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Transcript

Mid-Year Media Review
June 24, 2003

Dennis FitzSimons, President and CEO
Good afternoon I’m Dennis FitzSimons, Tribune CEO. It’s good to be here in NY. With me today are our division presidents -- Jack Fuller, who’ll talk to you about our publishing business, and Pat Mullen, who’ll cover broadcasting. Also with us are Ruthellyn Musil, vice president of corporate relations; David Hiller, president of Tribune Interactive, and Don Grenesko, our CFO.

Before I turn it over to Jack, I’d like to cover some general trends about our business.

Overall, business is solid. As you saw from our May revenue release, consolidated revenues grew nearly 6 percent in May, with publishing +3 percent, and television +12 percent. Those positive trends are continuing in June. Publishing has improved over May results, despite continued weakness in recruitment advertising. So we’re seeing signs of an advertising recovery on the publishing side. On the broadcasting side, we’re on plan for the second quarter. We hope this advertising improvement accelerates as the year progresses.

Given the strength and resiliency of our media businesses that’s been demonstrated throughout this downturn. The fact that we’re concentrated in major markets, which benefit disproportionately in an upturn, means we’re very well positioned as the recovery kicks in.

We’re also well positioned financially. Projected 2003 cash flow is $1.6 billion, that’s an 8 percent increase over 2002 and we’ll continue to see cash flow margin improvements. About half of that is free cash flow, and that compares favorably to many of our peers in the media sector.

We project debt to be down from $2.8 billion to $2.5 billion at the end of the year. That puts our debt-to-operating cash flow ratio at about 1.5X, giving us plenty of financial flexibility to take advantage of acquisition opportunities that might present themselves.

That brings us to the subject that been generating the most conversation recently - the FCC’s recent rulemaking. On June 2, as you all know, the cross-ownership ban was effectively eliminated, the TV ownership cap was moved from 35 percent to 45 percent and the restriction on two-station clusters was loosened (from eight independent voices to five). The good news for us is that Tribune is now in compliance in all our cross-ownership markets.

Tribune anticipated deregulation. We acquired Renaissance Communications in 1997, giving us a cross-ownership situation in South Florida. We acquired Times Mirror in 2000, giving us cross ownership situations in Los Angeles, New York and Hartford, Connecticut. We now have five markets where we own both a newspaper and television station.

Despite what’s happening in the Senate Commerce Committee, we feel these rules will stand. We think that any momentum created in the Senate will lose steam in the House. We believe Representatives Billy Tauzin and Fred Upton on the House Telecommunications Subcommittee will slow down these would-be rollbacks.

We really think, despite a lot of the coverage you’ve been seeing, that the FCC was statutorily obligated to take a look at these rules to see if they made sense in today’s competitive media environment. They did that and they obviously thought deregulation was in order. Down the road that’s going to benefit us.

But these rules haven’t caused a lot of change in our strategies. Our strategy has been consistent:

• Operate strong mass media franchises in major markets;
• Extend our existing brands such as we’re doing with Hoy in New York and RedEye in Chicago;
• Develop new products, such as CareerBuilder, our partnership with Knight Ridder and Gannett which is working very well for us.

Also, we want to share content, cross-promote our brands and cross-sell advertising among our businesses. We feel this gives us an edge, and enables us to compete better.

In a media environment where audiences are fragmenting, local mass media will continue to increase in value. We’re witnessing the continued nationalization of media.

Advertisers certainly have a lot of national network options. But to reach consumers on a local level, there are not nearly as many options. So, our local mass media assets fill the need of advertisers to reach consumers on a geo-targeted basis and on a demographically targeted basis. We think this will cause us to have continued asset appreciation of our local mass media businesses.

The basis of our strength starts in the top three markets. Tribune is the only media company with newspapers, TV and Internet sites in the top three markets. Those three markets have 16 percent of total U.S. population and 25 percent of households with income of more than $150,000. Advertisers have to be there. That’s why, coming out of this downturn, we feel we’re very well positioned.

Increasingly, we find ourselves in a market share battle with all media. And we see opportunities to grow both revenue and market share. To talk about that, I’ll turn it over to Jack Fuller who’ll focus on the strength of our recruitment advertising franchise, preprints, new product launches, and the advantages we have as the economy improves.

Jack Fuller, President/Tribune Publishing
Thank you Dennis, and good afternoon. Today, I want to talk about help wanted and how it figures in our future. I’ll also discuss how our investments in the high-growth area of preprints are paying off and talk about some of the innovative products that we have been developing using the brands and infrastructures of our newspapers.

