Primedia Q4 2005 Earnings Conference Call Transcript (PRM)

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PRIMEDIA Q4 and Full Year 2005 Results Conference Call (NYSE:PRM) February 21, 2006 ET

Executives

Dean B. Nelson, Chairman, CEO & President

Beverly Chell, Vice Chairman and CFO

Eric Leeds, Sr. Vice President and IRO

Carl Sallas, Vice President and Treasurer

Analysts

Paul Gnocio, Deutsche Bank

Matt Chesler, Deutsche Bank

Michael Meltz, Bear Sterns

Ken Silver, CRT Capital

Bob Kerchief, Credit Suisse

Al Alema, Seneca Capital

Adam Spielman, PPM America

Steven Weiss, Bank of America Securities

Michael DiMetri, Bank of America Securities

Todd Morgan, CIBC World Markets

Dean B. Nelson, Chairman, CEO & President

Good morning and welcome to PRIMEDIA full year 2005 conference call. I’m pleased to be joined by Beverly Chell, Vice Chairman and CFO, Eric Leeds, Sr. Vice President and IRO, Carl Sallas, Vice President and Treasurer and other members of our Sr. Management team.

As always, we refer to the safe harbor disclaimer spelled out in our earnings release. Also, any non-GAAP terms mentioned on this call are reconciled to GAAP in the earnings release in the Company’s SEC filings.

On today’s call we’ll summarize 2005’s results and review our operating strategies relative to those results. We will also provide 2006 guidance for our Enthusiast Media segment, our consumer guide segment and for PRIMEDIA as a whole. Carl will review our improved financial condition and then we’ll open the call to questions. Although we made progress across a number of dimensions in 2005, it was also a challenging year for the business, particularly in Enthusiast Media. As a result, we’ve set three priorities for Enthusiast Media in 2006. They are to first, improve our product to drive improved performance in our print business, second aggressively manage cost to fund any improvements and third, to rapidly grow our internet business along with the rest of our non-print portfolio.

The Consumer Guides overriding priority is to build on the year of investment in 2005, specifically, to reinvigorate our Apartment Guide’s business by leveraging the same management team and strategy that drive exceptional growth in our New Homes Guide business. To continue our strong performance in New Homes and DistributTech, to move our Auto Guides business to profitability through continued growth of our existing books and to continue to grow our strong on-line positions, particularly in Apartments and New Homes.

Regarding a potential split of PRIMEDIA, the Company’s management continues to examine all the relevant issues related to the split before making a recommendation to the Board of Directors. These elements include how a spin-off would impact taxes, debt, employees, customers, shareholders and debt holders. This work is complex and time consuming for our advisors and our corporate staff and we’ve been careful to shield the senior operating management from the assessment to ensure that they stay focused on writing the business. We will, of course, make an announcement when the Board has reached a decision either way. We did make significant improvements to our balance sheet during 2005. We divested some non strategic assets and retired or refincnaced some higher coupon obligations. Our debt maturity has been pushed out with no significant majorities until 2010. PRIMEDIA has strong prospects for 2006 thanks to initiatives currently being implemented. On a consolidated basis, the Company forecasts year over year mid single digit percentage revenue growth and low to mid single digit percentage EBITDA growth after corporate overhead.

We’d now like to move into a discussion of each of our large businesses starting with our Enthusiast Media Business. In 2005, both advertising and circulation revenue were down with the largest decrease being in Newsstand Revenue. Previously a number of you have asked us to provide more context and detail around our print revenue breakdown and we’re happy to do so. In 2005 5% of our print ad revenue came from US automakers, 7% from non-US automakers, 53% from automotive advertisers that are not automakers, for example, aftermarket parts and accessories, manufacturers and retailers, and 35% from non automotive advertisers. In 2005 the US automaker advertising declined 20% over 2004, while the non-US automaker advertising was flat. These percentages exclude our crafts and history businesses which accounts for the variation from the previous numbers that we have discussed.

I’d like to make a point on this revenue split which is although we are dependent on the auto category overall, we are not highly dependent on OEM advertising, especially domestic OEM advertising. The majority of our auto advertising is in this endemic market and it has very different characteristics and faces far fewer challenges than are facing the domestic OEM manufacturers or the part suppliers to those manufacturers such as Delphi. We’re making progress and attracting non endemic national advertisers particularly those aiming to reach the valuable 18-34 male demographic. We secured well recognized brands such as McDonald’s and Proctor & Gamble across print, internet and our Events Properties. Although our automotive segment struggled a bit in 2005, the Outdoor Marine Group had a 3% revenue growth and a 6% segment EBITDA growth in 2005. Power & MotorYacht had a particularly good year with over 7% increase in advertising revenue.

This brings us to our three priorities for Enthusiast Media for 2006. The first one is to improve our product to drive better newsstand and advertising revenues. Towards the end of 2005 we spent considerable time looking at our product improvement activities, specifically to understand what’s working and what’s not working, and we made some significant changes as a result.

First the team has created a much more rigorous and detailed schedule with key intermediate steps and checkpoints for each redesign along the way, and ensure that the appropriate resources have been committed to the process. This was not done with appropriate rigor historically.

