back | home

Transcript

UBS and Credit Suisse First Boston
Media Week Presentations
December 8, 2004

Dennis FitzSimons, President, Chairman and CEO

Thank you. There’s no doubt this has been a challenging year for our company -- one we won’t be sorry to see come to an end. But, it’s good to be here today to tell you about the progress we have made on a number of fronts. And also to tell you we are very positive about our future. Our management team is working to position Tribune for better results in 2005.

The newest member of that team is Scott Smith, who will take over from Jack Fuller as president of the publishing group on Jan. 1. Some of you know Scott from his days as corporate CFO. For the last 7 years he’s been CEO & publisher of the Chicago Tribune and prior to that headed the Sun Sentinel in South Florida -- two of our best-performing newspapers. You’ll hear from Scott shortly, as well as from Pat Mullen, president of our broadcasting group. Don Grenesko and Jack Fuller are also with us for Q&A.

As you know, Jack is retiring at the end of this year after a long and distinguished career with our company. We thank Jack for his many contributions and the strong advocacy he provided for quality journalism.

Now, let’s turn to our performance, starting with a brief recap of 2004. This was not the "recovery year" that we had looked for. Like you, we were disappointed with our growth, as the uneven advertising environment seemed to impact major markets more than smaller ones.

On the TV side, the year began with expectations of a strong ad market due to inventory tightening that usually accompanies Olympics and elections. Instead, many advertisers just avoided the Olympic period altogether. Political spending was concentrated in the "swing" states, which did not include New York, California and Illinois, home to our 3 top TV stations.

In publishing, results have been mixed. As you know, one of the biggest issues we’ve been faced with has been the weakness in national advertising. Given our major market footprint, national contributes about 25% of publishing ad revenues, compared to a peer average of 17%. So the impact of slowdowns in the movie and high-tech categories -- particularly in LA -- were significant.

But there has been some good news. Across the group, our preprint strategy is producing excellent results, with revenue growth of 9% through 11 periods. And recruitment advertising is up 12%, driven by our integrated print and online strategy. CareerBuilder has had a terrific year, and network revenues will be up almost 75% for 2004. Some of our individual newspapers -- like Baltimore and Chicago -- have performed well, with ad revenue growth in the 5% range. And at the Hartford Courant, ad revenue is up 11%. Our other newspapers have shown good progress, but we’ve clearly had big challenges in LA where ad revenue was up 1% and New York, where we’ve had to deal with the circulation fraud.

What happened at Newsday and Hoy/NY was unethical and wholly out of character with Tribune’s history of business integrity. However, we moved quickly to address the problems.

Here’s a summary what we’ve done:

• We’ve terminated those involved in the circulation misstatements at Newsday and Hoy, a total of 16 people so far, and our investigation continues. New publishers at both papers are in place: Tim Knight at Newsday and Digby Solomon Diez at Hoy. And they have new management teams in place, too.
• Instituted new quarterly certification requirements. Our publishers, CEOs and circulation directors are required to attest to the accuracy of their circulation numbers and to the fact that ABC rules have been followed.
• We modified our compensation plans. If individuals engage in unethical behavior or manipulate numbers in any way, they will not only be terminated, but we can go back and rescind stock option grants and revoke bonuses.

We’ve made good progress with Newsday advertisers. So far advertisers have signed more than 20,000 settlement agreements. More than 75% of the top 350 advertisers have either signed agreements or agreed in principle to accept our offers. And that includes all of the top 10 accounts. We believe that the $90 million pre-tax charge that we recorded in the second and third quarters will be adequate to address these settlements.

We’ve completed internal audits at our other major newspapers. That gives us confidence the problems in New York were isolated incidents. But, we’ve further tightened circulation procedures and standardized a number of those procedures across the group. This week we named a group VP of circulation and Scott will tell you more about that. And we’ve increased the role of the finance department in circulation activities at all Tribune newspapers.

