Journal Communications, Inc. Q2 2006 Earnings Conference Call Transcript (JRN)

Journal Communications, Inc. (JRN)
Q2 2006 Earnings Conference Call
July 18, 2006 10:00 am ET

Executives

Steven J. Smith - Chairman of the Board and Chief Executive Officer
Paul M. Bonaiuto - Executive Vice President and Chief Financial Officer
Douglas G. Kiel - President, Journal Communications; Vice Chairman and CEO, Journal Broadcast Group Inc.
Betsy Brenner - Vice President, Journal Communications; President and Publisher, Journal Sentinel Inc.
James J. Ditter - Vice President, Journal Communications; President, Norlight Telecommunications Inc.
Sara Leuchter Wilkins - Director of Investor Relations

Analysts

Mark Bacurin - Robert W. Baird
Stacy Fleck - Merrill Lynch
Peter Salkowski - Goldman Sachs
Debra Schwartz - Credit Suisse
Craig Huber - Lehman Brothers
DeForest Hinman - Paradigm Capital Management
Jeffrey C. Allen - Silvercrest Asset Management
John Kornreich - Sandler Capital Management

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the second quarter 2006 Journal Communications earnings conference call. My name is Janelle and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Ms. Sara Wilkins, Director of Investor Relations. Please proceed, madam.

Sara Leuchter Wilkins

Thank you, Janelle, and welcome everyone. Before we begin, I would like to introduce the Journal Communications senior management team who will participate in this morning’s call. Speaking from prepared remarks this morning are: Steven Smith, Chairman of the Board and Chief Executive Officer; and Paul Bonaiuto, Executive Vice President and Chief Financial Officer. Also with us today are Doug Kiel, President of Journal Communications and CEO of Journal Broadcast Group; Betsy Brenner, Executive Vice President of Journal Communications and Chief Operating Officer of our publishing businesses; and Jim Ditter, President of Norlight Telecommunications Inc.

I would like to remind you that certain statements in this call are forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements generally include all statements other than statements of historical fact, including statements regarding our future financial position, business strategy, budget, projected revenues and expenses, expected regulatory actions and plans and objectives of management for future operations. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Some such risks include decreases in advertising spending, loss of market share, an ability to acquire or successfully manage broadcast properties and acquisitions, failure to retain adequate viewers and listeners, increases in the cost of television programming, broadcast limitations and/or sanctions imposed by the FCC, an ability to respond to changes in telecommunications technology, continued overcapacity in pricing pressure in the telecommunications industry, loss of large printing services customers, loss of key personnel and other uncertainties and other factors which are contained in our periodic filings under the Securities Exchange Act of 1934.

Additionally, any discussion of EBITDA in today’s conference call may be referenced back to our un-audited reconciliation of consolidated net earnings to consolidated EBITDA schedule, which accompanies today’s earnings release.

Now I would like to turn the call over to Steve Smith. Please go ahead, Steve.

Steven J. Smith

Thank you, Sara, and good morning, everyone. This morning, Journal Communications reported net earnings of $15.2 million for the quarter ended June 25th. Note that there were a number of unusual items reported in the quarter that had a cumulative net impact of $3 million on operating earnings, $1.8 million on net earnings, and $0.02 on diluted earnings per share. These items were:

• a $5.1 million reduction of revenue for credits to be issued towards 2007 advertising in the Milwaukee Journal Sentinel and by a voluntary offer to preprint advertisers related to changes reported in 2003 and 2004 net paid circulation;
• a reserve of $700,000 for expenses related to the litigation, partially offset by a one-time curtailment credit of $1.7 million related to a pension plan amendment; and
• $1.1 million in insurance proceeds received from a business interruption claim from the impact of Hurricane Katrina;

Revenue of $197.2 million was essentially flat compared to $197.5 million, and was impacted negatively by the $5.1 million reduction of revenue that I discussed previously.

Basic and diluted earnings per share were $0.22 and $0.21 respectively, compared to $0.25 and $0.24 in the second quarter of last year.

During the quarter, the broadcast group again delivered a solid performance, while weakness persisted in publishing. Television performance was particularly strong, led by our Las Vegas market with significant contributions from our three new stations, as well as improvement in all but one of our other TV markets.

Additionally, radio revenue rebounded in the last two months, and our radio operators continued to improve margins.

At the daily newspaper, we continue to be challenged by a decline in classified advertising, particularly in the automotive category. Interactive revenue, however, was up nearly 29% to $2.3 million in the quarter. Journal Sentinel continued to focus on expense control, and that resulted in total operating expenses increasing less than 1%. Excluding litigation expenses, Journal Sentinel’s operating expenses decreased 0.8%.

Norlight continues to be impacted by the anticipated lower contract pricing in the wholesale business, and significant competitive pricing pressure in the commercial business, which has resulted in decreased revenues.

In late April, we announced a plan to spin off Norlight as an independent public company which will allow Journal Communications to concentrate greater managerial and financial resources on our diversified local media businesses and enable Norlight to concentrate on growth in its communication business.

We believe Norlight will benefit from greater operational and financial flexibility to take advantage of growth opportunities in its industry.

