First-Quarter Conference Call Remarks
April 21, 2010 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 first-quarter 2010 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 everyone.

Net results in the first quarter reflected improved operating performance, which was eroded by higher interest expense related to the debt refinance that we completed in February and to an unusual non-cash tax expense related to a “naked credit” that we’ve discussed previously.  John will discuss both of those items later in our report.

I’m going to focus on our operating results, which were a marked improvement over last year.  All of our business segments delivered significantly higher profit. 

Segment operating results in the quarter turned from a $780 thousand loss in 2009 to $19.4 million profit in 2010.  Total revenues were essentially even with last year, and we decreased total operating expenses 12%.  Thus, EBITDA from continuing operations rose to $22.8 million this year, compared with $4 million last year. 

Broadcast revenues increased 12% in the quarter.  We benefited from the Winter Olympics, the Super Bowl and March Madness.  Political revenues in the first quarter were nearly $1 million, compared with only $167 thousand last year.  This year’s Political dollars mostly reflected issues spending related to health care and the Massachusetts Senate race, which benefited our Providence, Rhode Island television station.  Continuing with Broadcast revenues, Local time sales increased 12.3% and National time sales rose 13.1%.  Retransmission fees were up 27.5%.

Digital media revenues increased nearly 10%.  Local online revenues continued their robust growth, up 23%, and we were very pleased to see online Classified revenues turn positive in the quarter, up 2%.

Unique Visitors to our web sites grew 11% in the first quarter. 

We’re also benefiting from our diversified revenue streams in Digital Media.  DealTaker.com, our shopping and coupon web site generated a 26% revenue increase in the quarter and its profit rose 43%.

While Publishing revenues decreased 9% in the first quarter, the sequential improvement that we began to see in the third quarter of last year continued.  Local revenues decreased 11.7%, national revenues declined 20.4% and Classified revenues were down 13.4%. Circulation revenues increased nearly 2% and Printing and Distribution revenues rose 5.5%.  The newspaper side of the business appears not to have not fully bottomed yet, although the trends are vastly improved compared to last year.

You’ve likely noted our new Revenues Detail table in the press release.  We’ve heard from many of you that you understand the many operating benefits of our new market structure, but that you also would like to see revenue detail by platform.  Going forward, as we did this quarter, we will provide a platform breakdown for each geographic market and we also will provide the traditional major revenue categories for each of our platforms (Publishing, Broadcast and Digital Media). 

Turning to costs, more than half of the total expense reduction in the first quarter was related to compensation.  Both headcount and employee benefits were lower than last year. 

Noteworthy savings also came from newsprint, which was down 53%. This decrease was due both to significantly lower average prices and to reduced consumption.  Also in the quarter, depreciation was nearly $1 million lower mostly due to reduced capital spending in recent years.

I’ll now ask Reid to provide details on the first-quarter performance of each of our geographic market segments.  

Remarks from Reid Ashe

Thank you, Marshall.

In the Virginia/Tennessee market, first-quarter profit was $7.6 million, compared with $2 million a year ago.  Expenses were down nearly 15%, more than offsetting a 2% decline in revenues.  By platform, Broadcast revenues increased 8% and Digital Media revenues rose 13%, while Publishing revenues declined 4%.  By category, Local revenues decreased 3.4%, National revenues declined 17.4%, and Classifieds were down about 7%.  These decreases were partially offset by higher Political, Circulation and Printing/Distribution revenues. 

In the Florida market, profit of $1.2 million compared with a loss of $3 million last year.  A 19% reduction in total expenses more than offset a near-10% decline in revenues.  By platform, Broadcast revenues increased more than 8%, while Publishing and Digital Media revenues decreased by 19% and 6%, respectively. By category, Local and National revenues were both down in the mid-single digits, while Classified revenues declined 26%.  Political and circulation revenues increased in the quarter.

In the Mid-South market, first-quarter profit was $4.7 million, compared with $1.1 million a year ago.  Revenues increased 8.2%, reflecting the higher concentration of television stations in this market. Winter Olympics, Super Bowl, March Madness and Political all contributed to the gain.  By platform, Broadcast revenues increased 13.3%.  Digital Media revenues rose nearly 13%, and Publishing revenues declined 6.3%.  By category, Local and National revenues increased 7.3% and 6.5%, respectively. All other revenue categories were up, except Classified, which was down 4.4%.  Expenses were down from last year by 2.5%. 

