E.W. Scripps' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 4.14 | About: The E.W. (SSP)

The E.W. Scripps Company (NYSE:SSP)

Q4 2013 Earnings Conference Call

March 4, 2014 9:00 am ET

Executives

Richard Boehne – President, Chief Executive Officer

Timothy Wesolowski – Senior Vice President, Chief Financial Officer

Brian Lawlor – Senior Vice President, TV

Tim Stautberg – Senior Vice President, Newspapers

Adam Symson – Chief Digital Officer

Carolyn Micheli – Head of Investor Relations

Analysts

Nadia Lovell – JP Morgan

Craig Huber – Huber Research Partners

Michael Kupinski – Noble Financial

Edward Atorino – Benchmark

Barry Lucas – Gabelli & Co.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the EW Scripps Fourth Quarter Earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Should you require assistance on today’s call of if you would like to ask a question, please press star then zero. As a reminder, this conference is being recorded.

I’d now like to turn the conference over to our host, Head of Investor Relations, Ms. Carolyn Micheli. Please go ahead.

Carolyn Micheli

Thank you, Mike. Good morning everyone and thank you for joining us for this recap of the EW Scripps Company’s Fourth Quarter Results. We’re going to start this morning with Scripps’ CFO and Treasurer, Tim Wesolowski, then Brian Lawlor, the head of our TV division will talk about the year ahead in television and Rich Boehne, our Chairman, President and CEO will talk about our digital strategy; then we’ll open up the lines for your questions. Also in the room are Tim Stautberg, who runs the newspaper division; Adam Symson, who is our Chief Digital Officer, and Doug Lyons, our Corporate Controller.

The commentary you’ll hear from our executives this morning may contain certain forward-looking statements. Actual results for future periods may differ from those predicted. You can read more about some of the factors that may cause results to differ from what you’re about to hear by referring to the Form 10-K and other regulatory filings. You can visit Scripps.com for more information, such as today’s release and financial tables. You also can sign up to receive emails any time we disclose financial information and you can listen to an audio replay of this call. The link to the replay will be up there this afternoon and will be available for a week.

Now here is Tim Wesolowski with a summary of the fourth quarter.

Timothy Wesolowski

Thanks Carolyn and good morning. In the fourth quarter, our core local and national ad categories grew 17% coming off last year’s record political year. We saw retransmission revenues grow by more than 40%. Of course, total revenue was down as we were comping against a record level of political revenue in 2012. In our newspaper group, the fourth quarter saw the second consecutive quarter of subscription revenue growth. We benefited from single copy price increases and the fact that all of our markets have rolled out a subscription bundle.

As you know, we greatly expanded our presence in the digital video business with the purchase of Newsy on January 1. Newsy is a digital video news service based in Columbia, Missouri. We can showcase Newsy in our local markets and it can help us build a national digital brand and footprint. Rich will talk more about our digital efforts in a few minutes, but first let’s talk about the fourth quarter consolidated results.

Of course, 2013 was an off-election year, so revenue for the fourth quarter declined as expected. Revenue was down 15% over fourth quarter 2012 to $221 million. That translates to a decrease of about $39 million. Keep in mind we did $55 million less of political in the quarter compared to fourth quarter 2012.

Our costs and expenses for segments, corporate and shared services decreased nearly 4% to $188 million. This was despite continued costs to build out our digital products and revenue streams. Excluding the incremental spend to support our digital strategy, costs and expenses decreased nearly 7%. There were a couple of non-cash charges in the quarter relating to the debt refinancing and an investment loss. These two items reduced EPS by about $0.10.

In the fourth quarter, we reported income from operations before income tax of $7 million compared to $40 million in the prior year period. Net income was $7.9 million or $0.14 per share compared to $27 million or $0.47 per share in the prior fourth quarter, again driven by record political spending. The tax expense for the 2012 fourth quarter includes $1.8 million or $0.03 per share in favorable adjustments to the company’s tax reserves.

Turning now to the broadcast division, total television revenues declined by about 24% to $115 million – again, that’s primarily due to expected declines in political advertising. As I mentioned, we booked $57 million of political advertising in the fourth quarter last year, and this year it was about $2 million. Breaking down television advertising in our key categories, we saw significant gains from communication companies, hospitals, and the insurance industry. Automotive was also up a healthy 10%. Digital revenue for the television division rose 8% to more than $4.5 million.

Q4 was a bit of a rollercoaster ride. The quarter started strong following September when auto sales hit monthly highs, but the government shutdown in October quickly tempered our momentum. In the San Diego market, for example, more than 30,000 government workers were furloughed. Most people aren’t spending when they aren’t working, so advertisers don’t spend either.

We showed good fiscal discipline in light of this environment. Total segment expenses were down about 6%. That includes reduction in incentive compensation and as in the third quarter lower promotion costs for Let’s Ask America and The List, which we rolled out last year.

Like I did in our call last quarter, I’d like to use the two-year cycle to highlight the progress made in our TV group. It’s the best way to reflect the cyclical nature of political advertising. Segment profit for TV increased more than 45% over the fourth quarter of our last non-political year – that’s 2011, from $23 million to $34 million. Of course, this year includes the four former McGraw Hill stations, but on a same station basis segment profit increased almost 25%.

