PRIMEDIA Q3 2006 Earnings Call Transcript

PRIMEDIA Inc. (PRM)
Q3 2006 Earnings Call
November 7, 2006 10:00 am ET

Executives

Dean Nelson - Chairman of the Board, President, Chief Executive Officer
Kevin Neary - Chief Financial Officer, Senior Vice President
Steve Parr - Senior Vice President; President, Enthusiast Media
Bob Metz - CEO of Consumer Source
Kim Payne - Chief Financial Officer of Consumer Source
Carl Salas - Senior Vice President, Treasurer
Eric Leeds - Senior Vice President, Investor Relations

Analysts

Matt Chesler - Deutsche Bank
Steven Wise - Banc of America Securities
Todd Morgan - CIBC World Markets
Michael Meltz - Bear Sterns
Ann Marie Green - UBS
Bennet Lightman –Axias Capital Management
Andrew Finkelstein - Lehman Brothers

Presentation

Operator

Good day, ladies and gentlemen, and welcome to PRIMEDIA's third quarter 2006 earnings conference call. (Operator Instructions) Now, I would like to introduce your host for today's conference, Mr. Dean Nelson, Chairman, President, and Chief Executive Officer of PRIMEDIA. Mr. Nelson, please go ahead.

Dean Nelson

Good morning, and welcome to PRIMEDIA's third quarter conference call. I am pleased to be joined by Kevin Neary, CFO; Steve Parr, President of Enthusiast Media; Bob Metz, CEO of Consumer Source; Carl Salas, our Treasurer; Eric Leeds, our IRO and other members of senior management.

As always, we refer you to the Safe Harbor disclaimer spelled out in our earnings release. Also, any non-GAAP terms mentioned on this call are reconciled to GAAP in the earnings release and the company's SEC filings.

On today's call, we will summarize third quarter 2006 results and review our operating strategies relative to those results. Steve and Bob will review performance highlights from their respective business areas, and Kevin will review our financial condition. Then, we will open the call for questions. We will keep our operating comments brief to avoid simply repeating the information in the release.

There are a number of very positive things going on in the business. In the third quarter, we generated year-over-year segment EBITDA growth in our two largest businesses, Enthusiast Media and Consumer Guide. The product redesigns in our Enthusiast Media business have been very successful. We continue to see rapid growth in our digital business, and now have our third lead delivery platforms running in marine to go along with our successful platforms in automotive.

We have carefully managed our costs in this difficult market, particularly by reducing our copies printed while still delivering good newsstand performance. We’ve gained advertising share in key segments such as automobile manufacturers, where our YTD advertising revenue is up 2%, while the overall market is down over 12% in ad pages.

In Consumer Source, our new homes and our online RentClicks apartment business both continue to grow rapidly, and the management in Consumer Guides has done a good job managing costs.

In education, two of our three businesses are performing well, and finally, we continue to enhance our talent, particularly in the editorial and online areas. We also have issues that we're addressing such as Channel One has faced a serious revenue shortfall in the fall school year and despite cost cuts, will be down significantly in segment EBITDA versus 2005.

Our apartment guide business continues to face unfavorable market conditions because of the extraordinarily high occupancy levels in much of the country. The international auto and tuning market continues to decline and our costs associated with the potential spin have been higher than anticipated, primarily due to a need to go back and verify the NOLs around all of the numerous transactions that have taken place at PRIMEDIA.

As a result, we are lowering our 2006 consolidated guidance. We now expect to deliver low single percentage revenue growth and flat segment EBITDA, both lower than the previous guidance of mid single-digit and low to mid single-digit percentage growth respectively. This is primarily due to the greater than expected decline in the company’s Channel One business, softness in the international automotive category, and greater than expected, non-recurring expenses related to the exploration of a spin-off, which are expected to total about $5 million in 2006, or $3 million more than forecasted.

The company expects these three variables will reduce 2006 revenue and segment EBITDA by approximately $17 million and $13 million respectively, below the company’s original forecast. However we believe that none of these reasons for the guidance reduction affect PRIMEDIA's longer term prospects. The spin-related costs are, of course, non-recurring. We are highly confident that continued focused execution on our existing strategies will generate solid performance across the portfolio.

We also continue to improve our balance sheet. On September 26th, we completed the sale of our Crafts Group to Sandler Capital Management, a private equity fund, in an all-cash transaction valued at approximately $132 million. Over the past five years, we have reduced our debt from $2.71 billion to $1.31 billion and have also reduced our leverage from 12 times to 7.6 times. We have done that by improving and then selling non-core businesses while also significantly improving the segment EBITDA of the portfolio businesses that we've kept.

Finally with regard to the possible spin-off of Consumer Source, the Form-10 was filed yesterday. The filing contains significant information on the potential spin-off and we will not be answering questions on the details of the Form-10 on this call today. If you have questions, please submit them to Eric Leeds in writing and we will address those that raise issues that require clarification in an amendment to the Form-10. We remind you that despite press releases to the contrary yesterday, there has been no final decision on whether to complete the spin-off by the board of directors.

