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Transcript

First Quarter 2001 Earnings
Conference Call
April 18, 2001

Ruthellyn Musil
Thank you and good afternoon everyone.

Welcome to our conference call to review first quarter earnings. Since our release went out just after the close of the market about an hour ago, we hope you've had a chance to review it. We've tried to accommodate those of you who requested email distribution, and the release can also be found on our Web site, Tribune.com.

Tribune reported first quarter earnings per share of 19 cents on a diluted basis, in line with First Call consensus and with the guidance that we provided when we released revenues last month.

Our speakers today will be Don Grenesko, Senior Vice President and Chief Financial Officer and our group CFOs. You may recall we recently made some changes in those positions, so let me take a moment to introduce Tom Leach, who is now CFO of the Broadcasting group. Tom has been with Tribune for 14 years in several financial and planning positions within Tribune Broadcasting, and most recently was a Vice President in our Corporate Development group.

He replaces Jerry Agema, who is now CFO of the publishing group, so Jerry is with us for the first time today in that capacity. Jerry replaces Phil Doherty, who was named CFO of the Chicago Tribune.

Brigid Kenney has not changed jobs--she is still CFO of Tribune Interactive and we're happy to have her with us today.

We're ready to get started, but let me first remind you that both our commentary and our responses may include forward-looking statements which are subject to a number of risks and uncertainties that we discuss in greater detail in our SEC filings. Our future results could vary materially.

During today's discussions, please keep in mind that our publishing and interactive results are on a pro forma basis, which assumes that the Times Mirror acquisition occurred at the beginning of 2000.

Now, here's Don.

Don Grenesko
Thank you, Ruthellyn, and good afternoon everyone.

Our first quarter EPS of 19¢, compares to 31¢ last year, but half of that decline reflects dilution from the acquisition of Times Mirror.

Cash EPS, excluding goodwill and intangible amortization, was 36¢ for the quarter and the acquisition resulted in 3¢ of accretion.

We reported consolidated revenues of $1.3 billion, operating cash flow of $315 million and operating profit of $203 million in the first quarter.

These are difficult times as the economy has slowed considerably since we put together our 2001 Operating Plan.

On a pro forma basis, our consolidated revenues declined 3% for the first quarter. As a result, we have been cutting costs aggressively in all of our operations. Expenses already are lower in all three business groups, and you'll hear specifics from each of the Group CFO's. One of our key initiatives is to accelerate the merger integration process to realize greater revenue and expense synergies than our plan of $130 million for 2001.

Tribune Media Net, our new national advertising sales force, is a key component on the revenue side. Even during this slowing advertising environment, Tribune Media Net is on pace to hit its target of $40 - $50 million of incremental revenue.

Their most recent cross media sale is with the Dish Network involving the Chicago Cubs, WGN Radio and CLTV. This advertising package combines in-stadium events and on-air sponsorship.

Since attracting new national advertising was a principal strategy behind the Times Mirror merger, we are encouraged by Tribune Media Net's early success.

And as we told you last month, we are reducing investments in both our ventures activities and capital spending. We will continue to fund profit-adding capital projects on a selective basis.

While it's difficult to predict how the economy will play out this year, operating comparisons will get easier as 2001 progresses.

For example, on a pro forma basis, Publishing operating profit grew 9% in the first half of 2000 vs. the first half of 1999, but decreased by 2% in the second half of 2000.

For this year's second quarter, we see the trends from the first quarter continuing and expect diluted EPS to be about 30¢ compared to 44¢ in last year's second quarter.

We are going to hold off on providing full year 2001 guidance at this time due to the uncertain economic outlook and until we can fully analyze the impact of our cost cutting measures, but we are encouraged by the Fed's action today of lowering interest rates another 50 basis points and the effect this move will have on the economy.

Our financial flexibility positions us well to weather the downturn and come out strong. Debt is currently about $3.5 billion. We expect it to increase to the $3.7 billion level as we continue to repurchase our stock.

