E W Scripps Co (SSP) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Scripps Fourth Quarter Earnings Report Conference Call.

At this time, participants are in listen only mode. Later we will conduct a question and answer session.

I will now turn the call over to our host, Vice-President of Investor Relations, Mr. Timothy Stautberg. Please go ahead.

Good morning all and thanks for joining us.

We will start the conference call today with comments from Ken Lowe our President and CEO and Joe NeCastro our Executive Vice-President and Chief Financial Officer. Our prepared remarks should take about 15 minutes. We know you have busy schedules so we will make sure that we are done by the top of the hour.

Before we begin, let me introduce the other members of our senior management team who are here with us on the call. Joining us are Richard Boehne, Chief Operating Officer, John Lansing, President of Scripps Networks, Mark Contreras, Senior Vice-President of Newspapers, Bill Peterson, Senior Vice-President of TV Station Group, Lori Hickok, Vice-President and Controller, AB Cruz our General Counsel and Jennifer Webber who heads up our Human Resources.

Let me remind you, if you prefer to listen in on the Web, you can go to scripps.com, click on shareholders and find the link at the top of the page. An audio archive will be available on scripps.com later today and we will leave it there for a few weeks so you can access it at your convenience.

Our discussion this morning will contain certain forward-looking statements and 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 2006 Form 10-K. Now, here is Ken.

Thank you Tim and good morning everyone. As always, we appreciate your interest in our company.

Scripps and its shareholders benefited truly once again during the fourth quarter for that matter for the full year 2007. From the tremendous popularity and superb financial performance of our lifestyle television networks and their related interactive businesses. Despite persistent industrywide weaknesses in newspaper advertising and an off election year for our television stations, consolidated total revenue was down just slightly for the quarter and actually finished ahead for the full year.

Total revenue of Scripps Network was up 14% during the final three-month period of the year, driving a very strong 22% increase in segment profit for the division. The full-year total revenue was up 13%. An annual growth rate that led the industry and i think the reflection of the talented team that we have assembled at Scripps Networks.

In fact, the Scripps Networks ad-sales group took top honors as best ad-sales organization in the latest Jack Myers survey of that agencies and media buyers. You know, it is quite an accomplishment. And I have to say, one that we are very, very proud of here at Scripps.

Kudos to [Steve Gulati] and his team.

HGTV and Food Network, our flagships, continue to carry the freight while our three emerging networks each saw very strong double digit revenue growth for the quarter. At HGTV, 2007 was the best ratings year ever. That is worth repeating, our best ratings year ever especially when you consider this network is almost 14-years-old. And that momentum that we created has continued right into the new year.

Programming standouts like House Hunters, Design to Sell and Find Your Stylist to name a few continue to draw passionate, engaged audiences to our highly targeted network.

So far this year, total daily impressions are up nicely year-over-year as we continue to build a solid audience across just about all key demographics. We started the year off right at the food network as well. Household viewership during primetime was up a very healthy 10% in January compared with the same period last year. And total daily impressions are up 5%.

We began seeing some strengthening in our audience numbers at food as 2007 drew to a close and clearly that trend, we are very happy to report has continued. Programming highlights at food all targeting increasingly younger viewers include: Ace of Cakes, Diners, Drive-Ins and Dives, Dinner: Impossible and of course Iron Chef America, just to name a few.

Incidentally, we are going to begin simulcasting both food and HGTV in high definition beginning on March 31st. Now, it is surprising to say that our flagship networks have stayed absolutely true to the programming strategy that has guided their success now for more than a dozen years. Our disciplined focus on shelter and food, two content categories that -- well just about everybody can relate to, continues to serve us and our shareholders very well.

And our merging networks ratings that DIY gained momentum here in the fourth quarter, thanks to great shows like Rock Solid, Cool Tools and Bathroom Renovations.

Fine Living is making good progress as we step up programming and marketing and anticipation of the network becoming Nielsen rated next year. We scored a really big coup signing Martha Stewart syndicated show to repeat in primetime Fine Living, Monday to Friday.

And over at Great American Country (GAC), pure country music fans are turning to us in increasing numbers now that the network has reached and actually passed the important 50 million subscriber mark. DIY and Fine Living are also both approaching 50 million households.

