E W Scripps Co (SSP) 2008 Q2 法說會逐字稿

Welcome to the second quarter earnings report conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded. I would now like to turn the conference over to Tim Stautberg, Chief Financial Officer, please go ahead.

Good morning all, and thanks for joining us. By way of explanation, this will be our last conference call as a consolidated Company that includes National Life Style television networks and global transactional based interactive businesses. As you know Scripps Networks in our interactive media segment, Shopzilla and uSwitch, were spun off July 1st into a separate publicly traded Company, now called Scripps Network Center Active. But since the EW Scripps Company, as it was previously structured, was in tact through the second quarter, we're reporting operating results for the period one more time, on a consolidated basis. The two companies will begin reporting earnings separately in the third quarter. And as a precursor, as I am sure you noticed, Scripps Networks Interactive issued its own press release this morning providing some forward guidance..

The senior management teams from both the EW Scripps Company and Scripps Networks Interactive are participating in this morning's call. We will start the conference call today with some comments from the CEOs and CFOs of both companies. Then we will open it up for questions. As always, we will keep our prepared remarks brief, because we know you have a busy schedule. We promise to be done well within the hour. Before we begin, let me introduce the members of the two senior management teams who are here with us on the call. Joining us from the EW Scripps Company are Richard Boehne, President and Chief Executive Officer, Mark Contreras, Senior Vice President of Newspapers, Bill Peterson, Senior Vice President of our TV Station Group, Doug Lyons, our Vice President and Controller, and Tim King, Vice President of Investor Relations.

From Scripps Networks Interactive are Ken Lowe, Chairman, President and CEO, Joe NeCastro, Executive Vice President and CFO, John Lansing, Senior Vice President and President of Scripps Networks, Lori Hickok, Senior Vice President of Finance and Mark Kroeger, Vice President of Investor Relations. Let me remind you that if you prefer to listen in on the web you can go to www.scripps.com, click on the shareholders link 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, 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 the EW Scripps Company's 2007 form 10-K and the information statement filed for Scripps Networks Interactive on June 11. With that I will turn it over to Ken.

All right, Tim, thank you. Good morning, everyone. As always we appreciate you joining us. For those of us around the table here in Cincinnati this truly is one of those bittersweet moments that gives you pause. For me personally, I have had the extreme pleasure and privilege of serving as the Chief Executive Officer of EW Scripps Company for much of the past decade. Now we have accomplished much during that relatively short period of time, creating new media businesses and in the process, substantial value for our shareholders. The time had come, though, to move in a new direction, to set our national life style media businesses and global interactive services on a new path, free to grow and be reborn, so to speak, as a more distinct investment proposition for our shareholders. We accomplished that goal on July 1st, with the successful spin-off of Scripps Networks Interactive from the EW Scripps Company.

And with a lot of hard work by a lot of very dedicated people throughout our organization, I might add. Now it is my extreme pleasure and privilege to be serving as the Chairman, President and CEO of America's newest media Company. A Company that also happens to be the undisputed leader in creating, developing and delivering life style content via cable and satellite television, the internet and other emerging platforms. Our success in building powerful brands that resonate with media consumers is reflected once again in the stellar operating performance of our television networks and Internet businesses during the quarter just completed. Growing audience trends at HGTV and Food Network, coupled with strong pricing in the scatter advertising market resulted in solid revenue and segment profit growth. Affiliate fee revenue also grew strongly, demonstrating the success we have had building our relationships with MSOs and direct-to-home satellite operators..

And our newer network, particularly DIY, are making significant contributions as viewership and advertising sales build in concert with their rapidly expanding distribution on cable and satellite systems.. By just about every measure our life style media businesses stand out from the crowd, both in terms of engaging original content and industry leading operating performance. Our transactional based internet businesses also had a very good second quarter, continuing a rebound that started really in the latter half of 2007. Shopzilla, BizRate and uSwitch, the online comparison shopping businesses that combine our interactive service business segment, all showed marked improvement over the prior year. Our ability to effectively monetize growing user traffic at Shopzilla and renewed interest in energy switching in the UK drove double digit revenue growth and contributed to improved segment profits.

