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A. H. Belo Corporation (NYSE:AHC)

Q2 2008 Earnings Call Transcript

July 28, 2008 2:00 pm ET

Executives

Maribel Correa – Director, IR, Communications and Financial Planning and Analysis

Robert Decherd – Chairman, President and CEO

Ali Engel – SVP, CFO and Treasurer

Jim Moroney – EVP, A. H. Belo Corporation; Publisher and CEO, The Dallas Morning News

Analysts

Peter Appert – Goldman Sachs

David Cohen – Athena Capital Management

Barry Lucas – Gabelli & Company

Operator

Ladies and gentlemen, thank you for standing by. AH Belo Corporation welcomes you to the second quarter financial results conference call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session. The instructions will be given at that time. (Operator instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Ms. Maribel Correa, Director Investor Relations. Please go ahead.

Maribel Correa

Thank you, Lorrie. Good afternoon and thank you for joining AHC's second quarter conference call. We issued a press release today announcing the company's second quarter 2008 financial results. This release has been posted on our Web site at ahbelo.com. A letter to shareholders and a letter to colleagues were sent today by Robert Decherd and can be accessed at ahbelo.com/invest.

Please note that Briefing, a new product to be published by the Dallas Morning News, will be launched on August 27, rather than August 22. Robert Decherd, our Chief Executive Officer; and Ali Engel, our Chief Financial Officer, will lead today's call. Executive Vice President, Jim Moroney; and Skip Cass are available for Q&A.

Before we begin, let me note that our discussion will include forward looking statements. Forward looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements. Additional information about these factors is detailed in the company's press release and publicly available filings with the SEC. Also we'll mention non-GAAP financial measures during this conference call. A.H. management believes that non-GAAP financial measures provide useful supplemental information to assist in determining performance comparisons to our peers. Reconciliations to the most directly comparable financial measures presented in accordance with GAAP are provided on our Web site at ahbelo.com under the Investor Relations section.

I would like to now introduce Robert Decherd.

Robert Decherd

Thank you, Maribel, and good afternoon everyone. A.H. Belo Corporation continues to make progress in evolving its business model and executing related strategies. For example, next month, we'll launch Briefing, a new product published by the Dallas Morning News that builds on AHC's strength of providing local news and information while leveraging existing news resources and assets. This niche product responds to the untapped needs of a younger demographic seeking a condensed print news format.

We used results from the Morning News' customer value management system along with advertiser input to create Briefing. As a result of this collaboration, Briefing has already closed more than a dozen multi week commitments from a diverse group of advertisers including some high profile retailers.

A.H. Belo's commitment to superior journalism while meeting changing consumer media habits is highlighted by dallasnews.com being recognized by the Radio-Television News Directors Association, with the 2008 National Edward R. Murrow award for best Web site non-broadcast affiliated. This accomplishment was made possible because of the morning news' ability to provide robust content drilled down to the community level and by aggressive use of locally shot and edited video.

Summarizing the comments of one Murrow award judge, "The depth of content and obvious connection to the communities it serves makes dallasnews.com valuable to its users."

AHC also continues to build partnerships that broaden and further diversify its revenue streams. The company recently entered into a multiyear agreement to resell ResponseLogix's Internet based lead management system to automotive advertisers, and we made a minority investment in ResponseLogix's Inc. The ResponseLogix technology allows AHC to provide meaningful solution to our automotive advertisers. This strategic investment can also provide financial opportunity to A. H. Belo as ResponseLogix grows.

While these and other initiatives broaden AHC's reach going forward, today we and all newspaper companies are encountering unprecedented cyclical and secular pressures. This macro economic and industry conditions are unlikely to improve substantially in the near term which make it necessary to realign AHC's expense structure to match revenue patterns.

