First-Quarter Conference Call Remarks
April 18, 2002 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. Welcome to Media General's First Quarter Conference Call and Webcast.

We issued two news releases this morning - one announced first-quarter earnings and the other March revenues. Both have been posted to our Web site.

The speakers on our call today will be Stewart Bryan, chairman and chief executive officer; Marshall Morton, vice chairman and chief financial officer; and Reid Ashe, president and chief operating 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. And thank you for your interest in our company and its first-quarter performance.

For the first three months of this year, Media General earned 26 cents per share, before a one-time charge to account for the impairment of certain intangible assets, in accordance with a new accounting standard.

We are very pleased with the performance of our operating units, whose results are significantly better than anticipated at the start of the year. I will discuss that in more detail in a moment.

Several items other than core operations contributed to our net income before the charge. Acquisition intangibles amortization was $12 million less than last year. Interest expense was down about a half million dollars. These two benefits in turn were offset by the under-performance of our investments in the Denver Post and SP Newsprint.

Equity income from our 20% interest in the Denver Post was down $5.3 million from last year. This decrease was mostly because in '01's first quarter, we had the benefit of a one-time gain from the start up of the JOA.

In addition, our one-third interest in SP Newsprint contributed $7.7 million less than last year's first quarter, almost entirely because of low newsprint prices.

While revenue in our three divisions was a mixed bag, all three of them performed very well. Our Publishing Division profit, not including Denver, was almost $1 million better than last year's first quarter. This increase is attributable entirely to strong cost management. The Broadcast Division's profit exceeded last year by $3.7 million, the result of higher-than-expected revenues and good cost management. Our Interactive Media Division also performed better than last year for two reasons: lower equity investment losses and new revenue initiatives.

Broadcast time sales for the quarter increased $4.2 million. We realized $3.4 million in billings from strong Olympics advertising on our five NBC stations. In fact, Olympic billings doubled our forecast. We believe this higher spending was a combination of strong patriotism and advertiser response to a rebound in the economy.

We have also seen an overall strengthening in many important broadcast categories, particularly automotive, which was 17% ahead of last year for the quarter.

We continue to outpace the national averages for time sales. Through February, TVB reports an increase in industry time sales of 5.4%, compared to our station's increase of 8.9%.

We believe this better-than-peer performance reflects three qualities: 1.) our ability to effectively manage and price our spot inventory, 2.) a strong national rep effort in our dedicated offices in New York and Atlanta, and 3.) our success in developing new business and garnering higher shares from existing clients.

We do continue to see broadcast advertisers place their orders unusually late, compared to past practices, which makes forecasting challenging and more difficult.

While Publishing Division revenues were below last year's first quarter, the declines in February and March were some of the smallest of the previous 12 months, at 3.5% and 3.7%, respectively. The first quarter of this year was certainly better directionally than the fourth quarter of last year.

Classified advertising is still down from last year, mostly because of continued weakness in the employment category. Improved automotive linage partially offset this. Retail revenue has been trending up; although, we see some advertisers continuing to hold back schedules in some markets. We got an unexpected boost in National revenue from ads placed in Tampa related to the proxy battle over Hewlett-Packard's merger with Compaq.

On the cost side, strong expense management company-wide enhanced our profits in the first quarter.

Publishing Division expenses were 8% lower than last year, and Broadcast Division expenses were about 1% lower. Total operating expenses were 3% below last year, and we held Corporate Expense even.

Overall, we continue to have about 5% fewer employees than we did at the end of the year 2000, when we began our cost reduction program in response to the advertising downturn.

Let me now ask Marshall to discuss further details of our financial performance.

Remarks from Marshall Morton

Thank you, Stewart. My comments will focus on our results for the quarter compared to last year's first quarter.

I'd like to begin by noting that we have expanded the format of our earnings press release tables. We are now providing a GAAP income statement supplemented by detailed segment data. This is in response to questions from investors, particularly about EBITDA and cash flow. We hope this fuller approach will better meet your needs - please let us know.

Starting with our Publishing segment, total revenues decreased 6%. Many advertisers remain cautious about the size of schedules they are buying.

Classified revenues declined 12%, mostly from weak employment advertising. Employment linage in Richmond, Tampa and Winston-Salem was down 36%, 40% and 48%, respectively. Increases in automotive and real estate in some markets partially offset the impact.

Retail advertising decreased 3%. A strong ROP schedule in our metro papers by Eckerd partially offset the decline. In addition, last year the Tampa Tribune had significant dollars from Super Bowl advertising.

National advertising increased 7%, with gains in the telecom, financial and automotive categories.

Preprints were about even with last year.

Circulation revenue declined 2%, excluding the effect of the conversion to independent contractors in Tampa. Last year, the Tampa Tribune sold 100,000 copies related to the Super Bowl.

Total operating expenses for the Publishing Division declined 8% and more than offset lower revenues. Salary expense was down 2%, while benefit costs were up about 10%. Other spending was down 11%, due to a variety of cost cutting measures.