In January, our CBS station in Augusta (WJBF) launched a joint sales and programming services arrangement with Schurz Communications, owner of the local NBC affiliate.  Our stations are sharing resources to provide better local coverage at lower cost to both.

In the North Carolina market, profit of $1.1 million compared with a $1.6 million loss last year.  Total expenses declined 13.8% while revenues fell less than 1% from last year.  By platform, Broadcast revenues increased 12.7%, Digital Media revenues rose 13.6%, and Publishing revenues declined 6.8%.  By category, Local and Classified revenues decreased 3.2% and 6.7%, respectively, while National revenues increased nearly 16%. 

In the Ohio/Rhode Island market, profit of $3.3 million compared with $160 thousand last year.  In this market, which consists of two NBC television stations, revenues increased 23%.  Both stations benefited from the Winter Olympics and our Rhode Island station benefited from Political spending related to the Massachusetts Senate race.  Digital Media revenues at the two stations rose 6.5%.  Expenses decreased 5.4% from last year. 

Company-wide, our television stations took full advantage of our opportunities to sell Winter Olympics, Super Bowl and March Madness.  At our newspapers, the revenue declines shrank to single digits in every market except Florida.  Florida’s unemployment remains very high as damage from the housing crash lingers, depressing Classified advertising. Meanwhile, we’re keeping a tight lid on expenses and working hard to develop new lines of business.

Our sixth segment, Advertising services, generated a profit of $1.4 million compared with $591 thousand a year ago.  The improved results were mostly attributable to the outstanding performance of DealTaker.com, which Marshall discussed earlier.

And, now, I’ll turn the presentation over to John.

Remarks from John Schauss

Thank you, Reid. 

We were pleased to put in place, effective February 12, a new financing structure that will greatly enhance our financial flexibility in the coming years.  The refinance package included an amendment and extension of our bank credit facility and the issuance of $300 million of corporate bonds.  Funds from the bond sale (net of a $7 million discount) were used to pay down bank debt.  In turn, we extended our debt maturities and favorably amended our covenants.  While the new finance structure increases interest expense, the overall parameters are manageable.

As a result of the new financing structure, and including $5.5 million of debt issuance costs that were expensed immediately, interest expense nearly doubled in the first quarter to approximately $20 million.  The effective rate, absent the $5.5 million, was approximately 8%.  Keep in mind that in the first quarter, we had 1-1/2 months at lower interest rates under our previous credit facility.

In the second, third and fourth quarters we expect interest expense will be about $17 million per quarter, excluding any significant changes in interest rates. 

Debt at the end of the first quarter was $693 million, compared with $730 million at the end of the first quarter last year and $712 million at the end of 2009. We ended the first quarter well within our new covenants Debt to EBITDA was 4.92x.

Together, our lower company-wide cost structure and increased financial flexibility place us in a strong position to capitalize on an improving economy while continuing to focus on developing new products and new revenue streams. 

Let me comment next on taxes.  As previously reported, we will recognize non-cash tax expense of approximately $30 million this year, related to a “naked credit” issue associated with our long-lived intangible assets (explained in detail in our 10-K), and applied ratably over the four quarters. 

In the first quarter, we recorded income tax expense of $6 million, which included the ratable share from the “naked credit,” partially offset by an additional $1.4 million federal tax refund that we expect to receive with respect to our 2009 NOL carry-back claim. 

Our total tax refund will be approximately $26 million, hopefully received by the end of the second quarter.  We plan to use the refund to reduce debt.

Looking ahead to second-quarter tax expense, you should anticipate an adverse change from the year-ago quarter in income tax expense of approximately $18 million, which reflects the current year naked credit expense of $7.5 million along with the prior quarter’s tax benefit that will not be repeated.  For the third and fourth quarters, you should model the ratable $7.5 million non-cash expense and also be aware that there could be other tax adjustments/intraperiod tax allocations that are difficult to estimate right now.

For cash-flow modeling purposes, we do not anticipate making any significant cash tax payments in the near term.  Therefore, it is appropriate to assume a zero percent tax rate for cash flow purposes.

Turning to other below-the-line items, acquisition intangibles amortization declined 13% year-over-year, reflecting impairment of network affiliation agreements in the third quarter a year-ago.

Corporate expense decreased 7.9% in the quarter, reflecting the benefit of our cost reduction initiatives.   

