Good day, ladies and gentlemen and welcome to the ThirdQuarter Media General Earnings Conference Call. My name is Frances and I’ll be your coordinator fortoday. At this time, all participants are in listen-only mode. We will conducta question-and-answer session towards the end of this conference (OperatorInstructions). As a reminder, this conference is being recorded for replaypurposes. I would now like to turn the call over to Ms. Lou Anne Nabhan, VicePresident.
Lou Anne Nabhan
Thank you Frances, and good morning, everyone.Welcome to our earnings conference call and webcast. Before market today, weannounced Third Quarter earnings and revenue for the month of September. Bothpress releases have been posted on our website. Our comments from today's callalso will be posted to the website immediately following the call.
Today's presentation as always contains forward-lookingstatements, which are subject to various risks and uncertainties. They shouldbe understood in the context of the Company's publicly available report filedwith the SEC. Media General's future performance could differ materially fromits current expectations.
Our speakers today are Marshall Morton, President andChief Executive Officer; Reid Ashe, Executive Vice President and ChiefOperating Officer, and John Schauss, Vice President, Finance, and ChiefFinancial Officer. We'll start with Marshall.
Thank you, Lou Anne and good morning everyone. Our Third Quarterresults reflected the continued economic downturn in Tampa, the relative absence of lastyear's record political revenues, the loss of SP Newsprint, and an investmentwrite-down. On the other hand, we've made meaningful progress in aggressivelymanaging expenses. Lower revenues in the Third Quarter were partially offset bya 4.6% decrease in our total operating costs.
Expenses for health care, retirement-related plans, andperformance incentive plans were down significantly from last year. Publishingdivision expenses decreased 7.5%, excluding approximately $1 million forseverance costs at several publishing operations. Staff reductions resultedfrom reengineering various processes, outsourcing certain functions andimproving efficiencies from combining or centralizing resources.
Our Tampa operations implemented additionalstreamlining measures in the Third Quarter, which enhanced the performanceimprovement initiatives we announced earlier this year. The Publishing divisionalso implemented cost reduction programs at several other newspapers and at ourWashington D.C. bureau.
Our Interactive Media Division continued its strong growthin the Quarter and produced a 32% increase in revenues. This growth was drivenby higher local and national advertising on our website as well as very stronggrowth 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 continuingoperations in the 2006 Third Quarter.
Publishing division profits were $22 million, a decline of7.4% from last year. Successful cost containment measures helped mitigate a6.7% decline in revenues, which primarily came from lower classifiedadvertising and was most pronounced in the Tampa market. Retail advertisingrevenues decreased nominally in the Quarter and national revenues declined 8%.
Broadcast division profits for the Quarter were $16million versus $22 million last year, which included a record $11.5 million ofpolitical advertising revenues compared to only $2.5 million this year. Totalbroadcast revenues of $91 million were down 3.5% from last year. Local andnational advertising revenues increased 3.2% and 10.3% respectively, andpartially offset the political revenues decline and lower network compensation.
Time sales growth was driven by our continued sales developmentand new business initiatives. Broadcast division expenses rose 3.6% from lastyear, mainly because of higher depreciation expense on newer additionalequipment and increased spending on sales initiatives. Compensation costs wererelatively flat as merit increases and sales commissions were, for the mostpart, offset by open positions and lower health care costs.
The Interactive Media Division posted a loss for thequarter of $1.1 million, excluding the investment write-down. Thisyear-over-year decline mainly reflected lower classified advertising,especially in the Tampa market, which impacted theoperating results of TBO.com, the division's largest website.
Our Advergaming business generated a profit in the quartercompared to a loss last year on revenues that were nearly triple to prioryear's level. Local and national online revenues were well ahead of last year.
Before asking Reid to comment further on our threedivisions, I want to address a question that we know is on your mind and commenton why splitting Media General's Print and Broadcasting businesses would notmake sense for our customers or our shareholders. We’ve been a successfuloperator in the local media business for nearly 160 years.
Today, our focus is on being the local multimedia leaderin strong growth markets with the principal geographic focus in the Southeast.We provide excellent news, information, and entertainment over a variety ofplatforms in all the markets we serve. We're adapting and evolving in the digitalworld, leveraging the strength of our traditional platforms for the benefit ofour online operations as well as continually enhancing our newspapers andtelevision 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 thelong-term viability of local media franchises and that our portfolio ofhigh-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-qualityproduct, draw more audience, and improve our market position better than weotherwise could. It enhances our value to advertisers by enabling them to reachtheir target customers whenever and however they like better than theyotherwise could.
