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Wall Street Breakfast

E.W. Scripps Company (NYSE:SSP)

Q2 2007 Earnings Call

July 24, 2007, 10:00 AM ET

Executives

Timothy E. Stautberg - VP, Communications and IR

Kenneth W. Lowe - President and CEO

Joseph G. NeCastro - EVP, Finance and Administration

Richard A. Boehne - EVP and COO

John F. Lansing - Sr. VP and President, Scripps Networks

Mark G. Contreras - Sr. VP, Newspaper

Analysts

Alexia Quadrani - Bear Stearns

Lisa Monaco - Morgan Stanley

Peter Appert - Goldman Sachs

Frederick Searby - J P Morgan

John Janedis - Wachovia Securities

Karl Choi - Merrill Lynch

Craig Huber - Lehman Brothers

Paul Ginocchio - Deutsche Bank

Scott Davis - JP Morgan

Leah Pilla - UBS

Edward Atorino - Benchmark Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Scripps second quarter earnings report. At this time all participants are in a listen-only mode. And later we'll conduct a question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded.

And I would now like to turn the conference over to our host, Vice President, Investor Relations, Mr. Tim Stautberg. Please go ahead.

Timothy E. Stautberg –Vice President, Communications and Investor Relations

Good morning all, and thanks for joining us. We’ll start the conference today with a few comments from Ken Lowe, our President and CEO and Joe NeCastro, our Executive Vice President and Chief Financial Officer. Our prepared remarks should take about 20 minutes. We know you have busy schedules, so we’ll still make sure that we’re done by the top of the hour.

Before we begin, let me introduce the other members of our senior management team, who are here with us on the call. Joining us are Rich Boehne, Chief Operating Officer; John Lansing, President of Scripps Networks, Mark Contreras, Senior Vice President of Newspapers, Bill Peterson Senior Vice President of our TV Station group and Lori Hickok, Vice President and Controller.

Let me remind you, if you prefer to listen in on the web you can go to Scripps.com, click on Shareholders and find the link at the top of the page. An audio archive will be available on Scripps.com later today, and we’ll leave it there for a few weeks, so you can access it at your convenience.

Our discussion this morning will contain certain forward-looking statements. Actual results may differ from those predicted. Some of the factors which may cause results to differ are set forth in our publicly filed documents including our 2006 Form 10-K.

Now here’s Ken.

Kenneth W. Lowe - President and Chief Executive Officer

Thank you, Tim, and good morning, everyone. As always, we truly appreciate your interest in the E.W. Scripps Company. Before we offer our commentary on the second quarter and outlook for the next three months, let me set the stage a little bit by providing some historical perspective. In over the 130-year life of this company, the focus has always been on building solid sustainable media businesses for the long-term. Throughout our history, Scripps has succeeded by staying ahead of the changing habits of media consumers. That determination to evolve, if you will, our heritage is what drives our decision-making everyday here at Scripps. As a result, we're a collection of valuable media assets that includes some of the most recognizable brands in America, an for that matter, even across the globe.

Of course, the evolutionary process has not always been pretty. In our legacy businesses, our newspapers, the ones that brought us to the dance, if you will, we're doing everything within our means to keep our footing in one of the most challenging print advertising environments that we've seen in a very long time. On the other end of the evolutionary spectrum, growth in our online comparison shopping businesses, our newest media enterprises, isn't as smooth as we all like, as they experience growing pains in an ever changing and untested marketplace. And even our popular national lifestyle networks, still growing a dozen years after their birth, are in some ways burdened by their tremendous success.

As annual revenues move well past the $1 billion mark, it gets increasingly difficult to sustain the double-digit growth that we've all enjoyed for so long. Although I hasten to add that we are on track to do it again this year at Scripps Networks for the full year.

The common thread that connects all of these different businesses is our determination to anticipate, and get in front of promising trends in the broader media marketplace. That’s why internet advertising accounts for a rapidly expanding share of our total newspaper revenues. And that’s why, just last week, Scripps Networks acquired Recipezaar.com, increasing our share of the online food and recipe category, a space by the way, that we already dominate with Foodnetwork.com. That’s why Shopzilla is growing by leaps and bounds in France, Germany and the United Kingdom. And why uSwitch is having measurable success in the U.K., breaking into new service categories like personal finance and insurance.

And it's also why we're investing now in our television stations, ahead of next year's very promising political season. So, we can broadcast local news in high definition and be ready to provide candidates with topnotch television and internet platforms. In other words, at Scripps, we don’t tolerate the status quo. We're not content to watch the trends of full potential pass us by.

We've often said that we consider these to be incredibly exciting times to be in the media business. It's not always easy. In fact, in times like these, exciting seems to be a good euphemism for gut wrenching. But we know instinctively at Scripps, from our tradition of entrepreneurship that we can’t evolve as a media enterprise, if we're timid or we're weak at heart. It's been our experience that at times we've had to weather short-term disruptions in the long-term growth of the company as we work toward our goal of creating sustainable value for our shareholders. Now, for those of you who have been with us for a long time, the soundness of our strategy is evident in the outsized returns that you've enjoyed.

