Good morning ladies and gentlemen. Welcome to The E. W. Scripps Company’s first quarter 2010 earnings report. (Operator Instructions) I would now like to turn the conference over to the Vice President, Corporate Communications, and Investor Relations, Mr. Tim King. Please go ahead.
Good morning everybody, thanks to all of you for joining us for this call. We’re going to start this morning with Timothy Stautberg, he’s the Senior Vice President, and Chief Financial Officer and he’ll discuss the first quarter financial and operational highlights. He’ll cover some non-operating data a give you a little bit more color on trends for the benefit of your second quarter and full year models.
Then you’ll hear from Richard Boehne, our President, and Chief Executive Officer. He’ll elaborate on what the recently announced sale of our licensing business means for Scripps. And then as usual we’ll open up the phone lines for your questions. We’ll be joined at that point by the operators who run our local media businesses, that would be Mark Contreras, who’s in charge of the newspaper division, and Brian Lawlor, who runs our television stations. Doug Lyons, our Controller also will be on hand for the Q&A.
Now the commentary you will hear from our executives this morning may contain certain forward-looking statements and actual results for future periods may differ from those predicted. On page 11 of the 2009 Form 10-K, you can read some of the factors that may cause results to differ from what you're about to hear.
If you’re unable to stick with us for the duration of the call you can access a streaming audio replay by going to www.scripps.com and clicking on the Investor Relations link at the top of the page. We’ll have it there later this afternoon and we’ll leave it there for a few weeks. If you don’t have a copy of the earnings release in front of you right now, you can use that same link to find the document and the financial tables.
So with that, I'll turn it right over to Timothy Stautberg.
Thanks Tim, and good morning everyone. The story of the first quarter at Scripps is pretty much the same story you heard from our peers earlier in earnings season. The TV business is rebounding after an unprecedented step function decline in the first half of 2009, and while newspaper remains a business that continues to be challenging, there’s plenty of evidence that conditions are improving in our markets.
Our consolidated revenues in the first quarter were down 3% compared with the first quarter of 2009. About 10 weeks ago we told you that year over year consolidated revenues in the fourth quarter of 2009 excluding political dollars in both years were down 10%. Being down 3% in the first quarter is hardly cause for celebration but you can see why we’re encouraged that the worst of the recession is behind us.
In the first quarter a year ago we announced dramatic steps to reduce our expense line. Those initiatives starting taking effect in March of last year, and have significantly helped our financial performance since then. We’ll talk more later about the expense line for the remainder of the year now that we are cycling against those reductions, but even in the first quarter of 2010 we were able to reduce our costs by more than 13% compared with the first quarter of 2009.
As a result we reported a net loss from continuing operations after tax of $0.02 per share compared with a net loss of $3.84 in the year ago period. Now there’s noise in both of those numbers particularly for the 2009 quarter when we recorded a non-cash impairment charge to write-down the carrying value of the goodwill and other intangible assets at the Scripps television stations, among other items.
The 2010 figure includes restructuring expenses related primarily to our continuing efforts to reset the newspaper model for success on the other side of the secular and cyclical challenges newspaper publishers are facing these days.
Excluding that charge we would have reported net income of $0.02 per share in the first quarter. Digging right into the results all of our TV station operators breathed a sigh of relief as this year started markedly better than 2009. A year ago our first quarter revenues were down 21% compared with 2008, which is why the return to top line growth in the fourth quarter excluding political was cause for modest celebration.
We’re pleased that we have built on that momentum in the first quarter of 2010 with revenue growth of 11% to $67 million. Importantly as the press release noted the momentum built throughout the quarter with revenues up 13% in March. During the first quarter auto advertising was up 65%, retail was up 17%, and services was up 9%.
Our previous earnings call occurred right in the middle of the Vancouver Olympics which generated a nice chunk of incremental revenue for us. Our three NBC affiliates which are in mid sized markets all finished among the top 16 NBC stations in the country in terms of share of total prime time audience during the Olympics.
We’re proud of that outperformance and reap the benefit of more than $3 million in Olympic revenue. Its worth a reminder that we do not have any CBS stations so we realized no bump from the Super Bowl or March Madness.
Year over year expenses in the TV division declined 4% for the second quarter in a row. That’s the result of continued savings in employee costs partially offset by an increase in programming expenses. A year ago as advertisers in key TV categories were reeling from the throws of economic uncertainty we reported a segment loss from our TV division of $2.4 million.
With a first quarter segment profit of $6.6 million, the division improved its profitability by nearly $9 million over the year ago quarter. Turning to newspapers we’re often gently chided about our cautious approach to calling the bottom in newspaper revenues. With limited visibility we’re encouraged by the improving tread lines, but we still face the reality that we’re still generating less revenue this year than last.