Operationally, our highly integrated news operationsenable us to direct significant resources to breaking stories as they happenand to leverage those resources to provide our customers and communities withvital information 24/7 in a variety of ways. The portal strategy that we'reimplementing on our web sites gains tremendous strength by combining contentfrom newspapers and television. Those collaborations would suffer were ourownership structure to change.
Our print journalism benefits from the sense oftimeliness, immediacy, and visual impact that comes with being part of anorganization that also has television news operations. Our broadcast journalismbenefits from the detail, analysis, and depth of understanding that comes withbeing 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 andsports, business, and entertainment news in the newspapers.
Financially, we believe that a separation of our print andtelevision 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 ofcapital than Media General currently enjoys.
Creating two separate smaller companies would likely makeeach of those companies less attractive to institutional investors and researchanalysts than Media General is today. Separation of Media General's print andbroadcast businesses would also have serious implications if the current FCCreview process results in a change in the current cross-ownership, while ourcurrent corporate structure and strategy position is particularly well if thatreview results in a lifting of restrictions on cross-ownership, which webelieve will happen.
We believe that a separation of Media General into anewspaper company and a television company does not make sense for MediaGeneral strategically, operationally, or financially.
Now I’ll turn the presentation over to Reid.
Reid Ashe Jr.
Thank you, Marshall. I’ll start with the Publishingdivision. Our newspapers continued to face a difficult advertising environmentin the Third Quarter. Most of our papers saw declines with the largestshortfall in Tampa. For the division overall, thelargest decline was in classified as employment, automotive, and real estateadvertising fell in virtually all markets. Real estate remained stable in some Virginia markets, but the falloff in Florida overwhelmed more favorableresults elsewhere.
The Tampa Tribune and its associated newspapers accountedfor more than 90% of the Publishing division's revenue shortfall in the Quarteras our properties there struggled against Florida's economic downturn.
Tampa's revenues decreased 17% fromlast year's Third Quarter. The bulk of the drop was in classified advertising,down 34% from last year. All three major classified categories declined. Retailadvertising revenues in Tampa were down 1.5% as new productspartially offset declines in traditional businesses.
National revenues in Tampa were down 22% in the Quarter. Toalign expenses with the current revenue environment, our Tampa team has streamlined a variety ofoperations and eliminated more than 150 jobs. We’ll convert to a 48-inch web, November1st. Tampa's savings will amount to $8.5 million next year with asignificant portion of the savings recognized this year.
Our Tampa properties have also movedaggressively to develop new lines of business and to exploit pockets for opportunityin classified. The Richmond Times Dispatch and its associated newspapersovercame the Third Quarter downturn and increased revenue 1.2% year-over-year.
Classified and retail advertising revenues held even withlast 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% whilenational revenues increased 2%.
Our community newspaper group saw a revenue decline of1.5% for the Quarter, driven mostly by lower classified advertising. Retailadvertising increased about 1% with the strongest results in our Alabama, North Carolina, and Central Virginia newspapers.
In the Broadcast division, profits declined to 26% fromlast year, reflecting the absence of last year's record $11.5 million ofpolitical revenue. Political revenues in this year's Third Quarter were $2.5million thanks to presidential candidates and to image campaigns in Florida andSouth Carolina, as well as gubernatorial and lieutenant governor races inLouisiana, 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 servicesspending declined.
Local time sales were up more than 3%, driven by highersales at a majority of our stations, which more than offset declines at otherstations, notably WFLA in Tampa.
Local advertising categories that grew included homeimprovement, health care, and media, while spending by furniture, automotive,and telecommunications advertisers declined.
Our Broadcast division continues to outpace industry'sresults for time to sales growth. We've begun broadcasting local news inhigh-definition at our Tampa, Birmingham, and Spartanburg stations, Birmingham just started last night. And weplan to launch our Roanoke and Columbus stations late this year.
In August, we launched a new locally produced variety showin Spartanburg that sold out for the rest of theyear. Soon, we'll begin creating news graphics for all of our stations at ournew production center here in Richmond.
