Third-Quarter Conference Call Remarks
October 15, 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 Third-Quarter Conference Call and Webcast.
We issued two news releases today – one announced our third-quarter earnings, the other our September revenues. Both releases have been posted on our Web site.
Our speakers today will be 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 also 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.
Net income in the third quarter of 2004 was $15.7 million, or 66 cents per diluted share, a 37% increase compared with last year’s third-quarter income from continuing operations and before a one-time non-cash accounting change.
The Broadcast Division was a major contributor to our earnings growth in the quarter. Its profit increased 32% percent over last year. The major contributors to the increase were robust Political spending and higher Local and National transactional sales, including $5 million in revenue from the Summer Olympics.
Publishing Division profit increased 5.2% compared with last year. We reported revenue growth in all newspaper advertising categories except National. Classified revenue saw the largest year-over-year increase, up more than 7%, led by employment advertising gains. Preprint revenue exceeded last year by nearly 6%.
The small operating loss reported by our Interactive Media Division was a 12% improvement over last year. That division’s revenues increased 35% for the quarter, due mainly to classified upsell arrangements and Local advertising from an increased array of product offerings.
Equity earnings from our one-third ownership of SP Newsprint improved to a profit of $316,000 this year from a loss of $1.2 million last year, due mainly to higher newsprint prices. Lower interest expense also had a favorable impact on our third-quarter results.
As you know, the Southeast was hit with an unusual number of hurricanes and tropical storms during the months of August and September. Our newspapers, television stations and online enterprises in Florida were hit particularly hard, and some of our properties in Alabama were affected, as well. Fortunately, there were no serious injuries to any of our employees and none of our facilities suffered serious damage.
On the other hand, trying to answer a question that is surely on your minds, we estimate that segment operating income for the third quarter would have been higher by $2-2.5 million, had it not been for lost revenues and higher expenses related to the storms.
While covering the storms presented tremendous challenges, our people responded with an unprecedented show of unity and focus. Our ability to provide news and information to our readers, viewers and users showcased the value of our strategies for Southeast Focus, Clustering and Convergence. Our pooled resources gave us advantages no competitor could match.
Support crews, including meteorologists, reporters, photographers, editors and producers; and equipment, such as satellite trucks; were dispatched from throughout Media General to the markets where they were most needed. Satellite uplinks were arranged so all Media General television stations had access to our live coverage, and some of our coverage was used by the networks. TV ratings were up, and several of our Web sites set visitor records. In short, we are very proud of the outstanding performance of our people during a most difficult time.
Let me now ask Reid to discuss the details of our divisional operating performance for the third quarter of 2004.
Remarks from Reid Ashe
Thank you, Stewart. I will start with Broadcast segment operating profit, which increased nearly $5 million, or 32%, compared with last year’s third quarter. Segment operating cash flow rose 18.5%.
Profit growth for the quarter is largely the result of increased time sales, up 11.6%, from political spending and higher Local and National revenues. While we are pleased with the overall increase in time sales, our growth was somewhat below our earlier expectations of a 13-14% increase for the quarter. Some of that was related to the hurricanes. In addition, political spending was not as strong as we expected in some markets because budgets were redirected to the key battleground states. The overall economy continues to be weak, which forced some advertisers to reconsider their spending levels.
Nevertheless, we still achieved a strong quarter. In addition to political spending, we saw increases in the services, automotive, furniture and telecommunications categories, while the drug store, fast food, department store and entertainment categories declined.
Media General television markets showing the strongest growth for the quarter were Tampa, Spartanburg, Florence, Charleston, Savannah, Panama City and Columbus, Ga.
Political revenues for the quarter were $8.5 million, compared with $2.4 million last year. The increase reflected spending for U.S. Senate campaigns in South Carolina, Florida, North Carolina and Georgia; presidential campaign spending in Florida, Alabama and Iowa; and issue spending in Florida.
Local time sales, excluding political, were up 3.3%, as our stations continued to focus on new business development through implementation of our New Revenue Solution program and on improving spot inventory management and pricing. Local categories with the strongest gains for the quarter were services, furniture, home improvement and entertainment.
National time sales, excluding political, increased 2.6%. Categories with the largest increases were automotive, services, financial, and fast food.
Our Local and National time sales included a total of $5 million in advertising revenues from the Summer Olympics, which we carried on our five NBC stations.
Broadcast Division total expenses for the third quarter rose 2.9%, primarily due to higher payroll, retirement plan and programming costs. Higher expenses were partially offset by lower cost of goods sold for our equipment subsidiary and lower depreciation.
Now, let’s turn to the Publishing Division.
Publishing segment profit was up $1.5 million, or 5.2%. Segment operating cash flow increased 2.4%.
