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Media General (NYSE:MEG)

Q3 2007 Earnings Call

October 18, 2007 11:00 a.m. ET

Executives

Lou Anne Nabhan - Vice President

Marshall Morton - President & Chief Executive Officer

Reid Ashe Jr. - Executive Vice President & Chief Operating Officer

John Schauss - Vice President of Finance & Chief Financial Officer

Analysts

Richard Tullo - Sidoti & Co.

David Clark - Deutsche Bank

Edward Atorino - Benchmark Capital

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter Media General Earnings Conference Call. My name is Frances and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Lou Anne Nabhan, Vice President.

Lou Anne Nabhan

Thank you Frances, and good morning, everyone. Welcome to our earnings conference call and webcast. Before market today, we announced Third Quarter earnings and revenue for the month of September. Both press releases have been posted on our website. Our comments from today's call also will be posted to the website immediately following the call.

Today's presentation as always contains forward-looking statements, which are subject to various risks and uncertainties. They should be understood in the context of the Company's publicly available report filed with the SEC. Media General's future performance could differ materially from its current expectations.

Our speakers today are Marshall Morton, President and Chief Executive Officer; Reid Ashe, Executive Vice President and Chief Operating Officer, and John Schauss, Vice President, Finance, and Chief Financial Officer. We'll start with Marshall.

Marshall Morton

Thank you, Lou Anne and good morning everyone. Our Third Quarter results reflected the continued economic downturn in Tampa, the relative absence of last year's record political revenues, the loss of SP Newsprint, and an investment write-down. On the other hand, we've made meaningful progress in aggressively managing expenses. Lower revenues in the Third Quarter were partially offset by a 4.6% decrease in our total operating costs.

Expenses for health care, retirement-related plans, and performance incentive plans were down significantly from last year. Publishing division expenses decreased 7.5%, excluding approximately $1 million for severance costs at several publishing operations. Staff reductions resulted from reengineering various processes, outsourcing certain functions and improving efficiencies from combining or centralizing resources.

Our Tampa operations implemented additional streamlining measures in the Third Quarter, which enhanced the performance improvement initiatives we announced earlier this year. The Publishing division also implemented cost reduction programs at several other newspapers and at our Washington D.C. bureau.

Our Interactive Media Division continued its strong growth in the Quarter and produced a 32% increase in revenues. This growth was driven by higher local and national advertising on our website as well as very strong growth in our Advergaming business. Income in the Quarter was $2.5 million, $0.11 per share, compared with $7.7 million, or $0.33 per share from continuing operations in the 2006 Third Quarter.

Publishing division profits were $22 million, a decline of 7.4% from last year. Successful cost containment measures helped mitigate a 6.7% decline in revenues, which primarily came from lower classified advertising and was most pronounced in the Tampa market. Retail advertising revenues decreased nominally in the Quarter and national revenues declined 8%.

Broadcast division profits for the Quarter were $16 million versus $22 million last year, which included a record $11.5 million of political advertising revenues compared to only $2.5 million this year. Total broadcast revenues of $91 million were down 3.5% from last year. Local and national advertising revenues increased 3.2% and 10.3% respectively, and partially offset the political revenues decline and lower network compensation.

Time sales growth was driven by our continued sales development and new business initiatives. Broadcast division expenses rose 3.6% from last year, mainly because of higher depreciation expense on newer additional equipment and increased spending on sales initiatives. Compensation costs were relatively flat as merit increases and sales commissions were, for the most part, offset by open positions and lower health care costs.

The Interactive Media Division posted a loss for the quarter of $1.1 million, excluding the investment write-down. This year-over-year decline mainly reflected lower classified advertising, especially in the Tampa market, which impacted the operating results of TBO.com, the division's largest website.

Our Advergaming business generated a profit in the quarter compared to a loss last year on revenues that were nearly triple to prior year's level. Local and national online revenues were well ahead of last year.

