Journal Communications, Inc (JRN)
Q1 2006 Earnings Conference Call
April 25, 2006, 10:00 a.m. CT
Steven Smith, Chairman of the Board & Chief Executive Officer
Paul Bonaiuto, Executive Vice President & Chief Financial Officer
Douglas Kiel, President of Journal Communications& CEO of Journal Broadcast Group
Betsy Brenner, President and Publisher of Journal Sentinel Inc.,
Jim Ditter, President of Norlight Telecommunications.
Mark Bacurin, Robert W. Baird
Stacy Fleck, Merrill Lynch
Debra Schwartz, Credit Suisse
Peter Salkowski, Goldman Sachs
Craig Huber, Lehman Brothers
Jeff Allen, Silvercrest Asset Management
D. Penman, Paradigm Capital Management
Good day and welcome ladies and gentleman to the First Quarter 2006 Journal Communications Earnings Conference Call. My name is Audrey and I will be your conference coordinator for today.
At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call, you require assistance, press * followed by zero, and a coordinator will be happy to assist you. As a reminder, ladies and gentleman, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Sara Wilkins, Director of Investor Relations. You may proceed.
Sara Wilkins, Director of Investor Relations
Thank you Audrey, and welcome everyone. Before we begin, I would like to introduce the Journal Communications senior management team, who will participant in this morning's call. Speaking from prepared remarks this morning are Steven Smith, Chairman of the Board and Chief Executive Office and Paul Bonaiuto, Executive Vice President and Chief Financial Officer. Also with us today are Doug Kiel, President of Journal Communications and CEO of Journal Broadcast Group, Betsy Brenner, President and Publisher of Journal Sentinel Inc., and Jim Ditter, President of Norlight Telecommunications.
I would like to remind you that certain statements in this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally include all statements, other than statements of historical fact, including statements regarding our future financial positions, business strategy, budgets, projected revenues and expenses, expected regulatory actions and plans and objectives of management for future operations. These statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Some such risks include decreases in advertising spending, loss of market share, inability to acquire or successfully manage broadcast properties and acquisitions, failure to retain adequate viewers and listeners, increases in the cost of television programming, broadcast limitations and/or sanctions imposed by the SEC, inability to respond to changes in telecommunications technology, continued over-capacity in pricing pressure in the telecommunications industry, loss of large printing services customers, loss of key personnel, and other uncertainties and other factors, which are contained in our periodic filing under the Securities Exchange Act of 1934.
Additionally, any discussion of EBITDA in today’s conference call may be referenced back to our unaudited reconciliation of consolidated net earnings to consolidated EBITDA of schedule, which accompanies today’s earnings release. And now, I would like to turn the call over to Steven Smith. Please go ahead, Steve.
Steven Smith, Chairman of the Board and Chief Executive Officer
Thank you Sara, and good morning everyone. Thank you for joining us. This morning Journal Communications made a series announcements including our first quarter earnings, March revenues, additional authorization for our share buyback program, and the plan spinoff of our Norlight Business. Paul and I would like to speak first about our financial results before moving on to the Norlight discussion, followed by our usual Q&A session.
Today, we reported net earnings of $12.3 million for the first quarter, ended March 26, 2006. Revenue from continuing operations increased 2.6% to $189.1 million compared to $184.2 million. Basic and diluted earnings per share from continuing operations were $0.17, as they were in the first quarter of 2005. We were pleased with the achievements of our broadcast group in the first quarter of 2006. A significant increase in operating earnings in television was driven by a particularly strong performance at our three new stations, excellent Olympic revenue, and a solid start to the year in Las Vegas. Further, despite a 3.5% decrease in radio revenue, strong cost controls resulted in a flat earnings performance in the quarter.
Our three new television stations exceeded expectations for both revenue and operating earnings. We attribute this success to three things. First, the intense planning of our transition teams. Second, the strong people we have in place. Third, our focus on sales and improving our news products. Our Las Vegas television station revenue was up 23.5% for the quarter and operating earnings increased 127%.
On a same station basis, we were negatively impacted by continued softness in NBC prime, but we did report strong Olympics revenue of $3.3 million. We are also pleased about the performance in Green Bay where revenue was up 28% and operating earnings were 15 times higher than last year’s first quarter. This reflects strong local revenue with increased news ratings, as well as Olympics advertising. In late February, our Milwaukee NBC affiliate teamed up with Time Warner Cable for a 24-hour weather channel called Today’s TMJ4 WeatherPlus. We are now running WeatherPlus full-time on digital 4.2, as well as on cable, on the web, and OnDemand. The new TMJ also recently launched a second digital cable initiative in collaboration with Time Warner for newscasts, and news-related programming from WTMJ OnDemand.
In radio, we were coming off of tough comparisons in 2005 where revenues had increased 9% from 2004. Our developmental clusters in Knoxville, Boise, and Springfield were solid performers in the first quarter of 2006. We continue to focus on cost control, with overall radio expenses in the first quarter down 4.5%.
