Media General Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good morning ladies and gentlemen and welcome to <b>Media General Inc</b> MEG's earnings call for the first quarter ended March 31, 2016. Today's call is being recorded. Now the company will read a briefly legal statement.

 

Andrew C. Carington:Vice President, General Counsel and Secretary:

This morning the company announced its first quarter 2016 results. The press release along with supplemental data can be found on the company's website at www.mediageneral.com when available, a full transcript along with the replay of today's call will also be posted on the company's website.

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 sections in these reports concerning risks factors. Media General's future performance could differ materially from its current expectations. The company undertakes no obligation to update these forward-looking statements.

Today's speakers will be the company's President and CEO, Vince Sadusky who will provide a high level overview of our results and achievements and James Woodward, the company's Chief Financial Officer who will discuss our financial results and guidance. They will take your questions after their prepared remarks. And now I will hand the call over to Vince.

 

Vincent L. Sadusky:President and Chief Executive Officer:

Thank you Andy. Good morning everyone and welcome to our earnings call. 2016 is off to a strong start.

Total net revenues were at the high end of our guidance growing 15% to $343 million compared to the prior year. Political advertising came in above our expectations as a result of early spending in the primary battleground states of Iowa and South Carolina. We also benefited from Super Tuesday on March 1 as 15 of our strong local news markets took large shares of the political spend. Our significant footprint with market leading TV stations and swings states like Ohio, Florida, North Carolina, and Virginia, position us very well for general election.

If you exclude political advertising, our total net revenues grew 11% compared to the prior year. Adjusted EBITDA exceeded our guidance range increasing 31% year-over-year to $94 million. This increase was driven by growth in ad revenue, higher pay TV subscribers fees, and expense synergies.

During the first quarter we reached new agreements with Dish Network other pay TV providers that accounted for 14% of the subscribers in our markets.

These agreements better reflect the value of our top rated programming and unique local content but the reality is local TV is still greatly undervalued. I believe there is a lot more room for growth and we will continue to work hard in order to receive our fair share. On our last earnings call I discussed our plans to transform our regional business and reposition it for growth and success. To recap, we established a new structure and leadership team, evaluate each revenue segment and shifted our focus to the growth areas of local and social, building on our historical successes.

 

We have the ability to continue investing local and social while delivering a consistent profit margin. And to that end we recently acquired the remaining stake of -- an industry leading social media advertising company and can now fully capitalize on the area of propritery technology and social marketing solutions that are in high demand.

Finally we took significant actions to reduce our cost structure. As a result of our plan digital revenues grew 25% in the first quarter versus the prior year. We are confident that our efforts will continue to deliver sustainable growth in 2016 and beyond.

Before I hand it over to Jim, I want to commend our stations for terrific February ratings book. 72% of our Big 4 TV stations ranked number one or number two in the local markets with adults 25 to 54 and 51% of our websites ranked number one or number two. In addition our TV stations to home 22 regional Edward R Murrow awards as well as many other industry awards that recognize the superior journalism we provide to our local communities and screens.

We believe our great assets and strategy positions us well to maximize revenue opportunities in 2016 including the Summer Olympics and robust political advertising. Lastly, we announced an agreement with Katz Television Group to be our national reference by having a single red firm we will benefit from a more focused sales strategy that leverages our significant footprint and scale. This an exciting year to work towards our proposed combination with Nexstar, a $4.6 billion transactions and one of the largest ever in our industry. Uniting our two local media companies creates a stronger company that can better serve its local communities and adapt to the changing media landscape.

I am pleased with the progress we are making on our divestitures and integration plans and we look forward to closing on the transaction in late Q3 or Q4 this year.

Now I would like to turn the call over to Jim.

 

James F. Woodward:Vice President of Finance and Chief Financial Officer:

Thank you Vince and good morning everyone. Before I begin I'd like to draw your attention to the financial statements and schedules on the Investor Relations page of our website Mediageneral.com. During the first quarter our total net revenues were up 16% to $343 million.

