Ruthellyn Musil, Senior Vice President/Corporate Relations
Good morning and welcome to our conference call to review 2006 second quarter result. Our opening remarks will be brief and then we will take your questions. We plan to finish within the hour as is our regular practice. Speakers this morning will be our CEO, Dennis FitzSimons and Don Grenesko, our senior vice president and chief financial officer. Other members of management are also here for Q&A.
Turning quickly to our press release, Tribune’s second quarter diluted EPS from continuing operations of $0.53 on a GAAP basis includes a couple of non-operating items. Our release contains the information so you can make a meaningful comparison to First Call estimates.
Before turning 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’s Dennis.
Dennis FitzSimons, Chairman, President and Chief Executive Officer
Thanks, Ruthellyn, and good morning everyone. Before talking about second quarter result, let me just recap some key events of the quarter.
As you know, we have embarked on an aggressive and deliberate program to realize improved value for all Tribune shareholders. There are three points to that program and we made substantial progress in all fronts. So, let me briefly cover first the recapitalization, second sales of non-core assets, and then third our plan for improving performance at our newspapers and TV stations.
On the recap — yesterday, as planned, we purchased 10 million shares from the McCormick Tribune Foundation at a price of $32.50. Along with the successful completion of our tender offer on June 26th for about 45 million shares, our leveraged recapitalization is on track. Our intention is to now repurchase the final 20 million shares on the open market by the end of the year.
We are also moving aggressively on the sale of non-core assets. As you know, we’ve already announced the sale of our Atlanta and Albany TV stations. We recently sold a majority of our Time Warner stock not tied to the PHONES. We are also making progress on the sale of the LA Times’, San Fernando real estate and a few smaller assets. So, at this point, we have identified more than $300 million of our $500 million target.
This is just step one. As we have said before, step two is about improving operating performance of our newspapers and televisions stations over time. As you can see from our second quarter results and recent news from the network and cable upfront, our near term advertising environment remains challenging.
Going to results, in publishing, revenues were even with last year. Although the Easter holiday falling in March this year had a small negative impact, we saw strength that many of our newspapers — particularly in Florida — and the L.A. Times was up slightly. But this was offset by continued weakness in Newsday’s preprints. Excluding Newsday, total ad revenues were up 2%.
Let me cover the situation on Long Island. As you know, in March of 2005, Newsday severed the relationship with an outside sales agent over an ethical breach and that sales agent took some clients with him. So, we regaining the preprint customers that Newsday lost has been a top priority.
Now the efforts of Newsday’s sales team are paying off. Walbaums, a large grocery client, will be back in Newsday starting next week for exclusive preprint distribution on Long Island and most of New York City. This is an important breakthrough in that Walbaums is a major client. And the Newsday ad sales group will use this momentum to bring other clients back. In addition, they will begin the cycle through this preprint issue in the third quarter.
On the interactive front, we continue to show strong growth. Second quarter revenues are up 27% over last year. In addition, Tribune Interactive’s online traffic was up 24% year-over-year during the second quarter. Our network of more than 50 websites averaged over 14 million average monthly unique visitors during the quarter.
CareerBuilder had a great second quarter with network and affiliate revenues up 42% over last year. CB reached 22 million unique visitors in June and it had a 40% share of total listings compared to Monster’s 37%. And we continue to have positive discussions with McClatchy about their newspapers participating in CareerBuilder.
Expense controls remain tight. Publishing cash operating expenses were about flat for the second quarter compared to 2005 and that is despite a 12% increase in newsprint prices. FTEs in the quarter were down about 1,100, or 6% from last year.
Turning to broadcasting, second quarter revenue for the TV group was down 1%. Several stations finished the quarter ahead of last year. This includes L.A., which was up in the high-single digits, and several of our six Fox stations. And given the current ad market and pacing, we expect third quarter TV revenue to be down in the low-single digits with July being the weakest and September the strongest month.
In its inaugural upfront again in that relatively soft network environment, The CW had a good sales performance, which was in line with management’s expectations. While we don’t benefit from upfront sales, it is certainly a good indication of the confidence that advertisers have in the CW. Our station group will benefit from a schedule that will combine the best of the WB and UPN. We feel that ratings increases in the 25% range are very achievable.
