Second-Quarter Conference Call Remarks
July 16, 2002 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 this morning - one announced second-quarter earnings and the other June revenues. Both have been posted to our Web site.

Our speakers today will be Stewart Bryan, chairman and chief executive officer; Marshall Morton, vice chairman and chief financial officer; and Reid Ashe, president and chief operating 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 our company and its second-quarter performance. It was good to see many of you a few weeks ago in New York at the Mid-Year Media Review.

We are pleased to report second-quarter results of 70 cents per share. All three of our operating divisions reported results that were substantially better than last year.

The Broadcast Division produced the strongest improvement. Its operating profits increased $7.2 million, or 47%. Broadcast revenues grew more than 16% as the result of increased advertising time sales in a number of categories, including robust political spending.

Compared to last year's second quarter, time sales increased by $10.6 million - 42% of that being political. Even without Political advertising, we were 10% ahead of last year.

We expect strong television advertising to continue. While third quarter pacings could change, at this time they are about 18% ahead of last year. For the year as a whole, we will continue to benefit from strong political advertising.

In our markets, there will be seven gubernatorial races, including Florida's, eight Senate races, all the congressional seats, and various state and local elections. Year to date, we've received $5.3 million in political revenues. For the full year, we estimate more than $16 million in political billings, compared to just under $2 million last year.

Our Publishing business, on the other hand, continues to feel the impact of a slow economy. Revenue was $5.4 million, or 3.9%, behind last year's second quarter, as advertisers remained cautious with their budgets. We are somewhat encouraged by the fact that the revenue decline in the second quarter was less than the 5.9% decline in the first quarter of this year. New revenue initiatives, such as cross-selling, are helping the Publishing Division. For example, in North Carolina, where cross-selling is most advanced, revenue was up 5.3%.

Nonetheless, retail and national advertising are still running well below last year. Classified is gaining traction, mostly on the strength of automotive. Help-wanted is still trending 15 to 20 percent below last year.

The Publishing Division has worked diligently on cost-saving measures. Expenses were below last year by $6.8 million, or 6.4%, and more than made up for the revenue decline. Newsprint expense continues to drive the favorable expense results, and, for the quarter was down $6.1 million, or 33%.

While most newsprint producers have announced price increases for August 1, we believe it will take some time before they become fully effective due to excess capacity and the ongoing sluggish economic recovery.

Excluding the impact of our interest in The Denver Post, the Publishing Division's profit improved 5.5%. The loss from our Denver equity interest was smaller this year than it was last year. Overall segment profit, including the impact of Denver, improved 7.6%.

For our Interactive Media Division, results improved by $2.7 million, or 65%, mostly from the absence of a write-off and reduced investment losses, as well as from new revenue initiatives.

Let me now ask Marshall to discuss more details of our financial performance.

Remarks from Marshall Morton

Thank you, Stewart. My comments will focus on our results for the quarter compared to last year's second quarter.

Let's begin with a review of our Publishing segment. The 3.9% revenue decline is indicative of the continued weak economic climate affecting all of our markets.

Classified revenue for the quarter was down less than 1%. The Richmond Times-Dispatch reported the largest decline due to weak employment advertising and weaker automotive advertising in the Richmond market.

The Tampa and Winston-Salem markets were up due to strong automotive advertising. Weakness in the employment category continued in all markets. Employment linage was down in all of our metro markets: Tampa, 17.5%; Richmond, 20%; Winston-Salem, 30%.

Retail advertising declined from last year by 8.6% and was the hardest hit category across all newspapers. The Tampa Tribune experienced the largest declines in the financial and home furnishings categories and also posted decreases in a number of other categories. For the Richmond Times-Dispatch, the department store and financial categories were down the most. Softness in a wide array of retail categories caused an overall decline in the community markets.

National advertising decreased from last year by just under 12%. Over 90% of this revenue comes from our three metropolitan newspapers. Tampa's declines were rooted in the automotive, healthcare, theme park and pharmaceutical categories, and Richmond's were in the telecommunications, medical and grocery categories.

Preprint advertising for the quarter was 2.7% above last year.

Circulation revenue declined 2.3%, excluding the effect of the conversion to independent contractors in Tampa. Some of this decline is accounted for by intentional contraction of remote home-delivery. Much of the balance is due to reduced single-copy sales.

While working to increase revenue is the primary focus of our newspapers, much effort continues to be focused on closely monitoring expenses that have been eliminated over the past year and a half. As a result, operating expense declines for the quarter more than offset the revenue losses.

Operating expenses were 6.4% below last year's second quarter. Newsprint expense showed the largest decline, at $6.1 million, or 33%, of which $5.4 million was price. Reduced consumption contributed $700 thousand. For the quarter, the average price per short ton was $390, compared to $559 last year.