The daily newspaper, which continues to concentrate on controlling our expenses, poses a disappointing February and March, as overall classified and automobile advertising in particular were challenging, despite a small increase in the retail category.
Journal Interactive, however, remains a bright spot as revenues in the first quarter of 2006 were up over 28%.
At our community newspapers and shoppers, operating earnings increased for the quarter as a result of reduced expenses in a number of areas. Revenue from specialty publications, which carry higher margins than our existing core products, was up about $500,000 in the first quarter. Overall revenue at our community newspapers was down, reflecting the closure of Dixie Web printing. Commercial print sales into the press that we moved from Dixie Web to Trumball, Connecticut are ahead of schedule.
At Norlight, a modest increase in the enterprise or commercial business was offset by the anticipated lower contract pricing in the wholesale business. Norlight continues to see success with its new VPM and its services and data center offerings. Revenue from these products was up some 70% in the first quarter of 2006 and the team remains focused on the introduction of its voice-over IP communication service later this year, which will improve it’s competitive position in the enterprise business.
We were also encouraged by the ongoing improvement in operating earnings at IPC despite the expected lower revenue.
Now, I’d like to ask Paul to begin his in-depth financial review, Paul.
Paul Bonaiuto, Executive Vice President & Chief Financial Officer
Thank you Steve. For the first quarter 2006 revenue from continuing operations increased 2.6% to $189.1 million compared to revenue from continuing operations in last year’s first quarter of $184.2 million. Note, that in the first quarter 2006, our newly acquired television operations contributed $12.7 million in revenue, and that the Winter Olympics added $3.3 million. These gains were partially offset by predicted declines in telecommunications and printing services revenue, as well as lost revenue from the Hurricane-related shutdown of our printing facility and declines in direct marketing.
Earnings from continuing operations were $12.3 million compared to $12.6 million in 2005, a decrease of 2.3%. Despite this modest decline, earnings per share of $0.17 held flat compared to last year, reflecting the positive influence of our share repurchase program. Note that in the first quarter of 2005, Journal Communications recorded a $4.8 million gain net of tax from discontinued operations related to the sale of NorthStar Prints Group. Total operating costs and SG&A increased 1.3% for the first quarter of 2006, yet this statistic does not tell the whole story. The newly acquired television stations caused an $8.5 million or 5.2% increase in cost over last year, which was largely offset by a number of cost productions, which netted for a total of $6.2 million.
Other expenses, which primarily consists of interests costs increased $3.1 million to $3.6 million in the first quarter compared to $0.5 million last year. The increase is attributable in large part to an increase in debt outstanding related to the 2005 acquisition, the share repurchase activity, as well as higher short-term interest rates. Within publishing, revenue was down 1.5%.
At the daily newspaper, total revenue of $58 million was slightly up compared to 2005’s first quarter. Yet, our community newspapers and shoppers revenue of $21.5 million was down 6.7% compared to last year. Excluding the impact of Katrina, and the plant shutdown, revenues at our community newspaper business would have modestly increased year over year for the quarter. Note, that for comparative purposes, the Easter Holiday fell in the first quarter of 2005 and will fall in the second quarter of 2006.
Operating earnings in publishing increased 2.5% to $7.7 million dollars compared to $7.5 million dollars for the first quarter of 2005. At the daily newspaper, operating earnings totaled $6.6 million, down 7.5% compared to $7.2 million last year. The decline was due to plant revenue growth, coupled with increased administrative expenses including recruitment relocation costs for newly hired senior personnel and litigation-related costs. Operating margin was 11.4% down from 12.4% from last year. Payroll costs were down $700,000 or 4%, reflecting a 4.6% decline in full-time equivalence.
First quarter 2006 paper costs were up $200,000 or 3%. Average paper pricing was up 20%, while tons were down 14%. The change to lightweight paper represented about half of the drop in tons consumed, and approximately 7 of the 20% increase in price.
Benefit expenses were down about $900,000 or 20% due to lower healthcare, pension, and vacation costs.
Moving on to our community newspapers and shoppers, we recorded operating earnings of $1.1 million; up nearly 229% from operating earnings of $316,000 last year, in part reflecting reduced labor costs, the benefit of our redeployed Louisiana press, and lower bad debt and legal expenses.
Total publishing advertising revenue was essentially flat with the daily newspaper about even, and a 1.6% decrease at the community newspapers and shoppers. At the daily newspaper, retail revenue of $21.4 million was up 1.8% compared to the first quarter last year. This was due in large part to flat ROP advertising, offset by gains in online preprints and shared mail. Increases in the finance and insurance, real estate, and food categories were offset by decreases in the automotive and department store categories.
Classified advertising at the daily newspaper, which includes both print and online, decreased 1.7% for the first quarter of 2006, driven in large part by auto. The employment print vertical was essentially flat compared to last year, whereas the real estate vertical continued to be very strong, posting an 11% increase. The other vertical increased 11.1% year over year. Mirroring the national trend, automobile advertising at the daily newspaper continues to be weak across the board. Auto classifieds were down 24.1% for the quarter, and retail ROP auto was down 42.8%. On a combined basis, auto advertising was down approximately 30% for the quarter compared to last year.
