Dean Nelson – Chairman and Interim Chief Executive Officer
Kim Payne - Chief Financial Officer and Senior Vice President
Kate Messmer - Investor Relations, ICR Inc.
David Clark - Deutsche Bank
PRIMEDIA Inc. (PRM) Q1 2008 Earnings Call May 8, 2008 10:00 AM ET
Welcome to the PRIMEDIA Inc. first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Kate Messmer with ICR.
Good morning and welcome to PRIMEDIA’s first quarter conference call. I am pleased to be joined by Dean Nelson, our Chairman and Interim CEO; as well as Kim Payne, our CFO, along with other members of senior management.
As always, we refer you to the section of our earnings release entitled Forward-Looking Statements for important factors that apply to and qualify any forward-looking statements made on this conference call.
Also a reminder that any non-GAAP terms mentioned on this call are reconciled to GAAP in the earnings release. Let me now turn the call over to the Chairman and Interim CEO of PRIMEDIA, Dean Nelson.
Good morning, everyone, and thank you for joining us on today’s call. Today I’ll be providing you with an overview of PRIMEDIA’s first quarter 2008 operating results. Kim Payne, our Chief Financial Officer, will then provide a more detailed discussion of our financial performance for the quarter, and then we’ll open the line for questions.
I would first like to address the announcement that we made on April 22 regarding the appointment of Charles Stubbs as PRIMEDIA’s new CEO. On behalf of the Board I would like to thank Bob Metz for his years of hard work and leadership.
With its foundation and reputation as a category leader secured, this company is well-positioned to pass on the leadership reins and embark on a new chapter of growth.
We believe Charles is the right person to lead the business going forward, from serving as President and CEO of Yellowpages.com, as well as his past experience with BellSouth and InfoSpace, Charles deeply understands the symbiotic relationship between print and online advertising.
He has a great track record of success and innovation, most recently at Yellowpages.com, where he created a significant Internet presence and integrated this with their strong traditional media offering.
This management decision was not based on PRIMEDIA’s recent results but rather about its future. The Board believes that Charles’ experience, knowledge and leadership capabilities will help PRIMEDIA take advantage of the significant opportunities Internet holds for our business, as we look to extend the value of our rich print legacy through new media.
Our goal is to strengthen our position as the premier print and online resource to advertise apartments, rentals and new homes by launching new products and improving those we currently offer. We believe this will leave our company well-positioned to generate significant revenue and EBITDA growth in the coming years. Charles joins the company on May 27.
Moving on to our first quarter results, our overall business remains steady. We were pleased to see our largest business, Apartment Guide and ApartmentGuide.com, generate year-over-year revenue growth for the third quarter in a row.
As we anticipated, our New Homes business and some of our DistribuTech customers continue to be impacted by the challenging environment and ongoing pressures in the residential housing industry.
In light of these headwinds, we’re focused on rationalizing our cost structure to reduce the expenses we can control including some selling, marketing, and general and administrative expenses.
I’ll now review each of our operations starting with our largest division, Apartments. Apartments, including Rentals.com, posted a 2.5% year-over-year increase in revenue in the first quarter as our Apartment Guide and ApartmentGuide.com business continues to gain momentum.
This quarter’s growth was primarily due to an increase in our large client business and the continued success of our program to help our clients better track online and offline leads.
This program provides advertisers with the ability to identify the number of leads generated by each of their advertising investments on an unbiased fact-based basis.
This data continues to show that Apartment Guide generates the most leads both in print and online. This is often the first time that an individual advertiser has had access to this data and not surprisingly our strong performance strengthens our relationship with the advertiser.
It is important for us to continue to increase our efforts on both expanding our national account relationships and rolling out these tracking tools.
Revenue at Rentals.com fell by 2.8% as this business was in a transitional period with Jamie Clymer, the new head of Rentals.com, only taking this position this quarter.
Jamie’s previous online experience has allowed him to hit the ground running. He has provided considerable focus to the business; introduced better metrics and processes to drive both product development and new client acquisition; and is in the process of filling key management positions with experienced Internet professionals. We continue to be optimistic about Rentals medium and long-term prospects.
