Third-Quarter Conference Call Remarks
October 16, 2003 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 third-quarter earnings, the other September 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 third-quarter performance.
Today we reported income of 50 cents per share from operations for the third quarter, compared to 41 cents per share last year. The increase is mostly attributable to reduced losses from our one-third ownership of SP Newsprint and lower interest expense. We were also quite pleased with the performance of all three divisions.
The Publishing Division had a year-over-year increase in revenues for the fourth consecutive quarter and posted its largest increase of this year, at nearly 4%.
Broadcast Division revenues were only $568,000 less than last year, despite the fact that political billings were $6.1 million lower than last year. This is an outstanding accomplishment that was achieved by focusing on aggressive local sales initiatives and improving our national sales process. These efforts resulted in higher local and national time sales for the quarter.
Both the Publishing and Broadcast divisions implemented expense management programs earlier this year that included a hiring freeze and restrained discretionary spending. These programs have continued, and, as a result, both divisions reduced expenses compared to their original budgets by 4 percent for the third quarter.
Our results for the month of September support our belief that advertising trends are improving.
In our Publishing business, after a slight slowdown in August, operating revenue returned to the growth experienced in June and July. Newspaper advertising was 5.1% above last September. We have been trending at the high end of our peer group on newspaper advertising growth for the past few months, and we are pleased with that performance.
The Broadcast Division delivered a solid performance in September. National time sales were up 13.5% and local time sales were up 7%. Political billings of $1.2 million exceeded our expectations. They were driven by a stronger-than-anticipated gubernatorial race in Louisiana, early spending on the South Carolina 2004 presidential primaries, and issue advertising for a tax referendum in Alabama.
The month of September was an interesting one here in Richmond in two completely different respects. First, two new upscale malls opened. The first mall to open was Short Pump Town Center, on September 4. The official opening of the second mall, Stony Point Fashion Park, was scheduled for September 18, the same day that Hurricane Isabel moved into Richmond.
The opening of the two malls is very exciting for the Richmond Times-Dispatch. We enjoyed an increase in employment classifieds as the stores worked to fill 6,000 new positions, and we are running a number of new retail ROP ads, including full-page, 4-color ads from stores like Saks and Nordstrom.
Hurricane Isabel posed challenges on a number of fronts, but the Richmond Times-Dispatch did an outstanding job reporting the news and getting papers delivered to homes despite severe weather conditions. Collaboration by the newsroom and its online partner, timesdispatch.com, were key to our coverage of Isabel. The web site had audio from reporters in the field, and the home page was updated repeatedly. The Times-Dispatch also benefited from its local radio partnerships. Many of our other Virginia papers and the Winston-Salem Journal did an equally outstanding job publishing under duress.
Last year we told you about a company-wide project to produce a series on Hurricanes that examined the weather phenomenon from every possible angle. That work came in handy this year, as we had already archived ready expertise, graphics and contacts for all Media General newspapers, television stations and web sites.
A combined Hurricane Center was a feature of all our web sites, and it was updated throughout the day and night with news, photos and graphics from our newspapers and TV stations. Page views were up 54% compared with our normal visitors, and our weather pages were up over 400%.
All three divisions kept each other updated through conference calls. Story lists, stories and photos were updated continuously and circulated company-wide over our intranet-based NewsBank for all platforms to use. The Broadcast Division pooled helicopters, satellite trucks and personnel from a number of stations to provide live storm coverage, just as it has done in previous hurricanes. They serviced all Media General stations plus the networks and national cable providers.
We are very proud of the work our people did during this regional disaster, and we are pleased with how well our ability to serve our customers demonstrated the effectiveness of our Southeast focus, clustering and convergence.
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 third quarter.
Segment profit of $28.2 million improved 2.6% over last year. Segment results include our 20% interest in The Denver Post. For the third quarter, our share of Denver’s income was $170,000, compared with $128,000 last year.
Publishing’s third-quarter total revenue beat last year by $4.9 million or 3.9%, and advertising revenue was up 4.6%. Most of our markets experienced operating revenue gains over last year. We believe this is indicative of the improving advertising environment.
The national, classified, preprint and other advertising categories all experienced solid gains during the quarter, and the retail category was about even with last year.
The two new malls in Richmond had a positive impact on the overall retail category. However, many retail advertisers in other markets are still holding back. The Richmond Times-Dispatch was 7.9% above last year, with significant increases in the department store and sporting goods store categories. The Tampa Tribune’s retail category was 3% below last year, with soft department store advertising continuing to be the biggest challenge. Preprint revenue increased 7.1% for the quarter.