Excluding the impact of the newsprint cost reduction, operating expenses declined $1.4 million, or 1.5%, for the quarter.

Salary expense decreased 1.2% due to reduced employment levels as we continue to hold positions open. Employee benefits expense, on the other hand, increased 10.4%, largely the product of higher health care and retirement costs.

As a result of outstanding expense management, Publishing Division profit, excluding Denver, was up 5.5%. We had a small decline in losses from our 20% ownership in The Denver Post, mostly due to lower newsprint and production expense.

Including Denver, segment profit increased 7.6%. Segment operating cash flow was up 4.5%.

Now, let's turn to the Broadcast Division. Total revenues increased 16.4%. Time Sales for the quarter increased 16.1% due to strong gains in national and local transactional billings and a surge in political spending during the primaries and runoffs in a number of markets.

Local revenues were up 6%, reflecting gains in the automotive, services, health care and specialty stores categories.

National revenues for the quarter increased 15.2% as a result of strength in the automotive, corporate, telecommunications and entertainment categories.

Healthy spending by the automotive sector is always a good sign as it is TV's biggest ad category. Leading this category was General Motors as it works to increase its share of the North American market. We also saw increased spending from Ford, Lincoln Mercury Dealer Associations, Nissan and other foreign car companies.

Political revenues for the quarter of $4.9 million were $4.4 million ahead of last year's second quarter. This increase was due to heavy spending for Alabama's First Congressional District race, as well as for the South Carolina gubernatorial and congressional primary and runoff elections.

Broadcast expenses were 7.3% higher than last year. Cost of goods sold increased by about $2 million due to an increase in third-party equipment sales by our broadcast equipment subsidiary. Payroll costs have increased by 2.9%, from merit pay raises and higher sales commissions and sales incentive bonuses associated with increased time sales. The payroll increase was partially offset by open positions. Benefits costs rose by 9.4%.

Other production costs declined 2.2% for the quarter. These decreased costs resulted from savings in the news departments attributable to reduced contracted news services, travel and research costs, and from the absence of last year's relocation costs for moving the division management team to Richmond.

Segment operating profit increased 47%. Most of the revenue growth flowed to the bottom line as the result of ongoing expense management. Segment operating cash flow increased 37%, and cash flow margin increased to 36%.

Now let's discuss the Interactive Media Division. Revenue of $2.8 million was 24% higher than last year.

Classified advertising revenue continued to be our largest online category, mostly the result of classified up-sell arrangements with Media General newspapers in several markets.

The division's operating loss of $1.5 million was a substantial improvement from last year's loss of $4.1 million. The improvement is due to the absence of losses associated with our prior equity position in iPipe as well as the absence of a $2.3 million investment write-off.

Now, let's turn to consolidated, below-the-line items. We benefited from lower expenses in several categories.

Interest expense was down 4% from last year thanks to lower debt levels and reduced interest rates.

Acquisition intangibles amortization was $12 million less than last year as the result of adopting SFAS 142.

Corporate expense was also down from than last year, mostly due to lower rent expense on leases that are tied to interest rates.

The Other category reflected unanticipated income from life insurance proceeds.

The $3 million loss from our investment in SP Newsprint in this year's second quarter compared unfavorably with income of $9 million in last year's second quarter. This loss reflects lower newsprint prices affecting both mills and higher energy costs at the Newburg mill.

The effective tax rate for the second quarter of 2002 was 38.25%, up slightly from the second quarter of 2001.

Capital expenditures in the second quarter were $5.5 million. By far the largest portion of that, $3.7 million, is accounted for by the Broadcast division, as we continue the build-out of our digital broadcasting capabilities. In addition the Publishing division spent $1 million. The Interactive division and Corporate accounted for the $750 thousand balance. For the full year 2002, we expect capital spending of approximately $50 million.

Debt at the end of the second quarter was $703 million and stood at 40% of total capital. Since the beginning of the year, we've reduced debt by $75 million. We stand at about $695 million today.

EBITDA for the second quarter was $55.2 million, up about $2 million from last year's second quarter.

After-tax cash flow (income before the cumulative effect of adopting SFAS #142, plus depreciation & amortization) was $33.2 million in the second quarter, compared with $36.3 million in the same 2001 period.

Free cash flow (After-tax cash flow minus capital expenditures) was $27.7 million, compared with $24.3 million in the second quarter of 2001.

I'll now turn it over to Reid.

Remarks from Reid Ashe

Thanks, Marshall. Our key operational initiatives today are product development and employment advertising. Both support our strategies of selling within clusters and across media.

Clustering has been a great help to our newspaper revenue. Stewart mentioned that in our North Carolina community newspaper cluster, revenue was up 5.3% in the quarter. The gain was due entirely to advertising cross-sales.

