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Journal Communications, Inc. (NYSE:JRN)

F1Q07 Earnings Call

April 24, 2007 11:00 am ET

Executives

Sara Leuchter Wilkins - Director of Investor Relations

Steven J. Smith - Chairman of the Board, Chief Executive Officer

Paul M. Bonaiuto - Chief Financial Officer, Executive Vice President

Betsy Brenner - Executive Vice President, Chief Operating Officer of Publishing

Douglas G. Kiel - President

Analysts

Mark Bacurin - Robert W. Baird

Stacy Fleck - Merrill Lynch

Lisa Monaco - Morgan Stanley

Craig Huber - Lehman Brothers

Peter Salkowski - Goldman Sachs

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Journal Communications first quarter 2007 earnings conference call. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Ms. Sara Wilkins, Director of Investor Relations. Please proceed, Madam.

Sara Leuchter Wilkins

Thank you, Gina, and welcome, everyone. Before we begin I would like to introduce the Journal Communications senior management team who will participate in this morning’s call. Speaking this morning are: Steven Smith, Chairman of the Board and Chief Executive Officer; and Paul Bonaiuto, Executive Vice President and Chief Financial Officer. Also with us today are Doug Kiel, President of Journal Communications and CEO of Journal Broadcast Group; and Betsy Brenner, Executive Vice President of Journal Communications and Chief Operating Officer of our publishing businesses.

I would like to remind you that certain statements in this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally include all statements other than statements of historical fact, including statements regarding our future financial position, business strategy, budgets, projected revenues and expenses, expected regulatory actions and plans and objectives of management for future operations. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Some such risks include decreases in advertising spending, loss of market share, inability to acquire a successfully managed broadcast properties and acquisitions, failure to retain adequate viewers and listeners, increases in the costs of television programming, broadcast limitations and/or sanctions imposed by the FCC, loss of key personnel, and other uncertainties and other factors which are contained in our periodic filings under the Securities Exchange Act of 1934.

Additionally, any discussion of EBITDA in today’s conference call may be referenced back to our unaudited reconciliation of consolidated net earnings to consolidated EBITDA schedule, which accompanies today’s earnings release.

Now, I would like to turn the call over to Steve Smith. Please go ahead, Steve.

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Steven J. Smith

Thank you, Sara, and good morning, everyone. This morning, Journal Communications reported net earnings of $73.3 million for the quarter ended April 1, 2007, which included a gain of almost $65 million related to our sale of the Norlight Telecommunications subsidiary. Earnings from continuing operations were $8.6 million. Basic and diluted earnings per share from continuing operations were $0.13 and $0.12 respectively and basic and diluted net earnings per share were $1.12 and $1.05 respectively. Revenue from continuing operations for the first quarter of $153 million decreased about 2% compared to $156 million.

Note that unless otherwise indicated, all comparisons are to the first quarter ended March 26, 2006.

Allow me to reiterate a few things we said in this morning’s press release for those of you who may not have seen it. We were pleased with the performance of our broadcast group in the first quarter of 2007, where growth in developmental revenue and interactive revenue enabled us to replace $3.3 million of revenue generated from the 2006 Winter Olympics and to overcome a decline in automobile advertising. We also exceeded last year’s quarterly political advertising of $530,000 through increased political and issue advertising in Wisconsin.

In addition, we recorded earnings growth at six of our eight radio market clusters and four television stations, despite tough television comparables to the first quarter of 2006.

We continue to face revenue challenges in a number of key areas in our publishing group during the first quarter. Most significantly, at the daily newspaper, total automobile advertising declined by 15.7%. Interactive revenue, however, increased 47.4% to $3 million. We were encouraged by revenue and operating earnings improvement at IPC, reflecting the successful return to its core printing business.

Cost control remains an important focus throughout our entire organization, especially given the difficult comparisons to last year in television and the ongoing revenue challenges in publishing.

On February 26th, Q-Comm Corporation acquired 100% of the stock of Norlight Telecommunications, our former subsidiary. Proceeds to Journal Communications net of transaction expenses were $175.9 million. The sale of Norlight improves Journal’s financial flexibility and allows us to focus on our diversified media businesses. To date, we have used the proceeds to reduce our obligations under our unsecured revolving credit facility.

We also recorded a gain from discontinued operations of $64.8 million in the first quarter and expect to pay quarterly estimated income taxes on the gain throughout 2007.

At the Journal Broadcast Group, as I mentioned, developmental and interactive revenue at both our radio and television stations helped to overcome the loss of Olympics revenue generated in last year’s first quarter. Remember that developmental revenue refers to non-transactional or non-cost per point revenue, which targets non-traditional advertisers.

