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Transcript

Credit Suisse First Boston Media Week
December 12, 2002

John Madigan, Chairman and Chief Executive Officer
Thanks Bill, and good afternoon everyone. Before I begin, I’d like to introduce the other Tribune executives you’ll be hearing from today. Dennis FitzSimons, our president, chief operating officer, and CEO-elect, who will report on how our businesses are performing, and our CFO, Don Grenesko, will update you on our financial picture.

After my pitching for Tribune for almost twenty years at these investor forums, I thought I would do something different this year. After all, things are relatively good from a performance standpoint, our stock is also performing well, and this will be my last "start" here as CEO. And besides, maybe you all need a break.

So today I want to spend my time focusing on the most important challenge facing the newspaper industry: growing readership -- an issue crucial to the very survival of every newspaper company in the country.

Throughout the industry there are some really exciting things being done to increase readership -- more than at any time that I can remember over the last 30 years. Tribune, Knight Ridder, Gannett, Dow Jones and McClatchy, to name a few -- we’re all launching new products or redesigning old ones, rethinking circulation strategy and attacking in-paper promotion like never before.

And it’s not just at Tribune -- we don’t have a monopoly on the good things going on. I’m so excited by what I see, let me spend a moment talking about some of the things being done by other media companies:

• Knight Ridder initiated a new circulation strategy, reducing the price of many of its newspapers to spur growth;
• Dow Jones’ redesigned the graphics lay-out of The Wall Street Journal, and began publishing the popular "Personal Journal" section several days a week;
• McClatchy made some big changes in design and content at The Sacramento Bee and Raleigh News & Observer;
• At Tribune, we took a radically new approach to the in-paper promotion of our news content. At the corporate level, we created the position of vice president/brand management, and appointed an experienced broadcast executive give our promotion a fresh look;
• We also launched a new product that’s generating a lot of excitement -- RedEye, a special tabloid edition of the Chicago Tribune aimed at young readers and non-readers.

You may wonder what’s behind all this change... and why is it happening now? A lot of it is the product of the normal long-term planning that goes on in our industry. But there is also something new, something very exciting: The Readership Institute.

The Readership Institute is Part of the Media Management Center at Northwestern University. The Institute was founded upon the belief that with some sophisticated research and study -- and most important an actionable plan for executing real change -- we could reverse the readership trends of the last thirty years.

And that’s not just a bunch of rhetoric. The Newspaper Association of America, the American Society of Newspaper Editors and the McCormick Tribune Foundation have put a lot of time and money and into the work being done by the Readership Institute.

The first thing researchers at the Institute did was something no one had ever done before -- they talked to thousands and thousands of readers and non-readers in 100 newspaper markets across the country. 37,000 people, to be exact.

Researchers looked at how people read their newspaper and why... what readers got excited about, and what they hated... what bored them, what drove them nuts and frustrated them.

They also looked at the news stories themselves -- more than 70,000 articles -- and how readers reacted to them. Which stories worked and which didn’t, and why... and what got a reader to read on? To dig deeper into a newspaper?

They even looked at advertising -- the reason a lot of people pick up a newspaper in the first place -- to see what ads readers found attractive and interesting, and what ads they ignored or didn’t even notice.

All of this was done for one reason: Readership. Notice I haven’t used the word "circulation" once. There’s a reason for that: We’re all tired of being judged by circulation figures when "readership" is what really counts.

Readership is more comparable to the audience measurements of other media. Radio and television don’t sell advertising based on reach, they sell it based on time spent listening or viewing. Newspapers ought to be measured the same way -- after all a newspaper that is bought but never read does an advertiser no good.

Even Bill Drewry is starting to see the light. Just last month he wrote, "We believe readership is fast becoming the more relevant metric to gauge newspaper audiences for ad buyers and marketers alike."

And what moves readership? Here’s what the Institute found:

• Readers want more local, people-focused news;
• It is too tough to find the “good” stuff, the articles that people really want to read. Readers say they have a hard time navigating the newspaper;
• Much of the advertising is unappealing;
• Newspapers do a bad job of promoting their content—they don’t give readers a reason to dig deeper into the paper or read upcoming editions.

At our newspaper group, we’ve taken the findings of the Readership Institute seriously and we’ve been making changes based its recommendations. It is early, but we think it’s paying off.

