Bear Stearns Media, Entertainment and Information Conference
March 5, 2002
Dennis FitzSimons, President and
Chief Operating Officer
Thanks, Kevin. We're glad to be here. Palm Beach for Chicago
is a good trade this time of year. The timing couldn't be
better to talk about the media industry, and why we think
Tribune is especially well-positioned. At the heart of our
company are strong, mass media franchises which give us the
ability to deliver for advertisers. Our focus on major markets
is intentional-advertisers have to be there because 50% of
all consumer expenditures made in the U.S. are made in the
Top 10 markets; we are in eight of those markets.
Unfortunately, during a recession like this
one, major markets are hit the hardest, as slowing employment
impacts classified recruitment advertising.
But these markets also rebound more quickly
as the economy improves. And right now, business is looking
a little better. In television the year started slowly, with
January and February results down, as we anticipated. But
March has been steadily improving. March TV station pacings
are up in the mid-single digits.
In newspapers, we've seen steady improvement
since the year began. In the first 3 weeks of February, ad
revenue was down in the high single digits, an improvement
from January's 12% drop. Classified declines have lessened,
and March will benefit from this year's earlier Easter, which
is a strong driver of retail advertising.
Don't get me wrong. These are not numbers to
get excited about -- but they are going in the right direction.
Overall, the first quarter will still be a challenge and we
expect that things will continue to improve throughout the
year. And with the tight cost controls we've put in place,
we expect earnings growth even if revenue for the full year
is flat. Cash expenses will be down about 2% this year, reflecting
moves we made in 2001 including staffing cuts, a Voluntary
Retirement Program, outsourcing, and salary freezes.
These cost cuts are in addition to the ones
we made in 2000, so we're now looking at a significantly lower
cost structure which means that when revenue growth does return,
it will fall quickly to the bottom line. The biggest cost
cuts have been in our publishing group, which accounts for
65% of Tribune's operating cash flow.
But given the focus of this conference, I'll
be talking a lot about broadcasting today. The recent Court
decision vacating the cable/broadcast cross-ownership rule
and remanding the broadcast ownership cap to the FCC was welcomed
by many in our industry. And from our point of view, it was
encouraging, given our opposition to the newspaper/broadcast
cross-ownership rule.
After the cable/broadcast decision, which many
thought had some rationale, it's hard to imagine the FCC not
eliminating the newspaper/TV cross-ownership restriction.
But many media companies-Tribune included-have
been anticipating these changes in the regulatory environment,
and have been building their businesses accordingly. This
is just the natural course of events in a media marketplace
that continues to fragment. The recent court rulings will
give media companies more opportunities to re-aggregate audience
share and at the same time continue to improve operating efficiencies.
In short, consolidation will continue-but probably not as
fast as some headlines would have you believe.
Anticipating deregulation, we've made a number
of moves in recent years:
Two years ago, we acquired Times Mirror and
became the only media company with newspapers and television
stations in the top 3 markets of NY, Chicago and LA. This
also positioned us to launch Tribune Media Net, and provided
national reach for our Interactive businesses.
In the 1990s, coming out of the last recession,
we built our TV group at some very reasonable prices, acquiring
17 stations at an average multiple of 8X operating cash flow.
More recently, we've focused on duopolies,
because two stations running on one infrastructure improves
both the stations' competitive position and margins. We're
well on our way in Seattle, New Orleans and Hartford. As we've
said all along, we're looking for additional acquisition opportunities
in the top 30 markets, and we'll "double up" wherever
we can. Our overall reach is 38% of U.S. television homes
but for FCC purposes we're at 28%, so we have room to grow
no matter how the cap ruling is ultimately decided. Growing
our television station group is one of our top priorities,
and the recent sale of our Denver radio stations will provide
$180 million towards that end. We felt we didn't have scale
in our radio business, with only WGN and the three station
cluster in Denver. We thought is was time to put that money
to use in TV where we do have scale.
We're believers in the power of local mass
media and Tribune has some of the strongest local media franchises
in the country. Local mass media is the most efficient way
for advertisers to geographically target their customers,
to build their brands and move their products. Local advertisers
like grocery chains, automobile dealer groups and retailers
need to reach the broadest possible audience in their selling
areas. Even national advertisers like movie studios and fast
food chains need local media outlets to reach audiences in
specific markets at specific times. That's what local TV can
do.
As investors look to the future, it's important
to recognize the differences between national and local media
options and how advertisers access those options. Today there
are seven over-the-air networks and dozens of cable networks.
But for advertisers, these are all national network options.
For advertisers looking to reach a mass audience in specific
major markets, the options are not nearly as great. And that
makes Tribune's local TV franchises more valuable than ever.
