First-Quarter Conference Call Remarks
April 16, 2003 at 11:00 AM Eastern
by J. Stewart Bryan III, Chairman and CEO, Marshall N. Morton, Vice Chairman and Chief Financial Officer, Reid Ashe, President and Chief Operating 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 First-Quarter Conference Call and Webcast.
We issued two news releases today - one announced first-quarter earnings, the other March revenues. Both have been posted to our Web site.
Our speakers today are Stewart Bryan, chairman and chief executive officer; Reid Ashe, president and chief operating officer; and Marshall Morton, vice chairman and chief financial officer. Their comments will be posted to our Web site immediately following this call, and a replay will be available.
Today's presentation contains forward-looking statements. These are subject to various risks and uncertainties and 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.
At this time, I will introduce Stewart Bryan.
Remarks from Stewart Bryan
Thank you, Lou Anne, and good morning ladies and gentlemen. Thank you for your interest in Media General.
Today we reported first-quarter earnings of 30 cents per share, compared with 26 cents per share for the first quarter of 2002.
These results were 4 cents better than our most recent guidance. The operating profit of all three divisions, the performance of SP Newsprint, and interest expense were all better than forecast to some degree. In addition, the Broadcast Division had much stronger than anticipated collections in March, which reduced required receivables reserves -- quite an accomplishment in a business known for its longer days outstanding for receivables.
Our first-quarter results included a gain of 16 cents from the sale of our investment in Hoover's. Following the write-down of a number of Internet investments in prior quarters, we were pleased to have such a nice gain. We fully expect that Hoover's will continue to be a significant customer of Media General Financial Services.
Total revenues were up 1.5% in the first quarter, in spite of a number of challenges. Publishing results reflect the impact of a long, harsh winter in Virginia and North Carolina, as well as the shift of Easter from March into April. The Broadcast Division had $3.4 million of Olympic revenues in the 2002 first quarter that, of course, did not repeat this year.
Certainly the war in Iraq had the greatest unfavorable impact on the quarter. We estimate a loss in revenues of more than $2 million for the quarter from ad cancellations and deferrals.
In February business began to soften because of geopolitical concerns. The start-up of the war in Iraq resulted in advertising cutbacks by some newspaper customers and a slowdown in ad placements by others. In the broadcast business, we experienced cancellations, network pre-emptions and spending deferrals.
In addition, a newsprint price increase that was scheduled to take effect March 1 would have helped our results from our share of SP Newsprint, but, as you all know, the increase was not implemented as planned.
To offset some of the revenue shortfalls, in February we reinstated some of the expense management measures that we put in place during the recession, such as a hiring freeze and reduced discretionary spending. We realized some benefit in March and expect to see greater impact in the second quarter.
Let me now ask Reid to discuss the details of our divisional operating performance for the quarter.
Remarks from Reid Ashe
Thank you, Stewart.
I will begin with an overview of Publishing's performance. The first quarter continued to reflect a weak advertising environment. January was encouraging, as revenue increased 2.8% over last year, but soft performances in February and March hurt the quarter. Economic uncertainty related to the war with Iraq affected results, as soft retail and especially soft national advertising pulled down overall performance. In addition, in our three metro papers, we added 2-4 open pages per day to cover the war, with no advertising to support the increase.
Publishing segment profit of $23.6 million compared with $28.3 million last year. These amounts include the results of our 20% interest in The Denver Post. This year it was a loss of $103,000, and last year it was a loss of $569,000.
In spite of all the challenges, total Publishing revenues of $130.4 million were 1.2% ahead of last year. This indicates an improving, but still depressed, advertising climate. Revenue was mixed among markets, and most advertisers remain cautious relative to the size of their ad schedules.
Classified revenue for the quarter increased by $495,000, or 1.2%. Employment linage for our three metro papers was still below last year for the quarter, but the loss narrowed in March. Unfortunately, we can't tell you how much of the improving trend was due to real improvement and how much was due to a later Easter this year. Employment classifieds are not typically strong on the holiday. Automotive linage for the metros was 17% above last year for the quarter.
