E W Scripps Co (SSP) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the E.W. Scripps Company first quarter earnings report conference call. At this time you are in a listen mode. There will be an opportunity for questions.[OPERATOR INSTRUCTIONS] I will now turn the call over to Mr. Tim Stautberg, Vice President of Investor Relations. Please go ahead, sir.

Good morning, all. Thanks for joining us. We'll start this morning with a few comments from Ken Lowe, our President and C.E.O., and Joseph NeCastro, our Chief Financial Officer. Joe is joining us from his vacation. We appreciate him take something time out this morning. Our prepared remarks should take about 15 minutes. Then we'll open it up for your questions. Other members of our Senior Management team also are here with us. They will be available during the Q&A portion of the call. Joining us are Richard 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 E.W. Scripps Company, Laurie Hickok and Bill Peterson, the Head of our TV station group.

If you prefer to listen in on the Web, go to Scripps.com and click on the investors relations link. An audio archive 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. Our discussion will contain certain forward look statements. Actual results may differ. Some of the factors which may cause results to differ are set forth in our publicly filed documents including our 2003 form 10-k.With that bit of housekeeping out of the way, here's Ken.

Thank you. And good morning, everyone. Very pleased to say that Scripps had a great first quarter. Led by outstanding performance at our national television networks and strong political advertising at our local broadcast television stations. We also saw an improving newspaper advertising environment, especially in the help wanted category. Double-digit profit and revenue growth at Scripps networks accounted for much of our improved operating results. In fact, for the first time in the company's history Scripps networks contributed more in quarterly segment profits than our newspapers did. It was the seventh consecutive quarter of 25% or better revenue growth for our national television network division. Clearly, our brand of popular lifestyle programming is resonating with viewers and advertisers.

The outstanding financial results are a direct function, we believe, of the growing popularity of HGTV and the Food Network and the increasing brand awareness of both DIY and Fine Living. Compared to the first quarter last year total day viewership was up 13% at HGTV and 23% at the Food Network. The result of our commitment to delivering a consistently strong schedule of top quality original programming. That strength is continuing into April. In fact, last week HGTV ranked 13thamong all cable networks in total household delivery during prime-time with a1.0 rating ahead of networks like discovery, A&E and TLC. Needless to say we're quite pleased with those results. Distribution of DIY and Fine Living continues to grow. DIY is approaching that important 30 million household threshold. And Fine Living now reaches 21 million households.

Those are very encouraging numbers, we believe, at the stage of their development. The growing popularity of all of our networks combined with a valuable consumer categories they target give us a great story to tell as we begin our spring and summer up front discussions with advertisers. We're seeing the results of last year's strong, up front in the quarter just completed. And we're confident that we'll be just as successful this time around. We entered this year's discussions armed with some really solid independent research that a firms what we've been saying all along. Scripps networks view viewers are more engaged. They view advertising as valuable, added information. And perhaps most importantly they're more likely to buy the products and services they see.

Scripps networks continues to be our big success story. Now, in addition to the strong operating performance at our networks, the company's consolidated operating results got a real boost during the quarter from our broadcast TV group. Political advertising at our local television stations has been much stronger than expected just a few short months ago. Thanks to the early start of the presidential election campaign. As I'm sure you know, both sides launched pretty vigorous television ad campaigns once it was clear that John Kerry would be the democratic nominee next. Now, Scripps has the add benefit of having top-rated stations in key electoral states of Michigan, Ohio and Florida. So we've seen plenty of early activity. First quarter political advertising is well ahead of where we were at this point during the last presidential election in 2000. Even without the surge in political, though, our local television stations had a very solid first quarter.

Local and national add revenues were up about 2% against some tough year over year comparisons that included about $4 million in super bowl related advertising at our six ABC affiliates during the first quarter of 2003.At our newspapers we saw encouraging signs that advertising sales are rebounding. Especially in the help wanted classified category. Help wanted revenues were up about 11% during the first quarter which is a very good indication, we believe, that the economic recovery is building up some steam. Now, despite the improving ad environment, newspaper segment profits were held back by rising news print prices and higher employee benefit costs.

Newspaper profits were also affected by an increase in the reserve for bad debt which was related to the Kmart bankruptcy case. Finally, we're making progress on implementing our television commerce strategy at the Shop At Home network. Strong retail sales during the quarter helped us offset some of the costs related to the transition, but we'll be sticking to our plan in the months ahead as we continue to shift the product mix and fine tune the on-air look and feel of the network. We believe we're getting the right pieces in place to move Shop At Home forward. But remember, this is still very much a work in progress.

Before I turn it over to Joe, let me just say that we're very encouraged by the company's overall operating performance year to date. Based on our forecast, and, of course, barring any unforeseen circumstances it appears the balance of the year will be equally strong. So for Scripps and the shareholders, 2004 is shaping up to be the company's third consecutive year of growth. Now let me turn it over to Joe to talk about some of the numbers. Now let me turn it over to Joe to talk about some of the numbers.

Thanks, Ken. I'm going to provide a little more detail on the first quarter, specifically look at some of the issues that effected net income during the period. Then we'll look at some cash flow and balance sheet items before were view the guidance we just provided this morning. Got news is that our networks continue to perform extremely well. The tremendous growth at HGTV and food and the traction we're getting at DIY and Fine Living are the direct results of the strong up front deals we struck last year and a solid scatter market that's made our inventory even more valuable. Affiliate fees were up because of the transition of roughly 25 million Food Network subs from free to paying status and both rate and sub growth at the other three networks. Half of the quarter's growth and afife yacht fees came from the Food Network. The rest of the numbers pretty much speak for themselves so I won't go over them in detail other than to say our ship networks drive the company's overall growth. The first quarter net income was affected by the a couple of unusual items.

First we recorded an after tax gain of $8.4 million related to the sale of our holdings in digital theater systems. These were securities we held as a roofment capital financing. D.D.S. went public and we decided to take the gain soon after our required holding period had expired. We also recorded an after tax gain of about $1.1 million related to our investment. It was acquired in march by FineWet.com. We received a combination of cash and FineWet stock in change. Together the investment gains added about 12 cents to our first quarter E.P.S. As Ken mentioned, our television commerce strategy is moving forward at ShopAtHome and we expect to close the summit America transaction very soon. As a reminder, we'll be spending $184 in cash and forgiving about $51million in debt in preferred stock. Total consideration is about $235 million.

