PRIMEDIA Q1 2007 Earnings Call Transcript

May. 3.07 | About: Primedia Inc. (PRM)
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PRIMEDIA, Inc. (NYSE:PRM)

Q1 2007 Earnings Call

May 3, 2007 10:00 am ET

Executives

Dean Nelson - Chairman, President and CEO

Kevin Neary - SVP and CFO

Bob Metz - EVP and CEO of Consumer Source Inc.

Kim Payne - CFO of Consumer Source

Carl Salas - SVP and Treasurer

Eric Leeds - SVP and IR

Analysts

Michael Meltz - Bear Stearns

Todd Morgan - CIBC World Markets

Jeffrey Farrell - Private Investor

Presentation

Operator

Good day, ladies and gentlemen, and welcome to PRIMEDIA's First Quarter 2007 Earnings Call. At this time all participants are in a listen-only mode. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today's conference call, Mr. Dean Nelson, Chairman, President and Chief Executive Officer of PRIMEDIA. Please go ahead, sir.

Dean Nelson

Good morning, and welcome to PRIMEDIA's first quarter conference call. I'm pleased to be joined by Kevin Neary, PRIMEDIA's CFO, Bob Metz, CEO of our Consumer Source Business, Kim Payne, CFO of Consumer Source, Carl Salas, our Treasurer, Eric Leeds, our IRO and other members of our senior management.

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

On this morning's call we'll summarize first quarter 2007 results and review our operating strategies relative to those results. Bob will then offer performance highlights from his business and Kevin will review the financials. Finally, we will open the call to questions.

Before I get into the detail on our Consumer Guides business, I wanted to give you a quick update on PEM. As you know in February the Board announced the exploration of the sale of our Enthusiast Media business. I really can't comment much on the specifics of the process except to say that it's on track.

The Board continues to be encouraged by the strong investment in debt markets, and as a result, we view the current environment as extremely favorable for a sale. And although sales are preferred course to generate shareholder value, we do have a favorable IRS ruling and have nearly completed the compliance with the SEC regulation, which gives us the flexibility and option of spinning off the Consumer Source business and creating two distinct publicly traded companies. If the Board ultimately decides that a spin is in the best interest of the shareholders.

We anticipate announcing the outcome of the process in May. If the process results in a sale, the specific timing at the close of the transaction is somewhat dependent on the financing requirements of the buyer, but we would expect to close in the third quarter.

In terms of financials, PEM delivered 1.6% revenue growth and EBITDA growth of 30.9%, which we view as a terrific performance by Steve Parr and his management team. PEM's strong results this quarter underscore the strength and potential of these brands, and also are indicative of the early returns from our key initiatives. A meaningful part of the EBITDA growth was driven by very strong growth in online revenues, which have a high flow-through the EBITDA.

Additionally, we are now seeing the result of our efforts to increase operational efficiencies and reduce overhead expenses. The second biggest cause of improvement in EBITDA was, in fact, the reduction in draw that we've been working on for the past year and the third largest was, in fact, the reduction of overhead, reflecting the fact that we have a much smaller PEM business today.

Interestingly enough, our financials do reflect an increase in investment in our publisher controlled expenses, which are sales and inventory related which is consistent with our strategy to invest where it most positively affects our advertisers and our readers.

In terms of our other efforts to streamline our organization and to improve our balance sheet, as you know, in January we sold our Outdoors group for $170 million, and recently on April 23 we announced that Channel One was sold to Alloy, one of the largest providers of nontraditional media programs reaching targeted consumer segments. As part of this transaction, Alloy has assumed all liabilities associative of Channel One.

Finally, we continue to explore options for our other educational assets. I'll let Consumer Source CEO, Bob Metz provide you with a more detailed view of the quarter and let me give you an overview.

Ad revenue in the first quarter declined by 1.2% driven primarily by continued weakness in our Apartment Guide segment, which represent a large majority of the revenue from the business. However, we are starting to see some positive trends in this business as ad revenue only declined 1.1% versus the last quarter, which is the businesses’ best sequential performance in seven quarters. We believe that this improvement is a direct result of both our more favorable operating environment and better execution by the team.

Please note that, because this business is not seasonal and the vast majority of the business is done via annual contracts with advertisers, sequential revenue growth is a good measure to judge the business. We continue to be very pleased with the performance of our online single unit real estate rental business.