As we expected in New Homes, we experienced increased pressure on our revenue, due to the ongoing challenges for home builders, which intensified in the first quarter and continued to spread to additional markets.
Total revenue declined by 6.6%, which was driven by an 11.1% decline in our advertising revenue for markets that have been in operation for more than one year. This decline varied across the country depending upon local real estate market conditions, with more than 40% of these markets actually experiencing revenue growth in the first quarter.
We are aggressively managing each local market’s expenses based on the underlying business conditions in that market by adjusting the number of sales people deployed and the number of books distributed.
We are generally satisfied with our revenue performance in New Homes given the extremely high decline in new home sales. We think the fact that these declines are manageable in the face of such major headwinds reflects a growing realization by our advertisers that our guides represent the most cost effective advertising vehicle available in the market.
As the industry stabilizes and ultimately starts to grow again, we expect to see solid growth in this business in three areas. The first is organic growth in our existing publications. The second is the expansion into new geographic markets, and the third is launching complementary products into our existing markets as we have done in Charlotte with the Professional New Home Guide.
Moving on to our DistribuTech business, revenue was up 1.1%. However, it decelerated versus the fourth quarter of 2007 as we anticipated, due to the ongoing impact of customers who publish in the resale homes sector cutting back or closing operations.
We continue to pursue new categories of DistribuTech customers to diversify our client base and we began the rollout of Yellow Book to our distribution locations in the first quarter.
We believe that regional and national businesses such as Yellow Book represent a growth opportunity for DistribuTech, as rising print and distribution costs make less targeted advertising vehicles, such as direct mail and newspaper inserts, less financially attractive to advertisers.
Regarding our Auto Guide business, we are still pursing a sale of this business and have several interested buyers but no pending sales transactions at this point. As we have previously communicated, whether this business is sold or ultimately shut down, we do not expect the exit from this segment to meaningfully impact the financial position of the company.
Looking forward, we are pleased to see steady improvement in our Apartment Guide business and we will remain focused on our priorities for 2008, including driving traffic and leads for our online advertisers, increasing market share in each of our categories, and controlling our costs.
We’re excited about what the future can hold for a consumer source. Our leadership in both print and online provide us with opportunities not available to most of our competitors.
Many of these opportunities, especially in online and the emerging mobile market, have not historically been pursued aggressively by our company. Most of these opportunities have been exploited successfully in analogous businesses and, with some adaptation, should work well in our end markets.
We are bringing in a talented CEO who has successfully led this transition in a comparable business. We have great confidence that he will extend our leadership position. We will pursue these opportunities while continuing to recognize the critical role that print plays for our consumers and advertisers both today and in the future.
Let me now pass the call to Kim.
Thanks, Dean. I wanted to start out with some of our P&L highlights. Our first quarter revenue increased 0.8% to $77.5 million compared to $76.9 million for the same quarter last year, reflecting growth in Apartment Guide and DistribuTech.
However, due to the various conditions that Dean reviewed earlier, momentum slowed as we expected at Rentals.com and New Homes. First, Apartment Guide grew revenue by 2.8% year-over-year due to steady increases over the past few quarters driven by continued progress selling ApartmentGuide.com premium online product upgrades and our integrated print and online products.
Next, New Homes experienced a revenue decline of 6.6% as a result of the ongoing challenges for home builders which intensified in the first quarter and continued to spread to additional markets due primarily to ongoing weakness in premium integrated print and online advertising.
This resulted in a sequential quarterly revenue decline of 7.5%. DistribuTech revenue increased 1.1% year-over-year in the first quarter of 2008 due to the addition of retail locations that we added since the first quarter of last year. This was partially offset by continued out-of-business activity which also resulted in a sequential quarterly revenue decline of 4.4%.
Total adjusted EBITDA declined 9.4% in the first quarter to $12.9 million compared to $14.2 million for the same quarter last year. The decline in EBITDA was primarily driven by incremental legal fees and expenses of $1.3 million.