Before asking Reid to comment further on our three divisions, I want to address a question that we know is on your mind and comment on why splitting Media General's Print and Broadcasting businesses would not make sense for our customers or our shareholders. We’ve been a successful operator in the local media business for nearly 160 years.

Today, our focus is on being the local multimedia leader in strong growth markets with the principal geographic focus in the Southeast. We provide excellent news, information, and entertainment over a variety of platforms in all the markets we serve. We're adapting and evolving in the digital world, leveraging the strength of our traditional platforms for the benefit of our online operations as well as continually enhancing our newspapers and television broadcast for changing customer needs.

We also provide a multitude of targeted products in print, on the air, and online in all of our markets. We strongly believe in the long-term viability of local media franchises and that our portfolio of high-quality assets positions us to build long-term value for shareholders.

Strategically, our integrated presence in print, broadcast, and on the Web allows us to produce better content, deliver a higher-quality product, draw more audience, and improve our market position better than we otherwise could. It enhances our value to advertisers by enabling them to reach their target customers whenever and however they like better than they otherwise could.

Operationally, our highly integrated news operations enable us to direct significant resources to breaking stories as they happen and to leverage those resources to provide our customers and communities with vital information 24/7 in a variety of ways. The portal strategy that we're implementing on our web sites gains tremendous strength by combining content from newspapers and television. Those collaborations would suffer were our ownership structure to change.

Our print journalism benefits from the sense of timeliness, immediacy, and visual impact that comes with being part of an organization that also has television news operations. Our broadcast journalism benefits from the detail, analysis, and depth of understanding that comes with being part of an organization that also has print news operations.

Each benefits from the other's special content franchises, which typically include weather, medical, and consumer news on television and sports, business, and entertainment news in the newspapers.

Financially, we believe that a separation of our print and television operations would not be value enhancing for a number of reasons. Creating two separate smaller companies, each with its own capital structure, would likely result in lower credit ratings for each and a higher cost of capital than Media General currently enjoys.

Creating two separate smaller companies would likely make each of those companies less attractive to institutional investors and research analysts than Media General is today. Separation of Media General's print and broadcast businesses would also have serious implications if the current FCC review process results in a change in the current cross-ownership, while our current corporate structure and strategy position is particularly well if that review results in a lifting of restrictions on cross-ownership, which we believe will happen.

We believe that a separation of Media General into a newspaper company and a television company does not make sense for Media General strategically, operationally, or financially.

Now I’ll turn the presentation over to Reid.

Reid Ashe Jr.

Thank you, Marshall. I’ll start with the Publishing division. Our newspapers continued to face a difficult advertising environment in the Third Quarter. Most of our papers saw declines with the largest shortfall in Tampa. For the division overall, the largest decline was in classified as employment, automotive, and real estate advertising fell in virtually all markets. Real estate remained stable in some Virginia markets, but the falloff in Florida overwhelmed more favorable results elsewhere.

The Tampa Tribune and its associated newspapers accounted for more than 90% of the Publishing division's revenue shortfall in the Quarter as our properties there struggled against Florida's economic downturn.

Tampa's revenues decreased 17% from last year's Third Quarter. The bulk of the drop was in classified advertising, down 34% from last year. All three major classified categories declined. Retail advertising revenues in Tampa were down 1.5% as new products partially offset declines in traditional businesses.

National revenues in Tampa were down 22% in the Quarter. To align expenses with the current revenue environment, our Tampa team has streamlined a variety of operations and eliminated more than 150 jobs. We’ll convert to a 48-inch web, November 1st. Tampa's savings will amount to $8.5 million next year with a significant portion of the savings recognized this year.

Our Tampa properties have also moved aggressively to develop new lines of business and to exploit pockets for opportunity in classified. The Richmond Times Dispatch and its associated newspapers overcame the Third Quarter downturn and increased revenue 1.2% year-over-year.

Classified and retail advertising revenues held even with last year while national revenues grew 17%. In Winston-Salem, revenues declined 5.6% in the Quarter. Classified revenues were down 10% and retail revenues declined 3% while national revenues increased 2%.

