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Transcript

Goldman Sachs Communacopia
October 1, 2002

Dennis FitzSimons, President and Chief Operating Officer
Thanks Peter, it’s good to be here with all of you this afternoon. It’s certainly good to be on the same stage with so many great CEOs.

Needless to say, a lot has changed since this conference last year. Back then, presenting on the financial issues facing media companies seemed insignificant -- especially compared to focusing on how the journalism produced by our newspapers and television stations served our communities in the days following 9/11.

A year ago, the economy was in flux and advertising was in a tailspin. A year later, the situation is improving, slowly. We’re not ready to declare ourselves out of the woods yet, but things are definitely better.

Today I want to take step back, and talk to you about why our local mass media businesses -- newspapers and television -- are coming back and getting even stronger.

No doubt, the last three years have been a tough ride. It’s interesting to take a look back at who was here at this conference in 1999 when telecom and other "new media" companies were at their zenith. New media and anything Internet-related was hot -- traditional media companies most definitely were not. The word "dinosaur" was being used a lot in relation to newspaper companies in particular.

I hate to bring up some painful stats, but of the 19 companies that presented here in 1999, four have filed for bankruptcy. In that group of 19, over the last three years, about $800 billion in market value has gone away.

And the plodding dinosaurs? Well, we’re still around with lots of great assets. Take a look.

Going back to 1999 and 2000 -- the irony of it all is that the surge of cash from new media IPOs flowed right through to old media, who had the reliable, measurable ability to create awareness, build those new media brands and drive traffic to their sites. Unfortunately, there’s nothing like good advertising to kill bad products or products with flawed business models.

So anyway, the bubble was good for the dinosaurs, too. At least for a while. Then, like everyone else, we had to endure the dot-com hangover for the last couple of years.

But it is ironic that far from what everyone thought, the new media not only did not erode the value of traditional media, but rather underscored their resiliency and long-term value.

To demonstrate that, I want to focus on three things:

First, the reality of the "threat" posed by the Internet;
Second, the power of properly executing straight-forward business strategies;
And finally, the importance of "quality" earnings -- earnings that are marked by consistent free cash flow, a strong balance sheet, and conservative accounting.

First, the Internet. Targeted advertising directed at the most narrowly drawn demographic possible ... pop up ads ... banner ads -- the Internet was supposed to devalue traditional ad-supported media businesses.

Another thought was that streaming video over the Internet would erode the importance and profitability of broadcast television.

And, on the newspaper side, Internet-based companies like Monster, were going be the end of the classified advertising business -- particularly help-wanted -- the life-blood of newspapers.

Those were the myths, anyway. But it’s not exactly how things are working out. There is value in Internet advertising, and we’ve invested to get our share. But the reality is this: The hyper-targeted, one-to-one marketing that the Internet can provide is what we originally thought it would be; a great tool for marketers -- much like direct mail or telemarketing. It’s a great add-on. But it is no substitute for the brand-building capabilities of local mass media.

Advertisers need to reach consumers in major markets, and that’s where Tribune has great media franchises capable of reaching those consumers with messages that have impact. And in addition to our major markets, we see tremendous value in owning multiple media in a single market, giving us the opportunity to share content, cross-promote, and cross-sell. In our case this involves both traditional and new media. We are the only media company with newspapers, TV, and Internet combinations in the nation’s top three markets: New York, Los Angeles and Chicago.

Let me give you a concrete example of how our businesses work together in an individual market like Los Angeles. When the LA Times uncovered new information regarding the death of rapper Tupac Shakur after a year-long investigation, KTLA broke the story in its prime time news which then drove readership to the LA Times the next morning. Here’s how it came together...

The day after KTLA broke the story, single copy sales of the LA Times increased substantially. And registration at the newspaper’s Website jumped from the normal average of 7000 users, to 67,000... in one day!

That’s an example of "convergence" that makes sense -- using multiple media, in concert, at either the national or local level.

Additional examples involve our newspapers and several of our interactive sites. For example, we own a 50 percent stake in CareerBuilder as a compliment to our newspaper "help wanted" business. We also own stakes in Cars.com and Apartments.com, which compliment our automotive and real estate classifieds. These print and online services are co-branded and allow us to better serve our advertisers by combining the strengths of both local newspapers and the Internet.

And, of course, we have the ability to promote them all through our TV stations. For example, we’ve just launched a new series of TV ads for Cars.com. (Roll Cars.com Spots)

The single greatest expense of stand-alone Internet companies is promotion. That’s why so many of them have failed -- the cost of promotion was greater than the revenues generated. We can drive traffic to our sites at low incremental cost because we own the high-reach media franchises that produce results.

And that brings me to my second point: The power of executing on straight-forward business strategies. At Tribune that means focusing on the fundamentals, building our local mass media franchises, efficiently managing our costs, and looking for acquisitions that make strategic and financial sense.

And that focus is paying off. As I mentioned earlier, business is gradually coming back. Two weeks ago we released our revenue numbers for August, and they continue to show improvement. Consolidated revenues for the month were up three percent compared to the same period last year. Publishing revenues were up two percent, with television up 12. Interactive, while still a small portion of our overall picture, showed revenues up 29 percent.

The proof of our traditional media model is our ability to generate free cash flow in good times and in bad, and that’s because each of our lines of business has a basic strategy...

In television, we want to expand our national footprint by acquiring more stations in the top 30 markets, and continue building two-station clusters wherever we can. When you look at the television landscape, the situation today is not unlike the early 1990s. Back then, Tribune Television was a lot smaller -- we owned just six stations, but the economy was in a downturn and advertising was soft. Cable and DBS (which was emerging at that time) were the latest threats to broadcasters, and not everyone believed that over-the-air television was a good business going forward.