As you know, our largest site is RentClicks but we have also acquired two other smaller businesses and are actively integrating the businesses. These collective businesses grew 68% organically in the first quarter on a pro forma basis, and the business is very profitable in a hub and annual revenue run rate is above $10 million. And although we are the market leader, we still only have 2% penetration of the available market, so there is plenty of room for us to grow.

New Home Guide posted strong organic revenue growth of 17% in the quarter. This business continues to perform well even in soft real estate markets.

And in Auto Guide, we have a new management team in place which is making a number of changes, including improving the book formatting, implementing new production processes, and most importantly upgrading publishers and regional directors. James Moon and his team had made great progress on fixing the fundamentals of the business. These fundamental have to be in place first before you can grow the business profitably.

Consumer sources segment EBITDA growth was driven by our revenue growth and New Home Guides and in the online single unit real estate rental business, and through continued cost management. Also, we are constantly optimizing our DistribuTech distribution function to best meet the distribution needs of our advertising based businesses. These optimization activities reduced the third party revenue generated by this activity, but improved the segment EBITDA performance as we dropped some of our less attractive retail locations.

Overall, we remain committed to our strategy to diversify and grow our revenue streams while also growing segment EBITDA. As recently as fiscal year 2004, we had one profitable advertising based business Apartment Guide and one marginally profitable advertising based business New Home Guide. Two years later, we now have three highly profitable advertising based businesses Apartment Guide, New Home Guide and our online single unit rental business, and our fourth business Auto Guide that we are working hard to grow and make profitable.

In total, we remain very optimistic about the growth prospects of consumer source, especially as the apartment occupancy environment improve, and as we continue to reap the rewards of the strength in the single unit real estate business.

Now on the guidance, we are first reiterating that consumer source will deliver mid- single-digit percentage segment EBITDA growth excluding corporate overheads reflecting revenue growth from New Home Guides, Auto Guides and the single unit rental property business. This, however, will be offset by a full year decline in Apartment Guide, reflecting the continued operating environment weakness I just described.

However, the improvements in Auto Guide are not materializing as quickly as expected, therefore we're reducing our guidance on revenue growth from mid-single digit percentage growth to low-single digit percentage growth.

You should be aware that our guidance reflects a few assumptions. First, that the Apartment Guide weak environment will continue, though there is a possibility that sequential revenue growth will come as 2008 approaches.

And secondly, that because of our efforts to improve the management and operations of Auto Guide, we expect operating losses in the business to diminish throughout the year.

With that I will turn the call over to Bob Metz, CEO of Consumer Source.

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Bob Metz

Thank you Dean. Dean took you through the top-line components of the business. So, I will provide you with a bit more detail on each business line. First, on Apartment Guide. In ApartmentGuide.com and our single unit real estate rentals business, Apartment Guide revenue declined 1.1% versus fourth quarter of 2006, and as Dean mentioned the best sequential performance in seven quarters.

Although, the rate of condo conversions has slowed down, the lost advertiser base from conversions in 2006 continue to negatively impact the business this quarter. We are quite pleased with these results as it indicates that our efforts to offset the weak market conditions are paying off.

Let me give you a quite overview of these initiatives. The addition of advertisement specific phone numbers to publications as another means for tracking leads and results for our advertisers. Our tracking process which measures the sources of leads for property manager is showing that our Apartment Guides and ApartmentGuide.com are generating considerably more leads than any other printer internet marketing vehicle for most properties. Expanding this property, tracking capability across more property managers will remain a priority in 2007.

Additionally, management bolstered sales resources, strengthened relationships with these biggest advertisers and is rolling out improvements to its web properties. As part of these improvements, ApartmentGuide.com is launching new internet and technology features enhancing the user experience and adding to the upgrades we are making to attract and retain advertisers.

Based on first quarter revenue, included completed acquisitions, Consumer Source's online single unit real estate rental business represents a $10.4 million revenue internet business on an annualized basis. The company's single unit real estate rental business experienced 68% organic growth pro-forma for the early 2007 acquisitions of RentalHouses.com and 2006 acquisition of HomeRentalAds.com.