So, we begin life as a separate publicly traded Company on several high notes.. Solid operating results at all of our businesses, engaged in growing audiences on television and the internet and powerful media brands to recognize the world over, Scripps Networks Interactive is poised for growth and truly the creation of long-term value for our shareholders. With that, let me say it is my privilege now to turn it over to Richard Boehne, my successor as President and CEO of EW Scripps Company. As many of you know, Rich has really been there from the beginning. A real champion of change and always cognizant of our responsibility to shareholders, Rich has been instrumental in the Company's transformation over the years and has truly been an avid proponent of our decision to separate the Company. He's now taking on the awesome challenge of guiding our local media businesses through some very difficult times. But if anybody in the industry can come up with some creative solutions for local media, it is Rich Boehne. Rich?

Thanks, Ken. Good morning, everyone. I am going to spend just a few minutes focusing on the factors that are going to influence future investment decisions at the EW Scripps Company. I am often asked, and we were asked quite a bit on the recent road show, probably saw, we saw many of you, if the recent conditions in the local media markets have led us to second guess our decision to separate into two companies. To the contrary, what we're seeing today and what you're seeing today illustrates exactly why we proposed and advocated this spin-off. I will admit we didn't foresee the severity of the cyclical economic downturn that is affecting some of our markets, particularly Florida and California, but nothing about the secular challenges surprises us at all. Our results and those of our peers and local media well demonstrate the wisdom of decoupling our national businesses from our local businesses.

The newspapers and broadcast stations that are confronting head-on the underlying fundamental challenges that are causing so much angst in this industry and in the market as well. What is important for you, the owners, to know is that we decided to relaunch the EW Scripps Company as a Company focused exclusively on local media because we believe there will be a long-term opportunity to increase the economic value of this enterprise. That is what you all pay us to do. So, we have set up this Company, properly focused and well capitalized to be among the few who can play offense during a period when value should accrue to the strongest players in each local market. That could be a newspaper or it could be one or two of the TV stations, but without a doubt it will be whoever captures the largest share of the audience and the local ad dollars on the growing internet platform.

Don't get me wrong. The next few years, they are going to be bumpy and uncomfortable as these markets adjust and as we shift resources and carefully allocate our capital for the best long-term return. But even in the weak part of the economic cycle, Scripps brings a few advantages to the table. One, we're concentrated in favorable growth markets, primarily southern and southwestern and western growth markets, with attractive long-term prospects. We like mid-sized growth markets. Two, we have very low debt, which affords us the financial flexibility to seize opportunities to increase our share in attractive markets and at the same time return some cash to our owners in the form of dividends.. Three, we have the right attitude, built on a firm belief that where there is angst there is opportunity.

And we have faith in the valve of local media markets and intend to use this period of difficult transition to our and to your advantage. That is the view and the enthusiasm that the team on the EW Scripps Company side brings to the job each and every day now that we have sharpened the focus of the EW Scripps Company. Now I am going to turn it over to Joe and let him talk about Scripps Networks Interactive.

Thanks, Rich. Good morning, everyone. As usual I am not going to give a full recitation of everything that is in the press release. It is all there for you to see, so no need to go into that level of detail on the call. I do want to give a little color, though, on the quarter as it relates to our life style media and interactive services businesses and provide some context for the forward guidance that we issued this morning for Scripps Networks Interactive. Tim Stautberg will talk about the local media businesses and provide some context for the EW Scripps Company's financial forecasts in a couple of minutes. As for Scripps Networks Interactive, we begin life as a publicly traded Company coming out of a very solid quarter at both of our business segments. Total revenue at Scripps Networks grew 13% and segment profit was up nearly 10%, continuing a long standing pattern of sustained growth.

Growing audiences at HGTV and the Food Network, combined with strong pricing and scattered advertising market and improved affiliate fee revenue drove these very strong results. The good news wasn't limited to our flagship networks though. DIY network had a very good quarter as well with the top-line up a very strong 28%. Now that it is a metered network, DIY is demonstrating its ability to deliver and engage audience to advertisers as we promised. By just about every measure, our life style media businesses are moving in the right direction.. At our interactive services businesses, the second quarter was very good for Shopzilla and uSwitch, as our focus on improving fundamentals at both brands is paying off nicely. Combined revenue was up 13% year-over-year and segment profit more than doubled. The success we have had monetizing growing user traffic at Shopzilla and the renewed interest in energy switching at uSwitch are driving improved results.

