E W Scripps Co (SSP) 2003 Q3 法說會逐字稿

Welcome to the third quarter earnings report conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Vice President, Investor Relations, Tim Stautberg. Please go ahead.

Thank you and good morning, all. I appreciate your joining us this morning.

We'll start the conference call with a few comments from Ken Lowe, our President and CEO, and Joe NeCastro, our Chief Financial Officer. Our prepared remarks should take about fifteen minutes and then we will open up for your questions.

Other members are 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 of Newspapers; Steve Sullivan, Vice President, Newspaper Operations; Frank Gardner, Senior Vice President and Chairman of Scripps Networks; John Lansing, Senior Vice President for our Broadcast TV Group; and Lori Hickok, our Vice President and Controller.

Let me remind you that if you haven't received our third quarter earnings press release, please call Heather at 513-977-3825 and we will 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 and click on the link on the first page. An audio archive of the call will be available on scripps.com later today and we will leave it there for a few weeks so you can access it at your convenience.

A telephone replay also will be available from 2.30 this afternoon until midnight Friday, October 17th by calling 800-475-6701. The international number is 320-365-3844 and the access code for the replay is 699378.

Our discussion this morning will contain forward-looking statements and actual results may differ from those predicted. Some of those factors which may cause results to differ are set forth in our publicly filed documents, including our 2002 Form 10-K and most recent Form 10-Q.

Now with that bit of housekeeping out of the way, here is Ken.

Thank you, Tim. And good morning, everyone. As always, thank you for joining us. We do appreciate your interest in the E.W. Scripps Company.

Scripps had a solid third quarter, thanks primarily to the continued success of Home & Garden Television, HGTV, and the Food Network. Once again, robust advertising sales at both HGTV and Food propelled the Company's total growth for the three-month period.

The national television advertising market continues to be strong, especially for targeted cable and satellite networks like ours that deliver the kind of audience demographics that advertisers highly value.

The popularity of our two flagship networks is evident. Prime time viewership during the third quarter grew in double digits at both networks, up 15 percent at HGTV, and up 20 percent at Food. Household distribution also grew during the quarter -- HGTV can now be seen in 83 million homes nationwide and food reaches 82 million. Combined, HGTV and Food added 5 million subs during the third quarter alone, and there's still room for more distribution growth.

Our long-term strategy at HGTV and Food has been to leverage their wide household distribution by building brand identity and then attracting more viewers. We continue to have great success by delivering a steady stream of quality original programming that really resonates with our viewers. Our plan, obviously, is to continue building the very valuable brands in all ways.

We're also making progress with our newer networks. At DIY and Fine Living, our focus has been on expanding distribution and beefing up programming to make sure that compelling content is in place as more households are able to tune in. And they are. DIY now reaches 23 million households; Fine Living is in 19 million households -- just 18 months, by the way, after its launch. Together, DIY and Fine Living have added 6 million subscribers since the end of the second quarter, just in the last three months. The internal development of these valuable young brands, we believe, is a very wise use of the Company's capital. We plan to forge ahead.

Looking at our other businesses, our third quarter results were helped once again by our newspaper partnership in Denver. While ad revenue growth in Denver continues to be held back by the local economy, the efficiencies that we've been able to achieve by combining business and production operations of the market's two metropolitan morning newspapers have kept costs under control.

The improved results in Denver helped the Company's newspaper results by compensating for stubborn weakness in local retail advertising at our other daily newspapers. We've had some success mining our markets for new revenues, but it just hasn't been enough to replace department store advertising dollars that really evaporated during the summer months.

Flat classified advertising results for the quarter reflect strength in the automotive and real estate categories, which offset persistent weakness in help wanted. During the quarter automotive and real estate advertising grew 5 and 2 percent respectively. Help wanted was down 8 percent for the quarter, and we're hopeful it really is approaching a bottom here in the fourth quarter.

At our broadcast television stations, we've done a remarkable job generating new local revenues to overcome last year's record level of political spending. We also had to contend with the effects of the big blackout in August, which knocked us off the air for a while in both Cleveland and Detroit. Even with those challenges, total TV Station Group revenues were about even with last year. Now to put that in perspective, we had $5.5 million in political advertising in the third quarter of 2002 compared to only 1 million for the same period this year.

Now before I turn it over to Joe, just a word or two about the progress that we're making at Shop At Home. Year-over-year revenues in the quarter were up about 10 percent on a pro forma basis, if we had owned the network for all of 2002. Segment losses for the third quarter were about 3.8 million, or 4 cents a share, which is slightly better than we projected in our guidance for the quarter.

Those losses reflect resources that we've been allocating to Shop At Home to make some needed improvements in the core business, and execute our strategy to tie the network more closely to our lifestyle cable programming services. For example, this week we will be testing the ability of all of our media businesses to drive business to Shop At Home during a series of live broadcasts Thursday through Sunday at the Annual Furniture Show in Highpoint, North Carolina. We've enlisted the help of several of our network personalities to help make this a very special event -- Gordon Elliott, Sheila Bridges, Nancy Golden and more are going to be on hand for live coverage of the event, providing decorating and design tips and demonstrations, featuring products that will be offered for sale on Shop At Home.

