E W Scripps Co (SSP) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the E.W. Scripps Company second quarter earnings report conference call. At this time all participant lines are in a listen-only mode. Later we will have a question and answer session. [ OPERATOR INSTRUCTIONS ] I'd now like to turn the conference over to the Vice President of Investor Relations, Tim Stautberg. Please go ahead, sir.

Good morning all, and thanks for joining us. We'll start the conference call today 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 and then we'll open it up for your questions. Given the busy schedule we know a lot of you have today, 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 Rich Boehne, Executive Vice President; John Lansing, President of Scripps Networks; Mark Contreras,Vice President of Newspaper Operations; Bill Peterson, Head of our TV station group; and Lori Hickok, Vice President and Controller.

Let me remind you, if you prefer to listen in on the web you can go to Scripps.com and click on the investor relations link and follow it to the webcast. 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 2004 !0k. Now here's Ken.

Thank you, Tim. Good morning, everyone. Scripps had an excellent second quarter. Not only did the Company post solid revenue and net income growth, but we also completed our acquisition of an exciting and fast-growing internet business that we believe offers our share holders long-term potential for an outsize return. We completed our acquisition of Shopzilla on June 27th, and in the three short days that we owned it, the business contributed about $1 million in revenue and around $350,000 in segment profits.

Now, I want to emphasize once again that this was a very deliberate, very carefully thought out acquisition. In fact, the process took well over a year to complete. Shopzilla is a powerful business model in a growing marketplace. Now, we can clearly see business migrating to the internet and we intend to be standing directly in the path of those growing revenues. It's really a matter of following the eyeballs and marketing dollars, something we've had plenty of experience with, in the continuously evolving history of the company. Now, together, Scripps and Shopzilla, we believe, make a very powerful combination. It brings together the best of breed content from Scripps with Shopzilla's best of breed utility. The quality and quantity of internet traffic improves, really, in both directions, delivering highly qualified consumers to advertisers and merchants.

Now, we're in the early stages of the integration process, but I can tell you that our plan is to make absolutely certain that the creative environment at Shopzilla remains fertile for its continued growth. We're looking for obvious and easy to achieve cross benefits between Shopzilla and our other media businesses, but let me emphasize that we won't force anything that might disrupt the momentum that the talented Shopzilla team has created. It's a fundamentally strong business, that we believe can get only stronger, with the depth of resources that Scripps can bring to bear to help build out the brand. We firmly believe that Shopzilla has a very promising future and this addition brings a new era in the company's on going evolution as a platform agnostic forward-thinking media company.

Now, looking at the second quarter results for the rest of the company, newspapers contributed to the gross story, along with our national networks, which continue to grow at a solid double-digit pace. Newspaper advertising revenue grew during the period thanks in large part to continued improvement in help wanted and real estate classified advertising. Now, when paired with good cost management by our publishers our newspaper division was able to post respectable year- over- year segment profit growth that we suspect will lead the industry.

Turning to our national lifestyle networks, it's clear that we have plenty of wind at our backs. Revenue and segment profit at Scripps networks, led by HGTV and Food Network, surged ahead during the second quarter and we expect the momentum to continue for the balance of the year. Now, as many of you know, we've seen a slight dip in ratings at HGTV that we have been actively addressing. I can assure you though that HGTV continues to bargain from a position of strength, thanks to the talented nature of the content and the motivated consumers it delivers to advertisers. Now, we're well into up front discussions and negotiations with advertisers and we've seen very little effect from the ratings pickup at this point. That said, though, we are not pleased with any hint of softness in the ratings at HGTV, especially after posting 21 consecutive months of viewership growth.

We'll be beefing up HGTV's programming schedule this fall with new series, including a show called "My First Place" and another one entitled "Small Place, Big Style." Another series that they've come up with down in Knoxville, and I think maybe I inspired this one, is called "I Have No Taste", I'll tease you on that one. You'll have to tune in to see it for yourself.

We're also committed to keeping the momentum going at the Food Network. In the coming months we'll be launching a complete lineup of new shows and specials. In other words, at both of our flagship networks, we're following really the same successful programming schedule that really got us there.

Meanwhile online, we continue to build our network brands by leveraging the increasing power of broadband. Our HGTV probe broadband channel is attracting about a half million unique visitors just a few short months after its launch. And we unveiled a second video rich broadband service called Living.com, just a few weeks ago. If you get a chance, check out either both or either one of those services. I think you'll be really impressed by the quality of the content and the sponsors that we're serving at both.

Now, over at Shop at Home, one of the highlights during the second quarter was signing Emeril Lagasse to do some live appearances selling some cookware lines and lending his name to a regularly scheduled series of on air retail segments. His first live appearance, actually aired this past Saturday, with fantastic results. And it really affirmed for us the power that our national networks and our on-air talent have driving business to shop at home. Emeril accounted for about 20% of the air time at Shop at Home this past Saturday, but he drove 45% of the sales for the day. Let me repeat that. 20% of the air time equalled 45% of the sales for the day. That's the power of Emeril Lagasse. He simply blew away our usual sales stats for cookware, with the number of units sold per hour pacing more than 170% above our average. More importantly, 68% of the sales were made to new customers. That's a huge number. We queried the shoppers as they called in and most said they saw Emeril promos on the Food Network and then searched out Shop at Home.

