PRIMEDIA Inc. Q2 2008 Earnings Call Transcript

Executives

Kate Messmer – ICR, LLC

Dean Nelson – Chairman

Charles Stubbs – President, Chief Executive Officer

Kim R. Payne – Chief Financial Officer

Analysts

Michael Meltz - JPMorgan

A.J. Guido - Golden Tree Asset Management

PRIMEDIA Inc. (PRM) Q2 2008 Earnings Call August 7, 2008 10:00 AM ET

Operator

Welcome to the PRIMEDIA second quarter 2008 earnings conference call. (Operator Instructions) At this time, I would like to turn the conference over to Kate Messmer with ICR.

Kate Messmer

I am pleased to be joined by Dean Nelson, our Chairman, Charles Stubbs, our President and CEO and 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, 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 of PRIMEDIA, Dean Nelson.

Dean Nelson

On behalf of the board of directors of PRIMEDIA, I would like to start off by publically welcoming Charles Stubbs, our new President and CEO. Charles joined the company on May 27 and hit the ground running, fully immersing himself in the business, our markets, our competitive position and our growth opportunities. Charles is bringing a sense of purpose, experience and energy that is matching well with the talents of our existing management team and we have high expectations for PRIMEDIA under Charles’ leadership.

First, Charles will talk about his background and he will then offer some of his perspective on the business and how he is starting to see the pieces come together during these early days. He will also review the second quarter results. Kim Payne, our CFO, will then provide a more detailed discussion of our financial performance for the quarter following which we will open the line for questions. Charles?

Charles Stubbs

First, I would like to say how excited I am to be part of the PRIMEDIA team. I would like to take a somewhat unconventional approach to structuring my remarks, focusing first on letting you know a little bit more about me, my background, what got me here, and what I believe my job is. I hope to also share some of my observations to date and pose some reasonable expectations as we move forward.

By way of background, my experiences are in both traditional and online media. Most recently, I was with Yellowpages.com where I spent three and a half years leading a team that transformed a leading national print brand into a successful Internet business. Through prudent and strategic investments and our platform of product and sales channels, we firmly established Yellowpages.com’s position as a Top 30 Internet media property, providing value to customers on a highly competitive environment. This experience was invaluable and I am excited about applying these successful growth strategies to the opportunity at PRIMEDIA.

So what have I been doing since I started 70 days ago? It seems that I have been completely immersed in our business, asking the tough questions, reviewing market data, getting the true understanding of the value proposition we provide to our customers, analyzing our sales efforts, and getting a handle on the state of our technology and what will be required over time, to capture market share and grow revenue.

During this process, I have been able to gain a perspective on our existing businesses, competitive position, new product opportunities and technology as well as our initiatives to streamline our cost structure while we refine our growth strategy.

What is the key element of a successful distribution and publishing enterprise? For PRIMEDIA, I believe that it is to be the leading cross platform, distributor and publisher of content intended to help people find a place to live. First and probably most important is the product. We must have products that consumers need, that are differentiated and develop leads for our customers. There is a solid foundation in this area with the Apartment Guide, Rentals.com, and New Home Guide property. As I look in the near future, I see enormous opportunity to improve on these platforms and provide more compelling consumer products to drive growth in our audience and be the premium lead vehicle for our advertisers.

Second is sales execution. Successful enterprises have sales and marketing teams that work extremely well together and are agile to respond to marketplace sets. At PRIMEDIA, we need to make sure that our salespeople are offering and pricing as effective as possible to help us drive growth in our existing businesses and attract new customers.

Third is scale. I believe that by building our scale and controlling the largest number of quality leads, we will remain a premium product and thus be able to command premium pricing. We must leverage our relationships and brand awareness to reach more markets and increase penetration.

The fourth element is customer segmentation. Successful companies understand that there is no one size fits all solution where we will be focused on developing a targeted approach to each of the segments that we serve. Not only will that help us to better monitor our current segments but also define new opportunities to grow our business.

Finally, success depends completely on consistent execution. I intend to take a methodical approach to our initiatives, we will cap, refine, measure and track our results and we will infuse a greater sense of accountability into our culture. I believe that there is an even greater opportunity for growth at this company than when I originally took the position. We had one overarching goal, to be the leading cross platform distributor and publisher of content intended to help people find a place to live. We are extremely well-positioned to accomplish this objective.

Over the next several quarters, we will be developing our operating plan and segmentation strategy including analyzing everything from growth opportunities in print and Internet to pricing, to distribution, while improving our cost structure. I expect this plan to be aggressive but achievable. I believe that we have a number of opportunities to grow our business that will not require a significant amount of capital investment beyond the cash flow we generate today.