The cluster approach also helps us to identify gaps in our offerings, and opportunities to extend our reach. An example is Caldwell County, N.C., an area in a strategic region where we lacked an advertising vehicle. To fill the gap, we launched a mail-delivered shopper publication two months ago. Its revenue is almost entirely cross-sold from our surrounding daily newspapers, it required no additional staff and it was profitable from the first month.

We have other new products in development and we'll report on them as they are launched.

As you've heard, employment advertising represents the most painful decline in our newspaper division. The good news is that it's been stable this year. The bad news is that we've still seen no sign of an upturn.

When the upturn comes, though, we'll be more competitive than ever, thanks to a series of initiatives that are now under way:

We've created a new position to coordinate our recruitment sales, company wide and across divisions. In several newspapers, we're converting inside sales positions to outside sales, to strengthen our relationships with recruiters.

We're creating new vehicles to extend our reach - to non-subscribers, to students and to Spanish-speakers.

We're creating value-added services to help recruiters sort and screen their applicants.

We're targeting industry segments through special projects, trade-association partnerships and category pricing.

And we're using multiple media, such as the Top Jobs feature on the Internet, Employment TV and virtual job fairs.

The great majority of jobs are filled locally, and we intend to remain the local employment marketplace - by delivering value and service that are second to none.

Stewart and Marshall told you about the success of our broadcast division. We're proud of the way we're continuing to outpace our industry peers. Through May, according to the TV Advertising Bureau, the average station increased its total advertising time sales 2.2%. Our stations increased 9.3%

The industry gain in national sales was 5.3%, while ours was 13.6%. The industry increased its local ad sales 0.4%, while we increased ours 6.7%.

The reasons are ratings gains - the ability to attract more viewers to better products - plus better inventory management, more effective sales and the blessing of being located in the Southeast.

The May sweeps showed modest improvement in our TV audience. Six of our stations were up, four were down and 11 held even. WFLA remains Florida's #1 station. It was the clear winner for all news programs and the only station in its market to gain share of the late news audience. It was also the only station in the market to grow year-to-year and book-to-book.

In Charleston, S.C., WCBD is now fully operational in its new state-of-the art facilities.

In the Interactive Media Division, the main revenue driver remains classified up-sales from our newspapers. When you call to place a classified ad, you're encouraged to post it on our web sites, as well, for a small additional fee. In the first half of this year, that additional fee totaled $1.3 million, which is about what it totaled in all 12 months of last year. The sell-through rate in Tampa is steady at nearly 86%, and the rate in Richmond has grown to 81%.

In selected categories, we're enhancing our on-line classified sections with improved visibility and functionality. We call these our vertical products, and they create more value for advertisers and more revenue for us.

Top Jobs, an employment vertical, is up in Tampa, Richmond, Winston-Salem and Florence, S.C. We're introducing Top Properties, a real-estate vertical, in several markets, and we have others in development.

On June 3, we completed the acquisition of Boxerjam Media. Boxerjam runs interactive games on the internet that attract 2.5 million regular monthly players, a number that continues to grow. We plan to re-launch Boxerjam this fall with two revenue streams - advertising and subscriptions. Our plan is to offer a limited number of game episodes for free play and require a small subscription fee to play the rest. We also hope to extend the Boxerjam games into other forms, such as interactive television and newspapers' games and puzzles pages.

Now I'll turn it back to Stewart.

Remarks from Stewart Bryan

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

We continue to be an active participant in the FCC's review of the newspaper/broadcast cross-ownership rule. We have communicated our view that this review should be a separate proceeding on the basis that the record has been complete since February and that Congress, back in 1996, asked the FCC to review its ownership rules biennially and to eliminate those that could not be justified as "necessary in the public interest." That review - mandated six years ago -- has not yet happened in any substantive way.

We are deeply disappointed that the Commission isn't going to render a decision on cross-ownership this year, but we understand that it is committed to ruling promptly on this issue. We're going to take the FCC at its word, and we will participate actively in its new, omnibus proceeding once it is initiated this fall.

Next, let me discuss our expectations for the third quarter. At this point, we do not expect any improvement in our Publishing revenues from our present levels for the balance of this year. In addition, as we begin to bump up against the results of our cost-savings efforts in 2001, our ability to reap additional expense savings has narrowed. We also expect SP Newsprint to continue its price- weakened performance near term. On the other hand, the outlook for our Broadcast business continues strong.

Analyst estimates for the third quarter currently range from 49 cents to 53 cents per share. In light of our moderate expectations in Publishing, that strikes us as high. We currently expect third-quarter earnings to be in the range of 35-to-37-cents per share. For the full year, analyst estimates range from $2.32 to $2.40 per share, and we currently expect to be in the range of $2.25.

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

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