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Scripps Networks Interactive, Inc. (NYSE:SNI)

Q4 2009 Earnings Call

February 10, 2010 10:00 am ET

Executives

Mark Kroeger – VP, IR and Corporate Communications

Kenneth W. Lowe - Chairman of the Board, President, Chief Executive Officer

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

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

Lori A. Hickok - Senior Vice President - Finance

Analysts

Michael Morris – UBS

Barry Lucas - Gabelli & Company

Matthew Harrigan – Wunderlich Securities

John Janedis – Wells Fargo

Anthony DiClemente – Barclays Capital

Brian Shipman – Jefferies & Co

Doug Mitchelson - Deutsche Bank

Alexia Quadrani - JP Morgan

Benjamin Swinburne - Morgan Stanley

Brian Parensad (ph) – Goldman Sachs

Brian Shipman - Jefferies & Co.

Jason Helfstein - Oppenheimer

Jessica Reif Cohen - Bank of America Merrill Lynch

Tom Eagan - Collins Stewart

Operator

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter earnings report. At this time all participants are in a listen only mode. Later we will be conducting a question and answer session. (Operator’s instructions).

I’d like to now turn the conference to our host, Vice President of Investor Relations, Mark Kroeger. Please go ahead.

Mark Kroeger

Thank you, Anne, and good morning everyone. We’ll start the conference call today with comments from Ken Lowe, our Chairman and President and CEO and Joe NeCastro, Executive Vice President and Chief Financial Officer.

Our prepared remarks should take about 20 minutes. Then we’ll open it up for questions. Also on the call with us 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 on the web, go to Scrippsnetworks.com. Click on investor relations and find the microphone icon on the landing page.

An audio achieve will be available on our website later today. And we’ll leave it there for one week 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 Form 10K.

With that, I’ll turn it over to Ken.

Kenneth W. Lowe

Okay. Thank you, Mark. Good morning all. As always we appreciate you joining us. Without a doubt, 2009 was a momentous year for Scripps Networks Interactive and its shareholders. We ended the year on a high note achieving solid growth in both advertising and affiliate fee revenue during the fourth quarter.

For the full year ad sales were even with last year on an apples to apples basis. Which is especially good news given that we were managing through the worst recession in a generation. Importantly, we also executed on our top strategic prior for 2009, achieving what we set out to accomplish with our affiliate agreement renewals for both Food Network and HGTV.

We couldn’t be more pleased with the momentum that we’re creating. So let me give you a quick rundown of the headlines.

During fourth quarter, we completed our acquisition of Travel Channel giving us our third fully distributed basic Cable television network. And a promising new life style category on which to build. We achieved a significant reset of our affiliate rates effectively monetizing the value and the ever growing popularity of Food Network and HGTV. The new and improved rates took effect January 1.

We put into action our plans to expand internationally. We’ve created promising joint venture that enable us to leverage our expertise as creators of life style content around the globe. We’re exporting the Food Network to Europe, the Middle East, Africa and Asia. And we’re about to enter the growing Indian marketplace.

We made clear progress toward our debut later this year of the newly branded Cooking Channel. We expect Cooking to fit comfortably within the 55 million household footprint we created with this predecessor network. The goal at Cooking is to further capitalize on the exploding consumer interest in food as a television programming genre.

And perhaps the best news of all, Food Network, HGTV and Travel Channel reached new heights in 2009 with each brand ending the year with record growth in viewership.

Now, those are some pretty impressive headlines. All in all, an excellent quarter and a good year. Especially considering where the economy was at this time last year.

As we begin 2010 with our new affiliate rate structure in place, the company is poised for sustainable growth. As for advertising, the marketplace continues to show improvement which puts us in an inevitable positioned when you factor in the audience growth at our flag ship brands.

At Food Network we started the year pretty much where we left off in 2009 looking at total households in January, the prime time audience grew a very strong 25% over the same period last year. In fact, Food Network was the highest rated most watched network on all of Cable in prime time on Sunday January 3rd. Two shows let the way that night. The first was the Super Chef Battle. And American event from the White House which drew a whopping 7.6 million viewers and posted a 2.0 rating, among adults 25-54. That by far is a record audience for Food Network.

The second show that night was the premium of a new competition based show called, the Worst Cooks in America. About 4 million people stuck around to watch the premium episode of Worst Cooks, making it the highest rated most watched premium in Food Networks history. The show had 1.3 rating among adults 25-54 that night.

Now let me pause for just a minute to emphasize a point. Those are absolutely astounding numbers. And don’t forget Food Network was actually dark in many New York area households that night, and for three weeks in January.

As one of our advertisers told us recently, Food Network has become a power brand. I couldn’t agree more.

Looking ahead at Food Network, we have some very promising new shows in the pipeline, including one called Private Chefs of Beverly Hills. Which will premium in April, by the way. We’ve also responded to view demand for a show dedicated to Mexican cuisine with a premium last month of Mexican Made Easy. The show airs Saturday mornings during our In the Kitchen programming block.

Lots of really, really good things happening at the Food Network.

Over at HGTV, the audience growth that we enjoyed throughout the second half of 2009 has also continued into the new year. Total household viewership in January grew a very healthy 16% with the average prime time audience topping 1 million viewers a night.

HGTV ended 2009 with its highest ever annual prime time rating, achieving a solid 1.0 rating among total US households. Again, those are incredibly strong numbers.

Our programming team at HGTV has done an outstanding job repositioning the network to keep in sync with the times. Our first time home buyers programming block, including great shows like Property Virgins and My First Place have a resonated with viewers and provided the network with the lift it needed.

Another hit is a relatively new script called Homes on Homes. Plus we’re getting plenty of mileage out of perennial favorites, House Centers, House Centers International. And in January, the annual HGTV Dream home Giveaway Special.

This year we’ll be adding 14 new series at HGTV including a show called Selling New York. That I suspect will be of interest to a lot of folks in the call this morning.

