Third-Quarter Conference Call Remarks
October 18, 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 Third-Quarter 2007 Earnings Conference Call and Webcast.
Before market today, we announced third-quarter earnings and revenues for the month of September. 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 everyone.
Our third-quarter results reflected the continued economic downturn in Tampa, the relative absence of last year’s record Political revenues, a loss at SP Newsprint, and an investment write-down.
On the other hand, we have made meaningful progress in aggressively managing expenses. Lower revenues in the third quarter were partially offset by a 4.6% decrease in our total operating costs.
Expenses for healthcare, retirement-related plans and performance-incentive plans were down significantly from last year. Publishing Division expenses decreased 7.5%, excluding approximately $1 million for severance costs at several publishing operations. Staff reductions resulted from re-engineering various processes, outsourcing certain functions, and improving efficiencies from combining or centralizing resources. Our Tampa operations implemented additional streamlining measures in the third quarter, which enhanced their performance improvement initiatives announced earlier this year. The Publishing Division also implemented cost reduction programs at several other newspapers and at our Washington, D.C. bureau.
Our Interactive Media Division continued its strong growth in the quarter, and produced a 32% increase in revenues. This growth was driven by higher Local and National advertising on our web sites as well as very strong growth in our advergaming business.
Income in the quarter was $2.5 million, or 11 cents per share, compared with $7.7 million, or 33 cents per share, from continuing operations in the 2006 third quarter.
Publishing Division profits were $22 million, a decline of 7.4% from last year. Successful cost containment measures helped mitigate a 6.7% decline in revenues, which primarily came from lower Classified advertising and was most pronounced in the Tampa market. Retail advertising revenues decreased nominally in the quarter, and National revenues declined 8%.
Broadcast Division profits for the quarter were $16 million versus $22 million last year, which included a record $11.5 million of Political advertising revenues compared to only $2.5 million this year. Total Broadcast revenues of $91 million were down 3.5% from last year. Local and National advertising revenues increased 3.2% and 10.3%, respectively, and partially offset the Political revenues decline and lower network compensation. Time sales growth was driven by our continued sales development and new business initiatives.
Broadcast Division expenses rose 3.6% from last year, mainly because of higher depreciation expense on newer digital equipment and increased spending on sales initiatives. Compensation costs were relatively flat, as merit increases and sales commissions were, for the most part, offset by open positions and lower healthcare costs.
The Interactive Media Division posted a loss for the quarter of $1.1 million, excluding the investment write-down. This year-over-year decline mainly reflected lower Classified advertising, especially in the Tampa market, which impacted the operating results of TBO.com, the division’s largest web site. Our advergaming business generated a profit in the quarter, compared to a loss last year, on revenues that were nearly triple the prior-year level. Local and National online revenues were well ahead of last year.
Before asking Reid to comment further on our three divisions, I want to address a question that we know is on your mind and comment on why splitting Media General’s print and broadcasting businesses would not make sense for our customers or our shareholders.
We have been a successful operator in the local media business for nearly 160 years. Today, our focus is on being the local multimedia leader in strong growth markets, with a principal geographic focus in the Southeast.
We provide excellent news, information and entertainment over a variety of platforms in all the markets we serve. We’re adapting and evolving in a digital world, leveraging the strength of our traditional platforms for the benefit of our online operations as well as continually enhancing our newspapers and television broadcasts to serve changing customer needs. We also provide a multitude of targeted products, in print, on the air and online in all of our markets.
We strongly believe in the long-term viability of local media franchises and that our portfolio of high-quality assets positions us to build long-term value for shareholders.
Strategically, our integrated presence in print, broadcast and on the Web allows us to produce better content, deliver a higher-quality product, draw more audience, and improve our market position better than we otherwise could. It enhances our value to advertisers by enabling them to reach their target customers, whenever and however they like, better than they otherwise could.
Operationally, our highly integrated news operations enable us to direct significant resources to breaking stories as they happen, and to leverage those resources to provide our customers and communities with vital information 24/7, in a variety of ways.
The portal strategy that we are implementing on our web sites gains tremendous strength by combining content from newspapers and television. Those collaborations would suffer were our ownership structure to change.
Our print journalism benefits from the sense of timeliness, immediacy and visual impact that comes with being part of an organization that also has television news operations.
Our broadcast journalism benefits from the detail, analysis, and depth of understanding that comes with being part of an organization that also has print news operations.
Each benefits from the other’s special content franchises, which typically include weather, medical and consumer news on television, and sports, business and entertainment news in newspapers.
Financially, we believe that a separation of our print and television operations would not be value-enhancing for a number of reasons.
Creating two separate, smaller companies, each with its own capital structure, would likely result in lower credit ratings for each, and a higher cost of capital, than Media General currently enjoys.
Creating two separate, smaller companies would likely make each of those companies less attractive to institutional investors and to research analysts than Media General is today.
