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Scripps Networks Interactive, Inc. (NYSE:SNI)

Morgan Stanley Technology, Media & Telecom Conference

February 26, 2013 3:45 pm ET

Executives

Joseph G. NeCastro - Chief Administrative Officer, Chief Financial Officer and Principal Accounting Officer

Lori A. Hickok - Executive Vice President of Finance

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

Okay, good afternoon. My name is Ben Swinburne, Morgan Stanley's media analyst. And once again, if you want to see important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, they're all available as a handout at the registration area and on the Morgan Stanley public website. And with that, I'm pleased to have next to me from Scripps Networks Interactive, Joe NeCastro, Chief Financial Administrative Officer; and Lori Hickok, EVP of Finance. For those of you who may not be aware, Scripps is a leading developer of lifestyle-oriented content for television and the Internet, including such popular brands as HGTV, Food Network, DIY, Cooking Channel, Travel Channel and so forth. Joe and Lori, thanks for being here.

Joseph G. NeCastro

Thanks, for having us.

Question-and-Answer Session

Benjamin Swinburne - Morgan Stanley, Research Division

So maybe we can take a step back and ask you to talk about the evolution of the company over the last couple of years. You've made some acquisitions, you've invested quite a bit in content. Take us through that process and sort of what you see as the outlook for the company today in terms of building value for shareholders.

Joseph G. NeCastro

Sure let me start with that. I guess it all started with the spinoff from The E.W. Scripps Company back in '08, and since then, we had a couple of priorities that we've been executing against. The first was to get bigger domestically, so we started with the acquisition of the Travel Channel a couple of years out of the spin or 1.5 years out of the spin. And then from there, started to work against the, probably the primary area of the company that we had -- didn't take advantage of and that was international distribution of our networks. And we've done that through a JV with the BBC called UKTV and then also we acquired Travel Channel International. And since then, we've been working on looking at our capital structure and the use of cash and probably the biggest event there was the buyback programs that we've executed, one for $1 billion and then we re-upped for our second $1 billion dollars. We're in the middle of executing that right now. So as we look forward though, I think it's going to be somewhat more of the same. Our biggest value creation opportunity, we believe, is to fulfill the promise of the Travel Channel and to have that network resemble the other 2 large networks that we operate, the Food Network and HGTV. I think if we do that, we will have created an enormous amount of value. And then secondly, is to continue the international development for the company, I think, is the second biggest opportunity. And then of course, most people know we have minority partners in both the Food Network and the Travel Channel and we'll be looking to bring in those pieces over time, if and when it makes sense to do so. So lots ahead, lots of ways that we think we can continue to create value for shareholders.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. One of things that Scripps has been doing over the last, really, since your history in the television business, is driving advertising share gains and advertising growth well ahead of your peers. And there's sort of a -- there's an obsession with ratings in the market right now. I'm sure you feel that sometimes from the investor base. But what -- why is it that you tend to seemingly consistently outpunch your peers in terms of growth and taking share and it appears to go beyond just the simple math behind ratings?

Joseph G. NeCastro

Yes. Look, I think we do feel that acutely. Obviously, we're an advertising-focused company but we're in a really good spot in terms of the position we occupy in the industry. We are -- we operate niche networks essentially, but they're big enough that they really matter to advertisers. So there's no place to get an audience like we can deliver for advertisers, upscale female audiences interested in trying the products that they see advertised on our networks and a very active and engaged audience. And then we do that through the best programming we can and then we turn that over to the best ad sales team in the business. A guy named Steve Gigliotti has run it for -- well, since the mid '90s and he's got one of the best teams out there. And his team has been together for many, many years, headed by a guy named Jon Steinlauf -- and of course, I could go down the list, but developed just tremendous relationships with advertisers who stay with us through thick and thin.

Benjamin Swinburne - Morgan Stanley, Research Division

Joe, is there a part of the advertising revenue that's sort of sponsorship or less tied to ratings performance year-to-year and make good in all of the things we focus on?

Joseph G. NeCastro

Yes, absolutely. I think Steve's history and Ken's in the broadcast world have brought a different view to the cable business and we do many things that get you sort of above-average performance. Probably the biggest one is the way we run contests, promotions and we have the biggest giveaways on cable. The biggest of course, is the Dream Home Giveaway but we have 3 other home giveaways and we're actually moving in that direction for Travel now, for a vacation of a lifetime. And these are ways that you can work more closely with advertisers. You can sort of get away from the CPM game, provide great value to advertisers and it's one of the things that builds loyalty in this relationship over the years.