We're promoting live from Highpoint on all of our networks, on all of their related Web sites, and all of our newspapers, and on all of our television stations. The programming will be, we believe, an uncommon mix of information and commerce leveraging our strengths as lifestyle programmers and Shop At Home's expertise in home shopping.

We've already developed some valuable new relationships with advertisers and vendors who will be participating in this event. We really consider live from Highpoint our first significant trial as we begin to learn the best ways to build a commerce business adjacent to our mix of media businesses.

This is really shaping up to be a very busy month for us. We will also be celebrating the Company's 125th Anniversary and 15th year as a publicly traded company by ringing the opening bell at the New York Stock Exchange next Thursday. Snoopy, Emeril and I will be doing the honors, so be sure and watch for us next Thursday.

Finally, let me take this opportunity to publicly welcome Jeff Sagansky to our Board of Directors. Jeff joined us in September. He brings with him, as many of you know, a wealth of knowledge in television and entertainment, including serving most recently as Vice Chairman of Paxon Communications. Jeff will be a very valuable addition to our Board and to our team.

With that, let me turn it over to Joe who will go into a little more detail about the numbers and review the guidance that we're providing for the fourth quarter.

Thanks, Ken. And good morning, everyone. I'd like to spend just a few moments to highlight some of the non-cash and non-operating items, and then I will touch very briefly on our guidance for the fourth quarter before we get to your questions.

First, depreciation and amortization were higher in the third quarter because of the Shop At Home acquisition. We acquired Shop At Home in the fourth quarter of 2002, so these D&A comparisons will be effective until we report the fourth quarter. To help with this, we're now including depreciation and amortization tables by segment in the release.

Capital spending was about $20 million in the quarter, with the majority dedicated to our newspaper plant projects, primarily in Treasure Coast of Florida, but also still some spending in Knoxville, and the new building for our TV station here in Cincinnati. We have spent just under $60 million on capital projects so far this year, and we now expect to spend between 90 and $100 million for the full year.

Next, interest expense was roughly even with the year ago quarter, which is the result of two offsetting effects. The first was our decision last year to replace some of our commercial paper borrowings with longer-term debt, which increased our interest expense. Second, our lower overall debt balances have all but completely offset the increased cost of the fixed-rate debt.

Total debt at the end of the third quarter stood at about $550 million, down from $629 million at the end of June. The decline in debt is attributable to lower-than-expected capital spending so far this year and fewer launch fee payments. Our weighted average cost of debt is right around 5 percent at this point.

Corporate expenses were up during the quarter, primarily because of the vesting of a performance-based restricted stock award.

Now looking ahead, we're offering the following guidance for the fourth quarter. Based on the strong up front and solid scatter market, the Company currently anticipates fourth quarter 2003 advertising revenue for Scripps Networks will the up 25 to 30 percent year-over-year. Affiliate fee revenue for Scripps Networks is expected to increase about 30 percent during the fourth quarter, net of distribution fee amortization. Programming and marketing expenses are expected to increase 30 percent as the Company continues to invest in building viewership across all four networks. Investments in the development of DIY and Fine Living are expected to reduce segment profits by about $8.4 million and earnings per share by about 7 cents. All in, the segment profit margin for Scripps Networks is expected to expand both sequentially and year-over-year in the fourth quarter.

Newspaper advertising revenues are expected to be up low single digits over the prior year, as softness in local retail is offset by some strength in classified, national, and preprint advertising.

At the Company's broadcast television stations, advertising revenues are expected to be up about 10 to 12 percent in the fourth quarter (technical difficulty) political advertising was $17.3 million in the fourth quarter of 2002, which is a rather big hill to climb. All in we expect total broadcast TV revenues will be down about 10 percent in the quarter.

The Company's continuing investment in the Shop At Home Network is expected to reduce fourth quarter segment profits by about $3 million and earnings per share again by about 4 cents. That will bring the total dilution for the year to 16 cents, slightly above the range we provided at the beginning of the year.

As we told you during our second quarter earnings call in July, we have undertaken an effort to prune low yielding homes from our distribution) footprint. In the third quarter our average full-time equivalent homes was about even with last year, and in the fourth quarter distribution will likely be lower than in the prior year. Our goal is to increase our revenue per home, while lowering our near-term cost of distribution.

Now a word or two about minority interest. Our minority interest line will rise by 2 to $3 million in the fourth quarter due to the increasing profitability of the Food Network. As you know, we own about 70 percent of the Network, with Tribune as our minority partner. In the fourth quarter we will begin allocating the full 30 percent of net income of the Food partnership to Tribune, which will increase the minority interest line on our consolidated income statement. Starting in the fourth quarter of last year, you will remember, the Food partnership agreement called for an allocation of 13 percent of Food's net income to Tribune. The increase in the allocation of Food's net income from 13 percent to 30 percent is a function of the cumulative profitability of the network. It's all good news.

Let me stress that we will continue to consolidate Food Network's operating results in our Scripps Networks segment and our segment profit line will be unaffected by the increasing allocation of net income (technical difficulty). The Food Network financial table in our third quarter report provides some more detail on this subject.

Fourth quarter earnings per share all in are expected to be between 87 and 97 cents, compared with 94 cents per share in the fourth quarter of 2002. Remember that results in the fourth quarter of 2002 included some unusual items that increased net income by about $3.2 million. Without these items, fourth quarter 2002 earnings per share would have been about 90 cents.