Now with that, let me turn it over to Joe to talk about the second quarter and provide a little more analysis on our forecast.

Joseph G. NeCastro - Executive Vice President, Finance and Administration

Thanks, Ken. Good morning, everyone. I think the best way to characterize the second quarter is to describe our results as mixed. On the one hand, financial performance of Scripps Networks was solid, with growth in both advertising and affiliate fee revenue. Segment profit for the division which includes our national lifestyle networks also grew respectively.

On the other hand, we're continuing to work through some issues at our other business segments including persistent secular weakness in newspaper adverting, lower referral fee revenue in our comparison shopping businesses, here in the U.S. and in the U.K. And the biennial effect the non-political year is having on our broadcast television stations.

At Scripps Networks, which accounted for nearly half of the company's consolidate revenue during the period, the top and bottom lines continued to move in the right direction. Advertising revenue improved, albeit at a somewhat slower pace, largely because of softer daytime viewership at HGTV and Food Network, even though primetime ratings remained solid. The good news is that we reacted quickly, made some programming adjustments at both networks and are confident that impressions growth going forward will help support our full year forecast of 10% revenue growth.

Our optimism is also based on the favorable trends we are seeing in the advertising marketplace. We are anticipating stronger year-over-year pricing during the summer's upfront negotiations, which we're now in the middle of. The effects of stronger upfront pricing as you know will show up in the fourth quarter.

As for total revenue growth at Scripps Networks during the second quarter, we are just a hair short of meeting the low end of the range that we had forecasted. We got close, thanks to better than anticipated affiliated fee revenue which was a direct result of the rapid growth in distribution at DIY Network, Fine Living and Great American Country.

Now, turning back a moment to the ratings and viewership story at HGTV and Food Network. We are seeing some improvement as we move deeper into the summer programming season. At HGTV, for example, Color Splash a show hosted by last year’s winner of the HGTV Design Star competition is breaking out as a hit for the network. Season 2 of Design Star by the way debuted Sunday night and based on the show's success last summer, we are anticipating some very solid prime time numbers. As for daytime and weekends, we are seeing improvement in viewership after a challenging April and May, thanks to some of the scheduling changes that we made.

Over at Food Network, we kicked off Season 3 of the next Food Network Star during the second quarter. Viewership for the popular series was up 30% year-over-year and on July 15th, the show achieved the highest viewership in the history of the network. About 2.5 million tuned in that night to watch the drama unfold.

We are also seeing steady ratings improvement in DIY Network, thanks to our strategy of adding time tested favorites Bob Vila, The New Yankee Workshop and This Old House. Combined with our quality original programming, DIY has become the exclusive television destination for How-To enthusiasts.

Our interactive initiatives at Scripps Network also showed significant improvement during the second quarter. Advertising sales on our category leading websites were up strongly during the period. Last week, as Ken mentioned, we announced our acquisition of Recipezaar.com. Our intent is to position ourselves to grow in the online Food and Recipe category. There is very little duplicated traffic between Recipezaar and Food Network.com, so we see an opportunity to build the business through both increased user traffic and advertising sales. The acquisition will increase our share of the Food category traffic to around 20%.

The Recipezaar acquisition also is part of our broader strategy at Scripps Networks to move our online businesses beyond expansion to our networks to become multi-branded user centric applications that create communities of online consumers. The news from Scripps Networks continues to be very encouraging on several fronts.

Now turning to Scripps Interactive Media, which includes Shopzilla and uSwitch. Referral fee revenue from both businesses was lower during the second quarter, primarily due to the changing market conditions. At uSwitch, a sharp decline in natural gas prices in the U.K., which occurred in the first quarter and persisted into the second has resulted in reduced consumer demand for energy switching. We believe this is a short-term dynamic that will over time… sorry that over time energy prices will move higher following historical trends. We are at the low end of the curve right now, but even so, keep in mind that referral fee revenue at uSwitch during the quarter was more than double what it was just two years ago.

In the meantime we are seeing meaningful growth in the other service categories we're developing including personal finance and insurance. The momentum we are creating in those areas however hasn’t been enough to overcome the malaise in energy switching. Temporary market conditions notwithstanding, we believe there is considerable potential to create value at uSwitch. It’s the leading comparison shopping website for energy switching in the U.K. is very high. We believe the business is well positioned to capitalize on growing consumer acceptance of online price comparison for higher value services. Same is true at Shopzilla, where we are focusing on improving the online search and comparison shopping experience for consumers and merchants both here in the U.S. and abroad.

We are seeing tangible evidence that our efforts to strengthen our competitive advantage at Shopzilla are paying off. Including the latest comp score reports that show Shopzilla leading the pack in May and June in terms of total unique visitors. Still the vigorous competition for keywords in the search engine marketplace has a direct impact on the business, resulting in modestly lower referral fee revenue during the second quarter, compared to the same period a year earlier. Our response has been to deploy new keyword marketing methodologies that are designed to increase consumer awareness and drive user traffic.

Meanwhile, Shopzilla’s international expansion is going well. We are seeing very strong revenue growth in the U.K., France and Germany, as we built consumer awareness for the brand in these very promising European markets. As we have said before, we believe both Shopzilla and uSwitch are in the early innings in terms of their growth and development. Long-term, we think there is considerable potential to create value for our shareholders at both businesses.

