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Transcript

Fourth Quarter and Full Year 2002
Earnings Conference Call
January 29, 2003

Ruthellyn Musil, Vice President/Corporate Relations

Good morning! Welcome to our conference call to review 2002 fourth quarter and full year results. As you saw in our press release, Tribune reported diluted earnings-per-share of $.57 for the fourth quarter and for the full year, we reported EPS of $1.87. Please note these results are before special items that are outlined in the release, and that 2001 results are adjusted for intangible amortization.

Our speakers this morning are Dennis FitzSimons, who became Tribune’s CEO on January 1, and Don Grenesko, senior vice president and our chief financial officer.

Before turning the call over to Dennis, please bear with me as I remind you that our discussion may include forward-looking statements that are covered in greater detail in our SEC filings.

Now, here’s Dennis...

Dennis FitzSimons, President and CEO

Thanks, Ruthellyn.

2002 may have started with a shaky advertising environment but our performance in the fourth quarter ended the year on a high note. All of our employees pulled together to deliver new earnings per share records for both fourth quarter and the full year.

For the full year we posted EBITDA growth of 20% to 1.5 billion and generated over 700 million in free cash flow.

We reduced full-year consolidated expenses by 3% and brought our debt down by 650 million to 2.75 billion. That brings our year-end debt/EDITDA ratio down to 1.8x.

And we accomplished this on revenue growth of just 2% for the year.

Some other accomplishments:

• We acquired three WB affiliates in “Top 25” markets: Indianapolis in August, and in St. Louis and Portland at the end of the year.
• We built state-of-the-art preprint facilities in Los Angeles and Chicago. Results are obvious, as we see preprint revenue growth in the mid-teens.
• Tribune Media Net generated over $60 million in incremental revenue.
• Tribune Interactive reached profitability and CareerBuilder increased its market share by about 2 share points at the expense of Monster.

As you saw in the press release, our newspapers posted higher EBITDA margins for full year 2002. As a group margins moved up 26%, an improvement of four points over last year. TV cash flow margins improved 3 points to 40%. Interactive margins were 11%, a welcome move into positive territory.

Now, let me turn it over to Don for some specifics on the fourth quarter and then I’ll be back with a look at trends for the first quarter.

Don Grenesko, Sr. Vice President/Finance and Administration

Thanks, Dennis.

Tribune’s record fourth quarter earnings of 57 cents per share were 2 cents above analysts' consensus estimates. Consolidated revenues were up 8% compared to last year's fourth quarter. Consolidated cash expenses for the quarter rose by 2%, due to the restoration of bonuses, a lower pension credit and higher variable costs associated with increased revenues and improving business trends.

At the group level...

Publishing revenues grew 6%, and we’ve provided details by advertising category in the press release.

• In our 3 largest markets during the quarter -- total ad revenue for Chicago and New York increased 11 and 10 percent, respectively, while LA was up 5%
  • LA had tougher comps especially in retail; last fall’s lockout of dockworkers helped to limit inventory in area stores.
  • The three major markets had double digit preprint and national revenue increases, and showed continued improvement in help wanted in the quarter.
  • In addition, help wanted was positive in both Florida markets.
• Margins improved at most newspapers, with Chicago and NY each up six points, and the group’s cash flow margin improved by almost 5 points to 27%.

In the television group, revenues increased 22% as virtually all of the TV stations showed excellent growth, reflecting improved market conditions, strong ratings for our off network sitcoms, and a terrific fall season for the WB Network. Our TV stations improved their cash flow margins to 42%.

Tribune Interactive revenues were up 17%; however, Interactive was breakeven in the 4th quarter compared to being cash flow positive in the 3rd quarter. This decline reflected significantly higher promotional spending for CareerBuilder and cars.com in order to build brands, build traffic, and increase market share over time. Looking ahead, we expect TI to again be cash flow positive and show continued improvement over 2002.