Journal Broadcast Group had great success in driving developmental revenue, which was up 51% in radio and 44% in television for Q1 2007. Additionally, broadcast new media revenue was up substantially in the first quarter to almost $600,000. We were pleased in the first quarter to exceed last year’s political and issue advertising spending in what is essentially a non-political year.

In television, revenue declined by only 1.6%, reflecting surprising strength in political, as well as solid growth in developmental. We saw revenue growth at all three of our new television stations during the first quarter of 2007, although Fort Myers has been experiencing advertising weakness in the home builders and financial categories.

Our Palm Springs NBC affiliate also recorded a solid quarter, with double-digit increases in revenue and operating earnings.

In radio, revenue was up more than 3% for the quarter, reflecting gains in developmental and interactive advertising while operating earnings were up slightly. Our Boise, Knoxville, Springfield, and Tulsa operations recorded double-digit growth in revenue and operating earnings. Our successful performance in radio was driven by generally strong ratings in our markets as well as strength of both our general management and sales management teams.

In late March, Journal Broadcast Group completed the sale of Omaha radio station KOMJ-AM. Concurrently, we completed the purchase of KMTV Channel 3 from Emmis Communications Corporation, and remitted to Emmis a final purchase payment of $10 million. Recall that Journal Broadcast Group had been operating KMTV under a local marketing agreement since December 5, 2005, pending approval by the FCC of the transfer of the television station license.

In 2006, we recorded revenue of $1.4 million from KBBX, which was divested in late September, 2006, and KMOJ, which was divested in late March of this year.

We continue to face challenges in our publishing group. First quarter advertising at Journal Sentinel was disappointing, with weakness in a number of categories, including automotive, business and financial services, department stores, due largely to consolidation, and real estate.

Even after two years of steep declines, automobile advertising in the quarter was down almost 16%. In addition, we began to feel the negative affects of the recent acquisition of 10 Milwaukee area Jewel-Osco stores and the loss of the Boston Stores direct marketing program following its acquisition by Bon-Ton.

The Daily Newspaper has won a number of new key accounts to help offset those losses, and has seen increased spending from some of our long-time advertisers. We are coordinating programs to boost sales in print and online, such as the first quarter successful The Big Employment Extra, a recruiting initiative which generated nearly $1.3 million.

The newspaper is also reengineering its sales and sales management processes to drive performance. Note the Journal Sentinel continues to somewhat mitigate the impact of revenue declines on operating earnings through ongoing reductions in newspaper expenses and by tightly controlling -- on newsprint expenses and by tightly controlling direct expenses.

In February, Journal Sentinel signed an agreement to join Google’s pilot newspaper advertisement program, which will enable Google’s online advertisers to purchase surplus print ad inventory in the Milwaukee Journal Sentinel. Online revenue growth at the daily newspaper continues to be strong, up 47% in the first quarter of 2007.

We reached a milestone in March when, for the first time, monthly online revenue surpassed $1 million. Online growth in our classified verticals was robust despite a decline in print classified advertising. Specifically, online employment, automotive and real estate rentals were up 39%, 60%, and 99% respectively.

Journal Sentinel’s commercial printing and commercial delivery revenues continue to grow, up 84% and 24% respectively for the first quarter. We are clearly benefiting from the five-year contract signed last October to print the national edition of the USA Today for distribution in Northern Illinois and Eastern Wisconsin. USA Today applauded our strong launch and recently moved another 14,000 copies to our print site, boosting total nightly production to 104,000.

In late January, 2007, we introduced the new look of the Milwaukee Journal Sentinel, fully redesigned to be more reader friendly. In February, we began printing the full daily newspaper on a 48-inch web down from 50 inches. We expect the updated design will draw new readers to the newspaper and that its slightly smaller size will save an estimated 4% in annual newsprint consumption.

In late February, Journal Sentinel purchased Wisconsin Trails and Milwaukee Home and Fine Living Magazine from the Trails Media Group Inc. The acquisition of these two great titles underscores our strategy to go deeper in our local markets to reach the quality readers that advertisers most desire.

I am pleased to report two recent awards won by the Journal Sentinel; the American Society of Newspaper Editors has honored the newspaper’s print and online coverage of the fatal propane explosion at Falk Corporation in December as the best breaking news reporting by a newsroom in 2006. Also, for the second straight year, the American Society of Business Editors named the Journal Sentinel’s business section one of the three best in business winners among large circulation newspapers for their work done in 2006.

At Journal Community Publishing Group, revenue declined 8% and the division posted an operating earnings loss of about $240,000 compared to operating earnings of $1 million in the first quarter of 2006. This reflects in large part the product changes that we have made to community newspapers, our Milwaukee area publications group, as well as the shift of significant commercial printing to the Journal Sentinel’s Burnham print plan, following the closure of our Hartland, Wisconsin facility.

