Cox Radio Q4 and Full-Year 2005 Earnings Conference Call Transcript (CXR)

February 22, 2006

Executives

Robert F. Neil, President and Chief Executive Officer
Neil O. Johnston, Vice President and Chief Financial Officer

Analysts

Victor Miller, Bear Stearns
Marcy Ryvicker, Wachovia Securities
Anthony DeFlemente, Lehman Brothers
Jonathan Jacoby, Bank of America
Maurice McKenzie, FBR
Eileen Sukara, Citigroup
Lorraine Mancini, Merrill Lynch
John Kornrich, Chandler Capital
Lee Westerfield, Harris Nesbit

Presentation:

Robert Neil, President and Chief Executive Officer

Thank you Operator and good morning everyone, welcome to our Fourth Quarter and Full-Year 2005 Conference Call; and as usual this morning, I am joined by Neil Johnston, our Chief Financial Officer. We’ll start off by reviewing our operations, Neil will then provide a financial overview and then as always we’ll take your questions.

Before we begin, let me remind you for the 683rd time that this mornings’ call will contain forward looking statements that are subject to risks and uncertainties that could cause the actual results to differ. Please refer to our 10K for a list of risks and uncertainties that could impact the actual results.

While 2005 proved to be a challenging year for the radio industry, I am pleased to report that Cox Radio continues to do what we do best. Operating locally oriented radio stations, the programming and content, the super circle of our loyal listeners and our advertisers, and that led to a good year for us in 2005. Our Full-Year 2005 net revenues on an actual basis were essentially flat verses 2004 in line with the industry. However, our true performance was actually much more favorable. If you exclude the impact of the Atlanta Braves broadcasting agreement, which we discontinued during 2004, our revenues were up 3%; a healthy gain that far out pays both the industry and our market as a whole. That out performance continued during the Fourth Quarter. While I am a bit disappointed that our revenues were down 2% for the Quarter, that performance was once again better than the industry which was down 3% for the Quarter and there were a number of unfavorable comps in the Fourth Quarter.

For the Full-Year, 11 of our 17 clusters out performed their respective markets revenue growth per Miller Kaplan; 5 of our clusters generated revenue growth greater than 3%, and that’s 3% higher than the industry as a whole and not an easy task in the is environment. I am especially pleased with our stations in Tampa, which grew their revenues by 12% while the market was flat for the year and our stations in South Florida, which were up 9% and that market was down 2% for the year. Looking at Atlanta, our largest market, I am happy to report that revenues, excluding the impact of the Braves, were up 5% out pacing the market growth of 1%. This broad based performance speaks to Cox Radios consistent ability to monetize our solid ratings results and validates our long-term focus and operating strategy.

For the Full-Year, with a strong focus on expense management as Neil will address further, we were able to generate $165 million consolidated operating cash flow; decreasing our leverage while also acting on our boards approved $100 million dollar share re-purchase program. I continue to believe our share re-purchases represented excellent use of our free cash flow and an attractive vehicle for returning value to our shareholders.

Briefly looking at our Fourth Quarter results, Cox Radios results were heavily impacted by strong comps in 2004 driven by an impressive amount of political spending from the Presidential election year, which amounted $3.4 million during the Fourth Quarter of 2004 alone. Looking at the Quarter, our strongest categories included the Financial Category, which was up almost 20%, Health Care, which was up 8%, Small Specialty Retail, which was up 14%, and Utilities, which were also up 14%. On the negative side, we continued to see weaker than expected performance from groups including Telecom, which was down 25%, advertising from other media which was down 11%, and Home Improvement, which was down 10%. Our largest category, Automotive, was down 3% for the Quarter. We had another good rating book in the fall of 2005, and I’d like to touch on a few highlights this morning. We’ll start of with our home market of Atlanta; overall we saw 6% increase and 25-54 ratings from fall-to-fall. WSB-AM, our big news talk station posted another strong rating book, finishing number 225-54 but just one-tenth of a point away from number 1. And its’ primary competitor ranked 20th in the same demographic and had its’ worst rating book in a decade. WSB-FM posed a 20% increase in audience compared to last fall, and in fact, in the prime revenue day part, the 6 AM to 7 PM, Cox finished with 3 of the top 4 stations in the market. WBTS, our rhythmic CHR and a younger targeted station, was the second most listened station in the market among 18-34-year olds. On January 1, we changed the format of WFOX, an Urban adult’s hits format, the classic hits featuring music from the Dooby Brothers, Fleetwood Mac, The Eagles, other pop rock acts. After doing research last fall, we determined that while the Urban adult hits format was a noble experiment in trying to expand the choices for African Americans in the market, we just weren’t satisfied with the bottom line rating. We’ll get a first look at the rating of the new WFOX in the next few weeks.