On the Internet, the Scripps Network is making great strides towards expanding its competitive advantage as the leader in lifestyle media.

In December, for the 17th consecutive month, foodnetwork.com was the internet's top website in the food and cooking category attracting an attractive -- get this -- 13 million unique visitors. And by the way, that is an all-time record for us. With the recent addition of recipes, our Scripps Network now accounts for 25% of all web traffic in the food and cooking categories. That percentage is even higher when you include our new revenue-sharing partnership with Rachael Ray on her popular website.

Also, during the fourth quarter, as part of our ongoing strategy to build out our interactive portfolio we launched frontdoor.com, a video-rich real estate listing service powered by HGTV. Front Door is in its infancy but we believe it will have a competitive edge over other real estate sites, thanks to HGTV's deep archive of relevant video content. All in, online revenue of Scripps Network was up 22% during the fourth quarter.

As we accelerate development of interactive enterprises, to target the same lifestyle categories that we dominate on TV. And as we move towards completion of our separation plan and following the years our total revenue approach $1.2 billion. The trends at Scripps Network are all moving in the right direction.

Now turning to our search businesses, the story at Shopzilla is one of improvement. One of America's top online comparison shopping services. Shopzilla finished strongly in the fourth quarter with both the top and bottom lines ahead of last year during the same period. Even better, we have been experiencing very solid revenue growth in the early going so far this year, thanks to increased traffic acquisition efficiencies. Things are definitely looking up at Shopzilla both here in the United States and in Europe.

At uSwitch, we continue to face very challenging market conditions prompting us to anticipate a substantial write down of goodwill and other intangible assets.

Joe is going to go into a little more detail on the write down issue in just a moment.

Our strategy at uSwitch for now is to align costs with current business conditions while at the same time working to diversify the business sent away that reduces its dependence on energy switching.

In our local newspapers, we continue to be affected during the fourth quarter by the persistent weakness in advertising sales that is truly bedeviling the entire industry. The weakness has affected us in virtually every category of classified and local advertising.

On a couple of positive notes, circulation revenue was steady during the fourth quarter compared to last year and we continue to see growth in online audience and advertising. At our television stations as expected results reflected the relative absence of political advertising during the fourth quarter and the full year. Now, we are really looking forward to the second half of 2008 when we expect campaign spending to really hit its stride.

With all that, let me now turn it over to Joe.

Thanks Ken. Good morning everyone.

As we reported this morning, Scripps Network had a very strong quarter thanks to the solid viewership at our flagship networks and website and the strength of the national television and advertising environment.

The weakness in newspaper advertising, the lack of our political advertising in our TV stations and challenging business conditions at uSwitch, however, largely offset the growth at networks and consolidated revenue was flat for the quarter. In addition, as we noted in the press release our results are preliminary at this point because we are not yet final on the outcome of our Annual SF142 Asset Impairment Tests.

In the course of that evaluation, we have determined we will need to take a substantial write-down in the carrying value of our investment in uSwitch. We would not know though the exact amount of the charge until we work to the entire process. The amount of the write-down will be disclosed when we file our Form 10-K at the end of February. As I'm sure you are aware of the impairment issue is related to the general decline in the energy switching business at uSwitch. The losses there in 2007 were significant enough for us to determine the write-down of goodwill and other intangible assets is in order. Also related to uSwitch, net income was reduced $0.6 per share because we brought down our estimated value of certain future tax benefits that we had recorded in prior periods. The anticipated tax benefits had been based on more favorable future business assumptions for uSwitch.

As Ken mention, while business has been difficult to uSwitch it looks like we have turned a corner at Shopzilla. Revenue and segment property at Shopzilla improved during our fourth quarter year-over-year, showing very healthy double-digit growth rates. Our sites continued to rank in the top 10 of all US retail web properties. While estimates of unique visitor growth for the US online retail industry in December were the low single-digit. Shopzilla sites group 15% and they top 26 million visitors for the first time ever.

Back to the network for a moment. The news is pretty much all good with just about every measure moving in the right direction. We are expecting double-digit growth again at the Scripps Network in the first quarter based on the success we had in the upfront last fall and the encouraging ratings and viewership numbers we are seeing as we begin the new year. Of course, our estimates depend on the continuing strength of the scatter advertising market which so far has been holding up pretty well.