During the first quarter of 2001, we repurchased 2.7 million shares and we are continuing our ongoing aggressive buyback program. Our goal is to reduce shares outstanding by 1-2% annually.

We are encouraged by the direction the FCC is heading on broadcast deregulation. It appears that the cross-ownership rule will be significantly modified, if not repealed, and we look forward to working with a business-oriented FCC on a variety of issues.

Finally, we believe strongly in our unique set of assets and our strategy to focus on major markets and deliver content in multiple ways. We're the only media company with TV/newspaper combinations in the country's top three markets. Importantly, we are building the multimedia company of the future.

Now, here's Jerry with an overview of Publishing.

Jerry Agema
Thanks Don. Good afternoon everyone.

Before I begin, please note that the growth rates I refer to are on a pro forma basis and have been adjusted to remove the impact of the extra five days at the seven newly acquired newspapers in this year's first quarter. This information is also located in the footnotes of the pro forma summary of revenues table, which is attached to the press release.

As Don said, slower advertising trends in the first quarter of 2001 have resulted in cost reduction programs throughout the publishing group.

Cash expenses, other than newsprint, for the quarter were down 1 percent. For the full year 2001, they also are expected to be below last year.

In the first quarter, our FTEs are down about 800-4% lower than last year-in large part to actions taken in Los Angeles, which were identified going into the merger.

We are holding open unfilled positions throughout the group and we are continuing to reduce staff through various actions this year.

Newsprint prices increased on average 18% from last year to a first quarter average price of $584 per ton, while consumption was 5% lower because of targeted circulation reductions, lower advertising volume and productivity improvements.

Newsprint suppliers notified us of a price increase of $50 per ton, effective March 1. However, all but two suppliers have moved the price increase effective date back to April 1.

Our average newsprint price continues to be below the industry benchmark prices. Additionally, given the consumption fall-off by U.S. newspapers, we believe the recent price increase is not justified and may not hold.

Other cost controls impacting our newsprint expense include web-width reduction and waste initiatives.

All of our broadsheet newspapers have or will shortly move to the 50-inch web. The Chicago Tribune converted last month, in conjunction with a major redesign of the newspaper that has been well received by both advertisers and readers. The South Florida Sun-Sentinel is scheduled to convert to the 50-inch web on April 29.

We've significantly reduced waste at the LA Times and at other newly acquired newspapers-saving about $600,000 from last year's first quarter.

Let's now look at the revenue picture, by market and by category.

Advertising revenues decreased 5% from last year. Retail was up 1%, but was more than offset by lower national and classified, which were below last year by 6% and 10%, respectively.

Retail was strong in food/drug and department stores. Preprint revenues were up 12% in the first quarter, so you can see why this is an area of significant opportunity for us.

National showed strength in auto manufacturers, but dot.coms, especially in LA and Chicago, entertainment/movies and financials were off.

The classified variance was driven by weakness in help wanted (-21%) with real estate (+2%) and automotive (-2%) flat to down slightly.

Now let's look at the Top 3 markets. In LA, ad revenues were down 8% with all three categories lower than last year, driven principally by lower help wanted, which was off by more than 20% and lower dot.com. Retail was off 4% due primarily to electronics stores, yet preprints were up again strongly in the quarter. National was down 8% due to lower dot.com, financial and movies.

In Chicago, ad revenues were down 10%. Retail was up 3% on strength in food/drug and hardware stores, primarily from preprints which were up 9%. National was down 12% due to dot.com, movies and media spending. Classified was off 17% as help wanted was down 33%. Real estate was a bright spot as it was up a strong 16%.

New York ad revenues were down 3%. Retail was about 1% lower while national and classified were down about 5% and 3%, respectively. In retail, department stores were strong and preprints were up about 9%. National was impacted by soft car rentals, insurance and auto. Both classified help wanted and autos were down about 2%, while real estate was up also about 2%.

As you can see, our $400M preprint business is strong and has significant upside potential, especially at the LA Times where preprints grew strong double-digits in the first quarter. Preprints currently represent 5 - 10 percent of advertising revenues in Los Angeles, compared to 15 - 20 percent at the Chicago Tribune. At this pace, preprints at the LA Times will play a larger role in overall advertising revenues.