We expect the summit America transaction to be neutral to 2004 earnings. Even with the nice bump in revenues in the first quarter we're expecting Shop At Home to reduce segment profits by about $22 million in 2004, about the same amount as last year. Let's take a look at some of the cash flow and balance sheet items. Capital spending for first quarter was about $21 million with most of that dedicated to our newspaper plant project and a new building for our TV station in Cincinnati. We expect to spend about $80 million in on capital projects in 2004, about 10%less than we spent in 2003. On the other side of the balance sheet, the company's debt at the end of the quarter stood at about $406 million, net of $50 million in short-term investments. Total debt stood at $509 million at the end of December. Interest expense was $7.4 million in the quarter. Down slightly from last year. Some top level guide and for the second quarter of 2004 starting with E.W. Scripps Company.

We anticipate about a 35% increase in ad revenue from our national television networks. Affiliate fee revenue is expected to increase about 40%.Programming and marketing expenses are set to increase about 30% and the company continues to invest in building viewership across all four of our brands. Investments in the development of DIY, Fine Living and video on demand and broadband programming services are expected to reduce segment profits by about $8million and earnings per share by about 7 cents during the quarter. In our newspapers, advertising revenues are expected to be up 4% to 6% over the prior year and at the company's broadcast television stations advertising revenues including political are expect to be up 8% to 10%.The company's continuing investment in the Shop At Home network is expected to reduce second quarter segment profits by about $7 million in earnings per share by about 7 cents.

Due primarily to the increase profitability of the Food Network and the company's allocation of operating income to tribune company, which owns about 31% of the network, minority interests will be somewhere between $11-12 million in the second quarter. Because Food Network is a partnership, we're not including in our provision for income tax nizz tax liability accruing to tribune's interest. During the second quarter the company's also expected to realize a $6.5 million after tax gain related to the sale of our television station property in Cincinnati. The property will be acquired through eminent domain to make way for the expansion of the city's convention center.

We built a new production facility and studios nearby and are in the process of moving as we speak. Excluding the anticipated gain on the sale of the TV station property, second quarter earnings per share are expected to be between 92 cents and $1.02. During the second quarter 2003, were 80 cents, including investment write downs of about 3 cents per share. That's a look at some of our numbers. Moderator, we're ready to take any questions.

[OPERATOR INSTRUCTIONS]

First on the line is George Smith with Davenport. Please go ahead.

Good morning. I was just wondering if you could remind me what the total or accumulative investment in E.W. Scripps Company so I can get a feel - in crisis networks is so I can get a idea of EBITDA.

It's about $900 million all in.

$900 million all in?

Correct.

And is that -- how do you guys prefer to look at that time in terms -- do you look at that time from an EBITDA yield perspective? How do you measure your performance, return on capital there?

Well, that's a good question. It means somebody's got to put a value on what these networks are worth. Certainly more than $900 million.

Right.

It's a little bit of a mixed bag. You can certainly look at home and garden and food and the cash they're throwing off. The total Val yuste networks, George-- value of the networks, George. It's still a bit of a guess on the long-term R.O.I. on something like DIY and Fine Living. But then you have to factor in all the ancillary pieces, the fact that we own 15,000 hours of our programming which is now viewed as something very valuable in the V.O.D. and broad band areas. Then the Web sites. The Web sites have become ancillary businesses in and of themselves. So not trying to duck the question as much as it's a mixed bag. All in it all we're pretty pleased with the R.O.I. to say the least.

And the up front market, can you remind me quickly. Last year what type of gains you saw? And juxtapose that with what's happened in the scatter market?

This is Frank. HGTV, for example, just to give you something current in the first quarter was getting scatter prices that were about 29% of the up front C.P.M.'s. And last year in the up front we virtually doubled the industry performance. In the up front in terms of the increases. And it was very healthy, double-digit increases. We are very optimistic and upbeat about this up front. There's been a lot of speculation about big shifts of dollars from the broadcast side over to the cable side. I've seen some estimates that it could be $750 million. I've seen estimates all the way to $1.3 billion. Who knows? I don't know if it will be $1.We're very optimistic with or without shifts from broadcast that our piece of the pie will be growing in very, very healthy double digits.

And with Food Network, haven't been to bashful about talking about your interest in obtaining the rest of it. Have you become more interested? Or do you think the tribune has become a more interested seller? Anything different at all on that front?

No. We're where we've always been. Dennis, the folks at tribune know that while they've been excellent partners we'd like to own 100% of the network. But at this point I think, as you recall, there's nothing contractly put in call basis to force that issue so we continue to operate as good partners. I think when the two companies find the right time and the right vehicle and/or the right exit strategy for tribune, we'll sit down and work something out. Other than then having Dennis on my speed dial there's not much else we can do at this point.

OK. Thanks and have a great day.

Thanks, George.

Next on the line with Credit Suisse First Boston, William Drurery.

First on the newspapers. I just wandered if you could tell us what percent of newspaper costs is benefit and news print. And just wondering where the threshold is on revenue growth to see that flow threw and leverage on the profit side. Is it 5%, 6%? If you hit I guess the high end of that guidance range for the second quarter towards 6%, would you start to see the leverage flow through?

And then, Ken, maybe you could talk about the path of profitability on the start-up cable nets. I'm just wondering -- you referred to development costs. Just wondering -- or how much of the costs that you're running right now are really truly development versus just day-to-day operating expense, I.E. a year or two from now are a lot of those costs that you're generating right now going drop off? And just wondering if you could describe to us how you're going to get the profitability with those networks. Is it just a revenue-driven phenomenon or is there a cost element to it as well?

OK. We'll let Alan and Steve take the newspaper questions first, Bill.

