E W Scripps Co (SSP) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the 3rd quarter earnings report teleconference. At this time, all participants in a listen-only mode. Later we will have a question/answer session. I will give you instructions for that right now. If you wish to ask a question, please press 1 on your touch-tone phone. If you're using a speaker phone, please pick up your handset before you ask your question. As a reminder, this conference is being recorded and it will also be replayed. You may stay on the line at the conclusion of the call for the replay information. If you need assistance while on the call, simply press zero and then star and an operator will come onto your line to assist you. Now I'd like to turn the conference over to our host and first speaker, the Vice President Investor Relations, Mr. Timothy Stautberg. Please go ahead.

Good morning, all and thanks for joining us. And thanks for waiting for a few minutes to get everybody in. We will start the conference call off this morning with a few brief conference from Kenneth Lowe, our president and CEO. Then Joe NeCastro, our Chief Financial Officer. Our prepared remarks shouldn't take any longer than 10 minutes. Then we will open it up for questions. Other members of our senior management team also here with us and available to take your questions, joining us on the call are Rich Boehne, Executive Vice President. Alan Horton, Senior Vice President for newspapers. Steve Sullivan, Vice President of newspaper operations. Frank Gardner, Senior Vice President and Chairman of Scripps Networks. John Lansing, Senior Vice President for broadcast television. And Laurie, Vice President.

If you haven't received our 3rd Quarter earnings press release, call Sara at 513-977-3719. Also, we offer a live audio webcast. If you prefer to listen in on the web, go to Scripps.com and click on Investor Relations and follow the live webcast link at the top of the page. An audio archive of the call will be available on Scripps.com later today. We will leave it there for a few weeks so you can access it at your convenience. A replay will be available by telephone at 2:30 this afternoon through midnight Sunday, October 13 by calling 1-800-475-6701. The international number is 3230-365-3844. And the access code for the replay is 652-951.

Our discussion will contain certain forward-looking statements this morning. Actual results may differ from those predicted. Some of the factors which may cause results to differ are set forth in our publicly filed documents, including our 2001 form 10K and latest form 10Q.

Now here's Ken.

Thank you, Tim and good morning, everyone, we appreciate you joining us. Scripps has just completed an outstanding 3rd Quarter. Our cable television networks posted superior operating results. There's been significant and fundamental improvement at our broadcast television stations, and that's really not even taking into account the expected boost we're getting from political advertising. And our newspapers showed modest growth, thanks to stabilizing local ad markets, some lower newsprint prices and growing profitability in Denver. All this, despite the stubborn uncertainty that's been dogging the economy. But that's not all.

We also took a couple of very important strategic steps forward during the past three months. First in August, we announced our intention to enter the growing $6 billion television retailing market by acquiring controlling interests in the Shop At Home network. We think Shop At Home is a very, very good fit. The acquisition is consistent, I might add, with our strategy to find attractive entry points in the growing markets. Plus, we believe we can create value at Shop At Home by leveraging our expertise as cable TV programmers and building on our cable and DBS industry relationships; same is true with advertisers. We hope to wrap up the deal by the end of the year. We're waiting for shop and home shareholders to give us the nod later this month. We will let you know as events unfold there.

In addition to Shop At Home, we successfully negotiated a very important carriage deal just a couple of weeks ago with Direct TV that immediately put Fine Living into an additional 11 million U.S. households. And for a little icing on the cake, Time Warner flipped the switch, making our newest network, Fine Living, available to half a million cable TV customers in New York City. Fine Living now reaches 13 million households, and that's just a mere eight months after we launched this network, quite an accomplishment in our opinion, as it bodes very well for the network's future. Now, we've accomplished all of this by staying focused on our commitment to create value at Scripps over the long-term.

About 18 months ago, as the economy headed into recession, we chose to stay focused on our growth strategies; specifically, we chose to continue investing under the expansion of Scripps Networks while at the same time making certain that all of our established media businesses were positioned to take advantage of any uptick in business conditions. Based on our 3rd Quarter operating results, we'd say our strategy is definitely working. Now, in addition to getting Fine Living off to a good start, we successfully expanded distribution of our other three cable networks. HGTV and Food Network are now both approaching 80 million subs. And DIY, our digital and online how-to service is in 12 million cable and satellite TV households.

We've also been investing a new original programming to drive viewership, especially at HGTV and Food. That investment is paying off in higher ratings and household numbers, which, in turn, has accelerated cash flow growth at both of our flagship networks. More people are watching HGTV and Food than ever before.

During the 3rd Quarter, year-over-year primetime viewership was up 29% at the Food Network and 35% at HGTV. That's translated into stronger than expected ad sales, both during the upfront season and in the scattered market. And we believe the phenomenal growth of our networks demonstrates our increasing ability to deliver to advertisers and to passionate viewers who are also motivated buyers, I might add, into a clearly defined consumer category area.

Now, we continue to believe that investing to expand Scripps Networks is the best use of the company's capital, expanding Scripps Networks remains our top priority and we continue to stay that course.

