E W Scripps Co (SSP) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Q4 Earnings Report conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you have a question, please press the 1 on your touchtone phone. You may remove yourself from queue at any time by depressing the # key. If you are using a speakerphone, please pick up your handset before depressing the numbers. If you should require assistance during the call, please press 0 and then *. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tim Stautberg, Vice President of Investor Relations. Please go ahead, sir.

Good morning, all, and thanks for joining us. I will start the conference call off this morning with a few comments from Ken Lowe, our President and CEO, and Joe NeCastro, our Chief Financial Officer. Our prepared remarks should take up about 15 minutes. Then we'll open it up for your questions. Other members of our senior management team also are here with us and will be 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 Lori Hickok, Vice President and Controller.

Let me remind you that if you haven't received our fourth quarter earnings press release, please call Sarah at (513) 977-3046, and we'll fax you a copy during the call. Also, we offer a live audio webcast. If you prefer to listen in on the web, go to scripps.com, 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, and we'll leave it there for a few weeks so you can access it at your convenience. A replay of this conference call will be available by telephone from 2:30 this afternoon until midnight Sunday, January 26, by calling (800) 475-6701. Internationally, it's (320) 365-3844. The access code for the reply is 670042.

Our discussion this morning will contain certain forward-looking statements. 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 10-K and latest Form 10-Q.

Now, here's Ken.

Thank you, Tim. Good morning, everyone. As always, we value your continued interest. The E.W. Scripps Company apologizes up-front for a bit of laryngitis this morning, but 'tis the season.

I am happy to report that we ended 2002 on a high note, and we anticipate that the momentum we've created will continue into 2003.

This is an important year for E.W. Scripps. Not only do we expect continued growth, but we're also celebrating the company's 125th anniversary. We've come a long way from that first penny paper in Cleveland. At its core, this is really the same company that old man E.W. Scripps envisioned so many years ago.

Scripps has succeeded over the years by tapping a rich tradition of entrepreneurialism, balanced by a commitment to financial discipline. It's a culture that old man Scripps so deeply engrained in this company that it survives and serves us very well even today. By following these basic principles, we built a strong, diversified media company, and in the process have created tremendous long-term value for our shareholders. We intend to deliver more of the same -- hopefully -- for the next 125 years.

When we talked at the end of the fourth quarter just a year ago, our pledge to you was that we would remain focused on the company's long-term growth strategy, regardless of where we were in the economic cycle. I can report to you today that we stayed true to that pledge into 2002. Without hesitation, we carefully invested in our new and growing businesses, while at the same time holding down operating costs where prudent at all of our going enterprises.

Although we don't manage strictly for the short term, we believe the excellent quarter and year that we've just completed affirms our value-building strategy. Across the board, financial results at all of our businesses improved through the three-month period and for the full year.

Leading the charge was Scripps Networks, our fastest-growing business segment and home to our portfolio of national television programming services. HGTV (Home & Garden Television) and Food Network, our flagship networks, grew by just about every measure. Prime-time ratings and viewership for HGTV and Food moved up during the fourth quarter, and we succeeded in expanding each network's footprint. HGTV passed the magic 80 million [sub-mark] and Food is right behind at 77 million households.

Singling out HGTV, let me give you just an idea of how ubiquitous this network has become. Neilson estimates that more 8 million viewers tuned in at some point during our New Year's Day coverage of the annual Rose Bowl Parade. At any point in time, an average 800,000+ viewers were watching the parade on HGTV. Needless to say, it was a record day for the network.

Our newer networks are gaining traction too, I'm happy to say. Recently beta research ranks DIY, the Do-It-Yourself network, and Fine Living, as the number 1 and number 2 networks respectively among cable operators who intend to add channels to their lineups this coming year. Fine Living, which we just launched 10 months ago, already can be seen in 13 million homes today, thanks in large part to a distribution deal with Direct TV that immediately put us on the Total Choice package in front of 11 million households last fall.

We also announced a carriage with Comcast just a couple of weeks ago that helps keep both Fine Living and DIY each be in at least 20 million homes by the end of this year.

As for the financial results, well the numbers really speak for themselves. Scripps Networks had an absolutely terrific quarter and a fantastic year. Our top priority continues to be the expansion of these very valuable businesses. We believe that building these powerful brands and, I might add, establishing new ones continues to be the best use of the company's free cash. Put another way, we won't be timid in the months ahead about investing what's needed to establish DIY and Fine Living.

We're also taking a very serious look at rolling out a Hispanic lifestyle programming service, perhaps later in this year. And we're putting considerable effort into developing video-on-demand (VOD) content for some of our cable partners. As a matter of fact, we've secured several contracts for VOD distribution already.