And throughout all this, Newsday’s journalists have been given the freedom and resources to go after the story, wherever it takes them. Re-establishing trust with our readers is paramount.

During this process, the goal of the management team at Newsday has been to not only complete the restitution process but to improve relationships with Newsday advertisers, which had been frayed over the years. It’s clear that despite the circulation misstatements, Newsday is still recognized as the best way to reach consumers on Long Island, with a penetration level of more than 50%, and that’s after the adjustments.

We believe the company’s response to the situation at Newsday and Hoy has been strong. We are proud of our new team at Newsday. They have bounced back, they have a sense of optimism and they are guided by one of Tribune’s core values ... integrity.

Our financial results also have been impacted by the challenges we’ve faced this year. Through three quarters we’ve taken charges related to staff reductions and to circulation restatements at Newsday and Hoy. This quarter, we’ll take a charge for staff reductions primarily at our East Coast newspapers.

However, our ongoing operations are strong. Excluding special charges, we will generate about $1.6 billion of EBITDA and $825 million in free cash flow. Over the course of the year we have repurchased a significant amount of stock, and, by year-end, we will see a net reduction of about 11 million shares outstanding. At year-end, debt will be about $2 billion, for a debt-to-cash flow ratio of about 1.3X.

This gives us a very solid financial foundation going forward.

As we look to 2005, our visibility is limited and given that the economy is still choppy, we’re not going to give specific revenue guidance for 2005. But we will tell you, our strong focus on costs will continue. Next year cash expenses will grow just 2%. Exclude the impact of increased retirement and medical costs, and higher newsprint prices, and cash expense will essentially be flat. We’ll look to do this by continuing to achieve greater efficiencies at our individual business units and through economies of scale across the company.

With that as background, let’s go to Scott and Pat. I’ll be back to wrap up and answer any questions.

Scott Smith, Chief Operating Officer/Tribune Publishing

Thanks, Dennis. You know, I’ve really missed this annual December ritual over the past few years, so it’s great to be back with you in my new role.

Over the past month, I’ve been talking with folks across our publishing group as well as some of you in Chicago. One of the questions that I’ve been asked frequently is about future priorities.

Obviously, with our recent financial results not living up to what you expect from us and also what we expect from ourselves, we need to create more value for you, our customers and all our employee owners. With that, these are our priorities:

• First, to grow responsive readership
• Second, to row revenue and ad share
• Third, to continuously improve efficiency across the board.

Our progress will come through a combination of innovation and disciplined execution. We are also very focused on making sure we have the right talented people in the right jobs.

Responsive readership is naturally tied closely to circulation so let’s start there.

It is a topic that has generated a lot of appropriate attention lately -- on circulation reporting, verification, composition and trends.

We’ve focused many of our very best people on assuring Tribune practices are clearly grounded in solid fundamentals. Vince Casanova, the Chicago Tribune’s head of circulation (and who earlier in his career was our corporate audit director) has coordinated these efforts. This week I named Vince as the full time group VP for circulation, reflecting the ongoing priority and his solid leadership in this area.

Now, before summarizing our plans, I’d like to put our position in today’s ultra-competitive media marketplace in context. Even with the recent circulation declines, our total group daily paid circulation stands at 3.1 million, with Sunday at 4.6 million. Our newspapers are also read by over 8 million adults on average each day and almost 12 million each Sunday.

That huge readership is at the same total level both daily and Sunday, as it was 4 years ago when we acquired Times Mirror. This reflects our focus on responsive readers, not just paid copies. Our daily papers reach 45 percent of all adults in our major markets every week, including over 40 percent of all young adults 18-34. That’s a fact that surprises many since it doesn’t include RedEye and amNewYork that explicitly target younger demo.

The challenge going forward obviously is to make sure we keep delivering broad, high-quality readership that is the most responsive readership to advertiser messages and also serves our community needs.

