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Hearst-Argyle Television, Inc. Q1 2008 Earnings Call Transcript

May 01, 2008 | about stocks: HTV

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Hearst-Argyle Television, Inc. (HTV)

Q1 2008 Earnings Call

May 1, 2008 9:30 am ET

Executives

David Barrett – President, Chief Executive Officer

Harry Hawks – Executive Vice President, Chief Financial Officer

Tom Campo – Director of Investor Relations

Analysts

Victor Miller – Bear Stearns

Lee Westerfield – BMO Capital Markets

Marci Ryvicker – Wachovia Securities

James Gross – Barrington Research

John [Cornwright] - Sandler Capital

Presentation

Operator

Good morning and thank you for participating in the Hearst-Argyle Television, Inc. first quarter earnings call. (Operator Instructions)

Your host this morning is Mr. Harry Hawks, Executive Vice President and Chief Financial Officer. Also participating are Mr. David Barrett, President and Chief Executive Officer and Mr. Tom Campo, Director of Investor Relations.

I would now like to turn the call over to your host, Mr. Harry Hawks.

Harry Hawks

This is Harry Hawks, CFO at Hearst-Argyle. Welcome to our first quarter 2008 earnings call. This morning you will hear from David Barrett, our CEO and me regarding our financial and operating results. Then the two of us with an assist from certain other members of management will respond to your questions. First we need to take care of the legal administrative details.

Tom Campo

Just to remind all of our listeners we will be discussing forward-looking information and we refer you to the cautionary language we detail in the Safe Harbor Statement and in our earnings release which was released earlier this morning and which is also posted to our corporate website, www.HearstArgyle.com, or to most any finance website.

We will be discussing non-GAAP information during this call and in compliance with Regulation G we provide tables within the press release reconciling this non-GAAP information to GAAP measures. Cautionary language, which is also provided in our SEC filings, also accessible via our website. The company undertakes no obligation to update this information.

Once again, we want to welcome those of you who are listening to the web cast which will be archived on our site.

With that I will toss it over to David Barrett.

David Barrett

Thank you for being with us today for a discussion about our first quarter earnings results which we released earlier today. As reported, revenues for the quarter declined 2.6% compared to first quarter 2007. A pervasively weak economy is certainly a challenge for us and indeed all American business. The combination of high energy costs, rising food costs, the nationwide housing slump and unsteady credit and capital markets are all contributing to a sluggish economy and what I view as a borderline recessionary environment.

The adverse impact on consumer confidence and consumer spending is well-documented. It has caused a slow down in advertising expenditures across much of the media landscape. Notwithstanding the strength of our local TV franchises in 25 markets across the country and the infusion of political spending in this election year we were not able to fully overcome the ongoing softness in numerous ad categories including automotive, our largest category, retail, furniture, restaurants, movies and health services.

Modest gains in attractions, packaged goods, media financial services and home improvement did not fully offset the down categories. That said I am pleased that twelve of our stations did achieve quarter-to-quarter revenue growth. Consistent with past comments in February and October, our mid-sized Midwest markets are holding up reasonably well. Not that their local economies are especially strong but rather that these economies are somewhat less volatile on both the up side and the down side and to be sure in these markets we have very, very strong station performers.

Political spending in the quarter totaled $9.6 million, an increase of $8.1 million versus 2007 and $7.5 million versus 2006. That was largely driven by the New Hampshire Primary and to a lesser extent the Ohio Caucuses in January. Somewhat to my surprise every single Hearst-Argyle station booked some political revenue in the first quarter, albeit modest in most markets.

Six of our markets accounted for approximately 2/3 of our political total led by WMUR in Manchester, New Hampshire and KCRA in Sacramento, California. A reminder that the Pennsylvania Democratic Primary spending largely occurred in April, the second quarter, and that is also the case with the upcoming primaries in North Carolina and Indiana. That will be second quarter revenue.

Notwithstanding, the ongoing spending by Clinton and Obama, we are seeing political spending backing up somewhat as a result of their contest. Party money, both Democratic and Republican, is ready to go once a Democratic candidate is determined and that is also the case with the various 527 organizations and PACs that are ready to enter the fray.