The broadcast group, following a strong first quarter, continued to perform exceptionally well in the second quarter, especially in the June period. Major contributors to this momentum were specialized developmental sales revenue and political advertising. In total, development revenue in television was $3.1 million, and political was $1.7 million in the second quarter of 2006.

Las Vegas Television recorded another strong quarter, with revenues up 23% and operating earnings up 62% at KTNV. In Green Bay, while television revenue grew by 3%, operating earnings increased by 90%.

Our three new television stations continued to outpace expectations for both revenue and operating earnings. In June, Fox 4 in Fort Myers, Naples added three hours of news each weekday morning and the station is expected to further add to its news offerings later this summer.

In radio, revenue was up 2.6% in the June period, and 3.3% in the quarter. Our clusters in Boise, Milwaukee, Omaha, Wichita and Tulsa were particularly strong. We were also positively impacted by developmental revenue in radio, which totaled some $2.6 million in the second quarter of 2006. Our emphasis on cost containment in radio helped drive continued improvement in margin, up over 500 basis points in the second quarter of 2006 compared to last year.

The daily newspaper continued to be challenged by significant declines in automobile advertising, which is reflected in both the retail and classified comparisons. In circulation, Journal Sentinel has identified and is intensely focused on driving increased penetration in 25 growth zip codes in the fastest-growing and most demographically attractive areas to our advertisers.

In June, Journal Sentinel acquired Milwaukeemoms.com, the leading online brand in the metropolitan Milwaukee for parents of young children. The acquisition of Milwaukeemoms.com, though a modest one, is an important first step for us to enter existing online parenting communities and to better serve this often overlooked audience. The new site will be packaged with Metro Parent magazine to enable online content development and bundled advertising buys targeted to the growing and vital parenting segment. This is yet another example of our local targeted websites which will broaden our web offerings to local advertisers.

Journal Sentinel remains focused on expense control, as Paul will discuss in detail.

At our community newspapers and shoppers, operating earnings increased for the quarter as a result of reduced expenses in a number of areas and by a one-time insurance recovery related to the losses we suffered from Hurricane Katrina.

Revenue from specialty publications, which carry higher margins than our existing core products, was up about $200,000 in the second quarter. Overall, revenue at our community newspapers was down again in the second quarter, reflecting the closure of our Dixie Web printing operations and the continued fallout from Hurricane Katrina on our Louisiana publishing operations.

Journal Sentinel’s integration of community newspapers ads remains on track, as the entities have now combined their respective ad order, entry, pagination and billing systems.

Our community newspapers and shopper group continues to focus on margin improvement. Margins in the second quarter were 16.1% versus 9% in the second quarter of 2005 -- clearly helped by the one-time insurance recovery of $1.1 million. Excluding this benefit, however, margins were nearly 12% -- an improvement of about 300 basis points over 2005.

At Norlight, revenue decreased in both wholesale and commercial businesses. The decline on the wholesale had been anticipated as we have discussed on previous calls. The decrease on the commercial side, however, reflects significant competitive price pressure from the RBOCs as well as the loss of a large long-distance customer during the second quarter of 2005.

Norlight continues to see success with its new VPN managed services and data center offerings. Quarterly sequential revenue from these products was up some 23% in the second quarter of 2006. The team remains focused on the introduction of its voice-over IP communication services and local voice later this year, which will improve its competitive position in the enterprise business.

IPC continues to post operating earnings improvement, despite the lower expected revenue. Year-to-date, the sales team has closed 60 new printing accounts that are expected to add significant revenue this year and beyond.

Now I would like to ask Paul to begin his in-depth financial review. Paul.

Paul M. Bonaiuto

Thank you, Steve. For the second quarter 2006, revenue of $197.2 million was essentially flat compared to $197.5 in last year’s second quarter. Note that in the second quarter of 2006, revenues from our newly acquired television operations totaled $14.2 million. This incremental revenue was entirely offset by the $5.1 million reduction of revenue at the daily newspaper for future advertising credits, along with the softness in auto advertising, the expected declines in telecommunications and printing services revenue, lost revenue from the hurricane and shutdown of our printing facility, and declines in our direct marketing business.

Net earnings were $15.2 million compared to $18.1 million in 2005, a decrease of 16%. As Steve mentioned earlier, a number of one-time events had a negative impact of $1.8 million on net earnings, or $0.02 per diluted share.

Other expense, which primarily consists of interest expense, increased $3.5 million to $3.9 million and the second quarter, compared to $400,000. The increase is attributable to the increase in debt outstanding related to the 2005 television station acquisitions and share repurchase activity coupled with higher short-term interest rates.

Within publishing, revenue was down 10%. At the daily newspaper, total revenue of $54.7 million was down 11.7% compared to 2005 second quarter. Absent the $5.1 million litigation settlement revenue reduction, total publishing revenue would have been down 4.2%, and revenue at the daily newspaper would have decreased 3.4%.

At our community newspapers and shoppers, revenues of $24.7 million was down 6% compared to last year. The revenue reduction from the impact of Hurricane Katrina and the Louisiana print plant shutdown accounted for virtually all of the decrease.