That leaves no doubt in our minds that our electronic commerce strategy, as we first envisioned it, has the potential to create considerable value for our shareholders. So with the addition of Shopzilla, the sustained rapid growth of our national networks, industry leading newspapers, and promising news from Shop at Home, Scripps has carved out a unique and valuable niche for itself among diversified media companies. Now, with that, let me turn it over to Joe.

Thanks, Ken. Good morning everyone. I'm going to spend a couple minutes looking at some of the highlights from the quarter, reviewing some balance sheet items, and then providing a bit more texture on the guidance that we provide in the press release this morning.

First, when we announced our intention to acquire Shopzilla last month, we said we'd provide a little more detail on some of the companies historical numbers once the transaction was completed. As you saw in our release, note five to the financial statements details Shopzilla's quarterly revenue and segment profit for the past six quarters. A look at the year over year growth for the first half of 2005, should give you an idea why we were so positive about this acquisition and for its potential going forward. Revenue is pacing more than twice what it was this time last year and segment profit is four times as large. Traffic is also up significantly year over year with more than 15 million unique visitors in June, according to comScore.

All of the numbers demonstrate how rapidly Shopzilla is growing in the comparison shopping market place, and why we were so impressed with the business once we dug in a little bit. Based on how it's developing and its leading competitive position, we believe Shopzilla has tremendous potential for growth for some time to come. Turning to our national networks,the growth story of HGTV and Food continue to impact during the second quarter and based on the success we're having in the current up front negotiations, promises to continue well into 2006. We're more than halfway through our negotiations with advertisers and we're encouraged by what we're seeing so far.

We've seen pricing growth in the mid- single digits, and our total ad dollar volume looks like it will be up 15 to 20% at this point. Our developing networks, including Great American Country, also are participating more fully in the up fronts this year, as audience levels continue to grow. GAC is already on the Nielsen meter so we're seeing immediate progress there. As Ken said, the rating softness we've experienced recently at HGTV, hasn't had a significant effect on our discussion with advertisers, who continue to value the targeted nature and up scale demographics of the audience that our networks deliver. That said, however, you should know that we won't hesitate to spend whatever we think is necessary to drive viewers to our flagship networks. That's the best way we know to keep the momentum going at HGTV and Food and leverage the competitive advantage we've created so far.

In our newspapers we saw improvement during the quarter in just about every advertising category. The big gain though was in help wanted classified which continued to improve nicely. Help wanted was up about 22%, year over year accounting for most of the 6% increase in the overall classified category. Real estate also contributed, up about 8%, and automotive was down about 5%.

Newspaper online revenue was a very good story for the quarter. We were up about 38% over the prior year. Now, news print prices increased about 9% in the quarter, which was pretty much in line with what we'd expected. Our newsprint costs, however, were only up about 3%, because consumption was down due to overall lower overall circulation.

As for our broadcast television stations the numbers are pretty straight forward. Local advertising improved in most of our markets, and our ABC affiliate in Detroit benefited from the Pistons seven game NBA finals series. Also cost control has been very effective in the broadcast division. Expenses were down some 2% in the quarter. Obviously though, any gains we've made haven't been nearly enough to overcome last year's record political advertising revenue.

At Shop at Home, revenues grew at a healthy pace during the quarter as we continued to work through our transition. Losses for the quarter were a bit ahead of our guidance, but at this point in this year, we're on track to meet our full year expectations. Before I review our third quarter guidance, let me update you on a couple balance sheet items. First, total debt stood at about $900 million at the end of the quarter, including the borrowings we made to complete the Shopzilla transaction, which closed three days before the quarter ended. Our blended interest rate, including the Shopzilla related portion, is about 4.5%. Next, our share repurchase activity under the 10b51 trading plan we established is moving forward.

We purchased 60,000 shares at an average price of $49.30 per share during that period. We expect to repurchase, at a minimum, enough shares to off set the on going dilution from our executive compensation programs. As a reminder we currently have authorization to repurchase up to 5 million class A common shares.

Finally, just as a reminder, our capital spending is now projected to be about $85 million, which is $25 million less than we had originally forecast back in December. We decided to delay a couple significant projects that had been planned for the second half of 2005. Now, here's our guidance for the third quarter starting with Scripps networks. Advertising revenue and our National Lifestyle Networks will be up 25 to 30% year over year, as we continue to benefit from last year's up front. Of course , our forecast also depends on the scatter market holding up, which at this point, looks like a pretty good assumption.

Affiliate fees are expected to be about $40 million, net of distribution fee amortization. Total Scripps network expenses are expected to increase about 20%, as we invest in programming and marketing, to drive viewership at all of our networks and especially at HGTV and Food. Newspaper advertising revenue is expected to be up 6 to 8%. Remember when you're making your comparisons, the hurricanes Frances and Jean negatively effected advertising revenue, during the third quarter of last year.

At Shopzilla we're expecting segment profit of between 3 and $5 million for it's first full quarter as a Scripps subsidiary. Advertising revenue at the company's broadcast television stations is expected to be up 5 to 7% in the third quarter, excluding political. Political advertising in the third quarter of 2004 was $10.2 million, so total broadcast television revenue in the third quarter is expected to be down some 8% to 10%. Losses at Shop at Home are expected to reduce third quarter segment profits by about $7 million. A minority interest is expected to be between 10 and $12 million due to the increased profitability of the Food network and the Company's allocation of operating income to Tribune company, which owns about 31% of the network.

