Hearst-Argyle Television, Inc. Q2 2008 Earnings Call Transcript

| About: Hearst-Argyle Television (HTV)

Hearst-Argyle Television, Inc. (HTV) Q2 2008 Earnings Call August 1, 2008 9:30 AM ET

Executives

David J. Barrett - President, Chief Executive Officer, Director

Harry T. Hawks - Chief Financial Officer, Executive Vice President

Tom Campo - Director of Investor Relations

Ellen McClain – Vice President Finance

Analysts

Marci Ryvicker - Wachovia Securities

Leland Westerfield - BMO Capital Markets

James Goss - Barrington Research

Michael Schechter – Mentor Partners

Tracy [Young] – JP Morgan

Operator

Thank you for participating in the Hearst-Argyle Television, Inc. second quarter earnings call. (Operator Instructions) Your host this morning is Harry Hawks, Executive Vice President and Chief Financial Officer. Also participating are David Barrett, President and Chief Executive Officer, and Mr. Tom Campo, Director of Investor Relations. I would now like to turn the call over to your host, Harry Hawks.

Harry T. Hawks

Welcome to our second quarter 2008 earnings call. This morning you’ll hear from David Barrett our CEO and me regarding our financial and operating results. Then the two of us with an assist from certain other members of management will respond to your questions. First we need to take care of the legal and administrative matters.

Tom Campo

Just to remind all our listeners, we will be discussing forward-looking information and we refer you to the cautionary language which we detail in our Safe Harbor statement and in our earnings release which was released earlier this morning and which is also posted to our corporate website www.hearstargyl.com or most any finance website. We will be discussing non-GAAP information during this call and in compliance with regulation G we provide tables within the press release reconciling this non-GAAP information to GAAP measures. The cautionary language is also provided in our SEC filings also accessible via our website. The company undertakes no obligation to update this information.

Once again we want to welcome those of you who are listening to the webcast which will be archived on our site. With that I’ll pass it over to David Barrett.

David J. Barrett

Thanks for being with us for a discussion about our second quarter financial results which we released earlier this morning. As you’ve seen and read, our results are impacted by the weak economic conditions we’ve been facing, discretionary like for ad driven businesses.

Overall revenues declined in spite of a solid increase in political revenues and positive growth in digital revenues and retransmission consent fees. Category data is revealing and speaks to how businesses have responded in recent months - the macro challenges of high energy costs, $4.00+ per gallon gasoline costs, the ongoing housing slump, credit crisis, continuing job losses, and some declining consumer confidence levels. Quite simply we’re seeing that advertisers are reducing expenditures to alleviate pressure in their own businesses. The category weakness is fairly broad-based and includes automotive, retail, restaurants, movies, furniture, telecommunications, all of which are reliant on discretionary consumer spending that’s really quite intuitive.

Once again our mid-size and Midwest oriented markets are faring a bit better than our East and West Coast stations. These smaller markets are traditionally more stable without the big swing up in general economic conditions and they’re better immune from dramatic downturns. It certainly helps that our stations are in these markets, and I’m thinking markets such as Oklahoma City, Omaha, Des Moines and Albuquerque are particularly dominant for us.

A few categories were up in Q2 including utilities, pharmaceuticals, and the home improvement category.

As referenced, political was reasonably active in Q2 for us with total revenues of $8.5 million being better than the $4.9 million we did in Q207 but below the $13 million that we did in Q206. As I mentioned on our April call there was a lag in party and 527 spending from both parties because of the protracted Democratic primary races, but once Senator Obama secured the presumptive nomination these dollars did start to flow in June and into the third quarter. The conventional wisdom is that there are 12 key states whose electoral votes may very well determine the Presidency in November and this is where presidential spending is likely to be most concentrated. We have strong stations in eight of these states - Wisconsin, Ohio, New Hampshire, Pennsylvania, Florida, Missouri, Iowa and New Mexico. They’ll be very busy over the remaining 95 days of the campaign.