We're not prepared at this time to address questions on our 2004 expectations, as we're still in the middle of our budget process. We will provide guidance on '04, we promise, as soon as we can.

I'd like to turn it back to Ken to wrap things up.

Thank you, Joe. To put our quarterly results into perspective, let me remind you how we create value for the long-term here at Scripps.

Since 1994, we've launched three cable networks -- HGTV, DIY, and Fine Living -- and have acquired two turn-arounds -- the Food Network and Shop At Home. Today, these businesses represent substantial value for the Company's shareholders. In fact, HGTV and Food are among our largest sources of cash flow. We intend to stay on course, investing in these new businesses to take advantage of opportunities in this fast-moving media environment.

Let me turn it back to the moderator, as we are ready for your questions.

(OPERATOR INSTRUCTIONS) George Smith, Davenport.

Good morning, guys. I'm wondering -- newspaper, everyone's looking at the fourth quarter and trying to figure out what's going to happen there to gauge whether or not we are indeed in the midst of a turnaround. Can you tell, or I guess have things improved at all, in late September and into October to lead you to believe that things are getting better?

Let me just try to give you a one sentence answer to that. Late September didn't give us a lot of hope, but the flashes we're getting from some of the newspapers so far in October are encouraging. So it's a mixed bag.

And then programming expenses, how long do you anticipate staying up at this what could be deemed a rather lofty level? Is this a type of spending we're going to see going through 2004 and into 2005? Or are we going to see these costs taper off a bit?

What specifically are you referring to? You are referring to the programming costs for the new network?

Yes. No. Well, what was it -- 34 million all in and then targeted 40 million programming and marketing?

We will continue to spend on programming because it's the heart of what we're selling. But there are, to your point, there are ebbs and flows and highs and lows in the overall curve of our spending year-to-year when you look at it over a two or three year period. We don't expect any huge bulges going forward. We don't expect any huge diminution. But there could be some moderation year-to-year.

I guess the thought was right now we're kind of in building mode, and once we have built something maybe costs do come down a bit. And you're saying over the course of the next 12 to 24 months that could indeed happen?

I think it will be kept in check, and the overall cost of the programming will be more than in harmony with our overall growth on the ad sales side in terms of keeping it in harmony with our margin. Because at the end of the day that's what we're looking at, is making sure that doesn't get disproportionately out of control. So we expect it to be very supportive of the overall margin growth targets that we have.

And where do we stand in terms of the launch of a Hispanic lifestyle network?

We are still, as we have said in recent presentations, testing, piloting and researching the subject. Those sound like buzzwords, but they are very real. We have some actual pilot projects in the works, and we have some other projects testing those pilots. And we're doing significant research. We're not ready to pull the trigger on it yet because it's a very complex issue that involves a lot of complexities in the demography of the particular audience within that category that you're targeting. They are all wildly different inside that demo. So it's a very complex issue. It's something we're still optimistic about in terms of the overall ad potential. But we're not ready to pull the trigger yet.

Thanks a lot.

Peter Appert, Goldman Sachs.

Two unrelated questions. First for Alan, the local revenue growth within the newspaper group looks to be a bit weaker than what we're seeing from some of the other companies from the industry. I'm wondering if you could speak to that issue. And then two, the unrelated question, the minority interestin Food, any discussions or any insight you can offer in terms of how you are thinking about that and prospects of bringing that minority stake in?

Let me take the newspaper question first. You're right; from what we've seen so far, our local growth is a little less than some of our peers. That's unusual. As you know, we have for several years outperformed our peers so we're up against some pretty tough comps relative to some of our peers. That's number one. Number two, local revenue is very much tied to specific market situations and specific categories. And we've been particularly hard hit by department store cutbacks in a couple of our larger markets, and also the casino category has hit us. So we have some unusual circumstances which are not going to continue forever.

Alan, can you remind me how big department stores are as a percent of local revenues or as a percent of total newspaper ad revenue?

Let me get that for you. It's about -- it's at 15 percent of local or total ad revenues?

Local.

It's about 15 percent of local, so it's -- and local is about 30 percent of total ad revenues, so you can figure the numbers. Department stores for us in the quarter were down a little over 15 percent. So it was a big hit.

On the question of the minority position in Food, just to refresh everybody's memory, the basic contract we inherited when we acquired Food did not have any puts or calls, which would force an action on Tribune's piece. We've said numerous times, publicly and privately with Tribune, we would very much like to acquire that. But I think they would tell you they have been pretty pleased with the job we've done in growing Food.

Now that it is reaching a more mature stage -- once you get past the 80 million households -- there might be an opportunity in the near future for us to do something with Tribune about that. I tried to bet FitzSimons that if the Cubs ever made the World Series it would be a good time to rid himself on that, but he didn't bite.

They are good partners. As Joe said in our opening remarks, there's nothing but good news here. I think there will come a time when it will make sense for us to own all of Food. And we will just have to continue to talk to our friends at Tribune and figure that time out.

James Marsh, SG Cowen.

Two quick questions. First, I was just wondering what you're outlook is for newsprint pricing going into the fourth quarter, whether you're seeing any of that it announced price increase starting to stick in the fourth quarter. Secondly, if you could just update us on what's driving the sub fees at the network business? I presume a lot of it is the Food Network that was given away for free and now is starting to roll on to a paid tier but -- or not a paid tier, but you'll be getting some payments from the MSOs. But if you could just give us an update on that as well.

