Third Quarter 2006 Earnings
Conference Call
October 19, 2006
Ruthellyn Musil, Senior Vice President/Corporate Relations
Thank you very much, operator, and good morning, everyone. Welcome to our conference call to review our third-quarter 2006results.
As usual, our opening remarks will be brief, and then we will have time for questions. We expect to finish within the hour, recognizing that it is a busy earnings day for most of you. Speakers this morning are Dennis FitzSimons, our CEO, and Don Grenesko, senior vice president and CFO. Other members of management are also here for Q&A.
Turning to our press release, Tribune’s third-quarter diluted EPS from continuing operations of $0.65 on a GAAP basis includes several non-operating items. Our release contains the information for making a meaningful comparison to First Call estimates.
Now before I turn the call over to Dennis, just a quick reminder that our discussion may include forward-looking statements that are covered in greater detail in Tribune’s SEC filings. Now here is Dennis.
Dennis FitzSimons, Chairman, President and Chief Executive
Officer
Thanks, Ruthellyn. Good morning. Let me start with a review of recent developments, and then I will turn it over to Don for more specifics on the quarter. As most of you know, in September we agreed to restructure two complex partnerships, the TMCTs, that exist between the company and the Chandler Trust. This simplified the company’s capital structure, retired expensive preferred stock, and the company was compensated for any potential tax exposure. This was an excellent transaction for all shareholders.
Completing the unwinding of the TMCTs puts us in better position to explore our strategic alternatives. That process is underway with a special committee of independent directors overseeing management’s direction of the process.
We also continue to move ahead on our performance improvement plan that we announced May 30 in conjunction with our leverage recapitalization.
With regard to asset sales, we have sold or agreed to sell approximately $420 million. This includes the sale of three television stations, 2.8 million shares of Time Warner common stock, a printing facility in the San Fernando Valley and our company airplane.
The most important element of that performance improvement plan is driving top-line growth. That is why we are putting more emphasis on interactive as well as targeted print products. Tribune Interactive provides news and information on 16 news websites, as well as 25 television, 10 entertainment and 16 mobile websites. Combined, these sites drew almost 14 million average monthly unique visitors during the quarter.
Also during the quarter, we announced or we increased our stake in CareerBuilder where robust growth continues. Third-quarter network revenue grew by 29% over last year. CB reached 23 million unique visitors in September compared to 11 million for Monster and 16 million for HotJobs.
As far as targeted print products, Tribune now owns 100% of amNewYork, and distribution in and around New York City is about 320,000 copies daily. The newspaper will be profitable for full-year 2006.
We have also increased circulation for RedEye in Chicago by 50% to 150,000 copies daily.
Some other contributors to topline growth, the L.A. Times distribution agreement with ADVO began in August. This expands The Times insert program and will enhance the profitability of its preprint business by about $10 million annually.
At Newsday where preprint sales have dragged, the ad sales team won back the CVS drugstore business on Long Island from the sales agent we terminated due to an ethical breach. This latest win following, Waldbaum’s, provides Newsday some momentum to bring back other food and drugstore business.
In ROP advertising, customers are responding well to newly created ad positions that include section front advertising opportunities and back page positions. These are already generating several million dollars of incremental revenue.
In television, the CW network is off to a promising start. In New York, L.A. and Chicago, America’s Next Top Model is beating all competitors in the target demo of women 18 to 34. In addition, the strong lead-in from the CW has helped improve the competitive position of our late newscast.
On the expense side during the quarter, cost controls remained tight with consolidated expenses up just 1% despite $4 million of stock-based compensation. Over the longer-term in 2007, 2008, we look to keep expenses flat while at the same time keeping quality and customer service high.
Here are some good examples of how we are doing this. First, by year-end our eight largest newspapers will have outsourced their circulation call centers.
Second, Baltimore Sun, Chicago Tribune and Orlando Sentinel have launched the first phase of our new common advertising system. This upgrades efficiency and will include a sophisticated e-commerce platform for selling classified ads via Tribune newspaper websites.