We are also seeing current spending with more to come from key Senate match-ups in New Mexico, North Carolina, Mississippi, Louisiana, Nebraska, Maine and New Hampshire. Seven other Senate races where we have stations will generate modest spending. On the gubernatorial side, races in North Carolina, Indiana and Missouri are being hotly contested and our stations in those states will benefit to some degree.

A comment about the Olympics which begin next Friday, 8/08/08. Sales have been a bit softer than expected due to overall economic factors and limited automotive participation. Our Olympic revenue total will likely be similar to that of 06 in Torino but marginally below that of Athens in 04.

Our year-to-date revenue mix is approximately 48% from ABCs and 40% from NBCs and 12% from others. NBCs weak primetime performance continues to be part of the problem equation. Obviously this is turning out to be a very atypical even year absent the usual dynamic of a buoyant economy and a demand-driven sales environment. At the moment there does not appear to be a near-term catalyst that would re-ignite meaningful economic recovery although if this week’s easing on oil prices is straw, I suppose I would grasp that.

Our stations’ competitive performance is measured by ratings and qualitative achievement continues to be very solid. We’ve included some highlights in our release. I’ll underscore two of those. First, Argyle stations led the ABC and NBC affiliate lineup in May. For NBC WXII in Winston-Salem is the number one rated station in primetime in the top 50 markets for adults 25-54. For ABC KOCO in Oak City is ranked number one in primetime in the top 50 markets again for adults 25-54. And KCCI in Des Moines is CBS’s number one rated station for adults 25-54 for markets 51-100. That’s a remarkable feat that three of our stations would be the leader in the affiliate lineup for the three principal networks. And in constant pursuit of our local news objectives, I’m pleased to say that we rank number one or number two in 77% of all weekday news programs for adults 25-54.

Equally impressive are our improving digital media traffic stats. They too speak to the strong connection we have with our online customers. I hope you’ll take a look at some of the accomplishments we reference in our release. I think you’ll conclude that we are a very strong company with real local dominance.

As always, cost containment is an imperative for us. During the period station salaries, benefits and other operating expenses were flat to Q207 and program payments were up only modestly by less than 1%. Capital spending during the first half is below prior year, and for the full year we’re projecting cap ex to be approximately $40 million down from $56 million in 07 and $60 million in 06.

Our balance sheet and our balance sheet management are positively differentiating qualities for our company. Even in a more difficult year than expected, we’re generating meaningful free cash flow and using it to reduce our outstanding debt balance. Over the past 12 months we’ve paid down $114 million in debt, paid our regular dividends, and invested in our business particularly in the areas of sales development efforts and ongoing strategic digital initiatives. Both sales development and our strategic initiatives will be important future growth drivers. Our credit statistics remain very strong. We continue to be rated as an investment great credit.

We are as well positioned if not more so than anyone else in the industry I think to compete and grow as the economy eventually stabilizes and recovers, all of that given the strength of our station assets, our outstanding local news products, and best people and our disciplined financial stewardship. Current performance however disappointing will be transitory I think as only a media company with a 120+ years of history legacy and experience and operating through every kind of economy and circumstance knows all too well. And that is indeed the profile of the Hearst Corporation and Hearst-Argyle Television.

Our local propositions for viewers on-air, online and on-demand and for our advertisers is superior and sustainable. We think we have the very best advertising proposition of anyone in the media and that ultimately will define a winning business model for our company.

I’m going to stop there, ask Harry to offer his comments, and then we’ll be happy to take your questions.

Harry T. Hawks

Given the detail in the press release and the extent of David’s comments this morning, I’d like to use my time just to make a few quick observations and comments here.

First, this audience on this call is well versed in macroeconomic matters and don’t need to discuss that too much. However, as was implied in David’s comments, if you look a little bit closer you’ll see the variations within local economies and regional economies and that is part of the dynamic you see with our California, Florida and New England stations performing less well than our Midcontinent, Midwest stations.