Benjamin Swinburne - Morgan Stanley, Research Division

You've been invested a lot in your content over the last several years and that's in a landscape of increasing competition. So I'd love to hear from the 2 of you, how you think about the competitive dynamics out there in lifestyle, particularly in the food space and how you invest behind your brands to sort of try to stay ahead of...

Joseph G. NeCastro

I'll start that and maybe Lori can jump in too. When you're a top 10 network, competition is not just in the same genre anymore. So we -- Food Network is consistently a #8 or #9 network. HG is threatening to break into the top 10 from time to time and Travel, knock on wood, is moving up the ranks as well. So that means you're competing with sports, you're competing with The Voice, you're competing with The Walking Dead, you are competing for viewers against many of these big -- the bigger networks and bigger players. That's said, there is more lifestyle content. There's no home for lifestyle content like there is HG or Food and, soon, Travel and the other networks we have. So while we welcome the competition because it actually drives interest in the categories and that has actually helped us over the years, I think. And it's just really what forces us to stay sharp and deliver the best value for our viewers.

Benjamin Swinburne - Morgan Stanley, Research Division

Any comment you'd make on the level of sort of new hours of programming and the kind of cost per hour trends over time which is a big focus for folks as well?

Lori A. Hickok

Yes, it really is and it wouldn't be a shock to anyone in the room that hours are going up for us, but they're going up because of Travel, not because of our existing fully-distributed networks. And as we have success, that will continue to happen at Travel. We'll keep investing, so that's a good thing. As far as our HGTV, DIY, Cooking, pretty much, we've got that down as far as the hours, what do you need for repeats, those sort of things. But as Joe said, we are seeing some costs rising, probably more the Food space but nothing that gives us concern. A little bit of that is mix as we look at tent poles and more character programming. But again, we think it's more short lived and moderating over time.

Benjamin Swinburne - Morgan Stanley, Research Division

How do you come to the view of sort of what's the right number of hours? I feel like that's sort of a little bit of a moving goalpost. But given there's so much change in how the consumer is watching television, less linear, more on-demand, how do you guys think about optimizing the schedule?

Lori A. Hickok

Well, I think it's a couple of things. One, is just ratings, how are we performing. The other I think, is just history. We've -- over time if you go back where we've taken the hours down a little bit, we've seen a lagging impact. So I think over time, we've gotten comfortable with what's right repeat, what's the amount new premieres coming. We do, do different things to shake it up with stacking and scheduling and those sort of things. But we found on our fully distributed, a really nice mix -- give or take, you might moderate up and down depending, but not significantly.

Benjamin Swinburne - Morgan Stanley, Research Division

Do you think that the number of new hours on the network will go up over time if you take kind of a 3- to 5-year view? As a result, do you feel like you're in a pretty good steady state?

Lori A. Hickok

As we sit here today, taking out Travel Channel, I feel pretty comfortable with where we're at. I think it's more about what are we putting on the air, what is the content.

Benjamin Swinburne - Morgan Stanley, Research Division

The other big sort of high-level thing I wanted to ask you about was international, which, Joe, mentioned before. You've got your partnership in the U.K. I know you've spent -- you and the team spent a lot of time looking for opportunities outside the U.S. and it's been a big theme at the conference as we've interviewed a lot of executives from the media industry. Give us a sense for the Scripps International story today and where it's going?

Joseph G. NeCastro

Absolutely. Look, I think one of the reasons you keep hearing about it is that there is an appetite globally for U.S. content. Specifically in the lifestyle space, there's nobody that produces globally, that produces 2,000 hours plus of quality lifestyle programming. And whether or not it's that specific programming or just those formats, there is -- definitely there's been a very warm reception to our programming. So I think that's the underpinning of it and we always believed that we have this library that we exploit domestically and we had anecdotal evidence through our licensing program that people like the programming. But we weren't getting any upside from it. We're just licensing the programming. So that was the impetus and that's where we started. And obviously, we -- our first big move in international was to create this partnership with BBC where we bought Virgin Media's 50% stake in UKTV. Happy to report, it's had a tremendous year last year. It was -- in its 20-year history, it was the best year for ratings for that group of assets and it was the fastest growing commercial group of networks in the U.K. this year. So hats off to the management team there. We're delighted with our partnership and we -- hopefully, we'll see more out of that partnership. Beyond that, obviously we launched our own Food Network in the U.K. It is now the top lifestyle network in the U.K. and that is a mix of U.K. programming, Nigella and Jamie Oliver and others that actually are household words over here as well but are British chefs. But they're really taking a liking to Guy Fieri and Ina Garten and Giada di Laurentiis, some of the staples from our own Food Network. So it is very gratifying to see that. And then beyond that, of course, we rate well in South Africa. We just launched some FLN [ph] on full sets, so we're doing a lot of organic growth throughout EMEA and we're working very hard. We're starting some organic distribution through in Asia, looking at some good opportunities there. And then of course our third priority area is Latin America, and hopefully we'll have a breakthrough there in the not-too-distant future.