Our national advertising revenue category was down 13.3% for the quarter reflecting lower spending in the transportation airlines, business services and manufacturing categories. The direct marketing category of the daily newspaper was up 5.2%. Although interactive advertising is reflected in the various categories, online revenue of $2.1 million was up 28.2 % for the quarter. Circulation revenue of $13 million for the first quarter was down 1.9% compared to last year. Other revenue at the daily newspaper of $3.4 million was up, 30.1%, reflecting gains in commercial printing and commercial delivery.
As you know, we installed new color couples late last year to take advantage of advertiser demand for additional color in the newspaper. In the first quarter 2006, total color advertising was up 16.5%.
Moving to our community newspapers and shoppers, advertising revenue of $15.1 million was down 1.6% compared to $15.3 million for the first quarter of 2005. Retail advertising of 12.3 million was down 4.1% compared to 12.8 million. Classified advertising revenue increased 14.6% and other advertising revenue decreased 7.1%.
The plant shutdown in Louisiana continues to affect other revenue, which consists of commercial printing, down 18.8% for the quarter.
At broadcasting, revenue increased 38.8% to $51.6 million and operating earnings were up 115.2% to $11.6 million. We were positively impacted by the contribution of the new television stations, as well as the Winter Olympics. Also, at our Las Vegas ABC affiliate, as Steve mentioned, revenue was up 23.5% and operating earnings increased 126.6%.
Revenue at our television stations for the first quarter of 2006 increased $15 million or 78.9% to $34 million including $12.7 million in contribution from the television operations which we acquired in December of 2005 and $3.3 million from the Winter Olympics. Excluding the new operations, revenue of $21.4 million increased 12.5%. Television operating earnings of $7.8 million increased nearly fivefold from the $1.6 million in the first quarter of 2005. Excluding the new television operations, same station operating earnings of $3.6 million increased 125.6%.
While softness in NBC prime continues to pressure our results, we have seen improvements in rates and sellout in Las Vegas and Green Bay, and in sellout in Boise. We have been successful at increasing revenues, while continuing to maintain tight cost controls.
Radio revenue of $17.6 million was down 3.5% compared to last years first quarter, reflecting declines in auto, media and gaming revenue, as well as 1 less Packers broadcast. Operating earnings of $3.8 million were essentially flat, although Omaha, Springfield, Knoxville and Boise all recorded solid operating earnings margin improvement.
Moving on to our Norlight Telecommunications business, revenues of $32.8 million were down 12.3 % compared to the first quarter of 2005, reflecting continued service disconnections and repricing in the wholesale market, as well as sluggishness in the enterprise business. Operating earnings for the first quarter of 2006 were down 45.8% to $4.2 million from $7.8 million in last years first quarter. This represents an operating margin of 12.8%. Wholesale revenues of $17.7 million were down 13% compared to 2005 and down 4.6% sequentially compared to the fourth quarter.
Terms of the Verizon, formally MCI business contract, were fully implemented in mid-March, further reducing monthly recurring revenue, but resulting in a stable Verizon business run rate going forward. Enterprise revenues of $15.1 million were down 11.5% compared to the first quarter of 2005. This decline reflects a decrease in long-distance revenue as a result of losing several significant customers, as we had previously discussed, and aggressive competition from the Regional Bell Operating Company. It is important to know that we are experiencing continued growth in managed services and data center offerings, which are the products that open doors to new customers to sell all of Norlight’s products.
At our printing services business, revenues in the first quarter of 2006 decreased 10.9% to $16.3 million, largely reflecting the expected decline in revenue from DELL. For the first quarter of 2006, operating earnings from printing services were $492,000 compared to $391,000 last year, an increase of 25.8%. IPC exited the software kitting business with DELL at the end of January. This plan transition away from the hi-tech arena will result in a much stronger business platform without the customer concentration we’ve experienced in the past. In 2006, IPC’s largest customer is projected to account for less than 5% of its total annual revenue.
Moving on to our other business segment, for the first quarter of 2006 revenue of $8.8 million decreased 16.4% compared to the first quarter of 2005 due in large part to significant weakness in automative at PrimeNet’s Clearwater, Florida location. Other operating earnings decreased to $67,000 from $267,000 last year.
Our balance sheet remains sound. In the first quarter of 2006, operating cash flow was $25.8 million. At the end of the quarter, debt was $269.8 million, reflecting our share repurchase program and the television acquisition. Shareholders equity stood at $481.3 million. Our capital expenditures during the quarter were $6.8 million compared to $6.5 million last year. During the first quarter, we repurchased 836,730 shares of our class-A common stock. Through March 26, the company had repurchased a total of 4,271,725 class-A shares with authorization to purchase up to an additional 728,275 shares that remains on the original program.