Also, earlier this month, we wrapped up our HGTV renewal agreement with Time Warner. It is a multi-year agreement with terms similar to the one we signed last year with Comcast. At our TV stations, we are feeling positive about 2008 with the return of political and the Olympics on our NBC stations this summer. We are expecting a pretty good year.

The newspapers are a different story. With the secular issues confronting our newspapers along with the rest of the industry, of course, are showing no signs of letting up. Classified revenue was particularly weak especially employment which was down 31% and real estate which was up 25% year-over-year in the quarter. Automotive was not quite as weak but still down about 11% from the same period last year. Also, just as a reminder, we ceased publication on the Cincinnati Post at the end of 2007. And going forward we will be reporting its prior year results as discontinued operations.

As I have said, the company continues to generate substantial free cash flow, that as of December 31st, was down to $504 million compared with $766 million at the end of 2006. Because there is less down on the balance sheet, interest expense for the fourth quarter was down to $8 million from $13 million during the same period last year. Capital spending ended up being about a $129 million for the year. That included spending related to the expansion of our Scripps Network, headquarters in Knoxville, our TV station upgrade to high-definition and software development cost for the search businesses.

For the full year, we spent about $58 million to repurchase about 1.3 million shares at an average price of just over $42.

As for the guidance, you have the numbers on the press release. I'm not going to go over all of them again here.

As we noted, we are looking for first quarter EPS to be in the range of $0.38 to $0.42 per share. That range does include an allowance for transition costs related to separation. Also, implicit in the EPS range we provided, is an effective tax rate of somewhere between 33% and 34%. Remember that we do not include any provision for income taxes on the tribunes 31% minority interest in the food network.

Finally, let me give you a very quick update on the company's separation plan.

First, we are still right on track to complete the transaction by the end of June. First, we are also anticipating at the private letter ruling from the IRS on a tax free nature of the spend should be received sometime on February. We are also well under the process of preparing the registration statement for the new company. We have made very good progress on identifying key members of each of the company's new management teams. And also, lastly, based on our current negotiations we are very confident we will have our bank financing in place well ahead of the separation date.

That concludes our prepared remarks. Operator will be happy to take any questions at this time. We will be happy to take any questions at this time.

[OPERATOR INSTRUCTIONS]

And our first question comes from the line of Peter Appert of Goldman Sachs. Please, go ahead

Good Morning, thank you.

Ken, can you give us any more specifics on what you are saying in terms of scattered pricing currently and in particular is there any differentiation in terms of categories?

Sure. Yes, Peter we got John here. I'll let John jump on that.

Sure Peter. Good morning.

Scatter pricing remains strong in the first quarter. We are seeing on a net C3 basis scatter up 5% to 6% on HGTV and closer to 9% to 10% on the food network. And the pending business is pacing ahead of last year so all indications are the market is strong and should remain so for the quarter.

And any thing interesting in terms of categories?

The same categories, Peter. The endemics on HGTV lead the way. And on food network, we are still seeing strength in the financial category as well as the endemics there.

Okay, great. Thank you.

And Ken, one other thing on the interactive business, can you give us any added color in terms just the revenue momentum you are seeing in Shopzilla will be really helpful to better understand the turn you are seeing there if we could better see the progression in revenues in terms of yearly growth rate. And then short of related to that, the write-off at uSwitch, should we take that perhaps as an indicator that this business could be sold or discontinued some time in 2008?

I will let Joseph NeCastro comment on both those questions, Peter.

As far as Shopzilla, we are honestly very encouraged by the recent news there and sort of the change in fortunes that began in the fall. We are optimistic now that we are also cycling over some pretty weak quarters from last year but the fourth quarter was a strong story for us. And for the first time in several quarters we were experiencing double-digit growth in net revenue. I think we are safe to say mid-teens level on revenue growth there.

As we enter the year 2008, we continue to see that strength and we are doing a lot of things to insure that that is sustainable for us. So, I think we are all very optimistic about how things are going at Shopzilla. The team now there is doing an outstanding job of riding the ship and getting us on the right track going forward.

Over at uSwitch, we are focused on getting the costs down to where they need to be. We had a significant head count reduction last year. We are hopeful to avoid further but that is always a possibility as we size up the market.