Ultimately we need to await a final resolution in the Obama/Clinton race before the next significant wave of spending occurs. That said, this is a very dynamic situation. Yesterday we booked an order in the Midwest market for a Democratic PAC which starts today, May 1. So there is a pent up demand for this money and the order we received yesterday may be an indication that things are beginning to open up notwithstanding the lack of resolution on the Democratic side.

Presidential spending along with the expected heavy spending for certain contested Senate, Gubernatorial and House races as well as the inevitable ballot initiatives which come up should be significant in the second half and should contribute to anticipated top line growth for the full year.

We are doing well with our Olympic sales programs at our ten NBC stations. As previously stated we anticipate a modest increase in Olympic revenues compared to the 2004 Games. While there are some rumblings about a boycott, I am of the strong view that the Bush Administration will not follow the same course of action that President Carter took in 1980 to no positive benefit. I have no doubt we will see the American Olympic team competing in Beijing. Watching the Games on NBC I think the ratings will be strong, providing very good value for our advertisers.

Digital revenues and retransmission revenues were up in the first quarter and we continue to work hard on digital sales and receive positive results for our efforts, especially allocation of new resources in the form of digital sellers and a commitment to sales training across our sales group.

As for the revenue overview as noted in our press release earnings per diluted share were $0.11, favorably impacted by a long-awaited insurance settlement in respect to lost property, lost income and extra expense incurred at WDSU New Orleans due to Hurricane Katrina. The after-tax effect of this settlement was $9.3 million. Harry can elaborate on this in a moment.

As is our practice, we will provide updated and revised information about full-year expense and expenditures. There are several notable items. Salaries, benefits and other operating expenses are expected to decline from the outlook we provided to you in February.

Corporate G&A excluding stock based compensation expense, interest expense and capEx have been favorably revised, meaning downward. You’ll note that our full-year effective tax rate is now projected at 34%.

Of course we are focused on expense management in this difficult economy and our operators are carefully and smartly differentiating cost and programs that will sustain our competitive advantage this year and into the future versus other costs that can be deferred or eliminated during these weak economic times. This is an every day and ongoing discipline at our stations.

We do take the view that the strength of our company and our stations, along with our inherent financial strength provides an opportunity to capture gains in audience share and revenue share this year. We are continuing to press the mettle on our various digital initiatives which are highly strategic and vital to our future growth prospects.

Indicative of the ongoing viability of our local media business model is our continued ability to generate strong free cash flow. Our release references how we utilized $37 million in cash during the first quarter including the pay down in $27 million in debt. Notably, over the past twelve months our total debt repayment is $101 million. Hopefully economic recovery will occur sooner rather than later and give us an opportunity to leverage our strength and leadership positions in a more robust advertising environment.

In the mean time, we are carrying on with confidence that our station assets and our people, as well as our viewer and advertiser propositions are second to none. Our strong, strategic execution should enable us to aggregate the largest audience revenue and profit segments in our market.

Now I’ll hand it off to Harry and after his comments we will be happy to take your questions.

Harry Hawks

Given the detail in the press release and the extent of David’s remarks this morning I would like to use my time to address just a handful of quick observations. As David touched on the economy and the housing slump across the country and the impact on consumer confidence and spending, I wanted to re-emphasize the points that David made that as it relates to our performance during the first quarter it indeed was very concentrated in only a few markets. Noting once again that a number of our stations actually experienced growth this quarter versus prior year.

Secondly, the credit markets and capital markets issues indeed are an indirect effect to us because of its effect on consumers. But specifically to our corporate finance perspective and position, our liquidity and financial position is very good. We can easily handle the upcoming $90 million maturity in the fourth quarter of this year. So in this particular capital markets environment we have no financing risk as there is no financing that needs to be done. I think you are aware that our marginal cost of debt capital is priced at LIBOR + 0.75. Yesterday 90-day LIBOR was 2.85%.

With respect to the insurance settlement during the period, just to underscore, the majority of that settlement does relate to actual operating losses and actual operating expenses previously incurred. Only a small portion of that settlement relates to property. So we are basically being reimbursed for expenses which have previously been run through the income statement or revenues which we lost due to business interruption.

As David mentioned free cash flow was very healthy in the quarter. I don’t need to go back over the details other than to comment that it is appropriately spread across investment in the company, return of capital to our investors as well as a substantial amount of debt reduction.

