E W Scripps Co (SSP) 2004 Q2 法說會逐字稿

Ladies and gentlemen. Thank you for standing by. Welcome to The Scripps Second Quarter Earnings Report Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. If you'd like to ask a question at that time, please press "star", then "one" on your touch-tone phone. You may remove yourself from the queue at any time by pressing the "pound" key. If you're using a speakerphone, please pick up your handset before pressing the numbers. Should you require assistance during today's call, please press "one", then "zero". As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Tim Stautberg. Please go ahead.

Thank you, Cynthia and good morning all. Thank you for joining us. We'll start the conference call this morning with a few comments from Ken Lowe, our President and CEO, and Joe NeCastro, our Chief Financial Officer. Our prepared remarks should take about 15 minutes, then we'll open it up for your questions. Given that -- pardon me, we have an internal announcement that we're going through. Given the busy schedule we know a lot of you have this morning, we'll make sure we're done by the top of the hour. Before we begin though, let me introduce the other members of our senior management team who are here with us on the call.

Joining us are Alan Horton, Senior Vice President of Newspapers, Steve Sullivan, Vice President of Newspaper Operations, Frank Gardner, Senior Vice President and Chairman of Scripps Networks. Bill Peterson, who heads up our TV Station Group. And Lori Hickok, Vice President and Controller. Let me remind you that if you prefer to listen in on the web go to scripps.com click on the investor relations link and follow it to the live webcast link at the top of the page. 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 this morning will contain certain forward-looking statements, actual results may differ from those predicted. Some of the factors, which may cause results to differ are set forth in our publicly filed documents, including our 2003 Form 10-K and most recent Form 10-Q. Now here's Ken.

Okay. Thank you, Tim, and good morning everyone. As always, we truly appreciate your interests in E.W. Scripps Company. You know we just completed a very solid quarter thanks in large part once again to outstanding financial performance at our flagship national television networks. Home & Garden Television and Food Network are in the midst of a sustained period of rapid growth that's virtually showing no signs of letting up. We've had tremendous success positioning Scripps as the leader in lifestyle television programming, which is the chief reason why the company has posted 10 consecutive quarters of solid profit growth. You know more and more viewers are tuning to HGTV and the Food Network for programming of, of course it's entertaining and informative and we believe refreshingly different from anything else that you'll find on television today.

Scripps Networks programming stands out from the crowd and really appeals to a steadily growing number of engaged viewers, who, by the way, are also motivated consumers. Now, those are qualities that resonate very clearly with our advertising partners, who are looking for the best and most cost-effective ways to reach their valued customers. Recent ratings in viewership numbers of HGTV and Food tell the real story and we believe affirm our strategic decision to build both brands by investing in a full schedule of quality original programming and effective consumer marketing. HGTV, which is sell celebrating its 10th anniversary, and that's hard to believe, achieved a solid 1.0 rating in June, which is frankly, just a remarkable number, 1.0.

During June, an average of 830,000 viewers tuned into HGTV each night during prime time. And I got to be honest, never in our wildest dreams back when we launched HGTV at the end of 1994 did we ever expect to be a 1.0 rated network, but has fortunately been our experience all along. HGTV has exceeded expectations just about every step of the way. So maybe the 1.0 shouldn't be all that surprising to us.

Food Network, we're very happy to report, is on a similar trajectory, a growing and loyal cadre of "foodies," if you will, are tuning in to watch the country's best known celebrity chefs and the strongest and most creative line-up of food genre programming on television today. Prime time viewership during June was up 19% at the Food Network, with a nightly average of 600,000 households tuned in during prime time.

Total day viewership was up 18%, which we believe reflects the popularity of our very important "In the Kitchen," which is what it's titled, block of programming. Now, these are shows that are a little more "how to" in nature, that air in the early weekday afternoons and during the day on weekends.

HGTV and food clearly have earned their place among the country's top 25 cable and satellite television networks, which we think is a very fitting tribute to what we've accomplished in just 10 short years.

Our developing lifestyle networks are coming along very nicely as well. The combined revenue at DIY, the Do-It-Yourself Network, and Fine Living, more than doubled year over year, reflecting the success that we've had gaining valuable distribution on cable and satellite systems across the country. DIY today reaches 29 million households and is well on track to top 30 million by the end of the year. Fine Living is available in 23 million households and can be seen today in all of the country's top 50 markets, not bad we think for just a two-year old network, still a baby.

The same successful programming strategy that we've deployed at HGTV and the Food Network is at work at DIY and Fine Living. Our priority continues to make certain that new DIY and Fine Living viewers are greeted with the strongest possible schedule of top quality, 100% original programming that's informative, entertaining, and highly useful.

Now, over at Shop At Home, we're making good progress towards our goal of creating a television commerce platform that compliments our portfolio of lifestyle television networks. We've totally immersed ourselves in the business and have been spending a good amount of time making sure that the company is really healthy at its core. We saw some positive results during the quarter.