Bill, as always, you ask the key question. And I think we're going to actually see the leverage become positive in the second quarter. We hate to make projections this early in the quarter. But we had an unusual benefit expense in the first quarter, an adjustment on the disability reserve which was -- which caused our first quarter benefits to be a little higher than we had budgeted. We did know that we were going to have significant benefit increases in the first quarter and we did budget for them. But the reserve for the disability was a little bit of a surprise. We do not expect that to repeat in the second quarter. And, as you see, our advertise -- we expect our advertising revenue to grow a little faster in the second quarter than the first. We expect news print prices to be relatively where we budgeted them. So we are looking for some positive leverage in the second quarter.

OK.

Bill, on your question specifically, again, a little bit of a mixed bag. DIY, which is approaching, as I said in my comments, 30 million households is getting to the threshold where, you know, as you've heard me say in the past we would expect -- the once that network exceeds 30 million households, start on the path for profitability. We've never given any exact dates because we want to make sure we've "invested" in development of that network. Both as a cable network, as a Web site and as a library. But it's more operational -- I'm sorry. It's more operational day-to-day costs right now on DIY. Fine Living, on the other hand, just topped out about 21 million. That worked that works on a little bit different development track so there are still some start-up costs. Total for the year above these networks is 22.4 million. Somebody help me. What's that down from 2003?

It's about 27 mp -- million, 28 million.

So the overall costs are starting to improve. DIY definitely on a faster track just because it's a little older. But there's still some development money going in. But more along the lines broad band, B.O.D. and Web site related.

Bill, this is Frank. You know this but these are not hobbies with us. These are going to be businesses. Real business. DIY is obviously getting set way ahead of Fine Living by a year, year and a half. But DIY is having a gangbusters year on the sales side of it just talking to the sales people yesterday. We've got people who are buying BOIP because it's BOIP. -- DIY. Buying DIY because it's DIY. They're buying it and they're buying the Web sites. These going to be buyable businesses. They won't be as robust as the two big networks. But these are going to be buyable, stand on their own businesses. By the time they turn the corner, they will have created valuable libraries. Meters will probably turn on sometime in the first quarter of 2006.

We have a year and a half to go probably before the meters come on by the end of next year or first of 2006 when we get to that point where the Nielsen meters kick in, we will go into a whole different level or echelon of buying activity on the part of a whole different level of buyers. We're very optimistic about that ability of DIY first and then right behind it Fine Living to really start to show a profit.

Thanks. And great quarter.

Bill, let me just correct myself. I think I gave you an incorrect number. Total investment in Fine Living and DIY last year was about -- around $36million. And this year it's going to be about $22 million. So it gives you somewhat of a basis of the fact that we're improving the cash invested in these while yet we still have a ways to go. I think specially on the development side for Fine Living. But those are good indications of how these businesses, young though they may be are growing.

Next question from Steven Barlow with Prudential. Please go ahead.

Thanks. Guff an estimate on your minority interest line to tribune for food for the whole year. Political for the whole year at this point, how do you think it's going to track? You have McCain-Feingold back half in the fourth quarter. Would like to know what your forecast is for the year. And for Joe, tax rate was down, what's your use for the year?

OK. Joe, why don't you take that one first. While we check a little more detail on the minority interest question on food. OK?

I can give you the minority interest as well.

If you got it, OK.

Yeah. Steven, you may be -- both that and the tax rate are related to the same question which is the changing treatment of the minority interest. From the tribune. We changed our accounting to reflect the fact that that's a partnership and not a taxable entity so the minority interests were recognizing now is the pretax minority interest. That number will be around $40 knoll $42 million on the whole year. That because the taxes are not shown in the tax line as well. That reduces our effective tax rate. We should be at around -- if you think of it as effective tax rate all in, it will be more like 36, 36.5 to 37. Call it36.5 for the year down from 39 as we were referring to before.

I think that minority interest is all of our minority interest.

OK.

That's all inclusive.

What's the food amount?

More like 38 million, 39 million.

OK.

And Steven, Bill Peterson, Head of our TV group, will take the political question.

McCain-Feingold was the -- the big uncertainty when we built the plant for the whole year, it was a reality. But we didn't know what it was going mean. We're right now -- right now political is running strong. We built our projections for second quarter based on the premise that it will continue to run strong. But at the same time remember three months ago we were sitting here despite our optimism reporting that political was very weak so it could go away in a moment. We just don't know. Right now as we look at the quarter, probably the uncertainty that we see is towards the end of the quarter in June. We may see some activity from two open senate seats. One in Oklahoma and one in Florida. We originally budgeted those to impact third quarter. But we may see some activity that we didn't anticipate coming in had June. Pro IP we also have an open Governor's seat in Missouri that also might kick in. Right now we're just projecting that it will continue as it is. And it's fairly strong. And we feel that way about the full year. Again, I don't know what the impact of that legislation is going to be on political advertising. It is enforce -- in force right now. We are seeing a lot of strong political advertising. We anticipate that we'll achieve pretty much what we budgeted for the year.

Which is?

It was around $30 million.

Thank you.

Next on the line William Bird with Smith Barney. Please go ahead.

Ken, I was wondering if could you drill down a little bit on Shop At Home's integration with Scripps networks, specifically if you could talk a little about where you are in the shift and mix. As well as the change in feel in some of the talent promotion. Thanks.

Sure, Bill good question. Since rich and frank are spending more on a day Tiday basis with those folks, I'll let Rich take that.

It's Richard Boehne. I'll talk a little about merchandise mix and let Frank talk more about the day-to-day integration with the cable networks. The one thing you probably noticed, the revenues were pretty strong. And that is despite all the shifting we're doing in the background. Product mix on the quarter, for example, the strict home category was up to about 10% all by itself which is up almost double from where it was a year ago. Also, pretty strong shift in other categories that start to strengthen the female viewer like health and beauty. At the same time, jewelry and gem stones and things like that were down about 10 percentage points so everything's moving in the right direction there. I'll let frank talk for a minute about the integration.

