Primedia Q3 2007 Earnings Call Transcript

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 |  About: Primedia Inc. (PRM)
by: SA Transcripts

Primedia (NYSE:PRM)

Q3 2007 Earnings Call

November 6, 200710:00 am ET

Executives

Dean Nelson - Chairman

Bob Metz – President, CEO

Kim Payne - CFO

Analysts

Michael Meltz - Bear Stearns

Robert Simmons - Oppenheimer

David Clark - Deutsche Bank

Scott Cohen - Amber Capital

Operator

Good day everyone and welcome to the Primedia conferencecall. Today's conference is being recorded. At this time, I would like to turnthe conference over to Mr. Dean Nelson, Chairman. Please go ahead, sir.

Dean Nelson

Good evening and welcome to Primedia's third quarterconference call. I'm pleased to be joined by Bob Metz, our CEO; Kim Payne, ourCFO; and, other members of senior management. As always, we refer you to the Safe Harbor disclaimer spelled out inour earnings release.

A reminder that any non-GAAP terms mentioned on this callare reconciled to GAAP in the earnings release and the company's SEC filings.

On August 1st, 2007Primedia closed the sale of its Enthusiast Media business to Source Interlinkfor approximately $1.2 billion in cash. The Enthusiast Media management teamworked very hard over the prior 18 months refining the strategy and moreimportantly, executing against that strategy. In the end, we believe wereceived a very good price for a well-run business in an attractive segment.

Primedia now has one remaining business, Consumer Source.The board believes that this business has meaningful upside. Our position isnot unlike where we were with Enthusiast Media approximately two years ago; aleading market presence with additional growth opportunities, particularly onthe Internet. Therefore, our response to the opportunities should parallel ourprior experience at Enthusiast Media, to aggressively execute against thelargest opportunities.

Finally, our process to move our corporate headquartersactivities to Atlanta is wellunderway and on schedule, and that transition will be fully completed by theend of the first quarter in 2008.

Now, I'll turn the call over to Bob Metz, Primedia's CEO.

Bob Metz

Thank you, Dean and good evening. Today, I will be providingwith you a quick overview of Primedia's third quarter 2007 operating resultsand I will discuss the progress that we're making against Consumer Source’s keystrategies and initiatives. Kim Payne, our CFO, will then get into a moredetailed discussion of our financial performance for the quarter andyear-to-date and then we will open the line for questions.

I'm excited to be CEO of Primedia. Consumer Source is agreat business with a history of consistent revenue growth, having deliveredannual revenue increases every year in the more than 30 years since I've beenwith the company, along with strong and stable cash flow.

In brief, during the third quarter, we delivered revenuegrowth in each of our businesses except Auto Guides. While we are disappointedin our overall third quarter results due in part to current market conditionsalong with our own actions, we are being proactive in pursuing opportunities todrive profitable growth.

I'll now review the third quarter performance for each ofour product lines along with some of the initiatives we have in place toimprove the performance in more detail. Starting with the largest, Apartments.Apartments consist of Apartment Guide, ApartmentGuide.com and Rentals.com andrepresented 77% of third quarter advertising revenues. Revenues grew 2.6% yearover year and the third quarter was the first quarter in over two years thatApartment Guide and ApartmentGuide.com delivered year-over-year growth.

As a reminder, Apartment Guide and ApartmentGuide.com is ourproduct line serving apartment communities with an average of 50 units or more.Our product is a unique one in that it is sold as a blended medium, utilizingtraditional print combined with the power of the Internet. Apartment Guideprint editions are distributed through more than 60,000 Distributech locationsand ApartmentGuide.com reached more than 4 million unique visitors during thequarter.

Importantly for many of our customers, Apartment Guide isthe single greatest source of our new leases and we are able to provide themwith tracking capabilities to demonstrate our effectiveness and the favorablereturn on their investment.

This quarter's return to growth was due to successfulefforts to strengthen our salesforce and improve customer relationships, whileproviding them with the tools to better track results. One of our competitiveadvantages is our ability to demonstrate the effectiveness of our products ingenerating leases with tools such as Max Leases and call tracking.