Classified advertising increased 4.1% for the quarter. Automotive, real estate and other classified advertising helped to partially offset employment declines. The Richmond Times-Dispatch was 6% above last year as the result of robust automotive advertising. Employment advertising benefited from the job ads for the new malls and was only 1% below last year. The Tampa Tribune was 3.6% above last year for the quarter. Employment linage at the Tribune was 15.2% above last year, but at a lower rate due to some successful promotions they are running.
National advertising increased 16.5% for the quarter. Overall, The Tampa Tribune led the increases with strong financial and healthcare advertising. The Richmond Times-Dispatch enjoyed increased telecommunications advertising, while the Winston-Salem Journal benefited from strong national automotive advertising.
Circulation revenue was nearly 1% higher year to date. For the quarter, The Tampa Tribune has benefited from its growth plan to increase circulation. The Tribune’s circulation was above last year by 2.4% for the quarter. Daily and Sunday circulation increased by 3.4% and 1.4%, respectively. Year-to-date they are above last year by 3.4%, as a result of strong increases realized in the first quarter of this year.
The Publishing Division’s expenses were down 4% from budget, and up 4.2%, or $4.2 million, from last year.
Salary expense increased 2.4% and is attributable to annual merit increases and higher commissions, partially offset by lower FTEs. Employee benefits expense increased 12.3% from increased healthcare and retirement costs.
Newsprint expense for the quarter increased 12.4% due to increased newsprint prices and consumption. The price per ton increased $43 from the year-ago quarter, and higher consumption was due to increased advertising linage and net paid circulation increases.
Before moving on to the Broadcast Division’s performance for the quarter, I’d like to comment on the new telemarketing laws that became effective October 1, as they relate to our Publishing Division.
Certainly the Do Not Call lists will require us to make changes in our telesales model. At the same time, change provides an opportunity for innovation, and we have pursued alternatives to telemarketing for some time because of its growing unpopularity.
First, we have developed a centralized database to house our federal, state and internal DNC lists, and we are training our people how to operate under the new rules. We are also reducing the number of outside telemarketing contractors that we use to better control the process.
We are refining our circulation telemarketing processes and procedures company-wide. This includes centralization of call centers in order to enhance the effectiveness of telemarketing and to tighten our control over it. We are also placing much greater focus on current subscribers, as it is far less expensive to retain and upgrade them than to attract new ones.
While we will continue to use telemarketing where possible, we will significantly expand other means of circulation marketing. Examples include kiosks, door-to-door, targeted direct mail, web sales, sampling and single copy promotions.
Now, let’s turn to the Broadcast Division. Segment profit for the quarter decreased about 8% from last year. The major factors were lower political billings, increased employee benefits expense, and higher sales costs from investments made to drive the revenue increases that were realized.
Total Broadcast revenues of $71 million were less than 1% below last year, despite a substantial drop in political revenues. Gains in local and national billings of $4 million and $1.2 million, respectively, made a substantial contribution to offsetting the $6.1 million decline in political billings. Categories showing the largest increases were automotive, financial, furniture, medical and utilities.
Broadcast Division expenses for the third quarter were 1.5% above last year and 4% below budget. Salary costs declined because of fewer FTEs, and benefit costs increased.
Now let’s turn to the Interactive Media Division. The division posted an operating loss of $1.7 million, which was a 41% improvement over last year’s loss of $2.9 million. All of the increase is due to the absence of last year’s investment write-off.
Interactive revenue for the third quarter exceeded the prior year by 59%. The increase is due mainly to classified upsell arrangements and to the introduction of new products and services.
Let me now turn our presentation over to Marshall for additional details on our financial performance.
Remarks from Marshall Morton
Thank you, Reid.
Income for the third-quarter of 2003, before the cumulative effect of an accounting change, was $11.7 million, or 50 cents per share, compared with net income for last year’s third quarter of $9.5 million, or 41 cents per share. Total revenues for the quarter of $205 million increased 2.6% over last year.
As we told you last time, we adopted the new accounting interpretation, FIN 46, for dealing with variable interest entities beginning with the third quarter. This resulted in three things, and none affected cash.
First, since we are the primary beneficiary of two VIE’s, we have consolidated them in our financials. This increased our assets (essentially three office buildings and two parking garages) by approximately $86 million and at the same time our liabilities (principally debt) increased by $95 million. We have provided a separate line on the Balance Sheet to make it easier for you to identify this debt. Finally, the $8 million difference was the cumulative effect accounting charge, net of taxes, and largely represents the depreciation of those facilities since we began using them in the late 1990s.
Our costs this quarter rose by approximately $800 thousand pretax as a result of this adoption. As in the case with the catch-up amount, this largely represents depreciation. In addition, certain amounts that had previously been recorded as rent expense have now been reflected as interest expense.