Also, we have made reasonable capital investments for common editorial and circulation systems that will put Tribune in a leadership position on both quality and efficiency.
So, on that note, let’s go to Don and I will be back to wrap up.
Donald Grenesko, Senior Vice President/Finance and Administration
Thanks, Dennis, and good morning, everyone. On a GAAP basis, our diluted earnings per share from continuing operations of $0.65 compares with $0.06 in the third quarter of 2005. The results for this year’s third quarter included a net non-operating gain of $0.22 per share, $0.19 of which relates to the restructuring of the TMCT partnerships.
Because of the pending sale of our Boston TV station, operating results for this station have been reclassified as discontinued operations. The sale was made at a very attractive multiple of cash flow expected to generate pretax proceeds of approximately $114 million.
We have also classified results from our Albany and Atlanta TV stations as discontinued operations. The Albany sale is pending, and Atlanta closed in August.
As you saw in our press release, consolidated revenues declined to 3% in the quarter with publishing off 2% and broadcasting and entertainment down 3%. There were some bright spots, however, including solid growth in Interactive as revenues increased 28% year-over-year.
In television, half of our stations finished the quarter with ad revenue ahead of last year. KTLA was up in the low single digits, primarily due to strong political spending and our group of Fox affiliates was at a combined 6%.
Turning to publishing, overall classified advertising was down approximately 1% during the third quarter. Classified auto trends were similar to the second quarter, down on the print side with healthy growth online. Recruitment was off about 10% this quarter due to declines in print. Classified real estate, however, continues to be strong, up 24% in the third quarter with gains in both print and online. Los Angeles and Orlando are again our strongest markets as we saw in the second quarter.
Retail was flat for the quarter with increases in South Florida, Orlando, Chicago and Newport News, offset by decreases at Newsday and Hartford, while Chicago and L.A. benefited from Macy’s rebranding campaign in September. Preprints continue to be impacted by Newsday. Excluding Newsday, preprints were up 1%. However, as mentioned earlier, the preprint situation at Newsday is improving as we regain lost business and cycle through its effects.
National was down across most categories, consistent with industry-wide trends.
Turning to circulation, the individually paid category was down 2.5% Sunday and less than 1% daily, which is an improvement over the second quarter. Total circulation declined more than individually paid as we continue to manage down other paid circulation which consists of hotel, education and third-party sponsored copies. Circulation revenues were off 6% for the quarter due to selective home delivery discounting and lower single copy sales.
Cash operating expenses in publishing increased $3 million due to severance charges associated with the outsourcing of our circulation call centers and stock-based compensation. All other cash expenses were down slightly as increases in postage for mail preprint, outside services and higher newsprint expense were more than offset by a 5% reduction in staffing.
Turning briefly to television, cash operating expenses were up 3% or $5 million. This increase was due to higher programming expenses of $6 million and $1 million of stock-based compensation, partially offset by the absence of $2 million in costs related to last year’s Hurricane Katrina. All other expenses were flat due to cost reduction.
Corporate office expenses, excluding stock-based compensation expense, were down 3%.
Turning to the equity line, income was about $19 million compared to $8 million in the third quarter of 2005. The increase reflects operating improvements at TV Food Network and CareerBuilder, as well as the absence of losses to the WB Network.
In the third quarter, we repurchased 66 million shares of our stock, which reduced our common shares outstanding to approximately 239 million at the end of the quarter.
Third-quarter interest expense rose year-over-year to $84 million, primarily due to higher debt levels and interest rates. Excluding the PHONES, debt was at $4.7 billion at the end of the third quarter of 2006 and $2 billion at the end of 2005’s third quarter. The increase was due to financings of share repurchases and paying the Matthew Bender and Mosby tax liabilities in the fourth quarter of 2005.
And with that, I will turn it back to Dennis. Dennis FitzSimons
Okay. Just a couple of quick things before we go to Q&A.