Max Leases, which we launched and started rolling out at theend of June, is a web-based lead management solution for multi-family propertymanagers. As the software continues to gain acceptance, it will enable propertymanagers to track leads and results more accurately from all sources whileproviding them with the good management tool. It also reinforces the value andresults that we offer.

During the third quarter, Apartment Guide and ApartmentGuide.comprovided clients with over 2 million leads. The number of leads trackable to ConsumerSource almost doubled from last year, due to the effectiveness of ourdistribution but also due to some of the enhanced tools I just described.

While our print guides are a very important part of ourvalue proposition as an integrated print and online medium, we're alsoinnovating and finding new opportunities to better leverage our leading marketposition and accelerate online growth. A critical component of our continued onlinegrowth is driving traffic and we have added staff that are focused on searchengine optimization and expanding our online distribution.

Apartment Guide product line has a few key drivers, the mostimportant of which is occupancy rates. In recent years, occupancy rates havebeen driven to historically high levels in the high ‘90s as apartment buildingswere being converted to condos and new construction was concentrated on housesand condos. With vacancies so low, many apartment management companies cut backon or completely eliminated advertising as demand was outstripping theirsupply.

In today's markets, we're seeing far fewer conversions tocondos. Over time, as apartment conversion continues to decrease andconstruction of new apartment communities emerges, we expect to return to amore normal environment with occupancy rates returning to the mid to low ‘90s,which would be quite favorable for our business over the long-term.

Within Apartments, Rentals.com continued to outpace ourother product lines. Single unit rentals make up approximately 85% of the totalrental industry. During the third quarter, Rentals.com revenue grew a solid 29%on a pro forma basis, reflecting the ongoing opportunity in this market and ourinvestment in capturing it.

As we have expanded both organically and throughacquisitions, we are now the online leader with the most paid small unitlistings on the Internet and we have low single-digit market penetration, whichmeans there are still meaningful opportunities.

To better capitalize on the opportunity that our leadingmarket position offers to us, we're make strategic investments in the business.

First is the salesforce and as of the end of the thirdquarter, Rentals.com achieved full salesforce staffing. We expect to begin tosee the revenue impact from these salespeople in the first half of 2008, asthere is a typical lag period between the hiring of salespeople and thecorresponding increase in revenue. This lag period impacted our expenses in thethird quarter, as these expenses were not aligned with our revenues and thisdisparity will continue into the fourth quarter.

Second is marketing. In the third quarter, we conducted aone-time limited Rentals.com targeted marketing and advertising campaign. Webelieve that the best way to continue to drive revenue growth is to deliverresults for our advertisers and one of the ways to deliver results is toprovide traffic to the listings. The campaign was aimed at driving traffic tothe website to increase links for property owners and building brand awarenessamong potential advertisers. The campaign was effective in generating leads andincreasing sales volume but not at an acceptable cost, and we're working onother ways to achieve the desired results.

The third element of our strategy is finding opportunitiesfor line extensions and providing more targeted offerings. For example, overthe summer we launched Vacation Rentals and late in the third quarter began toroll out a Spanish language version and a special section for senior living,though it is too soon to obtain meaningful results from these extensions. Webelieve there are many other similar untapped niches which we are analyzing andwe will update you on our progress over time.

The next biggest product line, New Homes, which consist ofNew Home Guide and NewHomeGuide.com represented 19% of third quarteradvertising revenue, an increase by 10% year over year. Despite weakness in thegeneral housing industry, particularly new home sales, some of our new homemarkets were still able to grow due to our strong customer relationships, ourvalue proposition to advertisers and variances in market conditions across thecountry. The geographic diversity of New Home Guides helps to moderate theimpact on our business and based on the results, performance varied from marketto market.

We have proven our ability to provide an effectiveadvertising model in all except the best and worst of the New Homes markets. Inareas where open inventory is extremely low and demand is extremely high, manydevelopers don't see the need to spend additional dollars on advertising. Thisis what we saw during the real estate industry's boom in areas like Arizonaand Nevada. On the other hand,where inventory levels are at extreme highs and developers are struggling toaddress the difficult mortgage environment and declining home prices, somebuilders are facing a tight financial situation and are unable to spend onmarketing to move their inventory as they struggle to stay afloat. This is whatwe're seeing now with some new homebuilders who have developments in parts ofthe Midwest and Northeast and we don't expectimprovement in these markets in the near term.

