PRIMEDIA Q2 2006 Earnings Conference Call Transcript (PRM)

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PRIMEDIA Inc. (NYSE:PRM)

Q2 2006 Earnings Conference Call

August 3, 2006 10:00 am ET

Executives

Dean B. Nelson - Chairman of the Board, President, Chief Executive Officer

Kevin Neary - Chief Financial Officer, Senior Vice President

Steve Parr - Senior Vice President; President, Enthusiast Media

Kim Payne - Chief Financial Officer of Consumer Source

Carl F. Salas - Senior Vice President, Treasurer

Eric M. Leeds - Senior Vice President, Investor Relations

Analysts

Paul Ginocchio - Deutsche Bank Securities

Andrew Finkelstein - Lehman Brothers

Ken Silver - CRT Capital Group LLC

Todd Morgan - CIBC World Markets

Bobby Kim - Bear, Stearns & Co.

Al Alamo - Seneca Capital Management

Operator

Good day, ladies and gentlemen, and welcome to PRIMEDIA's second quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded. Now, I would like to introduce your host for today's conference, Mr. Dean Nelson, Chairman, President, and Chief Executive Officer of PRIMEDIA. Mr. Nelson, please go ahead.

Dean B. Nelson

Good morning, and welcome to PRIMEDIA's second quarter conference call. On the call for the first time are recently promoted executives: Kevin Neary, CFO of PRIMEDIA; Steve Parr, President of our Enthusiast Media segment; and Kim Payne, CFO of Consumer Source, which is the new name of our Consumer Guides segment. Carl Salas, our Treasurer, and Eric Leeds, our IRO, are also on the call.

As always, we refer you to the Safe Harbor disclaimer spelled out in our earnings release.

Also, any non-GAAP terms mentioned in this call are reconciled to GAAP in the earnings release and the company's SEC filings.

On today's call, we will summarize second quarter 2006 results and review our operating strategies relative to those results. Carl will review our financial condition, and then we will open the call for questions.

Our focus in PRIMEDIA's Enthusiast Media, our largest division, is to execute on our strategy of improving product quality, growing online and other non-print other areas, leveraging our dominance in the male 18 to 34 market, and improving circulation performance.

Our pockets of success during the quarter are evidence that our long-term strategy is beginning to work.

During the quarter, Consumer Source's new home and auto guides businesses continued to show growth. We are working hard to ensure that the launch activity to date in both of these businesses is profitable by year-end.

The new team at Apartment Guides is working hard to offset ongoing difficult market conditions.

Next, I would to go over a few announcements we made during the quarter.

First, we appointed Kevin Neary to Chief Financial Officer of the company, replacing Beverly Chell, who retired after co-founding the company 17 years ago. First, I would like to thank Beverly for her many years of commitment, counsel, and insight.

Kevin is absolutely the right person for this job. He has had a long and successful run at the company, which has given him a deep understanding of PRIMEDIA's many assets and divisions. He is a true operating CFO, with a deep working knowledge of the business, which is exactly what we need at this point in PRIMEDIA's history.

We recently announced the appointment of Steve Parr as CEO of our Enthusiast Media segment. Steve brings the talent, expertise, and leadership skills that we will need at this point to take the business to the next level in terms of growth, and as we explore the possibility of it becoming a separately traded company.

We also recently appointed Kim Payne Chief Financial Officer of Consumer Source, which comprises the company's entire consumer guide segment. Kim has been with Consumer Source for 15 years. Her leadership and financial acumen have played a great role in the segment's success.

We also announced two new Board members: Dan Ciporin is the former Chairman and Chief Executive Officer of Shopping.com; and Kevin Smith is the former Executive Vice President and Chief Financial Officer of R.R. Donnelley & Sons. Both have invaluable experience in markets that define the future of this company. We look forward to their counsel and insight, and we are really fortunate to have them on our Board.

As far as the exploration of the potential spin, the Board of Directors approved the filing of a request with the Internal Revenue Service and a Form 10 with the Securities and Exchange Commission.

The IRS ruling request has been filed, and it is anticipated that the Form 10 will be filed during the third quarter. Although the accounting and legal work to ensure that a spin does not create any economic inefficiencies for our shareholders has not been completed, the Board felt it was appropriate to file the paperwork at this point in time.

Now, on to the results from our business segments.

We worked hard to present additional operating information in our earnings release. Therefore our goal in these remarks is not to simply replicate it all orally but instead to provide you with some additional color and insight.

In our Enthusiast Media segment, the Enthusiast Media's advertising revenue decline this quarter reflects continued challenges in the international auto group, as well as weakness at some smaller titles that fall outside of both auto and outdoors.

I would like to give you a status update on our two largest initiatives.

First, our product redesign and circulation performance efforts. We have implemented significant product improvements on 16 magazines so far in 2006. The early results of the redesigns are positive, as the total newsstand units on the 16 titles have increased by over 5% versus the average sales in the six months prior to the redesign.

This compares to a low-single-digit decline in the rest of the portfolio on a comparable basis. In addition, almost 40% of the units sold are at a higher cover price than prior to the redesign.