Our Philadelphia and Seattle stations will not be CW affiliates. They will be affiliated with Fox’s MyNetworkTV beginning this fall. And at the same time, we’ve also extended the term of our six existing FOX affiliates or those agreements through June 2012.
On that note, let me turn it over to Don for some additional detail on the quarter.
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 $0.53 compares with $0.72 in the second quarter of 2005. These results include the following items: stock-based compensation expense of $5 million or $0.01 per share; a gain of $0.01 per share related to our portion of a one-time favorable income tax adjustment recorded at CareerBuilder; and a non-operating loss of $0.03 per share associated primarily with a change in the fair value of our PHONES and Time Warner stock.
Combined, these items reduced our earnings by $0.03 per share in this year second quarter. Conversely, 2005’s second quarter results included a non-operating gain of $0.13 per share.
Because of the pending sale of our Atlanta and Albany TV stations, operating results for these stations have been reclassified as discontinued operations. As noted in our press release, these sales are expected to result in a $90 million pre-tax book loss, included in discontinued operations, almost all of which relates to a portion of the TV group’s goodwill being allocated to these stations. Nevertheless, the $200 million of gross sale proceeds was a very attractive multiple of cash flow.
Our expense control remains tight, excluding stock-based compensation and special items, consolidated cash expenses are about flat.
Turning to some additional detail at publishing, classified real estate was up 29% in the second quarter with strong gains in both print and interactive. Los Angeles and Florida continued to be our strongest markets as we saw in the first quarter.
Auto tends were also similar to the first quarter, down on the print side with healthy growth online. Recruitment was off about 3% this quarter because of declines in print. Online showed good growth across almost all markets.
Retail trends improved versus the first quarter with most of the upside in LA. National was down due to lower movie and auto advertising.
Looking at the major markets, Chicago was lower due to national auto and financial advertising, two categories which had a very good performance a year ago. LA was up slightly for the quarter, with strength in real estate and retail advertising. As Dennis mentioned, Newsday continues to be impacted by preprints, and weakness in classified auto.
Circulation revenues fell by 5% for the quarter as individually paid did not perform quite as well as it did earlier in the year. We expect third quarter results to be a little better, consistent with our goal of stabilizing individually paid circulation.
Cash operating expenses in publishing were flat, excluding stock based compensation and special items. Higher newsprint and TMC postage costs were more than offset by lower compensation and benefit expenses primarily due to staff reductions.
Turning briefly to broadcasting and entertainment, the group’s cash operating expenses were up 3% or $8 million primarily due to higher programming costs.
Corporate office expenses, excluding stock-based compensation expense were down a $0.5 million due to staff reductions and other savings.
Turning to the equity line, income was about $26 million in the second quarter, compared to $12 million in the second quarter of 2005. The increase reflects improvements at the TV Food Network and CareerBuilder and includes a $5.9 million, one-time favorable income tax adjustment related to CareerBuilder. In addition, we are no longer recording losses for the WB Network.
Second quarter interest expense rose by 34% to $47 million due to higher interest rates and debt levels. Excluding the PHONES, debt totaled 2.6 billion at the end of the second quarter and now stands at $4.4 billion following the 55 million shares we just repurchased.
And with that I will turn it back to Dennis.
Okay, thanks Don. So, in closing, let me just go back to our next steps following the share repurchase. It’s clear that the key for us is top-line revenue growth and we have initiatives in place designed to make that happen. Our plans also call for $200 million in cost savings over the next 24 months. But let me stress there is more to this plan than just cutting costs. We intend to redeploy resources to reinvest for growth in interactive as well as at our newspapers and targeted print products.
Our Internet strategy is to build a portfolio of rapidly growing successful online businesses using a proven national network/local affiliate model. We have a track record of success in this, as demonstrated by CareerBuilder.
In addition, we intend to make our local newspaper sites more robust including increased use of video and user-generated content. We intend to expand Metromix, an entertainment vertical has been very successful here in Chicago, to other markets, and acquire additional businesses like ForSaleByOwner.com that will add to our portfolio of faster growing Internet businesses.
As we said before, by 2010, we expect to more than double the percentage of publishing ad revenue coming from our fast growing Internet businesses to the 12-15% range. We will reinvest for newspaper and targeted print growth as we’ve done with RedEye and AMNew York. Combined revenues for those two publications were up 45% last year.
