Belo Corporation Q4 2008 Earnings Call Transcript

Feb. 5.09 | About: Belo Corp. (BLC)

Belo Corporation (NYSE:BLC)

Q4 2008 Earnings Call

February 5, 2009 2:00 pm ET

Executives

Paul Fry – Vice President Investor Relations

Dunia A. Shive – President, Chief Executive Officer & Director

Dennis A. Williamson – Chief Financial Officer & Executive Vice President

Analysts

[Abi Steiner] – JP Morgan

Michael [Mells] – JP Morgan

Edward Atorino – The Benchmark Company

Stacey Finerman – Goldman Sachs

Barry Lucas – Gabelli & Company

[Bill Green – Claren Road]

Operator

Welcome to the Belo fourth quarter and yearend earnings conference call. At this time all lines are in a listen only mode. Later there will be a question and answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s call is being recorded. At this time I’d like to turn the conference over to the Vice President of Investor Relations Mr. Paul Fry.

Paul Fry

Welcome to Belo’s fourth quarter and yearend conference call. We issued a press release today announcing the company’s fourth quarter and yearend 2008 earnings. This release has been posted to our website at www.Belo.com. Today’s call will include comments from Dunia Shive, Belo’s President and Chief Executive Officer and Dennis Williamson, Executive Vice President and Chief Financial Officer.

Before Dunia makes her opening remarks, let me note that our discussion will include forward-looking statements. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements. Additional information about these factors is detailed in the company’s press release and public filings with the SEC including the annual report on Form 10K.

Also, reconciliations of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measures presented in accordance with GAAP including the reasons we believe the non-GAAP financial measures provide useful supplemental information for investors, are posted at www.Belo.com under investor relations. Now, I’m pleased to turn the call over to Dunia.

Dunia A. Shive

Total revenue declined 5.6% in 2008 as record setting political revenue and double digit increases in retransmission fees and Internet revenue were not enough to offset the overall soft advertising conditions Belo experienced during the year. The company responded with a number of expenses initiatives in 2008 including the freezing of open positions companywide, staff reductions in certain markets and many other cost saving measures.

These expense initiatives led to a 4.1% reduction in combined station and corporate operating costs in 2008. Excluding spinoff related charges and a gain on the purchase and retirement of company bonds, the company generated $255 million in consolidated EBITDA in 2008 with a pro forma consolidated EBITDA margin of 35% only slightly below the 2007 pro forma consolidated EBITDA margin of 36%. The station EBITDA margin for the fourth quarter of 2008 was 41.2% and 38.7% for full year 2008.

Retransmission revenues increased 30% in the fourth quarter and 41% for full year 2008. Retransmission revenues for 2008 totaled $33.1 million and represent 4.5% of Belo’s total revenue. The increase in retransmission fees is due to recently completed agreement, contractual growth rates included in existing agreements, the full year of impact of negotiations completed last year and the continued growth in subscribers across cable, satellite and telco distribution systems.

Belo’s online businesses continue to grow in importance during the year. Advertising revenue associated with Belo’s website increased 5.1% in the fourth quarter and 14% for the full year 2008. Internet revenues surpassed $30 million for the year and represent over 4% of the company’s total revenue. Automotive classified Internet revenue mostly associated with www.Cars.com was up 21% in 2008.

Belo’s web audiences continue to grow with the number of unique users increasing 44% in the fourth quarter and page use increasing 22% for the same period. New video content on Belo’s websites increased significantly in 2008 leading to an increase in video stream requests of 40% in the fourth quarter of 2008.

Belo’s television stations enjoyed strong performances once again in the November ratings period finishing number one or number two sign on to sign off in 12 of 15 Nielson rated markets. Belo received numerous national awards in 2008 and that trend continued last month when WFAA television in Dallas Fort Worth was distinguished with the prestigious Alfred I. duPont Columbia University’s Gold Baton Award for a series of investigative reports. WFAA is the first and only local television station ever to receive a Gold Baton.

Fourth quarter and full year results for 2008 and 2007 include non-cash impairment charges of $465 million and $22 million respectively. These charges were determined through Belo’s annual impairment testing of goodwill and other intangible assets using the methodology prescribed by Statement of Financial Account Standards No. 142. It is important to point out however, that these impairments are non-cash charges to earnings and will not affect Belo’s liquidity, cash flows from operating activity or debt covenants or have an impact on the company’s future operations.