At our newspapers, the industry-side weakness in advertising persisted in the second quarter and was exacerbated what most believe to be a cyclical downturn in the Florida real estate market. If you take our Florida newspapers out of the mix, advertising revenue from newspapers managed solely by Scripps was down about 6% which is in line with some of our better performing peers.

The economic pressures weighing on our newspapers prompted us during the second quarter to take a closer look at the division’s already low cost structure. One step we took was to offer voluntary separation plans that were tailored to the specific needs of individual markets. 137 newspaper employees accepted the plans resulting in a net 3% reduction in our newspaper division’s headcount. Total newspaper expenses, excluding the one-time cost of the separation plans were down 1.3% during the quarter.

We'll continue to look for ways to reduce costs further, but keep in mind we are still going to do what we need to do to protect and grow our share of local advertising in our markets. I want to emphasize that we are being very deliberate in how we are dealing with the challenges we are facing in our newspapers. As always we are determined to be efficient operators. But given how rapidly advertising revenue has fallen off, our response can’t all come down on the expense side. It’s equally important we believe to be diligently mining our local newspaper markets for new advertisers, which is why we have been shifting resources to our sales efforts. At this stage, we are doing a lot blocking and tackling that doesn’t make for exciting headlines. But rest assured that we evaluating our newspaper businesses from a number of different perspectives as we readjust our strategy to reflect the current market conditions.

Finally, our Television Station Group did an excellent job during the second quarter making up the huge disparity in political advertising this year compared with last. Local advertising improved slightly over last year even though domestic automakers have been sitting on the sidelines. Total broadcast TV revenue was down modestly during the quarter and expenses were pretty much flat to last year. All in all, a good effort, considering the challenges they faced.

Now, turning to some non-operating items. The Company continues to generate substantial free cash flow. Debt as of June 30th was down to $620 million compared with $765 million at the end of the year. Looking ahead, we will be retiring $100 million in 6 5/8% notes that expire in October this year and $40 million in 3.75% that expire in February of 2008. We plan to replace those borrowings by drawing on our commercial paper program which is currently carrying an interest rate of around 5.75%. Because there is less debt on the balance sheet interest expense for the second quarter was down 31% to $10.7 million from $15.5 million during the same period last year. We are still expecting interest expense for the full year to be around $37 million.

Capital spending through the first half of the year is up to about $49 million compared with $29 million at the same point last year. The difference is attributable to capital we are using to upgrade our TV Stations’ capabilities to broadcast high definition newscasts, some spending in preparation for construction of a new production facility in Naples, Florida and the money we are using to expand Scripps Networks headquarters in Knoxville. All in, we are expecting capital expenditures on the year to be between $110 million and $125 million.

As for our share repurchase program, we spent about $12 million to buy back our own stock. We have repurchased about 273,000 shares during the second three months of the year at an average price of around $44 per share.

And with that, I will turn it back over to Ken.

Kenneth W. Lowe - President and Chief Executive Officer

Thank you, Joe. To quickly recap, we are expecting the solid growth in Scripps Networks to continue for the balance of the year. We are concentrating on driving viewership at all of our networks and especially at HGTV and Food Network. And we will be developing new interactive businesses around our lifestyle categories. At our local media businesses, we are working hard to capture new advertising dollars in each of our markets while doing our very best to keep the lid on expenses. And at Scripps Interactive Media, we intend to strengthen the competitive advantages of both Shopzilla and uSwitch by making the experience for consumers, merchants and service providers second to none. We will also be expanding internationally in broadening the capabilities of both websites to grow their businesses.

Now, that concludes our prepared remarks. And operator, we are now ready for questions.

Question and Answer

Operator

[Operator instructions].

Our first question from the line of Alexia Quadrani with Bear Sterns. Please go ahead.

Alexia Quadrani - Bear Stearns

Hi, thank you. Couple of questions. First, could you give us some more color on the ongoing cable upfront discussions? What do you think a good range on CPM increases are and any early thoughts on how that may translate into growth in the fourth quarter in ’08?

And the second question is, maybe an update on your use of cash going forward. With debt level so low, any consideration of planning a more aggressive share buyback.

Kenneth W. Lowe - President and Chief Executive Officer

Okay, John go ahead.

John F. Lansing - Senior Vice President and President, Scripps Networks

Yes, thanks. Good morning Alexia. We are in the middle of our upfront negations. And I am very optimistic based on what we have seen so far. We're anticipating a CPM growth in the mid to high single digit range and that would support the model for our fourth quarter that would indicate our full year forecast is right on target.

Joseph G. NeCastro - Executive Vice President, Finance and Administration

Alexia, this is Joe. With respect to our plans for cash flow, you rightly point out, that debt is down again. This is the situation. Obviously we monitor constantly and have ongoing discussions with our Board about. We are in the middle of our planning season, we just started our long range planning and of course we will be discussing those with the Board as well. Our priority has always been and continues to be reinvesting in the business, if possible, if we find opportunities that we think are value creating, we certainly would do that first. Absent that, and given the cash flow we have got, I think you will definitely see us actively considering increasing the payout down the road.