Management have moved quickly to integrate these brands into a cohesive operating unit that now represents an estimated 62% of all paid single unit real estate rental listings on the internet. The company's dominance in this very lucrative market segment is significant. It makes up nearly 85% of the total rental market and with only 2% penetration achieved at year end 2006. There is certainly enormous growth opportunity in front of us.

The limiting factor for growth is getting trained sales people in place and we continue to ramp up these resources, including adding both telephone sales people and sales people on the ground in key markets.

Now, on to New Home Guide and NewHomeGuide.com. The segments New Home Guide, NewHomeGuide.com business delivered strong results yet again with total organic revenue growth of 17% in the first quarter.

In March of 2007, New Home Guide moved into Colorado Springs, and launched a Neighborhood Map in Charlotte, North Carolina. The division now has 35 New Home Guide publications in 26 markets. In aggregate, our New Home business is not being impacted by the slowdown in the homes market. We believe that the success in this business is indicative of New Home Guides position among New Home builders as a cost effective and attractive media channel, and our ability to identify markets where we can leverage or prove in.

Now on to our Auto Guide and Autoguide.com business. The Auto Guide business experienced a 22% revenue decline primarily due to prior management’s execution issues that we have discussed and as previously announced, the shutting down of our publication in San Diego in the second half of last year. Auto Guide represents a $13 million revenue business based on annualizing first quarter revenue.

Acquisitions in Wisconsin and Atlanta are performing nicely and point to opportunities to scale nationally. Under new head James Moon, the team has replaced 7 of 10 publishers and lead product improvements that have increased our lead generation capabilities. We expect operating losses in Auto Guide to diminish throughout 2007.

Finally, our DistribuTech activity. All of our Consumer Source's print properties benefit significantly from this business. It gives us, what we regard as the best distribution at the lowest cost and enables immediate and widespread distribution wherever we decide to launch a new Auto Guide or New Home Guide.

We are continuously evaluating and optimizing our distribution business which is why DistribuTech revenue fluctuates. In other words, we don't do this as a business; we are constantly trying to grow and gain share. Instead the primary function of this activity is to provide the best distribution in the industry which offers terrific benefits to our advertisers. In this quarter, the optimization resulted in lower revenue but higher EBITDA.

So, as you can see, the business is quite strong. We look forward to delivering even better results when the apartment market normalizes and as we reinvigorate our Auto Guides business under new management. We also are looking for continued improvements through the further growth of our New Home and single unit real estate rental business, both of which have great growth potential.

I will now turn it over to Kevin Neary, our CFO.

Kevin Neary

Thanks, Bob. As of March 31, our net debt was $1.2 billion versus $1.3 at December 31, 2006. Our ratio of debt-to-segment EBITDA was 7.5 times this quarter versus 7.6 times at the end of last year, and was 7.8 times at 3/31/06. As of March 31, the company had cash of $145 million and availability on its revolver of $257 million for a total availability of $402 million.

Due to our lower debt levels compared to last year we paid $2 million less cash interest this quarter versus last year. During the quarter, we also had interest income of $1.1 million versus $29,000 last year. These items are reflected in other income on the accompanying financial statements.

As of March 31, our average cost of debt was 8.4% this year compared to 8.1% last year. This reflects the impact of rising rates on our floating rate debt partially offset by reductions in our fixed rate debt balances due to our bond repurchases. At 3/31, our fixed-to-floating rate debt ratio was 53% to 47% on a split.

Free cash flow, which includes discontinued operations, was negative $2.4 million in the first quarter of '07 compared to $1.8 million for the same three months in 2006. The primary drivers for the change were due to the timing of vendor payments along with an increase in taxes paid, partially offset by lower interest costs.

After giving effect to the estimated gain on the sale of Outdoors Group, the company estimated that it had approximately $1.1 billion of Federal NOLs as of December 31, 2006.

In summary, the company continues to improve its financial profile and as mentioned, reduced debt service by $2 million versus the same three months in 2006. At this point, operator, we would like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. Today's question-and-answer session will be conducted electronically. (Operator Instructions). And we will take our first question from Michael Meltz with Bear Stearns. Please go ahead.

Michael Meltz - Bear Stearns

I have three questions. Dean or Bob can you talk a little bit about a Consumer Guide, I know the acquisitions were small. Can you just tell us what the organic revenue performance was? You said New Homes was up 17% organic. What was total revenue growth organic and what was that benefit at New Homes? And then I have two follow ups?