Our community newspaper group saw a revenue decline of 1.5% for the Quarter, driven mostly by lower classified advertising. Retail advertising increased about 1% with the strongest results in our Alabama, North Carolina, and Central Virginia newspapers.

In the Broadcast division, profits declined to 26% from last year, reflecting the absence of last year's record $11.5 million of political revenue. Political revenues in this year's Third Quarter were $2.5 million thanks to presidential candidates and to image campaigns in Florida and South Carolina, as well as gubernatorial and lieutenant governor races in Louisiana, Mississippi, and Kentucky; and issue advertising in Florida, Louisiana, Kentucky, Ohio, South Carolina, and Georgia.

National time sales increased more than 10% in the Quarter, reflecting higher spending by telecommunications, financial, corporate, furniture, and department store advertisers, while automotive and services spending declined.

Local time sales were up more than 3%, driven by higher sales at a majority of our stations, which more than offset declines at other stations, notably WFLA in Tampa.

Local advertising categories that grew included home improvement, health care, and media, while spending by furniture, automotive, and telecommunications advertisers declined.

Our Broadcast division continues to outpace industry's results for time to sales growth. We've begun broadcasting local news in high-definition at our Tampa, Birmingham, and Spartanburg stations, Birmingham just started last night. And we plan to launch our Roanoke and Columbus stations late this year.

In August, we launched a new locally produced variety show in Spartanburg that sold out for the rest of the year. Soon, we'll begin creating news graphics for all of our stations at our new production center here in Richmond.

In the Interactive Media division, revenues grew 32% in the Quarter. All significant revenue categories exceeded last year except classified advertising, which decreased 3.5%. This flows through from our newspapers, because online classifieds are typically sold in combination with print. Classified remains our largest source of online revenue and we're working aggressively to lessen that dependence.

Local online revenues, other than classified, increased 43%. We're benefiting from an emphasis on online-only sales, as well as greater market awareness and enthusiasm for online advertising. National and regional revenues were up 49% thanks to expanding relationships with a network with national agencies.

Advergaming revenues in the Quarter nearly tripled from last year. Blockdot, our affiliate that produces these games, is turning out to be a star performer. We look for continued growth in this business, thanks to Blockdot's expanding relationships with major branded products advertisers.

Our Yahoo! partnership is off to a great start. In the Third Quarter, the Yahoo! HotJobs relationship mitigated the decline in online employment classifieds. Year-to-date, we have sold $2.2 million in advertising on our HotJobs co-branded websites. Job searches on our sites are up 100% and more. We're moving at full speed to exploit the many opportunities under this relationship.

Let me update you one some of the major areas of progress. First, HotJobs, we're now in the second phase of this relationship in which our employment websites are co-branded with and hosted by HotJobs. We've created locally tailored, customer-focused advertising packages that combine print and online media. We've trained our staff to sell them and we've seen a steady acceleration in sales.

Next, ad serving, the partnership affords us use of Yahoo!'s advanced ad serving technology, which selectively exposes you to ads for just the specific categories that interest you most.

We assisted a consortium-wide effort to set technical standards for this system, which will be implemented in mid-2008. TBO.com is our test site. For the last two weeks, Yahoo! has sold national ads into our online inventory, and we're selling into a portion of Yahoo!'s inventory.

It's too early to report results from the test, but we expect this to produce measurable results by late next year.

Next is search. Yahoo!'s Web search engine operates through our sites where users are exposed to our advertising on eight sites so far. Content Match, which is Yahoo!'s equivalent of Google AdWords, has launched on TBO.com, our test site. Other sites will follow in October and November. We share the revenue that Yahoo! sells for that feature.

Next is content. Our local headlines now appear in the top two headline slots on Yahoo! pages. This has just begun and it's not yet fully implemented across all Yahoo! channels, but we're already seeing very nice increases in traffic. Our web sites continue to attract more users. Page views and user sessions from our newspaper and television websites rose 7.7% and 10%, respectively, in the Third Quarter. Those numbers exclude the new NBC stations, which were previously hosted by a third party, making comparisons difficult.