In New York, Chicago and Los Angeles, readership at each of our newspapers is up. In fact, according to Scarborough, over the last year, readership at Newsday is up almost 5 percent during the week, and 1 percent on Sunday. At the Chicago Tribune both weekday and Sunday are up, too. And at the LA Times, Sunday readership is up.

I want to focus on content, navigation, and in-paper promotion -- and show you some of the things we’re doing.

In the area of content, one thing the study found is that readers want newspapers to do a better job covering lifestyle news: health and fitness, medicine, home, garden and real estate, food, fashion, beauty, and travel. That doesn’t just mean more lifestyle news -- it means doing more with it. And, it means making feature news easier for readers to find.

Earlier this fall the Chicago Tribune launched the "Q" section, which runs in the Sunday paper. (The "Q," of course, standing for "Qualities of life.") The section is devoted to lifestyle issues and news, and it has really caught on in Chicago.

In Los Angeles, we all know that entertainment and pop culture are very important. The writers, editors and publisher of the Los Angeles Times know it, too. That why the Times recently launched a new, user-friendly "Calendar" section, designed to present feature and entertainment news together in a more compelling way that is easier for readers to find.

We’re also promoting our content more aggressively than ever. Promotion has been largely ignored in the newspaper industry compared to other media. We’re changing that, both inside our newspapers and on our TV stations.

In the television industry, promotion is constant. Stations are constantly promoting their product on their own air. New shows, returning shows, news, entertainment -- it doesn’t really matter. "Coming up next..." is repeated like a mantra. The result is that viewers know where and when to tune into what they want to see.

Newspapers can do the same thing for their readers. Let me show you what were doing at some of our newspapers:

Here’s an example from the Hartford Courant. As you can see, this promotion teases stories that appear in that day’s newspaper as well as stories running later in the week.

Here’s an example of how the Chicago Tribune is promoting its new Sunday "Q" section. These promotional pieces run earlier in the week and serve to build the brand for the "Q" section.

Here’s a look at the new Calendar section of the LA Times I mentioned earlier. Notice the promotional material at the top of the page, designed to entice readers to dig deeper into the section.

And at Tribune Company, we have the added advantage of being able to promote the content in our newspapers on our television stations. That is especially important in the large markets we’re in like Los Angeles.

Now that is something few other "newspaper" companies can do.

All of these efforts though, are aimed at increasing readership among existing readers. If we’re going to grow readership significantly, we have to do more than that -- we have to develop new products. We have to figure out a way to reach people who never even pick up a newspaper -- especially younger people.

That’s why the launch of RedEye is so important! The Chicago Tribune already reaches 50% of the Chicago market between 18 and 34. But some people in that demographic just aren’t going to read it. But they will sample RedEye -- it’s a quick read, easy to digest.

It is also an investment in our future. We think RedEye will cultivate a whole new generation of newspaper readers, and eventually, we think they’ll move from RedEye to the Tribune as their needs change. That builds readership and market share.

And I want to point out how quickly we got RedEye up and running: We moved from idea, to concept, to prototype, and then to product launch all in under six months. Not bad for a lumbering old dinosaur of a media company!

The point of all this is that we’re changing the way we think about readership -- and we’re making very real changes at our newspapers to grow readership... very deliberately and in a cost-effective fashion.

We’re investing for the long term... and we’re putting some of our best and brightest people to work on growing readership. And the efforts of the Readership Institute are helping guide the way. Not just for Tribune, but for the newspaper industry as a whole.

And you ought to know about it. Many of you tend to think of newspaper companies as dinosaurs. Well, as Dennis said at another forum: "Don’t underestimate the dinosaurs... after all, they ruled the earth for millions of years!"

And with that kind of archeological "dig," I’ll turn it over to Dennis who will give you a look at the financial performance of all of our operating groups -- publishing, broadcasting and interactive. Dennis??

Dennis FitzSimons, President and Chief Operating Officer
Thanks John. It’s a pleasure to be here with you today. With John’s comments about readership as a background, I’m going to get more specific about Tribune’s growth agenda in both publishing and broadcasting. You’ll notice a couple of recurring themes: margin improvement and speed.