Turning to 2003, the year is off to a good start. Dennis will talk about current trends in a moment; I’ll review some of our plan assumptions:

• As we said in December, we’re anticipating consolidated revenue growth in the mid-single digits, assuming continued economic recovery.
• Consolidated expenses will be up in the 5% range in 2003 due to merit increases and higher benefits costs, related to a lower pension credit, and higher medical expenses.
  • Last week Abitibi announced a $50 per ton price increase effective March 1. While we don’t feel it is warranted, our plan incorporates a price increase in the mid-to-high-single digit range.
• Moving to the equity line, losses will be around $15 million in 2003.
• We expect to grow earnings-per-share in the low-double-digits, which puts us within the range of current analyst estimates for full year 2003.

Now, back to Dennis.

Dennis FitzSimons

Thanks, Don.

Taking a look at current trends -- the year is off to a good start.

Looking at Television first, January pacing is strong -- up in the 10% range and we expect double digit growth to continue through the first quarter. Part of what is driving these revenue numbers is the fact that our November rating books were very strong, including both our syndicated programming and the WB network in prime time.

Given these strong ratings -- and the fact that our revenue comparisons are not as tough as some other group operations since we didn’t have a large percentage of ’02 revenue coming from political and Olympics -- we expect to gain revenue share in ’03.

In addition, syndicated program costs will begin to decline in the second half of the year after two years of increases from our accelerated amortization of successful new shows like Everybody Loves Raymond and Will & Grace.

Turning to publishing in the first quarter, retail is up mid-single digits, national is up in the mid-teens and classified is down slightly, which is about what we expected. We also think the uncertainty of a war with Iraq is impacting job creation and help wanted.

In Interactive, trends are good. Revenue is up in the 10% range as in Television.

We look to build on the profitability achieved in 2002. Our plan calls for revenue growth in all categories and continued expense control.

In recruitment, we look to continue to gain market share vs. Monster.

• We are rolling out new products, including Flexads, which combine print and online features, as well as a new database product focused on the skilled-and-hourly category.
• The investments we’ve made in CareerBuilder promotion that Don referenced already have resulted in gains in audience—January traffic is up 50%-plus from the fourth quarter.
• CareerBuilder has benefited from a strong showing in Gannett markets.

In summary, we are optimistic that 2003 will be another strong year for Tribune.

• We’ll continue to build scale in TV, and add value with two-station clusters;
• We’ll look to extend our brands by using existing infrastructure and editorial expertise to launch new products like Newsday’s Hoy and Chicago Tribune’s RedEye;
• We’ll continue to bring the full promotional power of our newspapers into play to leverage sales from print to online, and
• We’ll use our multimedia strength in the top three markets, along with Tribune Media Net, to tap into new national ad dollars.

2002 has proven our people’s ability to execute in a difficult environment and we’re looking for another excellent year in 2003.

Now, we’ll be happy to take your questions.

Steve Barlow/Prudential Securities.
Q. Could you be more specific on the amortization schedule that you use for the new shows?
A. We use a 160 percent declining balance method. So, a lot of it's a function of how many runs we gets per episode, but it puts about 30 percent of the cost in the first year on a five-year show.

Q. How are the ad sales going on the spot business right now versus what you sold in the up front and do you think, if that's an up number, can we carry that over into the fall of 2003? At this time is that your best guess on that?
A. Things are good in the spot marketplace. Particular strength in New York and Chicago. We're seeing a healthy network marketplace also, particularly in the movie business. But that is falling over into the spot marketplace and we feel in almost all cases our spot markets are very healthy. We do have relatively easy comps going through May of this year. So, we're expecting double-digit growth in the first quarter and again, we expect that to continue through the year. We see some good trends.

Q. Can you give us an idea of what the national revenue is in New York, Chicago and L.A. as a percent of total revenue in those newspapers?
A. In terms of national advertising for our top three markets, that is equal to about 28 percent of total advertising in the fourth quarter.

Brian Shipman/UBS Warburg.
Q. As you mentioned there are still strong pacings in Q1 for broadcast TV, can you give us a sense for what advertising categories are driving that?
A. As far as the categories that are driving the growth in TV, it's really broad-based. We're seeing a strengthening in the overall pricing structure in our markets. And automotive continues to be strong. The movie category is very strong. We're seeing an overall strengthening in pricing.