In other words, we believe we've demonstrated our ability to create considerable value by building new businesses. And we intend to stick to the program throughout this year.

Of course, the overall success of our growth strategy rests squarely on the creativity and the efficient operation of our local newspapers and television stations, of which I'm very proud. At our newspapers, we're introducing new products, new sections, and local media partnerships to build readership. And we're working to develop an enhanced marketing culture that will span the entire newspaper group. Our drive to attract readers includes our commitment to quality journalism, as it's been for the past 125 years.

You know, we're proud to say that Scripps Newspapers, across the board, won more regional and state awards for editorial excellence than in any time in recent memories. It was truly a memorable year.

Our Nwspaper Goup' financial performance excelled in 2002 as well. While growth was modest, our newspapers continued to out-perform the industry, thanks in large part to the joint operating agreement in Denver and the concentration of our papers in small- to mid-sized markets that have been insolated somewhat from the struggling economy. We've also had success mining our newspaper markets for new business by offering advertisers a full array of print and online services. Our newspaper internet operations, by the way, were in the black by about $1.4m in 2002 -- very significant.

We'll continue to invest in newspapers when there's a real, clear return on investment. For example, we're going to be breaking ground on a new production facility in Florida that will serve all of our Treasure Coast newspapers. And in about a week, we're going to be dedicating our new state-of-the-art printing plant in Knoxville Tennessee. We'll be able to offer some value-added services in the Knoxville market that we really couldn't provide with our older, constrained facilities. So, we're very excited about that coming dedication.

Bear in mind that we'll have some duplicative costs over the next three months while we operate both plants in Knoxville during this transition. We expect the new plant to be fully online in the second quarter of this year.

Now, turning to our broadcast television station business, I'd just like to say, "Go bucks!". ABC's claim to the Super Bowl this year is really good news for Scripps, but it is especially good sweet in Tampa Bay. With the Tampa Bay Buccaneers in the game, we're expecting a very nice windfall from our ABC affiliate there, in addition to the boost the Super Bowl will give our other five ABC-affiliated stations. Even without the Super Bowl, though, we're seeing some real improvement in the broadcast television advertising environment. In December, after the dust settled from the political campaigns, local and national television advertising revenues were up about 10% for our station group. And we're seeing much of that strength continuing into the first quarter of this year.

Of course, political advertising in the fourth quarter reached a record high for our stations for a non-presidential election year. It's important to remember, though, that not all of that revenue just really didn't walk in the door for us. Our local sales teams deserve a lot of credit for taking our stations' high concentration of viewers who vote for candidates and convincing them that the local Scripps stations was the smartest place to put their money. Our decision to offer candidates free air time through our Democracy 2002 initiative, by the way, we think helped make that sale a little bit easier for our sales folks.

In addition, in a very trying business environment, our TV folks scratched and clawed and brought in new, non-traditional TV advertisers into the fold, and they're searching for every opportunity to increase local market share. For example, our Station Group saw an opportunity to boost share by focusing on morning news. And in this past November book, every one of our TV stations showed improvement in that ever-important time slot.

And in Detroit, our station was ready to step in when the CBS [O&O] station decided to get out of the news business. Our Detroit station, WXYZ, has been producing the 10:00 pm news for Viacom's sister UPN station for a couple of months now, and with good results I might add. Ratings for the 10:00 pm news are up, and we've also gained a good cross-promotion platform for our 11:00 pm newscast.

That's a look at newspapers and broadcast television, but let me spend just a minute or so on our newest business, the Shop At Home Network. As you recall, we closed that deal on October 31, and promptly had two months of better-than-expected sales with Shop At Home. We finished the year with the network reaching an average 48 million full-time equivalent households, and that compares to 39 million at the end of 2001. Our transition plan for Shop At Home is now in full swing. Before long, you'll be seeing some changes in the on air look. In December, we introduced some new home, garden and cookware products with some initial success in all three. Part of the transition plan includes devoting less and less time selling sports memorabilia and other male-targeted products.

Now that we're getting into the thick of it, we're even more convinced that, for a very modest investment, we've acquired a solid basic business and a very fast-growing marketplace.

Well, those are some of the highlights from our various businesses. Looking ahead, we'll continue to build on the tremendous popularity of the HGTV and Food Network brands, and we'll be investing very prudently to establish DIY and Fine Living. We'll also be integrating Shop At Home, moving its product mix closer to our cable network categories.

At our newspapers and television stations, we'll be working to build readership, viewership and advertising market share by delivering compelling local content and an array of print, on air and online advertising services.

Finally, we'll be managing all of our media businesses to generate maximum, sustainable free cash flow, money that we intend to continue using to create long-term value for our shareholders.