Earnings per share are expected to be between 35-cents and 39-cents, compared with 34-cents last year. Remember again the third quarter EPS last year was reduced by about .02 per share to account for hurricane damage at our Florida newspaper and television properties. Year over year comparisons are, of course, affected by higher depreciation and amortization as well as interest expense related to acquisitions. These costs will affect the 2005 quarterly results. That's a look at our guidance and some of the second quarter highlights. With that, moderator, we're ready to take any questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from the line of [Peter Appert], of Goldman Sachs. Go ahead.

In the margin performance in the cable network businesses, very impressive, particularly the year to year improvement. I'm wondering, how do the anticipated higher programming costs in the second half and presumably the higher expenditures of HGTV impact margins going into the second half. And then more importantly I guess, what do you think is a sustainable level of margin for the cable network business as we think out over the next couple of years?

All right, Peter. John, Joe, who's going to tackle that? You've got some --

I can. Let me just give you a little bit of grounding. I'll let John take the harder question, looking forward. In terms of year over year margins, we agree, was pretty impressive the first half due to some lower spending. I would say we had a couple things affecting the margin performance there. One is, as we mentioned, a bad debt, recovery that we realized in this year's quarter, which as an offset to expense, lowered our expenses and improved our margins. Secondly, there is some timing there with respect to some hiring and some things that we're going to do a little bit later than we had initially anticipated. That has accounted for some -- also some of the improvement in the margins.

With respect to programming, I'd say the expenses are a little bit lower than they might otherwise be. That's not to say we're not spending, but the way we amortize, that hit will come later down the road. We're spending aggressively, especially on the HGTV programming introductions that Ken mentioned, to keep the schedule firm there. So, we don't see any real aberrations. There is some timing and I'd say,there are some positive benefit, but generally speaking we are at a reasonably consistent level in margins. John, you want to talk about --

Well, Peter, going forward, we have certainly a significant investment of programming looking ahead to the third and fourth quarter as we continue to grow HGTV's ratings, and they have consistently grown over the last several months. As you know, this certainly has leveled out by the amortization, so the impact on the PNL is much less than the cash out the door would comply. We're also moving expenses around and redeploying expenses to give ourselves room to make these investments in programming, so we're being much more careful about head count additions and how we're managing the digital networks in terms of our anticipation of revenue and the expenses we're applying against that anticipation. So we're moving some pieces around in order to invest in the areas that we think benefit the business the greatest.

Does that imply then stable to modestly rising margins as we look ahead? Maybe not in the second half, but '06 , '07?

Yes. But not by a great deal.

Right.

Able and modest growth, yes.

Okay. And last thing and I'll let someone else get on. What portion of the inventory do you expect to sell in up front this year versus last year?

We'll be about the same as we were a year ago, Peter. Typically would rather not get into specifics of that while we're still in the market place. We still have about two weeks of work yet to do in the market place. I anticipate that it won't be a great deal different than it was a year ago.

Great, Thanks very much.

Thanks, Peter.

Our next question is from John Janedis from Banc of America Securities. Please go ahead.

Hi, good morning. First as you roll out the new programming on HGTV, assuming it improves ratings, when do you think you'll start to see a benefit there? And then separately on Shop at Home, how is the shift in merchandise going? How often can we expect to see Emeril? I wish it could be 24 hours a day. And then, should we expect much of an increase in average full time, equivalent homes going forward? Thanks.

All right, John. You want to talk about the effects of the new programming a little lag as far as the ratings. Actually Shop at Home, too. Actually, John, after Saturday, I think we all wish Emeril would -- and, there's a chance down the road because of some of the talent coming online, that as we said in our comments, how we first envisioned this from talent from our networks continuing to migrate to Shop at Home, we'll see some continued improvement on that side. But, John, do you want to talk about the programming?

Absolutely, John, the programming that we're putting in place for the fourth quarter will continue what has been a steady growth in household ratings. Although, to be clear, we still are not pacing with our household ratings from a year ago. And just to bring you up to speed in the fourth quarter, we were -- we had a dip of 20% to the prior year that we have steadily grown and in June we had our best month of the last eight months in our household ratings trailed prior year by only 5%. But the good news within that household ratings story is that our younger demographic ratings have actually grown at a faster pace ahead of our household ratings. In fact, we had the highest second quarter ever for adult 18 to 49 demographic ratings on HGTV. That's the first time in the last eight months that we've broken through on year over year growth. We anticipate the investment of programming in the third and fourth quarter will feed that growth, particularly with the younger demographics and we're selling in the market place in anticipation of that.

So, to be more specific to your question, we have already put guarantees in the market place based on the trending that we've seen over the last eight months. When we get to the fourth quarter, we'll be introducing six additional new series on HGTV. That's compared to one new series a year ago in the fourth quarter of '04. So, as the trend continues to grow, as the demo's start outpacing the household growth, we're selling in anticipation of that trend continuing. Does that answer your question?

Yes. Great. Thanks a lot.

The migration at Shop at Home, John, I think, needless to say, we made comments that obviously we're very pleased with Emeril. But it has been, as we've commented in previous calls, taken us a little longer to migrate some of the talent over from Home and Garden and Food than we had hoped. But, since Judy Gerard moved over from Food, that process has picked up. I think we're feeling very good about where we are right now.

We're feeling very good. The Emeril weekend on Saturday. I think you asked how often might we see Emeril. Believe me, we'd like to see him every day, considering the performance there. But, we have it on a quarterly basis that Emeril will be in a special programming selling mode, and then we're building out from Emeril adding -- Judy Gerard is adding a collection of local chefs that Emeril has picked out -- hand picked who will also build out the Emeril franchise. It will still be labeled the Emeril cooking show and Emeril's sous chefs will be continuing the selling and we'll be using liberally -- borrowing liberally from Food Network programming to bring the image of Emeril around that selling effort and also the promotion of Shop at Home using Emeril's likeness.