Now, before I turn it over to Joe, I'd like to spend just a minute talking about a project that we're very, very proud of here at Scripps. I had the pleasure a couple of weeks ago of participating in the dedication of the new Scripps Howard school of journalism and communications at Hampton University in Virginia. It was made possible through a generous commitment of time and money from our arm, the Scripps Howard foundation, led by its president and CEO, Judy Clays. If you're not familiar with the work, our foundation dedicates itself primarily to educating journalists and media professionals. A couple of years ago, the foundation decided to partner with Hampden to address the media's need for more diversity in the board roops. We chose Hampton because it is a leading historic black college and university and because the president, Dr. William Harvey, shares our vision to create what we believe someday will be one of the nation's top 10 journalism programs; from what I saw when I was there, we're off to an excellent start. There is a beautiful new building with all the latest technology and about 140 journalism and communications students enrolled in the program this fall, its inaugural semester. I want to congratulate judy, the foundation and Dr. Harvey for working on a solution to the persistent industry problem.

Now I will turn it over to Joe to talk about our numbers. Joe?

Thanks, Ken.

We finished the 3rd Quarter a lot stronger than we had anticipated as recently as just a few weeks ago. The improvement was due to a few factors, the first was the unexpected strength of the scattered advertising market as it unfolded for HGTV and Food. In addition, local and national advertising at our broadcast television stations finished better than we anticipated. Political advertising gave our stations a nice boost, but it came in where we expected.

Excluding Denver, our newspapers finished the quarter right on target, both revenue and EBITDA were flat to last year, which we think is about as good as you can get in the current newspaper advertising department. Our newspapers continue to benefit from lower newsprint prices, which were down 24% from last year's 3rd Quarter. Of course, newsprint suppliers are raising prices, but we expect the increases to take effect more gradually than originally announced because of the sluggish economy. To throw Denver back in the mix, newspapers had had a modest revenue and cash flow growth in the quarter. A swing in Denver was more than $2 million to the plus side as we continued to reap benefits from our joint operating agreement there.

One word about corporate expenses, much of the increase in corporate spending is directly attributable to the good year we've been having.

We've been including more for performance incentives as it becomes that we're going to finish the year well above plan. Turning to the company's capital structure, we ended the 3rd Quarter with $645 million in total debt, and as we mentioned in the release, we also replaced our revolving credit facility which expired in the quarter, and we reloaded our shelf registration at $500 million. We've been using some of our increased cash flow to pay down debt, but we expect it will rise again at the end of the year if we complete the Shop At Home transaction as expected. We continue to project that our capital spending for the year will finish roughly at $80 million.

Looking out to the 4th Quarter, we expect strong advertising growth at Scripps Networks to continue. Based on what we're seeing right now, it doesn't look like there's going to be any letup in the scatter market, at least for us. We think cable network advertising revenues will grow between 40 and 45%, and affiliate fee revenues should be up 35% net of amortization. Operating cash flow losses for DIY and Fine Living will be about $9 in the quarter, reducing earnings per share by about 7 cents a share.

Newspaper advertising looked a little better in September, but we're not ready to jump up and down just yet. We think there is a good chance that newspaper ad revenues could keep bumping along for the next three months. For now, we anticipate modest to low single digit increase.

Broadcast TV revenues, including political are expected to be up 10 to 15% in the 4th Quarter. We are expecting political advertising to reach about $12 million during the quarter compared to $1.4 million last year. Consolidated, net income per share from core operations is expected to be between 78 and 88 cents, compared to an adjusted 61 cents per share in the 4th Quarter of 2001. To be clear, this range does not include any potential impact from a Shop At Home transaction in the quarter.

And that's a brief look at the numbers. We're ready to open it up for your questions. Tim?

Okay, our first question comes from Credit Suisse First Boston; we go to the line of James Weepy. Go ahead.

Hi. It's actually Bill. Can you hear me okay?

Yes.

Okay three, quick questions. One, newspaper advertising, excluding help wanted if you look at it that way, can you isolate help wanted, what it's doing at the moment? And what the other categories with that. And two, on the cable networks side, can you remind us where you were in the up-front going into the season, so isolate scatter trends versus up-front? And then third, with the new season under way, primetime season under way, are you seeing anything on the local ratings at your ABC affiliates, either to the better or the worse, you know, around the lead-ins and lead-outs on the primetimes? Thanks.

Thank you, Bill. We will split it up. Alan and Steve, newspaper advertising excluding classifieds. And Frank, if you could handle the cable network piece. And John Lansing, primetime ABC question. Alan?

I will start by saying a couple of things, Bill, about the -- you asked what would advertising revenue be up if we excluded un-- employment advertising, and frankly I haven't figured that out, we will do it while we're talking, but in the quarter, our ad revenue was up slightly. Our volume was also up slightly. Meanwhile, employment was down, and I will give you the exact number: Employment was down about 11.5%. But, remember two things about that, the first is that we -- we did -- I get kidded about this, but we did lose another Sunday in the 3rd Quarter. And compared to last year. And employment is particularly heavy on that -- on Sunday. So, and in September, when the Sundays were even, employment was down from last year only 5.5%. So, we're just about to cycle on the decline in employment, we believe, across-the-board. A number of our markets already have. We still are lagging in Ventura, in California, which I think is a trend that we will see for the entire area. And obviously Denver still has -- is still not quite to the cycling point in employment, but very close. So, the answer to your question is we were probably up in the low single digits without -- without employment in the -- in the quarter in advertising revenue.

Okay. Frank, you want to take the cable network up-front versus the scatter?