We also announced in December that Mark Byrne will producing Susan Five of HGTV design star which will air this summer. We’re expecting Mark to do for Design Star what he’s already done for Survivor and the Apprentice.

HGTV is blazing ahead in 2010 and we’re expecting big things at the network.

At Travel Channel, the news is every bit as good. Travel finished 2009 with its best year ever in prime time and total day rating. And even more important, the median age of the networks audience dropped from 49 to 44. Hit shows like Man v. Food with Adam Richman, No Reservations with Anthony Bourdain and Ghost Adventures have found true cult followings with younger viewers. The rating success of Travel is a great story for Scripps Networks Interactive as we begin to build out our presences in the promising travel programming category.

Of course it’s important to remember, we’re not just all about television. We’re also making great headway building related content services in the home, food and travel categories across an array of media platforms. And that includes the highly successful Food Network Magazine, which continues to outpace our initial expectations.

Counting subscriptions and single copy sales, the magazine is reaching a very impressive 1.3 million readers. You know, we’ve said it before but it bears repeating, our partners at Hursts tell us that this is the biggest new title launch for them since Oprah Magazine.

Also in the food category, we continue to lead on the internet. Foodnetwork.com and recipezaar, continue to be among the top food websites in the country in terms of total unique visitors, page views and time spent on our websites.

In the home category HGTV just announced a new partnership with Serta, to create a collection of eco friendly mattresses appropriately labeled as the HGTV Green Home Collection by Serta. HGTV.com and DIYnetwork.com also maintain their leadership positions a valued online destinations for designers, for do it yourselfers, and more.

So, there you have it. Three powerful fully distributed life style television networks. Three powerful lifestyle content categories. And great content across a full range of media platforms including the internet and mobile devices.

Scripps Networks Interactive is extraordinary positioned to deliver value to our viewers, our advertisers, our distribution partners and importantly to our shareholders.

With that I’m going to turn it over to Joe who’s going to talk how we finished 2009 and then provide a new outlook for 2010, that will include travel. Joe?

Joseph G. NeCastro

Thanks, Ken. Good morning everyone. The fourth quarter turned out to be very good for us thanks to the improving advertising environment, strong rating of our flagship networks and continued growth in affiliate revenue.

Excluding the Travel Channel, advertising revenue grew a very solid 7% during the three month period. Which pushed full year ad revenue even with 2008 on an apples to apples basis.

Strong growth in the fourth quarter was due to the healthier ad market and the success we’ve had in monetizing the audience growth at both Food Network and HGTV. As for our affiliate fee revenue, again, ex Travel, we’re up about 16% in the fourth quarter and finished the year up about 16%. That was a tad better than the 15% growth we had forecasted at the beginning of the year.

It’s also worth noting that ad sales from our lifestyle media websites grew 10% during the fourth quarter. And that positive trend has continued into the new year. If you’ll remember internet ad sales were our leading indicator as we entered the recession. So we see this growth as a very good sign for us.

Now looking at other full year results, relative to the guidance we’ve provided, programming expenses were up about 9%, not including the write down and excluding Travel. That was in line with our forecast.

All other expenses in our lifestyle media segment went down slightly from the prior year as we had predicted. Again, that’s on apples to apples basis, minus Travel and any one time items.

Capital expenditures finished the year at $91 million as we continue to work on the expansion of our Knoxville operations facility. The effective tax rate from continuing operations was about 29% for the full year, which was lower than we had anticipated. A number of one time discrete items, including some favorable adjustments to previously filed tax returns contributed to the lower rate.

Going forward, when you factor in the non controlling interest for Food Network and Travel Channel, our effective tax rate should be in the 31%-33% range.

And finally, in Shopzilla we ended up with about $31 million in segment profit which was right about where we had guided.

Looking at earnings per share, as we noted in the press release, we finished the quarter at $0.52 after you strip out a number of onetime items related to our affiliate renewal, Travel acquisitions, Cooking Channel rebranding and the new switch divestiture.

To make sure we’re all clear, let me quickly run and size the items that effected net income and EPS. They’re also outlined in the press release for you. First, $21 million write off of Fine Living programming, accounted for about $0.07 per share. This was prompted by our announcement during the fourth quarter that we’d be rebranding Fine Living to the Cooking Channel. The write off includes existing Fine Living programming and commitments that we determined couldn’t be used at Cooking or in our other networks. The write off shore up was an expense on the income statement, which is why programming costs were up 25% during the period.

Next, about $18 million or $0.08 per share is tied to the Travel Channel acquisition, including both professional fees and financing costs. Our international investments primarily the Choazon (ph) JV accounted for about $0.01.

And finally to support our affiliate renewals, we had about $4 million in onetime marketing and legal expenses that accounted for another $0.02 or so. And if you live in the New York area you probably know that another bunch of these costs will hit in the first quarter as well.

The combination of all the onetime items reduced fourth quarter net income by $0.17 a share, which was offset by the $0.17 gain we realized on the sale of uSwitch and the $0.05 added back (inaudible) tax adjustments. That should get you to the $0.52.

So that was 2009. Let’s move on to the forecast we provided this morning. I’m sure you noticed that since we’re including Travel Channel in our forecast we decided to give you a range of actual dollars on (inaudible) revenue and expense items. Rather than trying to relate apples to oranges using a growth rate we thought this would be a better way to present our guidance for this year.

Let’s start with affiliate fee revenue for 2010. With the majority of our carriage right agreements renewed at more attractive rates, total affiliate fee revenue is expected to be in the $530-$540 million range. With about $100 million of that coming from Travel.

As Ken said, we accomplished substantially all that we set out to accomplish in this very important round of renewals, achieving parity and rate structures between Food Network and HGTV. Rates at both networks also are now more in line with our competitive set. The new rate structure we believe more accurately represents the value of these brands for both us and for our distribution partners.