You may recall that in the third quarter 2006, community newspapers discontinued 10 shopper publications. Additionally, in late January 2007, it revamped its 18 weekly community newspapers and reduced the number of publications to eight, with each covering a slightly larger footprint.

These weeklies are now being distributed free of charge with the daily newspaper, which has more than doubled their circulation. We have lost subscription revenue from the suburban weeklies but expect to see increased advertising revenue that should more than cover the loss, as more small advertisers will be able to precisely target specific suburbs and selective audiences.

Real estate softened across all markets, especially in our important Florida locations. Also, while winter storms in February significantly impacted our Ohio and East Coast operations, the lack of snow in Vermont and Northern Wisconsin had a negative impact on tourist markets served by our publications in those locations.

At IPC, the sales team sold more than 50 new accounts, which delivered almost $2 million in revenue during the first quarter of 2007.

During the first quarter, we named Carl Gardner to the newly created position of Vice President Digital Media. In his new role, Carl has responsibility for the continued development and implementation of the overall corporate digital and online strategy that leverages our print and broadcast brands across the Journal markets. Carl is now working with managers who currently have Internet brand responsibility to identify, prioritize and manage the creation of new growth opportunities. Additionally, he is helping to guide those brands in digital distribution expansion, product development, and technical support.

Now I would like to ask Paul to begin his in-depth financial review. Paul.

Paul M. Bonaiuto

Thank you, Steve. For the first quarter 2007, revenue from continuing operations of $152.8 million decreased 2.3% compared to $156.4 million last year. Net earnings were $73.3 million compared to $12.3 million in 2006, and included a gain from discontinued operations of $64.8 million.

Earnings from continuing operations were $8.6 million compared to $9.4 million in 2006, a decrease of 8.5%.

Basic and diluted earnings per share from continuing operations were $0.13 and $0.12 respectively compared to $0.13. Basic and diluted net earnings per share were $1.12 and $1.05 respectively for the quarter, compared to $0.17.

As I just mentioned, the first quarter 2007 after-tax gain from discontinued operations was $64.8 million. This reflects a $62 million gain on the sale of Norlight, as well as a $2.8 million impact from first quarter 2007 operating results. This compares to a gain of $2.9 million for the first quarter of 2006.

Included within discontinued operations are Norlight’s first quarter 2007 revenue of $18.5 million and operating earnings of $4.6 million, compared to $32.9 million and $4.9 million respectively.

Other expense, which primarily consists of interest expense, decreased $0.6 million to $3 million. This decrease is attributable to the direct application of the proceeds from the sale of Norlight to outstanding debt.

In the first quarter 2007, our effective tax rate on continuing operations was 39.5%, flat with last year’s first quarter.

Within publishing, revenue was down 4% for the first quarter, in part reflecting weakness in automotive and changes at our community newspaper division, which Steve discussed earlier. At the daily newspaper, total revenue of $56.4 million decreased $2.4 million, with the most pronounced change obviously occurring within advertising, where we experienced a 4.3% decline to $39.8 million.

Retail advertising revenue of $20.8 million was down 2.8%, reflecting decreases in ROP partially offset by increases in the online and preprint categories. Within ROP, the most meaningful declines were seen in the business services, finance, insurance, department store, and auto categories. Retail online revenues increased 61.4% to $1 million and preprints were up by 3.7% year over year for the quarter.

Although classified advertising at the daily newspaper of $15.6 million decreased 5.2% for the first quarter, the fall-off was softened by an increase in online classified revenue of 41.1% to $2 million. The employment vertical was down 1.9%; auto was down 16.6%; real estate was down 8.9%, reflecting softness in both home sales as well as rentals; and the other classified vertical increased 8.7% year over year.

As we continued to see on a national basis, automobile advertising at the daily newspaper remains weak. On a combined retail and classified basis, auto advertising was down approximately $610,000, or 15.7% compared to last year.

Our national advertising revenue category decreased 2.3% to $2.4 million for the quarter. The direct marketing category of the daily newspaper was down 21.8%, largely due to lost business from Bon-Ton’s consolidation of all Boston Store mail programs into a larger corporate-wide program.

Although interactive advertising is reflected in the various revenue categories, total online revenue was up almost $1 million to $3 million, for an increase of 47.4%. Circulation revenue of $12.7 million for the first quarter was down 2% due to a decline in single copy sales.

Other revenue at the daily newspaper of $3.9 million was up 20.7% year over year for the quarter, principally reflecting gains in both commercial printing, due to USA Today, as well as commercial delivery.

Operating earnings from publishing, as Steve discussed, decreased 27.1% to $5.6 million compared to $7.7 million last year. This decline in large part reflects an operating loss of $243,000 at the community newspapers and shoppers division.

At the daily newspaper, operating earnings totaled $5.8 million, down 12% compared to $6.6 million last year. The decrease was mostly attributable to the decline in revenue, a vacation accrual adjustment, and costs attributed to the 48-inch web cut-down. These were partially offset by a decline in newsprint costs.

