Welcome to the Second Quarter 2014 Media General Incorporated Earnings Conference Call. My name is Hilda and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms.

Lou Anne Nabhan. You may begin..

Thank you Hilda and good morning everyone. Welcome to Media General's Second Quarter 2014 Conference Call and Webcast. Earlier today, we announced second quarter results. The press release is on our Web site. 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 does contain 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 Web site.

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..

National gross time sales decreased 12.9% in the quarter. But even so, the National categories of health care and grocery showed good growth in the quarter. We think the softness in National advertising is symptomatic of the underlying sluggishness 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 second 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 at about $15 million for financing synergies and about $15 million for operating synergies.

We also said at the time that we believe 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 a $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’ve 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.

And today we're announcing an additional $5 million of operating synergies, all as part of our ongoing effort to manage costs smartly. The new $5 million mostly reflects lower healthcare costs, relative to what we'd expected for 2015. They are 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 our 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..

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 I’ll focus on the expenses. Total operating costs of a $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; and 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 the merger-related expenses, corporate severance expense and losses related to property and equipment sales, and the higher depreciation and amortization this year increased 2.9% and the 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 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 and significant net operating loss carryover for tax purposes.

The company has $681 million of NOL carry forwards, which are available to offset future income, enhancing our free cash flow. George mentioned that our free cash flow was nearly $23 million. Excluding one-time expenses for merger-related costs and severance, our free cash flow would have been $32 million.

Capital expenditures in the second quarter were $5.9 million and were mostly 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. Going forward we’ll 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 4.21 times, which is among the lowest in the industry.

The 4.21 times 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, compared with $155 million on December 31, reflecting a $45 million cash contribution to the Company's pension plan in early 2014.

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

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 24th, 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, Alabama; Green Bay, Wisconsin; Mobile, Alabama; Providence, Rhode Island; and Savannah, Georgia. 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 Department of Justice. 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 eight times. 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..

Thank you. We will now begin the question-and-answer session. (Operator Instructions). The first question comes from Marci Ryvicker from Wells Fargo Securities..

Couple of questions. I guess the first one is national being down 13%. I'm just curious if it was across all the categories and across all of your markets. And then I just wanted clarification on some of your comments about Q3 and the rest of the year.

Is national just looking better, or is national actually up for Q3 and the rest of the year?.

So what we said was that it wasn’t all categories, in fact we had healthcare and grocery going up in the second quarter in national for us. And it’s not across all markets, which is why we don’t think it is secular shift going on here at all, we think this is the economy.

So you see markets as diverse Greendale, North Carolina in Davenport Iowa, we have good growth in national. And so we just don’t see anything other than a slow national market related mostly to the national economy. So that’s why what we said is that we see national improving.

We don’t see it going positive but we see it being less bad as the year progresses through Q3 and Q4. We think it’s getting better, because the economy itself is getting better. It’s getting better, slower than anybody would like but it is getting better.

And in particular what we look at is the pricing and sales of existing homes which we think gives people confidence to go out and spend money, particularly money on cars, the category that we licensed to spend on the most as you know that’s 20% to 25% of all of our revenue.

So we look at cars and we look at projections on cars and we see as you know car sales have been at a nearly record breaking pace for all times for the year this year and they are expected to continue with that kind of a pace in the third and fourth quarter, so the whole back half of the year.

And as we look further into auto, we look at things like new model introductions, Ford has a new aluminum body F model truck coming out, Honda has got a new SUV, it’s got new products, but it also is reinvigorating, it needs to be introduce those to the American public and television is the way think for Honda to do that.

So we’d expect them to be back more strongly in the back half of the year. So all auto we think that National picks up and we think that, that’s in spite of the displacement from political that we expect in our markets from the third quarter and the fourth quarter..

Great.

And then, my second question is, as you start your negotiations for reverse compensation with someone like a CBS, is there any concern, given some of the things that we've read in the trade press -- I think that they've been pretty vocal that they want more than 50% from their affiliates, and they've been asking for some money for the NFL games.

So I'm not sure how you're thinking about this as you go into negotiations with any of the networks..

Well it’s early for us to be talking about negotiations that really won’t begin in earnest for a bit, but we’re pretty comfortable with the perceived model being the one that actually goes forward and that’s a about a 50:50 split with the networks and we’re comfortable there.

We think we deliver good audience for them, we think that they deliver good programming for us. So we think that model works and we think it continues and we think that, that split is about where things will come out..

The next question comes from Barry Lucas from Gabelli and Company.

George, maybe we could drill down just a bit more on national versus local, particularly for auto, and not necessarily wanting to rain on the parade, but we are bumping up against a 17 million annual SAAR rate. And it's hard to see unless the manufacturers and dealer groups start spending more per vehicle, that that's going to go materially higher.

So maybe you could just break out where auto has been and where you see it going on a local and national basis?.

Yes. Well I think -- I am looking at an August 1 Wall Street Journal report that talks about auto sales jumping in July, the sub-head is GM, Ford, Chrysler have best years in July, Nissan has had best every July. Auto sales roared ahead is the journal story.

