First-Quarter Conference Call Remarks
April 19, 2007 at 10:00 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 first-quarter 2007 results and March revenues. Both press releases have 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. We will begin with Marshall.
Remarks from Marshall Morton
Thank you, Lou Anne, and good morning ladies and gentlemen.
As we stated in a press release last month, we are deeply disappointed that this year started out much weaker than we had anticipated.
Like other media companies, all of our markets and advertising categories have been affected by slowing economic growth in the United States. As you well know, weakness in the auto sector, especially for the domestic auto companies, has been ongoing for some time now. In addition, a measurable slowing of job growth began a little over a year ago. More recently, we have seen a significant weakening in the housing market, and the retail sector has been affected by the slowdown in consumer spending caused by higher interest rates and energy prices. All of these factors have caused advertisers to significantly reduce spending.
The economy in Florida has been hit particularly hard. Tampa, as you know, is our largest market, and we are very much feeling the effects of the downturn there. I’ll comment more on Tampa in a moment.
Growth of the Internet, too, is having an impact. However, we embraced the Internet as an opportunity many years ago. We have generated strong online audience and revenue growth, and we are pursuing additional growth through our own initiatives and through partnerships with others, such as Yahoo! I’ll talk more about that in a moment as well.
For the first quarter of 2007, Media General reported a net loss of $6.5 million, or 27 cents per share, compared with net income of $6.7 million, or 28 cents per share in the first quarter of 2006.
This year’s results include a pretax charge of $1 million for severance costs related to staff reductions at The Tampa Tribune. They also include the results of four NBC stations that we acquired as of the beginning of last year’s third quarter.
Total revenues in the first quarter of 2007 were $230.4 million, a 5.9% increase over last year, including the new stations. Excluding the new stations, total revenues declined 3.2%.
Operating profits for all three of our divisions were hampered by the revenue weakness. In the Publishing Division, very good expense management and a small increase in Retail advertising revenues were more than offset by a steep decline in Classified revenues and lower National advertising. In the Broadcast Division, the softness in transactional sales that we saw through most of last year has continued into 2007, and automotive advertisers have further reduced spending. In addition, in 2007 we did not have the benefit of the Winter Olympics advertising that we enjoyed last year on our NBC stations. Interactive Media Division revenues increased 30%, and would have increased even more except for the overall softness in Classified advertising.
The equity loss in unconsolidated affiliates of $2.3 million included $1.6 million from our share of SP Newsprint and $733 thousand from our share of a limited partnership that invests in media-related emerging companies. Higher interest expense also had an impact on our first-quarter results.
As we announced last month, we have implemented an aggressive plan to align our cost structure with the revenue environment we are now experiencing.
A key focus of the plan is streamlining several functions in Tampa. The Tampa Tribune recently announced plans for cost reductions, as well as for product enhancements that are designed to better serve evolving reader and advertiser needs.
The cost reduction program includes consolidating some functions, such as the classified call center, and outsourcing others, such as circulation telemarketing and customer service. A plan announced April 10 will result in the reduction of 70 staff positions over the next several months. In addition, the consolidation of some community paper printing operations in February eliminated 16 positions. Moreover, many unfilled positions will remain open well into the foreseeable future. Other cost reduction measures at the Tribune include reducing the width of the paper by one-half inch later this year, which will lower newsprint expense, as well as tightening discretionary spending.
Product enhancements focus primarily on further developing hyper-local content in collaboration with the Tribune’s associated community newspapers and on increasing the number of local web sites that serve focused geographic communities of interest in the market.
Also in Tampa, our NBC television station WFLA will realize some expense savings from the transfer of its master control operations to a new centralized facility for all 9 of our NBC stations recently completed at our new Columbus, Ohio, station. In fact, all of our NBC stations will realize some benefit from this centralization project that we had planned for some time.
Let me next discuss our new NBC stations, which experienced a weak first quarter. In the aggregate, the four-station group posted a loss of $1.3 million. The performance of the Raleigh and Birmingham stations was not far from our expectations, while the Columbus, Ohio, and Providence, Rhode Island, stations were well below our expectations for the quarter.
