Bear Stearns Media Conference
February 28, 2005
Dennis FitzSimons, Chairman , President and CEO
Thanks, Alexia. We’re happy to be here in warm Florida;
it sure beats Chicago at this time of year.
Presenting with me today will be Scott
Smith, president of our publishing group since the beginning
of this year. Pat Mullen, who heads up the TV group, and
Don Grenesko, our CFO, are also here for Q&A.
Let me start with a few of the fundamentals that make Tribune
a strong company. Alexia pointed these out in a recent report.
First, our high quality newspaper properties, primarily
in major markets, account for 65% of our cash flow.
Our 26 television stations deliver the other 35%. They are
also in major markets, and well-positioned to reach highly
attractive younger demos. They do that with WB Network programming,
sitcoms in early and late fringe, and excellent local news
operations.
We also have an array of equity investments
that include a 33% stake in CareerBuilder, 22% of the WB
Network, 31% of the TV Food Network and 25% of Comcast
Sports Chicago, which was launched back in October. Alexia’s
model includes a "Hidden Value Analysis" that
estimates our public and private company investments are
worth just over $1.1 billion.
With these assets as a base, we will
generate significant cash flow, which should grow modestly
over last year’s
$1.6 billion. And nearly 50% of that will convert to free
cash flow. Our newspapers and TV stations convert at that
high percentage because we have modest capital expenditure
needs and a conservative debt level. This conversion rate
is well above other media and entertainment businesses such
as cable, movie studios or theme parks.
A major priority for the use of this
free cash flow is returning capital to our shareholders.
We demonstrated that recently by increasing our quarterly
dividend by 50%. We’ll
also continue to repurchase stock.
As far as acquisitions go, we have been
very disciplined. That won’t change. Our focus right
now is on organic growth and improving bottom-line results.
Speaking of 2005, January was a good month for publishing
ad revenue, which grew nearly 4%. But trends are still choppy
and comparisons in February and March are tougher. You also
may have noted in our January release that circulation revenue
weakness will moderate overall revenue growth in the first
quarter. We expect that to trend to improve in the second
half.
Turning to television, clients are holding
back on budgets so business is breaking late. We’re
seeing a general softness across the industry. Our first
quarter pacing is down in the mid-single digits.
We’re feeling the impact of Local
People Meters in the Top 3 markets. This is because the
current Nielsen sample under-represents younger and urban
viewers, which are both important demographic groups to
our stations and our advertisers. Pat Mullen and our research
people are working with Nielsen to make sure that these
samples provide accurate ratings data. We feel the samples
are not where they need to be. And with outside research
consultants, we inform Nielsen of that on a regular basis.
On the bright side, we’re pleased
with the actions The WB is taking to improve the prime
time schedule. David Janollari, new head of programming
is in place and he has strong relationships with the Hollywood
creative community. For next season, he has already committed
to projects from Jerry Bruckheimer, producer of CSI, David
E. Kelley, who produced Ally McBeal and The Practice, and
Tom Fontana who produced Homicide for NBC.
Also on the programming front, we’re
looking for a boost this fall when we launch My Wife and
Kids in early fringe and Sex and the City in late fringe.
Sex and the City is a perfect fit with Friends, Raymond
and Will and Grace, and should refresh our lineups in late
fringe. Other than Sex and the City, no other new programming
is entering these time periods on competing stations, and
that should also be a benefit to our stations.
Sex and the City will be our first off-HBO
sitcom and it’s
a good example of how we’re broadening our sources
of programming supply.
And with spring training in full swing,
we’re looking
for a another winning season for the Cubs. They’re
one of our most important programming assets, and last year
produced record local ratings on WGN-TV-- up 22%. Cubs’ revenue
at WGN-TV on a per game basis was up 22% as well.
The Cubs’ success also has helped
WGN-Superstation increase its distribution to 68 million
homes outside of Chicago. Their success this year will
ensure that Comcast Sports Net gets off to a great start.
Advance ad sales are great for both WGN and Comcast. So,
we expect our 25% ownership stake to quickly grow in value.
And as you know, Sammy Sosa is now an Baltimore Oriole.
While this trade will not impact our full year results, there
is a timing impact. In the first quarter it will cost us
close to three cents on an EPS basis due to the required
accounting acceleration of his salary. That will balance
out over the course of the year.
On the regulatory front, we have joined
other major media companies in petitioning the Supreme
Court to restore the FCC’s local ownership rules
that were announced in 2003. If the Supreme Court does
not accept the case, we’ll
continue to work at the FCC for cross-ownership relief. We’ve
been saying this for a number of years now -- what our
industry needs at this point is clarity, not further delay.