Bill, as you know, we moved Judy Girard, who has been running the Food Network, to Nashville. And she's going to be running Shop At Home from now on. Her replacement will be announced shortly at the Food Network. Because Judy has now been sort of onboard in Nashville for a month or so, a lot of things are already starting to happen. One of the first initiatives she's making is to beef up an area that was not paid much attention to in the past there. That was the commerce activity online. There's going to be a major thrust to beef up our activity in the Web site area as it relates to the ability of the networks to promote to that Web site. And here literally in the next day or so a whole new commerce initiative related to Shop At Home's Web site is going to be announced by Judy. That's one of the first areas.

There's a lot of other stuff going on I won't bore you with in terms of improving the look and the design of the network and the product mix and the new relationships with buyers and surrenders. There's quite a lot go -- and vendors. There's quite a lot going on. And simultaneously, the Scripps networks folks are now having a direct oversight role in the day-to-day coordination of Shop At Home so that we don't miss an opportunity anywhere along the line to cross promote and drive people to and from Shop At Home. Pro IP prescription so there's quite a bit going on in terms of activity to cross, promote and bleed across those lines at every opportunity.

And if I could tack on one quick comment, this is Ken. I'm really pleased at how the entire company has really gathered around Shop At Home. Our newspaper division, our broadcast television group, our cable networks. It's not just cross promotion. They're coming up with some very creative ways to integrate Shop At Home. Areas like the classified ads and some of our newspapers.

And a good example to that point, Ken, is the fact that Shop At Home has aired a number of shows recently key to the dream home give away promotion on HGTV. Which as you know is a huge, multi, multi, multimillion dollar project at HGTV. On Shop At Home you could see shows where hosts were literally walking through the dream home showing you how and demonstrating all the various products and features inside that home and showing you how to buy directly right here, right now, go buy those products inside that home. That's probably the poster child or at least earliest, first one, of our cross promotional capability between those two networks. It's a wonderful example of the driving power of our broader networks to drive to Shop At Home.

Just as a follow. I know you had a sort of co-promotion with the Queen of Queen. Just wondering if any other call yent is starting to point viewers to Shop At Home.

Yes. There's a lot going on that the Judy Girard level. One of the main reasons why she was so logical for that job because she has terrific relationships with a lot of our talent at our existing networks. She is proceeding right now with her entire team to come up with the right kind of contract extensions for people to make sure that we have the right to bring those people over to Shop At Home and do licensing deals with them and a lot of them have had or would have had licensing deals down the road anyway had we not acquired the Shop At Home networks. So it's a good way to keep that money under our roof. She's working on that as we speak in terms of making sure that all the contracts with all the talent include fairly soon bringing those people over at Shop At Home to maximize that licensing and marketing potential they bring.

Bill bird knows the Queen of Queens.

I thought my secret was safe with you.

Any follow-ups?

Yeah, actually. for Alan. I was wondering if you have March newspaper growth on a comparable day basis.

Yes, I do. Do you have that with you, Steve?

I'm not sure I understand the question.

Bill put march and February together. Do you have that sheet? Somebody has it here. We'll figure it out here.

Basically if you take the two months together, which is the easiest way to do it, February and many, total revenue up 3.6%. Total advertising was up 4.1%. So it's right online with what we saw for the quarter. So we didn't lose any ground or gain any ground. In march from what we've been seeing.

Thank you.

Next from the line of Lauren Fine with Merrill Lynch.

Sticking with Alan if I could. I'm wondering if you could give us for the quarter I think you cited the relief. If you could give us the classified for the quarter. And then if could you help us on Denver and tell us how the revenues performed there in the quarter. And if you could isolate the Kmart charge that they might have incur sod we can understand what really happens with the underlying profitability. Then I have a follow-up question.

OK. Lauren, the classified categories, and this is just the Scripps newspapers including the J.O.A.'s for the moment, the Scripps run newspapers, automobile advertising in the quarter was up 4.4%, employment up 11.6%, real estate was down 4.7% and that is entirely due to Naples. Let me just explain that. Naples had a good game in the quarter all things end. But in real estate interpret they were down because the market was actually so hot there was very little need for the real estate to be advertised. Things were selling so quickly. And also, if you recall, 9/11 and for the developers cut back, phased down the speed with which the developments were coming lack of inventory to sell and online. And they actually had a lack of inventory to sell. But that will pick up again. So I don't think you ought to put too much credence in that real estate number for the quart eastern expect it's a trend that's going to continue of too long. All other categories of classified were up 18.1%. Now, what was your second question?

Denver revenues and the charge Audio inaudible or unavailable?

Denver's Kmart charge -- our part of it was 650,000. So you can double that for the total impact on Denver. They look at retail and national together. Because they've done some recategorizing of certaintiesers . And -- for certain Advertisers. The national and retail were down a little less than 1%. Auto has been a struggle for them. As you know, the Denver economy has some issues. Auto been a struggle for them. As you know, the Denver economy has some issues. Auto was down 4% in the quarter. Real estate was essentially flat. Employment was up a robust 11%. But in their case a lot of that had to do with online sales, it had to do with top job sales which is another piece of online . It's not just strictly in paper employment advertising. And commercial and private party was essentially flat for them. So that gives you -- they're very long T.M.C. Online was up 34% for them. Circulation was up a nice 5%. Overall, Denver's revenue numbers are look encouraging .

Thanks. This is I think more to Ken. I've been hearing some speculation that you're interested in buying more to support Shop At Home. I'm wondering if that's true and why you would be interested, sort of what the thought process might be.

Sure, Lauren. That speculation has been out there I think since we announced the summit deal in taking in the rest of the company. Of course, those five television stations. Our answer continues to be it was not at the top of our priority list. But once we took a look at the rent versus own scenario of carrying the Shop At Home signal on over-the-air broadcast stations that carryover cable systems, etc., the numbers were compelling to the point that we really felt the summit television stations were a good buy, if you will, in the total sense of this business. I think going forward it's always market dependent.

