PRIMEDIA Inc. Q2 2010 Earnings Call Transcript

Aug. 6.10 | About: Primedia Inc. (PRM)

PRIMEDIA Inc. (NYSE:PRM)

Q2 2010 Earnings Call

August 05, 2010 10:00 am ET

Executives

Jeff Grossman - IR

Charles Stubbs - President, CEO

Kim Payne - CFO

Analyst

John Carlin - Gulf Stream Asset Management

Operator

Welcome to the PRIMEDIA Inc. Second Quarter 2010 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Mr. Jeff Grossman PRIMEDIA's Investor Relations, contact. Please go ahead sir.

Jeff Grossman

Good morning and welcome to PRIMEDIA’s 2010 second quarter earning conference call. I am pleased to be joined by Charles Stubbs, our President and CEO and Kim Payne, our CFO, along with other members of senior management. As always, we refer you to the section of our earnings release entitled Forward-Looking Statements for important factors that apply to and qualify any forward-looking statements made on this conference call. In addition, any non-GAAP financial measures mentioned on this call are reconciled to GAAP in our earnings release. Let me now turn the call over to the Charles Stubbs.

Charles Stubbs

Hello everyone, and thank you for joining us on today’s call to discuss our company's second quarter 2010 results. First, I would like to update you about our positive progress in executive against our operational and strategic initiative. And our CFO, Kim Payne will follow with additional details on our financial performance. We are very pleased with significant progress we continue to make in transitioning our enterprise into the premier online source for consumers and advertisers in the rental space. There were a number of operational highlights over the quarter as we expanded our reach in consumer audience, enhanced our product offering, gained client count and increased lead for advertisers. We accomplished all of this while increasing the company's productivity and efficiency. Simply put, we continue to maintain our strategic focus by investing in our internet platform while reducing our cost structure to drive positive financial results.

During the quarter we succeed in reducing operating expenses by 19% and increasing adjusted EBITDA by over 22% year-over-year. Focusing on four key strategic objectives. Our first objective is to grow our consumer audience by strengthening our digital media offering. Throughout the second quarter, we continued to refine our network of websites by improving our overall performance and load time in increasing relevant quality content. As we expanded site content, increase search engine marketing expense and executed against our HCO strategy we also gain consumer traffic. Our focus in commitment to invest in our website, HCO and STM continues to bear fruit as our PRIMEDIA apartments rentals network of site continues to be ranked number one among its competitors averaging over 4 million unique visitors each month.

We also continue to lead the apartment industry in our efforts in mobile application with keynote of downloads exceeding 850,000. Enhancing the tools and information we provide to consumers has enabled us to grow our consumer audience and also to progress in our second objective which is to maximize the number of leads we provide to our advertiser client.

In the second quarter, our total number of leads increased by over 35% on year-over-year basis. And over 75% of the leads we provide to our client are now generated through our digital platforms. Our third objective is to grow our client count and revenue. In Apartment Guide, our largest business we have continued to grow our client count on both the year-over-year and sequential quarterly basis with the year-over-year increasing 7.6%. During the second quarter, revenue was impacted by negative economic market and competitive conditions.

However, we see some encouraging signs of stability in the apartment industry. For example, in uptick in effective rent level, and we believe we are well positioned to reap the benefits of a broader client base as economic and market conditions improve. Finally, we have made significant strides against our fourth objective, to improve our operating efficiency by permanently changing our cost structure.

Our on going cost cutting initiative is in part of our permanent streamlining of our organization and are evident in our strong adjusted EBITDA and adjusted EBITDA margins. In addition, our strong cash flow generation has allowed us to opportunistically reduce our financial leverage and pay healthy dividend. We repurchased $7.5 million of our outstanding term loan obligation at a discount during the second quarter.

Since December 31, 2008 we reduced our long-term debt by $32 million or 13% as at the end of the second quarter. In addition, today we announced the $0.07 per share quarterly dividend for the 11 consecutive quarter. During third quarter 2010, we will continue to focus on growing or consumer audience and client count while increasing the number of leads we provide to our clients. We remain committed to streamlining our cost structure and investing in opportunities to enhance long-term shareholder value. I will now turn the call over to Kim Payne.