We also focused on re-launching these redesigned products to our advertisers. As a result, for these titles, revenue trends were over 20% higher than on the rest of the portfolio. The advertisers tend to be particularly excited about advertising in the first couple of issues of a well-designed re-launch, so that gap may decline but we believe that we will continue to see positive advertising impact going forward on these products. We also want to emphasize that we do not view the redesign process as a one-time activity. We now routinely run cover and content consumer tests on our major titles, and we will also track the net economic impact of each individual redesign.

Editorial and art talent upgrades continue to also be an area of focus, as new talent has been brought in to fill 7 of the 22 automotive, editorial, and art director positions.

Finally, we further optimized draw and distribution to fund these improvements and improve overall circulation profitability. In the quarter, we reduced draw by over 3 million copies, or 6%. We are pleased by the results of this draw reduction and have planned additional reductions in the second-half of the year.

Our strategy here is to make incremental reductions on a product-by-product and location-by-location basis, while carefully monitoring the impact on newsstand sales. It is a very labor- and data-intensive process, but one with significant cost benefits.

Our second big initiative is our focus on non-print revenue. PEM's non-print businesses are on track to represent approximately 25% of Enthusiast Media segment EBITDA in 2006, which is up considerably versus the 10% in 2005. Through the first half, non-print represented 14% of segment EBITDA, with growth of 3% driven primarily by the acquisitions of automotive.com. and equine.com, partially offset by declines in licensing.

Automotive.com continues to make substantial progress, as auto dealers seek increased car sale leads. Since the acquisition of automotive.com, the efficiency of automotive.com's lead generation business has significantly improved.

To support our on-line advertising activity, we recently established the Automotive Digital Network, which is comprised of seven flagship in-market websites, including motortrend.com, automobilemag.com, automotive.com, and intellichoice.com.

This network delivers more than 10 million unique visitors and 55 million page views each month, and is currently the sixth largest online automotive network. According to Nielsen, this network has the highest percentage of uniques who are active in the market to purchase a new automobile. This is a measure that is really important to automobile OEM’s.

I would like to make a point on our automotive.com acquisition.

A contract established prior to our acquisition gave an outside agency exclusive rights to sell advertising on the site. This contract expired in June, and we now have taken over automotive.com sales efforts.

Despite this constraint, advertising revenue booked in the first-half of 2006 across the automotive digital network already exceeds the combined advertising revenue generated on these sites for the entire calendar year 2005.

We also hired a new vice president responsible for advertising sales. We expect to benefit from both the management change and now having total control over the automotive.com inventory in the second-half of the year.

Equine.com is also tracking well, and we are working hard on the next two extensions of that platform into marine and antique guns.

Merchandise and licensing revenue was down slightly year over year, which is really driven primarily by a reduction of toy-related revenue. We believe there is still meaningful revenue growth potential in merchandise and licensing, as our team there continues to focus on more and more of our titles, particularly in the Outdoor group where they have just recently started to work more closely with this business.

Television and radio also had double-digit growth, highlighted by 30% growth in the Outdoor group, as they continue to successfully extend their profitable programming.

I would like to make a couple of points on our Enthusiast Media Automotive business.

First, the International Automotive Group's underlying market continues to decline and although the revenue grew quarter over quarter, it declined year over year. We are taking very aggressive actions in response to this tough market environment.

First, we redesigned a few of our largest properties here to ensure we defend our market-leading position. Also during the quarter, the International Automotive Group was restructured, dividing the publications between the Consumer and Performance automotive groups to both significantly reduce overhead costs and improve market execution.

The second point I would like to make is that our reliance on automaker advertising has historically been, and continues to be, relatively small. U.S. automaker print advertising in the quarter was just 4% of PEM's total print advertising revenue. Total automaker print advertising in the quarter was 12% of the segment's total. Non-automaker advertising was 50% of the segment's total. Approximately 85% of Enthusiast Media print advertising is for products and services specifically targeted to each publication's subject matter. The level of this advertising tends to reflect the general interest in the subject matter, whether it be cars, fishing, hunting, or whatever, rather than general economic trends.

In Outdoors, in order to create operational efficiencies, we combined the Action Sports Group with Outdoor, Marine, and Equine under one umbrella that we have named PRIMEDIA Outdoors. Jeff Paro will run the group.

A 20-year veteran of Enthusiast and Outdoors media, Jeff oversees 15 of the Outdoor's leading media franchises which form this group. Prior to joining PRIMEDIA, Jeff spent several years with Times Mirror as president of their outdoor company, and he also began his career with the New York Times Sports and Leisure division.

Moving on to Consumer Source, revenue growth was driven primarily by very strong results in new home guides and the expansion of the segment's Auto Guide division. This was offset by declines in the segment's Apartment Guide division. Other revenue’s slight decline reflects DistribuTech's optimization of distribution locations that were unprofitable and not critical to the Consumer Source's core guides business.

EBITDA growth reflects a strong increase in New Home Guide’s organic growth and DistribuTech’s profitability improvements, largely offset by expenses associated with the new home and auto guide launches and the revenue declines in apartment guides.

Starting with Apartment Guides, the new management team there continues to take a number of aggressive actions to improve performance.