We did. But we thought building scale was essential. With the market depressed, and station owners highly leveraged, we saw the chance to pick up stations in great markets at very reasonable prices. We now own 24 stations in 20 markets, covering 38% of USTV HH, and, despite the downturn, our group cash flow margin looks to be close to forty percent this year.

We also invested in The WB Network, insuring that we’d get the quality prime time programming for our stations that would allow us to compete more effectively in a world of increasing viewer choice. This year’s fall season just kicked off and in addition to a record premiere for 7th Heaven on Monday night, the network has a big hit with a new family-oriented show called Everwood. The show’s debut had record ratings -- with more than 7 million viewers.

Some other bright spots: The Gilmore Girls on Tuesday night. Its fall premiere went head-to-head with Buffy, The Vampire Slayer’s premiere on UPN, and came out with a forty percent advantage. And our remake of Family Affair is scoring well with teens and adults 18 to 49, giving The WB its highest Thursday debut ever. Great front page article in Electronic Media this week.

Our partnership with Warner Bros. in The WB is paying off on the bottom line, too. It’s a great growth story, with upfront billings in the range of $575 million, which is awfully impressive when you consider that we started this business just seven years ago.

The other important part of our television strategy is building two-station clusters wherever we can. Our recent purchase of the Indianapolis WB affiliate created our fourth two-station cluster. We have similar clusters in Seattle, Hartford, and New Orleans. This acquisition made both strategic and financial sense for us. We estimate that during the first year of operation, by co-locating and combining engineering staffs, we can achieve about $5 million in cost savings alone. Our experience is that in markets where we are operating two stations, we can boost cash flow margins 6 to 7 percent at each station over time.

On the publishing side, our strategy is also simple:

Build scale;
And win in classifieds, both in print and on-line.

Our acquisition of Times Mirror two years ago was the largest acquisition in newspaper history. It more than doubled the size of our publishing division. We added some great newspaper franchises to our group and established ourselves as the only media company with newspaper, TV, and Internet combinations in the country’s top three markets.

That kind of scale enables us to package new advertising solutions for our clients. Tribune Media Net, which we formed after the acquisition, generated $34 million in incremental revenue last year despite the advertising slump. This year the total should be $50 to $60 million.

We’re also building scale within our markets. Our recent purchase of Chicago Magazine is a great example. It reaches an upscale, younger demographic, delivers great entertainment news and is a terrific advertising vehicle for high-end clients. And at $35 million, the purchase multiple of less than 10-times 2001 cash flow was reasonable. We’ll operate this separately from the Chicago Tribune and our other Chicago media properties, but cross-promotion, cross-selling, and sharing content will work here, too.

Another way we’re building scale is by targeting the fast-growing Latino populations of our larger markets with Spanish-language newspapers that are attracting a growing number of readers. Here in New York, Hoy is our best success story. Launched just three years ago, as a compliment to Newsday, Hoy now has a daily circulation of more than 75,000. And Newsday’s goal is to turn Hoy into the nation’s number one Spanish-language daily.

This is not unlike our two-station cluster strategy in television: one infrastructure, one distribution system -- but two newspapers.

That kind of success is something we’re looking to duplicate in the classified advertising category, which represents 21% of Tribune’s total revenue. Our partnership with Knight Ridder in CareerBuilder is critical to our efforts. This quarter the company is launching an innovative new product called the "Flex-ad." This is an easy-to-post, integrated print and online listing that delivers tremendous local market reach and value for employers.

But the important point to remember is this: our competitors, Monster and HotJobs just can’t compete with "Flex-ads" because they can only deliver the online element and we deliver a total solution, both on-line and print.

In a very difficult economy, CareerBuilder’s results were strong during the first half of this year. We estimate that CB increased its market share by two points compared to Monster and HotJobs.

Our over-all strategy at Tribune Interactive, is really simple: Drive on-line classified revenue, create value for users and reach profitability. I’m happy to report that in the second quarter, TI did just that -- reached profitability -- a full six-months ahead of schedule. The challenge down the line for TI will be to develop registration and paid content models for our newspaper sites and make them profitable, too.

And, that brings me to my third point: The importance of "quality" earnings -- consistent free cash flow and a strong balance sheet.

Overall, Tribune will deliver over $1.4 billion of operating cash flow this year, and free cash flow of over $650 million, an increase of about 15 percent over 2001 -- despite the recession.

We’ve significantly streamlined our company during this downturn. Improvement is already evident in our publishing group, which this year will improve cash flow margins to 26%, compared to 22% in 2001. In television, we doubled cash flow margins over the ten-year period from 1990 to 2000, and this year, as I mentioned earlier, they will approach 40%.

This free cash flow has enabled us to significantly reduce debt. Since the Times Mirror acquisition, we have lowered debt by $2.3 billion, and by the end of this year, we should have our debt to EBITDA ratio down to 2 to 1.

But we haven’t neglected capital investments for future growth. One of the opportunities we identified at the LA Times was to grow preprint market share. We’ve invested $50 million in new inserting facilities and expect the return on that investment to be well above 20 percent.

Another thing our ability to generate free cash flow gives us is the flexibility to move quickly as industry deregulation presents new opportunities for growth.

In summary, Tribune has great strength in local mass media -- our newspapers and television stations are among the best in the country. We’ve turned the supposed threat of the Internet into an advantage with our print and on-line strategy. The added value in the equation is the combined power of our media assets, and what they can do together -- cross-selling, cross promoting and sharing content. That’s convergence that makes sense, and it’s something few other media companies can do.

And as any good paleontologist would tell you: dinosaurs walked the earth for 100 million years.

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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.