So the effect is that direct selling by Emeril, once a quarter, indirect selling under Emeril's brand built out around that for several days. Then the on going promotion of the network with Emeril as our partner in the cooking category will continue. Ken's point is right on. We're looking at all of our different talent at Food network. Looking at whether we need to work with them to develop merchandise or if they currently have merchandise. In some cases they have merchandise and they have other deals that we have to work around. But, it's a priority of ours to take what we've learned from the Emeril experience and accelerate the effort to bring to bear the leverage of the Food Network talent to the selling proposition on Shop at Home.

Great. And lastly, anything on the increase in the full-time equivalent homes? Should that be around 53 or is that going to go higher as the year goes forward and also into '06?

Yeah, we are -- 53 is where it is. We hope to have it go higher, but we are being very choosey and not taking just any home, but rather homes that we think we can make profitable. So, as our number increases, it's actually a net number that comes from the subtraction of nonprofitable homes and the addition of profitable homes by way of either renegotiating our distribution agreements or in some cases actually canceling some distribution in favor of other more profitable distribution. So, we're trying to grow. We think of our MSO partners essentially as our stores. We want to make sure that we're keeping an eye on profitability and not just the number of stores as we grow the total number of stores.

Thank you very much.

Our next question is from Steven Barlow from Prudential. Please go ahead.

Thanks. On Shopzilla, was there any organic -- was it all organic growth ? I'm trying to figure out why it's just jumping so well. Whether there was an acquisition in the Shopzilla neck of the woods last year when we didn't see the numbers. Secondly, the JOA's did pretty well for the quarter. Can you update us on a forecast there. What was -- we can see some of the pieces but what was going on there in general. And then, Joe, do you have a debt goal for the end of 2005? Thanks.

All right, Steve. We'll jump in. I'll let Joe add some color to Shopzilla. Shopzilla was going through somewhat of a transition last year, including as part of the brand name change, but you might want to comment, Joe, just on the growth.

They had what they described as a relaunch of their technical platform and of their branding last year. So, we've been involved with Shopzilla for more than a year. And we sort of -- we have been in discussions with them. They told us about that plan and they actually hit exactly what they said they were going to. Something of a slower growth year for them. It is 100% organic and they have done exactly what they've said. In fact, they are exceeding what they told us early on. So it's 100% organic. No acquisitions in there.

Rich, do you want to take the JOA question?

Yes, just quick. The JOA markets are not performing dramatically different. What you saw, there was a reversal of, you know, a hit we took in Birmingham last year.

It was a hit we took last year. It was not a reversal.

I'm sorry. The hit we took last year. So you had the comp. Easy comp.

Okay.

For the most part those markets are not performing different than others.

Steve, this is Joe again. I don't have a particular debt goal in mind. As we looked at that cash flow generation, everything in, we expect that we'll be actually working the debt back down over the next 12 to 18 to the point where we'll probably be able to repay all the commercial paper that we used as for the Shopzilla acquisition. But, I don't have a specific goal figured out.

That debt reserve that you referred to, was that a one-time thing or is there more potentially to come?

No. That was related to one specific event.

Okay.

And, no, that would not occur.

Thanks.

Thanks, Steve.

Our next question is from the line of Brian Shipman from UBS. Please go ahead.

Thanks. Good morning. Joe, your guidance for Shopzilla operating profit or profitability implies a step backward. Are you planning some investment spending there in the third quarter or do you see revenue growth slowing a little bit? And then also, could you give any indication from 4Q Shopzilla performance? Separate question on Shop at Home. Joe, you mentioned you're still on track to achieve your guidance in terms of losses for the full year. First half you've done $10.5 million in losses and your guidance is for $7 million in the third quarter. So, do you see a ramp then back towards profitability in the fourth quarter and if not, do you see losses exceeding that $20 million upper end? Thanks.

Great. Brian, thanks. Joe again. The answer to both questions in part is seasonality. Shopzilla wouldn't surprise you, is a heavily fourth quarter oriented, as far as the back half. So we have something of a modest dip. We've also -- the one thing we have put in place at Shopzilla is a management incentive program and some of those expenses will hit in the third quarter. But they'll also hit in the fourth. What you see, if you do the math, you'll obviously see a big fourth quarter. That's related to holiday shopping. That's same pattern they've had. We expect they will continue.

For Shop at Home, again, hate to pull the same trigger, but it is seasonality. We would expect, as you indicated, that the fourth quarter could approach break even again tied to the Christmas season, holiday season shopping. So, that was our expectation all along and continues to be.

Thank you. If I could ask a follow-up. Could you give us an update on what you expect for options expensing? Thanks.

We don't expect to start expensing options until next year. And I think the guidance we had for the effect this year, we had originally anticipated we'd start July 1st. We had about a .05-cent expense built in. So you'd probably just double that as far as a really early indication. We'll give you more on that in the fourth quarter as we get closer to it. But that will get you in the ball park.

Thanks, Joe.

Our next question is from the line of Alexia Quadrani from Bear Stearns. Please go ahead.

Thanks you. Your newspaper advertising growth seems better than your peers and your outlook. Your guidance for the second half also remains very much on the high end. Understanding you've got some easy comps from the hurricanes. Could you sort of tell us what else is driving your optimistic outlook? And then my second question would be on the cable network side, where do you think I guess, could you remind us where Maxim distributions are going to be. I understand that HGTV and Food are probably close to there, but maybe for your other three networks if you can tell us where you think it could go.