Separation of Media General’s print and broadcast businesses would also have serious implications if the current FCC review process results in a change in the current ban on cross ownership, while our current corporate structure and strategy position us particularly well if that review results in a lifting of restrictions on cross ownership, which we believe will happen.
And so we believe that a separation of Media General into a newspaper company and a television company does not make sense for Media General strategically, operationally or financially.
I’d now like to turn our presentation over to Reid.
Remarks from Reid Ashe
Thank you, Marshall. I’ll start with the Publishing Division.
Our newspapers continued to face a difficult advertising environment in the third quarter. Most of our newspapers saw declines, with the largest shortfall in Tampa. For the division overall, the largest decline was in Classified, as employment, automotive and real estate advertising fell in virtually all markets. Real estate remained stable in some Virginia markets, but the falloff in Florida overwhelmed more favorable results elsewhere.
The Tampa Tribune and its associated newspapers accounted for more than 90% of the Publishing Division’s revenue shortfall in the quarter, as our properties there struggled against Florida’s economic downturn. Tampa’s revenues decreased 17% from last year’s third quarter. The bulk of the drop was in Classified advertising, down 34% from last year. All three major Classified categories declined. Retail advertising revenues in Tampa were down 1.5%, as new products partially offset declines in traditional business. National revenues in Tampa were down 22% in the quarter.
To align expenses with the current revenue environment, our Tampa team has streamlined a variety of operations and eliminated more than 150 jobs. We’ll convert to a 48” web Nov. 1. Tampa’s savings will amount to $8.5 million in 2008, with a significant portion of the savings recognized this year.
Our Tampa properties have also moved aggressively to develop new lines of business and to exploit pockets of opportunity in Classified.
The Richmond Times-Dispatch and its associated newspapers overcame the third-quarter downturn and increased revenue 1.2% year-over-year. Classified and Retail advertising revenues held even with last year, while National revenues grew 17%.
In Winston-Salem, revenues declined 5.6% in the quarter. Classified revenues were down 10% and Retail revenues declined 3%, while National revenues increased 2%.
Our Community newspaper group saw a revenue decline of 1.5% for the quarter, driven mostly by lower Classified advertising. Retail advertising increased about a percent, with the strongest results in our Alabama, North Carolina and Central Virginia newspapers.
In the Broadcast Division, profits declined 26% from last year, reflecting the absence of last year’s record $11.5 million of Political revenues.
Political revenues in this year’s third quarter were $2.5 million, thanks to Presidential candidates and to image campaigns in Florida and South Carolina, as well as gubernatorial and lieutenant governor races in Louisiana, Mississippi and Kentucky, and issue advertising in Florida, Louisiana, Kentucky, Ohio, South Carolina and Georgia.
National time sales increased more than 10% in the quarter, reflecting higher spending by telecommunications, financial, corporate, furniture and department store advertisers, while automotive and services spending declined.
Local time sales were up more than 3%, driven by higher sales at a majority of our stations, which more than offset declines at other stations, notably WFLA in Tampa. Local advertising categories that grew included home improvement, health care, and media, while spending by furniture, automotive and telecommunications advertisers declined.
Our Broadcast Division continues to outpace the industry’s results for time sales growth.
We have begun broadcasting local news in high definition at our Tampa, Birmingham and Spartanburg stations and plan to launch our Roanoke and Columbus stations late this year. In August, we launched a new locally-produced variety show in Spartanburg that’s sold out for the rest of the year. Soon we’ll begin creating news graphics for all our stations at a new production center in Richmond.
In the Interactive Media Division, revenues grew 32% in the quarter. All significant revenue categories exceeded last year except Classified advertising, which decreased 3.5%. This flows through from our newspapers because online Classifieds are typically sold in combination with print. Classified remains our largest source of online revenue, and we’re working aggressively to lessen that dependence.
Local online revenues (other than classified) increased 43%. We are benefiting from an emphasis on online-only sales, as well as greater market awareness and enthusiasm for online advertising. National and regional revenues were up 49%, thanks to expanding relationships with a network of national agencies.
Advergaming revenues in the quarter nearly tripled from last year. Blockdot, our affiliate that produces these games, is turning out to be a star performer. We look for continued growth in this business, thanks to Blockdot’s expanding relationships with major branded-products advertisers.
Our Yahoo! partnership is off to a great start. In the third quarter, our partnership with Yahoo!HotJobs mitigated the decline in online employment classifieds. Year-to-date we’ve sold $2.2 million in advertising on our HotJobs-co-branded websites. Job searches on our sites are up 100% and more.
We’re moving at full speed to exploit our many opportunities under this relationship. Let me update you on the major areas of progress:
- HotJobs: We’re now in the second phase of this relationship, in which our employment websites are co-branded with and hosted by HotJobs. We’ve created locally-tailored, customer-focused advertising packages that combine print and online media. We’ve trained our staff to sell them and we’ve seen a steady acceleration in sales.