Sales were up strongly, and we saw improvements in other key metrics, such as higher margins on specific merchandise offerings and lower returns, which just affirms our decision to move Judy Girard over from the Food Network to head up Shop At Home. The improving results have provided us with a nice cushion as we develop what we believe will be a completely innovative electronic commerce strategy.

Now, turning to our other media businesses, the company got a very nice boost during the second quarter from our local television stations, thanks to all of the early campaigning in this year's presidential elections. Political advertising revenue was about three times the amount that it was at the same point in the last presidential elections, and if you'll remember, our stations set a record for political advertising revenue in the election year of 2000, so that's certainly bodes well for us for the balance of this year, especially when you consider that we have top ranked stations in the key battle ground states of Michigan, Ohio, and Florida.

However, even without political, it's worth noting that local and national advertising at our television stations continue to trend upward during the quarter. The improvement in both categories can be attributed to really a generally stronger television advertiser market, and the success of our ad sales teams, the success they've had in developing new business in their local markets. It's some mining we've been doing for a while and it's paying off.

Finally, at our daily newspapers, there was modest top line growth but a number of industry related macro economic forces conspired to hold back profits. A general softness in local retail advertising, higher employee benefit costs, and rising newsprint prices teamed up to really offset any successes we were able to achieve at generating new revenues. On a more than encouraging note, Help Wanted advertising improved strongly during the second quarter in just about all of our newspaper markets.

Now, let me assure you, we are not content with the pressures being brought to bear on newspaper profits. Our response has been to aggressively pursue new business by launching new print and online products in many of our key markets, and I might add, with considerable success. For example, initiatives include new zone sessions in Memphis and a growing and popular Spanish language publication in Ventura County, California. We are also going to be launching a brand new use-oriented tab in Boulder in a few weeks just in time to greet CU students as they return from summer break.

We've seen strong double-digit increases in ad revenues from our online and developing publications, which really have gone a long way in making up for so-called traditional newspaper advertising revenue that has been taken off the table. It might be worth noting that Scripps newspapers consistently outperformed their peers during the depths of the recession through a combination of efficient cost management and creative marketing, including the development of a steady stream of new direct mail and total market coverage products.

Now, while the current newspaper environment is certainly challenging, we think it's important to recognize that these are incredibly valuable and fundamentally strong local media franchises. Our focus has always been on building from that position of strength and we'll continue to do so.

So to recap the second quarter, we believe the overall improvement demonstrates the effectiveness of our long-term growth strategy. Scripps and its shareholders continue to earn attractive returns from the organic internal development of Scripps Networks and the efficient performance-based management of all of our established media businesses. Going forward, we plan to stay the course as well as keeping a sharp eye out for new growth opportunities. With that, let me turn it over to Joe, who is going to talk about our numbers this morning. Joe?

Thanks, Ken. Good morning, everyone. I'm going to spend my time talking about some of the operating issues that affected our second quarter net income and then we'll take a look at some below the line and some balance sheet items as well. I'll wrap up by providing a review of the third quarter forecast that we issued this morning in our press release.

Scripps Networks continues to be our big story. Our lifestyle networks performed exceptionally well which is a direct result of last year's strong upfront deals and continued strength on the scatter advertising market. Affiliate fees rose sharply once again as more food network subs transitioned from free to paying status. Rate and sub growth at the other three networks also are contributing factors but most of the growth and affiliate fees still can be attributed to food. Do It Yourself and Fine Living continue to gain traction during the second quarter, with the revenue growth reflecting the success we've had in building distribution.

Losses related to the development of both networks narrowed during the three-month period. DIY and Fine Living are right about where we expect them to be at this stage in their development. Over at Shop At Home, losses related to the implementation of our television commerce strategy were considerably lower than anticipated. That's largely a function of improved merchandising and delayed spending. Some of the changes in product mix that we've made have resulted in higher margins and return rates were also lower during the period. Both are welcome improvements but keep in mind we are not going to be shy about investing to develop this very promising business and to implement our commerce strategy.

So don't take these results to mean that we've had any kind of break through at Shop At Home. We are continuing to experiment with the product mix and promotions, and we expect the financial results will continue to vary somewhat by quarter. We continue to expect full year losses to be in the 20 to $22 million range for the year. By the way, in case you didn't see the press release yesterday, we announced the appointment of a new chief financial officer at Shop At Home. Steve Hannon comes to us from Polo Ralph Lauren and becomes the newest member of the very talented management team that we are assembling down in Nashville.

Turing to other operating results, net income for the quarter got a boost from our broadcast television stations, which are up nicely, thanks primarily to the return of political advertising. We also had comfortable gains in other categories, which helped push total ad revenue at our TV stations up about 11%. Broadcast TV segment profits were up 15%.