Providing a bit more granularity, 40% of our markets arelocated in the most challenged areas, but 60% of our markets are growing.However, there are many markets that fall in between those two extremes wherebuilders continue to advertise their developments and therefore, New Home Guidehas continued to grow primarily due to ongoing gains in the Southwest, Floridaand Texas. So, while the New Homesproduct line has been impacted by real estate market conditions, the strongrelationships we have established with homebuilders along with the measurableresults we deliver to our customers is resulting in continued year-over-yeargrowth.

However, in light of the uncertainty in the current mortgageand real estate markets, we're closely monitoring this product line so we can movequickly to right-size if the markets worsen. We also continue to pursueopportunities to leverage our existing infrastructure and add line extensionopportunities. During the third quarter, we successfully launched a New HomeGuide in Richmond and a ProfessionalEdition Realtor Data Book in Charlotte.Revenues in both of these exceeded our original projections and aresignificantly outpacing the average 18 months it takes to breakeven when weopen a new market.

We believe there are other new market opportunities, butsuccess is highly dependent on specific market conditions. We intend to pursuenew opportunities, but we will be very deliberate in evaluating each prospectbefore we move forward. We now have 39 New Home Guide publications in 27 marketsand similar to Apartments, New Home Guide ads are sold on an integrated basiswith print and Internet.

Our third business, Auto Guide, which consists of Auto Guideand AutoGuide.com, represented 4% of third quarter advertising revenue. Auto Guidecontinues to underperform and we're disappointed in the results. During thethird quarter, revenues decreased approximately 30% year over year, includingthe three markets that we have exited in the past year.

We launched the Auto Guide business over two years ago tosee if we could leverage our existing infrastructure and develop a profitablebusiness in this base, but have had limited success. We are now focusing on themarkets that we believe to have the greatest potential due to economicconditions, area competition and strength of our field support.

In markets where we have determined that achieving aturnaround would require time and/or investment that would not produce anattractive return on investment, we have been exiting those markets. During thethird quarter, we exited New England and Triangle, North Carolina markets and are currently in seven markets.We will make a decision on the strategic direction of our Autos product line bythe end of the year.

Moving on to distribution, as I have mentioned severaltimes, one of the key benefits of our products is our “printernet” approach. Thisstrategy for our Guides offers unparalleled rates and value to advertisers byoffering an integrated print and online product. Our research has shown thatthe combination of print and online delivers results that are two to threetimes better than either method alone.

Our objective for Distributech is to optimize ourdistribution network to the benefit of our publications by expanding storelocations through new and existing retail programs. Distributech is also arevenue generating business where we distribute guides for other publishers.While there are other publications on our racks, by owning the distribution,we're able to secure optimal placement for our guides.

Distributech had a challenging quarter as a combination oflost revenues from a slowdown from customers who publish within the resale homesector combined with an increase in expenses as we added over 2,000 retaillocations as part of our ongoing strategy to optimize our distribution network.

As of September 30, 2007 we had approximately 20,000 retail locations. During the thirdquarter, Distributech revenue increased 5.7% while distribution expensesincreased approximately 10.5%. This revenue growth was slower than we originallyanticipated as some our third-party distribution customers who publish resalehome guides scaled back or ceased operations. These losses continue tonegatively impact us, but we are pursuing new categories in order to diversify andexpand our customer base. Additionally, we expect revenues to better align withexpenses as we monetize our newly expanded distribution.

Our legacy is in print and with a 32-year history, that sideof the business has been thoroughly developed. However, we continue to seeequal, if not greater, opportunity on the online side. Our web sites reach morethan five million visitors on average per month and our online presence,particularly through Rentals.com, continues to grow. While we're proud of whatwe've established to date, we believe that there is still a lot more we can do.

Looking ahead, we will pursue long-term growthopportunities. We also must improve our execution. Having the right managers inplace in each of our core businesses and locations is critical. This is arelationship business and a manager's ability to build a team around him or herthat can drive new businesses is how we will improve and sustain ourperformance. This is evidenced by the progress we're making in our Apartmentsand New Homes businesses.