As we begin the fourth quarter, keep in mind that we have a 53rd week this year.
In publishing, as you have already heard from some of our peer companies, October started soft, particularly in the national category. However, we are seeing some strength in retail. We’re looking for slightly better results in periods 11 and 12 than in October. We will recover revenue that was lost due to last year’s hurricane in South Florida and the L.A. ADVO partnership will also have a positive impact. Fourth-quarter cash operating expenses will be down year over year before the extra week.
Also on that basis, television is picking up slightly right now. Political advertising is strong, well ahead of the $25 million we saw in 2004. We have also benefited from the baseball playoffs at our Fox affiliates in Grand Rapids and Sacramento. And the success of the Mets and Cardinals bodes well for our New York and St. Louis TV stations in 2007.
Now I would be happy to open it up to Q&A.
QUESTION AND ANSWERS
Lauren Fine, Merrill Lynch
Q. As you look at TV in the fourth quarter and given the comments you just made, do you think that revenue can actually grow in the fourth quarter for the TV stations?
A. Our pacing is up slightly for fourth quarter, so that is an improvement. Part of that certainly is political. It tightened our markets, and part of that is the CW.
Q. You mentioned that a couple of your markets benefited from rebranding of Macy’s in September, and it sounds like you continue to get some benefit into October. But overall do you expect the restraint that you have experienced in retail to continue?
A. We did benefit from some innovative advertising we ran for Macy’s largely in L.A. and Chicago in period nine. But we’re still running against the combined Macy’s and RobMay and other branded spending from Macy’s. So in aggregate we think we will still be down with that client year-over-year. But we are seeing improvement in some of the other big retailers competing against Macy’s, and our smaller retailers, that growth year-over-year has been very good. You see some of that in the part run lineage growth.
So retail category, particularly with the economy staying fairly good, gas prices down, that is a fairly stable category, and we expect the fourth quarter to be reasonably good in retail.
Q. Interest income jumped up in the quarter relative to the last couple of quarters. I am wondering what that was attributable to?
A. I think the increase in the interest income was really dividend income that we received from the Time Warner shares that we run.
Q. Could you break out on a year-over-year basis where the big step-up was in equity income? I know you already cited CareerBuilder, TV Food Network, but I’m wondering if you could tell us just proportionately which one contributed what?
A. It is really the TV Food Network that is the biggest driver of that followed by CareerBuilder, and then the absence of any losses at the WB network would be the third major component left.
Q. Is CareerBuilder actually making money at this point the way you record it?
A. It was breakeven-ish in the third quarter.
Debra Schwartz, Credit Suisse
Q. I was just wondering can you break out for the quarter print advertising revenue from New York, L.A. and Chicago?
A. For the quarter, L.A. was down 2%, Chicago down 5 and Newsday, again driven largely by the preprint losses, down around 10%. What I would tell you is that in both Los Angeles and Chicago, while we are down, we’re doing well in terms of our print share of market. It’s just been a tough quarter for newspapers overall. In L.A., our share is stable to up, and our share in Chicago is up significantly.
Our Chicago situation is also impacted by significant GM spending last year, so we were running up against some very tough automotive numbers from last year’s third quarter, the "Friends and Family" campaign.
Q. So are there any categories in L.A. that are showing signs of improvement?
A. For the quarter, retail was flat in L.A., which when you consider they were running against combined Macy’s/RobMay spending, is very good. They grew in many other retail categories. They were strong in real estate, and help wanted was still reasonably good in L.A. in the third quarter.
Q. How is studio advertising there?
A. Studio advertising continues to run down. It was down less in third quarter than earlier in the year, and we do expect more releases later in the fourth quarter and expect that trend to improve somewhat.
Q. Can you just give us the shares at the end of the quarter and cash at the end of the quarter?
A. Shares at the end of the quarter were 239 million. And on the cash side, we had about $238 million in cash.
Let me just mention one other thing on the TV side. In the top three markets, all of our top three are pacing ahead for the fourth quarter. Those markets are a little bit better on the TV side.
