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Scripps Networks Interactive, Inc. (NYSE:SNI)

Q1 2009 Earnings Call

May 8, 2009 10:00 am ET

Executives

Kenneth W. Lowe - Chairman, President, Chief Executive Officer

Joseph G. NeCastro - Chief Financial Officer and Executive Vice President

John F. Lansing - Executive Vice President and President of Scripps Networks

Lori A. Hickok - Senior Vice President of Finance

Mark W. Kroeger - Vice President of Investor Relations

Analysts

John Janedis - Wachovia Capital Markets

Alexia Quadrani - J.P. Morgan

Doug Mitchelson - Deutsche Bank

Jessica Reif-Cohen - Bank of America

Martin Pyykkonen - Wunderlich Securities

Michael Nathanson - Sanford C. Bernstein & Co.

Benjamin Swinburne - Morgan Stanley

George Hawkey - Barclays Capital

Edward Adarino - Benchmark

Scott Davis - J.P. Morgan

Operator

Welcome to the Scripps Networks Interactive first quarter earnings report conference call. At this time, all lines are in a listen-only mode. Later there will be a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today’s call is being recorded. At this time, I’d like to turn the conference over to the Vice President of Investor Relations, Mark Kroeger.

Mark W. Kroeger

Good morning all. Thanks for joining us. We’ll start the conference call today with comments from Ken Lowe our Chairman, President, and CEO and Joe NeCastro our Executive Vice President and Chief Financial Officer. Our prepared remarks should take about 15 minutes and then we’ll open it up for questions. Also, with us this morning are John Lansing, Executive Vice President and President of Scripps Networks and Lori Hickok, Senior Vice President of Finance.

Let me remind you if you prefer to listen in on the web, go to www.scrippsnetworksinteractive.com, click on investor relations, and find the microphone icon on the landing page. An audio archive will be available on our website later today and we’ll leave it there for a few weeks so you can access it at your convenience.

Let me remind you that our discussion this morning will contain certain forward-looking statements, actual results may differ from those predicted, and some of the factors that may cause results to differ are set forth in our publicly filed documents including our recently filed Form 10-K.

And with that, I’ll turn it over to Ken.

Kenneth W. Lowe

Good morning everyone. The company’s operating performance during the first quarter really demonstrates the durability and recession resistant nature of targeted television programming, and in particular, the strength and popularity of our unique lifestyle brands. In the midst of truly the most challenging economic environment in the generation, our lifestyle television networks are performing solidly with growing audiences, expanded distribution, and financial results that really defy the daunting head-wins.

During the first 3 months of this year, we managed to improve margins at our network businesses. Total revenue from our Lifestyle Media segment was even with last year with strong affiliate fee revenue growth compensating for the anticipated weakness in advertising. Also, we were able to lower overall costs at our networks while continuing to invest in new programming.

Our second quarter advertising will continue to reflect the general state of the economy. We are seeing some promising signs that the market is stabilizing. That coupled with more favorable comparisons should lead to an improved advertising picture for us in the back half of the year.

That said though, we remain cautious about the advertising marketplace in general for 2009 because of the persistent lack of visibility. In the meantime, we’re going to continue investing in core brands to build market share all the while keeping a tight rein on discretionary spending, an operating strategy that resulted in modest segment profit growth for our Lifestyle Media businesses in the first quarter.

The positive viewer-ship trends that we’re enjoying at our leading networks confirm our strategic commitment to deliver cost effective original programming that is both engaging and entertaining, and nowhere is that more evident right now than at Food Network.

During the first quarter, primetime viewer-ship among adults aged 25 to 54 was up a very healthy 16%; thanks to great shows like, Iron Chef America, Chopped, and Last Cake Standing. Proven standbys like Guy Fieri’s Diners, Drive-Ins and Dives continue to attract enthusiastic Food Network fans. Thanks to the many programming improvements that Brooke Johnson and her very creative team have made it for the viewer-ship growth the past couple of quarters, and this may even be better than we expected. While it has been a challenge to fully monetize that growth short-term given the relative weakness in the scattered advertising marketplace, we truly believe Food Network is in an excellent competitive position in this year’s upfront.