All right. Rich, Mark? You want to--

Okay. We'll let Mark take it.

The second quarter, we experienced growth, double digit growth, in about four of our markets and more than 70 % of our markets had what we would consider to be very, very healthy above industry. A large part of that is the fact that we're located in Florida, California, some healthy -- some healthy parts of the country that have really -- when the economy has come back and help wanted has come back, has given us a healthy lift. Looking forward to the second half, we're engaged in a process to try to expand our sales force. We think we're going to see some of the benefits come to us in the second half. That's what leads us to the optimistic outlook after the last half.

Okay. And, John, do you want to talk about the newer nets? I think Alexia is right. Obviously Home and Garden and Food are starting to approach maximum distribution, 90, 91, 92 million, it's going top out. But, how about some of the newer nets and where we think they might end up at this point?

Sure, Ken. GAC, DIY, and Fine Living are all three having a very, very positive first half in terms of distribution. The full universe for digital right now would be in the range of the high 40s to 50 million households. Leading the way for us, actually, is GAC. They are approaching 40 million. They are now at 38,500,000 subscribers and we anticipate GAC will crack the 40 million mark by the end of this year and will have the head room to grow an additional 10, as distribution and as the digital penetration grows in the market place. Today, we believe that penetration to be roughly 50 million households. DIY had a very, very good month of June, for instance, adding almost 1 million households. And it's now at 34 million households and growing very well.

And Fine Living is among the fastest growing of any of the new cable networks out there in the last five years. It, too, added 650,000 subscribers in the month of June alone. It's up to 27.6 million. We're in active conversations with Echo Star and that would yield an additional 3 million households. We're also planning, we're very excited about this, about the launch -- for the launch of Fine Living in Los Angeles on the Adelphia system on August 1st. So, for us, the ceiling is 50, the growth story for GAC, DIY and Fine Living is among the best in the industry.

Thanks.

Our next question is from the line of Douglas Arthur from Morgan Stanley. Please go ahead.

Most of my questions have been covered. I guess just trying to drill down on the improvement in primetime ratings at Food in the first half. Did you get the bang for the buck out of the new shows, such as "Iron Chef America" , you were expecting or do you think with the addition of even more shows in the second half that's going continue its upward momentum?

Yes. We certainly did get the bang for our buck out of "Iron Chef." There actually were two special programming events for Food Network in the first half. You mentioned "Iron Chef America." That was one. Then "The Next Food Network Star" which was a four week miniseries ending in June, was the other. And both -- both series consecutively rated the highest of any prime time series in the history of Food Network. And that was both on a household basis and a demographic basis. And in fact, "Food Network Star" with its finale Sunday night, June 26th, was a first ever live finale on the Food Network. It did a 1.65 household rating. It cracked the 1 rating mark in adults 25 to 54. That's never happened on Food Network.

So, the answer is yes, we are getting a bang for the buck. Total day impact on all of the Food Network improvements has yielded a 7% growth in the second quarter in household ratings and significantly a 5% growth in adult 25 to 54 from the prior year. The other neat thing about those special programming events is that they really provide great selling opportunities and wonderful value propositions for advertisers. By the way, we're able to integrate advertisers within the special programs and that's not product placement. You know we don't do that. But we're able to sponsor with live events different elements of the show and provide a lot of pizzazz, a lot of specialness for the advertisers that they really can't get anywhere else in cable where typically you're not seeing as much original programming as you're seeing on the Scripps Networks.

Great. Thank you.

Thanks, Doug.

Our next question is from the line of Lauren Fine from Merrill Lynch. Please go ahead.

Thank you. Just a couple quick questions. First of all on GAC, you actually came in slightly positive from a cash flow perspective. I guess I thought you were going to be showing losses. I'm wondering if something is doing better than you expected there top line on the cost side. Then secondly, on HGTV, you had suggested the second half would be down about 10% and with the third quarter being down 8 to 10 and the fourth quarter being the toughest comparison, I'm wondering if there's a change in that thought for the second half and if you think you can continue the cost performance of the second quarter into the second half.

Okay. Go ahead, John.

I'll take the GAC question. I think the second question was for broadcasting. Bill will take that. Lauren, hi. It's GAC is really has been a special story for us in the first six months of operating. During that time, we have moved the network from Denver to Nashville. We've had the chance to interact with the country music industry and have been welcomed with open arms into the industry. And as we've gotten our programming planning and strategies together, the first thing that we did is meet with the people who own the Grand Ole Opry Live program which really anchors our entire schedule. We were able to secure a three-year renewal on that program. And that runs six times at various times in prime time. Helps drive the network.

But your question about profitability, we are being very intentional about cost containment here. We see this network as one that has a very different equation for creating value for us because, frankly, it does not drive a lot of affiliate revenue. It's really much more of an advertising revenue driven business. And to that end, we're focusing on the programs that do move the Nielsen meter. By the way, in the second quarter, we had improvements there. I won't quote a lot of numbers, but we had improvements that included up 100 to 200% in key demographic cells with GAC. That's in total impressions. So part of that improvement is ratings improvement, but is driven by the added distribution.

