E W Scripps Co (SSP) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the E.W. Scripps first quarter earnings report. For the conference all the participant lines are in a listen-only mode. However, there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) As a reminder today's call is being recorded.

Now with that being said I will turn the conference over to the Vice President, Corporate Communications and Investor Relations, Mr. Tim King. Please go ahead.

Thank you very much, John. Good morning, everybody and thanks for joining us on this call. We're going to start this morning with Tim Stautberg. He's the Senior Vice President and Chief Financial Officer. He will discuss the first quarter financial and operational highlights. He will cover some non-operating data and give you a little more color on trends for the benefit of your second quarter and full-year models. Then you will hear from Rich Boehne, our President and Chief Executive Officer. He will elaborate on what the recently announced sale of our licensing business means for Scripps. And then as usual we'll open the phone lines for your questions. We'll be joined at that point by the operators who run our local media businesses. That would be Mark Contreras, who is in charge of the newspaper divisions, and Brian Lawler who runs our television stations. Doug Lyons, our controller, also will be on hand for the Q&A.

Now, the commentary you will hear from our executives this morning may contain certain forward-looking statements and actual results for future periods may differ from those predicted. On page 11 of the 2009 Form 10-K, you can read some of the factors that may cause results to differ from what you are about to hear. If you are unable to stick with us for the duration of the call you an access a streaming audio replay by going to Scripps.com and clicking on the investor relations link at the top of the page. We'll have it there later this afternoon and leave it there for a few weeks. If you don't have a copy of the earnings release in front of you right now, you can use that same link to find the document and the financial tables. So with that, I will turn it over Tim Stautberg.

Thanks, Tim, and good morning, everyone. The story of the first quarter at Scripps is pretty much the same story you heard from our peers earlier in earnings season. The TV business is rebounding after an unprecedented step function decline in the first half of 2009. And while newspapering remains a business that continues to be challenging, there's plenty of evidence that conditions are improving in our markets. Our consolidated revenues in the first quarter were down 3% compared with first quarter of 2009. About 10 weeks ago we told you that year-over-year consolidated revenues in the fourth quarter of '09, excluding political dollars in both years, were down 10%. Being down 3% in the first quarter is hardly cause for celebration, but you can see why we're encouraged that the worst of the recession is behind us.

In the first quarter a year ago, we announced dramatic steps to reduce our expense line. Those initiatives started taking effect in March of last year and have significantly helped our financial performance since then. We'll talk more later about the expense line for the remainder of the year now that we are cycling against those reductions. But even in the first quarter of 2010 we were able to reduce our costs by more than 13% compared with the first quarter of '09. As a result, we reported a net loss from continuing operations after tax of $0.02 per share compared with a net loss of $3.84 in the year-ago period.

Now, there's noise in both of those numbers, particularly for the 2009 quarter, when we recorded a noncash impairment charge to write-down the carrying value of the goodwill and other intangible assets at the Scripps television stations, among other items. The 2010 figure includes restructuring expenses related primarily to our continuing efforts to reset the newspaper model for success on the other side of the secular and cyclical challenges newspaper publishers are facing these days. Excluding that charge, we would have reported net income of $0.02 per share in the first quarter.

Digging right into the results, all of our TV station operators breathed a sigh of relief as this year started markedly better than 2009. A year ago, our first quarter revenues were down 21% compared with 2008. Which is why the return to top-line growth in the fourth quarter, excluding political, was cause for modest celebration. We're pleased that we have built on that momentum in the first quarter of 2010 with revenue growth of 11% to 67 million. Importantly, as the press release noted, the momentum built throughout the quarter with revenues up 13% in March.

During the first quarter auto advertising was up 65%, retail was up 17%, and services was up 9%. Our previous earnings call occurred right in the middle of the Vancouver Olympics which generated a nice chunk of incremental revenue for us. Our three NBC affiliates, which are in mid-sized markets, all finished among the top 16 NBC stations in the country in terms of share of total prime time audience during the Olympics. We're proud of that outperformance and reaped the benefit of more than 3 million in Olympic revenue. It's worth a reminder that we do not have any CBS stations so we realized no bump from the Super Bowl or March Madness.

Year-over-year expenses in the TV division declined 4% for the second quarter in a row. That's the result of continued savings in employee costs partially offset by an increase in programming expenses. A year ago, as advertisers in key TV categories were reeling from the throes of economic uncertainty, we reported a segment loss from our TV division of $2.4 million. With the first quarter segment profit of 6.6 million, the division improved its profitability by nearly 9 million over the year-ago quarter.