The positive rating story also should give us some added leverage as we re-negotiate new affiliate agreements for the network with cable and satellite operators this year. The Food Network ranked very well in just about every category in the most recent beta-research brand identity study. Not only did Food Network rank among the top 10 most entertaining US cable networks, it also ranked number one in the category that advertises, truly care about the most, and that’s the one where viewers say they’re more likely to buy advertised products on the network. Clearly, but just about every measure, Food Network is poised to take full advantage of the economic recovery when it comes.

HGTV is also making headlines, placing high in the beta rankings across most categories, and notably placing just behind Food for advertising engagement. In keeping with the times, we deliberately and effectively shifted our programming strategy at HGTV. We’ve added shows that are more relevant to viewers who are living on tighter household budgets and they’re responding. Viewer-ship at HGTV improved during the first quarter, pulling out even with last year’s audience levels, which if you remember had spiked during the riders’ strike.

Primetime viewer-ship among adults, 25 to 54 at HGTV was up modestly, about 1%, and total late viewer-ship was even with the prior year period. Proven hits like House Hunters and House Hunters International continue to carry primetime, but we’re also getting the solid lift from new offerings like the Unsellables, My First Place, and Income Property, all shows that are focused more squarely on today’s economic realities.

At DIY Network, our focus on entertaining home improvement programming has been resonating with viewers throughout this economic downturn. Among adult 25 to 54 viewer-ship at DIY grew 18% in primetime and 22% total day during the first quarter. On weekends which is really DIY’s other primetime viewer-ship was up 23%.

As I’m sure you noted in the press release, revenue at network distribution at DIY grew nicely during the quarter as well, and we’re very pleased with the momentum that we’re creating at DIY.

Now, turning briefly to key growth strategies for our Lifestyle Media businesses, we’ve really been making progress on all 3 fronts. Even though our lifestyle websites are feeling the effects of slower online advertising, we’re continuing to expand our footprint, particularly in the food category. We’ve launched a video rich food community site called Food2 that targets younger consumers, and we’re beta testing the interactive recipe box that helps foodies search for recipes that they find from across the internet, and we’ve launched a food website, a program specifically for the UK.

On the international development front, we’re exploring a host of opportunities to partner with programming and distribution partners from around the globe. We’re really not far enough along to talk about any of these opportunities in detail, but as we like to say, stay tuned. And we’ve made some real progress extending our valuable brands including the new Food Network venues at Yankees Stadium and the growing success of our Food Network magazine in partnership with Hearst.

Issue number three, is the new stance this week. Paid circulation was up to about 840,000 copies with 50 paid advertisement pages; it’s turning out to be one of the most successful new launches in recent memory.

So, going forward, we’ll continue to navigate the difficult economy by focusing on the health and vitality of our core network brands. We’ll continue to execute our key growth strategies by developing content for emerging media platforms, leveraging our reputation globally and capitalizing on the strength of our established domestic brands.

Now, before I turn it over to Joe, just a word or two about our Interactive Services business and the progress that we’re making repositioning Shopzilla. As I’ve said, we made a deliberate decision this year to sacrifice near-term results of Shopzilla in favor of longer-term sustainability. Our objectives are to make the business more consumer-centric and enhance value to online merchants. We’re focusing a great deal of our time and energy on consumer satisfaction, and based on some metrics that we’ve started monitoring, we’re definitely moving in the right direction. Leased merchants are also up nicely year-over-year even in the challenging retail environment which we view as a very positive trend.

We’re working on the prototype of a new web shopping experience which we expect to have ready for the holidays. Now, keep in mind when comparing year-over-year results for the interactive services segment that the first quarter 2008 was unusually strong. We expect 2009 results for the segment to improve as the year progresses and we begin seeing some positive effects of the changes that we’re making.

As we guided in the press release, you can expect full year segment profit for Interactive Services to be somewhere north of $30 million.

Now, with that, let me turn it over to Joe.

Joseph G. NeCastro

Good morning everyone. As we noted in the press release, the key drivers affecting consolidated first quarter results were, first, the stronger than expected affiliate fee growth and secondly anticipated weakness in advertising at our Lifestyle Media businesses. The number of factors affecting our Comparison Shopping services also had an impact.

As a result, total revenue for the company was down about 7% with nearly all the decline attributable to the Interactive Services segment. As Ken mentioned, we are intentionally sacrificing short-term revenue and margins from Interactive Services as we reposition our Shopzilla subsidiary for longer term competitive sustainability.

