LIN Media LLC (NYSE:LIN)
Q2 2014 Earnings Conference Call
August 5, 2014 9:00 AM ET
Denise Parent - SVP, Chief Legal Officer
Vince Sadusky - President and CEO
Rich Schmaeling - SVP, CFO
Marci Ryvicker - Wells Fargo
Tracy Young - Evercore
James Dix - Wedbush Securities
Good morning ladies and gentlemen and welcome to LIN Media LLC's Earnings Call for the Second Quarter ended June 30th, 2014. Today's call is being recorded. Now, the company will read a brief legal statement.
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 web site at linmedia.com and on the SEC's web site 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, because they contain important information about the transaction.
Today's speakers will be the company's President and CEO, Vince Sadusky, who will provide an overview of results and achievements, and Rich Schmaeling, the company's Chief Financial Officer, who would discuss financial results and guidance. We will take your questions after their prepared remarks.
And now, I will turn the call over to Vince.
Thank you, Denise, and good morning and welcome everyone to LIN Media's second quarter earnings call. We posted solid results this quarter. Net revenues were in line with our guidance, increasing 15% to $188.8 million compared to $164.3 million in the second quarter of 2013. Our focus on securing a higher pay TV subscriber fees and building an industry-leading digital business continues to pay off, as these were key drivers of our results this quarter.
In addition, automotive, our largest advertising category, was up for the third quarter in a row, increasing 3% over the prior year. TV advertising was up 3%, which includes $4.6 million of net political advertising sales. Core television sales were about flat year-over-year, and we attribute that primarily to the softness in national advertising. We experience growth in local advertising, driven primarily by the automotive, home improvement and services categories.
Must see live events continue to exceed historical performances on broadcast television. For example, ABC's Billboard Music Awards garnered a 13-year ratings high. The World Cup Final scored massive ratings on ABC and FOX's Major League Baseball All-Star game was the most watched since 2010.
Our diverse network affiliations and highly rated stations continued to maximize the record-breaking appeal of live TV events, to generate greater advertising demand.
We are also making important investments in our own content creation model. For example, KSAN-TV, launched its new local lifestyle show yesterday, and WBDT-TV in Dayton, who premieres locally produced reality show, featuring six local high school graduates next month. Our localism contributes to our television web site and mobile screens consistently generating high local market rankings.
We strengthened consumer engagement on our web sites and local properties, which delivered over 376 million page views in the second quarter. Nearly half of these page views came from mobile devices, representing a 70% in mobile consumption, as compared to the prior year.
Our digital media business is an important growth catalyst that differentiates us from our peers. Net digital revenues increased 59% to $33.2 million, compared to $20.8 million in the second quarter of 2013. An important part of our strategy is to acquire, invest in or build our own businesses that will deliver numerous synergies throughout our entire ecosystem. For example, our local TV station sales teams have all been trained to sell LIN's digital products, beyond their television station web sites.
During the second quarter, those sales increased 40% year-over-year, and business [indiscernible] so far in 2014 has exceeded full year 2013 sales. We continue to evaluate opportunities to grow our digital media business, and seize opportunities to expand our national, regional and local sales channels.
Looking ahead, third quarter TV ad revenues currently pacing up 2% and our digital revenues on a same station basis are forecasted to be up 40%. Political continues to gain momentum, and we believe August and September will be big months, as we own or operate television stations in seven states holding primary elections.
Our highly consumed content, including valued local news, positions us well to maximize revenues during the second half of this election year.
Before I hand it over to Rich, I want to update you on the progress we are making on our pending merger with Media General. On August 20th, we will hold a special shareholders meeting to vote on the proposed deal, and we are working diligently with Media General's leadership on other critical steps. We were pleased that the SEC granted Sinclair's approval of Allbritton, and find it encouraging for our closing timeframe, which we still anticipate to be during the first quarter of 2015.
We are eager to close on the deal, and leverage our combined scale and resources to better compete for high quality content, viewers and advertisers, as well as capitalize on the expanded footprint to grow our digital business.