It's TV station dependent. Because of a lack of any movement on regulation in Washington on the whole TV station ownership issue, including cross ownership, some of those prices for television stations softened, as we mentioned, in the call that concluded the summit deals. So if any of those other opportunities come up and they make sense financially and it's a good R.O.I. for us, we take a look at them. But are we out actively looking for television stations, no. No. We're very opportunistic when it comes to that. Having said all of that, I must tell you I'm very, very pleased and confident that the affiliate sales team headed by Susan Packard and John beard have a very solid game plan moving forward on gaining distribution the old-fashioned way, like we had always done for our cable networks. So it's very much of an opportunistic mode for us when it comes to looking at a television station for Shop At Home signal.

Then just the last couple of questions on TV. You had a category that you cited of other TV revenues of 12%. I'm wondering what's in there. And also, your revenues were better than we were looking for but the cash flow hit our estimate. I'm wondering if there was anything unusual going on or if high margin replaced with low margin political ads and nothing more than that on the cost side.

In terms of other, the primary increase to that is the revenue associated with our syndicated program "Rebecca's garden." There are some other increases in that category. But the big one is "Rebecca's garden." And I don't know if I understood the second part of that question.

What I'm trying to ask is the cost increase looked higher than I would have expected. Or another way, the margin may not be as strong as I would have expected given revenue strength. I'm curious if there was something going on the cost side.

There were a couple of things. We have added Nielsen expense because of the metering of the Tulsa market and also actually new deals in several of our markets. There were, the same as in newspapers, some of our benefit expenses. Some of them anticipated some. Not anticipated. We did take a hit on short-term disability accruals. And also, we had been investing in programming in some of our stations. And those investments have been paying off in terms of buying "wheel" and "jeopardy" for some of our markets so it's kind of the aggregate of all of those.

That's great. Thank you very much.

Thanks, Lauren.

Next question from Brian Shipman with UBS.

Good morning. Two questions. First, given that you're pondering alternative distribution strategies for Shop At Home what are the implications of that for the potential launch of new cable networks in the future? And then second, the follow-up on the earlier emerging network question. I realize Fine Living is a younger cable network than DIY, but can you please expand on sort of what the development issue that you're still work on at Fine Living? Thanks.

Sure, Brian. I'll let frank talk about Fine Living. As far as alternative distribution and how it relates to quote/unquote new networks, those are apples and oranges really. Because as you know, TV commerce networks end up either paying a percentage of products sold or just a flat fee to distribution partners as opposed to quote/unquote cable networks which are usually looking for license fees. So one is total partnership with the distribution folks. And the other is very much a vendor relationship. I don't connect the two going forward. I think as we continue to have good ideas, be it 24/7, V.O.D., broad band, we'll be out there talking with distribution partners on those kind of deals. And moving forward, as I mentioned, with our affiliate sales team with Shop At Home it does help to have that same distribution team, if you will, associated with Scripps networks and Shop At Home when it comes to all inclusive deals. So going forward, new networks, new ideas. We'll still do it the way we've always done it. But again I wouldn't totally rule out any alternative deals for Shop At Home just on the nature of what that net work is all about. And as far as the Fine Living question, Frank?

Expand on the development issues surrounding Fine Living, Brian. Fine Living is going to be, we think, a very successful network. It's a year or so behind DIY. Strictly, literally a matter of newness, greenness, if you will. And it's strictly a matter of distribution going forward. We're making distribution gains consistently and steadily and according to plan. We've had no surprises. Everything's working just the way we thought it would go. And I think Fine Living, the product itself is quite add Michele for a start-up -- admirable for a network with that quality, that much depth and all original as it is quite a remarkable feat. It will gradually, I think personally, involve in a more of a-- concierge kind of service. I don't think there will be any surprises. It's just further behind than our others. As to your earlier point about the implications of launching new nets, there's nothing in our future that tells us there's going to be a lock or network launch because you can only slice that pie just so thinly.

The business models are not out there. There's lots of ideas for still as yet unoccupied niches. But you can't come up with a business plan rational in terms of the cost structure. So our future is about more of one of mining and less of prospecting and building and developing. We're in the mining business now. And to give you an example, the online Web sites of our networks, our third largest network right now if you want to look at that time that way. So when we say it's been mining, not prospecting, and not building new networks, that's literal, true. When you take the Web sites of these networks and you say from a revenue standpoint they're now our third largest network, that's why mining is not just a cliche and not just some sort of gray, neutral sort of leveling off kind of cliche. There's a lot of gold in them thar hills when it comes to the mining ahead of us. As opposed to going out and building three new networks that don't have a rational business model behind it.

OK. Just to follow up with Fine Living, then. Is it fair to say that the programming is where you'd like to have it? Is this the distribution story at this point?

Absolutely. And if you go back to where Home and Garden was or where Food was, at this point the programming of Fine Living is 10,000 percent ahead of where those networks were at this stage of their infancy. The programming will change. It will become more defined. It will become more specific. It will become more definable, whatever word you want to use in the next couple of years. But compared to where we've been with our other networks that the stage of the start-up curve, or anybody else's network at this start of the curve, that network is, we think, highly admirable.

Thank you.

Thanks, Brian.

Next to the line of James Marsh with S.G. Cowen. Please go ahead

Hi. Two quick questions. One, I noticed that Shop At Home revenues were up 50% in March, up 27% for the quarter. Those numbers seem to be remarkably strong to me. I wanted to get a sense, were those expected in your mind or are those revenues higher than expected, maybe you're plowing a little more money in and ending up at the same rough EBITDA number.

Second question, just follows up on the discussion about political advertising and the risks to those numbers. I wanted to get your view on the 527 group money being spent. I know there's been some points by republicans that organizations like moveon.org and the media fund are spending money illegally or at least circumventing the spirit of becra (ph) and they're going to the federal election commission. I wanted to get a sense, what are your lobbyist and legal people saying about the risks to 527 money?

It's Rich. Let's start with the Shop At Home. Clearly our folks did an outstanding job in march. But also I have to point out that they had a pretty easy comparison because of the outbreak of the war a year ago. That made March look particularly strong. But certainly and obviously that's not all of it across the quarter. The numbers were pretty good.

Bill, you want to take the political?