For 2008 $351 million of the impairment charge related to goodwill and $114 million related to SEC licensing. In 2007 all of the impairment charge related to goodwill. The $465 million impairment charge in 2008 represents a 23% reduction in the company’s total intangible assets. In the fourth quarter of 2008 the company purchased at a discount and retired $43.6 million of bonds maturing in 2013 and 2027 at a cost of $27.2 million. As a result, fourth quarter and full year 2008 results include a gain net of taxes of $10 million or $0.10 per share associated with these bond transactions.

Given the current economic climate, we continue to remain very focused on expense controls and paying down debt. The company reduced its debt $45 million in the fourth quarter and $75 million for the year. On the expense side, we are operating under the assumption that revenues will not improve any time soon and we are continuing to evaluate all costs against their value to the company.

Now, I would like to turn it over to Dennis to provide further details about our fourth quarter and full year results.

Dennis A. Williamson

Belo announced fourth quarter and full year 2008 pro forma earnings per share from continuing operations of $0.28 and $0.78 respectively compared to $0.32 and $0.88 respectively for the fourth quarter and full year 2007. Pro forma earnings per share from continuing operations exclude non-cash impairment charges to goodwill and other intangible assets, spin off related charges and a gain on the purchase and retirement of company bonds in 2008.

Excluding the impairment charge and the gain on the purchase and retirement of company bonds in the fourth quarter of 2008, Belo’s fourth quarter earnings per share from continuing operations was higher than the consensus estimate by $0.02. Including the non-cash impairment charges to goodwill and other intangible assets, spin off related charges and the gain on the purchase and retirement of company bonds in 2008 the GAAP net loss per share from continuing operations for the fourth quarter and full year 2008 was $3.50 and $3.21 respectively compared to net earnings per share from continuing operations of $0.06 and $0.59 respectively for the fourth quarter and full year 2007.

Spin off related charges which include transaction and financing costs and a one-time tax charge associated with the spinoff of the company’s newspaper businesses and related assets on February 8, 2008, totaled $0.22 per share and $0.08 per share respectively for the full year’s 2008 and 2007. The fourth quarters of 2008 and 2007 include spinoff related charges totaling $0.01 and $0.05 per share respectively.

Total revenues decreased 8.8% in the fourth quarter of 2008 versus the fourth quarter of 2007 as declines in Belo’s core local and national spot business were greater than incremental gains from political revenue. Fourth quarter total spot revenue including political was down 11% with 26% decreases in both local and national spot. Total revenues decreased 5.6% for the full year of 2008. Full year 2008 spot revenue including political was down 7.9% with 13% and 17% decreases in local and national spot respectively.

The spot revenue declines in the fourth quarter and full year 2008 were primarily due to a weak advertising environment particularly in the automotive category which was down 37% and 21% respectively. We also noted softness in several other categories in the fourth quarter including retail, financial services and telecommunications. The professional services and beverage categories were both up in the fourth quarter over the prior year.

Fourth quarter and full year 2008 included record political revenues of $35.9 million and $56.2 million respectively. Markets experiencing the most political revenue included Portland, Seattle, Tacoma, Houston, New Orleans, St. Louis and Charlotte. We saw very little presidential spending in Texas and Arizona which include three of our largest markets.

Station expenses decreased 4.2% and 2.7% respectively for fourth quarter and full year 2008 due primarily to the freezing of open positions companywide, staff reductions in certain markets and other cost saving initiatives. Corporate operating costs were $10.6 million in the fourth quarter of 2008 as compared to $11.5 million in the fourth quarter of 2007, a decrease of 7.8%. For the full year 2008 corporate operating costs totaled $32.2 million versus $40.5 million in 2007, a decrease of 20%.

The decreases for both fourth quarter and full year were due to lower share base compensation, lower bonus expense, fewer employees and other cost saving measures. Combined station and corporate operating costs declined 4.5% and 4.1% for the fourth quarter and full year 2008 respectively. Excluding impairment charges and spinoff related costs, the company’s earnings from operations decreased 17% and 9% respectively for the fourth quarter and full year 2008.

Belo’ depreciation and amortization expense totaled $10.7 million in the fourth quarter of 2008, 2.8% lower than the fourth quarter of 2007. Full year 2008 depreciation and amortization expense totaled $42.9 million, a decrease of [inaudible] from 2007. The company’s interest expense totaled $17.7 million in the fourth quarter of 2008, a decrease of 21% from the fourth quarter 2007. Full year 2008 interest expense totaled $83.1 million, a 12% decrease from the full year of 2007.