Alexia Quadrani - Bear Stearns

Okay. Thank you.

Operator

And our next question is from the line of Lisa Monaco with Morgan Stanley. Please go ahead.

Lisa Monaco - Morgan Stanley

Good morning. Could you just provide us a little bit of color on the advertising weakness at the cable nets? What came in a little bit weaker than expected? And are you seeing some impact from the housing market slowdown? Thanks.

John F. Lansing - Senior Vice President and President, Scripps Networks

Yes, Lisa, this is John. I have to tackle that one. The second quarter weakness in ad revenue is really tied not to the marketplace at all, but rather to some weakness in our ratings in daytime on HGTV and on daytime and weekend daytime on Food Network. As a result of some slowdown in our ratings, we weren’t able to monetize as many impressions in the second quarter. But the good news behind that is that the marketplace in the second quarter was actually quite strong. In fact scatter CPMs in HGTV in the quarter were up 25% and similarly on Food Network scatter CPMs are also up 25%. And that strength in scatter is continuing into the third quarter.

And the other good news is that the slowdown in the ratings during daytime and HGTV have shown marked improvement beginning in June actually and even further improvement into July. In fact, this July so far month-to-date is up 40% over the where we were in May in terms those daytime ratings. And we are right back on track, if not a little bit better than on track in terms of meeting the guarantees that we give to the advertisers. So, my 10% full year forecast feels very solid and certainly the third quarter should show a marked improvement over the second quarter now that the ratings are improving.

Lisa Monaco - Morgan Stanley

Okay. And then just separately on interactive, if Joe, maybe you could give a little color on revenue trends there, what we should expect? And how should we think about the seasonality because you guys have segment profit expectations for interactive of $30 million to $40 million for the year and that seems rather aggressive relative to where we stand year-to-date? Thanks.

Richard A. Boehne - Executive Vice President and Chief Operating Officer

This is Rich. Let me give you a little bit of background, and Joe may want to talk about the actual guidance that we issued. Yes, the business is obviously back-loaded and we are in the seasonal slowest period of the year right now. So, yes, absolutely, it is back-loaded. At this point though, we still feel pretty good about the guidance understanding where we are today and how it looked last year and where we think we are year-over-year. Shopzilla has been picking up and accelerating, and they believe they'll have a better second half. And then obviously uSwitch, just because the energy market is always better atr the end of the year. Now, I will let Joe talk about the actual guidance.

Joseph G. NeCastro - Executive Vice President, Finance and Administration

I think actually it is laid out in the release. I think you were interested in trends that Rich addressed, so I am not going to add anything here.

Lisa Monaco - Morgan Stanley

And for Shopzilla, I mean, embedded in that guidance, is Shopzilla expected to see revenue growth in 4Q?

Richard A. Boehne - Executive Vice President and Chief Operating Officer

At this point, yes.

Lisa Monaco - Morgan Stanley

Okay. Thanks.

Operator

Our next question from the line of Peter Appert with Goldman Sachs. Please go ahead.

Peter Appert - Goldman Sachs

Thank you. John, in the context of some of the initiatives you talked about to improve the ratings performance, what might we anticipate back half of the year and then into ’08 in terms of trends in programming expenses?

John F. Lansing - Senior Vice President and President, Scripps Networks

Well, Peter we are continuing to invest in programming because now that our distribution is maxed out almost entirely at $93 million, we'll grow very much incrementally from that point forward. Our growth is tied certainly to our ability to grow our audiences. And so we are looking at mid teen percentage growth in terms of investing in programming this year, and I don’t anticipate that slowing down a great deal next year keeping in mind that there is a flattening of those percentages based on the amortization of the programming over three years. The trends are very positive, though Peter, for Food Network, for instance was up 4% in primetime in the second quarter, had a very, very strong Next Food Network Star Season 3 to help drive that performance.

HGTV was solid in primetime with several new series that were launched that will… certainly Color Splash being one that comes to mind will be strong series for us going forward. Plus Judy Girard and her team at HGTV have really rethought the scheduling of HGTV and taking some of the stronger programs and using them at the same time across, the entire schedule on weekdays, including Designed to Sell at 8 o’clock Monday to Friday and House Hunters at 10:30 Monday to Friday, which is also stabilizing and helping to grow ratings and also helping to create a platform for launching new successful series.

And I don’t know, Sunday night if you are watching, but we launched HGTV Design Star Season 2 Sunday night. I am waiting to see national ratings this afternoon. But on a sampling of some of the overnight markets, the numbers look very, very good for that series as well. And as you can imagine, not only is that series good in its own right, but it helps us launch new series into the next year.

So investment is paying off. We are seeing the growth that we were hoping to see. The slowdown in daytime was a bit unexpected. But the recovery was fairly timely. So, all in, I am very optimistic.

Peter Appert - Goldman Sachs

So, John, the follow-on that is in the context of the need to step up programming even with the benefit of, with better ratings numbers, might it be realistic then that we should assume that margins perhaps eased a little bit lower here on a near-term basis and maybe we get back sort of, to the mid 40% kind of range that we were doing in ’04, ’05 time period.

