Tim King - VP, Corporate Communications and IR
Rich Boehne - President and CEO
Tim Stautberg - SVP, CFO and Treasurer
Brian Lawlor - SVP, Television
Mark Contreras - SVP, Newspapers
Townsend Buckles - JPMorgan
Barry Lucas - Gabelli & Company
The E. W. Scripps Company (SSP) Q2 2009 Earnings Call Transcript August 10, 2009 9:00 AM ET
Ladies and gentlemen, thank you for standing by. Welcome to the second quarter earnings report conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator instructions). And as a reminder, this conference is being recorded.
I would now like to turn the conference over to Tim King. Please go ahead.
Thank you, Mary. Good morning everybody, and thanks for joining us for this call. In just a minute, I will introduce Rich Boehne, the President and Chief Executive Officer. He will give you a brief strategic overview of the business. And then, he will be followed by Tim Stautberg, the Senior Vice President, CFO, and Treasurer. He will discuss the second quarter financial and operational highlights. And then as usual, we will open up the lines for your questions.
And at that point joining us for the call are Mark Contreras, the Senior Vice President of Newspapers; Brian Lawlor, the Senior Vice President of Television; Bill Appleton, our General Counsel; and Doug Lyons, our Vice President and Controller.
Now just a couple of quick housekeeping items. If for some reason you can't stick with us for the duration of the call, you can access a streaming audio replay by going to Scripps.com and clicking on the Investor Relations link at the top of the page. The replay will be active later this afternoon and we'll leave it there for a few weeks. You can also use that link to find today's press release and the quarterly financials.
As a reminder, when you're reading the release and the financial tables, the results for the Scripps Networks and Interactive Media divisions are presented as discontinued operations, as they have been since the third quarter of last year.
Now, as always, our discussion this morning may contain certain forward-looking statements and actual results may differ from those predicted. You can check Page 11 of the Form 10-K for 2008 to read some of the factors that may cause results to differ from what you're about to hear.
So with that, I'll turn it over to Rich Boehne.
Thanks Tim. Good morning. Thanks for joining us early on a Monday morning. I am going to walk through the second quarter from a more strategic point of view and then Tim will talk about the numbers.
The end of the second quarter also marked the end of the first year since we separated the lifestyle networks from the journalism group and businesses as the TV stations and newspapers, so that each company could focus on its particular opportunities and challenges.
The separation that created Scripps Networks and Interactive and returned the E.W. Scripp’s company’s focus to news and public service media, took more than a year to complete. But at no time, during that preparation period, did we have even an inkling how vital important the split would be for the strategic future of both companies.
For us here at E.W. Scripp’s being separate and focused on local news and information businesses has allowed us to react quickly and appropriately to the rapid downshift in the national economy and also to begin restructuring our organization for success in a very different media marketplace.
Let me talk about both of those for just a couple minutes; first, how we’re moving to protect our financial health and value during this dramatic swoon in advertising revenues. We believe financial flexibility will be a key strategic asset in the years ahead, so we’re determined to keep debt as low as possible during this crunch period.
Tim’s going to talk in just a few minutes about our new bank agreement, which ensures favorable borrowing rates and enough flexibility to reposition the company. But we are determined to use our credit line only as a backstop. We’re aggressively cutting expenses and reallocating resources to both improve our short-term financial health and shift resources to where we see longer-term opportunity for Scripps.
The top priority for both the TV stations and the newspapers is increasing the amount, the quality, and the value of our news and information content. At a time, when most competitors are whacking away at their products, we are trying to do the exact opposite. That’s not been easy. Even in newsrooms, we’ve reduced compensation, but we’ve tried to protect our overall investment in news product. At the same time, we are focused on earning a return on those content investments by offering advertisers the most attractive marketplaces available across multiple platforms. Brian and Mark can give you some examples in just a few minutes.
Granted, you are not seeing the results of these efforts in the revenue numbers, the macro environment is still way too cruddy. The benefits of audience and ad share gains and new revenue streams won’t be fully evident until the overall ad markets stabilizes which we hope is beginning and we saw some evidence of in the second quarter. But we are confident the opportunity is there in many of our markets, so we intend to continue putting our money where we expect to get the best return, in content, marketing and the creation of attractive new environments for advertisers. That means we are not cutting expenses uniformly across the board. We are doing surgically, different by division and in some cases, different by local market. The decision is driven by our analysis of the opportunity.
