E W Scripps Co (SSP) 2004 Q3 法說會逐字稿

Welcome to the third-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. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

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

Good morning all. Thanks for joining us. We will start the conference call this morning with a few comments from Ken Lowe, our President and CEO, and Joe NeCastro, our Chief Financial Officer. Then, Frank Gardner, Chairman of Scripps Networks, will frame up our discussion on the GAC transaction. Our prepared remarks should take about 20 minutes; then we'll open it up for your questions.

Now given the busy schedule we know a lot of you have today, we will 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 newspaper operations; Rich Boehne, our Executive Vice President; Bill Peterson, who heads up our TV station group; and Lori Hickok, Vice President and Controller.

Let me remind you if you prefer to listen in on the Web, go to Scripps.com and click on the link on the homepage. 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 is Ken.

Thank you, Tim. Welcome everyone. Good morning. I know a lot of you want to talk about the GAC acquisition and we do plan to get to that topic in just a few minutes. In fact, I've asked Frank to provide some context for the acquisition and explain why strategically we think GAC is a good fit with our growing portfolio of national lifestyle networks.

Before we turn it over to Frank and Joe, though, I'd like to review some of the dynamics behind the Company's third-quarter results. One of the biggest factors that we had to contend with, obviously, was the destructive force of three major hurricanes that hit Florida in August and September. Our Treasure Coast Newspapers and West Palm Beach television station were directly in the path of Hurricanes Francis and Jeanne. And our Naples newspaper and Tampa TV station took a glancing blow from Hurricane Charlie. The hurricanes obviously not only affected our own operations, but they also interrupted business for many of our advertisers. It's going to be at least a couple of months before things are back to normal there.

Damage-wise and from a business interruption perspective, our West Palm and Treasure Coast facilities really bore the brunt. The adverse effects of Charlie on Naples and Tampa were relatively minor in comparison, by the way. The good news is that all of our people are well and accounted for. We have many, many people to thank for literally working around the clock to keep us on the air and keep the presses rolling. They were magnificent. We know how tough it was to balance work with concerns about family, friends and personal property, so we are extremely proud of and we're really grateful for the exceptional efforts that were made by our people to cover and cope with the hurricanes and their aftermath.

While nobody was seriously hurt, many have had to deal with severely damaged homes and disrupted lives. To help we have set up a disaster relief fund through the Scripps Howard Foundation, which is providing direct financial assistance to employees who are most affected by the storms. And just to give you an idea of what a great bunch of people we work with, more than 200 Scripps employees have augmented the fund by making personal donations. In the days immediately following both hurricanes, we were inundated with calls from Scripps employees across the country asking if there was any way they could help. Thanks to their generosity we have been able to help more than 100 Scripps employees along the road to recovery.

Now as for the Company, all of our Florida properties are fully covered by property, casualty and business interruption insurance, so we will be able to recover a good percentage of our storm-related losses. The effect of the hurricanes did obscure a general improvement in newspaper advertising. Absent the hurricanes, we estimate our newspaper advertising revenue would have been up about 4 percent during the third quarter, which was at the upper end of what we had forecast. We also saw some improvement in Denver and in Cincinnati where we operate newspapers as a partner in joint operating agreements.

By the way, while we're talking about newspapers, let me just take a moment to acknowledge the terrific job that Alan Horton and Steve Sullivan have done guiding our newspaper division. Thanks to their skilled leadership, each of our newspapers is fundamentally strong and positioned for future growth. If you missed it, Alan and Steve plan to retire by the end of the year and they have been working closely with Rich Boehne on the transition in leadership in the newspaper division.

Now, Rich, in addition to his other responsibilities as Executive Vice President of the Company, will be heading up our newspaper division. My thanks go to both Alan and Steve for their many years of excellent service. It just won't be the same around here without you two guys.

Now looking to the third quarter, the Company's consolidated growth continues to be driven by the strength of Scripps Networks, which includes our portfolio of fast-growing national television networks. Spectacular financial performance by Home and Garden Television and Food Network tells most of the story; plus, our developing networks -- DIY and Fine Living -- are really coming right along.

HGTV and Food are both in a sustained period of strong revenue and profit growth. At DIY and Fine Living we're seeing healthy topline growth as we establish these new and powerful brands. And now we have added GAC, which as you know is consistent with our oft-stated strategic position of expanding Scripps Networks. As I mentioned, Frank will have more to say about the GAC acquisition in just a few minutes.

Our focus at Scripps Networks has been establishing powerful national television brands through our steadfast commitment to the delivery of top-quality original programming. We have established ourselves as the recognized leader in lifestyle television programming, but we're going even deeper than that. As we polish and improve our networks and their websites, we're also taking the lead in developing original video content for the growing number of on-demand services and providing creative short form programming to keep pace with the exploding growth of broadband Internet services.

True, the business models for these emerging services are still evolving, but it's our intent at Scripps to make sure that we as one of the country's leading content providers have a place at the table as the new media technologies emerge and take hold, which they will. That's the kind of entrepreneurial thinking that led to the launch of HGTV 10 years ago, and it's the kind of thinking we believe that will lead to more new businesses and the creation of long-term shareholder value.

In addition to the strong performance at Scripps Networks, the Company's third-quarter earnings got a solid boost from our broadcast television stations. If you have been keeping up with the Bush and Kerry campaigns, you know that we have been spending a lot of time -- that they have been spending a lot of time trying to win Ohio, which is really, really good news for Scripps. We're also benefiting from spirited campaigns in Florida. We operate top-ranked stations in big metropolitan markets in both contested states.

