Second-Quarter Conference Call Remarks
July 15, 2003 at 9:30 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 announced second-quarter earnings, the other June 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. These are subject to various risks and uncertainties and 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.

At this time, I will introduce Stewart Bryan.

Remarks from Stewart Bryan

Thank you, Lou Anne, and good morning ladies and gentlemen. Thank you for your interest in Media General and our second quarter performance. I know there are several other calls scheduled this morning, so we shall try to be brief.

Today we reported second-quarter earnings of 75 cents per share, compared with 70 cents per share for the second quarter of 2002. This performance was a little better than our most recent guidance and is almost entirely attributable to a stronger-than-expected month of June for the Publishing Division.

In June, total Publishing revenues exceeded last year by 4.2% and advertising revenues were up 5.5%. June was the best month so far in 2003. National and classified advertising both exceeded our expectations, and retail was the only major category that declined year-over-year.

Classified advertising was up 5% in June. Automotive advertising was strong in many markets. The best news in the employment category was in Tampa, where help wanted linage was up 2.7%. That was Tampa's first year-over-year increase since January 2001. Employment linage declines in Richmond and Winston-Salem were markedly smaller than those of previous months. Even with the improvements, we caution that employment advertising in most markets continues to be weak. Strong real estate advertising in some markets has helped offset soft employment linage.

National advertising exceeded last year by 27%, driven by strong telecommunications and financial advertising in Tampa and strong telecommunications advertising in Richmond.

Retail ROP is still weak, as the major stores hold back. Some ROP is also switching to preprints, which were up 12.3% from last year. We look forward to the opening of two new malls in Richmond this fall. along with several first-time Richmond advertisers, and expect to see a boost in retail revenues as a result.

Publishing's strong performance helped cover a gap left by weak television advertising. For the Broadcast division, June's revenue decline of $2.4 million created a 9.6% drop from last year. Last June we had $1.8 million of political revenues, compared to $200,000 this year. Also reflected in the decline were lower sales by our broadcast equipment subsidiary. Gross time sales declined about 8% in June.

TV advertisers continue a trend first noted in April of being very conservative with their marketing budgets because of an overall soft economy and flat consumer spending.

We are pleased that both Publishing and Broadcast have done a good job of continuing to implement expense management measures that they initiated earlier this year. For the second quarter, Publishing expenses were down 4% compared to its original budget and Broadcast's were down 6% compared to its budget.

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

Remarks from Reid Ashe

Thank you, Stewart.

I'll begin with an overview of Publishing's performance for the second quarter.

Higher than expected Publishing Division revenues, especially in June, helped offset higher expenses for newsprint and employee benefits. Segment profit of $31.7 million was down slightly from last year. Segment results include our 20% interest in The Denver Post, which generated income of nearly $300,000 this year, compared with a loss of about $200,000 last year.

For the Publishing Division, the second quarter of 2003 was the third consecutive quarter of revenue growth over the prior year, and it marked the largest increase since the fourth quarter of 2000. While revenue has not reached the levels anticipated in our budget, we are encouraged by the growth we've seen so far this year.

Second quarter revenue beat the prior year by $3.2 million or 2.4%, with advertising revenue up by $3.2 million or 3%.

Some of our papers, especially in Richmond, Tampa and Northern Virginia, have enjoyed strong year-over-year growth. Several community papers have struggled, though, as their local economies have been slow to rebound.

All advertising categories, with the exception of retail, performed above the prior year, with some categories up by double digits. The national and preprint categories produced outstanding results during the quarter and increased $1.4 million or 19.5%, and $2.2 million or 12.3%, respectively. Those more than offset soft retail and essentially flat classified results. Throughout the first half, preprint revenue has been our strongest performing category.

Retail revenue for the quarter decreased by $1.2 million or 3.5%. Department store advertising caused the bulk of that decline.