But what we see for us is that people that have been pulling back a little on national advertising like Honda, we will need to step up and we see that the car dealers that are out there for GM, even the second tier Mazda, Subaru, those people are experiencing terrific sales, they’ve got models that they are working on, Mazda 3 or Subaru Forester that they’ve read on.

Those are models that they need to continue to push and remember we’ve got U.S. auto fleet that’s still 11 years old. So as people get confidence because of the housing prices that I mentioned. We know that they will be out buying cars, that’s the record over the last ever.

And so we think that that’s exactly what we will see in the future and that’s why we are feeling better about national in the back half of the year as we talked to the agencies that we deal with and as we talk to advertisers..

If we could talk about the prospect of closing earlier and your focus on, if you will, on the overlap market.

So what goes into the decision-making process in terms of which stations get divested and in light of the fact that Allbritton is done, doesn't that move you up in the queue so to speak?.

Well, listen the fact that Allbritton is done is great news for us, its great news for the industry. It shows that the SEC is willing to work with the broadcast industry and so that is a good thing and we are heartened about that. What we are looking at in our overlap markets is, it’s really nothing sort of angst for us.

These are terrific performing stations in every single one of these markets and this is a hard call. These are not stations that anybody in their right minds would want to get rid of. So we have to get rid of one set or another set in each market and it’s a difficult process and we are talking to a lot of people.

As I mentioned when we announced the LIN transaction, on that day the phone started ringing. And it’s been a pretty competitive marketplace so far and we’re pleased with what we are seeing, we're pleased with the pace.

Things on track with what we expected and I think that the safest thing is still to say that we will close this transaction in the first of quarter ’15. That’s what we are comfortable with and I want to come off that. But as you say, we’re happy with the FCC and its approach on Sinclair..

Last area for me, on the pension contribution, are you done for this year? And is there a way to ballpark what you might do, given the liability, what your thoughts are in terms of voluntary contributions in 2015?.

I have got a man sitting here with a huge grin on his face, because he actually understands pension accounting and contributions. Let’s hear from Jim Woodward..

Yes we are done for this year and very no, we haven’t firmed our plans up for 2015. I don’t think we’ll be in a position. We won’t have mandatory contribution. So if anything we do it would be voluntary just to help the funded status..

The next question comes from Edward Atorino from Benchmark..

How are your rating? Is it all at the marketplace? Are your station ratings holding up? Was there any particular station where there might have been a ratings problem that’s adding to the weakness in advertising or was it just all of the marketplace?.

No I mean, it’s a function of ratings chore but what we’re seeing particularly on national is spottiness this from one market to the next. And so -- that’s why we can pick a station in the East say in Greenville, we can pick a station in the Midwest in Davenport and say national there is pretty good.

Those are both good strong performing stations but it’s a question of what people are buying and in some cases they’re buying pretty well. And so see National up there. But that’s just kind of the way it’s been all during the second quarter. And as I said that Ed, we don’t see that as a secular shift.

What we see is just some sluggishness because in national economy remember GDP was down in the first quarter, came back in the second but the mix is still pretty sluggish economy in the first half of the year we think that’s what’s driving most of this..

How about other key categories? Could you just hit the -- I'd ask for a long list, but let's say the top three categories besides auto? Are they all down, or is it all auto?.

No, we’ll be happy to give you the details on it. What we’ve said is that we’ve had pretty good growth in a lot of these. I am looking down the list of local categories and they are all pretty strong. I guess down to seven or eight on the list before I start to see something it isn’t a good result..

Sounds like its auto..

It always is Ed..

The next question comes from James Dix from Wedbush. Please go ahead..

Just in terms of looking maybe a little bit longer term, in terms of how you see your ability to compete in particular for national spot dollars with the other players in the marketplace, how do you see broadcast television, especially in theory assuming the merger goes through and you have greater scale to invest in systems and things like that, being able to compete against improvements in the ability of locals, spot cable, to deliver targeted advertising and addressable advertising? And then increasing inventory becoming available in terms of online video and presumably some of it being of sufficient premium quality to actually attract national advertisers? I'm just curious as to how you see that playing out and whether you think that broadcasters maybe need to partner up in order to get the targeting ability to be more competitive over the longer term for national advertisers..

Sure. We think that the evidence is all there, that television is still the thing that draws the audiences that advertisers want. When you want to promote a product, this is what politician wants to promote himself the place you go to is to television. And so the model we think is strong, we think it continues to be strong.

We think that we’re seeing some nice growth on the digital side for us. Our digital numbers in the second quarter for all stations across all stations were up 33% which is the same 33% that we saw in the first half of the year.

So we think that to the extent that people want to target particular demographics and split things out that we’re not only positioned well to cover that and to get it with our broadcast sites, but that we’re getting it.

So you know that when people turn to broadcast television websites what they’re going mostly for is local news and weather, we see that continue to be strong. But what we’re also seeing is a terrific move towards mobile. And so we’re feeling really good about being able to capture that. Mobile is a category that’s growing everywhere.