It's also helped that we've established our stations as preferred platforms for political discourse through our free airtime initiative, Democracy 2004. Now, this is a policy that dates back to election year 2000 whereby we make free airtime available upon request to responsible candidates. In fact, in keeping with that policy, WCPO, the Scripps station right here in Cincinnati, will be hosting Ohio's only live debate between the state's two Senate candidates. All of our stations have succeeded in creating an environment that is attractive to the candidates and fosters healthy community participation in the democratic process.

Now before I turn it over to Joe, let me bring you up to date on the progress that we're making at Shop At Home. If you happen to be a frequent Shop At Home customer, you are beginning to notice the handiwork of our creative new management team. The on-air look and feel of the network is continuing to evolve. We are broadening and improving the mix of products. We have strengthened the carriage deals, extending Shop At Home's reach to 51 million U.S. households. And the migration of Scripps Networks' talent has begun.

Just this month for example, we announced a multiyear marketing and product development deal with Carol Duvall -- Carol Duvall who incidentally was one of the first personalities we signed at HGTV 10 years ago as a solid performer. Carol helped us pioneer a whole new category of lifestyle programming, and now she's going to help us pioneer a new approach to electronic commerce and merchandising. It's a big step for Shop At Home and more announcements are to follow.

Now those are just some of the highlights from the third quarter. Now here is Joe to talk about some of the numbers.

Thanks Ken. Good morning everyone. I'm going to spend just a couple of minutes providing some context for our third-quarter results and for our fourth-quarter guidance.

As Ken mentioned, the hurricanes in Florida had a significant effect on our Florida newspapers and television stations. The results for the quarter include charges for impairment losses and restoration costs of $2.4 million -- 1.1 million in the newspaper segment and 1.3 million in broadcasting. The other impact on our financials is the missing revenue and profit from our affected Florida properties. The amount of lost profit is estimated at around $3.7 million in the quarter. The combination of the property losses and the lost business is what results in the estimated 2 cents per share hurricane impact on the third quarter.

Please note that this estimate does not include any anticipated recoveries from our insurance underwriters. We expect that we will have favorable adjustments in future quarters as soon as we are able to arrive at a settlement with our insurance companies. Unfortunately, the adverse effects of the hurricanes have spilled over into the fourth quarter because of many of our advertisers, especially at our Treasure Coast Newspapers and our West Palm TV station are still trying to recover from the storms.

Other than the hurricanes, the quarter was pretty straightforward. I'm not going to bother to go through all the numbers because I'm sure by now you've got them in front of you with our press release. Generally the story remains much the same, with Scripps Networks continuing to perform strongly during the quarter. As we mentioned in the press release, affiliate fee revenue for our networks got a healthy boost during the third quarter thanks to the renewal of certain distribution agreements we reached with a couple of cable operators in September.

Looking into the fourth quarter at Scripps Networks, we are projecting a 25 percent growth rate in ad revenues. While this looks a little lower than the growth rate for the first three quarters, please keep in mind that this increase will come against some pretty tough comparisons resulting from last year's exceptionally strong scatter (ph) market. We are on pace with the guidance we provided at the major media review for revenue growth in the back half of the year.

Our broadcast television stations -- I'm sorry. At our broadcast television stations, political advertising continued to drive results during the third quarter, but at a slightly slower pace than we had anticipated at the beginning of the quarter. Part of the reason is that Michigan fell into the Kerry column and both candidates and parties took their money elsewhere. Fortunately, that elsewhere included Ohio and Florida, where the races are still pretty hotly contested. At this point we are anticipating that political advertising revenue for the year will be about $35 million, or just about the same level we hit during the presidential election four years ago.

Finally, let me just add a word or two on how the GAC transaction, if it's approved as expected, will affect our balance sheet and operating results going forward. On the balance sheet side, we'll be using 140 million in commercial paper to finance the deal. Our leverage was very low to begin with and we'll still be well within our comfort level once the GAC deal is baked in. We look for debt to be around $630 million after the deal, which is right around 1 times our annual operating cash flow.

If we close the deal in late November as anticipated, we expect the GAC transaction to have a minimal effect on fourth quarter results. On an annualized basis, we expect operating losses at GAC to reduce Scripps Networks' segment profits by something in the range of 5 to $10 million in 2005. This will keep the total amount of development spending on new lifestyle networks roughly constant between 2004 and 2005.

We've not yet finalized, obviously, the accounting for the acquisition, so we don't have a precise estimate of the impact on EPS. But I would expect that it will be dilutive and it will be dilutive in the range of 7 to 10 cents per share for the year 2005. And when you boil it all down, we're talking about continuing our successful strategy of reinvesting roughly 10 percent of our cash flow in developing businesses which we think have the potential for outsize returns.

That's a quick look at some of the dynamics behind our numbers. Now I'd like to turn it over Frank, who is going to give you a little more perspective on the transaction.

Thanks Joe. I'm going to focus on what we're thinking strategically for Great American Country and why we think it's a good fit with our other lifestyle programming networks.

First and foremost is the proven popularity of country music videos and the rich potential for all sorts of related lifestyle programming that we believe can hit home with much of Middle America. In fact, when we look out there at all of the channel choices on the dial, we believe we've identified a programming void that GAC is perfectly positioned to fill.

What we're talking about is a network built around GAC's strong country music video format, but complemented by some high-quality Americana-themed programming that you just can't find anywhere else on the TV dial today. We're talking about a who's who of the best of all the country music artists, with a good dose of mom, the American flag and apple pie thrown in.

We see GAC as another programming vehicle that in addition to music videos can focus on targeted facets of home and everyday living. Some of GAC's programming -- and here I'm specifically thinking for example of celebrity kitchens on GAC -- is already headed in that direction.