Now quickly a little color on the third quarter. At Scripps Networks, as we indicated in the guidance we offered ahead of the spin-off, we're expecting total revenue growth during the third quarter to be in the 5% to 7% range. Now keep in mind that the third quarter of 2007 was enormous for us, up 16% from the prior year. Setting us up for some difficult comps this year. Also, our forecast takes into account all the inventory that we expect the Olympics to take up. On the full year, as we noted in the release, we still anticipate that our life style media segment will finish at the high end of our forecasted range of 8% to 10% growth. As for the upfront, it looks like we're going to end up on the top end of the range in terms of CPM increases and they will be committing slightly more inventory this year than last, because of the strength in pricing.

And I will let John provide a little more color on that on the upfront when we get into the Q&A. one more note on Scripps Networks. we're anticipating about $30 million in capital spending for the third quarter. Most of that is for an expansion of our operations headquarters in Knoxville Tennessee. We will be breaking ground on that project, which we have talked about in the past, during the second half of this year. Looking ahead at Shopzilla and uSwitch, we're on track to finish the year well within the range of $55 million to $65 million in segment profit as we forecasted in December of last year. The rebound that we have seen in the first half of this year looks to continue into the third quarter, when we expect segment profit to be in the $8 million to $10 million range. One note of caution, though, Shopzilla's sponsored link contract with Google ends on October 31st.

We're in active discussions was them right now. But depending on where we end up, we could see some impact beginning in the fourth quarter. In the meantime, Shopzilla is enjoying solid growth in Europe as well as domestically and we're working hard to diversify sources of traffic, strengthen our competitive position with both consumers and merchants. Likewise at uSwitch, profits have been surprisingly stronger than expected, allowing us to pursue a number of initiatives to help us diversify the business away from its reliance primarily on energy switching. Our goal is to better position both Shopzilla and uSwitch as valuable consumer services that can support sustained growth. That is a quick look at Scripps Networks Interactive and with that I will turn it over to Tim to talk about the EW Scripps Company.

Thanks Joe. The operating results for our local media businesses in the second quarter reflect the same forces at work across the newspaper and broadcast TV industries. You're well aware of them and in the interest of getting to your questions more quickly, I won't recount them here. Turning to the third quarter forecast, we're expecting more of the same for the Scripps Newspaper Group. All three classified categories are expected to be down 20% or more as the cyclical forces further compound the challenges we were facing from secular shifts. We are forecasting to be flat on expenses compared with last year, although we certainly hope to do better than that. Reductions in employee costs and other cash expenses are helping to defray an anticipated 30% increase in newsprint prices. As I said, we hope to do better.

We have been and will continue to explore ways to reduce the fixed cost structure of our newspaper enterprises. The challenges we're facing across our portfolio of newspapers, managed solely by us, are also affecting our JOA newspapers, particularly in Denver. As a result, we expect our third quarter results from JOA newspapers and other partnerships to mirror those in the second quarter. On the TV station front, the news is much better, thanks to the political season that is upon us. It helps to have strong TV stations in Florida, Ohio, and Michigan. We also expect to see some political dollars flow into our stations in Kansas City and Phoenix. All in, we're expecting a 15% to 17% increase in total revenues from our TV station group in the third quarter. Although difficult to predict, we still expect political advertising revenue will reach $40 million or more for the full year. TV station expenses will be at mid-single digits in the third quarter, as we continue to invest in our online and interactive enterprises.

Corporate expenses, excluding costs incurred as a result of the Scripps Networks Interactive spin-off, are expected to be about $11 million in the third quarter. Third quarter earnings per share from continuing operations, excluding separation costs, are expected to be between $0.10 and $0.15. Now based on the stock price of the Company subsequent to the July 1st spin-off of Scripps Networks Interactive and the continued affects of a weakening economy on our newspaper advertising revenue, the Company will test goodwill, long lived assets and equity investments for impairment as of July 1st. If it is determined that the fair value of those assets are less than their carrying values, a noncash charge for impairment will be recorded in the third quarter. Such a charge is not included in the earnings per share forecast provided above..