As Don mentioned, a bright spot in the advertising picture for us is Tribune Media Net, which has sold or booked nearly $9 Million of incremental revenues this year, so we are well on our way to the $40 - $50 million goal for 2001.

Journalistic excellence also has been reinforced recently. On Monday, Tribune was honored with four Pulitzer Prizes, more than any other media company. The Chicago Tribune received two Pulitzers, the LA Times collected one and Tribune Media Services also garnered one Pulitzer.

And last month, we officially opened our Cuba News Bureau, which will serve our 11 newspapers, 22 television stations, and 50 web sites. We are one of only two U.S. newspaper publishers permitted to operate a permanent bureau. This will help us better serve the growing demographic of Cuban-Americans who live in Florida, Chicago, Los Angeles, and New York.

In closing, let me remind you that our newspapers have historically had some of the highest cash flow margins in the industry. We have significant opportunity with the LA Times and other recently acquired newspapers, and we are making progress despite the soft ad environment.

Now I'll turn it over to Tom.

Tom Leach
Thank you Jerry, and good afternoon.

While results compared to last year are down, there are a number of reasons why our broadcasting group should continue to "outperform" the industry.

First, strong expense controls are helping offset revenue shortfalls. Q1 cash operating expenses for TV are down 6% from 2000. Expenses should continue below last year's spending levels for the remainder of the year.

We are also well positioned to increase our share of market revenue this year, with strong syndicated programming and limited exposure from non-recurring political and Olympics revenue.

And we posted strong February sweeps results at our local stations, as did The WB. This benefits both our local stations' ad inventory and our 25% ownership in The WB.

Here's some additional detail on those areas, starting with revenues:

Although TV revenues declined 8% in the first quarter, last year's first quarter results reflected a 13% increase over 1999's - making for some tough comparisons.

Our first quarter performance saw growth in several major categories including telecommunications, movies and beverages/soft drinks.

Our largest category, automotive was off 18%, but that's against an 11% increase from last year - another tough comparison. As you might expect, dot.com advertising declined from 4% of Q1 2000 revenues to 1% in Q1 2001. Together, automotive and dot.com accounted for over half of our decline in TV ad revenues this quarter.

Ad revenues from Friends, which remains the #1 show across the key demographic categories in New York, Los Angeles and Chicago, were not negatively impacted versus last year.

This underscores our mass media strategy -- that advertisers will pay a premium for Tribune's ability to deliver large audiences targeted to specific local markets that reach desired younger demographics, even in a soft market.

As I mentioned, strong expense control is helping to offset revenue shortfalls. Q1 cash operating expenses for TV were down 6% from 2000. Expenses would have declined 10% were it not for new investments in morning news in New York, Boston and Denver and late news in Houston. I'll speak to the potential for these new news operations in a moment.

Second quarter trends appear to be consistent with "the industry", again adjusted for political and Olympics. We continue to see a real change in the placement pattern by advertisers. Some advertisers right now are holding back and trying to buy opportunistically later in the period. We saw some tightening in February and March and we hope that is going to improve into the 2nd half of the year, when comparisons are easier.

Second quarter revenue is also being impacted by the move of Seinfeld from our NYC and LA stations to Fox and Chris-Craft stations, respectively. While we wish we could have renewed Seinfeld and retained its revenues, we could not justify the significantly higher license fees and accompanying low profit margins for the second-cycle of Seinfeld compared to our first cycle fees.

We think we made the right decision. After two weeks of head-to-head competition in NY and LA, our stations' telecasts of Friends are generating higher HH ratings than Seinfeld on its new station. In addition, our lineups will be bolstered this fall by the addition of the increasingly popular Everybody Loves Raymond.

Finally, we were very pleased with the results of the February sweeps. Our WB stations in New York and Chicago were the 3rd highest rated stations in their markets, ahead of both CBS and Fox. KTLA was the 4th highest rated station in Los Angeles.