I sent a letter today to AHC shareholders discussing current operating conditions and the restructuring of the company's newspaper operations. The restructuring further focuses AHC's newspapers while accelerating the allocation of resources to promising new products both in print and online. These initiatives are being undertaken after careful consideration of the positive impact on advertisers, consumers, our brand equity, and AHC's long term revenue generation strategy.

The Board of Directors and management committee, along with AHC's entire senior management team, believe that with these changes we're creating the solid foundation essential to A.H. Belo's future success. We have diverse markets, extensive local and national advertiser relationships and talented leaders and employees who will be even more focused on local content creation and sales.

As mentioned in my letter to shareholders, we plan to eliminate $50 million of ongoing costs by the end of the first quarter of 2009 exclusive of newsprint price fluctuations, while at the same time investing in revenue generating initiatives. Specific cost reductions include reducing operating unit FTEs by approximately 500 employees or 14% from July 2008 levels. This reduction is in addition to the approximately 170 FTEs already eliminated this year through attrition and disciplined hiring practices.

The FTE reduction will be achieved by a voluntary severance offer and if necessary a subsequent involuntary reduction in force. A onetime severance charge will be recorded in the third quarter. The amount will depend on the length of service and the salary distribution of the employees who accept the voluntary severance offer or who are part of a subsequent reduction in force. Approximately 25% of the resultant savings will be realized in the fourth quarter and the full savings will be realized in 2009. In addition, web widths at The Providence Journal and the Press Enterprise will be reduced to 46 inches rather than 48 inches.

Overall, marketing and promotion expense, travel and other discretionary expense will continue to be reduced significantly. On the revenue side, we are working to equip AHC sales forces to be even more effective local and regional selling organizations. With continued investment in sales training and increasing emphases on vertical categories that cut across both print and online products and provide sales opportunities for both advertising and marketing services to A. H. Belo's business costumers.

Circulation price increases instituted at all three AHC newspapers this year have met or exceeded our revenue targets, while causing circulation decline at expected levels or better. The net impact of these circulation pricing actions will be approximately $5 million in incremental revenue in 2009, beyond the favorable impact of these actions in 2008.

The Providence Journal recently added the Wall Street Journal to its current group of contracts to print and or distribute other publications. Company-wide, such contracts add incremental revenue and further diversify AHC's revenue streams. This year, print and/or distribution contracts will produce at least $4 million in incremental revenue. Another $1.5 million in incremental revenue will be realized in 2009.

In addition, we are evaluating AHC net core assets, capital spending levels, dividend policy, and uses of investment capital. One immediate goal is to determine what real estate owned by AHC and its operating companies can be monetized without adversely affecting ongoing operations. Our internal estimate is that property owned outright by AHC in Providence and property owned jointly with Belo Corp in downtown Dallas could produce pretax proceeds of about $35 million for AHC.

It is difficult to put any timeframe on real estate transactions, but we do not expect to complete any significant sales before mid 2009. The management committee continues to review capital spending. We believe we can reduce capital spending by at least 10% this year, holding spending to approximately $20 million in each of 2008 and 2009. Dividends represent a significant use of cash and the Board will set 2009 dividend policy at its regular September meeting. The current dividend yield is unrealistically high and obviously cannot be sustained at this level over time.

Turning to second quarter results, AHC had $10 million in consolidated EBITDA. Top line conditions in the second quarter were very soft. The Dallas Morning News' revenue performance was in line with its peer group in the second quarter unlike the first quarter when the Morning News outperformed its peer group. Partly due to very weak economic conditions in Riverside, AHC's retail revenue for the second quarter declined 15% and classified revenue exclusive of Internet revenue declined 38%.

Certain niche products and other businesses continued to perform better than AHC's core products. AHC's distinguished newspapers continued to attract large audiences. Most recent readership data shows that total readership grew 1.9% versus the same period last year. And AHC's content creating capabilities were recognized again in the second quarter, including the Metcalf Award for Diversity in Media won by The Providence Journal and Rhode Island Monthly, a 2008 EPpy Award finalist for the Press Enterprise for best community Web site with fewer than 1 million unique monthly visitors.