Operating margin was 10.3%, down from 11.4% last year. Total operating costs and expenses for the first quarter 2007 at the daily newspaper were $50.9 million, down 1% compared to last year. Note that in the first quarter 2006, we recorded litigation expenses of $728,000.

First quarter 2007 paper costs were down by $1 million. This decrease in cost reflected a 4.1% decline in newsprint pricing and an 11.2% reduction in newsprint consumption.

Turning to our community newspapers and shoppers, revenues of $19.7 million was down 8.3% compared to last year, reflecting declines in retail advertising, classified advertising, and circulation revenue. Weak automotive advertising affected both retail and classified. In addition, declining real estate advertising affected the classified category, especially in Florida.

Circulation revenue at the community newspapers and shoppers of $477,000 decreased 35.9%, largely reflecting the change in the distribution model of the community newspapers in the Milwaukee area. This change, however, provides advertisers with a more effective way to zone their advertising and to target the neighborhood customers they most want to reach.

The division recorded an operating loss of $243,000 compared to operating earnings of $1 million. Operating earnings were negatively impacted by the decline in revenues and by costs associated with the lease termination. I would also note that in the first quarter 2006, we recorded $300,000 in recoveries of bad debts related to Hurricane Katrina and a $200,000 litigation reserve reversal.

At broadcasting, first quarter revenue increased slightly to $51.7 million. Political and issue advertising totaled approximately $670,000 in the first quarter of 2007, and 530 in last year’s first quarter. Operating earnings were down 13.7% to $10 million, largely reflecting the revenue reduction at certain television stations, as well as increased television expenses, which I will detail shortly.

Of note, revenue increased at all three of our newly acquired television stations, and at our Palm Springs operations, operating earnings improved significantly.

Revenue at our television stations for the first quarter of 2006 decreased $543,000, or 1.6% to $33.5 million. This reflects the loss of $3.3 million in Olympics revenue, partially offset by growth in developmental and interactive revenue. Television operating earnings of $6.2 million for the quarter decreased 21.1% compared to $7.8 million, in part reflecting higher costs associated with newscasts that we added in 2006 and an increase in depreciation.

Moving on to radio for the first quarter of 2007, radio revenue of $18.2 million was up $601,000 or 3.4%. Operating earnings of $3.8 million were flat compared to last year’s first quarter, partially reflecting the sale of KBBX and KOMJ.

Now turning to printing services, revenues in the first quarter of 2007 increased 3.5% to $16.9 million. While IPC is still experiencing declines in revenue from Dell Computer Corporation and other software customers, it recorded $1.8 million in new print business. For the first quarter of 2007, operating earnings from printing services more than doubled to $1 million compared to $492,000. This partially reflects the increased revenues, as well as efficiencies gained from manufacturing operations.

For the first quarter 2007, other revenue of $8.2 million decreased 10.7%, due in part to the loss of a large customer and weakness at Prime Net’s Clearwater, Florida location. Other operating earnings were $600,000 compared to a loss of $600,000 due to decreased corporate expenses.

Our balance sheet remains sound. At the end of the quarter, debt was $105.3 million, compared to $235 million at year-end 2006. This reflects the application of proceeds from the sale of Norlight to significantly pay down debt.

Our capital expenditures from continuing operations in the first quarter 2007 were $7.8 million, compared to $5.4 million last year.

During the first quarter 2007, the company repurchased 2,155,400 of its Class A shares. Through April 20, 2007, the company had repurchased a total of 8,949,100 Class A shares. Approximately 1 million shares remain available for purchase under our second of 5 million share buy-back authorization through October of this year.

On February 13th, our Board of Directors increased the quarterly dividend on our Class A and Class B shares by 15% from $0.065 to $0.075. This increase reflects our strong cash flow and financial position and underscores our commitment to building shareholder value.

For the second quarter of 2007, Journal Communications currently anticipates that its publishing revenues will be up modestly compared to the prior year, reflecting a favorable comparison to a litigation settlement at the daily newspaper, partially offset by ongoing weakness in automotive advertising.

Radio revenue should be flat to up slightly, reflecting continued growth in the development category, partially offset by the sale of KKBX-FM in the fall of 2006 and KOMJ-AM in early 2007.

Television revenue should be flat, despite having to replace $1.4 million in political and issue advertising generated in the second quarter of 2006.

Now, I would like to turn the call back over to Steve for a brief wrap-up before we open it up to Q&A. Steve.

Steven J. Smith

Thank you, Paul. We continue to be focused on expanding our revenues and operating earnings margin throughout our businesses. We are also committed to growing our new media, digital and non-traditional revenue platforms in both publishing and broadcasting.