First, let’s take a look at 2002. When we presented at this conference last December, we knew we were facing a challenging year. Advertiser budgets were uncertain, and no one was projecting near-term improvement in the employment picture. So our plan for the year was to do more on the cost side, and to make investments that would set us up to grow the top line when the advertising environment improved.

That plan has paid off. In the first half of the year, consolidated EBITDA grew 6 percent on a 2 percent decline in revenues. In the third quarter, we generated $378 million in EBITDA -- a 45 percent gain from 2001 and a new third quarter record. And, we should finish 2002 on a strong note, setting new records for both fourth quarter and full year earnings per share.

In publishing, despite flat revenues for full year 2002, group cash flow margins have improved four percentage points to about 26 percent. Television cash flow margins will be about 40percent, improving more than 2 percentage points over last year.

As you can see, we are well-positioned going into 2003. So let’s look more specifically at each of our lines of business:

Starting with newspapers, which represent about two-thirds of Tribune’s cash flow, our priority will be top line revenue growth. We’ll pursue that growth through:

• continued expansion of our preprint business,
• more national advertising through Tribune Media Net, and
• new products that build off our core media brands and infrastructure.

Preprints continue to evolve as an important targeting option for advertisers which is why we’re investing in more sophisticated zoning and insertion capabilities. And we know these investments pay off -- by broadening the advertiser base for preprints and driving revenue growth. Take Chicago for example. Five years ago our preprint business was dominated by a few key categories -- food, discount retail, restaurants. Today, we have high end retail, electronics and telecom added to that category list. Our revenue has grown from roughly $100 million to $145 million in five years, with over a 60 percent market share against ADVO and other competitors.

And we’re only beginning in Los Angeles, where we currently have just one-third of the preprint business. With the investment we’ve made there this year, we’re looking to generate about $75 million in new incremental revenue over the next several years, and move our share closer to where we are in Chicago. Next year we’ll be investing in new facilities in South Florida, with the goal to grow the Sun-Sentinel’s share of the preprint market by 10 points over the next few years.

We’re frequently asked if preprints are cannibalizing our ROP retail business. The answer is that preprints and ROP are two very different advertising strategies, and we win either way. ROP is long established as an advertising vehicle of immediacy and impact. Pre-prints have grown in recent years because

• Advertisers are making more sophisticated decisions on how they want to go to market and we’ve responded by providing them more options to meet their needs.
• Those advertisers understand that pre-prints have a unique appeal. Newspaper readers perceive that we deliver the local mall to their doorstep, conveniently, consistently and with real, quantifiable value. Advertisers see the results.

A second focus for Tribune Publishing is the continued growth of Tribune Media Net. TMN’s mission is to expand the role of newspapers in advertisers’ overall media mix, particularly in brand building. In its first year, 2001, TMN delivered $34 million in incremental revenue, from national and cross-media advertisers. They will deliver $60 million this year, and project to grow to $70 plus million in 2003. TMN’s efforts, along with our multimedia strength in the top 3 markets enable Tribune to tap into national advertising and promotional budgets to which our peers may not have access.

Finally -- as John described earlier -- we’ve made some aggressive readership moves in our newspaper group:

• First, with new products aimed at targeted segments of our audience, such as Newsay’s Hoy!, RedEye at the Chicago Tribune, and Chicago magazine, we’ll expand our share of overall local ad dollars.
• And second, we’ve put new emphasis on promoting the content in our newspapers, using the same kind of strategies to drive readership that we’ve used to drive ratings in the broadcast business.

This is about competition. We recognize that advertisers’ media options will continue to evolve and become more targeted. We see this pattern of fragmentation and brand extension not only in media, but also across industries like packaged goods and retail. So we’re taking a lesson from magazines and others to extend our strong franchises to new brands. We can create these new products on a cost effective basis using our existing infrastructure.

For example, RedEye makes extensive use of resources from the Chicago Tribune, including editors and writers. We’re also using their ad sales staff to jumpstart RedEye’s revenue -- so far they’ve generated about 75 percent of sales. In addition, we draw heavily on our highly recognized online event guide in Chicago called Metromix. RedEye contains four pages of Metromix content every day, and a full Metromix supplement every Wednesday. With these resources, we’ve been able to launch RedEye without adding a lot of staff, and, have realized the added benefit of having longtime employees feel personally invested in the excitement and success of this new product.

