Fourth-Quarter Conference Call Remarks
January 31, 2007 at 2:00 PM 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 afternoon everyone. Welcome to Media General’s Fourth-Quarter Conference Call and Webcast.
Earlier today, the company announced earnings for the fourth quarter of 2006 and revenues for the month of December. We also announced that the Board approved a 5% increase to the quarterly dividend. All three press releases have been posted on our Web site. The comments from today’s conference call will be posted on the site 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 afternoon ladies and gentlemen.
Media General’s net income in the fourth quarter of $32 million, or $1.33 per diluted share, increased nearly 27% from the fourth quarter of 2005.
The 2006 results included the benefit of four new NBC television stations, acquired at the end of June 2006, and 14 weeks in the 2006 quarter compared with 13 weeks in the fourth quarter of 2005.
The strong profit improvement in the quarter was mostly due to the outstanding performance of our Broadcast Division, bolstered by the four new NBC stations and record Political revenues of $34 million.
Another highlight of the quarter was higher equity income from our investment in SP Newsprint, which rose by $3.2 million compared with the 2005 fourth quarter.
These favorable contributions to our fourth-quarter results more than offset lower Publishing Division profits and acquisition-related interest and acquisition intangibles expenses.
Total revenues of $295 million increased 26% over the 2005 quarter. Although it’s difficult to precisely quantify the impact of the additional week in 2006, we have estimated the impact on key metrics in order to allow meaningful comparisons. We estimate that the additional week in 2006 contributed $18.5 million of revenues, including the new NBC stations.
Please also bear in mind that non-cash stock option expense – new this year in accordance with the new accounting standard – was $1.1 million pretax in the fourth quarter, or 3 cents per share. For the full year, we expensed a total of $5.6 million.
Income from continuing operations was $1.35 per diluted share, which exceeded the guidance we provided for that metric in early December of $1.30 to $1.33. This better performance principally reflects the outstanding results achieved by our Broadcast Division.
In early December, we had anticipated Broadcast time sales to increase 71-73% in the quarter, driven by the presence of the four new NBC stations and excellent Political revenues. Actual Broadcast times sales increased 85%. This higher revenue performance was due to even better than anticipated Political advertising, local auto dealer spending in late-December to promote 2006-model closeout sales, and strong sales by our broadcast equipment subsidiary.
Our Broadcast Division once again has delivered above-peer group growth in time sales. Through November, the latest period available, the Television Bureau of Advertising reported that industry time sales were up 9.3%, while our Broadcast time sales, on a same-store basis, were up 10.2%.
Broadcast Cash Flow margin in the fourth quarter was nearly 41%, compared with 35% last year, which mostly reflected the impact of Political advertising revenues. Our new NBC stations contributed approximately one-half of our Political revenues in the fourth quarter, or $15.2 million. Because of the strength of their market position, bolstered by their excellent local news, our new stations in Columbus, Ohio and Providence, Rhode Island, were especially well-positioned to capitalize on some of the most hotly-contested gubernatorial and congressional races of the year.
While we, of course, won’t see broadcast cash flow margins that high in 2007, because we’re in a non-election year, our expectations for 2008 to be a banner year in our Broadcast business are reinforced by this strong fourth-quarter performance.
During 2007, we will continue aggressively pursuing the operating synergies we envision for the new NBC stations, which are estimated to be at least $3 million by 2008. The centralization of master control for the four new NBC stations has been completed, in a new control room located at our Columbus, Ohio, station. The transfer of the five remaining stations is proceeding now and will be complete by the middle of April. We expect to immediately realize the benefits of lower expense and enhanced quality control.
You may recall that we could not interact closely with our new NBC station in Birmingham until we had sold our previously held CBS station there, which we did in October. We recently installed one of our seasoned general managers in Birmingham, and we’ve only just begun the process of helping that station realize its full potential. We are very encouraged by the prospects there.
In addition, in Raleigh-Durham, we’ve just completed a very enlightening market research study, which they had never done before, and we’ve embarked on an aggressive plan to move that station up in the rankings from its current #3 position.
All in all, we are very pleased with the performance to date of our new NBC stations and we have high expectations for their future contributions.
We believe our Interactive Media Division has made good progress leading online revenue growth for our web sites, and we are pleased with their new growth plans for this year. At the same time, we were disappointed that the division’s results fell short of becoming cash-flow positive by the end of 2006.