We will continue to pursue our priorities in publishing. These include targeted local new media initiatives, such as milwaukeemoms.com, non-traditional revenue growth, creation and acquisition of niche local publications, such as the titles we recently purchased from Trails Media, and ongoing excellence in commercial printing.

We also remain focused on cost control through our publishing businesses and expect to benefit from decreasing newsprint prices.

Top line growth remains a challenge at publishing. One specific factor affecting the top line in the Milwaukee market includes ownership changes in the department and drug store categories, which have led to marketing program changes that have reduced spending.

Mirroring other markets around the country, real estate continues to be sluggish and automotive remains weak, although we believe we have emerged from the worst of the comparables. Our revenue growth initiatives are front and center. We are committed to providing a full suite of print and web-based products to our advertisers and we will continue to pursue web development of our traditional printed lifestyle products.

We are also committed to building local audiences and are launching a number of significant and diverse products online that will lead in new directions.

At Journal Sentinel, online initiatives include expansion of the sales team, including hiring a senior online sales executive, online ticket sales, a focus on new business development, and exploration of video and mobile advertising sales.

With 85% of the Southeastern Wisconsin market already reached by Journal Sentinel’s print and/or online products, we are confident that we can benefit from that reach as we seek new advertising revenue possibilities.

Despite a disappointing first quarter at our community newspapers and shoppers, we still expect to improve margins at that division. Note however that in the second quarter 2006, our community newspapers and shoppers division recorded $1.1 million of insurance proceeds received from a business interruption claim from the impact of Hurricane Katrina, which will negatively impact next quarter’s comps.

As we discussed previously, our weeklies in Milwaukee are working together with the daily newspaper to leverage local news coverage and Internet capabilities while reducing duplicative operating costs. We should see further efficiencies from the consolidation of our Wisconsin printing operations in late 2006.

We also expect the division to launch several new local specialty publications, expanded circulation and distribution reach, and launch new web initiatives tied to its current publications.

In broadcasting, we continue to pursue priorities, including growth in developmental and interactive revenues, ratings growth, especially at our three new TV stations, and focused cost control. As I said last quarter, we intend to maintain our local advertising sales franchises and extend them to new channels, continue to be a leader in local video/audio content, incorporate additional new media platforms, and develop targeted new brands and products.

We expect another quarter of tough television comparables as we face the loss of $1.4 million in political and issue advertising revenue generated during the second quarter of 2006. However, we anticipate that continued growth in developmental revenue, enhanced programming, such as TMJ4’s The Morning Blend, and additional newscasts in several markets should bolster television revenue. Speaking of The Morning Blend, we expect to replicate the format of this successful new local television lifestyle show in the Fort Myers Naples market later this summer.

We are especially excited about the continued opportunities for revenue and operating earnings growth in Las Vegas. We look forward to the completion of the new state-of-the-art digital television facility there, which will help the station’s growing business to transition to a fully digital infrastructure and to better support the expansion of its local news organization.

In fact, the new digital equipment we are installing in all of our television stations will allow us to create efficiencies in news gathering and production and to speed up the process of moving stories and pictures to our interactive products.

Also, we continue to take advantage of digital technology to establish new local digital television channels which provide the opportunity for additional revenue streams.

We also remain confident that the strong framework we have in place at our three new television stations will continue to drive growth and enhance performance. On the radio side, that we said last quarter we continue to see growth in developmental revenue and ongoing strength across most of our markets. We are committed to pursuing our online radio initiatives, such as podcasting, on-demand programming, text alerts, blogs and more.

We expect that our multiple revenue stream should enable us to increase modestly our radio revenue through 2007, particularly because we will need to replace about $1.4 million in revenue due to the sale of KBBX and KOMJ.

We also recently made a format change in Tucson, replacing a hot adult contemporary station with the city’s first FM news talk radio station. Local news updates will be provided by our Tucson ABC affiliate, KGUN 9, throughout the day.

At IPC, which has now lapped the effects of the Dell fulfillment business, we are encouraged by ongoing success in growing its core printing business, as well as in continued margin improvement at that company.

Our view for the remainder of 2007 remains consistent with that of what we have discussed previously. We are clearly focused on our core media businesses, where we expect to expand our traditional revenue platforms and our online initiatives, while continuing to drive additional efficiencies through cost controls. Our balance sheet is strong with low debt and solid cash flow. This allows us to enjoy the financial flexibility to make further investments in our business, evaluate potential acquisitions, fund our share repurchase program, and continue our dividend policy. Delivering meaningful value to our shareholders remains a very important priority.

Operator, this concludes my remarks. You may begin the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question is from the line of Mark Bacurin of Robert Baird. You may proceed.