Now turning to the newspaper division, total revenue from newspapers was $103 million, down less than 2% from fourth quarter 2012. Subscription revenue increased for the second consecutive quarter. That’s due to both the rollout of the subscription bundle and to single-copy price increases. Subscription revenue was $31 million, which is a nearly 5% increase over the fourth quarter of 2012. Again, we saw disciplined cost control here. Expenses for the newspaper group dropped 3.6% to $90 million. That includes another 5% drop in employee-related costs.

Fourth quarter segment profit for newspapers was $13 million – that’s up $1.5 million from the same quarter last year. Advertising and marketing services revenue was $66 million, down about 6%. That’s an improvement over the third quarter decline of about 8%. Classifieds were down nearly 7%. Local advertising was down 4.5%. Preprint and related products were down about 4%, and digital revenue was down 4% to $6.3 million as our combo sales – that’s digital advertising that’s tied to print – were hurt by declines in some of our categories.

I’d like now to look at our cash position and share repurchase program, then I’ll turn it over to Brian for a moment before I talk about our guidance. At December 31, our cash on hand was $221 million and we had $200 million of debt. We refinanced our debt during the quarter with a new $200 million seven-year term loan B, and we also secured a $75 million five-year revolver. We continue to have the best balance sheet in the industry. After closing the $35 million Newsy acquisition in early January, we moved to a very modest net debt position.

We have only $26 million left of $100 million stock repurchase authorization that our board approved in November 2012. In 2013, we repurchased 5.1 million shares for $74 million. In Q4, we purchased about 250,000 shares for $5 million. We ended the year with 56 million shares outstanding.

And now here’s Brian to talk about our recent acquisition and the outlook for the TV division.

Brian Lawlor

Thanks Tim. The Scripps TV division is setting up for a busy, profitable year in 2014. The year ahead brings some promising political races in our markets and a nice step-up in our retransmission revenue. Above that, the two Granite stations will begin contributing to our bottom line as soon as the deal closes.

The addition of these two stations extends the Scripps reach to 14% of the U.S. population, so we get broader scale. We also get deeper. In Detroit, we will locate the staff of the MyNetwork affiliate, WMYD, into the facility of our ABC affiliate there, WXYZ. We will expand our WXYZ newscast into new time periods, pursue partnerships with additional sports franchises in this big sports town, extend our original shows, Let’s Ask America and The List, onto WMYD, and tap into our strong existing partnerships in that community. As I said on the investor call announcing the deal, we are thrilled to be doubling down in Detroit. Duopoly stations operate at high margins, and this particular duopoly is a pairing with one of the industry’s strongest local television operations.

In Buffalo, we took over an ABC affiliate with tremendous potential. It has a strong legacy, having served Buffalo for over 50 years, but it has underperformed recently and has ranked third in audience. We are confident we can restore its standing as a market leader. In addition to audience growth, we have a terrific opportunity to increase the station’s digital content and sales across all platforms. We aren’t certain when that deal with close, but we’ve modeled the first 12 months of revenue to be about $30 million and segment profit to be about $10 million as we build the foundation for long-term synergies.

We now have a full two years of operating the former McGraw Hill stations, so I’d like to give you an update on how these markets are performing. The three largest – Denver, Indianapolis and San Diego, had an aggregated share of their local news audience of about 17% when we bought them. In just two years, we’ve already grown that share to nearly 20%, and as you know, better ratings means better revenue. During that time, we have also exceeded the revenue and the cash flow projections we modeled at acquisition. We plan to take what we’ve learned about driving news audience and revenue growth on a newly integrated station and apply it to Buffalo as well.

In addition to beginning to integrate the Granite stations, we’re looking to 2014 as a strong election year. Six Senate races, nine gubernatorial races, and eight highly competitive House seats are at the heart of the activity in our markets. We looked at the competiveness of those races and we forecast $65 million in political advertising this year. We expect several key races in Arizona, Colorado, Florida and Michigan to drive much of that political spending. Of course, the outcome will depend on how many races stay competitive.

2014 looks to be a good year for another margin booster as well – retransmission fees. As we have noted, in a number of places we expect to receive more than $50 million in retransmission revenue this year. Looking ahead to 2015, we expect that number to nearly double. A third of our subscribers come up in 2014, including one large contract midyear. The rest of the subs renew at the end of the year, giving us the nice jump for next year. Finally in 2014, we’ll continue to pursue additional duopolies while we continue to look at other stations to buy as well.

And now I’ll turn things back over to Tim.

Timothy Wesolowski

In seeing our detailed guidance in the release this morning, I just want to touch on a couple of things. First of all, the impact of the Granite stations is not in our guidance since the timing of the closing is uncertain. We expect our tax rate to be about 30%, although not spread evenly across the year. Our political estimate of $65 million is in line with the last non-Presidential election year after we adjust for the McGraw Hill stations. As we said last month, we expect retransmission revenues to be more than $50 million in 2014. In order to help you frame the longer term growth in retrans, we said that we expect the 2015 number to nearly double from 2014.