To discuss our Enthusiast Media business segment, I will now turn the call over to Steve Parr, President of Enthusiast Media.

Steve Parr

Thanks, Dean and good morning, everyone. I want to spend a few minutes today to discuss our major initiatives in hand. First we have spent considerable time and effort improving our product. To date in 2006, PEM has implemented 24 products upgrades, primarily in the performance and international automotive groups where challenges have been the greatest. These improved products account for approximately 25% of our year-to-date print advertisement and circulation revenue, and the early results of these improvements show positive results.

The calculations around the performance of the regionalized products are simple: first, how does the newsstand and advertising revenue post-redesign compare to the average performance over the six months prior to the redesign? We compare that change in advertising and newsstand revenue against the changes for the rest of the portfolio which allows us to adjust for any seasonality in the business.

Secondly, we calculate the financial returns from the redesign efforts by subtracting the ongoing redesign costs such as more pages of content per issue or higher quality paper stock from the change in revenue calculated above. 17 of the 24 redesigns have driven newsstand revenues for the redesigns more than 12 percentage points above average for the rest of the portfolio. Advertisers are responding favorably to product enhancements, evidenced by the fact that advertising revenues for the 24 redesigned titles grew more than 11 percentage points above the rest of the portfolio. We expect to see continued higher levels of advertising in these redesigned publications albeit at a probably lower level over time.

Finally across our revamped publications, the increase in revenue well exceeded the costs associated with the redesigns. Ultimately, much of the product improvement initiative centers around people, therefore we have continued to enhance the quality of our senior editorial and art director teams. Here today we have promoted 32 editors and art directors and have added 18 new top-level recruits. Their contributions have already been felt in the segments product improvement efforts. Four of these individuals have been recruited from the UK, where the revenue model is based on successful newsstand sales.

Going forward, the challenge for us is twofold. First, to continue to apply our proven methodology to continually improve these publications; and secondly, to expand our capabilities through the rest of the portfolio.

Finally on the product side, we have been optimizing draw and distribution to increase circulation profitability. We have reduced draw by 9.4% or 4.6 million copies in the third quarter alone; and 6.5% or 9.3 million copies in the first three quarters. We continue to be encouraged by the results of the program and will implement new programs to further reduce draw in the fourth quarter.

Our second major initiative has been to grow our non-print revenue and segment EBITDA. We expect non-print will represent 20% of the Enthusiast Media segment EBITDA by year end, which is double the 10% reported for full year 2005.

We are pleased with the progress we have made in growing our internet position, particularly in our efforts to expand beyond advertising to bring buyers and sellers together. Beyond the strong lead generation performance in Automotive.com and Equine.com we launched our marine lead generation site in October. Advertising revenue across all of our online sites has grown significantly, but some were lower than our initial estimates. We’re working hard to continue to drive more growth there.

Our sites are attractive to advertisers. For example, Nielson’s Ad Plan Market Research System currently indexes the PRIMEDIA automotive digital network as the leading online network in the critical category of consumers who intend to purchase a new or used vehicle in the next six months, which is obviously a key component of the auto maker’s online advertisement selection process. As a result, we are confident that we can continue to drive advertising growth going forward.

In total, the online segment EBITDA in the third quarter exceeded the total online segment EBITDA generated in the first two quarters of this year, so our strategy is obviously working. We have seen slower growth than we anticipated in the rest of our non-print portfolio. Events in TV and radio continue to perform well but we have seen a decline in licensing and merchandising and also in list rentals and in Retail Vision, which is our small distribution arm. The licensing and merchandising declines were driven primarily by large programs with major accounts such as RadioShack.

Finally, we do face ongoing challenges in the business that we are working hard to address. First, continued weakness in nearly all the areas of the international automotive group negatively impacted overall results. The group continues its vigorous efforts to maximize product quality, circulation costs, profitability and non-print sources. The group will soon be testing the launch of two new titles to address the change in interest in the youth market, one called Siphon and one called Project R.

Secondly, we have seen some weakness in our smaller product categories, including action sports, home tech and marine. Although some of this weakness is driven by soft markets, we will expand our product improvement capabilities to include these smaller groups for 2007.

I would now like to turn it over to Bob Metz, CEO of Consumer Source, PRIMEDIA’s Consumer Guides segment.

Bob Metz

Thanks Steve. Good morning. For Consumer Source, revenue growth was driven by outstanding results in New Home guide, strong results in Auto guide and offset by predicted challenges in this segment’s Apartment Guide business. Other revenues slight decline reflects Distributech’s ongoing optimization of distribution locations. EBITDA growth reflects a strong organic growth for New Home guide, Distributech program optimization and the annualization of New Home and Auto guide launches, partially offset by a revenue decline in Apartment Guide advertising.

