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Transcript

Mid-Year Media Review
June 22, 2005

Scott and Pat will bring you up-to-date on business trends, but first let me cover some short-term issues we are managing through and then review our strategies. You are all aware we’ve faced a number of challenges in the past year, but none of these issues has changed our belief that the business of newspapers and television is resilient, and provides a strong base for our future growth.

And we are making good progress toward resolution of our short-term issues. So, let me bring you up-to-date on where we stand, starting with publishing and Newsday.

On the legal front, you may have read last week about the arrests last week of three former circulation employees at Newsday and Hoy. What’s important here is the charges filed by the U. S. Attorney’s Office mirror the conclusions reached in our internal investigation. The fraudulent circulation programs, responsible individuals, and time frame identified by the authorities are the same as what our internal investigation uncovered last year. So there no new news here.

Turning to the situation with advertisers at Newsday and Hoy/New York, we will substantially complete our settlement process by the end of the second quarter. So far, we have settled with more than 33,000 advertisers, including more than 80% of our largest advertisers. We continue to believe our $90 million reserve will be adequate.

At the Los Angeles Times, we have a new management team that is focused on improved sales results and rebuilding the circulation function. Throughout our newspaper group, initiatives to improve circulation trends are taking hold; Scott will talk more about that in just a few minutes.

At The WB, the network upfront produced good results and we’re looking forward to an improved fall schedule. Pat will have more on that, as well as overall broadcasting trends.

The issue of media ownership deregulation is once again back in front of the FCC. Given that the Philadelphia court affirmed the commission’s original positive view of major market cross-ownership relief, we hope for as swift a review as possible.

In the Matthew Bender tax case, we recently filed final briefs, as did the government; outside observers said that our lawyers presented an excellent case. As we’ve said before, we expect a ruling on this in late 2005 or early 2006.

Even as we work to resolve these short term issues, we’re looking to the future and continuing to invest in both our core and complimentary businesses.

It’s clear that the fastest growing segment of the advertising economy is online. Between 2004 and 2005, online ad spending is projected to grow about 30% to almost $9 billion. It’s still a relatively small percentage of the total, about 3%-3.5%, but it’s growing rapidly.

We have invested and we will invest further to get a bigger share of that growth. Tribune’s interactive businesses represent the fastest growing segment of our company. A large part of this is CareerBuilder, our online recruitment resource, which we own with Gannett and Knight Ridder. Last year CareerBuilder network revenues were $280 million, up 76% over 2003. And through May of this year, network revenues are up 82%. We’re also seeing excellent growth at Cars.com and Apartments.com.

We have similar expectations for other joint ventures including ShopLocal.com, which provides consumers with online access to merchandise available in retail shops in their area and Topix.net, an Internet aggregator of news stories that allows consumers to search for information by ZIP code or subject matter.

But one look at this forecast for 2008 tells you that traditional media will continue to be an essential option for marketers and the major component of ad spending. It’s no secret that our most important task is to generate better top-line growth in these sectors.
And we’re making high-return capital investments to make that happen. New preprint facilities and additional color capacity investments are already paying off.

Tribune’s strategy is based on the ability to deliver both mass and targeted audiences. We can do this by offering advertisers and consumers an array of media choices, built around local franchises.

Adding to our strong newspaper positions has worked for us in Chicago and South Florida. We will look to launch or acquire additional complementary assets in order to continue to extend our reach in other top markets.

Here’s a quick look at how this has worked for us in Chicago, where we offer consumers varied media choices like the Chicago Tribune, RedEye, and WGN television and radio. We also own Chicago magazine, Hoy/Chicago, CLTV, our 24-hour cable news channel, and Tribune Direct, our direct mail operation. And we have a strong Internet presence with our newspaper sites Chicagosports.com and Metromix.com, our very successful entertainment site. Together, the weekly reach of these properties is 6.4 million people or more than 90% of the market.

Chicago represents the third-largest ad market in the country, valued at about $4.3 billion. And overall, Tribune properties capture about 20% of that.

Advertisers clearly value the local market audiences we deliver. By offering the right content and sales strategies, we can grow our share of the advertising in our local markets.

Our local media franchises will generate more than $1.5 billion in operating cash flow this year and about 50% of that will convert to free cash flow.

We’ve used that cash to return value to shareholders. Earlier this year, we increased our dividend by 50%; over the past 5 years, it has increased 64%.

We’ve also been repurchasing stock—more than 15 million shares last year and year-to-date, we’ve repurchased more than 5 million shares. We have about $400 million remaining on our current share repurchase authorization.

As noted earlier, we also are investing in our business. In addition to preprint facilities and additional color capacity, we’re making “tuck in” acquisitions of online businesses as well as related media in our local markets.

Our financial position is strong. We are among the few media companies with over-funded pension plans, so there is no present need to make additional cash contributions. And we have a strong balance sheet with a debt-to-cash flow ratio of 1.3x.