Taking a quick look at a couple of our other larger revenue markets, Miami had a particularly strong performance in our two Urbans led the way there. WHQT our Urban AC again was at number 125-54, continuing its’ streak at the top of the market. Our mainstream and heritage Urban WEDR, had its’ best book since it got competition on its younger side a few years ago. WEDR was number 112+, 18-34, 18-49 and number 225-54 behind HOT. The 18-34 audience nearly doubled its’ younger targeted format competitor. WFLC, our adult contemporary station, has had very steady performance over the past year covering right around a rank of number 5. And WHDR, our new active rock station, it just celebrated it first birthday, was the number 1 non-ethnic focused station among men 18-34. All-in-all, we had 3 of the top 6, 25-54 in a market where we just have 4 FM’s, so the entire portfolio is performing well.

Finally a trip up the State to Orlando, where WCFB, our Urban AC there finished number 125-54; and Cox has 4 of the top 7, 25-54 in this rapidly growing market. Two of our stations had very large gains, WMMO saw its’ fall-to-fall 25-54 numbers grow 46% and WHTQ, our classic rocker, grew 129% compared to last fall. Our younger targeted CHR, WPYO, was the most listened to station in the market among 18-34-year olds. As always, we continue to invest in our products and in the marketing that it takes to attract an audience. We’re continually refining our formats and format selections in markets, as we adjust based on our research when it shows any change of pace among the listening public.

These ratings continue to be a testament the hard work of our management and local teams as we continue to invest in our station brand and focus on developing content our local listeners want. I’d like to thank all of the members of Cox Radios team for this terrific performance in the fall and for their efforts and accomplishments. As we reflect on 2005, I think we can probably say that even in a challenging environment, we continue to deliver. Cox focused on operating our station group and acted proactively on opportunities to better our business for future growth. As I look to 2006, I believe we’re well positioned to take advantage of the ever changing landscape in front of us. As I told our programmers and managers at a recent group meeting, there’s never been a more exciting time to be in radio. We own strong local brand and now we have a chance to extend our reach with the internet, provide digital programming for the first time via HD and create a host of new and different programming choices as we begin to program out HD2 channels. Those new extensions of our brands will present us with even more possibilities for our advertisers as we seek to help them with marketing solutions and will also help us to become even more locally focused in our communities with the choices that we offer. And with that I’ll turn it over to Neil.

Neil O. Johnston, Vice President and Chief Financial Officer

Thanks Bob, good morning everyone. Before I begin let me point out that in accordance with SCC regulation G we have provided full reconciliations of all non-gap financial measures in our earnings release. These reconciliations include station operating income to operating income. Free cash flow to net income, consolidated operating cash flow to operating income, and consolidated debt to certain balance sheet liability. These are the most comparable gap measures. Before we end 2005, revenues are $437.9 million dollars, flat with the prior year. The local revenues were up .3% and national revenues were down 2.5%. Excluding 2004 net revenues of $12 million attributable to the discontinuance of the Atlanta Braves agreement, revenues were up 2.7%. The tough political comps, our Fourth Quarter revenues were down 2%, but the local revenues down 1% and national revenues down 10%. As Bob mentioned, our strongest markets were in Miami, Orlando, and Tampa, which saw substantial growth during the Quarter, a great job by those teams.