With that, I'll be turning over to Joe to talk about some of the financial highlights. Joe.

Thanks, Ken. Good morning, everyone. As you can tell from the release, our fourth quarter results exceeded our recent guidance, and they reflected improvements in each of our business segments. Our Newspaper Group benefited from an improving ad environment, with all ad categories, except local, showing good growth in the quarter. We continue to benefit from the formation of the Denver Newspaper Agency, as cash flow from Denver improved by nearly $7m.

Overall, the Group realized 15% growth in EBITDA [inaudible]. That's Scripps Networks, HGTV and the Food Network continued to demonstrate outstanding growth, driving segment revenue growth of 41% and EBITDA growth of more than $26m for the quarter. At our broadcast TV stations, a strong political season generated a 19% increase in revenues and a 42% in cash flow.

This performance, in addition to the strong showing over the three previous quarters, resulted in core operating cash flow growth of 24% on the year, and core EPS growth of nearly 33%.

The only downside to the story is the effect on corporate expense, which is up considerably as a result of the achievement of performance incentive targets. We'll remember that we didn't have this problem in 2001.

Looking ahead into 2003, we've updated our guidance in the release. So, I won't repeat it on this call. I'll just mention that the only change from our previous full-year outlook is that Scripps Networks is now projecting ad revenue growth of 20% for the year, up from the previously-announced estimate of 15%. We've also added our outlook for the first quarter EPS, a range of $0.60 to $0.70 per share.

Major use of cash generated by our core businesses in 2003 will continue to be the expansion of our cable networks, both the developing networks, DIY and Fine Living, as well as programming and distribution for the established properties. We expect to spend between $40m and $45m in 2003 on the combination of DIY, Fine Living and new VOD programming. Should we decide to launch a Hispanic service this year, that figure could grow by another $7m. Beyond these, we expect capital spending to increase next year to roughly $100m, due to the construction of a newspaper plant on the Treasure Coast of Florida and a new TV station in Cincinnati. Remember that we sold our current facility to the city of Cincinnati to make room for a larger convention center here. The proceeds were roughly $11m.

We expect that interest expense will increase next year to around $34m, the result of our decision to replace some of our commercial paper borrowings with more fixed rate debt.

Lastly, a word or two on our pension plan, as it affects our 2003 view of cash and the P&L. We have, in the last two months, contributed roughly $56m to the plan, and may contribute as much as an additional $20m later in the year. We'll be changing our accounting assumptions as well, reflecting a more conservative set of expectations going forward. We've reduced our expected return on assets from 9.5% to 8.25%, and decreased the discount rate that we use from 7.5% to 6.5%. This will increase our pension expense by just over $10m in the year ahead. But with these changes, we feel the plan is well-positioned and we don't anticipate any further financial exposure from the plan.

With that, we're ready to open it up to your questions. Mary.

Thank you. Again, ladies and gentlemen, if you do wish to ask a question, please press 1 at this time. The first question comes from the line of Kevin Arthur with Morgan Stanley. Your line is open, sir.

You were very comprehensive. I have no major questions. I was wondering if you could just sort of highlight the economic momentum of the environment -- out in Denver? I mean, it's a pretty critical property. You've got a lot going on there. Are things getting better? Are they stagnating? What's sort of happening?

I'll take a stab at that, Kevin. There are a couple of factors in Denver that, in the economic environment, that we're all very aware of. Obviously, the dot.com and telecommunications impact there. And the second thing, which you may not have thought about is the drought, which has a significant effect on tourism and various other related industries. However, the combination that JOA in Denver did exceptionally well overcoming all of that in 2002. That has built considerable momentum across a whole variety of fronts. We had very strong growth in 2002, despite both of those impacts. And once employment starts to come back, if you just think about how much money the agency in Denver has lost because of the whole employment category declining, they were down again 34% this years, and yet showed strong revenue growth. And when that comes back, the opportunities in Denver are terrific. We're getting much higher ad revenue growth rates in other categories in Denver than anywhere else in our company -- in our Newspaper Division.

So, what kind of combined revenue growth could you see for the JOA in 2003? Mid-single-digit?

It'll be different in different categories, but yeah, at least mid-single digits.

Okay. Great. Thank you.

Our next question comes from the line of Michael Kupinski with AG Edwards. Please go ahead, sir.

Thanks and congratulation on a great quarter. I was wondering if you could give a little bit more color on the pacings in the first quarter for television? If there is a way, can you lay out the Super Bowl revenues that you might be receiving? And then, also, in the fourth quarter, newspaper classified advertising turned up a little bit more strongly than I expected. Can you break out the performance of the categories of classifieds in that quarter? And then retail seemed a little soft in December, which I would have thought would have been a little stronger, given the shortened holiday season. Did some of that migrate to pre-press?

