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Second-Quarter 2014 Conference Call Remarks
Tuesday, August 5, 2014, 10:00 am EDT

by George L. Mahoney, president and chief executive officer; James F. Woodward, senior 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 2014 Conference Call and Webcast.

Earlier today, we announced second-quarter 2014 results. The press release is on our website. A transcript of the comments from today's call will be posted after the call, and a replay also will be available.

Today's presentation contains forward-looking statements. Our future performance could differ materially from our current expectations, as a result of various risks and uncertainties. For a discussion of these risks, see the Risk Factors section of our Form 10-K, which is available on our website.

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

Remarks from George Mahoney

Thank you, Lou Anne. Good morning everyone, and thank you for tuning in.

Today we reported our second full quarter of results for the combined Media General and Young Broadcasting. It was an outstanding, and a reaffirming, quarter for us.

As we promised when the Young transaction was announced, we're generating meaningful incremental free cash flow and reducing debt.

Comparing combined results for the second quarter of this year and last year, we delivered strong increases in Net Operating Revenue, Operating Income, Net Income, Broadcast Cash Flow, EBITDA and Free Cash Flow.

Net operating revenue increased nearly 12%, driven by higher Political, Retransmission, Digital and Local revenues - and in spite of the lower National revenues affecting the industry.

Our revenue growth and expense management were the key drivers of our 20% increase in Broadcast Cash Flow and our 39% increase in adjusted EBITDA. BCF margin in the current quarter was 37% compared to 34% last year.

Free Cash Flow was nearly $23 million compared to a $5 million deficit in last year's second quarter.

Political revenues in the quarter were $9.3 million. As anticipated, we benefited particularly from early spending on a number of Senate and gubernatorial races.

The Senate races that generated strong revenues for our stations included a challenge to Kay Hagan in North Carolina, Tom Harkin's open seat in Iowa, the two Senate races in South Carolina, Saxby Chambliss' open seat in Georgia, a challenge to Mary Landrieu in Louisiana, and Carl Levin's open seat in Michigan.

The Senate races in our markets are expected to be among the nation's most contentious -- and expensive -- and these races also should benefit significantly from outside money. Additionally, it looks like Mark Warner's re-election race here in Virginia will be more of a battle than originally thought.

The gubernatorial races that benefited our stations in the second quarter were in Florida, New York and Rhode Island. We additionally expect to benefit from gubernatorial races in Georgia, South Carolina, Illinois and Wisconsin.

As a reminder, our Political revenues in recent election years were, on a pro forma basis: $115 million in 2012, an off-the-charts year by any measure; $69 million in 2010, and $59 million in 2008.

Retransmission revenues in the second quarter increased 49%.

We are currently paying reverse compensation for 19 stations.

A network affiliation agreement for our ABC station in Augusta, Georgia, expired on June 30. We're negotiating a new agreement right now under a contract extension.

We're also not currently paying reverse compensation at eight CBS stations and one NBC station. The NBC agreement, for our Davenport station, expires at the end of the year, and our CBS agreements expire during the first eight months of 2015.
Our Digital revenues in the quarter rose very strongly as they have all year, at 33%. This growth was driven by strong Local sales of our core digital products, particularly targeted display advertising on both desktop and mobile platforms. Digital audience growth was up 28%, largely driven by increased consumption on mobile platforms. More than 64% of our digital content is now consumed on a mobile device compared to about 45% during the same period last year.
Core advertising, that is, our Local and National gross time sales combined, declined 3.1% year over year. That's solely because of the National softness I mentioned a moment ago.

Here are some details on Core; first on Local, then on National: Local gross time sales increased 1.8% to $81.1 million compared to $79.7 million in the second quarter of 2013.

Of our Top Local advertising categories, the largest and most important – automotive – continued ahead of last year. Other key categories in the plus column included home improvement, telecommunications, retail, healthcare, furniture and fast food/restaurant.