Moving to Lifestyle media expenses, including Travel. We expect programming amortization costs to be between $380-$400 million and non programming costs to be within a range of $550-$570 million. You’ll remember, please, that we cut back dramatically on marketing expenses in 2009.

At Shopzilla we’re forecasting segment profit to be $33-$35 million. Which would be a modest improvement from 2009. The performance you saw in 2009 will likely continue to the first half of 2010, with a much, much stronger finish in the back half.

One other operating item for 2010, while it’s too early to quantify with any precision, we do expect to report losses on our international start-ups in the year ahead.

And finally we expect capital spending to be in the $95-$100 million range. We’re on track to finish our Knoxville expansion this year. So starting in 2011 I’d look for normalized Cap Ex run rate of about $50-$60 million per year.

Before I finish, let me quickly bring you up to date on where we are with Travel Channel’s integration. At time point I’d say we’re proceeding very close to plan. We anticipate fully assuming ad sales responsibilities by the end of the first quarter. Which will tee us up to market the brand in this year's upfront. We also expect to assume technical responsibilities from discovery in about the same time frame. We lastly expect to assume affiliate sales during the second quarter.

A couple more housekeeping notes related to Travel. You’ll notice that we did not include the quarterly balance sheet or cash flow statement with this morning’s release. That’s because we’re still working through some of the acquisition accounting. Naturally, we’ll have everything ready in time for our 10K filing in a couple of weeks.

Let me highlight a couple of balance sheet items, though. First, we ended the year with a cash balance of about $254 million. That includes $181 million we contributed to the Travel Channel joint venture. And our debt balance at year end is $884 million. Again, all related to the Travel acquisition.

Lastly, when we report the first quarter we intend to provide a quarter by quarter pro forma look at Travel to help you with your models and comparisons going forward.

With that, Operator we are ready to take questions.

Question and Answer Session

Operator

(Operator’s instructions) We have a number of questions at this time. The first one is coming from Michael Morris. Please state the company you’re with. Your line is open.

Michael Morris – UBS

Hi, I’m with UBS, thank you. Joe, could you provide us some more color on those renewed contracts that you’ve entered into effective the beginning of the year. You made the statement that you see parity and rates now between Food and HGTV. Does that mean that the rates themselves are the same? Does it mean that the escalators are the same? And then what are you seeing in terms of escalators on those contracts, if you can maybe give us some guidance there. And then in terms of what you reported for Food and HG in the quarter, Food revenue grew at a much higher rate than HG. Both have had very strong rates. Food a bit stronger. But could you talk a bit more about why Food grew so much higher than HGTV in this quarter. Thank you.

Joseph G. NeCastro

Yeah, Mike, I’ll take the first question. I’m going to kick to John for the revenue question. As far as rates, let me start by saying there’s a limit on what we can disclose based on our negotiations. But let me give you a little bit of color. The parity comment does refer to rates. We are going to be in the same neighborhood as the other network and some of our peer networks. And the terms are, they’re multiyear, they’re varying terms and not all going to terminate at the same time. The escalators are a little bit different shape than what we’ve told you in the past about the HGTV renewals. We did achieve a much large slow to the growth early on in the Food renewals. So by and large we’re very, very pleased with how those renewals came. And as I said, we certainly met our objective and we actually exceeded our internal expectations for success on the renewals.

So I’m going to turn it over to John for the second part of your question.

John F. Lansing

Sure. Thanks, Joe. Michael, the story on Food compared to HGTV is one really, where we saw the growth in rating on Food throughout the full year of 2009, and it gave us three opportunities to improve our estimates going into the ad sales market. We improved them once after the second quarter we grew them once again in the upfront. And then we grew them yet again going into the fourth quarter for the scatter business. And as a result we were able to drive up our average unit rate for Food Network and capture the value of that rating growth in the fourth quarter in a manner that was measurably higher than HGTV. But thankfully now that HGTV has caught a wave, having now seen six straight months of audience growth, we’re also able to begin pushing the estimates up for HGTV as well.

Michael Morris – UBS

Okay. That’s great. Thanks for that color. And just so I’m clear, Joe, on those rates, for HG and for Food essentially all of the renewed contracts at this point are at essentially the same per subscriber rate, is that correct? You said in the same neighborhood?

Joseph G. NeCastro

They’re in the same neighborhood. I think that’s the way to look at it.

Michael Morris – UBS

Okay. Great. Thank you.

Operator

We will now go to Barry Lucas with Gabelli & Company. Please go ahead your line is open.

Barry Lucas - Gabelli & Company

Thanks and good morning. Couple of quick items and one of them is housekeeping. The $28.7 million gain on uSwitch that’s from a base of zero, that was totally written off, wasn’t it, Joe?

Joseph G. NeCastro

No, it wasn’t totally written off. It kind of met with the bases where we had left.

Lori A. Hickok

We probably had about $11 million in basis plus there was some foreign currency gains on the balance sheet. Which is why you’re seeing a gain. It’s non cash. But you’re seeing it really – it’s accounting rules that when (inaudible) to take those in when we load up part of the book value at the end of last year.

Barry Lucas - Gabelli & Company

Okay. So I sense you’re saying that I can’t just tax effect the gain and say that that’s the cash proceeds or not?

Joseph G. NeCastro

No, not exactly. We can give you more on that later if you want.

Barry Lucas - Gabelli & Company

Okay. That’s great. Second item, would be on the affiliation issue. Joe, looks like if we take out the $100 million or so for Travel, it looks like about $100 million increment for affiliations year on year. That correct for the core networks, ex Travel?

Joseph G. NeCastro

Yeah. I think that’s about right. Might be a little more than that.

Barry Lucas - Gabelli & Company

Okay. But that would seem to suggest that year one, ball parking for all the networks and I’m assuming that’s for primarily HGTV and Food that that’s about $0.05 per sub per month, ballpark if I take the $100 million divide by it 200 million total households and divide that by 12. I think that comes out to about $0.05?