John F. Lansing - Senior Vice President and President, Scripps Networks

No, actually not, Peter. That’s not my anticipation. We have, certainly a great deal of discipline around all of our investment around the brands and lot of the investments in programming and other key areas are growing. We are also being very deliberate in managing costs around all other line items in the budget. And it's our anticipation that the margins will not move by that… certainly not by four or five points, perhaps a point one way or the other. But we believe there is still a great deal of growth ahead of us on the top-line. Our interactive revenue, by way of example, grew 27% in the second quarter. And our focus and much of investment beyond programming on the linear networks is in widening and deepening our interactive businesses, so that we can drive the kind of growth we have experienced in the past, hopefully into the future.

Peter Appert - Goldman Sachs

Yes, that’s great. And if I can just ask one follow-up maybe Joe, for you. Can you tell us what roughly the earnings contribution from Cincinnati will be in ’07 so we can better understand what you need to make up next year? Thanks.

Joseph G. NeCastro - Executive Vice President, Finance and Administration

It’s about $12 million.

Peter Appert - Goldman Sachs

Okay. Thank you.

Operator

And our next question from the line of Fred Searby with J P Morgan. Please go ahead.

Frederick Searby - J P Morgan

Yes. A couple of questions. One is in our upfront discussions given the fact that you are seeing a ratings improvement with Food having earlier in the year, been a little bit of a laggard or disappointment there. What are you telling your endemics or clients guiding for in terms of ratings growth for the fourth quarter and ’08 time period and to flagships?

And then secondly, given that so much of the growth going forward looks like it’s going to increasingly come from the interactive side, you had a great number in the second quarter, how do we think of the margin contribution there, of the margins that are coming from the interactive side.

And then a couple of questions, this is really to Ken. You guys said that you are thinking about still evaluating strategies with the newspaper business and I wondered if you could really elaborate on that and tell us what your thoughts are with bringing uSwitch to the U.S. or given that you are going in your verticals whether you will focus on that and, as you're going into other geographies. Thank you.

Kenneth W. Lowe - President and Chief Executive Officer

Lot of questions there for us. John, why don’t you go ahead and tackle the upfront question.

John F. Lansing - Senior Vice President and President, Scripps Networks

Good morning, Fred. The thing on the ratings, to be really clear about is that, double digit ratings and impressions growth is something that was fairly common through the last several years at our major networks as the distribution was also growing. Now, that the distribution has matured the ability to grow ratings in double digit percentages will be increasingly challenging. And so, when we think about ratings growth, we think about a much more competitive environment, 200 to 300 channels competing against us. And really staying even with, or even growing in the low single digits, we consider a great success. For that reason then, with the margin for error slimming down, we are a little more conservative on how we are guaranteeing those impressions in there into the future with our endemics and non-endemics. And, being a bit conservative on that, Fred, so that we can deliver on that impressions, and preserve the added inventory that we have, to continue to promote the network in order to continue the slow, but steady ratings growth. And that’s really our strategy. We are not a hit-driven collection of networks like an entertainment network might be. We really believe in slow and steady audience development, and we invest very deliberately for that effect. And then we try not to over promise and under deliver but do our best to be conservative in our estimates. In terms of interactive…

Fredrick Searby - JP Morgan

The you are guiding for some ratings growth.

John F. Lansing - Senior Vice President and President, Scripps Networks

We are guiding right now…

Fredrick Searby - JP Morgan

The low-single would make sense, I guess?

John F. Lansing - Senior Vice President and President, Scripps Networks

Since we are in the middle of negotiations and that’s a competitive issue, I would rather not get into the details of what we are guaranteeing.

Fredrick Searby - JP Morgan

Okay.

John F. Lansing - Senior Vice President and President, Scripps Networks

And then, by the way it's different with different demos on different networks, so there is no one catch all…

Fredrick Searby - JP Morgan

Sure. Sure.

John F. Lansing - Senior Vice President and President, Scripps Networks

And Interactive is currently on a top-line basis, is about 6% of our total ad revenue. Our goal is to grow that over time, to be much more material. We will be this year nearing the $100 million mark in terms of Internet… pardon me, Interactive revenue against probably $900 million ad revenue goal. And we are seeing, as I said earlier 25% to 35% growth depending on the quarter, going forward. And that will become material over time. I think that the three pieces of that that will help it become material, the first is our, our new strategy having brought in Deanna Brown as our new President for Scripps Networks Interactive from Yahoo! Lifestyle Media. And she has laid out an aggressive strategy for increasing our user generated content, our social networking, and generally just growing a much more user-centric business around our core brands as we extend beyond their connection to our linear networks. And then secondarily to that, internally we’re working on some exciting ideas to grow some interactive businesses within our category under new brands. And then as you saw with Recipezaar, by way of acquisition. We continue to have an ambition beyond our existing brands, but rather to grow several brands and be the dominant, continue to be the dominant interactive business in the shelter, food and lifestyle categories, and increasingly see the materiality of that side of our business grow, as the linear business matures.

Kenneth W. Lowe - President and Chief Executive Officer

Okay. Rich, you want to take the usage Switch question and then I’ll talk about evaluating strategies.