This morning, we also announced that our Board of Directors has authorized the repurchase of up to 5 million additional shares of Journal Communications class-A common stock over the next 18 months. The action supplements the 5 million repurchase authorization approved in February of 2005.
In terms of our guidance for the second quarter, we currently anticipate total revenue, including revenue from Norlight, which will be reported as a discontinued operation in the second quarter, to be between $196 million and $201 million. Revenue from continuing operations is expected to be between $166 million and $170 million. The company also anticipates net earnings to be between $14 million and $16 million and earnings from continuing operations to be between $11 million and $13 million. Please remember, that our guidance can be affected by the risks that we outlined in the forward-looking statement at the beginning of this call.
Now I’d like to turn the call back over to Steve for a brief wrap-up and to discuss the Norlight spinoff, before we open it up to Q&A, Steve.
Steven Smith, Chairman of the Board and Chief Executive Officer
Thank you Paul. This morning we announced plans to spinoff Norlight to our shareholders. The spinoff will be accomplished through a pro rata distribution of all of Norlight’s shares to Journal Communications shareholders. Journal Communications will announce the record date, the dividend date, and the distribution ratio at a later time. Norlight is expected to apply for a listing on the NASDAQ global market.
This morning Norlight filed a registration statement with the Securities and Exchange Commission. Completion of the spinoff is subject to the effectiveness of the registration statement, and receipt of an opinion from counsel to the effect that the spinoff will qualify as a tax-free transaction for Journal Communications and its shareholders. Additionally, Journal Communications intends to submit a request to the Internal Revenue Service seeking a private letter ruling as to the tax-free nature of the spinoff. No other significant approvals are required and completion of the spinoff is expected to take up to six months.
After careful consideration by our Senior Management Team and our Board of Directors, we are making the strategic decision to establish two independent companies positioning each to better focus on its core business and deliver greater value to our shareholders. By spinning off Norlight, Journal Communications can concentrate greater managerial and financial resources on our diversified local media businesses, including the Milwaukee Journal Sentinel, our community newspapers and shoppers, our radio and television operations, and our growing online presence. Similarly, Norlight can concentrate on the growth of its communication businesses, and will benefit from greater operational and financial flexibility to take advantage of growth opportunities in its industry. Norlight is a facilities based communication company with more than thirty years of experience, proving network and internet protocol and enhanced services over it’s regional fiber network to 1400 wholesale and commercial customers in the upper Midwest. It has a strong track record of discipline, return-base capital investment. Jim Ditter and his team are excited about the opportunity as they embark on the creation of a new independent public company, historically, Norlight has conducted its business with an emphasis on annual free cash-flow generation.
This separation gives Norlight the flexibility to compete more effectively in its target markets, and take advantage of strategic growth opportunities, which includes the expansion of its IP&E service offering, such as voice-over IP, security, business continuance and premise-based IP telephony offerings to small and medium sized businesses located in the upper Midwest. As I said before, we will report on further details concerning the particulars of the spinoff as we continue to move through the process.
Turning back for a moment to a view of our businesses going forward, we remain focused on the performance of all our companies, and on driving new revenue opportunities and new products in print, on air, online, and through additional local news. We are excited about a number of new online additions at the Journal Sentinel. In the first quarter, we also launched our strategy to develop a family of local community websites that will leverage the database of content we own at the flagship daily newspaper, and the deeply local content at the 18 CNI publications. These community Internet sites include local search, local news and features, local events, local classifieds and much more. They were designed to experiment with user-generated content and create a platform for everyday citizens to engage in their local communities.
In late March, we soft launched 6 test sites into the live environment, and we are currently getting users involved with helping us focus on relevant content, working out any unforeseen technical issues and defining the resource and marketing formula needed to operate, replicate and promote these sites across other communities. With our test community sites in full launch mode, the JF center interactive team turned its attention to internally launching two new high utility sites for users. Milwaukeemarket.com is our online aggregate shopping solution, and milwaukeenow.com is our utility portal. Both of these sites bring the power of local search to users. Milwaukeemarket.com sorts newspaper classified, display and preprint ad, advertisers self-service solutions, and utility yellow pages all in one place. Milwaukeenow.com provides a one-stop site for city information such as traffic, crime statistics, real estate values, latest headlines, local search, and local advertising listings. Both of these sites offer numerous revenue models including sponsorships, text links, yellow pages enhancements, direct merchandising fees and upsale.
Ultimately, building audiences is what it’s all about, and Journal Sentinel is launching such significant and diverse products online that will lead to new directions. With 87% of southeastern Wisconsin market already reached by Journal Communications print and/or online products, we’re confident we can leverage that reach into new ad revenue possibilities. Despite aggressive sales efforts, we expect advertising revenue to remain sluggish at the Journal Sentinel. We continue to be focused on marketing, on seeking growth in our single copy and home delivery sales, on gaining additional commercial print customers, and developing new shared mail products. Margins at our community newspapers and shoppers should continue to improve as we focus on increased advertising; new product launches, and continued strength in commercial print revenue. We continue to execute on our new television station integration and expect performance there to continue to exceed expectations.