Note that while we may incur additional legal costs over the next quarter or two related to a lawsuit we will have, we expect insurance recoveries for the same matter to offset most of these costs.
Additionally, EBITDA was impacted by higher distribution costs given DistribuTech’s network expansion in 2007 and an increase in bad debt expense related to the out-of-business activity in DistribuTech and New Homes.
While our bad-debt expense grew versus the prior year, we remain comfortable with our receivables as we collected 99% in the first quarter of 2008, compared to 102% in the first quarter last year.
These items were partially offset by the growth we experienced in our overall revenues, as well as a reduction in head count and professional fees related to our headquarters transition.
Moving on, through the first quarter the strength of our balance sheet continued to improve. As of March 31, our net debt was $244.9 million. Our leverage ratio of net-debt to reported EBITDA was 4.3 times, which was well within our bank credit facilities agreement with a maximum allowable total-leverage ratio of 5.25 times.
As indicated previously, we called in April the 8% notes of which approximately $2.6 million are outstanding, and we expect to redeem them in mid-May.
During the quarter, free cash flow, which includes our discontinued operations until they are sold or shut down, was negative $19.6 million compared to negative $2.4 million in the first quarter of 2007.
This decline was primarily due to the absence of $23.7 million of cash flow from businesses divested after the first quarter of last year in addition to post-Enthusiast Media fill obligations of $14.4 million, partially offset by lower capital expenditures and debt service, as well as working capital improvements that totaled approximately $20.9 million.
Ongoing consumer source working capital requirements and capital expenditures remained relatively consistent year-over-year. This business usually experiences a use-of-working capital in the first quarter of the year, primarily due to retail distribution expense prepayments that hit in the first quarter.
Historically, consumer source cash flow has strengthened as we progressed throughout the year, and we expect this trend to continue in 2008 and generate strong cash flow for the full year. As we announced this morning, our Board of Directors declared our second quarterly dividend of $0.07 per share.
I would also now like to comment briefly on what we are currently seeing in our business to-date in 2008. On a high level, we are experiencing similar trends in the second quarter of 2008 compared to the first quarter in Apartment.
Our New Homes business is still under pressure as trends in the housing sector continue to deteriorate. Out-of-business activity continues to impact our DistribuTech operations, but we are seeing early signs of improvement in this business. Now I will get into a more detailed discussion of each business.
The Apartment Guide division remains stable and continues to exhibit steady growth. Occupancy rates have moved to more normalized levels, in the low to mid-90s in most of our markets, which is optimal for our company as this typically increases the demand for advertising.
However, construction levels remain at low levels and our industry sources lead us to believe that there is not likely to be meaningful growth in the apartment inventory in 2008 which may impact occupancy levels.
As Dean indicated, Rentals.com has been in a transitional period with new leadership coming on board in the first quarter. While the new team is still in the process of implementing changes to this business, we are seeing a positive impact on revenue growth leading to sequential gains in recent months.
We continue to believe that 2008 will be the most difficult for our New Homes business, where we have seen industry indicators such as housing prices, inventory and sales levels continue to deteriorate and cause the softness we are experiencing to spread to additional markets.
While we continue to have limited visibility into housing industry trends, we are making adjustments to our expense structure to operate as efficiently as possible. This may include suspending additional New Home publications, head count reductions, paper and printing changes, or eliminating some distribution if conditions continue to worsen.
At the same time we are also focused on strengthening our client relationships to take full advantage of our opportunities when the sector improves.
In DistribuTech, we expect to see an ongoing revenue impact from our customers primarily publishing within the resale home sector, cutting back or shutting down operations. However, we are continuing to sell space on our racks and are experiencing early indications that trends at DistribuTech are starting to improve as we fill these empty slots.
As we’ve previously communicated, we also expect to roll out our national Yellow Book deal throughout the year. We continue to pursue new customers to diversify our client base, as well as optimize our network by eliminating points of distribution that are not as effective for our publications.