The story in National is the same one you've been reading about everywhere: National gross time sales decreased 12.9%. But even so, the National categories of health care and grocery showed good growth in the quarter. We think that the softness in National advertising is symptomatic of underlying weakness in the economy. As we look out, we actually see National improving somewhat in the third quarter -- and for the rest of the year.

In addition to higher revenues in the quarter, we benefited significantly from the financing synergies we realized when we merged with Young. Our interest expense in the second quarter was $9.6 million compared with $21.6 million last year on a combined basis.

You'll recall that, when we announced the Young merger, we said we'd deliver financing and operating synergies of approximately $30 million, and we said they'd be split about evenly: $15 million for financing synergies and about $15 million for operating synergies.

We also said at the time that we believed these synergies would go higher -- and, indeed, they have.

Our financing synergies increased from $15 million to $36 million because of excellent credit ratings, and rates, as we refinanced the debt of our combined company.

On the operating side, in April, we announced an additional $10 million of synergies from the Young transaction. That amount was attributable to expense reductions as we shifted our operating model to become much more decentralized as we restructured our corporate and shared services functions. Approximately half of the $10 million came through a reduction of corporate expense; the remainder was at the station level. All of this is being phased in during 2014, and the full impact will be realized starting January 1, 2015.

I also said at the time we announced these savings that we expected to find more.

Today we're announcing an additional $5 million of operating savings, all as part of our ongoing effort to manage costs smartly. The new $5 million mostly reflects lower health care costs, relative to what we'd expected for 2015. They're savings we've gained by negotiating better rates as a larger company. This $5 million figure also includes some additional synergies at the corporate and station levels, mostly from newly renegotiated contracts and from some further reengineering. So, just as we exceeded expectations with our financing synergies, we've now also doubled our operating synergies from our merger with Young.

And now, let's hear from our CFO, Jim Woodward.

 Remarks from James Woodward

Thank you, George.

Let me first note that, as I explained on our last earnings call, the Young merger was accounted for as a reverse acquisition. Consequently, the GAAP financials in our press release this morning include only Young operating results for the 2013 second quarter.

Also in the press release, we included for 2013 Supplemental Combined Company Information. This combined information simply adds together the results of legacy Media General and legacy Young without any adjustments. My comments are going to compare the 2014 second quarter to the 2013 combined results.

George covered revenues in detail, so let me focus on expenses.

Total operating costs of $132.1 million compared to $124.7 million in the second quarter of 2013.

Depreciation and amortization was $5.7 million higher this year due to the effects of purchase accounting resulting from the Young merger.
Merger-related expenses in the current quarter were $4.8 million compared to $11.6 million last year.

Corporate severance expense this year was $4.5 million, related to the restructuring announced in April and compared to a nominal amount last year.

Total operating costs, excluding the impact of merger-related expense, corporate severance expense, losses related to property and equipment-net in both years, and the higher depreciation and amortization this year, increased 2.9%. This 2.9% increase is attributable mostly to expected higher reverse compensation paid to networks.

Corporate and other expense of $7.6 million decreased from $11.3 million last year, due to lower pension and postretirement costs and lower incentive compensation expense.

Tax expense in the second quarter for both years was predominantly non-cash due to the company's interim net loss for tax purposes and significant net operating loss carryover for tax purposes. The company has $681 million of net operating loss (NOL) carry forwards, which are available to offset future income (subject to annual use limitations), enhancing our FCF.

George mentioned that our Free Cash Flow was nearly $23 million; excluding one-time expenses for merger-related costs and severance our FCF would have been $32 million.

Capital expenditures in the second quarter were $5.9 million and were mostly for HD news sets, equipment upgrades and replacements, and vehicles. Capital expenditures for the full year are still expected to be approximately $41 million, as we complete the build-out of HD at our stations and invest in our news gathering and production capabilities.

In May, we completed the sale of the building in San Francisco that houses our KRON station for $24.5 million of net cash proceeds, most of which was applied to debt reduction. We have leased back the space through December 31, 2014, with no rental payments. We're required to defer the gain on the sale until the end of the lease term. We anticipate recording a gain in the range of $10 million in the fourth quarter. We will be subleasing studio and office space for KRON from the local ABC station, and we expect to move our operations to the new location in the fourth quarter.