Political advertising revenues were $16 million in Q1 of '16 versus $1 million in Q1 of '15 and as Vince mentioned, after political, our total net revenues grew 11% compared to the first quarter 2015.

In addition to political, our revenue growth was driven by our ability to grow retransmission consent fees in the 25% increase in digital revenues. Overall our total net broadcasting revenues were near upper end of our guidance at $306 million and our net digital revenues exceeded our guidance.

Diving a little deeper in to revenues, net local revenues which include net local advertising revenues and retransmission consent fees increased 11% year-over-year to $230 million.

Net national revenues increased 1% to $50 million compared to the prior year.

Core time sales increased 5 for the quarter compared to 2015 driven by a 4% year-over-year increase in automotive advertising, our largest category that represented 26% of core advertising sales. We are pleased to see the automakers pushing hard to continue achieving sales and pacing ahead of last year. In addition to auto, the retail, medical and restaurant categories also shared growth in Q1 versus the prior year.

Net digital revenue grew 25% year-over-year to $38 million. During Q1 we took additional steps to restructure our digital business. The result of our plan was evident as digital revenues exceeded our expectations. Excluding the increase in programming fees paid to the networks and variable sales cost, our operating expenses and SG&A decreased 2.6%.

If you include the programming fees and variable sales cost, our operating expense and SG&A for the quarter increased 11% year-over-year to $229 million.

Corporate and other expenses excluding stock-based compensation was $8 million in the first quarter compared to $9 million in the prior year. The decrease reflects our integration efforts and the realization of merger related synergies. Adjusted EBITDA for the quarter increased $22 million or about 31% to $94 million compared to Q1 of '15. Growth in adjusted EBITDA was mainly driven by year-over-year revenue growth from TV advertising, retransmission consent fees and our continued focus on managing operating expenses.

 

We recorded $66 million in merger related costs due primarily to the $60 million break-up fee paid to Meredith. Additionally we incurred $4 million in restructuring charges related to both the continuation of our digital turnaround and the loss of the WAGT in Augusta, Georgia.

Turning to Media General debt and key credit metrics, on March 31, 2016 net cash on hand of $34 million and $146 million of availability under our revolver. Our net debt at the end of the quarter was $2.2 billion. Leverage as defined under our senior credit agreement was five times.

Focusing on the for the second quarter we expect net revenues to increase in the range of 13% to 17% versus the second quarter 2015.

Excluding political, we expect net revenues to increase in the range of 10% to 13% mainly driven by increases in retransmission consent fees and digital revenues. Net digital revenues are expected to increase 15% to 29% compared to $36 million in the second quarter of 2015.

For expenses if you exclude the programming fees paid to networks and the variable sales cost, direct operating SG&A would be flat to slightly up compared to the second quarter of 2015. Including programming fees paid to the networks and variable sales cost, we expect that direct operating and SG&A will increase in the range of 13% to 14% compared to expenses of $213 million in the second quarter '15. We also expect corporate expenses excluding stock-based compensation to be between $8 million and $9 million and given our NOL balance, we do not expect any significant cash taxes.

And now I will turn it over to the operator for Q&A

 

Question & Answer

 

 

Operator:

And we'll go first to Marci Ryvicker with Wells Fargo.

 

Marci Ryvicker:Wells Fargo:

Thanks. I have a couple of questions. First for the second quarter is auto -- plus 4% and can you just give a little bit of color on your -- core sales.

 

James F. Woodward:

Yes sure thing Marci. So auto is pacing up for the second quarter. I think what we saw was on the core was really good growth in the majority of our markets and we had some markets that were just tougher geographically for one reason or another, the Northeast was pretty tough, New England and New York State and the San Francisco market was a tough market also but that's a handful of markets out of our 40 something odd markets.

The vast majority when you look at our pacing report and our core performance were green, were up. So auto continues to pace up for Q2.

 

Marci Ryvicker:

Then for political, are you expecting second quarter number to come in half or below Q1 just from a timing perspective various should we...

 

James F. Woodward:

Yeah. We do. We actually think the second quarter would be a bit below the first quarter.