After more than 30 months of decline, help wanted advertising is poised to rebound, and Tribune Publishing is well positioned to capture more than our share of it as it does. Our newspapers have posted 2 percent advertising revenue growth year-to-date despite help wanted being down 15 percent. This demonstrates that our newspapers can grow even with the engine of help wanted stuck in reverse. You can imagine the momentum we’ll have once the engine launches into forward gear.

To give you some perspective, in 2000 help wanted revenue at Tribune’s newspapers totaled about $600 million. By 2002 this had been cut in half. The overwhelming majority of this reduction resulted from the downturn in the economy and will come back to our newspapers when the economy begins creating jobs again.

Job creation is the economic factor that most closely correlates with recruitment advertising. Up until recently job creation trends had been quite consistent with what we saw in the economic downturn in the early 90’s. The Iraqi war stalled the recovery, but we believe that we’ll see help wanted in positive territory in 2004. Beyond that, the fundamentals suggest the longer-term future of recruitment advertising is very bright.

Within the next five years the baby boomers will begin retiring in significant numbers. Economists believe this will lead to a shortage of 3 million employees by 2008. This tightening of the labor market will create a highly competitive recruitment marketplace for employees as employers struggle to fill open positions.

As they do, they are going to need to use multiple channels, including both print and online. Gallup recently surveyed job seekers in Chicago and found that:

• 47 percent turn to the newspaper when looking for a job;
• another 38 percent use both the newspaper and go online;
• 9 percent say they use neither.

If you add that up, you can see that an overwhelming majority of job seekers, 85 percent, use the newspaper when conducting their job search. It is no wonder, since we have almost twice as many job postings as the online-only competitors in our local markets.

But what is really telling about this research is that only 6 percent of job seekers said that they looked exclusively online for their search. In other words, an employer who only advertises online barely breaks the surface of the candidate pool.

To get the depth of potential candidates they are looking for recruiters will need exactly what, through CareerBuilder, our newspapers are uniquely able to provide. The centerpiece of our print-online products is the FleXad. FleXads are easy-to-post, integrated print and online listings that deliver tremendous local market reach and value for employers. Monster and HotJobs just can’t match FleXads because they only have the online part.

FleXads are not conventional uploads of agate listings. They put together the unique characteristics of each medium to make something more powerful than either could deliver by itself.

Already customers see the value. We are converting more than 25 percent of our print ads to FleXads now. This conversion rate is rising nicely and we expect it to continue to rise in all our markets.

I was wondering about the 9 percent of job seekers who look to neither newspapers nor online to find a job. Here is one of them in a commercial that we have been running in our markets.

This sort of consumer promotion is paying off. CareerBuilder’s unique visitors grew 46 percent from the fourth quarter 2002 to first quarter 2003. This was more than double the rate of Monster.

I want to walk you through a comparison between Monster and us in Chicago that should put to rest once and for all the myth that Monster offers employers a huge price advantage over newspapers:

• CareerBuilder reaches twice as many job seekers;
• An employer pays $305 for a 60-day posting on Monster, which is only online. For just $55 more they can place their ad with CareerBuilder and have it run in print and online.
• So by using CareerBuilder, an employer can cost effectively reach far more candidates.
• In many of our markets, a print and online package starts in the $200 - $300 range, making CareerBuilder’s price advantage over Monster even more dramatic.

Another important area is the blue-collar segment, which represents more than three-quarters of U.S. jobs. Our print and online strategy positions us particularly well here, given that blue-collar job seekers tend to be heavier users of print. You see this in CareerBuilder’s blue-collar job count, which is twice that of Monster. We’re not sitting on our lead either. We’re on the offense, developing custom print and online posting packages for key categories like transportation, hospitality and retail and, through CareerBuilder, doing heavy outbound telemarketing of these print and online packages.

All in all, we at Tribune Publishing have never been more confident of the future of our help wanted business.

We are also bullish on the continued growth of preprints. Preprint revenue at Tribune’s newspapers has grown 31 percent over the last five years to more than $550 million in 2002, and in many of our markets we have more than 70 percent share of the preprint market. Last year, as the new facilities in Chicago and LA came on line, we saw significant revenue and market share growth: the Tribune grew its preprint market share
4 percentage points to 71 percent of a $225 million market and the Times increased its share by 2 percentage points to 33 percent of a $400 million market. As you can see from the size of this market, getting LA up to the market share levels we enjoy in most of our other markets represents a real opportunity for us.

Meantime, we have been borrowing a play from the broadcasters and using our existing infrastructure to launch new products. The purpose is simple: to increase our share of readers and advertising dollars in order to accelerate top line revenue growth. Here are just a few examples.

In LA, the Times plans in September to launch Distinction, a luxury magazine showcasing the world of affluent and socially minded Angelenos. The Times is borrowing a page from Newsday, which saw an opportunity back in 1996 to create a high-end lifestyle magazine devoted to the best of Long Island. Newsday’s Distinction has a controlled circulation of 40,000 in the areas of Long Island where the household income is over $150,000 – this is a very targeted and desirable demographic for high-end advertisers.