Q. Can you give us a sense for what advertisers are saying about a possible war with Iraq and their outlook for continued spending?
A. As far as advertisers and their attitudes on the war, I think it certainly is creating some uncertainty, but again, the comparisons with last year and the strengthening of our markets I think are getting us past that in TV. Newspapers I think are being a little bit more impacted. We are seeing and getting questions about how the network marketplace advertisers are concerned with wall to wall coverage. This could actually turn out to be a positive for the spot business as advertisers need to get their messages out, they might come to individual markets as the network marketplace tightens up for some period of time through lack of inventory availability as the networks go wall-to-wall.

Q. Could give us an update on the status of the potential tax liability stemming from Times Mirror’s divestiture of its magazine businesses?
A. In terms of the Matthew Bender and Mosby tax case the IRS has withdrawn the penalties. All the petitions and necessary responses have been filed with Tax Court at this point. We're awaiting assignment of a judge and then we'll go into a discovery period. So we're still thinking that this is going to take a couple of years to resolve. However, we still believe that this is a legitimate tax-free reorganization.

Q. TV cash expenses were up 10 percent in Q4. What are the implications for this going into 2003 in terms of cash expenses in TV?
A. This fourth quarter was a function of restoring bonuses where as last year we reversed our bonus accruals. With the 22 percent revenue increase, our selling costs were significantly higher. And with the improvements we saw in the revenue line, we restored a little bit of our promotional spending which seems to have paid off in the November books that we had. Going forward, we won't continue to increase expenses that fast. Promotion and the selling costs should settle in and certainly the bonuses will be more apples-to-apples next year. Even with that expense increase our margins were up significantly in the fourth quarter.

Lauren Fine/Merrill Lynch.
Q. what was the WB Network’s contribution in the fourth quarter in the equity line and what you might expect at this point for 2003? I
A. The contribution on WB cash flow in the fourth quarter was $11 million.

Q. And related to that, given if its parent company needs to raise cash, if that were to come for sale, what’s your interest level in owning more of it?
A. As far as owning more of the WB, what we have said in the past and where we're still at is the partnership has really worked well. It's in certainly Warner Bros. and AOL Time Warner's strategic interest to have a shelf space, so I believe they're very pleased with their investment overall and we are pleased at the percentage level that we're at, so we don't anticipate any change in that.

Q. And then I'm wondering on help wanted, Dennis, it sounded like you made a comment that classified maybe was a little bit softer in January? Have you seen a step back on any of the classified categories in January versus December, is that what you were referring to?
A. Classified versus December, we've got a couple of things happening there. The holidays, both Christmas and New Years falling in the middle of the week we think had some kind of impact in reducing help wanted advertising a little bit for the January period. As of now, we're still tracking pretty similarly till -- to the '91 recession. But we are a little lower in percentage terms in January than we were in the November/December period in help wanted.

Q. And then finally, could you go through some of the cash flow items for the full-year of 2002 in terms of CAPEX and other items? And CAPEX for 2003?
A. Yes. In terms of capital expenditures for the fourth quarter we were at $71 million and for the full-year, the total came in at $187 million. That is lower than what we had previously projected. We had been around $200 million, but we've been trying to conserve our cash and reduce our debt levels, and we did not have any share repurchases in the quarter. CAPEX for 2003 will be up somewhat over that $187 million range or area, probably in the low $200's.

Doug Arthur/Morgan Stanley.
Q. Trying to reconcile the fourth quarter performance of the equity line -- you talked about WB being up $11M -- with your outlook for '03 which is a loss of $15M. Elaborate on the fourth quarter dynamic a little bit, anything other than WB.
A. In the fourth quarter, as we mentioned, there was $10 or $11 million of income from the WB Network. We're assuming that to be relatively flat next year. So that's a big swing in the numbers there.

Q. And then secondly, non newsprint cost expectations for '03? Just clarify that. Thanks.
A. The other cash expenses for 2003 should be in the low single digits.