Again, when it comes to the 527 money -- and we are seeing advertising from both the media fund and moveon.org, not on all of our stations but on some, we're not in the enforcement business. That's really up to the government to decide. We don't have a horse in that race. We'll just sit back and see what happens. But in terms of how we built our plant for this year, there was uncertainty about 527 impact, McCain-Feingold as well. We just remain optimistic. There's so much money out there that will be applied to these campaigns that we're comfortable with our projection for the year.

Thanks very much.

Sure, James, thank you.

And a question from the line of Michael Kupinski from A.G. Edwards.

If I can follow up on the Shop At Home revenue growth because obviously it was better than expected. Do you have any guidance on terms of 2004? Are we supposed to look for single digit type revenue growth in the third and fourth quarter? Is what I have I guess in my model. I was wondering if given the changes, are you kind of slowly implementing them or do you think you're going to press the pedal a little bit is to where that revenue growth might be more at risk. If you could just give us more color on that.

Sure. This is Rich again. It's kind of hard to tell. The numbers have picked up dramatically. And we're pleased. But at the same time there's a lot of shifting going on and a lot of investment going on. So we plan to take some of that revenue growth and plow it back in. So it's just hard to tell if the top line remains this strong. It could affect the numbers for the year. We're not really ready yet to try to reforecast the year. If I was you, I wouldn't spend a lot of time trying to spread third and fourth quarter at this point. Just sort of wait and watch it month by month and stick close to that 22 number that we're giving for the bottom line.

OK. And on the affiliate fees for the Food Network, obviously you're going start cycling against a little more tougher comps in the fourth quarter. But it still seems like your guidance for the year was like 30% to 40%. It looks like you are going to come in at the higher end of that range. Do you have any thoughts about the guidance since it was fairly wide and I was wondering if you want to narrow that guidance. Do you think it will come in at the higher end of the range right now?

Yeah. I think Michael two things. We had a couple contracts, as I recall, near the end of the year that we were closing. And based on how they would hit the books and when they would quote/unquote officially be closed and when we would recognize that revenue, it's a little bit of a pleasant upside. I think for the entire year we are looking at a better forecast on affiliate fees overall for the networks, especially for food network as I think we've mentioned in our comments.

You think it would be over 40%?

Hard to tell at this point. I think 40% is probably a pretty good number at this point based on what we know today as far as the modeling. But as Rich said earlier on Shop At Home, you know, stay tuned. Given these quarterly updates, the numbers tend to move a little bit. Contracts when they're executed can tend to fall in one quarter or another. But overall the obvious point here is we've been saying for a while that when that 10-year free period ran out on the Food Network, we would start to see some nice affiliate fees coming in. I think bottom line, Michael, these affiliate fees are reflective of how popular this network has become and the recognition by distribution partners that is certainly worth something to their customers. We always contend it's worth more than they think it is. But again, have to give our affiliate folks a pat on the back for negotiating pretty good deals.

Terrific. Thanks much.

Thank you, Michael.

And we'll go to Douglas Arthur with Morgan Stanley. Please go ahead.

Yeah Allen, I'm just wondering, going back to a earlier question, if you could be a little more specific on the cost trends in the newspaper division. You obviously talked about news print. You had a couple of unusual items, I guess, on the benefit side in the quarter. What is sort of your underlying, non-newsprint cost, cash cost trend right now? And what can we expect from the second quarter?

I'll let Steve Sullivan take this. He's been doing a little work in this area, Doug if it's all right with you.

If you look at our other cash expenses, newsprint and ink, they were up 7.6 for the quarter. But if you dive into that and take the Kmart adjustment, the investments we've made in Memphis with our zoning strategy, with our Home and Garden television magazines that we launched in march, we have several promotion that we kicked off, including sponsoring the Honda classic in Florida and a big women's expo in Knoxville. If you roll up all of those costs, it's about 300 basis points. That would adjust our other cash expenses down to about 4.6%. Going forward, as you know, we have launched some new initiatives in this year and have planned for that. We did have some unusual start-up expenses. But I'm happy to say our new initiatives are profitable. And believe that they will continue to grow at the rates that we've put in our plans for this year.

Yes, I'm sorry. Didn't you mention earlier that there was an unusual catch up on benefits in Q1 for the newspaper group?

That's correct. That's correct.

It was a little under $1 million for the newspaper division.

Great. Ok. Thank you.

If I could just tack on -- I know you finished your question, Doug. But Steve, would you tell -- talking about some of those initiatives, would you mention the "HGTV" magazine that the newspaper division started, just an executive summary.

We've developed a really robust content from Home and Garden television, Home and Garden content developed out of our Scripps Howard new media division in Washington. They provide the content. It's a 50/50 editorial content versus advertising. Typically 48-page magazines glossy, printed outside. Again that drives up our outside printing costs. But these magazines are very profitable. They bring in new sources of revenue. All of our newspapers will launch this year three "HGTV" magazines and one food magazine. That will accelerate next year to probably six magazines, HGTV and two food. They're very profitable magazines. Right out of the gate. And very high quality content. We've had several of our markets with a March publication go back into the field and they're sold out for the year as a result of the quality that we're producing in these magazines. We expect to continue developing these magazines to the point where we're looking outside of Scripps for interested partners who would like to join the excitement.

Let me add a sentence to that, Doug. The margin in the first quarter for the HGTV ideas magazine, which has been launched I think in eight or nine markets already, Steve, is 42%. So it's adding to our bottom line. And we do have some 400 and some other newspapers who subscribe to one or another part of the Scripps Howard news service, service out of Washington. They are the first natural potential customers for this strategy rolling it beyond Scripps. And I think the testimonials you'll get from the Scripps newspapers will be great selling points.

OK. Thank you, guys. Back to the moderator.

Our next question from the line of Fred Searby with J.P. Morgan.

Good morning gentlemen, it's Fred Searby. Congratulations on the results and your ongoing success. Just a couple of quick questions. One is how much up side initial readings is there for your networks as the local people meters are rolled out? I assume cable networks will do better. But if could you give us some sense there of your thinking. And it sounds like you're having some success in preoccupied but what is your thinking on Hispanic and you postponed it but the opportunity there and whether it's cost-assured just to have so much on your plate right now with Shop At Home and the networks.