Total publishing revenues for the third quarter were 4.1% higher than last year, and newspaper advertising revenue grew 4.6%. Including online revenues from our newspaper web sites, total publishing revenues were up 4.6%, and advertising revenues increased 5.1%.
Publishing revenue growth was at the low end of our earlier expectations of growth of 4-5%. Part of that is related to the hurricanes and part is related to lower than anticipated National advertising sales and continued retail softness.
The Tampa Tribune’s revenues were up 5.6% for the quarter and its associated newspapers in Florida were up 5.3%. Some of our Virginia newspapers were up strongly, as well, including our Northern Virginia group, up 11%, and our Charlottesville group, up 10%. The Richmond Times-Dispatch revenues increased 2.5% for the quarter, despite going up against grand opening advertising for two new malls last year.
Publishing’s overall revenue growth was driven primarily by Classified advertising, up 7.1%, led by increased help wanted advertising. Employment linage at our three metro newspapers increased 10% and automotive linage increased 2.6% for the quarter.
Classified advertising revenues in our Florida Publishing Group, which includes The Tampa Tribune and its associated newspapers, increased 1.9% for the quarter. Employment gains slowed, particularly in August and September, when hurricanes impacted the market. Automotive advertising exceeded last year, while real estate advertising was down. At the Richmond Times-Dispatch, classified revenue increased by 11%, with gains in employment, automotive and real estate advertising.
Employment linage at our three metropolitan newspapers for the quarter increased 18.1% at the Richmond Times-Dispatch, 5.9% at the Winston-Salem Journal, and 2.3% at The Tampa Tribune.
We also saw healthy gains in the Other advertising revenue category, up 21%, which reflected increased use of color by many customers and advertising in the comics pages.
Retail ROP revenue for the quarter was slightly above last year. The Florida Publishing Group and the Northern Virginia group had the strongest retail results for the quarter. In Florida, increases in retail revenue came from strong financial institution advertising as well as entertainment, utilities and medical advertising. Retail revenue for the Richmond Times-Dispatch was below last year with the entire shortfall occurring in September as new mall advertisers spent significant amounts in 2003 for grand opening advertising. The Winston-Salem Journal and most of our remaining community newspaper markets showed declines in Retail ROP revenues for the quarter.
National ROP advertising declined 4.4% for the quarter. In Florida, the primary categories showing decreases were cruise lines and travel, offset by some improvement in national automotive and entertainment, and telecommunications advertising was flat. At the Richmond Times-Dispatch and the Winston-Salem Journal, the declines were primarily the result of weakness in the telecommunications category.
Preprint revenues rose 5.7% for the quarter, and most of our newspapers reported increases. If we allocate preprint revenues to the respective Retail and National categories, as some of our peer companies report, the picture for both of those categories improves. For example, combined Retail ROP and retail preprint revenues were 1.1% higher than last year’s third quarter, and combined National ROP and national preprints were 1.8% higher than last year.
Circulation revenue increased by 1.6% for the quarter. Many of our newspapers continued to see growth in circulation revenue, mostly driven by rate increases in the last 12 to 18 months. The Florida Publishing Group continued to show volume gains as well, although they have slowed somewhat compared to the outstanding growth realized over the past few years.
Let me comment on how Media General has responded internally to reports of circulation inflation issues at some newspapers around the country. We have launched a thorough administrative and operations review of the circulation departments at all of our newspapers. So far, we have visited all three of our metro newspapers and have found no major areas of concern, certainly nothing that calls our reported numbers into question. We expect to complete the review of our daily newspapers, 25 in all, by the middle of next year. Also, starting with the September Publisher’s Statement, we now require the Publisher, controller and circulation director at each of our newspapers to certify the numbers they report to the Audit Bureau of Circulation in addition to the certification already made by the Publisher to the ABC.
Publishing Division total expenses for the quarter were up 3.9%. The most significant increases were newsprint prices and other departmental expenses.
Salary expense for the quarter increased only 2%, mostly because total FTEs were below last year.
Other departmental expenses increased 8.1%. The Florida Publishing group saw a 12% increase, reflecting higher expenses to support increased circulation volumes, as well as higher repair and maintenance costs.
Newsprint expense for the quarter increased 9% and reflected higher newsprint prices and consumption. The average price per ton increased $37 for the quarter.
Let’s turn now to Interactive Media Division, which reported a 12% improvement compared to last year’s operating results. Revenues of $3.5 million increased 35% over last year, mainly from classified upsells and Local 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.
Net income for the third quarter of 2004 was $15.7 million, or 66 cents per diluted share, a 37% increase compared with last year’s third-quarter income from continuing operations and before an accounting change.