Our overall expenses as a company will continue to come down and they need to come down, but the reductions will continue to be made methodically and strategically. Thanks to our already light debt load, we can set our own course. That course will continue to focus on three things.
One, producing quality content that drives larger and more valuable audiences, the public’s appetite for news content has never been more insatiable; two, increasing our share of profitable ad dollars through our new products and services for advertisers; and three, at course, we will continue to focus on an eagerness to adapt our organization and our business models to the realities of the future. That takes a lot more than just cutting costs. It also requires reallocation of existing resources and the importing of new talent.
Here’s the bottom line. 2009 is shaping up to be one of the most challenging years from media since the dawn of television. That means it’s also a season of opportunity for the industry’s entrepreneurs who instead of battling to protect our industry’s traditions are determined to create some new ones. We believe we are making the right moves to improve our odds for long-term success as a creative and aggressive provider of news and information content for the benefit of consumers, advertisers and the communities we serve.
Now, here’s CFO Tim Stautberg, to talk more about the quarter.
Thanks, Rich and good morning, everyone. As you’ve already read, our revenue in the second quarter came in at $194 million, a decrease of 23% from a year ago. Of course, we are not satisfied with that figure, but it’s consistent with what we’ve seen from our peers and local media. The bottom line was a little more encouraging. Thanks to disciplined cost cutting.
We reported net income of $0.04 per share in the second quarter. This was our first reporting period since the S&I spin-off without unusual items in the income statement, so that $0.04 is a nice clean number and thankfully, it’s in black ink.
Turning to the operations, revenues at our TV stations were down 24%, as the weak economy continued to pressure local and national advertising budgets. Auto advertising was down 52%. Keep in mind, this was in the same quarter that Chrysler and General Motors were going through their bankruptcy processes and before Uncle Sam decided to spend a billion dollars to have Americans trade in their clunkers. The good news is this category is starting to show signs of improvement in the third quarter.
Elsewhere in the second quarter, retail advertising was down 17%, and the services category was down 15%. Unfortunately, there weren’t enough local ballot issues this year to offset the $1.6 million in primary season political dollars we garnered last spring.
We remain aggressive in developing business from customers who are new to TV or who have not advertised in our markets for the past 12 months. Even in this economy, newly developed revenue streams grew more than 5% in the quarter. Also, our focus on serving our customers with online solutions continues to show success with a 35% increase in television, Internet advertising.
On the whole, business at the TV stations was disappointing due to an operating environment in April and May that was simply terrible, but June showed some improvement in local and national advertising. And early indications lead us to believe that momentum will continue in the third quarter. That will help us in offsetting the absence of nearly $13 million in political and Olympic advertising during last year’s third quarter.
You read Rich’s quote in the release that talked about week-by-week improvements in our revenue projections. Let me be clear that these incremental adjustments are modest compared to the magnitude of our year-over-year declines, but at least the trends are pointing in the right direction and have done so consistently for almost two months.
On the expense side, disciplined belt tightening when it comes to employee and other expenses offset a double-digit increase in programming expenses, resulting in a 10% decrease in cash expenses for the stations.
Segment profit for the TV group came in at about $5 million for the quarter. That’s a far cry for more than $18 million in the election year of 2008, but it’s a return to positive territory after the segment loss we reported in the first quarter.
Turning to our newspaper group, all advertising categories declined by double digits, classified continues to be most troubled category with the year-over-year decline of 39%. Within classified, help wanted was down 68%, auto was down 42% and real estate was down 48%. The all other category was essentially flat which I guess is an accomplishment these days.
Online advertising fell by 25%, which is slightly better than in the first quarter. You’ve heard us explain that the drop is attributable to the fact that about half of our online ads are tied to print classified ads. Online advertising that is independent of classified, what we call pure play continued to grow impressively, raising 19% during the quarter. Pure play is growing at a steady pace due to the early successes of the Yahoo!, behavioral targeting initiatives that we’ve talked about in previous call.
Total ad revenue dropped 29%, but circulation revenue actually increased 2% to $29 million, limiting the total revenue to decline for the quarter to 22%. Total cash expenses in our newspaper group declined 23% in the quarter. The results of last year’s workforce reductions and this year’s many cost saving initiatives including pay cuts, the elimination of bonuses and the suspension of the 401(k) match.
