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Tribune Company (TRB)

Q2 2006 Earnings Conference Call

July 13, 2006 9:00 am ET

Executives

Dennis J. FitzSimons - Chairman, President and Chief Executive Officer

Donald C. Grenesko - Senior Vice President/Finance and Administration

Scott Smith - President, Tribune Publishing

Ruthellyn Musil - Investor Relations

Analysts

Lauren Fine - Merrill Lynch

Steven Barlow - Prudential Equity Group

Lisa Monaco - Morgan Stanley

Craig Huber - Lehman Brothers

William Bird - Citigroup

Paul Ginocchio - Deutsche Bank

Peter Appert - Goldman Sachs

Debra Schwartz - Credit Suisse

Frederick Searby - JP Morgan

Christa Quarles - Thomas Weisel Partners

Alexia Quadrani - Bear Stearns

John Jendis - Wachovia

Brian Shipman - UBS

Michael Kopinski - AG Edwards

James Goss - Barrington Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2006 Tribune earnings conference call. My name is Gregory and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Ms. Ruth Musil. Please proceed, ma’am.

Ruthellyn Musil

Good morning, and welcome to our conference call to review 2006 second quarter results. Our opening remarks will be brief, and then we’ll take your questions. We plan to finish within the hour, as is our regular practice.

Speakers this morning will be our CEO, Dennis FitzSimons and Don Grenesko, our Senior Vice-President and Chief Financial Officer. Other members of management are also here for Q&A.

Turning quickly to our press release, Tribune’s second quarter diluted EPS from continuing operations of $0.53 on a GAAP basis includes a couple of non-operating items. Our release contains the information so you can make a meaningful comparison to first call estimates.

Before turning the call over to Dennis, just a quick reminder that our discussion may include forward-looking statements that are covered in greater detail in Tribune’s SEC filings. Now here’s Dennis.

Dennis J. FitzSimons

Thanks, Ruthellyn, and good morning, everyone. Before talking about second quarter results, let me just recap some key events of the quarter. As you know, we’ve embarked on an aggressive and deliberate program to realize improved value for all Tribune shareholders. There are three parts to that program. We made substantial progress on all fronts.

So let me briefly cover: first, the recapitalization; second, sales of non-core assets; and then third, our plan for improving performance at our newspapers and TV stations.

On the recap, yesterday, as planned, we purchased 10 million shares from the McCormack Tribune foundation at a price of $32.50. Along with the successful completion of our tender offer on June 26th for about 45 million shares, our leveraged recapitalization is on track. Our intention is to now repurchase the final 20 million shares on the open market by the end of the year.

We’re also moving aggressively on the sale of non-core assets. As you know, we’ve already announced the sale of our Atlanta and Albany TV stations. We recently sold the majority of our Time Warner stock, that stock not tied to the PHONES. We’re also making progress on the sale of the L.A. Times San Fernando real estate and a few smaller assets. So at this point, we’ve identified more than $300 million of our $500 million target. This is just step one.

As we’ve said before, step two is about improving operating performance of our newspapers and television stations over time. As you can see from our second quarter results and recent news from the network and cable up-front, near-term advertising environment, it remains challenging.

In publishing, going to results, revenues were even with last year, although the Easter holiday falling in March this year had a small negative impact, we saw strength at many of our newspapers, particularly in Florida. The L.A. Times was up slightly. This was offset by continued weakness in Newsday’s preprints. Excluding Newsday, total ad revenues were up 2%.

Let me cover the situation on Long Island. As you know, in March of 2005, Newsday severed a relationship with an outside sales agent over an ethical breach. That sales agent took some clients with him. So regaining the preprint customers that Newsday lost has been a top priority. Now the efforts of the Newsday sales team are paying off.

Walbounds, a large grocery client, will be back in Newsday starting next week for exclusive preprint distribution on Long Island and most of New York city. This is an important breakthrough in that Walbounds is a major client and Newsday’s ad sales group will use this momentum to bring other clients back. In addition, we’ll begin to cycle through this preprint issue in the third quarter.

On the interactive front, we continue to show strong growth, with second quarter revenues up 27% over last year. In addition, TI’s online traffic was up 24% year over year during the second quarter. Our network of more than 50 websites averaged over 14 million average monthly unique visitors during the quarter.

CareerBuilder had a great second quarter, with network and affiliate revenues up 42% over last year. CB reached 22 million unique visitors in June, and it had a 40% share of total listings, compared to Monster’s 37%. We continue to have positive discussions with McClatchy about their newspapers participating in CareerBuilder.

Expense controls remain tight. Publishing cash operating expenses were about flat for the second quarter compared to 2005, and that’s despite a 12% increase in newsprint prices. FTE’s in the quarter were down about 1,100, or 6% from last year.

Turning to broadcasting, second quarter revenue for the TV group was down 1%. Several stations finished the quarter ahead of last year, and this includes L.A., which was up in the high single digits, and several of our six Fox stations. Given the current ad market and pacing, we expect third quarter TV revenue to be down in the low single digits, with July being the weakest and September the strongest month.

In its inaugural up-front, again in that relatively soft network environment, the CW had a good sales performance, which was in line with management’s expectations. While we don’t benefit from up-front sales, it’s certainly a good indication of the confidence advertisers have in the CW. Our station group will benefit from a schedule that will combine the best of the WB and UPN. We feel that ratings increases in the 25% range are very achievable.