Our expectation for the shared services and corporate line, which includes some of the incremental investment in our digital operations, is in the mid-$60 million range. You may recall that’s in line with our initial guidance for 2013. We ended up spending less than our guidance last year as the hiring of sales folks was slower than we anticipated. We’ve been very selective in the hiring process. As a result, our actual spend for shared services and corporate last year was $53 million, or about $10 million less than our initial guidance. Our first quarter number will be about $18 million, which is a couple million higher than the level for the rest of the year. As always, some expenses get front end-loaded into Q1, such as payments to our employees’ health savings accounts.

The investment in digital can be divided in the same three buckets as last year: first, investment in salespeople, which I call feet on the street, to help generate revenue; second, investing in content initiatives, including WCPO.com and our national news desk; and third, developing new products and services for consumers and advertisers. In 2013, we added more than 100 people to our sales infrastructure and we plan to add about 50 direct sellers in 2014. That should just about complete the sales build-out in our existing footprint. Once again, because this effort will be cross-divisional, cross-market and cross-platform, we’re going to report many of the expenses in the shared services line. I do expect to be providing additional color during this year about our digital operations.

We’ll hear now more from Rich.

Richard Boehne

Thanks Tim, and good morning everyone. At this point, 2013 seems like old news, but here at Scripps we use years like 2013, which as you remember is the weakest period among a normal four-year political cycle, as a springboard, a time to improve our business platforms in preparation for the anticipated surge in political revenue in the next 12 months and the build-up toward the Presidential election in 2016.

To improve our position heading into the favorable part of the television advertising cycle, we focused in 2013 on the plays where we get the greatest leverage – local TV news ratings – and the bet paid off. In November, nine of our stations finished first or second in the most valuable adult demographics and at least one of the major local news time periods. Ten of our 13 major network affiliated stations improved their share of local news viewing in at least one major time period over the same period in 2012. Steady growth in local news audiences is one of our key strategies and one of our core competencies at Scripps, and we do it with quality content, enterprise reporting that sets our stations apart. Our Denver and Phoenix stations in ’13 won coveted Peabody Awards, and Denver and Campus City each won prestigious duPont Awards. Behind these awards were stories that changed lives and communities and pulled in larger and more valuable audiences for advertisers.

We also strengthened our local positions and pushed margins in 2013 through our original programming strategy. Just as a reminder, we have three shows built on three somewhat different business models, and so far all three are successful. What they have in common is their P&L effect – lower syndicated programming costs and we keep more of the ad revenue in those time slots. We built these shows to be economically sound just in our markets alone. Any expansion of the audience beyond the Scripps footprint is all gravy.

Our game show, Let’s Ask America, is launching in national syndication with MGM and is adding clearances and excess hours just before prime time. 2014 is a critical year for this show, and so far, so good. Our nightly information and entertainment program, The List, spread to eight Scripps markets last fall and will launch in our remaining markets in 2014. We produce this show every day at our Phoenix facility and we post it in time for local stories to be inserted across the country. It’s doing really well, and in some markets it’s already ahead of some of television’s most successful syndicated shows. Our third show, Right This Minute, was the first to launch under our programming strategy. It’s a partnership between Scripps, Cox and Raycom. It’s a highly profitable big hit, and it’s now airing in 87% of the country.

The significant investments last year in television carry us into the 2014 political season with one of the strongest and most attractive geographic footprints in the television industry. We also have bigger and more engaged television and digital audiences.

Over in the newspaper division, 2013 saw the conversion of all of our markets to paid digital subscriptions and bundled print digital subscriptions. As a result, subscription revenue grew, as in upward, and we believe that should continue this year. We backed this up with aggressive investments in digital content and sales systems.

By year-end, about 35% of our subscribers had activated their digital accounts, and in some of our newspaper markets that number is now approaching 50%. This is good, early affirmation of our strategy to build local products that are worth paying for with more features to come as we build the value of these bundled and digital subscriptions. We’re also moving into 2014 with an expanding portfolio of media businesses, having reached a deal early in the year to acquire two TV stations from Granite, and on New Year’s Day we acquired Newsy, a digital video news service. As Tim said, our strong financial position enables us to make these investments at attractive rates of return and at the same time acquire more of what we already won by buying back shares.

Now I’m going to spend just a few minutes talking about our commitment to building these digital media businesses. Our primary approach is twofold: first, build local digital businesses that align with or expand our existing brands. We do business in some of the most attractive digital markets in America and we’re now serving those markets with products and platforms that we believe will set us apart as the leader in both audience reach and revenue, and we’re investing in digital-only content and sales systems to support the products. This local strategy is primarily funded through the P&L, a prudent expense that we expect to more than cover with incremental revenue, and we’re well on our way.

At Scripps, as you probably know, we like investing through the P&L, building real businesses on top of or adjacent to where we already have strong brands. This relentless evolution of the core brand has created value for our company’s owners over many generations. Today our most aggressive internal investments on the digital side are in TV markets, which tend to be larger and today offer more digital scale. That’s also where we’re challenging this notion that only local newspapers can receive payment for digital content. Now, I’m not sure who started that rumor, but we intend to test the theory starting in Cincinnati where we have launched a paid digital business alongside our successful TV brand, WCPO. To our knowledge, it’s the only paid digital business associated with a local TV brand in this country, although the content and the benefits are above and beyond what’s available for free on our site or on the others that serve the greater Cincinnati audience. Over the coming year, we’ll continue to roll out new features and benefits for those who paid $7.99 a month to become a WCPO insider – and by the way, if you’re walking in there right now with your credit card, I recommend you take the yearly deal at $79.99 and save yourself a couple bucks.