During our second quarter, Fort Myers will add three hours of morning news and an extensive rebuild of our new set. In Green Bay, as we previously mentioned, we retargeted our sales management to focus more closely on local revenue and development, merged our national sales management for Milwaukee and Green Bay and added sales people. We expect to vastly improve this year, and are completely focused on making up the lost ground in year one to hit our expectations in year two of this acquisition.
On the radio side, while growth may be slower than its previous years, we believe that our cross-media strategy, the strength of our local brand, the continuing focus on new revenue opportunities and a disciplined cost culture will drive our business.
Beginning in the second quarter of 2006, as Paul said, Norlight will be classified for general communications financial reporting purposes as discontinued operation, and will pursue its business objectives and margin goals as previously discussed. As details from the registration statement Norlight filed with the SEC earlier today, Norligh has identified a number of growth initiatives including voice-over IP, which has already commenced. At IPC we anticipate further declines in revenues since fully exiting the DELL fulfillment business in the first quarter; however, growth in the core printing business driven by our expanded press capacity is expected to lead to margin expansion in 2006. IPC’s new binding line and its finishing operation should expand capacity and improve efficiencies.
The authorization by our Board of Directors for the repurchase of 5 million additional shares, which we announced this morning, is a reflection of their confidence in the company’s financial strength in our ongoing commitment to shareholders. We continue to believe that the purchase of our common stock at current levels represent an attractive opportunity to benefit the long-term interests of the company and it’s shareholders.
Operator, this concludes our remarks. You may begin the Q&A session.
Ladies and gentleman if you wish to ask a question, press * followed by one on your touchtone telephone. If your question has been answered, or you wish to withdraw your question, press * 2. You may begin by pressing * 1 to register your question.
Our first question will come from the line of Mark Bacurin with Robert W. Baird, please proceed.
Good morning everybody. A couple of questions, maybe Doug I’ll start with you on the weakness in the radio. I think you guys have been experiencing pretty good improvements in most of your markets with regard to ratings, so I’m curious. Specifically, it sounds like auto has been weak. Were there any markets in particular where you had ratings related issues, and you could you give us a sense of what the breakdown of the local verus national growth was?
We talked about it before, we had a couple of areas where we had some weakness in ratings in the past and last year, we mentioned our big FM station in Milwaukee WKTI. They have sense improved their ratings and they had kind of a soft first quarter. We talked about Tucson where our #2 and #3 stations in that cluster were softer and our big stations were a little softer last year. That has all been turned around in terms of ratings. Those are the kind of the ratings issues we had to overcome. The rest of our stations did well.
In that first quarter, as Steve mentioned, we were going up against very difficult counts. We had a great first quarter last year, where we almost had double digits over 9%. All of that was working against us in the first quarter. As we look forward to the second quarter, we’re seeing that correct itself. Our Milwaukee radio market is solidified. We continue to do well on WTMJ and KTI is coming around much, much better. As we look into the second quarter, it appears that all but one or two of our radio stations will be up and the group will be up, we think now in the mid single digits.
Thanks, that’s helpful. Paul, this is one is for you. Is there any way, as you look at the publishing results for Q1 to try to quantify what you think the negative impact may have been from the Easter shift, and then following up on that, what you expect the positive impact may be going into Q2?
Well, it’s actually the opposite. We’re expecting the negative impact in Q2. Remember, when Easter occurs, advertising tends to fall off a bit. So, as we look at the impact, our estimate is that it will have about a $600,000 impact on revenues.
Yes. And if you do the Q1 comparison, we probably had a bit of an uplift to the tune of $600,000 versus last year where Easter fell in the first quarter.
Okay, and then you mentioned I think during your prepared remarks $6.2 million in cost savings that was sort of masked by the extra cost from the television acquisitions. Could you just break down for us where those cost savings came from?
Yes, they came from a number of areas Mark. Clearly, there were savings in our Journal Community Publishing Group from the discontinuance of printing operations in Louisiana. Obviously, revenue implications with that as well, but there were cost savings there. In addition to that, as you look at the newspaper, there were fairly significant savings in terms of benefits, whether it was healthcare, pension, or vacation, in aggregate we saw about $900,000 of savings in those categories. Additionally, at broadcast, we continued to maintain tight cost controls throughout, and I really wouldn’t point it at anything Mark, other than just continued in a number of areas very tight cost control.
I might add, that in the radio side of our business we dropped cost by almost 4.5% and it was kind of throughout the organization on our ongoing cost savings initiatives. Some were in areas where we were able to save cost related to sports merchandising and there were some promotional expenses that we deferred, but it has been a wide-ranging and ongoing program for us to drive our margins up in radio. We continued that in the first quarter.