Finally, we are also now better positioned for future years in TV. In addition to the launch of The CW, this fall, we recently announced the purchase for fall 2007 of “Two and a Half Men” and “Family Guy.” Both of these shows target the difficult to reach young male demo. John Reardon and his group did this in a very disciplined way, so our programming expense increases will be very modest.
So, while we are focused on quarterly results certainly, you also know that executing our longer-term growth plan will be essential for our success. Our major market newspapers and TV stations provide a great foundation for our growing interactive business while at the same time delivering the mass audience that we believe will always be important for advertisers.
Now, we’d be happy to take your questions.
QUESTION AND ANSWERS
Lauren Fine, Merrill Lynch
Q. On the newspaper side, I’m wondering if you have any sort of interpretation of what’s happening in help wanted throughout the industry, where it seems to be weakening. If you think is just a blip in near-term and it is going to strengthen again or if we’re just looking at weakness going forward. And then I’m wondering if you could isolate what the decline was in print ad revenues for the quarter?
A. In terms of help wanted what you’re describing seems to be a fairly broad trend across the industry where, particularly print revenue and volume is down somewhat. There are some hot job markets still, but in general it seems like job creation has slowed. That’s certainly a factor. And also you’ve seen continued migration, as we knew would happen from print help wanted ads to online. So, those are the factors driving it. In effect, our inbound call volume for print advertising is down. We’re working to offset that through much more aggressive outbound calling both for print ads and bundled. We are also starting to package print packs of ads much as we do online. So, we see some steps we can take that will improve that trend.
Q. Can you talk about the relative pricing between print and online for help wanted?
A. What we have done is aggressively raise online prices; the print price is relatively stable. If you look at a big market today you will see an average print ad cost about what average online ad costs.
You also asked about print ad growth versus online. What you see is we’re flat year-to-date in terms of our overall ad revenue we’ve said. Online is up in the high 20% range, that means print revenue alone is down about 2%, again mostly driven by the decline in preprint at Newsday.
Q. My last question has to do with the equity income line, if you would exclude that almost $6 million from CareerBuilder what looks like kind of an $8 million increase year-over-year, can you isolate the pieces of that in terms of the improvement of Food Network, not recording loss of WB and then presumably the improvement of CareerBuilder as well?
A. Well, all three are positive.
Q. I mean if you would look at $8 million, how would you allocate it across those three in terms of the improvement?
A. The largest improvement would be at the TV Food Network, followed by the fact that we didn’t have any losses that we are recognizing at the WB and then CareerBuilder.
Steven Barlow, Prudential Equity Group
Q. Can you talk a little bit more about your programming expenses on television, how it’s going to look for the rest of this year? And you just talk about what you paid for “Family Guy” and “Two and a Half Men” and what that would do to your expense potentially in ‘07? And then Don, if you could just help us on what is the right amortization, depreciation numbers we should use after the sale of Albany and Atlanta?
A. On broadcast rights, we’re up mid-to-high-single digits this year. As you know, we do accelerated amortization. We had in our future projections what we are going to pay for both first run programming and off-network programming. “Family Guy” and “Two and a Half Men” were both group deals. These shows have come in actually below what we had originally projected. So, we paid good prices, but on the other hand that’s going to lead for us to very modest increases, actually lower than what we are seeing this year, considerably lower on the program expense line for broadcasting.
Q. And then the rest of this year should be about what we have already seen this year?
A. Yes, that’s correct.
And in terms of the amortization and depreciation, the two TV stations, it is really relatively modest piece. There’s no real impact there. I would say that again, we moved these two stations into discontinued operations. So I think you can see some from the footnotes that $3.2 million of after-tax profit was moved from continuing operations over to discontinued. So, obviously that will have an impact on the second half also.
Lisa Monaco, Morgan Stanley
Q. Could you just give us a little bit more color in the circulation trends in 2Q and just a little bit more going forward, how we should think about volume versus circulation revenue? And then secondly, just on the newspaper side, can you rank the top 3 markets in terms of margins?