As was the case in the fourth quarter, the division’s revenues declined but at a much slower rate than we’ve seen in a long time. We reported a decline in total year over year revenue of 7.6%, about half the rate of decline in the fourth quarter. Ad revenues which were down 20% on a year over year basis in the fourth quarter were down just 12% in the first quarter.
The most noticeable improvement was in local advertising which was down 11% in the first quarter compared with being down 24% in the last quarter of 2009 and it was nice to get the declines in preprint and online advertising into the single-digits.
Even classified advertising which was down 18% year over year showed improvement compared to the fourth quarter when it was down 26%. Within classified year over year declines in the first quarter were 11% for auto, 19% for help wanted, 28% for real estate, and 14% for all other.
Online advertising fell by just 8% in the first quarter but online advertising that is not tethered to a print product continued to grow impressively rising 23% during the quarter. In the first quarter our reported circulation revenue increased 4.9% to $32.1 million, but I need to remind you of the effect of a change in the nature of the business relationship between the company and certain newspaper distributors in select markets that is detailed in our release this morning.
Excluding the effects of that change, which does not effect segment profit, circulation revenue in the first quarter was down $443,000 or 1.5%. The big story on the newspaper side was the remarkable work of our operators around the country who delivered the fourth consecutive quarter of serious expense reductions.
We finished the first quarter with 3100 full time equivalent employees in the newspaper division, a decline of more than 13% from the year ago quarter. Those reductions and difficult decisions relating to our employee compensation and benefits plans led to a 23% decrease in employee related costs in the first quarter.
Newsprint expense was down almost 40% from last year’s first quarter with more than two thirds of the savings coming from price and the balance from reduced volume. Total segment expenses in our newspaper group declined 19% resulting in newspaper segment profit of nearly $17 million in the first quarter.
This compares with less than $3 million in the year ago quarter. The big news from United Media came two weeks ago, and Richard will cover the sale of the licensing business in just a minute, but let me quickly touch on the financial highlights. Year over year revenue fell by 15% to $19.6 million and international licensing was the culprit.
We reduced costs 9% in the first quarter but that didn’t keep pace with the revenue declines so segment profit decreased from $3.1 million in the first quarter of 2009 to $1.4 million in the 2010 quarter. We expect the sale of the licensing business to close by the end of the second quarter and that business will be reported as discontinued operations for all periods presented starting with the second quarter earnings report.
We will continue to operate our syndication business which will generate about $2.7 million in revenue per quarter after the transaction. Before we talk more about guidance let me touch on some non-operating items, our solid balance sheet has been a strong part of the Scripps story since the separation of the cable network businesses in 2008.
The balance sheet that was in today’s release indicated that we had cash and cash equivalents totaling $29 million as of March 31, and $11.4 million of long-term debt. During April we used some of that cash to pay down our revolver to zero. Proceeds from the sale of United Media licensing coupled with expected tax refunds will put the company in a very strong cash position.
Its likely that we’ll make one or two voluntary contributions to our qualified defined benefit pension plans this year. We’ll be working with our actuaries and advisors to determine the size and timing of those contributions. Ideally we’d like to fund our qualified plans to levels where its unlikely we’ll need to make additional contributions in the future.
Now that we’ve completed construction of the newspaper facility in Naples, our capital expenditures are much lower. In the first quarter they totaled less than $3 million. As we look ahead, revenue trends from the first quarter generally speaking are continuing into the second quarter. We expect the rate of decline in newspaper ad revenues to continue to moderate slightly but our exposure to Florida and California may delay our full participation in the recovery that’s underway.
Newspaper expenses are a different story. The extraordinary discipline we’ve shown in cutting costs in the past four quarters is largely the result of decisions we made a year ago to adjust our employee compensation and benefits. We’ve established a new level for such expenses but investors should not assume that we’re going to extend those decisions with deeper cuts.
In other words we’re forecasting our expenses to be only slightly below last year as we cycle through the dramatic cuts made last year. On the TV side the recovery in advertising is expected to continue strengthening with ad revenue growth in the mid teens during the second quarter. This is fueled by improvements in many local and national ad categories particularly automotive.
More encouraging is our enviable footprint when it comes to political races. We’ve said before that we think the level of political advertising we garnered during the 2006 and 2008 election years is doable again in 2010 but I need to make clear that the political calendar is heavily weighted toward the back half of the year.
Charlie Crist’s decision in Florida for example makes for a much more competitive general election but suggests the primary spending in the Sunshine State may be less robust. TV expenses which were down in the first quarter are expected to be up 10% in the second quarter as we cycle through cuts made last year to employee compensation and benefits and marketing and we continue to invest in digital initiatives.
