Bear Stearns
16th Annual Media, Entertainment and Information Conference
March 4, 2003
Dennis FitzSimons/President
and Chief Executive Officer
Thank you Kevin. I’d like to publicly thank
Kevin and his colleague Victor Miller who were nice enough
to come out to our management’s kick-off meeting for
the year and they gave us a great industry overview. It was
very helpful for our top management. Kevin gave us a great
line that we’ve used a lot when we want to say no to
expenses -- "investors want to see that cost control
is forever." It’s been a handy statement to use.
Thanks to those cost controls and many other
factors, Tribune posted record earnings per share in 2002.
And, we’re looking for 2003 to be even better, with
earnings growth in the low double digits and EBITDA of $1.6
billion, over half of which will convert into free cash flow.
That, of course, assumes continued improvement in ad spending.
We’re all wondering what the impact of a war will be,
but right now we’re seeing good trends. One thing that
works to our benefit in terms of posting increases in 2003
is that our TV business won’t have comparisons as tough
as some of the traditional affiliate groups, whose 2002 results
were more driven by election and Olympic spending.
Speaking of free cash flow, we realize that
investors are putting more emphasis on this metric in determining
value. The conversion rate of EBITDA into free cash flow is
a good indicator of return to shareholders because it captures
the amount of reinvestment a business requires in order to
grow. Our strong newspaper and TV franchises convert a high
percentage of EBITDA into free cash flow, thanks to modest
capital expenditure needs and our overall conservative debt
level. This is particularly true relative to other media and
entertainment businesses such as cable, movie studios or theme
parks.
So, lets talk about Tribune’s business.
Our focus is on local mass media in major markets.
We’re the only media company to own newspapers,
television stations and internet sites in the top three markets
of New York, Los Angeles and Chicago. We see this as a critical
advantage because advertisers have to be there. Those markets
represent 16% of the total U.S. population, and 25% of households
with incomes exceeding $150,000. Widening that out to the
top ten markets, those figures are 30% of the population and
50% of homes with incomes over $150,000, -- and we’re
in eight of those top ten markets. In this era where advertisers
have an increasing number of national, network options, there
are not nearly as many local options. Our local mass media
fill the need of advertisers to reach consumers with impactful
messages on a geo-targeted basis.
What we’ll do today is focus on our television
assets and describe how we’ll deliver above-average
growth, and why. Then, we’ll cover how we’re migrating
some of our television strategies to the print business. While
there are differences in our two lines of business, there
are also a lot of similarities, as we compete in an increasingly
fragmented media environment.
Our television group will number twenty-six
stations in twenty-two leading markets after we complete our
announced acquisition of WB affiliates in St. Louis and Portland.
Our coverage will extend to 40% of U.S. television households
(30% for FCC purposes), including 18 of the top 30 markets.
And the top 30 markets will continue to be our target for
acquisitions. Our 2003 television revenues should top $1.3
billion and EBITDA margins should be around 40% for the group.
Over the past fifteen years, we’ve doubled our EBITDA
margins, and margin improvement continues to be a high priority.
We’ve been able to post these kinds of
results because coming out of the last recession, we made
two critical decisions that have served us well. First, build
scale. In 1991, we had six stations. Now, we have twenty-six,
and we acquired these stations at acquisition multiples that
made financial sense. Our national footprint -- we’re
the fifth largest station group in terms of coverage -- gives
us important advantages as a leading program buyer. It not
only improves our access to the best shows in syndication
but it allows us greater flexibility in negotiating program
license terms. These are syndicated programs, usually sitcoms,
we air in early and late fringe and they account for over
40% of our station revenue. So, our scale makes a big difference
in the bottom line. In addition to programming, scale enables
economies in news, engineering and other aspects of our operations.
The second critical decision was partnering
with Warner Brothers to launch the WB Network back in 1994.
The network achieved profitability in 2002, and in February
the WB was the fastest growing network with young adults.
Ratings for adults 18-34 were up 35%. Programming aimed toward
young demos, which advertisers find more and more difficult
to reach, has worked from both a ratings, and certainly a
revenue, standpoint. Impacting brand selection at an earlier
age is critical to advertisers, so the WB’s concentration
of viewers aged 12-34 generates premium CPM’s -- to
the point where the WB’s revenue is projected to be
in the $800 million range for calendar 2003. From a standing
start in 1995, to $800 million eight years later, is a great
story. Tribune remains the leading affiliate group for the
WB, representing over 50% of the network’s audience
delivery. Our strong VHF stations in New York, LA and Chicago
consistently double the network’s national rating, so
the WB’s success is amplified for us.
Another way we look to build value in our television
group is to improve our competitive position in individual
markets through two station clusters. We now have four markets
where we’re doubled up, and we’ll look to do more.
We feel we can add six to seven margin points to our operations
over time in these markets by sharing facilities, cross-promoting,
optimizing program buying and scheduling, and coordinating
selling.