We finally cycled through the newsprint price increases that plagued our P&L last year and actually enjoyed a 6% reduction in the average price per ton for the quarter, couple that with a 34% decrease in volume, and our newsprint expense declined by 37%.
Segment profit from newspapers managed solely by us was $15.4 million, which is a drop from $19 million in the year-ago quarter, but an encouraging result in this punishing operating environment.
Today’s release was probably the last time you will see a segment called JOAs and newspaper partnerships. During the second quarter, we reported a segment loss of less than a $1 million, representing additional costs associated with shutting down the Rocky Mountain News and exiting Colorado. It’s likely that during the third quarter, this entire segment will move to discontinued operations.
Rounding out our operational discussion, United Media’s revenue dipped 22% in the second quarter. A majority of this business comes from the licensing of animated characters for using consumer merchandize so the worldwide economic challenges particularly in Asia have affected our sales. Segment profit was just under $2 million compared with $2.5 million in the second quarter of 2008.
Aside from the income statement, the other big news from Scripps this morning was the announcement that we recently amended our credit agreement in order to move away from unsecured borrowing that is tied to a multiple of segment profit.
As I said in the release, we were in compliance with our existing credit facility, but believe we will have much more flexibility to navigate through the current storm, now that our revolver is not limited by an earnings based leverage covenant.
We’ve reduced the size of the facility from $200 million to $150 million and provided the bank group with a security interest in substantially all of our assets. We didn’t touch the tenure of the facility, which has another four years to run. Our current pricing under revolver is LIBOR plus 300 basis points which we think is pretty good considering current conditions in the credit markets.
The amount we can borrow under the facility will be limited by a borrowing based formula related to the value of eligible collateral as defined in the amended agreement. Based on our current projections, we believe we will have sufficient availability to meet our operating and capital needs.
Before we stop and take your questions, let me address a few non-operating items. Capital expenditures in the second quarter were approximately $10 million, bringing the six-month figure to $24.1 million. The full-year figure is now projected to come in under $50 million. For 2010 and beyond, the maintenance level for capital expenditure should be about $25 million a year, although we will only spend what we can afford.
Through the second quarter, our total debt was essentially unchanged at $73 million. At the end of June, we had $42 million in cash and marketable securities on our balance sheet, resulting in a net debt of roughly $30 million.
Let me switch gears now and give you an update on our pension situation. As a result of the plummeting equity markets last fall, the asset value of our pension plans was $145 million, less than our accumulated benefit obligations at the end of 2008. And as a result, our pension expense was projected to be roughly $45 million this year versus $15 million in 2008. As a result of changes to our workforce and our decision to freeze the plants starting July 1st of this year, our actuaries are now projecting pension expense to be $28 million for 2009.
From a funding standpoint, we have met the minimum funding requirements this year for our defined benefit pension plans. And based upon our current actuarial assumptions and the IRS guidance regarding funding calculations, we currently do not anticipate a contribution being required in 2010. That could change if interest rates or the return on plan assets differ from what we have assumed and there is always a risk that the pension funding rules will change, but we are encouraged that it may be 2011 before we need to begin making cash contributions to our defined benefit plans.
That’s a quick review of the quarter. It was nice to report net income. Again, it was the fruit of many tough decisions and hard work. But I can tell you that no one here is relaxing. The declining revenue trends maybe showing some signs of moderating as you have already heard from the peers who reported before us, but we are a long way from calling these growing businesses.
Make no mistake, challenges still abound, but investors in Scripps should be heartened that our actions have improved the expense line, our amended bank agreement enhances our financial flexibility for the long-term, our net debt remains very low, our pension situation is better than it was when we entered 2009, and we remain committed to reshaping the operating model of our newspapers and TV stations, so that Scripps can be a recognized leader during the next season of local media.
With that, let’s open up the lines for your questions.
Thank you. (Operator instructions). And our first question is from the line of Alexia Quadrani from JPMorgan. Please go ahead.
Townsend Buckles - JPMorgan
Thanks. This is Townsend Buckles for Alexia. Can you talk – or can you give some more color on where you are seeing incremental strength or stabilization? Are you seeing a pickup in certain verticals aside from auto that you mentioned, or, in specific geographies?