Mark Bacurin - Robert W. Baird

Good morning, everyone. A couple of questions. I guess first on the publishing margins, we have clearly seen some contraction there and you went through a lot of details in terms of some of the issues pressuring the margins there. What levers really do you have left to drive and enhance margins? Paul, have you thought about, or have you guys collectively thought about where you think those margins can get back to over time?

Betsy Brenner

Mark, this is Betsy. Good morning. Let me talk about some of the efficiencies we have underway this year already or yet planned for 2007, which will help us on the expense side this year.

We are continuing our fee-for-delivery conversion in circulation, which should return $1 million in circulation revenue to the company. We are continuing to consolidate our distribution centers in the Milwaukee market, reducing the number of leased facilities throughout the community that we deliver from.

We have gone, as you know, down to two presses nightly and that reduces our labor and expense costs in the press room, also enables us to print USA Today, which as Paul and Steve mentioned, we took on last October.

The 48-inch web reduction should result in annual savings of about $984,000 in newsprint, and we are going to realize that this year.

Finally, we are looking at every other opportunity, down to even partnering with the Lee newspaper in Racine to have them deliver our TMC products in their subscriber newspaper. Over the course of the year, that is another $100,000 in savings.

That together with the attrition of unfilled positions that we look at throughout the publishing division should realize some additional savings for us this year.

Mark Bacurin - Robert W. Baird

So collectively, you sort of add all of that up and even look out into ’08 and ’09, is there a margin level? You guys used to share long-term margin ranges and goals, but have you rethought what a realistic margin level might be for that business overall?

Paul M. Bonaiuto

I think, Mark, if you look at that range we have talked about in the past, we have talked about operating earnings margin, and I believe what we have given you is a range of 16% to 20% in operating earnings. At this juncture, we have no reason to believe that there is a significant change from that, although we will be pressured in the early portion of that. We think that that is still a reasonable range.

Mark Bacurin - Robert W. Baird

Second, just in terms of this cash infusion you got with Norlight, understood the near-term action was to pay down debt but I’m just curious to hear what you are seeing now on the M&A landscape and/or buying back stock has been a priority. Would you consider now with a much, with a significantly de-leveraged balance sheet, looking at something like a more aggressive tender offer for a larger chunk of stock at one time?

Steven J. Smith

We continue to be focused on the utilization of cash that we have talked about. I would tell you that there we are out talking to folks about acquisitions where there is strategic logic, and we have talked in the past about the fact that we would be interested in television and radio and publications and specialty publications and new media related businesses, so there are ongoing conversations.

Short of achieving that, certainly as you pointed out we remain committed we think investing in ourselves at this point is a good idea, as is evidenced by the fact that we are almost through April 20th, 9 million shares in the buy-back with only a million remaining from the authorization from October this year, so our Board is very committed to shareholder value and I am sure that will be a discussion with them.

And then, the other idea in terms of enhancing the dividend, where we did do that in the first quarter also remains a solid way to return to have value go to the shareholders.

We will be continuing to talk with the Board about all of those consistent ways to drive shareholder value.

Mark Bacurin - Robert W. Baird

Beyond just using the expected free cash flow, is there a target level of leverage that you might be willing to get back up to in pursuit of both M&A as well as share repurchases?

Paul M. Bonaiuto

What we have said in the past, as you may recall, Mark, is that we define capacity as 3X debt to EBITDA. Last year, we had about $140 million of EBITDA. We kind of target 2X, but I think for the right acquisition clearly that 2X to 3X is in our warehouse, at least.

Mark Bacurin - Robert W. Baird

Okay, great. I did not hear if Carl was available or not, but I was just curious to, Steve I think you addressed it right at the end, but just what some of his near-term priorities are in his new role as heading up the digital --

Steven J. Smith

We do not have Carl here today, Mark, but I would tell you that he is very busy in both the near-term and more strategic thought processes for online. He is working with -- we have some talented executives in our group and in the online space, and in particular Carl has the ability to work with Sherry Pearl at publishing and a number of our general managers in the broadcast group, and so he is multi-tasking at this point.

Looking at the strategy, we are going to put him in front of the Board in about a week and have him talk to the Board about all of the growth opportunities that we see, but I would tell you also, and I am sure Betsy and Doug would reaffirm this, that the near-term revenue possibilities are on his plate as well as all of our operating managers.

But he is very busy and we are delighted that he is in that chair.

Mark Bacurin - Robert W. Baird

Great. Thanks a lot, guys.

Operator

Your next question is from the line of Stacy Fleck of Merrill Lynch. You may proceed.

Stacy Fleck - Merrill Lynch

Good morning, guys. I guess to start on the publishing side, did you guys feel that you had any benefit from Easter being a week earlier this year?

Betsy Brenner

Stacy, this is Betsy. I think we definitely saw some improvement in our retail performance for period three, March. We were down four-tenths of a percent versus last year. We saw a little fall-off the start of period four, but for the most part, did not see a significant loss of business as it switched from period to period.