The implementation of these strategies will be no easy task. Particularly in the near-term, we expect challenges to remain as we face ongoing pressure in the residential housing industry. We will continue to manage our cost structure while we establish our cross platform strategy so we are in the best possible position to capitalize on the opportunity when the market begins to turn. Most importantly, we must be able to adapt to the ever-changing environment. I’m confident that if we invest in the right areas we will be able to leverage our established brand position in core markets to refine and implement strategies that will help both near and long-term benefits for the company, our clients and our shareholders.

Now, let me briefly review our second quarter results. The apartments business continued to generate improved performance in the second quarter achieving a fourth consecutive quarter of year-over-year growth in both revenue and customer cap. This track record is a direct result of producing a superior product localized to specific market needs.

As expected, the new home and DistribuTech businesses continued to face pressure given the challenging economic environment and further deterioration in the residential housing industry. In new homes, we are focused on streamlining our expense structure and insuring that we are in the best position to capitalize on the opportunity when the housing market turns.

In our DistribuTech business, we are currently focused on the pursuit of new categories of customers and to help diversify the client base along with measures to streamline our operations, to better align our costs with the current environment.

Let me now pass the call to Kim to go in some more detail on our second quarter results and discuss each of our businesses.

Kim R. Payne

Let us start out with a few of our P&L highlights.

Our second quarter revenues decreased 2.2% to $76.8 million from $78.5 million for the same quarter last year as growth in apartments was offset by declines in new homes and DistribuTech.

First, Apartment Guide continued to forward momentum with revenue increasing 2.6% compared to second quarter 2007 due primarily to an increase in the number of listings as well as online product upgrades. Revenue at Rentals.com declined by 6% compared to the second quarter 2007 as previous execution and engineering related issues continued to impact the business. However, with new leadership in place and a focus on FEO and price functionality, Rentals is showing signs of progress with a 7.9% increase in sequential revenue from the first quarter.

New homes experienced a revenue decline at 16.4% driven by a 21% decline in advertising revenue from markets that have been in operation for more than 1 year. With declines that are across the country depending on local real estate market conditions although most of our markets experienced revenue declines compared to the same quarter last year. These declines are a result of the ongoing challenges for homebuilders which has led to fewer listings and reductions in premium advertising.

DistribuTech revenue declined 5% compared to second quarter 2007 due to the ongoing impact of customers who publish free publications primarily in the resale homes sector cutting back our closing operations.

Proforma adjusted EBITDA increased 13.7% or $14.9 million from $13.1 million for the second quarter 2007. This improvement was driven primarily by a decrease in operating expenses due to reductions in costs of goods sold, marketing and selling in G&A expenses, and dollar initiatives to reduce expenses that have started to take hold.

We have been focused on looking at every area to take cost out of our business. For example, during the quarter, we lowered overall printing costs and we negotiated more favorable rates and modified specifications that offset paper price increases. The reduction in general and administrative expenses is due to decreased corporate overhead including $3.3 million in lowered headcount associated expenses. Additionally, our audit and other professional fees increased by $1.8 million and we benefited from insurance recovery of approximately $1 million related to an ongoing litigation matter. We expect additional recoveries associated with this matter.

These factors were partially offset by an approximate $1.9 million increase in cost related to the change of our Chief Executive Officer, $1.7 million in transition costs associated with moving our headquarters from New York to Atlanta, $0.7 million in legal expenses and a $0.6 million increase in bad debt expense, that is related to new home customers that have gone out of business. Despite the higher bad debt, we continue to experience healthy collections at 97% compared to 98% in the second quarter 2007.

The strength in our balance sheet continues to improve. As of June 30, our net debt was $247.1 million. Our leverage ratio of consolidated debt to EBITDA as calculated under our bank credit facilities was approximately 2.9x which is well within the maximum allowable total leverage ratio of 5.25x. As we indicated previously, in mid-May, we redeemed the remaining 8% notes of which approximately $2.6 million were outstanding at the time.

During the quarter, pre-cash flow which includes discontinued operations was

-$1.1 million compared to -$32.8 million for the second quarter 2007. This improvement was primarily due to a $39.6 million reduction in debt service partially offset by the absence of cash flow for businesses divested after the second quarter of 2007 and approximately $2 million of expenses related to completing the headquarters transition.

During the quarter, we invested $3 million in consumer-sourced capital expenditures compared to $3.6 million in the second quarter 2007. As we announced this morning, our Board of Directors declared a regular quarterly dividend of $0.07 per share.

As we communicated previously, we completed the exit of our AutoGuide business during the second quarter by shutting down the Atlanta Auto Guide and selling our South Florida and Wisconsin Auto Guide publications as well as AutoGuide.com. We’ve received $2.1 million in proceeds for the sale of these entities.