Secondly, there wasn’t enough senior editorial and talent, art talent helping ensure that the redesigns continue to perform as the redesign was launched. We didn’t always have the right talent in the right spots; we organized and upgraded some of the talent to fill that role. The cost of the additional talent was relatively modest; at about $300,000 a year and we believe the benefits will be significant. This should help us address a recidivism problem where some of our redesigns were the changes didn’t stick.

Third, historically there wasn’t enough alignment between the budget and the redesign process. This year our budget as built in over $3.5 million in print product improvements, such as thicker package size and higher quality paper and cover stock.

Fourth, there wasn’t an explicit linkage between the product redesigns and a more aggressive advertising sales program. The economics of the redesign are partially dependent on generating some incremental advertising gains. Each of our major redesigns now is paired with an aggressive sales program.

Finally, previously we didn’t have the proper metrics in place to track performance versus the plan and make the necessary adjustments. We now have those metrics in place. We have scheduled 25 redesigns through September in our automotive sector with 17 of them incorporating major package size additions of 16-32 pages.

Our second priority is to pay for the investments through cost reductions elsewhere. First we took a hard look at the draw which is the number of copies we print and distribute to newsstands. Our sell through rates were low, and we collectively decided as a team to reduce the draw and eliminate the very low sell through locations to fund the improved products at the remaining locations. As our sell through improves at the core locations, we can add distribution back to the secondary locations as appropriate. Secondly, on the cost side, we dissipated a lot of editorial and circulation time on low impact special interest publications under our major brands. These special interest publications can serve a critical role when they have the potential to be a stand alone publication, like Motor Trend Classic or Diesel Power or when they offer immediate significant profitability. However, most are only break even at best resulting in what we call profitless prosperity. We’re focused on fewer more significant special interest publications, those with lasting potential. Third, we reduced our cost in other areas including headcount, particularly in the support functions where we have integrated across the groups to leverage our scale. We also needed these cost reductions to offset inflation and paper, ink and postage. These cost increases are forecast to total $10 in 2006

Finally, our third priority for PAM is to build out the non print revenue streams of our business, particularly the internet. We know that our internet investments have been of particular interest to a number of you and therefore worthy of some additional discussion.

First, we think our business is particularly well suited to the internet. Our information has a long shelf life. For example, fixing up a classic Mustang or a classic Chevrolet. And our relevant content therefore goes well beyond what you see in any one issue. Therefore, the internet represents a great way to provide a broad set of information when and how our readers want it. Also, unlike many categories such as news and sports weeklies, we generally don’t face the large range of new competitors.

Secondly, many of our enthusiasts also make major purchases to support their hobbies on line and want and need more information to make those purchases than is available on an eBay or Craig’s list types of site. We are a great source for that information. And we have a role to play in those transactions. The second major point we make on the internet is our internet presence historically has been sub-par. After acquisitions it was less than 3% of our revenue in 2005 and we really had no real presence on the transactional side of the business, which offers us greater potential than the advertising based market.

Third, if you look back a year or so ago, our internet assets were not a good fit with our strategy. We have worked very hard to fix about. The turnaround was driven by striking a major relationship with Google in 2003 and fixing the navigation issues and editorial quality issues at the same time. However, About really offered very little tangible benefit to our core Enthusiast business. In other words, it was a good internet asset, but not a good strategic set. We had really done very little work on our core internet assets nor had we really explored other internet assets in the market.

Based on this we took a number of actions in 2005 to address these issues. First, we sold About at a very attractive price for our shareholders. Secondly, we acquired two internet platforms, Automotive.com and Equine.com, that help us establish platforms in the transactional side of the Enthusiast Market. And, towards the end of the year, we merged our collection of smaller internet properties into a larger integrated automotive internet business to gain scale and focus. We also made management changes and upgrades as needed. The cumulative impact of these actions is significant for PRIMEDIA shareholders. Even after the cost of the two subsequent acquisitions, we netted over $300 million in cash from the About sale to reduce our leverage. We now have a substantial collection of internet assets that are tightly integrated with our core print business versus our small fragmented secondary Enthusiast internet position a year ago. The segment EBITDA potential of our integrated internet assets in 2006 is forecasted to be approximately 10% of the total PEMS segment EBITDA, making it a substantial and rapidly growing component of our business. At this level of performance, it will generate segment EBITDA that is comparable to about immediately prior to a sale.

We are happy to report that we are making great progress on the integration of our internet actuations. We’ve retained the key management and are pleased with their performance and contributions. Our initial focus is on integrating the businesses from a systems standpoint, driving advertising dollars on the acquired side and using the internet expertise from the new teams to increase stage views on our PRIMEDIA side. Our second priority is to extend the platforms in the new markets including Marine and the Automotive Aftermarket. Our efforts to extend l our business outside the print; go well beyond the internet and including licensing of merchandising, TV and Radio and events among other businesses. Including the internet, we expect to generate approximately 25% of our 2006 PEM segment EBITDA from these non print initiatives. We’ve seen particularly strong growth in licensing with revenue up 22% in 2005. In television, the outdoor group added two television shows for a total of 9 and grew revenue 44% and events, specifically our automotive events.