I'll try and tackle both of those.

With respect to newsprint pricing, as everyone knows there was an announced increase in August. We have finally probably now reached a conclusion with some of the major suppliers and we will be realizing an increase there. It won't be anywhere near the announced level. I think that companies will realize about what they realized in the last increase, somewhere between 25 and $35, depending on the Company. And they announced 50, as you will recall. So that seems to be settling in and that will be the effect we will see starting off fourth quarter. Obviously we don't expect any other increases in the balance of the year. I think there's some noise about an early next year increase, could be March. But again, we're going to wait and see on that. I think this is the second increase in a row, some of which got through without a commensurate increase in consumption. So I think we get much less likely. Our costs all in for paper, including newsprint, will be probably up low double-digits next quarter, in the 12 percentish all in.

With respect to sub fees, you're talking about the increase in the fourth quarter?

That's correct. And then maybe if you could give us a sense for what that might look like as we move into 2004. I guess a lot of those ten-year contracts roll off for Food.

There are two stories here unfortunately; one is the fourth quarter story and then second is the first of next year story. Food contracts that go from free period to paid will affect us starting in January of next year. And for that -- we've talked about this before -- we're looking at an increase year-on-year, full-year revenues a bump of somewhere in the neighborhood of 12 to 15 to $16 million. And that's something that will affect us starting first quarter next year, obviously positively.

The other effect is the fourth quarter, and I don't know how many of you remember the fourth quarter of '02, but we did have some adjustments in that quarter, negative adjustments, as we talked about before. Some of these adjustments are fairly lumpy; you hit thresholds from time to time and you have to take an adjustment. So last year's fourth quarter was artificially somewhat level (ph), making this year's fourth quarter have a much easier comparison. To normalize for that, you're probably at about a full effective growth rate of about 20 percent without the effect of the increases -- or those adjustments, I'm sorry -- bringing the total increase to 30. So that's what accounts for the fourth quarter bump. And then the Food Network will account for a further bump in the first quarter of next year.

Excellent. Thanks, Joe.

Lauren Fine, Merrill Lynch.

Thank you. I think you were suggesting -- this may be at the very, very beginning of the call, but could you specifically address what's going on in the cable scatter market? We've heard of weakness there. And I know that you withheld inventory, and I am wondering if you could sort of give us a sense of whether the inventory you withheld varied significantly from quarter-to-quarter.

I'm going to let Frank handle that, because he's in closer touch with Steve Gelatti (ph).

The story for our upfront and our scatter is significantly out of whack with the stuff you're reading about the industry as a whole and in a very positive way, I might add.

You know the story on upfront -- our CPMs were significantly ahead of the marketplace, and I do mean significantly. And then scatter for us is to this very hour quite healthy. We're significantly outpacing the overall marketplace. And our percentage of scatter pricing over our upfront is in double-digits ahead of the rest of the marketplace as it relates -- as those other networks relate to their upfront prices. So our story is quite good, and a little bit happily out of sync with some of the overall tone of the headlines you're reading about the rest of the industry.

In terms of the percentage of inventory that you withheld quarter by quarter, were there any big differences from quarter-to-quarter?

No. You pick a certain percentage going into the upfront and you just spread it across the year. And our target was to reach about 58 percent -- the 58 percent mark, I think -- in terms of sellout and we are sanguine about that decision and happy with it.

If I could ask one follow up question. I'm curious, Alan, if you could address any sense you have that some of the major department stores that have cut back might be coming back in towards the end of the year?

I really do feel pretty positive that it will. You have heard all the same reports that I have. This is supposed -- many analysts are now saying that this is going to be a much stronger Christmas than we've seen since December 1999. Dillard's has specifically said that they're going to evaluate in October what they're going to do in their fourth quarter, which is November, December and January. We have a number of markets that we're working with Dillard's to get increases. We have all kinds of value added approaches that we're suggesting to other department stores.

But again, the trends over the last few years suggest that we're going to have to continue to depend on new revenue streams on both the retail and the service side -- the classified side. And that's what we're developing. So we're not counting on over the long haul the department stores are ever going to get back to where they were five years ago. But we do think the fourth quarter will be much stronger than we've seen for the last two.

Great. Thank you.

William Drewry, CSFB.

Two questions. One, I just wanted to clarify on the programming expenses up 25 to 30 percent, what specifically are they running up at Food and in HG? Is it that same range or greater? And then just wondering, looking into next year on Food, as far as percent of the footprint that you have on the rate card right now, I think you had mentioned before it was maybe 70, 75 percent. Just wondering if it was still at that level or if you had closed the loop and have 100 percent of the footprint on the rate card now?

Programming expenses, the HGTV and Food are up slightly less than that average and obviously the developing networks are more expensive, or the increases are larger. It's a function of where they are in the cycle. We don't want to understate that we are continuing to invest in programming in the developing networks as well. But again, at a slightly slower pace.

With respect to the Food rate card, by January of '04 the entire footprint will be on a rate card.

Thanks.

Steven Barlow, Prudential.

Thanks. You talked a little bit about help wanted in September, if you can just breakout what help wanted was down versus the quarter? And then if you can see if there's any differentiation between geography -- big cities, small cities -- just want to see when you might think even whether the fourth quarter (ph) you have help wanted in the positive category.