Dean Nelson

Michael, I don't think there was any non-organic revenue growth in New Homes. It was all organic at this point, because it's all being well over 12 months since we have done an acquisition. The only acquisitions that would affect the growth rate would be the ones in the single unit occupancy online business and the number we quoted in there of 68% growth is on a pro-forma basis. So, it's incorporating the previous revenues prior to acquisition.

Michael Meltz - Bear Stearns

Right. But, since you are not giving us the actual number, what was--

Dean Nelson

Those were de minimis. And so, it wouldn't have a meaningful impact on the year-over-year growth. I think if you actually look at the overall P&L, what you'd find is that the ad revenue is basically flat. Excluding auto and excluding the benefit of acquisitions.

Michael Meltz - Bear Stearns

Okay. If you look at Enthusiast in the quarter there is the significant margin drive there. Was there a profit drive there? Is there a one-time factor boosting things there or it's that the type of improvement you would expect going forward?

Dean Nelson

No, there was no, there were no one-time benefits in the first quarter, Michael. I think, again the three things are, online grew really well. It represented slightly more than the entire growth of that division. The rest, the print was marginally down less than 1%, and that has really good flow-through. And so, that helps our margins.

Secondly, we are getting the benefits still of our draw reduction, particularly, on the year-over-year basis, but also quarter-over-quarter basis. And the third one is, we've worked very hard post the disposal of Crafts and Outdoors to get our overheads down. So, there is a big decline in the divisional overhead.

But, like I said in the comments upfront, if you actually look at our editorial and sales process it's up year-over-year. We continue to believe that investing behind our sales force and our editorial product is the right thing to do for the business. So, there is no one-time benefits at all, we would expect those improvements to remain throughout the course of the year.

Michael Meltz - Bear Stearns

The on the Channel One sale, is very big tax gain from that transaction?

Dean Nelson

No. There is no real, it’s a de minimis transaction across all dimension force displayed Michael.

Michael Meltz - Bear Stearns

Even though the purchase price was much higher?

Dean Nelson

No, I think what you would find and I'll turn to Kevin and Bob on this, you know, it’s an old after at this point. So, most of that had been already amortized overtime. So the remaining asset value was extremely small.

Michael Meltz - Bear Stearns

Okay. And a last question from me, your numbers here for the quarter on corporate expense, I know there's a lot of moving pieces with Enthusiast, but as it stands now, how would you expect corporate expense to run the remaining quarters of the year?

Dean Nelson

Well, I think, you know, what we would, it's hard for us to put a hard number on that because it depends, and as you know, in all these different scenarios we are looking at, but I think, you know, -- the basis at this point was relatively low. And so I would say the 1.1 billion of NOLs that we put in Release and in our comments reflect basically all the transactions do now.

Michael Meltz - Bear Stearns

That’s all I had there. Great. Good quarter.

Dean Nelson

Thanks.

Operator

We will take our next question from Jeffrey Farrell, a private investor. Please go ahead.

Jeffrey Farrell - Private Investor

Hi. Nice quarter. I wanted to ask you what would be the forecast for price in the coming years, I mean, how would you feel PRIMEDIA is going to do in the coming year.

Dean Nelson

You mean price in terms of our share price.

Jeffrey Farrell - Private Investor

Exactly.

Dean Nelson

I think that’s really hard for us to calculate, as you can understand.

Jeffrey Farrell - Private Investor

I know it’s the hardest question, but, I mean, is there any feeling, amongst you that we had either, you know, how an investor should feel in terms of price, the 10%, 15%, 20% what’s -- where do you think the price is headed?

Dean Nelson

Well, I would be the only CEO, if I said I didn’t think of the values, but I think, the price of the stock will be highly dependent upon the resolution of the PEM sale, as you can imagine, given that it reflects the majority of our EBITDA. We do think that the Consumer Source business is an extremely attractive business, even with the very difficult apartment market you saw the kind of EBITDA improvement we drove, and we think it should be trading at a high multiple of whether that’s as a spun company or as the remaining part of PRIMEDIA. So, we see a good element on both sides we are operating.

Jeffrey Farrell - Private Investor

How close is the negotiation with the sale, comment?

Dean Nelson

I think its, as we said, we would expect to announce the resolution of that process sometimes this month.