Four of the 12 regional managers and 32 of the 75 local publishers have been replaced since October 2005. Changes that fueled increased revenue have been made to the compensation system. Thirteen of the 17 remaining black-and-white apartment guides have been converted to color, with the remainder scheduled to be converted by the end of 2006. Finally, there was a major upgrade to the apartmentguide.com site in June.

Still, Apartment Guide and apartmentguide.com continue to face challenging market conditions. Over half of our revenue is in markets where local occupancy levels are above 95%, which historically is the level where we start to see reductions in advertising by property owners.

These publications are grouped particularly along the Gulf Coast and the West Coast, and this level overall is very high relative to historical norms. As a result, total advertising revenue in the quarter declined 6.2%.

While these negative market conditions resulted in reduced advertising revenue for the quarter, the Apartment Guide brand continued to show its strength, as apartmentguide.com grew leads by 14% versus the previous quarter.

RentClicks performed extremely well in the second quarter, growing organically 53% versus the previous quarter, and 91% versus last year.

We are quite excited about RentClicks as a platform to serve the five- to 75-unit rental marketplace. RentClicks is the market leader in this lucrative segment of the market, and with low market penetration, represents a significant growth opportunity.

On to New Home Guides, we continue to deliver strong results with revenue growth of 34% in the quarter. This business has established itself as one of the most cost-effective and attractive media channels for home builders. We are also seeing solid growth in the online presence. The newhomesguides.com portfolio site had the fastest growing number of unique visitors in the first two quarters of 2006, according to media metrics.

In Auto Guides, we continue to show strong performance with total revenue growth of 123% in the quarter. This new division now represents an $18 million business, based on annualizing the revenue in the second quarter.

It continues to have strong growth potential, both within its existing markets and through new market expansions.

Finally, DistribuTech -- we view this business first and foremost as a support activity for our guides. We offset most of the total distribution costs by also placing other publications on our racks for a fee. We are continually optimizing our number and type of distribution outlets in each local market, to ensure that we have the best local distribution for our own guides at a reasonable cost.

A number of factors can impact our DistribuTech revenue.

First of all, as we add our own guides to our racks, it reduces the third-party revenue potential of those racks.

Also, in the second quarter, we reduced our quantity of revenue-generating distribution locations, which are generally retail locations in which DistribuTech leases the third-party rack space, while increasing the quantity of non-revenue-generating distribution locations, such as street-boxes.

This shift in the mix of distribution locations took place primarily in markets where DistribuTech had an extremely high share of the retail distribution. The net effect of this optimization was reduced DistribuTech revenue with a positive impact on Consumer Source profitability.

On to Education -- in the first quarter, we decided to actively pursue the sale of the Films Media Group. The operations were classified as discontinued operations.

We have always said that we would sell a business if it was worth more to somebody else than it was to us. This was the one example of where this proved to not be the case, as we went through the process.

We believe that Film's revenue and segment EBITDA will grow, based on continued improvements to the core operation and the rollout of the digital platform. The offers we received did not recognize this up-side in performance.

As a result, the operations of Films have been reclassified to continuing operations.

We have brought in new management to run the business and to capitalize on these opportunities. The business also now reports to Judy Harris, President and CEO of Channel One, who has significant experience in the education market.

Channel One's decline in advertising revenue is mainly attributable to the ongoing impact of large reductions in advertising from a few select advertisers in late 2005, and a decrease in sales from the Entertainment category.

During 2006, Channel One added sales staff to cover the critical New York and Chicago geographies, and expects to bolster West Coast sales coverage through a new hire late in the third quarter. One thing is important to note about Channel One, and that is Channel One's advertising has by far the longest sales cycle of any of our properties at PRIMEDIA. Many of the advertisers make their annual television commitments during the network and cable TV up-front market process, which happens over the summer of each year.

Judy joined us in the second quarter of 2005, and our new head of sales joined us in the fourth quarter of last year. As a result, we expect to begin to realize the benefits of this new management and sales team in the fourth quarter of 2006.

Channel One recently moved the production of its programming from Los Angeles to its new, state-of-the-art Washington, D.C. newsroom -- a move that puts the network at the hub of news and public affairs, significantly reduces operating costs, and adds efficiencies into the production and content generation process.

Expenses relative to the move have been realized in the second quarter, while the positive impact on expenses are expected to be realized beginning in the third quarter, with full benefit in 2007.

We anticipate the annual cost savings are over $2 million.

Finally, PRIMEDIA's Healthcare business had quarter-over-quarter revenue and segment EBITDA slight declines, but it is still expected to have a second year of solid growth in this continuing medical education business, following from its new strategic direction in 2004.

As we have said before, Healthcare has already contracted for more revenue in 2006 than it had in all of 2005.

Finally, with regard to guidance, as previously announced, for the full-year 2006, PRIMEDIA forecasts that on a consolidated basis, the company will have year over year, mid-single-digit percentage revenue growth and low- to mid-single-digit percentage segment EBITDA growth, second-half weighted with the revenue and segment EBITDA growth in both the third and the fourth quarters.

With that, I will turn it over to Carl Salas, our Treasurer.

Carl F. Salas

Thank you, Dean, and good morning, everyone. Through the second quarter of 2006, we continued to track along our plan for improving PRIMEDIA's financial strength.