Yes, Bill, despite all the earlier-in-the-year negative predictions, the cable up-front and cable market as a whole, taking the whole industry into account, was up about 15 to 20%. HGTV and Food were up by well in excess of twice that rate. And the -- even more important piece of that story is the cost per point situation. A number of the larger less-targeted, more general interest cable networks, as we say in the business, dive for share, and they lowered their cost for points, and in so doing, they also ate up more runway in the scatter market; and our people, happy to say, had a very good plan strategically going into the up-front market. They held firm, they actually walked on some fairly significant business and they held their rates and said no. They still went up more than twice what the industry was up in the up-front, and while a lot of other cost per point rates at major, major networks were going down, ours were up in healthy single digits. As a result of all of that, our scatter situation is quite good right now. We have enough runway and there is enough pressure in the market we're able to not only, you know, take the benefit of all that extra runway, but do it at a higher rate than all of our peers. So, the scatter situation, coming on heels of a very good up-front situation is quite good, and the rough ratio is 60% for the up-front and about 40% for the scatter in terms of sales inventory expenditures. So I hope it answers your question.

And I would add, Bill, you know, it's something we've been saying all along, the targeted networks, with the efficient reach, and targeted audience continue to do much better than cable overall, and I think what you're seeing is what we've been talking about all along and that's the continued growth of targeted cable networks. That was true not only in the up-front, but we're really feeling it in the scatter. John, the primetime ABC question?

Sure, Ken. Bill, the short version of this is there are modest signs of improvement on the ABC network. If we look at, for instance, Tuesday night, the new program "8 simple rules" followed by "Life with Bonnie" "Less Than Perfect" moved into a number one position in adults 18 to 49 in the 8:00 to 8:30 half hour with a good flow-through into the next hour. NYPD Blue, in addiction is leading the time period at 10:00 on Tuesday, and although we're used to it being on the schedule for many years, this is actually the first time that program has been in pattern at a 10:00 on a Tuesday in five years because of other programs they've been trying out in the time period. So, that's a positive. Monday night football with John Madden improved year-over-year, and we're seeing Sunday night continue to show some strength. With all that said, though, Bill, we still have ABC down 10% in key demos year-over-year, although they are certainly improved over the May sweep. It just really is indicative of the hole they really dug, but I do think these are the kind of positive signs we were looking for that perhaps the worst is behind us and they're on their way out of that hole.

Thank you very much.

Before we go to the next question, let me remind you to please press 1 if you wish ask a question, and if you're using a speaker phone, please do pick up your handset. And next we go to the line of Lauren Fine at Merrill Lynch. Go ahead.

Thank you. I guess a question for Frank back on the Scripps Networks. If you can talk about the increases you're seeing; is this supply-driven in that there isn't a lot of supply elsewhere? People are flocking to cable networks? Or is it truly demand driven? And I guess related to that, if you could discuss where are you seeing -- which categories are particularly strong with gains, auto, retail, CPG or where the strength is coming from?

Well, I'm pattern tends to say that the strength, in terms of categories; sort of across-the-board. Obviously [INAUDIBLE] are strong because the 0 financing obviously continues to propel that whole category, but we're not seeing significant -- any painful downside to any particular category. The important thing to understanding us as it relates to ad sales is what Ken said earlier. This was the season when the premium for being a very precisely-targeted network started to really kick in and that's why our cost for points were up in healthy, and I mean healthy single digits, while other, bigger networks, even more widely distributed that, were not only flat, but in many cases down. It is not because they love us, it's because they know we're delivering and aggregating the right eyeballs and know that's worth more. That truly is the bottom line on our ratings, demos and targeting. We continue to be very strong, you see all the articles I see. The housing, remodeling boom continues at pace. That obviously is a huge plus for the Lowes and the Home Depots of the world. They're key to our category. So, our ad strength, happy to say, is pretty solid and uniform across-the-board.

Frank, one other question, do you have any inventory left to sell in the 4th Quarter?

We have some inventory left, we've been very judicious and very cautious about it. This is a game of cat and mouse -- at the end of the day, the whole sales market,our business, gets down to calling the market, you know, gambling how much to sell now at this rate versus how much I'm going to save for later and hope to get a better rate. Happily our people have truly out-performed a lot of peers in that regard. As I said earlier, we talked on very significant business earlier in the up-front market. We just said no, because we had a lot faith in the ratings improvement and demo improvement that we were seeing daily to be able to wait it out. We did that and it paid off. We still have some runway left in scattered, but it is supposed to be narrowing down to a precious few. We have some capacity left and the pressure is good and our rate integrity is exceedingly good.

And how is your crystal ball for the 1st Quarter?

I wish I had a crystal ball; we're just getting into the budgeting process. It is way too early to say. There is no reason to believe that things won't look good for Scripps Networks, and the reason I say that is because every week our ratings and demo delivery gets better and better. And there is always a lag between ratings improvement and the way you cash in on that with sales. It takes a while to get that word out in the sales community. So, if you're already approaching the 4th Quarter with brand-new improvements, you know, across the board in demos on all the networks that, only goes to -- to prove that the outlook is good for sales in the coming quarter or even all of next year. We're way too early in the cycle of planning the budget to be, you know, exceedingly definitive about that, but all the indices on which you base a prognosis are quite good right now.

And Ken, given that you're in the, you know, interesting position of owning across different medias, you're seeing good strength in TV and cable and not such good strength on the newspaper side. Do you think there is a fundamental market share shift because advertiser budgets aren't going up that much. They're stealing from newspaper to play elsewhere or six months from now we will laugh at the notion?

