LIN Media's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.28.14 | About: Media General (MEG)

LIN Media LLC (Private:LIN)

Q1 2014 Earnings Conference Call

April 28, 2014 16:00 ET

Executives

Denise Parent - Investor Relations

Vince Sadusky - President and Chief Executive Officer

Rich Schmaeling - Chief Financial Officer

Analysts

James Dix - Wedbush Securities

Barry Lucas - Gabelli & Company

Aaron Watts - Deutsche Bank

Tracy Young - Evercore

Jon Evans - JWest LLC

Operator

Good afternoon, ladies and gentlemen and welcome to LIN Media LLC’s Earnings Call for the First Quarter ending March 31, 2014. Today’s call is being recorded. Now, the company will read a brief legal statement.

Denise Parent - Investor Relations

This conference call may include forward-looking statements that involve risks and uncertainties. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, those described in the company’s press release and filings made with the SEC, all of which are available in Investor Relations section on the company’s website at linmedia.com and on the SEC’s website at sec.gov. Many of these factors are beyond the company’s control and the company undertakes no obligation to publicly update or revise any forward-looking statements unless required by applicable laws. Shareholders are urged to read the joint proxy statement prospectus and other filings regarding the proposed merger with Media General when they become available, because they will contain important information about the transaction.

I will now turn the call over to the company’s President and CEO, Vince Sadusky.

Vince Sadusky - President and Chief Executive Officer

Thank you, Denise. Good afternoon and welcome to LIN Media’s first quarter earnings call. I will begin with an overview of our results and achievements, then Rich Schmaeling, our Chief Financial Officer will discuss financial results and guidance. At the end of our call, we will take your questions.

We are off to a strong start this year with net revenues increasing 18% to $166.2 million compared to $141 million in the first quarter of 2013. If you exclude the three digital companies we acquired in the last 12 months, net revenues increased 8% over the prior year. Our results reflect higher television advertising sales, including a 4% increase in the automotive spending and the popularity of much see live sporting events such as the Winter Olympics and the Super Bowl that generate even greater advertising demand on our highly rated stations.

Our industry leading digital media business was another key driver of performance during the first quarter. Over the years, we have evaluated and invested in some great companies that add scale and depth to our portfolio. In February, we expanded our portfolio with Federated Media, the largest digital acquisition in company history. In addition to driving numerous synergies within our ecosystem, Federated Media’s premier network of influential publishers that produce original content on a daily basis significantly enhances the content marketing and native advertising solutions we provide clients nationwide. The response from agencies and brands has been just terrific. They know LIN brings expertise, relationships and resources to the table. And as a result, they can benefit from deeper engagement, more robust native advertising solutions and premium video and social platform offerings, such as the LIN Digital’s new Video Insights platform.

Launched in the first quarter, VIP is the comprehensive analytical tool that enables agencies to measure and evaluate their campaign’s true performance. This is just one example of how our new product innovation and best-in-class digital marketing solutions helped us earn the Number 13 comScore rated video network of premium publishers and remain at the forefront of the rapidly evolving digital industry.

Closing the gap between our highly rated content and the feeds we received remains the top priority. During the first quarter, we renewed agreements with Cox Communications and other pay TV providers that account for 10% of the subscribers in our markets. Over the next two years, we will negotiate renewals that represent more than 75% of the subscribers in our markets. This is an important revenue stream that allows us to reinvest in our broadcasting operations in order to benefit viewers and advertisers. We continue to make great progress integrating our largest television station acquisition by making important investments in our people, processes and technologies. Our ability to improve these stations speaks volumes about our qualified management team and talented hardworking employees.

To illustrate KOIN-TV, our CBS affiliate in Portland, achieved share growth during the last two Nielsen rating periods in both the 5 to 7 a.m. broadcast morning news and the 5 to 7 p.m. early evening news despite being up against the Olympics and having a brand new team of anchors. We expect to realize even more upside throughout the year as we launch new brands, graphics, set designs and multi-screen products and advertisement solutions. We are also making important investments in our local news and lifestyle programs. In fact, we are producing more local news than ever before.

