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Mutant X Articles: 6/23/04 Tribune mid-year review

Excerpt from Tribune Entertainment 6/23/04

Mid-Year Media Review
June 23, 2004

Dennis FitzSimons, President, Chairman and CEO

Good afternoon, I’m Dennis FitzSimons of Tribune Company. Presenting with me today are Jack Fuller and Pat Mullen, heads of our publishing and broadcasting divisions. With us in the audience are Don Grenesko, our CFO; David Hiller, senior VP of publishing; and Ruthellyn Musil, whom all of you know. I’d like to offer special thanks to John Sturm and the NAA, who are hosting this event this year. And we’re especially pleased to be part of NAA and appreciate the great job they do for our industry.
Pat Mullen, President/Tribune Broadcasting
Thanks Jack. I’m happy to be here today to update you on our television business. Let’s first look at how 2004 is shaping up. Then I’ll cover some of the strategies that position us well for future growth.

With nearly 6 months behind us, 2004 is on track and unfolding pretty much as expected….a mirror image of 2003. We had a very strong first half last year, so we faced tougher comps this year than most broadcast groups. However, lower programming costs helped offset higher retirement plan and medical expenses. The result is strong cash flow growth and improved margins. As you know, with our younger skewing programming, we don’t achieve a high share of political business, particularly for the primary elections.

Our first quarter is a good example of how this plays out:

Ad revenues were up 2 percent, compared to growth of 10 percent in the first quarter of 2003.
Our operating cash flow grew 7 percent -- on top of a 20 percent gain in 2003 -- and cash flow margins were up more than one percentage point over last year’s increase of more than three margin points.

In the second quarter, television revenues have shown steady improvement. June should finish in the high single digits.

Moving into the second half, our third quarter pace is encouraging, and fourth quarter should be even better. This acceleration is due to a combination of factors. First, comparisons in the second half ease considerably for our stations. Second is the overall recovery we’re seeing in television advertising, driven by an improving economy and political spending. We achieve slightly higher political shares during the general elections compared to the primaries. But more importantly, political dollars tighten the market overall, which makes our inventory more valuable. Third, we’re enjoying a record-breaking season with the Chicago Cubs which translates into increased ratings and revenue at three of our businesses:

On television, local ratings on WGN-TV are up 30 percent over last year’s terrific ratings and Cubs ad inventory is in high demand.

On a national basis, Cubs ratings on the Superstation is more than 17 percent higher than last season -- so fan interest isn’t just limited to Chicago.

And while we’re still waiting for radio ratings, WGN Radio’s regular season ad sales are already 35 percent higher than last year’s regular season total.

Speaking of the Superstation, we’re seeing good growth in distribution. With the recent addition of over half a million subs in Baltimore, WGN now reaches almost 62 million homes outside of Chicago, up from 52 million just three years ago. Our goal is to increase that to 70 million over the next couple of years. Over time, greater distribution results in increased subscriber fees and helps our ratings -- both important contributors to revenue increases.

The Cubs ratings example brings me to a key fundamental of the television business: programming drives success. And in that regard, Tribune Broadcasting is well positioned for 2004 and beyond.

In primetime, One Tree Hill gained terrific ratings momentum toward the end of the season, and we’re encouraged by the WB Network’s newest hit Summerland. The premiere of this Tuesday-night drama was the highest-rated summer premiere ever for the network in all key female demographics and adults 18-49.

One Tree Hill and Summerland are two of several building blocks in place at the WB, and this fall we’re encouraged by a couple of new shows that are perfectly targeted at the WB demographic. Those of you who were at the WB upfront presentation will remember these shows, The Mountain and Jack and Bobby.

The Mountain is scheduled for Wednesday nights following the WB hit Smallville, demonstrating the confidence the network has in this new series. I’ve described the show as a Melrose Place in the mountains.

In addition, you may recall that two years ago at this meeting there was a lot of interest in the drama Everwood, based on the pilot for that show. It’s now a hit and a core part of the WB line-up. This year, there’s equal enthusiasm for the pilot for Jack and Bobby. It’s the best pilot I’ve seen since Everwood. Jack and Bobby will air on Sunday nights following Charmed.

On a final note regarding The WB, some of you have asked about our affiliation renewal discussions. With the hectic activity of the upfront market and with the recent management changes at The WB, we’ve agreed to a one-year extension and we’ll continue our discussion for a long-term agreement over the next few months.

Another key program strategy for the Tribune group is local news. In the past 3 years, we’ve expanded our newscasts in 5 markets. We’ll soon be adding another half hour to our morning news in New York and LA, by moving up the start time to 5 a.m. That will increase our local news production to almost 225 hours per week across our group. You’ve heard us talk about our strength in morning news in Chicago and Los Angeles. However, in New York, where our a.m. news has not been around quite as long, we’re the fastest growing morning news program and number one in the May book with adults 18-34, beating all the network morning shows and the local Fox station from 6 to 9 a.m.