Michael, we'll let John Lansing address the pacings issue on TV, and Alan and Steve the newspaper question. John.

Michael, certainly our pacings support the projection for us. We're basically seeing the strength in December carrying through into January and into the quarter as a whole. I would say to you that, if we were to take the Super Bowl revenue out in total, we'd still be in the plus single high single-digit range, 6% to 7% in January, without the Super Bowl.

So, right now, with the Super Bowl, it's pacing more like 10% to 12%?

No. Much better than that with the Super Bowl. Into the high 20s, actually.

Alan and Steve, the newspaper question.

Let me take the classified part of it first, Michael. In the fourth quarter, Our Money was up 7.4%, Real Estate was up 8.8%. Help wanted was down for us by 4.4%. A number of our markets, by the way, showed strong gains in Employment for the first quarter in a while. The Merchandise categories were up just 1.6%. Legal was up 3.2%, and All Other was up 30.6%. So, we had strong gains across all classified categories, except Employment, and we were down only 4.4% there.

On the retail side, it's been soft for us for a variety of reasons that are very market-specific. Retail consolidation continues to be a big part of it. It's majors and key accounts that are the areas where we're having the hardest time. Department stores alone accounts for the down there. That's just in a category that's been very difficult.

Last question. Have you changed any of your assumptions for news print prices for 2003?

Changed them from when?

From what you had indicated in December. I think that you were looking at as much as a 10% increase in news print prices.

No. We have not changed our newsprint assumptions. Obviously, it's a very fluid environment. We continue to try to do as well as we can to keep the prices down.

Okay. Great. Thank you.

Thanks, Michael.

Peter Epher with Goldman Sachs, your line is open.

Good morning. Back to the TV thing for one second. The ex-political, I think the fourth quarter, TV was essentially flat. Right? So, we're looking at guidance that's up 7% to 10% for the first quarter. Is there any particular categories that are giving you this inflection?

Yes. There are. As a matter of fact, the Automotive category for December was +18%, and the Retail category +9%, and the Services category, which includes mortgage, Houses, Banks -- that type of thing -- was up 25% in the month. Those three categories alone account for 70% of the total revenue in December. And the strength of Automotive continues into the new quarter.

Okay. How about on the cost side for the TV business? Where are you in the process of re-negotiating your syndicated programming contracts? Do you have any news on that front?

Yeah, actually some good news on that front. We were successful in acquiring Wheel of Fortune and Jeopardy, which are two of the top-3 rated syndicated programs, year-in and year-out, for three of our stations. Phoenix, Kansas City and Tulsa. In doing so, we were able to reach an agreement with the distributor to lower the cost that they were receiving in that marketplace by as much as 20% from the other stations that owned the product. And we'll have those in the fall of this year. So, that's an improvement.

Our overall programming costs, when you look at where we were for the full year in 2002-- While we were up 7%, most of the increase were one-time only programs, which really included football games that we acquired in markets like Tampa, where football was hot and where we put significant revenue on the books as a result of that. But our basis syndicated programming was actually flat.

And what will 2003 then be?

2003 will be up, but up in the low single-digit range. The acquisition of the improved programming for Phoenix, Kansas City and Tulsa, while it was lower than the marketplace pricing, it was higher than our pricing. But here again, we believe that revenue associated with those programs will exceed our margins.

Last thing, Ken, you were pretty outspoken, in terms of the focus on the Scripps Networks, in terms of use of cash flow. Should we assume from that that you are basically out of the newspaper and TV acquisition business?

No, not necessarily at all. As we’ve said continually, we tend to be opportunistic, as far as acquisitions. Our newspaper strategy continues to be one of clustering. I mentioned the new plant that we’ll be building this year on the Treasure Coast in Florida. Three different papers will actually be printed out of that one facility. And with the anticipation of possibly some relief on the regulatory side this year. That, indeed, could put us in an opportunistic position for both newspapers and television. But, having said all of that, up to this point, we think the best use of the free cash flow has been into these new, growing cable networks. We have taken a look at a lot of acquisition opportunities. It’s just that the financials have not been compelling enough to dissuade us from continuing to invest in the cable networks.

Great. Thank you.

Thank you.

Your next question comes from Lauren Fine with Merrill Lynch. Your line is open.

Just a few minor questions. The cable networks affiliate fees were down in December. I’m wonder-- I’m sure it was just a result of contracts. But why was that down? And could you give us a couple of balance sheet figures for the end of the year? And I guess the last question is maybe bigger picture, but on the Hispanic Lifestyle, are you still exploring doing that with a partner? What are you looking at right now that would cause you to go ahead with it in this environment, or not go ahead with it?