Total debt outstanding was $852 million at the end of the second quarter compared to nearly $917 million at the end of 2013.

Net leverage as of June 30, 2014, as defined in our credit agreement, was 4.21x, which is among the lowest in the industry. The 4.21x is based on adjusted pro forma trailing eight-quarter average EBITDA of $199.4 million.

Retirement and postretirement plans liabilities decreased to $105.6 million on June 30, 2014, compared with $155.3 million on December 31, 2013, reflecting a $45 million cash contribution to the company's pension plan in early 2014.

And, now I'll turn it back to George.

Remarks from George Mahoney

Thank you, Jim. I'd like to close with an update on the status of our merger with LIN Media. After that, we'll move to Q&A.

The LIN transaction has been unanimously approved by both the Media General Board of Directors and the LIN Board of Directors. The closing of the transaction is subject to the approval of the FCC, clearance under the Hart-Scott-Rodino Antitrust Improvements Act and some third-party consents.

The SEC cleared our S-4 on July 24, and we mailed a joint proxy statement that same day. Media General and LIN will convene special shareholders meetings on August 20 to vote on the transaction.

As we've said, Media General and LIN will be required to divest stations in five overlap markets to obtain regulatory approval for this transaction. These markets include Birmingham, AL; Green Bay, WI; Mobile, AL; Providence, RI; and Savannah, GA. Media General and LIN have not announced which stations in these markets will be divested – nor which will be swapped or sold for cash. We're working diligently right now to finalize those plans, and when we have definitive agreements, we'll make the announcements and move forward with the FCC and DOJ.

It's still best to target the first quarter of 2015 for the completion of our transaction with LIN.

Before closing, I'd also like to touch on the agreement we announced in June with Sinclair Broadcasting to purchase WHTM, an ABC affiliate in Harrisburg, Pennsylvania. This is an attractive acquisition for us, with a buyer's multiple of less than 8x. It also is immediately accretive to Free Cash Flow. WHTM is a top-rated station in a capital-city market. It has a demonstrated, winning commitment to high-quality local news and programming and to its community. It's a perfect fit for us, and we look forward to welcoming WHTM to Media General as soon as we get through the necessary, but very straightforward, regulatory process.

And now we'll be pleased to take your questions.

ADDITIONAL INFORMATION AND WHERE TO FIND IT

This communication is not a solicitation of a proxy from any shareholder of Media General, Inc. ("Media General") or LIN Media LLC ("LIN Media"). In connection with the Agreement and Plan of Merger by and among Media General, Mercury New Holdco, Inc., ("Mercury New Holdco"), LIN Media and the other parties thereto (the "Merger"), Media General, Mercury New Holdco and LIN Media have filed relevant materials with the SEC, including a Registration Statement on Form S-4 filed by Mercury New Holdco with the SEC on July 21, 2014 and a joint proxy statement/prospectus filed by Mercury New Holdco with the SEC on July 24, 2014. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THESE MATERIALS BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT MEDIA GENERAL, LIN MEDIA, MERCURY NEW HOLDCO AND THE MERGER. The Form S-4, including the joint proxy statement/prospectus, and other relevant materials , and any other documents filed by Media General, Media General Holdings and LIN Media with the SEC, may be obtained free of charge at the SEC's web site at www.sec.gov. The documents filed by Media General and Mercury New Holdco may also be obtained for free from Media General's Investor Relations web site (http://www.mediageneral.com/investor/index.htm) or by directing a request to Media General's Investor Relations contact, Lou Anne J. Nabhan, Vice President, Corporate Communications, at (804) 887-5120.

This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

PARTICIPANTS IN THE SOLICITATION

Media General and LIN Media and their respective executive officers and directors may be deemed to be participants in the solicitation of proxies from the security holders of either Media General or LIN Media in connection with the Merger. Information about Media General and LIN's directors and executive officers is available in the joint proxy statement/prospectus filed by Mercury New Holdco with the SEC on July 24, 2014.

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