First quarter net income per share for the consolidated company was $0.37, that’s in large part to the effective cost controls that we initiated across the enterprise to mitigate the impact of the economic downturn. One note on corporate expenses, as we said in the press release, $3.7 million of the total represents one-time costs related to the separation. Excluding these spin related costs, corporate expense was actually down modestly for the period.

Now to help with your models, we’re planning on holding corporate expenses to about $10 million a quarter for the balance of the year. Keep in mind though that there will continue to be spin related noise in those numbers and the second quarter results should reflect some of that as we put some finishing touches on the separation.

Now, let’s look at some segment highlights, starting with Lifestyle Media. This segment accounts for 86% of the company’s total revenue, and if we exclude corporate, 95% of the total segment profit. The headline for Lifestyle Media is the affiliate fee growth which came in considerably stronger than we had anticipated. The difference is attributable to a number of factors, first expanding distribution for DIY and Fine Living and increasing number of telecom subs and modest distribution growth for our two flagship brands as well. Accordingly, we revised our forecast for the full year for affiliate growth which we now expect to be in the 12% to 14% range.

As for first quarter advertising, results were held back by a combination of factors including the relative weakness in scatter pricing compared with the robust growth we saw last year. There was a lower level of commitment from the counter upfront and of course the secular downturn in online advertising. Keep in mind that internet advertising accounts for a relatively higher percentage of total revenue for us than for most of our peers.

To give you a little more color on our overall advertising results, the decline at both Food Network and HGTV was in the low single digit range. Higher affiliate fee rates for HGTV though were enough to push total revenue growth for the brand into positive territory versus the slight decline in total revenue for the Food Network.

Also at Food Network as Ken mentioned, the soft scatter market made it difficult for us to immediately monetize our huge audience gains. Remember we committed around 50% of foods inventory during last year’s upfront based at that time what we considered to be reasonable audience delivery estimates. We’ve been outpacing that estimates of-late which puts us in a strong competitive position for the current upfront season. It also gives us importantly plenty of leverage as we begin to re-negotiate our affiliate deals.

In general, the advertising marketplace continues to reflect the economic downturn and we still don’t have enough visibility to provide any meaningful forecast. Advertisers are still making decisions very close to err time.

As others have reported and based on the level of cancellations we talked about in February, we expect second quarter results to reflect the continued decline in advertising revenue. As for the balance of the year, it’s hard to tell for certain that there are early signs that the market could be improving; for instance, early in the quarter, scatter to scatter pricing declines were at about 10% to 12% but it’s been improving steadily albeit modestly. Scatter pricing in general has continued to hold up well relative to last season’s upfront plus we have more favorable accounts in the back half of the year, so we do have cause for some optimism as we move forward.

Turning to Lifestyle Media expenses, we did a good job holding down costs without sacrificing what viewers are seeing on the screen. Total expenses for this segment were down about 2% as a result of certain measures we initiated late last year as the macro conditions deteriorated. We turned back on marketing during the first quarter and we went line by line on a host of SG&A costs to bring expenses down. Headcount is down slightly from the third quarter 2008 just before we initiated a hire increase.

We’ll continue to defer discretionary spending until we see a positive turn in advertising. While we reduce overall cost in the first quarter, we continue to invest in original programming at all of our networks based on our conviction that this is the right time to be expanding audience share.

Now turning to our Interactive Services segment, results reflect both the current state of the economy as well as our decision to reposition Shopzilla. To help you size-up the impact of the various factors affecting Shopzilla’s business, we’d like to think about it this way; roughly 30% of the decline in revenue was attributable to the repositioning and may be about 40% due to general economic factors including lower consumer demand, the lower cost for pricing environment, and the unfavorable currency exchange rate, and the remaining 30% roughly is attributable to the less favorable sponsored-link relationship we have with Google.

As for the recalibration efforts, we’re making great progress. Consumes are spending more time on the website and are more deeply engaged in the product content that we’re offering. We’ve improved the comprehensiveness of search results and are working closely with merchants to ensure that we’re delivering a sustainable return on their marketing investment.