For the second consecutive year, I'll be at aldiatx.com was a finalist for an EPpy Award in the category of best news Web site in Spanish. The Dallas Morning News was recognized by the International News Media Marketing Association winning first place over peers like The New York Times for its online audience and engagement around high school GameTime.com's initial campaign, and The Morning News also won the Harry Chapin Media Award in Photojournalism for The Bottom Line.

Turning to online, ad revenue contributed – online ad revenue contributed over $12 million in the second quarter of 2008 or 7.4% of AHC's total revenue. Internet ad revenue, exclusive of classified revenue, was flat over the prior year. The best performing non-classified revenue category was National, which increased 13%. For the second consecutive quarter, we experienced growth in Internet auto revenue increasing 18%. This increase, however, was more than offset by declines in employment and real estate. The Other category in Internet revenue grew 22% in the second quarter.

Online usage continues to be strong. We had increases of 88% in unique users and 17% in page views on AHC's Web site in the second quarter. Time spent on AHC Web sites increased by 13% versus the same period last year and we had 1.2 million video streams in the second quarter, a 103% increase over the prior year. AHCs partnership with Yahoo produced over $2.5 million through the HotJobs platform, a 125% increase over the same period last year.

We have been pleased with how well some of our locally produced stories are headlined and distributed on Yahoo Top Features, and our content-creating capabilities make it possible to get that exposure and in turn add traffic to our sites.

Ali is going to provide some more detail about our second quarter financial results now. Then we'll be happy to take your questions, Ali?

Ali Engel

Thank you, Robert. AHC reported second quarter revenues of $163 million and a net loss of $3.2 million or $0.16 per share for the second quarter of 2008. Earnings per share results included an $800,000 tax benefit.

Total advertising revenue decreased 21% in the second quarter of 2008, with classified and national print revenues decreasing most significantly. Classified revenues decreased 38% versus the second quarter of 2007. Classified revenue at The Dallas Morning News was driven mostly by declines in employment. The largest classified revenue declines at The Press Enterprise and The Providence Journal were in real estate. National print revenue decreased 30% over the prior year with the steepest decline at The Dallas Morning News.

On a positive note, part-run revenue increased 3.3% in the second quarter, and circulation and other revenues were up 8.5% and 14% respectively. Total newspaper group expenses decreased 3.9% in the second quarter. Year-to-date, this equates to a reduction of $11 million.

Improvements in second quarter newspaper expense were driven by lower direct compensation and other benefits. Expense decreases in newsprint of $1.9 million, computer-related activities of $1.4 million, and communications of $900,000 further contributed to overall expense reduction.

For the second quarter of 2008, aggregate newspaper EBITDA was $19 million and the newspaper EBITDA margin was 12%, an improvement of almost 3 percentage points over the first quarter. EBITDA margin performance in the second quarter was the highest at The Providence Journal followed by The Dallas Morning News.

Corporate and non-operating company expenses declined more than $4 million versus the same period last year. Because of AHC's spinoff in February of 2008, the full year 2007 corporate expenses are based on allocated amounts.

Turning to the balance sheet, total assets were $607 million and for the second consecutive quarter, AHC has zero long term debt. The company did not repurchase any shares during the second quarter. Capital expenditures where $4 million for the quarter.

Operator, I believe we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions) We have a question from the line of Peter Appert with Goldman Sachs. Please go ahead.

Peter Appert – Goldman Sachs

Thanks. Robert, this is the impossible question, but I'm required to ask you, and that is, how do you maintain editorial relevance and quality as you are doing such dramatic cuts in staff?

Robert Decherd

Peter, part of the method is to focus the product itself on the categories of news coverage and investigative reporting, editorial comment, and the entire gamut that we know is most meaningful to local audiences and the media usage environment that’s developed. We believe we can do this over periods the next several months. Clearly, there are some products and sections that are going to have to be fairly substantially re-geared, but the thought process behind that is well under way and we are just convinced we can put this together in a way that keeps our products more than relevant, actually essential to the local news and information needs of these communities. We have managed this process I think pretty ably over the last several years and we will still have a very large news gathering capability at The Dallas Morning News especially.