The top priority is to grow our most valuable customer base, home delivery subscribers, which already account for more than 70 percent of daily and Sunday sales. We intend to do that primarily by improving subscriber retention.

Better circulation systems and the science of database marketing already are producing retention gains for us in several of our markets. In 2005, we expect to make real progress at the Los Angeles Times, where the database has just gone live. The Chicago Tribune also will launch a robust  -- subscriber advantage program -- as part of a broader consumer marketing initiative, both in print and online.

We are also looking at ways to increase the frequency of single copy purchases by better matching distribution to today’s consumer patterns. For example, the Tribune is now sold at all Wal-Mart stores across Chicagoland.

And finally, we are limiting circulation reported in the "other" paid category to copies with clear readership and value. Our "other" category is also already a lower percentage than many of our peers.

We also believe that there is real value in readership where much of the circulation is not paid. That’s true for amNewYork and RedEye, which currently have a combined weekly reach of more than 1.2 million people, over half of which are young adults. Ad revenues for the two papers will top $15 million this year with good growth ahead.

For similar reasons, we are converting Hoy to a controlled circulation model in both Chicago and LA, where free copies will be distributed in Hispanic neighborhoods of high value to advertisers. Hoy New York will remain a paid edition and circulation of all three editions will be verified by ABC.

We are clearly delivering the audiences most responsive to advertising messages.

The Yankelovich research shown here reinforces how much consumers really value newspaper advertising. An overwhelming 90 percent of respondents said they would keep ads in newspapers even if they could get rid of them. They show far more enthusiasm for our advertising as valuable content than with any other medium.

Now, let’s turn to our initiatives for driving ad revenue growth.

First, we are working hard to reinvigorate ROP advertising across the retail, national and classified display categories.

We’re offering enhanced products. Advertisers want more color and pay a premium for it, so we’re increasing color capacity at our largest newspapers. The LA Times will have a 33% increase in color on stream in early 2005, followed by Chicago and South Florida.

We recently ran a series of creative ads for Motorola in the Chicago Tribune to launch their new Razr V3 cell phone and take branding dollars from other media. They included a bag wrap for the paper, full-page color ads and innovative "shadow ads" that appeared on the stock tables.

In addition, Tribune Media Net recently sold New Line Cinema "Big 3 market roadblocks" that ran exclusively in the Tribune, the Times and Newsday to promote the most recent Lord of the Rings and Elf on DVD.

We are also offering more for local advertisers. In Chicago for example, the Tribune recently expanded the daily and Sunday Metro sections from four zones to eight. And with great work by our local sales team, part-run ROP revenue is up over 35 percent over the last 2 years.

Improving our share of preprint advertising continues to be a major priority as advertisers look for targeted and more flexible distribution for their messages. While growth may slow some in 2005 from this year’s 9 percent, preprints remain a long-term strategy with significant upside.

Next, let’s talk about the Internet, where revenue growth is up over 30 percent this year and we expect very healthy growth in 2005 as well. Online now represents 16 percent of our recruitment revenue, driven by the huge success of CareerBuilder. Cars.com revenues are also up over 30 percent this year. In the real estate category, customers go online and place ads themselves, generating meaningful new revenue.

The addition of ShopLocal.com will enhance our offerings to retail adverting clients such as Target, Sears and Home Depot. We just completed sales training in each of our local markets and early indications are that smaller retailers are also embracing Shoplocal.com.

So what does all this mean in terms of our ad revenue outlook for 2005? Most of our revenue contracts with major advertisers do not come up for renewal until at least early next year. Relationships with major clients are very good. The natural negotiations over price and volume tied to their goals and creative ideas we bring them are well underway. On balance, even with the mixed economic picture and somewhat lower circulation, we are quite optimistic that we that we will grow overall revenue from key advertisers. Our goal is obviously to earn a higher share of each client’s budget but with so much in flux we’re cautious in providing any specific guidance at this time.