The net short-term effect of some of the changes we’re making is fewer sessions and lower revenue per session. The good news, however, is that more of our sessions result in re-directs and more of those re-directs are going to our merchants. Over the long-term, as our focus on consumer evangelism and merchant ROI takes hold, we believe growing volume will counter the lower revenue.

It’s important to note that we’re executing this strategy by redirecting existing resources and not adding new ones. Headcount is down from last year, and in fact, first quarter expenses were down 23% year-over-year at our interactive services business. Operating results for the segment should start positively reflecting these changes we’re making at Shopzilla by the end of the year.

And quickly at uSwitch, first quarter results were held back by falling energy prices in the UK which in turn led to increased consumer apathy for switching. Also, the impact of the tight credit markets had a negative effect on our personal finance products. On a positive note, we strengthened our core energy switching business by securing a deal for the first time with British Gas which of course is UK’s largest energy supplier.

Finally, a couple of other items worth noting, first as you can see, we’re in a very strong cash position having pay-down debts of zero during the first quarter. We’ll continue to use the cash we’re generating to meet our operating requirements to protect the competitive advantage our core brands enjoy and to advance our various growth strategies with an emphasis near-term on international development opportunities.

And lastly, regarding our ongoing discussions with Tribune, we remain an interested buyer of their 31% share of the Food Network, but based on recent conversations with their management, it looks increasingly like a transaction will not be completed in this calendar year.

With that operator, we are ready to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of John Janedis - Wachovia Capital Markets.

John Janedis - Wachovia Capital Markets

You guys bought GAC a few years ago for what I think was a pretty good price, and so I’m wondering with $56 million subs revenue out in the maybe $25, $30 million and modest EBITDA, would you consider flipping to another format to something more related to food or shelter?

Kenneth W. Lowe

No, not at this time; I think we’ve been pleased with the progress that we’ve made especially under Ed Hardy’s leadership and his crew at GAC; they really have done a great job of getting themselves embedded in the national community and who now has got a direct competitor with CMC, so it’s always a bit different; but at this time, we’re pleased with GAC and we’re looking for improvement throughout 2009.

John Janedis - Wachovia Capital Markets

One quick one for Joe, on uSwitch, have you guys pulled back somewhat on investment due to some of the issues you discussed?

Joseph G. NeCastro

Indeed we have; we do have a couple of modest investments underway, one, we’re looking at expansion into Spain, we’ve got something underway there and as we look at new product launches there, we’re looking at either white label or very low cost launches, but we have pulled back on any significant diversification efforts there.

Operator

Our next question comes from the line Alexia Quadrani - J.P. Morgan.

Alexia Quadrani - J.P. Morgan

A couple of questions, first, just to clarify Joe on a comment you made earlier when you said that scatter was selling at about 10% to 12% discount year-over-year early in the quarter and then improving, were you talking about early in Q1 or is that what you saw at the beginning of the second quarter? And then, any color you could give on how scatter is currently selling right now in the market.

Joseph G. NeCastro

I’ll clarify and then I’ll turn it over to John and he could talk about the current color; I was talking about quarter 1 when I talked about the 10 to 12.

John F. Lansing

It started off as Joe described and then modestly was improving throughout the first quarter and we’re seeing some additional improvement in pricing in April and looking ahead into the second quarter, and at this point, we’re seeing our scatter pricing actually coming in a little better than last year’s upfront.

Alexia Quadrani - J.P. Morgan

How would that compare to year-over-year scatter as well right now?

John F. Lansing

The ranges would be high singles, perhaps into the low doubles depending on the network, but steadily improving.

Alexia Quadrani - J.P. Morgan

And then, when we look at the options for cancellations for Q3, are they trending worse than what you saw for Q2?

John F. Lansing

They’re trending better, Alexia; on a percentage basis, Q2 was about 14% cancellations, we’re seeing the same percentage for Q3, but Q3 carries a lesser amount of upfront revenue, so on an actual dollar-for-dollar basis, it looks to me as though Q2 will be the worse quarter as far as I can see right now in terms of cancellations and is beginning to improve in the third quarter.

Alexia Quadrani - J.P. Morgan

And any major changes in terms of how much inventory you’re selling to sort of direct response or remnant or has the percentage been roughly stable throughout this year?