Peter Evert – Goldman Sachs

Do you know roughly what portion of the staff reduction, the 500, would be editorial versus other areas?

Robert Decherd

Not at this time, because the offer is being made to a substantial number of employees at each of the three newspapers. It varies, Peter, depending upon the newspaper and its specific circumstances. But, you could see some pretty large numbers coming out of non-news areas in some instances. And in others, it’s just hard to predict who is going to take the voluntary severance offer. But we believe we can keep that very well balanced and at the end of the day, we are still going to have a news department at The Dallas Morning News with 350 professionals and around 200 in both Providence and Riverside.

Peter Evert – Goldman Sachs

Fair enough. And then, on the dividend front, Robert, do you have a thought in terms of what you think an appropriate payout ratio is, or a comfort level would be for management in terms of payout ratio?

Robert Decherd

Peter, that discussion is just not far enough along with the Board. We, as you know, had a clear idea or a concept in announcing the spin as to how the dividend paid to pre-spin shareholders of Belo Corp would be divided between the two companies, given how significantly revenues have declined on the AHC side. We need to model that and lay it against our best thinking about the reminder of this year and through 2009, which we'll discuss with the Board in September.

Peter Evert – Goldman Sachs

And then just one last thing, any flavor for how the third quarter is starting, any meaningful difference in July versus what you saw in the second quarter?

Robert Decherd

Well, of course, we don’t give guidance in that regard but I think that the comment I made about – in my prepared remarks about no likelihood of a change in these revenue patterns and the immediate term is the way to think of it.

Peter Evert – Goldman Sachs

Okay, got it. Okay thanks, Robert.

Operator

(Operator instructions) Our next question from the line of David Cohen with Athena Capital Management. Please go ahead.

David Cohen – Athena Capital Management

Good afternoon, Robert.

Robert Decherd

Hi, David.

David Cohen – Athena Capital Management

Hi. In terms of the CapEx figure, I see you've sort of tightened the screws a little bit in terms of what the 2008 number is going to be and what the 2009 number is likely to look like. After that, assuming that we are still in relatively tough circumstances in terms of the business conditions, should we expect that number to decline as we get through the sort of necessary investment programs, or are there other programs that you think also need to be pursued after 2009 that will keep that above a sort of a classic maintenance number?

Robert Decherd

David, the way to think of it is, unless something comes along that has a relationship to generating incremental revenue or increasing revenue streams from our current revenue sources, you could model that down after the integrated advertising system is in. Because that together with the reduction in web width projects, which as I noted in my letter, has a pretty fast turn in terms of ROI. Those are the big ones. And beyond that, I think it really is all about technology platforms and what we need to grow the business.

David Cohen – Athena Capital Management

And could you, from the way things look now, what would you suggest that we use as the sort of baseline maintenance number, given current conditions?

Robert Decherd

I think we should probably defer that until little later in the year. We are in the middle of that process as I indicated in the letter to shareholders and I don’t want to get ahead of it. But we are definitely looking at it through 2010. It’s not just an '08/'09 process at this point. We need to get all of our team involved. Our normal capital planning cycle is just getting underway. And so, we will be able to be better informed as a result of that and I think be able to give you a look at that a little later in the year.

David Cohen – Athena Capital Management

Fair enough. And then on the real estate monetization effort, the Providence piece of it, I certainly understand. The Dallas piece of it, obviously, we’re in a partnership with another company that you have more than passing knowledge of. I'm wondering how we deal with the fact that the partners in the Dallas Real Estate might be working across purposes in terms of what they want to accomplish with their holdings.