The new mantra in our newsrooms is continuous news coverage. That means frequently updated news and information on our web sites throughout the day. Part of this initiative is an aggressive move to deliver more video online, especially on our newspaper sites.

Since our Tampa newsrooms launched their combined continuous news desk in August, local news traffic has increased by more than 30%. Meanwhile, our broadcast division is refining several new models for cross sales with the Internet with very promising results.

Now, I'll turn our presentation over to John.

John Schauss

Thank you, Reid. I'd like to comment first on below the line items for the Third Quarter. Our share of SP Newsprint results this year was $4.9 million loss compared with income of $3.5 million last year. The swing was attributable to lower newsprint prices, decreased sales volume, and higher raw materials cost.

As announced in May, SP Newsprint is currently engaged in a strategic review to maximize value to its partners, which might result in a decision to sell the company. That review continues. Lower interest rate expense in the Third Quarter reflected lower debt levels. Lower corporate and other expenses primarily reflected lower costs for health care, retirement related plans, and performance-based incentive plans.

The effective tax rate from continuing operations through nine months was 33.8% in 2007 compared with 37.5% last year. Additionally, a favorable resolution of a state tax issue during the Third Quarter lowered the income tax expense resulting in a 6% effective tax rate for the Quarter. Capital Expenditures totaled $17 million in the Third Quarter. Of that amount, Publishing division capital expenditures of $6.9 million were invested mainly in the new printing facility at our Lynchburg, Virginia newspaper, which is scheduled for completion in early 2008.

With the Tampa Tribune's conversion to a 48-inch web, in November, we will have completed web width reduction projects at all of our daily newspapers. The Broadcast division had Capital Expenditures of $8.6 million. Spending was mainly for a new facility in Myrtle Beach, as well as the development of locally originated high definition newscasts in selected markets. Interactive Media division Capital Expenditures were $200,000, primarily for infrastructure and software, and corporate capital spending was $1.7 million, principally for information technology.

EBITDA from continuing operations in the Third Quarter was $37 million compared with $48 million in 2006, primarily due to the lower income from continuing operations. Free cash flow was $4.2 million compared with $1.2 million last year, the result of lower capital spending this year. And total debt at the end of the Third Quarter was $938 million, and today we are slightly lower than that amount.

That concludes my report and I will now turn the presentation back to Marshall.

Marshall Morton

Thanks John. Before opening our call to your questions, let me provide some insight into our expectations for the Fourth Quarter.

In our Publishing business, we expect continued softness in classified and retail advertising, particularly in the Tampa market, partially offsetting our projected expense savings from our cost reduction initiatives and lower newsprint expense. This year's Fourth Quarter will have one less week than did last year's.

The Broadcast division will not be able to match last year's record Fourth Quarter political revenues of $34 million. The division does expect local time sales to increase over the prior-year, and we also expect national political spending in Tampa; Savannah, Georgia; Spartanburg and Myrtle Beach, South Carolina; and Mobile, Alabama.

In addition to Broadcast political revenues, we're pursuing online political advertising sales. We expect our share of the loss at SP Newsprint in the Fourth Quarter will be about $6 million. Looking ahead to next year, we expect 2008 to be a much stronger year than 2007.

Our Broadcast business will benefit from political and Olympics revenues, the performance of our four new NBC stations will reflect the benefit of the synergies derived from this year's integration. Our Publishing business will benefit from this year's cost reduction and from the division's focus on new revenue development through innovative products and services.

Our Publishing operations also will continue to generate substantial cash flow for investment in all of our businesses. Our online enterprises will continue their strong growth. We expect capital spending in 2008 to be in the $40-45 million area, following several years of investment in newspaper printing facilities and broadcast television digital transmission. The possible sale of SP Newsprint will generate proceeds for debt reduction. Our multimedia strategy and southeast focus will continue to serve us well.