Operating earnings from publishing decreased 41% to $8.5 million, compared to $14.3 million. The results included the $5.1 million negative impact on earnings related to the advertising credits and the $700,000 in litigation expenses. These were partially offset by the $1.1 million in hurricane-related insurance proceeds. These one-time effects had a negative impact on quarterly publishing earnings of $4.7 million.

At the daily newspaper, operating earnings totaled $4.5 million, down 62.9% compared to $12.1 million last year. The decline was due in large part to the $5.1 million litigation settlement reduction in revenue, coupled with increased expenses for litigation. These amounts totaled $5.8 million and drove operating margins down by 9% for the quarter. Operating margin was 8.2%, down from 19.5% last year. Future litigation-related expenses are estimated to be $700,000 and insurance proceeds, if any, are uncertain at this point in time.

Payroll costs were down $500,000, or 3%, reflecting a 6.3% decline in full-time employees.

Second quarter 2006 paper costs were up $233,000, reflecting an increase in newsprint pricing of 11.8%, offset by a reduction in consumption of 10%.

Benefit expenses were down $882,000, or 23.7% due to lower medical costs and the pension plan curtailment credit, partially offset by an increase in worker’s compensation costs.

Moving to our community newspapers and shoppers, we recorded operating earnings of $4 million, up 73.9% from operating earnings of $2.3 million in last year’s second quarter. During the 2006 quarter, we had a one-time benefit from $1.1 million of hurricane insurance proceeds. Excluding that payment, operating margin would have been 11.6% and earnings would have increased $600,000, or 26%.

At the daily newspaper, retail revenue of $18.5 million was $5.4 lower compared to last year. Once again, excluding the settlement related reduction in revenue, retail was down $400,000, or 1.7%. This is explained by decreases in ROP and shared mail, partially offset by increases in preprints and online. Increases in building, hardware, lawn and garden and food were offset by decreases in the automotive, health services, communications and entertainment categories.

Note that for comparative purposes, the Easter holiday fell in the first quarter of 2005 and the second quarter of 2006. We estimate that Easter falling in the second quarter of 2006 negatively impacted advertising revenue in the Milwaukee Journal Sentinel by about $600,000.

Classified advertising at the daily newspaper of $16.8 million, which includes both print and online increased -- or decreased, pardon me, 10.5% for the second quarter of 2006. This was largely the result in a decline in the auto advertising vertical, in which we experienced a $1.5 million, or 33.7% drop. We also saw a decline in the employment advertising vertical, which posted a $400,000, or 4.7% decline. This is the first quarterly year over year decline we have seen in employment since the first quarter of 2004.

The real estate vertical was up 0.8% for the second quarter. The “other” vertical decreased $134,000, or 6.1% year over year. Mirroring the national trend, automobile advertising at the daily newspaper continues to be weak across the board. On a combined retail and classified basis, auto advertising was down approximately $2 million, or 33.8% compared to last year. This follows a combined 29.6% decline in the first quarter of 2006.

Our national advertising revenue category was down 3.3% for the quarter, reflecting lower spending primarily in the entertainment category. The direct marketing category at the daily newspaper was down 13.5%.

Although interactive advertising is reflected in the various revenue categories, total online revenue was up $518,000 to $2.3 million, for an increase of 29.4% for the second quarter. Year-to-date, online revenue is up 28.8% to $4.3 million.

Circulation revenue of $12.8 million for the second quarter was down 3.5% compared to last year.

Other revenue at the daily newspaper of $2.4 million was up 64.2% year over year, principally reflecting gains in commercial printing and commercial delivery.

As you know, we installed new color couples late last year to take advantage of advertiser demand for additional color in the newspaper. In the second quarter 2006, total color advertising was up 15.1%, following last quarter’s gain of 16.5%.

Turning now to broadcasting, revenue increased 36.2% to $58.5 million, and operating earnings were up 81.2% to $16.2 million, reflecting the positive impact of the new television stations and our Las Vegas operations.

Revenue at our television stations for the second quarter of 2006 increased $14.9 million, or 69.3% to $36.4 million. The results include a $14.2 million contribution from the television operations which we acquired in December 2005 and $1.4 million from political advertising from all of our television stations. Excluding the new operations, same-station revenue of $22.2 million increased 3.3%.

Television operating earnings of $9.4 million increased 168.6% from $3.5 million in the second quarter of 2005. Excluding the new television operations, same-station operating earnings of $4.1 million increased 18%, whereas some same-station expenses remained essentially flat.

While softness in NBC Prime continues to pressure our results, we have nonetheless seen margin improvement at all of our television stations except for our Milwaukee NBC affiliate. We have been successful at increasing revenues while continuing to maintain tight cost controls.

Radio revenue of $22.1 million was up $700,000, or 3.3%. However, operating earnings of $6.8 million increased by $1.4 million, or 25.4%, reflecting not only the increase in revenue but a reduction in expenses of some 4.1%.

Moving on to our Norlight telecommunications business, revenues of $32.1 million were down 11.2% compared to the second quarter of 2005, reflecting the anticipated service disconnections and repricing in the wholesale market, and formidable competition in the commercial business.