Despite the cash payout of $32 million of semi-annual interest payments on two of our bonds in this second quarter, and despite funding once-per-year employee bonuses and vendor payments, debt balances at June 30th remained below December year-end levels, and increased only $4 million compared to the last quarter ending March 31.

In the second quarter, we benefited from higher levels of cash from operating activities, resulting from continued improvements in working capital management, and also reduced debt service.

Our ratio of debt-to-segment EBITDA, including discontinued operations, was 8.0 times for June 30th, versus 7.8 times last quarter, and compared to 12 times in 2001.

We expect the leverage ratio to improve in the third and fourth quarters, as we grow segment EBITDA consistent with guidance.

Demonstrating the benefits of lower debt levels compared to last year, through the six months ending June 2006, we paid cash interest on funded debt of $64 million, which is $28 million lower than cash interest of $92 million for the same six months last year. As of June 30th, our average cost of debt is 8.3%, reflecting the benefits of eliminating higher-rate preferred shares, which carried an average [coupon] of 9.2%, partially offset by rising interest rates.

We expect free cash flow to be negative $4.1 million for the second quarter of 2006, which is significantly improved compared to negative $38.9 million for the same three months last year.

Again, the increase in free cash flow to the second quarter of 2006 is due to better working capital management, as well as lower interest payments. Adverse timing differences in payables that we noted at the end of the 2005 were indeed temporary.

As we enter the second half of 2006, which is traditionally our stronger period, we are positioned to generate higher levels of free cash flow from operations versus the first half, enabling us to reduce debt further.

Finally, we purchased 57 million of our 8-and-7/8 senior notes during the second quarter, at an average price of 97.6%. Buybacks to date total $64 million, and our fixed floating ratio is approximately 50-50.

We will continue to take advantage of opportunities to redeem higher coupon debt at attractive prices, which further reduces interest expense.

In summary, the company continues the track on the plan to improve its financial profile. In the first-half of 2006, we succeeded in improving our working capital position, and also reduced debt service by $28 million versus the same six months in 2005.

Thank you. We will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

We will go first to Paul Ginocchio, Deutsche Bank.

Paul Ginocchio - Deutsche Bank Securities

Thank you. Just a couple questions, maybe starting with Enthusiast Media. It looks like some of your larger titles are turning quite well, with ad page growth based on what we can track from the trade press. Can you maybe talk a little bit more about what titles or what sub-categories are performing badly, and are performing below expectations, and what the outlook for those are? I have a couple of follow-ups as well. Should I ask those now?

Dean B. Nelson

Why don't we just go one question at a time, Paul, and then you can ask a follow-up.

You are right. Our larger titles, and especially our titles in our core businesses, automotive and outdoor, action sports, and marine are doing generally well, with one exception, which is our international auto title. That market continues to struggle overall.

We performed, we think, pretty well in a difficult market, but it is still a very difficult market, particularly for advertising.

The rest of our titles are the ones also that under-performed our expectations, under-performed the rest of the portfolio. Titles in things like gems, [slam], soap, so on and so forth, our smaller groups.

Our two large groups, automotive and outdoor, with the exception of international, are doing well.

Paul Ginocchio - Deutsche Bank Securities

On international auto, I thought there was a new Honda, sort of tuner model. Has that had any impact yet?

Dean B. Nelson

It is out there. Realistically, from an advertiser standpoint, what they have to see happen is the following: one is, there have to be enough cars out there in people's hands to justify bringing out tuner parts for those cars. Once they get those parts developed, then they have to get to distributors, and then the distributors starts to advertise, and that takes some time.

I would say the Honda model is selling fine, but we have not yet seen that process work its way through.

Paul Ginocchio - Deutsche Bank Securities

Any time-line based on historical patterns? Maybe the second-half of ’07?

Dean B. Nelson

It is difficult for us to say. I would say the historical pattern was partly driven by a couple of models that were great, but also just a market that was on fire, and an interest level that was extremely high. I think we would be too optimistic if we tied to it the second half, or the previous process.

What we are working on is everything we can control, which is making sure we have the best quality product and making sure that we have good, effective sales activity, and finally, making sure that we do not burden the business with lots of in-directs that hurt the profitability.

Paul Ginocchio - Deutsche Bank Securities

Just a follow-up on circulation, a two-parter -- one is, is it also where you are seeing advertising under-performance is also where you are seeing circulation weakness?

Dean B. Nelson

Generally, that is the case, yes.

Paul Ginocchio - Deutsche Bank Securities

Then finally, you have been really reducing your draw, I think now 6 million over the last two quarters.

Dean B. Nelson

Reducing -- I am sorry, what? Our draw?

Paul Ginocchio - Deutsche Bank Securities

Yes, your draw. I think you implied the number. You are at 53 million of draw. How much more is possible, do you think? I know it is an iterative process.

Dean B. Nelson

I think we believe in the second-half of the year, that we can take it down. If not as much, incrementally as much as the first-half of the year, still very much -- still a healthy number.

As I said and as you said, it is an iterative process. We keep taking it down and then we track the publications for a few months to see how they are doing. Then, if it looks like it has not had a negative effect, we continue to take it down.

From our standpoint, it is a great way to fund the improvements in the product.

Paul Ginocchio - Deutsche Bank Securities

Great, sorry, just three more quick ones. When do you cycle most of the New Home Guide and automotive launches, so that the cost structure, or EBITDA growth starts to pick up in the Consumer Source area?