Kim Payne

Thanks, Charles. I will now review our second quarter 2010 result. Our comparison unless specifically noted are to second quarter 2009. Total revenue was $58.6 million, a $6.6 million decrease, our apartment division representing approximately 93% of second quarter advertising revenue decline 6% to $48.8 million. Apartment Guide revenue declined by 6.3% due to a 13.6% decrease in revenue per community served. This is partially offset by 7.6% increase in apartment community served.

Revenue per community served was impacted primarily by pricing pressure, caused by negative economic market and competitive conditions. As we look at our markets geographically, the areas that have been hit hardest by the housing down turn are also the areas that have continue to drive most of our revenue declines including the West Coast in Florida. The majority of our markets are operating within an occupancy range of 90% to 96%.

We did see national uptick in year-over-year respective risk levels this quarter with a 1.3% increase. While these developments are encouraging, roughly one half of our Apartment Guide markets remain either outside a 90% to 95% occupancy rate range or continue to experience lower effective rent year-over-year.

These factors continue to put pressure on our clients' budget. Overall however one half of our markets across the country have growth rates of up to 12% in the second quarter. Revenues from Rentals.com and RentalHouses.com decreased by 0.5% primarily due to decrease in revenue per listing and decrease in a number of page listing through the staff provisioning feature of these websites.

This was partially offset by an increase in the number of listing generated from property managers. We expect to see 5.5% to 6.5% year-over-year decline in third quarter 2010 apartments revenue. New Homes representing approximately 7% of advertising revenue for the quarter declined by 23.4% to $3.5 million. New Home still makes a positive financial contribution to the company and we will continue to manage this business to maintain a positive contribution.

We currently expect a year-over-year decline in third quarter 2010 New Home's revenue of approximately $1 million. DistribuTech revenue decline 27.6% to $6.3 million. This decline was primarily due to the planned reduction of retail location service and the ongoing impact of lost business from third party customers. Our overall distribution strategy is to reduce product distribution cost, including the elimination of less effective locations while focusing efforts on retaining and servicing locations that produce the best results for PRIMEDIA advertisers.

We currently expect a year-over-year decline in third quarter 2010 DistribuTech revenue of approximately $1 million. Moving to other financial highlights. Adjusted EBITDA increased to $16.6 million in second quarter 2010, this result reflects lower operating expenses of $9.6 million partially offset by a decrease in revenue of $6.6 million, adjusted EBITDA margin increased significantly to 28.4% from 20.9%. Total operating expenses decreased by approximately 19%. Our distribution and circulation expense decreased by 37.8% or $6 million. Cost of goods sold declined by 32.1% or $1.9 million and sales and marketing expense declined by 1.8% or $0.4 million.

For the quarter, bad debt expense improved to 0.4% of revenue compared to 1.4% for the second quarter of 2009. We collected 101% of net revenues this quarter compared to 98% in second quarter 2009. Income from continuing operations increased to $4.5 million and diluted earnings per share increased to $0.10 per share. These increases were primarily due to increased adjusted EBITDA, lower provision for restructuring costs and lower interest expense. The significant initiative in permanently reducing our expense structure has been the modification and in certain cases, the restructuring of Retail Display Allowance contracts which we refer to as RDA.

Restructuring charges for 2010, the vast majority of which relate to RDA is currently expected to be $6.5 million to $7.5 million. Net income increased by $15.2 million to $3.4 million or $0.08 per common share. This improvement was due to increased income from continuing operations. Looking at our capital structure. We have $4.4 million of cash on hand at the end of the quarter compare to $2.1 million as of June 30, 2009. Our senior secured credit facility includes an $88 million revolver which matures in 2013. Those amounts were outstanding on the revolver as of June 30. We also have $216 million term loan which matures in 2014.

As Charles previously mentioned, we repurchased $7.5 million in principle amount of our outstanding term loan over the quarter. The $6.6 million resulting in a net gain of $0.7 million.

Subsequent to the quarter end we have already agreed to repurchase and additional $5 million of principals for approximately $4.5 million. At June 30 our leverage ratio of consolidated debt-to-EBITDA as calculated under our bank credit facility was approximately 2.7 times, which is well within the maximum allowable total leverage ratio of 5.25 times. During the quarter, free cash flow was $16.6 million compared to $6 million for the second quarter 2009. This change was primarily due to an increase in net cash provided by operating activities, partially offset by an increase in capital expenditures.