Content is king and we are committed to providing the best and most relevant local content to viewers on multiple screens. For example, WLUK TV, our Fox affiliate in Green Bay, airs Good Day Wisconsin on week days from 7:00 to 9:00 a.m. which is then streamed online. This morning news program delivers the kind of hometown reporting that viewers want along with extensive local weather and traffic updates. And as a result, to a Nielsen’s February 2014 ratings book Good Day Wisconsin was the most viewed morning show outperforming all three network morning news programs.

Our localism strategy contributes to our television website and mobile screens consistently ranking at the top of their local markets. And superior local coverage has earned our station some of the industry’s top awards. And I would like to comment KXAN TV, our NBC affiliate in Austin for winning a regional Edward R. Murrow award in the continuing coverage category. This award is just one of the many our stations received which exemplifies our commitment to delivering the highest quality journalism in the communities we serve.

Turning to our most recent strategic development, on March 21, we announced the merger agreement with Media General. Over the years we evaluated numerous opportunities and we believe we found the terrific partner in Media General. We are eager to leverage our combined scale and resources to better compete for high quality content, viewers and advertisers and capitalize on the expanded footprint to grow our digital business. We look forward to working with Media General’s leadership to complete the transaction.

Looking ahead, April’s TV ad revenue is currently pacing up 3% and digital was up 16%. Revenue pacing has been building throughout the month as advertisers are placing buys with less lead time. Local is strong, but national is lagging although we think this would improve marginally. Healthcare related issue advertisement is currently providing a nice boost and we are looking forward to several primary elections taking place in our markets during the second quarter. Political has been behind expectations so far this year, but it’s still projected to be strong with momentum picking up as the year progresses. We believe our great group of assets and strategy positions us well to maximize all these revenue opportunities.

And with that I will turn it over to Rich who will discuss our financial performance.

Rich Schmaeling - Chief Financial Officer

Thanks, Vince and good afternoon everyone. For the first quarter, our net revenues came in at $166.2 million, up 18% compared to $141 million during the same quarter last year and we are at the high end of our guidance range. On a same business basis excluding the digital acquisitions that were completed in the last 12 months, net revenues increased $11.9 million or 8% largely as a result of growth in local and national core time sales, political revenues, retransmission consent fees and digital revenues.

Overall, webcast revenues increased $9.8 million or 7% to $141.7 million. This increase was driven by local revenues which include local time sales, station websites and retransmission consent fees which increased $8.7 million or 9% to $108.1 million compared to the same quarter in the prior year. Core local and national time sales were you 2% year-over-year. Automotive advertising, our largest category increased 4% in the first quarter compared to the prior year and represented 25% of local and national advertising sales. Drilling down further domestic was up 5%, foreign was up 3% and local viewer advertising increased by 3%.

Seven out of top ten categories were up for the quarter compared to the prior year including financial services, media, medical and education. The categories that declined for the quarter were retail, restaurants and paid programs. Digital revenues increased $15.5 million or 171% to $24.5 million. Excluding our recent digital acquisitions, digital revenues were up $2.1 million or 23%.

Our total operating expenses for the quarter excluding corporate expense, stock based compensation and D&A increased $21.6 million or 22% to $120.7 million. $14 million of this increase is attributable to our recent digital acquisitions and the remainder was largely driven by an increase in programming fees paid to networks and cost of sales tied to digital revenue growth. BCF for the quarter was up $3.6 million or 9% to $45.5 million compared to $41.9 million in the prior year.

Corporate expenses, excluding stock-based compensation and non-recurring transaction related expenses were $6.2 million, up 8% compared to $5.7 million in the prior year due largely to increased professional fees. Adjusted EBITDA increased $3.2 million or 9% to $39.3 million compared to $36.1 million in the prior year. And free cash flow was $15.9 million, up 23% compared to $12.9 million in the prior year.

Now, turning to LIN’s debt and key credit metrics, at March 31, 2014, we had unrestricted cash on hand of $20.9 million and $60 million available under our revolving credit facility. Our net debt was $929.6 million, down $2.6 million from the end of last year. Our consolidated leverage at March 31 as defined under our senior credit facility was 5 times compared to 5.2 times at the end of 2013 and our covenant of 7 times. Our consolidated senior secured leverage ratio was 2.4 times compared to our covenant of 3.75 times.