GAC offers the potential for an extraordinary blend of personality-based entertainment and informational lifestyle programming. The more we looked at GAC, the more it became apparent to us that this network is literally right up our alley. Now don't forget, we were producing Club Dance for the Nashville Network back in the '90s at the same time we were getting HGTV off the ground. Club Dance was the most-watched show on the Nashville Network at the time. In fact, I think I recall some pretty fancy line dancing moves by some of the folks who are on this call this morning.

By acquiring GAC, we're doing what we think we do best at Scripps Networks; we've identified a content category that's underserved on television and we intend to appeal to specific viewer passions by developing program strategies that in turn will enable us to capitalize on the consumer demand we create. It's the very same strategy that's led to the tremendous success of all of our other lifestyle networks.

But why GAC? Well, because much like our decisions to acquire the Food Network and Shop At Home, we saw the potential to create value for our shareholders. In GAC, once again, we think we've found a reasonably valued cable network with a widely recognized brand that provides us with immediate entree into 34 million television households.

Now, to help put the GAC deal into perspective, just take a look back at what we paid for the Food Network back in 1997. We acquired 56 percent of Food and 25 million subs for $125 million. That put the full value of the Network at somewhere just north of 200 million, or more than $8 a sub. If all goes as planned, we'll be paying about $4 a sub for GAC. So at that valuation, we think there's a lot of potential for a very attractive return.

Now keep in mind we're sharing some very preliminary thoughts here on where we think we'll be headed with GAC, but we're still very early in the process. Like many other acquisitions before it, we will move cautiously and judiciously, and making certain that we don't disturb what is right about the business. We're confident that GAC provides us with another excellent opportunity to expand the national television footprint of Scripps Networks.

That is our prepared remarks. I guess we're now ready to take your questions.

Michelle?

(OPERATOR INSTRUCTIONS). William Drewry, Credit Suisse First Boston.

A couple of questions. First off, just wondering, Ken, what you think the TV group is going to do post-political here, and thoughts about the effect of these ABC ratings? If they hold, obviously, the network is in a much better position (indiscernible) the debate is still early. But looking better than if you had touched on that in the prior (indiscernible). And then, just wondering -- outlook for the newspapers, if you could talk about help wanted and just -- even ex the hurricane the profit growth has still been a little bit tepid there year-to-date. Obviously the operating conditions are still tough. I'm just wondering if that's a cyclical issue or if there's anything strategic that you are thinking about going into next year specifically on the newspapers?

Okay, Bill. I'm going to turn it over to Bill Peterson, but let me just say top that we are obviously quite pleased with what we are seeing so far from ABC after quite a few years of being on the wrong end of the new fall schedule. So from that standpoint, very pleased. Bill, you want to tackle both those questions -- ABC's early success and political?

Certainly, ABC looks like they have captured lightning in a bottle with Lost and the unlikely Desperate Housewives, and also even Boston Legal is going pretty well. So we're pretty optimistic that they are starting to go back to the position that they deserve in terms of prime time. Beyond political, if we look at business right now it appears to be soft. If we look at our top 10 categories, our top two categories, automotive and services, remain positive. But the others have softened. The thing we don't know yet and we won't know until political is over is whether that's been retarded a bit by displacement being driven by heavy political in Ohio and Florida, and in Kansas actually, or whether that softness is indeed real. Also, that softness is contributed a little bit by the hurricane impact, because both of our Florida stations were really humming along there. So we won't get a good read until we get beyond the political campaign.

Alan, you want to take the paper and help wanted?

Bill, as you probably know from your research over the years, we depend an awful lot on Florida. And it typically accounts for about 24 percent of our non JOA revenue and about 35 percent of our segment profit. So it's a big hit when Florida gets hit by hurricanes. The second thing that you need to keep in mind is that the Scripps newspapers were significantly outperforming the industry for several years leading into the recession. We were helped by our market mix. We didn't depend as much on national advertising and on national and regional employment as some of the other groups with many larger newspapers. The smaller newspapers generally were somewhat insulated from that. So those are two points.

But even given that, we were up about 10 percent in employment in the third quarter, once you extract the Florida issues. And almost all of our newspapers were up; in fact, more than half of them were up more than 10 percent. We only had two papers down in employment. So we're starting to see recovery there. As others have said, automotive was a big problem and it looks like it will continue to be something of a problem, although we're beginning to see new models being advertised, national advertising and by the local dealerships.

I don't know if I've hit all the things that you wanted to talk about. The center of the country has been mostly the problem for us. And as you know, several of our largest newspapers are in that range from roughly Corpus through Memphis to Evansville. And those markets in particular have struggled somewhat.

Just one quick follow-up, if I could, on GAC. Looking out beyond 2005 and the preliminary dilution there, it sounds to me like the Network could be a source of investment. I think, Joe, you cited a 10 percent investment into new properties. Would that be a kind of number that could go into GAC? Could there be a big step up in the investment similar to how you sort of scaled up with DIY? Or would that include potentially more acquisitions within the space of a GAC type?

Bill, it's probably more of the latter. Frankly, it's unlikely that we're going to get to really big numbers on GAC. They already have 34 million homes and it's not an expensive programming exercise at this point. Our projection is that those losses actually moderate over the next couple of years. So we would expect that we keep looking for new things. It may not be cable networks, but we're going to keep looking for attractive ways to invest. It's been roughly that level for the last few years, and I think that's a good level for us to target for ongoing investment.

Steven Barlow, Prudential Equity Group.

Two quick ones. Talk about HGTV margins. It looks like they have been declining a bit during the year. Is that all programming related? Second question, it's a little more of a (indiscernible) I guess. You talk about 34 million GAC. I looked at a Kagan report; they said you've got 27.5 at GAC. I don't know whether -- what the difference would be.