Operating earnings for the second quarter of 2006 were down 59.9% to $2.7 million from $6.7 million in last year’s second quarter. The 2006 second quarter included spin-off related expenses of $950,000, which had an approximate negative impact of 3% on operating earnings margins.

As expected, wholesale revenues of $17.1 million were down 12.2% compared to 2005, and down 3.4% sequentially compared to the first quarter of 2006. Commercial revenues of $15 million were down 10.1% compared to the second quarter of 2005. This decline reflects a decrease in long-distance revenue as a result of losing several significant customers, as we had discussed previously, as well as aggressive competition from the RBOCs.

As Steve mentioned earlier, we continue to see growth in managed services and data center offerings, up about 23% compared to the first quarter. These products opened the doors to new customers to sell all of Norlight’s products.

At our printing services business, revenues in the second quarter of 2006 decreased 7.7% to $16.7 million. This reflects the expected decline in revenue from Dell Computer Corporation and other software customers, partially offset by $2.0 million in new print business. For the second quarter of 2006, operating earnings from printing services were $530,000 compared to $389,000 for the second quarter of 2005 -- an increase of 36.2%.

Moving on to our “Other” business segment for the second quarter 2006, “Other” revenue of $10.6 million decreased 12.9% due to the loss of a large customer at PrimeNet’s Clearwater, Florida location. For the second quarter 2006, "Other" operating earnings increased to $1.5 million from $0.2 million, due to a reduction of incentive compensation expense.

Our balance sheet remains sound. In the second quarter 2006, operating cash flow was $48.3 million. At the end of the quarter, debt was $274.7 million, reflecting our share repurchase program and our acquisition of television stations in late 2005. Shareholders equity stood at $481.2 million, and capital expenditures in the second quarter were $17.5 million, compared to $13.4 million last year.

In the second quarter 2006, the company's Board of Directors authorized the repurchase of up to 5 million additional shares of the company's class A common stock over the following 18 months. Under the program, share purchases may be made at the discretion of the company, from time to time, in the open market and/or in private transactions. Share purchases by the company will depend on market conditions, share price, trading volume and other factors. This action supplemented the 5-million share repurchase authorization which was approved by the board in February 2005 and completed in June 2006.

During the second quarter 2006, the company repurchased the remaining 728,275 shares of its class A common stock from the first 5-million share authorization and an additional 243,700 shares from the second 5-million share authorization.

In terms of our guidance for the third quarter of 2006, we currently anticipate total revenue -- including revenue from Norlight -- to be between $195 million and $200 million. We also anticipate net earnings to be between $13 million and $15 million.

Please remember that our guidance can be affected by the risks that we outlined in our forward-looking statements at the beginning of this call.

Now I would like to turn the call back over to Steve for a brief wrap-up before we open it up to Q-and-A. Steve.

Steven J. Smith

Thank you, Paul. Looking forward at Journal Sentinel, we anticipate advertising revenue to remain challenged, although we do expect to cycle through the significant declines in automotive later in the third quarter. Nonetheless, Journal Sentinel is committed to margin growth by expanding its online initiatives, increasing its single copy and home delivery sales, gaining additional commercial print customers, and developing new shared mail products. It is also leveraging efficiencies in distribution, printing and cross-selling between the daily and weekly newspapers, which should lead to margin gains this year. The advertising department is focusing sellers on active account growth and developing new business.

Journal Sentinel recently launched six community websites which leverage the database of the content we own to flagship daily paper and the deeply local content at the 18 community publications that serve the greater Milwaukee metropolitan area. These community Internet sites include local search, local news and features, local events, local classifies, and much more. They will enable us to experiment with user-generated content and create a platform for everyday citizens to engage in their individual communities.

In mid-June, the Journal Sentinel also launched its new shopping website -- Milwaukeemarketplace.com. It is the first destination of its kind in southeastern Wisconsin and allows online shoppers a way to find specific items with their local market with one simple search. Milwaukeemarketplace.com underscores the real potential that exists in all of our markets to leverage our traditional media businesses by utilizing the Internet and digital media. As I mentioned earlier, the Journal Sentinel recently purchased Milwaukeemoms.com.

Margins should continue to improve at our community newspapers and shoppers. This is especially true in Milwaukee where CNI and the Milwaukee Journal Sentinel are working together to supplement publications, events and other products with dynamic local news coverage and Internet capabilities, while reducing duplicative operating costs.

Our community newspapers and shoppers are being repositioned to focus on increased advertising, new product launches, and continued strength in commercial print revenue. They have consolidated back-office systems and new editorial front-end and circulation systems are on the way. These initiatives will enable our community newspapers and shoppers to reduce headcount, improve efficiency, and cut expenses.

Our outlook for television remains strong for the third quarter, as developmental revenue and political advertising are ahead of expectations. We are particularly enthusiastic about Las Vegas, where we are leveraging slightly better ratings and our strong sales management organization to drive continued revenue growth and enhanced operating performance.

