Second-Quarter Conference Call Remarks
July 19, 2007 at 11:00 AM 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 morning everyone. Welcome to Media General’s Conference Call and Webcast.
Earlier today, we announced second-quarter 2007 earnings and June revenues. Both press releases have been posted on our Web site. Comments from today’s call also will be posted.
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 morning ladies and gentlemen.
Our second-quarter results were in line with the guidance we provided on June 14. We are disappointed, however, that 2007 has turned out to be an even weaker year than we anticipated.
Our second-quarter results mostly reflected the ongoing recession in the Florida housing market and its impact on all of our Tampa operations. The newspaper side of our business in Tampa has been hardest hit, but our television and online operations there have been affected as well.
In addition, overall softness in retail and national advertising affected virtually all of our newspapers in the quarter.
On the Broadcast side, we entered the quarter with the challenge of replacing $4.1 million in Political revenues from last year’s second quarter, and reduced spending by automotive advertisers affected virtually all of our stations.
Our second-quarter results also included an equity loss from SP Newsprint and increased interest expense.
Net income in the quarter was $5.1 million, or 22 cents per diluted share, compared with income from continuing operations in the second quarter of 2006 of $18.3 million, or 77 cents per diluted share.
Total revenues were up 4.8% to $241 million, including our four new NBC stations, compared with $230 million in the prior year. Excluding the new stations from our 2007 results, total revenues declined 5.7% in the second quarter.
Let me take a moment to provide a more in-depth perspective on Florida.
Over the past few years, we saw significant growth in our Tampa operations, as the economy and market conditions in the state outpaced many other U.S. markets. Since late last year, however, Florida’s economy has reversed, driven by an adjustment in the housing market following several record breaking years. This adjustment reflects rising mortgage rates as well as the unfavorable impact of an unusual number of strong hurricanes in recent years on the volume of relocations to the state.
The root of the Florida economic problem is not just the collapse of the housing bubble. Two other trends are also contributing. Those are the sudden difficulty and enormously increased cost of buying property insurance, and high property taxes that are incurred when homestead properties are sold. Both these trends create a further drag on housing sales, while insurance costs lower disposable income for everyone. Higher energy costs are also a contributing factor, as they have reduced discretionary spending for consumers and businesses alike.
As an example of the impact on our business, in the first six months of last year The Tampa Tribune generated an 87% increase in real estate linage. For the same 2007 period, Tampa’s real estate linage was down 47%.
The housing market decline has also impacted other sectors of Florida’s economy. Spending by home improvement and furniture advertisers was down 26% and 9%, respectively, for the first six months of this year.
Weak consumer confidence has also had a negative impact on other sectors of the economy. From January through May, new auto sales in Tampa were down 5.4% -- exacerbating already weak advertiser spending in the automotive category. While the unemployment rate in the Tampa market remains a low 3.2%, job growth has slowed because of losses in construction sector jobs.
We cannot tell you today if the economic situation in Florida has bottomed, or precisely when it might turn around. There is some thought by real estate experts in Florida that the 2005-2006 housing peak was an overheated condition and that the market may not return to the peak level. At the same time, Florida remains a fundamentally desirable place to live, the state has always had its ups and downs, mostly driven by the real estate market, and it’s always bounced back.
Nonetheless, early this year, it was prudent for The Tampa Tribune to take a hard look at what could be done to reduce expenses in this current revenue environment. In April, the Tribune announced a performance improvement plan, which has mostly been implemented. The plan also included elements for increasing revenues and audience share.
The following actions have been taken:
-- Certain printing operations have been consolidated, and we are now printing our Florida weekly newspapers at The Tampa Tribune. Also at The Tampa Tribune, since February of this year, we have been printing USA Today and distributing it in Central Florida, a solid new revenue source.
-- We have further consolidated the Classified call centers for The Tampa Tribune and its many associated daily and weekly newspapers.
-- The process of outsourcing the Tribune’s circulation telemarketing operations has been completed, and the outsourcing of its circulation customer service function will be completed by the end of this month.