Assuming we find some success in Cincinnati, we’re looking at rolling out to other markets. Most important for you to know that these internal investments follow rigorous research and are run by nimble teams that follow consumers time and money on digital devices. Advertisers obviously are following, too – Nielsen says display advertising across the web, mobile web, and apps grew by about a third last year, and it’s still less than 5% of overall ad spending but showing by far the fastest growth.

This revenue opportunity for us is considerable. We earn more than $40 million in revenue from digital media in 2013. We would be disappointed if that number doesn’t increase by more than a third this year as our digital-only sales force kicks into gear. Now remember, none of this revenue is from acquired businesses. It’s all from organic expansion of markets where we already do business. That should over time produce the best return for shareholders.

The second leg of our digital strategy focuses on expanding to take advantage of growth in national mobile audiences and revenues. The addition of Newsy provides us a window to the growing national mobile marketplace and at the same time leverages our existing advertising, marketing and technology platforms. Newsy also supports and benefits our large local digital audiences. Newsy is a nice fit for Scripps and at $35 million it’s an investment that can drive attractive growth and returns for our owners. These digital investments, both internal through the P&L and external through prudent acquisitions that leverage our existing platforms, are good examples of how Scripps has created value over its history. We look forward to these relatively modest digital investments becoming significant value drivers in the years ahead.

That’s a look at the results and at some of our digital growth and investments; and Operator, we’re now ready for questions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

We’ve got a question coming from the line of Alexia Quadrani from JP Morgan. Please go ahead.

Nadia Lovell – JP Morgan

Hi, good morning. This is Nadia Lovell in for Alexia. Just a few questions. Can you provide some color on what percentage of your newspaper base saw price increases, and should we expect a similar lift in 2014? What’s built into your assumption for mid-single digit growth in ’14?

Richard Boehne

Good morning, Nadia. We’ll let Tim Stautberg take that.

Tim Stautberg

Yeah. We passed along a subscription price increase in all of our markets, so as we rolled out access to the digital platforms that was concurrent with a pricing increase across all markets, we also in select markets increased single-copy prices where it made sense. So we’re seeing a nice lift of mid-single digits and would expect that that would continue, at least halfway if not through the rest of this year.

Nadia Lovell – JP Morgan

So is it fair to assume that much of your growth in circulation is coming from price increases?

Tim Stautberg

That’s correct, plus we are adding digital-only subscribers, and in 2013 we finished the year with about 23,000 digital-only customers. We would expect that number to continue to grow in 2014 as well.

Nadia Lovell – JP Morgan

Okay. And then on the digital sales rep, is the performance of those higher sales reps meeting your expectations, and when should we start seeing that translate into digital revenue growth on the TV side? What has demand been like from an advertiser standpoint?

Brian Lawlor

We’ll let Adam Symson—

Adam Symson

Hi Nadia, good morning. The dedicated team added a couple million last year as they were just getting phased in. As you recall, we really started to phase them in in second quarter. Almost all of the increase above sort of modest increases that we expect to see on the TV and newspaper integrated side in 2014 will come from these new sales teams, so they are meeting our expectations as we get them ramped up.

Nadia Lovell – JP Morgan

Okay, thank you. Lastly, more on the TV side, can you provide some color on how your major categories did in the quarter and what the pacing is for the current quarter?

Richard Boehne

Yeah, here’s Brian.

Brian Lawlor

Good morning Nadia. Automotive was our top category in the fourth quarter. As we said in the statement earlier, it was plus-10. Services, which often competes for our top category, both of those auto and services was more than 20% of each of our total revenue, that was also up double digits, so services rebounded after a little bit of a slow start to 2013. Retail was down just low single-digit percentages. Food services was up just a touch, and travel and leisure, which is our fifth category, had significant growth – about 30%.

The other category, it’s not one of our top five but it’s something that we talked about a couple times last year that really got a resurgence, was the telecommunications category, and that was up 32% in the fourth quarter.

Nadia Lovell – JP Morgan

And are some of those strengths that we saw in the fourth quarter, that momentum continuing into the current quarter?

Brian Lawlor

You know, I would say that a couple of the key categories have softened a little bit in the first quarter, but really it’s weather-related, Nadia. If you look at automotive and retail, those are probably the places where we’re seeing the most significant impact. I was in Detroit a couple of weeks ago and they were wrapping up January as the snowiest month ever in the history of Detroit, so you don’t sell a lot of cars when you’re dealing with all that snow. So I think especially across our Midwest and our northeast footprint, weather has had an impact in first quarter but we’re hoping March will grow out of that and by the end of the quarter, some of those things will get back with some more positive pacing. But telco and travel and leisure continue to pace very well for first quarter as well.

Nadia Lovell – JP Morgan

Thank you.

Operator

Our next question comes from the line of Craig Huber with Huber Research Partners. Your line is open. Please go ahead.

Craig Huber – Huber Research Partners

Yes, good morning. I have several questions, please. The Newsy acquisition, in your guidance, how much revenue and EBITDA are you expecting to get from that this year, and where are we going to see that added in your segment breakdown, please – those two numbers?