We've all been much more intentional, again,about the ad sales strategy. 80% of the inventory in 2004 and GAC was sold into direct response. As we've taken over that network we've put -- we've hired an excellent new Vice President of Sales, who came over from Style. And we've organized our selling effort. We brought to bear the leverage from HGTV and our other networks. And now we're introducing GAC for the first time into the up front to significant spending commitments. And so it's the combination of cost control, focused on the programming expenses that we're really move the audience forward. And then really driving very, very hard or selling effort to monetize the network.

Lauren, this is Bill Peterson. Probably the only unanticipated lift we got in the second quarter from a revenue standpoint was that automotive was a little stronger than it appeared three months ago. Also, as Joe mentioned, the seven-game NBA series in Detroit turned out to be very effective for us for a couple of reasons. One, it was seven games. Last year we had five. Also, we had very strong ratings last year. We could use that to drive unit costs. So, that helped quite a bit.

As we looked forward to third quarter, automotive is -- excuse me,-- more of a question mark in that the employee discount campaign is primarily a network campaign. It's being supplemented by some spot. And what will happen after that with automotive, we're not necessarily too sure. So we're pretty comfortable with the guidance that we just gave out.

I guess, though -- I guess I'm wondering if you've lowered your guidance is what I'm trying to get at. It feels like you've lowered it a bit.

No, I don't think so.

Okay. I just wanted to be clear on that. I guess I had a question on the cost side there and I also wanted to slip in one last question on Shopzilla, to find out if you'd give us guidance on DNA for the year.

On the cost side, the trend we've seen in the first two quarters of us being lower than last year will continue, I think -- will continue for the rest of the year. Maybe not the same percentage rates but will end up the year with our costs below last year.

Okay.

Lauren, this is Joe. On DNA for Shopzilla, first of all, you have to allow me to qualify this by saying we haven't done the valuation work we need to get done, obviously, having just completed it. We would expect that the amortization on the deal would be somewhere in the range of 17 to 20 million on the back half, but, again that could change depending on how the valuation comes out.

So about 9 1/4-ish plus or take a little bit?

Yeah, that's right.

Okay, great. Thank you.

Thank you. Next question.

Our next question is from William Drewry from Credit Suisse First Boston. Please go ahead.

Hi, it's Deborah Swartz on for Bill. Just wondering, back on the cable network are you starting to see any meaningful impact from HGTV Pro and can you mention Living.com. I was wondering if you could give us an update on the rollout of other broad band channel launches for the rest of the year.

Go ahead, John.

Sure, Deborah. The HGTV Pro is doing very, very well for us. We had, I think Ken mentioned earlier, 5,000 uniques in the month of June. And over 3 million pay views. That's for broad band channel that was just introduced in January, we're very pleased with that. Terms of our advertising commitments, we're looking at, for the third quarter, looking ahead. We're anticipating as much as $1 million in ad revenue commitments. And for the full year, not to put a number on it, but I'm very confident that we could be near break even in its first year although we'll probably take some of that and invest in the channel to create a greater selling opportunity in '06 and continue to grow it.

On the question of our other broadband vertical, Living is an example of a broad sort of magazine that encompasses all of our brands and sensibilities. And that is ad supported with General Motors. And you can take a look at that on Living.com. Our plans going forward are to follow the model much more similar to what HGTV Pro does, which is to identify very specific niche audiences that fall within our categories, within the shelter and food categories, that we can super serve by way of highly informational video centric services that are interactive. For instance, to give you an example of that, we're anticipating the launch on December 1st of our first broadband vertical channel. And this one will be under the HGTV brand and its target will be kitchen design. It will be hopefully the one-stop shopping place for anybody with a passion for changing or in some way adding to the design of their kitchen. And we're busy building that right now.

Our anticipation is that we will launch four additional broadband vertical channels next year and then continue into the following year. Subjects that we're considering today, for instance, are gardening under HGTV. Woodworking and scrap booking under DIY and other ideas associated with food. That gives you a sense of how our strategy for growing our brand stems beyond cable television and our partner certainly there are important, as we build the brands on cable and satellite. But we see the opportunity that even further grow our brands with a direct relationship to our audience. As we look at the statistics of the increased use of broad band, increased penetration of broad band, I should say, and within that penetration, the highly increased use of video in broad band and it's our belief that we can go to where our fans are and provide the service that they expect from us within the categories that we have so long done such a good job with.

Great. Thanks a lot. And then actually, if I could ask one question on the newspapers. On auto specifically in the early part of the year, I believe auto had been mixed geographically. Is that still the case? If so, could you give us some color on exactly what you're seeing in auto right now.

This is Mark. For the second quarter, it remained to be a mixed bag. We had slightly fewer than half of our markets in the second quarter up in auto. Again, California and Florida were in the up category. Both beneath that, though, we had shrinkage overall we were down about 4.5%. So it remains a highly local market phenomenon, and we expect that we'll get a slight bump from some of the activity at some of the major auto dealers, some of the major auto manufacturers the last couple months, into the third and fourth quarters. But it's very, very unclear at the moment. I loathe to predict great upsurge there.

Great. Thank you.

Our next question is from the line of Paul Ginocchio from Deutsche Banc. Please go ahead.

Hi there, thank you. Two quick questions. First, I think you've recruited some pretty accomplished people on the internet side out of Lawrence, Kansas, and into Naples. Can you just talk a little bit about that , plus any update on myhub.com out of Denver. Second, maybe just a view on when the investment, at least infrastructure investment in Shop at Home levels, Shop at Home levels are awesome, and then are you at a position now where you think it's built out? Thanks.

Go ahead Rich.