For the full year 2006 we expect Enthusiast Media to deliver year over year mid-single digit percentage revenue growth and low single digit percentage EBITDA growth. Adversely impacting our 20206 segment EBITDA are expected increases in paper costs, including the annualization of cost increase in the middle of 2005 and the US Postal Service postage rate increase. As I said a minute ago, these costs are forecasted to increase by $10 million in 2006. Our EBITDA is more heavily weighted to the second half of 2006 as we capitalize on the benefits of our internet acquisition see the initial benefits from our product redesign work, and annualize the cost increases that occurred in the middle of 2005.

Moving on not our Consumer Guide business. There the revenue growth in 2005 was driven by strong results in the segments New Home Guide division and the rapid expansion of the segments Auto Guide division. Consumer Guides invested approximately $19.5 million in 2005. In its Auto Guide Division to launch an additional New Homes Guide and to expand and extend this retail distribution programs in DistribuTech. The segment launched 6 new publications, acquired 13 publications, and added several new on-line properties, including the acquisition of American Home Guides Family website and Rent Cliffs.com. Collectively this level of expansion measured by the number of new properties started or acquired, well exceeds the level of activity in any one year previously and in fact exceeds the total activity over the prior five years. In other words, we’re working very hard to turbo charge this business.

The Apartment Guide, the business continues its market leadership in the most difficult market conditions in the businesses’ 30 year history. The year presented some significant challenges including unprecedented levels of condo conversions that eliminated existing potential customers and decreased vacancy rates in markets with high condo conversions and also in markets with significant levels of temporary residents caused by Hurricane Katrina, which caused advertisers to pull out from some of the books. Our stability in adverse market conditions is because of our brand leadership, our client retention rate and our high visibility distribution. We have some key initiatives in place to drive growth in the business.

First of all we appointed David Crawford to the new position of President and COO and Ellie Mayfield to the position of President of Apartment Guide. Both of them came up through the ranks of Apartment Guide and went on to generate terrific results in our new Home Guide. We also are looking to capitalize in the potential of the Apartment business through our Apartment Guide.com component of it which grew unique users 8.8% in 2005. Our combined Apartment Guide printer net offering print and internet media services to our advertisers provided approximately 3 million leads to customers in 2005.

We’re particularly excided about our recent acquisition of RentClicks.com Historically Apartment Guides has been focused on the 75 and up unit market, while RentClicks.com gives us access to the less than 75 unit market, which represents 70% of the overall market for rentals. We’re going to accelerate RentClicks.com’s growth by expanding its sales resources particularly by adding some dedicated (inaudible) and key markets and utilize in our strong sales culture. There are also comp synergies and the opportunities to place advertising on the RentClicks site. In our new Homes Guide area it represented the best year in history with revenue growth of 60% in 2005. 33% of that growth was organic growth in its existing markets. The division launched a new guide in the Washington, D.C. market and acquired Guides in Atlanta, Charlotte, Jacksonville, Nashville, Seattle and Portland. We significantly expanded our on-line presence through major upgrades to our primary website NewHomesGuide.com. and with the acquisition of the American Home Guides websites. The relatively low penetration of essential builder communities in our core market and a strong momentum in these markets will enable strong growth in 2006, despite any potential slow down in new home construction.

On the Outer Guides side, we did a major expansion of the Outer Guide business in OuterGuide.com By year end we grew Outer Guide into a $16 million revenue business based on annualized run rate. We grew to a total of 14 publications through the launches in Triangle, Orlando, Miami, San Diego, Orange County and the (inaudible) empire. We acquired publications in Atlanta, Milwaukee and New England. We launched a national website Autoguide.com, to provide dealers with and integrated media product.

Most importantly, though, we enhanced our management team with the appointment of Bob McRae to the position of President of Autoguide. We’re seeing the benefits from Bob’s focused leadership and experience. We’ve seen almost 12% organic growth in our publications over the past 13 weeks.

The priority for Autoguide is to have all the markets on a break even or profitable run rate by the end of 2006. And then to add new markets as the existing markets become profitable. DistribuTech is the leading distribution business and showed strong 17.3% revenue growth in 2005. It’s working hard to renew its existing agreements and entering new agreements to both maintain (inaudible) locations and expand distribution to new locations. This primary objective of course, is to ensure continued top placement for Consumer Guides existing publications and to provide a platform to rapidly roll out new publications and to grow third party distribution. We expect in Consumer Guides in 2006 to deliver year over year mid single digit percentage revenue and EBIDTA growth. Our growth is expected to be led by strong gains in New Homes Guide, Outer Guide, expected growth in the RentClick.com business and that will be offset by a flat to modest decline in the Apartment Guide business. We expect to see higher growth in the second half of the year as we annualize expenses from our Outer Guide launches in the middle of 2005 and as our new team at Apartment Guide begins to have a bigger impact on the businesses’ performance.

On the education. In 2005, Channel One took significant steps. We appointed Judy Harris to CEO and President in April. We began to broaden this revenue base and she is actively developing partnership and sponsorship opportunities with corporations and foundations. She brought in a terrific new head of sales in the third quarter. Our primary objective for Channel One is to broaden its revenue base beyond traditional advertising to include corporate sponsorships, of public affair topics that are relevant to teens. In 2005 Channel One gained new sponsors including Verizon and Subway. The 2006 results will benefit from significant cost cuts taken in late 2005 and early 2006. Both the filmed media group and PRIMEDIA healthcare had positive year over year revenue of segment EBITDA growth in 2005 as a result of the fixes in the respected business models implemented in 2004. In fact, PRIMEDIA healthcare’s already booked revenues for 2006 exceeding those posted in 2005. And the Film media group is focused on the roll out of its digital platform.