Okay, Lauren. Let me have Joe handle the affiliate piece, balance sheet questions. Then Frank will weigh in on the Hispanic channel issue.

Okay, Lauren. On the December affiliate fees, we at the end of the year reviewed all of the contracts and found we weren’t amortizing a couple of them exactly properly. We made an adjustment which brought down the number. Without the adjustment, you’d be looking at a growth in December of around the high teens to low 20s%. So, it was not an insignificant adjustment, but it doesn’t change the longer-term trend there.

With respect to the balance sheet, we’re at the end of the year at about $725m in debt, all in. The cost of that is blending still to high 3s, 3.7 to 3.8. Other than that--

What about cash?

I don’t have the cash balance with me at the moment. I can get back to you on that.

Okay.

Frank, do you want to address the Hispanic-- ?

Lauren, the answer is ‘yes’. We are looking at various combinations of relationships and partnerships. No, we have not decided yet. But as recently as just last week, one opportunity that relates to distribution sort of walked in the door.

We’re looking at a number of those possibilities, because it’s such a different universe. The traditional approaches to distribution just don’t work. But we’re still optimistic that somewhere within the range of possibilities we’re investigating that relate to partnerships, for distribution at least, that there is an opportunity for us that we’ll pursue and decide on fairly soon. But, no, we haven’t decided yet.

Okay. Just one last one, if I can sneak it in. Is there any way you could tell us what the ad revenues are right now at DIY, and if there’s any at Fine Living?

There are definitely ad revenues at both of them. You know, they’re increasing steadily and giving us great reason for optimism. Both those networks are still in the investment and cash flow loss stage, but no. Particularly with DIY, there’s such a relationship with the endemic advertisers in the home and how-to categories that, frankly, I believe DIY, from an advertising standpoint, is the sleeper in our whole constellation. And it lies right at the intersection of the advertisers’ needs to be online and to be on-air and VOD. So, yes, there’s definitely revenues on both of those networks, and it’s growing appreciatively.

You don’t want to quantify that, do you?

We don’t normally put that out. But it is nothing to sneeze at.

Okay. Great. Thanks.

Thanks, Lauren.

And next, Kevin Gruneich with Bear Stearns, your line is open.

Hi. Thanks. I’ve got three different questions. First, on the cable networks, can you just update us on the Adelphi situation. I think you had set aside $4.9m in reserve regarding that situation. I was just wondering where you are on preferred vendor status?

Kevin, we are post-petition. We are a preferred vendor. We don’t have any issues there. We maintain that reserve that we kept, we put on the balance sheet the time of our filing. We haven’t taken it down yet. Those pre-petition balances are still out there and fully reserved.

So, you haven’t gotten paid $4.9m. What triggers the reversal of reserve?

I think that’s still tied up in the court.

My second question has to do with your Retail business. I was wondering if Alan could talk a little bit more about specific markets where that’s weak, specific department stores where you’re seeing consolidation. Given that understanding that you’re in different markets with your TV stations, when John says that Retail was strong in December, +9%, I was wondering if John was pulling a lot of that retail advertising from newspapers?

Well, let me just give you a fast overview. And if you want more specifics, maybe we ought to do it later. In Denver, for example, Retail has been very strong lately, just out the top, double-digit growth in a number of categories. In Memphis, we’ve had some consolidation. Remember that K-Mart spent a lot of money on our OP advertising in the last month or two of last year, but they didn’t repeat this year.

The department stores -- you’ve been reading about it as much as I have -- the department stores, many of them are having a hard time. They reported sluggish sales; they’re not getting the traffic that they once did. Consumer trends have been away from department stores. They’ve been traditionally very large advertisers for newspapers. So, clearly, that category by itself accounted for our down from year to year. There are a whole lot of Retail categories, however, that continue to do pretty well. Do you have any other specifics you want to aim at?

I guess, what was your K-Mart ad revenue for 2002?

Steve, do you want to-- ?

About $7m.

John, do you want to address the issue of Retail on television and where that’s coming from? The 9% increase?

Yes. Kevin, we saw an aggressive push by the big box retailers -- WalMart, K-Mart, Target -- in the holiday season, because of all the press in the air about whether the season would be a success or not. There was really an aggressive advertising push on television led by them. We also see a fairly aggressive increase on the retail drug store side of that category, which continues to show growth into the new year.

Kevin, this is Alan again. I probably ought to mention some of the real positives in retail too, because it dovetails with what our other businesses are showing. Home Furniture and Furnishings, for example up 7.5% in the fourth quarter, Electronics and Computers and Appliances up 4.2%, Entertainment and Amusement up 15.8%, Finance Banking and Insurance up 11.9%. So, there are a number of categories that are doing very well. And Other Services, which is a catch-all category that we use, we’ve really been going after the service business, and it’s retail service business. That was up in the fourth quarter 23.9%. So, we are continuing to develop those revenue streams, even though the big department stores and some major account categories are declining.