Our newspapers represented our biggest challenge during the quarter. The recovery in newspaper advertising just hasn't been as strong as we had hoped. We are seeing weakness in selected categories in all of our markets, including a general softness in local retail.

Automotive classified advertising also is soft, down about 4% on the quarter. Real estate was also down about 2%, but that was largely a one-market issue, specifically Naples, Florida. Ironically, the real estate market in Naples is still very hot, so hot in fact that there has been a temporary shortage of inventory that's caused a falloff in ad spending. It's only a matter of time before the homebuilders in Naples can catch up with the demand and the advertising should return.

One bright spot has been the return of help wanted as Ken mentioned. We can safely say that recruitment advertising has bounced well of the bottom. We're seeing double-digit improvements in the category across nearly all of our markets. Help wanted revenue was up a solid 15%.

We've also had considerable success generating new business with some of the newsprint products we have been developing in key newspaper markets. We view these as investments to strengthen our position long-term in these local markets. And new products that are definitely working but at this stage in their development, they are still generating very little margin.

On the expense side, we are contending with a one, two punch, rising healthcare benefits in our newsprint prices, nothing new there. For the balance of the year, we are going to be keeping a tight reign on our spending including being very selective on hiring. We anticipate finishing the year with a lot of unfilled positions and maintaining that level until we see some concrete improvement in the business.

Let me add a word or two about our results from the newspapers that are managed under joint operating agreements. JOA results reflected $2.5 million accrual recorded during the quarter with respect to Birmingham following a recent court decision, which we detailed in our press release this morning.

The JOA numbers also reflect the stubbornly slow economic recovery in Denver, which resulted in softer revenue growth and lower profits at the Denver newspaper agency. On the non-operating front, we recognized a gain on the sale of property during the quarter, which resulted from the relocation of our television station in Cincinnati. Remember, the City of Cincinnati acquired our former location by eminent domain in order to expand the city's downtown Convention Center. Entire transaction including moving our station to a brand new production and office building is now complete.

On the balance sheet, the only item that changed during the quarter that bears mentioning is our debt level. We ended the second quarter with a total of around $575 million, which is up from a previous quarter. The increase reflects the money we borrowed to complete the acquisition of Summit America in April.

And now let's briefly review the guidance for the third quarter starting with Scripps Networks. Based on the strength of last year's upfront and the current scatter market, 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 expected to increase about 30% as the company continues to invest in building dealership across all four 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 10 million, and earning per share by about 8 cents in the third quarter. In our newspapers, ad revenues are expected to be up 2 to 4% over the prior year.

And at the company's broadcast television stations, ad revenues, including political are expected to be up about 20%. The company's continuing investment in Shop At Home network is expected to reduce third quarter segment profits by about $6 million, and EPS by about 6 cents.

And due primarily to the increased profitability of the Food Network and the company's allocation of operating income to tribune company, which owns 31% of the network, minority interests will be somewhere between 8 and $9 million in the third quarter. Because Food Network is a partnership, we are not including in our provision for income taxes any tax liability accruing to tribune's interest. In case you're wondering why the income tax, effective income tax rate was lower in the quarter. Third quarter earnings per share are expected to be between 70 and 78 cents. Earnings per share during the third quarter of 2003 for comparison purposes were 64 cents.

Now, let's look at our second quarter and our forecast for the next three months. I want to mention one more item before we take your questions. Just in case you didn't see it, we issued a press release just before the call began announcing the results of the vote by the company's common voting shareholders that in effect doubles the authorization for the company's two classes of common stock. The vote to amend the company's articles of incorporation pays the way for a two for one stock split. If you remember the company's board of director's proposed the amendment in April, and is expected to vote on a resolution to split the stock when it meets again on July 29th. That concludes our prepared remarks. Moderator, we're ready to begin the Q&A session.

Thank you very much. Our first line will come from William Drewry from CSFB. Please go ahead.

Thanks very much. Newspaper related question. I was just wondering, Ken, you sort of sited the sector being slower in general, and obviously it is versus cable networks, but I just wonder, when you look at the growth rate and the volatility in the quarter with a couple of months down there, obviously there was some Sunday switch that affected that.

But then you compare it to somebody like Maclachy who reported this morning in their numbers in June were up high single digit for the quarter, gaining momentum -- and I mean the numbers in the sector are all over the map, but is it just a function of the specific markets that you're in? You know, at Memphis and Knoxville, and Denver right now just aren't growing, for whatever reason, at the same rate that other markets are, or is it a bigger issue than that?

Yes, Bill, I think you did a good job of answering your question, but let me just add Alan and Steve to the mix here and they can specifically, I think target exactly what you said the question was.

Bill, obviously, we would like to own Minneapolis and Sacramento and Raleigh right now but Denver is starting to look a lot stronger as we flash into July than it has so far this year. The economy is starting to pick up some steam, and obviously the Denver newspaper agency has done a great job in outperforming the economy right along. And our July forecast is a multiple of what we've seen so far. The other market that has been sluggish for us, really sluggish has been traditionally one of our biggest and best, and that's Memphis.