Secondly, I do want to underscore David’s comments about if you will management’s response through the economic slowdown that we’re in the middle of. We’ve actually accelerated our new initiatives, we remain committed, and are investing accordingly. In news leadership our revenue market share is quite strong of the revenue that’s out there. We are building audience. We’re controlling costs. Free cash flow conversion right now is actually fairly good given that we’ve had a dramatic reduction in cap ex year-over-year. As we point out in the press release, we expect around $40 million of cap ex this year which compares to $56 million last year and over $60 million in the year before. In addition, we’ve done reasonably well with our tax planning matters. Our actual cash tax payments this year are down; our investment in working capital is also down; therefore the impact on free cash flow is actually positive.

With respect to our financial position, I think David hit the nail on the head. We do have the ability given our high level of free cash flow to constantly pay down debt; as he mentioned $114 million of debt reduction in the last 12 months. And of course as you look at the prescription of our redemption of the convertible preferred that’s in the press release you’ll see that we’re also reducing the average cost of our capital structure and indeed picking up a very positive EPS impact on a go-forward basis.

With lots of performance data provided for you in the press release, I think that really the key point there is that we are incredibly well positioned for strengthening in the economy, which we’re not counting on but should that happen in the coming quarters I think we’ll benefit significantly from that.

With respect to the outlook, as you know we don’t give revenue or EPS guidance other than we have given ample commentary about the market and industry conditions. However, we do give rather detailed expense guidance provided in the press release and encourage you to look there. We expect to file the 10Q in the next day or so, so you can look for that.

One final comment: As Hearst has announced or disclosed through its 13D filing a week or two ago, you will observe that Hearst has continued to acquire Hearst-Argyle shares in the open market, at present owning in excess of 81% of Hearst-Argyle Television.

Operator, we would now be pleased to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first call comes from Marci Ryvicker - Wachovia Securities.

Marci Ryvicker - Wachovia Securities

The first question is kind of broad. Do you have any thoughts on how NBC Universal’s acquisition of The Weather Channel will impact the NBC [Oh No’s]? That’s the first question. The second one is more specific to Hearst-Argyle. Can you just update us on your retransmission agreements if you signed any new ones in the quarter and remind us how many subs in your markets are now covered by agreements?

David J. Barrett

Let me say on The Weather Channel question, we’re uncertain as to what their plans are. I had a meeting with them as recently as last week and they’re not ready to discuss what their plans are for The Weather Channel, particularly in respect to the venture that the affiliates have with Weather Plus as a multicast television product. So whatever plans they are contemplating are still internal and we don’t know yet what they’re going to advance to the affiliates in that regard.

In terms of retrains, the one agreement that we got done was with DISH Network/EchoStar. That was accomplished during the quarter and we are satisfied that that deal is done. And we’re moving on to other agreements. We previously said that our Comcast agreement runs through November of this year and we are in what I’d call early stage negotiations with Comcast about the renewal and extension of that agreement. Next year we’ll have some other operators that we’ll deal with of a larger scale but the principal ones that were on our agenda for this year were EchoStar/DISH and Comcast. Those are underway.

Marci Ryvicker - Wachovia Securities

Given all the comments on the economy, do you feel like what’s going on today is the worst cycle that we’ve been through?

David J. Barrett

The worst cycle that we’ve been through? Is the worst over? Is that what you mean?

Marci Ryvicker - Wachovia Securities

No. Does this environment feel worse than all the previous recession that Hearst-Argyle went through?

David J. Barrett

It feels as bad as it’s been in my business experience and I’m getting on in age at this point. So it does feel as difficult as anything that I can recall.

Operator

Our next question comes from Leland Westerfield - BMO Capital Markets.

Leland Westerfield - BMO Capital Markets

First, could you give us a sense about how the Olympics is contributing and what the sales look like for you in that regard? Secondly, if you can remind me when each of your network affiliation agreements will be coming up for renewal? And thirdly, briefly on Internet broadcast NBC went a different way. Is Internet broadcast still profitable with the economics in terms of contribution to your minority interest there?