Other income net increased $18.6 million in the fourth quarter and $13.6 million for the full year 2008 due primarily to a $16.4 million gain on the retirement of $43.6 million of bonds due in 2013 and 2027 that were purchased at a cost of $27.2 million. The bond transactions were funded through the company’s revolving credit facility. Income tax expenses decreased $61.5 million in the fourth quarter of 2008 compared to the fourth quarter of 2007 due primarily to a $68.4 million tax benefit associated with the impairment charge.

Full year tax expense decreased $44.6 million due primarily to that same $68.4 million tax benefit partially offset by a one-time $18.8 million tax charge related to the transfer of certain intangible assets in connection with the spinoff and the incremental tax related to the gain on the company’s purchase of its bonds at a discount.

Turning to the balance sheet, total debt at December 31, 2008 was $1.093 billion. The company’s leverage ratio as defined in the company’s credit facility was 4.4 times at December 31, 2008. The company did not repurchase shares of common stock in the final three quarters of the year but did repurchase 191,000 shares in the first quarter of 2008 for a total of $2.2 million. Belo invested $5.8 million in capital expenditures in the fourth quarter and $25.4 million for the full year.

Now, I’ll be glad to turn the call back over to Dunia to add some additional comments.

Dunia A. Shive

Given the continued weak economic environment, it is extremely difficult to project where advertising revenues will finish for the first quarter. Currently, first quarter local and national spot pacing trends are similar to our experience in the fourth quarter of 2008. For full year 2009, we expect retransmission and Internet revenues to continue to grow double digits. Combined station and corporate operating expenses are projected to be lower in 2009.

Capital expenditures for 2009 are projected to not exceed $12 million which is down from $25.4 million in 2008. We expect the company’s tax rate to be approximately 39% in 2009. The company will continue to stay focused on debt pay down and will continue to seek to reduce its long term debt through opportunistic purchases and retirement of bonds. Like many companies, the weak revenue environment is expected to result in an increase in our leverage ratio.

While we are in compliance with all terms of our current bank facility which expires in June, 2011, we are seeking an amendment to the facility to adjust the leverage covenant amiss the current economic slowdown. We expect to have an amended facility in place by the end of the first quarter. This concludes our formal remarks and we’ll be glad to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Abi Steiner] – JP Morgan.

[Abi Steiner] – JP Morgan

A couple of things here, just so I understand, when you talk about Q1 pacing the same as you finished Q4 local national, is that the 26% you referenced?

Dunia A. Shive

Yes.

[Abi Steiner] – JP Morgan

Then just directionally, was January worse than December? I know it’s early in February but is that trending worse than January? Any color on that?

Dunia A. Shive

If you look at January for local and national pace versus where we projected to finish, January actually shows just a little bit better in terms of local and national versus December but, it’s not demonstratively different.

[Abi Steiner] – JP Morgan

Can you break out how much of each of the bond issues you bought back in the quarter?

Dunia A. Shive

I’ll let Dennis do that. Most of it was in the 2013.

Dennis A. Williamson

Yes, I think it was only about $10 million of the $42 million or so was of the 2027. Most of it was the 2013.

[Abi Steiner] – JP Morgan

Are there any limitations under the credit agreement today preventing you from buying back more bonds in the open market?

Dennis A. Williamson

No.

[Abi Steiner] – JP Morgan

So effectively as much revolver capacity as you have theoretically you could buy back?

Dennis A. Williamson

Theoretically, yes.

[Abi Steiner] – JP Morgan

I may have missed this if you gave it in the opening remarks but can you give me the revolver balance as it stood at year end and what your availability was?

Dennis A. Williamson

It was a little under $440, it’s less than that now it’s about $430 but it was about $440 at year end.

[Abi Steiner] – JP Morgan

A couple of more and then I promise I’ll pass it on. How should investors think about the cost of any amendment? Do you think it will be a matter of price? Will the bank lenders have to get some sort of guarantees or some combination? Then lastly, on the amendment, what kind of covenant cushion would you guys be looking for? Would you be looking for a full turn, where you think you will trough out this year? With that I’ll let you guys answer and turn it over.

Dennis A. Williamson

We’re still in process with that negotiating with the banks. We’re, I think, getting closer to finalizing the terms with our lead banks but then they have to turn around and market to the rest of the banks on facility so I think it’s a little premature for us to comment on specific turns. Just to suggest though in this current environment, we do anticipate that this amendment will cost us something more than we’re currently paying. But, beyond that I really can’t speculate on where we will end up.

Dunia A. Shive

Once the amendment is finalized we will file that and it will be available.