Jeffrey Farrell - Private Investor

This month, alright. Thank you.

Operator

(Operator Instruction) And we will go next to Todd Morgan with CIBC World Markets. Please go ahead.

Todd Morgan - CIBC World Markets

Good morning. Thank you. I was hoping if you could talk a little bit more about the cost trends. I am basically just looking at the income statement, and it looks like the EBITDA improvement was largely almost entirely due to the cost improvements year-over-year. And yet, I think you've been pretty active in terms of adding sales people and kind of doing more, and also looking at some pretty significant revenue shifts and sort of the components of revenue. Are there sort of corporate allocations that are factoring into that move? Or can you really talk about that composition and is that really the right sustainable level to think about? Thanks.

Dean Nelson

Well, that's a good question. I mean, I think you have to look at the two businesses separately. And I think if you look to the release you will see that we presented the numbers absent corporate allocation and there has been no basic change in structure, where activities have to move to either to corporate or from corporate.

So, the comparisons are absent, the corporate allocations are clean. I think you have to break it into three parts. I think on PEM, we've had a very conservative strategy associated with improving our product, which has driven, I think, above market level performance on prints.

The online business is performing extremely well with high flow-through and those are both positive trend. I think, we've always had a point of view which is let's pull cost out where's the cost isn't helping our readers and our advertisers, which primary is been the unsold copies. So, that cost saving is sustainable and it's reflected in our revenue numbers and our cost numbers. And then also pulling the overhead down as much as we can, since we are smaller business, which is also sustainable. Those are one-time improvements that will continue.

And then, we have put some extra effort into both our sales and our editorial side, and there has been a slight increase in cost there. But, we think that also drove to what were relatively stable print numbers. And if you compare, I think our revenue trends against the number of other people in the industry and some of our direct competitors and look at our ad pages, I think you'll see that we picked up tremendous share.

So we think, we are getting a return on that investment, certainly on a relative basis and it's a right thing to do. So, that's a long answer on the PEM side, but I think the cost improvements are sustainable, but we are not in any way to perform starting the business.

On the Consumer Source side, I think we've made some good structural cost improvements on things like printing contracts and things like that. Our new CFO, Kim Payne has done terrific job of managing cost down. Again, on places that don't touch the customer. And apart of the cost savings there were of course exiting and the unprofitable book in San Diego on the Auto Guide side.

Todd Morgan - CIBC World Markets

Also the distribution optimization you mentioned earlier, Dean?

Dean Nelson

Yeah. On the distribution optimization pulled a lot of cost down, little bit of revenue than more cost. And so, we view all those things as sustainable also. And again, we don't feel like we are starving any of our businesses.

On the corporate side, you pulled some cost down, as the business has got smaller. And of course, no matter how we resolve this through a spin or through a sale of Enthusiast Media we'll be down sizing corporate and putting those sources in the two businesses.

So, I think if you look at our performance versus other corollaries in the world, whether its newspapers or some of the larger publishers that have released their earnings, I think you'll see our revenue trends are good and our margins are good.

Todd Morgan - CIBC World Markets

Okay. Well, it's helpful and again, just Consumer Source, focusing on that. It looks like the $3 million segment expense improvement tick up at corporate, it's little bit less than that. Is there any reason to think that that's not a sustainable level and it sounds like that's what we should be thinking about, I guess right?

Dean Nelson

Kim, I don't know if you want to comment on that.

Kim Payne

My comment on that is that what we saw, what we are reporting is little over 9% improvement in EBITDA and it's being driven by expenses improvement quarter-over-quarter. It's not going to be sustainable just for the affect that some of these expense changes we put into effect in the second half of last year. So, as the year progresses, we are going to see that margin, while there still will be improvement, it won't be at the same level that you are seeing right now.

Todd Morgan - CIBC World Markets

Okay.

Bob Metz

That's sustainable. But, it won't be the same because they started halfway through the year or last year.

Todd Morgan - CIBC World Markets

Okay. Great. Well, that's very helpful, Dean. Thanks.

Dean Nelson

Thanks Todd. Well, there are no more questions in the queue. So, we'll sign off for the quarter. We look forward to talking to you next quarter. Thank you.

Operator

Ladies and gentlemen, this will conclude today's presentation. We do thank you for your participation. And you may disconnect at this time.

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