Dean B. Nelson

That is a good question. We spent a lot more money on the auto launches than we did on the new homes launches. The auto launches primarily cycle here in the third quarter.

Most of them were done in the third quarter of 2005, so this is the last quarter, the second quarter, where we have launches that were not around the previous year. That is part of the reason why we are forecasting and giving guidance for the second-half of the year for that business that is much better than the first half.

Paul Ginocchio - Deutsche Bank Securities

Great. Last question -- how did the Channel One up-front go?

Dean B. Nelson

You know, Channel One in and of itself is not an up-front property, because of the very unusual nature of it. It is a big check for a couple of plots of advertising for most of our advertisers, but we get caught up in that same budget process. So they are out there right now, pushing quite hard to drive sales.

If you think about the up-front process, the first thing that converts is the network, and the second thing that converts is the cable. We tend to get our conversions and commitments from advertisers after the cable, which is still finishing up.

We would expect to know a lot more here in the next two months.

Paul Ginocchio - Deutsche Bank Securities

Thank you very much.

Operator

Our next question will come from Andrew Finkelstein with Lehman Brothers.

Andrew Finkelstein - Lehman Brothers

Good morning, just a couple of quick questions. Looking at the growth in the two segments, given that there were some acquisitions you put in at the second-half of last year, the numbers are implying the core business is down, it looks like to us. I just want to know if you can confirm that, and maybe flush that out a little bit more.

Then, obviously given the softness in this quarter, you are obviously reiterating guidance for the full year, but are putting, it looks like in our models, even more pressure on that back-half. Maybe you could talk about the visibility into the back-half, and how good you feel about, or what you see happening, where we sit today?

Dean B. Nelson

Print was down -- you think about print being the core business -- was down low-single-digits year over year on a percentage basis. That was primarily, as we said, advertising, and that was primarily in international, and these non-automotive, non-outdoor titles.

It was kind of a bimodal dichotomy performance, which is unfortunate, but it does show the health of our core businesses.

What you have to realize, in terms of the back-half of the year, is last year was a very unusual year for us in terms of our profile. The second quarter was really extremely strong, relative to historical second quarters. The back-half of the year was considerably weaker, particularly from an advertising standpoint. Part of the reason you are seeing a bigger improvement in the second-half of the year is that.

Secondly, we are anticipating continuing to get good performance from our redesigns, which are going well.

Third, there was a significant increase last year in July in some of our raw materials, particularly paper, which we are annualizing now.

Our visibility right now is very good through the third quarter. We are out there right now, finalizing the books from an advertising standpoint through that third quarter. We have less good visibility in fourth quarter, but our guidance is really geared around an assumption that the markets will be stable, generally stable -- neither having significant improvement or significant decline from an advertising standpoint.

The guidance on the Consumer Source side, the consumer guide side, is driven a lot by, as we said before, the annualization of these launches. We made a big investment, as we talked about before, last year in those launches.

On a quarterly run-rate basis, that number spiked considerably in the third quarter of 2005. The costs of those markets have not gone up. If anything, we have been pretty aggressive to manage them down. Obviously we now have some good revenue in those markets, and so therefore, on a year-over-year basis, the impact of those launches was considerably better in the third quarter of 2006 than it was in ’05.

Andrew Finkelstein - Lehman Brothers

Would you say the acquisitions from the second-half of last year, automotive, equine, are performing at or above expectations so far?

Dean B. Nelson

They are performing extremely well. We are seeing very good growth.

The numbers that we look at for automotive, in particular, are in two areas. One is we tend to look at the revenue we get on leads, [inaudible] the cost it costs us to drive that traffic. It is kind of like -- I cannot use any accounting terms here because I know I will get in trouble, but you can imagine what that [maps] like if you look at that on a weekly basis, and that continues to improve.

We had our best weeks ever in the history of the company in the second quarter, and it is looking very good here in the third quarter so far, in terms of July.

The second thing we look at is ad revenue, and as I said earlier, the total ad revenue across all of our automotive sites is above, in terms of commitments, is above all of our revenue for 2005.

Those are really the two revenue drivers in that business.

A lot of the benefits that we are expecting to get from the acquisition, we are just now starting to see. We are doing a better job of driving traffic from Motor Trend and automobilemag.com to the automotive.com site. We are just now really upgrading the quality of the sites themselves in terms of the content. We are improving the SEO, and a lot of that has not been built into the numbers yet.

On the equine.com site, it is doing great. The logic behind doing the Equine acquisition was only partially because of our position in the Equine business and much more around extending it into other businesses. We are making very good progress.

The next launch will be marine, which will happen here relatively soon. Then we will move into antique guns.

So the real way to judge our progress there ultimately will be getting those sites up and running and making it profitable.

Operator

Our next question is from Ken Silver at CRT capital.

Ken Silver - CRT Capital Group LLC

Good morning. In terms of the filing of the Form 10, can you give us a sense of whether you think it is going to be in August or September?

Dean B. Nelson

From a logistics standpoint, we are obviously finishing up the 10-Q first, and then we are going to focus on getting that out and finalized. So it is hard to say, but it will certainly be in the third quarter.