In summary, Tribune is a strong company with great assets, great markets, excellent people and lots of opportunities ahead of us. We can, and will, deliver better results.

Let’s hear now from Scott, then Pat, and I’ll be back to take your questions.

Scott Smith President/Tribune Publishing
Thanks, Dennis. I’d like to give you a brief update on our four key priorities for improving results in our publishing group performance eight months into my stint as head of the group.

Our first priority is to grow readership and online audiences in ways that deliver excellent results for advertisers.

There’s been a lot of discussion recently about the relationship between paid circulation, readership and advertising responsiveness, including several reports that attempt to define circulation quality.

We believe strongly that circulation quality is ultimately measured in terms of real readership. In general, the best read copies are those that are “individually paid” as reported by ABC, with home delivery the most valuable to advertisers, followed by single copy.

Our experience is that advertisers don’t ask how much consumers pay, so we disagree with the premise that individually paid circulation where the price has been discounted is only half as valuable to advertisers as some suggest. What different readers pay and our costs to reach them are key drivers of our circulation economics, but there is no evidence to suggest that the amount paid by consumers is related to how they respond to ads.

On the basis of “individually paid” circulation, our results were more in line with our major market peers in the ABC March reporting period. And we expect to substantially reduce the year-over-year declines by the September ABC reports.

We are deliberately managing down the category of “other paid circulation” more than many our peers. Selective hotel, NIE and sponsored copies can be worthwhile, but have less value to advertisers than individually paid copies.

In keeping with our belief that what matters most is readership, let me share the latest data from Scarborough for several of our papers. Newsday, despite the sharp decline in paid circulation due to the misstatements discovered a year ago, shows daily readership down only 3% and Sunday actually up. Readership overall at Newsday has actually grown over the past several years according to Scarborough.

Scarborough also shows that readership at the Los Angeles Times and the Baltimore Sun are down far less than paid circulation. The Orlando Sentinel’s readership is up daily.

As you know, we have major initiatives underway to improve both readership and circulation with emphasis on subscriber retention. Churn is declining across our papers, particularly at the Los Angeles Times.

Key tools in these efforts are consumer marketing databases that allow us to target how best to sell and retain individual customers in key market segments.

We’re also making significant new investments in promotion at each paper. Newsday, for example, is running a daily multimedia campaign that emphasizes information you can find only in Newsday.

As you can see, our newspapers are also taking major steps to make editorial content more accessible, engaging and distinctive. We’re improving navigation graphics, headlines and story selection with a focus on content that readers find useful and entertaining.

Our second key priority is to grow ad revenue and share. As you know, combined publishing and interactive ad revenue growth through May has been a little over 1%, or about 3% before the impact of lower ad rates at Newsday. We started the year relatively well, but results since mid-March have softened. The comparisons become somewhat easier in the second half. We’ll also cycle through the Newsday rate reductions by the fourth quarter.

We know that some of you are concerned that lower circulation will impact our ability to grow ad revenue. Please keep in mind that advertising is sold on many factors, and circulation is just one. We sell audience profiles and reach along with the responsiveness of our audience. Ultimately, advertisers pay for results, and we continue to deliver excellent results compared with their other local media choices.

One of the key ways we’re doing this is by increasing color advertising. LA’s new color capacity is fully operational and part of Chicago’s is now available also.

Today I want to highlight the innovative ads we’re introducing across all our papers. Here are several examples we have sold at premium prices over the past few months. There is also this Chicago Tribune special advertising section that highlights innovative content in the Tribune and shows really compelling ad shapes and sizes and new positions in the paper. We believe these unique ads will generate additional revenue this year and many years ahead, particularly in the national category.

Our third priority is to make sure we have the right people in place to improve top-line growth. The new team at the Los Angeles Times is a good example: Jeff Johnson, publisher; Dave Murphy, general manager, with a very strong sales and marketing background; Todd Brownrout, who we hired to head advertising; and Jack Klunder, who we brought in to lead circulation.

In addition, Ken DePaola, who has a great track record at the Chicago Tribune, will assume Dave’s former responsibilities as president of our national sales organization, Tribune Media Net.

Our final priority is to continue our drive for cost efficiencies. Total cash expenses in the publishing group were down in the first quarter, and will be down for the first half as well. A lot of this is driven by the year-to-date reduction in full-time equivalent employees of more than 5%, which is over 1,000 fewer people than a year ago.

As we look at the second half in light of the soft revenue picture, we are committed to expenses remaining under last year, even with an increase in promotion spending and cycling much of last year’s staffing reductions. We continue to look at innovative ways to further reduce structural costs over the longer term as well. And on that note, I’ll turn the podium over to Pat.

Pat Mullen, President/Tribune Broadcasting
Thank you Scott, and good afternoon everyone.