Kevin Gruneich/Bear Stearns.
Q. Just some clarification on this equity line. Can you just speak to the components of the significant swing that we saw in Q4, and maybe talk in '03 again why you're not going to see positive numbers there are?
A. On the WB, there's a very significant seasonal component to that. So that you had a fourth quarter equity pickup of this $11 million which still left us with an equity loss for the full-year. We think that type of trend could continue where it could be losses in the early part of the year, significant profits in the second half of the year in the fall season, and that we're assuming it still looks like a breakeven business or slightly positive.

Q. When you talk about the $11 million number, is that the positive swing or is that the income, and if it's the income what's the positive swing?
A. That's what we recorded in the quarter. WB said they had about $50 million of cash flow. We pick up 22 percent of that.

Q. What's the comparison with last year's Q4?
A. The comparison is that's about a $9 million improvement over the fourth quarter of last year.

Q. Could you give the same comparison for CareerBuilder?
A. CareerBuilder was about $8 million better in this fourth quarter versus the fourth quarter of last year.

Q. And do you expect that to turn negative in '03?
A. We really haven't broken out numbers as far as CareerBuilder goes. I think we're going to defer on that.

Q. +2 percent consolidated cash cost, which is about 2 percentage points higher than your expectations a month or so ago. I was wondering, just reflecting back what's a little bit higher than you would have expected?
A. It's basically due to the higher bonuses that we had in the fourth quarter and also there were some higher variable costs that we had with the higher revenues that we generated during the quarter.

Manda Hormozi/Lazard.
Q. I was wondering if you could give us an outlook for the entertainment line for 2003?
A. We have good expectations for our entertainment business in '03. It is a relatively small part of our broadcasting and entertainment line. But, we expect it to be up in the 10 percent range from this year.

Edward Atorino/ Blaylock and Partners
Q. Looking long-term, Dennis, you bought Times Mirror, you've got the two stations, a station in L.A. and a newspaper and a station in New York and a newspaper. Now that the economy is looking better, are you seeing any likelihood to try and perhaps linkup the newspapers more with the TV and engage in convergence?
A. We think we're doing that and we think we're doing it pretty effectively. We're getting more and more creative in how the stations and the newspapers are working together in all five markets. We have an experiment going in South Florida in market management where in that particular instance we've got a very strong newspaper in Broward County in Fort Lauderdale, and they are working very closely with the UHF television station in Miami to try to use the strength of the newspaper as much as possible to build the TV station. So, we've got some I think very good things going down there in terms of cross promotion and sharing content and also cross selling to advertisers. The same kinds of things are happening in L.A. and Chicago and to some extent in New York.
So, we don't see, as we've said before, any rush as deregulation comes through to go out and establish new cross ownership situations unless the individual market situations suggest that the economics make sense. But we're very encouraged with what we're seeing in the continued improvement of the corporation between the newspapers and the TV stations. We have new examples that we reference usually at every investor conference to try to keep people up to date as to how the efforts are coming.

Q. Could you put any sort of revenue numbers on that and do you see any potential to bring Newsday into the New York market more aggressively?
A. What we've said is in cross market or multiple media situations where we own multiple media in the same market if we do it right, we feel we can add a point or perhaps two in revenue growth. As far as Newsday's entrance into New York, we have no plans at this time.

Christa Sober/Thomas Weisel Partners.
Q. How is the preprint market affecting retail and then your just general outlook for the retail market going forward?
A. As far as the preprint business, where we see big upside is with the new facilities in Chicago and Los Angeles. We have the ability to offer advertisers a lot more targeting capability. Chicago has an excellent share of market versus ADVO and other suppliers right now, but we still see some upside there. Los Angeles is our big area of opportunity. We there only have about a third of the preprint market as opposed to Chicago which is in the 60 percent range. So we see big opportunities in Los Angeles. What we inherited from Times Mirror was an archaic hand insertion system, and what we have now is a state-of-the-art facility, the last part of which just came on in November. It gives us a tremendous advantage. We see a big percentage of share growth play in Los Angeles.

