Investor Relations

<< Back

Second-Quarter Conference Call Remarks
Thursday, August 8, 2013, 11:00 am EDT

by George L. Mahoney, president and chief executive officer; James F. Woodward, vice president, finance and chief financial officer, and Lou Anne J. Nabhan, vice president, corporate communications

Welcome from Lou Anne Nabhan

Thank you and good morning.  Welcome to Media General’s Second Quarter Conference Call and Webcast.

Earlier today, we announced second-quarter 2013 results.  The press release is on our website.  A transcript of the comments from today’s call will be posted immediately after the call, and a replay will also be available.

Today’s presentation contains forward-looking statements, which are subject to various risks and uncertainties.  They should be understood in the context of the company’s publicly available reports filed with the SEC, including the section on Risk Factors.  Media General’s future performance could differ materially from its current expectations.

Our speakers today are George Mahoney, president and chief executive officer, and Jim Woodward, vice president-finance and chief financial officer.  Let me now turn the presentation over to George.

Remarks from George Mahoney

Thank you, Lou Anne, and good morning.

Our biggest news in the second quarter was announced on June 6, when, as I’m sure most of you know, Media General announced a merger agreement with Young Broadcasting.  The combined company will own or operate 31 network-affiliated television stations across 28 markets, reaching approximately 16.5 million, or 14%, of U.S. TV households.

These are two companies with common cultures and shared values, including, importantly, a commitment to top-quality local news and operating top-ranked stations.  The new Media General will be more geographically diverse, and we’ll have a presence in more markets that generate unusually strong political revenues.  Our increased size enhances our ability to capture retransmission fees and gain efficiencies with broadcast vendors, including providers of syndicated programming. 

The balance of network affiliations includes CBS (12), NBC (9), ABC (7) Fox (1), CW (1) and MNT (1).  Sixteen of the 31 stations are located in the Top 75 DMAs.

Moreover, our new company will have a strong balance sheet and a dramatically enhanced credit profile.

And, on Monday of this week, you saw the latest installment on that front.  We announced a new, 4.25% credit agreement with a syndicate of lenders.  It will be in place following the merger.  The new credit facilities consist of a $60 million revolver and an $885 million term loan.

This puts the new Media General on an even stronger footing than we’d planned when we spoke with you on June 6th.  We had anticipated approximately $15 million of financing synergies as a result of the transaction.  In fact, these synergies are nearly doubling, to $29 million.  Our pro forma cash interest will be approximately $39 million annually, compared with the two companies’ current standalone annual cash interest expense of $75 million.  Or, put another way, the combination means that we’re saving $36 million in cash interest expense each year.  This is a significant free cash flow pick-up for our company.  Jim will provide you with more details about the new credit agreement in a minute.

First, though, our merger is progressing smoothly, and we’re hitting each of our timing marks.

The waiting period under Hart-Scott-Rodino expired on July 29, so that condition has been satisfied.

Our applications for license transfers have been submitted to the FCC, and we believe that process will go smoothly.

Our preliminary proxy statement also has been filed with the SEC.   Once the SEC clears the proxy statement, the date for the shareholder meeting to approve the merger will be set, and proxy materials will be mailed to shareholders.

We’re delighted with this progress – and with our gathering momentum.  We expect the transaction to be completed in the late third or early fourth quarter of this year.

In the meantime, we’re well down the path with Young working on the specifics of how we’ll integrate our two companies.  Since Young and Media General are coming at this with similar perspectives, and each gain a lot as a result of this transaction, the process is going very smoothly.  We anticipate a seamless transition. 

Next, I’ll highlight our second-quarter results. 

As we’ve said, Media General is focused on improving our broadcast cash flow margins.  We look at this by comparing odd-numbered years to odd years and even-numbered years to even years; that’s appropriate because of the impact of Political and Olympics revenues in the even-numbered years.

In the second quarter this year, our broadcast cash flow was $27.5 million, compared with $20.5 million in the second quarter of 2011, a 34% increase.  Our broadcast cash flow margin this year was 34%, a five-point improvement from 29% in the second quarter of 2011.  This improvement reflected growth in all revenue categories:  Local, National, Political, Digital and Retransmission.

Our operating income in the second quarter was $5 million, compared with $17 million in the second quarter of 2012.  The decline is attributable mostly to two things: first, to $7.2 million of merger-related expenses that we booked in the second quarter; and, second, to $3.7 million reflected in the “Incentive Compensation” component of “Corporate and Other Expenses,” from the effect of our higher stock price on our stock-based compensation plans. 

Additionally, the current quarter included $1 million of Political revenues, which compares with $7.5 million last year. 

Through the first half of this year, we generated $1.5 million in Political revenues, mostly from the special Congressional election in South Carolina.  That’s a little better than we’d anticipated.  In the second half of this year, in Virginia we have gubernatorial, lieutenant governor and attorney general races.  In Alabama, we will have a 1st Congressional District special election, and there’s a fairly significant mayoral race in Mobile.  As a result, we expect our Political revenues for the full year 2013 to be about $6 million; that’s up from our previous guidance of $5 million.

Retransmission revenues in the second quarter increased 38% to $13.3 million.  In May of last year, we completed a contract renewal with rate increases with Cox, so in the second quarter of this year we cycled against that increase.

Retransmission revenues are expected to increase approximately 47% for the full year 2013, to a total of approximately $54 million.  On June 28, we announced we were exercising a provision in our DISH contract to extend by 90 days an agreement that was set to expire on June 30.  This extension ensures that viewers can continue to watch their local news and lifestyle programs, as well as top-rated prime-time programming, as we negotiate a fair, market-based agreement with DISH. 

Digital revenues in the second quarter increased 17%.  Within a point, that’s the same growth pace we set for Digital in the first quarter of the year -- and we see it continuing.