In summary, we believe we have the right initiative in place to drive growth in both revenue and EBITDA in each of our businesses. And we are totally focused on execution at this point. Now, I’d like to turn it over to Carl Sallas, our Treasurer..

Carl Sallas, Vice President and Treasurer

Thank you Dean. Good morning everyone. 2005 marked yet another year of where we increased (inaudible) financial strength. With the sale of PRIMEDIA business and the refinancing of our bank facilities to take out higher coupons for stock and senior notes, our ratio of debt to segment EBITDA including this quarter’s discontinued operations was 7.5 times for year end 2005. This ratio compares favorably to 8.3 times at the end of 2004. In fact, in 2001 the Company has consistently reduced the ratio of reported debt and preferred (inaudible) obligations to segment EBIDTA at each year end.

Despite high interest rate, our average cost of debt is 7.9% with platform benefit of eliminating all of the high rate preferred shares which carried an average coupon of 9.2% at this time last year. The elimination of our highest fixed cost of capital benefits both equity and debt holders. Furthermore, we have pushed out our nearest significant debt maturity to 2010. Regarding free cash flow, we expect free cash flow to be negative ($47) million for 2005 compared to positive $4 million for 2004 due to the reduction in segment EBIDTA and also due to an increase in working capital as a result of timing differences. These variances were partially offset by the benefits of lower debt service and lower capital spending. Please note that for purposes of calculating free cash flow, discontinued operations were included until sold or shut down. Accordingly, the results of business information segment were included in the 2004 free cash flow calculation for the full year, but for only 9 months for the 2005 calculation given that it was sold in September.

Finally, we estimate that our restricted payment basket under our bond indentures is approximately $375 million for year end 2005. Of course, this figure takes into account redemption of all preferred shares (inaudible). Summarizing, the Company has succeeded in investing non strategic assets at attractive multiples and we have consistently reduced debt and preferred share obligations over the past five years resulting in improved financial strength. In 2006 we expect to benefit from the full year impact of these reductions. Thank you and we will now open the call for questions.

Question-and-Answer Session

Operator

As a reminder today’s question and answer session will be conducted electronically, if you would like to ask a question, please press the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Once again, if you would like to ask a question, please press star 1.

We will take our first question from Paul Gnocio with Deutsche Bank, please go ahead.

Paul Gnocio

Good morning gentlemen, it’s Matt Chesler for Paul. First question relates to Wards, can you tell us who you sold it to and for how much?

Beverly Chell, Vice Chairman and CFO

Wards was sold to the same people that bought the rest of the business information and it was sold for $5.75 million.

Matt Chesler

Okay. And, to touch upon the (inaudible) segment, I think you said on the call and then you released that in 2006 there aren’t any new launches planned? Can you talk about why you decided to sort of slow down or I guess halt or temporarily suspend the new launch activity? Thanks.

Dean B. Nelson

You must have broken up a little Paul, but I think what you asked was basically, what’s our launch plan for 2006 in Consumer Guides? I think you have to break that into two buckets. New Homes, we’re driving terrific growth in that business but we put a relatively burden on that magazine last year through the acquisition and the launches. And in fact, we think there’s a way to launch a secondary publication which we’ve done in a couple of markets already which is much more efficient and lower cost on the New Home side that could drive some incremental revenue in EBITDA. Our priority will be to do that because of the ease of doing that. On the Outer side, it has always been our intention to get a portfolio of Outer Guides out there started, get them up and running and then as we bring them across the finish line to move the management teams onto other areas. WE actually launched an additional Guide in 2005, that we didn’t expect to launch. We’re making great progress but we want to make sure that the management teams see them through before we move them on. You know as some of those publications crossed the line in 2006, we will go ahead at that point potentially and move the management teams on but that will be later in the year, and will not be significant in terms of our 2006 results.

Matt Chesler

I guess previous management had said that they were up to 55 attractive markets with which you could launch the Auto Guides in, is that still true with your current analyis?

Dean Neslon

Yes it is. Absolutely.

Matt Chesler

What’s the proximate turn around to profitability for a new Auto Guide launch?

Dean Nelson

Turn around profitability? In terms of the revenue required, or the timing?

Matt Chesler

In terms of the break even. How many months or years would it take on average to bring a new guide to sort of cash flow break even?

Dean Nelson

Well I think it varies a little bit by the individual markets and we’ve learned a lot as we’ve launched them. But generally we think one year to break even. What we’ve actually found is, some of the newest publications that we’ve launched, some of our Florida publications in particular have come out of the blocks very strong and are actually leading some of our previous publications and so as we get more experienced and launch more in the odd years, we would expect that time frame even shorten some.

Matt Chesler

Okay, thank you.

Operator

We will take our next question from Michael Meltz with Bear Sterns please go ahead.

Michael Meltz

Great. Thank you. First on newsstands, you mentioned some of the things you’re doing new or some new initiatives. What was the newsstand performance in ’04 as well as ’05? And then I have a follow up.