The company invested $3.6 million in capital expenditures compared to $2.5 million.

With that, we’d like to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Nadia Lovell with JP Morgan. Please go ahead.

Unidentified Analyst

It's actually Michael here. Three questions for you. In the press release, and Charles I think in your comments, you talked about some competitive pricing pressure at Apartment Guides. Can you talk a little bit more about what you're seeing, who's doing it, and I guess what I'm more interested in is why you're seeing it now as opposed to during the depths of the downturn a couple quarters ago? And then I have two follow ups.

Charles Stubbs

Good morning Micheal, good to hear from you. On the competitive pricing pressure, I mean I think that were applying more and more pressure on our competitors we continue to focus on a great value story, great growth and leads and as we continue to grow client count as we indicated over 7% year-over-year. They are responding with greater and greater pricing reductions to try to maintain or they are trying to not loose market share.

Unidentified Analyst

These are print competitors or online?

Charles Stubbs

I think both but I would say there some of them were dramatic what we have seen is from the traditional competitors. I think unfortunately and with the current economic pressure a lot of the clients are very focused on the budget, you know their budget constrains by our client and its economic environment sometimes they are more attractive to a lower rate then a better value but we believe ultimately that having more consumer traffic more leads and continuing to grow customer count positions us well for long-term growth.

Unidentified Analyst

And so you weren't seeing it as much earlier in the year or last year? You think it's mostly because you started to actually take, you've started to take customers away from competitors?

Charles Stubbs

Yeah, we are very pleased with our continued customer count year-over-year and we believe that they are responding with more and more dramatic rate cuts to try to maintain their business.

Unidentified Analyst

Okay. The cost reductions have continued to be really impressive. What's the expectation going forward? Is Q2's level of costs a run rate? Or should that even dip down further as you progress through the DistribuTech RDA wind down?

Kim Payne

Of course we continue to look at our cost, I think with where we are today if you look at the first half of the year about run rate at approximately $171 million I think that’s a reasonable number at this stage of the game.

Unidentified Analyst

The first half, 171 for the year?

Kim Payne

Yeah. If you take the first half and annualize it.

Unidentified Analyst

Okay. And then just one clarification, you gave the effective rates and occupancy rates. What about in your markets? I think you gave kind of national averages?

Kim Payne

Yeah. Those are our markets that we are always floating.

Unidentified Analyst

Even though you're not fully, you're in a lot of markets, but you're not national. The national is a full country metric. Do you have it for your 80 markets?

Kim Payne

So far 80 markets, we are looking at the average of those markets when we are quoting in our earnings release.

Unidentified Analyst

Okay. And so in your markets the average effective rent you said was up 1 point?

Kim Payne

Up more 1.3 that’s correct.

Unidentified Analyst

And what's the average occupancy rate? You gave a 600 bit of range. What is the average?

Kim Payne

93.3 is what we are seeing.

Unidentified Analyst

And that's up year-over-year?

Kim Payne

Up slightly. I mean 10% type of thing.

Operator

(Operator Instructions). And our next question comes from the line of John Carlin with Gulf Stream Asset Management. Please go ahead.

John Carlin - Gulf Stream Asset Management

Great, thank you. Kim, could you break out, or have you in the past broken out, just your Apartment revenue by print and digital?

Kim Payne

No, we haven’t done that, as the majority of our business is an integrated product and we have not working that out,

John Carlin - Gulf Stream Asset Management

Okay. And when you describe, I think 75%, I think in your press release you use the word value is now ascribed to digital. Can we think of that as a proxy for the composition of Apartment revenues?

Kim Payne

No. and what we are speaking to on that 75% is around leads the value that we are generating coming from leads but it doesn’t actually translate to.

Operator

Thank you. (Operators Instructions). Management I am showing no further questions in the queue please continue for any further remarks.

Charles Stubbs

Thank you for joining up today and we look forward to updating you on the progress of our business next quarter and have a great day thanks.

Operator

And ladies and gentlemen that does conclude our conference call for today, thank you for your participation and you may now disconnect.

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