And with that, I will turn it over to Rich, who will discuss our financial performance.
Thanks Vince and good morning everyone. During the second quarter, our net revenues came in at $188.8 million, up 15% compared to $164.3 million during the same quarter last year, and within our guidance range. On a same business basis, excluding recent acquisitions, net revenues increased $15.2 million or 10%, largely as a result of growth in retransmission content fees, digital revenues and political advertising.
Overall, our broadcast segment revenues increased $12.1 million or 8% to $155.6 million. This increase was driven by local revenues, which includes local time sales, station web sites, and retransmission consent fees, which increased $10.3 million or 10% to $117.3 million compared to the same quarter in the prior year.
Political revenues for the quarter were $4.6 million compared to $1.5 million in the prior year. Excluding political, broadcast segment revenues were up 6%. Core local and national time sales were about flat year-over-year. Automotive advertising, our largest category, increased 3% in the second quarter, compared to the prior year, and represented 25% of local and national advertising sales.
Drilling down further, domestic was up 5%, foreign was flat, and local pure advertising increased by 7%. Four out of the top 10 categories were up for the quarter, compared to the prior year, including auto, services, education and entertainment. The categories that declined for the quarter, were retail, restaurants, media and communications, financial services, medical and paid programming.
Our digital segment revenues increased $12.3 million or 59% to $33.2 million, excluding acquisitions, digital revenues were up 25%. Our total operating expenses for the quarter, excluding stock based compensation and D&A, increased 17% or $18.7 million to $130.2 million. Of this total increase, $8.7 million is attributable to the recent acquisitions, and the remainder was largely driven by an increase in programming fees paid to networks, compensation and benefits, and cost of sales tied to digital revenue growth.
BCF for the quarter was $58.6 million, compared to $52.9 million in the prior year. Corporate expenses, excluding stock-based compensation and non-recurring charges, were $5.2 million compared to $5.1 million in the prior year. Adjusted EBITDA for the quarter was $53.4 million, up 12% year-over-year, and free cash flow was $23.9 million, up 7% compared to last year.
Turning to LIN's debt and key credit metrics; at June 30, 2014, we had unrestricted cash on hand of $19.7 million and $75 million available under our revolving credit facility. Our net debt was $911.5 million, down $20.7 million from the end of last year. Our consolidated leverage at June 30th, as defined under our senior credit facility was 4.8 times compared to 5.2 times at the end of 2013, and our covenant of seven times. Our consolidated senior secured leverage ratio was 2.2 times compared to our covenant of 3.75 times.
Looking at the outlook for the third quarter, we expect that net revenues will be up 16% to 20% compared to net revenue of $163.1 million in 3Q 2013, primarily as a result of growth in local revenues, political revenues, and digital.
For expenses, we expect that direct operating and SG&A will increase in the range of 20% to 22%, compared to expenses of $103.8 million for 2013, driven largely by our recent acquisitions, and increases in variable selling expenses, increased cost of sales tied to digital revenue growth, and an increase in programming fees paid to networks.
On a same business basis, we expect that net revenues will be up 13% to 15% and that direct operating and SG&A expenses will increase in the range of 14% to 16%, both compared to the prior third quarter.
In regard to cash income taxes, we expect that cash taxes related to 2014 operations will total about $13 million to $15 million, about $6 million of which has already been paid.
I will now hand it back to the operator for questions. Operator?
(Operator Instructions). And we will take our first question from Marci Ryvicker from Wells Fargo.
Marci Ryvicker - Wells Fargo
Thanks. Two questions, first for the third quarter, can you talk -- I know you give us guidance; can you talk a little bit about what you're seeing relative the second quarter, especially national; because I think national being down with something we have seen across the board, and we are still trying to figure out if it was macro, if it was World Cup, or if its just moving to digital? And then the second question is I think related to the Media General transaction, there are seven markets where, I guess you need to make a decision of to what you are going to do to get this through? Any update on where you are with those?