The first quarter we did better than we internally anticipated with the primaries and where we are positioned et cetera. Second quarter the primary dollars look like they are going wane given the current situation but the back half of the year prospects, we by speculation on the national races but particularly for us we have a lot of very-very strong state races that will be heating up in the back half of the year.

 

Marci Ryvicker:

Okay and then last question, digital numbers came in great guidance was better than we thought. Are you thrilled with the majority of the transition in that segment you have your sales people on place. How should we think about where or the status?

 

James F. Woodward:

I think a way to think about it is, we had a pretty significant effort on the national side last year and with the advent of programmatic, I think we had a very attractive product offering but the margins were really challenged as a result of massive automation across the industry. So after I think a year of effort in that area, we just decided we had to really build on our success and we had within those numbers peeling back the onion, we had really good success, terrific growth on the social side and locally as well, introducing all these great products and services that are produced out of Boston to all of our relatively new television stations and our just a year and half old merger with Media General and that focus and kind of adjusting the infrastructure accordingly has really resulted in us turning things around.

So there is a different strategic direction. We still have a national, we still actually selling connected-screen products. There are still attractive offerings that I think can be built on for the company as it grows and gets bigger with Nexstar as well to be able to ground in and fulsome offering of national digital products as well as a pretty terrific TV footprint. But it is really a matter of emphasis and investment shifting pretty significantly for us internally along with a leadership change.

 

 

Marci Ryvicker:

Great. Thank you.

 

Operator:

We will go next to James Dix with Wedbush Security.

 

James Dix:Wedbush Security:

Good morning guys. I had three questions for you. I guess first just looking at your core growth kind of in that low single-digit range in times sales and then you have the broadcast network market which seems to be growing faster than that. I mean, how do you rationalize the difference in growth between those two markets because they both seem to provide the highest reach with premium video context that mean obviously to slightly different advertiser base but I am still curious about that difference and how you see it and also see it playing out.

And then secondly, just on broadcasting, I mean looking forward how does broadcast advertising target and how is it competitive position in targeting likely to change as video inventory will likely become increasingly delivered by IP and then I have one follow up on retrans. Thanks.

 

Vincent L. Sadusky:

Yes sure thing I think when we think about our business, it’s an amalgamation of a lot of local businesses. So the vast majority of the money that we take in as local and regional whereas the networks have national advertisers by definition. So we're impacted much more significantly by the local economies and whether or not there is a new furniture retailer that is expanding in providence versus may be one contracted in Buffalo and so if you look at over the course of years, I think you'd see there's a lot of consistency in our business.

We kind of don't have highs and lows of the scatter market and the upfront market which is I think comforting and as we scale I mean we are very, we are a good size company now covering 24% of the country but then with Nexstar 40% you have got a terrific I think portfolio theory opportunity. So right now you just described the couple of markets that were soft and we have markets like Austin and national that are pretty strong those markets. So it's a bit of a different business in reality.

Plus just the other comment on that point is the political displacement as well right. So the vast majority of the dollars for political are spent in these terrific news products, localism, connection has been proven overtime. So for groups like ours that's got a lot of strong news stations in all these different geographies, we will get disproportional amount of political spend and that will crowd out some of the advertisers so we saw some of that in the first quarter obviously you'll see a lot of that in the third and in the early in the fourth quarter.

Then your second question that video IP, we can talk for hours about kind of future of video delivery in IP in OTT, and all that but I think at the end of the day it really comes down to two things the amalgamation of large numbers of eyeballs people that content to watch your content for long periods of time and the effectiveness of that advertising as its here and I do believe that just talk about some of the alternative video delivery systems, the good news is we're in the conversation.

Even in the VOD world, there's still a lot of people that enjoy seeing that and watching Wheel of Fortune and Jeopardy, and local news and local news is recognized to be valuable whether its Apple service or some service, the local stations with their unique local programming is something that that is desired to have bonafide OTT service I am not sure exactly that's where you were going with IP delivery on video but...