Dean Nelson

Michael, that is gated information that we have not historically provided in that level of detail, but let us track that down. Why don’t you ask your follow up question?

Michael Meltz

It’s actually related to that. Have some of the redesign titles, how are they performing on the newsstand?

Dean Nelson

Well, when we went back and looked at those, Michael, towards the end of the year, what we found was some worked extremely well, examples would be Motor Trend and Hotrod, some of them struggled a bit. The ones that struggled a bit; struggled for the reasons we described and we think we have the process in place to fix those and move forward in a more successful way. But in general, it’s been a positive beneficiary or performance generator, but not at the level that we expect going forward.

Michael Meltlz

Okay. I’ll move on to another question, while you dig up that info, but in terms of the guidance, does the you can turn to your segment EBITDA growth, does that include all of your FAS 123 costs?

Dean Nelson

Carl, I don’t know if you can address that or Beverly? Guidance with our FAS 123 costs?

Carl Sollas

FAS 123 is below operating EBITDA.

Dean Nelson

10/4 on EBITDA the way we report it.

Beverly Chell

The non cash compensation.

Michael Meltz

Is there an extra load in, in ’06 or is that a $6 million number going forward?

Beverly Chell

It maybe slightly lower.

Michael Meltz

Okay. And in terms of what’s your expectation for CAPX severance and interest expense in ’06?

Dean Nelson

For CAPX will be at a similar run rate to what we have now which is approximately $30 million. For severance, it will be nominal reflecting primarily Kelley Conlan’s departure and the other number you asked?

Michael Meltz

Interest expense.

Dean Nelson

For interest expense as we mentioned we have roughly $1.45 billion of debt and we gave you an average interest rate currently of 7.9%. We don’t expect that to change.

Michael Meltz

Okay. I’m sorry, so the severance was just, aren’t there other severance items? Leaseholds and things like that?

Dean Nelson

I thought you mentioned severance related

Michael Meltz

I’m sorry, non cash, other cash payments, in ’06.

Dean Nelson

Nominal amounts, less than what we had last year.

Michael Meltz

Okay. Thank you very much..

Dean Nelson

Michael to address your question on newsstands, our circulation, we haven’t really broken it up separately, we have overall circ revenue, subscriber revenue as you would expect did better than newsstand. Newsstand was down more than the mid single digits in Q4 and it was really pulled down primarily by our Soaps and our International Tuner Title.

Michael Meltz

Okay. Thank you Dean.

Dean Nelson

Sure.

Operator

We will take our next question from Ken Silver from CRT Capital, please go ahead.

Ken Silver

Hi, good morning. I missed what you said about the restricted payments basket, how large it was?

Dean Nelson

The restricted payment basket at December 31 is approximately $375 million and again that was flex payment of all preferred shares in earlier that year.

Ken Silver

Okay. Thank you. And then the businesses that you currently have for sale, there are like three of them I think, can you disclose what the 2005 full year revenue and EBIDTA was for those businesses?

Dean Nelson

Ken we actually have two right now that are for sale. That would be Crafts and History.

Ken Silver

Okay.

Beverly Chell

And typically when you show them as discontinued operations, you restate the prior period so you’ll see the three quarters are restated to eliminate the numbers, we typically don’t give full year for discontinued operations.

Ken Silver

I guess (inaudible), businesses that we sold recently that you know in the discontinued operations?

Beverly Chell

The business information piece on Wards and About.

Ken Silver

Okay.

Beverly Chell

And we did continue a small business called Software on Demand.

Ken Silver

Can we go back and look at 4th Quarter of ’04 numbers, I can figure out what these two businesses did a year ago or not?

Dean Nelson

We restate our financials to reflect that so you should be able to do that and Ken if you have any issues about that we’re happy to take them off line.

Ken Silver

One last question. You cited some potentially good growth from the internet in the Enthusiast business. But does that imply that the print business you know is going to have negative growth in ’06?

Dean Nelson

Yeah, I think we’re looking at a relatively stable print business for ’06.

Ken Silver

Okay. Alright, thanks a lot.

Dean Nelson

Thank you.

Operator

As a reminder, if you would like to ask a question, please press star 1 on your touchtone telephone. And we will take our next question from Bob Kerchief Ken Silver from CRT Capital with Credit Suisse, please go ahead.

Bob Kerchief

CAPX, I was wondering if you could give us some idea of what it might be next year at least what it might be directional and if you could give us an idea what portions of it you know are associated with Consumer Guides versus what’s associated with The Enthusiast Media? And then also I just if you could give us any discussion on business trends most recently in sort of the New Homes side, with a lot of the real estate data that’s been coming out?

Beverly Chell

First on the CAPX we have not completed the CAPX budget for ’06. I think we believe directionally it would be down slightly.

Dean Nelson

And that CAPX, Bob, tends to be skewed primarily relative to revenues towards education and then second to Enthusiast and third Guides. You know Enthusiast and Guides are not incredibly CAPX intensive businesses.

Bob Kerchief

Okay, good.