I think it is too early to tell, Lauren. I wish my crystal ball was that good. You know, in the newspaper markets that we're in, the mid-sized markets, some of the our newspaper markets are holding up quite well, especially compared to the peer group and some of the other numbers you will see from some of the other publishers. It's just a little too early to tell, you know, the newspaper business, we've been in it for 124 years. It -- it tends to track with the economy a little bit more since it on a sensitive basis. The other thing is I think what you're seeing on some of the dollars -- and it is just too early to tell, and I'm talking primarily on the cable side -- could indeed be at the expense of magazines. We do know that there are some dollars shifting around on the magazine side and as you know, have been for about the past year. But many of our papers right now in our markets, we know we track are gaining share against broadcast. So, it's just -- it's a very difficult call right now, but we remain -- we remain bullish on the newspaper business. But there's no question the consolidation on the retail side has impacted some of the business there. But it is -- it is interesting to be sitting at this point and looking across a diverse media company and you see, you see some of the gyrations. We're glad we're there, and we're certainly glad to be able to talk about how well the cable TV stations are doing.

Thank you.

Next we go the line of Steven Barlow at Prudential Securities. Go ahead.

Good morning. Can you talk a little bit on the expense side of HGTV and Food as far as program expenses going up. Occasionally you have a wild card on the promotions side in terms of that number swings a lot, and I didn't know if it contributed a year-over-year comparison to the profit gain you had there? And what kind of promotion dollars are you spending on DIY and Fine Living at this point?

Well, there's not a lot of wild gyrations in our crystal ball looking forward in terms of expenses on HGTV or any of the networks, for that matter. The hallmark to understanding our business model from the beginning is that we sort of operate on a shoestring, and I say that proudly, by creating quality programming, but at very respectable costs. And we're not expecting any big bulges next year in terms of the rate of -- of increase of the cost of -- in the individual networks. They're all very respectable -- particularly compared to any of our peers in the -- the -- the costs per program hour or half hour or overall program schedule. We're -- we're on the very, very modest side as far as costs are concerned, particularly programming; our whole theory from the beginning has been to control it and own it and do it on on a shoestring and make it look good and make it appeal to the advertisers, but also not let it get out of control. I think programming is about 20% up year-over-year but that's -- given the fact that we've got all the new networks, very modest, very rational ratio. I think the projection from last year for Food this year was about 9.5 for Food. I think that's right.

About 10%?

About 10%, yeah. And as I said about, 20% on HGTV. But we -- we're very -- very sanguine about that part of our cost structure.

Okay, and two other quick questions. Do you have anymore investments to write-off? And it appeared in Joe's remarks that maybe Shop At Home could close at November 1st, as they're voting on October 30, versus a January 1, I thought you were indicating earlier.

Yeah. Hey, this is Rich. Joe and I will kind of split it up. Over the past recent quarters we've been trying to be sure we clear out anything that's not strategic. We've had a series of more venture-like investments that we made, really back several years ago, before we decided to ramp up the cable networks. We've been trying to take a very, very conservative view of any of those, if there are things that we don't intend to consolidate and bring inside the company, we've been trying to clear them out or write them down. From an accounting standpoint, get them out of the way so we can focus our time and attention on our category businesses. On Shop At Home?

Yes, we have a shareholder vote scheduled for October 30th and we are in a position to close immediately thereafter. Probably within a few days of that, assuming the vote goes favorably. One more, just a little more color, we don't have a whole lot left in terms of these investments that -- that Rich was mentioning, but there is something on the order of maybe $20 million out there, including what's left of the ventures we talked about writing down in the last quarter. Something left on this particular investment and a couple of other items. Obviously we review them pretty closely and take a pretty conservative view. This one happened to be related to a decision that was made in the quarter about our continuing involvement there. So, we don't expect that this is going to be a drumbeat that you will see every quarter, but that said, when we have something like this, we will move on immediately and not wait for it.

And based on the closing date of Shop At Home, you talked about 10 to 15 cent dilution the first year you own it. We should start banking that in sort of November 1st?

Assuming everything goes according to the schedule, you could expect to see a modest -- very modest impact on the 4th Quarter. That's correct.

And that's different -- in the guidance you gave us doesn't include that, correct?

Correct.

Thank you.

Thank you, Steven.

Next we have a question from the line of Kevin Roonike at Bear Stearns. Go ahead.

Thank you. I have two questions. Number one, seemed to be a little bit of a disconnect on broadcast TV. I think that you said that in the press release, TV ad categories appear to be firming up, and I think ex-political, you're looking for a down Q4, and I was wondering if you could comment on that. And secondly, I wasn't sure about Joe's statement regarding newspaper advertising because I think at one point he said it was improving, and it certainly looked like it was improving in September relative to recent months, and then I think he said it would be no better or bouncing along the bottom. Which one of those is it?

John, you want to take the disconnect, Kevin's point on 4th Quarter?

Sure. Kevin, looking at 4th Quarter without political, we would project to be just about flat for the quarter but when you look more closely at the quarter at just November and December, considering the heavy political in the month of October, which displaces revenue, of course, looking at November/December, those months in non-political dollars, I would project to be plus-4, and specifically plus-5 in national and plus-3 in local.

Okay. And the newspaper question, Alan? You and Joe both want to chime in here?

Well, Kevin, I won't take ownership of what Joe said! [ Laughter ] But let me just say that in September our ad revenue was up about 3.7%. And actually came on stronger the last couple of weeks of the month as you would expect because we were comparing it to the swoon after September 11th of last year. A couple of key categories really firmed up. National firmed up, for one. We're still strong in automotive, real estate is still hanging in there and we're cycling on employment downs that we've had. So, if you look at all that, you've got to be, you know, not overwhelmingly optimistic about the 4th Quarter, but not too pessimistic, you know, Joe said bouncing along at the bottom. I'd say our visibility isn't very good and lots of things could happen, but based on the trends that we're seeing right now I'd say that things are looking okay.