Finally, regarding corporate overhead. We provided some more detail in the release to make it clear how our expense structure is changing. Starting with this quarter we have combined the expense line items that we reported previously of Other General Expenses and Corporate Administrative Expenses into one General and Administrative Expenses line.
We continue to expect to complete our headquarters transition by the end of the second quarter and move to a corporate overhead expense run rate of approximately $12 million versus $29 million in 2007.
Our comparable corporate overhead expenses were $2.1 million in the first quarter, and we continue to add to our team and resources in Atlanta as we progress towards an annual run rate of about $12 million.
Our General and Administrative Expenses, which include corporate overhead, increased slightly from $14 million to $14.5 million in the first quarter. This was primarily driven by $3.5 million in transition costs and $1.3 million of fees and expenses related to a lawsuit, both of which were partially offset by a $4.6 million reduction in corporate overhead.
We expect to have approximately $1.5 million of transition costs still running through our income statement in the second quarter as we complete the transition.
In summary, our business remains on track with where we expected it to be at this point in 2008. With that, I’d like to now open the line for questions.
Our first question comes from the line of Paul Ginocchio - Deutsche Bank.
David Clark - Deutsche Bank
Good morning. This is actually David Clark for Paul. First, I was wondering if you could talk a bit about the potential sale of Landmark’s Apartment Guide business. Specifically I’m wondering if eBay or Classified Ventures were to acquire that business, what you think it would do to your competitive position.
And would it be enough of a concern that KKR might step in to ensure PRIMEDIA’s market position isn’t compromised?
I think that’s a fair question. One of the things to realize of course is, eBay already owns a business in this sector, which is Rent.com, which since they bought it, is a good competitor but still not a large competitor.
I think at the end of the day, the success in this business is driven by a couple of primary things. One is your local market presence and execution on the sales front and the quality of your product, which is a combination of your print product’s distribution and your online position.
I’m not sure at the end of the day, therefore, we would just compete more aggressively against either of those two companies, both of which are already in the apartment business. And I think we would continue to win and succeed.
I can’t comment on what KKR is or isn’t planning to do. I think it would be very unusual for KKR to own both Dominion and obviously PRIMEDIA. And right now we think we have a terrific portfolio of assets. Charles is very excited about them and we think we can control our own destiny perfectly fine.
David Clark - Deutsche Bank
Okay. Thanks for that color. And then also, so the Rentals.com declined, I think revenue declined about 3% year-over-year and you mentioned it was due to execution issues and the transition period to new management there.
Could you give us a bit more color on what those issues were? And I know you can’t give me outlook on this but what you might expect from that unit going forward, meaningful, positive growth in 2008, for example?
I think the transition really was an issue that started obviously towards the latter part of last year when we became uncomfortable with the existing management. A change was made and there was a period of time where obviously we were a little short of management in that division.
And since we’ve been lucky enough to get Jamie on board we are actually seeing month-over-month gains in revenue. The execution issues were primarily driven by sales force execution. And realize, this business can go through greater peaks and valleys than our regular business because these are mostly one-month transactions as opposed to year long contracts.
The two things that Jamie’s really focused on, one is, how do we improve the site to make it easier for advertisers to post their ads and for consumers to find the information they want. As part of that, how do we increase our SEO to get up there high in the rankings.
The second one is, he’s really instituted a much more structured, logical, thoughtful sales force management and tracking process to ensure that our sales people are successful in converting leads.
He’s only been on board since I think about the end of January and we’re already seeing the benefits of his work so we would expect this business to grow on an ongoing basis. I think I would leave it up to Charles to assess exactly what that growth rate’s going to be, but we’re still very optimistic.
David Clark - Deutsche Bank
Okay. Great. Thank you, very much.
Ladies and gentlemen, that will conclude our question and answer session at this time. I will turn the conference back over to management for closing remarks.
Thank you, everyone for joining us today on the call and we look forward to speaking to you about our second quarter results and having Charles on board. Thanks.
Ladies and gentlemen, that does conclude our conference for today. We would like to thank you for your participation. Have a pleasant day.
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