John F. Lansing

Well, it’s been lessening as we’ve been seeing the scatter marketplace improve somewhat; so, looking from April into May and into June, we’re seeing more of our inventory going into the spot scatter business and out of the DR.

Alexia Quadrani - J.P. Morgan

And then, the last question, either Ken or Joe, with the potential deal with Tribune maybe not happening this year, would you reconsider may be a more aggressive share buy-back program with the use of cash?

Joseph G. NeCastro

Yes Alexia, part of our consideration is the other opportunities there, and given our balance sheet, we’ve been fairly aggressive in turning over a number of rocks to look for, opportunities to invest, and the good news is that we think we see a number of things that are very attractive to us, especially internationally, but one or two other things here. So, while we can’t talk about any of them specifically, we’re going to chase them down, and it may mean that that we use some cash in that direction. Absent that I think you’re absolutely right. We would certainly think about a share buy-back.

Alexia Quadrani - J.P. Morgan

With these acquisitions; I know you can’t say much, but would they be in your core area though or more into related to the cablenet business or would they be in a different area as well?

Joseph G. NeCastro

More the former.

Operator

Our next question comes from the line of Doug Mitchelson - Deutsche Bank.

Doug Mitchelson - Deutsche Bank

A couple of things; one is, can you say anything about domestic auto, as a matter of fact where things are looking for as we think about the back half of the year and whether there can be some marked improvements in advertising as, we see Chrysler, Ford, and GM come back as their financing situation improves?

John F. Lansing

Our auto category was really strengthened by the imports throughout the first quarter and continues to be in the second quarter. I don’t have a lot of visibility into domestic looking beyond really the next month or so. It’s very very opaque.

Doug Mitchelson - Deutsche Bank

So, no discussions with them that would hint that ‘hey guys, we’ll be back as soon as we sort of wrap our financing.

John F. Lansing

Nothing significant. Thankfully, our exposure to domestic automotive is less than some of our competitors and so we may know less about it than some others.

Doug Mitchelson - Deutsche Bank

If I heard you right, I think you made a comment about investing more aggressively and programming to take market share in this environment, and I assumed that you were already investing aggressively as you thought was prudent; I am just wondering what more can you invest and what types of programming or where you think you can ramp investment that you had not considered previously.

John F. Lansing

It’s more of a case, Doug, of deciding not to cut programming even though we made a decision to significantly cut other expenses. We decided to maintain our programming investment to continue the strategy that we had developed particularly with Food Network, the investment and programming there, just for a ratings growth and to position Food Network for the renewals this year, as well as across all of our brands and we just viewed this economic period uncertainty as a time that we could maintain our investment and continue to grow market share where others may not be necessarily investing as much in programming.

Doug Mitchelson - Deutsche Bank

For your upfront strategy, I would think one thing you are fighting for each year here is to try to get the highest price increase as possible to get a fair shake for your inventory. You said you’re well positioned for the upfront; is this the kind of upfront where you continue to fight for price or do you have to consider relative market shares because of potential weakness in the overall marketplace. Do you hold back on inventory to get price?

John F. Lansing

We will definitely be fighting for price in this upfront. We have a great story to tell; obviously our strong ratings, but also really unmatched opportunities we have for conversion selling, and then of course our engagement scores and ad receptivity is among the highest in all of cable. So, the result of that is that we year in and year out are at or near the top of the pricing pyramid, and we expect to do that again this year, and if it requires us to hold back a modest amount of inventory to do that, then we will do that.

Operator

Our next question comes from the line of Jessica Reif-Cohen - Bank of America.

Jessica Reif-Cohen - Bank of America

I was wondering if you’ve had any preliminary affiliate discussions with cable operators; can you give us any sense of what those conversations are like.

Kenneth W. Lowe

It’s really a little bit early for that Jessica. We’ve had conversations throughout the last few months making it clear the value proposition of Food Network and just making the obvious point of the value it brings to the distributor, but beyond that, nothing to report.

Jessica Reif-Cohen - Bank of America

Moving onto Tribune, what changed in the discussions for you guys to be so definitive that this would not be a 2009 event?