Ken Silver - CRT Capital Group LLC

You have talked about the reduction in the magazine draw a couple of times now. Can you quantify how much you have saved in costs in the first-half of the year from the $6 million decline in draw?

Dean B. Nelson

I am not sure we have that number, or we disclose it. A lot of these publications are anywhere from $0.25 to $0.50, $0.60 a copy, so you can use some rough math and estimate what that would be.

Ken Silver - CRT Capital Group LLC

Okay, I am just writing that down. Thank you. Then, I do not know if you said this or not, but what was the decline in the Apartment Guide revenue in the second quarter, year over year?

Dean B. Nelson

I think -- what was it? I think we said overall for the apartment category, it was just over 6%. If you look back at our data, we saw a significant decline towards the end of last year, and very early this year. So part of what you are seeing in terms of the year-over-year decline is just the rollout of that.

Most of our contracts are 12-month contracts and constantly come up for renewal. So when you have a decline in one quarter, it kind of carries through the following couple of quarters.

Ken Silver - CRT Capital Group LLC

What percentage of the segment revenue is Apartment Guide?

Dean B. Nelson

Seventy-seven percent of the advertising revenue. The rest of the revenue that is non-advertising is our DistribuTech business.

Ken Silver - CRT Capital Group LLC

You give a separate line for that, right?

Dean B. Nelson

Yes. If you look at the release, you will see advertising and other revenue. Apartments is 77% of that advertising line.

Ken Silver - CRT Capital Group LLC

Okay.

Dean B. Nelson

If you look at the segment growth overall, it is 77%, declined at 6.2%. It shows you how much progress, on the other hand, we are making at new home guides and auto, given the overall performance of that line.

Ken Silver - CRT Capital Group LLC

Thank you.

Operator

Our next question is from Todd Morgan at CIBC World Markets.

Todd Morgan - CIBC World Markets

Thank you. I was hoping that you could talk a little bit more about the operating costs and the corporate overhead costs in the second-half. I am just looking at the first half of this year compared to last year, revenues are down about $10 million, the cost, including the corporate overhead, is up about $20 million.

If I try and think about the changes that are going to happen in the second half of the year, you talked about launch costs for some of the guides annualizing, but you had an acquisition, print costs are probably going to be up, postage, things like that, color conversion costs for the apartment guides, I think you have a few more of those to do, launch costs for new sites -- can you give us some sense of how that costs, some of the puts and takes in that cost number?

Dean B. Nelson

I would be happy to do it. First of all, from a cost standpoint, you have to realize that the revenue line has a lot going on in it.

One is that we added a couple of acquisitions, primarily automotive.com and, as we discussed a few minutes ago, lost some revenue in our traditional core print business. Although the revenue line has not shown a lot of change, we do have the issue of adding a new business and the costs associated with that new business, versus losing incremental revenue in the core business, which explains a lot of the cost increase in the Enthusiast Media business.

Also, you are going to see a little bit on the automotive.com. Because of automotive.com, you are going to see those costs jump around a little bit because they are quite selective about when they do buy traffic, is it attractive or not attractive on a marginal basis, and they try to drive that incremental margin as opposed to a revenue line. When they obviously are buying more traffic and driving more margin, it increases the cost a little bit.

The other part of Enthusiast Media that has driven up the cost, of course, is as we described before, we saw a significant increase in paper price in the second-half of last year, so we are seeing the annualization of that paper and ink cost increase in the first-half of this year. Overall, our headcount and labor costs are actually down.

Then there is the other tradeoff that you see going on in the Enthusiast Media cost structure is the reduction in draw offset by the expense of putting improvements into some of our publications, and net, net, the economic benefit of improving the publications has been positive as we look at it, but it does increase the cost of those publications.

There is an awful lot going on in those lines right now.

Todd Morgan - CIBC World Markets

That is fair, but I guess I am just…

Dean B. Nelson

No, it was a good question. Let me say, on the corporate overhead line, the reason the corporate overhead line is up is simply because of the cost associated with exploring the spending.

Todd Morgan - CIBC World Markets

So at the end of the day, if you were going to help me understand what costs are going to be down materially in the second-half of this year, I understand the revenue story that you have talked about, but just in terms of what components of your cost structure are going to be down in the second half. I am trying to come up with what those are.

Dean B. Nelson

I think if you look at our overall guidance, the cost on the costs will get better, right? Because you obviously hit the July, but most of our overall guidance is based upon a slight improvement in the revenue trends. The slight improvement in the revenue trend is partly driven by what was an extremely soft third and fourth quarter last year in ad revenue, versus a relatively strong second quarter, so the comps get easier.

But now realize in the area of Consumer Guides, Consumer Source, we have now got a number of new publications we did not even have a year ago. The new launches, which had positive revenue associated with it.

Finally, the benefits from the redesigns and the benefits from the integration of automotive.com.

What you are going to see is, and what you saw overall, I think, and what you are commenting on, is the costs did not necessarily stay down, but revenue that was relatively flat for the first six months, so what you are going to see is less of a cost increase on a quarter, year-over-year basis, and better revenue trends.

Todd Morgan - CIBC World Markets

Another comment you made in the press release, talking about the efficiency of lead generation improving dramatically in automotive.com. Could you just touch on that? Obviously there is a lot of traffic already. Could you just talk about how that really plays out going forward?