Our Philadelphia and Seattle stations, they do not participate or will not be CW affiliates. They will be affiliated with Fox’s My Network TV beginning this fall. At the same time, we’ve also extended the term of our six existing Fox affiliates, or those agreements, through June 2012.

On that note, let me turn it over to Don for some additional detail on the quarter.

Donald C. Grenesko

Thanks, Dennis, and good morning, everyone. On a GAAP basis, our diluted earnings per share from continuing operations of $0.53 compares with $0.72 in the second quarter of 2005. These results include the following items:

  • Stock-based compensation expense of $5 million, or $0.01 per share;
  • A gain of a penny per share related to our portion of a one-time favorable income tax adjustment recorded at CareerBuilder; and
  • A non-operating loss of $0.03 associated primarily with the change in the fair value of our PHONES and Time Warner stock.

Combined, these items reduced our earnings by $0.03 per share in this year’s second quarter. Conversely, 2005 second quarter results included a non-operating gain of $0.13 per share.

Because of the pending sale of our Atlanta and Albany TV stations, operating results for these stations have been reclassified as discontinued operations. As noted in our press release, these sales are expected to result in a $90 million pre-tax book loss included in discontinued operations, almost all of which relates to a portion of the TV groups’ good will being allocated to these stations. Nevertheless, the $200 million of gross sale proceeds was a very attractive multiple of cash flow.

Our expense control remains tight. Excluding stock-based compensation and special items, consolidated cash expenses were about flat.

Turning to some additional detail at publishing, classified real estate was up 29% in the second quarter, with strong gains in both print and interactive. Los Angeles and Florida continue to be our strongest markets, as we saw in the first quarter. Auto trends were also similar to the first quarter -- down on the print side with healthy growth online.

Recruitment was off about 3% this quarter because of declines in print. Online showed good growth across almost all markets.

Retail trends improved versus the first quarter, with most of the upside in L.A. National was down due to lower movie and auto advertising.

Looking at the major markets, Chicago was lower due to national auto and financial advertising, two categories which had a very good performance a year ago. L.A. was up slightly for the quarter with strength in real estate and retail advertising.

As Dennis mentioned, Newsday continues to be impacted by preprints and weakness in classified auto.

Circulation revenues fell by 5% for the quarter, as individually paid did not perform quite as well as it did earlier in the year. We expect third quarter results to be a little better, consistent with our goal of stabilizing individually paid circulation.

Cash operating expenses and publishing were flat, excluding stock-based compensation and special items. Higher newsprint and postage costs were more than offset by lower compensation and benefit expenses, primarily due to staff reductions.

Turning briefly to broadcasting and entertainment, the group’s cash operating expenses were up 3%, or $8 million, primarily due to higher programming costs. Corporate op-ex expenses, excluding stock-based compensation expense, were down $500,000 due to staff reductions and other savings.

Turning to the equity line, income was about $26 million in the second quarter compared to $12 million in the second quarter of 2005. The increase reflects improvements at the TV Food Network and CareerBuilder and includes a $5.9 million one-time favorable income tax adjustment related to CareerBuilder. In addition, we are no longer recording losses for the WB Network.

Second quarter interest expense rose by 34% to $47 million due to higher interest rates and debt levels. Excluding the PHONES, debt totaled $2.6 billion at the end of the second quarter, and now stands at $4.4 billion following the 55 million shares we just repurchased.

With that, I will turn it back to Dennis.

Dennis J. FitzSimons

Thanks, Don. In closing, let me just go back to our next steps following the share repurchase. It’s clear that the key for us is top-line revenue growth. We have initiatives in place designed to make that happen. Our plans also call for $200 million in cost-savings over the next 24 months, but let me stress there’s more to this plan than just cutting costs.

We intend to redeploy resources to reinvest for growth in interactive, as well as in our newspapers and targeted print products. Our Internet strategy is to build a portfolio of rapidly growing successful online business using a proven national network, local affiliate model. We have a track record of success in this, as demonstrated by CareerBuilder.

In addition, we intend to make our local newspaper sites more robust, including increased use of video and user-generated content. We intend to expand Metromix, an entertainment vertical that has been very successful here in Chicago to other markets, and acquire additional businesses like forsalebyowner.com that will add to our portfolio of faster-growing Internet businesses.

As we said before, by 2010 we expect more than double the percentage of publishing ad revenue coming from our fast-growing Internet businesses to the 12% to 15% range.

We’ll reinvest for newspaper and targeted print growth as we’ve done with RedEye and AM New York, and combined revenues for those two publications were up 45% last year.

Finally, we’re also now better positioned for future years in TV. In addition to the launch of the CW this fall, we recently announced a purchase for fall 2007 of Two-and-a-Half Men and Family Guy. Both of these shows target a difficult-to-reach young male demo. John Reardon and his group did this in a very disciplined way, so our programming expense increases will be very modest.

So while we’re focused on quarterly results certainly, we also know that executing our longer-term growth plan will be essential for our success. Our major market newspapers and TV stations provide a great foundation for our growing interactive business, while at the same time delivering the mass audience that we believe will always be important for advertisers.

Now we’d be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Lauren Fine with Merrill Lynch. Please proceed.