In the Interactive Media division, revenues grew 32% inthe Quarter. All significant revenue categories exceeded last year exceptclassified advertising, which decreased 3.5%. This flows through from ournewspapers, because online classifieds are typically sold in combination withprint. Classified remains our largest source of online revenue and we'reworking aggressively to lessen that dependence.
Local online revenues, other than classified, increased43%. We're benefiting from an emphasis on online-only sales, as well as greatermarket awareness and enthusiasm for online advertising. National and regionalrevenues were up 49% thanks to expanding relationships with a network with nationalagencies.
Advergaming revenues in the Quarter nearly tripled fromlast year. Blockdot, our affiliate that produces these games, is turning out tobe a star performer. We look for continued growth in this business, thanks toBlockdot's expanding relationships with major branded products advertisers.
Our Yahoo! partnership is off to a great start. In the ThirdQuarter, the Yahoo! HotJobs relationship mitigated the decline in onlineemployment classifieds. Year-to-date, we have sold $2.2 million in advertisingon our HotJobs co-branded websites. Job searches on our sites are up 100% andmore. We're moving at full speed to exploit the many opportunities under thisrelationship.
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 ouremployment websites are co-branded with and hosted by HotJobs. We've createdlocally tailored, customer-focused advertising packages that combine print andonline media. We've trained our staff to sell them and we've seen a steadyacceleration in sales.
Next, ad serving, the partnership affords us use ofYahoo!'s advanced ad serving technology, which selectively exposes you to adsfor just the specific categories that interest you most.
We assisted a consortium-wide effort to set technicalstandards for this system, which will be implemented in mid-2008. TBO.com isour test site. For the last two weeks, Yahoo! has sold national ads into ouronline inventory, and we're selling into a portion of Yahoo!'s inventory.
It's too early to report results from the test, but weexpect this to produce measurable results by late next year.
Next is search. Yahoo!'s Web search engine operatesthrough our sites where users are exposed to our advertising on eight sites sofar. Content Match, which is Yahoo!'s equivalent of Google AdWords, haslaunched on TBO.com, our test site. Other sites will follow in October andNovember. We share the revenue that Yahoo! sells for that feature.
Next is content. Our local headlines now appear in the toptwo headline slots on Yahoo! pages. This has just begun and it's not yet fullyimplemented across all Yahoo! channels, but we're already seeing very niceincreases in traffic. Our web sites continue to attract more users. Page viewsand 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 newscoverage. That means frequently updated news and information on our web sitesthroughout the day. Part of this initiative is an aggressive move to delivermore video online, especially on our newspaper sites.
Since our Tampa newsrooms launched their combinedcontinuous news desk in August, local news traffic has increased by more than30%. Meanwhile, our broadcast division is refining several new models for crosssales with the Internet with very promising results.
Now, I'll turn our presentation over to John.
Thank you, Reid. I'd like to comment first on below theline items for the Third Quarter. Our share of SP Newsprint results this yearwas $4.9 million loss compared with income of $3.5 million last year. The swingwas attributable to lower newsprint prices, decreased sales volume, and higherraw materials cost.
As announced in May, SP Newsprint is currently engaged ina strategic review to maximize value to its partners, which might result in adecision to sell the company. That review continues. Lower interest rateexpense in the Third Quarter reflected lower debt levels. Lower corporate andother expenses primarily reflected lower costs for health care, retirementrelated plans, and performance-based incentive plans.
The effective tax rate from continuing operations throughnine months was 33.8% in 2007 compared with 37.5% last year. Additionally, afavorable resolution of a state tax issue during the Third Quarter lowered the incometax expense resulting in a 6% effective tax rate for the Quarter. Capital Expenditurestotaled $17 million in the Third Quarter. Of that amount, Publishing divisioncapital expenditures of $6.9 million were invested mainly in the new printingfacility at our Lynchburg, Virginia newspaper, which is scheduled forcompletion in early 2008.
With the Tampa Tribune's conversion to a 48-inch web, inNovember, we will have completed web width reduction projects at all of ourdaily newspapers. The Broadcast division had Capital Expenditures of $8.6million. Spending was mainly for a new facility in Myrtle Beach, as well as the development oflocally originated high definition newscasts in selected markets. InteractiveMedia division Capital Expenditures were $200,000, primarily for infrastructureand software, and corporate capital spending was $1.7 million, principally forinformation technology.
EBITDA from continuing operations in the Third Quarter was$37 million compared with $48 million in 2006, primarily due to the lowerincome from continuing operations. Free cash flow was $4.2 million comparedwith $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 weare slightly lower than that amount.