Fred, this is Frank. We think there is potential upside when those people meters click in. Everything that we have seen so far in the various tests in Philadelphia and Boston whether it had been smaller samples of that effect, indicates that it bodes well for most cable networks. But we particularly for our networks it bodes especially well because of the attentiveness surveys and the audience retention survey that we have recently gotten from independent research. I think the people meters will just validate that retention and that attentiveness and it will only be better. We're optimistic about the people meters. I know there's been some glitches in New York. And pulling back temporarily because of the waiting in the minority area. We're optimistic.

Fred, it's Rich Boehne. We do still have a team working on an Hispanic concept in the home and food categories. But we have gone slowly, trying to be very careful that we build a business here and not just get into a marketplace where it's going to be hard to make money. As you probably know, max, it's 10 million homes across the country. So you've got to build to those economics. And our current strategy is really focused on starting local and key Hispanic markets and sort of building market by market. But again, going slowly not necessarily 24/7 to start. But trying to be very, very careful about how we do it. But still committed.

Great, if I could ask one quick follow-up question. The department stores took some money out of newspapers generally last year. What are your thoughts going forward whether some of that money clearly they're experimenting with would comeback. We had a nice retail number. You guys have had great numbers. But on the newspaper side, again, you know, the retail side is not quite getting the lift. I'm curious of your thoughts specifically if you can address it.

Well, there are a couple of points, Fred, I want to make quickly. One is that, yes, we are losing money on the department store category. In the first quarter we were down about 8.9%. I don't see a huge change in that. Although we're cycling on some of the Dillards and other decisions made early last year. The overall trend in department stores is not terribly encouraging. Department stores is not terribly encouraging. On the other side of that, we are developing lots of new revenue categories that are very positive. What was the second part of your question? I'm sorry.

Well, it was just basically that if the department stores -- it sounds like not only are they in the decline, but they pulled money through TV, federated and issues with Dillards and I just wondered if you thought that there was any sense that they may come back. Some of the publishing groups have mentioned that they think they'll throw some money. Whether that's wishful thinking or founded on something concrete.

I think it will depend on several things. One is how well will their new strategies work? Number two, how successful are they overall and how much money do they have to spend? I think those two issues will decide how much money we get. As you may recall, the last time we talked, a quarter ago we talked about a number of special initiatives that we're offering to department stores to try to get a larger share of their money. And we're working very hard on some of those. And in some markets those are paying off. We had some significant gains in department store spending in several markets.

Great. That's helpful. Thank you.

Our next question from the line of Toby Sommer with SunTrust Robinson Humphrey.

Two questions. One for Alan. National advertise ago appears to be doing a little better in the mid-sized markets. I was wondering if you could address that recording some key categories and maybe non-traditional newspaper advertising. And then regarding the emerging cable networks, Frank, can you refresh my memory as to when the Nielsen meters start up and when you think that's going to take hold for the emerging DIY and Fine Living networks. Thanks.

Let me start with the national. We have seen consistent near double-digit or double-digit growth in national advertising every quarter for a number of quarters now. I don't see that abating. Everything that we are reading suggests that national advertisers more and more are turning to newspapers. And more and more categories. And we're certainly working very hard to get our share of it. I don't know if that answered your question. I hope it did.

And Toby this is Frank. On the emerging networks and when the Nielsens start up, usually that's somewhere between 30 and 35 million. We think DIY will be approaching that number sometime, you know -- I don't know. Probably in '05. We think at the latest the Nielsen meters will click on -- I just talked to the sales guy about this yesterday. He thinks the latest they will probably click on for DIY is probably early 2006. So a year and a half.

At this stage, do you have an expectation for Fine Living?

Well, it will be whatever, a year and a half progression passed the DIY number is that I just gave you. Because that's about how far behind Fine Living is behind DIY in terms of its growth. In relation to when it started up. It's roughly in it that 30 to 35 million sub range is the hard answer to your question.

Thank you very much. Appreciate it.

Our next question from Kevin Grunic with Bear Stearns.

I was wondering if could you update us on what percent of foods, households are still free and where you expect that to be at the end of the year. And then if Bill would just talk about what programming costs were up in broadcasting.

Bill, you want to take the second question first and let us dig a little bit deeper on the free, if you will, food households, quote/unquote.

The programming costs increases are primarily because of investments we've been making in trying to upgrade the programming in some of our selected stations. We purchased "Wheel" and "Jeopardy" for some of our stations such as Phoenix and Kansas City. We're give getting a nice return on that investment. But it was a step up in terms of our programming costs.

What percent, Bill, in Q1?

You know what, I don't have that number. Of what specifically is being driven by "Wheel" and "Jeopardy."

I just need it overall what programming costs were up in Q1.

OK. It's around -- just 10%. 9.8%.

Great. Thanks.

Kevin, once the 10-year period expired, there really will be no quote/unquote free food households. However, having said that, as I mentioned earlier on some of these contracts that had been renegotiated or in the case of one cable system buying another cable system, etc., there's still some negotiating going on. When those turned to a license fee, we'll recognize the revenue. But as far as quote/unquote pre-households to the Food Network, those days are over. It's just a matter of concluding negotiations on a few of the contracts. And I might say there are very few that are outstanding.

And the vast majority of our distribution is the big M.S.O.'s and they're all done.

So it's 90% plus pay right now?

Yeah. I think that's a pretty fair number, Kevin, 90%.

And one follow on. With the Cincinnati J.O.A., the softness in the bottom line number there, is there some further severance reserve in there? Is there a Kmart reserve in there? Could you discuss that number?

No, there isn't anything unusual in there, Kevin. That's just the performance. This market is very soft right now.

OK. Terrific. Thanks.

Next from the line of Thomas Russo with Gardner, Russo, Gardner.

Great quarter. Congratulations on the great quarter. Frank, continuing a question on, a couple of questions for you. The list that you might suspect when Fine Living or DIY does go Nielsen, what would be the magnitude? What changes in '06 in terms of the revenue?