Our debt covenant compliance is unaffected by this change. Irrespective of this accounting change, we have 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.
Reid has thoroughly discussed divisional results for the quarter, so let me move to unallocated amounts.
Interest expense declined by $3.2 million, or 28%, from last year due to lower interest rates.
Results for our share of SP Newsprint improved to a loss of $1.2 million this year from a loss of $4.6 million last year. This improvement primarily reflects higher newsprint prices. To put the year in perspective, the March 1 price increase of $50 per ton was partially implemented, and on average about $35 per ton was realized. Most producers, including SP Newsprint, announced another $50 per ton increase August 1. SP is billing the full increase, but it remains to be seen how much of it will be implemented. Their thinking at this time is that it will not be completely realized. SP believes there could be another price announcement just before the end of the fourth quarter. Media General has adjusted its full-year expectations for our share of SP Newsprint’s earnings. We are no longer expecting near breakeven results as we had most recently indicated at the Mid-Year Media Review. While the loss will be significantly less than last year’s, it could be in the range of $4 to $5 million.
Corporate expense was more than $1 million higher than last year, principally the result of higher salaries and benefits.
Our “Other” line changed by $3.7 million primarily due to the absence of last year’s sale of our former WFLA studio in Tampa.
The effective tax rate for the quarter was 36.5%, compared with 42% in last year’s third quarter.
Total debt at the end of the third quarter was $677 million and represented 39% of total capital. We stand at about $660 million today. The increase since the beginning of the year until today reflects the addition of the VIE liabilities to our balance sheet, less $78 million for debt curtailment.
Capital expenditures in the third quarter were $6.9 million. Of that amount, the Broadcast Division accounted for $4.8 million, for various equipment upgrades at several stations. The Publishing Division spent $1.7 million. Expenditures for Interactive Media and Corporate were nominal.
EBITDA for the third quarter was $43 million, compared with $44 million for last year’s third quarter.
After-tax cash flow was $28 million in the third quarter, compared with $26 million in the same 2002 period.
Free cash flow was $21 million this year and $16 million last year.
On Tuesday of this week, we announced the sale of Media General Financial Services. MGFS had become less central to our core strategy, and we believe the business has better growth opportunities by being part of a company that is committed to the financial information services business. You will note on our Statement of Operations that we have shown MGFS as a discontinued operation. For the quarter, the EPS impact was a penny per share and year-to-date it was 4 cents. We will record a gain on the sale in the fourth quarter, but that number has not yet been finalized.
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, starting with our view of the status of the FCC cross-ownership rules.
There have been a lot of headlines on cross-ownership, but the essential point now is this: the FCC's new ownership rules are before the federal appellate court in Philadelphia, and that's exactly what we want. As you may have read in August, Media General appealed the FCC's decision because it retained a cross-ownership ban in smaller markets. We don't think any vestige of the rule can be justified, and so we've asked the court to eliminate the cross-ownership ban for every community across the country. There are, of course, all sorts of issues before the court, and it could take some time for a decision. We hope for a ruling by next summer.
Things are now relatively quiet on the political front in Washington. We will continue to watch developments there, but in the end, we believe that the consideration of such things as cross-ownership are best handled by the expert agency and the regular appellate process. So, if we can get the Philadelphia court to focus properly on our issue, we expect to improve our position. And, for all of the reasons we've outlined for you in the past, we think it’s highly unlikely that the court will roll back the FCC's decision and reinstate the old ban.
Next, let me discuss our expectations for the fourth quarter.
For the Publishing Division, we are projecting revenue growth of about 3 percent, from continued year-over-year improvement in all advertising categories. Employment advertising comparisons are improving every month and we will continue to benefit from the new malls in Richmond for the remainder of the year.
For the Broadcast Division, time sales forecasts for the fourth quarter reflect cautious optimism. In some markets, there are signs that the economy is strengthening and advertisers may be overcoming profitability concerns. While the Broadcast Division expects to replace a substantial portion of last year’s $18 million in political billings for the fourth quarter, its total revenues for the quarter are expected to be about 10 percent below last year.
For the full year 2003, analyst estimates for Media General currently range from $2.27 to $2.44, and the consensus estimate is $2.34. We currently expect earnings per share from continuing operations (which will no longer include Media General Financial Services) to be above the consensus estimate.
Before opening our call to your questions, I’d like to take the opportunity to thank all of the Media General Financial Services employees who have worked so hard to build and grow that business. All of us wish them the very best for success as they pursue their mission under the new ownership of CenterPoint Data.
That concludes our formal remarks, and, now, we will be pleased to take your questions.
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