I appreciate that, John. If you're looking for four and five in November and December, you're expecting a slowdown from what we've been seeing?

Well, really, if you look at the 3rd Quarter, Kevin, and take out the political and net out the effects of 9-11, which is a -- isn't as simple as just subtracting last year's loss revenue because there was revenue lost this year, but when you do the calculation it puts the 3rd Quarter in the high single digit range. And looking at the 3rd Quarter to give you a little color on that, we had three categories doing very well: automotive was up 16% or $2.5 million in the 3rd Quarter. Retail was up 19%, which was $1.6 million, led by discounters such as Target, Wal-Mart and K-Mart, and our services category was up 28%. But perhaps the most telling category and the one I'm really most excited about is our new business for the 3rd Quarter was actually $6.8 million versus $5 million in the prior year, and that's up 37% but it represents 10% of our total time sales in the 3rd Quarter. So, we're putting a lot of effort and considerable effort at developing dollars that are new to the television stations and in fact, new to the television marketplace. We grew the market by those dollar amounts and took 100% of the dollars. That effort is going through all four quarters. So, there is a heavy displacement factor in the 4th Quarter due to October. It skews the view of local/national on a year-over-year comparison, and I believe that looking at those plus-4, plus-5 range for November/December at this point is certainly conservative.

Got it. Just one follow-up in that new business area, John; there -- are there a few sectors that really stand out?

It's interesting, I'm really proud of our stations, Kevin, they've created sectors that you really don't see on television, normally. They've put dollars on the books from colleges and universities, from senior care centers. They've opened up a whole new section of automotive advertising by introducing sort of a back to the future concept which is catching on wildly, that's the live commercial for automotive. It sounds like a small, interesting effort, in Cincinnati alone, the success was so amazing in this last quarter that our sales organizations signed up over a dozen automotive advertisers for next year for commitments of over $500,000 just for live automotive advertising. So, that's the kind of effort we're really putting forth to try to drive more revenue.

Thank you.

Thanks, Kevin.

Next we go to the line of Michael Kopinski at AG Edwards and sons. Go ahead.

Thank you and congratulations on a good quarter. Great to be able to say that! I was just wondering, in terms of the rate card at your newspapers, is there much difference in the rate card between real estate, automobile and help-wanted? And if you could list for me, just from the highest to the lowest in terms of rate card for your newspapers, I would appreciate it.

Well, let me take that in order, Michael. It's -- obviously employment has traditionally been the highest-rated advertising because there is a lot of national and regional advertising in it, it is much higher rate than real estate. Which, in turn, in general is higher than automotive. A lot of that is based on the volume that individual advertisers buy. The more you buy, the lower your rate. So, it's -- it's pretty hard to say that there aren't some rates on the real estate card that are equivalent to the rates of the same volume for automotive. I don't want anybody to get the idea that the brokers and real estate are getting a worse deal than the auto dealers. But having said that, clearly, employment has been the category that has been suffering. That's been the economy-driven category, and let me just give you an example -- and this doesn't show up as ad revenue for us because it's the JOA in Denver: but in Denver this year, we're going to -- by the end of the year we will be down somewhere between $18 and $19 million in employment revenue just in the one category from last year, and over a two-year period, employment is going to be down in Denver between $50 and $60 million, probably closer to $60. And yet they've made all that up and then some in the other categories. So clearly, other things aren't so bad. And that's pretty much true across-the-board. Particularly in the large newspapers we've made up for what we've lost, and it is a big number, but we've lost in employment in the other categories. And you're right, these other categories have lower rates so it's taken a heck of a lot work.

It in terms of the rate card, particularly for help wanted, if you can talk about the national category and maybe your retail in comparison to what the rate cards are for in your classified versus national and versus retail. Obviously your national business carries a higher rate card, as well. But in comparisons, what would you say, to list them, where you be at?

Well, national employment is way higher than the local and there are a couple of reasons for that. One is national advertising in general is -- is a higher rated, but secondly, the national advertisers frequently don't buy the volume that the local advertisers do, and you have lots of local employers who do a lot of advertising with you across many categories, not just employment advertising, and they therefore qualify for lower rates because of the volume they do, not just in the employment category. So, again, I can't give you a simple answer. If you looked at the rate cards, you wouldn't see all the differences there are because of the volume and characteristics of each advertiser.

Right. So, the -- the -- roughly flat revenues that you're seeing is really a function of a -- a portion of your business that is not seeing -- or has the highest rate card, actually had significant volume declines. So that you can almost make the case that if help wanted does start to tick up a little bit here, you could see an acceleration in the revenue line.

That's exactly right.

Okay. In terms of going through your -- the cable networks side, I know that you were at least initially talking about maybe launching or looking into launching another cable network at some point. Have you made any decisions on -- on that, particularly as you are getting into the Spanish-language side?

First off, Michael, any personal motivation on the rate card, we will buy your Acura straight-up! On a cable network side, I think maybe, there might be a little confusion. What we have said is we are really exploring the hispanic side of our categories and leaning toward "some type of cable network." We haven't really announced exactly what that will be, when it will be. But beyond that note, recently, there have been no speculative announcements on future cable networks. Some of that confusion may center around what we're doing; for example here in Cincinnati, we have additional networks on the Time Warner system that are HGTV on-demand, Food on demand. It is a cable channel, where you go to the channel and if you're a Time Warner digital box subscriber and download video on demand from the core networks. But no, no immediate plans to do any additional cable networks beyond hispanic at this point.