Newsprint expense decreased 28%. Consumption was down 7%, and newsprint prices were down 23%. Our average price per ton was $415 in this year's first quarter, compared with $537 last year.

As a result of the outstanding expense management, Publishing Division profit, excluding Denver, was up 3.4%. The Publishing segment results we report externally include the results of our 20% interest in the Denver Post. In this year's first quarter, we posted a $569 thousand loss from Denver, compared with income of $4.7 million in last year's first quarter. Most of last year's income was from a one-time gain related to the JOA conversion.

Publishing segment operating cash flow was up slightly.

Now, let's turn to the Broadcast Division. Total revenues increased 5.5%.

Total time sales increased 7%. Local revenues were up 6%. This reflected gains in the automotive, services, specialty stores and grocery categories.

National revenues were up 8%, mostly from WFLA, with strength in the automotive, corporate, telecom and entertainment categories.

Political revenues increased $273 thousand.

Total Broadcast expenses were just under 1% lower than last year. Payroll was down slightly, while benefit costs increased.

Most of the revenue increase flowed through to the bottom line because of ongoing expense management. Segment profit increased 47%. Segment operating cash flow increased 26%, and the margin improved to 27%, compared to 22% in the first quarter last year.

Now let's discuss the Interactive Media Division. Total revenue of $2.6 million was 17% higher than last year.

Classified revenue, our largest online category, increased 183%, mostly as a result of classified up-sells in several markets.

While the segment showed a loss of $1 million, that performance was 40% better than last year, mostly from lower losses from equity subsidiaries.

Now, let's focus on changes in consolidated, below-the-line items.

Interest expense was 4% lower than the first quarter of 2001.

This year's investment loss at SP Newsprint contrasts sharply with last year's strong profitability and is due to lower newsprint selling prices.

Now last year, we didn't get a lot of questions about why we are continuing our investment in SP, but, understandably, we have been getting some lately with the downturn in newsprint pricing. Over the long term, we believe this is a sound strategic investment, and I'd like to highlight a few of the key reasons:

1. Our 4 machines will produce more than 1MM tons/year.
2. Our star performer (PM #2 in Dublin), installed in the early 90's in Dublin is the fastest, most productive newsprint machine in North America by a large margin. Last July, set a speed record of 5,600 ft/minute (i.e., more than 60 mph)
3. #2 in Dublin is the second most productive machine in the world, exceeded only by a much newer, wider machine in Germany.
4. Dublin Plant designed for 1,300 tons/day, now running at 1,700 tons/day.
5. Ranked against other machines in service in the 90's, our # 2 outperforms by 25% in productivity.
6. We've finished the de-inking revamp in Oregon and we're fully competitive with all comers.
7. Cogeneration investment, which is underway right now in Oregon, will have dramatic impact on costs. West Coast energy cost is the largest cost difference between the two mills.
8. Just signed a very competitive 6-year labor agreement with our unionized employees.
9. Our expanded recycling capabilities position us well for expected upturn in the fiber market.
10. All this puts us in a terrific position when more normal pricing returns.

Now, moving on to other items. Acquisition intangibles amortization was lower by $12 million, or 81%, due to the adoption of SFAS 142. For the first quarter of 2001, had the new rule been in effect, our pre-tax amortization expense would have been lower by the same amount. This translates to 37 cents per share after tax. You will see the same difference in each of the next three quarters.

In addition to eliminating a major portion of amortization, the adoption of SFAS 142 requires companies to reassess the value of existing goodwill and identified intangibles, like FCC licenses, on an annual basis to ensure that their value has not been impaired. As a result of our initial impairment testing, Media General has written off some existing intangibles to reflect the lower level of cash flows currently being generated by some of our recently- acquired broadcast properties. This is a cumulative accounting catch up and will not be part of ongoing earnings. The charge was $126 million, or $5.47 per diluted share.

Corporate expense was about the same level as last year.

The largest components of the change in the Other category were reductions in license fees from SP newsprint and the absence of a gain on the sale of land in the 2002 quarter.

The effective tax rate for the first quarter of 2002 was 38%, compared with 41% for the first quarter of 2001. The reduction was largely attributable to the adoption of SFAS 142.

EBITDA for the first quarter was $40 million, compared with $49 million in the 2001 period.

After-tax cash flow (income before cumulative effect change plus depreciation & amortization) was $23 million, compared with $33 million in the like 2001 period.

Free cash flow (After-tax cash flow minus capital expenditures) was $12 million, compared with $23 million in the first quarter of 2001.

Total capital expenditures in the first quarter were $10 million. By division, they were: Publishing, $1.1 million; Broadcast, $8.7 million; IMD, $147 thousand; and Corporate, $447 thousand. For the full year 2001, we continue to expect capital spending of $59.5 million.

Debt at the end of the first quarter was $751 million and stood at 42% of total capital. Today we're at $745 million.

I'll now turn it over to Reid, who will provide more highlights from operations.

Remarks from Reid Ashe

Thank you, Marshall. I'd like to begin by discussing two of the successful revenue growth initiatives we have under way.