Capital spending in the first quarter was $2.1 million, compared with $4.1 million last year.  The current-year investments were mostly to upgrade equipment at television stations.  For this year in total, we expect our capital expenditures will be approximately $26 million.  We believe this level of investment is adequate to meet our needs given our strategic focus.

Free cash flow in the first quarter was $834 thousand, compared with a negative $10 million last year.

For the second quarter, we expect another year-over-year improvement in segment operating results.  However, the adverse turnaround in income taxes and higher interest expense will more than offset.  Let me also remind you that last year’s second quarter had the benefit of a $7.9 million gain on the sale of our CW affiliate in Jacksonville, Florida. 

Our focus is on free cash flow generation and debt repayment.  We continue to expect free cash flow for 2010 of $58-60 million, including the tax refund.  

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

Remarks from Marshall Morton

Thank you, John.

Closing observations I would make about the first quarter would start with the fact that we were pleased to complete our debt restructure.  The new flexibility it provides enables us to continue to execute on our business strategy as we navigate soft economic conditions in certain markets, especially Florida, as we’ve discussed today. 

We hope you saw our recent news about plans for a consolidated copy editing and page design operation for our three metro newspapers, including an article about it in the New York Times.  This will be our third such operation, and we expect to have all of our newspapers in a consolidated editing and design center by the end of the year.  Once this occurs, we expect to realize annual cost savings of $1 million, and we will reinvest part of the savings in content generating resources.

Our new market structure is providing a stronger focus on customer needs and also giving us the flexibility to leverage all of our resources across the various platforms we operate in each market.  We continue to benefit from the transformation we have inculcated in our sales culture.  All of our sellers are now selling all of our products – traditional and new media – to all of our customers.  This is a huge and significant change for us and a key driver of digital media revenue growth.

We entered this year with good momentum in our Broadcast business, and the decline in Publishing revenues continues to moderate.  In March, our total revenues increased 2% from last March, a very encouraging sign.  Broadcast revenues in March increased 14% and Digital Media revenues grew 9%.  Publishing revenues in March fell only 6.6%, reflecting the improvement we are seeing in core categories.  As Reid noted, our biggest challenge on the newspaper side remains in Florida, especially in Classified advertising. 

Let’s be clear, however, that we are not simply sitting back to enjoy the lift of special sporting events or Political revenues.  We are making our own way, with aggressive audience and revenue growth initiatives.  One example of how we are doing this is related to our Yahoo partnership.  As a result of our success selling Yahoo products, we were given the exclusive opportunity to pilot the sales program in four television markets this year, starting in February.  We will soon surpass the $1 million mark in those markets, which will enable Yahoo to give us the green light to expand our Yahoo partnership to virtually all of our television markets by the end of this year.

We’ve begun a total overhaul of our Classified advertising approach.  It is now a centrally-managed, technology-driven, internet-based and print-augmented service that’s designed to delight both readers and advertisers.

Last week, along with 11 other broadcast companies, we announced that we are forming a national mobile content service.  This action is very strengthening for the development of mobile high-definition television and very strengthening for the member companies themselves.  The service will allow the companies, who are now part of a joint venture, to provide content to mobile devices, including live and on-demand video, local and national news from print and electronic sources, as well as sports and entertainment programming.

Our first markets to offer this service will be Tampa, Columbus, Ohio, Raleigh and Birmingham.  We’re very excited about this whole new opportunity for our television viewers and advertisers.

I would be remiss if I did not mention the Pulitzer Prize for Public Service, won this year by our Bristol Herald Courier.  We are very proud of our team and congratulate them on this most prestigious recognition.

Let me make a few comments about our outlook for the second quarter and then we’ll take your questions.  Broadcast revenues are expected to increase by about the same amount as the first quarter, based on stronger political spending as we begin entering state primaries.  Robust growth in Digital Media revenues is expected to continue, and the decline in Publishing revenues should continue to moderate.  Total operating expenses in the second quarter are expected to be up 3 to 4% compared to last year.  The increase is due mainly to higher salary expense, reflecting the absence of prior-year furlough days. Also, departmental expenses are increasing in support of our revenue growth initiatives in the areas of circulation sales, marketing, third-party services and promotion.

Our Annual Shareholders’ Meeting takes place tomorrow, here in Richmond, at 11 a.m.  My report on the state of Media General will be posted to our web site shortly after the meeting concludes.  I hope you’ll find the time to read it.

That concludes today’s report on our first-quarter results.  We will now be pleased to take your questions. 

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