Okay, great, thank you.

Thank you, Michael.

Next we go to the line of Gary McCam at McCam and Company.

Good morning, guys. Two questions. If DIY and Fine Living are doing so great, why are the operating losses increasing? Please tell me what I'm missing. And secondly, I heard the answer to the question earlier about are there going to be anymore investment losses to write-off, but did not understand the answer. Could maybe you say that a different way or answer it again, please?

I will let Frank tackle the DIY/Fine Living question relative to -- they are doing great on the distribution side. But the start-up cost of these two cable networks --

Yeah, Gary, it goes down to start-up costs and the more subscribers you have, the better you want to make the programming for the bigger audience, so, that's sort of a natural, inherent progression that's built into the first couple of years of launching a cable network. You don't put the most expensive programming on in the very first month or the first six months or first year of a brand-new cable network because it reaches so few people. There is a natural ramp-up as far as costs are concerned for the programming. And the -- you know, the break-even point -- [ phone ringing ] For any cable network in the $25 million range. When you get to that point, you're naturally going to be, you know, your costs are going to be escalating because you're starting a bigger audience and doing more, you're literally just doing more. There's nothing unusual or abnormal or out of kilter with the general trend of the way you launch a network in the first two or three years as it relates to DIY or Fine Living for that matter.

Okay. And Joe, Rich, you want to revisit the investment question and the write-off piece of that?

Yes, I will start and Joe can jump in. It's Rich. When you go back, before DIY, before Fine Living, before Shop At Home and really before the ramp-up, the aggressive strong growth of HGTV and Food, we did some venture and other non-strategic investing, and over the last really year, year and a half, we've been either selling some of those or writing them off or clearing those out as we turn our focus more to building out our categories. So, that's kind of the -- that's the strategic answer. Go head, Joe.

On further writedowns coming, it's hard to say, the simple answer is we don't know. It depends on the value of the investments. My answer, really, was not to say, at this moment I couldn't tell you there is another one out there because based what I know, everything is fairly-valued now. That's not to say in a quarter some investment won't turn sour or increase in value. If we think there is an impairment of any of the assets, we will write it down.

Does that help, Gary?

"We don't know," answered it, yes.

If it's any help, if you look at the early years of Home and Garden and Food, to Frank's point, you have the sticks costs up front and the key is how quickly can you get to distribution levels? I think the reason, what you're hearing from us, we're very pleased with where Fine Living and DIY are right now in household growth, as quite frankly, both are tracking ahead of where Home and Garden and Food were in the early years.

So, the environment makes it more difficult --

So, on that side we're pleased. The fixed costs are not surprised. I mean you have to have those start-up ramp-up costs, but the good news is that the more households you get, the more edge you can sell and the more subscriber fees come back in. So, right now, overall, very pleased with Fine Living and DIY and where they are on the timeline.

One more quickie, newsprint costs, you continue to think they'll -- or do you think they will continue downward or have thoughts there?

As you know, the manufacturers announced an increase that was supposed to start in August. They've been gradually slipping off of that. I think that slippage will continue into the short-term future, at least. So, we're very careful at this stage of the game not to try to guess what's going to happen next year, but clearly if they can't get the increase that they announced in August to stick, they will have to start from that point in the future.

Okay. Thank you.

Thank you, Gary.

Next we go to Morgan Stanley to the line of Douglas Arthur. Go ahead.

Yes, I wondered if you could elaborate a little bit on Denver. I mean, the slightly-over break even in the 3rd Quarter seems on the surface disappointing. I know you've had a lot of extenuating circumstances out there; how are the revenues doing at the paper? Where are you, you know,the rationalization and what kind of , you know, broad range expectations would you see in '03 in terms of margin improvement? I think Craig has a follow-up.

Okay, Doug. Go ahead, Alan.

Let me try to give you a little more guidance than we have so far in what we've said so far today. We're -- we're going to project, I think I referred to it a little earlier -- we're projecting by the end of the year we will have $45.8 million in employment revenue, that's the first nine months, actual plus what we're projecting for the last three. And that will be $18.5 million less than we had last year. Meanwhile, we think the agencies ad revenues are going to turn out to be flat, taking that into account. And why is that? Because we were seeing increases in display advertising, backup 3%, automotive up about 8%. Real estate up about 13%. Commercial and private party, up about 24%. TMC, up about 24%. So, when you start looking at what they've done to overcome the loss in employment, you've got to be impressed. Let me give you a couple more specifics to show you how they're finding new revenue streams out there. They've gone to paid obituaries. Now they have paid obituaries in Denver. The -- that revenue stream this year is $3 million compared to $1.8 million last year. Direct mail: they've gone from $5 million last year to $7 million this year. A private party that I talked about a minute ago is up about $5 million. I could go on. I've got a whole long list of these things, that they've -- they've done very well. The point is that Denver is very well positioned for the future. Their costs are down very substantially. Their revenue streams are improving very well, except for employment why employment starts to come back, we're going to be fine.

So, in terms of what you refer to as sort of an acceptable margin for the JOA given the long-term health and size of the market, how many years out, I mean I know this is guessing, but how many years out do you see that occurring assuming you get a reasonable recovery help wanted over the next few years?

Assuming the economy recovers in a reasonable period of time, we will be getting to what we had projected would be good, reasonable margins.

Okay. Great. I think Craig has a follow-up.