And the other thing I’d add Mark is that $6.2 million, net of some rather unusual expenses that occurred during the quarter, and if you think about it, we had a number of relocations and recruitment costs at the newspaper where a number of new senior leaders came on board. That represented in and off itself, an excess of half a million dollars of cost that we wouldn’t traditionally incur. Then as we looked beyond that, we saw that the cost for the Norlight spinout, as well as some litigation costs, represented about another $600,000 of cost that we wouldn’t necessarily typically incur in a quarter. So, netted into that $6.2 million was also $1.1 million dollars of costs that were nontypical unusual expenses.
Okay great, and then if we could switch over to the spinoff. I know it’s probably early to talk about what the structure is going to look like in terms of the balance sheets for both companies. I would assume that Norllight would take some portion of the Disney Corporate debt. Is that fair?
I think what we mentioned in the Form 10 is that there would likely be some form of dividend prior to the spin, or at the time of the spin, but we didn’t outline a specific amount.
I guess that will be determined somewhere down the road?
I think that’s fair. As you might well guess, there is yet a good deal yet remaining to accomplish.
Could you then walk us through the process in terms of evaluating spinoff versus selling the business, etc., and why ultimately you chose the spinoff?
Sure, I’d be glad to do that. Obviously, the most important part of the process is looking at the strategy of the two businesses and allowing they’re to be focus on the strategic direction in the growth for both of our businesses. Our board looked very carefully at the strategy for the telecommunications business and our ongoing media business, and we made the determination that Norlight has some very significant solid plans in place with a good prospect for success in the future, and therefore, the spinoff was selected as the superior solution at this point for our shareholders. But, along with our advisors, we took a hard look at the future and made that determination.
Thank you guys.
Our next question will come from the line of Stacy Fleck with Merrill Lynch, please proceed.
Good morning. A couple of questions, if you could just discuss the current pacings at the T.V. stations, and looking ahead to the second quarter.
Yes Stacy. First of all the pacing continues to be strong, that’s the overall look at the second quarter, both radio and T.V. on a same station level, it’s in single digits, some are probably low single digits. The new acquisitions, the three that we brought from Emmis look to be pacing the second quarter much ahead of their plan as they did in the first quarter.
And which category are we doing well on T.V.?
Well, when you have a year like we’re having right now Stacy, they’re all looking pretty good, and I know that’s unusual because folks are complaining about our automative category. Across our television group is actually up. In the first quarter, it looks to continue to be okay. In the second quarter, varying by market, there are some markets where it’s strong; somewhere it’s not. So, across our television group, it’s hard to isolate one category that’s strong. It’s been ranging. I might also add, and we talked about this before, in our television group, particularly coming off of 2005 where we saw the weakness at our big NBC stations, particularly in Milwaukee of course.
We have embarked on developmental revenue platforms across our group, and that’s helping drive our sellout and its helping put a floor under our pricing and that’s been working for us both in the first quarter and as we go forward. We have three times the developmental revenue in the first quarter in our television group we had last year, and we’re strongly up in radio as well. So, that’s a part of what we are going to be doing ongoing, and we’re particularly work on that to help us, seven as well.
Great, and staying on T.V., what are your expectations for political, I guess looking forward to the bottom of the year, and are you seeing any in Q2 yet?
We have some in Q2, but Q1 and Q2 are not big numbers. The bulk of our political will be coming in the third quarter, and of course the fourth. We are looking at this year, 2006 being more similar to our finish in 2002 in terms of the way we expect the political season to firm up. And I think in 2002, we did just over $6 million across our group, and we added a couple of stations to that.
And I would add to that that in the first quarter, there was $374,000 of political and issue spending on television. Approximately $208,000 or 56% emanated from our newly acquired stations in Omaha and Tucson.
And Stacy, I might just add as an add-on, when Steve earlier talked about our addition of three hours of morning news in Fort Myers, we expect Florida to be a good political state as it has been in the past. Our timing of that local news in the morning to start June 1 is not accidental. It’s part of our strategy of course to add significant news there. We are doing that. It will also help us to get into the political revenue game there.
Great, and just lastly, are you taking a look at the media general stations that are up for sale?
Stacy, it’s Steve. I think that without going into any specifics in terms of specific markets that we might look at, we certainly are going to pursue our strategy of getting deeper in our local markets. We will attempt to purse that strategy as we go forward. Having said that, I would tell you that we are very focused on what we are doing in our current markets. We are obviously very focused on driving shareholder value and are excited about the fact that we can utilize our cash in terms of buyback and in continuing a good solid dividend program. Also, I think the story is still to be told in terms of value and what kind of multiples will be paid for these kinds of stations, so we are going to evaluate, but we will continue to be mindful of values as well as we go forward.
Great, thank you.
Our next question will come from the line of Debra Schwartz from Credit Suisse, please proceed.
Hi, thanks, good morning. I was wondering, given the softness that you are seeing at the Milwaukee Journal Sentinel, could you just give us an expectation of where you think the margins could get to this year, and I guess as the year progresses, is there any catalyst that we could look for topline growth to pick up, or does it really just hinge on certain categories like auto stabilizing?
Why don’t we let Betsy Brenner answer that question.