However, we recognize that we have further opportunities. Weneed to better leverage our unique product lines and lead a network of onlineand print distribution in order to improve our returns. We thank our team fortheir effort and our shareholders for their patience as we reinvigorate thebusiness and begin to increase the value of Primedia.

Thank you, and let me pass the call to Kim Payne, our ChiefFinancial Officer.

Kim Payne

Thank you, Bob. Forthe three months ended September 30, 2007 our third quarter revenue increased 2.5% to $83.3 millioncompared to $81.3 million for the comparable quarter last year. Totaladvertising revenue increased 1.8% to $68.5 million from $67.3 million lastyear. The increase in revenue was primarily related to growth in our productlines, Apartment Guide, Rentals.com, New Home Guide and Distributech, partiallyoffset by a decline in Auto Guide.

With regards to our corporate costs, as we previouslycommunicated last quarter, the third quarter was still less thanstraightforward for a couple of reasons. One, we closed the sale of EnthusiastMedia in the quarter while we still incurred costs associated with the businessthrough July.

Second, the corporate transition to Atlantawas in the early stages and we still have residual resources in New York that will remain until we get through the fourthquarter 2007 close. Through the first quarter 2008, we will still havenonrecurring expenses that will go away later in the year and we expect to beon course to reach an $11.7 million run rate.

Consumer Guides adjusted EBITDA which we formerly refer toas Consumer Guides segment EBITDA, decreased 8.3% to $19.9 million from $21.7million in the same period last year. The decline in adjusted EBITDA was drivenby increased selling expenses due to higher salary, commission and benefitscost as a result of achieving full sales staffing at our high potentialRentals.com unit. In addition, we had increased distribution expenses relatedto the company's strategic decision to invest in its retail distributionnetwork, partially offset by the revenue growth and lower printing expenses ofour guides.

Operating income declined to a $0.7 million loss from incomeof $8.8 million for the comparable period last year. In addition to the items Imentioned impacting EBITDA, the decline in operating income was drivenprimarily by a higher provision for restructuring costs of $6.6 millionincluding the transition of corporate functions from New York to Atlantaand the exit from two Auto Guide markets.

Interest expense declined by 57% to $14.1 million from $32.8million in the third quarter of 2006, due to the significant reduction in debt,which I will detail in a moment. As expected, due to the capital restructure,Primedia incurred a loss of approximately $44.3 million on the redemption ofdebt including the write-off of deferred financing fees. The company estimatesthat it has in excess of $700 million of net operating loss carryforwards orNOLs, which are available to offset future taxable income.

The loss from continuing operations was $38.1 million or$0.86 per share, which includes approximately $22.1 million in tax benefit,compared to $37 million or $0.84 per share in the third quarter of 2006.

Turning to our balance sheet, as of September 30th, 2007Primedia had a cash balance of $46.8 million compared to $5.8 million at thesame time last year. Debt outstanding was $252.9 million, down from $1.3billion last year. The reduction in debt was driven by the repayment andredemption of much of our outstanding debt.

During the third quarter, we repaid all $492.5 million ofour term loans, redeemed all $410 million of our 8 7/8% senior notes, redeemedall $122.5 million of the senior floating rate notes and redeemed $292.2million of our 8% senior notes. We have approximately $2 million of the 8%notes outstanding, which we intend to redeem when they become callable in thefirst half of 2008.

We completed financing for a $350 million senior securedbank credit facility, consisting of a $100 million revolver and a $250 millionterm loan. Importantly, the redemptions and refinancings that I just discussedhave resulted in a significant reduction in our net debt and increasedfinancial flexibility.

During the quarter, free cash flow which includes ourdiscontinued operations until they are sold or shut down, was negative $15.1million compared to a positive $13.8 million in the same period of 2006, primarilydriven by the timing of cash interest paid due to the redemption of senior debtand due to the sale of Enthusiast Media on August 1, 2007.

Year-to-date, through the third quarter, Consumer Guides'capital expenditures was $10.1 million and we estimate full year Cap Ex ofapproximately $15 million, which is in line with our expectations.