But look at what broadcast has been able to capture here and it’s a really nice store we think. So we feel real good about the model and broadcasters doing just fine as they are..

And George I might add I mention something about partnering. Well, we are partnering, LIN, with their digital platform and the investments they've made there, we feel even stronger about the combined Company’s efforts to be able to attract that national advertising be it video or sponsored content or whatever.

So I just thought we are doing some partnering. That merger will get --.

Okay. And just one follow-up, in terms of auto particularly, the category.

Do you have any sense that cable is taking any share in the near term there, or do you think it's just more a category-specific thing as opposed to any share shift among various television providers with auto?.

We’re really not seeing it as a share shift at all. What we’re seeing is just a reflection of the national economy..

Thank you. We have a question from Edward Atorino from Benchmark.

Your political looks like a pretty good start. Was that better than you thought or is it on target, $13 million for six months? That's pretty good.

Do you think political is going to be a little bit of a bonanza for the year?.

Yes, we do. And it’s -- political is one of those things that is -- you have a hard time predicting in any particular month. We saw the first quarter light up in particular because we saw a big raise in the Tampa market that nobody expected to go quite as strong as it did. Remember it was lot about healthcare and national debates on that.

And in the current quarter we’re seeing things light up a lot in Iowa and also in Rhode Island. So we don’t necessarily expect Rhode Island to be widening up but there is a democrat primary there that has been a big deal for us. So what we're looking forward to is hot races on the Senate side.

Remember there are seven open Senate seats this year and four of them are in our markets, Iowa and Georgia and Michigan and South Dakota. And we think that as the landscape begins to shift a little bit more toward republicans that Virginia also will be a pretty hot race.

So we are looking forward to the Senate and some of those are starting to heat up as I said. And so it’s the story that we also know is the story Media General. We're seven battleground states, and so political is one of those things that we love to talk about and it benefits us very well.

So we’re happy with where we are and we’re excited about the second half of the year in political..

Could you remind me what you did in ‘12?.

We have that number and the number in ’12 was $115 million, that’s pro forma for both companies..

Yes, I understand. I don't think you're going to hit that this year, but --.

No, I don’t think we will either. We’ve said that this is more comparable to 2010, but we think this is going to be a nice year..

What was 2010, now that you brought it up?.

’10 was $69 million..

Thank you. (Operator Instructions). The next question comes from Sachin Shah from Albert Fried & Company..

So I just wanted to clarify, the conversations that you're having, they're both at the DOJ level for the secondary requests, as well as the FCC? You're trying to mitigate both of the issues on the five markets? And are you expecting to announce the divestments before you get those two approvals or are they expected, the divestments are expected as a package afterwards?.

Yes. So the process is this. When we first announced the transaction with LIN, it was clear to us that we were going to have to make some changes in the five markets that I had talked about earlier. And that’s because the FCC rule simply won’t let us hold those numbers of stations in those markets.

And so some of that is a question of FCC rules, some of it is a question of concentration in the marketplaces. Just look at Providence, Rhode Island for example. We’ve got the number one station and LIN has very, very strong combined stations in that marketplace. I think together we have something like 80% of the market for television in Rhode Island.

So the justice department is going to get involved in something like that and we knew that. So when we announced the transaction, what we said was to the FCC and to the justice department, look, we recognize the issues in these five markets.

And what we are going to do is we’re going to file, we’re going to bring you solutions, we’re not going to try to push this and pretend that these aren’t issues they are and we recognize it and we are bring these solutions. And so now what we need to do is figure out in those markets which stations, LIN’s or Media General’s we’re going to divest.

And the divestitures can take two forms, either swaps or cash sales. And so we're in the process of working that out right now. That’s a third quarter or kind of bit event for us and we're pretty happy with the way the process is going right now. No, we’re very happy with the process is going right now.

And so that’s why we think we’ll be able to get in a good position with the commission this quarter going into the fourth quarter and that’ll drive the closing for the first quarter of ’15..

Just out of curiosity, because of these assets or divestments, are we expected to hear them trickling in, like you're going to sell this market to party A, and then the rest of the markets to party B, et cetera? Or are we just going to hear the package, whenever that's completed? So should we expect it to be trickling in or should we expect it to be one package and then you are kind of moving forwards with the other aspects of the deal?.

I am going to leave you in suspense, because when we have the announcements, we’ll have announcements..

Thank you. And at this moment we’re showing no further questions..

Well as I said at the top this has been a very reaffirming quarter for Media General. What we’re working on is working both on the revenue side and on the cost side. And we’ve more than doubled our expected synergies from the Young transaction to $66 million.

We have along in the second quarter picked up a strong station at Harrisburg, Pennsylvania and our LIN transaction is right on track. So very reaffirming for Media General right now. We are pleased that you all tuned into our call and we look forward to updating you on our progress in the future. Thank you very much..

Ladies and gentlemen, this concludes today’s conference. We thank you for participating. You may now disconnect..