Richard Boehne

Hey Craig, it’s Rich. We don’t break it out, but if you want to try to go looking for it – Tim, where would it be in the--?

Timothy Wesolowski

Yeah, so the Newsy acquisition, as we said earlier, has revenue associated with it. It’s not a pre-revenue business – they’re operating at about breakeven, and we’ll be reporting the revenue from that in our syndication and other line as it’s more of a national product.

Craig Huber – Huber Research Partners

Can you just ballpark what the revenues are, just for modeling purposes? I mean, just what the run rate is or something?

Richard Boehne

At this point, Craig, we’ve decided not to break it out. We’ll see what happens in the future.

Craig Huber – Huber Research Partners

Okay, and then forgive the tone in this question – it’s a follow-on from the prior question. You guys did big digital investments last year – I think you said you hired 100 new digital advertising sales people, and then we look at the digital – you know where I’m going with this – the digital ad revenues down 4.4% in the newspaper segment year-over-year, and digital on the TV side up about 8% in the quarter. Do you feel early on that you’re—you know, I realize we’re on a public call here, but do you feel you’re getting enough bang for your buck – I mean, down 4.5% for digital in newspapers is actually worse than your peers attracted out who did not make these investments. Again, sorry for the tone of the question; just want to hear your thoughts on that, please.

Richard Boehne

No, no problem with the tone at all. Yeah, we are – I mean, you’re still ahead of where we would expect to see the real payoff on the revenue side, but if you look at our core local digital businesses, they have been profitable. We continue to make some additional investments on top of that, like what we’re doing at WCPO to try to build new businesses, but yeah, we feel like we’re in good shape today and we’re ahead of the—what we would expect to be a pretty good ramp on the revenue side thanks to the investment.

What happens in newspapers, some of that is tied to or follows the print business, and I wouldn’t necessarily look at that as any sort of report card on how we think our digital investments are going to pay off.

Craig Huber – Huber Research Partners

Okay, and a nitpick question here – Tim, what were your daily and Sunday print volume size down, I assume, year-over-year in the quarter?

Timothy Wesolowski

Yeah, Craig. For the fourth quarter, daily was off 9% and Sunday was off 10% in terms of net paid.

Craig Huber – Huber Research Partners

And then Brian, on the TV side, can you give us some help here what your thoughts are on where you think programming costs are going to be on a year-over-year basis, and then also maybe talk separately about network compensation, how the incremental hit there may hurt you this year? Can you just ballpark those numbers?

Brian Lawlor

Sure, okay. Morning, Craig. Look, as you know we’ve talked about it many times over the last couple years, we’ve really implemented a strategy to take more control over our programming future, stop renting as many shows and really trying to improve our margins through the programming that we put on our air, and we’ve been very successful. We’ve reduced our syndicated costs across our entire division by more than half over the last couple years, and I think you’ve seen that benefit on a quarter-to-quarter basis.

If you look in fourth quarter, which just wrapped up, again our syndicated costs were down double digits but our overall programming costs were up just a little bit over 1%, and that really has to do with the network spend that we have relative to the share of retrans with them. So you know, those trends will continue. As I model out 2014, you’re going to look at double-digit declines in syndicated costs again, so we continue to find ways to grow our own programming, but network payments will be up double digits. And at the end of the day, I think our programming costs for next year will be up low singles. The reality is we’re paying more to networks, but I think we’re doing a very effective job of still keeping our programming costs nearly flat as a result of our own home-grown programming.

Does that answer your question?

Craig Huber – Huber Research Partners

Yes, that’s helpful. I appreciate that. And then Tim, back on the newspaper side, can you just update us further on the price increases you guys took on the subscription side on home delivery but also on the newsstand? What’s the rough average there for each of those with those price increases where you guys put in the back half of last year?

Tim Stautberg

Craig, it wasn’t a monolithic increase on the home delivery side. We’re very strategic about passing along increases and especially making sure that there’s a good value exchange for those increases, but I’d say on average they were 10 to 20% increases, maybe some of them even on the higher end of that. On the single copy side, we increased single copy on Sunday and in some markets daily to—where most of our markets were at $0.75 or $1 on the daily basis and Sundays closer to $2.

Craig Huber – Huber Research Partners

Okay, I’ll leave it there. Thank you.

Operator

Next question comes from the line of Michael Kupinski with Noble Financial. Please go ahead.

Michael Kupinski – Noble Financial

Thanks for taking the questions, and congratulations on a solid quarter, and thanks for the additional color on your retransmission revenue outlook. I was wondering if you can—I know that some of the trades have been reporting about a new show that you guys are planning in depart (ph), and I was wondering if that was factored into your recent guidance, Brian, that you just gave in terms of your cost outlook for programming going into next year, and then maybe if you can just add a little color about the show itself and what you expect it to replace and that sort of thing.

Brian Lawlor

Hey Mike, it’s Brian. Are you talking about the news program that has been kind of rumored out there?

Michael Kupinski – Noble Financial

That’s right.

Brian Lawlor

Yeah. You know, we’ve got a couple of markets where Ellen currently runs at 4:00, and through some negotiations a couple years ago, Ellen is leaving our markets and so we stepped back and looked at the opportunity, and we think that there’s a big upside in terms of producing some news programming. But I think the way we’re approaching it is not to just do another newscast – you know, we’re not going to take a 5:00 and just reload it and put it at 4:00, and in many of our markets there’s already a newscast at 4:00 that looks a lot like a 5:00 news. So we’ve really stepped back and looked at what is a news—what kind of news programming could we create that would engage people at a different level and be able to be scaled across multiple markets.