Speaking about Apartment Guide, total advertising revenue this quarter declined 5.6%, primarily due to the continuation of abnormally high occupancy rates in more than half of our markets. Although the rate of condo conversions has slowed down considerably from this time last year, the lost advertiser base from conversions in prior periods continued to negatively impact our business this quarter. The quarter’s rate of advertising revenue decline was nearly half a percentage point lower on a sequential quarterly basis, indicating some improvement in market conditions combined with continued improvement in our execution. Unfortunately, we are not at the point where we can state that the tide has turned in Apartment Guide.

Here are some specifics about how we're improving execution in these difficult market conditions. 16 of the 17 remaining black and white Apartment Guides have been converted to color and publications were consolidated in two of our four cross-town markets. Features have been added to Apartment Guide to enable us to better track leads for our advertisers. Our tracking process, which measures the sources of all leads for a property manager, is showing that Apartment Guides and ApartmentGuides.com is generating considerably more leads than any other print or Internet marketing vehicle for most properties. Expanding this property tracking capability across more property managers is a primary objective for 2007.

RentClicks performed well in the third quarter, organically growing revenue 30% versus the previous quarter and 94% versus last year. RentClicks is the market leader in a very lucrative segment of the small unit rental marketplace; a market that accounts for approximately 70% of the total rental market, and with low market penetration, represents significant growth opportunity.

Onto New Home Guides. Our New Home Guide and newhomeguides.com continued to deliver outstanding results with revenue growth of 24% in the quarter, all organic. This growth is reflective of the brand’s position as one of the most cost effective and attractive media channels for new home builders. The newhomeguides.com portfolio of sites is the largest on the Internet and has the fastest growing number of unique visitors versus prior quarter, according to Media Metrics. We do not believe our New Home business is being adversely impacted by the slowdown in the homes market.

The Auto Guide business generated total revenue growth of 31% in the quarter, which is less than we expected. Auto Guide represents a $17 million business based on annualized revenue in the third quarter, and we believe represents our group’s most substantial opportunity. Long term, we believe that our Auto Guide business could become larger than the Apartment Guide.

We did, however, experience quarter-over-quarter decline in Auto Guide’s run rate primarily due to the management failure to implement the company's proven sales and operations strategies in a significant number markets, including San Diego, where the company decided to shut down its auto book. These execution problems were felt primarily in the third quarter and are expected to impact fourth quarter results. In markets where our model has been properly applied, growth is in line with expectations. The executive in charge of Auto Guides is no longer with the company.

On October 1, we appointed James Moon as Vice President of Auto Guide division. His knowledge of the automotive industry and success at New Home Guide, gives Auto Guide the leadership needed to ensure growth and expansion consistent with its potential and prior performance. We're highly confident that James will rectify the execution issues and bring Auto Guide back to the growth rates in the first half of the year.

Distributech, all of our consumer source print properties benefit significantly from this business. It gives us what we regard as the best distribution for the lowest cost and enables us to provide immediate, widespread distribution wherever we decide to launch a new Auto Guide or a new Home Guide. We are continuously evaluating and optimizing our distribution business, which is why Distributech revenue fluctuates.

Also this quarter, a fall in gasoline prices reduced the customer delivery surcharge which somewhat reduced revenues.

Now I'll turn it back to Dean to talk about PRIMEDIA's education segment.

Dean Nelson

Thanks, Bob. In education, Channel One, as we said earlier, is the main reason why we're lowering guidance for 2006. The management team has done a great job in reducing costs in the business while improving the quality of the programming, and the program also continues to gain broader endorsement and support around the value of educating teens on news and public affairs. For example, during the quarter Channel One secured a $2.25 million three-year grant from the Knights Foundation to launch a first amendment education campaign.

However, Channel One continues to struggle on the revenue side as it has had a much lower than expected 2006 fourth quarter selling season. As a result, we're expecting Channel One to deliver roughly two-thirds of the revenue that we had originally planned for 2006, and we're in the process of assessing the business.

At the close of the second quarter, we announced our decision to hold and continue to operate our films group under the new leadership of Amy Bevilacqua, EVP and General Manager. Amy brings a successful tenure, leveraging technology and distribution to create new growth avenues for content, and she is continuing films’ strong turnaround, facilitating consumers' transactions and their transition to the digital media as evidenced by the adoption of new formats including our on-demand delivery platform. Films overall performed in line with our expectations in the third quarter.

Finally, PRIMEDIA health care continues to perform well. As we've said, this business benefits from a close strategic partnership with Mass Gen Hospital, a leading healthcare educational association. I'll turn the call over to Kevin Neary, our CFO.