Those are sales across multiple media in the same market, and sales across multiple publications in our newspaper clusters. In both cases, we're leveraging our market knowledge and customer relationships, offering customers the convenience of one order and one bill and giving our sales staff more things that they can sell.

Multi-media, or converged sales, began last year in Tampa, where we operate The Tampa Tribune, WFLA-TV and TBO.com. By selling multi-media advertising packages or simply encouraging advertisers to throw an additional medium into their mix, we estimate we gained about a 2% lift in total revenue last year in the Tampa market. We expect that benefit to grow this year by about two-thirds.

In Tampa and five smaller markets, we can sell all three media. Everywhere that we operate a newspaper or a TV station, we have our traditional medium plus the Internet. Convergence sales outside Tampa are just beginning this year, and the early results are encouraging.

The greatest short-term potential is in classified advertising on the Internet. Almost exactly a year ago, we began offering classified advertisers in The Tampa Tribune the option to add TBO.com at a small additional fee. Eighty-five percent of advertisers opted in, producing $1.1 million in incremental revenue in the program's first nine months.

On March 7 of this year, we launched the same program in Richmond. Advertisers' participation rate here is running at 78%, rivaling Tampa's 85%. We expect to offer the Internet option at almost all our newspapers by the end of this year.

The second major new revenue initiative is cross-selling in our newspaper clusters. The best example is in our North Carolina Community Newspaper cluster, where we launched the program last August, selling advertising across five daily newspapers and several other publications.

By the end of last year, we were generating about $100,000 per month from these efforts. This has now risen to the range of $170-180 thousand per month. At this rate, our North Carolina group is enjoying about a 5% revenue lift from this new initiative, at virtually no additional cost.

We are now implementing cross-selling in all three of our Virginia newspaper clusters. Because of the nature of these markets, we don't think they offer quite the potential of our North Carolina cluster. Nevertheless, incremental revenue at negligible cost is a welcome thing.

Now, let me comment on a few other significant operating matters.

In our Broadcast business, the Olympics, as expected, heavily influenced the February sweeps. Our NBC station in Tampa recorded the highest 6 p.m. news ratings of any station in the market in recent history, and one of the 10 highest ratings for 11 p.m. news of any NBC station in the country.

Because the Olympics had such a dramatic impact on the February sweep, the majority of media buyers aren't using it. Instead, we continue to rely on our strong November ratings. Those have translated into revenue gains averaging 8% this March compared to the same month last year.

Our Broadcast business also will benefit this year from political advertising. Even with campaign finance reform, we still expect to have a good year. Significant political activity will occur in every state where we operate. There will be seven gubernatorial races, including Florida's; eight Senate races, all the congressional seats, and various local elections.

Construction of our new station in Charleston, SC, is complete. Our news and technical departments are rehearsing with their new equipment and will move in right after the May ratings period. The rest of the staff moved in last weekend.

We are on track to meet the May deadline for digital TV. We are at full power in Tampa, Spartanburg, Florence/Myrtle Beach and Charleston, and we will have full power in Birmingham later this year. All of our other stations will be at low power by May 1, except for our four satellite stations, which have a waiver until 2006. By the end of this year, we will have invested $21 million in digital conversions, and we estimate spending another $52 million over the next few years to get all stations to full power by 2006.

At this time I will turn it back to Stewart.

Remarks from Stewart Bryan

Thank you, Reid. I have just a few more comments before we move to the Q&A.

First, let me update you on our view of the FCC's review of the newspaper/broadcast cross-ownership rule. We were gratified to hear Chairman Powell say at the NAB meeting in Las Vegas last week that he expects to rule on the issue this year.

Media General is taking an active role in the process. We believe we have made a compelling presentation to the FCC, and we are pleased to have their interest. On April 22, we will host two FCC commissioners and other staff at our Tampa News Center. This follows a visit on January 19 by the FCC's chief economist. It is very important, we think, for the Commission to see real-life convergence and the enhanced local news product that we're continuing to develop in Tampa. We remain hopeful that the commission will make a decision by early autumn.

Next, let me discuss our expectations for the second quarter.

Our near-term outlook is somewhat cautious in our Publishing business. While we're pleased with the signs we have seen, it is too early to announce a trend.

In our Broadcast business, we feel more confident that we are seeing a recovery, for both local and national spot business, in the majority of our markets. Broadcast sales for the second quarter are pacing 12% ahead of last year, with the strongest month forecast to be June.

Our Publishing Division expects second-quarter revenues to be about 1.5% below last year's same period, and the Broadcast Division expects an increase of about 8.5%. Analyst estimates for the second quarter currently range from 54 cents to 60 cents per share, and the consensus is 57 cents per share. We are comfortable with these estimates. For the full year, analyst estimates range from $2.14 to $2.24, and we are comfortable with the lower end of the range.

I'd like to close by reminding everyone that our Annual Meeting will be held on May 24 here in Richmond. If your schedule permits, we would be glad to have you attend. Also, we will be at the Mid-Year Media Review -- our presentation is on June 19 at 11 a.m. We hope to see a lot of you there.

That concludes our formal remarks, and, now, we will be pleased to take your questions.

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