Moving to television, our growth strategy is also about building from a strong base. Tribune Broadcasting operates 24 stations in 20 markets, with a national footprint covering 39 percent of U.S. TV households. With WGN Cable, that reach grows to 80 percent. Increasing our scale in station ownership remains a high priority as we look to expand our national footprint with new markets, and to create two-station clusters in markets where we can.

Our acquisition of a second station in Indianapolis demonstrates the value we can create with two-station clusters. A recent example was Sunday, December 1st. We aired NFL football on our Fox station, and Indiana basketball on our WB station, achieving a combined 21 rating, 40 share. That more than tripled the combined rating of the four other Indianapolis stations combined. Two station clusters provide the opportunity to cross-promote, reduce back office expenses, improve program buying power, program scheduling, and ultimately market share. Combining all these factors, given the right market conditions we see margin improvement with two station clusters of between 6 and 10 points.

We currently have four two-station clusters, three of those are WB-FOX combinations. We also see value in combining operations of a traditional Big 3 affiliate with a WB or Fox station. The opportunity here is to fill news time periods on two stations with only one news department.

Seventeen of our 24 stations are WB affiliates, our partnership with the network is providing strong momentum for audience and market share growth. The network just had its best sweep month ever in November, growing 23 percent in men 18-49, and17 percent in women 18-49. Our syndicated programming is also performing well. These rating gains translate into increases in our stations’ share of revenue in their markets.

WPIX here in New York is an excellent example. The WB11 is having a great year. Prime time ratings are up versus last year with major gains on Wednesday night (+40 percent) and Sunday night (+25 percent). Our syndicated lineup is also performing well, with strong numbers for ‘Friends’ and for ‘Everybody Loves Raymond,’ which is up nearly 15 percent in its 2nd season. Our newest sitcom addition, ‘Will & Grace,’ is also working well, increasing its time period delivery by nearly 20 percent over last year. The WB11 achieved these gains despite strong competition from a two station cluster, which on a combined basis has actually lost 8 percent of its audience share.

And we’re having similar success across our other 16 WB affiliates. Given this kind of November ratings performance combined with a healthy ad market, we look for television revenues to be strong next year. And on the expense side, we’ve got a tight handle on programming costs.

With our ownership of newspapers and television stations in the top three markets, as well as in South Florida and Hartford, Tribune has been a leader in executing on a major market multimedia strategy. We’re often asked by investors to be more specific about this topic. It’s sometimes difficult to quantify, but here’s a fact you’ll find interesting. On election night in November, our stations in both Chicago and Los Angeles were number one in primetime with election coverage. Is this directly attributable to the resources from our newspapers in those markets? Not sure, but its never happened in LA before, and we’re very proud of the depth of coverage we are able to provide our viewers.

Lets move now to our interactive group. The headline there is that Tribune Interactive is now profitable. It’s our smallest division, yet perhaps our biggest story because the turnaround has been so dramatic. In the last three years, Tribune Interactive has improved its cash flow by $58 million, with a $29 million increase in revenue and a $29 million decrease in expenses. Here’s how we got there:

• Positioned the online business more closely with our newspapers to guarantee two things: One, that the full promotional leverage of the newspapers would be brought to bear on our interactive product. And two, that we could leverage the sales from print to online, particularly in the key classified categories of employment, auto and real estate.
• On the cost side, we reduced headcount by 25 percent. We also scaled back operations to match the revenue opportunity, and introduced common technology platforms that significantly cut overhead.

In closing, I’d like to summarize the fundamental strengths that will drive Tribune’s growth in the coming year.

• We’ve got an excellent management team that has managed through two very tough years in the media business. You may recall that 140 of our top managers took a 5 percent paycut in 2001, and received no bonuses. That enabled us to implement a pay freeze for the rest of the company. We don’t know of another company where that occurred.
• We have a strong ability to execute, in good times and in bad -- during this downturn, we’ve significantly streamlined our company. Margin improvement is the result in all of our business groups, and we are well-positioned for next year. That enables us to generate significant cash flow, and to continue to reduce our debt. Since the Times Mirror acquisition, we’ve cut our debt in half -- from $5.5 billion to $2.8 billion.
• We’re taking the offensive by extending brands and using our existing infrastructure and editorial expertise for new products. We’re innovating to increase our share of readers and of advertising dollars -- all of which should accelerate top line revenue growth.
• And finally, we’re moving quickly to make it happen

Now, here’s Don...