So we’re looking at—you know, we’re in development of a program, a news program that we’ll be able to scale into six of our markets that I think will be unique and distinctive and really get to the root of a full engagement of news and not in just a traditional, repetitive way. And yes, the start-up costs and all of the investment in terms of people and all is built into our forecast which we’ve laid out. I just spoke in Craig’s question about our syndicated costs going down double digits. It’s a pretty good double-digit decline, and that would be as a result of us releasing Ellen in several of our markets.

Michael Kupinski – Noble Financial

Perfect. And then given your strong balance sheet, obviously you’re really well positioned to make further acquisitions. I was just wondering if you are likely to seek more geographic expansion in your next acquisition or still focus on duopolies.

Brian Lawlor

You know, I think it’s both – this is Brian still, Mike. Duopolies are something because of the high margin growth, and—look, we’re committed to the markets that we’re in and so we would like to be stronger and be able to take a bigger piece of the pie out of those markets, so duopolies is a top priority. But beyond that, again I don’t think we share the same roll-up strategy as some of our peers. We don’t plan to get bigger just for the sake of getting bigger, but as you saw in Buffalo, when there is something strategic that can get us into a new market that’s the right sized market that has a good revenue base in it with a good economic foundation, that has a news brand that we think we can grow, those are the kinds of markets we look at. So it could be regionally—you know, buffalo was a really nice fit. We’re really right along that Lake Erie corridor with Cleveland and Detroit, but it doesn’t mean we wouldn’t look into other clusters or other regional areas. But it’s really about strategic fit and certainly making sure we’re getting into markets with good economic bases.

Michael Kupinski – Noble Financial

In terms of the WCPO in Cincinnati, what are the benchmarks and/or metrics that you would like to meet in order to determine success for this subscription-type service, and whether or not you would roll it out into additional markets? I mean, what would you be looking for?

Adam Symson

Hi Mike, it’s Adam. So WCPO is our most highly experimental initiative this year, and our goal is to build long-term value to the model. So the metrics that we’re looking at are really pretty consistent with the way we measure the rest of our business – revenue, subscriptions, audience engagement. But of course, because it’s focused on one market, we don’t generally break out market data for competitive reasons, and Cincinnati is a highly competitive market. We’re unlikely to be sharing the data there, but the facts are essentially the same in this market as we look at sort of a cross-section of the way we see our newspapers and our television markets around audience engagement and then revenue generated from digital advertising, as well as from digital subscriptions.

Michael Kupinski – Noble Financial

Okay, fair enough. That’s all I have. Thank you.

Operator

And again, if you have a question, please press star, one at this time. The next question comes from the line of Edward Atorino with Benchmark. Your line is open. Please go ahead.

Edward Atorino – Benchmark

What did you see from the Olympics and the Super Bowl, if anything, in the quarter?

Brian Lawlor

Hey Ed, it’s Brian. Nothing in the Super Bowl – we don’t have any Fox stations, and the Olympics a little over $4 million gross revenue. It was up about $1 million versus our last Winter Olympics, and we look at that about 45% of that being incremental.

Edward Atorino – Benchmark

On the advertising category, you mentioned healthcare being up – excuse my voice. Any of that related to Obamacare, and is Obamacare generating any incremental advertising and where does it show up?

Brian Lawlor

Yeah, it is. It’s showing up in our government line, so it’s not in any of the categories. Well, it probably pops in two places, so just the straight-up government healthcare money hits our government line so that we can track it specifically. Some of it also hits, Ed, within our services category because we are seeing an uptick in insurance, in hospitals and doctors. Now that they have better clarity on what Obamacare looks like, they’re now able to provide certain services to people that a year ago there was a lot less clarity and they were standing on the sidelines waiting to get some guidance there. So two places – the government line and our services category; and as I mentioned to you, services was up double-digits in fourth quarter so you can see the impact there.

Edward Atorino – Benchmark

Want to put some numbers on what that’s adding to?

Brian Lawlor

No, not really.

Edward Atorino – Benchmark

Okay. Sorry about that. Thanks much.

Operator

Next question comes from the line of Barry Lucas with Gabelli & Company. Your line is open. Go ahead.

Barry Lucas – Gabelli & Co.

We’re on the ball today – thank you and good morning. I have several this morning, and let me start with Mr. Stautberg. One line item that sort of stuck out was real estate classified being up a sizzling 2%, which is still up, so I’m not belittling it, Tim; but is that primarily Naples or is it broader than that, and might one infer—could one infer that we’re seeing the bottom in that category?

Tim Stautberg

Yeah, Barry. What’s encouraging is it’s broader than Naples, and it’s broader than just our Florida markets. Naples is once again the one that’s up the most in terms of percentages, but we saw several of our other markets either flat to last year or up a little bit, so I think that is an encouraging sign that we’re bottoming out. I think a lot of the national news and press around real estate prices and a firming of that business supports that.

So we’re encouraged by that, and I think Rich several years ago on a call said that Florida was on sale, and for the folks that jumped at that, I think they’ve seen a nice return; but we’re very encouraged by the broader base of support on the real estate end.