While our primary television assets are local
mass media franchises, we also have several national
television assets which complement our local strength. WGN
Superstation is available in over 57 million homes via cable
and DBS. Having a dual revenue stream, advertising and subscription
fees, makes WGN Superstation a very profitable part of our
broadcast group. We have other holdings in cable programming
as well, and they represent considerable value. We own a 31%
stake in the Food Network stemming from use of our retransmission
consent rights back in 1992 to get the channel launched. Our
partner Scripps has done a great job running the network and
the asset value continues to grow. We also own a 9% stake
in the Golf Channel where Comcast is the general partner.
Now that the merger with AT&T is complete, Comcast has
announced they will be rolling out the Golf Channel to all
of its basic subscribers. This is going to do nothing but
increase the value of the network. We’ve been delighted
with the increasing value of these investments. We’re
happy to continue to ride this growth, but, alternatively,
we’re open to a strategic transaction (if it is tax-efficient)
that would enhance our core business.
Let me just talk about content for a minute.
Another of our divisions with more of a national focus is
Tribune Entertainment. Their mandate is to supply programming
that fits the specific needs of our stations and today, we’re
the largest supplier of first-run action-hours led by Andromeda
and Mutant X. First run syndication has always been
a high-risk business, and to limit our financial downside
we do most of our production with foreign partners. We’ve
had some success selling the back-end of these series to cable.
This has been a business that has added to our bottom line
and kept our risk in-line.
Maybe our most visible subsidiary is the Chicago
Cubs that we acquired back in 1981 for $21 million dollars.
With all the market activity around sports teams these days
-- Disney looking to sell the Angels and Fox reportedly putting
the Dodgers on the market -- we’re often asked about
why we own the Cubs. The Cubs have provided WGN-TV, radio
and the Superstation with programming for over 20 years. Not
nearly enough wins, but good programming. But with Dusty Baker
at the helm and some good off-season player acquisitions we’ve
got high hopes for the upcoming season. Ticket sales are up
12%.
We’re also working hard on sharing
content between our newspapers and stations. We've learned
that its a natural fit. The most recent effort is taking place
right now in the Middle East, where print reporters from the
LA Times and the Chicago Tribune are delivering
live reports for our stations’ newscasts.
This is a great enhancement for our stations
because we can leverage the credibility and knowledge of the
newspaper reporters who are on the ground, immersed in the
region, and who add enormous depth to our coverage. Typically
local stations would not be able to justify this kind of expense.
But, the technology available today -- in this case the video
satellite phone -- makes it possible.
Moving to the newspaper side of our company,
let me give you a sense of how some of our television strategies
apply to newspapers. First, as in television, scale is
important, and major markets are an advantage.
That’s why acquired Times Mirror in 2000, with its seven
newspapers. Now, with just eleven newspapers, Tribune ranks
second among newspaper publishers in terms of revenue. This
kind of scale has provided a platform to grow our national
advertising through Tribune Media Net. In a tough advertising
environment in 2001, Tribune Media Net generated $34 million
in incremental revenue, grew that to $60 million in 2002,
and is looking for $70 million this year. About half of that
comes from cross-media sales, including television, and the
other half from national advertising across our network of
newspapers.
At newspaper conferences we often hear concerns
about declining circulation. We currently have a number of
initiatives to reverse those trends, and to grow our overall
market share by leveraging our existing strengths in local
markets. In New York, we launched a daily Spanish language
newspaper called Hoy!, which has grown to over 78,000
in daily circulation in four years. Today it’s the number
one Spanish language newspaper in the New York metropolitan
area. Newsday recognized that this community had
been underserved by traditional print media, and in addition
to reaching thousands of new readers, we were able to offer
our advertisers a vehicle to reach this fast-growing market.
And we think we have a model that can work in other cities.
We recently named Louis Sito, who created and spearheaded
the growth of Hoy!, to lead our expansion in other
markets.
In Chicago, we launched a Monday-Friday tabloid
called RedEye, to deepen our readership among 18-34s.
Right now the Chicago Tribune reaches about 50% of
adults 18-34 every week. We were able to plan and launch the
publication in just a few months, with modest incremental
costs drawing on existing content, production and promotion
resources at Chicago Tribune. And we’re also
using our other Chicago media to get the word out.
RedEye targets young adult demos,
with the objective of offering them a quick read that fits
with their lifestyle. It is designed to establish a newspaper
habit that will extend to the core Chicago Tribune,
and increase readership over time. This is a Monday-Friday
commuter read and we heavily promote the Sunday edition of
the Tribune. We think over time that’s going to have
an impact. Both Hoy! and RedEye expand the
options we offer advertisers, and are vehicles for us to grow
our overall share of revenue.
We’ve received a fair amount of attention
over the last few years for the steps we’ve taken to
share content across our newspapers, our TV stations and the
internet. But, we’ve actually been sharing content across
the industry a lot longer than most people realize, through
Tribune Media Services. TMS is a business within Tribune Publishing
that has traditionally been known as our "syndicate."