Okay, Steve. Joe, you or Frank want to tackle the margin question at HGTV?

The HGTV margin is still something we are actually feeling very good about because of the outperformance against the market. That network is dramatically outperforming the market, Steve. The marketplace for the first three quarters was up 15 percent, and you know what our numbers have been; it's quite a respectable margin ahead of that. And the fourth quarter marketplace is going to be up probably 10 to 11 percent, and we are guiding in the release today for 25 percent. So I think the margins, they are what they are, but that network is dramatically outperforming the rest of the industry. And the programming -- you've alluded to the programming thing. Our programming costs are very, very much in line with where they ought to be. There's no aberration there in terms of any giant lurch on programming expenses, in particularly compared to other networks in our competitive set. Our programming costs relative to revenue are quite modest.

Steve, let me just throw one more fact in there. It does -- obviously, the margin is lower than it was in the first half, but every quarter the margin on HG has exceeded the same quarter in the prior year. So what you have (technical difficulty) margin is the lowest of the four quarters. It was that way last year, is that way this year, but it's still better than last year's margin this quarter. So we do see continuing improvement in the margin, not a decline in the margin.

(multiple speakers) have a problem with the revenue side at all, obviously. It's really just more on the expense side. I'm just trying to see if there was something there that was growing fairly rapidly besides programming maybe..

We have, Steve, from time to time as you recall, told you that we were investing a little bit more in the marketing programming side, and that's all resulted in some stronger ratings across the board. I think 16 consecutive months of ratings growth. So there has been some investment there, but to your point it's paid off on the top-line. Frank, that's a good question on the 34 million households for GAC. You want to take that one?

Yes. The distribution on GAC is quite good. Actually, it's a very well distributed network across all the big players, including cable and DBS. The carriage is very well-balanced. This deal hasn't closed yet, so we're not at liberty to go into a lot of detail about the specifics of the contract, but DirecTV launched GAC on just September 21st. So the distribution is quite good at that network and the spread of that distribution among all the players is quite good.

In fact, Steve, that's the difference between the 27 and the 34 estimates that you're quoting. (multiple speakers). The 27 was obviously published before the DirecTV deal was done at GAC. Now that they've got it in, we're counting it in there. And they have a commitment to launch (inaudible)

Actually it's been launched. It's on channel 326 (multiple speakers). So it's up in operating, so that's why the number is higher now.

Peter Appert, Goldman Sachs.

Ken, can you dig a little further into the expectation of somewhat slower but -- still impressive, but some deceleration sequentially in the network ad revenue growth in the fourth quarter? And does it speak to a more cautious view of the ad market generally that you are seeing at this point?

Peter, I'll let Frank handle that since he is deeply involved with that question daily.

Well, the market is a little more tepid just industry-wide right now than it has been for a while. There's all sorts of inponderables (ph) in terms of visibility with fourth quarter. There's also obviously concerns about the economy, and the broadcast networks put a lot less inventory into upfront which then floods more of that inventory over into the scatter market. And then that makes it more difficult for us to have precise visibility on what the pricing will be. There's a lot of wait-and-see going on on buyers right now wanting to see the results of the election. And of course, the last three or four weeks before an election creates all sorts of displacements. So there's a lot of noise in the system right now in terms of being able to see with great, great quality clarity what the fourth quarter is going to do.

Given all of what we do see, we think that the guidance of 25 percent up in the fourth quarter is very responsible and very impressive, frankly, particularly compared to our competitive set. Of course if the market pressure materializes to a greater extent than we think, we'll do better. But we think 25 percent is where it ought to be and significantly ahead of our competition. The scatter has just become a much more difficult thing to forecast in the last couple of years because there's a lot more last-minute buying decisions. The decision is made much closer to the sale, and therefore, a plan is not worth the paper it's printed on. And I think this is a condition by the way we're going to have to live with from now on in terms of marketplace pressure and visibility month-to-month and quarter-to-quarter.

Frank, does this suggest though that October has gotten off to a particularly soft pace? And then, Ken, actually more broadly, can you comment on what you're seeing in October in the other businesses?

I think there was a little softness in September. October is different, and we don't see that. So far we feel pretty good about it.

I think, Peter, we're up against, obviously, some tougher comps (multiple speakers) fourth quarter. And I'm sorry -- the second part of that question kind of faded out.

It was more about sort of the same issue in October of what are you seeing in terms of how the month has started in the newspaper and broadcast businesses? Does that weigh on your caution here for the fourth quarter broadly?

Newspapers, Bill, TV?

The good news, Peter, is that September, once you strip out Florida, was our strongest month of the year. We showed strong ad revenue growth of around 7 percent. I'm not predicting that we're going to see that in the fourth quarter because one month does not a trend make, but it's a hopeful sign. And obviously as the businesses struggle to get ready for Christmas even in Florida, and the strong first quarter in Florida, which is the season down there, we just think businesses that aren't for sure going to be back in business are going to find a way to get back in business. It's a hunch more than actual knowledge.

Bill?

In television, October is going to be giant month, but it's going to be driven by political. And as I mentioned earlier, the underlying (indiscernible) business appears to be soft. But again, we won't really know the extent of that until we get this campaign behind us.

How about the November/December pacing?

Well, it's pacing kind of in low single-digits in regular business. But again, we don't know if that is going to be the reality or there will be something that comes in afterwards. We know automotive is holding back a little bit. Chrysler Daimler is holding back a big campaign for, I think, Dodge. We know Ford is introducing some new models and we expect that we're going to be seeing activity there, but we're not quite seeing it yet.