Additionally, our new television stations are well-positioned to continue to exceed our expectations, especially as we expand our news product. In the second quarter, Fort Myers added three hours of morning news, and the station will add an additional hour of morning news and an 11:00 p.m. newscast in August. Our Omaha television station will add a 6:00 p.m. newscast in September.

On the radio side, we are encouraged by the revenue rebound in the late second quarter and we see continued margin progress as we continue to keep expenses well under control. We recently announced the sale of KBBX FM in Omaha and expect to record a gain on sale after the transaction closes in the fourth quarter.

Completion of the Norlight spin-off is subject to the effectiveness of the Norlight registration statement and receipt of an opinion from counsel as to the tax-free nature of this transaction. We are currently on track for completion of the spin-off, which is expected to take up to six months from the April filing of the registration statement. We expect to report on further details concerning the particulars of this spin-off as we move through the remainder of this process.

Of course, we will continue to support the Norlight business, attempt to optimize results and position the company well for its future.

IPC, as previously discussed, has fully exited the Dell fulfillment business which will continue to result in revenue declines through 2006. We are encouraged, however, by continued growth in its core printing business and expect ongoing margin improvement from IPC’s expanded press capacity and enhanced finishing operations.

We continue to focus on selling new, non-traditional development revenue at publishing and our broadcast group, developing profitable targeted print publications, securing further commercial print opportunities and leveraging our news professionals while driving additional efficiencies through expense initiatives in every business.

Operator, this concludes our remarks. You may begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you.

(Operator Instructions)

Our first question comes from the line of Mark Bacurin from Robert W. Baird and Company. Please proceed.

Mark Bacurin - Robert W. Baird

Good morning. Good quarter -- good cost control, in particular. I had a couple of questions on the radio side. I guess Doug, maybe you can address these. You indicated you saw pretty good rebound over the last couple of months. Could you comment on specifically where you maybe saw strength, and could you give us a breakdown of what the growth rates were for local versus national?

Douglas G. Kiel

Thank you, Mark. In radio, what we saw was somewhat market-specific as opposed to just strength across all markets. For example, our national was up in double-digits, which generally is related to the fact that our big radio station in Milwaukee, WTMJ, is very strongly positioned in our marketplace. We have been working very hard in developmental revenue, new platforms not tied to transactional business that is on a cost-per-point basis, and we saw that was able to cause our local revenue, which has been challenged across our marketplaces, to be up just slightly in the quarter.

Our developmental markets continue to show some progress. That’s really helped those places that we talked about, like Boise and Tulsa and other places where we have relatively new stations that are driving our overall results. So that’s in the top-line side.

Of course, on the expense basis, you kind of alluded to that. We have a quarter where we dropped expenses over 4%, so it is very good discipline by our operators on the radio side of our business.

Mark Bacurin - Robert W. Baird

Just to be clear, when you talk about development revenue, those are where you are adding new news content, either on the television or the radio side?

Douglas G. Kiel

We define developmental new business revenue as business that is generated using some kind of creative platform or sales program developed specifically for advertisers or customers separate from the debate over cost-per-point, and it’s really creative business. We have been focusing on that this year and have had a significant increase, both on radio and television. Sometimes we use commercials, sometimes it’s not spot inventory that we’re creative about on television, like bugs on the screen, for example, that are sponsored that talk about the weather. That’s what we mean by that.

Mark Bacurin - Robert W. Baird

Are those revenues that you would consider to be recurring or are they more one-time project oriented in nature?

Douglas G. Kiel

Some of it is recurring because we get a program that really works for an advertiser and we continue on. Some of it is very, very -- it’s a program that we come up with that works for one year. We have to come up with a new idea the next year, but it is a focus. As I mentioned before, both in radio and television for us, this kind of developmental revenue fills up our inventory and allows us to drive price on other, more transactional revenues that come in during the course of the year. For example, in television this year with political as we move forward. Radio we have a little political as well.

So it’s an overall emphasis for us, and we think we will bear great results going forward for us.

Mark Bacurin - Robert W. Baird

Great. This is probably for Paul. In the Q3 guidance, how much of that development revenue are you sort of baking in going forward in the Q3 numbers? Also, are you anticipating an incremental step-up and the political spend, both in radio and television in those revenue and net income guidance numbers?

Paul M. Bonaiuto

Mark, typically we do not break out our revenue down to that kind of granularity as we look forward into guidance.

As we think about the developmental revenue in the third quarter our sense is, for both radio and television, it will be a little lighter than what we experienced in the second quarter.

With respect to political, clearly we do expect an up-tick in political, especially in television. As we have said in the past, our thought is that for political, we kind of think of 2006 as comparable to 2002, with the exception that we have now added three additional television stations.

Douglas G. Kiel

Mark, this is Doug again. I might add on the political number that we have been pleasantly surprised this year so far in the second quarter by the amount of political we have had in Arizona and in Nebraska. Those are not typically considered swing states, as you know, and there are some unique races going on there that we think will help us as we go, not only in the second quarter but as we go through the remainder of the political season.

Mark Bacurin - Robert W. Baird

Great. Then, just curious on your comments about the weakness at your NBC affiliate, WKMJ in Milwaukee. Is there any way for you to strip out how much of the softness there is related to just the primetime NBC ratings issue that we are aware of versus any particular issue you guys have had on the local news side? Thank you.