Turning to newspapers, we're often gently chided about our cautious approach to calling the bottom in newspaper revenues. With limited visibility we're encouraged by the improving tread lines but we still face the reality that we're still generating less revenue this year than last. As was the case in the fourth quarter, the division's revenues declined but at a much slower rate than we've seen in a long time. We reported decline in total year-over-year revenue of 7.6%, about half the rate of decline in the fourth quarter. Ad revenues, which were down 20% on a year-over-year basis in the fourth quarter, were down just 12% in the first quarter.

The most noticeable improvement was in local advertising, which was down 11% in the first quarter, compared with being down 24% in the last quarter of 2009. And it was nice to get the declines in preprint and online advertising into the single-digits. Even classified advertising, which was down 18% year-over-year, showed improvement compared to the fourth quarter when it was down 26%. Within classified, year-over-year declines in the first quarter were 11% for auto, 19% for help wanted, 28% for real estate and 14% for all other. Online advertising fell by just 8% in the first quarter, but online advertising that is not tethered to a print product continued to grow impressively, rising 23% during the quarter.

In the first quarter our reported circulation revenue increased 4.9% to $32.1 million. But I need to remind you of the effect of a change in the nature of the business relationship between the Company and certain newspaper distributors in select markets that is detailed in our release this morning. Excluding the effects of that change, which does not affect segment profit, circulation revenue in the first quarter was down $443,000, or 1.5%. The big story on the newspaper side was the remarkable work of our operators around the country who delivered the fourth consecutive quarter of serious expense reductions. We finished the first quarter with 3100 full-time equivalent employees in the newspaper division, a decline of more than 13% from the year-ago quarter. Those reductions and difficult decisions relating to our employee compensation and benefits plans led to a 23% decrease in employee-related costs in the first quarter.

News print expense was down almost 40% from last year's first quarter with more than two-thirds of the savings coming from price and the balance from reduced volume. Total segment expenses in our newspaper group declined 19% resulting in newspaper segment profit of nearly 17 million in the first quarter. This compares with less than 3 million in the year-ago quarter. The big news from United Media came two weeks ago, and Rich will cover the sale of the licensing business in just a minute. But let me quickly touch on the financial highlights.

Year-over-year revenue fell by 15% to 19.6 million, and international licensing was the culprit. We've reduced costs 9% in the first quarter but that didn't keep pace with the revenue declines so segment profit decreased from 3.1 million in the first quarter 2009 to 1.4 million in the 2010 quarter. We expect the sale of the licensing business to close by the end of the second quarter, and that business will be reported as discontinued operations for all periods presented, starting with the second quarter earnings report. We will continue to operate our syndication business, which will generate about $2.7 million in revenue per quarter after the transaction.

Before we talk more about guidance, let me touch on some non-operating items. Our solid balance sheet has been a strong part of the Scripps story since the separation of the cable network businesses in 2008. The balance sheet that was in today's release indicated that we had cash and cash equivalents totaling 29 million as of March 31, and 11.4 million of long-term debt. During April, we used some of that cash to pay down our revolver to zero. Proceeds from the sale of United Media licensing, coupled with expected tax refunds will put the Company in a very strong cash position. It's likely that we'll make one or more voluntary contributions to our qualified defined benefit pension plan this year. We'll be working with our actuaries and advisers to determine the size and timing of those contributions. Ideally, we'd like to fund our qualified plans to levels where it's unlikely we'll need to make additional contributions in the future.

Now that we've completed construction of the newspaper facility in Naples, our capital expenditures are much lower. In the first quarter they totaled less than 3 million. As we look ahead, revenue trends from the first quarter generally speaking are continuing into the second quarter. We expect the rate of decline in newspaper ad revenues to continue to moderate slightly but our exposure to Florida and California may delay our full participation in the recovery that's underway. Newspaper expenses are a different story. The extraordinary discipline we've shown in cutting costs in the past four quarters is largely the result of decisions we made a year ago to adjust our employee compensation and benefits.

We've established a new level for such expenses but investors should not assume that we're going to extend those decisions with deeper cuts. In other words, we're forecasting our expenses to be only slightly below last year as we cycle through the dramatic cuts made last year. On the TV side, the recovery in advertising is expected to continue strengthening with ad revenue growth in the mid teens during the second quarter. This is fueled by improvements in many local and national ad categories particular automotive. More encouraging is our enviable footprint when it comes to political races.

We've said before that we think the level of political advertising we garnered during the 2006 and 2008 election years is doable again in 2010. But I need to make clear that the political calendar is heavily weighted toward the back half of the year. Charlie Crist's decision in Florida, for example, makes for a much more competitive general election but suggests the primary spending in the Sunshine State may be less robust. TV expenses, which were down in the first quarter, are expected to be up 10% in the second quarter as we cycle through cuts made last year to employee compensation and benefits and marketing, and we continue to invest in digital initiatives. Depending on the outcome of our negotiations with ABC related to the renewal of our affiliation agreements for our six ABC stations, it's likely that our programming expenses will continue to be higher than they were last year.