Stacy Fleck - Merrill Lynch

Okay, that’s helpful. Moving over to TV and radio, the costs were a little bit higher than I expected and I heard you mention the news on the TV side, but should we expect these types of 4% expense gains going forward at both TV and radio for the balance of the year, or are we just cycling some things in the first-half?

Douglas G. Kiel

Stacy, this is Doug. Let me just go through it in a little more detail. Some of these costs will be baked in, some are not. Let’s talk about radio first.

As you mentioned, they were up in the quarter, radio by about 4%. Costs there, about $144,000 of the cost was associated with the sale of KOMJ-AM in Omaha and the loss that came with that. We also had a promotional campaign at one of our radio stations that is under a tack and going through a transition, of about $120,000. I will not identify the market, and that is something that will not recur.

But we also had some increase associated with our interactive and development revenue projects. Those expenses will see, will carry slightly a higher price tag and will occur as we go through the year.

On television, where costs were up about 4.2%, the increased news expenses that we talked about, those were partly for payroll, adding extra newscasts, as you’ll recall. We mentioned during the year last year of several of our stations, including two of our new acquisitions. And then depreciation expenses that we talked about, those were also associated with adding those newscasts with our news expansion and filling some open positions we had last year.

So to answer your question more specifically, we made those investments to drive revenue in non-Olympics and political years and to set up our group to maximize political revenue opportunities, even in even years, even years as we know but even during those locations when they come up unexpectedly in years like this year. For example, in the first quarter, where we had an unusual race or a race we did not expect to be so significant in places like Milwaukee.

So some of these are investments that will be ongoing during the year. The news expenses, particularly in television, and then in radio the expenses associated with the new revenue initiatives we have going on.

Stacy Fleck - Merrill Lynch

Okay, that was really helpful, thanks. How is the auto category performing so far at the TV stations in Q2?

Douglas G. Kiel

In quarter two they get -- let’s talk about quarter one, because I have it specifically, not very well. Quarter one our automotive category in television was off about 16% across our entire group. It varied by market. Radio was better. It was off by about 5%, so I guess comparatively that is a good number.

In quarter two, we see automotive continuing to be slow, particularly on the national side. That is why it has been so important for us and why we have invested in people and a little bit more in costs, these developmental revenue initiatives that have been so helpful to us, is to replace some of this revenue that we are losing with automotive and to create a longer list of advertisers who have access to both television and radio. It has been vital to us and it is what our revenue performance in the first quarter was, as strong as it was considering what occurred with the automotive and of course political cycling out.

Stacy Fleck - Merrill Lynch

Also, given the investment on the radio side specifically, do you guys expect to show a margin gain for the year?

Douglas G. Kiel

I think our goal for the margin for the overall group consolidated is to lose a couple of points because of political cycling out. I think we will lose a little bit in television and we will probably lose a point or two in radio as well.

Stacy Fleck - Merrill Lynch

Great, thank you very much.

Operator

Your next question is from the line of Lisa Monaco with Morgan Stanley.

Lisa Monaco - Morgan Stanley

Good morning. Could you just give us a little color on how your Las Vegas station performed in the quarter? Thanks.

Douglas G. Kiel

Our Las Vegas station continued to perform well in the quarter. Our revenue was up I think about 4% for the quarter over last year, and that is cycling out some pretty significant sports projects that ABC had last year, which did not recur this year. We also gained some revenue share in the market that, of course, coming off political, the overall Las Vegas market was slightly softer in the first quarter. We don’t expect that to continue for the year.

So we continue to be, as Steve said and I think Paul mentioned it, very, very hopeful that we will continue to see growth in Las Vegas this year.

Lisa Monaco - Morgan Stanley

Okay. Thank you.

Operator

Your next question is from the line of Craig Huber of Lehman Brothers. Please proceed.

Craig Huber - Lehman Brothers

Good morning. First, a housekeeping question, CapEx for the year, are you still roughly assuming it is about $45 million for the year, including $10 million for that new building down in Las Vegas?

Paul M. Bonaiuto

Yes.

Craig Huber - Lehman Brothers

Okay, good. Secondly, non-newsprint cash costs for your newspaper division, what was the percent change there in the quarter please?

Paul M. Bonaiuto

Would you like it for the entire publishing group or broken out, Craig?

Craig Huber - Lehman Brothers

The entire group is fine.

Paul M. Bonaiuto

Okay. If we look at it unadjusted, it was down 0.81%. If we adjust for the fact that in 2006 we had $728,000 of litigation related expenses, it would be up 0.45%.

Craig Huber - Lehman Brothers

Okay, and then my last question please is for your online revenues for the quarter, could you just break down how much was from classified, and then also more importantly, how much again help wanted, real estate, and auto, the percent change in the quarter for online? Thank you.