-- The paper’s planned circulation withdrawal in five non-core counties was completed in June
These actions, plus keeping open positions unfilled, except for sales positions, result in the elimination of approximately 115 positions. The Tampa Tribune expects to realize total expense savings of approximately $3.5 million, including severance costs, in 2007, a portion of which was reflected in the second quarter.
Our Publishing Division, since 2001, has reduced FTEs by nearly 500, as a result of capital investments and by creating synergies within our newspaper clusters. The Tampa group contributed more than 250 FTEs to this total, which they achieved before their latest reduction of 115.
Let me also highlight some of Tampa’s revenue and audience growth initiatives.
On the sales side, The Tampa Tribune has implemented a number of classified initiatives in all three major verticals – employment, real estate and automotive – including some aimed at underserved markets.
One example is a new real estate product, Weekend HomeSeeker, which enables advertisers to build their own ads on-line. We price the section competitively and it’s solidly profitable. We’re also seeing some positive movement with local automotive advertisers as a result of focused sales efforts. And, the Yahoo! Hotjobs partnership is increasing online employment classifieds at TBO.com.
Content improvements are also a key focus at The Tampa Tribune. The paper is conducting research this summer to assess the impact of changes it implemented earlier this year. We’ll review those results in the Fall.
The Tribune has also folded the content of its zoned sections into its associated community newspapers and launched new hyperlocal web sites for each of them. The early response to these new offerings has been positive.
Moving on to another topic, I’m pleased to report that the performance of our four new NBC stations improved in the second quarter compared to this year’s first quarter. Seasonally, the second quarter is stronger, and the stations progressed with their transition to our way of managing inventory and pricing and to our approach to local sales.
With respect to the individual stations, we are essentially re-launching the one in Birmingham, following extensive market research. We just introduced new on-air talent, along with improved news and weather content, and the initial response has been positive. This Fall, we will upgrade our news and meteorology sets. We believe the changes will help restore this station to at least the #2 position in the market, a position the station has held before. Currently it is ranked #4 overall and #3 in news.
In Raleigh, we have implemented a number of changes, including a 7 o’clock evening newscast. Viewership in this time slot is up 55% compared to the previous programming in that slot. We’re also implementing a plan to provide an innovative Web-integrated approach that we believe has the potential to set a new standard for a television station’s use of the Internet.
Our Columbus station in November will open a new downtown studio, which will provide high-definition local news, that is expected to further increase ratings. The new studio will be located in a highly visible, heavy volume traffic area, which should help drive viewership.
In Providence, we have upgraded weather programming and rebranded to “Storm Team 10,” an identity that has worked well for us in other markets.
For the four stations overall, we’re on track to realize operating synergies of $3 million annually in 2008. This includes the benefit of a new Central Master Control operation for our nine NBC stations, which was completed in April.
On another front, we’re very pleased with our implementation of the offerings provided by our partnership with Yahoo!. Yahoo! HotJobs revenue for the second quarter increased by 70% from the first quarter.
We’re currently rolling out Phase B of Yahoo! HotJobs. All of our online career sections will be powered by Yahoo! HotJobs, and they will be co-branded. TBO.com in Tampa launched Phase B on June 20, and they also just launched Yahoo! search. The Richmond Times-Dispatch will launch Yahoo! Hot Jobs Phase B at the end of this month. The majority of our sites will be live by mid-September, and all of our sites will be up and running with the new HotJobs features by November 30.
At this point, I’ll ask Reid to provide more details on the performance of our three operating divisions in the second quarter.
Remarks from Reid Ashe
Thank you, Marshall. I’ll start with the Publishing Division.
Segment operating profit of $22.6 million compared with $31.7 million in the prior year. The decline is mostly attributable to decreases in Classified and Retail revenue. Publishing expenses in the quarter were down 4.5%.
Classified advertising revenue decreased $9.6 million, or 16.7%. The decline was across all categories and virtually all markets, and was most pronounced in Tampa. A bright spot in the quarter was at the Richmond Times-Dispatch, where Classified revenues were even with last year’s second quarter, the result of an increase in real estate linage.
The Tampa Tribune saw a 36.7% decrease in Classified revenues in the quarter, the Winston-Salem Journal was down 8.9%, and the Community Newspaper Group declined 5.2%.