Depending on the outcome of our negotiations with ABC related to the renewal of our affiliation agreements for our six ABC stations, its likely that our programming expenses will continue to be higher than they were last year. During the coming year, the company will continue to implement the restructuring of certain functions and the standardization and centralization of key systems and processes in our newspaper division.
This realignment and pursuit of operational efficiencies could result in restructuring charges of up to $15 million during the balance of 2010. As a reminder for the full year we expect capital expenditures to be approximately $20 million, depreciation and amortization will be approximately $46 million, corporate expenses are expected to be about $32 million, and the company expects to receive at least $45 million in federal tax refunds in 2010.
Later today we expect to file our 10-Q which will have more information in it and with that let me turn it over to Richard Boehne.
Thanks Timothy, good morning everybody. Scripps has been successful for more than 130 years because of its enthusiasm for change, risk, and evolution. In the past two years alone we have successfully maneuvered through two structural realignments designed to position us as a leader and innovator in the future of news and information content.
The most recent strategic realignment came just last month with the announced sale of our [character] licensing business which had been a good business and a value creator for Scripps for 60 years. Brands like Peanuts, and Dilbert, animated this company long before Scripps built up and then spun off Scripps networks and all of its incredible personalities.
But with the spin off of scripts networks and the refocusing of this company on news, journalism, and local brands, it became clear that character licensing was outside our core and potentially more valuable in somebody else’s portfolio. The Iconix Brand Group agreed and soon will be the licensing unit’s new owner through a deal that works we think very well for all involved.
First we believe the $175 million cash purchase price is an attractive confirmation of the value we have built there over the years. Also the cash as Timothy talked about will greatly enhance our already strong financial flexibility. And the buyer is keeping virtually all of our licensing employees which is great news for them and their families.
Finally we expect the transaction to close by the end of this quarter and there are no immediate plans to deploy the proceeds beyond funding up our pension plan a bit while contributions are so tax favorable. We have been cautious toward major acquisitions and that will not change, at least in the near-term.
We will continue to invest relatively modest amounts of capital in the development of new audiences and new revenue streams. We’re in a pretty good change in some chaos in our businesses and its probably a very good time to focus on building versus buying. A good example is the new mobile TV venture that we’ve entered into with a group of other broadcasters and Brian can talk about that in a few minutes.
Ending any long-term business relationship is never easy especially when it includes saying goodbye to Snoopy and Charlie Brown, but it reinforces our determination to always look ahead and do what’s right for our owners. Most important to keep in mind is that the strategy behind the licensing sale was entirely about our commitment to become the news industry’s most innovative player.
Since the day we separated Scripps networks interactive nearly two years ago our mission has been to position Scripps for leadership in the next season of news and public service journalism. Near-term strengthened by our financial flexibility we will continue to invest modest amounts through the P&L to gain audience and revenue share in our current TV and newspaper markets.
For example Timothy just talked about our TV expenses and that they may be up slightly for the full year. Those expenses are related to content, marketing, and the build out of new revenue streams, investments which we believe will yield long-term returns and strengthen our brands. Underpinning everything we do is our faith in the long-term value of public service.
We’re determined to be the information partner that our audiences and our advertisers cannot live without. Community building, we believe also builds value for shareholders so it’s the driving force in our Scripps culture. That’s a quick look at where our focus is directed heading into the summer of 2010.
We’d be happy now to take questions.
(Operator Instructions) Your first question comes from the line of Alexia Quadrani - JPMorgan
Alexia Quadrani - JPMorgan
On your guidance for newspaper costs which adjust down slightly in Q2 can you talk about the components behind that guidance where you see newsprint pricing for example and what are the headwinds you may be encountering beside the tough comps.
We’ve enjoyed as you know a very positive environment for pricing for the last couple of quarters. Q2 and particularly Q3 and Q4 we anticipate rapid increase in pricing. As you know that’s all a matter of negotiation and really depends on how those go. But we’re anticipating in our plans pretty steep ramp up particularly toward the end of the second quarter all the way into the third and fourth compared to last year.
Alexia Quadrani - JPMorgan
But newsprint expense probably still down given volumes or is that not correct.
No, we’re anticipating newsprint pricing up particularly in the back half of the year, net net. Obviously more than all of that driven by rate obviously. We’re still anticipating volume and consumption levels to be down but the net effect of the pricing anticipation is going to be that expenses would be up.
Alexia Quadrani - JPMorgan
And jumping to TV for a second, in your guidance for the mid teens revenue growth in the second quarter how much political are you anticipating in that.