Yeah, sure thing. So with regard to the first question, Q3 national; national has been soft this year. There has been plenty of folks that have been kind of speculating, as to the reasons for. I think we kind of joined the speculation, as best we can tell. It’s a combination of a lot of different things, including the money that was taken out in the Olympics, World Cup, kind of a weak upfront and resulting in a not so strong scatter market on the broadcast front, as well as folks, seeming to kind of reallocate a lot of their monies to the fourth quarter.
We are seeing things improve, as we get into September, things improve quite a bit over the pacings that we are seeing right now. And its interesting, its not across the board, clearly it’s the trend, but when we look at markets as diverse as Austin, Texas, Albuquerque, New Mexico, even Buffalo, New York, we actually have pretty good increases, in those particular cases, double digit increases in third quarter spot, national spot pacing.
So it's not across the board, but clearly that has been the macro trend this year in national. But clearly, we do see the trend improving, as we get into September, and with the political pressure being put on the inventory as well, that should help to drive pricing, as it has in past political cycles.
With regard to media general, I think we are moving along well, we are having an announcement, when we are having an announcement. So the process I think is moving along, in terms of, the station divestitures we certainly understand, that that's a gating item in our regulatory review process, and so we have been very actively engaged in that process. It has been a very good competitive process. I mentioned in the past, these are difficult decisions, regarding these overlap markets, both the media general television stations, as well as the LIN Television stations in the overlap markets are very strong properties, and we hate to be involved in a divestiture discussion at all. But these are great properties, competitive process and hopefully, we will have something to announce in the very near future.
Marci Ryvicker - Wells Fargo
And our next question is from Tracy Young with Evercore.
Tracy Young - Evercore
The first question really is here to present gross guidance. Is that just really related to ad time sales? And the next question, in terms of your guidance, what are you seeing as far as political advertising? Are you seeing it being placed a little bit later than you have in previous years? Thanks.
Yeah, good question. So yes, plus 2% guidance is just ad sales, not digital or subscriber fees. And then with regard to political -- the first half of the year for political was a bit slower than we expected, and as you know, it's very difficult to kind of handicap the race. It just so happens, in some of the states that we felt, we have some more vigorously contested primary, such as the state of Alabama. They became a clear frontrunner early on, and the money spent; in some of the races we handicapped for not as significant as we had planned.
We now are getting into the back half of the year, and July is kind of the first month in the back half of the year, and we are excited, and that the race has really started to pick up, and we actually exceeded our internal plan in July. So we expect to see quite a bit of activity, and as we mentioned, we have quite a few states where we have got active primaries taking place; we are here in Providence today, and awful lot of advertising taking place, and the political race taking place here. So things are really starting to heat up, and the back half of the year, September, October in particular of course, really is what ultimately determines kind of how robust the political ad spending is, and things are really starting to heat up now.
And Tracy, the piecing for political in the third quarter looks fairly consistent to 2010. So it doesn't look odd, and what we see, and what's hard to know is, superpack money, that -- we could anticipate, there is a greater extent of superpack money in this cycle, than in the last congressional cycle in 2010, and that may come on the books later. I think they will focus that money, as you know on, places where they think they can change the outcome through added spending. And that may --
Tracy Young - Evercore
Makes sense. Thank you.
And our next question is from James Dix with Wedbush Securities.
James Dix - Wedbush Securities
Good morning guys. Two things, I just wanted to maybe then follow-up a little bit more, I guess Marci's question about the potential sources of weakness on the national pacings, and just national growth generally this year. Some investors obviously speculate that there is some potential shift that's occurring to digital in particular, whether its video or some other types of platforms, and then just curious as to whether you could speak to that specifically, especially in light of the fact that you have a pretty large standalone business on the digital side yourselves?
And then I guess longer term, there is discussion about how inventory in the TV market may be transacted more programmatically, whether it's at the national side or the local side, maybe starting with the cable companies? How do you see that playing out and how do you see local broadcast TV assets, being competitively affected by increased targeting of TV inventory or even associated video inventory? Thanks.