- Ad Serving: The partnership affords us use of Yahoo’s advanced ad-serving technology, which selectively exposes you to ads for the specific categories that interest you most. We assisted a Consortium-wide effort to set technical standards for the system, which will be implemented in mid-2008. TBO.com is our test site. For the last two weeks, Yahoo has sold national ads into our online inventory and we’ve sold into a portion of Yahoo’s inventory. It’s too early to report results from the test, but we expect this to produce measurable results by late next year.
- Search: Yahoo’s web search engine operates through our sites, where users are exposed to our advertising, on eight sites so far. Content match, which is Yahoo’s equivalent of Google AdWords, has launched on TBO.com, our test site. Other sites will follow in October and November. We share the revenue that Yahoo sells for that feature.
- Content: Our local headlines now appear in the top two headline slots on Yahoo pages. This just began, and it’s not yet fully implemented across all Yahoo channels, but we’re already seeing increases in traffic.
Our web sites continue to attract more users. Page views and visitor sessions from our newspaper and television Web sites rose 7.7% and 10%, respectively, in the third quarter. Those numbers exclude the new NBC stations, which were previously hosted by a third party, making comparisons difficult.
The new mantra in our newsrooms is “continuous news coverage.” That means frequently updated news and information on our web sites throughout the day. Part of this initiative is an aggressive move to deliver more video online, especially on our newspaper sites. Since our Tampa newsrooms launched their combined Continuous News Desk in August, local news traffic has increased by more than 30%.
Meanwhile our Broadcast Division is refining several new models for cross-sales with the internet, with very promising results.
And now I will turn our presentation over to John.
Remarks from John Schauss
Thank you, Reid.
I’d like to comment first on below-the-line items for the third quarter.
Our share of SP Newsprint’s results this year was a $4.9 million loss compared with income of $3.5 million last year. The swing was attributable to lower newsprint prices, decreased sales volume and higher raw materials costs.
As announced in May, SP Newsprint is currently engaged in a strategic review to maximize value to its partners, which might result in a decision to sell the company. The review continues.
Lower interest expense in the third quarter reflected lower debt levels.
Lower Corporate and other expenses primarily reflected lower costs for healthcare, retirement-related plans, and performance-based incentive plans.
The effective tax rate from continuing operations through nine months was 33.8% in 2007, compared with 37.5% last year. Additionally, favorable resolution of a state tax issue during the third quarter lowered income tax expense resulting in a 6% effective tax rate in the third quarter.
Capital expenditures totaled $17 million in the third quarter. Of that amount, Publishing Division capital expenditures of $6.9 million were invested mainly in the new printing facility at our Lynchburg, Virginia, newspaper, which is scheduled for completion in early 2008. With The Tampa Tribune’s conversion to a 48-inch web in November, we will have completed web-width reduction projects at all of our daily newspapers.
The Broadcast Division had capital expenditures of $8.6 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 $200 thousand, primarily for infrastructure and software. Corporate capital spending was $1.7 million, principally for information technology.
EBITDA from continuing operations in the third quarter was $37 million, compared with $48 million in 2006, primarily due to lower income from continuing operations.
Free cash flow was $4.2 million, compared with $1.2 million last year, the result of lower capital spending this year.
Total debt at the end of the third quarter was $938 million, and today we are a little lower than that.
That concludes my report, and I will now turn the presentation back to Marshall.
Remarks from Marshall Morton
Thank you, John.
Before opening our call to your questions, let me provide some insight into our expectations for the fourth quarter.
In our Publishing business, we expect continued softness in Classified and Retail advertising, particularly in the Tampa market. Partially offsetting are projected expense savings from our cost reduction initiatives and lower newsprint expense. This year’s fourth quarter will have one less week than last year’s did.
The Broadcast Division will not be able to match last year’s record fourth-quarter Political revenues of $34 million. The division does expect Local time sales to increase over the prior year. We also anticipate National Political spending in Tampa, Savannah, Georgia; Spartanburg and Myrtle Beach, South Carolina; and Mobile, Alabama.
In addition to Broadcast Political revenues, we are pursuing online Political advertising sales.
We expect our share of a loss at SP Newsprint in the fourth quarter will be $6 million.
Looking ahead to next year, we expect 2008 to be a much stronger year than 2007. Our Broadcast business will benefit from Political and Olympics revenues. The performance of our four new NBC stations will reflect the benefit of the synergies derived from this year’s integration. Our Publishing business will benefit from this year’s cost reductions and from the division’s focus on new revenue development through innovative products and services. Our Publishing operations also will continue to generate substantial cash flow for investment in all of our businesses. Our online enterprises will continue their strong growth. We expect capital spending in 2008 to be $40-45 million, following several years of investment in newspaper printing facilities and broadcast television digital transmission. A possible sale of SP Newsprint would generate proceeds for debt reduction. Our multimedia strategy and Southeast focus will continue to serve us well.
That concludes our formal remarks. Now, we will be pleased to take your questions.
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