Kevin Neary

Thank you, Dean. We continued through the third quarter of 2006 to deliver on our plan for improving PRIMEDIA's financial strength. As Dean mentioned earlier, as of September 30, debt balances net of cash of $1.3 billion were $146 million lower than the end of last quarter. This reduction was driven primarily by the sale of the Crafts group.

Our ratio of debt to segment EBITDA was 7.6 times for September 30 versus 8 times last quarter and 12 times in 2001. We are continuing to refine the amount of available NOLs which are centered on the impact of divestitures in '05 and '06. We expect the amount available to be substantial and will offset taxable income in the foreseeable future.

Due to our lower debt levels compared to last year, for the nine months ending September 2006 we paid $28 million less cash interest on funded debt versus the same nine months last year. As of September 30th, our average cost of debt was 8.4% compared to 8% for the same period last year, reflecting higher short-term interest rates. We expect free cash flow to be $13.8 million for the third quarter of 2006 compared to $21 million for the same three months last year. However, for the nine months ending September 30th, free cash flow was positive $11.5 million compared to negative $21 million for the same nine months last year, reflecting lower debt service and improvements in working capital.

In October, we purchased $5 million of 8% senior notes at an average rate of 92%. Buybacks year-to-date totaled $69 million, and our fixed to floating debt ratio is approximately 50-50. We will continue to take advantage of opportunities to redeem debt at attractive prices.

In summary, the company continues to track on the plan to improve its financial profile. Through September of 2006, we succeeded in improving our working capital position and as mentioned, reduced debt service by $28 million versus the same nine months in 2005.

Operator, I think now we will open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question today from Matt Chesler - Deutsche Bank.

Matt Chesler - Deutsche Bank

A couple of questions. It sounds like there were some execution problems in the Auto Guide segment of Consumer Source. Apart from changing management, can you explain what it is that went wrong in the quarter and what you guys are doing to correct that going forward?

Dean Nelson

Bob would you like to take that question?

Bob Metz

Yes. Thank you, Dean. The biggest problem we had with execution had to do with hiring the right people. The man that we had in charge was very good at generating revenue in any market that he traveled to, but he didn't do a good job of hiring staff and building them out in the markets. The person we've replaced him with, James Moon, that was what he was best at. He ran our New Home Guide division, and he built a tremendous staff there and he's bringing a few people over with him. We think that he will be very successful adding strong staff to these markets which then will actually run the program that we put in.

Dean Nelson

I think also Matt it's worth noting that in markets where we have publishers that we feel comfortable with, the business is performing quite well so it's a mixed mode right now but that gives us confidence we have the right model.

Matt Chesler - Deutsche Bank

Do you anticipate shutting down any other books other San Diego?

Dean Nelson

Not at this time, we don't. We'd like to see what James Moon can accomplish when he's in charge. His background is in the Auto Guide product with Trader and he feels very confident about this product.

Matt Chesler - Deutsche Bank

Can you talk a little bit about your performance generating online revenue in the Enthusiast Media segment this quarter? What was the quarter, year-over-year growth and if you weren't pleased with it, where were you disappointed?

Dean Nelson

We don't normally disclose that revenue and one thing to note about our online revenue in Enthusiast Media which is on the lead generation side we tend to track less revenue and almost equivalent of segment EBITDA, our contribution margin from the leads. Sometimes the market is very attractive. We might spend a little bit more money on key words and drive some more revenue, obviously at a cost.

The one thing we can say is we saw improvements in both components of the business both the online advertising revenue and also the lead generation side of the business.

Matt Chesler - Deutsche Bank

With regards to the selling season at Channel One, previously you guys you had expected to make up for the shortfall, I think partially created by the absence or the decline from U.S. government spending. Where do you think the ad dollars that previously were going into the network are going now? Is it a share loss or is it a matter of timing, or budget or is it food advertising? Can you go into further detail on why the selling season was weak?

Dean Nelson

I think that's a good question. I think if you look at the data you will see that there's really been two sources of ad revenue decline in the last couple of years. One has been food and beverage, although interestingly enough, as we have gone to having programming run things like healthy lifestyles we have attracted people like Subway to support those programs.

The second has been a fall off in government spending, most specifically around the drug prevention program, ONDPP, which we have felt here through the remainder of this year. I think those programs hopefully will come back, although we can't guarantee it. But those are the two areas where we've seen losses.

I think one of the things that's difficult about the business for us is it's the only real television type of ad revenue that we are trying to drive and so it puts us at a little bit of a sales disadvantage versus the other larger players. Also it's a difficult sale, it takes a little while to build those relationships with the teams, which the team is working on but we were fairly disappointed by where we came out this year.

Matt Chesler - Deutsche Bank

Okay, well thank you for your answers. Take care.

Operator

Your next question comes from Steven Wise - Banc of America Securities.

Steven Wise - Banc of America Securities

We just touched on some of the operational questions. You said up to $13 million EBITDA shortfall versus prior expectations, you said $3 million of that was from the non-recurring spin-off costs?