During the coming year, the Company will continue to implement the restructuring of certain functions and the standardization and centralization of key systems and processes in our newspaper division. This realignment and pursuit of operational efficiencies could result in restructuring charges of up to 15 million during the balance of 2010. As a reminder, for the full year we expect capital expenditures to be approximately $20 million. Depreciation and amortization will be approximately 46 million. Corporate expenses are expected to be about 32 million, and the Company expects to receive at least 45 million in federal tax refunds in 2010. Later today we expect to file our 10-Q which will have more information in it.

And with that, let me turn it over to Rich Boehne.

Thanks, Tim. Good morning, everybody. Scripps has been successful for more than 130 years because of its enthusiasm for change, risk, and evolution. In the past two years alone, we have successfully maneuvered through two structural realignments designed to position us as a leader and innovator in the future of news and information content. The most recent strategic realignment came just last month with the announced sale of our character licensing business which had been a good business and a value creator for Scripps for 60 years.

Brands like Peanuts and Dilbert animated this Company long before Scripps built up and then spun off Scripps Networks and all of its incredible personalities. But with the spin-off of Scripps Networks and the refocusing of this Company on news, journalism and local brands, it became clear that character licensing was outside our core and potentially more valuable in somebody else's portfolio. The Iconix Brand Group agreed and soon will be the licensing units new owner through a deal that works we think very well for all involved.

First, we believe the $175 million cash purchase price is an attractive confirmation of the value we have built there over the years. Also, the cash, as Tim talked about, will greatly enhance our already strong financial flexibility. And the buyer is keeping virtually all of our licensing employees, which is great news for them and their families. Finally, we expect the transaction to close by the end of this quarter, and there are no immediate plans to deploy the proceeds beyond funding up our pension plan a bit while contributions are so tax favorable.

We have been cautious towards major acquisitions and that will not change, at least in the near term. We will continue to invest relatively modest amounts of capital in the development of new audiences and new revenue streams. We're in a period of change in some chaos in our businesses, and it's probably a very good time to focus on building versus buying. A good example is the new mobile TV venture that we've entered into with a group of other broadcasters, and Brian can talk about that in a few minutes. Ending any long-term business relationship is never easy, especially when it includes saying good-bye to Snoopy and Charlie Brown. But it reinforces our determination to always look ahead and do what's right for our owners. Most important to keep in mind is that the strategy behind the licensing sale was entirely about our commitment to become the news industry's most innovative player.

Since the day we separated Scripps Networks Interactive nearly two years ago, our mission has been to position Scripps for leadership in the next season of news and public service journalism. Near term, strengthened by our financial flexibility, we will continue to invest modest amounts through the P&L to gain audience and revenue share in our current TV and newspaper markets. For example, Tim just talked about our TV expenses and that they may be up slightly for the full year. Those expenses are related to content, marketing, and the buildout of new revenue streams. Investments which we believe will yield long-term returns and strengthen our brands.

Underpinning everything we do is our faith in the long-term value of public service. We're determined to be the information partner that our audiences and our advertisers cannot live without. Community building we believe also builds value for shareholders so it's the driving force in our Scripps culture. That's a quick look at where our focus is directed heading into the summer of 2010. Operator, we'd be happy now to take questions.

Certainly. (Operator Instructions) First go to the line of Alexia Quadrani with JPMorgan.

Thank you. On your guidance for newspaper costs, which suggests down slightly in Q2, can you talk about the components behind that guidance, where you see newsprint pricing for example and what are the head winds you may be encountering besides the tough comps?

Alexia, this is Mark. We have enjoyed, as you know, a very positive environment in pricing for last couple quarters. Q2, and particularly Q3 and Q4, we anticipate rapid increase in pricing. As you know, that's all a matter of negotiation and really depends on how those go. But we're anticipating in our plans pretty steep ramp-up particularly toward the end of the second quarter all the way into the third and fourth compared to last year.

But newsprint expense probably still down given volumes, or is that not correct?

No, we're anticipating newsprint pricing up, particularly in the back half of the year, net-net. Obviously more than all of that driven by rate, obviously. We're still anticipating volume and consumption levels to be down, but the net effect of the pricing anticipation is going to be that the expenses would be up.

Okay. And jumping to TV for a second, in your guidance for the mid teens revenue growth in the second quarter, how much political are you anticipating in that?

Hey, Alexia, it's Brian. Let me get second quarter political. Maybe to a million. Most of our political is back-ended. I think we only had one primary, Ohio, in the first half of the year, so all of our other political will hit in the back half of the year.

Okay. Thank you very much.