Let me now discuss the restatement due to the non-cash errorin the preparation of the company's accounting for income taxes under FIN 48.Specifically, the company discovered that the benefit for income taxes wasoverstated by approximately $1.4 million for both the three and six monthsended June 30, 2007, whileincome from discontinued operations net of tax was overstated by approximately$0.5 million for the same period.

As a result, the company will restate its interim financialstatements for the three and six months ended June 30, 2007. The correction of the error will not haveany impact on the company's cash or the company's net operating losscarryforwards that are available to offset future taxable income and have nobearing on operating income or day-to-day funding of the business.

Turning to guidance, the company continues to estimate full yearrevenue growth of flat to low single-digits and anticipates that full yearConsumer Guides adjusted EBITDA, formerly referred to as Consumer Guidessegment EBITDA will be approximately flat compared to 2006.

Our largest product line, Apartment Guide and ApartmentGuide.comwill continue to deliver sequential quarterly revenue growth in 2007 while fullyear revenue will still be lower than 2006. Full year revenue should increasein New Home Guide, Rentals.com and Distributech, while full year revenue forAuto Guide will decline compared to 2006.

The company anticipates that it will reduce its annualcorporate overhead expense from $28.3 million in 2006 to a run rate ofapproximately $11.7 million annually, including approximately $2 million ofcorporate overhead, which has already been allocated to the Consumer Guidesbusiness. The company believes that the majority of corporate overhead expensereductions be will be completed in 2007 and that there will be nonrecurringcosts associated with reducing its corporate overhead expense.

With that, I would like to open the line for questions.

Question-and-AnswerSession

Operator

(Operator Instructions) We'll take our first question fromMichael Meltz - Bear Stearns.

Michael Meltz - Bear Stearns

Your guidance for full year EBITDA -- just so we're clear --you're saying approximately flat. Are you guiding to down EBITDA for the fullyear? I just want to clarify that. Even if it's down a little bit, I just wantto make sure I understand what you're saying.

Secondly, on NOLs, I think back in August, you talked abouthaving a little bit over $500 million was your estimate at the time. Can youtalk about how that has been grossed up to this level and how much confidenceyou have in that number?

Third, on the net debt number, does that include all fees oris there a tail on Enthusiast Media fees, so that net debt number is actually probablya little bit higher than that $206 million or $207 million you were talkingabout?

Kim Payne

I'm going to try to tackle all of these. On the guidancequestion, we're saying flat and your question is could it potentially be down,even if a little bit?

Michael Meltz - Bear Stearns

I'm not sayingpotentially. When you're saying approximately flat, are you saying flat ordown?

Kim Payne

Well, it could bedown slightly to up slightly.

Michael Meltz - Bear Stearns

And that would incorporate better expense performance orbetter EBITDA performance in the fourth quarter?

Kim Payne

Right. On NOLs, the$500 million was an estimate prior to selling Enthusiast Media. After the saleand through all the current evaluations and analysis, we're around $700million. We do feel confident that that is a good number based on all of theinformation that we have.

On the net debt, we do still have some items outstanding,specifically the taxes have not been paid on the gain yet. We're still workingthrough that component. So, that's would be the biggest driver that would beimpacting that net debt.

Michael Meltz - Bear Stearns

Roughly, what's thatnumber?

Kim Payne

Roughly, as we outlined in the earnings release, it isaround $31 million, a little north of $31 million, that estimate.

Michael Meltz - Bear Stearns

On Apartment Guides, you're saying you'll do better as youview it in Q4 than the $52.4 million you did in Q3? Can you just tell us whatthe year-ago number was? So 4Q06, what the base number is?

Kim Payne

Let me see if I'vegot that one handy for you.

Bob Metz

Kim, we can follow upon that if you don't have it handy.

Kim Payne

Yes. Let me follow up with you on it.

Michael Meltz - Bear Stearns

On New Homes, Bob I don't think I understand this; 40% is inchallenged markets, 60% is in growing markets?

Bob Metz

What we were trying to say there, Michael, is that inessence, 60% of our books are growing while 40% of the books are not growing.