There has been some recent volatility and in the energy market there that is always good for us but if it continues to be a share fight with some other switching companies that it is premature for us to say we would do anything other than continue to engage our competitors there and try to diversify some away from energy. That is our plan for the moment.

But at the moment, the revenues at uSwitch are at 100% related to the energy switching offering.

No. There are majority related but not anywhere near a 100.

What are other products that are up and running?

Financial services, insurance, telecommunication products.

And then you see revenue momentum in those categories?

Well, we saw a pretty good momentum in financial services but the UK like the US is experiencing its own issues in subprime, and personal loan, and the credit card business there. So things have been a little bit rockier lately but the trends there have been pretty good.

Okay, then the last thing, you are still committed to getting this to break-even no matter what in 2008, correct?

That is correct.

Great, Thank you.

Thanks Peter.

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

Thank you. A couple questions.

First, can you give us the sense of how much you are budgeting for that allowance you mentioned in the first quarter for the separation of the businesses.

And then, I know you test on the categories for HGTV being pretty much the same as they happen in terms of who is spending but I just wanted to check to make sure if anybody had any change in that so far for the start of the year in January. And lastly, if you could just comment on how much of a drop-off you saw in the newspaper business in December versus the previous months in the quarter and does that continue to deteriorate in January?

John I want to jump off the category question and then Joe the budgeting for the separation and Mark newspaper part after that.

Sure. Alexia, the categories of spending on HGTV continue to be supported a great deal by the endemics.

And now withstanding all that is going on around the housing market, we continue to see strength in the endemic category indeed even some improvements with some key advertisers and we understand why that is the case because HGTV is a very efficient place for people in our category to reach an audience that is passionate and predisposed. So, although budgets maybe changing for other media, we see the sheltered budgets continuing to be strong in HGTV.

Okay, Joe.

Yes, Alexia. On transition costs, we are budgeting somewhere in the $4 million to $5 million range for the first quarter, but I got to tell you that number is a little bit lumpy and some of that could shift out of the quarter because some of it is based on some consulting help we are getting in transaction related.

That is what you are including in your guidance?

Well in the guidance we got somewhere between four and five, couple of times.

Alexia, this is Mark.

On the December versus the full quarter, in December we did about two points better in terms of less decline if you want to pilot it that way. In December, the only other upcoming issue that maybe of interests is we are going up against, some very negative numbers in the first and second quarter of next year, to the tune of 9% or 10% in the first and second quarter of 2007.

So, we may be able to see some improvement on the last couple quarters performance but we are still very, very cautious and do not want to single to you that there is any light at the end of the tunnel in the short term.

Thank you.

Thanks, Alexia.

Our next question comes from the line of Fred Searby with JPMorgan. Please, go ahead.

Okay, great. Thank you.

A couple questions. One is the 10% to 12% in programming costs for the cable now just looked a little bit higher and just wondering if you could just highlight what is going on there. And then secondly, could you talk about the licensing deals, maybe I missed it in the press release, what the impact was on the close deal with food and where you stand on the other ones in your pipeline? Thanks.

Yes, Fred this is John. Starting on the close deal, the fourth quarter was very strong. It matched -- just about met all the expectations that calls had for the quarter and we are very pleased with the deal. Remind me of the first question?

I can do it. Fred, you were looking at the 12% cost increase at the network for the first quarter, that guidance.

Yes.

It is a little bit high relative to the other quarters. We just have some seasonality now. The spending on the first part of the year is higher. The rough translation to that is that we have some programming advertising and then actually during the year it reduces overtime so we are reaching the end of the amortization of certain programming costs.

So, programming in the first quarter is higher than any quarter in the year and that gives us the higher expenses on the network's quarter.

And do you think the writer strike is boosting ratings at the -- it looks like food has picked up a little bit -- I wondered what you thought the -- Yes, we are all interested in following the writers' strike.

The thing about our ratings, the strength that we are seeing today was really began during the third quarter with the remarkable success of the next Food Network star -- actually that was in the second quarter and then HGTV design star in the third quarter which we used as catapults to launch a number of new series in primetime and those series they proved to be quite successful and that success build throughout the fourth quarter and then it is continuing now in to the first quarter.