For the Full-Year station operating income was up 3.7% and our margins increased from 40.5% to 42%. Our free cash flow grew 4.3%. When looking at operating income, it’s important to note that both the Fourth Quarter and the Full-Year were impacted by a $14.4 million dollar one-time, non-cash write-down of good will as a result of a valuation analysis of intangible asset pursuant to FAS142. That write-down affected also our affective tax rate and net income. Our affective tax rate for 2005 was 44%, from early due to the write-down excluding this, our Fourth Quarter affective tax rate would have been 38% and our Full-Year affective rate would have been 40%. Net income for the Fourth Quarter and Full-Year also affected by good-will write-down there was $13.4 million on an after-tax basis, or .13¢ per share. Capital expenditures for the Fourth Quarter were $2.6 million and for the Full-Year $11 million dollars. In late August, 2005, we announced board approval to re-purchase up to $100 million dollars of our common stock. As of December 31, 2005, we’ve purchased 2.7 million shares when aggregate purchased price of $40 million dollars at an average price of around $14.80 per share. While re-purchasing shares, we are still able to reduce our leverage during 2005 ending the year with a leverage ratio of 2.5 times. As of Year-End, our total net debt was $415 million dollars and our consolidated operating cash flow as defined in our credit agreement was $165 million for the 12-month period. Before the year 2006, we expect station operating expense growth in the low to mid single digits, depending on how the revenue picture shapes up, but higher expenses in Second and Fourth Quarters. Property and Air expenses will be approximately $20 million dollars. Interest expense for the year should be around $25 million and our affective tax rate for the year will be around 40% with a current affective rate of 28% and a deferred rate of 12%. Capital expenditures for the year will be in the $11-12 million dollar range for the year as we continue to roll out HD radio.

In October, 2005, Cox Radios compensation committee approved the acceleration of vesting all of Cox Radios out of the money options in order to avoid future P&L expense related to those options. As we adopt FAS123, although these out of the money many options will not affect our P&L, we do still have expense for existing performance units and restricted stock and any new long-term incentive awards. At this point, we expect 2006’s total non-cash compensation expense to be in the $8-9 million range and this includes an estimate for awards expected to be granted in March. We will update this guidance, if necessary, on our next call. That concludes the financial overview, so at this point Bob and I will be happy to answer any questions, operator.

Operator

Your first question is coming from Victor Miller, Bear Stearns

Victor Miller

Good Morning, Bob and Neil. You counted out about $7 million dollars of expenses this year, you talked about maybe having low to missed single digits expense code this year, what levers did you work on in 2005 and what would you like to reinvest in if the revenues permit, of course, for 2006; and then secondly, in March 3 we are supposed to hear about the RFP on the PPM, just like to see what your thinking is and what would like to see come out of that process. Thanks.

Robert Neil

Thanks Victor and I guess we’re going to see you here in about a week.

Victor Miller

Yes, Sir.

Robert Neil

Hopefully it will be a lot warmer in West Palm than it has been up in the Northeast for the last couple of weeks.

Victor Miller

Yes the 20-inches of snow is getting a little old.

Robert Neil

At least I know why you schedule these if Florida. The expense work is an ongoing process. I think I dealt with this a little bit on a couple of questions on this subject last year. We’re constantly beta testing ideas in different markets. It’s the best practices issue more than it is anything else to try to figure out ways to do things more efficiently. We’re fortunate that technology continues to allow us to do that. It’s interesting that for a lot of people that were, even in the business 10-years ago, most traffic orders were spilled into the system manually. A sales person would write-up the contract, it would get sent to the traffic person and that it would have to be entered by the traffic person manually. Now that process is all electronic, it goes from a computer on the sales person’s desk to the sales manager who approves it and then on right into the traffic system and traffic manager has to massage the log more than have to spend time entering a lot of that information. As an example, I think of how technology continues to work in our favor, so we continue to look at it in all of our stations, we continue to look at best practices whether it’s on the programming side or on the sales side and that’s just ongoing process with it. The RFP, which we are part of the committee that is working on that process, is in place and they are working through it right now. I think it’s probably inappropriate for me to comment on that at this point because I think the committee needs to finish up its’ work. There were a whole lot of proposals that came in, the committee is an industry wide committee with representatives from virtually every major group sifting through this, so I think it’s only fair to let them conclude their work and make their recommendations without me jumping into the middle of it at this point.

