Cox Radio Inc. Q3 2008 Earnings Call Transcript

Executives

Robert Neil - President and CEO

Neil Johnston - VP and CFO

Analysts

Jim Boyle - C.L. King

Lee Westerfield – BMO Capital Markets

Tim Schlock - Wachovia

Michael Schecter - Mentor Partners

Cox Radio Inc. (CXR) Q3 2008 Earnings Call November 5, 2008 11:00 AM ET

Operator

(Operator Instructions). Before beginning this morning I must remind you that management remarks will contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ. Please refer to Cox Radio's most recent 10k filing for the list of risks and uncertainties that could impact actual results.

Today's conference call will also include reference to certain non-GAAP financial measure. In accordance with the SEC Regulation G, Cox Radio has provided reconciliations of all non-GAAP financial measure in its earning release issued earlier this morning. The reconciliations include station operating income for operating income and free cash flow to net income. In each case the most comparable GAAP measure.

Now it is my pleasure to turn the floor over to your host, Mr. Robert Neil.

Robert Neil

Welcome to our third quarter 2008 earnings conference call. I'm joined today as usually by Neil Johnston our Chief Financial Officer and we'll start off today's call by reviewing our third quarter performance and recent developments, and then Neil will provide the financial overview of the quarter and then as always we'll open up the lines for your questions.

Our third quarter results reflect the impact of the economic downturn across the majority of our markets offset in part by good efforts on our part to control costs while continuing to make prudent investments in our programming content.

Through our stations and our expanding digital platform we strive to consistently deliver audiences attractive demographics and ultimately results for our advertisers. Despite the weak advertising climate we remain committed to prudently executing our operating plan, carefully managing our expenses, and maintaining a strong balance sheet.

During the third quarter we once gain outperformed our markets. For the quarter our revenues were down 6.2% compared to our markets which were down 8.7%. Local business was significantly stronger than national business with local down 4% and national down 14%. This is a trend that we've observed all year with large national advertisers pulling back due to the economic weakness. Other revenues were down 7%, Internet revenue is essentially flat.

Our best performers this quarter were our stations in Houston, Long Island, Birmingham, Tulsa and Louisville. Conversely revenues were weak in our Florida markets with Orlando, Miami, Tampa and Jacksonville all posting year-over-year declines. The economic conditions in Florida have been well documented and we definitely are feeling that even flow.

Revenues at our Atlanta stations were down 11% for the quarter but performed substantially better than the 17% decline in the Atlanta market. As we take a look at our revenues by category, our traditionally strong advertisers including auto, home improvement and financial categories continue to be pressured by the economic instability in this consumer wide recession. Specifically auto was down 16%, home improvement down 19%, and financial services down 13%.

Our strongest categories during the quarter were insurance up 24%, grocery and convenience stores up 15%, and hotels and resorts up 83%. Political dollars were $1.2 million in the third quarter. We continue to believe that compelling content is absolutely critical for our long-term success. Over the last year we have continued to make programming investments that we think will propel us through 2009 and beyond.

Those investments include Steve and Vicky in Atlanta, Rick and Bubba in Birmingham, Bubba the Love Sponge in Tampa and Jacksonville, and most recently the legendary Greaseman who just joined Jacksonville in afternoon drive. The results of these investments can already be seen in our summer rating book.

In Atlanta, Steve and Vicky are the number four ranked morning show in the city with a 5.3 share of adults 25 to 54 and substantially better in their female 25 to 54 target. In Birmingham WEGK is now the number two station in the market with adults 25 to 54 behind our own Hits urban adult station and in morning drive with Rick and Bubba ZZK takes the top spot with a whopping 19.8 share of adults 25 to 54.

In Tampa WHPT is now the number one station in the market with a share of adults 25 to 54 and in morning drive with Bubba the Love Sponge the station is number one with a 12.5 share. In Jacksonville where we also have Bubba on the air in morning drive, FYV ranks number two in that daypart and with the addition of the Greaseman in afternoons to Rock 105 we're expecting strong ratings performance on that station as we go forward.

We've often said on these calls that the summer book is the least important in radio so I won't really dwell on the results other than to say that we continue to perform at very high levels in our markets and I'm very pleased with our programming teams.