David J. Barrett

Let me answer the network and Olympic question and I’ll let Harry respond to the IB question. Our network deals first with NBC run through 12/09; the same for our ABC deals. So both are 12/31/09. Our CBS deal goes out to 2015. So what we’ll be dealing with over the next 18 months and I don’t expect to be addressing at all this year is renewal discussions with NBC and with ABC.

As I mentioned in my remarks, the Olympics are a little bit softer than I would expect to be the case. I think we’re going to end up in the same zone that we were in for the Winter Olympics in 06 for Torino which is in that $16 million to $17 million window. Torino just touched $17 million in 06. We’ve got some more inventory to sell at the moment as I believe the network does and we’ll be selling Olympics as we run through the next 28+ days and my guess is there’s be some political drops into the Olympics. But I think there are some advertisers that are on the fence and reluctant to write a check on this but I think if the Olympics open big and there are initial strong ratings for the Olympic broadcasts, I expect we’ll write a little bit of business during the ensuing 18+ days of the Olympics plus next week. So we’ve got about 25 days to write this.

In terms of IB, Harry.

Harry T. Hawks

Lee, as you know but just for the larger audience, we own a little over 40% of Internet Broadcasting and have been involved with it for quite some time, which means that we want to go back to probably a year ago when we announced the strategic relationship with CNN. We’ve had a great relationship with NBC. We have had lots of conversations with them on a variety of levels, but the relationship with CNN was deemed to be a very strategic and important opportunity for Internet Broadcasting we knew at the time that that would probably begin a rather significant change in the relationship with NBC. It was deliberate. It was expected. And we do expect to continue doing business with NBC going forward but it’ll be in a much different shape and form. On the flip side, the expansion of our relationship with CNN has been dramatic, very positive, and we’re quite excited about it and indeed CNN invested significantly into IB and continues to be a great partner today. As you know we brought in a new management team over the past year, we’ve been investing in new products launching several, and so we’re spending at a fairly significant rate right now to launch new products but that’s a very positive thing for Internet Broadcasting. So you asked about the level of profitability, we’ve got a period now where profitability is diminished because we’re spending so heavily on technology, on new product innovation; we’ve launched three; we’ve even got something that’s really cool for iPhones coming out; we’ve got local communities commenting and that kind of thing. So it’s really kind of a fun place to be right now, having a lot of fun.

On our income statement where we show the income in affiliates there’s actually a second company in there and that’s Wright Digital Entertainment, which is a company that produces short form video entertainment content for the 18-34 year old male demographic. That was a startup and we are encountering a substantial amount of success there so we’re quite pleased with that. But we’re spending there to build the film library and roll out a whole bunch of new products.

So for the present time that line item is a negative for us on our income statement but we remain very excited about it and confident that that both companies will be a significant profit contributor to us in the future.

Operator

Our next question comes from James Goss - Barrington Research.

James Goss - Barrington Research

Hearst is now at 81%. Am I correct in thinking 82% is the limit for 08 and what would the limit be for 09 in terms of their buying into the company?

Harry T. Hawks

I think as disclosed Jim in the 13D filings Hearst had an authorization from its Board to purchase 8 million shares and they’re at about 7.6 million shares roundly as of earlier this week. There is no further authorization that is in place for Hearst to buy beyond the 8 million shares. And should they modify that of course there’ll be a new 13D filing.

James Goss - Barrington Research

Is there some legal limit as to how much they can do in the following year though in terms of whatever they’re restricted to?

David J. Barrett

I don’t believe there is but that is a matter that, it’s a decision Hearst like any other shareholder is free to buy and sell shares within the parameters of SEC rules.

James Goss - Barrington Research

Politically you mentioned that it started into June and moved into the third quarter. Is the shortfall in second quarter relative to say the last couple of political cycles than mostly based on this timing issue and possibly borrowing from the first quarter into the second?