As a reminder, in last year’s third quarter we recorded a non-cash charge of $8.1 million, or 34 cents per diluted share, to recognize the cumulative effect of an accounting change related to variable interest entities. Including the accounting change and the results of a small operation that has been sold, last year’s third-quarter net income was $3.7 million, or 16 cents per diluted share.
EBITDA for the third quarter of 2004 was $48.3 million, compared with $42.8 million for the prior-year period.
After-tax cash flow was $31.4 million, compared with $27.8 million in last year’s third quarter.
Free cash flow was $21.5 million in the third quarter, compared with $19.5 million in the prior-year period.
Now, let’s look at unallocated amounts for the quarter, as shown in the Business Segments table in our press release.
Interest expense decreased $766 thousand compared to last year, due lower debt levels and a decreased average interest rate.
Equity income from our share of SP Newsprint improved from a loss of $1.2 million last year to income of $316,000 this year, due mainly to higher newsprint prices.
Newsprint producers, including SP Newsprint, announced a $50-per-ton increase September 1. Our current expectation is that $25-30 will be effected by year-end. If that happens, we would expect to see continued earnings progress from SP Newsprint in the fourth quarter.
Acquisition intangibles amortization was $1.1 million higher than last year due to network affiliation amortization.
Corporate expense was slightly lower than last year.
The effective tax rate for the quarter was 37%, compared with 36.5% in the prior year.
We have begun a preliminary analysis of the American Jobs Creation Act that was recently passed by both the House and Senate and awaits the President's signature. The Act contains a reduction in the corporate tax rate that will be phased in over the next five years. We estimate the impact to be a decrease in our expected income tax expense for 2005 in the range of $865 thousand to $1.2 million, which would reduce our effective tax rate by one-half-to-one percentage point and increase earnings per share by 3.5-5.25-cents.
Total debt at the end of the third quarter was $581 million and represented 34% of total capital. Our debt outstanding at the end of the quarter included $286 million in bank debt, $200 million in public debt, and $95 million in consolidated variable interest entity debt. Debt has decreased by $47 million in the first nine months of this year and currently stands at about $575 million.
Capital expendituresfor the third quarter were $9.9 million, compared with $8.3 million last year. The Publishing Division spent $4.8 million, including expenditures for new press control equipment at the Richmond Times-Dispatch, editorial software, new production equipment and replacement fleet vehicles. The Broadcast Division spent $3.7 million, mostly for the new Centralized Master Control operations for our CBS stations, as well as editing and news production equipment. Expenditures by the Interactive Media Division were nominal, and Corporate spending amounted to $1.3 million, mostly for enterprise software license renewals.
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 on the status of the FCC’s cross-ownership rules, as well as our outlook for the fourth quarter.
As we’ve said before, we do not think the Third Circuit’s decision this past summer on cross-ownership serves the American public, and we do not believe it provides practical guidance for our industry. We expect to file a petition on December 2 to try to get these issues before the Supreme Court. We think this will be an historic opportunity for the Court, and we’re hopeful it will take the case and provide some necessary direction for the lower courts and the FCC.
In the meantime, we are proceeding with the license renewals for our stations in cross-owned markets. We’ve filed for renewals for WBTW in Florence, South Carolina, and for WMBB in Panama City, Florida. We are requesting waivers of the FCC’s 1975 rule, and we are submitting what we believe are solid examples of the compelling public interest benefits of convergence in each community.
We will follow a similar path for WRBL in Columbus, Georgia, and for WJHL in Johnson City, Tennessee when it’s time to file for their renewals.
We are optimistic that waivers will be granted in all of these markets.
The FCC has renewed our license for WSLS in Roanoke, which we operate as a convergence market with Media General newspapers in Lynchburg and Danville, but it technically does not qualify as a cross-owned market under the FCC’s rules. The new expiration date for WSLS’ license is 2012. Tampa, as you know, is grandfathered, so we do not expect any difficulties there.
Now, let me turn to our expectations for the fourth quarter.
Visibility is somewhat limited at this time. The economy is soft and consumers are holding back spending, which is creating uncertainty about where ad spending will be. There is also uncertainty about the vitality of political spending and the degree of implementation of the September 1 newsprint price increase.
Currently, we expect Publishing Division revenues to increase approximately 3% compared to last year’s fourth quarter. Classified revenues are expected to maintain their growth trend with solid gains in employment advertising. Retail revenues are expected to be stronger as a result of holiday season spending.
We expect Broadcast Division revenues and time sales to increase approximately 15% over last year, driven mostly by Political campaign spending and holiday season advertising.
Media General expects to provide more definitive guidance on earnings expectations for the fourth quarter as the period unfolds.
That concludes our formal remarks, and, now, we will be pleased to take your questions.
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