Goldman Sachs Communacopia
September 30, 2003
Dennis FitzSimons, President and
Chief Executive Officer
Thank you Peter, and good
afternoon everyone. Joining me here today are Don Grenesko,
Tribune’s Chief Financial Officer and Ruthellyn Musil,
our vice president for Corporate Relations.
It’s great to be back in New York City
again. I grew up here and it’s always a lot better to
come back and face my friends from the neighborhood when the
Cubs are in the playoffs. The Cubs play the Atlanta Braves
tonight and while it has been a while since we won a World
Series in Chicago, we’re pretty excited about our chances
this year, with our pitching and Dusty Baker... this could
be our century!
The Cubs are one of Tribune’s smaller businesses - but
certainly one of our most visible. Our larger businesses come
in the form of great media assets across the country - our
newspapers and TV stations - and they are the real drivers
of Tribune’s revenue and cash flow. I’m just glad
I’m here to talk about the economics of media, not the
economics of baseball.
Tribune’s business is local mass media.
Our 26 television stations, 13 daily newspapers, and other
media businesses will generate about $5.6 billion in revenue
this year, $1.6 billion of operating cash flow, and more than
$800 million in free cash flow. When you put it all together,
it looks something like this...
(Roll TRB videotape)
Now, we’re here today to tell you specifically
about Tribune, but because speakers at Communacopia frequently
delve into bigger picture issues, let me touch briefly on
the debate in Washington regarding media ownership.
Of the two sides to the debate. One side is
simple: Big media is bad for democracy -- and that sounds
logical. But like so many superficially plausible arguments,
it doesn’t stand up to scrutiny. This is especially
true if one sector of the media industry is allowed to consolidate,
like cable, and others -- like over the air TV -- are not.
The other side of the debate, led by FCC Chairman
Powell, reflects a more "free market" position,
and in our opinion, a firmer grasp of the complexities of
today’s media landscape.
Today’s media environment is more robust
and diverse than ever before. And if you take the long view
of how the various media have evolved, the pattern is consistent:
It’s a continuing cycle of expansion, fragmentation,
and consolidation, with technology and regulation being the
catalysts for all three.
- Take the early 1900’s here
in New York. Joseph Pulitzer and William Randolph Hearst
-- competed in a media landscape that featured only newspapers.
Pulitzer reached New York from his newspaper base in St.
Louis, Hearst from San Francisco. Each used his newspapers
to push his own political agenda. Hearst expanded his newspaper
chain to the point that he used it to mount a presidential
campaign. At the time, some said that was bad for democracy.
- In the ’30’s and ’40’s,
AM radio grew tremendously, dominated by three or four networks.
Radio competed with newspapers for audience share and ad
revenue. Later, the advent of the evening news on television
fragmented the newspaper audience even further. The newspaper
industry went through a period of consolidation and many
papers either shut down or were gobbled up by stronger competitors.
(Those of us who grew up here in New York remember The Herald
Tribune, Journal American, Daily Mirror, and others that
shut down.)
- Then in the ’60’s, with AM
radio dominant, explosive growth of the technologically
superior FM signals fragmented radio audiences. Over time
there were too many stations and not enough advertiser demand.
Radio was a slow-growth business until consolidation enabled
by deregulation created the healthy industry we had in the
’90’s.
- Over-the-air television fragmented audiences
for all media in the ’60s, and became the dominant
medium for news, information and entertainment. But during
its alleged "golden age" in the ’60’s
and ’70’s, it was controlled by just three networks
-- which garnered more than 90 percent of prime time audience
share. Then independent television got stronger. Then cable
penetration increased and subscriber fees enabled more networks.
- Finally, in the late ’80’s
and early ’90’s, with the expansion of cable,
DBS -- and now the rise of the Internet, media audiences
have fragmented still further.
Now, my point in reviewing this brief history
is that consumers have never been better served and have never
had more choice. The "golden age of media" that
regulators seem to remember nostalgically, if not accurately,
was characterized by fewer voices dominating the media than
exist today.
But our view is this -- the media cycle of
expansion, fragmentation and consolidation is needed if a
level playing field for media competition that benefits American
consumers is going to continue. So, both the public and companies
in the media sector will be better served by a quick resolution
to the controversy surrounding the FCC’s revised ownership
rules. What our industry needs now is clarity, not further
delay -- just establish the rules and let us compete!