But we continue to hear investors express concern
about audience erosion-especially about broadcasting's loss
of audience share to cable and what it might mean to our revenue
share going forward. Audience erosion is certainly an issue
for everyone but much more so in the national marketplace,
because cable itself is primarily a national network medium.
Cable can't compete nearly as effectively on the local level.
Let me explain…. To a national network advertiser, cable
can be a reasonable substitute for network television because
both cable and network television are selling basically the
same thing: commercials that reach a national audience. Broadcast
reaches 100% and cable reaches about 80% through both wired
and DBS homes. On a network basis, cable's revenue share tends
to correlate with its audience share. But, to a local advertiser,
cable isn't even a reasonable substitute for local broadcast
television.
Let's look at the Chicago market as an example,
and see how an advertiser who specifically wants to reach
Chicago-area consumers - and only Chicago-area consumers -
might go about buying advertising time. According to Nielsen,
broadcast has 58% of the viewing audience, cable has 42%.
Advertisers access the broadcast slice through commercial
television stations. The cable slice is bought via what is
called the local area cable interconnect.
The interconnect has two minutes of commercial
time per network for advertisers looking to reach Chicago.
The remaining 12 minutes of commercial time is sold by cable
networks on a national network basis. For comparison purposes,
our stations have 12-14 minutes per hour to sell, with the
exception of prime-time.
Obviously, pay cable has no advertising. Not
so obvious, however, is that the interconnect doesn't insert
local advertising on a great many of the niche networks. Next,
take out the networks aimed exclusively for kids like Nickelodeon,
Cartoon Network and the Disney Channel. The interconnect doesn't
reach all cable systems. The interconnect also doesn't reach
DBS homes. In the end, what's left for a local advertiser
in this case is just 11% of the viewing in the Chicago market.
42% of the Chicago area market may be viewing cable networks,
but advertisers can only buy locally-originated commercials
in 11% of that market. This is why - in the local marketplace
- cable's revenue share doesn't... and won't ever... correlate
to its audience share. The limited reach and limited local
inventory available to the local interconnect just doesn't
allow it.
Sometimes, especially in specific areas such
as news, even cable's audience share can't compete significantly
with local broadcast television. For example, on a weekly
average, one spot on WGN's Prime Time News delivers almost
4 times as many households as all the cable news services
combined.
It's pretty clear that local advertisers have
far fewer options than national network advertisers for reaching
their targeted audience. So, when it comes to revenue share
in spot TV, local broadcast television is strong, and will
continue to be strong into the future. And it's why, when
the economy turns around, our large-market stations will rebound
quickly -- just like they did coming out of the last recession.
Fragmentation also is a concern we hear often
about newspapers. But even in today's fragmenting media environment,
newspapers reach more than half of the adult population on
an average weekday. They are a great mass medium delivering
the high-income demos that advertisers want. Last month, 87
million adults watched the Super Bowl, while 132 million adults
read that Sunday's paper. And consumers look to newspapers
as the best source for in-depth, relevant news and information.
And given the events of the last six months, that's never
been more important or more timely.
Many of you watch circulation trends, but the
focus should be on readership. After all, a newspaper that's
not read doesn't do anyone any good. At the same time a newspaper
that's read several times is much more valuable than a circulation
number would indicate. The latest readership study for the
Chicago Tribune showed that fourth quarter readership is up
across-the-board. Average weekday readership was up 10% and
on Sunday, it was up 2%.
We're also developing new tools for enhancing
readership. We're starting to implement some of the "best
practices" we've developed on the broadcasting side of
our company. One area is in-paper promotion - we're treating
it more like on-air promotion at our television stations.
We're more heavily promoting same-day content in our newspapers
to increase readership and working to increase awareness of
upcoming content. In a fragmenting environment we're promoting
ourselves by using our own medium better. Coming from the
broadcast side, self-promotion to consumers comes easier to
television stations. Our newspapers are just starting to do
it and it's going to be much more effective in building our
readership.
While our newspapers and TV stations are the
foundation of our company, we have several other strategies
for growth.
First, there is WGN Superstation, which now
reaches more than 56 million cable and satellite homes. And
by using out 23 stations' $200+ million syndication programming
budget as negotiating leverage, we've put a good national
programming schedule on the superstation that delivering an
attractive audience for advertisers. Perhaps some of the most
attractive programming we supply to ourselves is the Cubs.
The 75 games on the superstation have some of the highest
ratings. And, by taking control of national distribution to
cable operators from United Video last year, we have added
a subscription revenue stream that will grow over time. As
the national cable ad market improves, we expect to see both
revenue streams grow over time.
We recently announced key management changes
in this division. Michael Eigner, President of Tribune Cable,
will be retiring after a distinguished career and many contributions
to Tribune Television. Taking over the leadership of WGN cable
is Bill Shaw, who was president and CEO of Fox Television
Sales, the Fox/Petry joint venture, prior to joining Tribune.