John F. Lansing

Maybe I am being too definitive; two things have happened; one is their situation there, bankruptcy and trying to get their governance figured out and the fact that they are still working on the Cubs deal, I think they are in more of a sequential factor or mode than they are being able to work on several points at the same because they have to go through the same committee. So, they know we remain interested and we’re going to keep going there. The other is frankly there are other things that are very appealing to us, but we’re chasing down as well. So, it’s a little bit of a balancing act on our side. We’re not going to overextend ourselves. Again, very clear on the Tribune piece; it’s got to come at a fair price because there are no synergies there. That’s the little perspective on that, and when you add all that together, it makes me a little less convinced that we can get something done this year.

Jessica Reif-Cohen - Bank of America

Just to move on to advertising; as we get to the upfront in the next month or so or little later for you guys, what is your sense of budgets for 2010, and can you discuss what you’re seeing in terms of your top categories?

John F. Lansing

We’re seeing an improvement right now in activity as I mentioned earlier due to scatter marketplace and that can only board well if the third quarter proves to be an improvement over the second quarter which I believe it will be. It only boards well for a more optimistic upfront; of course our key categories include the food category, consumer, retail which embodies our major endemics, and as you know the business we watch carefully are the business through those major endemics and that appears to be improving as well, and their commitment of advertising, I can’t put a percentage or dollar amount on it, but I can tell you that there is general optimism in the market place that the worst is probably going to be in the second quarter and we will improvement from there going forward.

Operator

Our next question comes from the line of Martin Pyykkonen - Wunderlich Securities.

Martin Pyykkonen - Wunderlich Securities

Following up on Jessica’s upfront just from a strategy standpoint because if you were expecting better recovery in the second half I am just wondering if you would entertain deliberately holding back any inventory to get the benefit of the scatter in the second half. Then, the second question, on DIY; do you scope a timeframe when that becomes a more meaningful part of the affiliate fee revenue; is that a 2010 potentially or is it more of a 2011?

Joseph G. NeCastro

On the upfront, as I said earlier, we are going into this year’s upfront very intent on driving as high of CPM pricing as possible and we will be willing to hold back inventory in order to achieve that because we do believe as you point out that with an improving market overall that the scatter market place could offer a chance for us to keep our pricing structure where we think it needs to be. Now, the amount we might hold back is likely to be modest because there is a certain amount of business that has to be laid in, but we have room to do that in order to maintain the integrity of our pricing and we intend to do that. On DIY, the majority of their affiliated agreements, I believe are up in 2012; is that right Lori?

Lori A. Hickok

2011 and 2012.

Joseph G. NeCastro

2011 and 2012.

Operator

Our next question comes from the line of Michael Nathanson - Sanford C. Bernstein & Co.

Michael Nathanson - Sanford C. Bernstein & Co.

I have a couple of questions on the cost side of Lifestyle Media. Can you give me a sense of what the change in employee costs were this quarter for Lifestyle Media versus the first quarter of last year?

Kenneth W. Lowe

You are talking about employee costs?

Michael Nathanson - Sanford C. Bernstein & Co.

Just off of last year’s base.

Kenneth W. Lowe

Our employee costs were up somewhat artificially based on the transfer of a corporate EITO group, information technology group, during the separation last summer. So, if you take those out of the numbers then our growth year over year is 3%.

Michael Nathanson - Sanford C. Bernstein & Co.

Then let me follow up then; then the other line on the expense side has to come down a ton given that programming was up, employees were up; so how much did the other line come down then?

Kenneth W. Lowe

We held back on marketing and all of SG&A as Joe mentioned earlier. So, temporarily we are withholding consumer marketing spend as a means of keeping our total cost down, but we have the advantage of cross promoting our various networks on our other properties including online where we have two of the largest shelter and food, they are the largest online properties available; so we have a variety of means through various platforms to promote our programming internally. Now, that can’t last forever. This is a temporary period where we were tightening our belt on consumer marketing and thankfully and happily the ratings have grown even beyond what we expected. That’s the biggest explanation for that variance.

Joseph G. NeCastro

Michael, just to give you some color; between marketing promotion and all other costs in the first quarter, we’re down about 20%.

Michael Nathanson - Sanford C. Bernstein & Co.

Let’s say the year continues as expected, that’s your area of fluctuation rate; if you see the ratings coming in strongly, maybe you can keep that line relatively down, and as revenues come back you may spend a little more in marketing if you feel you’re at the top line, right?

John F. Lansing

Yes, that’s generally the way it would go.