Joseph G. NeCastro

Barry, I think you’re vastly over simplifying it. First of all, not all HG subs came up this time.

Barry Lucas - Gabelli & Company

Okay.

Joseph G. NeCastro

At year end I think we only had about 50% of the HG subs come up. And we had about 3/4 of Food subs come up. And Comcast was not one of the renewals at this time. So the increase per sub was well north of what you calculated.

Barry Lucas - Gabelli & Company

Great. And last item, any more color you can provide on the ad environment today given the strength that you exited the fourth quarter?

Joseph G. NeCastro

I’ll let John answer that one.

John F. Lansing

Yes. Good morning Barry. We’re continuing to see a very strong scatter of marketplace for advertising. Scatter versus scatter is now in the plus territory in the mid singles. And in the mid teens, higher than upfront business. And so the strength we saw that accelerated through each of the three months of the fourth quarter carried over into January. And continues to look very strong.

Barry Lucas - Gabelli & Company

Terrific. That’s great, John. Thanks for flushing that out. And that’s it for me.

Operator

We will now to Mathew Harrigan. He’s with Wunderlich. Please go ahead, your line is now open.

Matthew Harrigan – Wunderlich Securities

Good morning. A couple of question. Can you talk more about the international angle, no pun intended, on the Travel Channel and the competition out of London? The branding is going to be a little bit confused. The potential relative to Food and HGTV overseas. And then secondly, can you talk about your over indexing in the HG, Homes, which is presumably providing some of the thrust for your rating improvement. And maybe that applies particularly to Travel. And then lastly, you’ve shown us the magazines that you’re able to do some things in media that a lot of other guys can’t do right now on the older categories of media. Can you talk about some things like tablet and all that and how you’re beyond you, as is, internet strategy right now how that overlays and whether you would expect it perform disproportionably well, so the adaptations in that area as well. I know that’s a little bit fuzzy, but it seems like you just have so many venues for extending your brand right now.

Joseph G. NeCastro

I’ll talk about the international piece than I’ll turn it over to John. I’m not sure we understand your second question but we’ll come back to it. John says he understands that second question. And so, on international, I think we’re at the very early stages of thinking about Travel. We sort of put in priority order the categories that we like for international, I’d say Food is number one, a generalize lifestyle channel, probably branded under Fine Living is number two. Travel, while has great international feel, you correctly point out as established competitors and other choices in many, many markets. Not the least of which is owned by our good friends at Discovery.

So, we’re proceeding cautiously. One thing we do like is that we do think the programming has great appeal. We are not so concerned that the brand name is taken in large parts of the world. In fact these two companies did have the same set of parents, way back when and split off at that point. International went one way and domestic went another.

We’ve had conversations with the owner there that I think we might be able to do together down the road. But we’re not married to that brand globally, partially because we think the program is more important than the brand. And we may actually create other brands if we think that there’s room for another stand alone travel network globally. But like I said, we like the programming appeal. It’s sort of third on our list of most important priorities globally. But we’re going to our best in – and as I said, we’re still early days thinking about what we can do with travel.

John, you want to talk about the other?

John F. Lansing

Yeah. Thanks, Joe. Yeah. Matt, I think what you may be referring to, we do indeed over index with high definition audiences. And that really is an artifact of the fact that our audiences are in the top five in terms of both young women and upscale younger audiences altogether. And so, to the extent we over index upscale I think that transcends – or I should say translates into the high definition viewing. And it’s evidence of the fact that we do well with those audiences.

Regarding your question about platforms, when you think about particularly HGTV and Food or maybe think more in terms of our two biggest categories, Food and Home, we really have brands and now adding Travel to the mix, brands that transcend television, per se, and resonate with audiences on a variety of platforms. And the way we think about it is that we’re agnostic as to the platform per se. Rather we just think about accessing as many consumer touch points as we possibly can that resonate with our media content.

So we’re seeing that happening with the Food Network Magazine. We’re seeing it certainly through our digital businesses. Travel Channel, by the way, has also done a great job in this regard. Their website is up 20% in traffic after their recent redesign. And we just see a lot of opportunity going forward to create new revenue streams on top of these relations we build by way of these massive Cable Television properties to continue the growth into the future.

Matthew Harrigan – Wunderlich Securities

And your good at interpreting fuzzy questions. Thank you.

Operator

Now we’re going to John Janedis. He’s with Wells Fargo. Please go ahead your line is open.

John Janedis – Wells Fargo

Hi, thank you guys. Joe, just wanted to follow up on the Travel Channel. Obviously a lot of pieces here. But can you give us a bit more clarify on both the programming and non programming expenses for the year? And maybe can you also on the expense front talk about incremental expenses related to the Cooking Channel? Thanks.

Joseph G. NeCastro

John, on the Travel Channel expenses, we’re very careful, we don’t provide enough information to get people to segment profit buy network. And there’s a good reason for that. There’s just too many allocations involved. And in fact, it’s pretty early on the Travel Channel. We’re not really even fully through our integration process. So to provide specific guidance on expense line items is premature. I will say this, we absolutely expect that the network has the full potential to achieve very bit of margin that the other two fully distributed networks due. And we’re working towards that objective. So, I think I’m going to have ask you to stay tuned on that one while we work through the transition. I think as we get a little more clarity on that we can give you some better guidance on margin expectations for Travel Channel as we go forward.

John Janedis – Wells Fargo

Joe, can you at least help maybe with just the one time transition cost then?

Joseph G. NeCastro

Well, transition costs again, they are the outcome of our transition plan, which is still somewhat under construction. You would expect – there are things in there that would you expect. There is some breakage related to the discovery agreements. There are things that we’re going to have to put in place, some infrastructure we’re building to adapt the way they operate to the way we operate. And they’re be some disruption to that business. There may even be some real estate implications.

Look, I think it won’t be an insignificant number for the year. But I’m afraid it’s a little early to give you a range on that.

