Second Quarter 2001 Earnings
Conference Call
July 18, 2001
Ruthellyn
Musil, Vice President/Corporate Relations:
Good morning!
Welcome to our conference call to review second
quarter earnings.
As you saw in our press release, Tribune reported
second quarter earnings of 24 cents per diluted share, from
continuing operations -- two cents above First Call's estimate
and the guidance we gave in June.
To review the details of those results with
you, we have: Don Grenesko, our CFO and Senior VP/Finance
and Administration, Tom Leach, CFO of our broadcasting group,
Jerry Agema, CFO of the publishing group and Brigid Kenney,
CFO of Tribune Interactive.
After some brief remarks, we'll be ready for
your questions.
Before we start, let me remind you that our
comments and answers may include forward-looking statements,
which are subject to risks and uncertainties that we discuss
in greater detail in our SEC filings.
Future results could vary materially.
Also, during today's discussion, 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, I'll turn the call over to Don.
Don Grenesko, Sr. Vice President/Finance
and Administration:
Thank you, and good morning everyone.
As Ruthellyn mentioned, we posted second quarter
EPS of 24¢, which is before the restructuring charge
and non-operating items.
Cash EPS, excluding goodwill and amortization
of intangibles, was 42¢ for the quarter and reflects
3¢ of accretion from the Times Mirror acquisition. So
even in this very tough ad environment, our newly-acquired
newspapers are contributing to cash flow.
On a pro forma basis, we reported consolidated
revenues of $1.4 billion, cash flow of $353 million and operating
profit of $239 million in the second quarter. The bright spots
were Tribune Interactive, which had significant lower losses,
our consolidated lower cash expenses were down 4%, and Tribune
Media Net continues to add incremental revenues.
Equity losses were $15.8 million. BrassRing,
Classified Ventures and The WB Network all had lower losses
compared to a year ago, so we're on track with our plan for
full-year losses in the range of $60-65 million.
Significantly, our voluntary retirement program
and other staff reduction initiatives are well underway. As
anticipated, we have started taking restructuring charges
to cover the expenses associated with these programs.
In the second quarter, we recorded a charge
of $14.3 million or 3¢ a share.
On the non-operating line, we recorded normal
quarterly adjustments for marking-to-market the PHONES and
related AOL stock, which resulted in a 7¢ per share,
non-cash gain.
Offsetting this gain was a write-down of 7¢
per share to adjust investments in our Ventures portfolio
to fair market value. As we've said before, this does not
change the rationale for these investments, because they are
strategically important to our businesses.
Looking ahead, we expect to take the bulk of
our restructuring charges in the third quarter and expect
that amount to be in the range of $110-135 million. Excluding
those charges, diluted EPS should be at the low end of current
analyst estimates, which is 15 to 28 cents.
Because of the aggressive cost cutting measures
that we have taken so far this year, full year operating cash
flow should be about $1.4 billion, down just slightly from
last year. Our staff reduction initiatives should generate
annual savings in the range of $50 million. A portion of this
will be seen in the fourth quarter, with full impact in 2002.
Debt is currently about $3.5 billion, and we
expect it to stay in that range for the balance of the year.
As you'll hear from our group CFOs, trends
appear to be moving in the right direction, improving slightly.
In the meantime, we are focused on cost controls, maintaining
our financial flexibility, and executing our multi-media strategy.
Now, here's Tom with an overview of Broadcasting.
Tom Leach, Vice President/Administration
and CFO, Tribune Broadcasting:
Thank you Don, and good morning.
While results compared to last year continue
to be down, we believe we are well positioned for the remainder
of the year.
In Television, our markets are showing gradual,
consistent improvement. May and June were stronger than April,
and we see that trend continuing through the third quarter.
Beginning in July, our comparisons versus last year also begin
to ease considerably. This includes the impact of dot-com
revenues, which were less than 1% of our TV revenues in the
second-half of 2000.
We have good momentum going into the fourth
quarter due to strong program lineups, including the syndication
debuts of "Everybody Loves Raymond" in many markets,
and "Just Shoot Me" and "King of the Hill"
in several markets. As we have seen with "Friends,"
the stronger syndicated shows have fared better in attracting
ad dollars in this soft economy.
The advertising community has also reacted
positively to the WB's Fall primetime lineup. While our stations
do not sell inventory in the upfront, the fact that the WB
did generate revenue increases in this advertising environment
bodes well for our WB stations.
Last, we are also not up against sizable political
and Olympic comparisons in the third and fourth quarters.
As a result, we expect our share of market revenues to increase.