Robert Decherd

Well, from my standpoint, I can tell you that we are exactly aligned on purposes. The focus of Belo Corp, as you no doubt know, and was I think reiterated in the conference call that Dunia held on Friday, is to manage the balance sheet and keep their various ratios headed in the right direction. So, they are very supportive of this process. She and I have talked about it on numerous occasions, and our colleague Dan Blizzard, who is going to run the process from the AHC side, is essentially acting for both companies.

David Cohen – Athena Capital Management

Okay. All right, I think that does it for me. Thank you, Robert.

Robert

Good David, thank you.

Operator

(Operator instructions) We have a question from the line of Barry Lucas with Gabelli & Company. Please go ahead.

Barry Lucas – Gabelli & Company

Thank you. Good afternoon, Robert.

Robert Decherd

Hi Barry.

Barry Lucas – Gabelli & Company

You were kind enough to provide some sequential numbers for The Press Enterprise which shows a slight improvement. Could you be good enough to tell us what happened in Providence and Dallas from 1Q to 2Q?

Robert Decherd

Providence is tracking at about the same rate it has been. The big change is in Dallas, and Jim can speak to this more specifically. We really did a lot better than our peers in the first quarter and I’m sorry to say, we joined the pack in the second quarter. It may be that some things that we were able to push off in Dallas just finally cycled around. In fact, that’s likely and I think most of that had to do with the overall economy, Barry, starting to deteriorate at a market rate into the first quarter and through to the second quarter, and I think Dallas was more insulated. As a result, we have had a better experience here compared to some other markets that obviously have had a lot of macroeconomic challenges in addition to the secular issues that newspapers are facing. I think they caught up with the North Texas economy too a little bit in terms of people’s attitude about spending and advertisers’ view of how to deal with the economic conditions that became more pronounced in the second quarter. Jim, you want to add to that?

Jim Moroney

I think that's really it, Barry. Dallas has just come to the party a little bit later than many of the other major metros in the country. But still Dallas has not had the kinds of declines that you've seen on the East and West Coast, but it's not immune from it either. We have seen more pullback in the real estate spending particularly. And then employment, we had a very significant onetime revenue event in Q2 of last year with a lot of I9 employment advertising that was millions of dollars that did not repeat. It was a statutory kind of spending and that, in some ways, has made this quarter’s employment look worse than it really is on an underlying basis. But I think pretty much, Robert is on the mark. It’s just a little later coming to the party in Dallas and we benefited from that, and now we caught up.

Barry Lucas – Gabelli & Company

Thank you. Just maybe a quick comment, other than people, other areas to reduce cost that you’re looking at additional outsourcing, or I'm sure everything is on the table, but anything you can identify specifically?

Robert Decherd

Barry, we are truly looking at everything that moves and I don't think there are any really significant opportunities. We continue to be pleased with the progress Jim and his team and the other publishers in Providence and Riverside have made with these print and distribution contracts. But that's not the game. We have got to get the revenue piece stable and moving in the right direction, which is why Skip Cass’ work is so important. That's why I noted the ResponseLogix, both the use of that tool and the investment in the opening comments. Those things in the aggregate will ultimately make a significant positive impact. And while we are looking at everything from an expense reduction and outsourcing standpoint, I think we are intentionally taking a very aggressive approach in this pass to try to get ahead of the curve and then get focused on the revenue side. We don’t want to be doing this two and three and four times, and that’s to Peter Evert's question. That's one reason we've gone as hard at this as we can. We want to get ahead of the curve and we believe with these actions, we can.

Barry Lucas – Gabelli & Company

Thank you.

Operator

And we have no further questions at this time, so speakers please continue.

Robert Decherd

Okay. Operator, thank you very much. Thanks to everyone for joining in. We have a lot of work to do and we are hard at it. So we look forward to speaking to you in our next conference call and certainly by year-end, have hopefully a clearer picture of ‘09. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes our conference call for today. We thank you for your participation and for using AT&T's executive teleconference service. And you many now disconnect.

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