As many of you know, Arbitron is being investigated by both the New York and New Jersey attorney generals office regarding PPM. We continue to believe that the PPM has significant flaws and with no sign of accreditation in sight, a huge increase in our cost for a service that has thus far provided no better revenue indexing we think that Arbitron will be under increasing pressure from all broadcasters with regard to the value proposition it brings to the table.

At this point, there's no way to speculate on the outcome of these investigations it's just sad that it had to happen this way. I've said over and over again how disappointed I am with Arbitron's lack of attention to its customers concerns and this is the result. The only good news is that you can't spin-meister the attorney generals office so maybe some good will come out of this.

We currently have the PPM in Houston and Long Island and over the next year it will be introduced in Atlanta, Miami and Tampa. Atlanta pre-currency numbers are going to be out later today and we're focused on ensuring that our programming maximizes PPM ratings, but obviously we're only going to know the results of these new markets as it becomes current and we'll update you on how that rollout is going.

So far our stations in Houston and Long Island have done very well. Our lower commercial loads tend to play well on the PPM measurement and we certainly know how this game is played and we know how to win at it. We're just wondering if the PPM game is the right game for the industry at this point.

On August 1 we announced the completion of our acquisition of six radio stations serving the Athens, Georgia market. The stations WNGC-FM, WGMG-FM, WPUP-FM, WGAU-AM, WFRC-AM and WXKT-FM have been successfully integrated into our family of 86 stations clustered in 19 markets.

Last quarter we announced the next step in our digital initiative with the conversion of all of our station websites to a new digital platform. Not only do the new site features an enhanced user interface improve the look and feel of the sites, but they also offer us additional opportunities to monetize our audience on the sites.

Our streaming numbers continue to grow so more and more people are continuing to stream our radio stations over the web. Looking ahead, fourth quarter pacings continue to be very erratic. It's a combination of weak economic news, political spending in October, late placing business and all of that makes forecasting very, very difficult.

At this stage October looks in down low double digits and we expect the quarter to pace more negatively. The impact of the recent credit shock makes meaningful guidance virtually impossible in this environment. While the near-term outlook on the economy is negative, I continue to remain optimistic about the prospects of our medium and of Cox Radio.

Radio has attributes that many other media would love to have at this point in time. We reach 93% of Americans on a weekly basis, that's over 235 million people each and every week. Our audience is growing in the face of fragmentation. Our usage is unparalleled. Americans spend 19 hours a week with radio, that's 60% more time than newspapers, magazines and the internet combined.

We have a personal and emotional contact with our listeners and we can cause them to act and that's a characteristic that's very attractive to advertisers. We're free and in this economic environment that's a good thing to have. We're easy to access. We can be used at home, in the car, at work and on many portable devices like cell phones and some MP3 players and computers.

Finally, we do a great job of delivering specific targeted demographics advertisers and getting them the results they need to grow their business and we do it in a cost effective way. In this economic environment I think that's one of the reasons why our medium will do well in comparison to many other advertising vehicles.

So, I can tell you that despite this recession and the difficult ad market that we're in, we think our business is very optimistic with regard to advertisers. We believe that the value proposition of radio's never been stronger, and given the investments that we continue to make in content in digital I think we'll be in a much better position to drive the market share as the economy improves as it certainly will.

With that I'd like to now turn the call over to Neil.

Neil Johnston

You should have a copy of this morning's earnings release show earnings highlight key third quarter numbers. I will also provide some guidance for the full year expenses and capital expenditures.

Total revenues for the quarter decreased 6.2% to $104.9 million with local revenues down 3.5% and national revenues down 14.4%. Internet revenues are down 0.7% for the quarter and accounted for just under 3% of our overall revenues.

During the quarter we carefully managed our operating costs with overall operating expenses flat this prior year. Sales costs and corporate G&A costs were down offset by slightly higher programming and marketing costs.

Operating income for the third quarter was $30.5 million versus $37.1 million in the third quarter of the prior year, and net income was $15.9 million or $0.19 per share versus net income of $20.2 million or $0.21 per share a year ago.