Dean Nelson

$3 million higher than planned.

Steven Wise - Banc of America Securities

Higher than planned, right. Did you happen to say what the Channel One drag on that number was?

Dean Nelson

No and I think the other two drivers as we said are Channel One and the decline in the [computer] market. Channel One was larger in impact than the [computer] market decline.

Steven Wise - Banc of America Securities

Okay, and then in terms of the Crafts sale that happened at the very end of the quarter. It looks like you are still sitting on about $70 million of cash from that. Any sense yet how that will be applied, because it looks like pro forma for the spin should have moved forward, most of that is going to go to repay existing bank debt, if I understand it correctly?

Kevin Neary

The first use of it will probably be in November for the interest payments and then what's left we will use as we see fit. But the revolver has been paid down.

Dean Nelson

We are not sitting on cash with the anticipation of going out and doing acquisitions or something. It would be used generally for debt service, to pay down debt.

Steven Wise - Banc of America Securities

Right because you are going to basically pay down your bank debt it sounds like, so I guess if you are going to pay down more debt then we will have to look to your bonds, would be the assumption.

Kevin Neary

I think over time we are going to be actively paying down debt, absolutely.

Steven Wise - Banc of America Securities

Pro forma for the spin, again it should have moved forward. Are you happy with the composition of your capital structure post-spin? Are you contemplating any other changes, obviously again you are going to be out of your bank debt, two of your three bonds are callable or soon will be callable?

Dean Nelson

Well I think the final definition of the capital structure is still to be determined if the board in fact does approve the spin. Based upon the constantly changing financial markets they may actually change the composition somewhat. But we are comfortable at this point from a leverage standpoint if we do choose to do the spin, we'll create two very healthy and successful businesses.

Steven Wise - Banc of America Securities

Just lastly it sounds like the board has approved it, the shareholder approval is not needed yet you said that it's still not final. Are there any major hurdles that would prevent it from moving forward at this point?

Dean Nelson

Well the board actually has not approved it. I think that was picked up mistakenly by some of the press yesterday.

Kevin Neary

The board approved the filing of the Form-10 which has been filed. We have not yet heard back from the IRS our tax ruling. We expect to hear momentarily, of course we have not gotten comments back yet from the SEC on our Form-10 and final approval would come certainly after we get all the feedback. The board is just constantly looking at the business and making sure that if they do approve the spin, the spin makes sense for the shareholders.

Steven Wise - Banc of America Securities

Just lastly on that, from a tax standpoint, should either piece of PRIMEDIA possibly be disposed post-spin? Are there any tax limitations that are part of the company?

Kevin Neary

Tax limitations such as -- what were you thinking?

Steven Wise - Banc of America Securities

Just post-spin, the tax law, are there any issues that would relate to the company post-spin that would prevent either side from being sold?

Kevin Neary

We are working to examine our ability to balance NOLs across both companies, which would have a positive tax implication presumably, if the business was sold potentially. There are no tax issues or limitations around post-spin acquisitions, as we've been told by our advisors. So we could sell either business if we chose to.

Steven Wise - Banc of America Securities

Okay, very good, thank you.

Operator

Your next question comes from Todd Morgan - CIBC World Markets.

Todd Morgan - CIBC World Markets

Thank you, good morning. Just to follow-up on that tax comment, Dean. If I'm reading the Form 10, it does talk about issues that could arise from the potential change of control down the road. Are you really just saying, blanket that either company could get sold, a change of control could occur and that wouldn't be a tax issue?

Dean Nelson

I think one of the things we're waiting for is our tax ruling overall from the IRS, but assuming we get a clean ruling, we are not doing the spin, I want to be clear, as a sale of the business and therefore the blackout period for potential acquirers, is de minimus, is our understanding of the situation. That being said, let be clear, we're not doing the spin in anticipation of quickly selling one or the other of the business.

Todd Morgan - CIBC World Markets

But de minimus is generally a couple of years?

Dean Nelson

In this case, de minimus would be less than a year. Our understanding of the situation, generally from hopefully knowledgeable and certainly well-paid advisors, is that if you haven't entered into conversation prior to the spin with the potential acquirer, then six months or more after the spin you can have conversations.

Todd Morgan - CIBC World Markets

I guess there's just some pretty strong language in the Form 10 on it, but I hear what you're saying.

Dean Nelson

Well I think it's an open question but I think again, the key message for the investment community is, we are not doing the spin in anticipation of selling one or the other of the businesses.

Todd Morgan - CIBC World Markets

Okay, that's fair. Just a couple other questions on a similar front. The $3 million increase in your expected costs for the spin work, obviously that's not a big number in the context of the overall company but that's a big number versus the budget. Is that a situation where the work just turned out to be a lot more complex than anticipated or was the initial number just low for what you actually ended up doing?