Last year the newspaper syndication business generated about
$60 million from over 2,100 newspapers around the world --
distributing content that ranges from Dave Barry to Henry
Kissinger to Dick Tracy.
In addition to syndicating newspaper columns
and features, TMS has built an entertainment listings business,
born out of newspapers’ need for daily television schedules.
Today, we gather and distribute program schedule information
for over 12,000 broadcast stations and networks. Our database
includes descriptions of close to 2 million episodes and movies,
and we marry this with channel lineups for 17,000 cable head
ends. Navigating the almost one hundred channels available
in the average home is a big challenge for cable and satellite
as they rollout more digital offerings. TMS has successfully
extended their market to supply the on-screen program guides.
And, every TiVo and Replay box that is sold today relies on
Tribune-supplied data for their program guide. Your TiVo has
to know what’s on, and has to be accurate, in order
for it to record the right shows. Lots of people see TiVo
and Replay as threats to the over-the-air TV business, but
we don’t see them as much of a threat. If somebody is
going to supply them with information and make money on it,
it might as well be us. Our data business is providing us
a unique window into the world of new television technologies...
and a growing revenue stream.
So just to wrap up, here’s why Tribune
is positioned to achieve above average growth:
o In a world where advertisers have increasing
national options, we’ve got great local mass
media assets:
o they’re in the major markets,
o they’re strong businesses that
can be extended into new markets and new products, and
o they’re proven generators of free
cash flow.
o We believe that scale is an important competitive
strength. So, we see ourselves as consolidators -- but careful
consolidators -- with a sharp focus on how acquisitions,
new products and complementary businesses, translate directly
into shareholder value.
Before I take your questions, I’ll turn
it over to Don Grenesko for a brief update on our financial
outlook
Don Grenesko, Senior Vice President/Finance
and Administration
As Dennis said, we continue to be cautiously
optimistic about 2003. However, it’s difficult to predict
the effect on our businesses of a possible war with Iraq.
We had a good start to the year, with January
consolidated revenues up 5%, reflecting higher revenues in
each of our business groups.
February’s publishing revenues are a
little softer that January’s as uncertainty surrounding
the war is having some impact on advertising. Help wanted
continues to reflect weakness in job creation. On the positive
side, TV revenues were up in the mid-double digits range in
February, which was also above January’s results. And
pacings continue to be strong in March and into the second
quarter.
For the first quarter, revenue should be up in the mid-single
digit range and we’re comfortable within the current
range of analysts’ earnings estimates, which is 37 to
43 cents per share.
Cost control will continue to be a primary
focus for us, as it has been for the past two years. Consolidated
expenses for 2002 were down 3%, but we expect 2003 full year
expenses to be up in the low-to-mid single digit range, reflecting
merit increases in 2003, after salary freeze/cuts last year,
as well as higher benefits costs due to lower pension credit
and higher medical expenses.
As far as newsprint pricing is concerned,
Abitibi recently announced a $50 per ton price increase effective
March 1. However, industry consumption in January was up only
1% -- certainly not an indicator for a price increase at this
point.
Turning to the balance sheet, we began 2003
with debt at $2.75 billion, after reducing debt by $650 million
in 2002. We plan to reduce debt further this year to about
$2.5 billion, or a debt/EBITDA ratio of 1.6X. This should
provide ample flexibility to pursue our growth initiatives,
and we’ll do so with our usual financial discipline.
One of the metrics that helps us ensure this
discipline when we acquire or invest is ROIC, or Return on
Invested Capital.
We’ve had an excellent track record,
achieving consolidated returns in the 12-14% range through
most of the 1990s. This was 1-3 percentage points above the
publishing industry average.
As with all large acquisitions that require
a significant amount of capital, our ROIC was affected by
the Times Mirror merger, and the recession exacerbated the
impact. However, we’ve seen significant improvement
in the last couple of years and we expect that upward trend
to continue.
Another important metric that Dennis mentioned
earlier is free cash flow. Because of our relatively low capital
requirements and declining leverage, Tribune will convert
about 50% of our EBITDA -- around $800 million-- to free cash
flow in 2003. The conversion ratio has been in the range of
50% for the past several years. It’s a good reminder
of the relatively low capital requirements of the newspaper
and TV businesses, compared to other media like cable.
For all of these reasons, we’re optimistic
about Tribune’s future.
:: :: ::
This document contains certain comments
or forward-looking statements that are based largely on the
company's current expectations and are subject to certain
risks, trends and uncertainties. Such comments and statements
should be understood in the context of Tribune's publicly
available reports filed with the SEC, including the most current
annual report, 10-K and 10-Q, which contain a discussion of
various factors that may affect the company's business. These
factors could cause actual future performance to differ materially
from current expectations. Tribune Company is not responsible
for updating the information contained in this press release
beyond the published date, or for changes made to this document
by wire services or Internet service providers. |