Second quarter political, maybe $2 million. Most of our political is back ended. I think we only have one primary, Ohio in the first half of the year so, all of our other political will hit in the back half of the year.
Your next question comes from the line of Craig Huber - Access 342
Craig Huber - Access 342
Concerning the proceeds you expect to get from the licensing sale, say you get $100, $110 million is that reasonable but I wanted if I could is how do actually think you’ll be putting into your pension plan this year.
I would say that we’re working with our actuaries and advisors as I mentioned, at the end of 2009 I think our unfunded liability was close to $120 or $130 million so I could see us making a contribution north of $50 million potentially. Again we’ll work with them to determine a level where we have a low probability of having to make future contributions but an equally low probability that we’ll be over funded.
So that’s what we’ve got to work with.
Craig Huber - Access 342
And then on the TV station front, if you took auto out of the mix here in the first quarter how did your TV revenues do.
Obviously automotive was a pretty significant driver with our pacing over 60 but I would tell you that I don’t have the exact numbers broken out, I can probably break it out in the next few minutes here, but of our other top five categories, all five of those categories were up, three of them double-digits so obviously our overall increase would have been up probably mid single-digits.
Craig Huber - Access 342
Can you speak a little further if you would, how did the month of April do here for your newspapers, was it down roughly 10%.
We usually don’t give monthly guidance and I think we’re going to stick to that for now but we anticipate what we said earlier, the continuing reduction of the rate of decline will continue.
Craig Huber - Access 342
Can you just update us on where your newspaper advertising pricing is at for the quarter year over year I guess for both retail and for the classified categories.
I have retail but not classified, but if you looked at total local down about 10% or 11%, nine points of that, lineage was down about 9%, rate was down about 1.25%. I don’t have classified but we can dig that up if we need to.
Your final question comes from the line of John Kornreich – Sandler Capital
John Kornreich – Sandler Capital
Just a basic question about the TV business, while your TV margins showed big improvement, I don’t understand how the margins are so low and they’ve always been low at your company even if I look back to 2006 which was a strong year all around and a political year, your margins were in the low 30’s and they’ve been trending down since then. I think last year they were in the teens at best. How do you earn $6 million even in a seasonal low quarter when you’re in 10 different markets. There’s something endemic about your TV business that says this is a low margin business.
Thanks for the complement by the way, the one thing to touch on in our current configuration and I’ll let Brian talk in a little bit more detail is as we separated the company we had retransmission agreements in place and those will continue to be there for some time. That takes many points of margin out for us and will until or as these roll off in the years ahead.
Some of the other details I’ll let Brian talk about.
I think obviously margin is something of a high level of focus as we look to continuing to run these operations. Richard talked about retrans and the fact that we have not gotten our full value of retrans relative to our competitors so there’s several margin points that are associated with that. I think if you look across our properties we’ve made significant investments in some of the top programming in the industry, things like Oprah and Wheel and Jeopardy, and I think there’s opportunities there to reconfigure our commitment to syndicated programming and get those more in line.
And I think those are great properties and have been for a long time but I think our margin has been shrinking over time as it relates to them and so we look forward to improving our bottom line as it relates to our syndicated programming. And then I think if you go back and look at the history of our company as we were growing the cable networks, there were investments that were better made in the cable networks then they were in terms of creating efficiencies within the broadcast division.
I think as we’ve separated our companies, we’ve gotten very focused on that last year when we introduced two traffic hubs, we introduced a graphics hub, I think we’re very proactive right now in terms of trying to rescale our business for efficiency. It should allow us to become more competitive as it relates to margin.
We agree with you and we’ll rebuild the margins. At the same time in the short-term we believe there’s an awful lot that’s changing in the local TV business and one of the best ways to build margin over time will be to take market share and build local audience. So while we have been watching expenses and trying to get the margins up short-term, we’re also trying to look out and say where can we grab big chunks of audience and big chunks of revenue and have the leading margins in those markets for the long-term.
John Kornreich – Sandler Capital
What should programming cost be up this year and next year, purchased programming costs.
They’ll be flat.
John Kornreich – Sandler Capital
Even flat this year.
Our syndicated programming costs will be flat to last year this year.
John Kornreich – Sandler Capital
Even though they were up by 12% in the first quarter.
Some of that included in that is some accruals as it relates to our ABC negotiation which is ongoing at this point, but we are accruing some money assuming that that business model is going to change. And that’s the line by which we’re applying that.
John Kornreich – Sandler Capital
So flat this year and hopefully flat again next year.
No , I would expect a reduction in 2011. Our Oprah contract which is four markets, expires in September, 2011 and whatever we put there would not be at the same level of expenses Oprah was.
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
We thank everyone for tuning in.
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