Taking a moment to digest the second quarter,
TV revenues decreased 10%, coming off an 11% increase last
year. The 10% decline includes copyright revenues generated
by WGN's Superstation signal. The decline in advertising revenue
was 13%, two percentage points of which was due to lower dot.com
revenues.
Automotive, our largest category, was down
13%. Within automotive, foreign is outperforming domestic.
Movies, beverage/soft drink and fast food outperformed the
other major categories, due in large part to the younger audiences
on our stations that these advertisers target.
Second quarter revenue was also impacted by
the loss of "Seinfeld" in New York and Los Angeles.
As you know, we could not justify the significantly higher
license fees and accompanying low profit margins for the second-cycle
of "Seinfeld". And in head-to-head competition in
both markets, "Friends" is out-performing "Seinfeld,"
underscoring that we made the right decision.
The revenues shortfalls were offset by continued
strong expense controls.
TV's second quarter operating expenses, excluding
programming, were down 3% from 2000. Expenses would have declined
7% were it not for news expansion costs in New York, Boston
and Houston and WGN Cable distribution expenses that were
not in last year's second quarter numbers. Expenses should
continue below last year's spending levels for the remainder
of the year.
TV headcount has been reduced by 5% year-over-year
through a combination of position eliminations and holding
vacant positions open.
We are pleased with the positive impact the
cost controls have had on cash flow margins to-date and look
to increase margins to their previous levels as the economy
recovers.
In the May sweeps, WPIX and WGN remain the
third highest rated stations in their markets, ahead of both
CBS and Fox O&O's. KTLA remained fourth in Los Angeles.
Each of the three stations has the winning combination of
Friends in access and late fringe, the WB in primetime and
a successful locally produced morning news program.
The May sweeps also concluded a successful
season for Tribune Entertainment, which had the #1 new action
hour this year in "Andromeda." TEC will build on
"Andromeda's" strong performance this fall, launching
its 4th action hour, "Mutant X."
And the Cubs entered the second half of the
season with the best record in the National League. The strong
Cubs performance is generating ratings momentum for WGN TV
and the Superstation. And WGN Radio was the #1 station in
Chicago in the Spring book, with a 7 share, more than 2 share
points better than its nearest competitor.
In summary, we believe a gradual steady improvement
in the economy, easing comparisons, and strong program schedules
this fall position us well for the remainder of the year.
Now I'll turn it over to Jerry.
Jerry Agema, Vice President/Finance,
Tribune Publishing:
Thanks Tom. Good morning everyone.
Before I begin, please note that the growth
rates I refer to are on a pro forma basis. This information
is also located in the footnotes of the pro forma summary
of revenues table, which is attached to the press release.
As Jack Fuller said at Mid-Year Media, the
rate of decline in advertising revenue has slowed. April and
May each showed declines in total advertising of 14%, while
June was down 12%.
The declines in Classified and National were
less in June than in May, and trends in the first three weeks
of July are better than June. Retail is soft, which is typical
at this point in the cycle, plus it is impacted by losses
from out of business retailers.
For the quarter, cash expenses, other than
newsprint and ink, were down 5%. For the full year 2001, they
should be down in the 2-3% range.
In the second quarter, our FTEs are about 4%
lower than last year due in large part to actions taken in
Los Angeles. Moreover, the voluntary retirement program will
accelerate reductions so by the end of the year our group
will have reduced staff by 10% or over 2000 FTEs since June
of last year.
Newsprint suppliers backed off the $50 per
ton price increase, as we expected.
Newsprint prices in the quarter increased on
average 8% from last year, which was lower than our peers
as we enjoy the benefits of being the second largest newsprint
purchaser in North America. Consumption was 12% lower in the
quarter because of targeted circulation reductions, lower
advertising volume, web-width reductions and waste initiatives.
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 current
price is not justified and expect price reductions.
Let's now look at the revenue picture, by category
and by market.
Advertising revenues decreased 13% from last
year.
In the quarter, retail declined 7% with preprints
5% lower. Preprints are generally one of our strongest performers,
but losses from out-of-business retailers, fewer non-newspaper
total market coverage pieces in Los Angeles, and the softening
retail environment were the principle reasons for this decline.
Preprints in the LA Times newspaper are up almost 30% as we
have targeted this as an incremental revenue opportunity.
National was down 14% and showed strength in
travel/resorts, but entertainment/movies, financials and technology/dot.coms
were off. In the quarter, dot.com advertising was less than
$6 million, which was significantly lower than last year's
$15 million, with most of the decline in LA and Chicago.