On the question of Cooking Channel and the transition there. The only transition expense that we’re sort of not having covered by the existing Fine Living budget that we had would have been (inaudible) fees or conversion fees that we paid in incentives to the operators to launch the new network for us, or work with us to launch the new network. And while that’s a relatively modest fee, it will be an increase in expenses there. But it’s not going to be significant. You can think in terms of a dollar or so, that we converted over a very long period of time it was amortized. So overall, those carriage agreements. So it’s not going to be a meaningful change in this year’s budget for what we had in place for Fine Living.

John Janedis – Wells Fargo

Okay. Thanks. And maybe just a follow up on the international frame. IF we’re thinking about dilution there, in general, would a range or a thought of, kind of, a few percentage points or low singles be the right way to think about it?

Joseph G. NeCastro

You’re talking about dilution on – I mean, give me the basis?

John Janedis – Wells Fargo

On international investment, whether it be programming related to Asia or the other things that you’re doing that you’ve announced.

Joseph G. NeCastro

At this point we have one operating under way and one about to get underway in the Far East. It’s again, early. But I would tell you that we lost a penny’s worth in (inaudible) operation for the very short side of period. A lot of that launch related and initial marketing campaign it won’t occur. The big unknown is when do we actually hit the ground in India and the sort of the shape of that business and the timing of the launch of a second network there. And frankly, we haven’t even closed on that transaction. We put the announcement out when we reached, sort of, term sheet. And we’re still waiting for some regulatory approval there. We won’t likely close until sometime late in the first quarter.

So, I hate to dodge this one, but we do have an appetite to continue to invest there. We will be conservative as we always are. But we do expect that we’re going to lose some money there this year. And I said up to the earlier question – I answered the earlier question, I think as we get a little more clarity on the plan, especially in India, we’ll be able to give you a little better guidance on that.

John Janedis – Wells Fargo

Okay. Thank you very much.

Operator

Next we’ll go to Anthony DiClemente. He’s with Barclays Capital. Please go ahead.

Anthony DiClemente – Barclays Capital

Hi, maybe I’ll try a different way. Joe, if I exclude the one time transition cost related to Travel Channel, what would the margin be – what would your guidance imply for the Lifestyle media margins in 2010?

Joseph G. NeCastro

It’s not going to be significantly different from what it was last year. In fact, in total it will probably be up.

Anthony DiClemente – Barclays Capital

Okay. So what you’re saying is that – are you saying that the Travel Channel is accretive to the overall margin or are you saying that its dilutive but because of the inherit organic growth you’ll have year over year margin expense?

Joseph G. NeCastro

It would be very modestly dilutive to the overall. And the others are going to be lifting some. So I think in our view, that’s our internal projections. So I think the overall will grow. It’ll be slightly dilutive, Travel will be slightly diluted to the others.

Anthony DiClemente – Barclays Capital

Okay. Got it. And then is there any material change year over year in your corporate expenses, ‘010 versus ’09, like down 50-55?

Joseph G. NeCastro

Yeah, on apples to apples basis, no, in fact we expect it to be flattish to up very, very slightly. But our corporate line is where we’re carrying the development expenses related to international. So to the extent we do more there, we’re more aggressive there, it will hurt that line item. That said, we’ll break that out in our results so you know exactly how much of the corporate line item is related to international and other development. So you’ll see that.

Anthony DiClemente – Barclays Capital

Got it. And then final question is on minority interest. Because I think, if I’m not mistaken, Cox owns the 35% of Travel. So I would imagine that your minority expense would go from the, call it 100 million in Food Network that you don’t own. What can we expect to add to that minority interest line 2010?

Joseph G. NeCastro

(Inaudible) Lori, do you have that number?

Lori A. Hickok

Yeah. We think it’ll be right around $120 million for 2010, with all in.

Anthony DiClemente – Barclays Capital

All in. Okay.

Lori A. Hickok

Yeah. So that’s an estimate you can use. I mean, obviously the more profitable those are the bigger that number gets.

Anthony DiClemente – Barclays Capital

Helpful. Thank you.

Operator

And next we’ll go to Brian Shipman he is with Jefferies. Please go ahead.

Brian Shipman – Jefferies & Co

A couple of questions, just follow up on the margin related question for media networks. I guess longer term bigger picture where do you see that potential margin moving towards? And then second question related to international, I know it’s going to be small this year. But what percent will international contribute this year and where do you see that going longer term as well? Thank you.

Joseph G. NeCastro

Look, longer term on media services, the way we typically think about margin is that it’s an outcome of actions that we take to build the brand over time. And we’ve said many, many times we don’t manage to a margin. That said, as you build affiliate fee revenue over time that’s margin enhancing and that will provide upward pressure on the margin over time. But you always have to have our over standing caveat that we will do what it takes to build for the long term of the networks. And if that means there’s a year, like this year when we’re still in marketing expenses that were absent last year, that’ll go in the other direction.

I think where you see the margin sit now is obviously very strong, very healthy. It could continue to move up if we did nothing else. But we’re not in the business of milking the networks. We want something that’s going to be just as strong 10 years from now. We like to take credit for these networks being as strong as ever 15 years after launch. So we’re feeling very good about where we are. We will continue to push in the direction we’ve pushed.

International, look, I would make sure that we all keep our expectations in check on international. It’s a start up for us. We’re going to be very prudent the way we like to be in everything. So we’re going to try and walk before we run. I would not expect a significant percentage of revenue or even something I would worry about measuring at this point in 2010. I would love to believe that by the end of 2010 we’re in a position to say it’ll hit the radar for 2011. But unfortunately we’re in that mode we’re a little opportunistic more than we are anything else. But we’re trying to see what opportunities make the most sense and what geographies. And so I don’t have a budget in mind of what that ought to be. I think longer term our view of internationals, it should easily hit 10%-15% of our revenue, a few years out. That’s sort of our mind set. If we can come up with opportunities that are bigger than that or that are more profitable but smaller than that, that could change.