Bill's management skills and marketing expertise will drive
further growth for WGN Superstation. Our intent is to get
WGN Cable to the top tier of cable networks and use our retransmission
rights to make that happen.
Tribune Entertainment is another important
piece of our broadcasting growth strategy. TEC is the industry's
largest producer of first-run "action hour" programming
and a significant program supplier to our own station group.
"Mutant X," which premiered successfully in the
fall, and "Gene Roddenberry's Andromeda," are currently
the highest-rated weekly hours in first-run television syndication.
And, as you may know, the back-end syndication rights to "Earth
Final Conflict" have been sold to the Sci Fi channel.
In total, TEC is distributing nine series representing 15
hours of programming per week.
We're also diversifying TEC's revenue stream.
One way is by handling national advertising sales for production
companies such as Vivendi Universal, FremantleMedia North
America and Hearst Entertainment. This has enabled us to double
our barter sales over the last two years. Secondly, we have
launched Tribune Studios in Hollywood to lease stage space
and production offices. We have the first all-digital studio
lot in the U.S., with five state-of-the-art production stages.
Moving to our growth strategies in publishing,
we are intensely focused on help wanted advertising, our largest
classified category. We have an aggressive print and online
strategy, anchored by our newspapers and CareerBuilder, the
online recruitment company we operate in partnership with
Knight Ridder. In 2001, CareerBuilder acquired Headhunter.net,
which more than doubled CB's revenue and employer customer
base. We needed that scale to better compete with the online
category leader Monster.com.
To accelerate CareerBuilder's progress, yesterday
we announced a new management team lead by Bob Montgomery,
former CEO of Headhunter. Bob and his team are intensely focused
on sales, execution and operating efficiencies which will
take CareerBuilder to the next level. We've got great momentum
and with our cross-promotion capabilities, we'll continue
to grow our share of the growing online market.
Finally, Tribune Media Net continues to build
momentum. As you know, TMN is going after national ad dollars
by using its ability to link our newspapers, TV stations and
interactive sites. In 2001, the group produced nearly $34
million in incremental revenue, despite the difficult ad environment.
The two areas that have worked for us and have the most potential
are 1) using our strength in Chicago and LA to drive advertisers
into our smaller-market newspapers and 2) cross-media sales.
Our most recent example of cross-media sales
is an innovative partnership with General Motors, which uses
all of our newspapers and all of our television stations.
The arrangement is based on increasing the share of GM dollars
that go to Tribune media outlets. And without going into specifics,
I can tell you that GM has incentive to increase spending,
and we gain market share. It's a win-win package that we think
other advertisers will find appealing as well.
In conclusion, let's look at the big picture.
Tribune's local mass media franchises -- 23 television stations,
11 local newspapers, more than 50 Web sites -- reach more
than 80% of U.S. households. Our newspaper-TV combinations
in the country's Top 3 markets, enable us to deliver audiences
in a way few other media companies can. We've also got a strong
balance sheet and financial flexibility and that gives us
the potential to grow and to position Tribune in a deregulated
environment that will make the media landscape very interesting
in the next few years.
Thank you. Now here's Don with a short financial
recap, then we'll be happy to answer questions.
Don Grenesko, Sr. VP/Finance &
Administration
Thank you Dennis and good morning everyone.
For planning purposes, we're assuming flat
revenues for 2002 with a pick-up in the 2nd half of the year.
Because of the difficult economy, our focus will continue
to be on cutting costs, as it was last year. On the cost side,
our 2002 plan calls for consolidated cash operating expenses
to be down 2% next year, and corporate expenses will fall
by 12%. A lot of this is related to the cost-cutting measures
we announced in the 2nd half of last year, including staff
reductions, outsourcing programs, salary cuts for senior executives
and a wage freeze throughout the company.
On an operating basis: 2002 cash flow and earnings
should grow in the low-single digits, even with flat revenues,
because of the 2% reduction in cash expenses I mentioned.
If the economy recovers quickly, earnings could increase in
the high-single digit to low double-digit range.
With that in mind, we're comfortable, we will
be within the current range of 1st Quarter and full year analysts'
estimates, with the 1st Quarter being our toughest comparison.
On the balance sheet side, we began 2002 with
$3.4B of debt, and despite the difficult advertising environment,
we still expect to reduce our debt by $400 million by year-end
by using our strong operating cash flow which should be around
$1.3 billion.
This assumes no dividend increase and capital
expenditures of $275 million, about the same as last year.
Our debt ratios will continue to improve throughout
the year and our year-end debt/EBITDA ratio of 2.3x and debt/total
cap of30% are stronger than many of our media and entertainment
peers. That provides us with a lot of financial flexibility.
:: :: ::
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.
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