Douglas G. Kiel

I can tell you this -- I mean, it’s trouble for us as it is in most NBC affiliates. It’s not just -- it is related significantly to prime, but there is carryover because when your leads are down, it generally affects your newscasts that go around it. Although we have continued to perform well at 10:00 -- we are number 12554 there, we actually showed an increased in the last sweep over the sweep previous and the year previously. So we have a lot of emphasis on defending and growing the news product in Milwaukee, and that is occurring. As you know, we have a significant amount of revenue tied to prime. It affects our cost-per-point and that has occurred here in the first two quarters of the year.

I will say this though: that as we go forward in quarters three and four, with the large amount of developmental revenue we have placed on the books, and are working on now, and then political in a marketplace like Milwaukee, that will help us and turn around our decline in the next couple of quarters.

Mark Bacurin - Robert W. Baird

Great. Maybe just one quick one for Jim. Continued softness in the business, I guess I am only thinking we are one quarter away from seeing stabilization and we continue to see deterioration. Is there a point in time at which you think the wholesale contract and service disconnections, we anniversary those and we are back to at least a stable sequential run-rate on the wholesale side? Then maybe also on the commercial side, where do you anniversary those long-distance revenue losses where in some of your managed service products are to offset that and we see maybe flat to sequentially up revenue growth?

James J. Ditter

I think when you take a look at the second quarter, you will see that the -- if you look at the change in monthly recurring revenue on the wholesale side, it pretty much was a flat quarter. We were down just slightly, so the new business really did offset any decreases we saw in pricing along with disconnects.

It is a similar story too for the commercial business in terms of the data offering. In that business, we need to continue to invest to have a local service offering and do that bundling that we are talking about with the VOIP initiative. I think at the point where we launch that, we will see stabilization -- we will start to see some up-tick in that business.

Mark Bacurin - Robert W. Baird

Okay, great. Thanks a lot, guys.

Operator

The next question comes from the line of Stacy Fleck from Merrill Lynch. Please proceed.

Stacy Fleck - Merrill Lynch

Good morning. I was hoping you could comment on early trends in July at the newspaper business.

Betsy Brenner

Stacey, I would be happy to take that question. July is probably the peak of our year over year anniversarying of our highest automotive revenues and new car sales in our market last year. So starting off the third quarter, we still have some challenge going up against pretty strong automotive sales numbers and automotive advertising numbers from last year.

Beyond that, we are seeing some slight recovery on the retail side. Some of our key categories like financial, business services, and amusement, where we have some good spending by a local casino, are all rebounding and so we are encouraged by that as the third quarter starts out.

I think from a trend standpoint, we are looking to some minimal improvement, not yet year over year gains but a better trend through the third quarter than we saw in the second quarter.

Stacy Fleck - Merrill Lynch

I guess on the auto side, I know you guys mentioned in your prepared remarks that you saw it being a little bit better in the second half. Is that just running against easier comparisons or do you think that there will be increased spending with the new product launches?

Betsy Brenner

Probably less the new product launches than increased or improved spending comparisons. As you recall, last year June and July were the peak times for the heavy incentive spending by the manufacturers, not just in our market but every market. We saw that particularly in June and July of last year, so once we cycle through those, we should have -- we know we will have very much easier comparisons for the remainder of the year.

Stacy Fleck - Merrill Lynch

I just have two quick questions for Paul. Is there any way to break down the pension curtailment by segment? Also, if you could quantify the reduction in incentive compensation?

Paul M. Bonaiuto

Sure. For pension curtailment, it had about a $1.1 million impact on publishing, about a $500,000 on broadcast, and about a $100,000 impact on “other”.

Then, your second question once again?

Stacy Fleck - Merrill Lynch

You mentioned a reduction in incentive compensation at the “other” division.

Paul M. Bonaiuto

Sure. I think if we look at incentive compensation reduction, if we look at it versus last year, we had a reduction in expense of about $800,000.

Stacy Fleck - Merrill Lynch

Great, thank you.

Operator

The next question comes from the line of Peter Salkowski from Goldman Sachs. Please proceed.

Peter Salkowski - Goldman Sachs

Good morning, everybody. On the broadcasting side, if you look at the television stations, ex the three new stations and the political revenue, it looks like your revenues were down about 3%. Doug, how much of that is the Milwaukee market?

Douglas G. Kiel

If you look at the same station, Peter, for television, actually our revenues were up slightly in the quarter, about 3.3%, I think .All of our TV stations in our group were up in revenue in that quarter except for Milwaukee, so the downturn was significantly Milwaukee.

Peter Salkowski - Goldman Sachs

Yes, but if you back out the political, then you are down, right?

Douglas G. Kiel

Oh, I see, if you back out the political. Okay, I misunderstood.

Peter Salkowski - Goldman Sachs

So ex the political, were any other markets down, or was it just Milwaukee?

Douglas G. Kiel

It was Milwaukee -- definitely Milwaukee. Of course, political advertising, if you back it out, we would have sold it to somebody else, so it is not that it is a net-net, and I know you know that but Milwaukee is our issue in the second quarter.