And the economy in Memphis is not only trailing Tennessee, but Tennessee as a whole is trailing the nation. So I think we're starting to see a little help there, but we have some pockets where things are strong. Ventura is strong, the trader coast in Florida is strong, Naples outside of that real estate phenomenon that both Joe and Ken spoke to is still pretty underlined, is still strong, up about 5%, once you take real estate out of it. So we feel pretty good about things going forward. Obviously, we're a little disappointed in how things have gone so far.

And just one follow-up, if I could. With Fine Living and DIY, are there any major MSOs that you've not been able to start to achieve penetration with? And what would you think as far as now looking at a little further, maybe '05 and '06 penetration goals, can you get both of these networks to a 50 million plus kind of level over that time frame?

Yes, good question, Bill. I'll let Frank handle that one.

Bill, yes, we always are in the middle of negotiations with somebody for distribution on some network or some combination of networks. And because of that fact, we never talk about the particular nature of any one of those negotiations or deals. But we are actually elated with the distribution growth of all of our networks, and DIY now it being almost 29 million homes, is up I think about 56% year-to-year. Fine living has grown about 700,000 subs, I think year-to-year.

And keep in mind that's the network that's only two years old. So we're very pleased with where that distribution is. We're optimistic about its growth. I can't tell you if DIY and Fine Living will be 50 million network ultimately, sub-networks or if they're going to be 60 or 40 or what, but I think based on the growth rate so far, we are optimistic that these not only are going to grow but are going to be very solid businesses, and we're very pleased with the rate of growth of that distribution and the deals that are ongoing.

Yes, Bill, if I could tag onto Frank. One of the things that we've been very encouraged about, because of our VOD deals and you've heard us say this before with all of the major MSOs, we tied the distribution and roll out a VOD specially to the launching of DIY and Fine Living. So to my knowledge, we have major deals completed with all of the MSOs for these two networks. Now it's just a matter of working the local markets and getting these things launched. But to underscore what Frank said if you really stand back and look where they are compared to when they launched, very pleased.

All right. Thank you.

Thank you. We'll next go to Douglas Arthur from Morgan Stanley. Please go ahead.

Wondering, if you could detail non-newsprint to expense trends in the quarter, and then secondly, June newspapers, what would that have looked at, looked like pro forma for the Sunday switch? Thanks.

Doug, this is Alan. The non-newsprint expenses in the quarter rose, let me look it up here for you, about 5.5%, and included in that were a lot of costs related to our initiatives which Ken mentioned in his remarks, the new zone sections we're starting, have started, started early in the year in Memphis, some magazines that we are now publishing, putting HGTV ideas magazines which are inserted in most of our large newspapers, and a fair number of other initiative related expenses. Otherwise, the other costs are well under control. Now, your second question was what? June?

June.

If you look at the pro forma basis, advertising growth, if you take May and June together, which you have to because then that's the only way you can have the same number of Sundays, and otherwise June is minus a Sunday the last year. If you look at May and June together, advertising revenue was up about 2.6%, still a little shy of what we had expected, but not as disappointing as June was all by itself.

And then just a follow-up. I mean, the TD profitability was obviously strong in the quarter, but the margin improvement seems a little lack luster given the revenue surge. I know it's been an ongoing issue. Any comment on that, any elaboration on that?

The expense increases were tied to several factors. One as Ken or Joe mentioned, our benefits healthcare has gone up, but also during the quarter, we were investing in improvements in programming and that's been ongoing since actually the fourth quarter of last year we added wheel and jeopardy at some of our stations. Also during the quarter, in both Tampa and Detroit, because of the Tampa Lightning doing well in the Stanley Cups and the Pistons doing well in the NBA playoffs, we produced a lot of additional programming just to exploit those opportunities. So all of those things contributed to the added expense.

Thank you.

Thanks Doug.

Thank you. We'll next go to the line of Craig Huber (ph) from Lehman Brothers. Please go ahead.

Yes. Good morning. Thank you. Can you just give us the breakdown for May and June for classifieds by the three subcategories? And then secondly, would you look out to the second half, can you just give us what your expectations for total cost for the Scripps network, what the expenses should be up? Thanks.

Okay, Craig. Al and Steve will take the newspaper question, Frank, the second half of cable expenses.

Okay. Again, combining May and June for the forecast by categories, I think you're looking for, Craig, automotive was down about 6%. Real estate was down slightly, and employment was up a little over 16%, and I think that answers your questions.

And on the second half on cable expenses, Joe why you don't you grab that one?

Yes, Craig, it looks like all expenses including networks, when you roll them all up including obviously pretty large increase in programming there, would be about 25, 26% on the back-half.