Michael Nathanson - Sanford C. Bernstein & Co.

So, what we see now may continue for the near term?

John F. Lansing

Yes, until we see revenue comes back into strong positive territory, we’ll be holding cost as you’ve seen us do it in this quarter and into the next quarter.

Michael Nathanson - Sanford C. Bernstein & Co.

Let me just turn this to the option cancellation question; when we’ve asked other companies about option cancellations since the third quarter, they’ve been very quick to say to us, ‘look, don’t get ahead of yourselves because cancellations are coming in later.’ So, in terms of saying it like for like and as a percentage, maybe better on dollar terms, is that factoring maybe what you expect to happen or is that a real-time look at it versus where was the last quarter?

John F. Lansing

We’re still experiencing some of the same things you’ve heard on other calls. There are some major accounts that are asking for time, but our ad sales group has vectored for what they know now and the accounts that are out, and they feel like the 14% range is probably where it would end, and they’re fairly confident that it would be at the very least no worse than the second quarter and very likely be better than the second quarter, in terms of total revenue.

Operator

Our next question comes from the line of Benjamin Swinburne - Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

Two questions if I might, one on the affiliate fee side and the subscriber growth in particular, seeing HGTV and Food up between 2% and 3%; it’s certainly above what I would say would be normal pay TV growth, certainly in this housing environment. I am curious if you guys think that some of the over-the-air transition might be benefiting that as you’ve got a healthy amount of customers coming out of over-the-air into pay and how you think about that playing out through the rest of the year, I think June you have another whole significant part of the country that converts if that’s a meaningful benefit. Then, not to drive the cancellation thing underground, but you made a comment last quarter, I think, that a lot of the canceled upfront deals were coming back into the scatter market. Is that something that came in as you expected and is that what you expect to continue to see as we move into Q3?

John F. Lansing

Benjamin, I’ll start with the last part of your question. Yes, that’s what we were seeing as the quarter progressed, there wasn’t enough scatter marketplace to replace all of the cancellations, obviously, but the strength was modest, but it grew throughout the quarter and continues to be even stronger in April than it was in March in terms of pricing and volume. So, directionally, it’s modest, but we’re seeing improvement since the beginning of the year.

Benjamin Swinburne - Morgan Stanley

Just a followup, scatter versus scatter, we’re still not back to flat yet, and presumably if we got close to flat, then you see the cancellations fall over; there’d be really very little reason to do?

John F. Lansing

That’s exactly right. As for your speculation on the effective over-the-air on paid distribution, I don’t have an informed opinion beyond yours, but the improvements in distribution are significant for us pushing Food and HGTV now into 98 million subscriber households, and I guess I would say it can’t hurt that the transition from analogue to digital when broadcasting presents an opportunity for our distribution partnerships; they seem to have marketed to that very aggressively so that it would make some sense.

Operator

Our next question comes from the line of George Hawkey - Barclays Capital.

George Hawkey - Barclays Capital

Just had a couple of questions; the first is, in looking at some of your competitors, they have on the cable network side, have expanding operations and we just wanted to get your perspective on if there were any international acquisition targets either on distribution or on a content basis that you might be looking at, and then two, I just wanted to get a better understanding of what you’re looking at on a working capital run rate through the rest of the year?

Kenneth W. Lowe

You mentioned expanding operation, you telling specifically internationally?

John F. Lansing

I’ll talk about that and then I’ll pass to Joe on the run rate. We brought Greg Moyer on and created really a more aggressive international strategy coming into the New Year and Greg’s role has been to in the first three months travel around and determine the interest that there maybe in potential joint ventures or other investment opportunities to take our international business from what today is a syndication business to other people. Lifestyle Networks around the world to a strategy whereby we would look to become part owners and put together lifestyle channels that we have an equity position in around the world, and what he’s finding is a great deal of interest in Scripps and the reputation of Scripps in lifestyle media. So, we expect it will be a little while, nothing in the short run, but we expect that we’ll have some very interesting opportunities to talk about in the quarters ahead.

Joseph G. NeCastro

I assume your question relates to the working capital number in the release and how it was negative to positive during the year. I think that’s probably not a sustainable trend. Frankly, the positive $24 million in a quarter is pretty significant. Its timing is related to the fact that advertising is lower, so receivables are lower, and so mechanically as long as we don’t continue to trend deeper and from all the commentary there, ‘hey, that’s not our outlook,’ you should see that actually stabilize; it would not be another positive $24 million in the future quarters.