Richard A. Boehne - Executive Vice President and Chief Operating Officer

Sure. Hey, Fred, it’s Rich Boehne. Step back for just a second and think about the way we look at expansion for uSwitch and Shopzilla, because we spend more time on just looking at U.S. for uSwitch. Right now, almost all the emphasis is on Europe and the U.K where the market is very, very strong. So, Shopzilla is expanding across Europe, and as we’ve said that the numbers are very good over there. And at the same time, uSwitch is focused on the opportunity there to expand other categories outside of its core energy, which at the moment is a little bit weak. So, at some point, yes, absolutely, uSwitch will in some fashion come to the U.S. But right now we’re very focused on the opportunity in the very strong European market with both Shopzilla and uSwitch.

Kenneth W. Lowe - President and Chief Executive Officer

And Fred, as I said in my opening comments, we’re a company that’s constantly evolving. We always have been. And I’d like to refer to us, not as a traditional media company, but as a transitional media company. So, we’re constantly evaluating our strategies… it relates to all divisions. I will say though that I think Mark and his team have just done an outstanding job of aggressively moving in our local markets where we operate on newspapers to a web strategy and interactive strategy. We’ve documented a lot of that, Fred, you’re familiar with a lot of it. And on an ongoing basis, it’s just an area that we focus a lot on, and will continue to. But there are no immediate plans on the front burner.

Fredrick Searby - JP Morgan

Okay. Thank you.

Operator

Thank you, Mr. Searby. And the next question from the line of John Janedis with Wachovia. Please go ahead.

John Janedis - Wachovia Securities

Hi thank you. Ken, you mentioned the challenges in the interactive businesses for a couple of quarters now. Are you expecting any kind of a moderation as it relates to the competition for keyword bidding? And is the European market much different from the U.S. for keywords?

Kenneth W. Lowe - President and Chief Executive Officer

Well, I’ll let to Rich dig in a little bit, but it’s obviously a very competitive area that’s actually gotten more competitive, since we entered, especially on the retail side here in the States, with comparison shopping. But Rich, do you want to dig in just a little?

Richard A. Boehne - Executive Vice President and Chief Operating Officer

Sure, the… I don't think there will be any moderation in the competition for keywords and the page search markets, I mean that’s not going to change. We are doing an excellent job of driving traffic there and on the free side. If you've looked at Shopzilla's numbers in May and June, they lead the marketplace. So the challenge is not so much getting the traffic and competing in those markets, it's turning that into revenue and bringing more to the bottom line. But no that will continue to be competitive.

In Europe, it's still much less of a search engine market, whereas over here there is an awful lot more free traffic, and we generate a whole lot more of traffic through more traditional kinds of marketing. Over time it's going to become, we would expect more of an search engine market. But today that’s not the challenge over there.

John Janedis - Wachovia Securities

Okay. So on the free side versus the paid side, can you give us a sense of how that’s changed today versus maybe in like February, March for you guys?

Richard A. Boehne - Executive Vice President and Chief Operating Officer

We don’t give the exact breakout, but the free side is up strongly compared to the paid side.

John Janedis - Wachovia Securities

Okay. And just one quick follow-up to an earlier question. Related to the housing market slowdown, have you seen any kind of a pull back from either Home Depot or Lowe's at Home and Garden or DIY as of yet, and do you expect one?

John F. Lansing - Senior Vice President and President, Scripps Networks

Hi this is John, John. We have not seen a significant or material pullback. There is an ebb and a flow quarter to quarter. If you think about our networks, while they seem to be endemic and tied to the housing industry, it really is much more, the program is much more focused on the design and the voyeurism, if you will, of the process of buying a home and not literally buying and selling homes. But they are clearly two of our top five advertising customers and they remain there and their investments have moved up and down. But we don't see anything tied specifically nor do we hear about anything tied specifically to the variances in home sales.

John Janedis - Wachovia Securities

That’s great. Thank you.

Kenneth W. Lowe - President and Chief Executive Officer

Thanks John.

Operator

Our next question is from the line of Karl Choi with Merrill Lynch. Please go ahead.

Karl Choi - Merrill Lynch

Hi, I have a few questions. First one just to clarify, in your guidance with Scripps Networks revenue in the third quarter, are you assuming that there will be no year-over-year erosion of ratings?

Kenneth W. Lowe - President and Chief Executive Officer

Yes, absolutely.

Karl Choi - Merrill Lynch

Okay. Second question is regarding the upfront. Can you just tell us about how many, sort of, what percentages of ratings do you actually gain or lose from going to live only to commercial plus 3 and that presumably will have an impact on top of your CPM growth though?