Finally, let me turn to some housekeeping items. As part of the spin-off of Scripps Networks Interactive the EW Scripps Company drew down $60 million under our new 5-year revolver, unsecured revolver. We typically carry $10 million to $15 million in cash on hand, so our net debt is around $50 million. Capital expenditures during the second quarter for the combined companies, pre-split were $38 million. The figure is $23 million for the businesses that comprise the EW Scripps Company after the spin. During the second quarter, we did not repurchase any shares. And on July 16th we completed the 1 for 3 reverse stock split on shares of EW Scripps, bringing our weighted average shares outstanding down to approximately 55 million. With that, we're ready to open up for your questions. Operator.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from the line of Peter Appert from Goldman Sachs. Please go ahead.

So the -- Joe I heard what you said with regard to the reason why your offering what seems to be fairly cautious guidance with regard to the third quarter on the network business, but even so it seems particularly cautious. So maybe this is the proper time for John to tell us what happened in the upfront market and are there any glitches from a ratings standpoint that we should be aware of in the third quarter.

I would be happy to have John answer that question.

Good morning, Peter.

Good morning.

Let me begin by saying that our full year guidance is exactly where we said it would be for the last 12 months. The upfront is coming in, I believe, strong. I think we will be at the high end of our peer group. I think it is safe to say on CPMs we will be be in the mid to high single digit growth. We're about 50% finished with our negotiations at this point. When you think about the third quarter, there are two dynamics. First of all, our comps are fairly difficult compared to last year's third quarter, which had growth in the high teens in terms of percentage growth. Plus, in addition to that, we have all of the Olympic inventory in August on the variety of NBC cable outlets that is suppressing the scatter market place substantially. So the combined effect of tougher comps with a challenging third quarter causes us to be somewhat conservative in our forecast, but again, our full year and our back half continue to support the growth that we have been projecting all along for the entire year.

How about scatter pricing currently?

Scatter pricing has come off a little from a torrid pace in the first and second quarter, but it is still in the mid-single digit range, range when you compare scatter to scatter and it is still pacing at 20% to 25% better than last year's upfront. But, Peter, let me also talk about ratings at our networks because you asked about trends there. Food Network in June had the highest rated month in the history of the network. In fact, last week Food Network had the highest rated week in the history of the network. It continues to post 20% increases in adults 25 to 54. And its median age, happily, has dropped now to 45 from over the last couple of years when it was hovering closer to 50.

Similarly, HGTV, while somewhat flat on 25 to 54 impressions, it is increasing high teen percentage increases in the younger skewing demographics, 18 to 34 as well. And then DIY, as you heard Joe mention, continues to be very, very strong. When you consider everything that we have within our control, which is the programming, the marketing, the ratings, delivery, all of those key indicators, are doing exceptionally well. It is really the market place that we're just a bit cautious about. But as I say, even with those dynamics in the market place, we're continuing to perform at or above our peers in the upfront negotiations and the scatter negotiations and we are holding firm with our guidance for the full year.

Great, thanks John. What percent of the inventory will you sell then in upfront this year.

We're usually right around the 50% range, Peter. Last year we held back a little bit because we anticipated, I should say our ad sales teams led by Steve Gigliotti anticipated strong scatter pricing and they were right. This year they are anticipating that the scatter may come off a bit and it is a time to put more inventory into the upfront. We're taking a few more percentage points than 50% this year in the upfront in anticipation of the scatter pricing not necessarily being as torrid as it has been in the past year.

I got it. Thank you. One last thing. The interactive component of the cable networks, John, how did they look in the second quarter?

If you think about where the -- often we will have questions, you and I have spoken, Peter, where does the economy really hit Scripps Networks, particularly our endemics. Our endemics have held up exceptionally well through the housing economy on the cable channel. We have seen some small endemic hit on the interactive side for us, simply because interactive advertising is much more fluid. It is cancelable up to the last minute. And we're also seeing a flight, if you will, of advertising back to television during tough economic times. And with that, we saw a second quarter ad growth that was only in the high single digit range for interactive. On Scripps Networks now are all of our associated Websites.