Craig, I might just add that maybe you've seen some of the articles about the amount of programming in our categories has been out there against us over the past, I don't know, 18 months. Some of it's starting to lose it's effectiveness, while our ratings have continued to grow, and we think that's because of the wise investment we've continued to make in our content and in our marketing. So as we've said all along, we think that's a wise investment and that's why we're continuing to invest in the original programming on these networks, and so far it's paying off nicely.

Yes, I understood. Thank you.

Thanks, Craig.

Thank you. We'll next open the line of Steven Barlow from Prudential Equity Group. Please go ahead.

Thank you. Alan, could you talk a little bit about circulation trends and circulation numbers in the quarter were not all that grand. And secondly related to that, can you talk about newspaper profitability in the second half? Your first half profitability was lower than it was in the first half of '03. Do you expect newspaper profitability in the second half to be lower than the second half of '03?

Well, let me take the circulation question first, Steve. We are down just slightly in net pay in the quarter, about three-tenths of a percent, both daily and Sunday, but there's good news behind that. Obviously we were cycling away from telemarketing into other acquisition modes.

We think the retention in these other modes will be better than the telemarketing subscriptions we've sold in the past. But secondly, in some of our key markets where we needed to increase our penetration, we've continued to do well and we've spent some money to do that. Memphis, for example, showed both daily and strong daily and Sunday growth through the first half of the year, and that's against trends in the region that are much more depressing. So we are very proud of that. Then the -- as far as newspaper profitability, based on the trends we've seen so far, I would expect that you would see some margin erosion from a year ago.

Let me add. This is Steve. You recall that we've made some pretty serious investments in developing new products, and as we get into the second half, many of those products are -- they are very successful, and so the profitability of those new initiatives will look better than they did in the first half.

(inaudible) on that.

Can you tell where you are on the margin of the new products, as has been mentioned there, new products on the newspaper side having about a 20% margin. Are you at that Level? If not, where are you and how do you think it's going to roll out?

Depending on the initiatives, we have some initiatives that are in fact in the 30% range. We have others that are still emerging that would be closer to probably 15 to 20%, but by the end of the year we expect that they would be probably better than 20%.

And Alan, just on the other side, it sounds like because you've gotten the new subscribers in, it seems to be costing you money, so it sounds like it's going to cost you money for the rest of the year.

Well, I don't think anyone in our industry is bragging that it's higher -- easy to get higher circulation rates these days than it used to be. So yes, there is more promotional pricing than there used to be, but as I said, I think the retention will be higher with the new methods of acquisition, so those two tend to balance each other out. A little more promotional spending, but a little less cost in trying to cover the churn.

Thank you.

Thanks, Steve.

Thank you. We will open the line of Lauren Fine from Merrill Lynch. Please go ahead.

Thank you. I have got a few questions. I guess in your guidance for the third quarter for TV, what assumption are you incorporating for political, and then I'll ask my follow-up.

Okay, Lauren. Bill.

The actual number for political, we're looking somewhere in the 11 to 12 range, 11 or 12 million during the third quarter.

Okay, great. And then I am curious on the newspaper side, what confidence do you have in your guidance of 2 to 4% add revenue growth given the performance in the second quarter. Is there something specific that you're looking to for improvement?

Well Lauren, as we said a minute ago, I think maybe an answer to Craig's question, I'm not sure whose it was, but that we experienced in May and June together 2.6% revenue growth, so add revenue growth, so we feel fairly confident in the way July is starting it looks pretty good. But it's awfully early to be 100% confident.

Okay. And then I guess on the Scripps network side, two questions. One, do you have any update on DIY's profitability time frame? You know, I think you had said at some point maybe late this year early next year. And I didn't know if that was still the case. And then secondly you had forewarned that the ad revenue growth would flow in June as it did, but yet you seem confident that it will pick back up again in the third quarter. Sad to say, so I am really what you're seeing in July scatter combined with as you mentioned up front?

On DIY profitability, Lauren, this is Frank, it's too difficult to say with great precision when a new network like this is going to reach profitability, except that we are confident that it's going to be -- but it is within, it is in our vision, so to speak. You can see it on the horizon. Whether that's going to be in the first half or the second half of '05, I can't tell you right now.

We will probably have a better grip on that by the end of this year. But I would say we are robustly confident about DIY's growth and the trajectory it's in, it's right where it needs to be and we're very happy about it, but I can't tell you. Because these things in those first few months when they do get close to profitability bobble up and back and you can get false signals sometimes, but it is safe to say that we think it'll be sometime in '05. Your second question was scatter -- would you rephrase that?

It was ad revenue. The fact that it did flow in June and you had forewarned us. I know you weren't surprised by that, but I guess I don't understand why it flowed in June and then why you're confident it picks back up to the 35% revenue growth in the third quarter.

There were a lot of idiosyncrasies in the upfront this year that impacted the old upfront, and it was a very, very strange season. The buyers went out and went for some of the cable money, then they went over to the broadcast. Then they came back to cable.