Benjamin Swinburne - Morgan Stanley, Research Division

Is the sort of optimal outcome for you, Joe, to own networks in all these markets versus licensed content?

Joseph G. NeCastro

Well, it would be great if we thought we could own everywhere, but there are regulations that prevent us from doing that in many attractive markets. So we do look at joint ventures where outright ownership or a control position is not possible. I think we certainly flipped our view on its head. Our top priority is full ownership and then control position and then minority position and then last, there are markets where we will only be able to do either licensed programming or go in a broadband way with some of our content. And that's sort of our order of priority.

Benjamin Swinburne - Morgan Stanley, Research Division

Got it. Let's segue a bit into the advertising part of the equation. I know you had your earnings call relatively recently but any update for us on the ad market and how it's feeling like particularly with scatter pricing in Q1?

Lori A. Hickok

Well it's very healthy. Tone with our advertisers are upbeat, optimistic, so we really are feeling good about where we're at. Cancellation rates are at or below normal levels. So where we sit today, we're feeling just as good as we did a few weeks ago.

Benjamin Swinburne - Morgan Stanley, Research Division

Terrific. Is the calendar upfront at this point basically complete and anything you can share with us on how that went?

Lori A. Hickok

It basically went well. I think we're probably still wrapping up, but it's probably about the same as far as the amount of inventory that we've committed, pricing is good, competitive, top of the peer set, which are again -- he talked about Steve Gigliotti and his team, they do a fabulous job.

Benjamin Swinburne - Morgan Stanley, Research Division

Terrific. One of things I think that was discussed on the call was perhaps, some benefit on the home improvement side. I'm almost afraid to say from housing -- find some wood to knock on, but can you give us an update there on that particular piece of your ad customer base, which is obviously significant?

Lori A. Hickok

Well, it's very strong. We're seeing strength on advertising side. We're also seeing -- I'll put a plug in here for HGTV, that we're seeing great audience growth there, great trends. I think it's a combination of this better feeling around housing, the uptick that we're seeing there. Not to mention that Kathleen Finch and the team there are putting on some great new programming and some nice scheduling of those programs. So we're seeing nice double-digit, actually, growth in lots of day parts at HGTV, which over time, translates to nice revenue growth in the top line.

Benjamin Swinburne - Morgan Stanley, Research Division

Right. And to your point Lori, that's both ratings and also sort of what's happening with your advertiser budget?

Lori A. Hickok

Yes, both. Yes, they're feeling very optimistic so we're seeing strength there. We're seeing strength in other places, too. So again, I would use the word healthy.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Joe, you mentioned Travel Channel is a big opportunity and one of the things everyone's looking out towards are the distribution agreements that come up on that network. Can you walk us through how we should be thinking about those renewals and what the strategy for the company is as you move through them timing wise?

Joseph G. NeCastro

Yes, certainly. We've completed a round of agreements in 2012 and I think 2013 has a very light calendar. We did have some Travel Channel renewals scheduled in '13 and '14, which we have extended so that they will fall more in the '14, '15 range. And so it is a relatively light calendar in terms of renewals. Once we get midway through '14, I think you'll start to see a lot more activity there.

Benjamin Swinburne - Morgan Stanley, Research Division

And I think you mentioned and this goes back a bit to your Analyst Day, but a bit of a 2-step process on the renewals. Is that still how you're thinking about, pretty back-end weighted?

Joseph G. NeCastro

Absolutely. I think that's true. Look, we would have loved to believe that Travel Channel would be a blowtorch by the end of '12 and we'd be able to negotiate better rates. But the reality of it is, we did no harm. We got some extensions on those agreements. We've put them out into an area where we think we're -- we're starting to see now, we're starting to see some ratings traction. If it gives us another year to 18 months to get that to a much stronger level, then I think we'll be better off.