Thank you. Once last quick question. I know this is probably not significant. But I [felt where] United Media just [dinked] a new Peanuts contract with Met Life. I was wondering if you could size that? What’s the term of the contract? What’s the difference between the old contract?

Unfortunately, Doug Stern is not on the call this morning. We’ll probably need to get back to you on that particular one, if we may. We don’t have the numbers here in front of us.

Thank you.

Thank you, Kevin.

Once again, ladies and gentlemen, if you do wish to ask a question, please depress the 1 on your touchtone phone. And our next question comes from the line Kevin Sullivan with Lehman Brothers. Your line is open, sir.

Hi. Thanks. Most of my questions have been answered. Just one quick one here. The depreciation number in the fourth quarter stepped up. Is that to do with what you were saying before on the affiliate fee revenue?

It’s the addition of Shop At Home for the couple last months at the end of the year.

Okay. So, that accounts for most of the step-up from-- ?

Right. Correct.

Great. Thank you very much.

Okay, Kevin. Thank you.

And we have a question from Brian Shipman with UBS Warburg. Please go ahead.

Thanks. Good morning, guys. Contribution of revenues from affiliate fees in 2002 grew modestly, just over 19% of total cable network revenues now. Where do you see that going, in terms of mix of revenues next year or two? And then separately, how closely tied are your affiliate fees that you charge MSOs to your rating trends? In other words, can there be interim adjustments to the per month fee that you charge? Thanks.

Okay. Joe, do you want to take that, at least?

On the contribution of revenue, it looks like it will probably be about the same level through 2003. It does depend, obviously, on growth rates of the components. But we’re not expecting any significant variation there. So, I would expect it to stay in the high teens to low 20s, as a percent of revenue.

Is that a long-term number as well?

Yes. There’s one step up that will happen in 2004 when Food goes to 100% paid, but it’s not going to be significant enough to move that contribution. It’s still going to be 3/4 to 80% advertising in that business.

Brian, regarding step-up or renegotiation of fees, relative to ratings, as you know, these are long-term contracts. Increases are built in on an annualized basis. They’re usually fairly modest and, I think, reflected in the numbers that we’re giving you.

Do you see significant upside from current affiliate fee levels, from where they are now HGTV and Food, especially given the ratings momentum that the two networks have?

Well, pushing aside our prejudice towards the positive side of your answer, A. because we do have longer-term contracts, which we’re pleased with, because it involves, obviously, a majority of analogue distribution, and [part of] the distribution of our newer networks, along with the fact that I think the industry, through consolidation, is looking to put more pressure on affiliate fees. You know, we believe that the value of our cable networks has increased over the last several years, as it relates to the local cable and DBS system. But getting that recognized by distribution partners is not all that easy. So, optimistically, I’d like to think that, over time, we can grow. But the reality is, right now, those contracts are a little difficult to undo on the short term.

Okay. Thanks, Ken.

Thank you, Brian.

Your next question comes from James Rightsue with Credit Suisse First Boston. Please go ahead.

Yes, James, most of my questions have been answered, but just one quick one here. You’ve obviously had solid success gaining distribution for DIY and Fine Living so far. But I was wondering if you could just outline looking out to 2004 and 2005 how you see distribution coming through for both those nets.

Well, DIY grew this past year 40% from up to about between 12 million and 13 million subs. Fine Living is about 12 milion to 13 million subs. Our goal this year is 20 million for 2003, and our goal for DIY is about 20 million this year. So, those networks definitely are going to grow. We had a huge shot in the arm with our Comcast deal. Most of that stuff is rolling out on the digital tier, but its not exclusively digital. There will be some pieces of analog scattered around. The growth, clearly, is there with both those networks. They are, however, largely digital networks. The digital distribution universe is always naturally somewhat more modest than analog. The digital universe right now, we think -- and this is only an educated guess -- is about 30 million. So, that gives you an idea where the finish line is. But the whole key to be in digital networks is not just a distribution, in the sense that distribution with the key in the old analog world. There is much more of an advertiser-related imperative in these digital networks, and the tie-in between the network -- and not just the linear – but the online viewing particularly, with the case of DIY, with the DIY kit that you heard us talk about in the past. So the growth is definitely there on the distribution side. But it’s also what degree does that distribution help on the ad sales side.

Great. Thank you.

Okay, James.

Next question comes from William Bird with Salomon Smith Barney. Go ahead.