In the fourth quarter, while our Interactive Media revenues grew 24%, that growth was not as robust as we had previously anticipated. The overall softness in Classified advertising that affected our newspapers also impacted our web sites. In addition, the Local online advertising category did not grow as much as we originally planned for the year. At the same time, when the revenue shortfalls became apparent, the Interactive Media Division curtailed expenses in the fourth quarter and lessened their impact.
Going forward, we will continue to leverage the model whereby Classified advertising is upsold by our traditional media platforms to our web sites, and we will also more aggressively pursue online-only Classifieds. Of course, we are very optimistic about the prospects provided by our partnership with Yahoo! Hot Jobs. We have also hired and trained additional online sales staff to go after more Local, Regional and National advertisers.
Our Interactive Media Divison plans to become not only cash-flow positive in 2007 but profitable by the end of the year. Several of our web sites were profitable in 2006, including TBO.com and timesdispatch.com as well as some of our community newspaper web sites in Central and Northern Virginia.
Visitors to our web sites increased 25% in 2006.
If you haven’t done so lately, I encourage you to visit some of our newspaper and television station web sites. You can access them through our corporate web site through the link to “MG Properties”.
All of our web sites are adapting to the “24-hour news cycle.” We have become more nimble at breaking news online and not waiting for the evening news or morning paper as we did in the past.
Our television station web sites are providing online newscasts and weather reports throughout the day, and our newspaper web sites are using more and more video in their online news reports.
All of our web sites feature blogs and other ways for visitors to participate in online conversations about topics that interest them. We also provide lots of convenient and engaging ways for people to post their own photos and videos online to share with others.
Our Publishing Division continues to progress with its initiatives to increase newspaper readership and aggressively pursue new revenue development opportunities.
In 2006, five of our newspapers achieved daily and Sunday circulation growth. Two more newspapers, including the Richmond Times-Dispatch, achieved daily circulation growth and one additional paper achieved Sunday circulation growth.
All of our newspapers are conducting sophisticated market research – comparable to what their Broadcast colleagues have always done – and they are providing content tied to expressed audience needs as never before. We believe this approach will help all of our newspapers increase readership and circulation over time.
Our Publishing Division will once again finish at the top of its peer group for total revenue and advertising revenue growth in 2006. Through November, they were the leader in Retail revenue growth, an outstanding achievement that is largely attributable to the introduction of targeted new products.
New product introductions will be intensified in 2007, not only by the Publishing Division, but by all three of our operating divisions. As we’ve mentioned before, we think pushing for growth in these ways is the best way to stay in close tune with the changing needs and interests of our advertisers, readers, viewers and users.
Let me now ask Reid to discuss additional details regarding the operating performance of our divisions in the fourth quarter. John will follow Reid with a report on our financial position.
Remarks from Reid Ashe
Thank you, Marshall. I’ll start with the Publishing Division.
Operating profits of $36.3 million in the fourth quarter were down 10.4% from a year ago.
Total Publishing revenues of $161.2 million increased 3.4% compared with the fourth quarter of 2005, including the additional week in 2006. Excluding the extra week, total publishing revenues declined 3%, which reflected the continuation of a generally weak advertising environment in all categories but Retail.
Retail advertising revenues increased $4.9 million, or 7.5%, including the additional week in 2006, the benefits of new revenue development initiatives in all markets, and higher spending in selected categories in our various markets.
The Florida Publishing Group generated an 8.2% increase in Retail revenues, including higher advertiser spending in the home improvement, home furnishings, grocery store, health and fitness, and travel categories. Also contributing to the increase was the addition of its Centro Spanish Language product, introduced in October 2005.
The Richmond Times-Dispatch generated 6.8% growth in Retail revenues, including increases in the department store, furniture store and restaurant categories.
Retail revenues at the Winston-Salem Journal increased 6.8%, including higher spending in the sporting goods, entertainment, home improvement and professional services categories. Our Community Newspapers group generated a 7.3% increase in Retail revenues in the fourth quarter.
Excluding the benefit of the extra week in 2006, total Retail advertising with our newspapers increased approximately 1.1% over 2005.
Classified advertising revenues were down slightly, 0.3%, in the fourth quarter.
The Richmond Times-Dispatch generated a 12.2% increase in Classified advertising, and our Community Newspaper group was up 3.8%, while the Winston-Salem Journal saw a 1.8% decline and The Tampa Tribune was down 10%.
Employment linage for the three metros declined 13.7%. Help wanted linage declined 29% at The Tampa Tribune and 8.5% at the Richmond Times-Dispatch, but increased 5% at the Winston Salem-Journal.
