Second-Quarter Conference Call Remarks
July 13, 2004 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 everyone. Welcome to Media General’s Second-Quarter Conference Call and Webcast.

We issued two news releases today – one announcing our second-quarter earnings, the other our June revenues. Both releases have been posted on 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 on our Web site immediately following this 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.

And now, I will introduce Stewart Bryan.

Remarks from Stewart Bryan

Thank you, Lou Anne, and good morning ladies and gentlemen. We appreciate your interest in Media General.

Let me touch on some of the highlights of our second-quarter performance, after which Reid and Marshall will provide you with more details.

For the second quarter of 2004, Media General reported net income of $18.5 million, or 78 cents per diluted share, a 5.9% increase compared with net income of $17.5 million, or 75 cents per diluted share, in last year’s second quarter.

Segment operating profit for the quarter was nearly 10% higher than last year, led by Broadcast Division profit growth of 22 percent, which reflected robust political campaign spending and increased local sales. At the same time, the Publishing Division continued to benefit from significantly higher classified revenues, driven by increased help wanted advertising.

Equity earnings from our one-third ownership of SP Newsprint, while substantially improved compared to last year, were well below our expectations for the quarter. Newsprint price increases so far this year have not materialized as quickly as we anticipated. SP Newsprint is also experiencing pressure on the expense side, especially for raw materials and energy costs. The lower performance by SP Newsprint accounted for the major difference between our original expectations for the second quarter and our actual results.

Let me now ask Reid to discuss the details of our divisional operating performance for the second quarter of 2004.

Remarks from Reid Ashe

Thank you, Stewart. I’ll begin with the Publishing Division.

Total publishing revenues for the second quarter increased 4.1% over last year, and newspaper advertising revenue grew 4.2%. Including online revenues from our newspaper web sites, total publishing revenues were up 4.7%, and advertising revenues increased 4.9%.

Like that of most other publishers, our revenue growth reflects the industry-wide robust increases in classified advertising, led by the help-wanted category. Our results also reflect the industry-wide challenges in the retail category as a result of a continuing softness in the department store category, as well as national advertising that was not as strong as it was in the year-ago period.

In terms of specific markets, our second-quarter revenue growth came primarily from The Tampa Tribune, up 5.7%; from Tampa’s associated community newspapers, up 12.6%; and from our Northern Virginia newspaper group, which achieved revenue growth of 9.8%. Richmond Times-Dispatch revenues grew slightly, and the Winston-Salem Journal was about even with last year. Most of our community newspapers saw solid gains for the quarter.

Now, looking at the major categories, Classified advertising was 9.6% higher than last year. Employment linage at our three metro newspapers increased 20%.

The Tampa Tribune and its associated community newspapers experienced the largest increase in classified revenues, up 9.7%, over last year. This increase reflected higher employment and automotive linage. Real estate classifieds were down somewhat.

The Richmond Times-Dispatch realized a 5.9% gain in classified revenues for the quarter, with higher employment advertising, partially offset by lower automotive and real estate advertising.

The Winston-Salem Journal’s classified revenues increased 6.6% for the quarter, also reflecting higher employment advertising but weakness in most other categories.

Our community newspapers enjoyed strong classified revenue growth for the quarter, with many showing double-digit gains, driven by employment advertising.

Also contributing to Publishing’s revenue gains were continued increases in preprint revenues, which rose 1.4% for the quarter. Most of our newspapers were on the plus side. We are also seeing healthy increases in the Other advertising revenue category, which reflects the greater use of color by many customers and advertising in the comics pages.

Retail advertising declined 1.4% compared to last year. The Richmond Times-Dispatch reported a 4.8% decrease, with the shortfall spread across almost all categories and reflecting a significant cutback by a major department store. The Winston-Salem Journal’s retail revenues were 6.2% below last year, attributable principally to the department store category. The Tampa Tribune’s results were also impacted by lower department store advertising; however, its associated community dailies realized significant growth from smaller accounts, putting the total Florida group on the plus side with an increase of 2.3%. Results for our other community newspapers were mixed, with growth in Alabama, South Carolina and Southwest Virginia, and weakness in North Carolina.

National advertising revenues were down 4.6% from last year. The shortfall was spread across all three of our metro newspapers, mostly reflecting declines in the telecommunications, computers and automotive categories.