Alexia Quadrani, Bear Stearns
Q. On the preprint business, even if you are excluding the Newsday issue, preprint revenues have been fairly soft, I think just up 1%. Should we assume that is sort of a normalized growth rate going forward? And I guess what is preventing further growth? Is it just saturation in the marketplace, pricing?
And then specifically on the Newsday, you mentioned a couple of large retailers signing up or coming back to Newsday. Could you give us an indication of when in the quarter that happened and if that means we should be positive growth in preprint at Newsday in the fourth quarter?
A. In terms of preprints overall, you have got a couple of phenomena there. One is that with higher paper prices, you have had preprint advertisers scale back the size of their pieces, which has impacted revenues.
Secondly, because preprints traditionally ran in all copies with us in effect scaling back the other paid copies, there has been some reduction in the number of pieces we have carried. We have mostly cycled that as we have pretty much reduced to the minimum level the other paid circulation.
We continue to add better targeting options. That is certainly true in Los Angeles where we are now at the sub-zip level and Chicago where we are at sub-zip daily. We believe those will drive growth and our two biggest markets. Overall we do believe that preprint revenues will grow faster growing than the kind of 1% or 2% level that you have seen recently.
At Newsday the year-over-year losses will diminish, but it is not likely we’re back in positive territory yet in the fourth quarter. We keep working at getting there as soon as possible.
Q. On your online advertising revenue, could you give us a sense of what portion of that revenue is classified related versus non-classified?
A. Roughly 80%.
Philip Olesen, UBS
Q. From a balance sheet perspective, I know previously you had indicated your desire to try to access the term debt market to fund out some of the bridge financing. Is it fair to assume that that is no longer the plan?
A. We may do that at some point in time. We have put that on hold right now just due to where interest rates are and the fact that we’re getting very good rates on the bank loans that we have right now. So we have decided not to do a public debt offering at this point.
Q. And in terms of the strategic review, is the timetable still you hope to have a conclusion by year-end?
A. Yes.
Paul Ginocchio, Deutsche Bank
Q. Could you give us an outlook for the tax rate going forward? It looks like it was pretty low here in the third quarter.
A. In terms of the tax rate, we had settled some state tax issues that we had, and so we were able to take down some reserves in the third quarter. That is why the tax rate is lower there. We expect it to be back to sort of the normal level in the 39% area for the fourth quarter.
Q. Was there a reset of the network revenue fees or the fees that you split between the newspaper and CareerBuilder at the time of the McClatchy sale, and is that one of the reasons profitability is improving? A. We did not change the affiliate network terms as it relates to Tribune in the reset with McClatchy. There were us some changes in affiliate terms for former Knight-Ridder papers, but not for us or for Gannett.
Q. Could you give us the trends in Baltimore please? Was it up or down in the third quarter? Has that gotten worse since the second quarter? A. Revenues were down just slightly in the third quarter.
Q. Is that worse than the second?
A. Slightly worse than the second quarter, yes.
Steve Barlow, Prudential
Q. Back in May, you talked about $200 million of cost savings still to go in your program at that time. Has any of that hit at this point, or are we still working off the previous $100 million or so program you announced in 2005?
A. Yes, I think you could see in our fourth-quarter projections that we have identified and implemented some of those cost cuts. Then we are in the operating planning process now, and we will continue to identify that, and some of those costs will certainly come out of ‘07 and also additional costs in ‘08.
Q. Is there a way to split the ‘07 versus ‘08 benefits?
A. Not at this point. Both John Reardon and Scott are traveling to the business units to really hammer out the final ‘07 numbers, and we will be able to give you a better idea on that probably in December.
Craig Huber, Lehamn Bros.
Q. On movie advertising in L.A,. how much of that is a percentage of your ad revenue base there, and also how much exactly was it down in the third quarter and year-to-date?