A. On circulation, first let me go back to the March ABC reports where we reported individually paid circulation down about half a point daily and down 1% Sunday, with home delivery up across our markets in total. Second quarter results were slightly worse than that. As Don said, we expect third quarter results on individually paid to be a little better due to the timing of circulation sales program. And overall, we made lots of progress stabilizing individually paid circulations, home delivery plus single copy, circulation that advertisers value the most. But you are also seeing, and as we described to you as well as advertisers, is a continued reduction in other paid circulation. So, total circulation will continue to show bigger declines than individually paid through year-end. That’s largely a reduction in hotel copies and some NIE in Los Angeles. So LA alone in the other paid category is impacting the group totals by 2 to 3% through about year-end. In terms of revenues, you see it down around 5%, that’s a combination of the modest individually paid declines and, as we’ve said, selective discounting essentially to improve our retention of subscribers. Churn continues to decrease. We would expect the circulation revenue trend to improve a little bit in the second half of the year, but still not likely to get the positive territory.
A. On margins, the top three would be our two Florida papers and Chicago.
Q. And then just following upon the circulation, have you seen any more additional pressure on ad rates from advertisers?
A. It is the normal give-and-take with advertisers who always prefer not to pay more, but as we’ve said previously, with individually paid circulation in relatively stable territory, our good audience story in terms of demographics, the responsiveness of newspaper advertising, it is a very competitive marketplace, but we are not seeing anything outside the ordinary in that regard.
Craig Huber, Lehman Brothers
Q. Can you just give us in your newsprint division, your non-newsprint cash cost with percent change in the quarter and then also for newsprint consumption and the price change year-over-year?
A. Newsprint is easier and I will get to the other number. So essentially on newsprint it was prices up about 12%, volume on the same basis weight, down about 7%.
Q. Do you have some sales on some real estate, did you say you already closed that or is it just up to sale right now? And if so, can you quantify that if it is actually been sold?
A. Yes, what we mentioned was the San Fernando real estate. So, we closed the plant in Los Angeles and that’s up for sale, bids are expected this quarter, within the next month.
In terms of other newspaper cash costs, compensation, pre-stock option expense is down 2%, and all other cash expenses are flat which is essentially growth in postage and all other costs down.
Q. And then on auto cost side. Are you guys seeing any light at the end of the tunnel here at all as you talked to the various auto dealers in your markets and so forth? Or you are expecting this just to continue here for the next New Year plus? Any idea there?
A. Well, it is still are really challenging environment for auto dealers, particularly domestic dealers. What you will see is we will start running against lower revenue a year-ago. But we are not seeing any big signs of pickup in that regard. You clearly got the situation with the domestic manufacturers where Chrysler did offer some, significant discounts, but GM and Ford have only done very limited programs. And if they continue on that pace, its hard to see where there is a lot of light in that tunnel soon realistically. But we are working very creatively with auto dealers both print and online packages that help them move inventory.
Q. And then would you also say that July newspaper is similar to June or is it similar to May or what’s your though there?
A. Well, what you have seen clearly is choppy trends as we described all along. And I would say the July trends are more like our year-to-date trend, which is essentially flat.
William Bird, Citigroup
Q. I was wondering if you could talk a little bit about your strategy for bridging the growth gap at Newsday? And also I was wondering if you could quantify what the growth rate looks like in online help wanted ad revenues?
A. At Newsday, as Dennis described our top priority revenue wise is to rebuild our preprint business there and win back these food and drug customers that we lost due to the termination of the sales agent. And getting Walbaums is the key first step. We are working aggressively on other opportunities. We also have cycled the biggest part of the preprint declines so you’ll see some improvement in preprint trends and Newsday as the second half progresses. You are also seeing some encouraging signs in other categories in Newsday, their national advertising performance is improving, their local retail sales in many areas are good. It has been an ongoing process that Tim Knight describes as of rebuilding key customer relationships. They are out in more dialog than ever with the advertisers big and small and we think that picture will improve as time progresses. They have also very clearly focused on their core Long Island market — Nassau, Suffolk and Queens — where they had the highest penetration of almost any newspaper in the country. So, the fundamental franchise is strong, it is the revenue-rebuilding process and particularly with the union negotiations behind them, they can focus on that.