Of particular note this quarter was free cash flow which was up over the prior year for both the quarter and the nine months. For the third quarter free cash flow was $28.5 million an increase of 7.3% over prior year, and for the nine months free cash flow was $76.4 million up 0.5% over prior year. On a per share basis, free cash flow was up $0.06 over the prior year to $0.34 per share for the quarter and up $0.10 over the prior year to $0.90 per share for the nine months.

Other items of note, interest expense during the quarter was $3.2 million with an average interest rate on our credit facility of 3.1% compared to 6.2% in the prior year. Our effective tax rate for the quarter was approximately 42% with a current rate of 5% and a deferred rate of 37%. Year overall effective rate was higher than normal due to a change in our overall state income tax rate as well as changes in our estimates related to tax depreciation and amortization.

Excluding these items, our overall effective rate would have been 40% with a current rate of 14% and a deferred rate of 26%. At September 30, total net debt as defined in our credit agreement was $420.8 million and our leverage ratio also as defined in our credit agreement was 2.9 times. That is well below our leverage covenant of five times so our balance sheet remains strong.

During the third quarter we repurchased 4.4 million shares of stock for an aggregate purchase price of $46.5 million. As of September 30, 2008, we had repurchased a total of 20.6 million shares at an aggregate purchase price of $256.5 million, $43.5 million remains authorized for further share repurchases.

Looking now at the full year, for the remainder of 2008 we will continue to watch our expenses closely. We expect full year operating expenses as well as corporate G&A expenses to be flat to slightly down for the year. Interest expense for the year is expected to be in the $13 to $14 million range and capital expenditures for the year will be between $10 and $11 million.

That concludes the financial review. Bob and I would now like to open up the call to any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Boyle – C.L. King.

Jim Boyle – C.L. King

How many shares were repurchased in October, and if any were what is the current diluted share count?

Neil Johnston

Jim, we don’t give guidance going forward we only give the result as of the end of the last quarter. I will tell you we have about 19 million shares outstanding at this point but we don't disclose what we've repurchased in October.

Jim Boyle – C.L. King

[Inaudible] noted yesterday they had a substantial surge in cancellations albeit some business was eventually regained, was that your experience?

Robert Neil

Jim, the end of September early October when the sort of credit meltdown news was at its peak, there were some significant cancellations. As you can imagine automotive dealers that were still on really took a [inaudible] folks were not walking into their showrooms and that environment. We know that from the automotive results that we saw in September and we know a lot of that damage was done in the last part of September.

I spoke with a fellow that I know in the automotive business and at this particular dealership I wouldn’t say this is typical, but they had had a pretty good September right up into those last few days and then really suffered right at the end of the month and then going into October.

So, I think automotive probably would be the category that would get hit the earliest just because it was much more sensitive to some of those immediate credit issues.

Jim Boyle – C.L. King

Has that continued or has that subsided?

Robert Neil

I think it's come back a little bit but I wouldn’t tell you that I thought there was any big surge back in automotive advertising.

Jim Boyle – C.L. King

Bob, how much of your revenue this year typically has been new business versus existing client revenue and is that all that much a different percentage than before?

Robert Neil

Jim, I don't have those numbers handy so I don't want to speculate on the exact numbers. I think I've spoken in the past on these calls that we put a lot more focus this year and we'll put even more focus next year in a broad way I think you call it developing new business. We have some other more technical terms that we use, but at the end of the day I think what we believe is that, and I think I might have said this to you at one point. I believe one of the reasons that the smaller markets have tended to do better than the larger markets up to this point is that they have historically been less reliant on advertising agencies.

They've been more likely to go out and just call on clients and show them how they can help their business, and from that standpoint I think there's a lot the large markets can learn from that. We have large and smaller markets too and some of our smaller markets have done particularly well this year.

So, we're trying to take some things that we're learning from that situation, apply it back to the larger markets and there's going to continue to be much more emphasis on that because I think in this environment if you've been in radio any length of time you've seen that cartoon of the two buzzards sitting on the pole saying go kill something we're not going to wait for it to die. So, I think that's the mentality we want to have in sales right now.

Operator

Your next question comes from Lee Westerfield – BMO Capital Markets.

Lee Westerfield – BMO Capital Markets

You mentioned the expense gross for the year including corporate you expect to be down slightly at? I wanted to ask if I could get a comment as to how proportion between station level and corporate overhead and does that include or exclude non-cash compensation?