Now as far as that category's impact on retail, we categorize most of our preprint advertising in the retail category. We feel it's not cannibalization, that we can just offer advertisers different ways to reach the consumers and they can select the best way for them.

Q. For Interactive, it looks like growth is starting to slow somewhat, although still nicely in the double-digit range. Could you give us a sense as to what you're expecting there? And then also I noticed that the marketing expenses in Interactive were up in the fourth quarter, do you expect that to continue?
A. Our marketing expenses were up in the fourth quarter and we will continue to spend on promotion, especially for our classified verticals next year. However, that spending will vary quarter to quarter as we see fit. So, you won't see the same level necessarily every quarter next year that you saw in the fourth quarter. As for our revenue growth slowing, and we have been very successful growing revenue over the last few years. We are coming up against much tougher comps, but we do look for revenue growth next year in the low to mid-teens.

Q. What's your outlook for programming expenses I guess going into 2003?
A. Yes, over the last couple of years we did have increased programming costs because of the new syndicated programming we added. That was the bad news, but the good news was they were the right shows. "Everybody Loves Raymond" and "Will and Grace" are doing very, very well, and because of our accelerated amortization policy, and the fact that we don't have a major show coming on this year, we'll see declining costs in the second half of this year on the programming line in television.

Kevin Sullivan/Lehman Brothers.
Q. You touched on the margins in the publishing group when you talked about Chicago and New York, I was wondering if you could provide some color on L.A., what sort of margin improvement you saw out there this quarter and what sort opportunities are still in front of you?
A. In general, L.A. has been our strongest story. We picked up 4 share points from 22 to 26 percent as a group. We saw good growth in the quarter with most of the newspapers. However, L.A. had some unusual favorable expenses in 2001, so the actual margin went down. If you discount those, it did go up. So, for the year L.A. and Chicago were up 4 points, New York was up almost 6 points. We've got three of our newspapers with margins of 30 percent or more for the year.

Barton Crockett/JP Morgan.
Q. I wanted to follow up a little bit more on the revenue trends you're seeing as we start the year. If you pull together all the separate items you gave on the TV line up 10 percent, some of the newspaper stuff up in double-digits, other in mid single digits. It sounds like January is pacing well above the sort of mid single digit growth range you've given for the entire year. Is that accurate? And could you give us sort of a consolidated view of January revenue trends?
A. As far as the revenue trends for January, we are slightly above plan in television. Our pacing for the rest of the quarter is well above plan, but what has happened is the pattern of placement has changed a little bit and advertisers when they feel the market has tightened up place earlier. So, again we are staying with our suggestion of double-digit increases in TV. Newspapers are about on plan and Interactive is in the same range. So, our guidance stands. We think it would be very premature to change anything at this point. But we feel good on the trends.

Q. Your equity line guidance presumes sort of a flat performance in '03 from the WB contribution. I was wondering, ex the unusual items on CareerBuilder, does it also assume a flat performance there or are you looking for some growth there?
A. In terms of the equity line, our losses this year were about $41 million. The tax implications of the change in the organizational structure of CareerBuilder cost us about $18 million. So, if you look at it on an ongoing basis, there were roughly $23 million of losses in the equity line this year, and we're projecting that to go down to around $15 million next year. The WB Network is going to be flat, so we're looking for losses in CareerBuilder and in Brass Ring. But, in CareerBuilder, there will continue to be improvement in that loss number, but we are expecting to have higher promotional expenses this year, so that's why it's not coming down as much as might be anticipated.

Q. Given some of the geopolitical stuff that we're coming up on, could you just sort of remind us, looking back at the last Iraqi war, what happened with advertising in your newspapers and TV stations, and how good of sort of a barometer you think that might be for the possibility of an event like that happening now?
A. On the publishing side we saw a falloff in the short term, but things really popped right back within a month or so after the war. And TV was pretty much the same. We would anticipate, if it happens and we all hope it doesn't, but if it does and it's quick, there could be a surge of confidence that would cause advertisers to come in more strongly, but it's very difficult to predict.