Q. I was also looking for the growth in online recruitment revenues in the quarter.
A. Sure, it was 19%.
Paul Ginocchio, Deutsche Bank
Q. What was cash at the end of the quarter? Second, the entertainment/radio EBITDA line was down pretty significantly. I think you just saying it was because of the fewer Cubs games, but you added a couple of 2,200 seats or 6% extra capacity at Wrigley. Let’s talk about how that affected numbers and there is some still a fallout from the I guess the closure of the Tribune Entertainment group? Then finally, if Media News Group got a hold Torrance Daily Breeze, would that change, the competitive landscape at all in LA?
A. Cash at the end of the second quarter was $114 million.
A. In terms of the entertainment and radio line, we have added seats and despite an unacceptable on-field performance, the attendance is probably 99% of capacity. So, what you are seeing in the second quarter is just a shift in the number of home games which is part of what is causing, that decline. Also WGN Radio revenues are slightly lower. So we did not have a strong quarter at the radio station. Those are pretty much the elements.
On the Daily Breeze, it is a modest factor in the overall Los Angeles market and whoever ends up owning it, we don’t see a significant change in competitive balance.
Peter Appert, Goldman Sachs
Q. How should we be thinking about the cost dynamics that newspaper business in ‘07 in the context of your $200 million target and specifically, I am wondering if you think newsprints would potentially be flat next year. If that were the case added on to your $200 million target, could we see operating cost down on a year-to-year basis next year on publishing?
A. We think it is very likely that newsprintspricing will moderate, whether it is flat or up a little or down a little next year, it’s just way too soon to know. But we do think that the fundamental dynamic of those price increases moderating is likely to occur. We are still working through our financials for next year and it is also premature to say whether total costs could be down. Our disciplines will be very strong and the publishing group will contribute by far the biggest portion of that $200 million over two years cost reduction target.
Q. I don’t actually fully understand what you have done on the depreciation side, if there was no goodwill associated with the stations you are selling, how is that that you have the write-down associated with this sale?
A. It was unusual, but what basically is happening is that we lump all of our TV stations together when we look at impairment for goodwill.And because we are putting all of our TV stations together for that calculation, the SEC is requiring companies to, in essence, take a piece of the group’s goodwill and assign that to each of the TV stations in this particular case. So, we had to do an estimate at the fair market value of each of our TV stations and then take the proportion for Albany and Atlanta of the grand total for all of our TV stations and multiply that by goodwill and then that is how we came up with this additional $80 million of goodwill that has to be written-off. So, in essence, we added it to the original purchase price of the TV stations.
Q. Okay. So this is not a write-down, of the other TV assets.
A. No it is not. No.
Q. But on a go-forward basis there is some modest earnings benefit associated with lower goodwill amortization now?
A. Well, we are not amortizing goodwill. But again the multiple here was a very good one. So, it will be slightly accretive going forward.
Debra Schwartz, Credit Suisse
Q. In TV, can you give us a little more color on why you expect that TV to be down low-singles in Q3? I know typically you don’t really get much in the way of political. But in the past political has had the effect of the tightening the market, I am just wondering why you don’t expect to see that this year?
A. We would expect political to kick in later in the year, more in fourth quarter, and we feel there should be some reasonably significant political then, particularly in New York and LA. I think what you are seeing in our comments is just sort of a relatively weak overall ad environment, whether it is a network upfront and that sort of trickles down and has an impact on the spot marketplace where we generate our revenue. So, also you are looking at a situation with The WB being in a lame duck situation. That is not helpful, and that is going to turnaround quickly in September with The CW being very much a positive for us particularly in our bigger markets.
In terms of the categories, it is a little bit the same as publishing, you have got automotive down, because of the weakness in sales. Retail is also down because a little bit of the consolidation that is going on there, while movies and telecom are up. And one thing we should see on both sides of the house as the competition gets stronger in the telecom business as we got cable versus satellite versus the telcos, that is going to roll out on a market-by-market basis which should be a benefit to local advertising economies, both print and broadcast.
Q. You mentioned generally where the three big markets were in publishing revenue. I was just wondering can you run through specifically the growth rates for LA, Chicago, and Newsday?