Hello Debra. If we look at the back end of the year, I think there is definitely potential for accelerated cost control, which will improve margins at the daily paper. You asked about which topline ad categories might show growth, and we’re not looking for any improvement in our automotive business, which has been the largest single drag on our revenue performance until possibly the second half of this year. So that leaves us fairly soft in classified because of automotive, some additional softness in retail also because of automotive, and if anything if we look for some remedy there it wouldn’t come until the second half. As far as margin improvement, I think the range that we put out there is still probably reasonable, looking more now at cost control and any revenue improvement to occur would occur in the second half.
Our next question will come from the line of Peter Salkowski of Goldman Sachs, please proceed.
Good morning everybody. To start out on the broadcast side, just a quick question on the MS stations, could you give us an idea on the expectations for the second quarter, I think the number for 2005 was $48 million, is that correct?
And then it was $12.7 in the first quarter, so are our expectations for the second quarter here for those stations?
We haven’t typically broken those kinds of items out in our projections or guidance going forward, Peter.
Okay, now’s the time Paul.
I understand, I understand what you’d like.
Just say it, you’ve got to try something new sometime. Anyway, okay, that’s fine. With regards to capital expenditures for the rest of the year, assuming the spinout happens in the next 4-6 months, could you give an indication on what you might expect for capital expenditures?
Sure, what we’ve said, and we still believe it to be accurate Peter, is that assuming Norlight were with us for the entire year, our capital spending would approximate $50 million this year, and it would include some carry overs from last year as well as some significant investments this year.
Okay, so no change in that even with the spinout on Norlight.
There might be a modest decline depending on the time of Norlight spinout. There will be a good deal of spending on Norlight between now and the time of spinout, as we discussed with the pursuit of voice over IP rogue strategy as well as with some core investments that we’ve made already.
Pete, it’s Steve. I’d add onto that, we will continue to operate the Norlight business in a very similar fashion that we had in the past. We will provide them with investment. Jim and his team at Norlight has had a history of providing us with capital requests that have good solid returns and we will continue to fund those things as they pursue their growth strategy.
Great. Doug, a quick question on the television side. With Monday nigh football moving to ESPN in the fall. Are they any expectations in terms of what impact that’s going to have on your ABC stations?
Well, first of all, we think incrementally, remember that that move off of ABC stations is additive to our NBC stations on Sunday night, so we expect that to be a net positive force for the year.
Okay, and then lastly, with regards to shares, are you seeing an increase in the employees changing their shares from B shares to A shares to be able to sell them given the current share? I know that a lot of them have debt supporting the purchase of those shares originally, and wondering if they need to be selling at current levels.
I don’t think we can have a general characterization. As you know, we have had, I think, as you know, we have had conversion in sales as folks have de-levered, and continue to diversify. Having said that, we still have a strong base of employee shareholders where there is some 30% plus of the economic base still held in the employees and former employees. In terms of what we are seeing in conversion, there are still folks who have debt, and who may be selling shares and also diversifying. But, in recent months we have seen some slowdown in the conversion of the B to A, and that may be a function of the fact that we have a shareholder purposeful that we have in front of our shareholders right now in terms of shortening the days that it would take to convert. It may also be that the fact that we are getting to a point now where those folks that needed to convert and sell have done so, and will have B shares staying at a more stable level. So, more to come, but as you look at it, we still have some 19 million B shares held in the hands of employees and former employees.
Thanks Steve, last question, with regards to the share purchases, are you going to be able to do the 5.5 million remaining shares over the 18 month period, given cash and operations, or do you expect to have to raise more debt?
I guess if you look at the balance of the year. It all depends on the pace at which we repurchase, doesn’t it Peter? So, with a normalized repurchase, my expectation would be that it would be largely from cash flow, but again it all depends on how rapidly we repurchase.
Okay, thank you very much.
Our next question will come from the line of Craig Huber with Lehman Brothers, please proceed.
Yes, good morning, a few questions. First, I didn’t understand the answer to the question about the T.V. pacings for the second quarter, exclude the stations that you recently bought, how much are your T.V. pacings running up in the second quarter?
Same station will be up, low single digits in the second quarter of the year, so our pacing looks like today.
Could you then just quantify if you would, what your non-newspaper cash cost percent change was in the first quarter for your newspapers?
Craig, this is Betsy. First quarter for the daily newspaper, non-newspaper cash costs were up 1.8% and the operating expenses up 1.7%.
What I’d add in there Craig, be aware, I talked a few minutes ago about the increased costs associated with relocation as well as recruitment and litigation costs. If you consider the impact of those against the 1.9% increase, it would actually be flattish without those expenses included. So, I though you should be aware of that.
I appreciate that, and then also could you just give us a little more color as to why your marketing services revenues were down 16% in the quarter?
It is largely, as we think about that business, the Clearwater operation is very much focused on the automotive business, Craig, and I think that would be the largest factor that we would point to, is the softness of the automotive market in the Clearwater operation.
Sounds like that won’t turn anytime soon then, right?
