, such as we operate in the Mid-South, generally haven’t suffered as a severe a decline in classified as have metro papers.

Expenses in the Mid-South decreased 14% from last year, mainly due to payroll savings and, to a lesser degree, newsprint.

The North Carolina market segment includes four operating groups: Winston-Salem; our North Carolina community newspaper group; WNCN in Raleigh and WNCT in Greenville.

Profit in North Carolina fell 63.3% from a year ago, to $1.4 million. Revenue declined 27.1%, to $18.9%. Our North Carolina TV stations lost $1 million in political and $2.3 million in Olympics revenue from a year ago. Classified was down 42% and Local was down 24%. National advertising fell almost 42%. Winston-Salem was especially challenged in the third quarter and we’re taking fresh steps to deal with the situation there.

Expenses in North Carolina fell 21%, mainly in payroll and newsprint.

The Ohio/Rhode Island market segment includes our TV stations in Columbus and Providence. We have no newspapers in this region.

Profits there were $2.5 million, down 46.5% from last year. We lost $1.5 million in political and $5 million in Olympics revenue from last year.

Total revenue for the market was $12.3 million, down 22.7% from last year. Local advertising was down 22% and National fell 30.7%.

Operating expenses declined 13%, mainly in payroll. Of course there was no newsprint effect.

The Advertising Services and Other market segment produced an 84% profit gain in the third quarter. Most of that came from Blockdot and Dealtaker.com. Blockdot’s revenue increased 29% from a year ago, thanks to aggressive and successful sales efforts. Improved operating efficiency also contributed. Dealtaker’s revenue increased 21%, thanks to an increased flow of shoppers.

Remarks from John Schauss

Thank you, Reid.  Let me first discuss the third-quarter impairment charge.

As reported in our most recent 10-Q, Media General performed a second-quarter 2009 interim impairment test, and no impairment was indicated.

In the third quarter, despite a rise in stock price, weaker-than-expected revenues, combined with the change in our management structure, triggered the need for another test.  Our new management structure created a greater number of operating segments and reporting units, leading to the test being performed at a more granular level.  As a result of both factors, we recognized a pretax impairment charge of $84 million.

This amount included non-cash impairment charges related to goodwill of approximately $66 million in the Ohio/Rhode Island, Mid-South, North Carolina, Virginia/Tennessee and Advertising Services segments, and charges related to FCC licenses, network affiliation and other intangibles of approximately $18 million in the Mid-South, Virginia/Tennessee, North Carolina and Advertising Services segments.

These non-cash charges have no impact on the way we manage our businesses, nor will they hamper our strategic efforts.

The effective tax rate on the loss from continuing operations was 21.6% for the quarter and 28.8% year-to-date.  This relatively low rate of tax benefit was due primarily to limitations imposed by the intraperiod tax allocation rules.  We can expect that those rules will continue to produce an unusual relationship between our effective tax rate and pre-tax income.  We do not anticipate making any significant cash income tax payments in the near term.  Therefore, it would be appropriate to assume a zero percent tax rate for cash flow purposes.  Additional information relating to our income tax situation will be provided in our third-quarter Form 10-Q.

Now I will review other key items in the third quarter.

Interest expense of $10.5 million was approximately $525,000 higher than last year’s third quarter, due primarily to higher marginal interest rates offset in large part by lower average debt levels.  Our “all-in” cost of debt in the third quarter was approximately 5.7%.

The significant decrease in acquisition intangibles amortization was the result of intangible assets written down in 2008.

Corporate expense decreased 45%, including the benefit of cost reduction initiatives and the final freeze of a retirement plan that Marshall mentioned.    

Free cash flow, excluding the non-cash impairment charge, was $14 million, compared with $16 million last year.

Capital spending in the current quarter was $3.6 million, compared with $6.8 million last year.  This year’s spending was for web-width reduction projects at three of our printing facilities, our annual Microsoft enterprise agreement, and automated press loading vehicles at our Richmond printing facility. 

We’ve taken decisive steps to reduce capital spending and improve liquidity.  This year we expect our capital expenditures will decrease from the 2008 level of $32 million to about $20 million.  We are funding projects that will provide strong ROI’s, and we are doing necessary maintenance.

Debt at the end of the third quarter was $706 million, compared with $712 million at the end of the second quarter of 2009, and $730 million at the beginning of the year. 