A quick comment on the effects of FIN 48. As of last year and every year going forward we have a significant amount of quarterly volatility and that is not unique to us. This would be a similar situation for every company in corporate America who complies with FIN 48. So we apologize for the up and down during the quarters but the full-year number we have guided to a lower provision in the 34% range.

Share counts…those of you that followed the year-end earnings call and the year-end press release will have observed that for the fourth quarter we were obliged to assume conversion of the convertible preferred so we got a higher share count for the quarter. In Q1 to do so would be anti-dilutive so we did not do it. So we have got the regular share count there that does not give effect to conversion. Conversion, if one were to do the math, is about 5.1 million shares and obviously if you did that you would back out the dividends or as it is reported on the income statement interest expense for the capital trust.

We note in the press release that subsequent to the end of the quarter the Hearst Corporation filed another 13D with the SEC noting that their ownership interest was now up to 77.8%.

Lastly, as it relates to the outlook, although we made reference to our expectation of this being a growth year we have not given specific revenue guidance. We do not give quarterly earnings guidance either. However, we have provided a very detailed update to the expense guidance which we had given on February 22. It is in the press release. As noted by David’s remarks several reductions in expenses were noted.

Lastly, we will indeed file the 10Q in the next day or two.

We would now be pleased to take your questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Victor Miller - Bear Stearns.

Victor Miller – Bear Stearns

First of all on just the auto category, David can you just let us know how that looks first quarter and if there is any changes in tone in the second quarter especially now that GM seems to have a little bit of a sense of what it wants to do with its spending dollars? Secondly, could you just talk about Boston and Sacramento? Just to give us a thumbnail of what the East and West coast looks like now.

Lastly, your digital dollars are up 22%. If you look at the metrics you are up 139 in uniques, the page view is up 36, video up 66, so is there a CPM compression in that business or do you think that the revenue just is not keeping up with the dramatic pace of that business? Or do you just think that is another sign that advertisers are just being a little more cautious?

David Barrett

Let me start from the bottom up. On the digital side obviously our traffic statistics are good. We are seeing growth as you noted. But it is always the case in my long experience that there is a lag time between advertising catching up with superior traffic and audience performance and that is what we are engaged with.

I think the challenge that the entire industry has, anybody who is selling advertising, is how to better sell a market and monetize the growing web audience and the growing audiences in interactive media. We are among the people who are working very hard to accomplish that but there is a lag time there. I have referenced that we have added sales personnel at our stations.

We are putting a big emphasis on our training trying to continue to elevate our game and how to monetize impressive traffic data that we have going for us and persuade advertisers of the efficacy of this medium. We are making progress but we are not fully keeping in step with the power of the audience there. That said, I am very pleased with how we are performing and I think there is continued upside for us.

In respect to Boston and Sacramento, I’d say the economies there continued to be challenged, probably a little bit more so in Sacramento that Boston at the moment. Although Boston has had its years of difficulties so Sacramento has had more robust market performance over the past several years as compared to Boston. But I would characterize each of those markets as a little bit soft.

Automotive the first quarter was down about 16%. I think that is certainly a challenge. The category represented about 22% of our total ad sales and it is very hard to overcome that kind of downturn.

Victor Miller – Bear Stearns

Any change in tone at all, David, in the second quarter?

David Barrett

Modestly. I think that at this point our overall pacing inclusive of automotive are reflective of the macroeconomic factors that I mentioned. There is nothing dramatically improving nor is there anything dramatically worsening. We are kind of the same zone with automotive and most of our other large categories.

I read this morning that Ford is increasing its contribution to local dealer advertising buckets by ½% point based on local car sales. They think there is an opportunity there for these local dealers to position the brand and let people know of products. They are going to focus on brand advertising or encourage local dealers to focus on brand advertising as opposed to low price selling. I think that is a good sign and an affirmative sign from Ford. General Motors is still continuing to struggle with its overall car sales as a company and their bottom line was reported this week as well that I noted and that was challenging.

I would comment that in the fourth quarter GM’s spending was up 3% and their January car sales were good. They reduced ad spending in the first quarter and there is some correlation with the downturn in February and March with their car sales. I don’t mean to suggest that the only issue here is their advertising. There is fundamental things going on elsewhere but I think that is of note I think. When they did spend up in the fourth quarter they saw the benefit of that in terms of better sales in January.