Lauren Fine - Merrill Lynch

Thank you. Just a couple of quick questions. On the newspaper side, I’m wondering if you have any interpretation of what is happening in help wanted throughout the industry, where it seems to be weakening -- if you think this is just a blip near-term, and it’s going to strengthen again, or if we’re just looking at weakness going forward?

Then, I’m wondering if you could isolate what the decline was in print ad revenues for the quarter? Then I’ll come back with one last question.

Dennis J. FitzSimons

Sure, Lauren. Scott is here. I’m going to ask him to take that one.

Scott Smith

Lauren, in terms of help wanted, what you’re describing seems to be a fairly broad trend across the industry, where particularly the print revenue and volume is down somewhat. There are some hot job markets still, but in general it seems like job creation has slowed. That’s certainly a factor. You’ve also seen continued migration, as we knew would happen, from print help wanted ads to online. So those are the factors driving it.

In effect, our inbound call volume for print advertising is down. We’re working to offset that through much more aggressive outbound calling, both for print ads and bundles. We’re also starting to package print packs of ads, much like we do online. So we see some steps we can take that will improve that trend.

Lauren Fine - Merrill Lynch

Can you talk about the relative pricing between print and online for help wanted?

Scott Smith

Sure. What we’ve done is aggressively raise online prices, keep print prices relatively stable. If you looked at a big market today, you’d see an average print ad costs about what an average online ad costs.

You also asked about print ad growth versus online. What you see is we’re flat year-to-date in terms of overall ad revenue. We’ve said online is up in the high 20% range. That means print revenue alone is down about 2% -- again, mostly driven by the decline in preprint and Newsday.

Lauren Fine - Merrill Lynch

Great. My last question has to do with the equity income line. If you were to exclude that almost $6 million from CareerBuilder and look at what looks like then as kind of an $8 million increase year over year, can you isolate the pieces of that in terms of the improvement at Food Network, not recording a loss with WB, and then presumably the improvement at CareerBuilder as well?

Dennis J. FitzSimons

Well, all three are positive.

Lauren Fine - Merrill Lynch

But which one has the bigger -- I mean, if you were to look at $8 million, how would you allocate it across those three in terms of the improvement?

Dennis J. FitzSimons

Lauren, the largest improvement would be at the TV Food Network, followed by the fact that we didn’t have any losses that we were recognizing at the WB, and then CareerBuilder.

Lauren Fine - Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Steven Barlow with Prudential Equity Group. Please proceed.

Steven Barlow - Prudential Equity Group

Thank you. Could you talk a little bit more about your programming expenses on television, how it’s going to look for the rest of this year? Could you just talk about what you paid for the Family Guy and Two-and-a-Half Men, and what that would do to your expenses, potentially in ’07? Then, Don, if you could just help us on what the right amortization/depreciation numbers we should use after the sale of Albany and Atlanta. Thank you.

Dennis J. FitzSimons

Steve, on broadcast rights, we’re up mid- to high-single digits this year, but our overall programming expense in future years, as you now, we do accelerated amortization. Given the prices that we have paid for Family Guy and Two-and-a-Half Men, and those were both group deals, then we had projected in our future projections what we were going to pay for both first-run programming and off-network programming. These shows have come in actually below what we had originally projected. So we paid good prices, but on the other hand, that is going to lead for us to very modest increases, actually lower than what we’re seeing this year -- considerably lower on the program expense line for broadcasting.

Steven Barlow - Prudential Equity Group

The rest of this year should be about what we’ve already seen this year?

Dennis J. FitzSimons

Yes, that’s correct.

Steven Barlow - Prudential Equity Group

Okay.

Donald C. Grenesko

In terms of the amortization/depreciation of the two TV stations, it’s really relatively modest, Steve, so there’s no real impact there. I would say that again we’ve moved these two stations into discontinued operations, so I think you can see from the footnotes that $3.2 million of after tax profit was moved from continuing operations over to discontinued, so obviously that will have an impact on the second half also.

Steven Barlow - Prudential Equity Group

Thanks very much.

Operator

Your next question comes from the line of Lisa Monaco from Morgan Stanley. Please proceed.

Lisa Monaco - Morgan Stanley

Yes, could you just give us a little bit more color in the circulation trends in Q2 and just a little bit more going forward, how we should think about volume versus circulation revenue? Secondly, just on the newspaper side, could you rank the top three markets in terms of margins? Thank you.

Scott Smith

On circulation, first let me go back to the large ABC reports where we reported individually paid circulation down about half a point daily and down 1% Sunday, with home delivery up across our markets in total. Second quarter results were slightly worse than that. As Don said, we expect third quarter results on individually paid to be a little better due to the timing of circulation sales programs.

Overall, we continue to believe we’ve made lots of progress stabilizing individually paid circulation, which is home delivery plus single copy -- the circulation that advertisers value the most. But what you’re also seeing, as we’ve described to you as well as advertisers, is a continued reduction in other paid circulation.

So total circulation will continue to show bigger declines than individually paid through year-end. That’s largely a reduction in hotel copies and some NIE in Los Angeles, so L.A. alone in the other paid category is impacting the group totals by 2% to 3% through about year end.

In terms of revenue, you see it down around 5%. That’s a combination of the modest individually paid declines and, as we’ve said, selective discounting essentially to improve our retention of subscribers; the churn continues to decrease. We would expect the circulation revenue trend to improve a little bit in the second half of the year, but still not likely to get to positive territory.