David J. Barrett

Yes, I think it’s going to be fairly typical in Q3 and for the first portion of Q4 as we get there. I was looking at some data this morning with Kathleen Keefe who’s sitting next to me and we reminded that ourselves that in Q206 when there was about $13 million in political, that was a function of what I’ll call fairly extraordinary activity in California - a number of House races, Schwarzenegger was just mounting his re-election bid there, and there were some extraordinary ballot initiatives, one on the energy side in California which I think caused the disproportionate amount of strong spending in Q206. There were big battles for the House as things were beginning to tilt there in favor of the Democrats. So that was a little bit of the anomaly

of the democrats. So, that a little bit of the anomaly between 06 and 08 Q2. Now, I do think we’re going to see fairly good activity from presidential candidates and from senate candidates as referenced in my remarks. I guess I’d remind everybody that on a year-to-date basis, what the split on things is. In 04, 19% of our money came on for the presidential race, about 11% from the senate race, about 18% from congressional races, 19% for congress and about 21% on various ballot initiatives and that should be reasonable proxy Jim to what’s going to go on this year. But, there may be a little bit more political in the split, in the composition.

James Goss - Barrington Research

I’m thinking $100 million ballpark isn’t an unreasonable expectation.

Harry T. Hawks

I looked at 03 and 04 and if we put those two together, we did about $106 million. In 99 and 2000 we did about $71 million and that gives effect to these early primaries and money that is spent in the odd year in advance of the presidential cycle year. I think we’re probably figuring that 07 and 08 will look like 03 and 04 did and we previously reported that we did $31 million in 07 so I think we’re going to be in that zone.

Operator

Our next question comes from Michael Schechter – Mentor Partners.

Michael Schechter – Mentor Partners

Can you repeat the number of subs and what’s covered under your retransmission agreements again?

Harry T. Hawks

I didn’t state the specifics of count. EchoStar had approximately 2 million plus, those are the ones that we did. Comcast is the largest MSO and that number is about 7.8 million, that’s the one that’s in play right now.

Michael Schechter – Mentor Partners

And what’s the total for the whole company at this point?

Harry T. Hawks

Well, we cover about 18% of US TV households and the number that we think about is about 16 million plus. There’s a variable there by market but those are pretty good numbers to play with.

Michael Schechter – Mentor Partners

DirecTV is done as well.

Harry T. Hawks

Well DirecTV/EchoStar is the one that I said that we did in the recent quarter. Oh, excuse me we did EchoStar, I was thinking Dish. DirecTV is in place on a multiyear basis right now.

Michael Schechter – Mentor Partners

What about any of the phone companies?

Harry T. Hawks

Well, they have pretty modest figures but we’ve got a deal in place with both of the phone companies and we’re in a renewal discussion with AT&T right now. Those are a very modest number of subs although a big upside. We have deals in place with Verizon and AT&T.

Operator

Our next question comes from Tracy [Young] – JP Morgan.

Tracy [Young] – JP Morgan

In your press release you mentioned a gain associated with the Nextel equipment exchange. Can you tell us how big that is and if you’ll have one next quarter?

Harry T. Hawks

Yes, in the quarter it’s about $500,000. We would expect – actually, let me ask Ellen to pick it up from there. Our resident expert, she’s quite close to it so Ellen would you like to comment please?

Ellen McClain

Well first of all, the Nextel exchange has to do with the way we gather news electronically out in the field and we are giving some of the analog spectrum back to Nextel and they are paying for us to operate on new digital spectrum. As we look out across our markets, we will be transitioning from now through 2009 and I don’t want to throw out any numbers but we do expect to have gains in all of the quarters as we go forward. It is on a market-by-market basis and when they switch and the equipment is placed in service, we record the gain. But, there will be more to come.

Harry T. Hawks

Tracy, I would say it is highly variable based on the age of the equipment that we take out of service and do this swap with Nextel. I think everybody on the call knows and is aware that this is an industry wide exchange of the 2 gigahertz spectrum that was FCC approved where Nextel is the party that is going to drive this swap of spectrum.

Operator

I would now like to turn the call back over to Harry Hawks.

Harry T. Hawks


I think this concludes our call for today. We appreciate you participating. Have a great day. Thank you for calling to listen to the call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged:
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.