Let me see if I can help you with that. September is an unusual time for us because we lost a Sunday in September. So the number I'm going to give you isn't going to help you very much. It was down 14.6 percent. But when you look at the quarter, that normalizes it because the quarter had the same number of Sunday's this year and last year. It's down 7.6 percent.

Frankly, what we're hearing so far this month is very encouraging on the employment side. We have a number of markets that are now showing positive year-over-year employment. We still have a couple of big laggards and they have to catch up.

Joe, just to clarify. Are you starting to pay the newsprint price increase on October 1st?

Yes. That's right. (technical difficulty)

Fred Serby, J.P. Morgan.

Actually it's Barton Crockett on for Fred. Could you talk a little bit about the sustainability of the cable network ad growth? You're basically running 30 percent plus out this year; I think double-digit ratings growth on the flagship networks and strong CPM increases in the upfront. Is there a chance that that type of growth can continue, at least into the first part of next year? And when do you think that comparisons might start to become an issue there?

We see no reason why our growth won't continue to proceed apace. The ratings continue to go up and our pricing continues to go up. We're not cavalier about it and we're not cocky about it, but there's no reason to believe that there's still not lots more runway left in our ability to cash in on these networks.

The recent experience we had in upfront bears living testimony to that. And on top of that, the more recent increases that we're experiencing and scatter over upfront and the increases that we have over our peers in scatter versus upfront all bear testimony to the fact that I think there's a lot more runway in our ability to monetize these things.

If I could just tag onto that a bit, and it's a firm grasp of the obvious. Targeted networks overall are doing much better in the marketplace, as you know. So to Frank's point, strong upfront, strong scatter, good momentum, and the advertisers are turning more and more to targeted networks. I think some of the push back at least you're reading in the trades about the scatter is some of the displeasure with early ratings coming off broadcast networks, the broader (inaudible). So obviously it all depends on the ebbs and flows of the advertising markets, but we're well positioned to continue, I think, to lead the pack when it comes to cable network ad sales.

If I could ask a follow-up. How comfortable are you with your position in terms of your scale in a consolidating industry? In other words, there's a lot of talk that as the cable system operators and some of the cable network complexes, consolidate that that maybe an issue since you're not among basically the largest in that. So are you seeing anything in the marketplace? Or is it really not an issue for you at this point?

It's a very fair question. I certainly don't want to be flip about it or cavalier about it, because there's no question that consolidation is going to play an ever increasing role, both on the distribution side and the content side of negotiations. But in direct answer to your question, at this point, no. I really think it comes down to quality of the network, the pricing of the network. And as you know, Barton, our networks are I think more modestly priced license fee. And also a bigger plus, if you will, to the distribution side is what do the networks bring to the local advertising environment? Our cable networks are highly inserted. They are highly valued by the ad sales department of the local cable MSOs. And you're going to see more and more importance on the DBS side too.

So I think we have to keep quality levels up, we have to keep customer passion at that fever pitch like it is, and continue to be good partners with our distribution folks. At the end of the day, consolidation doesn't necessarily get bad networks higher license fees and better channel position, etc. So right now, there's nothing on the radar screen that indicates we can't continue to grow these networks and continue to have fine relationships with our distribution partners.

Thank you very much.

William Bird, Smith Barney.

A question for Frank. Frank, I was wondering if you could give us just a rough sense of the range of CPMs for your cable networks, and the gap to other comparable networks, and really was required to close that gap.

We don't get specific about the CPM breakdown network to network within the Scripps Networks family. But as I just alluded to earlier, the degree to which we outpace our peers -- the national marketplace as a whole and individual marketplaces in particular -- individual networks in particular -- continues to be quite healthy. We are outpacing our peers on volume and we are outpacing our peers on CPM. And it has been proven true in the good years and even in the bad years.

Now, here again I don't want to make that sound like we're totally cavalier. But so far the proof is in the pudding and the numbers are what they are. We are outpacing virtually all of our peers in the upfront and in the scatter; CPM and on volume. So we don't break that out for competitive reasons, but we're pretty confident about our relationship in terms of overall pricing to our peers.

Looking at the group of networks as a whole, would you characterize the CPMs as relatively depressed versus other cable networks?

Would I look at our CPMs as being depressed relative to other networks?

Yes. In other words, do you think there's much more upside in terms of -- obviously the ratings story is great, but does the pricing story per thousand have good legs?

Yes it does, and it does not because we say so -- or not because of anything unique about what we say. It has to do more with what's happening on the other end of the table, at the advertiser end.

There's a huge wave of movement toward very specific accountability on the part of advertisers and agencies. And that is going to drive the shift more and more into our favor. We're not all things to all people, but we're a lot of things to a few very important people whom the advertisers are trying to reach. And things like these accountability moves that are going on at the big advertising agency conglomerates and simultaneously within a lot of the big advertisers themselves, combined with just an overall attitude that the results have to be measurable -- they cannot be broad and general; it has to be measurable down to a cash register ring -- that's what's going to lengthen the runway for us vis-a-vis other networks that try to be all things to all people. And we're very confident about that.