Circulation revenues increased 3.8% for the quarter, driven by rate increases for home delivery in some markets and increased circulation volumes at The Tampa Tribune.

Publishing expenses for the second quarter were up 5.1% over last year, reflecting higher costs for newsprint, employee benefits and other departmental expenses.

Newsprint expense for the quarter increased 11%. Newsprint prices were $39 per ton higher than last year, and consumption was up because of increased advertising linage and net paid circulation increases, particularly at The Tampa Tribune.

Employee benefits expense was just under 11% higher than last year, mainly reflecting increased retirement plan costs.

Other departmental expenses were up about 7%, with much of the increase occurring in Tampa, especially for higher costs to support increased circulation volumes.

The Publishing Division has done a good job of controlling salary expenses, which increased only 2% for the quarter. Pay increases of 3-3.5% have been partially offset by continuing to hold positions unfilled.

Publishing segment profit for the second quarter of $31.9 million was up 1% from last year. This amount included the results from our 20% interest in The Denver Post, which produced income of $48,000 this year compared with income of $279,000 last year.

Segment operating cash flow of $37.8 million was about even with last year.

Now, let’s discuss the very strong performance of our Broadcast Division.

Total time sales for the second quarter grew more than 10% as a result of higher political billings and local transactional sales.

In addition to political spending, we realized significant gains in the services, automotive, telecommunications and furniture categories, while the entertainment, medical and department store categories were down.

Media General television markets showing the greatest strength for the quarter were Tampa, Spartanburg, Mobile, Birmingham, Myrtle Beach and Charleston.

The Television Bureau of Advertising’s monthly Group Survey for May reported that overall for the year, industry time sales increased 8.4% compared to our 11.7% improvement. Industry national time sales rose by 9.1% compared to our increase of 14.7%. The industry’s local time sales improved 8% compared to our 10% gain. All of these numbers include political revenues.

Local time sales, excluding political, increased $3.4 million, or 7.5%. Our stations continued to focus on new business development through our launch of a New Revenue Solution program and on improving spot inventory management and pricing. Local categories showing the strongest gains for the quarter were automotive, services, telecommunications and furniture.

National time sales, excluding political, were down $494,000, or 1.8%. Categories showing the largest declines were entertainment, corporate and fast food. The decreases there were only partially offset by gains in the home improvement, financial, and telecommunications categories.

Political revenues of $5.6 million for the quarter exceeded our expectations and were generated by U.S. Senate primary spending in South Carolina, Georgia and Florida; presidential campaign spending in Florida, Louisiana, Alabama and Iowa; state congressional campaign spending in Alabama, and issue spending in Florida and Alabama.

Broadcast Division total expenses for the second quarter rose 6.6%, primarily due to higher payroll and benefits costs.

Payroll costs increased 7.5%, due largely to normal merit increases, sales commissions on our higher revenues, and critical open positions in sales, news and production, which were unfilled for cost reasons for an extended period of time, have been filled.

Benefits costs increased 14%, primarily due to additional expenses for the retirement plan.

Segment profits of $24.3 million were 22% higher than last year, driven by greater time sales. Segment operating cash flow of $28.9 million was up 13%, from a year ago.

Let’s turn now to Interactive Media Division, which reported a 14% improvement over last year’s operating results. Revenues of $3.5 million increased 53% over last year, mainly from classified upsells and, on a smaller scale, National advertising. Expenses for salaries, benefits and commissions, as well as hosting and content fees for this growing business, largely offset the higher revenues.

Let me now turn our presentation over to Marshall for additional details on our financial performance and position.

Remarks from Marshall Morton

Thank you, Reid. Let’s first look at our unallocated amounts for the quarter, as shown in the Business Segments table in our press release.

Interest expense decreased $428 thousand compared to last year, due primarily to a lower average interest rate.

Equity income from our share of SP Newsprint improved from a loss of $1.6 million last year to a loss of $72,000 this year, essentially due to rising newsprint prices. While the improvement from last year is substantial, the performance of SP Newsprint is below what we had expected so far this year originally because newsprint prices have not risen as quickly as anticipated, and cost pressures have impacted SP’s bottom line, as well.

Looking forward, we believe newsprint producers will announce a $50-per-ton increase in August or September, and we expect a good portion of the increase will hold. Based on that view, we are forecasting equity income from SP Newsprint of just under $1 million for the third quarter and just under $2 million for the fourth quarter.