Classified results were mixed across markets. Tampa was below last year, with lower employment partially offset by robust automotive and real estate. The Richmond Times-Dispatch was up year-over-year, as strong automotive and real estate advertising offset soft employment. Winston-Salem saw similar results to those of Richmond.
Retail revenue decreased by $500,000, or 1.5% for the quarter. Retail results were also mixed by market. Tampa was above last year, owing principally to a very strong January, which was buoyed by Super Bowl advertising. Richmond was below last year, as major advertisers pulled back due to economic concerns. The fall of Easter into April this year affected retail-advertising sales comparisons in the first quarter.
Preprint revenue increased by $1.2 million, or 6.8% for the quarter. Preprint has been the strongest category over the past several quarters and once again helped offset lower retail and national ad revenues. The preprint category is also increasing as a result of the progress we are making with circulation increases at most of our papers.
National advertising decreased by $450,000, or 5.8%. Over 90% of our national ad revenue is in our three metro papers. The Tampa Tribune experienced the largest decline for the quarter, mostly the result of 2002 advertising campaigns for one-time events that did not repeat this year, including a strong schedule for the Hewlett Packard/Compaq merger.
Circulation revenue for the quarter increased $330,000, or 1.5%.
The Tampa Tribune is showing very strong growth. Net paid circulation for the month of March increased over last year by 6% daily and 5% Sunday. We believe these are some of the highest increases in the industry. We are very pleased that our growth plan in Tampa is driving the increased circulation as well as supporting a growing share of advertising revenue in the Tampa Bay market.
Many other Media General newspapers are also increasing circulation as a result of new readership initiatives. In March, 20 of our newspapers had daily circulation increases and 18 had Sunday increases. For the first time in recent history, the Richmond Times-Dispatch was up both daily and Sunday.
Total publishing expenses for the first quarter were above last year by 6.8%. The increase is closely tied to higher costs for salaries, benefits, newsprint and other departmental expenses.
Salaries were 3.6% higher, which mostly reflects annual merit pay increases, and benefits were up 10.5% as a result of rising retirement plan and healthcare expenses.
Other departmental expenses within Publishing were 14% above last year. Three-quarters of the increase is attributable to higher expenses in Tampa. These expenses supported Tampa's growth plan and its extensive coverage of the Super Bowl. Growth plan initiatives include subscriber discounts, promotion, marketing and other circulation selling costs. The net effect of the Tampa growth plan in the first quarter was $800,000; that is, total costs, offset by related revenues.
Newsprint expense was up 5.5%, because of increased consumption for covering the Super Bowl in Tampa, increased ROP advertising in some markets, war coverage and to support our increased circulation. The average newsprint price per ton for the quarter was $408, compared with $415 last year.
Now, let's turn to the Broadcast Division. Profits for the quarter were down 20.7% from last year, primarily the result of increased payroll and benefits costs, higher depreciation expense related to our new studio in Charleston and the digital TV projects that were completed in 2002, and from WFLA's extensive coverage of the NFL playoff and Super Bowl games, featuring the Bucs.
These items were partially offset by an increase in gross time sales of $705,000, or 1.2%.
Local revenues for the quarter increased $1.2 million, or 3.2%, through our continuing ability to effectively manage and price our spot inventory. The automotive, medical and furniture categories had the strongest increases.
National revenues for the quarter decreased by $565,000, or 2.5%. This decline was due to the war in Iraq and the continued weak national economy. The automotive category showed a healthy increase; the corporate and financial categories showed more modest increases. Fast food and entertainment advertising were both down.
Political revenues for the quarter of $420,000 were about 10% higher than last year. They were generated by a variety of elections, most notably a mayoral race and issue spending in Tampa and a mayoral race in Wichita.
We are pleased that our Broadcast Division continues to outperform the industry in time sales. The TVB monthly group survey for February reported an industry decrease in times sales of 4.7%, compared to our smaller decline of 3.6%. Industry national time sales fell by 8.2%, compared to our decline of 7.6%. Industry local time sales decreased 2.5%, compared to our decline of 1.4%. We were able to outperform the industry through our effective management of spot inventory and our continued successes in developing new local business initiatives.
In the February ratings, 10 of our stations gained overall, 11 stayed even, and only one went down. (Does not include satellite stations).