Victor Miller

Bob, just a follow-up on the revenue side, you’re talking about maybe having a better revenue client that will allow to spend some more money on the expense side. What categories do you think either are looking or trending the right way or are you thinking that will actually lead to a recovery of later on in the year?

Robert Neil

Well for one, I think that automotive has been depressed probably beyond even though the fact that the domestic auto makers have had their share of difficulties. I think from an advertising side, there’s been a depression that out of line even with the troubles that they have and a lot of that had to do with the programs that they introduced in the back-half of 2005 in many ways the employee pricing was basically a national advertising platform and most of our dollars come from local dealers, so once the prices were fixed for the local dealers it was a lot harder for them to have anything to advertise, and of course, and pricing cut into a lot of their margin. I think as we look on into 2006, I would hope and I think most dealers would hope that some of that aggressive, across the board pricing tends to give way to something that will give the local dealers more flexibility and if they have more flexibility locally, I think we’ll see more automotive dollars in the back-half of the year. Also, it’s an election year, we have a lot of radio stations in Florida, there’s going to be some big races in Florida, there’s a Governor’s race in Florida, there’s a big Senate race in Florida, so I think that has the potential, because we have so many stations to positively impact our revenue at the back-half of this year.

Operator

Your next question is coming from Marcy Ryvicker, Wachovia Securities

Marcy Ryvicker

Hi this is the second Quarter where no formal guidance was provided, what’s limited your visibility and is this something that we should expect going forward?

Robert Neil

Marcy, one of the things we made up our minds on about 12-18 months ago was that if we couldn’t provide information that we thought would be useful to you, then we wouldn’t provide it; and the problem has been the pacing has been on a bit of a rollercoaster and difficult for us to even figure out. So, if it’s difficult for us to figure out it becomes I think a little questionable on our part to try to offer guidance to you in any meaningful way and to give you an example, in the First Quarter we are going to have some pretty tough comps that we have to deal with. If you remember a year ago, we had revenues for Cox that were up 10% in January and 6% for the First Quarter and that was verses the industry which was up 3% in January and 2% for the Quarter. So this year we ended January with revenues down slightly in the low singles. February and March were both pacing better than January did. March is pacing flat right now with last year and while it’s still early, Second Quarter looks much more positive and Third Quarter looks more positive than that, but the dollars are relatively small, and what’s been happening is that the dollars have come in, the swing on our pacing percentage, both ways to good or to the bad, has been fairly dramatic.

In February, we have added much more business than we did in January as well later than we normally have and that kind of flies in the face of the fact that when you look at the pacing in Second and Third Quarter, there’s a lot of business that’ s laid in there leading to that pacing looking pretty good. So, it’s a conflicting story and it’s very hard for us to give you guidance that is meaningful in the face of the fact that these trends just keep bouncing all over the place. So that’s the best answer I can give you to the question, nobody’s trying to be sneaky or hide anything, but we wouldn’t want to give you, if I gave you the pacing figures in Second Quarter right now at the level that they are, I just would feel uncomfortable, I mean they look very good and you know that’s great and we hope that it happens, but I’m also just not comfortable based on the fact that I’d seen over the last 6, 8, 12-months pacing just flop around so much.

Operator

Your next questions is coming from Anthony DeFlemente, Lehman Brothers

Anthony DeFlemente

Hi, I saw a prior management team earlier, thanks for taking the question, but can you just point to what you think the long-term growth driver to the radio business would be as you look out beyond March and I understand you should be helped out by a little bit of political revenues, but whether it be on a category basis or local verses national markets, what could we really point to that would lead us to think about a resurgence in organic radio revenues for the industry even as you look at 2Q and 3Q? Thanks.

Robert Neil

I hope the prior management team wasn’t a Cox prior management team. Thanks for the question, Anthony.

Anthony DeFlemente

No, it was an intercom.

Robert Neil

Oh ok, the question a lot of you pose to us is what does the long-term picture look like and it’s very difficult for us, although I will tell you this management team has spent a lot of time with the Ouija Board in the last year and half, but we still haven’t quite gotten the answers that we wanted. So moved to the Crazy 8 Ball and we started shaking that trying to see what was going to happen and the Ouija Board and the Crazy 8 Ball do not agree. So, because of that we really don’t have much of a consensus for you. But, seriously I think you should look out at our business, some good things are happening some trends are happening that will bode well for the long-term. While we probably would’ve preferred that the Clear Channel reduction in inventory go farther to include unit, not just minute, it’s a good thing that inventory has been reduced. That’s a positive thing for our business.