It’s important to keep in mind
that our television station licenses in
Los Angeles and New York don’t come up for renewal
until late 2006 and mid-2007. If the rule making is not complete,
we would receive waivers and the appeals process would likely
preclude any forced divestitures for a number of years past
2007.
This regulatory uncertainty won’t
stop us from moving forward with other strategies, including
creating more value in interactive and winning in classified.
CareerBuilder, which is out bet in online recruitment, is
making tremendous progress. In 2004, it established itself
as the industry leader in traffic and job postings, and grew
revenue 76% year-over-year.
Beginning with the Super Bowl, CareerBuilder
launched an aggressive marketing campaign. Commercials
also ran recently on the Grammy’s and, just last
night, on the Academy Award telecast.
Now here’s Scott.
Scott Smith, President Tribune Publishing
Thanks, Dennis and good morning everyone.
It’s great to be with you in South Florida, home of
one of our very best newspapers, the Sun-Sentinel, which
has an excellent track record of serving readers and advertisers
in this region and doing so very profitably. The Sun-Sentinel
accounts for over 10% of publishing group cash flow. We’ve
got copies of the Sun-Sentinel here today. It’s a terrific
newspaper that recently expanded its presence in the rapidly
growing communities in the Western part of Palm Beach County
and we’re very pleased with the results.
Here and across the publishing group, we are very focused
on four key priorities to win with customers and deliver
solid financial results for you and all our shareholders.
First, to grow responsive readership
amongst our most valuable customer base – home delivery
subscribers and single copy buyers. We want to increase
our share of online audiences as well. Our second priority
is to grow ad revenue and share across the board. Most
of my comments today will focus on actions to improve results
on both of these fronts.
Third, our drive for further efficiencies is in high gear.
We expect cash expenses in publishing to be up only 2% in
2005, and they will actually decline when you exclude the
impact of higher benefit costs and newsprint prices.
Finally, our people are central to our
progress. We’ve
made a number of key executive moves over the past year:
naming a new group vice-president of circulation; virtually
a hole a new management team at Newsday; a new head of advertising
at the LA Times; and a successor for me as publisher at the
Chicago Tribune. And we’ll continue to aggressively
develop our organization to get the right people in the right
jobs.
Growing responsive audiences is a top
priority for the whole organization. Whether it’s
our daily newspapers, our targeted publications, or our
websites, our goals we want to grow the frequency with
which customers turn to us, build their loyalty to our
brands, and their heighten interest in our advertising
messages. To do that, we are moving aggressively in the
following ways:
- First, we’re gaining important
customer insights through market research and consumer
databases that allow us to target potential and existing
customers more efficiently.
- Second, we’re upping our investment
in marketing and promotion and doing so on a much more
integrated basis. Newsday for example is using radio
along with in-paper promotion to highlight fresh, distinctive
content everyday only in Newsday.
- Third, we’re refining our
editorial content and presentation to make it more accessible
and engaging for both avid and occasional readers. For
example, the Baltimore Sun significantly expanded coverage
of issues of interest to the African-American community
in that area and is seeing solid readership gains in
this large, important community.
- And fourth, we’re focusing
our circulation efforts primarily on home delivery subscribers,
which already account for over 70% of daily and Sunday
readers.
Two months ago, the Chicago Tribune launched a new promotion
campaign as well as a Subscriber Advantage Program to strengthen
our relationship with both readers and online users. The
campaign is getting very positive reactions.
Subscriber Advantage benefits include
advertiser events and discounts, editorial forums, an information
hotline, and online content only available to subscribers.
Here you can see how we’ve tiered access to chicagotribune.com.
It’s a hybrid programming strategy designed to maximize
traffic and revenue related to three segments: free, registered
and paid users. We’re very encouraged by the early
results where January traffic was a record 53.5 million page
views. And subscribers appreciate more newspaper-oriented
benefits such as a full seven days of the paper online.
Turning to ad revenue and share initiatives,
we believe that key advantages of newspaper advertising
continue to hold. For example, in a recent Yankelovich
survey, an overwhelming 90% of consumers said they’d keep ads in newspapers
even if they could get rid of them. You can see other media
can’t come close to matching that claim. In this cluttered
ad world, delivering that kind of consumer engagement is
vital.
To build on it, we’re creating more opportunities
for colorful and compelling ads. We’ve expanded the
number of pages available for color by 33% at the LA Times
and are doubling color capacity in Chicago and South Florida.
This lets us run high impact ads for which advertisers pay
a significant premium.
I’m pleased to report that our preprint strategy is
also continuing to pay big dividends. Preprints represent
more than $660 million in business for Tribune Publishing,
and 16% of the group’s total revenues. Preprints has
grown over $170 million since 2000.