Dean Nelson

I think Todd, it's mostly the first one, which is that it was more complicated than anticipated. This company, as you know from following us for quite a while, is built up from enumerable transactions, both buying and selling and so really going back and sorting through and documenting and reverifying the transaction and most importantly the tax implications of the transactions, has been a fairly significant job for Deloitte and that's the reason for the increase. It's just the time and effort required to do that.

Todd Morgan - CIBC World Markets

Can you help us with the revenue EBITDA basis from last year off of which your guidance is based? You added back the films division, for example, I think that the historical pro forma numbers are a little bit different now, right?

Dean Nelson

Films should be added back in --

Todd Morgan - CIBC World Markets

$5 million of additional revenue off of what you had before and the same EBITDA. Something like that?

Dean Nelson

You should use fiscal year '05 as reported. We've got films added back in.

Todd Morgan - CIBC World Markets

If I look at the guidance that you've talked about, specifically in the Enthusiast segment, it looks like the third quarter revenue is up about 5%, roughly speaking, that sounds like mid single-digits, year-to-date third quarter is up about 4%, that's pretty close to mid single-digits as well, and yet you're talking about low single-digit guidance for the full year in that segment. That would at least imply, if I'm doing the math quickly, something even could be a down revenue quarter in Q4. Is that the right kind of math and could help me understand that?

Kevin Neary

Well I think on the revenue side, our guidance is low to mid single-digits. On the segment EBITDA growth side, our guidance for Enthusiast is low single-digits. So if you look at the revenue growth year-to-date of 3.9% through the first nine months, that would fall into our definition of low to mid single-digits for revenue growth.

Todd Morgan - CIBC World Markets

That's helpful. Lastly, just looking again in the Enthusiast segment, flat EBITDA year-to-date, higher revenues, margins weaker, obviously. I'm assuming that the contribution margin on the Internet and some of the new initiatives, it is probably pretty high. It sounds like those dollars have grown pretty strongly on the revenue side and again I would assume that the incremental contribution from that is pretty high and yet we're seeing really flat EBITDA year-to-date.

Is that the right kind of assumption and I guess it would imply that there is really a deteriorating profitability side going on, on the print end of things?

Kevin Neary

Well I think that there's a couple things going on there. First of all, as we said previously, I don't know that we said it in this round, but we did have about $10 million of cost increases built into the business this year, which were paper and postage and things like that.

Secondly, we are getting good growth on the Internet side of the business. But realize for the first nine months of the year, this includes an Internet business that we didn't own the previous year; so therefore, we also have the cost, not just the flowthrough associated with that business.

Third, we do have some overhead associated with the sale of some of our assets in Enthusiast Media that we're continuing to work through, particularly the Crafts overhead and the way the pro forma in accounting work, we need to obviously report that as overhead, even though in the first part of the year that overhead was actively managed in the Crafts business.

Todd Morgan - CIBC World Markets

Okay, good. Well I appreciate the clarification. Thanks.

Operator

Your next question comes from Michael Meltz - Bear Sterns.

Michael Meltz - Bear Sterns

Great. Thank you. Just one clarification then I have a couple of questions. On Todd's question there, can you actually give us the revenue and EBITDA basis for last year, because I think you did take out Gems out of the numbers –

Dean Nelson

You're right, Michael. We'll get you that number. Maybe someone can find it right now while we go on and we'll get that back to you.

Michael Meltz - Bear Sterns

It would be helpful to have those restated quarters as well.

Dean Nelson

I forgot about Gems being in those last year numbers.

Michael Meltz - Bear Sterns

Can you tell us, just to clarify your expectation for education revenues in EBITDA for the full year?

Kevin Neary

You know, I don't know that we've given guidance around that. It's obviously not one business, it's three businesses and it tends to bounce around on a percentage basis pretty significantly. I think you can tell from our guidance, our change in guidance for the overall company versus the change in guidance for our two large businesses, that the primary impact here has been education. So it's not performing up to our expectation, particularly Channel One.

Michael Meltz - Bear Sterns

Okay, again, because you're giving segment guidance for the others, it would be helpful to have those numbers as well. I see where you're taking down the aggregate number.

Dean Nelson

I think that the biggest relevant numbers, we think, especially if people think about this business, are obviously the guidance around Enthusiast Media and Consumer Guides because it reflects the core of the business. Like we said, I think this year we've worked down on the corporate overhead some. It doesn't show up in the total numbers at this point because we do have that $5 million for the whole year associated with the spin.

Michael Meltz - Bear Sterns

On that point, when we look at your corporate expense assuming a spin doesn't happen, should we be deducting that $5 million? Would you expect that $5 million to just go away next year?

Kevin Neary

That $5 million is a one-time expense. Absolutely.

Michael Meltz - Bear Sterns

You had talked before about office consolidation and things like that. Does corporate benefit from that next year?