The fact that as every month and year goes by, we’re getting smarter about how to extend our brands to the internet, we’re a lot smarter than we were 3 or 4 years ago about how to actually monetize those assets by providing some specialized solutions to customers and in front of us, we have all of the HD technology that it’s really hard to tell you how it’s going to impact revenue because we’re just now starting to get some experience with it. But logic would tell you, that it’s going to give us more things to sell. We’re going to have the ability to display advertiser’s names and phone numbers on the basis of the HD radio, that’s going to have a value to advertisers. We’re going to be able to launch a lot of new products and take some risks for some niche audiences that we probably couldn’t have taken with our main and with those niche audiences will come some specialized advertisers that probably we just can’t play for right now. So, long-term I think that what you see in our industry is maybe compared to 4 or 5 years ago, I think you see all of the radio company’s embracing this technology, rather than it. We’re rolling this stuff out, we’re moving ahead, not just us it’s our peer companies as well, so instead of maybe 4 o5 years ago I think this stuff was so new that none of us really knew what was going on with it, now we are actually starting to deploy it, we’re starting to get some experience with it and I think over the long-term, if we can provide good solutions to advertisers, if we can provide specialized audiences that they can reach efficiently, then we’re going to do just fine.

The next question is coming Jonathan Jacoby, Bank of America

Jonathan Jacoby

Good morning, two questions. The first the First Quarter sluggishness, do you think any of this is related to the fact that last year you are sort of copying Clear Channel’s “Less is More” program, and then secondly, in this weakness do you think that we’re also hearing of some price weakness in markets, is that any part of the problem or is it just a demand issue? And then the second question is on HD radio, you have proposed an expanded band idea to the alliance and it wasn’t accepted, what are your thoughts about their decision if you can give us any comments? Thanks.

Robert Neil

Well I think the alliance hasn’t said they out-and-out rejected it, I think what they is in the short-term they wanted to study the question more, they felt that they needed more information. I said all along, I am confident in our ability to program our radio station no matte which scheme we end up with. We just personally feel that it’s better for the long term success of HD radio if we had the expanded band format. There are reasons why people disagree with that, some of it has to do with the speed in which HD radio could roll out. But, there are also possibilities down the road that that scheme could be adopted as part of an evolution of the technology. I think from my point of view, look we brought the issue up, we’ve provided the industry with consumer feedback and it was overwhelming, it was 90% if the consumers preferred the expanded band. But, beyond that I think that is pretty much all we can do. We can put the facts out there, we don’t run or control the radio business nor does any group. I mean all of us have to get together to agree on this stuff, the receive manufacturers have to agree, we’ve presented the information and now books have to take that information and make whatever their decisions are. We will roll ahead and program our HD2 frequencies, this is not going to slow up deployment of programming, and we’ll be ready for it either way.

On First Quarter, I think it’s logical to assume that a year ago that Clear Channel was just starting to roll out “Less is More”, there certainly was some confusion about how they were going to do that, it was brand new. Did that help anybody that competed with them in markets, probably it did. We have some other factors too, we seem to be in an even odd year for some reason, our January revenue where one year we’re pretty up dramatically, the next year we’re down a little bit and it keeps bouncing from year to year. So, we had a great January a year ago, a little more sluggish January this year.

I am not hearing a lot of issues on pricing, really no more than I think we usually hear. I think at this point, the best thing that could happen to us is the local automotive dealers begin to get a little more aggressive with their advertising. I think there is reason to believe that that will happen as we proceed through the year.

Operator

Your next question is coming from Maurice McKenzie, FBR

Maurice McKenzie

Good Morning, can you comment on what you’re seeing in terms of telecom and cable spending particularly following recent consolidation of telecom industry and the roll out of the Triple-Play by cable operators, and also if you could just discuss the importance of digital measurement with respect to monetizing your HD broadcast.

Robert Neil

I think that ...