Then your other question was margins?

Lisa Monaco - Morgan Stanley

Yes.

Scott Smith

Of all of our newspapers of substantial size, the top three would be our two Florida papers and Chicago.

Lisa Monaco - Morgan Stanley

Okay, and then just following up on the circulation, have you seen any more additional pressure on ad rates from advertisers?

Scott Smith

You know, it’s the normal give-and-take with advertisers who always prefer not to pay more, but as we’ve said previously, with individually paid circulation in relatively stable territory, our good audience story in terms of demographics, the responsiveness of advertisers to newspaper advertising -- it’s a very competitive marketplace, but we’re not seeing anything outside the ordinary in that regard.

Lisa Monaco - Morgan Stanley

Great, thank you.

Operator

Your next question comes from the line of Craig Huber with Lehman Brothers. Please proceed.

Craig Huber - Lehman Brothers

Good morning. I wanted to start off, could you just give us your -- for your newspaper division, your non-newsprint cash costs percent change in the quarter? Then, also for newsprint, the consumption and the price change year over year? I have a couple of follow-ups. Thank you.

Scott Smith

The newsprint is easier, and I’ll get you the other number. So essentially on newsprint, it was -- the price is up about 12%, volume on a same basis weight down about 7%.

Craig Huber - Lehman Brothers

Okay, and while you’re getting that other number, I missed what you said on the -- you have some sales of some real estate. Did you say you already closed on that, or is it just up for sale right now? If so, can you quantify if it has actually been sold?

Dennis J. FitzSimons

Yes, what we mentioned was the San Fernando real estate. We closed the plant in Los Angeles, and that is up for sale. Bids are expected this quarter, within the next month.

Scott Smith

In terms of other newspaper cash costs, compensation, pre-stock option expense, is down 2% and all other cash expenses are flat, which is essentially growth in postage and all other costs [inaudible].

Craig Huber - Lehman Brothers

On auto classifieds, are you guys seeing any light in the tunnel here at all as you talk to the various auto dealers in your markets and so forth? Or are you expecting this just to continue here for the next new year, plus? Any idea there?

Scott Smith

Well, it’s still a really challenging environment for auto dealers, particularly domestic dealers. What you’ll see is we’ll start running against lower revenue a year ago, but we’re not seeing any big signs of pick-up in that regard.

You clearly have the situation with the domestic manufacturers where Chrysler did some pricing, term sales, significant discounts, but GM and Ford have only done very limited programs. If they continue on that pace, it’s hard to see where there’s a lot of light in that tunnel soon, realistically. But we’re working very creatively with auto dealers on both print and online packages to help them move inventory.

Craig Huber - Lehman Brothers

Would you also say that July -- is July newspaper similar to June, or is it similar to May, or what’s your thought there?

Scott Smith

Well, what you have seen clearly is choppy trends, as we’ve described all along. I mean, I would say the July trends are more like our year-to-date trends, which is essentially flat.

Craig Huber - Lehman Brothers

Thank you.

Operator

Your next question comes from the line of William Bird with Citigroup. Please proceed.

William Bird - Citigroup

Just wondering if you could talk a little bit about your strategy for bridging the growth gap at Newsday? Also, I was wondering if you could quantify what the growth rate looked like in online help wanted ad revenues? Thank you.

Scott Smith

Newsday, as Dennis described, our top priority revenue-wise is to rebuild our preprint business there and win back these food and drug customers that we lost due to the termination of the sales agent, and getting Walbounds was a key first step. We are working aggressively on other opportunities. We also have cycled part of that preprint decline, so you see some improvement in preprint trends in Newsday as the second half progresses.

You’re also seeing some encouraging signs in other categories in Newsday. Their national advertising performance is improving. Their local retail sales in many areas are good, and it’s been an ongoing process, and that describes it, of rebuilding key customer relationships. They are out in more dialog than ever with advertisers big and small, and we think that picture will improve as time progresses. They have also very clearly focused on their four Long Island markets, Nassau, Suffolk, and Queens, where they had the highest penetration of almost any newspaper in the country. So the fundamental franchise is strong. It’s a revenue rebuilding process. Particularly with the union negotiations behind them, they can focus on that.

William Bird - Citigroup

I was also looking for the growth in online recruitment revenues in the quarter.

Scott Smith

It’s 19%.

William Bird - Citigroup

Thank you.

Dennis J. FitzSimons

Thank you. Next question.

Operator

Your next question comes from the line of Paul Ginocchio with Deutsche Bank. Please proceed.

Paul Ginocchio - Deutsche Bank

Thank you. What was cash at the end of the quarter? Second, the entertainment radio EBITDA line was down pretty significantly. I think you were saying it was because of fewer Cubs games, but you added a couple 2200 seats, or 6% extra capacity at Wrigley. Could you talk about how that’s affected numbers, and is there some other -- is it still the fallout from I guess the closure of the Tribune Entertainment Group? Finally, if Media Newsgroup got a hold of the Torrance Daily Breeze, would that change the competitive landscape at all in L.A.? Thank you.