Alexia Quadrani, Bear Stearns.

Just following up on your comments about, on cable. What type of CPM increases did you finally end up getting under the upfront? And then a second question. Is there any way you can actually quantify the impact of the hurricane damage you're expecting (technical difficulty). How much if any does (technical difficulty)

Alexia, you faded out at the end of the second question. The hurricane we quantified in the release. Are you asking for something else?

I'm asking for the fourth quarter.

The fourth quarter. Sorry. I can answer that one right away; no, we can't do that just yet. We don't really have an effect. We're obviously monitoring it. It's sort of day by day. We'll give you a feel for that as soon as we have it, but it's sort of implicit in the guidance we had given on the newspapers, especially on TV.

Alexia, it's Tim jumping in on the CPM question. We really didn't provide any guidance on what the CPM growth was from our upfront deals. What we did say this summer as those deals were wrapping up was that our dollar volume was up in the mid-20s. And clearly, that's a mix of viewership growth, a mix of different businesses and demographics that we're selling, and then some CPM gains. So within all that, I think we sold about the same amount of inventory, maybe just slightly less. But it's a good healthy increase, and it is probably at the high-end of the competitive set of cable networks that we compete with.

Lastly, the cash cost on the broadcast side seemed to increase again a bit in the quarter. Anything that drove that that we haven't gone through? How is it trending for the fourth quarter?

What costs did you say? I'm sorry.

The cost of broadcast.

(multiple speakers) overall cash costs, I think.

Actually, if you remove -- for the quarter, if you move the cost of the hurricane coverage and the losses there, the costs that we had and just all the extended coverage -- and we produced hundreds and hundreds of hours of continuous coverage without commercials, and we had a couple of ESPN games that we added for revenue purposes. And our increased cost of Nielsen resulted in missing a little bit. But all of the rest of our expenses are around 3 percent. So they're fairly normal.

Douglas Arthur, Morgan Stanley.

Ken, I'm wondering if you can just help us with the affiliate fee growth, particularly at HGTV and Food, which has been really ramping up. Obviously you had a couple of renewals in September. You're still looking for 45 percent growth, I believe, in the fourth quarter. Where do you sort of see the rate of growth in affiliate fees normalizing, say, three quarters from now, if you can comment at all?

(indiscernible) a little difficult, because as you said, because of some deals that we closed that just timing-wise happened to fall in this period bumped it up a little bit. And as you recall, 2004 is the first year where really the sub fee revenue for Food kicked in in a big way. It will moderate somewhat going forward but will fall in line with the long-term deals that we have out there. And I think on average what we have been saying is roughly somewhere between 7 and 10 percent going forward, as far as built-in increases contractually across all of the networks. So once we get past the hump of digesting some of the newer networks and the distribution deal with Food, it will moderate. But it's really difficult to say at this point based on possibly some renewals down the line.

Michael Kupinski, AG Edwards.

I was just wondering in terms of the ratings at Home and Garden, you had mentioned that you had 15 consecutive months of ratings improvement, and at some point you may not be able to move ratings significantly due to the focused programming of the channel. I was just wondering where you think you would top out in terms of ratings in the relative near-term? And then I have a couple of other questions.

Mike, I want you to know that Frank has assured me that we've got another 16 months of ratings (multiple speakers) in front of us. If anybody could answer ratings questions, they're an immediate guru. Frank, you want to tackle that?

Oh God do I wish I knew the answer to your question, Michael. I could be an independently wealthy person if I could. All I can say is we continue to have very good news on the ratings front across the board. We just, as you alluded, had our 21st consecutive month of year-to-year ratings growth for HGTV. Now that translates into 12 straight quarters of HGTV ratings growth, and that translates into four straight seasons of ratings growth. So as the old Ted (indiscernible) line, around and around she goes and where she stops nobody knows. All I can tell you is we had the highest prime ratings in the third quarter ever. Total day adults 25 to 54 were up 8 percent, women 25-54 were up 13 percent. And in the third quarter, just as a moment of comparison here, HGTV's weekly prime ratings were stronger than TLC for 12 out of 13 weeks. The reason I am pointing that out is a year ago, TLC beat HGTV in each of those 13 weeks. So that may get at least part of the way toward trying to answer a piece of your question. Competitive to -- compared to the rest of our competitors we're doing quite well, and we don't think we've seen the top yet. But yes, there will come a day when they will level off. But we don't think we're there yet.

And then I was just wondering if you can add a little more color on the affiliate fee revenue increases? How many subscribers did this renewal affect, and can you give us an indication of what type of price increases that we had? And maybe the terms of the contracts, were they three years or longer? And are there any additional affiliate contracts coming up in the very near-term that would be substantial?

Mike, this is Joe. We don't have all the details of the contracts in front of us. They are longer-term; they're not just three-year renewals. They are all full deals and they're with major carriers, but I don't have them exactly in front of me. So we can get you the details on that later off-line.

Last question. Can you talk a little bit about local television? Obviously your political is a little bit lighter than what I would have thought. And just following up on the earlier question, can you give us little bit more color on local versus national, excluding the political, and what you're seeing in the markets? Any color that you're (indiscernible) particularly operations the local business.

This is Bill Peterson. Again, as I mentioned, right now we're seeing softness in local and national. We're actually waiting until this campaign is over to try and assess just how real it is. We know that some people are holding back. We least know of a couple of automotive campaigns that are being held back until after the campaign is over. But generally, I would say things look a little bit soft. If you look at our top eight categories, the top two -- automotive is up just a little bit, services is up fairly nicely, and then the rest are down a little bit. So we are anticipating as we look at the fourth quarter of it being a little bit soft.