Our locally produced morning news programs continue to be a significant strength - KTLA's morning news is #1 in Los Angeles and WGN is #1 or #2 in the key demos in Chicago. And as we noted, we continue to invest in morning news programs, as they also present a significant growth opportunity. We now have seven morning news operations across the country, and our newest, at WPIX, is already #4 in New York, consistently beating WCBS.

Nationally, the WB network posted double-digit percentage growth in the key demographic groups in the February sweeps. More importantly, our New York, Los Angeles and Chicago stations continue to nearly double the WB's national ratings.

The Cubs are off to a strong start this season (1st place at 9 and 5), which is already having a positive impact on WGN's ratings in Chicago and at the Superstation.

While TV cash flow margins were 38% for the quarter compared to 39% last year, we are pleased with the positive impact the cost controls have had on those margins. As you know, we have a long-term goal of expanding broadcasting margins by 1-2 percent annually. We've done that consistently since 1989, and while it may be difficult this year, we expect to be back on track when the economy recovers.

Now I'll turn it over to Brigid.

Brigid Kenney

Thank you Tom, and good afternoon everyone.

Tribune Interactive's strategic priorities for 2001 are to grow classified revenues and to focus on scaling our operations to achieve profitability by the end of 2002. Our first quarter results definitely show progress toward these goals.

Tribune Interactive revenues were up 34% in the first quarter to $13.7 million.

Classified advertising revenues were up 51% in the quarter, with growth in all three categories: recruitment, auto and real estate.

Auto and real estate product sales, which are primarily Classified Ventures products such as cars.com and apartments.com, remain strong, and CareerBuilder sales continue to ramp.

Another factor contributing to the first quarter growth is higher revenue from print classified ads that are upsold onto our web sites.

This increase is primarily at the former Tribune markets, which began to more aggressively price the online upsell after the first quarter last year.

Also important, cash expenses declined 9% from last year due to merger synergies and cost controls started in the second half of 2000.

First quarter operating losses improved 34% to $10.3 million.

For full year 2001 we expect revenue growth of about 20-30 percent. This is somewhat lower than what we discussed with you earlier in the year.

However, we still plan to cut cash flow losses in half, to around $25 million.

Now back to Ruthellyn.

Ruthellyn Musil
Thanks for participating in today's call, and we look forward to your follow-up questions.

Q & A

Peter Appert/ Deutsche Banc Alex. Brown
Q. Guidance on pacings in 2Q.
A. TV revenues in March down 9%. Pacing in March down 14%. April down high teens, but seeing weekly improvement. May and June are looking stronger than April.

Q. What are you seeing in terms of specific cost specifics arising from cross-ownership.
A. In all cross-ownership markets, seeing benefits. Tribune Media Net, with $8M incremental revenue, part of that is incremental w/ TV stations in L.A., Chicago, New York and Hartford. Content sharing between newspaper & TV is very beneficial. Cross-promotion is another area. Radio & TV stations w/ newspaper promoting each other.

Q. Can margins in L.A. approach levels in Chicago?
A. During merger, we felt we could improve margins significantly. We're on our way. Lower FTE count, most in L.A.; reduced high cost circulation initiatives; reduced waste in L.A. In terms of newsprint, generally our newsprint prices are lower than Times Mirror. Times Mirror would have had higher newsprint prices.

Q. So, there's nothing structural that would prevent L.A. from having margins similar to Chicago?
A. No, not at all.

Lauren Fine, Merrill Lynch
Q. Discuss circulation in L.A. market.
A. The ABC report that will be coming out will show a slight increase on Sunday. Daily will show an increase if you adjust for bulk sales done with La Opinion and Bonus Days circulation programs.

Q. When were FTEs reduced in L.A. and when will you cycle through those reductions?
A. At year-end, we were down about 400. Started in third and fourth quarter of last year. Once we get into third quarter, we'll be cycling through some of that. But also seeing further reductions through a number of different actions.

Q. What has margin improvement been at L.A. so far?
A. Cost items we've been able to affect. Unfortunately, advertising revenue shortfall hurt us on margins. But we're prepared to show improvement once as revenues take off again.