Dean Nelson

And in terms of recent trends on New Homes, we’re still seeing extremely positive growth in markets including growth in some markets that didn’t see a lot of growth before where the market was so overheated that people were not advertising. So you know, we’ve always said that one of the issues we faced in 2005 was some markets if you’re a builder. you didn’t need to advertise you already had a waiting list to buy your home. If that market softens a little bit, we actually often see a pickup in revenue as opposed to a decline

Bob Kerchief

If I can step back on the CAPX, net of CAPX would be education division, net free cash flow negative?

Dean Nelson

In 2005, the division was net free cash positive.

Bob Kerchief

Okay. After CAPEX?

Dean Nelson

After CAPEX.

Bob Kerchief

Okay, great. Thank you.

Operator

We will take our next question from Al Alema with Seneca Capital, please go ahead.

Al Alema

Hi, I’m just trying to understand may you’re corporate strategy a little bit better, you put out a Press Release for the Crafts Division, they were going to consider selling it, I think you commented something to the effect that you were going to focus on the male market age 18-35, 18-40, something like that. I was just wondering, how do your other Enthusiasts titles fit in or not fit in with that strategy like Soap Opera Digest and things like that?

Dean Nelson

Well you know, the vast majority if you look at our revenue, the vast majority do fit into that demographic. Outdoor is heavily skewed toward the male reader as is Auto as is Action Sports, so it would be an exception to the rule.

Al Alema

So you think you’ll, you may consider selling the Soap Opera down the road as well?

Dean Nelson

Well you know we never historically commented on potential acquisitions or divestitures. We’ve always had a philosophy as you know that if a business is worth more to somebody else than it is to us, we owe it to our shareholders to sell that business.

Al Alema

Okay. I thank you. And the second question has to do with restrictive payments basket. Based on what you’ve disclosed, is around $375 million. Do you think you’ve got enough capacity in restricted payments basket to spin off the Consumer Guides business?

Beverly Chell

We, no decision’s been made as to, by the Board as to which entity would be spun off, but the way the spin off would work, whatever entity it was you would leverage the entity up before it spun off, pay down existing debt and then the market value that goes through the restricted payment basket would be the post leveraged free market value, so yes we do believe we can complete the spin off of whichever entities are spun off within that basket.

Al Alema

Okay. And the last question. And I apologize cause it’s a complicated Press Release, I’m just trying to understand what I think the question was asked what was revenue and EBITDA of the discontinued operations and you said you don’t disclose that but it that’s the case, and I apologize if it’s in the Release somewhere, but you had given guidance about your results after the third quarter or on the third quarter call, that was based on the 2004 number that you’re now not reporting because you’re classifying some businesses as discontinued operations. So I’m having a hard time understanding how you’re 2005 results actually compare that guidance because you’ve reclassified EBITDA for 2004 for those discontinued corporations that are not included. So, could you help get us there and my apologies if it’s in the Release, what couldn’t understand how your 2005 results actually compare to your prior 2005 guidance.

Beverly Chell

With the exception of History and Crafts, we have, when we’ve announced a discontinued operation we stated how that would be impacted by the guidance. With respect to History and Crafts, we have not, but I think it would be fair to say that adjusted for those items; we still underperformed the 2004 guidance, 2005 guidance that we gave initially in the beginning of 2005.

Dean Nelson

We’re safely towards the better end of that guidance that we gave towards the latter part or 2005. We’re happy to spend time with you off line to provide what information we can.

Al Alema

Just a wrap up on that. So basically, you’re most recent guidance I guess as of the third quarter, you feel you were in the upper end of that range? Is that correct?

Dean Nelson

I would say the guidance; the number would not be significantly different on a percentage change basis with the inclusion of Crafts and History or with the exclusion. So when you see the numbers on the first page of the Release, we’re a full year total segment EBITDA was down 6.9% that percentage change is not dramatically different with the inclusion of those other ones.

Al Alema

Okay, thank you.

Dean Nelson

Thanks.

Operator

Once again, if you would like to ask a question, please press star one and we will take our next question from Adam Spielman with PPM America, please go ahead.

Adam Spielman

Thank you, I was just hoping to clarify your guidance and I apologize if you went through this. If you looked back at historical performance in ’05 you grew revenue modestly but you had substantial and meaningful EBITDA decline on your higher expenses. For next year you’re talking about again, pretty modest revenue growth but you’re talking about growing EBITDA, could you kind of walk through what are the large areas where you’re going to change in expense growth that’s going to allow you to generate EBITDA growth in 2006?

Dean Nelson

Sure, that’s a good question. Let me start with Consumer Guide which has realized in 2005 we made a major set of investments in the business and as we said a few minutes ago, those investments totaled $19.5 million of expense. And you know, we’re now working to leverage those investments and drive growth from those investments in 2006 in the out years. And so that’s why you do see a growth in the margin in 2006 because those investments are beginning to pay off. (inaudible), media business you know I think we have worked hard on the cost idea in the last few months as I said in a couple of key areas the biggest one being to reduce our print runs and our draws where it’s no longer profitable or economic for us to student copy to some of the more secondary locations.