Now, that’s the big picture. With that
as a jumping off point, I want to focus on what sets Tribune
apart in the media industry -- something we’ve called
"National reach and local touch." It’s a combination
of scale on the national level and localism in our individual
markets that gives us an advantage in serving our customers
growing revenue and controlling costs.
So let’s start by talking about scale.
While we’re not as big as some of the other companies
presenting here today, Tribune’s media businesses in
the aggregate reach 80% of U.S. consumers with a significant
concentration in the top markets. That’s an advantage
in today’s crowded media marketplace.
Our scale pays off in a number of ways...
- It provides opportunities to offer
viewers and readers broader and deeper news coverage.
- In television it gives us access to the
best syndicated and off-net programming;
- And for clients, we can offer customized
advertising solutions both nationally and locally.
In this era of shrinking audience shares,
different media companies compete in different ways, but with
a similar overall goal; reaggregating audience share. And
that's accomplished by consolidating outlets in a single medium,
operating multiple media in the same market or across a number
of markets, or by vertically integrating and controlling both
content production and distribution.
We’ve used all these methods. We’ve
consolidated nationally in television, adding 20 stations
since 1992, and in newspapers, acquiring the seven Times Mirror
newspapers in 2000. We’ve also grown locally within
our markets -- we’re the only media company with television
stations, newspapers and web sites in New York, Los Angeles,
and Chicago. And we are vertically integrated: Tribune Entertainment
creates and distributes syndicated programming that airs on
our stations, and of course, we do have the Cubs, which provide
hundreds of hours of programming for WGN-TV and Radio locally,
and for our Superstation nationally.
All of these moves are designed improve our
competitive position and serve consumers better. Growing media
companies are acquiring complimentary businesses, launching
new products, or expanding existing ones in an attempt add
new viewers and readers.
Looking specifically at newspapers, Tribune is the nation’s
second largest newspaper group in terms of revenue.
Our larger national footprint has improved
our position with big retailers, who have gone through their
own period of consolidation. These advertisers are looking
for broad reach but also want to target specific demos within
an individual market. We can do both.
Targeting is what’s behind the investments
we’ve made in improving our preprint capability at the
L. A. Times and the Chicago Tribune. It’s also the rationale
for the Chicago launch of our 18 to 34 tabloid, RedEye. Our
acquisition of Chicago Magazine and the recent expansion of
our Spanish-language daily Hoy, from here in New York to Chicago
is part of this strategy, too. One size doesn’t necessarily
fit all readers. And that’s also why we invested in
am/NewYork, a daily tabloid aimed at young commuters here
in Manhattan.
Over the years, many in the media industry
have expressed concern about readership trends, especially
among 18 to 34 year olds. Today, with products like RedEye,
Hoy and am/NewYork, we’re addressing that issue. We’ve
been successful in targeting younger demos in broadcasting,
and we’re now using some of those techniques to energize
our newspapers.
Speaking of broadcasting, scale is also important
in this sector, where the bulk of our cash flow comes from
local television. We’re the largest station group not
owned by a network, and we’re concentrated in the major
markets. We cover 40% of US television households, making
us the fifth-largest group in terms of overall reach. (For
FCC purposes, with the UHF discount, our reach is 30%, so
regardless of how the ownership cap issue is resolved, we
have plenty of room to grow.)
Our scale is an advantage for our stations
in accessing the best off-network programming available. Shows
like "Friends," "Will and Grace," and
"Everybody Loves Raymond" have generated great ratings
during early and late-fringe time periods, which account for
a significant part of our overall television revenue.
Our latest acquisition, HBO’s Emmy award-winning
"Sex and the City," is the most recent example of
how our size and market position give us an advantage. When
HBO decided to take its first series into broadcast syndication,
Tribune made the most sense as a station partner. We think
it will be a winner for us, because it’s aired only
on HBO and been available to less than one-third of the country.
For everybody else, it’s a terrific new program with
built-in name recognition. (Of course -- as you might imagine
-- the content has been edited to make it more suitable for
broadcast.)
Our major market footprint also is one of
the reasons Warner Brothers approached Tribune when it was
looking for a partner for The WB in 1995. Eight years later,
we couldn’t be happier with the way that partnership
has worked out. We get quality first-run programming on our
stations squarely aimed at the young demographic most sought
after by advertisers. Warner Brothers gets shelf space for
the programming it produces, and the network gets a powerful
distribution arm.