Kevin Neary

Some of it is corporate and some of it is media, but that obviously is not in our numbers yet. We won't get the benefit of that until 2007. We won't get the full benefit of that, as you remember, Michael, until 2008.

Michael Meltz - Bear Sterns

This may be in the release, but I had trouble finding it. In the quarter, what was the change at Enthusiast Media in terms of total print auto ad revenues in Q3 and then OEM revenues?

Dean Nelson

I don't know if we've historically released that number. We did give you the breakdown of fraction of auto revenue is in there. It's 11% of the segment advertising revenue is auto OEM on the printed side and 51% in addition beyond that is the auto aftermarket. That's not, frankly, considerably different over what we had last year. If you noticed elsewhere in the release, Michael, we talked about year-to-date our ad revenue for OEMs was up 2%. So those numbers are pretty flat. They're pretty consistent with the numbers we've told you in the previous quarters.

Michael Meltz - Bear Sterns

So year-to-date OEM, I'm sorry, is up 2%?

Dean Nelson

Yes. Which is we think from our standpoint is good execution in a market where ad pages are down 12% plus for that segment. As you'll recall, previously we said our guidance for the year assumes no significant increase or decrease in OEM advertising, and that's where we are. But we've probably seen a softer market than we expected.

Michael Meltz - Bear Sterns

That implies that total auto is down a little bit? I mean the bigger piece if ad revenues year-to-date are down a little bit?

Dean Nelson

I'll have to go back and check that math you're looking at, Michael. Automobile group's ad revenues, or total revenue, grew 12% in the third quarter. But that includes a number of publications and all the dimensions of revenue.

Michael Meltz - Bear Sterns

Okay. Those numbers would be helpful.

Dean Nelson

Our business has been relatively flat in that area. It wouldn't be significantly up or down. We have some troubles in the end markets right now.

Michael Meltz - Bear Sterns

Just help me understand the Consumer Guides margin in the quarter. I don't think I've ever seen expenses drop 6% here in a quarter. Just walk me through a little bit as to what led to the big margin gain there? It looks like from your guidance that's not going to recur in the fourth quarter. I'm just trying to understand that a little bit better.

Dean Nelson

Sure. I don't know if Bob or Kim, the CFO of the business, if you'd like to talk about that.

Kim Payne

The expense reductions, we actually did see some true expense reductions which will be recurring next quarter related to some of the optimization of RDAs that we talked about in the past.

Bob Metz

The closing of San Diego Auto Guides.

Kim Payne

The closing of San Diego and also printing. We're just seeing where we've tightened up in that particular area. We're seeing some quarter-over-quarter savings there.

Michael Meltz - Bear Sterns

But did San Diego close early in the quarter?

Kim Payne

The end of August.

Dean Nelson

I think also, correct me if I'm wrong, Bob and Kim. We did some consolidation of a couple of books on the Apartment Guides side, cross-town books where we thought in this day and age it didn't make sense to have two books in a local market.

Bob Metz

That was driven by two reasons, Dean. The margin and also once we switched to color, it didn't make sense to have two color books converting, and we switched all of those apartment books to color.

Dean Nelson

Exactly. I think also there were a couple of very small New Home books that we picked up in some of our bigger acquisitions last year that we never thought were necessarily the type of book we wanted to keep. I think those have been closed, is that right?

Bob Metz

Yes, that's right. I would add our New Home Guides have done particularly well, and when revenue is added to books that are established, that revenue generally adds at a very high conversion rate which improves our margin.

Dean Nelson

I think also we said that we're working hard to invest in the business, and Bob and his team did that through last year and now we're starting to see some optimization of that base.

Michael Meltz - Bear Sterns

Okay. Thank you.

Operator

Your next question comes from Ann Marie Green - UBS.

Ann Marie Green – UBS

With respect to that growth in the New Home Guides, could you quantify for us how many Home Guides you had in third quarter '05 versus this quarter to give us a sense of how much of that growth is coming from a penetration increase versus the new guide launches?

Bob Metz

We really had the same amount of guides; some of them may have started in the third quarter last year, but it's relatively the same amount of books as we had. We just have achieved some organic growth in those publications, and they were really starting so we would expect them to be larger this year than they were a year ago.

Ann Marie Green – UBS

Great. And then going forward, do you expect the growth to continue to be driven from that penetration increase? Or do you have a significant number of new launches planned for the New Homes Guides and the Auto Guides?

Bob Metz

Well for the Auto Guides, first off, we're minimally penetrated just above single digits. So we think there's a lot of opportunity just to grow those books organically. We do feel there are multiple markets around the country that are great opportunities for us next year, and we think it's likely that we'll open up a few books.

Ann Marie Green – UBS

Thanks. And last question, could you just tell us what the balance of the bank debt was at the end of the third quarter?

Dean Nelson

495.

Ann Marie Green – UBS

Great. Thank you.