Dennis J. FitzSimons

Cash at the end of the second quarter was $114 million. In terms of the entertainment and radio line, it’s true we do have added seats and despite an unacceptable on-field performance, the attendance is probably 99% of capacity. So what you’re seeing in the second quarter is just a shift in the number of home games, which is what is causing -- a part of what is causing that decline. Also, WGN Radio revenues are slightly lower, so we’re not having a strong year, or strong quarter -- we did not have a strong quarter at the radio station. Those are pretty much the elements.

Scott Smith

On the Daily Breeze, it’s a modest factor in the overall Los Angeles market and whoever ends up owning it, we don’t see a significant change in the competitive balance.

Paul Ginocchio - Deutsche Bank

Thank you.

Operator

Your next question comes from the line of Peter Appert with Goldman Sachs. Please proceed.

Peter Appert - Goldman Sachs

Dennis or Don, how should we be thinking about the cost dynamics that newspaper business in ’07 in the context of your $200 million target? Specifically, I’m wondering if you think newsprint could potentially be flat next year. If that were the case, added on to your $200 million target, could we see operating costs down on a year-to-year basis next year in publishing?

Dennis J. FitzSimons

Let me have Scott take that.

Scott Smith

Let me chime in there. We think it’s very likely that newsprint pricing will moderate. Whether it’s flat or up a little or down a little next year, it’s just way too soon to know, but we do think a fundamental dynamic of those price increases moderating is likely to occur.

We’ll still working through our financials for next year. It’s also premature to say whether total costs could be down. Our disciplines will be very strong, and the publishing group will contribute by far the biggest portion of that $200 million over two years cost production target.

Peter Appert - Goldman Sachs

Okay. Don, for you specifically, I don’t actually fully understand what you’ve done on the depreciation side. If there was no good will associated with the stations you’re selling, how is it that you have the write-down associated with this sale?

Donald C. Grenesko

Yes, Peter, it was unusual, but what basically is happening is we lump all of our TV stations together when we look at impairment for good will, and because we are putting all of our TV stations together for that calculation, the SEC is requiring companies to in essence take a piece of the group’s good will and assign that to each of the TV stations in this particular case. So we looked at the -- had to do an estimate of the fair market value of each of our TV stations, and then take the proportion for Albany and Atlanta of the grand total for all of our TV stations, and multiply that by good will. That’s how we came up with this additional $80 million of good will that had to be written off. So in essence, we added it to the original purchase price of the TV stations.

Peter Appert - Goldman Sachs

Okay, so this is not a write-off, a write-down of the other TV assets?

Donald C. Grenesko

No, it is not, no.

Peter Appert - Goldman Sachs

Okay, but on a go-forward basis, there is some modest earnings benefit associated with lower good will amortization now?

Donald C. Grenesko

Well, we’re not amortizing good will but again, the multiple here was a very good one so it will be slightly accretive going forward.

Peter Appert - Goldman Sachs

Right. Thank you.

Operator

Your next question comes from the line of Debra Schwartz with Credit Suisse. Please proceed.

Debra Schwartz - Credit Suisse

Hi, thanks. I was wondering, in TV, could you give us a little more color on why you expect that TV to be down low-singles in Q3? I know typically you don’t really get much in the way of political, but in the past, political has had the effect of tightening the market. I’m just wondering why you don’t expect to see that this year.

Dennis J. FitzSimons

We would expect political to kick in later in the year, more in fourth quarter. We feel there should be some reasonably significant political then, particularly in New York and L.A.

I think what you’re seeing in our comments is just sort of a relatively weak overall ad environment, whether it’s the network upfront and that trickles down and has an impact on the spot market place, where we generate our revenue.

Also, you’re looking at a situation with the WB being in a lame-duck situation. That is not helpful. Now, that’s going to turn around quickly in September with the CW being very much a positive for us, particularly in our bigger markets.

In terms of the categories, it’s a little bit the same as publishing. You’ve got automotive down because of the weakness in sales. Retail is also down because a little bit of the consolidation that’s going on there, while movies and telecom are up. One thing we should see on both sides of the house as the competition is stronger in the telecom, as we’ve got cable versus satellite versus the telcos, that’s going to roll out on a market-by-market basis, which should be a benefit to local advertising economies, both print and broadcast.

Debra Schwartz - Credit Suisse

Thanks, that was helpful. Just as a follow-up, Don, you mentioned generally where the three big markets were in publishing revenue. I was just wondering, could you run through specifically the growth rates for L.A., Chicago and Newsday?

Donald C. Grenesko

In terms of ad revenue for the quarter, L.A. is up 1, Chicago down 4, Newsday down 10.

Debra Schwartz - Credit Suisse

Great, thank you.

Operator

Your next question comes from the line of Frederick Searby with JP Morgan. Please proceed.

Frederick Searby - JP Morgan

Thank you. A couple questions. One is with respect to the ADVO deal in L.A., the L.A. Times deal. ADVO’s quantified it $10 million in savings. Do you have any thoughts on how material that will be to the preprint business in L.A.? I think that commences in August.

Secondly, are you amenable or open to striking other deals, similar deals, in other markets? Finally, general thoughts, whether there are any competitive issues that concern you or other issues with the merger of Valassis and ADVO? Thank you.

Dennis J. FitzSimons

We’ll let Scott handle that.