Paul M. Bonaiuto

If you look at the quarters, an example, last year revenue in Milwaukee was at about $8.8 million. This year’s quarter was about $7.1 million, so even with the political, the NBC Prime deterioration is having a pretty profound effect, not only in Milwaukee but its impact on the overall group in what otherwise is pretty darn good performance.

Peter Salkowski - Goldman Sachs

Great, thank you for that detail. Doug, on the radio side, obviously the cost efforts there are very good in terms of what you guys have been able to do. Are we going to cycle at any time soon, or was that just the first half of ’06 so far?

Douglas G. Kiel

Peter, we have ongoing cost containment efforts that we put into place starting this year. We expect to continue them as the year goes forward. We had, as Paul had mentioned, some help in the second quarter because, as he mentioned, part of that pension savings but we have ongoing efforts in terms of employees, in terms of some other projects that are going on in the radio group. So we have had a focus. It has been going on for really three or four years in the radio group and we continue to hold costs very, very tightly.

Peter Salkowski - Goldman Sachs

Great, thank you. Lastly, Paul, cap-ex for ’06 and ’07, any sort of indication of what it will be? Obviously ’06 with Norlight and ’07 ex-Norlight?

Paul M. Bonaiuto

Yes, what we have said for ’06 is that we would approximate $50 million in aggregate including Norlight. We have not updated it, nor do we see any reason to change that amount. We have not provided any guidance for ’07, but just from an historical perspective you might recall that Norlight has typically been in the $10 million to $15 million range, so you can kind of think of it from that perspective.

Peter Salkowski - Goldman Sachs

Thank you very much.

Operator

The next question comes from the line of Craig Huber from Lehman Brothers. Please proceed.

Craig Huber - Lehman Brothers

Good morning, thank you. Can you help us, what are the TV pacings pro forma for the third quarter, and the same question for the radio pacings for the third quarter? I have a follow-up.

Douglas G. Kiel

Radio pacings, I’ll start with that, in the third quarter look to be very, very similar to the second quarter, as I mentioned earlier. We expect to have low single-digit improvement in radio revenue in the quarter.

Television is stronger, and it is stronger across the board than we have seen, on a same-station basis, which I guess is what I can speak to that is probably most important to you. Pacing in the double digits up, and the question about where that will wind up has to do totally with political. We see that shaping up well. It is early in the season, and so to put something specific there would be certainly reckless but it is pacing up I think stronger, as we mentioned earlier, than we had expected.

Craig Huber - Lehman Brothers

Okay, then on the newspaper side, non-newsprint cash costs in the second quarter, what is the percent change there, with and without those adjustments?

Paul M. Bonaiuto

Sure. In the daily newspaper…

Craig Huber - Lehman Brothers

I’m sorry, do you have it for the whole company, or the whole division, or no?

Paul M. Bonaiuto

I do not have it adjusted, I just have it as it is reported, but let me give you adjusted and unadjusted for the daily newspaper. At the daily newspaper, unadjusted, we were up in expenses 0.1%. Adjusted for roughly $730,000 of litigation related expenses, it would have been down about one-quarter of one -- excuse me, 1.8%.

In the community newspapers and shoppers, we were down 13.7% unadjusted, but we did have that insurance proceeds that we mentioned a bit earlier for $1.1 million. Adjusting for that, expenses were down about 8.1%.

On an unadjusted basis for the quarter, we were down 4.5% and on an adjusted basis, for the items I mentioned, we were down about 3.9%.

Craig Huber - Lehman Brothers

That was non-newsprint cash costs?

Paul M. Bonaiuto

That is correct.

Craig Huber - Lehman Brothers

Lastly, can you give us some more detail, if you would please, on this $5.1 million reduction in revenue credits towards 2007 for your flagship paper? Just some more detail on that, If you would.

Paul M. Bonaiuto

All I’ll say is that as part of a settlement that we breached, we are providing credits that will be taken by advertisers in 2007 to the tune of about $3.2 million. In addition to that, we will be offering voluntary adjustments to preprint advertisers to the tune of $1.9 million. That will also be offered in the form of credits in 2007. We will be offering those on a quarterly basis, and in aggregate it totals about $5.1 million. I think there are good details in the May 30th press release.

Craig Huber - Lehman Brothers

Could you also just give us a little more detail, if you would, maybe how many advertisers you expect are going to be involved in this?

Betsy Brenner

Essentially all of the advertisers that advertised in the newspaper during the period that the settlement covers -- I am thinking back. I think maybe low thousands, high hundreds is what we are talking about.

Craig Huber - Lehman Brothers

Okay, great. Thank you.

Operator

The next question comes from the line of DeForest Hinman - Paradigm Capital Management. Please proceed.

DeForest Hinman - Paradigm Capital Management

Could you talk about the improvement in the operating income in the “other” segment? I know we talked about it being related to the incentive compensation, but what can we expect from that segment on a forward basis in terms of operating margins?

Paul M. Bonaiuto

I think if you look at the impact of that, a reversal of the accrual, we had about an $800,000 benefit. So I think if you take that into consideration, you can get a sense of what to expect going forward.