Just a quick question on Denver. The fourth quarter saw pretty material pickup in the profit swing in Denver to that $6.7m versus $2.2m in Q3. Just wondering if there is any new initiatives underway there. I was wondering if you could remind us if you have set out any particular goal for profit swing in 2003 there?

Let me start with the last question first, William. The profit swing, that we’ve said publicly so far, is we’re expecting our share of the profits in 2003 to be at least $6, and we’re not changing that. Obviously, we’re optimistic that we’ll do what we did this year, which is definitely outperform our expectations, but that remains to be seen. Denver had an unbelievably hot December across all categories, and an awful lot of that -- almost all retail categories. The reason for that was a whole series of initiatives. I could describe those for you, but it will take the rest of the day. It’s a very aggressive team. They’ve got initiatives, any kind of initiatives that you can imagine. For example, their partnership with [Advo] just went gang busters in 2002 and continues to expand and grow in all kinds of ways.

Their various category initiatives were successful. And some of the categories where they’ve been having problems -- Economy and Employment is one of them -- is any area where they-- They’ve just had a career fair, for example, that brought in a ton of revenue and had something like 80-200 job applicants, several hundred advertisers with booths interviewing these people. So, they significantly enhanced their online approach in all these categories. They’ve got all kinds of niche products. They’ve got [seven] products. All of these started in 2002. It’s a big, happy story out there.

Just to clarify, when you say share of profits, do you mean operating profit or EBIDTA?

The share of operating profits, translated into EBIDTA. This has been adjusted to become EBIDTA for us.

Okay.

We share 50% of the operating profits, which we record as revenue. Then there are obviously certain adjustments for depreciation.

So, would a tier based on what you did in the fourth quarter, which was $5.5m, but that $6m is probably, could be low by a few orders of magnitude?

I wouldn’t say that. I would say that the fourth quarter was unbelievably, surprisingly terrific.

Thank you.

John Lawrence with Morgan Keegan and Company, your line is open.

Thank you. Would you comment quickly on the Shop At Home network? You’ve had it for a couple months. It looks like the results were strong. And tell us, has the view changed, strategy-wise, at all since you closed that? And then maybe any guidance going forward in terms of merchandise presentations, etc?

Sure, John. Rich, go ahead.

It’s Rich Boehne. No, our view has not changed at all, which is good news. The only thing that maybe has changed a little bit since we closed the deal on October 31 is, we had a little bit better fourth quarter than we had anticipated. You kind of saw that in the numbers. Just quickly, we were able to offer them some improvements on cross-promotion and things like that that have a pretty quick effect. So long-term, our outlook has not changed at all. We’re starting to introduce the categories that are much more aligned with our networks. In December, we rolled out some cookware. Home and Garden categories that sold out, that were not a big chunk of revenue, we’ve introduced them on-air and started to build a customer base. Switching those for some of the older, more male categories that the sports memorabilia that the network had sold quite a lot of in recent years.

Any comments on how high you expect the targets for Household growth?

No. I mean we’ll continue to expand the distribution base, but we’ll do that carefully, making sure it’s homes that we think are going to yield the best revenue. At the same time, we’re in the midst of drawing up a distribution plan that will involve our TV stations. We think that’s going to drive a lot of new eyeballs to Shop At Home as well. So, we really feel very good. No negative surprises. If anything, a few positives. We’re in pretty good shape.

Great. Thanks a lot.

Thank you, John.

Your next question comes from the line Barton Crockett with JP Morgan. Go ahead, sir.

Hi. Thank you. I wanted to ask a couple questions about free cash flow lines. In particular, could you give us a little bit of an update on the net distribution payments on the cable side, and the net payments for amortization of programming assets, that payments are in excess of the amortization? What we saw in the fourth quarter and what do you think is likely in 2003, and what that might translate into in terms of free cash flow change on a percentage basis in 2003 versus 2002?

Barton, this is Joe. It’s fair to say that it’s early to give you a precise number on the fourth quarter. But I will say that we don’t anticipate that there would be any significant change in the direction of those numbers, certainly not in the fourth quarter. We expect that we’ll finish the year kind of on the same trend line as you saw in the first three. We have not yet finalized all the cash flow for next year, but we’re looking at numbers about in the same ballpark on both of those for the upcoming year. We continue to invest in programming beyond the rate at which we’re amortizing. And we obviously continue to invest in distribution. So I wouldn’t expect a break of any significant size in either of those requirements in 2003.

Okay. So, with the additional contribution then to the pension plans in the first part of this year, free cash flow from operations, should that be down then somewhat year over year?

Just slightly. I mean, the operating number will be higher, which will obviate some of that. And there are other tweaks in there obviously as well. So, it should be-- We’re not anticipating any significant increase in the debt level between now and the end of the year.