It's interesting that auto would be holding back. I mean, it seems like there's inventory out there. Does that seem a little bit peculiar to you that they are holding back given that they're coming out with so many new models right now?

A little. Yes, it does seem a little strange. But we also believe that they took some advertising money and converted it to incentives. So some of the advertising money may be being redeployed.

Lauren Fine, Merrill Lynch.

Just a couple of quick ones. I'm just curious -- does your fourth quarter guidance assume that you will be successful in completing GAC at the end of November? And then I guess in terms of your comment that the total kind of start-up loss is related to DIY, Fine Living, Shop At Home, maybe video on demand and all that, that the improvement there will be offset by GAC? Are you being conservative? Is there any upside to that, any sensitivity to maybe shareholders' desire to see upside to that?

Lauren, first, our fourth quarter guidance does include whatever affect there will be. It's going to be very modest though, if any. And secondly, if you're referring to the comment in my remarks, I was just sort of summing up the three -- call them development stage, if you can throw GAC in there -- GAC, Fine Living and DIY. The total we spent on those three will be constant. Shop At Home -- it's probably too early to give anything concrete on next year. We are under construction there and we're working on a plan. We are using as a guideline, I think, as a company, this 10 percent number that we feel comfortable with spending up to that amount on new development enterprises. That doesn't mean we have a specific budget to go out and buy things that are losing money up to 10 percent of our profits; it's just that we're not uncomfortable in that range, and we think it's an appropriate use of our cash flow to fall back into things we think provide for a longer-term return. So it's not maybe as disciplined or scientific as 10 percent, a hard 10 percent would sound, but we're very comfortable at that level. And we think it's an appropriate thing to do.

John Janedis, Banc of America Securities.

Can you just talk a little bit more about the longer-term GAC opportunity? How large do you think that market is? And then also, does this deal mean that you're really not going to be going forward with the launch of the Hispanic network?

We don't know what the sky limit is for GAC, but I can tell you, John, we like it. We like what's already there, I might say. Music videos right now are about 70 percent of the schedule. They get an audience and a very salable rating. It's the core of what the network is. We don't plan on changing that; we like that. The long-form programming that they're already doing is very good and getting better. These are shows that feature various country artists, weekly countdown shows, celebrity cooking shows, live request shows, things like that. They have made some real strides in the last year on improving the long-form programming, the non-video part of their programming. And they've also made some strides in improving the look and feel of the network, and it tests very well in their research. So we definitely want to retain the essence of what is there, but we also want to retain sort of the heartland Americana lifestyle mindset that we think is already there. And we have alluded to that before. We think it's very in step with the tenor of the time and the growing mindfulness of Americans of traditional values in family and home, in hometown and those kinds of things. We think that's a very current and very important quality to retain. We just hope to be able to improve it over time with no big, giant, drastic dramatic changes. I don't know if that answers your question, but --

John, if I may, this is Ken. Let me jump in. This just continues the strategy that we've employed for the last several years. And we are opportunistic acquirers of underdeveloped properties that we think we can, if you will, fix up, that some companies don't maybe feel the inclination to roll up their sleeves and get involved with something that is underperforming and needs some work, needs to be improved upon and can grow. As a matter of fact, it sounds like the same conversation that I had when we acquired Food in 1997. As far as the upside with GAC, realistically, it probably is not in a Home and Garden and Food type category. But going forward, we believe that DIY and Fine Living and GAC and broadband and (indiscernible) the Hispanic, are opportunities for us to use the resources that we have assembled at Scripps Networks to do other targeted networks. It might not be as big as what we have already, but they'll certainly add to our overall value.

As far as your Hispanic question. No, we have not in any way given up on the whole Hispanic initiative. As we've said, John, from time to time, we're just cautiously looking at what is about a 12 to $13 million household marketplace, and how the best way to attack that might be. What we're doing in the meantime before we get into maybe officially launching a Hispanic network is testing the programming right now through syndicated programming on broadcast television stations serving Hispanic markets. So still very much an alive initiative, and it's still an area we have a great deal of passion about. But right now it's more in a test mode model. And as we ramp it up you'll hear more about that in the future.

Craig Huber, Lehman Brothers.

First, can you just discuss what non-newsprint cost, what the cash percent change was during the quarter? And if you could do it with or without the hurricane impact, if that's possible, I would appreciate that. Then I have a follow-up. Thank you.

(indiscernible) to get me shuffling some papers here, Craig. We are in the range of six or seven percent. Let me find the number here. Cash expenses excluding newsprint and ink up 5.6 percent. And with the hurricanes out, I don't know; I don't have that in front of me. I'll have to get back to you on that one.

I appreciate that. Can you also just clarify some of the moving pieces to get to that percentage?

Clarify some of the moving pieces? That's cash expenses minus newsprint and ink. Everything else.

Is it all benefits? What's going on to drive that number (inaudible)?

It's excluding -- it does include everything but newsprint and ink.

I was just asking -- I'm sorry -- what the moving pieces are to get you up that high?

I'm sorry. I misunderstood the question. Well, there are a variety of things. The biggest piece of it is the initiatives that we have underway to develop niche revenue streams. As you probably recall from earlier calls, we were at about 5 percent of our revenue coming from new revenue streams. And we wanted to get that, move that up to 20 over a five-year period. We're now up to 8.4 percent roughly, and so that move has cost us some money to get there. We are putting magazines, we're starting zoned editions; we've got a daily youth product in Boulder. We just started a new weekly product in Wert (ph) County upset of Evansville. We started a weekly product in Knoxville in Blunt (ph) County, one of the suburban counties there. So those kinds of initiatives are driving up the cost.