Operator

Your next question comes from Lee Westerfield - BMO Capital Markets.

Lee Westerfield – BMO Capital Markets

First on the capEx in the quarter which was less at least than I embedded in the model and also seems to have been the difference in bringing your outlook for 2008 from $44 million to $40 million. What were the factors in the quarter that helped you save on budget? Any reason why we wouldn’t expect that kind of repetition in the latter half of this year? Secondly, for our models, just to understand the EPS impact here. What was the tax impact of the insurance settlement once we get down if we exclude to an ongoing EPS number?

Harry Hawks

With respect to the capEx while you were asking the question we are all sort of smiling because the head of engineering is in the room with us here and he has got a big grin on his face. CapEx, first off year-over-year we completed some fairly large projects in 2007 and so it was a natural sort of reduction there because we didn’t have the same kinds of big projects including some building projects and likewise in 2007.

So, a $40 million budget this year is actually a very healthy investment in plans, a good portion of it is attributable to introducing High Definition production in local markets, additional IT infrastructure and a lot of things associated with new initiatives.

The reduction of $44 million to $40 million, some of it is just being smarter about where we spend and prioritizing. Some of it is slipping projects into next year. Things such as that just to sort of help manage in respect of the kind of economic environment we have is to have some sort of operational response . So we have reduced in the outlook there different categories of operating expense and we have prioritized and delayed some capital spending as well. We think it is an appropriate response to the economic environment.

With respect to the tax effect, the total claim was $11.5 million. The after-tax effect was $9.3 million. So if you will the difference is the tax provision on the gain. That is below the statutory rate as we had some prior period capital loss carry-forwards which we could use to help mitigate that a bit. But, I think the guidance for the full-year tax provision at 34% gives appropriate reflection to that matter as well as some of the normal quarter-to-quarter issues that are related to various tax filing positions in all the different jurisdictions that we have.

Lee Westerfield – BMO Capital Markets

Let me just make sure I understood. So the 34% effective for the year is inclusive of the tax impact? Or excluding the impact of the insurance settlement?

Harry Hawks

That gives effect to it.

Operator

Your next question comes from Marci Ryvicker - Wachovia Securities.

Marci Ryvicker – Wachovia Securities

Is any of the weakness in the first quarter an indirect effect or a direct effect of the writers’ strike given network ratings were down pretty significantly? Since the transition to digital is now less than a year away, can you update us on where you stand in terms of additional programming, additional channels or anything you can talk about?

David Barrett

With respect to the writers’ strike, I do think it had some adverse effect on us in the first quarter when the stations lost the ability to sell the higher rated primetime shows and package those programs with other day parts. It is very hard to quantify that but I think as we referenced in our February call with the fourth quarter earnings we were seeing kind of a growing effect of that Marci as we got further into the strike.

So I can’t put a number to that but one looks at the ratings from last week, for instance, and see that ABC has five scripted shows in the top 20 in terms of viewers in 18-49 and I’m thinking of Lost and Desperate Housewives and Gray’s Anatomy and Brothers and Sisters to name four to the extent those shows are now back in original shape and are generating higher ratings. Respectively the stations can package an expected rating point delivery there and use it very effectively. So the strike was having some effect although I am unable to quantify that.

Harry Hawks

As we look at our relative day part performance, as we point out in the press release, we have had some almost spectacular performance with our news and local programming but the primetime indeed ratings were under pressure. Looking at it from an inventory utilization and rate realization point of view the same comment would extend there. More difficulty and more challenge in the primetime line up than other day parts. So we did indeed have some challenge there. But to sort of separate that from the larger economic issues is difficult for us to do but it certainly contributed.

David Barrett

Kathleen Keefe, our Vice President of Sales, is sitting next to me and she handed me a note and reminded me that the Academy Awards which was of course on ABC and affected 13 of our stations was an event that didn’t generate the kind of revenue this year that it had in the past and the kind of revenue we otherwise would have expected because of the uncertainty of the strike leading up to the Academy Awards. So the margins had some impact at our ABC stations.