The maximum leverage ratio allowed by our bank debt covenants was 6.0x.  We came in at 5.81x.  We remain confident that we will stay in compliance with all debt covenants.

Our bank facilities do not mature until mid-2011, and there are no mandatory cash amortization payments prior to this time.  We are encouraged by the recently completed and pending refinancing activity of a couple media companies and, along with our financial advisors, we continuously evaluate refinancing opportunities in the bank, public, and institutional markets.  We believe we’ll have sound refinancing options.

And, now I’ll turn it back to Marshall.

Remarks from Marshall Morton

Thank you, John.

As we enter the fourth quarter, we have seen signs of strengthening in ad spending.  While we do not expect to fully replace the $23.4 million of Political revenues we generated in last year’s fourth quarter, we do believe that Local and National advertiser spending patterns are firming somewhat, especially on the broadcast side.  September produced the smallest revenue decline we’ve seen all year, down 12%.  In September, and so far into October, we have seen some encouraging signs that the Tampa and Providence markets have stabilized.  They were the first to go into recession and we are feeling cautiously optimistic that they will be the first to emerge from it.

Looking to next year, we anticipate a lift from an improving economy and the promise of Political and Olympics revenues. 

Our Political revenues in 2006 (the last non-presidential election year) were $50 million.  We anticipate hotly contested races in several of our markets.  These include the gubernatorial elections in Florida where Gov. Crist decided to run for the Senate, in Rhode Island, Georgia and Alabama where the governors are all term limited, and in South Carolina where we have four stations.  Senate races in Ohio and Florida are expected to be close as well.  Many of these races will also entail primary contests,

Revenues from the 2006 Winter Olympics at our eight NBC stations were $14 million, although we did not own four of them at that time.  We aim, of course, to capture that amount again, but it will be a challenge.  The four NBC stations we acquired in June of 2006 benefited significantly from NBC Universal’s group agreements with GM and other corporate sponsors.  At the same time, we established a good track record during the 2008 Summer Olympics of attracting new local advertisers in a down economy that had caused some of the traditional national advertisers to pull back their historical spending patterns.

Other reasons for optimism about the new year include the potential for more accomplishments resulting from our push into new digital and mobile platforms.  

Our mobile delivery includes new advertising and marketing services, such as text messaging, mobile coupons and classified vertical applications.  We are aggressively executing on our Internet partnerships with Yahoo! and Zillow, and we’re accelerating the growth of new revenue streams tapped by DealTaker.com and Blockdot.

Our Digital Media revenues in the third quarter increased 2.4% and represented 8% of total advertising revenues.  Several of our local media web sites generated revenue increases compared with the year ago quarter.  The increases are directly attributable to our focused digital sales initiatives, and many were profitable in the quarter.  Local online revenues increased 25%.  Unique visitors increased nearly 30% in the quarter, mostly attributable to users who come directly to our news pages from a search engine, as well as from referrals from Yahoo! through our headlines displaying on the Yahoo! home page and local news pages.  Blockdot and DealTaker.com generated significant revenue growth in the quarter. 

We’re also pursuing new opportunities that exist in the territories between our traditional market boundaries.  Our market structure makes it easier for business units in close proximity to one another to work together to make inroads into new areas.  We’ve already experienced success with new digital products, with inventive sales packages, and even with new print products such as magazines and directories – all representing new revenue streams.

In February of this year, we set up a new unit to generate new outside sales for printing and distribution for other newspaper publishers.  To date, we have booked new business that will mean at least $5 million in annualized revenues next year.  We are particularly pleased to have just signed a new agreement with Dow Jones for delivering its products in the Tampa/St. Petersburg market.  This arrangement not only provides operational efficiencies and a dependably profitable new revenue stream, it also provides us with a new opportunity to resume delivery of The Tampa Tribune in Pinellas County.  We will also print the NY Post and have the opportunity to help Dow Jones market the Wall Street Journal in Tampa Bay.

On the Broadcast side, we are pursuing new joint sales and operating agreements with other local broadcast outlets.  We just announced  an agreement in the Augusta, Georgia market, where our ABC station will be providing the local NBC affiliate with sales, local news and other operational services starting in January 2010.

We will provide more details on all of our new audience and revenue growth initiatives when we present at the UBS Media and Communications Conference in December.  I hope we’ll see many of you there.

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