Dennis A. Williamson

But, just in terms of if I could just think about cushion, historically what would you have liked to operate with?

Dunia A. Shive

Well, again it’s one of the primary terms we’re seeking and it’s still in somewhat flux. Obviously, what we’d like, what we think is sufficient in this coming year in 2010. This facility doesn’t expire till mid 2011 so we’ve looked at a number of projections, taken some sensitivity analysis and hopefully we’ll get a leverage level that is suitable for what we anticipate in these next couple of years.

Operator

Your next question comes from Michael [Mells] – JP Morgan.

Michael [Mells] – JP Morgan

I think I have three questions, on expenses in terms of you’re saying lower year-over-year, can you give us a little bit more quantification there? You’re down 4% year-over-year in the fourth quarter however, programming other costs were higher. How should we be thinking about that line going forward? Then, I have two follow ups.

Dennis A. Williamson

Mike, you’re right programming costs were up in the fourth quarter and they’ll be up in the 2009. One cost that I think I’d also like to mention on the call is pension expense which will probably be up about $9 million over 2008. Now, remember, this is non-cash but that is going to offset any reductions that we do make as we go forward. We’ve taken a series of actions and are planning a series of others that will reduce costs. I can’t really speculate on where that will take us for the full year of 2009 other than to say that costs will be lower in ’09 than in ’08. We haven’t really fine tuned that and some of that will depend frankly on the revenues.

Michael [Mells] – JP Morgan

One question for you, so FTEs at the end of the year, where were they versus the year prior?

Dunia A. Shive

They were about 5% lower.

Michael [Mells] – JP Morgan

On [Abi’s] question on monthly pacings, can you talk about categories what you’re seeing in Q1 versus Q4? Is there much change in terms of that performance?

Dunia A. Shive

Obviously I would say the biggest issue in the fourth quarter was automotive and that continues in the first quarter of this year. I think you’ll hear that from everyone. We had the categories that we mentioned in the conference call script that were – Dennis, do you have those that were lower in 2007? We gave [inaudible] but with respect to 2008 telecom in the first quarter was actually up in the first quarter, it was not in 2007. Professional services were up in the fourth quarter 2008, continue to be up in the first quarter this year as does healthcare. Clearly, the issue that we and other broadcasters are seeing relate to the automotive sector more than anything else.

Dennis A. Williamson

Mike, I would add that because of this economic downturn which is fairly wide spread, most revenue categories are down. In the fourth quarter we only saw a few categories that were up with most being down. Some rather insignificantly but automotive being the largest category down. We didn’t experience many categories on the increase and I’d say you probably are going to see more of that certainly in the first half of this year than hopefully the second half.

Michael [Mells] – JP Morgan

Last question for me, is there any update on the status of the dividends? How are you thinking about that in the context of cash flow priorities going forward?

Dunia A. Shive

The dividend is obviously the prerogative of the board. The board has not cut the dividend since it was reduced from the spinoff. You may recall that prior to the spinoff we paid $0.50 per share, we cut that to $0.30 per share. Any changes obviously would be their prerogative but they’re very well aware of current market conditions so they regularly address all the various capital requirements of the company. They’re very mindful of debt levels and leverage and I think will take all that in to consideration as they always have when addressing the dividend on a quarterly basis at their meeting.

Operator

Your next question comes from Edward Atorino – The Benchmark Company.

Edward Atorino – The Benchmark Company

I know this is probably hard to say, January coming out of ’08 might have been paralysis as far as advertisers were concerned including the autos. We’re now in to February, any sign that sort of checkbooks are coming out again and people are calling for availability, stuff like that? Also, I read a rather bearish outlook that there may be some cancellations on the networks in coming weeks. It hasn’t happened in many, many years but could some of that money sort of show up in the spot market rather than stick your long term commitment with the networks you may be spread it around in the top 50 or whatever markets? You get the gist of the question?

Dunia A. Shive

Right, I understand. With respect to getting their checkbooks out, I cannot say that I’ve seen any demonstrable change in behavior in the beginning part of February than what we saw in January. You have heard that Chrysler is going to move some money out of [inaudible] spot. I do know because I’ve spoken with some of our team that we have availed for some of that but it’s not necessarily reflected on the books. But, outside of that I can’t say that people are getting their checkbooks out to a different degree than they have been in the fourth quarter and in January.

With respect to the networks, I think what’s going to happen and what you’re going to see then is that’s going to just translate in to a weaker scatter market for the networks. So, whether or not that will have an impact on our national spot business, I think it’s just too soon to tell since a lot of this came down yesterday. I don’t think it bodes for a very strong upfront if you enter in to it with a weak scatter.