Classified fell 19% and the variance was driven
by weakness in help wanted which was off 38%. Automotive was
down 4%, while real estate, which has been a good performer
all year, was up 7%.
Now let's look at the Top 3 markets.
In LA, ad revenues were down 16% with all three
categories lower than last year. Classified was off 21%, because
of lower help wanted, which was down by 41%. Retail was 12%
lower due to department, electronics and food stores. National
was down 14% due to lower entertainment/movies, technology/dot.com,
and financial.
In Chicago, ad revenues were down 19%. Retail
was down 6% due to lower electronics and other retailers,
but showed gains in food stores. National was down 19% due
to technology/dot.com, media, and movies, while travel and
financial showed increases. Classified was off 29% as help
wanted was down 52%. Auto was down 12% while real estate was
up 16%.
New York ad revenues were down 9%. Retail was
7% lower while national and classified were down 12% and 11%,
respectively. In retail, electronics, department and food
stores were off. National was impacted by entertainment/movies
and financial. Classified help wanted was down 22% while auto
was down about 2%, and real estate was flat.
Ad trends for the quarter in our other markets
are mostly better than the top three markets. This is true
in all categories, but particularly true in help wanted.
As Don mentioned, continuing bright spot in
the advertising picture for us is Tribune Media Net, which
has sold or booked $17 million of incremental revenues this
year.
Dave Murphy and his team are also having success
by building the base for 2002 and beyond as they just closed
another multi-year, multi-million dollar deal with a major
preprint advertiser beginning this fall, that means significant
incremental revenue to us. This is on top of our recent breakthrough
partnership with Harris Bank that combines content and promotion
in which all of our Chicago media businesses are involved.
We are still confident we will make our $40-50 goal this year.
The tough economy has overshadowed the many
things we've accomplished in the past year, especially at
the LA Times where we are 12 - 18 months ahead of schedule.
We've improved the quality and focus of the newspaper, reduced
the cost base by $80 million on an annualized basis and which
will increase from the savings of the voluntary retirement
program, and created $15 million in new revenue by increasing
the single copy price and other pricing actions.
And now here's Brigid.
Brigid Kenney, Vice President and
CFO, Tribune Interactive:
Good morning everyone.
Tribune Interactive's strategic priorities
remain to grow classified revenues and scale our operations
to achieve cash flow profitability by the end of 2002. Our
second quarter results continue to show progress toward these
goals.
Tribune Interactive revenues were up 22% in
the second quarter to $14.3 million. Our quarter over quarter
revenue growth was 4%, despite the down advertising environment.
Classified advertising revenues were 44% higher
than the second quarter of last year. Automotive was up 63%
and real estate was up 91%. Recruitment was up 24% as we continue
to grow with CareerBuilder. Even in this very challenging
recruitment environment, and our CareerBuilder product revenue
is up 61% in the second quarter while our employment upsell
revenue is up 16%.
Non-classified revenue was down 18% from last
year, mainly due to lower national revenues, which were down
in line with the industry.
Also important, cash expenses declined 21%
from last year due to merger synergies and cost controls started
in the second half of 2000. Cash expenses were even down 7%
from the first quarter of this year due to additional contingency
plans we have put in place.
Second quarter cash flow losses, before restructuring,
improved 61% from last year to $5.1 million.
For full year 2001, we expect revenue growth
of about 20-25%.
And we're still on track to cut cash flow losses
in half, to around $25 million.
Now back to Ruthellyn.
Q&A
Lee Westerfield, UBS Warburg:
Q. Effect of WB network in Q2?
A. Slight loss included in the equity line; a little less
than $5M. An improvement over last year.
Q. Newsday full run linage was up in Q2. Discuss.
A. Newsday has been the least effected of the big 3 markets
and in addition certain higher volume classified advertisers
have increased their presence.
Q. How much of the $80M savings will flow into
2002?
A. Majority of the $80M will be in 2001.Q2 - Q4 savings are
modestly higher than Q1. This does not include any VRP savings.
Annual savings for the entire company from the VRP and other
staff reduction initiatives will be in the range of $50 million.
Bill Drewry, CSFB:
Q. Should Q2 TV pacings be better in Q3 than Q2?
A. April was the worst month for us. May and June were better.
The outlook is still negative but better…maybe in the
single digits.
Q. Auto sales?
A. Auto is 20% of revenue. Foreign is much stronger than domestic
and foreign looks flat or even up in some markets. GM dollars
have already gone national. We heard that GM is going push
some dollars down to the local levels, which is good for us.