Dean B. Nelson

When we talk about efficiency of lead generation, it is really driven primarily by the fact that there are two ways we get people to automotive.com as a site to possibly capture their data around wanting to buy a car. One way is through organic, straight-to-the-site traffic, which can happen from search engine optimization, but also is happening now from people going to Motor Trend or Hot Rod or other places, and continuing through those sites to automotive.com, which is one of the benefits for us doing that acquisition.

The second way we get traffic is obviously through pay-per-click keyword. Obviously the leads generated by organic traffic are significantly more profitable, since we do not have any costs associated with driving that traffic, than the leads driven by pay-per-click, although the pay-per-click leads are profitable.

So when we talk about improved efficiency, we are talking about an improvement in the mix from traffic that we have to pay for to traffic that we do not have to pay for. It improves the profitability of that lead generation business significantly versus when automotive.com was a standalone business.

Todd Morgan - CIBC World Markets

On the same theme, if I look at automotive.com, there is not a lot of advertising on there right now. It sounds like you have just taken over that function, or brought that in-house. Is it fair to say that in your mind, there is a lot of significant, unsold inventory? I mean, just being able to add banner ads to a greater number of pages, it would appear to me there is this huge opportunity.

Dean B. Nelson

There is significant opportunity. It is going to take us a little bit longer to totally capitalize on that because of the sell-cycle on the Internet, but there is significant opportunity.

As we said, we just did take over control of that. Automotive.com did not have the interest or the bandwidth to have its own sales organization, so they outsourced that activity. It was outsourced in a way that did not particularly drive a lot of revenue.

Right now, September, October is the time when a lot of the OEM’s in particular, which are the highest revenue sources of advertising, are making their commitments for on-line for ’07, and we feel very well-positioned as we go into that September timeframe.

Todd Morgan - CIBC World Markets

Thank you.

Operator

Our next question comes from Michael Meltz at Bear, Stearns.

Bobby Kim - Bear, Stearns & Co.

Hi, this is Bobby [Kim] for Michael. Just a few questions. You gave the numbers between the U.S. auto and total auto and non-automaker for advertising revenues. What are your expectations for the full year? Do you expect that to deviate much from that?

Dean B. Nelson

Our guidance is based on what I would call consistent, steady performance versus where we are today from automaker advertising -- neither a significant improvement in that market, nor a meaningful decline in that market. We are expecting the ad market for auto to stay pretty constant. I think that is a reasonable assumption, based upon the visibility we have through Q3.

Bobby Kim - Bear, Stearns & Co.

Also, could you give Consumer Source revenue growth on an organic basis?

Dean B. Nelson

I do not know that we have that right in front of us, but it would be a very, very, very high percentage. We view launches as organic, since we are doing them off of our own platform.

Really, the only acquisition we have done of any size, and it was very low millions of dollars of revenue, was RentClicks. Most of the acquisitions we have done last year on the new home side have worked their way through the system.

Our new homes organic revenue growth was actually slightly higher than the revenue growth you saw in the press release for new homes, because we actually, from the acquisitions we had done, we shut down and sold a very small publication.

The organic growth there -- it is almost all organic. Obviously auto is all organic at this point, and apartments is all organic, except for the very small RentClicks.

Bobby Kim - Bear, Stearns & Co.

RentClicks was a few million last year in the quarter?

Dean B. Nelson

In the quarter, absolutely not. For the year, it is low-single millions of dollars I think for all of 2005, as a standalone company.

Bobby Kim - Bear, Stearns & Co.

Also, do you have the run-rate expectations for your corporate expense line after your office consolidations?

Dean B. Nelson

I do not know that we have a specific run-rate number like that. I think what you would find again if you backed out the cost of exploring the spin, particularly all the tax work that had to be done to get the NOL’s aligned on a tax basis, you would find our corporate costs are going down.

So what you are going to see is a little bit of a variation here from Q2 and Q3, driven primarily by that activity.

The other things that is worth noting that is in the release but we have not talked about so far is we are going to save considerable money in '07, and particularly in '08, as we finally get to one location in New York City for PRIMEDIA, which has been a long time coming.

That is going to save us quite a few million dollars going forward. Some of that could show up in the Enthusiast Media line, because that is part of that business space, but a lot of it will show up in the corporate overhead line as savings.

Bobby Kim - Bear, Stearns & Co.

Could you quantify that at all?

Dean B. Nelson

Sure. The ongoing run-rate benefit, once we get everybody moved, which will happen over '07, is about $4.2 million versus our current [inaudible] costs. It is about $2.7 million of savings in 2007, because we are not going to have everybody moved over until part-way through the year.

Operator

Our next question is a follow-up from Paul Ginocchio at Deutsche Bank.

Paul Ginocchio - Deutsche Bank Securities

Thank you. The language discussing DistribuTech, you say extremely high share of retail distribution, you sort of took some of those locations out. Was that because of competition concerns or that was another reason? Thank you.

Dean B. Nelson

It was not really a competition concern. I think what we find in some of these markets is the incremental benefit of being in virtually every grocery store in the market, or every retail location in the market, that the incremental costs associated with that in terms of the rack costs and the fees to pay the retailers, is not worth the incremental benefit to our guides business.