Marci Ryvicker – Wachovia Securities

Do you know how much revenue was lost? Can you disclose that?

David Barrett

No.

Marci Ryvicker – Wachovia Securities

What about the digital transition?

David Barrett

I think our stations are in good shape but notably we have launched HD local news in our largest markets. We have talked about that in the past. The networks are providing a pretty full menu of High Definition programming for us and we are beginning to see the vindicators now make commitments to go to Hi Def. So I think there is good momentum on that side of things. I think the industry and our company is well prepared for the digital transition. We are doing a lot of work and devoting a lot of air time to consumer education messages on television and we’re working with our local cable companies to be sure the market places are well prepared on this front.

I think in the normal course of business it is a little frightening to think of February 18, 2009, but I think our preparedness is good.

Operator

Your next question comes from James Gross - Barrington Research.

James Gross – Barrington Research

In prior years your tax rates do seem to bounce around a bit by quarter. Is there any way to gauge any pattern for us to look at as we go through quarterly estimates? Second, is the retransmission revenue, the $6.3 million, a decent run rate for this year before you start going into new contracts?

Finally, with regard to wireless, I’m curious if your thoughts of the ultimate performance of mobile platform applications recognizing Silver early on. But it seems like the news, talk, sports, weather-type content you create locally lends itself very well to that sort of thing. I’m wondering if you see it that way and do you need a separate or loosely linked brand identity sort of like Metro Mix to appeal to younger users who might not be as engaged with the local stations?

Harry Hawks

One of the things that is challenging and frustrating as many in the accounting community thought that FIN 48 would help clarify tax liability for corporate America and I think it has done the exact opposite. It has made it very confusing because you get this very, very dramatic volatility quarter-to-quarter. So we feel your pain. We apologize. We’re sorry about it.

There is almost nothing we can do about it, however. As it relates to this year I would say that a provision, and by the way I am unable to be precise here but I can put you in the zone, my guess is that for this year the first half of the year will be in the high 20’s as a provision rate and will be in the low 30’s in the third quarter and the high 30’s in the fourth quarter with a full-year provision coming out around 34%.

That is a different level, if you will, of apportionment quarter-to-quarter than last year because of different things going on that you have to give effect to at the time that you know about them. That’s about as best I can do on that. Sorry I can’t do any better.

David Barrett

On retrans my answer would be yes that is a reasonable run rate to use for 2008. We have previously said that several of our larger deals come into play in the fourth quarter of 2008. So whatever benefit there may be from those negotiations will spill into years 2009 and 2010.

In terms of wireless, we have a lot of interest and I’d say enthusiasm for the wireless opportunity and the ability to use content we have and distribute it on various mobile platforms and mobile devices. My view is there is close to 300 million television screens in this country and on the not too distant horizon there may be another 300 million plus mobile devices that ultimately will have chip technology in them which gives them the ability to receive television-like content on a mobile device. So the notion of doubling the number of screens out there suggests opportunity for us.

I think you are very correct that the kind of content that we have that I will say is hyper-local content engagement with our communities that manifests itself on content that shows up on our television news products are the same kinds of content components that will be useful on the mobile platform as well.

Today we’ve got 16 or 17 of our stations are using the [Whack] protocol to put some of their content on mobile phones. On my Blackberry device I have got all of our stations book marked and I can go look at Doppler radar in Orlando or Sacramento, etc. So we are making some progress there and I think we mentioned in our release what some of the statistics are for some of our mobile services, which are significant.

In terms of the brand identity question it is our belief, but it is under constant discussion and we do a lot of constant research on this, is that the brand equity that we have in our station names, call letters and local positions is the best brand identity to use on the mobile side.

We really don’t see the need to change what our brand identity is for the mobile platform and if I go back a few years some of our stations when they launched websites elected to use a different name and different marketing brand for their websites. In several cases they have retreated back, that is probably the wrong word to use, but they have gone back to the principal station brand.

Now that doesn’t preclude us from launching new websites that accomplish a different purpose than our station websites and I think that is certainly in our mix as well and there are examples of some of the things we have done last year, the beta work we did on High School Play Book was one such new brand content creation that also had some application on mobile distribution platform as well.

Operator

Your last question comes from John [Cornwright] - Sandler Capital.