Betsy Brenner

As we look at the 47% gain, we break it out a couple of different ways. Classified packages were 44%, some sponsorships up 19%, and then other, which is a smaller category, up 250%.

I think Steve gave the percentages in his text for the individual categories you asked about. Again, this is at the daily newspaper. We are looking at -- hold it, I’m getting there -- recruitment was up 39.3%, 66% for auto --

Paul M. Bonaiuto

-- for auto, 66% for real estate, 126% for rentals, and down 30.9% in one of the smaller categories, other.

Betsy Brenner

Right, so when you combine those rentals and real estate, you get a 99% gain there.

Craig Huber - Lehman Brothers

Finally, what percentage was classified of the total for online?

Betsy Brenner

I don’t know that -- classified -- I’m sorry, go ahead.

Paul M. Bonaiuto

Total online revenue within classified was $2 million. It was up $587,000, which represented a 41.1% increase.

Craig Huber - Lehman Brothers

I’m sorry, within the online revenues in total, how much of that came from the classified categories was the question.

Paul M. Bonaiuto

$2 million of the 3.

Craig Huber - Lehman Brothers

Okay, two-thirds. Okay, thank you.

Operator

(Operator Instructions)

Your next question is from the line of Peter Salkowski of Goldman Sachs.

Peter Salkowski - Goldman Sachs

Thank you. Good morning, everybody. Betsy, a couple of quick questions on the newspaper side. First of all, if I remember correctly, there was some ad credits that were supposed to come in in the first quarter and possibly throughout the full year from the litigation settlement last year. Could you remind us how much of that was in the first quarter?

Secondly, on the newspaper side, I know the Google thing is relatively new, but I am just wondering if you can give us any more information with regard to any revenue that may have been generated in that quarter or possibly expectations for ’07.

Paul M. Bonaiuto

In the quarter, we had about $900,000 of credits that were taken, but you may recall we took the P&L impact as well as the balance sheet impact last year, so really the only impact is on cash flow this year.

Peter Salkowski - Goldman Sachs

Okay, and the Google thing?

Betsy Brenner

The Google thing is relatively new for us, Pete. We signed with Google in early February and then there were several weeks of tuning up the system, so we have really been online receiving ads, or having the potential to receive ads, for a couple of weeks at the back-end of the quarter. We have taken a handful of ads. We like the rate we have taken so far and we think that number will continue to grow throughout the year.

Peter Salkowski - Goldman Sachs

Is it my understanding you have right of first refusal in terms of stuff that comes in?

Betsy Brenner

We do.

Peter Salkowski - Goldman Sachs

Okay, so you’ve been able to do that if you want to. Great. Excellent. Doug, on the TV side, I know political -- I am not quite sure what is going to happen in ’07 relative to ’08. I think some money is going to flow into ’07 here with all the primaries and with the number of candidates we have floating around. I am just wondering your sense in terms of what you think you might be doing in political advertising on the broadcast side.

Douglas G. Kiel

You know, Pete, your guess is as good as mine. I hate to say that. We have -- we got money in the first quarter we did not expect because of one race in Milwaukee or in Wisconsin not associated at all with all the discussion about the presidential campaign.

However, the fact that now the Republicans have moved up to join the Democrats with the early caucus in Las Vegas, and Nevada has been a great swing state. We know that that money is likely to occur in the late part of this year. We are guessing some time after Labor Day. We just do not know and we continue to talk to folks and cannot quite -- nobody is telling.

Florida has moved up, as you know. We have a bunch of these states that we are impacted by, so I do not expect that we will see in the next quarter or two, in the fourth quarter though we expect to see some. We just do not have a clear vision to it right now.

Peter Salkowski - Goldman Sachs

So it could be an incremental positive to the end of the year here?

Douglas G. Kiel

Absolutely.

Peter Salkowski - Goldman Sachs

Lastly, Betsy, you mentioned on the newsprint switchover to the 48-inch width that there was some additional costs in the first quarter. Is any of that going to repeat in the second or later in the year, or is that just a one-time thing?

Betsy Brenner

We don’t expect it to. That was some overtime regarding the crews who were actually making the changes on the press and some depreciation for the discarded press parts as well.

Peter Salkowski - Goldman Sachs

Thank you very much.

Operator

That concludes the Q&A session. I would now like to turn the call back to Ms. Sara Wilkins.

Sara Leuchter Wilkins

Once again, thank you all for joining us on this morning’s call. We do appreciate your interest in Journal Communications. As a reminder, a replay of the call will be available today through April 26th. Please refer to this morning’s press release for the dial-in information for the replay of the call. Also, an archive of the webcast will be available today through May 8th at www.journalcommunications.com/investors. Thank you again.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: Journal Communications F1Q07 (Qtr End 4/1/07) Earnings Call Transcript
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