On a related question, if I may. Back on August 10th, you guys put a press release out about the Scripps trust, I guess, wanting to sell 20 million shares registering that post-split. Can you just comment -- it's been two-plus months here -- why a deal hasn't happened? Is it getting more complex? I'm just -- should we expect a deal or (indiscernible) at 47 is it on hold, please? Thanks.

Obviously, Craig, we can't comment for the trust. And I can't specifically speculate on why or why not it hasn't moved. That would pretty much be an answer the trust would have to give you. As I said recently in New York last week, it's management's position that the sooner the better. And part of it, of course, has maybe been the fact that management truly has been preoccupied with hurricanes and some other things. But it would be our hope that that transaction will happen sometime in the very near future.

Paul Ginocchio, Deutsche Bank.

We heard yesterday from the Company that the circulation environment was challenging. I noticed in September your circulation revenues were down nearly eight percent. Wondered -- that's probably a lot of hurricane related, but could you just give us an outlook on what your circulation numbers are looking like? Is there any additional pressure on single-copy? Are you seeing the same effects in your small markets as some of your bigger markets? Thanks.

Paul, a couple of points. Yes, there was a dramatic impact on the circulation revenue because of Florida. We actually had a couple of publication days we couldn't make, and then on other days we couldn't get full distribution. Many of the areas were (indiscernible) away from our carriers. We couldn't deliver the papers because no one was allowed in the areas that were so badly damaged. Single copy was obviously something that would have been possible to take advantage of, but we in many cases -- what we did produce we have made available for free in public places so that we could get information out. It was basically no advertising and no circulation revenue for a few days on the Treasure Coast. So it was a big impact. As a general rule, our circulation revenue has been down from two to four percent this year. Depending on the month, it has to do with the extra promotional pricing to try to maintain numbers. It also has to do with the fragmenting media trends that we've been looking at for a long time, and a lot of our efforts have been going -- have been spent on niche products and extending our reach other than with the core product. So the core circulation revenue has declined to a certain extent. Our net pay is down somewhere between 1 and 2 percent as a general rule this year.

Thomas Russo with Gardner, Russo & Gardner.

A couple of questions. Joe, for you, in the fourth quarter you refer to the possibility of the weather effects carrying over into lower revenues. To what extent will that be quantifiable and insurance recoverable?

We do have insurance recoveries expected. It's just too early. Most of the hard work there is quantifying our case to present to them in terms of our business losses. So that is ongoing, and as I said in my comments, we expect that we'll have positive adjustments in the fourth quarter -- hopefully the fourth quarter; could be as late as the first quarter -- by the time we quantify this and reach a settlement agreement. So there is a positive coming. We are -- the loss you saw, recognized in the third quarter does include what we expect to be not covered, that is, under our deductibles. We will, obviously, be liable up to that level. But beyond that, we expect recoveries.

And the third quarter losses would seem to be much more quantifiably attached to the hurricanes. As you go into the fourth it's going to be a bit more speculative to the impact, and yet you still think you'll get some recovery from those shortfalls?

I do believe we will. Our coverage extends to lost business as -- not as a result only of our inability to do the work, to carry the ads, but also our advertisers' inability to present us with advertising. So we have very good coverage and we do expect that we'll be able to quantify and recover some of those losses.

That feature sounds very impressive. The 10 percent of segment operating income for cable broadcasting networks to be committed to new ventures makes a lot of sense, and it's paid off obviously well. As that base grows, however, will that 10 percent number stay fixed? You might be at a much higher number on the base three years from now. Would you continue to spend at that type of level or is that just a function of where you stand now in terms of the base?

It obviously will come down; in fact, if you look at the last few years it has come down. As part of our looking at GAC, we looked at where that number has been and where it is likely to go. We're sort of at that zone (ph) right now, the 10 percent, but we have been as high as 12, 13 percent earlier on. We expect that number to decline overtime, especially as the base grows.

Alan, congratulations and good luck.

Thank you very much, Tom.

A couple of questions for you. Early days in the Internet, one of the drivers for priced business was going to be weather. And I'm wondering whether you have had a chance to review your Florida experience and really your Southeast experience, to see to what extent your platform on the Internet provided a trusted venue for nervous residents?

It was huge, Tom. Unfortunately I didn't bring those numbers with me, but I think we quadrupled the traffic on our Treasure Coast. We share a site with the television station in West Palm Beach called TC Palm. And that site was like four times what it normally would be. We had as much traffic on one day right after the hurricane as we have had in a whole month the year before. That kind of thing. But over a period of time, because this hurricane season went on seven weeks or eight weeks -- and these areas were impacted that many weeks by different storms that were either going to hit them or looked like they were going to hit them. So yes, that was a big traffic motivator. However, it didn't motivate a lot of additional revenue right away. It will in the future.

Did you do anything to command resources to that channel at that time?

Absolutely. We had people all over the country at all of our Internet sites collaborating to put up whatever they could get as fast as they could get it from any source.

We also streamed the video of the extended coverage of the West Palm Beach station on that site as well.

Alan, also -- just an update as to the progress underway at Memphis, if you can cite anything there?

We also actually showed some positive gains in September in local advertising revenue there, which was very nice to see after some period of time without that. And we have a new general manager there reporting to publisher John Wilcox. You probably remember Butch Hughes who has been our ad director in Knoxville; he is now the General Manager in Memphis. We think that will add some oomph to our sales efforts and our various initiatives there. And as you know, we have within the last couple of years a new editor there. We've launched lots of new products. We're about to unveil a (technical difficulty)

Hello?

Edward Atorino, Fulcrum Global Partners.