We don’t have generally a set of products that have rate based guarantees, a few do but most don’t, therefore, we can and should be running our circulation for margin as opposed to trying to get some rate based number and we have distributed copies beyond the point of economics attractiveness. (inaudible), copies have a slightly negative impact, a very modest impact on revenue but a positive impact on segment EBITDA (inaudible) cost. And then the second place is frankly we’ve gone back through the business and really scrubbed our pots hard. You know we’ve reduced our headcount somewhat since the end of Q3, we have worked hard to consolidate some of our support functions, some of our management teams to get more leverage out of our resources and reduce the total costs of those resources and we feel comfortable that we can hit this guidance and not only hit this guidance but also we do have the $3.5 million to build into that guidance to improve our product.

Adam Spielman

And then on the top line, what kind of recovery if any in the automotive advertising segment is cooked in?

Dean Nelson

The main open question on automotive is the domestic OEMS, they represented about 5% of our revenue in 2005. So, a reasonable percentage but not a large percentage. We have not baked into our guidance or our budget at this point any real improvement in their performance (inaudible).

Adam Spielman

Can you run through quickly, you said, I just didn’t get, you said domestic was 5%, international was another single digit?

Dean Nelson

7%.

Adam Spielman

And then you said two larger numbers, what were those again?

Dean Nelson

The two larger numbers were the rest of the automotive, you know we have a large number of automotive publications such as Motor Trend, I mean such as Hot Rod that have a lot of what we call endemic advertisers. Retailers who sell you know rims and hubs, things to put on your car, or the manufacturers of those parts, that represents a large percentage of our revenue and in fact, represented let me find it so I say it right, 53% of our revenue in 2005 and then the remaining percentages would be endemic advertisers and non endemic advertisers in other areas. We have of course a lot of outdoor advertisers, action sports, surf boards, things like that.

Adam Spielman

And the 53% is not inclusive of the 5% and 7%.

Dean Nelson

No, it’s not inclusive.

Adam Spielman

Okay, thank you. And then just quickly, you burnt through a lot of cash and working capital this year, the business isn’t growing very much it seems somewhat counter institutive, can you provide any kind of guidance directionally at least as to how much working capital you think you’ll go through or generate cash in 2006?

Dean Nelson

Sure. 2006 we expect working capital to be in line with what it was in 2003 and 2004 and if you look back you’ll see that was anywhere in the mid teens to low twenties.

Adam Spielman

Mid Teens to low twenties use of cash.

Dean Nelson

That is correct. That would be in line and that would be conservative.

Adam Spielman

Okay, final question. You’re into the, I’m looking back it was the end of October when you announced the spin off so you’re into the fourth month of deliberating, can you provide us at least some guide posts or some gating issues that you’re working through to determine if an when you forward with this transaction?

Dean Nelson

As we said before, the real issue is working our way through all the details and rigor required, particularly given the history of PRIMEDIA and how it’s built up as a company. You know, issues like net operating losses and tax bases and things like that. Obviously if we had seen any deal killers, we would have announced that in fact we were not going forward with the spin, so really we’re just working aggressively again through all this detail and the Board has asked us to finish the work before they make a final decision.

Adam Spielman

And Beverly you mentioned the mechanics of what entity is spun is not determined. If you were to spin off Enthusiast the larger segment, how would that work, that would clearly be the entity that would need to receive cash but it would be the spun entity?

Beverly Chell

I’m sorry I don’t understand need to receive cash?

Adam Spielman

You said whoever was spun would be levered up and spun out

Beverly Chell

That is correct

Adam Spielman

That entity would pay a dividend back

Beverly Chell

Not pay a dividend back, it would pay down, the existing debt.

Adam Spielman

The entity that was spun?

Beverly Chell

The pre spin off, you would leverage the entity to be spun, and that leverage, that capital that you raise would then be used to pay down existing debt.

Adam Spielman

Got it, thank you.

Operator

We will take our next question from Steven Weiss with Bank of America Securities, please go ahead.

Michael DiMetri

Hi, this is Michael DiMetri filling in for Steven. I think most of our questions have been answered. I just wanted to follow up on one thing that Adam mentioned in regard to auto. I think last quarter the Company talked about higher plan launches this year, 22 new launches for domestic auto makers? Is that still the case or has there been some revision?

Dean Nelson

That is still approximately the case. The auto maker, domestic auto makers are certainly doing a lot of navel gazing right now. A number of those launches are later in the year and it’s still subject to you know I think flag ships and dates.

Michael DiMetri

Okay and then with the 25 new redesigns in automotive, I just want to make sure I understood, so you said that all costs associated with the strategic changes there, those redesigns, that would come out of cost reductions taken elsewhere in the segment? Is that correct?

Dean Nelson

Right, our reduction in cost in our print runs, the biggest costs in the redesigns is actually making the packages thicker, putting in higher quality paper, hard quality cover stock and the cost savings we generate through reducing our low sell through secondary draw locations exceeds the costs associated with improving product in the remaining locations.

Michael DiMetri

Switching over to the Apartment Guides, last year management saw a lot of unusual changes with the condo conversions with the hurricanes; can you talk sort of on conditions what they are today? Are these the last 12 months is that somewhat behind us at this point. Are you starting to see thing turn around there?

