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Tribune Entertainment 6/23/04
Mid-Year Media Review
June 23, 2004
Dennis FitzSimons, President, Chairman and CEO
Good afternoon, I’m Dennis FitzSimons of Tribune Company. Presenting with me today are Jack Fuller and Pat Mullen, heads of our publishing and broadcasting divisions. With us in the audience are Don Grenesko, our CFO; David Hiller, senior VP of publishing; and Ruthellyn Musil, whom all of you know. I’d like to offer special thanks to John Sturm and the NAA, who are hosting this event this year. And we’re especially pleased to be part of NAA and appreciate the great job they do for our industry.
We’ve got a lot to cover today including business trends and expense reductions we are making in the publishing group. We also want to discuss circulation misstatements we uncovered at Newsday last week. Jack will give you more details on this in a few minutes.
But first, you should know that we are taking the Newsday issue very seriously. Credible circulation figures are a cornerstone of the publishing industry, something that Tribune Company has always been committed to providing. We have confidence that the issues we uncovered at Newsday do not extend to our other newspapers, we will continue our audits until we are satisfied that our circulation practices group wide are above reproach. I know you are likely to have questions about this situation, and Jack and I will be happy to answer them after our remarks.
Now, let’s turn to business trends. As you know, we began the year with aggressive revenue targets -- 6 percent on a consolidated basis. Our growth through period 5 is just over 3 percent, and clearly not meeting our expectations. But we knew that the second half would show the strongest growth, and that’s still true. We now expect consolidated revenue growth of 4 percent for the year and we’re confident of achieving it because the overall economy is solid, help wanted trends continue to be strong and TV results will improve as 2nd half comps get easier and commercial inventory in our markets tighten.
On the cost side, in December we projected full year expense growth of 5.5percent. To break that down:
2 of that 5.5 percent increase is due to higher retirement and medical expenses
1 percent is due to higher newsprint prices and
1 percent for new publications that will contribute to future growth.
Just 1 ½ percent was due to normal salary and other inflationary increases
So a good percentage, more than half, was pretty much locked in with pension, medical and newsprint. But given the revenue picture I just described, we felt that it was important to take aggressive action on the cost side rather than just assume a better 2nd half would make up for the revenue shortfall. This was particularly true at the LA Times, given the sudden downturn we experienced there in period 5. While no one likes to make these types of staff reductions, we determined they could be accomplished while still maintaining the quality of our valuable franchises.
These expense reductions will not affect our growth strategies, which include:
Extending our existing brands, as we’ve done by taking Hoy beyond New York to Chicago and LA;
Developing new products like CareerBuilder, the Chicago Tribune’s RedEye and most recently our acquisition of Cross Media Services
Keeping our focus on excellent journalism.
On that note, let’s go to Jack. Pat will follow, and I’ll be back to wrap up.
Jack Fuller, President/Tribune Publishing
Thank you Dennis, and good afternoon.
Let me begin by describing what happened at Newsday and how we are responding to it. Early this year a class action suit called into question the integrity of the reported circulation through one part of the Newsday distribution system. We immediately dispatched internal auditors to see whether we had a problem. At the same time the Audit Bureau of Circulation was conducting its annual audit. Though no problem was found in the part of the circulation system the suit complained about, both ABC and our internal auditors found a problem in another part of the system. At first it looked like it might have been no more than poor documentation. ABC quantified the questionable size of the circulation. Then our auditors and attorneys conducted extensive and repeated interviews trying to understand exactly what had gone wrong. Finally last week the vice president of circulation at Newsday admitted that some portion of the circulation at issue, which had been reported as paid single copy, in fact had been cycled through the home delivery network as free samples. We made the problem -- and ABC’s quantification of it -- public as rapidly as possible. And the vice president of circulation was put on administrative leave pending the conclusion of our inquiry.