Benjamin Swinburne - Morgan Stanley, Research Division

One of the themes at the conference, maybe perhaps more on the cable satellite side than your business are programming costs, your revenues and the pressure it's putting on that side of the business. Do you think the perception that sports and retrans are causing increased pressure on what -- on nonsports, non-retransmission negotiations like yourselves that, that's becoming a bigger issue in the industry, is that correct? And if it is, how do you sort of navigate that going forward?

Joseph G. NeCastro

I'll take a swing at that. I think on a macro level, absolutely. There is a limit, ultimately, to what consumers will pay. And to the extent sports keeps grabbing a bigger piece of it and retrans, then there is a smaller pie left for everyone else. If you believe that there's an upper limit, and certainly, I think everyone does. The issue for us is probably not as acute. Like it or not, only -- first of all, 30% of our revenue is affiliate fees and the rest is advertising, so that's number one. Secondly, we are, relatively speaking, a bargain if you compare what it costs to -- for our content relative to the viewership it generates and the advertising opportunity that, that translates to for the operators. I think it's a long time before the MSOs solve their programming cost problems on our backs, I think.

Benjamin Swinburne - Morgan Stanley, Research Division

Maybe sticking along the MSO theme but a more positive discussion, how are you thinking about TV Everywhere rights, monetizing those? I thought it was an interesting comment on the call, we were talking about measurement from Nielsen and there has been some news, I think, on that front since the call. Can you update us on those 2 pieces of the story which are obviously related?

Lori A. Hickok

Yes. Well, we are obviously always thinking about TV Everywhere and we always start -- we know we delayed 1 year, trying to get through so some big negotiations that we like the market that we're in. We like the ecosystem, but we do believe that we have to get past the set boxes and be wherever the consumers are and our first play is working with our distribution partners with their TV Everywhere and those initiatives. Measurement being one of the issues longer-term, but we -- that will get solved. We believe that will be solved and then the good news is, because we own our content, then we're looking at those opportunities further out and still be some announcements with SVOD, electronics sell-through as we go through the year. We're busy and we're in conversations on that. So all good, so that's -- we focus on that quite a bit, which is probably not a shock to this audience.

Benjamin Swinburne - Morgan Stanley, Research Division

So it sounds like philosophically, you are willing to tap into both the SVODs pool as well as your TV Everywhere kind of tradition...

Lori A. Hickok

Yes, but I think it's a matter of windowing, right? I think that we've talked about this before and just maximizing your revenue at all points and experimenting around the fringe because again, I think starting with where we are today with our subscription model with cable TV distributors, it's a nice model but we know that you've got to go where the consumers are ultimately.

Benjamin Swinburne - Morgan Stanley, Research Division

Sure. How big of a benefit is measurement, in your mind, to other devices? And it sounds, based on some of the press reports, that Nielsen will be getting there by the end of this year, I think.

Lori A. Hickok

I think it really -- again, I think the business and the models aren't all there, but to have to -- the measurement has to get there because it's more eyeballs, which is really for our advertising in the play. So when you go out to your advertises, you're going to sell multi platforms multi and you can aggregate those dollars. So the measurement issue needs to be solved. I think it will be solved in -- those dollars I think are going to be bigger and more important 3 and 5 years from now.

Benjamin Swinburne - Morgan Stanley, Research Division

Let's segue a bit on the cost side of the equation. You gave guidance for the year for expense growth, 12% to 14% on cost of services, 7% to 9% on SG&A. Help us think about kind of a longer term trajectory of expense growth? Because clearly, you're investing this year but help us think about whether this is an unusual year, or something that will continue over time?

Lori A. Hickok

Yes. Well, just to make sure everyone understands what we're talking about. Cost of service, for the most part, is really our investment in the screen. It's program amortization with a few other things thrown in and we will continue to invest in the screen. What's driving a lot of that, which we've talked about, is Travel. And that will continue for the next year or 2 and we think that will moderate over time. But we don't run our business based on just trying to get to a short-term margin. We're looking at the long term. On the SG&A, when you look at it, it might be a little confusing but when you slice and dice it, what you've got in there is some noise around some of the investments that Joe was talking about. You've got international in there, you've got some digital initiatives that we're doing that are again, longer term, something that we're monitoring very closely. When you strip those things out, our costs are increasing closer to 5% and we really think over time, those will be more inflationary than anything else. But it's really getting the noise out when we're looking at seeds and how we're planting for the future.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Let me ask the required balance sheet capital allocation question, make sure I check that box and then we can -- right, we can open it up to the audience and if you have a question, please raise your hand and wait for a microphone. Joe, it's to you. I think the end of the year, basically [ph] about a turn of debt leverage, more or less. You've got a jump [ph] on the business that generates a lot of cash flow, you mentioned some minorities. Can you help us think about what happens from here in terms of buybacks, dividends and also what the opportunities are to deploy capital other ways?