Q. How much was help wanted down overall for the quarter? What were the trends for January, February and March across entire newspaper group?
A. Percentage change in help wanted in three big markets deteriorated during the quarter. New York was the best, Chicago the worst and L.A. was in between. In L.A., -11% in January, -31% in February and March. In Chicago, -22% in January, -36% in February and -44% in March. In New York, +9% in January, -4% in February and -15% in March.

Q. Does April look alot like March so far?
A. Yes, similar to March although the timing of Easter was different. There was about a two week difference when Easter was last year compared to this year.

Q. What was consumption during the quarter and could it go down even more during 2nd quarter?
A. Consumption was down 5% in Q1. In Q2, estimating 8 - 10% lower than last year's second quarter.

Bill Drewry/Credit Suisse First Boston
Q. What was percentage of total adverting revenue is from help wanted?
A. Slightly less than 20% of advertising revenues of newspaper group.

Q. Give a sense of time frame when you might have clarity on if newsprint price increase will succeed or fail.
A. Still talking to suppliers. Lot of resistance. With lower consumption across all newspapers, don't see how all of it will stick.

Q. When did Chicago help wanted start trending down?
A. Started in 1999, down high-single digits to low-double-digits. Started to see significant double-digit decreases in Q4 of last year.

Lee Westerfield/UBS Warburg
Q. With regards to writer's strike, any dialog with Jamie Kellner, re: WB primetime?
A. WB is contingency planning for a strike, producing programming ahead of time and stockpiling a few shows. Jamie's view, having gone through this at Fox, that the last time there was a strike, viewers who were watching networks heavily sampled programming on Fox and stayed with Fox. We'd prefer there not be a strike, but if so, it could create some sampling opportunities for WB.

Q. What, if any, would be the impact at Tribune Entertainment should a strike occur?
A. At Tribune Entertainment, they've started production for fall 2001 shows. Andromeda is in production to make sure there ill be new episode for fall whether there is a strike or not.

Q. What is your debt level at this stage? Is your preference share repurchase or repaying debt?
A. Debt is at $3.5B and expect it to move up slightly as year progresses. Will continue to buy back stock. Bought back 2.7M in quarter and will continue to buy back stock at these levels.

Rudy Hokanson/CIBC World Markets
Q. Are you completely done with cost savings actions in terms of FTEs? Is it now a stable environment or is there more to do?
A. Compensation is 40% of total expenses, so we pay alot of attention to it. We were very active in reducing head count in publishing by 800 FTEs vs. last year. Continue to be very aggressive n looking at head count and reducing compensation as we go through the remainder of the year.

Q. When you talk about advertising market "tightening," is that in terms of interest and inquiries or in terms of pricing?
A. We're seeing money coming in later vs. being placed very early last year. Tightening up the market. Some stations diving for business early which creates pricing pressure. We're hopeful business continues to come in later in period and try to hold price to take advantage of that.

Q. Pricing is holding rather than up front discounting?
A. For example, for Friends, because it's a quality show, advertisers want to be in it, so we're not seeing any revenue erosion. Some categories are up, like telecommunications and movies. There are areas where demand is there and we're pricing accordingly.

Doug Arthur/Morgan Stanley Dean Witter
Q. In L.A., 8% drop in ad revenue is significant. How do you see this playing for the rest of year if energy crisis returns in the summer and there is a strike for a couple of months?
A. Through the summer, we don't see any impact. Need to look at the number of releases and how successful they are. In Q4. if there is a strike, there will bee fewer movies in pipeline going into to Q4 and early next year. No huge adjustment to revenues. There'll be movies just fewer. As for the revenue drop, L.A. had two significant factors: falloff in dot.com and help wanted advertising. In terms of a power crisis, haven't heard anything from our people. We have contingency plans, backup power. Been able to get the paper out. Looking at the overall economy in L.A. vs. Chicago, haven't seen much difference either at TV or newspaper. L.A. Times advertising is actually stronger than Chicago Tribune and KTLA is a little stronger than WGN. Over last 5-10 years, L.A. economy is more diversified and not as dependent on defense as back in the early 90's.