What would be the revenue, magnitude change -

The lift to revenues that might occur. Simply for being metered.

What surge will we get in revenue when the meters click on?

Yeah.

I wish I could tell you, Tom. I think there will be definitely be a surge. But it will be spread out probably over a year because all of that stuff is bought way in advance. It's hard to give you a hard number. I'm not ducking your question. I honestly don't know the answer. If Steve Gilotti were here, he is responsible for that, even I think he would say that it would take probably the better part of a year for that surge to manifest itself. Because the stuff just bought that far in advance. You don't have those ratings in advance. So you can't sell them in advance. You literally have to wait until they click on. Based on what they show, you start selling it and you sell it way out over a period of six, eight months to a year. So I think surge is probably the wrong word. It's probably a slow ooze.

And at the end of ooze, are you picking up 25 million incremental off of the ratings numbers? What's the magnitude?

I can't tell you because I don't know what the rating is if I knew what that-- if we had an inkling or glimmer of what that rating is even now, if there were one, I could tell you. But since I don't have that number, we don't know. We just don't know.

Frank, could you talk about your experience where V.O.D. is being run? How's it working to you as a network? How does it impact your ability to increase affiliate fees, maybe gain more distribution? How have you been able to use your content through those offering V.O.D.'s to improve your networks, first of all. And then how has the negotiations been going about the advertising share that comes through the V.O.D.?

You've heard us say I think before, Tom, probably that the whole -- it's a currency. It's not a business in and off itself. I'm not sure it will ever be a business in and of itself. But it doesn't matter as long as it's a currency for to us get distribution that we otherwise would not be able to get. As soon as we are getting it or getting it at all. So it's a wonderful currency. That's the real reason for it being where it is today. The take rates are pretty impressive in the markets where we do have those tests going, in full operation in the Time Warner markets and a lot of the Comcast markets. As a business, I'm not sure it's valid or viable long-range. But it's certainly a wonderful currency for us. And we're way, way, way more than what we're spending on it.

Great. I've read strange comments about mlb.com and the migration of otherwise broadcast content to the P.C. in that category. What other trends have you seen there, Frank? You talked about your own cable networks having enormous potential on the networks. What about the loss through things like mlb.com going broadband rather than cable?

You mean Linear network content going over -

That's right.

To the online world?

A major league baseball game broadcast on the computer not the television.

I know there's a lot going on in that area in terms of tests and experiments. I'm vaguely familiar with the MLB situation. I don't know that there's any effect for us. We've got a lot of broad band experiments going on right now on what the content -- on both the content side and the sale side. A lot of broadband stuff is becoming more and more valuable to our sales people. They're wanting to buy it. But in terms of any viewing if that's what you're getting at from the Linear side to the online side, we haven't seen that yet and don't have any forecasts on that.

OK. Ken, for you, cash flow bills and your debts beginning to moderate pretty rapidly. Where do you see cash flow application going forward?

Good question, Tom. It's one that we're constantly asking ourselves. You know, if you look at our track record, we've pretty much over the past several years -- it's a broken record. We take our cash flow and reinvest it. In this case in the last few years, our cable networks. But I think the obvious answer is the ancillary businesses that are cable networks are either offering us or businesses that fit very well with our cable networks and our overall strategy. Of course, Shop At Home comes under that heading. We've tended to be more organic and grow from within as opposed to looking at acquisitions, although purely Shop At Home was an acquisition.

So I think going forward it's probably going to be, again, a little bit more of a mixed bag where we might acquire some companies or acquisitions that make sense in partnerships with our cable networks or our television stations or newspapers. As you know, Tom, they're few and far between. We're always looking for a good, solid R.O.I. But I see nothing to prevent from us reinvesting in ourselves. We've done a pretty good job of create some businesses and some ancillary businesses that throw off a good R.O.I. and as you know, things we just touched on. Technology is now offering us opportunities, we think in these categories that we're already in. They do nothing but enhance these brands. That's where we see it going forward.

Thank you again good job.

Our next questions are from the line of Edward Atorino with Fulcrum Global Partners.

I think we've had enough questions. Thank you very much.

Thank you, Ed.

You're welcome.

The line of David Gibson with Macquarie Securities (ph). Please go ahead.

Just on broadcast television. Two questions. One was can you give us some sense of current trends by category? What categories are up and what down? Second question was on the political assumptions for Q2. Want to get some sense of what you're assuming in political revenue for the quarter in your guidance. Whether it would be in line or slightly ahead of this quarter number for political revenue.

In terms of the categories, actually, it's really interesting because political kind of obscures everything. There's a tendency to look at political as the only story. But in fact, automotive is a category for the first quarter. It was up 13% in our stations. We also have some other categories like services that are up 10%. We're seeing -- even though we're told that nationally communication as a category is down a little bit. And it was down a little the first couple of months of our quarter. We're seeing that emerge as being fairly robust because there's some wireless battles in some of our markets like Cleveland, Cincinnati, Detroit, Phoenix, West Palm Beach. So there are some categories that have some real movement behind them. In terms of the way we projected political for the second quarterlings are we really project it pretty much at the same level we experienced in the first quarter.

The level of the 527 advertising and then the Kerry and Bush campaigns kind of continuing through the quarter. As I mentioned earlier, the uncertainty that we have, we're relatively comfortable with our projections for April. We're feeling ok about May. And then when it comes to political, it's so hard to project it out too far. So June we may -- we projected it at pretty much level. We may see a hit come from those other campaigns.

Did you expect a political to impact? What I'm looking at is if you back out the political span in Q1 and your projections implies political is slowing down in Q2. Would you concern that? Reason behind that? Reason behind that? Or is this just assumption? You're making a conservative assumption to that?

What you're seeing right now is that there's just so much crowding of political. So that's why we projected pretty much at the level that we experienced towards the end of the first quarter. So I don't see it going down. But we're also not quick to say that it's going to be going up.

Thank you.

We have no further questions.

Terrific. It's Tim Stautberg calling back. Thank you for joining us. If you have any questions, you can call me at 513-977-3826. Thanks for joining us. Have a great day.

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