For the three metros, employment linage in the second quarter declined 22.8% and automotive linage decreased 20.3%. Real estate linage decreased 27.2% overall, but at the Richmond Times-Dispatch it was up 6.4% from last year. This growth was attributable to new housing developments and longer listings, and the Richmond market has not been as affected by the national housing downturn as some markets have.
Retail advertising revenues in the quarter decreased $3.7 million, or 6.5%.
The Tampa Tribune and its associated daily newspapers saw a 9% decline, reflecting shortfalls in virtually every major category.
Retail revenue for the Richmond Times-Dispatch was down 5.4% in the quarter, reflecting lower spending in the department store, financial, furniture and drug store categories. The Winston-Salem Journal saw an 11.2% decline, due to lower spending in the home improvement, financial and department store categories. Our Community newspaper group reported a decrease from last year in Retail revenues of 4.3%.
National advertising revenues in the second quarter decreased $410,000, or 4.1%. The bright spot here was at the Winston Salem-Journal, which generated a 5.1% increase in National revenues for the quarter as the result of increased medical advertising and use of color. The Tampa Tribune and its associated daily newspapers saw a 9.5% decline, due to lower automotive, travel, grocery store, medical and electronics advertising. The Richmond Times-Dispatch reported a 3.5% decrease, due to a special campaign from last year that did not repeat and was partially offset by increased telecommunications advertising.
While Circulation revenues declined $920,000, or 4.5%, the main factor was the change in wholesale rates to carriers at several newspapers, for which there is a corresponding expense reduction. Excluding this impact, Circulation revenues would have decreased 1.4%. As of the end of June, we have cycled through these changes. In the quarter, five Media General newspapers increased their net-paid Daily Circulation, and six did so for Sunday.
Operating expenses in the Publishing Division decreased 4.5% in the second quarter, with lower newsprint expense providing nearly three quarters of the savings.
Average cost of newsprint was down $57 a ton to $545 per ton. Consumption was 13% below last year.
Salaries decreased 1.4% from last year, as the result of holding positions open, lower commissions, and the reengineering plan in Tampa.
Benefits expense was down 5.6% in the quarter, as a result of lower headcount and reduced retirement-related expense.
Let’s now turn to the Broadcast Division.
Segment operating profits of $19.8 million compared with $20.2 million in the prior year, including our four new NBC stations. Excluding the new NBC stations, operating profit declined 22% from last year.
Total Broadcast revenues increased 30.6%, including the new stations. Excluding the new stations, total revenues were down 2.1%.
Gross time sales, including the new NBC stations, increased 33.4%. Same-station gross time sales decreased 3.4%.
Local time sales increased $15.8 million, or 34%, including the new stations. Same-station Local time sales decreased 1.9%. The decline mostly reflected lower spending by automotive advertisers across the station group and lower sales in the quarter at our Tampa station, WFLA.
National time sales increased $12 million, or nearly 50%, including the new stations. Same-station National time sales increased 6%, reflecting higher spending in the telecommunications, services and entertainment categories.
Political revenues of $1.3 million compared with $4.1 million in the prior year. The 2007 revenues were mostly derived from gubernatorial campaigns in Mississippi, Kentucky and Louisiana, and issue spending.
We’re pleased that, year-to-date, our Broadcast Division continues to outperform the industry in Local and National time sales.
Now let’s look at Broadcast operating expenses, on a same-station basis. Excluding higher Cost of Goods Sold from increased sales by our production equipment subsidiary, broadcast expense in the quarter increased 4%. Higher depreciation expense reflected the full-year impact of the conversion to full-power digital TV. Excluding depreciation and cost of goods sold, Broadcast expenses in the quarter increased only 2.8%.
Salary expense was 4% higher, due largely to merit increases and sales commissions, while benefits expense increased only 1.2%, aided in part by reduced retirement-related expense.
Now let’s turn to the Interactive Media Division, which reported its first quarterly profit from operations.
Segment profit of $346 thousand compared to last year’s loss of $798 thousand. The improved performance mainly resulted from an excellent quarter for our Blockdot advergaming business, and a recovery on an investment of $188 thousand, which was originally written off in 2002.
Interactive Media revenues increased 44.5%, including Blockdot and the Web sites for our new NBC stations. Excluding the new station Web sites, interactive revenues increased 38%.