Turning to the expense side of the equation, we remain committed to smart, aggressive cost management. With the circulation fraud at Newsday and the slow revenue growth this year in LA, we have taken out over $50 million in annualized expenses at these two papers alone, with additional expense reductions in other markets.

Looking ahead to 2005, two major expense challenges will impact us. First, higher benefit costs will account for over half of the increase on the compensation line next year. Lower FTEs from this year’s staffing reductions will moderate the impact of merit pay increases.

Second, higher newsprint prices will only be partially offset by lower consumption, so paper and ink expense will likely be up about the same as this year.

We will reduce all other cash costs so that total expenses increase more slowly than revenue. This should yield some margin improvement, with much obviously still dependent on economic conditions.

In summary, let me recap our game plan.

First, as Dennis described, we rebuilt the management team at Newsday and are confidant they’re making make great progress rebuilding customer relationships and this fundamentally very strong franchise.

LA Times management is also very focused on restoring momentum in their financial performance. We made great headway in the first few years following the acquisition and we are working hard to improve the ad revenue picture on the West Coast in 2005.

Across the group, we are committed to growing responsive readership, revenue and ad share. We will also control expenses smartly; as well as innovate and execute with consistent discipline.

By doing all that well, we intend to achieve the solid financial performance you expect from us in 2005 and beyond.

Thanks very much. Now here’s Pat.

Pat Mullen, President/Tribune Broadcasting

Thanks, Scott. As Dennis mentioned, a choppy ad environment, atypical political spending, and the Olympics came together to make this a challenging year for Tribune Broadcasting. We’re looking forward to 2005, a non-Olympics, non-election year, when our stations typically gain market share. We’ll be focused on driving improvements and managing costs throughout the year as well.

But before talking about 2005, let me make a couple of comments on our fourth quarter. TV revenues will be down slightly, with the auto category off just a bit. But we are seeing continued weakness in movies. However, we are seeing sustained good performance in the telecom and education categories.

The movie category is having the biggest impact on the fourth quarter, but we don’t believe the decline represents a trend. I met recently with the heads of the marketing divisions for the major studios in Hollywood and they reaffirmed their confidence in spot television as an important part of their marketing mix.

Maybe more importantly, we have heard there will be an increase in the number of releases in 2005. And since releases drive revenue in this category, this is very good news.

We’ll also continue to have tight control on expenses in 2005. Broadcast rights will increase only modestly, and we’ll increase efficiency and maximize economies of scale wherever possible. For example, our new digital Central Distribution Center will open in Indianapolis, serving as a single location for formatting and distributing all television shows airing on Tribune television stations.

This use of new digital technologies allows us to make significant gains in efficiency at all of our local TV stations while at the same time providing better overall quality control. Furthermore, the facility will function as a test bed for identifying similar opportunities in other parts of our broadcast operations.

In ‘05, we’ll also open a Regional Operating Center in Seattle, which will enable us to operate our Seattle WB and FOX stations as well as our Portland WB station out of one master control facility. And we’ll use this digital technology for similar opportunities in other markets.

Now, before turning to programming, let me briefly address the issue of Nielsen’s local people meters, which all of you have heard about. As a company, we remain very disappointed with the accuracy of the new system. We feel it over-represents suburban homes and older viewers, while at the same time it under-represents younger viewers, homes with five or more people and urban populations. These are important viewers to advertisers, and key demos for our stations.

The result is a system that does not accurately reflect the viewing tastes and preferences of a diverse population. Nielsen agrees that these problems exist; they’ve just not been effective in developing solutions. We’ll continue to work with Nielsen to find a satisfactory answers over the next year.

Now, let’s move on to programming with a look at the individual dayparts that deliver the majority of our stations’ revenues.

Starting with early & late fringe, our key sitcoms, Friends, Raymond, and Will & Grace, continue to be highly-rated, highly-competitive shows which should continue to perform well in 2005 for two primary reasons.