Broadcast Division expenses for the quarter increased 5.9%. Increased payroll costs resulted from merit pay raises, higher sales commissions, and 16 additional positions. Benefits costs are rising for the same reasons stated for the Publishing Division - healthcare and retirement plans. Our strategic plan to increase TV revenues this year factored in higher sales costs, primarily for advertiser incentives and sales training programs, and these investments are paying dividends for us as evidenced by local time sales increases. A portion of these higher costs was offset by a decrease in our syndicated program expense, due to lower contract renewal rates.
Now let's turn to the Interactive Media Division. Operating profit for the quarter of $4.6 million compared to the loss of $1 million last year. The increase is the result of the sale of Hoover's, which resulted in a pre-tax gain of $5.7 million. Absent this, the division would have lost $1.1 million.
Interactive revenue for the first quarter exceeded the prior year by 35%. The largest source of increase was classified advertising, which was 89% higher than last year. Classified liner upsells from our newspapers and new online classified products, such as Top Jobs and Top Properties, contributed to the growth.
We are pleased that the Interactive Media Division has continued to grow and produce revenue increases. They are also focused on building new revenue streams, launching new products, and adapting Boxerjam, our interactive games service, into new media and new formats, with multiple revenue streams.
Let me now turn our presentation over to Marshall for additional details on our financial performance.
Remarks from Marshall Morton
Thank you, Reid.
Net income for the first-quarter of 2003 was $7 million, or 30 cents per share. This was a 16% increase over last year's income of $6 million, or 26 cents per share, before the accounting change for SFAS 142. Total revenues for the quarter were $197.4 million, up 1.5% from $194.5 million last year.
The year-over-year earnings increase can mainly be attributed to lower interest expense and to the gain on the sale of our interest in Hoover's. Partially offsetting these positive factors were the decreased divisional profits that Reid just discussed.
Below the line, interest expense declined $3.5 million, or 27%, from last year. Lower borrowing costs, as well as declining debt levels, account for the decreased expense.
Our share of SP Newsprint's results was a loss of $2.1 million this quarter, compared with a loss of $1.5 million last year. This performance reflects low newsprint prices, as well as the impact of higher production costs for raw materials and energy offset partially by an increase in sales volumes.
As we previously reported, SP Newsprint's $50-per-metric-ton price increase that had been scheduled for March 1 did not take effect. SP is now planning to implement a good portion of the increase as of May 1.
As a reminder, every $1 change in the price of newsprint has a net effect of $115,000 after tax for Media General; that is, counting both the impact on our Publishing Division expenses and on our share of SP Newsprint's income.
Acquisition intangibles amortization of $3 million was up nominally from last year.
Corporate expense was about 4% higher than last year. This increase is mainly attributable to higher expenses for occupancy and employee benefits.
The "Other, net" line on the GAAP Income Statement shows income of $6.9 million for the first quarter of '03 compared to income of $423 thousand for the '02 period. This is where the Hoover's pre-tax gain is recorded.
The effective tax rate for the first quarter of 2003 was 36.5%, compared with 38.25% in the first quarter of 2002.
Total debt at the end of the first quarter was $614 million and represented 37% of total capital. We stand at about $610 million today.
Capital expenditures in the first quarter were $6.5 million. Of that amount, the Broadcast Division accounted for $4.5 million. The Publishing Division spent $1.7 million. Expenditures for the Interactive Media Division were nominal and Corporate was around $300 thousand.
For the full year 2003, we have reduced our capital-spending budget from our original budget of $62 million to a new plan of $49 million. We will accomplish this reduction by deferring some of our spending plans into 2004. The principal projects that will start later than planned are printing press operations for our Lynchburg and Bristol newspapers.
EBITDA for the first quarter was $38 million, compared to $39.8 million for last year's first quarter.
After-tax cash flow (income before the cumulative effect of adopting SFAS #142, plus depreciation & amortization) was $24.1 million in the first quarter, compared with $22.7 million in the same 2002 period.
Free cash flow (After-tax cash flow minus capital expenditures) was $17.6 million, compared with $12.4 million in the first quarter of 2002.