Looking at the outlook for the second quarter, we expect that net revenues will be up 13% to 16% compared to net revenues of $164.3 million in the second quarter of 2013, primarily as a result of growth in local, political and digital revenues. For expenses, we expect that direct operating and SG&A will increase in the range of 18% to 20% compared to expenses of $103.7 million in the second quarter of 2013 driven largely by the operating expenses of acquired digital companies, increased cost of sales tied to digital revenue growth and a increase in programming fees paid to networks. On a same business basis, we expect that net revenues will be up 9% to 11% and that our total operating expenses will increase about 9% compared to the prior year, primarily as a result of an increase in variable selling expenses, including digital cost of sales and network programming fees. If you exclude those expenses, our total operating expenses are expected to be up about 3%.

I will now hand it back to the operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from James Dix of Wedbush Securities. Go ahead sir.

James Dix - Wedbush Securities

Hey, good afternoon guys. A couple of things, I guess, Vince that the past month has seen a number of legal developments for the industry, so I wanted to ask about two in particular. Now, that you have seen kind of the full rules related to the JSAs, which the FCC put out, is it your sense that a broadcaster that has a JSA that would be attributable, have the option to just reduce the amount of time covered under that JSA to being under 15% or so of the time and therefore bring it into compliance. I was just curious about your view on that? And then I will just follow up after that. I’ll just let you take that one first.

Vince Sadusky

Yes, yes, sure thing James. So, I think the rules came out as we had thought that they would, this hasn’t been finalized yet, but assuming that it continues on, it gets codified in this way from what we understand there will be two years to unwind these JSAs and come into compliance with the 15% rule. And I think different entities will have their own kind of strategy for dealing with that particular, so we have got a number of JSAs and we will need to address these issues perhaps sooner than some others in contemplation of the combination with Media General.

James Dix - Wedbush Securities

Okay, great. And then regarding Aereo in the arguments last week, the justices raised or at least in one set of questioning raised the issue of services like NimbleTV and simple.tv and other services which to some extent might do somewhat what Aereo does but just using different technology, I mean more broadly do you think the broadcasters need a plan for dealing with services that might make more use of cloud technologies to provide services similar – that are similar to Aereo as opposed to just thinking about Aereo and how that particular case comes out in order to fully capture the value of the broadcast programming that you are providing and if so what do you think the features of that plan should include?

Vince Sadusky

Yes, it’s a great question because technology really does get confusing especially now with the ability to deliver high – video in pretty good quality over IP. So it gets very, very confusing and I just – from our perspective we just try to simplify the best programming out there in terms of the highest number of people watching most consistently throughout the day is our network affiliates that combination of really highly viewed top shows, local news, NBA basketball, NFL football, primetime scripted programs. I mean, it’s just a wonderful wheel of programming that to this day gets multiples of anything else out there in terms of consumption.

And there is a significant cost associated with that programming both on the production side, the sports leagues, local news all that has a real cost to it and it’s significant. And so for folks to kind of bundle and profit from that, whether it’s IP delivery, whether it’s delivered via satellite, whether it’s delivered over coaxial cable or a fiber line. However, they are going to deliver that. The reality is they are charging a consumer for that service. And we know that this video service that we provide this wheel of programming is the most valued in that value chain as evidenced time and time again. I mean how well could you explain having one channel to have the potential impact of a small player like ourselves come to terms with some of the largest pay TV providers in the industry.

So to me it’s pretty simplistic. I think the encouragement of competition is something that we are excited about the more pay TV competitors in the marketplace is better I think that’s a wonderful thing. And I think they all absolutely need to be customers of ours if they are going to provide a really robust service and a fulsome product offering to their customers. The moment that they don’t want to pay and they are going to kind of use technology as the excuse is the moment that I think ourselves and the rest of the industry has really come down pretty heavily against because that’s not really a fair business.