A. Let me tell you what it is for the group. First, in the third quarter, it was down 10%. It is down 17% year-to-date.
In terms of the percent of Los Angeles revenue, it would be roughly 10% of their total ad revenue is in the movie category. What I would tell you is that part of the decline is due to smaller ads and also shorter theater runs where we are just not getting the ads for the same number of weeks that we used to.
One of the things we have done recently is hired a woman in Los Angeles who was the associate publisher of the Hollywood Reporter who has great relationships with the studios. She is working very hard on how we improve our movie performance in Los Angeles. A key priority for the Times is to really own the entertainment advertising category, and we are confident we will make good progress there.
In broadcasting, the movie business has been pretty good. So, in third quarter, we were looking at double-digit increases, and the fourth quarter pacing is up mid to high single digits.
Q. And then as a follow-up to Steve Barlow’s question, above and beyond this $200 million of cost, is there any plans at all to look above and beyond that as you think out your strategic alternatives? Do I hear some more cost cutting on top of that?
A. Beyond the $200 million?
Q. Beyond the $200 million, yes.
A. At this point we have identified a significant amount of that, but we still have work to do to get to the full $200 million. So we do not have plans beyond that at this point.
Q. I mean you got it very tight on cost the last six years or so. I mean is it getting down to the bone here, or you don’t want to hurt the operations?
A. Well, you know we have invested a lot, too. When you look at how we have done this, we have invested in these common systems, and that is part of what we’re going to be benefiting from. We have tried to keep our quality high. As we look at comparisons with other companies in terms of staffing, particularly in our areas of journalism, we are in very, very good shape. So we feel the quality issue and the customer service issue are issues that we do address, and those things are critically important to the company, and we want to make sure we keep the quality high. But we still do think with what we have announced that we can accomplish that, without cutting into the bone.
Q. And then lastly, real estate advertising is very strong given the quarter. But is there markets in particular where it is looking weak, down?
A. Well, as Don said, the strength has been in Florida and Los Angeles. Those gains are shrinking year-over-year. We have a couple of markets that are actually down year-over-year. Chicago just turned negative after really positive gains for awhile. It seems fairly clear those year-over-year gains will continue to decline, but with interest rates where they are and overall demand for housing still very good, we expect a relatively soft landing in the real estate category overall.
Jim Goss, Barrington Research
Q. Comment a little bit more on newsprint pricing usage trends.
A. As we said in the third quarter, price was up 9%, our consumption was down 8%, roughly offsetting the price increase. It is noteworthy that the most recent announced newsprint price increase is not sticking. And it is on its way to being rescinded. So it is likely we’re seeing the peak in newsprint prices here. Consumption across the industry is down 8%. Reductions in consumption are likely to continue.
One key driver there are plans on the part of many of the leading publishers to reduce the press web width. We are in the final stages of that planning ourselves and we are expecting to implement that beginning in 2007.
We also are testing Chinese newsprint as others are to make sure the supply of newsprint is as broad as it can be, which we think will help in the overall pricing dynamic as we work through this with the suppliers.
Q. Could provide any early sense of the tenor in Los Angeles with the management shift to David Hiller?
A. On Los Angeles, the transition from Jeff Johnson as publisher to David Hiller is going very smoothly. We reached a point with Jeff where the differences were such that we just needed to make a change, and David is absolutely the best executive to step into that situation. He is doing a great job getting out with customers in the community, visiting with the whole array of employees, and is very quickly getting up to speed on the Los Angeles market and leading that team forward. So I would say that has gone very, very smoothly in a situation where we preferred not to make a change, but it was clearly necessary for us to move forward together.
Q. The sale of the Time Warner shares, how did they affect the PHONES issue? Could you remind us how the PHONES transaction plays out over time?
A. The sale of those 2.8 million shares were unrelated to the PHONES. So no relation there. Now you had a second question on the PHONES.
Q. Is there any terminal date on that, or do they -- I think PHONES for debt backed by your ownership in AOL shares and they are now Time Warner shares.