Please note that, starting with this quarter's press release, the calculations for all three of the items I just discussed are provided in a new table that augments the supplemental information we have been providing in our earnings releases.
Before turning it back to Stewart, let me say a few words about expensing stock options and future pension costs in light of recent press coverage about their impact on media companies.
We continue to account for our employee compensation plans in accordance with APB Opinion No. 25. Under APB 25, no compensation expense is recorded because the exercise price of employee stock options is set to equal the market price of the underlying stock on the date of grant.
In our annual report, we provide a pro forma table (p. 31 of our 2002 Annual Report) that illustrates the effect on net income and earnings per share using a Black-Sholes valuation methodology. If Media General had expensed stock options in 2002, it would have amounted to $4.5 million, and the EPS impact would have been 19 cents per share.
Now, let me comment on pension obligations. As discussed in more detail on page 23 of our 2002 Annual Report, as with many companies, the combination of poor stock market performance, which affects pension plan assets, and lower long-term rates, which increases the present value of the company's liability, have come together to take our main pension plan from an overfunded position to an underfunded position.
At the end of 2002, Media General increased its pension liability to reflect this on the balance sheet. The adjustment didn't affect net income. Media General has not had to make any cash contributions to the plan since the 1980s, and we are still evaluating our plans for 2003. We believe annual cash contributions could average as much as $18-24 million over the next five-year period in the absence of meaningful market improvement. We expect retirement expense charged to P&L in 2003 to be approximately $9 million.
And, now, I will turn it back to Stewart.
Remarks from Stewart Bryan
Thank you, Marshall.
I have just a few more comments before we move to the Q&A.
We continue to actively participate in the FCC's review of the newspaper-broadcast cross-ownership rule.
We were pleased to learn the findings of a study released on February 16 by the Project for Excellence in Journalism, affiliated with the Columbia University School of Journalism. The study found that TV stations owned by companies with a newspaper in the same market are more than twice as likely as the norm to produce top-quality newscasts. Our Tampa operation was one of those in the study.
We think this is helping to make it clear to everyone who seriously studies the FCC's policies that the rule is actually inhibiting the delivery of quality local news to large and small communities across the nation.
Our experience in Tampa and five other markets across the Southeast is proving that local communities can be better served by the common ownership of broadcast television stations and newspapers because the combined resources of both platforms then can be harnessed more effectively to bring faster and higher quality local news to the public.
The proponents of the cross-ownership ban have not made their case, and we remain hopeful that the Commission will eliminate the cross-ownership prohibition altogether on the June 2 date promised by Michael Powell.
Next, let me discuss our expectations for the second quarter. Certainly we are encouraged by all of the positive outcomes in the war with Iraq.
In the Publishing Division, we are projecting revenue growth for the second quarter of 2-3% compared to last year's second quarter.
In Broadcast, national advertisers are re-booking spots that were pre-empted during war coverage. We expect second-quarter pacings to show positive growth.
We expect local time sales will be up in the second quarter, reflecting the benefit of our aggressive selling efforts and new programs implemented this year to drive local sales. National time sales, on the other hand, are expected to be down somewhat. Our year-to-year comparisons are now increasingly affected by last year's political advertising. Last year's second quarter included $4.9 million in political revenues. Industry-wide, the automotive, retail and fast food categories are expected to show strength in the second quarter. We expect total broadcast revenues for the second quarter to be about even with last year.
For the second quarter, segment-operating profits are expected to be down 3.5-4% from last year, mostly reflecting higher expenses for sales costs, newsprint, salaries and benefits. Expense reductions put into place in February are gaining traction, particularly a hiring freeze and a focus on eliminating discretionary spending wherever possible.
Interest expense will continue to be significantly lower than last year and will help offset some of the operating shortfall. We expect a loss from our share of SP Newsprint, but we expect it will be substantially less than last year's loss.
At this time, we anticipate earnings per share for the second quarter of 2003 to be in the range of 72-74 cents, compared to 70 cents in last year's second quarter. Because of ongoing economic uncertainty, we are reluctant to provide new guidance for the full year at this time - we hope to do so at the Mid-Year Media Review in June.
That concludes our formal remarks, and, now, we will be pleased to take your questions.
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