Classified advertising increased by less than 1%. The continued softness in the employment category remains a drag on classified. While the trends in help-wanted have recently begun to improve at our metropolitan newspapers, we're still performing below last year.

National advertising increased by $1.4 million or 19.5%. The metropolitan newspapers make up almost all of our national advertising revenue.

The Tampa Tribune was 26% above the prior year. Strong telecommunication and national automotive advertising were the primary drivers. The Richmond Times-Dispatch was above the prior year by 14%, the result of strong telecommunications linage. The Winston-Salem Journal was above the prior year by 18.5%, due to strong automotive advertising.

While we're pleased with these revenue results, it's clear that some retail and classified advertisers remain slow to spend. As a result, the Publishing Division remained focused on cost containment efforts during the quarter.

The Division's expenses were down 4% from budget, but up 4.2%, or $4.1 million, from last year. At this time last year, as you'll recall, newsprint prices were reaching the bottom of their slide. Newsprint accounted for more than a third of our year-to-year cost increase, while salaries, employee benefits, and other departmental expenses also contributed.

The growth in salary expense results from annual merit increases and higher sales commissions. Employee benefits have risen mainly due to healthcare and retirement plan expenses.

Other departmental expenses were up due to growth plans and transportation outsourcing in Tampa, partially offset by reduced discretionary spending. Late in the first quarter and throughout the second quarter the Division imposed a hiring freeze and cut discretionary spending in all markets.

Newsprint expense for the quarter increased by $1.6 million or 12.7%, the result of increased newsprint prices and consumption. The price per ton increased $37 for the quarter. Consumption increased by 920 tons, due to increased advertising linage and net paid circulation increases.

Now, let's turn to the Broadcast Division. Profit for the quarter decreased about 11% from last year. The major factors were lower political billings, increased sales costs for advertiser incentives, higher Nielsen fees in Spartanburg (which is now a metered market), sales development programs, and increases in health and retirement benefits.

Total Broadcast revenues of $74 million were about 4.6% below last year. Total time sales for the quarter decreased $2 million, or 2.6%, due to $4 million less in political revenues and a $400,000 decrease in national time sales, offset by a $2.4 million increase in local time sales.

Our stations increased their local times sales through new business development and training initiatives, and better management and pricing of our spot inventory. Our best gains have come in the automotive, furniture and healthcare categories.

Broadcast expenses for the second quarter were 2.1% below last year. The main reasons were lower cost of goods sold in our equipment business and lower syndicated programming costs due to schedule changes and lower renewal rates on a number of last year's "first run" shows.

In the May TV ratings, on a household basis, across all dayparts, we were up at 10 stations, even at 10 and down at two (not including our satellite stations). Our Jacksonville station was the top-rated WB affiliate in the country in key demographics.

Now let's turn to the Interactive Media Division. The division posted an operating loss of $1.3 million, which was a 10% improvement over last year's loss of $1.5 million.

Interactive revenue for the second quarter exceeded the prior year by 23%. The increase is due mainly to classified upsell arrangements and value-added classified 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 second-quarter of 2003 of $17.5 million, or 75 cents per share, represented a near 8% increase compared with net income for last year's second quarter. The year-over-year improvement is mainly attributable to lower interest expense and to reduced losses from our one-third ownership of SP Newsprint. Partially offsetting these two items were the decreased divisional profits Reid discussed, especially in Broadcast.

Total revenues for the quarter were even with last year at $212 million.

Interest expense decreased by $3.9 million, or 33%, from last year due to lower interest rates as well as the repayment of debt.

Results for our share of SP Newsprint improved to a loss of $1.6 million this year from a loss of $3.1 million last year. This improvement primarily reflects higher newsprint prices.

Acquisition intangibles amortization of $3 million was about the same as last year.

Corporate expense was higher than last year by 2%. The increase is mainly due to higher expenses for employee benefits.

The effective tax rate for the quarter was 36.5%, compared with 38.25% in last year's second quarter.

