Fourth-Quarter Conference Call Remarks
January 28, 2004 at 3:00 PM 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 afternoon everyone. Welcome to Media General’s Fourth-Quarter Conference Call and Webcast.
We issued two news releases today – one announced fourth-quarter earnings, the other December 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, 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.
And now, I will introduce Stewart Bryan.
Remarks from Stewart Bryan
Thank you, Lou Anne, and good afternoon ladies and gentlemen. We appreciate your interest in Media General.
For the fourth-quarter of 2003, Media General earned $1.00 per share from continuing operations, a 9% increase over the prior year. This better-than-expected performance was attributable to three principal reasons: 1) Lower-than-expected newsprint expense within our Publishing Division, as the August price increase materialized more slowly than we had anticipated; 2) Higher-than-expected political advertising revenue within our Broadcast Division; and 3) Lower-than-expected health care costs.
Publishing segment profit for the quarter was $2.4 million, or 6.6% above the prior year, the result of both revenue growth and strong expense management. Compared to our peer companies, Media General’s growth in total publishing revenues, through the month of November, was a strong second best in the industry. We expect to finish the year in that position because our total publishing revenue growth of 4.3% for the fourth quarter and newspaper advertising growth of 5.1% for that period also was better than many of the peer company results reported so far. We were pleased that our publishing revenue growth continued the strong quarter-to-quarter increases that we’ve seen all year long.
Performance in our Broadcast Division reflected, of course, the impact of lower political revenues compared to the prior-year. Still, we are pleased with what our Broadcast group was able to accomplish in making up part of that relative absence of political dollars in the 2003 period. Whereas political revenues were down $15 million for the quarter, total revenues were only $9 million lower than the prior year. We made up a good portion of that difference with increased local and national advertising sales -- the result of new, focused sales initiatives implemented across all of our 26 stations.
Another highlight of the fourth quarter was the continued improvement in SP Newsprint’s operations. Our equity loss of $463,000 was nearly $4 million better than the prior year.
Let me make just a few comments on the month of December. Publishing revenue was 2.7% ahead of December 2002, when we enjoyed an exceptionally strong month, making for tough comparisons. This December, national advertising, mainly in Tampa, and classified, most notably in Richmond, overcame weakness in the retail category at our three metro papers.
The Broadcast Division also enjoyed a strong December, aided by the unexpected political advertising. For the full year, television time sales totaled $283 million, versus last year's $296 million, including $32 million in political. Broadcast made up a significant portion of last year's total political sales and did so in a soft market, that resulted from an ongoing weak economy and the impact of the war in Iraq.
The Publishing and Broadcast divisions also did an excellent job controlling costs for the quarter and full year. The Broadcast Division’s actual expenses for the fourth quarter were 3.6% below the prior year. For the full year, Broadcast expenses increased a mere 0.3%. Publishing expenses increased 3.1% for the quarter and 4.6% for the year. Compared to budget, however, Publishing’s expenses were down 5% for the quarter and 4% for the year.
Media General has evolved into quite a different company than it was when we were approaching this new millennium. We have grown substantially through acquisition augmented by internal initiatives. Our ability to generate top-line growth is stronger than ever, across three media platforms – newspapers, broadcast television, and the Internet. We have become increasingly adept at disciplined expense management. Our regional focus has provided abundant opportunities to capture synergies of all varieties. Most importantly, Media General has become an industry leader in developing cross-platform operating and selling processes that will drive growth and innovation in the future.
We are excited as we enter the second month of 2004. The gradually progressing economic recovery, and the prospect of FCC rule changes, will create an even stronger environment in which Media General can pursue a growth plan that will continue to build shareholder value.
Let me now ask Reid Ashe to discuss the details of our divisional operating performance for the fourth quarter of 2003.
Remarks from Reid Ashe
Thank you, Stewart.
I’ll begin with an overview of the Publishing Division’s performance for the fourth quarter.
Segment profit of $39.5 million in the fourth quarter was up 6.6% from a year ago. Segment results include our 20% interest in The Denver Post. For the fourth quarter, our share of Denver’s income was $363,000, compared with $472,000 last year.
The fourth quarter of 2003 represented the fifth consecutive quarter of revenue growth over the prior year for Publishing. It was the largest increase since the fourth quarter of 2000, which had an extra week. Total revenues for the division were $146.5 million, up 4.3%. Advertising revenues were up 5.1%.
The national, classified and preprint categories experienced solid gains during the quarter, and more than offset retail results that were 3% below last year.
The decline in the retail category came from our three metro newspapers. The Richmond Times-Dispatch did benefit from spending by stores at the new malls, but this revenue was not enough to offset the impact of reduced spending by a long-time department store customer. Retailers in other markets remained cautious. Preprint revenue increased 10.5% for the quarter. Preprint revenue was the strongest performing category for all of 2003. Some of our gains were at the expense of ROP, some represent new business, and some are the result of higher circulation. If you look at total retail advertising revenue, combining ROP and preprints, it was up 1.3% for the quarter and 1.6% for the year.