Hi, Townsend, this is Rich. We will let Brian Lawlor talk about that from the TV side.
Hi Townsend. As you noted, we did mention that we are seeing an uptick in automotive in July and carrying right now through the third quarter compared to second quarter. We do have some other categories that are pacing better than they did in the second quarter as well.
Services which was our top category has improved in the third quarter versus second quarter. Our brand name category, which was – products like P&G and Kraft and those categories are up, home improvement is up, travel and leisure is up. So we are seeing growth in multiple categories beyond just automotive.
Townsend Buckles - JPMorgan
And by geography, are you seeing any pockets of strength?
I wouldn’t say pockets of strength. I still see Arizona and our two Florida stations is having challenges beyond the rest of the group. But I couldn’t identify one or two that I think is starting to break out.
Townsend Buckles - JPMorgan
And actually, how about the newspaper side?
Townsend, this is Mark. Slight improvement in all three categories, but primarily in automotive, for the quarter, we were down about 40% and July looks little bit better. Real estate down 40 some percent and that’s getting a little bit better.
The tough geographies for us are really still California and Florida, and I don’t want you to read too much into any kind of one-time snapshot in July. But without question, geographically, Florida and California are still tough.
Townsend Buckles - JPMorgan
Thanks. And finally your cost came down much more in Q2 than Q1 especially in the newspaper segment. Does Q2 reflect the full effect of your cost cutting measures over the last week few quarters, and can we expect a similar pace of cuts in the second half of the year?
All right. This is Mark again, Townsend. I would say that you – rather than look at year-over-year percentages, you might look at dollars in the second quarter remaining roughly the same in Q3 and Q4. There was some noise in last year’s numbers which makes the year-over-year percentages tough to track. But we remain committed to keeping a tight grip on personnel costs and we’re not planning on adding back during the last half of this year in terms of payroll or any other expenses.
Townsend Buckles - JPMorgan
Thank you. (Operator instructions). And there are no further questions. I am sorry we just had one queue up from the line of Barry Lucas from Gabelli & Company. Please go ahead.
Barry Lucas - Gabelli & Company
Thank you, good morning. Glad to get that in under the wire. Rich, can you provide anymore color on the Yahoo! relationship and maybe some assessment of what the search deal with Microsoft may or may not be?
Sure. Thanks Barry. This is Rich. I will give you just quick color. We continue to be enthusiastic about the Yahoo! consortium on two levels. One, it represents probably for the first time in the industry’s history a meaningful coalition of newspaper operators to get things done on both the cost and revenue side for the long-term, it’s just a great opportunity in a lot of ways. I will let Mark talk about the specifics of some of the new deals at Yahoo!
Barry, hi, it’s Mark. I just wanted to share with you. We have been in contact with our partners at Yahoo! and they have explained in detail why they did the Microsoft deal. It essentially puts Yahoo! much more in the content business and leaves technology for search particularly to Microsoft. So from our vantage point, it’s a good deal because it allows Yahoo! to continue to concentrate on us as content partners as well as economic partners.
Barry Lucas - Gabelli & Company
Okay. Thanks. One more quickie for Tim. Corporate came down, is that a good run rate for corporate expense for the balance of the year, and are there any other lingering costs from the separation or tails that could jump up either this year or next?
Yes, thanks, Barry. I would – I don’t anticipate significant mop up from the separation. I think probably in the third quarter, we will settle all of our accounts with respect to taxes and anything else that’s hanging out there, pension plan, asset, separations, those kinds of things, but I don’t expect any expense hits from that that would be in the nature of cash that would be significant. I think the run rate for corporate is probably $28 million to $30 million roughly into the back half of this year, probably $8 million or $9 million, probably $8 million a quarter might make sense.
Barry Lucas - Gabelli & Company
Great. Thanks, Tim.
Thank you. And there are no further questions.
All right. Mary, we appreciate your help this morning, and thanks to everyone else for your interest in Scripps. Have a good morning.
Thank you. Ladies and gentlemen, this conference will be available for replay after 11:00 AM Eastern Time today through Midnight August 17th. You may access the replay service by dialing 1-800-475-6701 and entering the access code 105580. International participants may dial 320-365-3844 using the same access code 105580. That does conclude our conference for today. Thank you for using AT&T Executive Teleconference Service. You may now disconnect.
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