Since then we have sent in the head of circulation of the South Florida Sun-Sentinel to lead the circulation effort at Newsday on an interim basis. He will have help from the head of the Chicago Tribune’s circulation department, along with other people from within Tribune in whom we have confidence. In addition to their outside eyes and focus on rebuilding the system, our investigation of what happened in the past at Newsday will continue until we can be confident it will never happen again. We are also instituting additional internal controls -- including periodic internal audits to complement ABC’s audits -- at all our newspapers.
We have no reason to believe that a Newsday situation exists at any of our other papers. The risk of falsification is greatest in single copy sales. And Newsday has a much higher proportion of street sales than any of our other metro dailies. For instance, 56 percent of Newsday’s circulation is home delivery, compared with 80 percent at the Chicago Tribune.
Moreover, at the Los Angeles Times and several other former Times Mirror newspapers, the circulation strategy changed dramatically after Tribune’s acquisition. As you may remember the circulation figures in LA and elsewhere declined significantly at that time. Emphasis on readership and on the premier importance of the integrity of our circulation number is the rule at Tribune. Unfortunately, Newsday turned out to be an exception.
We have begun working with our advertisers to rebuild their confidence in us, in our fair dealing with them and in the integrity of the circulation and readership numbers we report to them. We will not rest until we have regained their trust.
Let’s turn now to at the business trends at our newspapers and then look at the issues and opportunities in key advertising categories.
Since the LA Times represents about 30 percent of the publishing group revenue, it has a very significant impact on our overall group performance. So let me first update you on LA, and then take a look at the rest of the group excluding LA.
The year did not begin badly for the Los Angeles Times. But in May advertising revenues hit the wall. National plummeted, especially travel and high-tech. The movies and entertainment category started the first half very soft but is finally beginning to strengthen. National represents more than a third of the LA Times’ advertising revenue. Auto classified has also been soft. A major component of the revenue shortfalls in LA has been department store revenue as a result of key advertisers shifting from print to TV. We should start to cycle through most of the department store losses in the fourth quarter.
The rest of Tribune Publishing Company is doing much better. To give you a sense of degree, in May total ad revenue was up 4 percent. But excluding LA, it was up almost
7 percent.
As you know, we have dealt with the revenue shortfalls in Los Angeles (and to much a lesser degree in a few other papers) with expense reductions of $35-40 million in the second half, the majority of which will come from the Los Angeles Times. The largest component of these will come in the forms of reductions in force. We expect to take a one-time charge associated with these of $10-$15 million in the second quarter. As a consequence, we believe we will turn in a good bottom line performance in the second half and will have a strong start on expense control in 2005 and beyond.
Now let’s look at our overall advertising performance by category.
Retail represents about 40 percent of Tribune Publishing’s ad revenue, making it our largest category. Nearly 60 percent of our retail business is full and part-run ROP. Preprints account for just over 40 percent of the revenue.
Improving our share of retail pre-print advertising is a critical element in our long-term revenue growth strategy. That’s why we’ve been investing capital in it in many of our papers. In 2003, we posted growth of 9 percent and 2004 year-to-date we are up 6 percent. This category is expected to continue to grow as advertisers look for more targeted distribution for their ads, shorter deadlines, and the flexibility to run a wide variety of shapes, sizes and paper stocks.
Retail ROP presents a challenge. Department stores are its largest single component, and they are under significant pressure due to retail consolidation and the rise of the big national discounters. This has made retail ad budgets more national, and in response to the changing environment, we are changing the way we do business.
First, we are using Tribune Media Net to sell to large national retailers. Centralization plays to one of our strengths; the size of our group gets us access to decision makers that even the biggest single newspapers have a hard time reaching.
We’re also offering enhanced products. Advertisers want more color and will pay a premium for it, so we’re increasing color capacity in Los Angeles and Chicago. Local advertisers want to target part-run ROP for the same reason they want to target their preprints and we are working to accommodate them. In Chicago for example, the Tribune recently expanded the daily and Sunday Metro sections from four zones to eight zones. As a result, part-run ROP is up 26 percent year-to-date, on top of an increase of 15 percent last year. This model is being replicated in other markets, including Los Angeles.