Classified advertising increased 5.9% for the quarter. Of our three metro newspapers, the Richmond Times-Dispatch showed the strongest gain for the quarter, up 27% in employment linage. The Tampa Tribune, also above the prior year for the quarter, benefited primarily from higher real estate classified advertising, and, to a lesser degree, from an increase in employment advertising. Employment linage for our three largest newspapers turned positive in August of 2003 and stayed there for the rest of the year. We expect further improvement in help wanted advertising in 2004.
National advertising grew a robust 15.5% for the quarter. The Tampa Tribune led the increases, driven by strong results in the telecommunications and financial categories, as well as strength in pharmacy and travel advertising.
Circulation revenue increased 1.7% for the quarter. The Tampa Tribune was above the prior year by 4.2%, as daily and Sunday net paid circulation both increased, reflecting the benefit of its circulation growth program. As a result of the Tampa growth plan, we realized substantial gains in circulation volumes. These provided increased revenue from both circulation and advertising, and we achieved these gains at a lower cost than expected. Circulation revenue for the Richmond Times-Dispatch rose 4.5%, as a result of a home delivery rate increase.
The Publishing Division’s operating expenses for the quarter were 3.1% above the prior year.
The most significant increases were in employee benefits, which rose 20%, mostly due to higher retirement plan and health care costs. Salary expense increased 2.1% for the quarter, the result of annual merit increases and higher commissions, partially offset by savings from open positions.
Newsprint expense for the quarter increased 9.1%, principally due to higher prices, up an average of $38 per ton.
Now, let’s turn to the Broadcast Division. Segment profit for the quarter decreased 24% from the prior year -- largely the result of the off-year cycle for political advertising.
Total Broadcast revenues of $77 million were down 10.7%. Local time sales, excluding political, increased 5.7%, due to particularly strong automotive, furniture and services advertising. Our Broadcast Division increased Local time sales for the year by 6.2%. This reflects their success in new business development, intensified sales training, and better management and pricing of our spot inventory through our Centralized Traffic Operation, located in Tampa. We will continue to focus aggressively on growing local advertising sales in 2004.
National time sales, excluding political, were 4.8% ahead of the prior year, reflecting strength in the automotive and telecommunications categories in the quarter.
Political revenues for the quarter were $3.5 million, compared to more than $18 million in the fourth quarter of 2002. While overall Political revenue was down, the category finished higher than anticipated. This was due to early presidential spending in Iowa, and North and South Carolina, as well as gubernatorial races in Louisiana and Mississippi, mayoral races in Savannah and Charleston, and issue spending in Florida.
In television advertising growth, we moved ahead of the industry in November. The TVB overall figure was down 6.9% from the previous year, while we were down 5%. The whole industry suffered, of course, from political comparisons.
In the November ratings, 11 of our stations were up, eight were even, and three were down. This is in terms of key demographics, which drive revenues, and can vary slightly from household ratings. This good performance should help boost our first-quarter sales.
Broadcast Division expenses for the fourth quarter declined 3.6%. This is primarily due to lower sales commissions and bonuses, and lower cost of sales by our television studio equipment subsidiary.
Now let’s discuss the Interactive Media Division. The division posted an operating loss of $1.8 million, a 66% improvement over the prior- year loss of $5.3 million. Virtually all of the improvement was due to one-time investment write-downs that we took in 2002.
Interactive revenue for the fourth quarter exceeded the prior year by 45%. The increase is due mainly to classified upsell arrangements and to the introduction of new products and services.
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 fourth quarter of 2003, which included a gain on the sale of Media General Financial Services, was $30.5 million, or $1.29 per diluted share, compared with $21.6 million, or 93 cents per diluted share for the prior year. The Financial Services sale resulted in an after-tax gain of $6.8 million, or 29 cents per share. The impact has been reflected as a discontinued operation for all periods.
We were pleased with our results for the full year 2003. Earnings per share from continuing operations were $2.52, which exceeded our expectations, principally for the reasons Stewart has already articulated in explaining our better than expected fourth-quarter results.
Higher income from continuing operations, combined with lower capital expenditures compared to 2002, generated free cash flow for the year of $96 million, compared with $84 million in the prior year.
For the year, net cash provided by operations, supplemented by proceeds from the sale of our interest in Hoover’s in the first quarter and the proceeds from the Financial Services sale, produced $181 million in funds available to the company. Significant uses of these funds were capital expenditures, a substantial contribution to our pension plan, dividends, and substantial debt reduction. I will talk about all of this in detail.
But first, let me comment on consolidated below-the-line items for the fourth quarter.
Interest expense declined by $2.8 million from the prior year, due mostly to lower interest rates and to a lesser extent to lower debt levels.