In addition to primetime and news, we continue to have the strongest lineup of off-network sitcoms, anchored by Friends, Everybody Loves Raymond and Will & Grace. We’ll be refreshing this lineup for Fall ’05 and ’06 with some of the most popular newer sitcoms like According to Jim, My Wife and Kids and Sex in the City, which by the way has had a terrific debut on TBS.

It more than tripled their time-period ratings for adults 18-34 and 18-49 and was the highest rated TBS premiere ever. TBS is airing two shows per week, which bodes very well for our stations when we launch it five nights a week in the Fall of 2005.

With second half momentum building, we’re set up for a strong 2005.

We’re confident we will see ratings recovery from the WB network.

We add Sex and the City to our sit-com line-up in all of our markets.

Driven by efficient programming investments, expense increases will be modest.

And, finally because we are not dependent on political revenue, we expect outperform our peers in non-political years.

On that note, I’ll turn it back to Dennis for some closing remarks...

Dennis FitzSimons
Thanks Pat, thanks Jack. In today’s environment, where increased national choices continue to drive audience fragmentation, you can see why our local mass media franchises are more valuable than ever to advertisers as well as readers, viewers and listeners.

That’s our edge and the primary reason these strong local businesses generate substantial cash, giving Tribune one of the strongest financial positions in the media industry. Operating cash flow will be about $1.7 billion in 2004, and over half of that will convert to free cash flow. There are two reasons we convert at this rate.

The first is due to our low debt level, which means lower interest expense. And earlier this year, we completed a debt refinancing which further reduced this year’s interest expense by $25 million. By year end, debt will be about $1.9 billion, for a debt-to-cash flow ratio of close to 1 to 1.

Second, we have relatively low capital investment requirements. CapEx this year will total about $220 million. We have put a priority on projects that will have a positive impact on our newspapers’ top-line, including additional color capacity and preprint facilities. These projects have an excellent ROI and will help us meet advertiser needs.

We’re focused on investing our free cash flow -- about $900 million this year -- to provide the best return to shareholders.

You have heard us talk about being a consolidator in both television and newspapers. Our view has not changed on the industry pressures that will dictate further consolidation.

But recently, we have elected not to pursue acquisitions, mainly because prices have been too high to give us the rate of return we look for. But we have not been sitting still. As I’ve mentioned before, we’ve launched new products like RedEye, expanded into new markets with Hoy and creatively leveraged our assets. Our partnership in a new regional sports network with Comcast in Chicago is a good example.

Also, we’ve been aggressively repurchasing stock. So far this year, we’ve bought back about 12 million shares at a cost of nearly $600 million.

This repurchase activity indicates two things: confidence in the future and our strong belief that Tribune stock is undervalued.

As you know, Tribune typically trades at a premium to the newspaper group due to our major market concentration and because one-third of our cash flow comes from TV.

But currently, we’re trading at about 9 times 2005 cash flow, substantially behind the publishing group average of about 10x, and even further behind pure play TV at 11.5x.

In addition, investments like TV Food Network, The WB and CareerBuilder add $2-$3 of value per share.

Given recent news, the market is understandably focused on short term issues. But keep in mind that over the long term, for example a ten year period, Tribune’s total return of 14 percent annually has outperformed the S&P Media Index, including many of the large cap names that are in it.

So let me close by listing a few other reasons -- in addition to valuation -- why Tribune is a solid investment:

We operate leading businesses in the country’s major markets, and are uniquely positioned to deliver the local mass audiences that advertisers need to reach.

In publishing, help wanted advertising -- both print and online -- will continue to ramp-up and newspaper margins will improve as revenue accelerates.

In broadcasting, our TV stations should outperform their peers in 2005, as we usually do in a non-election year.

And finally, let me repeat that we are taking action quickly that will address the recent circulation issues at Newsday:

We are instituting additional internal controls across the publishing group.

Quarterly certification requirements are being expanded to include circulation reporting. Every circulation V.P. will have to certify the accuracy of reported figures every quarter, and that ABC rules have been followed.

Finally, our compensation plans are designed so that stock options and bonuses can be revoked in the event of unethical behavior.

It’s no secret to this group that 80 percent of Tribune’s revenues come from advertising. We must have the confidence of our advertisers. As someone who comes from an ad sales background, I know this first-hand. So we will be taking all the steps necessary to ensure that advertisers trust our numbers and our people.

Our company is 157 years old and one of the core values that has seen it through these years is integrity. And that’s not about to change.

Now, we’d be happy to answer your questions.

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