We’re taking a fresh approach to pricing for premium placement and key days of the week -- something like the broadcasting model. For example, General Motors recently jumped at the chance to pay a premium for the back page of main news in the LA Times when a large department store chain relinquished its position.
Finally, we see a retail opportunity online, where consumers frequently hunt for sales and special offers. We recently acquired Cross Media Services in partnership with Gannett and Knight Ridder. Through it, our newspapers will become the primary providers of local shopping information to consumers who use the Internet before they go to the store. And we’re way ahead of the competition.
Let’s turn now to national advertising. Because of Tribune’s major market concentration, a significantly higher proportion of our revenue is national than most of our peers --
25 percent versus the industry average of 17 percent. Although the category can be volatile, we believe fragmentation in other media has made newspapers an increasingly appealing alternative.
Movies are our largest national category, and the summer blockbuster season has looked up with hits like Shrek 2 and Harry Potter and promising openings of movies like I. Robot, Manchurian Candidate and Spiderman. But we’re not depending on only traditional movie advertising. When studios want to create a buzz by reaching a broad audience in the big markets well in advance of opening, we’re helping with new products.
For example, a campaign for Disney’s King Arthur recently ran in LA and Chicago, which included a wrap around the newspaper, teaser ad space, online ads, and in-paper promotion.
We’re also aggressively pursuing new dollars from the growing DVD/home entertainment business. New Line Cinema recently ran a "Big 3 market roadblock" exclusively with the Chicago Tribune, Los Angeles Times and Newsday to promote the release of The Lord of the Rings: Return of the King on DVD. Over the course of a week, ads in various sizes totaled 8 to 10 full-page equivalents with each of the three newspapers.
Finally, let’s take a look at classified, where both auto and real estate have continued to perform well. We believe that these trends will continue into the second half of the year, especially in auto, given the record number of new models being rolled out in the second half of the year.
As you know, help wanted has been strong, starting with CareerBuilder, who you will hear from later this afternoon. First, the partnerships with AOL and MSN are paying off; April traffic more than doubled, and unique visitors for the month increased to more than 16 million. Second, CareerBuilder continues to build on its lead in job postings; in May, CB had 1.1 million jobs on the site, more than double the postings in Dec. ’03. We’re also gaining share against the competition as measured by revenue; Q1 revenue was up 66 percent compared to Monster’s increase of 18 percent in the same period. We expect this kind of growth to continue in the second half of the year. Overall, Tribune’s total help wanted revenue is up 14 percent year-to-date, buoyed by 9 consecutive months of positive job creation nationwide.
On that rising note, I’ll turn it over to Pat.
Pat Mullen, President/Tribune Broadcasting
Thanks Jack. I’m happy to be here today to update you on our television business. Let’s first look at how 2004 is shaping up. Then I’ll cover some of the strategies that position us well for future growth.
With nearly 6 months behind us, 2004 is on track and unfolding pretty much as expected….a mirror image of 2003. We had a very strong first half last year, so we faced tougher comps this year than most broadcast groups. However, lower programming costs helped offset higher retirement plan and medical expenses. The result is strong cash flow growth and improved margins. As you know, with our younger skewing programming, we don’t achieve a high share of political business, particularly for the primary elections.
Our first quarter is a good example of how this plays out:
Ad revenues were up 2 percent, compared to growth of 10 percent in the first quarter of 2003.
Our operating cash flow grew 7 percent -- on top of a 20 percent gain in 2003 -- and cash flow margins were up more than one percentage point over last year’s increase of more than three margin points.
In the second quarter, television revenues have shown steady improvement. June should finish in the high single digits.