And here again, it's not because we say so; but it is because the advertiser on the other side of the bargaining table is saying so. They're going to be demanding accountability and our results are in fact more accountable than a lot of other networks' eyeballs (ph). And that's going to be aided and abetted when Nielsen doubles its sample size. They've already announced that. That's nothing but good news for us. People meters -- nothing but good news for us. And when you take all those things and add them together, accountability is the wave of the future and that's got us written all over it.

Well spoken. Could you also talk a little bit about trends in launch fees for DIY and Fine Living? What do the typical economics look like?

What's happening lately is there's very little upfront fee discussion. It tends more to be free periods deals where the distribution partners are looking for some lower cost programming. And in general, similar to the HGTV and Food experience there.

Are you speaking specifically of the rate card that we're charging advertisers -- cable operators?

Yes, just trying to understand the economics and how it may be changing in terms of getting distribution for the new networks.

While the incentive takes a different form, the economics -- if you measure the economics -- either way, free period or cash upfront is an incentive. The way we measure the economics, we look at cash on cash over the life of the deal and the economics are actually very similar. So we have not noticed a higher cost of entry, if you will, in any of the more current deals.

One of the things -- if I could just tag on to that -- is that video on demand, because we have such a robust library of 15,000 hours and we're now in 63 markets nationwide with some of our partners like Comcast and Time Warner with VoD -- VoD is playing a bigger role in leveraging the rollout of DIY and Fine Living. So the whole dynamics of the deals are changing. Joe's right -- free periods upfront versus launch fees are coming more into play but the overall economics of license fees, advertising pieces are pretty much intact with DIY and Fine Living, similar to what we've seen with HGTV and Food.

Kevin Gruneich, Bear Stearns.

Thanks. I want to ask a question on marketing costs, and then if I could follow up with questions on DIY and Fine Living. Could you isolate the marketing cost increase for Q3?

The marketing costs for the networks in general or the DIY and Fine Living?

Sorry, at Scripps Networks overall -- that line.

It was up significantly. Are you talking about the third quarter?

Correct.

Third quarter was up over 70 percent for marketing in the quarter. There is a little bit of distortion in that number only because we had so little marketing prior to that. We launched a fairly significant national consumer marketing campaign on behalf of HGTV which we've never really had before. And it's already bearing very fruitful results. So that 70 percent figure is just against such a very low base prior.

Is that the same number that you -- on the last conference call three months ago you said would be up 15 to 20 percent in Q3?

No. it wouldn't have been. I'm not sure what the 15 -- I don't remember what the context of that was. (multiple speakers) marketing and other expenses, because the other expenses were up very slightly in the quarter.

But in prior presentations we have alluded to the fact that this consumer campaign was rolling out, and so this is not a surprise. It's something we've been planning over the long haul.

Maybe this will help. Sometimes we break down those costs into -- Scripps Networks costs and programming and all other costs. And all other would have been up in a much lower range obviously. This is a small number, pure marketing, which is why it was up so high.

On DIY and Fine Living, could you just comment on the percent of Comcast digital households you're in right now and/or the percent of growth year-to-date that has come from Comcast? And just a follow on to that, have you inked other deals with the major MSOs for DIY and Fine Living since that Comcast deal surfaced earlier this year?

We just don't have in front of us the breakdown by MSO of those. We can follow up and get those numbers to you. We just don't have them readily available.

And what was the second part of your question about the --

Other MSO (multiple speakers) --

The pace that we're getting distribution for the other MSOs? Was that --?

The question was have you inked similar contracts with other MSOs since this Comcast deal? It sounds like you have; I haven't seen an announcement.

Yes. The distribution for Fine Living and DIY is right on schedule. And we're pacing right where we expected to be. I don't know if that is helping you at all, but there are really no surprises so far with any of our MSOs in terms of distribution for those networks. They are digital networks and naturally it is slower than an analog rollout because we're penned in by the available rollout of the boxes themselves. But we're pacing to that rollout, and we're happy with it.

Master agreements for Fine Living and DIY are done with most of the MSOs. You're now in the rollout phase. And as Frank said, you're rolling out with the digital boxes.

Douglas Arthur, Morgan Stanley.

You may have addressed this earlier, but when you guys released the second quarter the stock got crushed immediately after the quarter on your comments that margins at the established networks would be down in the third quarter. They were up pretty sharply. So I guess the question is, obviously you didn't spend as much on programming as you expected. Is this something you're going to your ramp later in the next -- some time in the next three or four quarters? That's question number one. And question two really relates to the revenue trend at Denver. Obviously you commented in the release that they're down. Can you quantify that, both in the quarter in year-to-date?

With respect to margins, they were down sequentially. They're not down year-on-year, which I think it might be what you're looking at. We expected them to go down from the second quarter to the third quarter, which they did. But they have not year-on-year. They're up year-on-year.

The third quarter ad revenue in Denver was flattish to '02. Total revenue was up about 1 percent. Expenses were down, FTEs are being well-controlled. Newsprint volume is down.

As far as year-to-date, ad revenue is down about 1 percent. Total revenue is up slightly and expenses are also down.

I don't know if no if that's enough to help, but maybe that will help a little.

What do you sort of assess as the prospects there in Q4, Q1 of '04 on the topline?

On the newspaper side we never look that far ahead in our prognosis publicly. There are some things that are happening in Denver that are good. United Airlines is coming back strong after a terrible period and they're spending a lot of money in the newspapers. That is big business for us. Territory sales in Denver are strong, overcoming the closing of Lord and Taylor. Employment continues to lag, but Denver's a great market with a very skilled workforce. Long-term employment is going to be strong in Denver. So how soon all of this happens, who knows?