Results for our share of SP Newsprint improved to a loss of $483 thousand, compared to a $4.4 million loss in the prior-year quarter. This significant improvement is mostly due to an increase in the average realized selling price, which rose about 10% per ton. Other favorable items were higher production and sales volumes, and lower overall production costs per ton.
Higher Corporate expense reflects increased employee benefits costs, as well as certain legal fees and multiyear charitable contribution pledges that were fully expensed.
The “Other” line primarily reflects property gains and favorable insurance adjustments.
The effective tax rate for the quarter was 38%, compared with 39% in the prior year.
Total debt at the end of the fourth quarter was $627 million and represented 36% of total capital. We stand at about $615 million today. A quick glance at our Balance Sheet would appear to indicate that debt was reduced by only $16 million during 2003. Remember, however, that with the adoption of FIN 46 in July of 2003, $95 million of variable interest entity debt was added to the Balance Sheet. Adjusting for FIN 46, debt reduction for the year was nearly $111 million, a strong 15% reduction.
Capital expenditures for 2003 were $28 million, compared with $33 million in 2002. The slow economic recovery prompted the cancellation and deferral of capital projects to later years. The Publishing Division spent nearly $7.5 million on capital items, mostly for computer systems and production equipment. The Broadcast Division spent $19 million, mostly to replace production equipment at various stations and for the completion of the new studio in Charleston. The Interactive Media Division spent $300 thousand, as they continue to build infrastructure for our online operations. Capital spending at the corporate level of just over $1 million was mostly to enhance our information technology.
Because of deferred spending from 2003, our 2004 capital spending plan is now projected to be $84 million, up from the $75 million we forecast in December. By division, the breakdown is: Publishing has budgeted $52 million, much of which was deferred from 2003, including new printing facilities for our Bristol and Lynchburg newspapers. The Broadcast Division has budgeted $26 million, mostly for news equipment, editorial systems and remote broadcast vehicles. The Interactive Media Division will invest $2 million in projects to improve content, advertising and infrastructure.
Corporate expenditures of $4 million are mostly for computer equipment and software.
Let me now bring you up to date on the status of our pension plan. In 2003, the Plan’s trust assets benefited from both a significant rise in market value and from the company’s $21 million contribution early in the third quarter. In total, the value of the Plan’s investments rose by $41 million during 2003, to reach a level of $208 million at year’s end.
Due in large measure to a decrease in the discount rate, the Plan’s accumulated benefit obligations rose by $38 million to $260 million at year-end. As announced, the Company intends to make a further contribution to the Plan of approximately $35 million, and will do so at the end of this week.
Going back to the fourth quarter, EBITDA was $61.9 million, compared with $61.4 million for the prior year. Higher income from continuing operations for the quarter was the main reason.
After-tax cash flow was $39.2 million in the fourth quarter, compared with $36.6 million in the prior year.
Free cash flow was $31 million in the fourth quarter, compared with $29.2 million in the prior year.
Before turning it back to Stewart, I would like to comment on our outlook for the first quarter of 2004. As of today, two of the seven analysts who have Media General in their coverage universe have published estimates for the first quarter. One is at 27 cents and the other is at 46 cents. It’s difficult to put too fine a point on the quarter at this early stage, but we would guide you to the lower of the two numbers at this time. Income from continuing operations in the first quarter of 2003 was 12 cents per share, before a 16-cent gain from the sale of Hoover’s.
Seasonally, the first quarter is always our weakest. In addition, while Publishing revenues are expected to be higher than last year’s first quarter, the retail category remains weak, and we don’t yet have strong visibility on where help wanted is headed. On the Broadcast side, we believe the Iowa caucus results should have a positive impact on political advertising, but orders have been slow to come in. We are optimistic about the impact of Super Bowl advertising on our 16 CBS stations. We will be in a stronger position to provide more definitive guidance for the first quarter after January results are finalized and we see how February is trending.
And, now, I will turn it back to Stewart.
Remarks from Stewart Bryan
Thank you, Marshall.
Before we move to the Q&A, I would like to provide you with our current view of the status of the FCC cross-ownership rules.
As you know, we were generally pleased with the FCC’s June decision allowing common ownership of a television station and a newspaper whenever there are four or more television stations in a market. If it stands, that decision opens 90 percent of the Southeast’s markets to common ownership, and it affords us new opportunities to expand our convergence efforts in our chosen region. That’s an exciting prospect because it means Media General will be able to serve more southeastern communities with better local news and become a stronger company because of it.
We spent a good bit of time last fall briefing this issue for the Third circuit, and we’ve also spent some time monitoring Capitol Hill. Washington, we find, is calm at this moment, and we look forward to oral argument on the FCC’s new rules in Philadelphia on February 11. We think we’ll hear from that court sometime this summer. We remain hopeful that the judges will agree that cross ownership benefits markets of all sizes.
That concludes our formal remarks, and, now, we will be pleased to take your questions.
Top of page |