Right.

Now the good news is that coming out of June, which was probably the weakest month of the year for us on interactive ad sales, July is proving to be one of the stronger months. So we're seeing a rebound. July looks to be, at this point, at least a 15% growth on interactive ad sales. And I think that is a fair projection for what the quarter will do.

Great, thank you.

Thank you. Our next question comes from the line of Alexia Quadrani from JPMorgan.

John, I just wanted to follow-up on some of your comments on the scatter market. Would you expect that 20% to 25% premium range through the remainer of Q3 or should we assume it will soften in August when some Olympic programming starts. And then you also said you obviously are expecting some slowing in the scatter, that is why you're selling a bit more in the upfront. If you can give us any color on what your expectation is the scatter may be going out a bit further.

Sure Alexia. The effect of the olympics is mostly due to a glut of inventory. And so it is a one-time only suppression on pricing that I think will wash through the system and then be out. So it will have, if you will, a one month somewhat artificial affect on the overall scatter pricing in the quarter. That's one of the reasons we're a little bit cautious on revenue growth in the quarter. As we look to ahead, we're not -- it isn't a dramatic shift from the scatter pricing that we have seen in the first and second and third into the fourth. If you think about it, there has really been for us, we're in the 10% to 12% CPM growth range in the first quarter. In the second quarter we were in the high singles and in the third quarter we will be in the mid-to high singles.

So it has really been an incremental slow down. And I think there could actually be a, at least a flattening of the slowdown or even a little bit more price pressure in the fourth quarter coming out of the olympics, because there will be two dynamics in place. One will be the post olympic demand that could push pricing somewhat in a stronger direction just because many advertisers will be on the side lines. And then there will be the post political advertising, when all the political revenue washes through the local TV and the national spot business, which will push some advertising on to the cable platform and, I think, support pricing in the fourth quarter. So I am actually somewhat optimistic that the fourth would not be any worse than the third. In fact, perhaps a bit better.

And then if you can give us any commentary on GAC. It is really not showing the same impressive growth as the other networks. What your thoughts about that network.

GAC is doing everything that a great network in the country music sector can do. And the issue there is there are some ratings erosion I think based on a -- the -- the summertime, I think, has one effect on GAC in terms of viewing of music videos. And then I think there is the effects that music videos can be seen on other platforms as well. So there is a continuing competitive issue that GAC faces. So our team in Nashville, I think, has done a fantastic job of developing content along with our ad sales groups that is both relevant to viewers and to advertisers in such a way that it has allowed them to work competitively against those forces.

And then just one last question on the newspaper side. I guess the outlook on what do you think, how committed I guess the Company is to the current dividend given the ongoing weakness in that segment in the quarter and I guess your guidance as well. And is there the possibility of maybe selling a newspaper property or two or is there really no market for that right now?

Alexia, this is Tim. I will -- I will tackle, I guess, the dividend question and maybe Rich will want to jump in on the portfolio question. From a dividend standpoint, coming out of the chute our philosophy is to target about a 50% payout for dividends of free cash flow over time. So we will be engaging in a conversation with our board in two weeks. And looking at certainly the forecast over the next couple of years. And we will come out of that with an announcement of what the quarterly dividend is going to be. Going into the road show we were anticipating what is now a $0.78 to $0.80 a share dividend. So we will see if that holds up, but we will be engaging in a discussion about that with the board.

Alexia, it is Rich. I think, in general, if you look at how Scripps has operated, we have always tried to be disciplined around the portfolio and make sure that it is healthy and if it needs to be pruned or added to, we want to do that. And I think that will continue to be the case on the EW side. Having said that, most of our newspaper markets are good. I mean they are, they are long-term growth markets. In some cases I think the markets in Florida they are being harder hit than the industry average but we will take Florida all day long, long-term. Those are great growth markets that will have real household growth over time. So at this point we don't have any markets that demand that kind of attention or need to be pruned at this point. But, like I said, we will always keep our eyes open and try to be disciplined about it.

Thank you.

Our next question is from the line of John Janedis from Wachovia.