You do not need that broad of a distribution to really drive the leads and traffic that we want to drive and leases for our advertisers.

Obviously, most of our third-party publications that we distribute only go on a small fraction of those racks, so what we did is we got rid of the racks we were least interested in, that were the least attractive to our third party, and therefore ultimately were the least attractive overall for our own guides. The result was an improvement in profitability but a decline in revenue.

Paul Ginocchio - Deutsche Bank Securities

There is no issue with your lock-up on quite a lot of the retailers, right?

Dean B. Nelson

No, there is not. Those are multi-year contracts, and we are not facing any significant contract renewals here in 2006.

Paul Ginocchio - Deutsche Bank Securities

Thank you.

Operator

We do have another question from Al [Alamo] at Seneca Capital.

Al Alamo - Seneca Capital Management

Regarding the possible spin, if you could give us a little more color on the timing, and what the request is you are making of the IRS, and your expected timing of a response from them?

Dean B. Nelson

I think if you look at the critical path on both filings, the critical path on the Form 10 is probably going to be longer than the IRS, because the IRS is [updating] its files.

If we file the Form 10 here in the third quarter, which we will do, if you look at history, there is a variable period of time for the SEC to get back to us. So we would expect to hear back this year, but I would say it is unlikely that a spin would happen in calendar year 2006.

But it could happen very, very, very early in 2007, if the Board decides to go forward.

Al Alamo - Seneca Capital Management

Will this Form 10, will it disclose a pro forma balance sheet of the two entities?

Dean B. Nelson

Yes, the Form 10 has to give, obviously, a fair amount of detail on how the two businesses will look as stand-alone businesses, so that is all going to be in the Form 10.

Al Alamo - Seneca Capital Management

When can we expect that?

Dean B. Nelson

In the third quarter.

Al Alamo - Seneca Capital Management

Okay, but is it going to be in the next few weeks, is it going to be in September?

Dean B. Nelson

Well, we are already a third of the way through the third quarter, so it will be some time in the next eight or nine weeks.

Al Alamo - Seneca Capital Management

Okay.

Dean B. Nelson

We are going to file the 10-Q first, obviously, and then we are going to finish up the work on the Form 10 right after that.

Al Alamo - Seneca Capital Management

Okay, but the board has approved the Form 10?

Dean B. Nelson

The board has approved filing the Form 10. So it is just a question of…

Al Alamo - Seneca Capital Management

So they have approved the balance sheets?

Dean B. Nelson

Yes, well, they have approved filing the Form 10, and they are aware of what is in that Form 10, absolutely.

Al Alamo - Seneca Capital Management

Does the pro forma balance sheet include 8 and 7/8 notes being at remaining outstanding?

Dean B. Nelson

We will wait for the filing of the Form 10 to show that.

The one thing I would say, if we do a spin, that we have talked about a number of times, is our goal in the spin is not to have significantly different leverage ratios in the two businesses. It is safe to assume that if we do a spin, both businesses will have approximately the same leverage ratio.

How that manifests itself will depend a little bit upon the credit markets at the time and everything else.

Al Alamo - Seneca Capital Management

Could you give us -- explain your rationale for buying the 8 and 7/8 notes as opposed to the 8’s?

Dean B. Nelson

I think what we are always doing when we feel like we have some cash that can be deployed, we are looking for where we think the best return is for the company. It is a de-leveraging activity for us, because the 8 and 7/8’s are of course a higher cost.

We are constantly looking at the relative market value of things like that, and picking the one that works best from the value of de-leveraging the company and reducing our interest [rate splits].

When we get approval from the Board to do things like this, it is not driven by a specific issuance or bond. It is just go out and make some smart decisions.

Al Alamo - Seneca Capital Management

Are you concerned at all on your credit agreement by your ability to buy back bonds? Do you have an unlimited capacity to go out on the open market right now and buy back bonds?

Dean B. Nelson

You know, I think we are cognizant of making sure that we do it in a prudent way, from a balance sheet standpoint, but that is the constraint we face.

Carl F. Salas

If you take a look at it, you are trading off debt for debt, so it is not leveraging at all.

Al Alamo - Seneca Capital Management

No, I understand that, but do they put a specific constraint on you in the credit agreement?

Carl F. Salas

No, and the reason is the following -- the credit agreement dates back to the early '90’s. At the time, the acquisitions and the recapitalizations were quite extensive, so we do have latitude to refinance the debt and redeem debt.

Al Alamo - Seneca Capital Management

Okay. Have you bought anymore 8 and 7/8’s? Or any other bond in this third quarter?

Carl F. Salas

We disclosed what we are able to disclose. We will provide updates when we can.

Dean B. Nelson

We are cognizant of the fact that there are periods of time when it makes sense for us to buy, from an information standpoint, and periods when it does not, so we are very careful.

Al Alamo - Seneca Capital Management

Okay. I hope you file your Form 10 before September 30th. Thank you.

Dean B. Nelson

Great. Well, that is the entire queue. We would like to thank you very much for dialing in on our quarterly call.

Operator

Ladies and gentlemen, thank you so much for your participation. This does now conclude the conference and you may disconnect.

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