Scott Smith

Sure. Starting with our distribution partnership between the L.A. Times and ADVO, we’ve said that’s a very good deal for us going forward, both as we manage the weekend program and had the opportunity to sell into their established mid-week program and then, our financial benefit will be in excess of $10 million over time.

In terms of whether we would create partnerships elsewhere, we already have one in Connecticut through the Hartford Courant. We’ve said we want to look at how the L.A. partnership unfolds. We wouldn’t rule it out, but in many of our markets, we’re in very strong positions, and I would only do that if it was especially advantageous to us.

In terms of the Valassis acquisition of ADVO, we have an excellent relationship with Valassis. We talked to Al Schultz, as well as Scott Harding, since the announcement. Our markets account for about 12% of Valassis’ total SSI distribution. We don’t anticipate any significant near-term changes as they work to first close the deal and then formulate their integration plans.

Valassis has said, both directly to us and publicly, that they continue to believe that home-delivered newspaper circulation is really the gold standard for preprint advertisers, their best distribution channel. They also believe, as we do, that the combination of that newspaper distribution and share-mail is highly effective. So we’re aligned in our beliefs in that regard.

Them acquiring ADVO adds to a degree a competitive dimension, but fundamentally we see upside in the same focus and are confident we can have a great partnership going forward.

Frederick Searby - JP Morgan

Great, thank you.

Dennis J. FitzSimons

Scott, this is one of the areas that we’re investing in for greater targeting capabilities.

Scott Smith

Absolutely, so we’ve made significant investments and we’re looking at continuing to do so as we differentiate ourselves going forward through this blend of newspaper and shared-mail distribution on a [inaudible] basis.

Frederick Searby - JP Morgan

In Long Island, just sort of segueing, but it just peaked my interest. As you kind of take back some of the clients you lost from your feared competitor there, do you think there’s sort of a coopetition possibility model or something that you could do similar along these lines on that front?

Dennis J. FitzSimons

We would anticipate continuing to fight that out and compete.

Frederick Searby - JP Morgan

Great, thank you.

Operator

Your next question comes from the line of Christa Quarles with Thomas Weisel Partners. Please proceed.

Christa Quarles - Thomas Weisel Partners

I just have some follow-ups on your online help wanted. I was wondering if you could give us the mix between I guess online and -- only if you still allow that, I’m not sure if you do -- combo sales and just pure online. Also, I was curious as to why CareerBuilder would be at 42% but your online help wanted was only at 19%. If you could discuss if that’s just a market-by-market difference or if there’s something else that I should be thinking about? Thank you.

Dennis J. FitzSimons

Well, essentially the revenue we booked that’s up 19% continues to be primarily print-online bundles. There is some online only in that, but a relatively modest fraction, driven largely by the newspaper sales forces.

CareerBuilder would be up more because they are booking online only sales and they have a very effective direct sales force that operates nationwide, including in our markets. So in effect, our share of online revenue is higher than plus 19%, but the rest is reflected in that CareerBuilder revenue growth, where we only show you the equity line but describe the growth in terms of the network and affiliates in total.

Christa Quarles - Thomas Weisel Partners

Could I just get you -- could you describe what your CareerBuilder online, for your markets, I guess, would be up?

Dennis J. FitzSimons

I don’t have that exactly, but it would be up more than 19%, what is sold directly through CareerBuilder.

Christa Quarles - Thomas Weisel Partners

Okay, thank you.

Operator

Your next question comes from the line of Alexia Quadrani from Bear Stearns. Please proceed.

Alexia Quadrani - Bear Stearns

Dennis, given your comments earlier about investing in the future of the newspaper business, should we assume that once the 20 million in buy-backs have occurred that going forward, your primary use of cash really will be investments or possibly de-leveraging and buy-backs will take a back seat?

Dennis J. FitzSimons

I think once we get to the end of the year -- and again, our intention would be to repurchase the 20 million shares by the end of the year -- then we’ll assess where we are. We have said we’ll continue to make investments as we just talked about, whether it’s preprint targeting to what advertisers are looking for, we’ll try to invest in those areas and also continue to de-lever.

Alexia Quadrani - Bear Stearns

When you look at your competitive environment out in Long Island in terms of the preprint marketplace, in terms of trying to regain that share, is it really an effort in terms of bulking up your sales force or is it really very much relying on maybe discounting and try to win the clients back?

Dennis J. FitzSimons

Actually, I think that’s going to be both. We’ve strengthened the sales staff out there, and we’re going to -- it will be a battle. We have a strong competitor, and it’s the job of the Newsday ad sales force to do whatever it takes to get that business back.

Alexia Quadrani - Bear Stearns

Thank you.

Scott Smith

We have also invested in a mail program lately on Long Island that again strengthens our distribution to go with our strong sales and pricing efforts.

Dennis J. FitzSimons

But we really think that Walbounds coming back is a result of the improvement in the infrastructure, confidence in Newsday’s ability to deliver, and just again a much better sales effort, and that does involve certainly competitive pricing.

Alexia Quadrani - Bear Stearns

Thank you.

Operator

Your next question comes from the line of John Jendis with Wachovia. Please proceed.

John Jendis - Wachovia

Thank you. Good morning. Two brief ones. Dennis, first, can you remind us, have you settled yet with all of the advertisers at Newsday? Then separately, as a company, you’ve talked for a couple of years now about trying to increase your political from expanding news coverage. Where are you on that? How do your ’06 political revenues look relative to ’04?