Page views and visitor sessions from our newspaper and television Web sites rose 29% and 36%, respectively, including the new NBC station Web sites.
All advertising revenue categories exceeded the prior year except Classifieds. The greatest increase came from National advertising, which exceeded the prior year by 157%. Local advertising revenue increased 66%. Classified revenue decreased from the prior year by 7.2%.
The largest source of online revenue, however, continues to come from Classified advertising. The single most significant source of the Classified revenue came from liner upsells from our newspapers.
In April, we launched a new regional portal called inRich.com, which features content from the Richmond Times-Dispatch, our Richmond weekly newspapers and specialty publications, and relevant outside sources. It is modeled in part on TBO.com, our most successful Web site to date. Its goal is to become the first place people look for local information about Richmond.
And, now, I will now turn our presentation over to John.
Remarks from John Schauss
Thank you, Reid.
Before I review below-the-line items for the quarter, let me say that in addition to Tampa’s performance improvement plan, we have implemented a number of other actions to reduce expenses during this challenging business climate.
For example, we are holding open most budgeted but unfilled positions, except for sales. We have also reduced discretionary spending wherever possible. And, we’ve asked all of our properties to intensify their focus on new revenue development and new product introductions.
The Publishing Division continues to pursue synergies in call centers, clustered printing, and product and distribution processes. The Broadcast Division is implementing a plan to centralize its graphics operations in Richmond.
Now, let me discuss the below-the-line items for the second quarter.
The loss from our interest in SP Newsprint was $2.4 million, compared to last year’s income of $4.6 million. The decrease was due to lower newsprint selling prices, decreased sales volume, and higher raw materials expense. SP Newsprint announced in May that it is exploring strategic alternatives to maximize value. SP will make an appropriate public disclosure if and when a definitive transaction is approved.
Higher interest expense mostly reflected increased debt from borrowings related to our NBC-station acquisition and the share repurchase program partially off-set by approximately $7 million in debt reduction resulting from the quarter’s free cash flow.
Increased acquisition intangible amortization also was principally related to the acquisition.
Corporate expense decreased 6.6% compared with the prior-year quarter, as the result of slightly lower retirement-related expenses and cost containment efforts.
The effective tax rate was 36.2% in 2007, compared with 37.1% in the 2006 second quarter.
Capital expenditures in the quarter totaled $18.3 million. Of that amount, Publishing Division capital expenditures of $9.8 million were invested mainly in the new printing facility at our Lynchburg, Virginia newspaper, which is scheduled for completion in 2008. We have also completed press-width reduction projects in Winston-Salem and Richmond, and Tampa will be completed in October.
The Broadcast Division had capital expenditures of $7.9 million. Spending was mainly for a new facility in Myrtle Beach, as well as the development of locally-originated high-definition newscasts in selected markets.
Interactive Media Division expenditures were $400 thousand, primarily for infrastructure and software. Corporate capital spending was nominal, principally for information technology.
EBITDA from continuing operations in the second quarter was $43.7 million, compared with $54.3 million in 2006. Lower income from continuing operations for the quarter was the main reason.
After-tax cash flow was $25.6 million, compared with $35.5 million in the year-ago period.
Free cash flow was $7.3 million, compared with $9.8 million last year.
Total debt at the end of the second quarter was $972 million. Today, we stand at about $959.
That concludes my report, and I will now turn the presentation back to Marshall.
Remarks from Marshall Morton
With respect to our outlook, as we’ve indicated, visibility is limited, particularly in Tampa. As a result, we can offer only the most general guidance at this time for the third quarter. In our newspaper business, we expect continued downward pressure from lower Classified advertising. Any revenue decline in the third quarter will be partially offset by lower newsprint expense. The Broadcast Division does not expect to be able to recover entirely the loss of last year’s third-quarter Political revenues of $11.5 million. We anticipate that our share of SP Newsprint’s results in the third quarter will be a loss of approximately $5 million, due in large part to the very weak price of newsprint. On the other hand, the Interactive Media Division is expected to continue its strong growth trends.
That concludes our formal remarks. Now, we will be pleased to take your questions.
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