Barry Lucas – Gabelli & Co.

Great, thanks. And Brian, not to carp too much, but given the lay of the land that you described in terms of competitive races in your really attractive political markets, flattish kind of political on a pro forma basis with ’10 would strike me as potentially being a little bit light, so how conservative are you being on your estimates there on political?

Brian Lawlor

Look, I think that for what we know, we’re dead-on, so there’s lots that you don’t know. We know we’ve got six great Senate races, a couple of them—you know, Michigan is going to be a stop-gap race for the Democrats. We’ve got lean races in Colorado and McConnell will be a target. We’ve got some really nice gubernatorial races, a couple of them – Michigan, Colorado, Florida – we think are going to be really competitive. So look, we put a real hard pencil to what we know, which of those races we think will be supported by the parties, where we think that there will be some PAC money that comes in and so forth.

Always the question is where is the issue money going to come from? What are going to be the issues? Is California going to get a whacky issue or two, which can always be fruitful for our broadcast company? So those are the things we don’t know yet. We’re also—you know, we call the races as we see them now. If something—we use a metric of eight points. If one of the races moves beyond eight points, it suddenly loses its competitiveness and we start to see the outside funding dry up, so we try and model all of that. So we think that the number we have put out there is dead-on to what we see today, but if things pop up that we don’t know, that could make some of these races more additive and really it will depend on what issues pop up and who is supporting those that can really break us out.

Barry Lucas – Gabelli & Co.

Great. One last one for you, Brian, and maybe to a certain extent to Tim and Rich. You’ve described the appetite, let’s say, for adding duopolies in new geographies, but a, what do you see in the M&A pipeline at this point; and maybe for Tim and Rich, what level of balance sheet use would you be comfortable with for something really attractive – let’s say, another McGraw Hill or even larger, if something like that came up?

Brian Lawlor

I’ll start first, Barry. You know, obviously last year was a wild year in terms of M&A, and a lot of the players you would have expected to put their groups on the markets did. A lot of that was private equity that had been hanging in there for a long time that now could get the return they wanted, so I think a lot of the—excuse the term, the low-hanging fruit kind of moved along.

As we look now, I think that there remains opportunities but I think it will probably be more strategic. There may be potentially less stuff that gets put up for auction but as much stuff that gets done, but it will be more strategic in the approach to it where people will be looking for those perfect fits versus just scale.

Richard Boehne

Barry, it’s Rich. I’ll give you the non-technical answer, then Tim can give you the technical answer. Where our limit is where we would start to feel a tightening around our flexibility. I mean, we would not be opposed to adding some debt, but clearly we want to be able to make digital investments which we think are essential and a great opportunity, and we just would not want to lever up to the point where we have covenants in place or any restrictions that just box us in and not allow us to make these true P&L investments and other small investments that we think can generate awfully strong returns over the long term.

Now, I’ll let Tim give you the technical answer.

Timothy Wesolowski

Sure. So we’re not afraid of taking on a modest amount of debt to further the strategic initiatives, such as going deeper in our markets, expanding our footprint, continuing with the digital initiatives. As far as the amount of leverage, that would really be—you know, we’re not comfortable going much beyond three times leverage without a route or path to pretty quickly bring that down. One of the beautiful things about this business, as you know, is every other year we get a lot of cash coming in from the political activities, so what happened with McGraw Hill is going to happen this year with Granite as well – make an acquisition and in a political year you can pay it off pretty quickly.

Barry Lucas – Gabelli & Co.

Thanks much. Last one, I’m going to squeeze this one in, but looking at the expectations for Granite in the first year, and there are obviously transition costs, relocation costs, why wouldn’t those two stations, particularly as you create the duopoly, generate a higher margin than the corporate average for the broadcast business?

Brian Lawlor

Well, I think they will long-term, Barry – this is Brian. They clearly will long-term. I mean, there’s significant cost to, especially in Detroit, move that television station into our station, to move the technical operation and rebuild it within our current infrastructure, so that’s significant. In Buffalo, we’re going to make some investments to be able to grow the news and get them aligned so that we’re not sitting at number three in news two or three years from now, but we expect to be taking a run at number one. So everything we put out in terms of the $30 million in revenue and the $10 million of segment profit is really pre-synergy, and there’s a fair amount of investment that we will make to align those stations so that I think you’ll see a very different story in the second 12 months where they’ll be completely synergized, completely integrated. We’ll have news up and running in Detroit on that station, as well as some other franchises, and we’ll have our foundation built just like we did in the McGraw Hill stations in Buffalo.

So look, I think it’s coming in about our average of our division margin in year one, but this will clearly be a margin driver for us moving forward.

Barry Lucas – Gabelli & Co.

Great. Thanks very much, Brian.

Operator

Next question, a follow-up from Michael Kupinski. Your line is open. Please go ahead.

Michael Kupinski – Noble Financial

I can remember that in your last political advertising guidance in 2012, you guys raised guidance, like, three times; so I was just wondering in terms of the swing factor, you mentioned issue advertising. Is there any particular market that maybe you guys think that you might have underestimated in terms of the opportunities for political?