Dennis J. FitzSimons

On the Newsday front, we have settled with a vast majority of advertisers. There is one major account that is still out there that we would expect to settle soon, but we are still very confident of the amount of the reserve that will be adequate to handle all those remaining, but we are well over 90% at this point, or in that 90% range, let’s say. Once we have this large advertiser completely settled and papered, that will put us well over 90%.

John Jendis - Wachovia

Is that an ’06 event, do you think?

Dennis J. FitzSimons

Yes, we would think so.

John Jendis - Wachovia

Okay.

Dennis J. FitzSimons

As far as political advertising, yes, we have looked to increase our share there. We’ve got additional time periods devoted to news, whether that’s in the morning, which has become a much more popular day part, but political advertising we think will be up about 50% for us over 2004.

John Jendis - Wachovia

Thank you.

Operator

Your next question comes from the line of Brian Shipman with UBS. Please proceed.

Brian Shipman - UBS

Thanks. One operating question, one non-operating question. First, I just wanted to clarify something you said earlier with respect to circulation. Have you gotten more aggressive in your discounting recently, especially in the second quarter? Or have you been managing down the other circ more aggressively? I just wanted to ask that given the increased declines in circ revenues in the second quarter relative to the first quarter.

Then, a non-operating question, I guess -- Dennis, have you had any recent discussions with the Chandlers and any effort to resolve the dispute with them? If so, can you provide any color on those discussions? Thanks.

Scott Smith

Brian, I would say there’s not a material difference in discounting. When you look at circulation revenues, it’s a relatively modest part of our total revenue. A point or two difference just isn’t that material.

Brian Shipman - UBS

Okay. We just saw that circ revenues deteriorated a bit sequentially, so I just wondered if…

Scott Smith

That’s true. They did slightly. Our discounting strategy again is very selective, focused on great retention to customers which, in terms of the cost part and our cost of acquiring new customers, you see some benefit there as well. So you have to really think of it not just circulation revenue, but then what’s the cost of acquiring and retaining those subscribers to have a net basis, the trend is good.

Brian Shipman - UBS

Understood. Thank you.

Dennis J. FitzSimons

As far as your second question we, now that the tender offer is completed, we will look forward to moving constructively with the Chandlers. They are an important shareholder. We work for the shareholders, and we’ll look to do something there that makes sense for both sides and all shareholders.

Brian Shipman - UBS

So nothing yet, but you’re planning on opening some sort of discussions, is what you’re saying?

Dennis J. FitzSimons

Well, I’m just saying we will look to move forward constructively, but really no comment on any other negotiations.

Brian Shipman - UBS

Thanks, Dennis.

Operator

Your next question comes from the line of Michael Kopinski with AG Edwards. Please proceed.

Michael Kopinski - AG Edwards

Thank you. I have a couple quick questions. On the improvement in revenues in L.A. Times, was that in preprints or ROP?

Scott Smith

It was both. They’ve done a great job in terms of local retail sales, both ROP and preprints.

Michael Kopinski - AG Edwards

Dennis, you mentioned that there’s additional asset sales. I was just wondering, there seems to be other non-strategic assets that the company could sell, and I was just wondering your thoughts about future asset sales beyond the $500 million that you targeted.

Dennis J. FitzSimons

We’ll look for situations if we don’t have, or feel we have a competitive advantage, those assets would be ones that we’ll look at. We’ll also look at the tax situation and where we can benefit shareholders the most, but we have been having conversations. As you might imagine, once we made the announcement, we’ve gotten a lot of phone calls. Some of those look promising, and we’ll keep everybody posted on that as soon as we make deals.

Michael Kopinski - AG Edwards

So there could be more asset sales beyond the $500 million that you targeted? Is that what I should read into that, or no?

Dennis J. FitzSimons

There could be. Again, depends on if the pricing was right. There are certain assets that would put us beyond $500 million but right now, that’s our target and we’ll stay with that number.

Michael Kopinski - AG Edwards

Any thoughts on the FCC’s move to lift media ownership rules -- your thoughts on timing? Are you facing any need for waivers, additional waivers at this point?

Dennis J. FitzSimons

Well, we will have waivers until the completion of the rule making. Our license renewal filings are due for KTLA in August of ’06, in Hartford in December, and in New York in February, 2007. But we expect the rulemaking -- first of all, the detailed text has not been released. There will be a 120-day comment period following the release of the detailed text, followed by another 60-day reply comment period. We figure right now the best case that the rules would be issued in second quarter of 2007.

We do not have to worry in terms of divestitures because we will be covered by a waiver until the completion of the rule making.

One thing to remember there, Mike, is that the court did agree with the FCC. They did remand the FCC’s original rule, but the court did say that the record favored relaxation of the newspaper broadcast ownership rules. Again, we’re confident the FCC will rule in our favor but as we all know, this has taken forever and we’re looking for a successful conclusion to the rule making.

Michael Kopinski - AG Edwards

One last question. In light of the move to decrease certain items in the newspaper, like the stock tables and such, an industry-wide issue, can you talk about your paper’s news hole and where does it stand? Does it look like this could be an area where you might be able to reduce and possibly migrate some more of this information over to the Internet, maybe to your Internet sights? What are your thoughts on that?