Brian Shipman – Jefferies & Co

Thanks for the color.

Operator

Next we have Doug Mitchelson. He’s with Deutsche Bank. Please go ahead your line is now open.

Doug Mitchelson - Deutsche Bank

Just a few questions. First is, can you give us a sense of what’s imbedded in your guidance for advertising for 2010? I mean, is it similar to the outlook for the first quarter and you carry that forward? Is it more conservative or more aggressive?

John F. Lansing

Well, yeah, we’re not giving any specific guidance regarding ad performance for 2010, similar to last year. But I can, again, comment that the marketplace continues to be very strong, the scatter marketplace. And as that pricing improves and that combines with our improving ratings, we’re seeing our average unit rate per commercials go up. So the direction is as positive if not more positive than the finish in the fourth quarter of ’09.

Doug Mitchelson - Deutsche Bank

And then shifting over to ratings, as you guys analyze your performance is there a point in time throughout the year that investors should expect the ratings growth to slow down dramatically because you start to compare against last year’s success? As you look at the new shows coming out and still more room for growth in these networks through the year?

Joseph G. NeCastro

No, absolutely more room for growth. That’s part and parcel the reason why we’re investing once again in more marketing to put behind and support the new launches of these series. As you know, last year we spent very little on marketing. We relied essentially on our existing audiences watching longer and more often. And in terms of attracting new audiences, that’s the point of investment and marketing. And we think our programming teams at all three of our major networks, Travel, HGTV, Food, have an excellent plan going into 2010. And we intend to support that plan. And we expect the results would be positive throughout the year.

Doug Mitchelson - Deutsche Bank

And then lastly I just wanted to try the nuance the affiliates to (inaudible) a little bit further. You said you had a sort of a mix of contracts and that – I think you sort of comment for the most part you achieved pretty good step ups right away early in the contract versus your old, HGTV contracts that you had done previously. Were there some contracts that were multiyear step ups? Was it a mix or should we consider all the contracts to have had a first year step up?

John F. Lansing

Let me just comment. First of all, we believe the affiliate negotiations were exceptional in terms of the outcome. Actually, well beyond even our greatest expectations. The step up is significant for Food as we hoped it would be. And it was also significant in all of our other negotiations. Each negotiation is separate and individual. We can’t comment, obviously, on the terms. But over the total term of the individual deals going forward the increase to our bottom line will be substantial in year one and will continue throughout the term.

Doug Mitchelson - Deutsche Bank

Okay. So they’ll be sort of above normal increases perhaps in year two and year three when you just look at the mix?

John F. Lansing

Yes.

Doug Mitchelson - Deutsche Bank

And I think you just confirmed it with a statement. But just to be clear, you said that Food was a parity with HGTV. But HGTV also received healthy step ups in these negotiations?

John F. Lansing

There was not ever negotiation involved HGTV. But those that did, HGTV did receive healthy step ups, yes.

Doug Mitchelson - Deutsche Bank

All right. Thanks for helping me spin it down. Appreciate it.

Operator

We now will go to Alexia Quandrani with JP Morgan. You may go ahead.

Alexia Quadrani - JP Morgan

John, if you could just give us a bit more color on your comments on the advertising market, specifically what verticals are you seeing particular strength and beyond the strong scatter market. I assume no one’s really exercising their options to cancel the front commitments, if that’s correct. And lastly, sorry to make you repeat yourself, but did you say scatter was up mid single digits versus scatter in Q1, up double versus scatter with scatter in Q4?

John F. Lansing

Yeah. Scatter in the first quarter is mid single digits, higher than the scatter from last year’s first quarter. So that’s the first scatter over scatter pricing growth that we’ve seen in over four quarters. So that’s positive.

In terms of the verticals for the first quarter, the leading top six for us include, Food, consumer product goods, financial, retail, medical and automotive.

And the in terms of your question about upfront cancellations, the good news is that we saw really a normalized, meaning very few, cancellations for the summer upfront going into the first quarter. However, we did see some cancellations in the calendar upfront. Which is the upfront business that we brought that is January through December. But we have more than offset those cancellations by a substantial growth in the scatter marketplace. In fact, we think many of those dollars are just re-expressing themselves from calendar upfront through the scatter market itself.

And so, by and large we’re thankfully seeing a normalized quarter in terms of cancellations from last summer is upfront. And in terms of strength in the scatter marketplace that is continuing to offset any other cancellations that we experience through the calendar upfront.

Alexia Quadrani - JP Morgan

And then in terms of the fourth quarter, I assume then scatter was up over upfront pricing, but scatter was still down year over year in Q4?

John F. Lansing

That’s exactly right.

Alexia Quadrani - JP Morgan

And then just one more question. On the transition of Fine Living, I think you mentioned it was going to be completed in the second quarter. I guess how long should we assume before we really see a turn around there before we can see sort of resumption of revenue growth in that channel?

Joseph G. NeCastro

Well, our ad sales teams are getting a lot of positive feedback regarding the rebranding of Fine Living to the Cooking Channel. The food category currently is the hottest category in Cable, both in terms of audience and as you heard in terms of advertises demand. We have a team that’s putting together an exceptional programming plan for the Cooking Channel. It’s schedule to launch on Memorial Day weekend. And the demand is lining up behind it. So not to overstate that and have too much optimism, but I have to tell you, the optimism around here about Cooking and our ability to cross promote Cooking on Food Network, the fact that audiences are craving this type of programming and advertisers are looking for it. We feel very good about this rebranding of Fine Living to Cooking that’ll occur in the spring.

Alexia Quadrani - JP Morgan

And then just one more on the affiliate agreement. You mentioned, I think, that the length of the contract varied by Cable operator. Is there an average length of contract you can give us a sense of?

Joseph G. NeCastro

No. I don’t think it’ll be material. They’re just different over the next several years.

Alexia Quadrani - JP Morgan

So none of one are sort of one year in length. They’re more than one year.