Don Grenesko, Senior Vice President/Finance and Adminstration
Thank you, Dennis and good afternoon.

I’ll start with some highlights of our 2002 financial performance.

I’m pleased to say that we expect record earnings per share in both the fourth quarter and for the full year, and we’re comfortable with analysts’ consensus of 54 cents for the fourth quarter and $1.84 for the full year.

Ad revenue trends continued to improve in November; consolidated revenues rose 7%.

However, because of the timing of the Thanksgiving holiday, it’s best to look at November and December together for a more accurate picture, especially in publishing. Thanksgiving is a particularly strong week for retail advertisers but soft for classified.

So, in the six-weeks including November and the first two weeks of December, publishing consolidated revenues were up 5% compared to double-digit declines in the same period last year.

• Retail advertising was up 2%, national rose 14% and classified increased 3%.
• Help wanted continues to show improvement as it fell by only 7%, compared to an 8% decrease in October and a 16% decrease in September.
• Television revenues rose 21% in November, putting us on track for 20% growth in the fourth quarter.
• Interactive continues to benefit from strong growth in classified, with November revenues up 28% to $6.6 million.
• We’ve continued our tight focus on costs, so fourth quarter expenses will be flat.

Turning to 2003, we have some challenges on the cost side. However, we’re optimistic about achieving these significant goals:

• We plan to grow earnings per share in the low-double digit range, consistent with the current range of Wall Street analysts’ estimates.
• We should generate about $1.6B of EBITDA, and free cash flow of nearly $800 million
• We intend to continue to improve margins at our newspapers and TV stations.

As many of you have observed, a lot will depend on revenue growth. Assuming the economy grows at about 3%, we think the strategies that we have in place will enable us to grow our top line somewhat above that rate.

On the cost side, consolidated cash expenses will be up in the 5% range next year.

Three things are contributing to this increase. The first is higher compensation as the result of merit increases in 2003, which were suspended during the past year. Second, benefits are being impacted significantly by a lower pension credit and higher medical costs.

These two factors will impact business group expenses as well as corporate expense.

Finally, we expect newsprint costs to be up next year, compared to a decline of over 20% this year.

Since we’ve had a number of questions from you about our pension credit, I’ll quickly walk through our assumptions for 2003:

• Our return assumption will be 8.5%, down from 9% in 2002.
• We plan to lower our discount rate to 6.75%, down from 7.25%.
• As a result, our pension credit will likely be down over $40M compared to 2002. That’s an impact to earnings per share of about 7 cents.
• Our pension plans are still somewhat overfunded, so a pension contribution is not an issue for us in 2003.

Now, let’s take a closer look at our business groups.

Publishing revenues will grow faster than the industry’s because of additional preprint market share in LA and Chicago, a rebound in help wanted advertising, and continued improvement in national advertising, where Tribune Media Net plays a key role.

Publishing cash expenses are expected to increase about 4% due to the higher compensation and newsprint expenses I mentioned earlier. We anticipate average newsprint prices to be up in the mid-to-high single digits and consumption will be roughly flat. We will continue to benefit from pricing that is below industry average.

Our TV station revenue growth should also outperform our peers because of strong WB Network ratings and our lower exposure to political advertising.

Television cash expenses are expected to increase about 6%. This reflects the higher benefits costs I mentioned earlier, as well as compensation and commissions associated with higher revenues. Broadcast rights expense will be up in the low single digits as we cycle through the introduction of ‘Will and Grace’ during the first three quarters of 2003. Programming expense should then level off.

Tribune Interactive again is expected to post good operating cash flow margins, due to revenue growth and continued cost controls.

Moving to the equity line, we expect losses in the $15M range in 2003. This includes increased marketing expenses at CareerBuilder as they continue to invest in building their brand.

We expect debt to decrease from $2.8 billion at the end of this year to about $2.5 billion at year-end 2003, for a debt-to-EBITDA ratio of about 1.6x. We also plan to resume modest share repurchases in order to keep shares outstanding about flat.

We continue to track shareholder value added and return on capital very closely because of the strong correlation to stock price. We expect continued improvement in ROIC.

On that note, we’re ready to take your questions...

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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.