We’ve made some meaningful improvements this year in our digital operations.  We invested in, and fully implemented, a new system to strengthen the content and technology for our broadcast websites.  We now have a single workflow between newsrooms, websites and mobile devices.  This change has been very meaningful in helping us capture more audience from mobile.  More than 50% of our digital audience is now consistently coming to us through mobile devices. 

Additionally, we’ve launched a new digital marketing and advertising service.  We offer a full suite of digital advertising solutions to reach targeted consumers in any U.S. market, and across all desktop and mobile devices.  We can help our customers use all forms of digital media to target audiences they wish to reach, based on geography, content, behavior, income or device. 

In June, we surpassed some important milestones in our digital business.  For the first time since we became a pure-play broadcaster, our monthly digital revenues exceeded $1 million, and our audience growth was 19%.

Our Core broadcast revenue in the second quarter increased 1%.  Local gross time sales of $46 million declined 1.9%, while National gross time sales of $25 million increased 5.6%.

Of our Top 10 largest advertising categories, the #1 category, automotive, grew 5.5% in the second quarter.  Automotive has been a steady growth driver this year, and, for the same reasons you’ve been reading about of late in the press, we expect automotive to remain healthy in the back half of the year.

Other categories that increased in the second quarter of this year were furniture, home improvement, medical, entertainment and telecommunications.

Turning to expenses, station production expenses rose 1.8%, due primarily to higher network affiliation fees.   SG&A expenses increased 8.6%, due to merit increases, and because of two items for which there were revenue offsets: that is, sales incentive trip expenses and higher revenue sharing expense from our increased digital media revenues.  Our stations did a good job in the second quarter managing discretionary spending.

Our core Corporate expense in the second quarter was $4.2 million, a 41% decrease compared with $7.2 million last year.  As you’ll recall, this decrease resulted from the elimination of 75 corporate staffing positions last year following the sale of our newspapers. 

I’ll now ask Jim Woodward, our CFO, to provide additional details about the quarter, including our new credit agreement.

Remarks from James Woodward

Thank you, George. 

I’ll start with below-the-line items for the second quarter.

Total interest expense of $19.5 million decreased from last year by $2.2 million, or 10%.  This decrease was due to debt repayment last year using the proceeds from the sale of newspapers.     

Tax expense was $1.9 million in the second quarter, compared with $3.4 million last year.  Tax expense continues to be non-cash and related to our “naked credit” issue as previously discussed in our public filings.  Our Net Operating Loss (NOL) carry forward for tax purposes was approximately $330 million at the end of the second quarter.  This NOL will be available to offset future taxable income for up to 20 years. The pending merger with Young Broadcasting may restrict our ability to utilize the existing NOL. In addition, Young also has significant NOLs that may be subject to restrictions as well.  We’re analyzing the combined NOL position to determine the total available and undertake tax planning strategy to maximize the annual utilization.

Enterprise EBITDA in the second quarter, adjusted for merger related expenses, was $18 million this year, compared with $23.6 million last year.  The increase in operating costs, combined with lower revenues due to the relative absence of Political revenues, resulted in the year-over-year decrease.

Capital expenditures in the second quarter were $4.1 million, compared with $2.7 million in the prior year.  The current quarter spending was spread over all stations and mainly for equipment upgrades and replacements, vehicles, and building and set improvements.

Our new credit agreement will be in place following the completion of our merger with Young Broadcasting.  The new credit facilities, which are contingent upon the closing, consist of a $60 million, 5-year revolving credit facility and an $885 million, 7-year term loan. The revolving credit facility interest rate is LIBOR plus 2.75%.  The term loan interest rate is LIBOR plus 3.25%, with a 1.00% LIBOR floor. 

Proceeds from the new credit facilities will be used to repay all of the outstanding debt of Media General and Young Broadcasting, including associated call premiums.  As of March 31, 2013, Media General’s outstanding debt was $601 million, and Young’s was $132 million.  Proceeds also will fund a $50 million contribution to Media General’s qualified pension plan and pay transaction fees and expenses.

Our new financing was very well received by debt investors, and our new term loan was meaningfully oversubscribed.  We appreciate the support of the credit community and this opportunity to greatly strengthen our balance sheet and to continue to improve our credit profile.

Integration planning is progressing well.  We’re on track to capture our expected $15 million of operating synergies, the bulk of which will be realized within 12 months after the closing. 

And, now I’ll turn it back to George.

Remarks from George Mahoney

Thank you, Jim.

Here are some thoughts about the third quarter.  In last year’s Q3, Political revenues were $19.6 million, and revenues from the Summer Olympics were $15.5 million.  Our total station revenues will decrease this year as a result.  However, excluding Olympics revenues, Core Local and National broadcast gross time sales are expected to increase in the mid-to-high single digits.  Retransmission revenues are expected to increase approximately 43% from last year’s third quarter.

We have a full slate of special revenue initiatives and new business goals at all of our stations.  These are going very well for us this year, and are helping to offset some of the lower Political revenues.

For example, in June, WFLA and the Tampa Bay Buccaneers announced a new multi-year media rights agreement to broadcast preseason games through the 2017 football season.  This is appointment television, and it will help replace some of the lost Olympics revenues from last year’s third quarter.  We’ve also acquired the rights to produce other special features and ancillary programming tied to the Bucs that will benefit us all through the NFL season.

Finally, we continue to focus intently on completing our merger with Young and on the integration we’ve mentioned.  We’re excited about our prospects, and our opportunities, as a larger broadcaster.  We look forward to providing enhanced value to our shareholders as an acquirer in the continuing industry consolidation.  Because they’re immediately accretive, we’ll be focused particularly on creating more duopolies.

And now, we’ll be pleased to take your questions.

Top of page