A. In terms of ad revenue for the quarter, LA is up 1%, Chicago down 4%, Newsday down 10%.
Frederick Searby, JPMorgan
Q. With respect to the ADVO/LA Times deal, ADVO has quantified $10 million in savings. Do you have any thoughts whether how many material that will be to the preprints business in LA? I think that commences in August. Secondly, are you amenable or open to striking similar deals in other markets? And just finally, general thoughts whether there are any competitive issues that concern you or other issues with the merger of Valassis and ADVO?
A. So, starting with our distribution partnership between the LA Times and ADVO, we’ve said that that’s a very good deal for us going forward, both as we manage the weekend program and have the opportunity to sell into their established weekly program. And then our financial benefit will be in excess of $10 million over time. In terms of whether we would create partnerships elsewhere, we already have one in Connecticut through the Hartford Courant. We said we want to look at how the LA partnership unfolds. We wouldn’t rule it out, but in many of our markets, we are in very strong positions and it would only do that if it was especially advantageous to us.
In terms of the Valassis acquisition of ADVO, we have an excellent relationship with Valassis. We’ve talked to Al Schultz and Scott Harding since the announcement. Our markets account for about 12% of Valassis’ total FSI distribution. We don’t anticipate any significant near-term changes, as they work to first close the deal and then formulate their integration plans. Valassis has said both directly to us and publicly that they continue to believe that home-delivered newspaper circulation is really the gold standard with preprint advertisers, their best distribution channel. They also believe, as we do, that the combination of ad newspaper distribution and shared mail is highly effective. So, we are aligned in our beliefs in that regard. Them acquiring ADVO adds to a degree in competitive dimension, but fundamentally we see upside in the same focus and are confident we have a great partnership going forward.
This is one of the areas that we are investing in for greater targeting capabilities. We’ve made significant investments and we are looking at continuing to do so as we differentiate ourselves going forward through this blend of newspaper and shared mail distribution on sub-zip code basis.
Q. And in Long Island, just sort of segueing, but tit just piqued my interest, I mean, as you kind of take back some of the clients you lost from your feared competitor there, do you think there is sort of a cooperation/competition model or something that you could do more on these lines and that front?
A. We would anticipate continuing to fight that out and compete.
Christa Quarles, Thomas Weisel Partners
Q. On your online help wanted. I was wondering if you could give us the mix between online only — if you still allow that I am not sure if you do — combo sales and just pure online. And then also I was curious as to why CareerBuilder would be up 42% but that your online help wanted was only up 19%, if you could discuss if that’s just a market-by-market difference or if there is something else I should be thinking about?
A. So, essentially the revenue we book that’s up 19%, continues to be primarily print online bundles. There is some online only in that but a relatively modest fraction, driven largely by the newspaper sales forces. CareerBuilder would be up more because their booking online only sales and they have a very effective direct sales force that operates nationwide including in our markets. So, in effect our share of online revenue was higher than that plus 19% but the rest is reflected in that CareerBuilder revenue growth where we only show you the equity line but describe the growth in terms of the network and affiliates and both.
Q. Could you describe what your CareerBuilder online, for your markets would be up?
A. I don’t have that exactly but it would be up more than 19%. What’s sold directly through CareerBuilder.
Alexia Quadrani, Bear Stearns
Q. Given your comments earlier about the investing in the future of the newspaper business, should we assume that once the 20 million in buybacks that have occurred, that going forward your primary use of cash really will be investments, possibly de-leveraging, and buyback will take a backseat?
A. I think once we get to the end of the year, and again our intention would be to repurchase the 20 million shares by the end of year, then we will assess where we are. But we’ve said we’ll continue to make investments as we just talked about in whether it’s preprint targeting to what advertisers are looking for, we will try to invest in those areas and also continue to de-lever.
Q. And then when you look at your side of environment out in Long Island in terms of preprint marketplace, in term of trying to regain that share, is it really an effort in terms of bulking out sales force or is it really very much reliant on maybe discounting and try to get win the clients back?
A. Actually, that’s going to be both. We’ve strengthened the sales staff out there and it will be about having a strong competitor. And it’s the job of Newsday ad sales force to do whatever it takes to get that business back.
We will also invested in a mail program late week on Long Island that again strengthens our distribution to go with our strong sales and pricing effort.
But we really think that the Walbaums coming back is a result of the improvement in the infrastructure, confidence in Newsday’s ability to deliver and just again a much better sales effort. And that does involve certainly competitive pricing.