 

James Dix:

Yeah I was just wondering I mean the traditional attracts the broadcast with just high reach even if you did know exactly detailed data on everywhere you are reaching like on YouTube or any type of IP delivered serviced.

 

Vincent L. Sadusky:

I think the systems of measurement will improve over time. I mean there is several initiatives that -- undertaking clearly the Comscore rent track combination is something that, that been very aggressive in trying to refine the audience measurement that they deliver via the set-top box data and then further down the road big splash was made this year about ATSC 3.0 there is opportunity there to do a much better job measuring through that direct transmission. So I do think that that piece of it will improve over time but I look at as glass of full essentially its a heck of a platform to be able to sell hamburgers and cars and furniture even with that system that much less than perfect and you argue and -- what the measurement you can get digitally and we know because we are in the digital game and advertise continually come back because is shift very effective.

 

 

Operator:

We will go next to Barry Lucas with Gabelli & Company.

 

Barry Lucas:Gabelli & Company:

Thanks and good morning. One question is a little bit of a deep dive James if you could given the change in affiliation in Indianapolis, how did that station do in the primary? Did you lose share of political dollars relative to what you thought you might have been?

 

James F. Woodward:

Yes it's a great question. When we covered our station on over to becoming a non-Big 4 affiliate it had pretty some news to begin with. The news ratings are not quite as high as they were when we were an affiliate just because we don't have that terrific high circulation of primetime programming and of CBS 4 so clearly it not but is still very competitive still one of the top-rated stations in the market with local news and we actually expand the local news in our market place.

And so having a station like that we got the flexibility to do a lot of coverage from the state capital when the primaries taking place in the market place and be relevant. So that product that news product because there is more of it remains very-very relevant and affective for advertisers. As far did our money go up or down on a station I don't have the answer to that.

 

James Dix:

Okay. Thanks for that and could you comment on the impact in the quarter of the Dish dispute and how that affects the run rate of rettrans during the balance of the year?

 

Vincent L. Sadusky:

Yeah. So I mean as you know we don't really enter the details of the individual MSO agreements but we had a protracted conversation. There were good negotiations is always difficult because you know you get an opportunity only every so many years to kind of move closer towards the value of our audience delivery vis-a-vis what other networks were getting paid and then you are done for several years and so it's kind of constant moving the bar up and as we said earlier I think the industry still has a long way to go.

We are very pleased with the results and I mean guess there is not much we can say other than you see the numbers you got the guidance for the next quarter and that effectively will be built into our run rate going forward but I'm not really sure what else I can say on that other than we were very pleased.

 

James Dix:

Thanks Vince.

 

Vincent L. Sadusky:

Sure.

 

Operator:

We will go next to Aaron Watts with Deutsche Bank.

 

Aaron Watts:Deutsche Bank:

Hey guys. A couple of question from me and VInce I apologize if I missed this but I think I heard kind of core was up low single digits, was that in the first quarter and then I'm curious kind of how that looks second quarter versus that.

 

Vincent L. Sadusky:

Yeah. That was first quarter. Second quarter is facing flattish at the moment but it picked up strength May stronger than April.

 

Aaron Watts:

Okay. Alright. Anything discernible on the market place kind of moving things around or just a little bit of a let up?

 

Vincent L. Sadusky:

Yeah, its really difficult to say. I think we had good advertising in the first quarter. I think in the back half of the year, we have had a lot more advertising placed earlier as our primary advertiser recognize what's going to take place in with political and I think folks ramping up for a lot of the big events that are coming up in the back half of the year including the month of -- August is normally pretty slow advertising month I think this year that's good and can be different.

 

Aaron Watts:

Okay helpful and then just follow up on auto. I am curious your view if auto sales ever do actually cool off at some point, is that good or bad for the amount of dollars you see the local dealers spending?

 

Vincent L. Sadusky:

It's a great question. We have looked at this analyzed this a bunch of different ways over the years. So I actually would have thought the increase in auto over the last three years or so would have been greater than its been given how strong the growth has been in retail sales.