Hi, it's Craig Huber, switching gears to the cable networks, the subscribers for your top two networks, 75 to 80 million, can you update us on how many of them you're getting affiliate fees on and what's the timeline to get it closer to 100%? Thanks.

Affiliate fees on the Food Network --

And Home and Garden, yes.

The top two networks. Yes. Thanks.

Let me jump in. On the -- on the top two networks, Home and Garden, there are no unpaid subscribers there. Everyone is on the right card, they may not be deep into the rate card if they just got turned on, but we're they're on the rate card. On Food, you have to be careful here, there's only about a third of them that are actually paying cash, but some are in a period where they're actually earning revenue before have to go deeper, I can take you there offline. You have to spread the revenue over the entire period. It accounts for another third of them. So, there are a third of them really not earning revenue. That will ramp up. You will get a modest bump up between 2004 and 2005 as those all go to an earnings status as the existing tenure deals roll off. Does that help?

Basically you're saying 2004, 2005 should be fully paid for these things?

Correct.

Okay, great, thanks.

Okay, Craig.

And if you have any further questions, please press 1 at this time. We go to JP Morgan to the line of Barton Crockett. Go ahead.

Thanks, I wanted to ask a little bit more about the outlook for the TV station side there. First off, in terms of your guidance for the 4th Quarter, it sounds like a big conservative with $12 million in political, you know, it seems like if you're pacing 4 to 5% up on the categories you're discussing there, you may get north of the 14% growth. Can you comment on that? And secondly, looking into the first part of 2003; there, you know, should we -- do you think it would be safe to assume at this point that that type of growth continues at least into the first part of 2003 and the TV stations?

Sure, Barton, starting with the last part of that. Barring something unusual yet barely, I suppose possible, with what's going on in Iraq, that certainly is a wild card that has to be thought about at this point. Knowing the timetable that's being discussed, the first quarter to see that impact if it does occur. But currently we remain optimistic that the trends that we've been seeing over the back half of this year should continue with the incentives on automotive continuing it looks like into the 1st Quarter. With the pace of automotive sales, considering automotive represents 26% of our total revenue and they're having the third best year in their history, on a pace for 17 million units and while the pace drop made September to 16.2 off of an 18 million pace if August that, was mom due to -- mostly due to inventory problems, mostly at General Motors, which should be a one-time only problem. So, that's -- that category, I think, will be there to support our expectations. So that's a little bit -- I guess the term today is crystal ball. We don't have one, we're getting closer to knowing more about the 1st Quarter and barring really an unusual event, I don't see a reason to be pessimistic. The first part of your question, if you look at the quarter, the 4th Quarter, and look at October -- at October where all of the real heavy political dollars land, in fact, 8.6 million of the -- of the $12 million are in October and that just sits on so much inventory and the effect of that is to drive down local-national categories into the negative range. For instance, October local will probably be minus 4 and national and October will be closer to minus 6. But that's not indicative of an endemic problem in the categories, it is simply the inventory isn't being used by the political category, but the effect, if you look at the quarter purely on the local-national basis, you come up with a flat number because of the effect of October and because of the effect of political on October. But when you clear October and hit November and December, and November, the short month for political there is still 3 million of political in November. But setting that aside it shows the uptick in the 4% range in local-national combined. Your question is that conservative? I think that's a little conservative, to be honest with you. But everything we're reading in terms of consumer confidence right now, in terms of how September retail sales were a bit of a disappointment on the back-to-school side, some concerns about Christmas retail, we're just trying to really stay close to our business and stay where we believe it is at the moment. Therefore, I think the numbers are just about where we think it should be.

Okay, great. And a question about the JOA contribution there, sequentially there was, you know, a big decline in terms of 2.9 million from the EBITDA contribution in the 2nd Quarter as I recall and 800,000 in this quarter. And since this is relatively new in terms of seeing profits there and trying to factor in seasonality, would it be fair to assume that the 4th Quarter contribution there would be something akin to what we saw in the 2nd Quarter and was the decline in the 3rd Quarter more of seasonality or something else at play?

I don't know where to start with that question, to be honest with you, Barton. Let me just put it this way. Timothy Stautberg describes it as the perfect storm in the 3rd Quarter and --

2nd Quarter.

2nd Quarter, I mean. So, I think we -- let me just leave it at where you left it. I don't think you see any long-term trends -- I will chalk it up in a simple word to seasonality. There are a whole series of issues that we're cycling on expense reductions. We're -- we're cycling -- we hope that we will soon be cycling on employment going the other direction, but we haven't yet, not as fast as we thought we would and so on. There are a whole number of issues there and many of which I've already discussed in my previous answers. So, if you want to try to ask the question in a different way more specifically, I will try to take a crack at it.

Well, maybe just very specifically, I mean any sense of you know, where the line is going to trend in the first quarter, do you think? The "Rocky Mountain News" EBITDA?

I think we're going to be right on plan in the 4th Quarter. Or better.

Okay. Great. I will leave it there. Thank you.

Next we go to the line of Brian Shipman at UBS Warburg.

Hi. This is John on for Brian. I just wanted to drill in a little bit to the -- I guess dramatic increase in advertising that we're expecting for the networks on the 4th Quarter. First, I guess I assume that given that a portion of that is from up-front as well as strong spot, if you could maybe distinguish, you know, break up the 40 to 3545% increase and how much of that is expected to be from the spot market and how much from the up-front? Also, going forward, I guess, you know, with the increase in CPMs, are we going to expect to see just a gradual tick pickup here in the HGTV and Food Network going forward? Thanks?