Moving into the second half, our third quarter pace is encouraging, and fourth quarter should be even better. This acceleration is due to a combination of factors. First, comparisons in the second half ease considerably for our stations. Second is the overall recovery we’re seeing in television advertising, driven by an improving economy and political spending. We achieve slightly higher political shares during the general elections compared to the primaries. But more importantly, political dollars tighten the market overall, which makes our inventory more valuable. Third, we’re enjoying a record-breaking season with the Chicago Cubs which translates into increased ratings and revenue at three of our businesses:
On television, local ratings on WGN-TV are up 30 percent over last year’s terrific ratings and Cubs ad inventory is in high demand.
On a national basis, Cubs ratings on the Superstation is more than 17 percent higher than last season -- so fan interest isn’t just limited to Chicago.
And while we’re still waiting for radio ratings, WGN Radio’s regular season ad sales are already 35 percent higher than last year’s regular season total.
Speaking of the Superstation, we’re seeing good growth in distribution. With the recent addition of over half a million subs in Baltimore, WGN now reaches almost 62 million homes outside of Chicago, up from 52 million just three years ago. Our goal is to increase that to 70 million over the next couple of years. Over time, greater distribution results in increased subscriber fees and helps our ratings -- both important contributors to revenue increases.
The Cubs ratings example brings me to a key fundamental of the television business: programming drives success. And in that regard, Tribune Broadcasting is well positioned for 2004 and beyond.
In primetime, One Tree Hill gained terrific ratings momentum toward the end of the season, and we’re encouraged by the WB Network’s newest hit Summerland. The premiere of this Tuesday-night drama was the highest-rated summer premiere ever for the network in all key female demographics and adults 18-49.
One Tree Hill and Summerland are two of several building blocks in place at the WB, and this fall we’re encouraged by a couple of new shows that are perfectly targeted at the WB demographic. Those of you who were at the WB upfront presentation will remember these shows, The Mountain and Jack and Bobby.
The Mountain is scheduled for Wednesday nights following the WB hit Smallville, demonstrating the confidence the network has in this new series. I’ve described the show as a Melrose Place in the mountains.
In addition, you may recall that two years ago at this meeting there was a lot of interest in the drama Everwood, based on the pilot for that show. It’s now a hit and a core part of the WB line-up. This year, there’s equal enthusiasm for the pilot for Jack and Bobby. It’s the best pilot I’ve seen since Everwood. Jack and Bobby will air on Sunday nights following Charmed.
On a final note regarding The WB, some of you have asked about our affiliation renewal discussions. With the hectic activity of the upfront market and with the recent management changes at The WB, we’ve agreed to a one-year extension and we’ll continue our discussion for a long-term agreement over the next few months.
Another key program strategy for the Tribune group is local news. In the past 3 years, we’ve expanded our newscasts in 5 markets. We’ll soon be adding another half hour to our morning news in New York and LA, by moving up the start time to 5 a.m. That will increase our local news production to almost 225 hours per week across our group. You’ve heard us talk about our strength in morning news in Chicago and Los Angeles. However, in New York, where our a.m. news has not been around quite as long, we’re the fastest growing morning news program and number one in the May book with adults 18-34, beating all the network morning shows and the local Fox station from 6 to 9 a.m.
In addition to primetime and news, we continue to have the strongest lineup of off-network sitcoms, anchored by Friends, Everybody Loves Raymond and Will & Grace. We’ll be refreshing this lineup for Fall ’05 and ’06 with some of the most popular newer sitcoms like According to Jim, My Wife and Kids and Sex in the City, which by the way has had a terrific debut on TBS.
It more than tripled their time-period ratings for adults 18-34 and 18-49 and was the highest rated TBS premiere ever. TBS is airing two shows per week, which bodes very well for our stations when we launch it five nights a week in the Fall of 2005.
With second half momentum building, we’re set up for a strong 2005.
We’re confident we will see ratings recovery from the WB network.