Complicating that further, there was a huge amount of money that came from the movie studios that impacted particularly the broadcast world and that had an influence on some of the dynamics of the buying process in cable. So it was a very screwy buying process this year, quite honestly that nobody has ever seen the likes of. Right now our third quarter scatter is about 30% higher than our average pricing for last year's upfront.

And we're guiding to 35% in add revenue in the third quarter, as I guess you heard us say, and with a second half guidance up 30%. The overall market was a little bit softer this year in upfront in general. The industry as a whole, than it was last year, or than it was predicted to be, but we're pleased with our upfront deals.

We're pleased with our scatter right now versus last year's upfront and we're pleased with where our upfront deals are for next year. As you know the total cable network marketplace grew about 15%, but our total volume grew about 20%, I'm sorry, in the mid 20's. So we're in the top tier of that very small handful of networks that significantly outperformed the marketplace.

Great.

Did that answer your question?

It does. Thank you.

Okay.

Thank you. We'll next open the line of James Marsh from SG Cowen. Please go ahead.

Hi, gentlemen. Two quick questions. First, Joe, you were talking little bit about Naples real estate and suggested that the market was almost too hot to be productive from a real estate advertising perspective. I just want to get a sense of why you believe that if that market starts to cool, actually strike, it almost seems like you're going to move back into the sweet spot, but as I recall on the help wanted side, people were saying the same thing, almost that the market were too strong, unemployment rates were too low and it seems like help wanted went straight down once things started to soften. I want to get a sense of why you believe that?

And then secondly, I was wondering if someone could comment, maybe compare and contrast, how autos has been doing across various categories, TV, newspaper and maybe the classified as well and some of the issues driving that? Thanks.

James, not to duck the question, but I'm going to let Alan take the Naples question. He's closer to that market.

Well, James, when developers run out of inventory, they don't advertise and the biggest advertisers in Naples are developers. And when they sell more than they've got and they don't have new stuff out of the ground yet, they stop advertising for a period, and that's frankly where we are.

And resale stuff is selling as soon as it's listed. Sometimes it doesn't even make the MLS before it's sold. So when you have a market that hot, it does impact advertising, but it's a good sign about the overall strength of the market, and all the other categories that are related to real estate. When you're selling a whole heck of a lot of real estate, it means you're selling a lot of furniture and a lot of the bank loans, et cetera, et cetera. So overall, I think it's good news. And I might also point out that in adjacent market has that plenty of inventory and you might want to ask (inaudible), how they're doing in Fort Myers, just up the road where they do still have plenty of inventory, and the answer is, it's hot.

James, when it comes to automotive -- this is Bill Peterson, in broadcast for the quarter, automotive and automotive related was up about 4%.

Let me tell about newspapers. National automotive and local automotive were both down, and the real reason they were down is because auto sales were way down. And the dealers associations and the manufacturers have been pulling schedules because -- in markets where cars aren't selling because they realize that right now it's -- they can't make any headway. However, we have plenty of good news coming. I think we're going to see a lot more incentives and a lot more advertising of those incentives in the months ahead. I'll give you one little anecdote. In Denver, Kirk McDonald, the head of our agency there, was talking to the biggest Chevy dealer, and he sold 125 cars last month. He normally sells 300. So that will give you an idea of the depth of the auto sales problem in some markets. As far as the auto category in Scripps Networks, James, the -- it was the single largest advertiser category in terms of growth and volume and in CPMs for our networks. We had some serious increases in the automotive category, particularly, with regard to Ford, Chrysler and General Motors.

Thank you, gentlemen.

Thanks, James.

Thank you. We'll open the line of Michael Kupinski with AG Edwards. Please go ahead.

Thank you for taking the question. Most of them have been answered already, but I was just wondering about the corporate expense growth was up from the first quarter, can you give us a little bit of idea about the run rate going forward? And then my second question is, going back to Shop At Home, which obviously came in better than expected in your guidance for the year, still maintaining those guidance, I was wondering what you plan to spend the money on and now where you're directing your focus on Shop At Home at this point?

Okay, Michael, it's Ken. I'm going to let Joe handle corporate expenses, and then Frank why don't you weighing on Shop At Home for the rest of the year. Joe, handle the corporate.

Mike, to start-off on answering the corporate question, two words for you, Sarbanes and Oxley are the two words. We spent an enormous amount of money, frankly, and a lot of it hit the second quarter. I'm afraid to say, we will have increased spending in the third quarter, as well that double-digit increase, and then we'll probably level off in the fourth quarter, in terms of prior year comparison. So that's the biggest effect. I won't bore you with how much we think we're spending, I'm sure you're hearing it from a lot of companies, but that's primarily we got there. We have also brought our legal function in-house, for the first time we are building out a legal staff, that's probably the second largest item. So aside from that, though, I think everything else we feel pretty good about, how the spending is going, but Sarbanes-Oxley is a big issue for us and I think for all companies.