That concludes my report and I will now turn thepresentation back to Marshall.
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 softnessin classified and retail advertising, particularly in the Tampa market, partially offsetting ourprojected expense savings from our cost reduction initiatives and lowernewsprint expense. This year's Fourth Quarter will have one less week than didlast year's.
The Broadcast division will not be able to match lastyear's record Fourth Quarter political revenues of $34 million. The divisiondoes expect local time sales to increase over the prior-year, and we alsoexpect national political spending in Tampa; Savannah, Georgia; Spartanburg and Myrtle Beach, South Carolina; and Mobile, Alabama.
In addition to Broadcast political revenues, we'repursuing online political advertising sales. We expect our share of the loss atSP Newsprint in the Fourth Quarter will be about $6 million. Looking ahead tonext year, we expect 2008 to be a much stronger year than 2007.
Our Broadcast business will benefit from political andOlympics revenues, the performance of our four new NBC stations will reflectthe benefit of the synergies derived from this year's integration. OurPublishing business will benefit from this year's cost reduction and from thedivision's focus on new revenue development through innovative products andservices.
Our Publishing operations also will continue to generatesubstantial cash flow for investment in all of our businesses. Our onlineenterprises will continue their strong growth. We expect capital spending in2008 to be in the $40-45 million area, following several years of investment innewspaper 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 pleasedto take your questions.
(Operator Instructions); your first question is from theline of Richard Tullo with Sidoti. Please proceed.
Richard Tullo -Sidoti & Co.
Yeah, I've got a question, in regards to SP Newsprint, areyou more optimistic a sale will take place at the end of the Fourth Quarter nowthan where you have been at the end of the Third Quarter?
Insofar as interest in SP goes, there's been plenty ofoutside interest and we have not seen final bids yet. So it's hard to give youa definite answer there, Rich. But one thing that had been goofing things upsubstantially had been the uneasy debt markets. That issue seems to havecorrected itself and has been reflected in the interest we are seeing frompotential buyers. But right now, it's a little early to forecast exactly howit's going to work.
Richard Tullo -Sidoti & Co.
Okay. And a little follow-up, in regards to Tampa, do you think things havebottomed out there, or do you expect some more bad news to come?
One thing we've learned about Florida is that it is a market that worksin cycles. But Reid was our publisher down there, so I'm going to ask him togive you a more learned response.
Well, it's always hard to say. Things seemed to havestopped the rapid slide, but we haven't seen much recovery yet. And the peopleI talk with down there seem to think it will take, I often hear, a year for thehousing situation to sort itself out and get its legs back under it, but yourguess is probably as good as ours.
Richard Tullo -Sidoti & Co.
Great, thank you.
Your next question is from the line of David Clark withDeutsche Bank. Please proceed.
David Clark -Deutsche Bank
On Interactive, what sort of trend have you seen over thelast 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 circulationresults for the six-month ABC period ending in September?
Reid, you want to talk about those?
I don't have those CPM numbers in front of me. We doexpect there to be some improvement as interest in that category grows andparticularly, 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 incirculation trends, but the reports are going to be coming out soon and you'llsee all the details then.
David Clark -Deutsche Bank
Okay. Thank you.
Your next question comes from the line of Edward Atorinowith Benchmark.
Edward Atorino -Benchmark Capital
Looking at some of the classified categories, particularlyauto and real estate, so it may sound like a strange question. is there any wayto gauge how many of the advertisers are basically out of business or went tozero?
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, andmaybe 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 andsimply can't come back anymore. You know what I mean?
Yeah. That's an interesting concept. And frankly, we can'tgive you a number on that, but the first cousin of that is that the majoreffort in our advertising departments today is looking at customers who aren'tadvertising with us and figuring out why.
A lot of the revenue growth that you've heard us talkabout today really comes from that kind of sales effort where we've gone afterthat customer and developed packages that make him an interested and effectiveadvertiser 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?
We're seeing it. And we had some in the Third Quarter. Weexpect more in the Fourth Quarter. Yes.
Edward Atorino -Benchmark Capital
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.
And there are no further questions in the queue at thistime. I'd like to turn the call back over to Mr. Marshall Morton for closingremarks.
Thanks, Frances. We appreciate the opportunity totalk with you all today. We look forward to talking to you in the future. Bye.
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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