Its been great, I mean we have had steady increases every quarter and 25% of the business that's all very good and actually one of the largest digital advertisers as well, so its all good but I think a big part of it has to do with when sales are really robust. You don't allow the incentives that you saw in a very competitive situation where there is nowhere stop situation and trying to move inventory after the overall at the end of the year. And then group for new models. You know over the last three years you really haven't seen a lot of that.

But we actually had years where the auto makers have had kind of tough years and you had a decline in auto advertising in the first couple of quarters but then at the end of the third quarter and the fourth quarter, you had really robust spending. As you got competition over sales whereas now it's a lot of for the last few years a lot of imaging and really kind of displaying the new models out there to people but you rarely have seen a lot of incentive type program. So it will cool off eventually at some point we hope it lasts as long as possible and I think we will have to wait and see what the impact is.

 

Aaron Watts:

Okay. Great and last one from me I value the insight you have in your crystal ball some I am curious as you think about the changing dynamics of how people are consuming video for Media General if lose a traditional sub but pick up perhaps a skinny bundle subscriber or over the top viewer, how do you think about that trade off of in terms of kind of the subscriber fees that you have coming in ?

 

Vincent L. Sadusky:

Yes I think what you are seeing, you probably heard from other broadcasters as well is the OTT folks are trying to negotiate with the network just from an efficiency perspective but not have to have a negotiation with a lot of different program providers locally and regionally and the local broadcasters have been part of that conversation because again fortunately they want in your feet and they want local news in particular. So whether its CBS All Access or Sony View through some of the networks they are negotiating those deals there the local broadcasters are included in the value chain and I mean of course I can't talk about what those rates and amounts are but the different dynamic because all have you see you have the network negotiate with the OTTs and then it's the affiliate who's negotiating with the networks versus direct negotiation with the distributor as in the MSO world and then a negotiation of program writes fees for the network programming with the networks.

So I think it's really a matter of these constant kind of negotiation over relative value but in an increasing OTT world I am more comfortable today then I was few years ago for the reason that these conversation and so the early deals that have been cut include the local affiliates in the value chain which is great and it's yes it's something that's obviously needed by the OTT provider the largest once of have recognized have done their research and have recognized that.

 

Operator:

We will go next to Lance Vitanza with CRT Capital Group.

 

Lance Vitanza:CRT Capital:

Thanks. I just was wondering if you could provide any update on the FCC auction process either as it relates to you guys are just more generally?

 

Vincent L. Sadusky:

Yeah. -- quite period now there's not a whole lot we can say about our strategy or our participation in the auction but in general you saw the notice come down so I think we are ready to go lot of the certainty in the processes there is kind of last mile here has been removed 126 megahertz so the FCC has decided that they are going for the highest potential clearing targets. The auction was determined whether or not that is actually achieved based upon the demand side but it seems is that at least preliminary at the values that the FCC initially published by market for through -- in the country they've got the supply and demand side will determine it but the rules of engagement have been determined and as of the end of this month, board rooms have been set up and at least as far as the supply side goes, we are ready to go

 

Lance Vitanza:

And to can you remind me what or when rather we should expect to hear that this has all been concluded just from a standpoint of knowing what the demand side looks like in the part of the option.

 

Vincent L. Sadusky:

Yes so on the supply side it will depend on how many rounds it goes whether it goes two rounds it will be over the first week of June more than likely it'll go multiple rounds so that will put you into later June may be and then they will have a start up process will have provisional winners on the supply side and then they'll begin the demand side and that will go again however many rounds any where from one to fifty rounds so depending on robustness and the competitiveness of that side as well. So I think it will be mid-summer before you could possibly been I think really have any data.

 

Lance Vitanza:

Thanks very much for your help.

 

Vincent L. Sadusky:

Sure thanks

 

Operator:

With no further questions in the queue, I will turn back over to the CEO for any closing remarks.

 

Vincent L. Sadusky:

Okay terrific. Thank you all of your interest in the company. We look forward to keeping you updated.

 

Operator:

And that does conclude today's conference call. We appreciate your participation.

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