Can you guys talk about what you're seeing in the comparison shopping business? It looks like traffic may have slowed somewhat at Shopzilla in June. I am just wondering if you have detected a change in habits of the consumer due to the economy. Thanks.

John, this is Joe. Hard to read that exactly. You saw the results from Amazon today and you wrote about what happened with ValueClick and we seem to have some conflicting information there. Our sense is that there is a very modest effect but certainly not terribly pronounced. We had very, very strong session growth in the second quarter. We continue to have decent session growth in July and through the month of July. So it is not what I would refer to as any kind of alarming slow down. There are some seasonal ups and downs and we watch that very closely, obviously, but we're not seeing anything that I would say is sort of indicative of the economy slowing down. If anything, we also expect there would be some strength related to people not wanting to get in their car to go shopping and also sort of a hunt for better prices in this environment.

Okay and that makes sense. Joe, on that front in terms of the back end of the year, can you just clarify the numbers. I think on the June 3rd release you guys had said that you're looking for a $35 million to $38 million income or EBITDA from the segment. I think today's implied guidance is $19 million to $29 million. Does that mean that your expectations for the holiday season have been tempered somewhat or am I missing maybe some of the numbers.

I'm not sure which numbers you're looking at. It would imply a lighter number in the quarter, probably in the fourth quarter than you would have had modeled. I would say that it is more like mid-20s, than high teens. But that would imply sort of flatish to down slightly. Again, as I mentioned, it is not that we have any less confidence in the -- in our ability to handle the traffic or even in the traffic arriving itself, it is just that we have an ongoing discussions with Google over the expiration of our agreement with them and I think what you're seeing there is an abundance of caution.

The other thing that is going on is at uSwitch we have authorized some reinvestment in the fourth quarter. They have outperformed our expectations in the first half and continue to outperform. So, we have discussed and approved a number of initiatives to reinvest and a lot of that will find a home in the fourth quarter. So for the full year we still expect those business to be where we said, if anything, maybe even a little upside from that. And what -- what you're seeing in the back half of the year are, again, some caution on Google and some deliberate reinvestment at uSwitch.

So it is fair to say you feel pretty good about those businesses going forward then, right.

Yes, we do. We always have our eyes open and these businesses can change very quickly and Shopzilla is in the thick of things and any kind of upstream issues that we experience there could have an effect. But I like where they are positioned and I like the way they are performing very well.

Great, thank you very much.

Thank you. Our next question is from the line of Craig Huber from Lehman Brothers.

Thanks, this is [Jenny Lesser] asking on behalf of Craig Huber. I just have a couple of quick questions. First, for classified advertising in the quarter, what is the percent change for help wanted, for auto and then for real estate. And then also how are newspaper advertising revenues tracking so far in July compared to a year ago, thanks.

Jenny, this is Mark Contreras. Auto in the second quarter was down 20, sorry, down 16.3%, help wanted down 39%, real estate down 29% and total classified -- let me get it for you. Total classified down 21% and we're anticipating a continuation of that in Q3 and a slight improvement in Q4. But only slight.

Okay.

Does that help?

Yes. And then I guess for the rest of, besides classified, could you give some more color on how local and how national newspaper advertising revenues are tracking so far in July?

We don't have a sense for July or really for how the third quarter is going to shape up other than for the entire quarter, but we don't directionally have a sense right this minute.

Okay. Thank you.

Other than to say total ad revenue in the third quarter is going to look a lot like in the second.

Okay. Thanks.

Our next question is from the line of Anthony DiClemente from Lehman Brothers. Please go ahead.

Thank you for taking my questions. I have two questions. The first is for John and the second one is for Ken. First on affiliate fees. We're assuming that the HGTV affiliate increases that you guys had wrapped up were for low to mid-teens growth initially in the first few years of the contract and then coming back down towards CPI towards the end. On the other hand, when you look at something else, like FOX news, I think that they were able to get, in some cases, a one-time re-rating of those fees where they get them to triple, in some cases, the initial year of the new contract with the MSOs. When you look at the Food Network and the negotiations that you have coming up at the end of 2009, can you help us get a sense for what type of growth we should expect? Is it just the type of acceleration that we saw at HGTV or can we expect something more like a one-time jump or re-rating of the affiliate fee level or higher.