Okay, John. Frank?

Well, I don't have a breakout on sort of the timeline of the 40% of the scatter in terms of how to proportion it, I don't have the information in front of me. But it's all driven -- at the end of the day, it is all driven by the quality of our -- of our demos and that reflects on the cost per point and our ratings to get to the last part of the question, about the level of dramatic increases is important. It all has to do with ratings from this point. When you get to the point where you're at or near distribution, now the pressure is on ratings and demos and getting the right eyeball. That process is proceeding quite well right now. The ratings across-the-board at all the networks is -- is very encouraging. HGTV's primetime rating, for example -- August, by the way, a light viewing month, was the highest in the history of the motor vehicle's. It was up 33% in August to a .8 rating, just for August. In the season to date Neilsen ratings, which is basically last September through this August, the Food Network had the highest average for prime time its history that, was a .6. That's another 20% increase over last August. In adults 18 to 49, food in August was up 24%. HGTV's prime target was up 20% year-over-year in August. And the reason I'm throwing out the numbers is the best way to say to you we have no reason to believe that the growth won't be steady and solid going forward because at a certain point after you reach full distribution, there is more pressure on the ad sales side and that proceeds only in direct proportion to how well the delivery is of the demographics and it is quite, quite good.

And John, I will have Rich tackle the margin question and cash flow and profitability on HGTV and Food. And, by the way, Food still lags HGTV for a lot of reasons, not the least of which is a catch-up on subscriber fees. And also, we really didn't get the network under control in the '98, revamping programming, where as Home and Garden we've owned and operated from day one.

And weapon don't have any margin projections together yet to give you. But if you look at what you saw happen in the quarter, you see that, you know, we're able to keep the expenses at some point pretty well under control. And that when the revenues take off like they did in the quarter, we're able to bring an awful lot of that money straight to the bottom line. So, you're sort of seeing the leverage on -- at the networks and HGTV being the oldest, the first one through, is the first very good example of it. HGTV's margin on the quarter -- Was about 40 -- about 44%. And that's up -- up from about 40 a year ago. But again, if you take a look at the revenue and expense and see it more when we break it out in the quarter, you will see how we're able to, thanks to our programming efficiency and ability to control other costs, we can bring a lot of that money to the bottom line when the revenues kick off.

That's great. So assuming then that your ratings continue to improve and obviously the up-front is locked in through the spring, we can expect 4th Quarter type of growth is going into 2003?

Well, you know, we don't want to jinx anything, but we're certainly hoping so, yes.

Okay, and then just a quick question on the TV side. You did have some Olympic advertising, correct, in the 1st Quarter for 2003?

Yes, three NBC affiliates, west palm, Tulsa and Kansas city.

Can you remind us what the amount was?

About $5 million. I can get a more exact number for you.

Okay. That's great. Thank you very much.

Okay.

Final question.

Our final question comes from Salomon Smith Barney and the line of William Byrd. Go ahead.

Yes, two quick questions, one, can you comment on what you think the ultimate margin potential is of HGTV and Food? And secondly, just a follow-on question on Food Network affiliates last quarter indicated that 20% of Food subs paid affiliate fees. If I understood the response to the question accurately, I understand a third aren't paying affiliate feeds, in other words, 2/3 are. Has it gone from 20% to 66% in a quarter?

Bill, I will take that one first. There's been some confusion about those that are paying versus those for which we are recognizing revenue. Now, I will try to break it down, thank you for giving me another shot at this. There are about a third that are actually paying cash that are on paying contracts and those are pretty straight forward. That relates to the 20% we talked about before. The confusion, though, comes from the fact that there's another tier or another layer, call it another third of the subscribers that are in free periods of paid contracts. So, they are contracts that over the life of them the -- the operators are paying for but we're in a free period. The way we have to account for that is spread the revenue that we're going earn in the paying period over the entire period. So, even though only 33%, less say, are paying real cash, we are recognizing revenue related to about 2/3 of them. That's always been the case there. Was some confusion early on when we answered the question based on who was writing a check and who was not. But we are and have been recognizing revenue on a larger percentage and now that number is about 2/3, which is why there won't be such a huge increase. And I also misspoke before. The increase will come, there will be a steppup between the years 2003 and 2004 when the last of them get onto a paid contract.

Bill, if I could just -- I will take the first part of that question. As far as margin potential, the way the networks have been constructed and put together, we have some of the most efficient programming costs relative to revenue, relative to overall expenses. We have four networks right now that operate with less than 1,000 people total. Our cost are highly containable. And going forward with Home and Garden, you're going to continue to work through some of the early launch fees that, to Joe's point amortized over the life of contract. You won't have relaunch fees on renewals. So, everything points to continuing margin improvement. Not only with Home and Garden, but with food. I -- I think the thing that gets, you know, a little bit dicey is if you take the top cable networks in the industry and break out the margins, you will see some of those have actually deteriorated over the last couple of years because some of the bigger, broad, cable networks are being eaten away by more efficient networks like Home and Garden and food. Bottom line, our margins, once these networks get up to, and remember, Home and Garden has been out there seven years, compared to networks on a A to B basis that launched 20 years ago. We should be right at the top of the pack as far as margins, once we get to that point. Whether that is two, three, four years from now is hard to say.

Thanks a lot.

Okay?

There are no further questions at this time. Please continue.

Thank you. If there are any further questions, please give me a call. Timothy Stautberg at 513-977-3826. And operator, go ahead and give final instructions.

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