Operator

Your next question comes from Bennet Lightman –Axias Capital Management.

Bennet Lightman –Axias Capital Management

I was hoping you could walk through the liquidity detail that you provide in your earnings release. I think you mentioned you have $327 million in cash and unused credit lines. I think you also specify that you had $72 million of cash. Does that imply that you have $255 million in revolver availability as of 9/30?

Kevin Neary

Yes.

Bennet Lightman –Axias Capital Management

Okay. Now are there any constraints in terms of the covenants? Or does the $255 million reflect full access to the current revolver commitment?

Kevin Neary

It does. But obviously if you look in the release, there are covenant restrictions on our leverage ratios.

Dean Nelson

There is a customary constraint; nothing unusual there.

Bennet Lightman –Axias Capital Management

Okay. So the $255 million would represent what you can currently avail yourself of in terms of your revolver?

Kevin Neary

Yes.

Bennet Lightman –Axias Capital Management

Thank you.

Operator

Your next question comes from Andrew Finkelstein - Lehman Brothers.

Andrew Finkelstein - Lehman Brothers

A couple questions on the Enthusiast Media side. First on the international auto, I was just wondering if you could talk a little bit more about that? We've seen declines for over a year in this segment, and I don't know a nicer way to say it, but where the bottom might be or how much left there is to go on the downside, do you think, in that segment since it's been affecting quarterly results for a long time now?

Steve Parr

You know, it still is coming down right now, and our hope is that it's not going to trend down by as much as it has right now. So our focus has been to reorganize the cost structure around that business so that when it does bottom out, that we still have a really profitable business that we can run with.

And then in conjunction with that, what we're really trying to do now is identify new potential for new products of which I mentioned two that we look to launch now and test them. And then if they work, we'll push them up to full launches in 2007. But for right now, I can't say exactly where it's going to bottom out, but this segment of the business is obviously less important to us now than it was two years ago.

Dean Nelson

It's also still very profitable. So it's not a profitability issue. I think Steve and the team have done a good job of keeping the costs under control.

Andrew Finkelstein - Lehman Brothers

Okay. And then on the action sports or the outdoor group which was down a little bit in the quarter, I just was wondering if you could talk a little bit more about that segment especially given that had some benefit of the Equine acquisition in there.

Steve Parr

Right. So in the action sports group, part of that decline was actually due to a special issue publication we published in 2005 which isn't going to be published this year. So that accounted for the bulk of the shortfall in the action sports group.
Dean Nelson

When we talk about action sports coming up a little bit short, that was as much versus our forecast as it was on an absolute basis. We had discussed greater growth than we've seen this year. And on the outdoor side, frankly one of the things that they've been doing there is optimizing the subscription base. By doing that we have saved more costs than we have lost in revenue, but it did have a very slight impact on subscription revenues. But it was very profitable for us to have done that.

Andrew Finkelstein - Lehman Brothers

So the disappointment on the action sports side, can you talk more about where that came from? Is it auto advertising generally in that group still?

Steve Parr

The action sports group is really largely related to publishing one less publication in the quarter versus the previous year. There's not really any major difficulties in that business with any of the advertisers. They tend to be widespread, small advertisers and not reliant on automotive advertising to a degree.

Andrew Finkelstein - Lehman Brothers

Right. But that one less issue was expected in the guidance plan?

Dean Nelson

Yes. I think the shortfall has been broadly across the board. And again relative to the shortfalls that we've talked about either, Andrew, in Channel One or international, it's smaller. We just wanted to make people aware of that.

Andrew Finkelstein - Lehman Brothers

Finally on Apartment Guides, just any more color on how things are trending now? It looks like the decline has been pretty steady I guess for the last two quarters. I know you said it's too early maybe to call a turnaround, but could you just give us more color on what you're seeing there in the fourth so far?

Dean Nelson

I think, Andrew, you've seen our overall guidance which we did take down our revenue guidance slightly for the business overall. But I think when you're going to see real improvement in the Apartment Guide business will be when a number of those markets that are above 95% occupancy, which reflects more than half of our revenue today and is an unprecedented high, when some more apartment construction which is going on now actually enters the market and then occupancy comes down. That's when you'll see, I think, a pickup in the revenue.

We're in a little bit of an unusual position in that business because as the one who generates by far the most leads for any advertising vehicle, for some of these guys that have 96%, 97% occupancy, we're overkill. We're generating so many leads they don't want that many. So they take a lower cost option that might only generate one or two leads relative to our 10 or 12 leads. But the real turnaround and improvement will come when we see a natural return to more normal levels of occupancy.

Andrew Finkelstein - Lehman Brothers

Thanks.

Dean Nelson

Great. We appreciate everyone's participation, and we look forward to talking to you after completion of our fourth quarter. Thank you.

Operator

Thank you. That does conclude today's conference call.

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