First, the launch of Sex & the City in all of our Tribune markets next fall will enable us to refresh our lineups in late-fringe. It’s a terrific show, and a perfect fit with Friends, Raymond and Will & Grace.

Second, other than Sex & the City, no other new programming is entering these time periods on competing stations, which will help us strengthen our existing lineups.

It’s also interesting to note that Sex & the City is not an off-network sitcom, but rather an off-pay-cable sitcom -- a new programming source for our stations. So looking ahead, we see both off-network and off-cable sitcoms as key programming sources. Additionally, we believe there’s opportunity to develop new first-run programming for these key time periods as well. With that in mind, last month we began discussions with the major studios about jointly developing new programming for our stations, and I have to say, there was a great deal of enthusiasm on both sides.

The second key component of our station revenue is prime time. It’s also the daypart -- along with local news -- that really defines a station’s brand; and for most of our stations, it’s the WB.

The WB overall is pacing about even with last season in the key young adult demographics. Much of the network’s success this year has been the strength of the returning shows and we expect them to continue their strong performance into 2005.

The WB’s most highly anticipated new show, Jack & Bobby, was originally scheduled opposite Desperate Housewives. Needless to say, a tough time period. Demonstrating its commitment to a solid show, the network has since moved Jack & Bobby to Wednesday nights following the highly-rated Smallville...and beginning in January, the network will re-launch the show with all new episodes which will focus on the younger characters. We’re pleased with the network’s decision to support, what in my mind is one of the year’s best new shows.

Now, let’s turn to news, where we’ve been expanding our local news broadcasts. This year, we’ve extended the morning news by an additional half hour in NY, Los Angeles, Chicago and Seattle.

Our local morning news ratings remain solid, placing either #1 or #2 in the key young adult demos in Chicago and Los Angeles. New York and our other markets continue to compete very effectively in this time period.

Finally, one of our best growth stories is the success of Superstation WGN. In the four years since we’ve taken over distribution, the Superstation has grown from 52 million homes to over 65 million homes, well on the way to expanding our distribution beyond 70 million homes. This generates more sub fees, as well as higher ratings, which in turn, drives advertising revenue.

So, in closing, here’s why we’re looking forward to a solid 2005:

First, it’s a non-political, non-Olympic year when our younger skewing stations increase their share of market revenue.

Second, we’re delivering quality programming to our core younger audiences. The WB Network is a solid performer with strong management ready to take it to the next level and we have the best off-network sitcoms in our key early and late fringe time periods, including Sex & the City this fall.

And finally, we have the continued growth of Superstation WGN and... a newly minted Satellite Home Viewer Act, which allows the Superstation to be seen in public establishments that subscribe to satellite, as well as in those that subscribe to cable. So now when you travel, you can go to the local pub and watch the Cubs play!

On that note, thank you very much... and I’ll turn it back to Dennis.

Dennis FitzSimons

As you heard from Scott and Pat, we believe there are opportunities throughout the company to improve our performance despite uncertain economic conditions. There has been a lot of talk about audience fragmentation and the impact it’s having on all media companies. But it’s important to recognize that it’s a challenge for advertisers as well. It’s also important to remember our newspapers and TV stations are still great vehicles for advertisers to reach the audiences they need to reach with geo-targeted, impactful messages. In tough economic times, advertisers look to media choices that produce results. Our strong local media brands can produce those results. But it’s up to us, in this day of more complicated audience metrics, to be committed to telling our audience story more clearly than ever before.

We’re also committed to clear, accurate communication. In today’s environment, credibility is essential. And credibility and integrity have been a strength of our company since its founding 157 years ago. That won’t change. So, going forward, you won’t hear us talking about future results. We will keep you updated on current trends with our monthly stat reports, but consistent quality results are the best way to generate investor confidence. Traditionally, Tribune has traded at a premium to our peer group. Right now we are trading at a discount. Our goal is to deliver results, and earn the to a multiple that reflects the quality of our people and our assets.

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

:: :: ::

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.