A. Yes, correct.
Q. And that just persists forever? (multiple speakers)
A. 2029. So if you recall, Jim, they were basically 16 million shares of Time Warner or AOL stock at that point that we monetized in 1999. The price of the stock was $78.50 at that point, and so it has declined significantly since then. So we were able to monetize it. We were also able to defer over $500 million of capital gains taxes. There is a favorable income tax rate deduction that we get on that. And then at the end of 2029, we owe the higher of the $78.50 or the Time Warner stock price at that point in time.
Q. And then on television, I know this is very fresh information with NBCU, the cost adjustments related to the expense of programmings that aren’t drawing the advertisers, but I was wondering how you see that process playing out and the implications for you as an operator of non-major affiliate stations?
A. I think the Journal article today said that NBC has kind of gone to the CW model, the model that we are already experiencing, a two-hour model. We have reversed comp. I feel confident we have got a very efficient model going forward.
Q. But are you competitively in a better situation if the major networks start to back off on how much they are investing in programming?
A. I think that could be positive for us.
John Janedis, Wachovia
Q. Can you talk more about your circulation strategy? Revenues were particularly weak in September, and I am wondering if you have increased discounting?
And then also as you anniversary the discounting, how do you balance the need to potentially further discount versus the potential decline in paid circ?
A. So, as we described it in earlier calls and conferences, our strategy is to stabilize individually paid circulation, a combination of home delivery and single copy while we have managed down the other paid. And also build on that through solid readership and growth in our overall audience between our core newspapers online and other publications. So that is the overall strategy.
What you see in recent results is that we have made a lot of progress on stabilizing individually paid. I would say it is noteworthy that home delivery circulation across the group is actually up daily, down only slightly Sunday. So the declines we are experiencing are essentially single copy. The revenue decline is a combination of lower single copy volume and then somewhat lower average rates on home delivery. And our view there is that it is better to extend discounts on home delivery and retain the most valuable subscribers rather than take them to higher prices after initial discounts and incur even more cost to remarket new subscribers. So it is a blend of those phenomena.
You have also got in that circulation revenue line some impact, for example, from taking Recycler publications in Los Angeles from paid to free, the conversion of Hoy from paid to free, and so that has a little bit of impact in that overall 6% decline figure. Our expectations are in the months and years ahead that year-over-year decline will shrink somewhat.
Q. So if you had had a year or two, then would you expect to be at least in terms of discounting on a first subscriber basis the same or less or more? How do you think about that?
A. Well, our focus is on retaining our most valuable customers, and we offer them great value in our newspapers. It is also important to remember in most of our markets we are the price leader in what we charge subscribers. We are likely to continue to discount when we need to, but the overall economics of retaining those subscribers between reacquisition costs and all the revenue are terrific. We also are working hard on retention and other ways through programs such as Subscriber Advantage in Chicago, where we have got close to 200,000 home delivery subscribers signed up for a really solid loyalty and retention program.
Q. Okay. On retention, can you give us retention in 3Q versus 2Q and then 3Q of last year?
A. Well, if you look at retention in terms of the inverse, which are churn rates, churn continues to decline and across the whole group is under 50% with virtually all of it essentially being short-term subscriptions and remarketing of those. So our retention continues to improve.
David Lewis, JP Morgan
Q. A quick question on CareerBuilder. Any change in the operating strategy with the increased stake? Obviously you guys are continuing with international expansion, but I’m just curious about how we should model the ramp-up given that it is breakeven right now. Monster, I believe, ramped up pretty quickly once they reached breakeven.
A. I would say there is not a change in strategy. We are now the leader in the domestic market in terms of revenue, audience and job postings. We expect that leadership position to continue and our momentum to continue. We think it will continue to be a tough competitive market with Monster, but we are quite positive.
As you mentioned, we are also going to expand internationally. We are in the early stages of that. We think that the international market eventually will be as large as the domestic US market, but it is going to take us awhile to build that business. :: :: ::
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