Scott Smith

Well, we’ve gone at this very thoughtfully, thinking of what content in our newspapers really had distinctive and differentiated value to readers, and we’re ahead of many people in terms of reducing things like stock tables that essentially are commodity. We see some selective opportunities to continue down that path and expect that newsprint consumption overall will continue to decline modestly going forward.

Dennis J. FitzSimons

One of the investments we’ve made is much more additional consumer and reader research, so we’re listening very carefully to the customers and trying to give them what they value the most.

Michael Kopinski - AG Edwards

Great, thank you.

Operator

Your next question comes from the line of Jim Goss with Barrington Research. Please proceed.

James Goss - Barrington Research

Thank you. I have several questions. To begin with, at the mid-year media review sessions recently, if I’m not mistaken Dean Singleton made a comment related to the greater relative profitability of the online portion of the business, and that while the percentage of the revenue mix was modest right now, he thought within say half-a-dozen years, they could be up to perhaps 20% of revenues and perhaps 40% to 50% of cash flow from the online sources. I’m wondering if that’s correct, if you think that’s a realistic target, and if not, what you think in terms of your own publishing operations? You might also relate that to the potential increasing share of online revenues that relate to non-classified categories.

Dennis J. FitzSimons

Let me take the first one. We still think that the print business will be a good business. It is lots of advertising migrating to online. Our view is that we, through launching additional verticals and making sure we’re positioned to get a good percentage, a good market share online, we’ll capitalize on that trend.

In terms of relative profitability, online does have very good margins. Scott, you may have a comment to add.

Scott Smith

Well, again, you can clearly identify revenue by media channel, and we do our cost structure essentially allocating incremental costs online. But you have to keep in mind that to a large extent, our online businesses are leveraging the print infrastructure, whether it’s content, sales, brand, you name it. So it’s great that Dean can talk about this, but we don’t see as easy a way as he might in terms of looking at what fundamentally are the profit drivers.

Our strategy is largely one based on the integration of print online, but we’re also building online only businesses that we expect will have good margins over time as well.

A key part of that, as you touched on, is building non-classified revenue streams. That revenue so far this year is up like 40% -- still too small a percentage of the total, but we see a lot of the upside in the non-classified area.

James Goss - Barrington Research

Okay. One other newspaper related question, Gannett commented that there might be some potential newsprint from China that could factor into the supply/demand equation. I’m wondering if you see that as one of the issues from your prior comment that perhaps newsprint pricing cycle could be coming to maybe a peak for this cycle?

Scott Smith

It’s a real possibility, sure.

James Goss - Barrington Research

Okay, you’re not looking into it specifically?

Scott Smith

We’d have to get back to you. I haven’t talked to our newsprint guy in the last couple of weeks.

James Goss - Barrington Research

Okay. Then, on the television side, you are getting potentially better pricing for Two-and-a-Half Men and The Family Guy, but the audience appeal I presume would be at least somewhat less than some of your previous high-profile shows, and I’m wondering what you see as the expected practicability from these shows, relative to the others and how it factors into the mix as you shift to a CW-driven environment for your TV group?

Dennis J. FitzSimons

We’ve had two issues, really, and some of the really terrific sit-coms that we’ve had, like Friends and Everybody Loves Raymond started to weaken a little bit, and the people meter impact exacerbated that situation. So what we’re really enthused about is both of these shows have young male demos -- men 18 to 34, adults 18 to 34. Two-and-a-Half Men is the number one sitcom on the air with both adults 25 to 54 and adults 18 to 49, so we can bring some young men back to the station. Adults 18 to 34, 18 to 49 are the demos that advertisers are looking for on a spot basis. So this is going to freshen our line-up in both early and late fringe, and that’s really what we needed.

Our major competitor elected to buy, at very high prices, the second cycle of Everybody Loves Raymond and the third cycle of Seinfeld. While those are terrific shows, they are going to be a little bit long in the tooth, so we think we can come in and compete very effectively with these two shows.

James Goss - Barrington Research

Okay. Last question, with the potential to measure viewing audiences, or the viewing audiences of the commercials rather than just the programs by Nielsen, how do you see that changing the mix? Is it all risk or is there potential plus too?

Dennis J. FitzSimons

We still -- it comes down to this; we think television advertising still works, sight, sound and emotion. We will have that kick in mostly on the network level first, and it will certainly be something that advertisers look at, but we don’t see any near-term impact on that. It will affect the perceived supply of impressions, but we’ve been seeing these kinds of things for a number of years, the reduction in the impressions. What we’re seeing right now I think is weakness in some key categories, so the demand side of the equation has been a little bit weaker.

This will be something just like with DVR penetration increasing slightly. This has been a subject of negotiation in the up-front marketplace, but we don’t see any immediate impact on this to our business.

James Goss - Barrington Research

Thank you very much.

Operator

Ladies and gentlemen, this concludes today’s question-and-answer session. I would now like to turn it back over to Ms. Musil for any closing remarks.

Ruthellyn Musil

I’m just going to say thanks to everyone for joining us, and I’ll be happy to follow up with your across the day. Goodbye.

Operator

Ladies and gentleman, thank you for your participation in today’s event. This does conclude the presentation and you may now disconnect. Have a great day.

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Source: Tribune Company Q2 2006 Earnings Conference Call Transcript (TRB)
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