In fact, Tribune’s contribution to the
WB has been big, as our station group delivers more than 50
percent of The WB’s national audience. Overall, last
season the network achieved its highest-ever ratings for men,
women, and adults 18 to 34 and 18 to 49. And in New York,
Los Angeles and Chicago, Tribune stations often double the
network’s national ratings.
And the network continues making incredible
progress -- earlier this spring, The WB exceeded $710 million
in sales in the upfront advertising market and saw a CPM increase
of more than 20 percent. That’s remarkable when you
compare that total to the other network that started back
in the mid-’90’s, UPN, which did only about $250
million in the upfront.
Our partnership with the WB is just one example
of how national scale allows us to manage costs for the broadcast
group. Add in advantages in negotiating for syndicated shows,
and the ability to launch or expand local news operations
and you have the reasons why the revenue growth and cash flow
margins at our stations have improved dramatically. In fact,
our station group margins are now over 40%.
Combine the advantages of national scale with
our focus on localism, and it makes Tribune an even stronger
competitor.
Local news is a lynchpin in this strategy and along with a
strong network affiliation, is what distinguishes our stations
in a sea of basic cable channels.
Morning news has become an increasingly important
revenue generator for us. In Chicago, our morning news program
on WGN consistently beats NBC’s "Today Show,"
CBS’s "Morning News," -- and the much discussed
cable news morning offerings on CNN and Fox News Channel aren’t
even close.
Here in New York we recently expanded our
successful morning news operation. The WB11 morning news soundly
beats CBS and is very competitive with ABC, NBC and Fox which
have all been airing news in the time period for many years.
Together, our stations produce over 200 hours
of local news programming each week.
Our national scale helps make those local
news programs better. Our Washington News Bureau has been
a big plus -- especially for our smaller stations. It produced
more than 700 live shots for our stations from the Middle
East during the war in Iraq. The bureau also coordinated live
access to newspaper reporters from the L.A. Times and Chicago
Tribune from the front. Our smaller stations like San Diego
or Indianapolis could never afford to send their own reporters
overseas.
Part of our success is based on being deeply
involved in the local community -- to know it inside and out
-- and to give local management the autonomy to make decisions
based on that knowledge.
We don’t dictate the editorial policy
or content of our newspapers or television stations from Chicago.
It doesn’t work. What does work is editorial independence
and an individual, local voice. It showed in this year’s
Pulitzer Prize competition. Tribune newspapers won five awards
-- more than any other media company.
And that is our advantage -- our local advantage
-- mass media businesses in the country’s major markets.
The best newspaper brands and strong local television stations
provide an excellent platform for growth and give us an edge
over our competitors.
So, let me wrap up by reminding you why you
should own our stock, or hopefully more of it if you already
have a position. (We wouldn’t feel right if we left
today without making a pitch!!)
First, Tribune converts about 50% of its operating cash flow
into free cash flow. This is a higher percentage than many
other media and entertainment businesses thanks to modest
capital expenditures and an overall conservative debt level.
In fact our debt to EBITDA ratio should be at a low level
of 1.4x by the end of the year.
Next -- as Peter Appert has noted -- we are
positioned well for an up-turn in the advertising cycle. This
is especially true in the help wanted category, where print
and on-line revenues are down more than 50% from their peak
in 2000. When job creation returns and this category rebounds,
we expect to build on our strong share. Print will most certainly
come back, and CareerBuilder, our on-line bet, is gaining
momentum.
Last but not least, TV should have an excellent
year in 2004. We expect strong ratings from our established
sitcom lineup, lower programming costs and political advertising
that will help to tighten inventory in our markets. Other
good news is that losses from The WB are behind us, and our
31% interest in the TV Food Network is now a positive on our
equity line.
For these reasons -- and many others that
I touched on earlier -- Tribune’s valuation is particularly
compelling right now. Historically, we’ve seen a premium
multiple on TRB, as investors valued our TV cash flow at multiples
in line with pure play TV companies. But after strong out-performance
in the past two years and through the first half of 2003,
we think our stock at today's price is a great value. In fact,
our host today, Peter Appert, upgraded TRB a couple of weeks
ago.
Things look good going forward. We have great
media businesses in the nation’s major markets. Combining
scale and localism has worked for us and we’ll continue
to make it work for our investors.
Thank you, and 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. |