In addition to soft economic conditions that were not fully anticipated, our new NBC stations are in a significant transition to a new way of operating. These stations operated quite differently as NBC owned-and-operated stations, where they were far more focused on network products and priorities, and they could rely more on the network’s selling power.
Our business, of course, is locally focused. In fact, we saw much upside potential for the new stations as a result of implementing our proven methods of inventory management and pricing, and sales training programs and tools, which have enabled us to drive significant local revenue growth over the years. These opportunities are a part of the synergies we plan to realize by the end of this year. Following the challenges of the first quarter, we are pursuing the implementations with heightened vigor and are doing everything possible to accelerate progress.
We have also identified several opportunities to improve the market positions of the Raleigh and Birmingham stations by implementing our proven research and branding practices. As of the February ratings period, both stations ranked #4 in their respective markets.
New research studies that have been completed and analyzed at both stations will enable us to refocus their news on expressed audience needs and wants. Branding and marketing strategies will be more targeted.
We will essentially re-launch the Birmingham station. In Raleigh, we are going to provide an innovative web-integrated approach to delivering news and information. We are very optimistic about our potential for success using targeted research, an approach that has enabled the vast majority of our stations to rank number 1 or 2 in their respective markets for a number of years.
As I mentioned before, we are focused on dramatically increasing our Internet presence in every market. One very key step I’d like to highlight today is being part of the newspaper consortium that is partnering with Yahoo! on a number of online revenue-growth and content-sharing initiatives. This partnership will enable us to increase revenues for recruitment and other forms of advertising, and it will significantly widen visitor exposure to our online local news and information.
Another important part of our growth strategy focuses on introducing new products and services to serve changing customer needs and preferences. We are committed to continuing to derive at least 5% of total revenues, profitably, from new products and services. In 2006, more than 10% of our revenues came from non-traditional products.
At this time, I’ll ask Reid to provide more details on the performance of our three operating divisions in the first quarter.
Remarks from Reid Ashe
Thank you, Marshall. I’ll start with the Publishing Division.
Operating profits of $18.9 million were 31% lower in the first quarter of 2007 than in the prior year, primarily reflecting a 5.7% decline in total revenues. Operating expenses were even with last year, and they were down when the severance costs for the Tampa restructuring are excluded.
Looking at the revenue performance for the first quarter, Retail advertising revenues increased $880,000, or 1.6% - the only major newspaper category to finish ahead of last year’s first quarter. Tampa produced most of the growth, though other markets also generated growth.
The Tampa Tribune and its associated daily newspapers produced a 4.6% increase in Retail advertising. The main drivers were Tampa’s successful Spanish-language weekly, Centro mi diario, and a new health publication, as well as increased advertising in the department store, electronics, office supply, financial, travel, and home improvement categories.
The Winston-Salem Journal generated a 3.6% increase in Retail revenues, reflecting higher spending by sporting goods, medical, furniture store and office supply advertisers. The Richmond Times-Dispatch saw a 3.3% decrease in Retail revenues, reflecting lower spending in the department store, medical, financial, drug store and grocery store categories. Our Community newspaper group reported a small increase in Retail revenues.
Classified advertising revenues decreased $7.9 million, or 13.8%. The decline was pervasive across all categories and in most markets, and was most pronounced in Tampa. Defying this trend, the Richmond Times-Dispatch produced a 2.8% increase in Classified revenues for the quarter, thanks to higher average rates and increased real estate linage.
Employment linage at the company’s three metro newspapers declined 17.7%, including decreases of 31.7% at The Tampa Tribune, 11.8% at the Richmond Times-Dispatch, and 6.8% at the Winston-Salem Journal.
Automotive linage for the three metros declined 27.8%, including decreases of 26.1% at The Tampa Tribune, 26.9% at the Richmond Times-Dispatch, and 32.6% at the Winston-Salem Journal.
Real estate linage for the three metros was down 20.9% in the aggregate, although the Richmond Times-Dispatch generated a 15.8% increase. The Tampa Tribune reported a 44% decline, due in part to a very strong comparison to the 2006 first quarter, and The Winston-Salem Journal saw a 2.7% decrease.