Michael Meltz - Bear Stearns

You grew 10% in the quarter. So, how big is the gap? The 60that were growing, what were they up?

Bob Metz

They netted out to 10%. We have not tried to break out themarkets.

Michael Meltz - Bear Stearns

Let me ask it thisway, Bob. How bad are the declines in the challenged markets?

Bob Metz

I think every one of those markets is still profitable. Itis not that the businesses are in trouble. It is just that the growing marketsweren't growing probably as strong as the markets that were going backwardswere losing. But keep in mind it is 10% up year over year.

Michael Meltz - Bear Stearns

Maybe magnitude, canyou give us a sense? Are they down 5% to 10% or are they down over 20% in thesemarkets?

Bob Metz

We haven't actually discussed any individual marketperformances. But again, I don't see any of the markets that are in trouble onour New Home Guide side.

Operator

Your next question comes from Robert Simmons - Oppenheimer.

Robert Simmons - Oppenheimer

I was wondering if you could give an idea of how much ofyour business is online versus print?

Bob Metz

We don't actually break out revenue in print versus online,because we sell it as an integrated product. Because of that, when we sell anad in the Apartment Guide or New Home Guide, it is combined with the Internetand other than Rentals.com and some additional revenue we pick up from trafficto our sites, the majority of the revenue is really combined with online andprint.

Robert Simmons - Oppenheimer

For Rentals.com, you said revenue grew 29% in the quarter. Canyou give me an idea of how much, what kind of a percent? Are we talking 1% or10% or what? I don't need an exact number, but just a general area.

Kim Payne

Can you clarify?

Bob Metz

Are you asking what percentage of our revenue?

Kim Payne

As a percent of the whole business?

Robert Simmons - Oppenheimer

Yes, of Apartments.

Kim Payne

We haven't disclosedthat.

Robert Simmons - Oppenheimer

You said that New Home Guides, you have 37 publicationscurrently. Do you have the numbers for apartments and autos?

Kim Payne

We do. I can get thespecific numbers on that. We’ll get back to you on that one.

Operator

Your next question comes from David Clark - Deutsche Bank.

David Clark - Deutsche Bank

What percentage of Distributech revenue comes from existinghome sales related products, at least in this past quarter?

What was the same-store New Home Guides growth for the quarteror is that 10% number a same-store number?

Bob Metz

The same-store New Home Guide growth not including our newmarkets was approximately 7% year over year. Kim, do you know what percentages of resale books are on ourracks?

Kim Payne

We haven't disclosedthat.

Operator

Your next question comes from Michael Meltz - Bear Stearns.

Michael Meltz - Bear Stearns

The corporate expense in the quarter, I understand you'resticking it out at an $11.7 million run rate once you get to it. But can yougive us a sense as to what it is going to look like in Q4? Is it going to beclose to what you did in Q3?

Kim Payne

It is going to beless. This quarter was the height of the transition cost and some of thecarryover related to that; it will be less. It will not be at that run rateyet, of the $11.7 million because we do still have overlap. We're going to havestaff here in Atlanta, staff in New York so as we transition, some of those costs willoverlap.

Michael Meltz - Bear Stearns

Can you give us a sense, Auto Guides, what is it on trackfor the year in terms of EBITDA losses?

Bob Metz

We stated in the last earnings call that it was in themillions but we didn't get anymore specific than that.

Operator

Your next question comes from Scott Cohen - Amber Capital.

Scott Cohen - Amber Capital

A quick follow-up to the NOL statement. Specifically, couldyou give us a sense of the expiry schedule of those NOLs?

Kim Payne

Could you repeat thatquestion?

Scott Cohen - Amber Capital

Just to get a senseof the expiry schedule of the NOLs, how long are those NOLs essentially good tobe used?

Kim Payne

Approximately 14years is what we're looking at before they expire.

Bob Metz

Before the first onesexpire. They've got a long way.

Operator

At this time, there are no further questions. Mr. Metz, Iwill turn the conference back over to you for closing comments.

Bob Metz

I would like to thank everyone who listened and participatedin our call. Good evening and thank you very much.

Operator

Ladies and gentlemen, this will conclude today's Primediaconference call. We do thank you for your participation, and you may disconnectat this time.

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