A big part of our preprint story is
in Los Angeles where we’ve grown preprint revenues by 10% annually since
2000, but where our market share of about 40% is still well
below the 60% plus levels we achieve in most of our markets.
That’s why the LA Times joined with five key newspaper
partners from San Diego to Las Vegas to create the Value
Network. The ability for advertisers to efficiently reach
7 million homes across the region
with one coordinated buy is proving very attractive to clients.
Let me take a minute to put the overall
performance at the LA Times into perspective. The LA metropolitan
area, were it a nation, would be the 10th largest economy
in the world. We have the largest circulation and revenue
of any metropolitan newspaper in its own market in America.
And we’ve taken
over $130 million of expense out of the paper and have substantially
improved editorial quality.
Ad revenue and cash flow did plateau
in 2004 due to factors largely specific to the market.
In addition, circulation declined last year primarily due
largely to the Times’ dependence
on telemarketing and the Do Not Call legislation. We’re
attacking these issues by hiring a new head of advertising,
reorganizing the newspaper’s marketing and circulation
departments, and implementing database marketing systems
like those used successfully at the Chicago Tribune. The
entire team in Los Angeles is committed to improving both
the circulation and revenue trends. We see opportunities
to grow our share in the $6+ billion LA ad market and expect
to make solid progress this year and beyond.
Turning to Newsday, let me update you
on what we’ve
done. You’re familiar with the circulation overstatements
and dishonest actions on the part of a few uncovered by our
internal auditors and also ABC. We have dealt with these
problems as forthrightly as possible.
Tim Knight, the new publisher at Newsday, and John McKeon,
the general manager, are making excellent progress reconnecting
with readers and advertisers. In addition they have rebuilt
their senior management team, appointing a new editor plus
new department heads in advertising, circulation, operations,
human resources and finance, and adding key talent in these
areas as well.
Newsday is making progress on the advertising
front too. It has settled claims with more than 24,000
advertisers. Of the newspaper’s top 350 clients,
75 percent have settled or agreed in principle. Many of
these customers made new commitments for 2005 underscoring
how important Newsday is to their business.
Newsday’s focus on Suffolk and Nassau counties, along
with the borough of Queens, targets one of the richest and
most highly sought after markets in the country. In fact,
Long Island is the 11th largest newspaper market in the country,
with more than 5.6 million people. And Newsday’s readership
penetration in the market remains the highest daily and second
highest Sunday of any of the top 20 newspapers.
We are confident that all the hard work being done to grow
this important franchise will prove very worthwhile to you
and the customers we serve on Long Island.
So in summary, we know our challenges and have set clear
priorities: increase readership, to grow advertising revenue
and share, and improve the performance of our major market
newspapers, especially the LA Times and Newsday. We face
the future with real optimism and a solid commitment to better
results in 2005 and beyond. Thank you.
Dennis FitzSimons
Before we take your questions, let me make a couple of important
points about our valuation. Whether you look at EBITDA
or Free Cash Flow, Tribune is trading at a significant
discount to our peers. We feel the primary reason for this
is the uncertainty caused by several temporary obstacles.
Let me tell you what they are and what
we’re doing
about them:
- The circulation issues at Newsday.
As Scott mentioned, we have a new management team in
place, new circulation controls there and at all of our
newspapers, and we’re
making solid progress with advertisers. We want to complete
the settlement process and bring this situation to closure
as soon as possible. By doing this, we’ll also reduce
our exposure to litigation.
- Revenue growth at the LA Times:
Re-establishing financial momentum on the West Coast
is critical. To that end, we’ve
brought in a new VP of advertising, created a wider distribution
network for advertisers, expanded our share of the high-margin
preprint business. Investment in additional color capacity
is going to be something that will cause our revenue to
brighten considerably. There is tremendous demand for that
from advertisers.
- The Matthew Bender tax case: This case went to
trial in December 2004. Outside observers commented that
our lawyers did an excellent job of presenting our case.
We feel confident, but with litigation you never know what
may happen. We are looking for resolution in this case
later in 2005 or in early 2006.
- Finally, on the broadcasting side,
as I mentioned earlier, we’re working with Warner
Brothers to improve ratings at The WB, and we hope to
get some clarity on the FCC regulatory situation as soon
as possible.
Our goal is to deliver results, and eliminate the areas
of uncertainty that are causing our stock to trade at a discount
to our peer group. We plan to earn back the premium multiple
that reflects the quality of our people and our assets.
We’re very positive about Tribune’s
prospects over the long term.
With that, we’ll be happy to take
your questions.
:: :: ::
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. |