Brian Lawlor

Look, hey Mike –I’m hoping I raised it three times. That wouldn’t be a bad thing. You know, as I said to you, right now honestly the number we put out there is how we see it. As I mentioned, there’s a couple of pretty good Senate races that—especially Colorado just recently went to lean – you know, Udall’s race, and so when we started modeling this a couple months ago, we thought that he would probably have that in hand, and that’s been moved to probably be projected now to be a bit more competitive. So if that stays in that case, there may be some upside there. You know, on the governor race, we’ve got 10 of them and there’s a lot of opportunity. Arizona and Maryland are both term limit seats, so those are open and I think we’ve modeled those appropriately.

I guess the ones that could get crazy would be Michigan, Florida and Colorado. I think all three of those existing governors are going to have to defend their position, and a lot of it will depend on how much party money gets brought in from the outside to be able to support it. I guess the other thing would be McConnell on the Senate side – I think the Democrats would potentially target him because of his role in the Republican party, so we’ve modeled some of that. But depending on—you know, as we look out, there’s about six or eight key races in the Senate across the country, and we have two of them. If something happens in Virginia or Pennsylvania that changes, it could bring more money to some of our races.

Look, we’ve talked about this before – we think we do political really well. We believe that we have a unique skill set that no other broadcast company has because of the way we handle political. We think we have some of the smartest political folks in the industry who manage our business and forecast all this stuff, and we’re really comfortable with the numbers we’ve put out there now. They can clearly change, as they did in 2010. We had a lot of momentum, people started buying 60’s instead of 30’s but maintained the point levels – it doubles the money. But then again, last year we wound up basically half of what we had modeled. Some things dried up and the government healthcare, it all kind of stagnated that.

So part of it is a guessing game; a lot of it is science, and we feel like we know the science part really well.

Michael Kupinski – Noble Financial

One of the interesting aspects of the Comcast-Time Warner merger, it seems like your company is probably more influenced or affected by that merger than anyone else. Was just wondering in terms of have you had any discussions with Comcast at this point what the opportunities might be to lessen the impact of the Time Warner retransmission negotiations, things like that?

Richard Boehne

Hey Michael, it’s Rich, and I’ll let Brian jump in. At this point, we haven’t had any direct talks with Comcast. It does potentially have an impact on us; the size of the impact, we don’t really have any idea because we don’t know what the new Comcast footprint is going to look like. I assume we’ll know that in the coming days. But it really—it just shifts a little bit of retrans revenue out a couple years and doesn’t have a—it’s not like it cuts off our retrans revenue substantially in any way. But I assume at some point we’ll have some discussions with them once we see what the footprint looks like. They’ve been good partners to us over the years, and we anticipate that that will continue.

Michael Kupinski – Noble Financial

Perfect, thank you.

Operator

A follow-up question from the line of Craig Huber. Please go ahead.

Craig Huber – Huber Research Partners

Yes, hi. I’ve got two follow-up questions, just general housekeeping stuff. What was the underfunded status of the pension at year-end, and what do you expect for the contribution this year and perhaps as you look out to next year? I know it’s early.

Timothy Wesolowski

Sure, Craig. We’ll be filing our 10-K later today. In round numbers, it’s about $50 million, so a decline from about $100 million to about $50 million, and we’ll be—we don’t have any required minimum contributions in 2014 or ’15, and contributions that we’d be making out beyond that will depend on changes in the funded status going forward, but we expect will be very manageable and modest.

Craig Huber – Huber Research Partners

My other question, please – on income tax rate, I think you said you were expecting it to be roughly 30% for this year. A more important question is when do you think your income tax rate that you’re going to book on your income statement will be actually a more normalize 38, 39, 40% level?

Timothy Wesolowski

It really kind of depends on when we have got—we’ve got some issues that we’ve got reserves against, and it really kind of depends on when those roll off, so it still might be a couple more years before we’ve got a more normalized tax rate.

Craig Huber – Huber Research Partners

Okay, thank you.

Operator

Our last question comes from the line of Edward Atorino – if I’m pronouncing that correctly. Your line is open.

Edward Atorino – Benchmark

It’s close enough. There is an FCC meeting, I think scheduled for the end of this month to talk about JSAs. You have any opinions, thoughts, insights, worries, et cetera?

Brian Lawlor

No, Ed – it’s Brian. Look, we’ll be watching it as closely as everybody else in the industry. We don’t have any JSAs, so if there is some adverse ruling that were to come down, it wouldn’t have an impact on our company. If anything, it could potentially provide some opportunity for our company if people are forced—

Edward Atorino – Benchmark

Yeah, I was just wondering how you saw it playing out. Okay, yeah. Thanks.

Operator

There are no further questions at this time.

Carolyn Micheli

Thank you everyone for joining us today. Thanks to our Operator, Mike, and I’ll turn it over to him to give replay instructions.

Operator

Yes. Ladies and gentlemen, this conference will be made available for replay after 11:00 am Eastern time today through March 18 at midnight Eastern time. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the conference ID 316445. If you’re an international participant, you may dial 1-320-365-3844 and entering the conference ID of 316445. Again, those numbers are 1-800-476-6701 and 1-320-365-3844.

That will conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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The E.W. Scripps Company (SSP): Q4 EPS of $0.14 beats by $0.01. Revenue of $221M (-15.0% Y/Y) beats by $4.37M.