John Janedis, Wachovia
Q: Can you remind us, have you settled yet with all of the advertisers at Newsday? And then separately as the company you have talked for a couple of years now about trying to increase your political from expanding news coverage. Where are you on that and how do your ‘06 political revenue looks relative to ‘04?
A. On the Newsday front, we have settled with the vast majority of advertisers. There is one major account that’s still out there that we would expect to settle soon. But we are still very confident of the amount of the reserve that will be adequate to handle all those remaining. We are well over 90% at this point, or in that 90% range let’s say. Once we have this large advertiser completely settled and papered that will put us well over 90%.
Q: Is that an ‘06 event, do you think?
A. Yes. We would think so.
As far as political advertising, yes we have looked to increase our share there, we’ve got additional time periods devoted to news, whether that’s in the morning, which has become a much more popular day part, but political advertising we think will be up about 50% for us over 2004.
Brian Shipman, UBS
Q. With respect to circulation, have you gotten more aggressive in your discounting recently especially in the second quarter or we have been managing down the other circ more aggressively? I wanted to ask that given the increased declines in circ revenue in the second quarter relative to the first quarter. Have you had any recent discussion with the Chandlers and any effort to resolve the dispute with them, if so, can you provide any color on those discussions?
A. There is not a material difference in discounting when you look at circulation revenues as a relatively modest part of our total revenue, a point or two difference just isn’t that material.
Q. Okay, we just saw that circ revenue deteriorate a bit sequentially, so I just wanted to ask…?
A. That’s true, they did slightly. Our discounting strategy again is very selective focused on retention of customers, which in terms of the cost part and our cost of acquiring new customers you see some benefit there as well. So, you got to really think of it not just circulation revenue but then, what’s the cost of acquiring and retaining those subscribers. On a net basis the trend is good.
As far as your second question, now that the tender offer is completed, we will look forward to moving constructively with the Chandlers. They are an important shareholder, we work for the shareholders and we will look to do something there that make sense for both sides and all shareholders.
Q. So, nothing, yet. But, planning on opening some sort of discussions is what you are saying?
A. Well, I am just saying we will look to move forward constructively, but really no comment on any other negotiations.
Michael Kupinski, AG Edwards
Q. On the improvement in revenues in LA Times, was that in preprints or ROP?
A. It was both. They’ve done a great job in terms of local retail sales, both ROP and preprint.
Q. You mentioned that there are additional asset sales and I was just wondering that there seems to be other non-strategic assets that company could sell and I was just wondering your thoughts about future asset sales beyond the $500 million that you targeted?
A. We will look for situations if we don’t have or feel we have a competitive advantage, those assets would be ones that we will look at. We will also look at the tax situation and where we can benefit shareholders the most. But, we have been having conversations as you might imagine, once we made the announcement, we’ve gotten a lot of phone calls, some of those look promising and we will just keep everybody posted on that as soon as we make deals.
Q. So, there could be more asset sales beyond the $500 million that you have targeted, is that what I should read into that or no?
A. Could be. Again, depends on if the pricing was right. There were certain assets that would put us beyond $500 million, but right now that is our target and we will stay with that number.
Q. And any thoughts on the FCC’s move to lift media ownerships rules? Your thoughts on timing. Are you facing any need for waivers, additional waivers at this point?
A. We will have waivers till the completion of the rule making. Our license renewal filings are due for KTLA in August of ‘06, in Hartford in December, and in New York in February 2007. First of all, the detailed text has not been released. There will be 120-day comment period following the release of the detailed text followed by another 60-day reply comment period. We figure, right now, the best case, that the rules would be issued in second quarter of 2007. But, again, we do not have to worry in terms of divestitures because we will be covered by a waiver until the completion of the rulemaking.
One more thing to remember there is that the court did agree with the FCC, they did remand the FCC’s original rule. But, the court did say that the record favored relaxation of the newspaper/broadcast ownership rules. So, again, we are confident the FCC will rule in our favor, but as we all know this has taken forever and we are looking for a successful conclusion to the rulemaking.
Q. One last question, in light of the move to decrease certain items in the newspaper like the stock tables and such and it’s an industry-wide issue, can you talk about your papers newshole and where does it stand? Does it look like this could be an area where you might be able to reduce and possibly migrate some more of this information over to the Internet, maybe into your Internet sites. What are your thoughts on that?