With regard to what could we do beyond this, this core business that we think is pretty strong I think your question is a very good question. Should we be in the IP business? We have a bunch of smart folks in the industry and we are participating as well thinking about the potential for a new standard. I think it’s more not so much along the line of IP delivery, maybe that’s in combination with somebody else, some other smart company putting together a service offering. But I think we offer up something that’s a terrific and very efficient one way delivery of high speed video from our distribution system that I think this standard and I am really excited about the potential for a new standard to be developed that could allow for us to be a big part of the video offloading and could really I think reduce the potential capital cost of LTE and some of the other video compression technologies that are being developed by telcos in particular to be able to deliver up video, because the video they want to see is our video and the ability to deliver one to many is something that our infrastructure to this day does really efficiently. So, I think for the short-term, we love competition whoever wants to call their pay TV service or whatever they want to call that’s awesome for us. We like where we fit in and we like the demand on our product. And as far as the longer term I actually think the industry could certainly benefit for some of the current thought leadership and evolving to an incremental business.

James Dix - Wedbush Securities

Great. And then just one follow-up just dealing with I guess the ad or the technology side of the business, you mentioned in your release that of your web ad impressions, roughly 45% of your page views, roughly 45% are coming from mobile. I was wondering if the share of web ad impressions that you are delivering that’s coming from mobile is similar to that or whether it’s much less just due to the different form factor. And just generally how well are you monetizing mobile as opposed to the rest of your web properties? Thanks.

Vince Sadusky

Yes. So, the web access through mobile is much lower. And so by design, we spent a fair amount of time and effort in developing these products that are distinctive and are very, very responsive to the major platforms really being iOS and Android. And we are finding people that are accessing information on kind of a more direct basis and primarily through our apps, which have had tremendous uptick. To be honest, that business is still building. We recognized clearly it didn’t take much foresight to recognize that mobile is an area that we have been very involved and we were frankly frustrated by the values of mobile companies, we would have liked to have gotten the game faster, but we have built it organically and we have got what we think is a heck of a product that the intention is to mirror what LIN Digital has done. We are really started off as kind of the focus on our proprietary content exploiting it out on the websites, but we have done that I think really effectively through mobile devices and through our mobile platforms for our news, information, weather, site, sports locally. And then the second piece of it is how do you get a kind of a national footprint like we have done – like we have successfully done LIN Digital. And that’s the piece that we don’t want to oversell that on the mobile side, but we have made very, very good progress. And as the numbers start to build, we will have more to talk about in the future.

James Dix - Wedbush Securities

Great, thanks very much.

Vince Sadusky

Sure.

Operator

And our next call comes from Barry Lucas with Gabelli & Company.

Barry Lucas - Gabelli & Company

Thanks and good afternoon. Couple of quickies, Vince, if you can you may not be able to. Just looking at the footprint and the weather-related issues, is there any way to size what the loss business might have been in that first quarter? So despite putting up some pretty impressive numbers, what might it have been absent the weather issues?

Vince Sadusky

It’s a great question. It’s so hard to tell we had – each quarter, we try to figure out the anomalies of the business, the Super Bowl on our thought station this year, how much of that was incremental versus that our competitors having that opportunity on the markets, where we don’t have Fox stations. You had the Olympics, which was a terrific event for our NBC stations. It was not a good event in primetime for our non-NBC stations. So, the weather was clearly an impact. It really is very, very difficult to tell. We just really root for good economic indicators coming out of our marketplaces, because we have just seen over time that as housing starts are up, unemployment goes down, where cars gets sold, consumer spending is healthy and ticking in a positive direction. All these things are the things that directly impact advertising on television as we are really effective at selling everything from cars to hamburgers, again really consumer goods. We are a direct reflection of how business is feeling in our markets.

Barry Lucas - Gabelli & Company

Okay. So put another way then, as we saw some deferrals of car sales, can you track what your auto advertising did with regard to the improvement in the weather? I mean, I guess what I am really asking is how do you feel about that employment category going forward?

Vince Sadusky

Yes. So, I think on the auto side, I think we are up about 4% or so in the first quarter, which I think was pretty good considering those weather-related events. And as SAAR looks to be pretty strong for the rest of the year, so we are hopeful the auto business continues to be a strong category and on paces like it did in the first quarter despite weather.

Barry Lucas - Gabelli & Company

Okay. Let me try one more on a related category and that’s political. It sounded like you are a little bit disappointed to the start of the year, any particular reason? And what would play into your confidence that we are going to have a really robust political season in ‘14 for a non-Presidential year?