Whether or not the writers' strike is helping or not, I have no empirical evidence. The truth does not hurt but I suppose -- but the strength in the ratings that we are seeing really is tied specifically to programs that have been showing strong growth since they were launched in September.

Great. Thanks, guys.

Our next question comes from line of John Janedis with Wachovia. Please go ahead.

Hi good morning. Thank you. I guess Mark, based on the 1Q newspaper revenue guidance that looks like you were expecting a bit of a sequential improvement in the quarter from 4Q. You touch that, does that exceptionally comes sir or does the tone feel any better or maybe even worse from advertisers?

Well I could tell you it felt a lot better but it does not. We just had such steep declines in the first and second quarter of last year that much of what we are talking about now is related to going up against some pretty tough numbers from last year making [accounts] easier.

Okay, thanks.

But I do not -- Again, I will be very clear, I do not want to signal that we see any light at the end of the tunnel.

We are acting on expenses as though much of the difficulty will continue and much of that is concentrated in Florida and California. The lion's share, frankly, because of what is going on in California and Florida.

Okay, thanks. How you view the longer-term profitability potential, have you switched given the right time? Do you foresee a time when energy, in a good scenario would be half or less than half of the business? How do you think about that?

Well. John this is Joe. You cut out a little bit during your question. But I will guess, I'll fill in the blanks here and answer the question I want to answer.

As you know, as you look at the impairment, that is very much about your future prospects and your outlook for that business and also about the timing of that. We had a great year in 2006 on a full year basis, 2007 fell significantly, we absolutety lost money. So as you push out that curve you end up producing the value of that business no matter what the view of the long term is. It does so happens, of course, that our long-term view of that business is less positive than it had been.

And so, the combination of pushing it out and flattening the curves as you go, results in obviously a significantly lower value for that business. We are still positive on the market and the consumer prospect to that business and the fact that its got a very good, strong and recognizable brand name. So, we are going to continue to pursue that near-term.

What was the second question?

Well just related to that. If you look at a couple years, is this a business that will be more so on none energy or how are you thinking about it right now?

That is exactly how we are thinking about it.

And in fact, if you go back and listen to what we had talked about before, we are making a pretty good amount of cash flow and our plan was always to reinvest that into the launch of products so we could diversify that portfolio both with the UK and to even diversify it geographically beyond that. That was the plan all along, we our going to continue to pursue that but on a scale down basis since we just do not have the cash flow coming out of the business that we expected.

Thank you very much.

Our next question comes from the line of Craig Huber of Lehman Brothers.

Good morning. Thank you. Going back to your guidance you guys gave back early this December for your cable networks up 8% to 10% for revenues, can you just give us some more details on what your thought is for this year to the more predictable part that your affiliate fee growth for this calendar year please?

Craig, give me a second I'm just checking some of my back up here.

We are still looking at double-digit increases were in the team in terms of growth rate for affiliate fees for the year and that has not changed since we gave the guidance early on.

Okay and then for the cost fund for your cable networks for this year, you also want to talk about -- gets up 8% to 10% for this [media relationship], have you [waited] in the first quarter as you mention? Can you give us one more detail why it cost that much that the marketing program [indiscernible] what is it exactly?

Yes, Craig. You touchdown to of them. It clearly is focused on our strategy which is to strengthen our core brands, HGTV and Food, a very competitive environment requires us to increase our programming investment.

And then, our particular investment around all of our interactive business, our interactive ad revenue is growing at about a rate of close to three times, our linear advertising revenue, and so our dollars investments on interactive side yield an excellent result and we will continue to do that. And we believe over the long haul, the rate of growth can actually improve on the revenue side as we grow the interactive business through the strength of these grants and these categories.

Okay, last question, on Shopzilla and uSwitch, are you looking to sell one or both of those properties in the market ad try to sell them

No, we are not.

Okay, thank you.

Okay Craig. We have no more questions at this time.

Thank you operator. This is Tim Stautberg, I appreciate everybody taking some time this morning to join us. If you have any further questions, I will be available at 5139773826.. Thank you operator.

Ladies and gentlemen, this conference will be made available for replay afternoon Eastern time today until February 7 at midnight.

That does conclude our conference for today, thank you for your participation and for using AT&T executive teleconference service. You may now, disconnect.