Softness in the television advertising market has persisted in 2005, especially in the larger markets. So it’s been a challenging first half.

As you know, our TV revenues are being affected not only by the overall ad environment but also by the impact of Local People Meters, or LPMs, in our top markets. This new measuring technology by Nielsen tends to under-report the TV viewing habits of minorities and young adults. These are important audiences for our advertisers, and are key demos for our WB and Fox stations.

Last month, Tribune and 16 other television groups asked Nielsen to stop the further rollout of LPMs until the service is fully accredited by the Media Ratings Council. Nielsen responded by pushing back its LPM rollouts for 30 days in Philadelphia and Washington D.C. Tribune will continue to be very aggressive in seeking improvements in the LPM system.

By the end of 2005 we’ll have cycled through the impact of LPMs on ratings in the top three markets.

Looking forward, we do see a number of things that make us more optimistic about 2006.

Program development at the WB Network has been terrific and we’re excited about the upcoming fall season. The network’s upfront in May was a good start, with the network booking around $675 million. That’s even with last year, but reflects a CPM increase of about 3 percent.

Two new shows that really turned heads at the upfront were “Supernatural” and “Just Legal.” The WB Network is clearly attracting the industry’s top creative talent.

We’re confident that The WB’s access to the top Hollywood creative talent will lead to improved prime-time ratings this fall for our 19 network affiliates.

The programming that surrounds prime time in the fringe periods is another key to success. Off-network sitcoms airing in these time periods contribute nearly 40 percent of our local TV revenues.

This fall, we’ll freshen our sitcom lineups when “Sex and the City” joins the late fringe schedule in all Tribune markets. About half of our stations, including the top three markets, will add “My Wife and Kids” to their early fringe schedules.

“Sex and the City” is our first “off-cable” program and shows how we’re working to broaden our sources of programming. This series, with episodes tailored for broadcast television, is a great fit with our current late fringe sitcoms—“Friends,” “Will & Grace,” and “Everybody Loves Raymond.”

Another example of tapping new programming sources is our partnership with Sony Pictures Television. Last month we announced an agreement that calls for Tribune Entertainment and Sony to develop and produce first-run syndicated programming for the entire Tribune station group. Our first project together will be a daytime series debuting in fall of 2006.

We’re seeking similar production agreements with other Hollywood studios to ensure that we continue to provide the very best programming for our station group.

Another important programming element is local news, and morning news in particular. After expanding our existing newscasts in New York, LA, Chicago and Seattle this past year, we added morning news in San Diego and Sacramento this spring.
We continue to see solid morning news ratings in the top markets. KTLA is the No. 1 morning news show in Los Angeles. WGN is ranked #2 in Chicago but dominates the key demos, beating all other morning shows including “Good Morning America” and the “Today Show”. During the May sweeps, WGN ranked No. 1 among adults 18-to-49 and 25-to-54 from 7 to 9 a.m. And audience share in New York was up 4% year-over-year as well.

We’ve also had terrific results in our mid-size markets. Morning news ratings increased 82% in Seattle and 36% in Denver. We’re anxious to see the demo ratings in these markets when the books are released later this week.

Tribune TV stations now broadcast a combined 240 hours of award-winning, local news every week. It’s a good business for Tribune, and it helps our TV stations build close ties with their local communities.

Superstation WGN also continues to grow. Over the past three years, distribution has expanded from 52 million to 66 million homes, well on the way to our short-term goal of 70 million homes. Over time, greater distribution results in increased subscriber fees, and helps our ratings—both important contributors to revenues.

One reason for the Superstation’s momentum is our own Chicago Cubs. The team is a valuable and unique source of programming for the Superstation as well as for WGN-TV and WGN Radio locally.

The Cubs also enabled us to secure an ownership position in Comcast SportsNet Chicago, which launched last October. Tribune owns 25 percent, so we share in the channel’s profits while also receiving substantial rights fees for the 72 Cubs games airing this season.

Obviously what we put on the air is critical to our success in television. But how we put it there is important too. On the operations side, we emphasize innovation and economies of scale.

Our all-digital Centralized Program Distribution Center is now up and running in Indianapolis. The facility receives, formats and distributes shared programming to Tribune television stations, eliminating redundant efforts in our local markets and reducing headcount.

During this time of slower revenue growth, being efficient and controlling costs is more important than ever. That focus will not change and it will position us for better results.

Another positive going forward is The WB’s decision to end children’s programming on weekday afternoons. Beginning in January 2006, the network will air general entertainment programming from 3 to 5 p.m., creating a larger afternoon audience and more advertising demand. The change also benefits our audience flow and provides a new window for promoting other programming.

And finally, 2006 will be an election year, and we expect the campaigns to tighten up inventory in some of our local markets.

So, in summary, smart programming decisions and efficient operations will drive our success. Our local stations are well managed, we’re in great markets, and we have a solid programming strategy which sets us up well for growth.

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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.