Automotive linage for the three metros decreased 10.1% in the quarter, including declines of 8.6% at The Tampa Tribune, 6.7% at the Richmond Times-Dispatch, and 16.8% at the Winston-Salem Journal.
Real estate linage for the three metros decreased for the first time in 2006 and was down 3.7% in the quarter. Real estate linage increased at the Richmond Times-Dispatch by 12.9% and by 5.5% at the Winston Salem-Journal, while it decreased 17.2% at The Tampa Tribune.
Excluding the impact of the extra week in the 2006 quarter, our total Classified advertising revenues were down an estimated 6.3% for the quarter.
National advertising revenues increased 1.5% in the fourth quarter. The Richmond Times-Dispatch generated a 1.5% increase in National revenues, which mostly reflected higher insurance advertising that was partially offset by lower telecommunications and electronics advertising. The Tampa Tribune’s National revenues were even with the 2005 fourth quarter, and included higher spending in telecommunications and financial advertising that were partially offset by lower automotive advertising. At the Winston-Salem Journal, National revenues declined 4.5%, reflecting lower automotive advertising partially offset by increased spending in the telecommunications category.
Excluding the extra week in 2006, National advertising revenues were down 9.4%.
Circulation revenues increased 0.7% for the quarter including the additional week, and they declined 6.5% without it. The primary factor causing the decline was our change in wholesale rates to carriers that also carries an equivalent expense decrease. As of June 2006, all of our newspapers had completed the conversion to the new wholesale rate program; however, it will take until next June to fully cycle through the comparisons.
Operating expenses in the Publishing Division increased 8.3% in the quarter. Adjusted for the estimated impact of the additional week, operating expenses were up only 1%.
Newsprint expense, excluding the additional week in 2006, decreased 3% in the fourth quarter. The price per short ton was $49 higher compared with the 2005 fourth quarter, while consumption declined due to conservation efforts, including the change to lighter basis weight newsprint, and decreases in circulation volumes,.
Let’s now turn to the Broadcast Division.
Broadcast operating profits of $46.1 million more than doubled from last year’s fourth quarter. Total revenues of $128.1 million increased 74%.
These results included the benefit of the four new NBC stations, record Political revenues, and the additional week in the 2006 quarter.
On a same store basis, total revenues increased 25.4%. Excluding the extra week from same-store results, total revenues increased 17.4% in the quarter.
Gross time sales, including the NBC stations, increased 85%. Same-store time sales were up 27.5%.
Total Political revenues were a record $34.3 million, of which $15.2 million was contributed by the new NBC stations. These Political revenues were driven mostly by gubernatorial and congressional races in Florida, Ohio and Rhode Island, a senate race in Tennessee, along with issues advertising.
On a same-store basis, Local time sales declined slightly in the quarter, 0.4%, which mostly reflected the impact of heavy political demand on our inventory, and also soft automotive advertising.
Same-store National time sales increased 7%, mainly the result of the additional week and paid programming.
Broadcast operating expenses increased 15.6% on a same-store basis including the extra week in 2006. Excluding the extra week, same-store expenses increased 7.3%. Major contributors to the increase were higher costs for salaries, benefits, syndicated programming, electricity, cost of goods sold for the division’s equipment subsidiary, and depreciation and amortization.
Now, let’s turn to the Interactive Media Division. Including a $700,000 write-down of an investment, the division’s loss for the quarter was $1.8 million. Excluding the write-down, the underlying operating results improved by 20% over the 2005 fourth quarter.
Total revenues of $7.1 million increased 24%, including the benefit of the new NBC station web sites and the extra week. Local advertising revenues increased 48% and the National/Regional advertising category doubled. Classified revenues were even with the prior period, which mostly reflected soft employment advertising.
Page views and visitor sessions increased 21% and 25% respectively.
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 fourth quarter.
Equity income from our interest in SP Newsprint was $2.3 million, a year-over-year improvement of $3.2 million.
Higher interest expense reflected acquisition borrowings and a higher all-in rate.
Increased acquisition intangible amortization was principally related to the NBC acquisition.
Higher Corporate expense primarily reflected increased legal expenses, technology costs and benefits.
Let me now review EBITDA, After-tax Cash Flow and Free Cash Flow for the quarter. The results shown in the table in our press release are based on continuing operations and, therefore, do not include income from Discontinued Operations.
EBITDA for the fourth quarter of 2006 was $85 million, compared with $60 million in 2005.
After-tax cash flow was $50 million, compared with $39 million in the year-ago period.
Free cash flow in the fourth quarter was $26 million, compared with $13 million last year.