So the current quarter will probably be more like a 10 million and then coming back down to like 9 million or so in the fourth quarter or do you think it will be higher than that?

No, it won't be higher than that. I think they'll be little bit below each of the numbers you mentioned.

Okay.

But you are in the ballpark.

Michael, we are sticking to the 20 to 22 million total year loss for Shop At Home for all sorts of good reasons, despite the fact that June was significantly above plan and above our expectations as has been the whole year to date. The reason is because we're fixing something that was broken and we're not there yet, and so we don't want to get deluded by any false positives here by the momentary blips up and down, in this case blips for the good. We are fixing a team. We are fixing the people. We are fixing the IT. We are fixing the merchandising programs. We are fixing the need for more buyers and more categories. We are fixing the need for migrating to a totally different set of categories, in some cases, the Scripps Network categories. And all these things take time and money and that's why it's the better part of wisdom to stick to the forecast loss that we are talking about, because that money is going to be well spent, and is much needed to do the ultimate fix that we bought this thing for in the first place.

I think then in your comments that you were saying that there were some expenses that were delayed or some spending that was delayed and I was just wondering what that was referring to?

Yes. Mike, that was my comment. This is Joe. The - and that primarily refers to the level at which Judy's been able to bring the staff together. There were several -- many deficiencies and she's been turning over some staff, but she's been putting primarily spending on the senior team. Now she's got them together. They're working in all areas, including the talent, and on air, the merchandising function, primarily we even have some - some obviously, back office hiring we have to do. So there is a -- that's a lot of the stuff that's been delayed and we'll find its way into the back half of the year. So that's to add to Frank's point. That's kind of why we are leaving that guidance where it's been.

Okay. Great. Thank you.

Thanks, Michael.

Thank you. We'll now open the line of Brian Shipman with UBS. Please go ahead.

Thank you. Good morning. You mentioned cable, your performance in the cable upfront is up 20 plus percent, could you clarify, is that CPM performance? And based on the pricing you have achieved in the scatter market this last year, do you plan on holding any additional inventory back to sell in the scatter market next year, try and take advantage of the attractive pricing you have achieved? Thanks.

Brian, no, what I said was our volume was up in the mid 20's. Our total dollar volume for the upfront this year over last year was in the mid 20's, versus a marketplace that was up about 15%. So we significantly outperform the marketplace in dollar volume. We still have a couple of deals still hanging. They are proceeding quite nicely. We are almost finished with the total upfront negotiation, but because we're not totally finished, we don't like to get too specific about CPMs, but we know for a fact that we have significantly outperformed the industry in CPM growth as well. We're going to sell about the same amount of inventory as we did last year to your last point, which will be fairly very little change in the overall.

Thank you.

Thank you. We'll now open the line of Paul Ginocchio from Deutsche Bank. Please go ahead.

Back to that question about June, on high revenues for Scripps cable networks, it was sort of a plus 40 in April, May and then went to plus 26 in June. Can you just -- again talk about the specific issues and again why they bounced back? I didn't quite get the understanding from the question previously. And then second, on my numbers next year you'll be toward the yearend you'll be pretty close to paying off your debt, if you choose to. What are you thinking about on cash flow? Will we see more regular dividend increases, like the one we just saw? Thanks.

Let me talk about the dividend -- the free cash question first and then we'll get to the -- Paul, you wanted clarification on the prior answer about why we saw that ad revenue growth slow in June but we expected to go back up in the back half.

Okay.

Is that what you're asking?

Correct.

Okay. On the free cash, we obviously get that question a lot and we talked about it some. We could pay down debt. We did sort of load up on the commercial paper program again to do the summit America deal. The board actively looks at the dividend annually. We did two in rapid succession here, primary because we -- when we first did it we were a little timid and as we felt a little stronger, we went forward with the actions to the split. We thought we have to take a look at getting dividend up one more time. We will look at it annually. I would say that obviously absent good investment opportunities, the best thing to do is to give it back, and we will. We're sort of counting on the fact that we're going to have very good investment opportunities. So I wouldn't expect a serious ramp up in any -- in the near term. So if that answers your question, we'll turn it over to Frank on the cable numbers.

Well, part of the difference was that we went from - we've literally crossed the line into a different quarter. There was a lot of machinations that were going on in the scatter market this time, that had to do with the networks taking money off the table. They are inventory off the table in the early stages of the -- sort of pairing back and forth of the upfront and that affected the dynamics of the current scatter market. It was just a very unusual market that had to do with timing and the amount of money that was -- or the amount of inventory that was put on the table and the amount that has been taken off the table. And then there was a lot of sort of game playing and signal sending, I think that was going on in the buying community about what the intentions were about trying to hold firm in the pricing wars. And those dynamics just sort of rippled over into the whole third quarter buying process. But as I said right now, our third quarter scatter is about 30% over the upfront.