Vince Sadusky

Yes. So, again, political is another one of those ones that is just so hard for us to budget and really tough to forecast. On the negative side is I think the parties have been pretty successful in avoiding these primary battles so far and whereas we saw a lot of that in the last non-Presidential year so that’s why we say we are a little disappointed now. And so we are a little disappointed now when we say are a little bit disappointed. We all know the back half of the year is the driver even in a great political year. On the positive side Virginia, Ohio, Georgia we are in places that we anticipate seeing some really heated battles or material seats and percent of seats.

In this year we saw the Super Packs had a pretty big impact on the federal election in 2012 and we think this is the first kind of non-Presidential election cycle there we expect to see the impact of the citizens united case. So we think there is a fair amount of money from what we can tell, from following it pretty closely with our rep firm and our political consultants. The fund raising is ahead of 2010. So I think right states every all the conversation points to heated battles, fund raising seems to be on target ahead of 2010 and just money a little slow to spend I think as sort of the primary battles that we saw back in the last Presidential cycle didn’t really materialize to that magnitude.

Barry Lucas - Gabelli & Company

Okay, great. Thanks very much guys.

Operator

And our next question comes from Aaron Watts from Deutsche Bank. Go ahead.

Aaron Watts - Deutsche Bank

Good afternoon guys. Hi.

Vince Sadusky

Hi Aaron.

Aaron Watts - Deutsche Bank

Hey, so just one question for me, a few weeks ago the Journal ran a story talking about how small businesses were kind of aggravated by some efforts they would had to put ads on the web and get their presence online more. And a couple of companies dominate that space and again this story was about the dissatisfaction of these small mid sized businesses with those guys it kind of when you think whether that’s an opportunity for you guys, I know you have been very focused on expanding your digital platform, Vince I don’t if you saw that story but maybe can you just talk about that optically and is that an opportunity for you to kind of crack into that and provide those types of services for the SMEs?

Vince Sadusky

Yes, it’s a good question. We – I am sure that that’s a pretty good business for somebody and maybe for station in smaller markets that are really kind of tapped out I think the revenue opportunities whether it’s just not enough advertising to really incrementally significantly increase the amount of ad dollars to TV stations maybe that’s something that would . Work but for us that’s just kind of a – it’s a different advertising bucket. We have experimented (Technical Difficulty) or achieve enough scale with these individual advertisers that it’s really a business that you can get excited about.

Aaron Watts - Deutsche Bank

Okay, now that makes sense. And then on Federated and I guess more holistically with rest of your digital platform, do you in terms of the traction you are getting with clients expand your wallet with those existing clients, finding new clients, can you maybe just talk to your experience over the last few months with that?

Vince Sadusky

Yes. So, Federated is so exciting for us, because it’s content and its content basically with a purpose. And the purpose is to provide native advertising that advertisers are just so excited about right now. That’s a way to get your messaging across, that’s non-traditional in nature, yes, arguably very, very credible and advertisers just really can’t get enough of that. And there is just like anything else in kind of the marketing, well, there is a real art to that. There is an experience level. There is filtering through folks that are really good at creating this content. There is folks that don’t do such a great job. And Federated really being pioneers in this area has learned so much. And I mean fortunately for us a lot of that learning came on their selling shareholders’ pocketbook. And so we got a company that we think has terrific ROI potential, because of the expertise they built up in this content area.

In the LIN Digital side, we are really – our team has done a wonderful job of carving a niche and building credibility in the area of putting together campaigns. This is that an added I think skill set that other people who compete with us don’t necessarily have with this ability to provide native advertising in an environment that’s with the company that was really kind of pioneers in this particular area. So, the feedback has been really great. The feedback comes, some to me, some to Rob, but really a lot to our digital sales team and our sales management and they – we see kind of an overwhelming positive response. So, we were – yes, we were really surprised that really within the first few weeks of the acquisition, we had some really nice wins that advertisers are really supportive and wanted to include Federated Media as part of their campaigns.

Aaron Watts - Deutsche Bank

Alright, great. Thanks a lot.

Vince Sadusky

Sure.

Operator

(Operator Instructions) And Tracy Young from Evercore has a question as well.

Tracy Young - Evercore

Hi, how are you? A question on cash phone payments, they seem to be trending lower than last year, is that a timing thing or are they going to be trending lower for the year? Thanks.