Q. How big a piece of advertising at L.A. Times is entertainment?
A. Entertainment, we're talking movies, is around 10% of revenues.

Lauren Fine/Merrill Lynch
Q. How did individual stations perform in the quarter?
A. New York, L.A. and Chicago, relative to last year, moved in the same direction to the same degree. Didn't see big disparity between WB & Fox stations. Bright spot is Dallas. Launched news and its done well. Expanded to one hour. Market seemed to be doing pretty well. Otherwise, not that disparate market to market.

Q. What were share repurchases and CapEx in quarter? Your CapEx projection for the year?
A. About $45M in CapEx for Q1. Had planned for $375M for full year. Mentioned last month, it would be down by $75M. Now looking at high $200s or around $300M. Year-to-date, repurchased around 2.7M shares. Cost of about $130M. Look to continue to be aggressive on share repurchases. We've been paying a little less than 5% on our commercial paper rates, which will probably drop to around 4.5%. If we can borrow commercial paper at 4.5%, it behooves us to have debt outstanding and do more share repurchases.

Bill Drewry/Credit Suisse First Boston
Q. Is auto category the biggest in TV advertising? What did it do in Q1? Are you seeing better or worse indications in Q2?
A. In TV, auto is largest category. It was down 18% in the quarter. Fairly uniform from market to market, station to station. Mainly local and dealer group advertising, but tend to move with national market. No real differences among markets.

Q. What was dot.com as percentage of ad revenues at L.A. Times in 2000? When will you annualize the tough comparisons there?
A. In 2000, dot.com was a little more than 2% of ad revenue. Q1 was most significant, Q2 was next. Third and fourth quarters were about equal, about half of 2nd quarter.

Q. Mentioned movie advertising on TV stations was stronger, but weaker in newspapers. Are you seeing a shift in any of your markets of advertising dollars from newspapers to TV?
A. Because of Friends, WB Network, which will have Everybody Loves Raymond, has younger demographics and audiences advertisers are trying to reach. We think our share of movie business may be up significantly this year since we're not seeing it as a down category.

Q. Is that just for TV or share on total market basis?
A. Up in share. For movies we would be up vs. competitors.

Mark Henderson/ABN Amro
Q. What are copyright royalties relating to at TV stations?
A. We get copyright money, because Chicago, and to a lesser extent WPIX and KTLA, are carried on cable systems outside of home markets via satellite. For local programming that is aired on satellite, cable operators pay into the copyright tribunal that gets distributed to copyright holders. We get compensated for our share for news and other local programming. The money we get varies. Got money on both January and March this year, but last year only received money in January. Quarter fairly even year to year, but some difference between periods. Tribune Entertainment gets royalties from Tribune Entertainment shows on WGN, KTLA and WPIX that air outside of market. They are the copyright holder for Andromeda, Beast Master and Earth: Final Conflict.

Q. Are copyright royalties likely to increase or remain steady?
A. Steady yet growing. As WGN's distribution increased from 40M to 50M homes over the last couple of years, we've seen increases. Tribune Entertainment shows are getting cleared broader and increase their share of the pool.

Lauren Fine/Merrill Lynch
Q. Any change or guidance on the equity loss line?
A. Same guidance we've given before, a range of about $65M for the year.

Rudy Hokanson/CIBC World Markets
Q. What can we expect to have budgeted for stock buy back this year? How much do you see yourself using of your authorization? Is $200M a good number?
A. Could be more. $200M - $300M.

Lee Westerfield/UBS Warburg
Q. Where does Tribune weigh in on lifting of national ownership caps?
A. We're for less regulation as it pertains as ownership cap. Like for newspaper/broadcast ownership cap to go away.

Q. Not ownership cap, the national ownership cap of 35%.
A. We're not at 35%, only at 28% on FCC basis. So, 35% doesn't concern us as much. Would be happy to see all ownership regulation eased.

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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.