Hi, this is Rich. Let me talk a little bit bout the internet site at the newspapers. We made a couple very deliberate moves. One was hiring, as you said, Rob Curly and a couple of his folks who come from Lawrence. And what we decided to do, instead of putting them in a corporate role, we put them right in the middle of what is probably our most valuable newspaper market and one of Scripps' most valuable assets and that's Naples, Florida. Rob will build out what we believe will be a very different model for not just really newspaper, but also local media websites. If you want to kind of get a look at what he does today, look at Lawrence.com and some of the other links and then think about moving that to a very different kind of community which Naples is. And what we hope to have there.

Also, your hub, as you mentioned, has launched very successfully in Denver. You guys aren't familiar with your hub, it's a zoning online and in print zoning strategy that we started in Denver 40 web zones and will be very quickly 15 print zones. They're up and all doing extremely well. It's a model you're probably going to see us roll out to other Scripps markets very quickly. And we'll probably in some manner offer it to the rest of the industry and it may spread out there as well. The other thing we did in addition to your hub and hiring Rob Curly in Naples is, we've shifted many of our recruitment sites to what we think is the best to breed career builder and enjoying good upside there as well. So, yeah, we made three pretty significant moves on the internet side of the newspapers. And Mark, what do the numbers look like?

Sequentially it's a pretty good-looking story. Midyear we're up in the low 30% range. But as you look month by month, we're closer to 50%. We see that ramp just continuing on, you know, in the 40% to 50% range month by month from here to the end of the year. So very, very encouraging.

The shop at home question, John, did you hear?

Yeah. We are obviously investing very much in the network and we do still have some continued investment ahead of us, building out the website further we had an initial improvement with the website that yielded some great returns. But we feel like we have another step there. And then we also have to consider, as we grow, in growing our warehouse facility and our fulfillment facilities as our volume grows, as we continue to add the kind of Saturdays that we had last Saturday with Emeril. So those are the two areas. But for the most part, I'm very satisfied with how we've built out our production side. How we built out our call center. And how our fulfillment systems have really been built out and are really allowing us to sustain the kind of growth we've experienced on the top line.

Perfect. Thanks.

And we have a question from the line of Fredrick Searby from J.P. Morgan. Please go ahead.

Thank you. Any thoughts on getting Emeril Lagasse on GAC? On a more serious note, couple questions. One is there's -- it's kind of an old issue, but Food, is there any thought or are you still working to find a tax efficient way to buy out the minority stake there, the tribe holds, or is that something that's kind of on ice definitely? And, not to jump ahead, but you know that we're tend to be completely dependent upon your guidance. The fourth quarter, you had been guiding at mid-year for 23 to 28%, I believe, on the network side. It's coming in pretty strong in the third quarter. Sounds like 25 to 30. Is there a little bit of a slowdown maybe anticipated, or should we sort of right now assume sort of similar growth rates to the third quarter? Thank you.

What we'll do is start with the guidance question first. John, Do you want to tackle that?

Sure. The short answer is we do not anticipate a slowdown. In fact, let me touch a little bit on our up front sales. That might give you some color as to our forecast going into the fourth quarter. We've written approximately 75% of all of our business in the market place. We have just about 25% yet to write. During that period, we have been at what really has been the high end of the CPM market of 4% mid, maybe 5% in some cases, but 4% right about where ABC set the marketplace, Frankly. As we understand it, the total market for cable all CPM's for all cable growth will be 0 to 4%. We feel very good that we are at the high end of that.

In terms of volume for our networks in the '06, 05/'06 up front, we looking at, perhaps, mid to high teens percent increase, 17 to perhaps 18% increase in volume in the up front.

And again, for the market place, we anticipate for all cable networks total volume growth would be up only 5 to 6% so we think we can trip what the market will do in terms of volume growth going into the fourth quarter. And so that bolsters our forecast. And when you look at our third quarter coming in, based on the scatter business and our up front business, I feel very good about the forecast.

And actually, Fred, you're actually close to home. Because, when we bought GAC, Emeril was delighted. He's a big country music fan. He's the cajun cowboy down there in New Orleans. So you never know.

I heard he's a huge karaoke star.

Anyway, back to the food and tribune question. You know, you do need a willing seller. We're very willing to acquire. As I have said before, in previous calls, you know, Dennis is on my speed dial. He just doesn't seem to want to return my calls. Seriously, we've always said that, you know, the deal made right sense for us and sense for Tribune. We'd love to have the remainder of Food. But at this point there's really nothing in the original agreement, put no calls to force the issue. But if you guys happen to bump into Dennis, tell him, you know --

Send him our regards.

Yeah.

Thank you very much.

Our next question is from Craig Huber from Lehman Brothers. Please go ahead.

Yes, thank you. First at mundane question. Could you give us the percent change, if you could, for help wanted, real estate and auto? Secondly for cable networks for your top two networks, talking about the CPN up about 4%, 4, 5%. Remind us if you would, how does that compare with the CPN increase you got a year ago and also two years ago, to mature networks. Thanks.

All right. Who wants to take these? Mark?

I'll blow through the classified numbers. Craig, June auto down 3.6. Real estate up 10.2. And employment up 25%. These are for all non JOA markets. Just the markets that we operate ourselves.

Okay, John, on the CPM question.