John F. Lansing - Senior Vice President and President, Scripps Networks

Yes, Karl. On a C3 basis, Scripps Networks HGTV and Food being the… those are rated and have the biggest impact obviously on our business, DIY is rated and is also falling into the C3 but is obviously smaller. The… the delivery of impressions on a C3 basis on HGTV and Food are among the highest in the market in all, among all our cable networks. That's based on our high engagement historically, we have delivered the highest numbers in terms of engagement. Put that in layman's terms, people see the commercials in HGTV and they not only do they see them, they act on them. They are engaged in the message. As a result, our advertisers are willing to true up the unit rates on a C3 basis. Our impressions are roundabout 5% or 6% below our program rating impressions, but our unit rates will remain the same making us whole on the exchange rate, if you will. And so when I talk about 5% to say a mid-to-high single-digit growth in CPM, that’s net of the C3 adjustment. Another way of saying that is if we were get say a 5% growth in CPM that would be in actuality, and 11% growth because we're made whole on the 6% differential based on C3 ratings compared to program ratings.

Karl Choi - Merrill Lynch

That’s very helpful. As far as the year-over-year sort of sell out level during this year's upfront, do you expect that to change from last year's?

John F. Lansing - Senior Vice President and President, Scripps Networks

I would rather not get into strategy but I will tell you this, that it's our intention based on the challenge every year of driving ratings to maximize our pricing. And in order to maximize our pricing, we may be a little bit more selective in terms of the volume we're willing to take upfront because the history over the last several quarters, really six quarters, looking backwards shows that the scatter marketplace is far outperforming the upfront marketplace. As I said earlier, in the second quarter, the pricing in the second quarter was 25% better than the pricing on last year’s upfront. So, I think we will be working harder to drive pricing in the upfront over volume.

Karl Choi - Merrill Lynch

Last question on the newspaper guidance, the down 5% to 8% revenues in the third quarter, does that assume once you… actually one more Sunday in the quarter?

Kenneth W. Lowe - President and Chief Executive Officer

Karl, are you speaking to the newspaper [ph]?

Karl Choi - Merrill Lynch

Yes, correct.

John F. Lansing - Senior Vice President and President, Scripps Networks

Yes, yes.

Joseph G. NeCastro - Executive Vice President, Finance and Administration

Yes, sir.

Karl Choi - Merrill Lynch

Okay. So it will be… it's actually down more on the underlying metrics?

John F. Lansing - Senior Vice President and President, Scripps Networks

Yes, yes and it's rate's largely driven by classified, Karl.

Karl Choi - Merrill Lynch

Okay. Even though the comps actually do look quite a bit easier in the third quarter.

John F. Lansing - Senior Vice President and President, Scripps Networks

It doesn’t get easier in the third quarter and fourth quarter, but the Florida classifieds decline continues to be the primary dragger for us.

Karl Choi - Merrill Lynch

Okay. Thank you.

Operator

And our next question from the line of Craig Huber with Lehman Brothers. Please go ahead.

Craig Huber - Lehman Brothers

Yes, good morning. On this Live plus 3 discussion, I would assume you guys anticipate that being your currency if you will, or the ratings you will be using starting what January 1st, or do you think it's actually earlier than that?

John F. Lansing - Senior Vice President and President, Scripps Networks

No, Karl, I am sorry Craig that would be beginning in the fourth quarter, for those agencies that are working on that currency. Not every agency by the way is using that currency. So we will have a mix of both program ratings and C3.

Craig Huber - Lehman Brothers

And if think I heard you correctly you are saying your CPMs right now are tracking up 5% to 9%. And that'd be net of this commercial ratings adjustment?

John F. Lansing - Senior Vice President and President, Scripps Networks

That’s correct.

Craig Huber - Lehman Brothers

Okay. And then Ken, are you taking off the cable, just to clarify you are taking off the cable selling or spinning off your newspaper division and/or your TV stations?

Kenneth W. Lowe - President and Chief Executive Officer

No, I'm not taking off, I'm not putting it on. I just, as I said earlier, I think we are constantly evaluating… as you know, Craig, we have in the past different businesses for those radio cable systems, TV stations, cable networks, newspapers. In the environment we are in, we have to look at all of our businesses. So, at this point, nothing imminent on any front.

Craig Huber - Lehman Brothers

Okay. And just a couple of nitpicks. Can you give us what the ad revenues were down at your Florida newspapers, in particular, how much the real estate component was down?

Joseph G. NeCastro - Executive Vice President, Finance and Administration

Sure Craig, hang on one second. If you look at just Florida alone, let me give you, classified was down about 33%, auto was down about 33%, real estate was down about 33% and print was down about 53%. And just for some context, if you look at our ad revenue performance, 60% of our decline was caused just by Florida. And in real estate alone, 95% of our decline is just Florida. And that had spill-over effects into retail as well. If you looked at furniture for example, furniture has the largest decline as a category, half of that is just Florida, even though Florida generally represents about a third of our total newspaper revenue normally.

Craig Huber - Lehman Brothers

What was the total ad revenue decline in the quarter for Florida?

Joseph G. NeCastro - Executive Vice President, Finance and Administration

About 21%.

Craig Huber - Lehman Brothers

Okay. And my last question, non-newsprint cash costs in the quarter, how much is that down, please?

Joseph G. NeCastro - Executive Vice President, Finance and Administration

About flat. And there is two things. It would have been down more… there is two major things that caused that. One was online spending, most of that related to the Yahoo! deal. And then we changed the way that we pay our carriers in Naples, Florida and that’s about a million bucks.

Craig Huber - Lehman Brothers

Okay, great, thank you.