That concludes our formal remarks. Now, we will be pleased to take your questions.

Questions-and-Answer Session

Operator

(Operator Instructions); your first question is from the line of Richard Tullo with Sidoti. Please proceed.

Richard Tullo - Sidoti & Co.

Yeah, I've got a question, in regards to SP Newsprint, are you more optimistic a sale will take place at the end of the Fourth Quarter now than where you have been at the end of the Third Quarter?

Marshall Morton

Insofar as interest in SP goes, there's been plenty of outside interest and we have not seen final bids yet. So it's hard to give you a definite answer there, Rich. But one thing that had been goofing things up substantially had been the uneasy debt markets. That issue seems to have corrected itself and has been reflected in the interest we are seeing from potential buyers. But right now, it's a little early to forecast exactly how it's going to work.

Richard Tullo - Sidoti & Co.

Okay. And a little follow-up, in regards to Tampa, do you think things have bottomed out there, or do you expect some more bad news to come?

Marshall Morton

One thing we've learned about Florida is that it is a market that works in cycles. But Reid was our publisher down there, so I'm going to ask him to give you a more learned response.

Reid Ashe

Well, it's always hard to say. Things seemed to have stopped the rapid slide, but we haven't seen much recovery yet. And the people I talk with down there seem to think it will take, I often hear, a year for the housing situation to sort itself out and get its legs back under it, but your guess is probably as good as ours.

Richard Tullo - Sidoti & Co.

Great, thank you.

Operator

Your next question is from the line of David Clark with Deutsche Bank. Please proceed.

David Clark - Deutsche Bank

On Interactive, what sort of trend have you seen over the last couple of quarters in online display CPMs? Has there been growth there, and has there been accelerating growth?

Can you give us any color on your newspaper circulation results for the six-month ABC period ending in September?

Marshall Morton

Reid, you want to talk about those?

Reid Ashe

I don't have those CPM numbers in front of me. We do expect there to be some improvement as interest in that category grows and particularly, as the Yahoo! relationship gives us more opportunities to sell. But I can't cite you rates currently.

Circulation, there has not been a major change overall in circulation trends, but the reports are going to be coming out soon and you'll see all the details then.

David Clark - Deutsche Bank

Okay. Thank you.

Operator

Your next question comes from the line of Edward Atorino with Benchmark.

Edward Atorino - Benchmark Capital

Looking at some of the classified categories, particularly auto and real estate, so it may sound like a strange question. is there any way to gauge how many of the advertisers are basically out of business or went to zero?

As you're looking forward, I'm just making this up suppose ‘x’ percent of your business is at zero, it's not going to go down anymore, and maybe it's wishful thinking, but that could sort of result in some kind of 'stabilization', going forward if you've got a lot of people that are gone and simply can't come back anymore. You know what I mean?

Marshall Morton

Yeah. That's an interesting concept. And frankly, we can't give you a number on that, but the first cousin of that is that the major effort in our advertising departments today is looking at customers who aren't advertising with us and figuring out why.

A lot of the revenue growth that you've heard us talk about today really comes from that kind of sales effort where we've gone after that customer and developed packages that make him an interested and effective advertiser for us and we're able to prove results for him.

Edward Atorino - Benchmark Capital

Any sign of early political money around in any of your markets?

Marshall Morton

We're seeing it. And we had some in the Third Quarter. We expect more in the Fourth Quarter. Yes.

Edward Atorino - Benchmark Capital

Any numbers?

Marshall Morton

We gave some numbers for the Third Quarter, $2.5 million. But for the Fourth Quarter we haven't given any forecast yet.

Edward Atorino - Benchmark Capital

Okay. Very good, thanks.

Marshall Morton

Sure.

Operator

And there are no further questions in the queue at this time. I'd like to turn the call back over to Mr. Marshall Morton for closing remarks.

Marshall Morton

Thanks, Frances. We appreciate the opportunity to talk with you all today. We look forward to talking to you in the future. Bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.

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