Our next question is from Craig Huber with Access 342. Please go ahead ?

Good morning. Few questions. Concerning the proceeds you expect to get from the licensing sale, say you get $100 million, $110 million is that reasonable? But what I want to hear if I could is how much do you actually think will be put into your pension plan this year? I have some follow-ups, too, thank you.

Craig, it's Tim. I would say that we're working with our actuaries and advisers, as I mentioned. At the end of 2009, I think our unfunded liability was close to $120 million or $130 million, so I could see us making a contribution north of $50 million potentially. Again, we'll work with them to determine a level where we have a low probability of having to make future contributions, but an equally low probability that we'll be overfunded. So that's what we've got to work with.

Okay. Then on the -- a few questions. On the TV station front, if you took auto out of the mix here, in the first quarter, how did your TV revenues do?

Well, obviously automotive was a pretty significant driver with our pacing over 60, but I would tell you that I don't have the exact numbers broken out. I can probably break it out in the first few minutes here, but of our other top five categories, all five of those were up, three of them double-digits. So obviously our overall increase would have been up probably mid single-digits.

Okay. Then can you speak a little further, if you would, how did April, the month of April, do here for your newspapers? Is it up roughly -- down roughly 10%?

Craig this is Mark. We usually don't give monthly guidance, and I think we're going to stick to that for now, but we anticipate what we said earlier, the continuing reduction of the rate of decline will continue.

All right. Lastly, if I could, can you just update us on where your newspaper advertising pricing is at for the quarter year-over-year, I guess for both retail and cost categories?

Craig, I have retail. This is Mark. I have retail but not classified. But if you looked at total local down about 10 or 11%. Nine points of that -- linage was down about 9%, rate was down about 1.25. I don't have classified but we can dig that up if we need to.

Okay. Great, thank you.

(Operator Instructions). We'll go to the line of John Kornreich with Sandler Capital.

Yes, just a basic question about the TV business. While your TV margin showed big improvement, I don't understand how the margins are so low, and they've always been low at your company. Even in that look back to '06, which was a strong year all around, and a political year, your margins were in the low 30s. They've been trending down since then. I think last year they were in the teens at best. I mean, how do you earn $6 million, even in a seasonal low quarter, when you're in 10 different markets? There's something endemic about your TV business that says this is a low margin business.

Let me start. Hey, John, it's Rich. Thanks for the compliment, by the way. One thing to touch on in our current configuration, I will let Brian talk in a little bit more detail, as we separated the Company, we had retransmission agreements in place, and those will continue to be there for some time. That takes many points of margin out for us and will until -- or as these roll off in the years ahead. Some of the other details I will let Brian talk about.

Thanks, John. Obviously margin is something of a high level of focus as we look to continuing to run these operations. Rich talked about retrends and the fact that we have not general our full value of retrends relative to our competitors. So there are several margin points that are associated with that. I think if you look across our properties we've made significant investments in some of the top programming in the industry, things like Oprah, Wheel, and Jeopardy. I think there's opportunities there to reconfigure our commitment to syndicated programming and get those more in line that I think those are great properties and have been for a long time. But I think our margin has been shrinking over time as it relates to them and so we look forward to improving our bottom line as it relates to our syndicated programming. Then I think if you go back and look at the history of our Company, as we were growing the cable networks, there were investments that were better made in the cable networks than they were in terms of creating efficiencies within the broadcast division. I think as we've separated our Companies we've gotten very focused on that. Last year we introduced two traffic hubs. We introduced a graphics hub. I think we're very proactive right now in terms of trying to rescale our business for efficiency. It should allow us to become more competitive as it relates to margin.

John this is Rich again. We agree with you. We'll rebuild the margins. At the same time in the short term we believe there's an awful lot that's changing in the local TV business, and one of the best ways to build margin over time will be to take market share and build local audience. So while we have been watching expenses and trying to get the margins up short term, we're also trying to look out and say where can we grab big chunks of audience and big chunks of revenue and have the leading margins in those markets for the long term.

What should programming costs be up this year and next year, purchase programming costs?

They will be flat.

Flat this year?

Our syndicated programming costs will be flat to last year.

Even though they were up, what, 12% in the first quarter?

Some of that included in that is some accruals as it relates to our ABC negotiation which is ongoing at this point but we are accruing some money assuming that business model is going to change. And that's the line by which we're applying that.

Okay so flat this year and, what, hopefully flat again next year?

No, I would expect a reduction in 2011. Our Oprah contract, which is four markets, expires in September 2011, and whatever we put there would not be at the same level of expenses Oprah was.

Thank you.

Thanks.

And to the presenters, no further questions in queue.

In that case we thank you very much for your help today, John, and we thank everyone for tuning in.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.