In Chicago, we launched RedEye, a Monday-Friday commuter edition of the Chicago Tribune. We did it with modest incremental costs because we used the Tribune’s existing content, production and promotion resources. Currently available only within the city, this new edition is designed to establish a newspaper reading habit among young adults.

A recent Gallup poll indicates that RedEye is on target. The average age of a RedEye reader is 30 and has an average income level of $63,000. This demo is younger and more affluent than the readers of the Sun-Times or Chicago Reader. RedEye is delivering the young, urban consumer with money to spend.

It’s also building a reputation with new advertisers. To date, RedEye has attracted over 170 new local accounts including restaurants and entertainment venues that have never before run an ad in the Chicago Tribune.

In New York, our Spanish language newspaper Hoy uses much of the same infrastructure that produces Newsday. Hoy is the largest Spanish language daily in New York. And the momentum continues this year – daily circulation jumped 21 percent in the March ABC audit to 91,000 making Hoy one of the fastest growing newspapers in the country. Through Hoy Tribune touches tens of thousands of new readers everyday, and produces an advertising vehicle that reaches one of the fastest growing demographic groups in the nation. We think this model can work in other cities as well.

Summing up, Tribune Publishing is positioned to achieve above average growth because:

• Our integrated print and online products put us in the sweet spot to capitalize on the return of help wanted;
• Our investments in preprints let us continue to grow revenue and capture share in this high growth area;
• Our newspaper infrastructures permit us to launch new products to target important reader segments.

Now here’s Pat Mullen to give you a closer look at the success we’ve been having at our broadcast operations.

Pat Mullen, President/Tribune Broadcasting
Thanks Jack. It is a pleasure to be here with all of you today to talk about Tribune Broadcasting’s growth strategies.

As most of you know, over the past 12 years, we’ve been a disciplined acquirer of television stations in key markets. And as Dennis mentioned, the recent relaxation of the ownership rules by the FCC is an important deregulatory action which will allow Tribune to continue to build scale in the broadcast business. We believe in the advantages of scale and have demonstrated that by our actions. In 1991, our group consisted of just six television stations.

Today, we have 26 stations in 22 markets.

Our stations reach over 40 percent of U.S. television households -- 30 percent for FCC purposes -- with a concentration in the large markets. We are in eight of the top 10 markets, and 18 of the top 30 markets. Now, we have even more room to grow.

We’re confident in the future of local mass media. Going forward, we believe scale will improve our competitive position, so our focus remains clear: Tribune will continue to seek acquisitions in the top 30 markets, which represent 54 percent of U.S. households and 64 percent of spot revenue. We also look to build two-station clusters in both existing and new markets.

Our recent acquisitions are in line with these strategies. In the last year we added WB stations in St. Louis, Portland and Indianapolis, and importantly, all three transactions were done at attractive multiples. Moving forward, even though seller expectations may be heightened by the recent deregulation, our disciplined, patient approach to acquisitions will remain the same.

In addition to our television station strategies, we will continue to grow our national cable channel, Superstation WGN, and build our barter syndication business through Tribune Entertainment.

Scale in the broadcasting business offers many advantages. As the fifth largest station group -- the largest not owned by a network -- Tribune is a leading buyer of off-network sitcoms. Our size improves our access to the top shows, and provides flexibility to negotiate favorable program license terms. These key off-network sitcoms, such as Friends, Everybody Loves Raymond and Will & Grace, which air in both early and late fringe, account for over 40 percent of station revenue.

As for prime-time, we continue to strongly support the growth of The WB Network. Our stations deliver over 50 percent of the networks’ prime-time audience. The WB was the fastest growing network in the November, February and most recently, the May sweeps. And for the season, the network posted the strongest growth of any broadcast network across the key demos, up 17 percent in adults 18-34 and up 13 percent in adults 18-49. And in the recently completed network upfront marketplace, The WB generated nearly $710 million on CPM increases of more than 20 percent. By far and away the best year-to-year increases of any network.

The WB sales team has done a terrific job of demonstrating to national advertisers the value of targeting younger demographics. These are the viewers that are beginning to make decisions about which brands they will buy for years to come... and these astute advertisers are going after that target audience today. Just as national advertisers recognize the value of younger demos, advertisers in the local marketplace are also changing their buying habits to target younger viewers. And that bodes well for Tribune stations. All in all, we couldn’t be more pleased with our 22 percent stake in the now profitable WB Network, and the value that the network brings to our local stations.