Most of my questions have been answered, but could you sort of go over the "investment in developing network outlook" for '05 again? Hello?

(Technical difficulty)

Ladies and gentlemen, please stand by. It seems that we are having some technical difficulty. Hang on.

(Multiple speakers)

This is Ed Atorino. Can you hear me?

We do have Ed Atorino on the line. Can you hear him?

Yes. Go ahead, Ed.

Most of my questions have been answered, but could you sort of review the investment in developing networks next year versus this year, and taking into account the GAC acquisition?

I think, Ed -- Joe, you can repeat that, but I think we covered that number. But (indiscernible) just want to -- developing network number -- it's going to be about the same as it is this year, Ed, for Fine Living, DIY and GAC next year, compared to Fine Living and DIY last year.

Including GAC?

Including GAC we'll spend the same as we did this year on Fine Living and (multiple speakers)

You're breaking up again but I got it. Thanks very much.

William Bird, Smith Barney.

I was just wondering if you could give us just a brief progress report on Shop At Home, to what degree you're starting to leverage some of the talent from the other networks? And where does product mix stand versus where you want it to be? Thanks.

This is Ken. As I alluded in my opening remarks, Judy Girard and her new team were very pleased with the progress thus far. It is a work in progress. She has changed out and added to her management team. We're starting to get products in our categories onto the network in more significant hours of time. And maybe most importantly, we're starting the first steps of moving talent over from our cable networks. As I mentioned Carol Duvall, who is the queen of crafts that's been with HGTV since day one, 10 years. Just signed a long-term deal. We have other talent to be announced in the coming weeks. So we are pleased with the progress. It's been topped off by great distribution effort. Susan Packard and her team have this network up to around 51, 52 million households full-time equivalents. It was around 40, 41 when we acquired it. So a lot of progress. It's not necessarily showing up on the bottom-line yet because we're having to invest, but we are pleased with where that network is at this point.

On the topic of investment, though it's early, I was wondering if you would expect losses to shrink next year for that unit?

It is early and, you know, we've said all along, Bill, it's going to be a bit of a roller coaster, not to get to hung up on month-to-month or quarter-to-quarter. It would certainly be a goal that we would like to see, but we won't hesitate to continue investing to drive that business, because it's -- once you do turn the corner, it's a very lucrative business. So we just want to make sure all the pieces and parts are in place. And Judy's got the team she needs. We've got the software. We've got the vendors. We've got all of the things that a cable shopping network really needs to be a success.

Thomas Russo with Gardner, Russo & Gardner.

Sorry, Alan, I just -- I was cut off. One last question for you. What steps has Scripps taken to monitor against the audit bureau kinds of difficulties you saw across competitors?

Tom, I think you probably saw the press release when we announced that we had appointed a circulation compliance officer. His name is Jeff DeLoach, and he reports not only to the newspaper division but to Controller, Lori Hickok. Most of our newspaper circulation, ABC books, were controlled by the finance department and not just in circulation. And now all of them will be. We have done a very careful analysis of everything that we thought could be a problem, based on the disclosures that other companies have had to endure recently. And we have found nothing today to that would indicate that we have any kind of an issue.

Frank, could you give little a color, if you would, on the sellers of GAC, and a bit of the history behind it? What is the legacy and the sort of origins of this network?

Well, Glen Jones was one of the pioneers of cable, and he had a lot of very important cable systems back in the '70s and '80s. And I can't remember -- maybe even into the '90s. He was truly a pioneer, and a very respected one, of the cable industry. And then he evolved into the programming of lots and lots of things in the radio area. He has a radio network programming service that literally beams 24/7 programming to a few hundred radio stations, mostly in the country music genre. I think there's some talk also there.

And I think this was a situation where he's just sort of slimming down his operation for actuarial reasons, and he's sort of thinning out some of his holdings. I think he's got -- there's a lot of pride in what they have here with this thing, because they built this thing from nothing and it was very compatible with their radio operations. And so was a real symmetry there for a long time. And I think we can just take it to the next level. We feel very good about this. And the more due diligence we have done on it, the better we feel.

I should point out there are 2000 radio stations programming country music right now, and it's the number-one format in the country. So there's a big foundation on which to build this thing. There's a big, wide, deep, rich appeal base here, that we think he has a lot of promise.

Tom, it's Ken, just to wrap up. And this will be the last question because the hour is late. When I sit across the table from Glen, I can't speak for him. He's an outstanding gentleman. His reputation speaks for himself. This is a labor of love. He was very much of the opinion, like us, that he wanted to create a channel that didn't feature offensive material, it didn't feature some of the things that we get complaints about from other cable networks. It was a haven, if you will. No profanity, no sexual innuendo. And that was very important to Glen, and he has built that audience. And that's why it fits so nicely with our networks; it's an attitude and lifestyle. It's a place you can go to and have true family viewing. So that also enhanced what we thought was already a very good acquisition to fit nicely with our networks, just in culture.

That sounds (indiscernible). I wondered whether you have the rights to repurpose any of your Club Dance footage for shows such as leading investors like country music.

We do have a right, but the lawyers tell us a lot of the releases that folks signed when they visited Knoxville from the investment community we'll have to review. And I think, Tom, you're on one of those tapes somewhere.

We saved your tape, Tom.

Keep it private.

Folks it's Tim Stautberg. Thank you. I know we went a little past the hour. Appreciate your patience. If you have any further questions please call me in the office, 513-977-3826. Thank you.

Ladies and gentlemen, this conference will be available for replay after 2:30 PM Eastern Time today, through October 18th at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 746663. International participants please dial 320-365-3844. That does conclude our conference for today.