Joseph G. NeCastro

They’re all multiyear agreements, yes.

Alexia Quadrani - JP Morgan

Okay. Thank you.

Operator

And we will now go to Benjamin Swinburne. He is from Morgan Stanley. Your line is open.

Benjamin Swinburne - Morgan Stanley

Couple of questions, on the programming costs outlook and maybe one, just sort of, on the accounting side. And then Ken, a longer term question. We don’t have a cash flow statement so I’m not sure what you’re cash investment in programming was in ’09 versus ’08. But when I strip out what I think Travel is plus your impairment in the fourth quarter, it seems like your programming cost amortization guidance is sort of 10%-11% growth in ’10 versus ’09 on the kind of core networks. And my understanding is it’s four year amortization accelerated depreciation of your cash investments is the way the accounting work. Correct me if I’m wrong. So I was curious if you could just help sink up your cash investment in programming over the last year or two. And this growth rate, which I think is sort of flat with ’09. I would have expected it to moderate in ’10 versus ’09, but maybe I’m doing that math wrong and my Travel estimate may be wrong.

And then along those lines, Ken, when you think about down the road, if in fact the broadcasters start to receive retransmission fees the way they think they will, you can make an argument that the sort of cost audience growth goes up in general. You’ve been competing with broadcasters in many ways that have had a broken model. And if in fact that model gets fixed and there’s an influx of billions of dollars of re-trend, how does that change, if at all, your investment strategy and content and how you think about spending on your core networks?

Lori A. Hickok

I’ll help you out. Our cash spend is about flat with last year. So you won’t see year over year from 2009 to 2008 much different. If you take the write off out for this year we were up about 9% which was right in our guidance. Next year we’re planning on being, if you exclude Travel, up 5%-7% which we have guided (inaudible) helps you get to where you’re trying to go. So we are moderating our increase year over year on the core networks.

Benjamin Swinburne - Morgan Stanley

Okay. So then I must be too high on Travel when I’m doing that math.

Kenneth W. Lowe

Sounds like it.

Benjamin Swinburne - Morgan Stanley

Okay. Thanks. That’s very helpful.

Kenneth W. Lowe

Benjamin, great question. I think what’s not being factored into the equation as much right now is kind of shifting in some revenue. Which you know, historically since retransmission consent launched in the mid ‘90s and we were pretty much at the front end of that because we took the retransmission consent of our 10 television stations. And then we coupled that with some other television stations. So we used that leverage to get HGTV launched. And as you know that was really also a mechanism for getting Food launched.

Some of those dollars that went from retransmission to Cable networks like ours are now maybe going to be shifting back to the network model. But that comes with NBC, ABC, CBS to a certain degree and FOX as well. Maybe having to shift some revenue internally. So it’s not going to be that all this new revenue is going to get created as much as we’re going to see some more shifts and resetting the brakes, which is going to have some upheaval over the coming negotiations.

Having said all of that, and having just gone through a massive renewal with about 75% of our Food Network base, it’s still going to come down to in my opinion quality content that has passionate viewership, passionate engagement from the audience that has high quality for the advertising community.

So you’ll continue to see us invest. I think it’s going to be a more competitive environment. I think looking forward you can actually expect to see some – as I said, not only dollar shifted, but some smaller and less popular Cable networks really put under duress.

From our standpoint, there’s going to be a lot of movement. But I’ve never felt stronger about our brands. And as John was alluding to earlier, as we see technology and some of the things that are probably going to be happening in the future with TV everywhere, inactivity being enhanced with these set top boxes. Our brands are actually, I think, in for great runs. And that’s why we were thrilled to pick up one more category, the Travel category because the Home category and the Food category. And to paraphrase what John said, our brands really transcend television. So it’s great to have those TV brands as popular as they are. But we’ve never been about just Cable networks. We’ve been about categories.

Operator

(Operator’s instructions) We have a question from Brian Parensad (ph), please go ahead. He’s with Goldman Sachs.

Brian Parensad – Goldman Sachs

Question on the non programming expense side. So you had wonderful audience growth last year with a pretty barebones marketing budget. Any reason why you shouldn’t just continue, not necessarily bare bones but why you’re going full open with the marketing spend this year when you seem to do pretty well without that. I know you’re trying to get some new viewers in. But there’s two ways to think about it. I guess one is, that if you had spent more you would have had that many more viewers. The other is perhaps maybe what you were spending on marketing was it the greatest place. How do you reassess your marketing mix, I guess, for next year? And then the other question is on the programming side, any idea, kind of, on the number of hours of new original programming in ’09, ’08 and then what you’re planning for ’10?

John F. Lansing

Listen, last year we had a very successful year, obviously in terms of rating. And we had indeed lessened our marketing spend. But to be clear, the ability to continue that year after year would really be impossible. And with the momentum we had going into ’09 what we were able to do was take our existing audiences and by using the cost promotion of our networks able to convenience audiences to watch us more often or longer when they did tune in as a manner of improving our ratings. But for the long haul, there’s no possible way that you can grow your audience without attracting new viewers along the way. And there’s really no way to do that without marketing off your channels on other media platforms. And so yes, it may seem like a question mark in your mind, I suppose, that if you can raise rating in a year without marketing why not just quick marketing altogether. But of course, that would be not only a failure in terms of strategy it would just invite competition in to steal the great momentum we’ve already created.

In terms of hours of programming, Lori, do you want to –

Lori A. Hickok

Overall that hasn’t changed dramatically year over year and we’re not anticipating a huge change next year. So the hours are pretty standard. I think over time we’ve learned there’s a certain amount of new program we have to introduce and we’ve learned, kind of, what that level is. Even with Fine Living and the Cooking Channel swap there's not an impact as far as the number of hours.

Brian Shipman - Jefferies & Co.

And then just going back a bit to the audience growth. Was substantially audience growth, are you able to tell from your existing viewer base or do you have any kind of count as to how much is new versus existing?