Sure. So I mean, we could talk for a long time on -- those are real good questions and topics. We are involved in the digital video business, online as well as obviously digital sales. So we are growing and investing in that business through federated. So we kind of sit on, kind of in both playgrounds. Clearly there has been significant growth in digital. From what we can see, it seems as if, the majority that has come from print, perhaps some of that has -- has come from television. We do kind of a pretty deep dive, advertiser by advertiser with national accounts, both ourselves and through the organization we participate in the TVB; understand what's taking place and have those high level conversations with media planners and buyers and VPs of marketing.
We had not really detected a trend of money move out of national spot over to digital. I mean, the total digital video market, to this day, is somewhere in the $7 billion range or so. A ton of that is not premium inventory. A ton of that is programmatic ROS type stuff. And so that does not make a kind of robust digital or video marketplace offering. You got to have quality, and you got to have eyeballs, and pretty clear, the television provides that.
With regard to individual advertisers, we have seen some people go away from national spot television, and spend more money in national cable. We have seen some folks, reallocate some of their marketing dollars to a greater percentage to digital, and we have seen other competitors jump on the opportunity to take advantage of investing back in television and do very well. And of course, we have all of our examples of people that, like GM a couple of years ago, like Honda, that have tied experimentations, where they have taken fairly significant sums out of national spot, led the local dealers continue to invest locally, but kind of reallocate on over the digital and have lost a significant amount of share; when they have done that and ultimately come back to national spot television.
So I think, you will see this -- you will continually see this ebb and flow. I ma definitely not convinced, that there is a longer term trend afoot here. I think its actually quite the opposite. I think advertisers wish they could get more GRPs, more rating points out of television, given that terrific environment of engagement and effectiveness, high definition video, good content, placement, all of that. So I think, there is a place for this, certainly for the long term. We are just kind of experiencing kind of the ebbs and flows that take place in individual marketing decisions.
With regard to targeted advertising and programmatic, just real quick on programmatic, I definitely think that there is a place for programmatic and spot TV. Spot TV is cumbersome to buy, and there is, I think, always going to be a person involved in the very-very high value advertising placements that we have on sports and syndicated programming and local news. But for kind of the lower viewed stuff, some of the over nighttime periods, those type of things that advertisers are buying, kind of quantity. I think that there is a place for programmatic, and there has been quite a few initiatives that have begun on programmatic. I think it will take quite a bit of a time, because we are talking about, needing broad participation, and creating a platform that's advocated by a lot of different people. So I do think it will take quite a bit of time, but we are not opposed of programmatic, we know our inventory is really valuable, and we will put checks and balances in place to control what areas we want to make available through programmatic and set the appropriate business.
The last question being around targeted advertising, I think the internet target is really-really well. And I am not sure that, if you take a cable TV show with let's say an average viewership of 120,000 of 150,000 national viewers, and you break that down into zip codes. Even if you provide 10 of those channels in a buy, if an advertiser really cares about getting 7,000 viewers and is really -- if there is a willingness on behalf of the advertisers to pay the cost, getting the viewers down to that small a level. I think TV has been a really super effective advertising medium, and its broadcast by definition. I think the local markets are frankly enough, with some exceptions. If you are in New York City, clearly a viewer, that VMA covers Connecticut, Long Island, New York City, New Jersey, parts of Pennsylvania. Clearly, there is enough hep [ph] there, that there is an opportunity. But in markets like Indianapolis and Albuquerque and Austin, these are fairly homogenous markets that I think benefit from driving those big audiences, and we try to augment targeting through our digital products, which we think are much better mechanisms for doing specific targeting, augmented with large audiences of television.
James Dix - Wedbush Securities
Great. Thanks very much for the color.
(Operator Instructions). It appears there are no further questions at this time. I will now hand the call back over to the company's President and CEO for closing remarks.
Terrific. Thank you all for your interest in LIN, and we look forward to updating you throughout the quarter. Have a great day.
This concludes today's call. Thank you for your participation.