Because of our Broadcast Division’s strong fourth quarter, we generated a little more free cash than expected and used it for debt repayment.
Total debt at the end of 2006 was $916 million, or 49% of total capital. This amount represents an increase from the end of 2005 of $431 million, primarily due to our NBC station acquisition. Compared to the end of the third quarter of 2006, total debt decreased nearly $150 million, reflecting the use of proceeds from divested television stations of approximately $125 million as well as the use of free cash to further reduce debt outstanding. Total debt at the end of 2006 is slightly lower than the $922 million we forecast in early December.
Capital expenditures in the fourth quarter totaled $25.2 million.
Of that amount, Publishing Division capital expenditures of $13.3 million were invested mainly in new production facilities and an integrated advertising system. We completed a new facility for the Opelika-Auburn News in Alabama. The investments Publishing is making in press and production systems will provide operating efficiencies and new revenue opportunities for years to come.
The Broadcast Division spent $10.1 million, mostly for the continued conversion to high-definition digital television and for automated news production systems, including a Central Master Control Operation for our NBC stations. We’re also building a new facility for our Myrtle Beach station, which will enable us to expand our viewership in this growing market.
Interactive Media Division expenditures were approximately $469 thousand, primarily for infrastructure and software. Corporate capital spending totaled $393 thousand, principally for information technology.
Capital expenditures for the full year 2006 totaled $94 million. Our 2007 budget is $80 million, including carryover amounts from last year.
The Publishing Division will continue with construction of its press facility at our Lynchburg, Virginia newspaper, which is scheduled for completion in 2008. The Broadcast Division has largely met the FCC’s requirements full-power digital television at most of its stations. Its 2007 spending will include completion of its new facility in Myrtle Beach as well as developing capabilities to broadcast locally-originated high-definition newscasts in selected markets.
Increasingly we are asking our divisions to find growth, or ROI, opportunities for all capital projects, including those that initially look like replacement spending.
The effective tax rate from continuing operations for the fourth quarter was essentially the same – 36.6% in 2006, compared with 36.8% in the 2005 quarter.
At the end of 2006, we adopted the new accounting standard FAS 158, which requires that the status of benefit plans be reflected on a company’s Balance Sheet. The adoption had no effect on our Statement of Operations and no cash effect, but it did reduce Stockholders’ Equity by approximately $55 million.
I also remind you that as of the first of this new year, Media General’s retirement plans have been changed to reduce the volatility of pension expense going forward. We will no longer add new participants to our defined benefit plan, and service accruals for current participants will no longer grow. At the same time, we increased the match in our 401(k) plan from 4% to 5% and added a profit-sharing component to the 401(k) plan that is expected to contribute between 2% and 6% of an employees’ annual compensation, depending upon the company’s performance against a specific target.
That concludes my report, and I will now turn the presentation back to Marshall.
Remarks from Marshall Morton
Thank you, John.
Before turning to Q&A, let me give you an update on the status of the newspaper/broadcast cross-ownership rule at the FCC. We have now filed first-round and reply comments with the Commission. We expect a decision in the second half of the year, and we believe that the combination of exploding technology and the Internet make the real-world case for complete repeal more compelling with each passing day. We’re optimistic about bringing the clear benefits of common ownership and convergence to an increasing number of communities, large and small.
Media General has made great strides perfecting the way we practice media convergence. In the five markets where we currently own both a newspaper and television station, we’ve found that we can gain a significant competitive advantage in being first to market with the most complete local news coverage available. That is because our journalists across all platforms share information and resources behind the scenes in ways that our competitors cannot, and they cover the stories from their varied vantage points. We give our local audiences the news as soon as we have it, and more often than ever that means online.
By using this approach, we become THE preferred local source, we have the most eyeballs, and advertisers want to be where the eyeballs are. In addition, we greatly enrich the content of our web sites in converged markets by giving them the advantage of both a newspaper and television station partner. While there have been some news reports recently that some media companies have been slow to realize the potential of their cross-owned markets, I’d like to assure you that is not the case for Media General.
Let me also comment on our outlook for the first quarter of 2007.
The Publishing Division expects revenue in the first quarter to be flat to slightly up, with solid Retail revenue growth offset by soft Classified and National revenues.
The Broadcast Division expects same-store time sales to be even with the prior year, or slightly up, with Local time sales offsetting a decline in National time sales and the absence of Political revenues.
The Interactive Media Division expects revenue growth of approximately 40%.
That concludes our formal remarks. Now, we will be pleased to take your questions.
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