The second question, Bob, you talked about pacings and I think you said double digits but if you could repeat exactly what you were referring to Atlanta specifically, the markets in general? The final question, Bob, now that we're post election whether the election in any way changes your thinking as to the prospects of radio royalty's legislation as the new administration and new congress get underway?

Neil Johnston

Let me begin with the financial. On the expenses side, corporate and field expenses will be pretty similar in the flat to slightly down. Year-to-date expenses are down about 2.2%. We expect them to be flat to down about 1% both at corporate and in the field. Those operating expenses exclude the long-term incentive plan or non-cash compensation.

At this point I would expect full year non-cash compensation to be in the $2 to $3 million range, but as we finalize our long-term plan we'll have a better lead on that as the quarter progresses.

Robert Neil

Lee, what I said about the pacing was that the erratic nature of particularly the credit news at the end of September and into early October has just been jumbled up pacing. There's no meaningful pacing that we can really derive right now. October we said looks to end down low double digits and we expect the quarter to be worse than that. So, that's about the best I can give right now in pacing.

As far as the election is concerned, I don’t think I really anticipate a lot of changes there. The reason is that we've been dealing with democratic majorities for the last two years on all of these issues that we discussed, the royalties, those kinds of things and believe me we haven't been ignoring the democratic majority during that period of time.

So, I think that's going to continue to be a front burner issue for us. It's an issue for the entire industry and it's one that's going to take a lot of work. Hopefully some good things will come out of it, but I think at this point I wouldn't anticipate the election changing a lot about that right now.

Lee Westerfield – BMO Capital Markets

I want to make a quick comment. You guys manage the best balance sheet that I know about in the radio industry. I just wanted to make that comment.

Robert Neil

Well, thanks and you know we were talking before the call I didn't get a chance to listen to Ed's call yesterday, but I saw a quote in one of the trades today that basically paraphrasing saying I've never known a company to go out of business from low debt levels. We’ve been conservative all along and believe me we thank our lucky stars right now that that's what we've been doing.

It gives us a lot more flexibility in terms of some of theses investments that we need to make and the things that we need to do. I know some people were critical of us a few years ago that we didn't take more debt on and I'm happy we were paying down the mortgage.

Operator

(Operator Instructions) Your next question comes from Marci Ryvicker – Wachovia.

Tim Schlock – Wachovia

This is actually Tim Schlock for Marci Ryvicker. First, on the non-traditional revenues we noticed that they've been down for both Q2 and Q3. We're just kind of trying to get an understanding of why that might be and are you seeing the same trend in Q4? The second question is I know the current pacings are very foggy right now, but what kind of trends are you seeing between national and local heading into Q4?

Robert Neil

Tim, one of the reasons that the non-traditional revenue number has gone down is that we made a conscious effort to get in from an expense standpoint and we eliminated some events that really didn't meet our profit goals. When you put on an event you obviously have the expense that goes along with putting on the event and then you sell different advertising packages either on the air or off the air connected with that event. In looking at this it didn’t make a lot of sense to do an event where it cost us $50,000 to put on the event and then yes, we got $50,000 in revenue and we covered the event and we made no money.

So, at the end of the day we paid out some sales commissions and we did a lot of work and we didn't really make any money, so went back in and we've been pretty aggressively trimming events that didn’t' meet some specific goals that we have in terms of their profitability. So, that's why the revenue number is down and you'll continue to see that in quarter four.

I think Neil noted here in the script that internet revenues were on the flattish side which is about what you would expect I think in this environment. Even the Googles and Yahoos of the world have not gone unscathed in this recession. So, that's why it's that way and hopefully I took care of your question there.

As far as pacings between local and national are concerned, in October, and I really don't quite know the November impact, there will only be four days of it in terms of political in November, but a lot of the dollars that get placed in political come back so October national was actually better than local and that's the first time we've seen that one in a while. National has significantly underperformed local all year long and I expect once we true up the political revenues that will continue to be the case.

So, national has paced down as much as 20 or 30% at times this year, so local, as I said, has done much better than that. Again, I think going forward we'll get back to that paradigm where national continues to struggle in the short-term and local continues to do better.

Operator

(Operator Instructions) Your final question comes from Michael Schecter – Mentor.