Rich Schmaeling

Yes, the program payments are trending a little bit lower, because we are burning off some pretty expensive programming that as you replace that programming and get new programming for little bit less.

Tracy Young - Evercore

Okay. And then on the digital side, can you give us a little more color as to what the expenses are? Is it primarily that you are hiring people and so there is a ramp up near-term on that?

Rich Schmaeling

If you look at the breakdown of our expenses, so I think you got that two-thirds of the expense growth was really tied to our digital acquisitions in the quarter. And as key driver across our digital portfolio of expense growth is variable selling expenses tied to revenue. So, cost of sales, commissions, we are in many instances selling the inventory of all those publishers and that’s a significant cost that’s tied to revenue. And that’s a big driver I think it’s probably pretty different than most of our peers. So, I do think that is important for people to appreciate them.

Tracy Young - Evercore

Okay. And lastly, in terms of the Media General merger, what should we be looking for as the next piece of information that’s out in terms of a proxy or something mid-May?

Rich Schmaeling

That’s right. I think in a couple of weeks’ time, we will file the S-4, so, yes….

Tracy Young - Evercore

Okay, thank you very much.

Rich Schmaeling

Thank you, Tracy.

Operator

Our next question comes from Jon Evans from JWest LLC. Go ahead sir.

Jon Evans - JWest LLC

Can you talk a little bit about I guess the slow start to national advertising and kind of your thoughts of that? Do you think it gets stronger as the year progresses etcetera? And then the other question is can you just remind us kind of where you are in your re-trans from – do you have any deals in the back half for re-pricing?

Vince Sadusky

Yes. So, on the national side, we are really not sure the ads are getting placed really closer to airtime, closer than ever before. So, that’s one of the great opportunities of television as advertisers kind of moderate their spend on the national spot side. And national spot has a tendency to follow the robustness or lack thereof of network spending both on broadcast network and national cable. So as that inventory and scatter prices kind of go up and down that has a lot to do with the impact on national spot pricing. And so it’s a good advertising vehicle just it’s become more and more difficult for us to really use pacing data and project out into the future how well it will do. We have talked about the auto business when we get into some of the other categories we have seen kind of a mix net-net categories all the other categories down, auto where we are up for the first quarter and that mix is kind of mix between national and local if local clearly being stronger of the two. So really tough for us to get our arms around national, so we are not seeing any one particular category up or down or one particular area up or down, its kind of been scattered across the board. And I think one of the things we do – what we do and we will continue to do is pay close attention to the network scatter market. And as I say typically has an impact on is a good indicator our national spot has anything.

And I am sorry and your second question on re-trans we mentioned that I think roughly 10% or so of our deals we have negotiated this year and then between this year and next year we have got a lot of deals coming up. We said somewhere in the – I believe in the 75% of our subscribers are up in the next couple of years. So we have got a kind of an ongoing opportunity to continue to negotiate the next retransmission team agreements.

Jon Evans - JWest LLC

Can you our I guess in the filing that you have with the merger will you give us anymore preciseness of kind of I am sure some competitive reasons you don’t want to give who they are with those kind of things, but will you give us anymore information of when kind of the timing is as opposed to just to the next two years?

Rich Schmaeling

Yes, Jon. There is no further detail about the timing of individual agreements. But hopefully this holding that 75% of our subs will be renewed over the next two years is pretty helpful because what we are trying to say is that the vast majority of our subs will get re-priced at prevailing market rates and would be a key driver of continued retransmission consent fee revenue growth.

Jon Evans - JWest LLC

Right, right. And just can I follow-up on that when you mean two years you mean ending 2015 is that correct?

Rich Schmaeling

That’s right during 2014 and 2015 we said that over 75% of our subs are up for renewal and some…

Jon Evans - JWest LLC

Okay great. Thank you so much.

Rich Schmaeling

Thank you.

Operator

And that concludes today’s Q&A portion. I will now turn it over to LIN Media’s President and CEO for closing remarks.

Vince Sadusky - President and Chief Executive Officer

Thank you very much for your interest in LIN. We look forward to updating you throughout the rest of the year.

Operator

This concludes – and that does conclude today’s conference. Thank you for your participation and have a great day.

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