Q. Quantify retail out of town business?
A. In top 3 markets about $3-4M in the quarter. Businesses
include Wards, HomeLife, Pergaments, Grand Union and Edwards.
Douglas Arthur, Morgan Stanley:
Q. What is the reason for the 60% drop in corporate expense?
A. Times Mirror corporate staff was around in last year's
Q2…we saw cuts in Q3
Q. In terms of comps... do you think you have
bottomed in help-wanted numbers?
A. Help Wanted in June for the group was down in the high
30s. In July we are looking the high 20s to 30%
Lauren Fine, Merrill Lynch:
Q. Why are publishing cash expenses down more in Q2 than for
year?
A: They were down 1% in Q1, 5% in Q2 and for the year expect
cash expenses to be down 2 to 3%. One important variable is
promotion, which has been down in 1H with 2H spending dependent
on revenue. Another factor is when and how many people will
accept VRP.
Q. At what rate are program costs increasing?
A: Program costs are basically flat in Q2 and expect to continue
through Q3 and pick up slightly in Q4 because of new programs,
i.e., "Everybody Loves Raymond," "Just Shoot
Me" and "King of the Hill." It is harder to
get program costs down because of lead time. For the new sitcoms,
we also use a slight accelerated amortization method.
Q. Interest expense is higher... what is the
blended overall rate for the quarter?
A. The avg. rate on the debt was 6% to 6.1%.
Brian Shipman, Robertson Stephens:
Q. Circulation trends in major markets?
A: In LA, daily was down due to the unbundling of La Opinion
plus absence of bonus days; Sunday down slightly. In Chicago,
daily (Wed. - Fri.) was up a couple of points (due to home
delivery, positive reaction to new design and promotion) and
Sunday down a little. In NY, daily and Sun. are down a couple
of points.
Q. On newsprint, is the Times Mirror hedge
still in place? Has this helped or will it hurt you with the
dropping?
A: The hedge did help us. In Q2, newsprint was up 8% rather
than 10%, if we did not have the hedge. The hedge is not material
going forward.
Kevin Gruneich, Bear Stearns:
Q. Entertainment EBITDA was down... is this a good run-rate?
A. The reasons are the Cubs and basic timing differences because
of number of games. In last year's EBITDA, there was a trip
to Japan. The Cubs are hoping to get a lift from ticket sales
this year. It is not applicable to a run rate. At TEC, "Andromeda"
has done well. We announced some new barter sales deals with
Hearst Television and NBC, including selling the syndicated
version of "Weakest Link." We are in the midst of
syndication upfront, which is down but net net should be good.
Q. Advertising revenues for retail seems to
be sinking.
A: Losses from out of business retailers are impacting us.
Also, LA's total market coverage non-newspaper revenue s down.
This is a breakeven business at best. Importantly, preprint
revenue at the L.A. Times is up almost 30%. Also, retail is
soft at this point in the cycle.
William Bird, Salomon Smith Barney:
Q. Which investments were written down?
A: Several companies: iExplore, Food.com, ReplayTV, Nextdoor
Networks, Daily Shopper, Eppraisals.com, dbusiness.
Q. Which markets are trending well?
A: We see strength in the Southwest markets (Dallas, Houston,
San Diego, Fox affiliates) too, as network performance is
better. The WB group (aside from the big markets) is doing
well as it is not up against big dot.com comparisons and we
are looking forward to the Fall line-up. LA and CHI are improving.
NY is about the same. Mixed bag in other markets with retail
soft, as expected, and generally national and classified better.
Q. Competitive position of CareerBuilder?
A: We expected to see consolidation in the recruitment...
this makes us a clear #2. We are focused on recruitment, as
that's why we bought CareerPath, BrassRing and CareerBuilder.
We are leveraging our other promotional strengths in print
and TV.
Jim Goss, Barrington Research:
Q. CareerBuilder is up and the newspapers are off…what
conclusions have you reached? What is the impact of Internet
on your classified business?
A: The fall-off is mostly the result of the economy rather
than the Internet. To the extent that there is an impact due
to Internet, that is why we are in CareerBuilder and BrassRing.
Q. The WB Network is close to breakeven, when
will record profits?
A: Jamie Kellner has said he expects the WB will be profitable
in the 2001 - 2002 season. This means we will still have an
equity loss for the 2001 calendar year. We haven't seen their
budget for calendar 2002. Also, Jamie was likely referring
to EBITDA. After interest expense and D&A, any WB profits
will not have a materially positive impact on our equity pickup.
:: :: ::
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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