Great. Thanks.

Thank you. We'll open the line of Thomas Brussels (ph) from Gardner -- Brussels Gardner. Please go ahead.

Hi. Good afternoon. A couple of questions. In the content area, what you've cited as additional investment now in the DIY Fine Living, but you also now refer to additional spending in VOD and broadband. So just curious, of that 10 million that you cite for additional spending, what's the mix going from the two networks to the developing spending on VOD and broadband, first question for Ken Lowe.

Tom, can I have a minute to look at up while you go on?

Sure. Also, just for Frank or Ken, to review the position where Fine Living finds itself today versus where DIY was a year ago. They both have about 4, just under 5 million of revenue at this moment and Fine Living has 23 million subs and last year DIY had about 20 million. DIY last year lost about $2 million and Fine Living about five. Is it just the fact that Fine Living is much more program intensive than the DIY cluster of repurpose material that you're using for that network. Why would one be?

Yes. That's a big piece of it, Tom. The Fine Living content by it's very nature is somewhat more cost intensive. But the -- both networks, I don't know if I said this earlier, but this should be said. Both networks sold an impressive amount or brought a lot of impressive business in this upfront, and this is without meters. Keep in mind, these are networks that are not even metered yet by Nielsen, and so you don't have the cost per point factor or basis on which to even sell these networks. So we're basically still selling these networks at a cost of 30 bases. And I'm happy to say that those unit prices, those cost per 30 bases on which we sold those two networks and this just concluding upfront period were in the very, very, very high double digits. So going forward, the prospects are quite good on the revenue side and there will always be continued cost control efforts on our part to bring down the costs of Fine Living. You always do this with a start up network, particularly one that's a rich in the field production intensive kind of content. We're not intentionally worried about that ratio between costs and profits on Fine Living as we gradually retrofit it, like you always do with all start-up networks in the second and third years.

Yes. And then when do you find that the legging up of the revenues from the metering of those two networks will kick in?

Yes. The metering probably will begin for DIY, Tom, the beginning of '06. We have about another year and a half to go. That usually kicks in at about 40 million for digital networks.

Okay. Thanks. Frank unfortunately a couple more for you. What's your take on the FCC's recent measures relating to media across ownership and any thoughts coming from there?

Tom, I'll take that. Obviously, we're disappointed. We're probably not at the forefront of breaking through in cross ownership like some of our other peers groups. But we feel and we felt all along that if you look at the concentration of media under other companies, and across other different media sectors, this is a fairly benign issue. So hopefully, when cooler heads prevail, cross ownership will truly be a non-issue, which it should be, and as a multimedia company, you can imagine we were disappointed, but we'll wait to see if there's some positive results on the other side.

Good. And then -- thanks, Ken. Al, on the newspaper side, in either Denver or else in Naples, in both cases, you cite sort of general market conditions, and in either market would you say anybody else in Denver is doing better than the JOA is doing, or is it -- and then in Naples, has anybody else picked up real estate advertising shares or is it simply just not there because of the condition that you cite?

Well, I didn't say there was general market malaise in Naples. There isn't. It's all related to the real estate.

Yes, specific...

I did mention it with regard to Memphis, but in Denver, we think we're gaining share against most other media sectors. You know, again, that varies from quarter to quarter. There are occasional big spins that move from one medium to another, and particularly move from say newspaper to TV or vice versa, and we track that very closely out there, and different quarters show different results, but overall we're holding our share very well there.

Let me, Tom -- turn it back over to Joe for your first question. Before I do that, since we're approaching the noon hour, after we wrap up with Tom, we'll have time for one more question. So we can get out by noon. Joe, go ahead on the other.

Tom, to answer your earlier question it looks like out of the 10 million, we'll spend about a million and a half on things that are not DIY and Fine Living. So that would include broadband, VOD and Hispanic. That level of spending should continue into the fourth quarter as well.

Thank you.

Thanks, Tom.

Thank you. Our last question will come from Edward Atorino from Global Partners. Please go ahead.

Hi. Good morning. On your comments on newspaper operating costs, 5.5% increase, did that include a $2.5 million charge?

No. No. This is just the -- the 2.5 million comes under our JOA segment which we break out separately.

Okay. Thanks. And that you give a newsprint price increase for the quarter, did I miss that?

We didn't, but it's around, a little over 10%.

Okay. One last question. On this, as DIY gets closer to -- well, it's 40 million. I thought it might be 30 million, I guess for satellite network, that the ratio is a little bit higher. So my question is moot. Thank you very much.

Right. Right.

Thank you very much.

And I'll turn the call back over to you.

Thank you, operator. This is Tim Stautberg. If you have any further questions, I'll be available all afternoon to handle those. The number 513-977-3826. Operator, you can give the replay information. Thank you

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