Acquisition intangibles amortization was $1.1 million higher than last year due to network affiliation amortization.

Corporate expense was higher than last year as a result of several key items: the changed VIE accounting requirements – largely depreciation, increases in employee benefits, and IT investments. Also included were higher expenses for several projects, including Sarbanes-Oxley compliance matters, which are not expected to recur. Barring any unforeseen items, we expect total corporate expense to run between $9.5-and-$10 million in each of the next two quarters this year.

The “Other” line shows an expense of $2.3 million, slightly higher than the first quarter. The first quarter benefited from fixed asset and non-strategic property sales while this quarter, to a lesser extent, benefited from a favorable adjustment in our postretirement benefits costs resulting from the Medicare Prescription Drug act.

We recognize that our “Other” expense line is a challenge for you to estimate, so I’d like to provide some details that you may find helpful. This line includes expenses related to our incentive plan, restricted stock awards, and other miscellaneous items, as well as income generated by our Shared Services Department from outside customers. That base can fluctuate up or down as a result of items such as a fixed asset sale or the prescription drug benefit realized this quarter. Approximately $2.5 million is a good base quarterly estimate.

The effective tax rate for the quarter was 37%, compared with 36.5% in the prior year.

Total debt at the end of the second quarter was $609 million and represented 35% of our total capital. Our debt outstanding at the end of the quarter included $314 million in bank debt, $200 million in public debt, and $95 million in consolidated variable interest entity debt. Debt has decreased by $18 million in the first six months of this year. It currently stands at about $599 million.

Capital expenditures for the second quarter were $12.7 million, compared with $7.3 million last year. The Publishing Division spent nearly $6.4 million, including $2.7 million on the new press project in Bristol, Virginia, as well as other investments in software improvements and new production equipment. The Broadcast Division spent $5.3 million, mostly for the new Centralized Master Control operations for our CBS stations, new weather graphics systems for several stations, replacement fleet vehicles, and editing and other news production equipment. Expenditures for the Interactive Media Division were nominal, and Corporate was $700,000.

EBITDA for the second quarter was $53.3 million, compared with $51.7 million for the prior-year period.

After-tax cash flow was $34.8 million in the second quarter, compared with $33.8 million in the prior-year period.

Free cash flow was $22.2 million in the second quarter, compared with $26.5 million in the prior-year period. The increased capital spending level compared to last year is the reason for the decline.
And, now, I will turn it back to Stewart.

Remarks from Stewart Bryan

Thank you, Marshall.

Before turning to the Q&A part of our call, I would like to comment briefly on the status of the FCC cross-ownership rules, as well as our outlook for the third quarter.

On the FCC front, it’s clear the Third Circuit’s decision means further delays; that decision therefore disserves the American public, who stand to gain significantly better local news as a result of cross-ownership. We’re reviewing our options in light of the court’s order. We can say at this point that we’re at least leaning toward an appeal.

At the same time, as we’ve previously said, the newspaper and broadcast industries need some measure of clarity and certainty to help them plan and invest for the future.

We know from the Third Circuit’s decision that the FCC properly repealed the 29-year old blanket ban on cross-ownership. That’s the good news from the Third Circuit. What’s needed now, however, is for the Commission to provide reliable guidance on what it will do if companies bring it transactions that comply with the rules it crafted last summer. We will be working actively with the Commission to try to secure that kind of interim guidance so that companies like Media General can move forward with their business plans.

Next, let me turn to our expectations for the third quarter, which is expected to be another quarter of revenue and profit growth.

In the Publishing Division, revenues are expected to increase approximately 4-5% from last year’s third quarter. Classified advertising revenues are expected to maintain their upward trend, and Retail and National revenues should be up from last year’s third quarter.

The outstanding performance of the Broadcast Division is expected to continue, with time sales expected to increase 13-14% over last year’s third quarter. A substantial portion of the increase will come from robust political spending as presidential, U.S. Senate and state congressional campaigns heat up. We also look forward to advertising revenues from the Summer Olympics on our five NBC stations. Local time sales should continue their growth trend, and we believe National time sales will increase compared to last year.

The current range of analyst estimates for the third quarter is 55 cents per share to 74 cents per share. At this time, we expect our results to be in the middle of the range. In last year’s third quarter we reported earnings per share of 49 cents, excluding the effect of an accounting change and discontinued operations.

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

Top of page