Just as a follow-up on the whole newspaper division, non-newsprint costs in the quarter year-over-year?

They're essentially flat, just down a hair. Wait a minute -- yes, right. It's 1/10 of a percent down.

I guess that's flat. Thanks a lot.

John Janidas (ph), Bank of America Securities.

Just two quick questions. In the TV segment, can you give us some more color on strengths or weaknesses in specific ad categories? Then also along those lines, can you talk about prospects of early political in December?

The strength in the categories for the quarter -- the third quarter -- were found in the automotive category, it was up 10 percent which paces with the year-to-date increase. The communications sector was up 22 percent, and that was driven mostly by SBC Communications coming back in a big way in Detroit and Cleveland. And the services category continues to be strong for us, and that's representative of mortgage services, banks and legal services. We've had a decline in retail of 10 percent in the quarter. But year to date retail is actually flat to last year, but we're seeing the pacing on retail on national sales to be plus 11 in the fourth quarter. So we think when the year is all in and the weight of the fourth quarter is in, we will have a plus year in terms of retail.

Political early in December, at this point it's still a guessing game, to be honest with you. The political window opens December 15th for primaries that begin in February. Arizona would be an example of that. So that that potential exists. So as we look ahead, we're just simply trying to position ourselves any way we can for the political dollars when they flow. But at this moment in time, nothing I could share with you that would indicate any spending in December.

Just quickly, can you also breakout the classified for September for real estate -- I should say the quarter -- for real estate and auto? I should say September, I'm sorry.

Again, I caution you about September because it was a one-Sunday-less month. Why don't we look at August and September together, if you don't mind. I think that's probably a more accurate reflection. Real estate for that period was up about 1.3 percent -- that is August and September together. It that what you're asking?

Yes.

Any other particular categories?

Auto as well, please.

Auto was up 3.5 for those two months.

Thank you.

Thomas Russo, Gardner Russo & Garnder.

This question is for Frank. Frank, the comment that you made about the move to accountability, which I found interesting, especially in light of the people meter and the comment about Nielsen's changes, allowing you to be more targeted there, how does it square with your growing share of advertising that's not endemic in the first place? How does that trend towards non-endemic advertising square up with accountability?

There's really no conflict, as strange as it seems, because the non-endemic folks want accountability and measurability of results just as much as the endemics to do. It's about attracting people who have a particular passion, and who pay attention longer, and who see the commercials more attentively than the broad mass general interest networks. And anybody who's watching that network who is attracted to that network is just naturally going to be more attentive and more apt to take action at the cash register.

So it's a good question, but as it turns out there is really no difference between the motivations, whether they are the endemics or the broader. It's about driving them to action. And the particular non-endemics that we attract are equally motivated to action as our endemics are.

So it's just a function of the state of alertness in some cases as the viewer(multiple speakers)?

Exactly. And there are some very interesting and incredibly intriguing experiments going on as we speak on the part of advertisers and agencies to measure that attentiveness. And it is going to be very, very interesting what those tests show.

How does it work around your opportunities, just to continue, to advertise along your VoD toolkit, let's say, on either side of the toolkits and advertising in the VoD sector for you?

The kits is a perfect example of linking the network to the cash register.

Explain what kits are, Frank.

For those of you that don't know, one of the things that we have on DIY is a program tied to very detailed information of how to execute that project on our website and it's all tied into various advertisers so that you can go literally from watching the linear network to buying the pieces required to execute that project. And it's a good example of how we have a better sales proposition to particular advertisers who participate with us on those DIY kits projects to be more effective on their behalf. I don't know if I have answered that question or not.

And likely to have opportunities because of attentiveness to advertising on either side of the VoD content that you offer?

Yes. We've already found in some of the tests -- and we're not there yet; the testing phase is by no means complete in the whole industry -- but we've already found already found that the closer the passion and of the viewer to the product they're watching, the more attentive they are to the commercial and the less intrusive that commercial is because at a certain point of narrowness and targeting the commercial becomes content to that one person.

You may have seen -- it has just come out in the past few days -- Cox has released some information on a VoD study that was done in San Diego on this very point. And it's striking, the attentiveness, if you will, of the VoD user relative to advertising messages. And I think that's just the first validation of what Frank is saying, that a good mix of commercials with content that engages the viewer is not as apt to Tivoed or replayed as maybe something taken directly off air.

That's wonderful. Thank you very much. Last, for Rich, Ken may have mentioned that the live from Highpoint possibly is building links to advertisers in a novel way and bringing in some new advertisers across all of those four medium. How does that seem to be working from your perspective?

It's working really well. Highpoint really plants a flag in the home furnishings category for Shop At Home. And in addition to the Shop At Home talent, there will be a lot of talent from Scripps Networks there as well. And it will be a vehicle to work on cross-promotion and at the same time to build relationships with a whole lot of new vendors in that home furnishings area. That kicks off Thursday evening live from Highpoint. At the same time, we're booking some real advertising dollars through a dedicated team out of Scripps Networks that's pulling in marketing, promotion and advertising dollars on the Shop At Home in a way that you really don't see at the other networks.

Wonderful. Thank you, Rich.