DeForest Hinman - Paradigm Capital Management

All right. I know we talked about stabilization of the operating margins in the Norlight segment in the second half of the year, and we did have a margin decline in the second quarter. What are we trending at, exiting at the end of the quarter? Can we get an idea in terms of the operating margins there?

Paul M. Bonaiuto

I think one of the things I mentioned in my prepared remarks is that during the quarter, Norlight experienced about $950,000 in spin-off related expenses and that that had an impact of about 3% on overall margin. So I think if you look at margins with that adjustment, what you would have seen is about 11.3% in margin. What we had said earlier on this year is our expectation for Norlight is that margins for the full year would approximate 11% to 13%.

DeForest Hinman - Paradigm Capital Management

All right, but I am just trying to understand that. We were going to see a downward trend in the first half of the year and stabilization in the second half, so are we kind of running, exiting the quarter at the -- it sounds like the bottom ends of that range. Is that a correct way of thinking about that?

Steven J. Smith

DeForest, it’s Steve. I think that what Paul was trying to communicate was we have looked at it and I think talked about 11% to 13% as being Norlight’s target for this year. Certainly the impact of the spin-out expenses have impacted that operating margin to date.

We think about them, as Jim talked about, as investing in the voice-over IP platform, which is obviously going to create benefit fourth quarter going forward, investing in the ability to have local voice, which is a product that our salespeople have not had the opportunity to sell in the past. Also, the data center and other products that are the new security products that Norlight is offering have gotten real traction, so there is a growth trajectory on those kinds of products that is in essence offsetting some of the products that are under pressure, i.e. long distance and frame relay.

DeForest Hinman - Paradigm Capital Management

All right. In terms of the soft switch, is that installed at this time?

Steven J. Smith

Jim, would you want to answer that one?

James J. Ditter

The soft switch has been installed. We are doing some testing with that. The next step is to install the server that provides some of the enhanced features and do the interoperability testing between that and the switch will occur over the next couple of months.

DeForest Hinman - Paradigm Capital Management

What time are we going to be able to roll out the VOIP product that we have been talking about? I think in the past we had talked about the second quarter, so are we a little bit behind in that regard?

James J. Ditter

No, I think we have always been talking about the fourth quarter of this year.

DeForest Hinman - Paradigm Capital Management

All right, so early fourth quarter or…

James J. Ditter

During the fourth quarter.

DeForest Hinman - Paradigm Capital Management

All right, that’s it. Thanks, guys.

Operator

The next question comes from the line of Jeff Allen from Silvercrest Asset Management. Please proceed.

Jeffrey C. Allen - Silvercrest Asset Management

Good morning. A quick question about the acquired TV stations. Do you have the pro forma revenues for the second quarter of 2005?

Douglas G. Kiel

No. This is Doug. We do not have that.

Jeffrey C. Allen - Silvercrest Asset Management

Okay, thank you.

Operator

Our final question comes from the line of John Kornreich from Sandler Capital. Please proceed.

John Kornreich - Sandler Capital Management

Okay, real quick -- what is the latest circulation numbers at the big paper in terms of rate of change year over year? Secondly, on the 5.25 million shares you’ve bought so far since the beginning of ’05, what is the average price? I apologize, but I missed the change in employment and real estate advertising in the second quarter for the big paper.

Betsy Brenner

John, I will take your first and third questions. Year-to-date, our circulation volumes on Sunday are down four-tenths of a percent, that is total Sunday. On daily, we are down almost 2%, 1.96%.

John Kornreich - Sandler Capital Management

Any pricing changes in the papers in the last year or so, six months or so?

Betsy Brenner

No announced pricing changes. We have seen a shift in the mix, which has affected us rate-wise, and that is a move toward home delivery and away from single copy but overall, our Sunday rate has improved by about 3% so far this year because we have done away with some discounting and we have also seen some good increases in home delivery.

John Kornreich - Sandler Capital Management

Good Sunday numbers. Okay, and on the share repo?

Paul M. Bonaiuto

On the share repurchase, John, through the first 5 million shares, they averaged a little over $14.00, and with the most recent acquisition against the second authorization for what you referenced is about 0.25 million shares, it is a little over $11.00.

John Kornreich - Sandler Capital Management

Okay, so call it $14.00 on average. The last thing, I apologize, I missed the real estate and employment rate of change in the second quarter, only for the big paper.

Betsy Brenner

For the Milwaukee Journal Sentinel, John, our recruitment advertising was down 4.7% and real estate was up eight-tenths of a percent.

John Kornreich - Sandler Capital Management

Thank you, I appreciate it.

Operator

At this time, there are no further questions. I would like to turn the call back over to Sara Wilkins for closing remarks.

Sara Leuchter Wilkins

Thank you, and once again, thank you all for joining us on this morning’s call. We do appreciate your interest in Journal Communications. As a reminder, a replay of the call will be available today through July 20th. Please refer to this morning’s press release for the dial-in information for the replay of the call. Also an archive of the webcast will be available today through August 1st at www.journalcommunications.com/investors. Thank you again.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Have a wonderful day.

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