Well, I don’t know, I think that there is a very good direct marketing business in Clearwater with a fast turn solution for automobile dealers, so they’re out there pounding and talking to people, and you would think, as the business hopefully gets better as we get into that second quarter that we would see some turnaround in Clearwater. Time will tell.
I just want to mention one think about this. In terms of that business, while we’ve been focussed on the automotive category, we’ve been branching out over the last year into financial services, other retail categories, to kind of ease that dependance on automotive for obvious reasons, and so we’re going through a transition there. We just signed a new client. So, the point for our folks there, and their focus is, to add some larger accounts and diversify that business. They are seeing success of that. We’ll see that play out as the year goes on.
I was also wondering if you could just help us, the margin difference between your community newspapers and also your flagship paper, what were those two numbers in the quarter please?
If we look at our daily newspaper for the first quarter, our operating margin was 11.4%, and Anne would you calculate quickly the combination of the other two……………5% for the community newspapers.
Okay, my final question. Concerning the timing of the Norlight spinout, your investors kept asking why are you keeping these businesses together, other than an $11.00 stock price, why now? Is that the only reason now? You guys are adamant for 2 ½ years that you wanted to keep it and if anything the business has gotten worse and not better. Why now? Is it just stock price?
No, I don’t think that is necessarily the whole story. I think that it really has to do with the two businesses pursuing their strategy. If you look at when Mark asked earlier why the determination for the spinout, I answered it with we have strategic opportunities at Norlight that certainly Norlight has the opportunity to fund, and to drive the revenue growth. The other benefit is obviously the fact that we can spin the business in a tax-free situation to our shareholders. But, as you look at Norlight inside Journal and pursing the growth strategy with their voice-over IP initiatives, it’s a good time for them to not necessarily be under the constraints of this company with our strategy and pursue their growth.
I think inside Journal, they just have much more flexibility as in independent company to pursue that growth. Although admittedly we are pleased with the fact the in the market, telecommunications stocks are obviously behaving and performing in a much better fashion than they have historically in recent years, so that gives us another reason for optimism. I would say it’s much more about the confidence that we have in the opportunity for growth in Norlight going forward. Jim, you haven’t had the opportunity, but do want to take thirty seconds.
The thing I would add is that we are really excited about the opportunity with voice-over IP. Our plans for that offering are to have an integrated communications package, which is going to be local and long distance along with internet, which is something that we don’t have today, which we believe is really going to be able accelerate our growth, however it is going to require investment in order to do it. I think that kind of relates to some of Steve’s comments about the investment required to take advantage of those growth opportunities.
Great thank you.
Our next question will come from the line of Jeff Allan with Silvercrest Asset Management, please proceed.
My question has been answered, thank you.
Our final question will come from D. Penman with Paradigm Capital Management, please proceed.
Hi everybody, I have a couple questions. You said the operating margin for the daily publishing was at 5.1% in the first quarter...
No, that was for the community newspapers and shoppers…..
The daily newspaper for the first quarter was 11.4% operating margin.
Oh, all right. And I have another question. I know you said we had $600,000 of expenses spinout related in the first quarter. Do you have any idea going forward what those could look like?
No, actually I think what we said is that spinout was probably about a quarter of a million dollars. There were expenses associated with relocation and recruitment, as well as the litigation.
Are we expecting additional spinout expenses in the next three quarters?
Certainly, once the transaction is completed it would be fair to assume that there would be additional expenses.
But, we cannot yet quantify those?
Not at this juncture.
All right, and then in terms of the class-C shares, are they going to receive any special interest in the spinout?
The shares that will be distributed for Norlight will be pro rata based on the ownership, as it exists today, so it will really be based on direct pro rata distribution. As you know, the C’s convert at 1.36 to get to A’s, and so it would be based on that now.
Alright, and then in terms of repurchase plan, are we just going to keep pecking away at that quarter to quarter, or will we ever go after and try to pick up a big hunk of shares, with the share price continually descending down recently?
I think our Board is constantly considering how we return capital to shareholders, and whether it be in the form of dividends, share repurchases or whether it actually be as opposed to a return of capital to the shareholders, investments as we’ve made in capital investments, or as we made in television stations last December. So, we’re constantly going through the calculus of which of those strategies provides the best options or best returns for shareholders in the longer term.
I would add to what Paul has said, I would point to the consistency that we have demonstrated in our share repurchase since we announced it, and we anticipate that we will continue to behave accordingly.
At this time, that does conclude our Q&A portion. I would now like to turn it back to Sara Wilkins, Investor Relations Director
Thank you Audrey. Once again, thank you all for joining us on this morning’s call. We appreciate your interest in Journal Communications. As a reminder, a replay of the call will be available today through April 27, 2006. Please refer to this morning’s press release for the dial-in information for the replay of the call. Also, an archive of the webcast will be available today through May 9 at our web site www.journalcommunications.com/investors. Thank you again.
Ladies and Gentlemen this does conclude your presentation. At this time, you all may disconnect and have a wonderful day.
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