So, in terms of uses of free cash flow from operations, I mean after dividends, do you expect there to be much left for potential debt pay down? Or would it be allocated towards acquisitions?

No, it’s-- We’re actually using between the networks and the capital spending budget, and then you mentioned dividend and interest and taxes, we’re using pretty much all the free cash of the company. We’re reinvesting whatever we can back in the networks.

Okay. Great. And then just another question on the Denver side. We’ve talked a little bit about the top line there. Can you give us a sense-- ? You talked about mid-single-digit growth in revenues there. What about on the expense side, taking sort of comparable newsprinter substance? What do you think we should see there?

Well, the expenses were reduced in the significant double-digits in 2002. We aren’t going to see that much that higher percentage of reductions, but we continue to look for ways to be more efficient in Denver. And because the payroll has been cut, the total number of folks is down. The payroll increase will be fairly modest. The newsprint increase in Denver will be a little less than it is elsewhere, simply because of some fixed priced contracts and other things that’s been assigned to Denver. So, the cost will be very well under control in Denver, and we’re still looking for ways to reduce them.

But in terms of the non-newsprint expense side, when do you start anniversaring again the jobs cuts? Is that basically in February? Or is that somewhat later in the year?

There were several rounds of job cuts in 2002, and they were phased in over the entire year. They continue to happen. I mean, we’re not totally finished. As you know, we continue to try to combine operations. During the year, we combined, we finished the combination of all the circulation routes. We have become more efficient in our production operations. We are going to be moving over the next year into a new office, which will allow continued economies. And so it wouldn’t be at the magnitude that we’ve seen in the past, but it will continue.

Okay. So, net expenses should be up, but somewhat less than revenues? Or do you think there’s a chance they’ll be down?

Let me look at that while you-- If you have another question, let me try to get you a more specific answer on that.

Unfortunately, that was the last question I had queued up.

It will be up modestly, very modestly.

Up very modestly. Okay. Great. Thank you very much.

Thank you, Barton.

There’s a question from Craig Huber with Morgan Stanley. Go ahead, sir.

Great. Thank you. Two things, please. One, this new plant in Florida, how much is it going to cost, please? How many years is that spread over?

It’s spread over about three years. The piece of it that falls into-- The big part of it falls in 2003. It’s about $28m. The total price of it is close to $45m.

Okay. And then switching over to the cable networks, can you just update us, please, on the affiliate fee contracts for your two large networks? You touched on this briefly in 2004 for your Food Network, but just play over the next few years. How many of the subs have you paid at the full rate over each of the next three years, if you can just play that out, please?

Well, we’ve made significant inroads in that regard with beginning the biggest MSOs on a rate card at Food. I don’t have the percentage here in front of me, but I think it’s a pretty respectable double-digit increase year over year. I think it’s--

Craig, I can rough it out for you. Right now, we have about three-quarters of the subs at Food are on a rate card. Many of them are at the sort of entry-level rate card, because some of those agreements just started to turn from the old free contracts into paid. In 2004, the rest of the free will roll-off, and by the end of 2004, we will have everybody on a paid contract. It will be growth of about $10m to $20m year on year. We would expect a revenue increase in that range in affiliate fee revenues from 2003 to 2004.

When would you expect nearly almost all of them to be paying the full rate? How many years out do you think that is? Or is it too hard to tell right now?

It’s really too hard to tell, Craig. Some of that’s a blended rate. Then you start consolidating AT&T contracts with Comcast contracts. It’s a hard number to quantify. I think the important thing to take away is now Home and Garden is approaching its eightth year. It’s been on a full rate card from day one. Food will be cycling out of that 10-year free. And as was asked in an earlier question, the value of these networks, at least in discussions with our distribution partners, had never been higher. So, I think it’s safe to say with the folks we’ve got [Susan Packard] and her team. Whatever opportunity that might exist there to increase the rate card will certainly be exercised.

Great. Thank you.

Okay. Thank you, Craig.

I just wanted to throw in-- I’ve check some numbers since I answered Barton’s question. Counting some initiatives, some special new revenue initiatives that we have, and circulation initiatives we have in Denver, the expenses in Denver in 2003 will be low- to mid-single-digit increases.

Okay. Next question.

Once again, ladies and gentlemen, if you do wish to ask a question, please press the 1 at this time. And we do have an additional question from Douglas Arthur with Morgan Stanley. Your line is open, sir.

Actually, I was covered. Thank you.

Doug, you just want to make sure we knew it was Doug.

Sir, there are no further questions at this time.

Thank you everyone for joining us today. If you have any questions after the call, you can contact me at (513) 977-3826. Operator, I believe you have some information on the replay.

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