I would now like to comment briefly on what we are currently seeing in our business to date in 2008. For now, we continue to experience a similar trend in the third quarter of 2008 from what we saw in the second quarter of 2008. Apartment Guide continues to exhibit steady growth. Occupancy rates in most of our markets remain at historical normalized levels in the low to mid-90s. However, new apartment construction remains at low levels and we believe that there is not likely to be meaningful growth in apartment inventory in 2008.

As indicated previously, Rentals.com has been in a transitional period with new leadership taking over in the first quarter. While the new team is still working their way through various initiatives, we are seeing a positive impact on revenue growth. Our focus is to continue to drive revenue growth and improve [inaudible] and performance while driving traffic through search engine optimization.

Unprecedented weakness in the U.S. housing industry according to lead generation and housing prices sales continues to impact our new homes business and we expect continued challenges for the rest of the year. We are carefully managing our expense structure to better align with the sales trends we are experiencing. These include suspending publications, further headcount reduction, paper and printing changes resulting in lower costs, and eliminating some distribution. At the same time, we are also focused on building new and strengthening current client relationships to take full advantage of our opportunities when this sector improves.

At DistribuTech, we expect an ongoing revenue negative impact from our customers primarily publishing within the retail homes sector, cutting back or shutting down operations. 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 affected by the publication.

Finally regarding corporate overhead, we completed our headquarters transition in the second quarter which moves us toward our target corporate overhead expense run rate of approximately $12 million versus $29.1 million in 2007. We do not expect to realize any further transition related costs. Our corporate overhead expenses were $3.7 million in the second quarter which included the one-time cost associated with the change in our CEO. We continue to refine our team and resources in Atlanta as we move toward the $12 million in annual run rate.

In summary, our business remains on track where we expect it to be in 2008. With that, we would like to open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Meltz - JPMorgan.

Michael Meltz - JPMorgan

Charles, I appreciate you taking a fresh look at everything that is going on at Consumer Guides. In your intro, you really didn’t talk specifics about how this company might evolve longer term. Can you talk about, I know it’s a vague question, can you see the company becoming less reliant on print longer-term, or doing more acquisitions online?

Charles Stubbs

We think that there’s a tremendous amount of opportunity at PRIMEDIA. I have been on the job about 70 days now and we’re undergoing a multi-month strategic planning process. As we continue to go through that, we’ll update you on the future quarterly earnings calls on our progress to-date. There are some tremendous assets and tremendous people here but our first priority is to get the right plan in place and to execute. We believe whole-heartedly in our print business. It’s the majority of leads today. As you know, we have a number of key relationships exclusively with retailers such as Kroger, Blockbuster, Albertson’s and CVS, just to name a few. We do believe there is tremendous opportunity on the Internet side and our first and foremost imperative on the Internet side is to build great consumer products that consumers want to use, that we have a consumer franchise to generate a lot of leads to our advertisers.

Michael Meltz - JPMorgan

Kim, your comment there on corporate costs, you fit $3.7 million in the quarter, that includes the $1.9 million for CEOs. You’re saying core underlying overhead was $1.8 million. But the transition costs are separate from that?

Kim R. Payne

Right.

Michael Meltz - JPMorgan

So why would you go from $1.8 million to $3 million per quarter, if you have the $12 million run rate going forward?

Kim R. Payne

We’re still going through building out the team here in Atlanta and making sure we have the resources in place. It’s just timing.

Michael Meltz - JPMorgan

So should we expect it to be closer to $3 million in the third quarter or is it going to take you some time to ramp-up?

Kim R. Payne

I would look at that $12 million as a run rate that will happen over time.

Michael Meltz - JPMorgan

In the quarter, I think last quarter you actually gave these details on new home guides, the percent of markets that were up versus down. It was more qualitative this quarter when most were down. I think it was 60% that were down in Q1. What was the number in Q2?

Kim R. Payne

It was 84% in Q2 that were down.

Michael Meltz - JPMorgan

Paper, you said, paper actions that you are taking, are you reducing distribution circulation, are you reducing, I don’t know what the term would be, web-lift or something? What are you actually doing there?

Kim R. Payne

On the paper side, we are looking at the type of paper that we’re using and modifying some of those specifications. We are also making sure that we maximize the distribution. That can correlate to books as well as locations.

Michael Meltz - JPMorgan

So the current stock that you are using, what’s the actual trend in pricing year-over-year?

Kim R. Payne

We feel like mid-single digits price increases.

Michael Meltz - JPMorgan

On the free cash flow side, what’s your expectation for CapEx, working capital and cash restructuring payments for ‘08?

Kim R. Payne

CapEx that we talked about is that we’re going to manage that consistent with the same levels as 2007. We have not given any other specific guidance on any of that or cash flow.

Michael Meltz - JPMorgan

Are there any liabilities from Auto Guides? Are there any cash leases or anything that we should expect?

Kim R. Payne

Nothing that’s meaningful.

Operator

Your next question comes from A.J. Guido - Golden Tree Asset Management.