A. Well, we have gone at this very thoughtfully thinking of what content in our newspapers really has distinctive and differentiated value to readers. And we are ahead of many people in terms of reducing things like stock tables that are essentially commodity. We see some selective opportunities to continue down that path and expect that newsprint consumption overall will continue to decline modestly going forward.
One of the investments we have made is much more additional consumer and reader research. So, we are listening very carefully to the customers and trying to give them what they value the most.
Jim Goss, Barrington Research
Q. At the Mid-Year Media Review sessions recently, if I am not mistaken, Dean Singleton made a comment related to the greater profitability of the online portion of the business and that while the percentage of the revenue mix was modest right now, he thought within say half a dozen years that could be up to perhaps 20% of revenues and perhaps 40 to 50% of cash flow from the online sources. I am wondering, if you think that’s a realistic target and if not, what you think in terms of your own publishing operations? And you might also relate that to the potential increasing share of online revenues that relate to non-classified categories?
A. We still think that the print business will be a good business. It is lots of advertising migrating to online. Our view is that we, through launching additional verticals and making sure we are positioned to get a good market share online, we will capitalize on that trend. In terms of relative profitability, online does have very good margins.
Again, you can clearly identify revenue by media channel and we do our cost structure essentially allocating incremental costs online. But you have to keep in mind that through a large extent, our online businesses are leveraging the prints infrastructure. Now there is a content, sales, brand, you name it. So, it’s great that Dean can talk about this, but we don’t see as easier way as he might in terms of looking at what fundamentally is the profit drivers. Our strategy is largely one based on the integration of print online, but we are also building online only businesses that we expect to have good margin over time as well. A key part of that as you touched on, is building non-classified revenue stream. That revenue so far this year is up like 40%, still too small a percentage of the total but we see a lot of the upside in the non-classified area.
Q. Gannett commented that there might be some potential newsprint from China that could factor into the supply-demand equation. I’m wondering if you see that as one of the issues from your prior comment that perhaps newsprint pricing cycle could be coming to maybe a peak for this cycle.
A. It is a real possibility, sure.
Q. Okay, you are not looking into it specifically?
A. We have to get back, I haven’t talked to our newsprint guy in the last couple of weeks.
Q. Okay. And then on the television side, you are getting potentially better pricing for “Two and a Half Men” and the “Family Guy.” But the audience appeal, I presume would be at least somewhat less than some of your previous high profile shows. And I’m wondering what you see is the expected profitability from these shows relative to the others and how it factors into the mix as you shift to CW driven environment for your TV group.
A. We’ve had two issues really, some of the really terrific sitcoms that we had like “Friends” and “Everybody Loves Raymond” started to weaken a little bit and people meter impact exacerbated that situation. So, what we’re really enthused about is both of these shows have young male demos, men 18 to 34, adults 18 to 34. “Two and Half Men” is the number one sitcom on the air with both adults 25 to 54 and adults 18 to 49. So, we can bring some young men back to the station. Adults 18 to 34, 18 to 49 are the demos that advertisers are looking for on a spot basis. So, this is going to freshen our lineup in both early and late fringe and that’s really what we needed. And our major competitor elected to buy at very high prices, the second cycle of “Everybody Loves Raymond” and the third cycle of “Seinfeld.” So, while those are terrific shows, they are going to be a little bit long in the tooth. So, we think we can come in and compete very effectively with these two shows.
Q. With the potential to measure viewing audiences or the viewing audiences of the commercials rather than just the programs by Nielsen, how do see that changing the mix, is it all risk or is it potential plus?
A. It comes down to this. We think television advertising still works, sight, sound and emotion, and we will have that kick in mostly on the network level first and it will certainly be something that advertisers look at. But we don’t see any near-term impact on that. It will affect the perceived supply of impressions, but we’ve been seeing these kinds of things for a number of years, the reduction in the impressions. And what we are seeing right now I think is weakness in some key categories. So, the demand side of the equation has been a little bit weaker. Just like with DVR penetration increasing slightly, this has been a subject of negotiation in the upfront marketplace. But we don’t see any immediate impact on this to our business.
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