Edward Atorino – The Benchmark Company

That’s what I was getting at. In past years advertisers would skip the upfront and just keep money on a short term leash. I wonder if that might happen again?

Dunia A. Shive

It could, it could. Again, I think a lot of these pull backs have just been coming in to the marketplace in terms of how they’re all going to play out I think is too soon to tell but I do think it will result in a weaker scatter market. I don’t necessarily think that means anything particularly strong on national spots.

Operator

Your next question comes from Stacey Finerman – Goldman Sachs.

Stacey Finerman – Goldman Sachs

Just two quick questions, with regards to the forward pacing you gave out for first quarter I guess local and national down about 26%, does that include or exclude any revenues you guys expect to have gotten from the Super Bowl?

Dunia A. Shive

That would include. We had about $1.5 million from the Super Bowl.

Stacey Finerman – Goldman Sachs

The second question is at the end of the year where did you guys stand with regards to your pension funding?

Dunia A. Shive

Let me go back a little bit on the pension funding. Prior to the market falling apart our pension plan was fully funded. You may recall we closed our pension plan to new participants several years ago and then we froze benefits under the plan I believe in March of 2007. So, right now we have about $150 million unfunded liability. The liabilities under the pension plan are shared with the newspaper company that we spun out earlier this year AHB.

Because there was some recent legislative relief provided to the Pension Protection Act Provision, indications are that we will not have a required contribution in 2009. That’s when Dennis was talking about pension expense earlier and said it would be non-cash, we do not have one for 2009. We would expect a required contribution in 2010 but we would expect it to be manageable. Then, I think future contributions beyond that part are really dependent upon what happens in the financial markets because you recalculate on an annual basis depending on what’s happened with your assets.

Operator

Your next question comes from Barry Lucas – Gabelli & Company.

Barry Lucas – Gabelli & Company

Dennis, not to beat this up too much but, who’s in the bank group and what kind of vote is it? Is it just a simple majority to get approval of an amendment?

Dennis A. Williamson

Our bank group is led by JP Morgan Chase and Bank of America. We have about 13 banks in the facility. Since this is an amendment it requires 51% of the banks voting affirmatively. JP and BOA together make a little over 20% so it gives you an idea we need about 30% of the banks to say yes. I would say overall too Barry, we’re pretty confident that we’ll get this done it’s just as we mentioned before, it’s just going to cost us something to do it. But, we’re pretty confident that we can get the amendment done in this environment.

Dunia A. Shive

Keep in mind, we ended the year at 4.4 times leverage so we’re starting in a position relative to the sector that is relatively attractive from a leverage point of view.

Operator

Your next question comes from [Bill Green – Claren Road].

[Bill Green – Claren Road]

I just wanted to ask if as part of the amendment process you were considering giving subsidiary guarantees or preferential treatment to the revolver as it pertains to the unsecured bonds currently? Second question, just going back to the earlier question, can you quantify the underfunded status of the pension at 12/31/08?

Dunia A. Shive

The unfunded was the $120 million. I also mention that we share that liability with AHB.

[Bill Green – Claren Road]

It’s shared 50/50?

Dunia A. Shive

The contributions are actually share in a 60/40 with us having 40 based on the number of employees and the liabilities under the plan. Again, not to dodge questions but since we don’t have a term sheet that has been agreed upon with all the banks, I think it’s safe to assume that many of the types of provisions you’re seeing in amendments will apply to us as well but being any more specific than that at this point I think is just a little premature.

Operator

At this time I am showing no further questions in queue.

Dunia A. Shive

I want to thank everyone for joining us on the call today. I think that we can all agree that these are very challenging times for most all businesses including Belo. We have a strong competitive position in our markets and we’re committed to taking the necessary steps that we need to take to get through this fiscal period.

Operator

Ladies and gentlemen this conference will be available for replay starting today, Thursday, February 5th at 3pm Central Time and it will be available through next Thursday, February 12th at Midnight Central Time. You may access the AT&T executive playback service by dialing 1-800-475-6701 from within the United States or Canada or from outside the United States or Canada please dial 320-365-3844 and then enter the access code of 980652. Those numbers once again are 1-800-475-6701 from within the US or Canada or 320-365-3844 from outside the US or Canada and again enter the access code of 980652.

That does conclude our conference for today. Thank you for your participation and for using AT&T’s executive teleconference. You may now disconnect.

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