Yes, Craig, the CPM growth for Scripps networks in a year ago up front market place was in the 7 to 8% range. And we're at the 4, perhaps 5% range this year. And, again, as much as we like to think that we can drive the total market place, at the end of the day, it's really the larger networks that drive the market place and set the bar. And so all we can really do is judge our performance against the total market place and so when you look at it that way a year ago, the high end for CPM growth was 8%. And NBC set the market place at that time along with CBS. And this year ABC made a decision and it was a strategic decision to go for share versus pricing and I think they did that for their reasons, but in doing it, it set the market place for CPM growth at 4% at the high end, and for any network, whether they are a large broadcast network or HGTV, getting above that mark is proving to be very, very challenging. Getting to that mark of 4% is something that's actually very rare in that market place.

Thanks. If I could just switch over to cost for your networks. If you look out to the fourth quarter, maybe into '06 for cable network programming and marketing costs. Is there anything to forecast your budget, material jump above is 15% to 20% plateau you're off of right now?

No. I don't. I think honestly, 20 is probably more the norm. The 15% in the second quarter, there was an anomaly there in terms of a reversal of bad debt, excuse me, that had a significant impact on our cost. We have also, I've been holding back somewhat on head count additions. But that's more of a timing issue for a variety of reasons. That had a one-time only effect on the second quarter. Our investment in programming, certainly has leveled out by the amortization process. And as I said before, we're working to put our resources where the business needs them most in order to drive the business. So in some cases we'll be shifting resources, for instance, in order to fund the broad band initiative to continue to drive our online business, which is growing at a very, very healthy rate. So we're continually re-evaluating all of the cost structures of the various business to align our resources in the right places at the right time. Item 1A for right place, right time right now is HGTV's programming and that's where we're putting our resources in order to get that momentum we have now and carry it forward.

Great. Thank you.

Our next question is from the line of Thomas Russo from Gardner, Russo, and Gardner. Please go ahead.

Hi. Good day. Great quarter. The numbers that are quoted for the online in aggregate. I think the comment was they were up 38%. How do you think about what you report in that category? That wasn't just newspaper, was it? I think it may have been across the entire company.

Tom.

Yes.

This is Rich. That was a newspaper number only.

Okay, good. And Rich, or others, on the video on demand relationship with the MSO's, the amount of development of broad band only delivered product that you're talking about, the launch of possibly four additional vertical channels at year end. All of the ways you're wishing the broad band delivered product. How does it work relative to your relationship with the MSOs on the BOD that you've been talking about early on?

John, do you want to tackle that?

Yeah, Tom, great question. First of all, our relationships with the MSOs and satellite companies are very, very important to us. We want to do everything we can to keep that relationship healthy and build our business along with those distribution partners. So as we look at our broad band strategy and building out our broad band verticals, we'll be -- we are in close contact with the distribution partners that we work with as to how we might integrate those broad band vertical channels with their home websites and we're also in conversations with them about the whole video on demand strategy and how we can improve upon what we've already done, I think at the high end of the industry in terms of delivering vod content to the MSOs and how the broad band content might inform that strategy further, perhaps some of the video we're producing for the channels might be to them more valuable than a vod realm or perhaps on their own web sites. We'll be engaging them over the summer and into next year on those discussions. But just to be clear, we don't view this strategy as one necessarily to go around the distribution system but rather work with them to build value for both and for ourselves.

And yet, it's interesting. You mentioned that it might go with them either through their vod offering or through their own websites?

When you think about it -- Think about internet video on the internet, it really is the ultimate on demand.

Yes, yeah.

So as we think about on demand, there's really two ways of thinking about it within the walled garden, if you will of the distribution system and then outside of any walled garden in the sort of the wild west video on demand. We feel it's important to work in both places.

Thank you. Thank you.

Our next question is from the line of Neil Deeten from Davenport and Company. Please go ahead.

Good morning. Congratulations on your strong quarter. I just had a quick question concerning Shopzilla going forward. If you have any kind of goals as far as your margins are concerned for that division?

Go ahead, Jim.

Tough question. We are relatively new to the business. We believe it's not got pretty significant upside on its margins, but I really wouldn't characterize them as any firm goals. As we learn more about it and their plans, we all expect that they'll probably want to reinvest some in some new products and new product development. So we probably won't -- we won't drive it as hard as you might be able to if you weren't interested in building new businesses. But at this point, we think there's room in the margin and we're pretty comfortable with their progress against it. But, I don't have anything specific in terms of the level at this point.

Neil, it's Ken. I just want to add in. I think the fact that Shopzilla model is such an efficient model, when we start thinking about the media businesses that we've been in for decades, we're very excited about just exploring the efficiency there as we like to say it gets the cash register ringing closer to the customer. We think some of that knowledge will rub off on some of our other businesses. While margin is very important, and it will be, it always has in our company. There's a lot to learn from this business.

Okay. Thank you.

Our final question is from the line of Steve Searle from [Coniaset] Management. Please go ahead.

Yes, I was wondering of the 900 million,approximate debt you have, how much of that is commercial paper and what your approximate cash balances were at the end of the quarter?

Yeah. Hang on a sec. Commercial paper at the end of the quarter was roughly 300 million. And cash on hand -- well, we had invested balances of close to 14 million.

And going forward in terms of free cash flow priorities, is it safe to assume in the absence of other acquisitions that CP repayment is the primary use and in addition to the option dilution share repurchases you mentioned?

Absent any acquisitions, absolutely.

Okay. Thanks.

There are no further questions. You may continue.

Thank you, operator. This is Tim Stautberg. I will be available this afternoon if you have further questions. 513-977-3826. Appreciate your participation on the call. I believe, operator, you have is a couple closing remarks..

Yes. Thank you.