Dean Nelson

Well you know one thing you need to think about in that Apartment Guide market is, it’s not one business it’s 80 businesses, all the different markets, whatever. And we’re seeing good performance in the majority of markets but we’re still seeing significant levels of condo conversions particularly in the Gulf Coast, Florida and some Western markets like Las Vegas or Phoenix. And so you know we have forecasted and budgeted but that level of conversion is going to continue going forward. One way we can reach out and impact that of course, is through our RentQuicks.com acquisition. A number of these are being bought and then rented out again and RentQuicks is a great location for people to list those condos. But right now we’re forecasting that stay the same and realize also that in some markets, like Florida where there are a lot of conversions, it allows the property owners to push up their rents on the remaining properties because of a shortage of locations and then basically also drive high occupancy so as a second order impact us of pulling on the advertising by those folks.

Michael DiMetri

Thank you.

Operator

We’ll take a follow up question from Ken Silver with CRT Capital, please go ahead.

Ken Silver

I just wanted to get some more sort of information about the on-line part of The Enthusiast business. I mean you raised some comments on it already. Can you just sort of elaborate on why it underperformed particularly over the last couple of years as on-line advertising has picked up, overall? And then, I know you mentioned you merged some websites or I didn’t understand exactly but why is it doing so much better?

Dean Nelson

Well I think a couple of things. I’m not sure you know, we don’t have great metrics and measurements for our peer company. I’m not sure that the revenue percentages we mentioned are necessarily out of line for integrated you know prints and internet. And it was growing with the market. Low double digits. But from our standpoint it was not large enough to be meaningful. And, most importantly you know every time we looked at one of the markets we serve like automotive or equine, the transactional side of the business and being involved in that was significantly larger than just (inaudible) in content and getting benefits from the advertising revenue. And so we thought it was important to basically you know bring that transactional capability in-house.

On the automotive side, the decision had been made before to break that into smaller groups so there was an international auto group, a consumer auto group, you know so on and so forth and we saw that we were losing so much critical mass on the ability to influence the business as much as we’d like by doing that so we brought it back together to what is now a very large and well positioned set of automotive assets. We haven’t made final decisions on how to position some of this but I think our priorities going forward will be to create some primary hub sites like hot rod to support not only Hot Rod, but a number of the performance auto sites under it. Trucking can do the same thing for the trucking sites that we have and allow us to basically get greater leverage and critical mass out of our content.

We think all that together upgrading some of the editorial talent, bringing in and benefiting from outside expertise, putting it under the management of one of our most senior executives on the TEM side, you know has all been positive. We’ve upgrade some of our sales talent also and we’re starting to see the results of that.

Ken Silver

And then you mentioned you thought the EBITDA contribution would be 10%, that was this segment, right?

Dean Nelson

Right. If you look at the overall TEM segment EBITDA for 2006, right now we are estimating the segment EBITDA that’s generated by our internet assets to be approximately 10% of that total.

Ken Silver

Okay. And what kind of revenue? The Enthusiast is a 600 man dollar business, what kind of revenue Is on line?

Duane Nelson

The on-line would actually be a lower percentage of the total than the EBITDA. Something more in the high single digits.

Ken Silver

Okay. Thanks.

Operator

We will take our last question from Todd Morgan with CIBC World Markets, please go ahead.

Todd Morgan

Thank you for letting me sneak in under the wire. I kind of wanted to follow up on that a little bit. You talked a lot about the drivers for the ’06 results and two things kind of jumped up at me as being harder to quantify for you guys, specifically the non endemic advertising and the non print initiatives and you had spoken pretty convincingly about you know the significant percentage (inaudible) you think those represent. Given the moving parts involved in that and the amount of changes and new things that you’re trying to do, can you just – how do you go about then trying to budget that? How great are the assumptions in those numbers and how concrete does that turn out to be?

Dean Nelson

I think you look at the non-print first, on the Enthusiast Media side, realize that 15 points of the 25 points of budgeted segment EBITDA is from things outside of the internet which has performed well the last few years and that’s basically and extension of the business practices that are already in place and then some things like some of the television programs that we’ve launched in outdoor, you know well in advance what the CPMs are going to be, and you get (inaudible) well in advance to the advertisers. So we feel good particularly about those elements of non print.

On the internet, we see tremendous growth potential that goes beyond 2006 and there’s an open question around exactly how steep that trajectory will be for 2006 but we have great confidence in the end point. So there could be a little bit more noise than that, but the real area of focus for us is the (inaudible) synergies that we talked about especially on the revenue side and you know really grew that trajectory (inaudible), we feel comfortable with those assumptions at this point in time. On the non endemic side, you know we have in place primarily two sales organizations that sell that non endemic advertising, one in outdoor and one in auto. We made some management changes recently on the auto side, where the publisher of Motor Trend is also now, he is queued to move into that position but he also still runs the non endemic sales force. We’re finding a lot of benefits right now in the cross sell just better cooperation across the business where we’re getting much better support and participation both the action force and auto and some of those non endemic sales propositions. I think it depends a little bit on the print advertising market, but we feel comfortable that we can grow our position relative to the growth of that market going forward.

Todd Morgan

Okay, that’s helpful. Thanks.

Dean Nelson

Thanks. Great. That concludes our questions, we appreciate every ones’ time and support and we look forward to taking to you and giving you an update in another quarter. Thank you.\

Operator

Ladies and gentlemen, this will conclude today’s conference call. We do thank you for your participation and you may disconnect at this time.

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