Joseph G. NeCastro

I think the most important point is that it's something that we watch closely and we discuss with our board at every meeting. Because we're in this funny position a little bit, from a timing point of view, we have 2 relatively large deals for us that are in the offing, we think, and have some likelihood of coming to fruition. One we know will, that's the sub of the Travel Channel and the other is something that could happen, which we we've been talking for a very long time, which is the Tribune's holding in the Food Network. So we are maybe a little more cautious than we might otherwise be, just in the near term, as we think about making sure we're flexible enough to execute those deals. That said, we're committed to returning capital to shareholders. We know we're in our second $1 billion program, we're going to continue with those. The continuation of those programs is not dependent on whether or not we do a Travel Channel deal or a Food Network deal whatsoever. It may affect the pacing over time, or we may interrupt it while we're working on it but when we run scenarios, when we look at our ability to generate cash, we look at the strength of the balance sheet now. There's no reason that we couldn't do all 3. And we obviously look to continue that. You saw that we raised our dividend recently. We have a target in mind there, we're going to keep that. Over time, it may make sense to raise but I think that will probably be on the other side of these transactions. We'd look at that again. But we have a policy and we'll stick to it. And I think over the next 2 years, some of these things will play out certainly, and we'll be in a much -- we'll have much more clarity around returning capital.

Benjamin Swinburne - Morgan Stanley, Research Division

This is the first conference I think where I interviewed you where Tribune is actually out of bankruptcy. I guess it's been 20 years. Any update on that other -- any update on that other than what you just said?

Joseph G. NeCastro

You know as much as I do.

Benjamin Swinburne - Morgan Stanley, Research Division

All right. Let's see if we have any questions from the audience. Please wait for a microphone. We've got one up here in the front.

Unknown Analyst

Joe, you guys have talked about expanding CPMs at certain networks, I think, specifically on Cooking Channel. I mean, is there opportunity there? Obviously, there's a disparity between broadcast and cable, but between your networks, what kind of opportunities does that represent?

Joseph G. NeCastro

I think obviously, we're focused on that. At least 2 or 3 times a year is when we get to the upfronts and then we watch it very closely during the scatter market. We have a history of outperforming the market and a lot of it goes back to the relationships we've got, the sectors we're in, the demos we deliver. And I think we'll continue to look to expand that advantage over some of our peer companies. But I think the direction is right, the trends are behind us in terms of our -- create a little bit of tailwind for us on that. And obviously, we look to maximize that every time.

Benjamin Swinburne - Morgan Stanley, Research Division

We probably have time for one more. That one out there?

Unknown Analyst

Could you give us some more specific metrics or milestones that we can monitor as you see improvement in your Travel Channel? It sounds like you're making good progress, but what should we be looking for?

Joseph G. NeCastro

Sure. Well, it really is -- it's about ratings and I know that typically, information that you all look at tends to be total-day related or the way we look at it is related to the specific demographics and also some time spent viewing, the cume for the network. There are a number of metrics that we watch that are very familiar to anybody who watches media. So we're not going to be looking at things that you don't see. I think the way we think about programming is a little bit differently. Obviously, we're not programming, say, like some of the other networks now. We're not hits-driven. We're trying not to be hits-driven and we want a, sort of, steady diet of things that support the brand and live within the brand promise and sort of bring the screen -- bring to the screen our view of what travel ought to be. We -- look, we define food for television. We designed -- we defined home for television, and we're looking to do the same thing for travel. Once we do that, then I think we know we will have built a great brand and hopefully, we can exploit the brand across other media after that.

Benjamin Swinburne - Morgan Stanley, Research Division

All right. Well, we're out of time. Lori, Joe, thank you so much.

Lori A. Hickok

Thank you.

Joseph G. NeCastro

Thanks, Ben. Good to be here today.

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