Total debt at the end of the second quarter was $592 million and represented 35% of total capital. We stand at about $606 million today.

Subsequent to the end of the fiscal month we have made a $21 million tax-deductible cash contribution to our pension plan using borrowed funds. As we discussed the Mid-Year Media Review, the severe downturn in the investment markets over the last three years, coupled with lower interest rates, has affected Media General's pension plan to the extent that funding is now required for the current plan year. We have historically maintained well-funded plans and have not had to make cash contributions for more than 10 years. Our annual expense is approximately $8 million. We plan to make cash contributions in excess of the required amounts in the next couple of years. Our current plan calls for making another contribution of $35 million in January of next year. Pre-funding the plan in this way may prevent spikes in future contribution levels and should reduce annual accounting expense, but it will certainly work, immediately, to enhance the funding status of the plan.

Capital expenditures in the second quarter were $6.4 million. Of that amount, the Broadcast Division accounted for $4 million. The Publishing Division spent $2.3 million. Expenditures for Interactive Media and Corporate were nominal.

EBITDA for the second quarter was $52 million, compared with $55 million for last year's second quarter.

After-tax cash flow was $34 million in the second quarter, compared with $33 million in the same 2002 period.

Free cash flow was $28 million in both years.

I have one more topic before turning it back to Stewart.

First, let me give you a bit of a preview on the impact of the new accounting interpretation (FIN 46) for dealing with Variable Interest Entities. It will become effective for us beginning with this year's third quarter and will result in three things-none of them affects cash. First, since we are the "primary beneficiary" of two VIE's, we will consolidate them in our financials. This is expected to increase our assets (essentially three office buildings and two parking garages) by approximately $86 million and at the same time our liabilities will increase (principally debt) by $94 million. Second, that $8 million difference will show up as a cumulative effect accounting charge, net of taxes, largely representing the depreciation of those facilities since we began using them in the late 1990s.

Finally, going forward, we anticipate our costs will rise by approximately $800 thousand pretax per quarter. As in the case of the catch-up amount, this largely represents depreciation. In addition, certain amounts that had previously been recorded as rent expense will now be reflected as interest expense in future periods.

Our debt covenant compliance is unaffected by this change. Irrespective of this accounting change, the Company has been pleased with the economic benefits afforded by these leases -- which we have disclosed since their inception in 1997 -- and we have no current plans to change them.

And, now, I will turn it back to Stewart.

Remarks from Stewart Bryan

Thank you, Marshall.

I have just a few more comments before we move to the Q&A.

We are pleased with the new FCC rules on cross-ownership. Not only do the new rules allow us to keep our current convergence markets, but also they open up 90% of all markets in the Southeast for cross ownership. Looking forward, it should pave the way for future acquisitions, provided we can find willing sellers and acceptable prices. We will execute a disciplined approach in considering acquisitions or trades that support our strategies of clustering and convergence in the Southeast. Unless there is new legislation on cross-ownership, which we think is highly unlikely, media companies should be able to proceed within the new framework established by the FCC.

Next, let me discuss our expectations for the third quarter.

In the Publishing Division, we are projecting revenue growth of about 4%, compared to last year's third quarter, coming mainly from gains in preprint and retail.

In Broadcast, it's more difficult to provide a forward perspective. For the month of July, we are pacing behind last year's third quarter, with local revenue pacings slightly ahead and national revenue pacings are running about 10% behind a year ago.

Another area where it is difficult to provide a forward perspective is newsprint pricing. It appears that $30-35 of the spring increase is holding, and some producers have announced another $50 per metric ton increase for August 1. It's difficult at this time to estimate our share of SP Newsprint's results for the third quarter.

As of today, analyst estimates for Media General for the third quarter range from 44 cents to 58 cents, and the consensus is 52 cents. Currently, we would expect to be below consensus, and depending on how business unfolds for the Broadcast Division and SP Newsprint, we could be at the lower end of the range. We will provide updated guidance as the quarter progresses.

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

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