Brian Shipman, UBS.

Just a quick question on Shop At Home. Despite slightly lower revenues in Q4 you talked about reduced level of losses. What specifically is going on there? In addition to trimming low profit distribution, is there any tweaking to other strategic parts of the business plan there? And if so, could you expand on that?

Just a quick reminder of our strategy for TV commerce -- we very much believe in focus, and as television the audience continues to fragment and as viewers timeshift and Ken just talked about it using the verb "Tivoed", and as product placement dollars become more significant, we see Shop At Home as a very good offensive move that deepens our relationship with advertisers. So on Shop At Home we can give them dedicated environments for long form marketing, product demonstration and cross promote from the cable networks. And that's where were moving. So there are a number of things going on.

If you look at the projected fourth quarter loss, and you look at the third quarter loss, a significant chunk of those losses is due to very intentional investments and changes that we're making to the business. And specifically those would be in marketing -- and Highpoint would fall under that category -- distribution that you mentioned as we take out unproductive homes and build new distribution, and then also a big piece of it is the merchandise shift. As we take out some of the old hours they had in more male categories, replace them with our categories, obviously you lose a little revenue in the transition. And you probably will start to see a much more sizable migration in merchandise in 2004. So yes, we're working on really all facets of the business. But really most of those losses you're seeing are the result of very intentional decisions we're making to tweak the business.

Is this a business you see as turning profitable in the next twelve months?

In the next twelve months?

Yes.

We haven't done our 2004 budget yet, but I think we would not expect it to be profitable next year. The real strong comparison is the Food Network. As Ken mentioned earlier, that is the other turnaround we purchased and we're digging in and making investments and it will take several years.

Thanks, Rich.

Mark Hughes, SunTrust.

It's actually Toby Summer (ph) for Mark. I had a question about employment classified. If you could describe what kinds of markets you might have seen better results out of your early October in terms of either size or geography. And if you could characterize any types of jobs, or industry verticals that may be showing a rebound, whether it's tech or national?

It's really hard to categorize by tech or national. As you know, for newspapers most employment in most newspaper markets is local. So it's very much tied to the local economy, and it's more -- so far it is more blue-collar than white-collar. And it's sometimes hard to predict.

For example, in a wonderful university town with lots of energy, Knoxville -- same state with Memphis -- Memphis is still down in employment, Knoxville is up. And we've got some ups in Florida, and we've got some other places where it is down.

So I don't know that I have even thought about it from a demographic point of view. But from a market vitality point of view, clearly if a market is humming for any reason -- whatever that is -- employment tends to follow.

As a brief follow up, has there been any movement in terms of pricing within employment classified? Or has that continued relatively stable?

There are two possible answers to that. From a national point of view, obviously if you don't have as much national classified, which is the highest price linage that we have in classified, then that's a big hit for you. Local classified pricing is up marginally.

Thank you very much.

Patrick Walker (ph), Walker Smith Capital.

I think most of my questions have been addressed. But I noticed in the guidance on Shop At Home I guess the continued losses, but you said in the fourth quarter that the losses there were less than planned. I'm just curious, is that fourth quarter segment loss above or below your plan three or four months ago? In other words, is that reflecting what you saw in the third quarter?

The best way to look at the loss in the fourth quarter is if you would look at it on the base business, I would say it's probably -- it's going to do a little better than we would have expected. But then the biggest chunk of those losses are the result of decisions we're making to invest in the business, migrate the merchandise, pick up the marketing and add distribution. The underlying business has been relatively strong after recovering from a rough spring after the war and during a war.

I guess you'd also said that -- well, by saying you're allocating -- are you allocating some corporate overhead expense that would have otherwise gone to other endeavors? In other words, is that a true contribution number, if you didn't own the network?

Yes, probably so.

And I think you'd talked a little bit more extensively last quarter about changing in the distribution and expecting some announcements there. Do you still expect to make some pretty meaningful changes as far as your carriage (ph) goes and which (indiscernible) and so on and so forth? Any clarification on timing or actions expected there?

If you looked at the sub numbers at the end, the FTE numbers at the end of September were down about 2 million year-over-year at that point. I think I probably had anticipated that we would be down more than that year-over-year, but Susan Packard and the distribution staff has pretty successfully renegotiated a number of those contracts, taken out some unproductive subs and replaced them with some new and better subs. And that improves the bottom line in the short-term, and really sets you up for a lot of improvement over the long-term.

Distribution, we're interested in whatever we can find that is the most effective avenue into those consumers' households. So we look at cable, and we have a little bit of broadcast in the mix today, and we're going to make investments in distribution in general, and a lot of opportunities and a lot of options.

I guess that was my question. I got the impression last quarter that it was going to be more about investing capital to improve it, and it looks like you have just kind of been paring back but you haven't really made those big investments yet. Are you still expecting and preparing to invest in distribution?

Yes, we're definitely prepared to invest in distribution. A good bit of it is running through the P&L right now. Sure, we would be willing to make other investments.

In other words, your character rights (ph) right now that are in the operating expenses, you would be prepared to make those a capital expense for the right deal I guess?

For the right deal, sure.

Thank you very much.

We have no further questions. Please continue.

Thanks, everyone. This is Tim Stautberg. If any of you have further questions, please give me a call at 513-977-3826. Have a great day.

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