We add Sex and the City to our sit-com line-up in all of our markets.
Driven by efficient programming investments, expense increases will be modest.
And, finally because we are not dependent on political revenue, we expect outperform our peers in non-political years.
On that note, I’ll turn it back to Dennis for some closing remarks...
Dennis FitzSimons
Thanks Pat, thanks Jack. In today’s environment, where increased national choices continue to drive audience fragmentation, you can see why our local mass media franchises are more valuable than ever to advertisers as well as readers, viewers and listeners.
That’s our edge and the primary reason these strong local businesses generate substantial cash, giving Tribune one of the strongest financial positions in the media industry. Operating cash flow will be about $1.7 billion in 2004, and over half of that will convert to free cash flow. There are two reasons we convert at this rate.
The first is due to our low debt level, which means lower interest expense. And earlier this year, we completed a debt refinancing which further reduced this year’s interest expense by $25 million. By year end, debt will be about $1.9 billion, for a debt-to-cash flow ratio of close to 1 to 1.
Second, we have relatively low capital investment requirements. CapEx this year will total about $220 million. We have put a priority on projects that will have a positive impact on our newspapers’ top-line, including additional color capacity and preprint facilities. These projects have an excellent ROI and will help us meet advertiser needs.
We’re focused on investing our free cash flow -- about $900 million this year -- to provide the best return to shareholders.
You have heard us talk about being a consolidator in both television and newspapers. Our view has not changed on the industry pressures that will dictate further consolidation.
But recently, we have elected not to pursue acquisitions, mainly because prices have been too high to give us the rate of return we look for. But we have not been sitting still. As I’ve mentioned before, we’ve launched new products like RedEye, expanded into new markets with Hoy and creatively leveraged our assets. Our partnership in a new regional sports network with Comcast in Chicago is a good example.
Also, we’ve been aggressively repurchasing stock. So far this year, we’ve bought back about 12 million shares at a cost of nearly $600 million.
This repurchase activity indicates two things: confidence in the future and our strong belief that Tribune stock is undervalued.
As you know, Tribune typically trades at a premium to the newspaper group due to our major market concentration and because one-third of our cash flow comes from TV.
But currently, we’re trading at about 9 times 2005 cash flow, substantially behind the publishing group average of about 10x, and even further behind pure play TV at 11.5x.
In addition, investments like TV Food Network, The WB and CareerBuilder add $2-$3 of value per share.
Given recent news, the market is understandably focused on short term issues. But keep in mind that over the long term, for example a ten year period, Tribune’s total return of 14 percent annually has outperformed the S&P Media Index, including many of the large cap names that are in it.
So let me close by listing a few other reasons -- in addition to valuation -- why Tribune is a solid investment:
We operate leading businesses in the country’s major markets, and are uniquely positioned to deliver the local mass audiences that advertisers need to reach.
In publishing, help wanted advertising -- both print and online -- will continue to ramp-up and newspaper margins will improve as revenue accelerates.
In broadcasting, our TV stations should outperform their peers in 2005, as we usually do in a non-election year.
And finally, let me repeat that we are taking action quickly that will address the recent circulation issues at Newsday:
We are instituting additional internal controls across the publishing group.
Quarterly certification requirements are being expanded to include circulation reporting. Every circulation V.P. will have to certify the accuracy of reported figures every quarter, and that ABC rules have been followed.
Finally, our compensation plans are designed so that stock options and bonuses can be revoked in the event of unethical behavior.
It’s no secret to this group that 80 percent of Tribune’s revenues come from advertising. We must have the confidence of our advertisers. As someone who comes from an ad sales background, I know this first-hand. So we will be taking all the steps necessary to ensure that advertisers trust our numbers and our people.
Our company is 157 years old and one of the core values that has seen it through these years is integrity. And that’s not about to change.
Now, we’d be happy to answer your questions.
© Tribune Entertainment
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