And then the second question for Ken, sorry for being long-winded. Of course there are probably four or five large media conglomerates that would love to own your Company. I think there are many reasons for that. The Food Network renegotiations obviously could be part of that strategy. The question is, if any of the CEOs of the large cap media companies called you today, unsolicited, with interest in buying Scripps Networks Interactive, is that a conversation that you can entertain legally, without in fact violating the tax-free nature of your July 1st spin-off. Thank you.

First, I would like my general counsel to stand beside me while I -- no. Anthony, first off let me repeat what I have been saying publicly, recent forums whether it was Bloomberg or CNBC or recently out on the road show, we did not execute this spin-off for the purpose of selling the cable networks interactive businesses. They are not for sale. If you will excuse the analogy, it is somewhat flattering to have a house that everybody wants to buy before you even put a for sale sign in the front yard. There is no "for sale" sign. That does not prevent rumors. That does not prevent innuendo and there is nothing we can do about that.

To the contrary, we feel very strongly, because of the team that John Lansing has in place across all of our networks, that we have a tremendous opportunity to continue to not only increase shareholder value but grow these brands, especially as we move content to other platforms beyond cable networks. So we're very excited about the opportunity to continue to grow shareholder value. And therefore, tax issues not with standing and you're right, there are complications there, which would prevent us from doing anything in the near-term. We believe that, if anything, we can increase the valve of these properties over the coming weeks and months. So I will just say, again, what I have been saying, they are not for sale, but we can't control the rumors. John?

Yes, thanks, Ken. Anthony, to your question on Food Network. Food Network today is the fastest growing, one of the most popular networks in all of cable and it is, in my opinion, severely underpriced and undervalued in the distribution community. So your question, will we be looking in '09 at a reset of the rates and the answer is yes, we will.

Great. Thanks for taking my question.

Our next question is from the line of David Clark from Deutsche bank. Please go ahead.

Okay. Thank you, good morning. A couple questions for Rich and Tim and Mark. First, I guess could we get a bit more color on the flat newspaper cost guidance for the third quarter given the 13% to 15% revenue decline you're looking for, it seemed a bit surprising that costs wouldn't come down mid-single digits. I guess if you could give us a bit more color on that. If there is something unusual about your cost situation or have you just set the bar low. And then a second question, on online for the newspapers, I think it is down 8%. I am assuming that is the result of a loss of classified up-sell. I guess if you could tell us both what percentage of your online for the newspapers comes from classifieds and then also how did the non-classified piece grow for you in the quarter. Thank you.

Go ahead, Mark.

Dave, this is Mark. Let me start with the expense question. So far year-to-date our expenses are down about 8% and our FTEs are down about 9%. We frankly anticipate much of that to continue. But what is really, frankly, affecting us the most severely is the really meteoric increase in newsprint prices in the back half of the year. We're looking at clearly 30% plus in terms of price. And we're doing a lot to try to mitigate that in terms of web width reductions and the amount of usage of newsprint. But it is primarily and singularly the increase in the rate of newsprint that is going to effect our expense numbers. We obviously hope to do better than those but that newsprint hit is just -- it is really, really difficult.

Let me just tell you a little bit about the online revenue piece. If you split apart the online revenue that is still tethered to print, which is primarily classified, it was down about 17%. If you looked at the pure play source of revenue, it was up about 26%. So clearly that source of online revenue that is tethered to print is going with the decline in ad lineage of print. We're focusing all of our efforts going forward on pure play, primarily. And again, that is about 8% to 9% of our total ad revenue base in the aggregate. 68% of that, of our online is still tethered to print, 32% is pure play. We're trying to get that pure play to 50/50 as quick as we can. I hope that is helpful.

Yes, very helpful, thank you. And then just one quick follow-up on the cost question. Does your cost guidance include anticipated severance. I know it excludes transition, spin related costs but does it include severance.

Dave, it does not.

Okay, thank you.

Thank you. Our next question is from the line of Harry DeMott from King Street Capital Management please go ahead.