William Drewry/CSFB.
Q. Just a cost related question around the '03 guidance. Could you just break down the cost outlook, one by just compensation, and if you could break that out to just your underlying compensation increase versus what medical and benefit would go up? And then if you could break it down to what you think the cost increase would be for the newspaper division versus just the cost increase for TV?
A. In '02, , with the exception of collective bargaining agreements, we had salary freezes in place. And then the top 150 managers took a 5 percent cut and there were no bonuses paid in '02. This year, we're looking at an '03 merit increase of 3 percent overall. If you also recall, our pension credit will be coming down by about $40 million or so next year compared to this year. And medical is going to be up in the mid-double-digits next year, so that's having a pretty big impact overall. The compensation increases are probably a little bit less at broadcasting than at publishing, but we're all around that 3 percent in terms of merit increases throughout the year.

Q. So, for mid single digit cost increase for the whole company, would newspaper division be above that 5 percent and TV be below? Or all in would they both come in around that number?
A. About the same.

Michael Kupinski/A.G. Edwards
Q. Automobile manufacturers already seem to be posturing for what appears to be another strong network upfront season and are obviously worried about rising rates. Some WB executives estimate that the WB Network could be up as much as 12 percent in this year's upfront. While it's a little far into the future, is there some upside to your broadcast television revenue outlook in the second half? Should the WB Network be up in that type of range? And could you talk a little bit about what that impact might be on your equity line if the WB is up that strongly?
A. Right now everything is really strong in the network marketplace. WB had a great upfront last year. Their numbers in November were certainly up more than any other network year-to-year. So, we have very positive outlook at the WB. Now, remember our stations are operating in the spot marketplace which operates independently from that network upfront marketplace. So our business is placed a lot closer to start date. But again, our markets are all healthier, we're operating from a stronger rate base. All the stations have gotten more aggressive on pricing. And advertisers, I think somewhat conditioned from the upfront marketplace, want to get their messages out and they're using the “go” targeting that spot television offers and we think it looks good. Could there be some upside on our WB projections for '03? Yes. Certainly there could be.

Q. I'm just looking at it obviously from the network perspective in looking at the tight inventory that they're likely to have if that's the type of strong demand that they are anticipating and how that affects your spot market for your television stations in the outlook? 10 percent growth in the first half is what you're indicating. What type of outlook are you looking for the second half if it's that strong? It would indicate that your numbers could be fairly conservative.
A. Again, our WB stations operate in the spot market and WB represents a little bit less than 20 percent of our overall revenue. So, if we have a continued strong showing by the WB, which we anticipate, we've taken that into account. Could there be some upside? Yes. But again, our pacing right now is very strong, but we wouldn't make any further predictions beyond what we said.

Jim Goss/Barrington Research.
Q. Can you give a regulatory update in terms of the timing of the likelihood of the template being put in place and then the order in which things occur? What are your expectations right now?
A. Chairman Powell commented on Friday on C-SPAN that he was expecting late spring. I thought that was good given the comments that had been attributed to the Chairman a couple of weeks ago; he seemed to be backing off the deregulation. And we think once the new Chairman is chosen for the committee governing the FCC, we are going to see more speedy movement towards the regulation. We would like to think spring will be the time, and we're confident of that.

You mentioned the sequence. We think cross ownership is likely to go first. If the Chairman has his way, we think all of them will be dealt with at the same time. If there's so much controversy about the other issues -- the independent voice rule and the top four rule -- we think there's a good possibility that cross ownership could be broken away from those other rules. But we do think there's going to be significant deregulation in each of those areas. The only one that we're not sure of, because the industry is so split, is the national cap.

Q. Your recent announced acquisition of the ACME stations was excellent. I'm wondering if you're seeing more opportunities like that starting to bubble up?
A. Again, we're always looking, we never know when people are going to decide. There are certain broadcasters out there that are always being speculated on, but we wouldn't have any comment on it, other than the fact of what we said in that we're looking for opportunities in the top 30 markets.

Doug Arthur/Morgan Stanley.
Q. Can you just quantify political in the fourth quarter and for the full-year?
A. For the full-year it was about 2 percent and it was 4 percent in Q4.

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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.