National revenues in the first quarter decreased $760,000, or 7%. The Tampa Tribune and its associated daily newspapers saw a 16.2% decline, due to lower automotive, travel, medical and electronics advertising. The Winston-Salem Journal saw a 9% decline, due to lower telecommunications spending. The Richmond Times-Dispatch was even with last year, as increases from automotive and preprint advertising were offset by lower telecommunications advertising and two campaigns last year that did not repeat.
While Circulation revenues declined $850,000, or 4%, approximately 80% of the decrease was the result of a change in wholesale rates to carriers at several newspapers, for which there is a corresponding expense reduction. Excluding this impact, Circulation revenues would have decreased 0.9%. In the quarter, eight Media General newspapers increased their net-paid Daily Circulation, and seven did so for Sunday.
As we’ve mentioned, Publishing’s expense management for the quarter was very good. The primary drivers of this performance were a 3.4% reduction in FTEs and a 12% decline in newsprint expense. Although salary increases averaged 3-3.5%, a lower headcount, resulting from streamlined operations and positions held open, and lower sales commissions, moderated the overall impact.
Most of the savings in newsprint expense were due to reduced consumption, reflecting lower volumes, reduced web-widths and lighter-weight paper. The average price per short ton of $576 was down $6 from last year.
Let’s now turn to the Broadcast Division.
Operating profits of $8.1 million fell 33% from last year, including our four new NBC stations. Excluding the new NBC stations, operating profits declined 22% from last year.
Total Broadcast revenues increased 30.5%, including the new stations. Excluding the new stations, total revenues were down less than 1%. These results were achieved despite the absence of Winter Olympics advertising that was present a year ago. Same-station Olympics revenues in 2006 were $4 million.
We enjoyed more than four times the Super Bowl revenue this year on our 9 CBS stations compared with the 3 ABC stations that carried the game last year.
Gross time sales, including the new NBC stations, increased 35%. Same-station gross time sales increased 1%.
Local time sales increased $12.6 million, or 29.7%, including the new stations. Same-station Local time sales decreased 2.5%, which was mainly attributable to a 20% decline in automotive advertising.
National time sales increased $10 million, or 45%. Same-station National time sales increased 5.4%, reflecting higher telecommunications spending that offset lower spending by automotive advertisers.
Political revenues were $408,000 and reflected early Presidential image spending in Florida, South Carolina and Georgia, together with advertising from the candidates for governor in Kentucky, Louisiana and Mississippi.
Same-station Broadcast operating expenses increased 5%. Major contributors to the increase were higher costs for salaries, benefits, syndicated programming and depreciation. In addition, we incurred approximately $300 thousand in severance costs related to the NBC master control centralization.
Now, let’s turn to the Interactive Media Division. The division’s operating loss for the quarter was $603 thousand, compared to last year’s loss of $912 thousand, a 34% improvement. Total revenues rose 30%.
Page views and visitor sessions from our newspaper and television Web sites rose 25% and 34%, respectively, including the new NBC station Web sites.
Strong Local and National/Regional advertising, new products, and higher revenues from the division’s advergaming business helped drive the higher revenues.
Local revenues increased 65% over last year due to a greater focus on online-only sales and increases in sales staffing.
National/Regional advertising increased 52%, due to increased volume from national networks, including new advertisers. Classified revenues decreased 3% compared with last year, largely reflecting continued softness in help-wanted advertising, especially at TBO.com in Tampa.
The division’s advergaming business, Blockdot, continues to grow robustly through new and continuing relationships with many “blue-ribbon” clients. Revenues in the quarter nearly tripled from last year, and the operation ended the quarter in the black.
And, now, I will now turn our presentation over to John.
Remarks from John Schauss
Thank you, Reid.
I will first discuss below-the-line items for the first quarter.