Kenneth W. Lowe - President and Chief Executive Officer

Thank Craig.

Operator

And our next question is from the line of Paul Ginocchio with Deutsche Bank. Please go ahead.

Paul Ginocchio - Deutsche Bank

Thank you. Just back to cable, the programming investments as you are ramping it here in the third quarter, although the cable costs have been under control for the last few quarters, how do see, I guess programming investments going forward. And just a second quick one, Joe, on minority line, is that still $80 million as the guidance? Thanks.

John F. Lansing - Senior Vice President and President, Scripps Networks

Yeah, Paul this is John. I see the investment in programming in the mid teens percentage growth, dissimilar from this year going into next year. And, by the way, since this just came in by an e-mail, the investment in programming makes you feel good when you see that our Design Star premiere on Sunday showed increases of 46% and 49% against households and key demographics over the last year's premiere. So, that’s the reason we do it because it will give us the chance to keep growing this network and keep refining the audience, so that keep in mind, it's not… for us it's not just the younger demographics, it's also the age and income. And we have the top ranked networks, number one networks among women, 25 to 54 in a 75K plus environment and that kind of investment is what keeps that growing.

Paul Ginocchio - Deutsche Bank

John, if I can ask you a follow-up, you mentioned before all the cable channels out there, I mean you got whole distribution, just wondering… and maybe I am going back to another question… just wondering if that changes your outlook on the margins long-term as programming costs stay sort of in the mid teens, yet maybe your top line does not?

John F. Lansing - Senior Vice President and President, Scripps Networks

The way I think of that is that there will be some moderate downward pressure on margins, while we ramp up interactive. But as we see the interactive business, we are not bound by two or three or four or five brands. We have those great brands plus we have the ability to build our acquired new brands and continue to expand in the shelter, food and lifestyle category. So I think where there may be a plateau or a slight retreat in margin, I think the opportunity to grow margin in the future is still very, very much, very real for us.

Paul Ginocchio - Deutsche Bank

Great. And Joe, on the minority line, is it still 80 million?

Joseph G. NeCastro - Executive Vice President, Finance and Administration

Yeah, Paul, the number's still pretty good.

Paul Ginocchio - Deutsche Bank

Great, thank you.

Operator

And our next question from the line of Scott Davis with JP Morgan. Please go ahead.

Scott Davis - JP Morgan

Actually Karl got my questions, thank you.

Operator

Thank you. We go next to the line of Leah Pilla with UBS. Please go ahead.

Leah Pilla - UBS

Yes, hi. I was just curious if you were still interested in acquiring the minority stake in Food TV and also whether or not you might have had discussions with Tribune recently of that nature.

Kenneth W. Lowe - President and Chief Executive Officer

Sure, Leah, it's Ken. We are interested in acquiring that at what would be, we think, a good acquisition price for our shareholders. We recently have not had any active discussions with Tribune. Although as you know, since they are partners in Food, we are constantly talking to them back and forth. But on this particular issue, no discussions recently. It's pretty well understood on both sides that we are a willing buyer and when they become a willing seller at a reasonable price, I think maybe that would be a great opportunity for us.

Leah Pilla - UBS

Okay, thank you.

Operator

And our next question from the line of Edward Atorino with Benchmark. Please go ahead.

Edward Atorino - Benchmark Company

Hi, Peter asked the question about Cincinnati and you said there was a $12 million make-up. Any plans you talked about, to make that up? And secondly, if you look at the affiliate revenues in the Networks, is that sort of the run rate for the balance of the year $55 million, $60 million?

Kenneth W. Lowe - President and Chief Executive Officer

Well, let me address the first question, although Mark, you are welcome to jump in. As far as "making up" Cincinnati, to be very clear that in our announcement we did not suggest there would be any continuing operations of any sort web based et cetera. But Mark is certainly looking aggressively, as he always does at contributing more throughout the remainder of this year, and especially ’08. But there is no “plan" that’s Cincinnati-based to do anything on that front. Okay?

Mark G. Contreras - Senior Vice President, Newspaper

Yes, Ken is right.

Joseph G. NeCastro - Executive Vice President, Finance and Administration

Yes. And this is Joe. That range still looks good for the rest of the year.

Edward Atorino - Benchmark Company

Okay, thanks.

Operator

And I will now turn the meeting back to our speakers.

Timothy E. Stautberg –Vice President, Communications and Investor Relations

I think that’s the end of the questions at this point. If you have any further questions this afternoon, I will be available, it's Tim Stautberg, at 513-977-3826. Otherwise, thank you and have a good day.

Operator

Thank you. Ladies and gentlemen, this conference call will be made available for replay starting today at 1:30 PM Eastern Time. The replay of the conference runs for one week until the date of July 31st at midnight Eastern. You may access the AT&T teleconference replay system by dialing 1-800-475-6701. Please enter the replay access code 877900. International participants may dial 320-365-3844. The replay access code is 877900. Those numbers again, 1-800-475-6701. International participants may dial 320-365-3844. The replay access code, 877900.

Well, that does conclude the conference call for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.

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Source: E.W. Scripps Q2 2007 Earnings Call Transcript
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