Operator

Our next question comes from the line of Edward Adarino - Benchmark.

Edward Adarino - Benchmark

Can you talk about your programming plans; any new stuff in the can coming up with the new season and what your cost might look like?

Kenneth W. Lowe

Absolutely. A lot of exciting things coming up. The Next Food Network Star and Design Star are coming up in the third quarter and there’s a lot of buzz around those plus HGTV is launching a new ten-pole event called the $250,000 Challenge which pits a neighborhood of real people who live around a real cul-de-sac against one another and they compete to design the best room per the judges, and it’s a cool idea because everybody is a winner, but one of the neighbors wins more; they win $250,000, and I’ve seen the early tape on that series and I can tell you I think it’s going to be very very successful for HGTV.

Edward Adarino - Benchmark

Are you projecting or giving out any cost increase for programming outlays?

Joseph G. NeCastro

For the full year we expect as we’ve said before, it’s in our guidance; programming will be up about 9% or 10% on the year, cash spend will be roughly more than the prior year, around the $300 million.

Operator

Our next question comes from the line of Scott Davis - J.P. Morgan.

Scott Davis - J.P. Morgan

I apologize because this may have been asked; I heard in the beginning when you were talking about as it related to Shopzilla, the components of where you think things have been falling short; I was trying to figure out within the 40% that you said is consumer driven, economy driven; presumably part of that includes just less clicks which in part may not be consumer driven, but may be the quality initiatives that Google is taking separate from changing your revenue share arrangement with them. I was curious, has that been better or worse than you saw in terms of the traffic that Google is no longer giving you.

Kenneth W. Lowe

I think it’s neither better nor worse. The fact is that they make and have been making for years changes in their definitions and what they consider to be the rules of the traffic there. Typically we see changes we adjust as we need to to their new rules and that hasn’t been a significant fact; any of you look week to week or month to month you might have some variations, but over the long haul, that’s not a significant factor.

Scott Davis - J.P. Morgan

If I could ask a second question on a completely different topic; when you were talking about the strategy for the upfront, the importance of maintaining pricing, I totally get that, but I guess I am wondering if there isn’t just a conversant benefit to getting more dollars than the upfront because I guess I am assuming that you have a lot of direct response to commercials, they’re probably coming in at such a lower CPM that even if you gave in a little bit on the upfront pricing component, your effective pricing for the full year would be so much higher with that many more dollars that you can get from those kind of quality advertisers versus the direct response guys. So, how do you think about that?

Kenneth W. Lowe

You put your finger really on the art of the negotiation in the upfront and our guys have done a great job year in and year out at nailing down the real value proposition of advertising at Scripps Networks that goes beyond just impression. It includes the engagements of our audiences and ad receptivity of our audiences as well as our unusually effective convergence opportunities with hgtv.com and foodnetwork.com among others. So, we fight hard to be at the top of the pricing heap, but it is, as you point out, a balancing act, and there is a certain amount of volume that needs to be written in the upfront to lay in a solid base and the balance is finding out the right mix as we get into the negotiations. We won’t know that until we really dig in deeply.

Scott Davis - J.P. Morgan

As a general rule of thumb would it be fair to say that the direct response type of commercials come in at a significant, massive; pick your adjectives, CPM discount versus the upfront type of advertising?

Kenneth W. Lowe

Yes.

Operator

At this time I am showing no further questions in queue.

Mark W. Kroeger

Thank you. I’ll be around here for the rest of the day if you have any followups. You can proceed with the replay instructions.

Operator

Ladies and gentlemen, this conference will be available for replay starting today, Friday, May 8, 2009, at noon Eastern Time, and it will be available through Friday, May 15, 2009, Easter Time, and you may access the AT&T executive playback service by dialing 1800 475 6701 from within the United States or Canada or from outside the US or Canada, please dial 320 365 3844 and then enter the access code of 996741. That does conclude our conference for today. Thank you for your participation and for using AT&T’s Executive Teleconference.

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Source: Scripps Networks Interactive, Inc., Q1 2009 Earnings Call Transcript
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