As Marshall reported, the loss from our interest in SP Newsprint was $1.6 million, compared to last year’s income of $172 thousand. The decrease was due to lower newsprint selling prices, decreased sales volume, and increased production costs. We believe the current adverse pricing environment will continue, at least in the short term, and in response SP Newsprint has initiated cost-containment efforts. Even so, we expect a loss from our interest in SP Newsprint of approximately $5 million for the full-year 2007.
Higher interest expense mostly reflected increased debt from borrowings related to our NBC-station acquisition.
Increased acquisition intangible amortization also was principally related to the acquisition.
Corporate expense decreased 4% compared with the prior-year quarter.
EBITDA for the first quarter of 2007 was $25.4 million, compared with $36.3 million in 2006.
After-tax cash flow was $14.1 million, compared with $24.3 million in the year-ago period.
Free cash flow in the first quarter was negative $5.4 million, compared with positive $5.6 million last year. This year we invested approximately $800,000 more in capital, mostly for high-definition TV in several markets.
Total debt at the end of the quarter was $929 million, or 50% of total capital.
Capital expenditures in the first quarter totaled $19.5 million.
Of that amount, Publishing Division capital expenditures of $7 million were invested mainly in a new production facility at our Lynchburg, Virginia newspaper, which is scheduled for completion in 2008, press-width reduction projects, and an integrated advertising system.
The Broadcast Division spent $11 million. The Division has largely met the FCC’s requirements for full-power digital television at most of its stations. Spending in the first quarter was mainly for a new facility in Myrtle Beach as well as the development of locally-originated high-definition newscasts in selected markets.
Interactive Media Division expenditures were nominal and primarily for infrastructure and software. Corporate capital spending totaled $1.5 million, principally for information technology.
The effective tax rate for the first quarter was 36.2% in 2007, compared with 37.6% in the 2006 quarter.
Also in the first quarter, the Company adopted FIN 48. This adoption had no impact on the income statement, but did result in balance sheet reclassifications and a $4.9 million charge to retained earnings, related to various state tax issues whose outcome is unknown. Additional disclosure will be provided in the Form 10-Q.
That concludes my report, and I will now turn the presentation back to Marshall.
Remarks from Marshall Morton
Thank you, John.
On the FCC front, the Commission has been holding a series of hearings on media ownership at different places around the country. The next of these forums will be in Tampa on April 30. We look forward to welcoming the Commission to Tampa, and to participating at the hearing. We've also issued invitations to all the Commissioners and to key staff members to visit us at The News Center while they're in town. A number have accepted, giving us the opportunity to showcase our facilities and our people, who are shining examples of the benefits of convergence. Simply put, this is the best possible place for the FCC to see first-hand how the common ownership of newspapers and television stations produces better local news and benefits communities.
But, the FCC still hasn't completed several ownership-related studies it commissioned last year and that were due in March. These studies are necessary to moving forward on media ownership. It's impossible to know how much of a delay this will cause in the rule-making process. We, and others, continue to press the Commission to stay on track.
Let me also comment on our outlook for the second quarter of 2007. We expect net income in the quarter to decline from the year-ago level, primarily because of a loss from our share of SP Newsprint – currently projected at $2 million, and higher interest expense.
The Publishing Division expects revenues in the second quarter to improve compared to the first quarter of this year and to be even with the second quarter of last year. Continued softness in the Classified category should be offset by higher spending in the Retail category.
For the Broadcast Division, gross times sales are expected to increase approximately 40%, including the new NBC stations. Excluding those stations, gross time sales for the second quarter are expected to increase approximately 1.5%.
The Interactive Media Division expects revenue growth of approximately 40%.
Later this year, we anticipate the potential for greater Political revenues than we would normally expect in an off-election year. The wide-open race for President and the move of so many primaries up to early February 2008 could push some Political spending into the latter months of 2007.
We are also becoming more optimistic about the potential for cable retransmission fees than we have been in the past. We believe that fees currently paid by the satellite companies, and, more recently, by Verizon for its new fiber optic service may change the competitive landscape for the cable companies. Our cable retransmission contracts come open again for negotiation starting in late 2008 and run into 2011.
That concludes our formal remarks. Now, we will be pleased to take your questions.
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