Hi there. Quick question just on the television segment there. You have your numbers out for Q2 and you obviously just gave guidance for Q3 of plus 15 and plus 17. If you were to exclude the political stuff, what would those two quarters be or what was it historically and then what would the guidance be, let's just say, if you exclude political? Just trying to get a sense of what the underlying average retail business is doing.

It would mirror what we put out for second quarter. It would -- which was what? Local was down 7%. National was down around 7.6%. And those -- that weakness carries into third quarter.

Okay that's just -- and is that -- obviously that's just coming across the board. If they are both down at roughly the same thing.

That's true. And we're seeing considerable weakness in automotive, which is a very important category for us. It was down 15% in the quarter. Actually, the only top five category that we saw growth in was travel and leisure, which was up nicely, but still not enough to mitigate the other weakness.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Edward Atorino from Benchmark.

Hi. Since you are talking about ad categories, could you talk about what kind of strong or weak categories you might be seeing in the networks business, Scripps Networks business. Also, you sort of addressed this indirectly, has there been any impact of the housing slump on Food Network advertising? And then lastly, could you talk about your programming cost plans at the Scripps Networks? And then would you go over again the comments you made regarding Shopzilla and the impact or positive or negative on the economic slowdown and the slump in retail.

Okay.

Ad categories, programming costs and housing slump.

Okay, let me start with ad categories. We are seeing some downward pressure, as you might expect, in the financial category. in consumer package goods category. Automotive, which is also important for Scripps Networks, has been under pressure on the domestic side. Imported automotive has actually been all right. Our endemics for HGTV, which leads to the question you asked about the housing slump --

Right.

Have actually been fairly strong, particularly the big box endemics. And when you think about it, HGTV, the real substance of HGTV is about improving the experience of living within the home you have. And so to some extent, the housing dilemma has drawn A, more audience to HGTV; and B, more advertiser interest in the specific category related to home improvement. Okay.

Understand, yes.

And what was your third question for me, I'm sorry.

So, you talked a little bit in response to a previous question about the Shopzilla's performance in the slow retail environment. Are people using it more or are they simply hiding under the table? What have you seen in the experience of Shopzilla related to either the housing crisis or the gasoline crisis.

Sure, this is Joe. And it is hard to pin anything directly on anything that is going on with housing or with the energy costs. I would say we have been pleased with the traffic. Any kind of interruption in traffic or, as John Janedis pointed out, a slight slowdown in July had more to do with technical issues related to sort of some upstream rule changes and clarifications, I would say, from the big search engines. So what we're seeing, we think, is pretty steady traffic through this period and it may be that people are doing more shopping online because of higher gasoline costs on the one hand and maybe doing a little less shopping because of feeling the pinch of the economic slowdown and retail slowdown. But, I would say it is pretty much steady as she goes on traffic that we feel pretty comfortable with the way we're operating there.

Last year's fourth quarter for Shopzilla, as I recall, was pretty strong.

It was.

Does that mean you got tough comps or were you just coming off a real poor previous year or both.

You mean --

Looking at this year's fourth quarter versus last year's fourth quarter, is it a tough comp environment or was last year's strength due to the fact that the previous year wasn't all that good.

Both are true. And I think, as I said, we're very confident of our ability to perform in the fourth quarter. We are cautious just because we have a change coming in our contract with Google, but I think we're very confident of our ability to perform and to convert our traffic into revenue.

I hate to prolong this but could you at least update me on what the Google situation is all about, maybe everybody else knows what it is, but I don't.

We have a contract -- we're coming off of a three-year contract with Google for our sponsor link business. That expires at the end of October. And so we're, at the moment, we're negotiating a renewal with Google.

On the rates and stuff on it.

All of that.

All of that. Probability of success?

We will have a deal with Google if we want one.

Okay, thanks.

And there are no further questions. I will turn it back for closing comments.

Thank you, operator. This is Tim Stautberg signing off. I would like to remind you if you have any questions after the call, for the EW Scripps Company you can contact Tim King at 513-977-3732. Tim serves as Vice President of Investor Relations for the EW Scripps Company. And for Scripps Networks Interactive questions, Mark Kroeger at 513-977-3827. Thank you, operator. I think you have some closing comments.

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