John F. Lansing

You know, where we had our big tent pole events like next Food Network star or HGTV Design star, those events we put some limited marketing against those and then strategically we placed new series launches on the backs of those tent pole events, and so our marketing teams at HGTV and Food just did a great job using a limited amount of resources to create a great deal of momentum going into this year.

Brian Shipman - Jefferies & Co.

All right, thank you.

Operator

And next we'll go to Jason Helfstein, he's with Oppenheimer. Please go ahead, your line is open.

Jason Helfstein – Oppenheimer

Thanks. Most of my questions have been answered – maybe just a follow up on one thing. When you think about the business in longer term and you adjust out a number of these onetime factors – we're all having to figure out how to model. Do you inherently believe that the lifestyle media business should be able to show margin growth kind of year in year out and do you try to model the business that way? Thanks.

Kenneth W. Lowe

Hey Jason, this is Ken, I'll just take it. Joe more or less answered that question earlier. We've always been very proud of our margins and I think it's based as we've said many times on the cost effectiveness of programming when you have targeted networks like we have. But I think the best way to answer that is as Joe said, we don't manage the margins we manage not only the profitability but continue to grow. And the best evidence is in the 15th year of this company we had the strongest years with our cable networks than we've ever had not only audience growth but continuing to expand on other platforms- we're starting to move international. So you know, long term yeah, we're going to continue to have very healthy margins but never at the expense of growing the business and growing these brands.

Jason Helfstein – Oppenheimer

Okay, thank you.

Operator

We will now go to Jessica Reif Cohen, she's with Bank of America. Please go ahead.

Jessica Reif Cohen - Bank of America Merrill Lynch

Should the affiliate fee guidance is related to new international channels if any?

John F. Lansing

None. It's all domestic, Jessica.

Jessica Reif Cohen - Bank of America Merrill Lynch

Okay. And then, can you just elaborate on timing of Travel Channel renewals and any thoughts you may have going into those negotiations having just come out of somewhat intense negotiations on your other channels?

John F. Lansing

Yeah sure. The Travel Channel renewals were spread out beginning at the end of this year and then mostly 2012-2014 and we do believe that there is headroom to improve the affiliate B's (ph) for Travel Channel. The network prior to us acquiring it has done a fantastic job in creating a great ratings story, done intention to provide the support and resources to help them continue to do that, and as we saw with Food to the extent that we can deliver a strong audience proposition then the negotiations become that much easier to complete.

Jessica Reif Cohen - Bank of America Merrill Lynch

Thank you. And one last one. I'm just going to try this one last time. On the Food affiliate renewals – it sounds like the big step up obviously is year one. Is it fair to assume that the escalators in years two through five or seven, whatever the deals are, are low single digits?

Joseph G. NeCastro

Jessica, this is Joe. It's fair to assume that they're in the single digits. I think low might be a stretch there. They're pretty healthy going forward but like I said the bulk of it came and of course it's not like an inflation escalator, it's a real money going forward but – my explanation was sort of relevant to HG where we got double digit increases for three years in a row and then it sort of flat-lined to an inflation adjusted number, eventually. This is a big step up time but still meaningful going forward, higher than the HG.

Jessica Reif Cohen - Bank of America Merrill Lynch

I guess one last one. So in the contract range, five to seven years? Depending on the operator?

John F. Lansing

I think it's fair to say three to six years. Ranging between three to six depending on the deal, depending on the affiliate.

Jessica Reif Cohen - Bank of America Merrill Lynch

Okay, thank you.

Operator

And our last question is coming from Tom Eagan, he's with Collins Stewart and you may go ahead.

Tom Eagan - Collins Stewart

Thank you very much. We've heard from other cable networks talking about tightening CPM's (ph) to broadcast. Can you tell us what you're seeing or I guess thinking about it more broadly do you think that your non-fiction networks are really substitutes for broadcast? And then I have a follow up. Thanks.

John F. Lansing

Yeah, we've always felt like we're more than a substitute, we're a great alternative to broadcast. What we really do well is create a passionate audience around these categories, Home and Food and now Travel and then we're able to monetize that passion through our higher engagement and those results flowed through our advertising rates and now our affiliate B's and now our other platforms that we've developed and so it's really a different model for us. We're not out to attract and audience that is a mile wide and an inch deep. Our audience is richly associated with our brands and as a result we monetize that relationship on TV and on all other platforms in a way that broadcast television could never dream of.

Tom Eagan - Collins Stewart

Right, so have you seen that CPM gap which I assume is still there, between your networks and broadcast. Have you seen that narrow over time?

John F. Lansing

The CPM gap is narrowing over time, absolutely just because the reach premium that broadcast television has always enjoyed is being eroded year after year because of other cable networks as well as ours, particularly cable networks that are more in competition for a broad audience unlike us.

Tom Eagan - Collins Stewart

Right. And then I have a follow up which is – you know we've heard other media managements talk about a new platforms such as the iPad. We have also heard them say that they're interested in new distributors into affiliates but not necessarily new devices. Could you just talk a little bit about your approach to these devices such as the iPad.

John F. Lansing

You know, it's a great question. I know it's the buzz right now, and every quarter or every year there's a new technology buzz, but we really think more about our consumers and how they're interacting with all this technology than the technology itself. We're fairly agnostic as to whether our consumers find and interact with our brands through an iPad or an iTouch or a television screen or a magazine. Our passion is about finding our consumers and linking with them in their lives and being part of a solution for them in the Home, Food and Travel categories, and as long as we stay focused on consumer behavior I think we'll find our way through the complexities of which platform and which technologies will win the day.

Tom Eagan - Collins Stewart

Great, thank you.

Operator

And at this time there are no further questions. So please continue.

Mark S. Hale

Great. Thank you Ann and thanks everyone, this is Mark. If you have any follow-ups I'll be here for the rest of the day, and you can give the replay instructions.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after twelve o'clock today until February 24 at midnight. (Operator's Instructions) That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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