Scale is also valuable within local markets. Tribune has four two-station clusters... we like the model, and we’re looking for more. There are obvious advantages, including shared facilities, backroom operations, cross promotion and joint selling... but one of the most important advantages is the efficiency and the flexibility of programming. After forming a two-station cluster, there is one less competitor for programming within a local market. This leads to better access for the station and pricing on key off-network sitcoms, and a "market license" which provides the flexibility to air these shows on either or both stations. Given time, we think a two-station cluster in a market can improve cash flow by as much as six points.

We know you look for results, and we can demonstrate the value of scale in the bottom line. Our cash flow margins for the television group have expanded by over 8 points since 1995, a period in which Tribune grew from 8 to 26 stations.

In addition to our core station operations and network partnership, we have several national television assets which complement our local strength. Superstation WGN is now available in over 57 million homes, and provides us with dual revenue streams -- advertising dollars and subscriber fees. We have other holdings in cable programming as well, -- a 31 percent stake in the Food Network and 9 percent of The Golf Channel, which by the way, Comcast has announced will be on their basic service. We’re delighted with the increasing value of all of these investments.

Also, Tribune Entertainment remains an important source of programming for our local stations and is building scale in distribution in its own right. As we did a year ago with Fremantle, Tribune Entertainment has recently entered into an agreement to take over the domestic distribution of programming from Hearst Entertainment.

And finally, before I turn it back to Dennis, I would like to talk for a moment about our cross-media efforts. We’re creating value from cross-media in three ways: cross-selling…content sharing... and cross-promotion. On the cross-selling front, Tribune Media Net is on course to deliver $70 million in incremental revenue to the company this year, over half of which derives from cross-media advertising. As for content sharing and cross-promotion, we’d like to show you two examples, one from Los Angeles and one from New York. The New York piece clearly highlights the cooperation between WPIX and Newsday. And the LA spot will show you how we’re utilizing KTLA to help re-launch the Calendar section of the Los Angeles Times.

Dennis FitzSimons
Let me just summarize a couple of things.

• We want to be a leader in TV consolidation.
• Expand our national footprint, because we still believe broadcast TV is the best way to hook advertisers to consumers, especially in major markets.
• Continue to build two-station clusters where we can, and the opportunities will be greater now that the FCC has deregulated.
• Grow overall market share by taking advantage of the growth of The WB Network. As the WB sales team has more success convincing national advertisers of the wisdom of reaching consumers when they’re making their brand decisions in their 18-34 years, that will be an advantage for us that increasingly shows up locally.
• Grow our newspaper business by leveraging our existing brands and infrastructure to launch new products such as Hoy and RedEye.
• Win in classifieds -- print and online. As the upturn comes, help wanted is going to be a big upside for us. We can grow share in the online sector as well as see our print franchise come back. We certainly want to continue to create value in Interactive.
• We have the financial flexibility to take advantage of acquisition opportunities. But we’ll continue to have the financial discipline that we’ve exhibited all along.

Speaking of ad recovery potential, we’re poised for that rebounding ad environment we see coming. We recognize we’re not just competing with other newspapers, but with all the players in the media sector. We’re looking at overall market share. We have strong franchises in great markets to build on. We think investors are recognizing this, as Tribune, over the last 12 months, ranks as the number two media stock in terms of total return, behind only Comcast and ahead of some other great companies like Disney, Gannett, Knight Ridder and the New York Times. We think things have been going well, but we think we have a lot of upside from here.

Before we go to Q&A, a couple of things I would like to mention. We anticipate some of you are focused on the Baltimore labor situation. Our contract with the newspaper guild expires tonight at midnight. And what we would say about that is that significant progress seems to have been made at the bargaining table, but there are also some significant issues that are still unresolved. We feel that since the Times Mirror merger three years ago we have made a lot of progress on the West Coast and now we have the ability to make some progress on the East Coast. We're looking for operating flexibility and again we have a very positive relationship with many of the unions in our company. We did manage to negotiate 18 contracts last year, and we have over 40 different unions that we deal with. And we believe in having very good relationships with our unions; but we do need, in this kind of competitive environment, to have the operating flexibility in Baltimore to achieve the kind of market share growth that we want to achieve and need to achieve. And we will be happy to answer any further questions you might have about Baltimore.

The other thing, I can never miss an opportunity, because we don't have it too often, to mention that our Cubs are in first place in the Central Division and we were very pleased to take two out of three from the Yankees. That was really a great weekend. John Kornreich wanted me to swear to him that these results are not corked. We get a serious benefit with the Cubs. Against the White Sox on Sunday, we did a 14 rating and 32 share on a beautiful Sunday afternoon in Chicago. So when the Cubs get hot, all of Chicago watches, as well as increased viewership around the country for Superstation WGN. This is a benefit to us that we hope to be able to talk about all season long.

So with that, I will open it up to questions.

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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.