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Executives

Gary Weitman - Vice President of Corporate Communications

Samuel Zell - Chairman and CEO

Chandler Bigelow - Chief Financial Officer

Randy Michaels - Executive Vice President, CEO Interactive and Broadcasting

Analysts

Ken Silver - Royal Bank of Scotland

Hale Oden - Barclays Capital

Louise Phelps - Phelps, Cutler & Associates

Adam Spielman - PPM America

Alex Chavez - CapitalSource Finance

Stuart Rossmiller - Members Capital

Vic Marvin - TCW

Tribune Company (TRB) Q4 2007 Earnings Call April 17, 2008 2:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Tribune conference call for lenders. My name is Antoine and I will be your operator for today. (Operator Instructions) I would now like to turn the call over to Mr. Gary Weitman, Vice President of Corporate Communications. Please proceed, sir.

Gary Weitman

Thank you very much and good afternoon and thanks for attending our call. Joining us for the call are Sam Zell, Tribune's Chairman and CEO; Randy Michaels, Executive Vice President and CEO of Interactive and Broadcasting; and Chandler Bigelow Tribune's CFO. As we previously announced, the purpose of this call is to discuss changes at the company since the closing of our going private transaction last December, review our 2007 results, and provide an update on business trends in early 2008.

We have allocated approximately an hour for the call. Sam will provide an overview, discuss the strides we’ve made in transforming our culture and talk generally about 2008. Chandler will then review the company’s 2007 financial results and speak briefly about our current capital structure. And Randy will provide further details on some of the initiatives underway at the company. The remaining time will be used for Q&A, and we have more than 350 participants in the call, so we are going to try to move the Q&A along fairly quickly.

In the interest of making the best use of our time, we will focus our remarks and answers to questions as much as possible on these topics. Please keep in mind that the company’s operating results for the first quarter are still being finalized and are not yet public. Accordingly, first quarter results will not be addressed in detail in today’s call, although Sam will provide a general review of our trends so far. More detailed first quarter results will be the subject of a future press release likely to be issued in mid-May when the company files its first quarter 10-Q with the SEC. Going forward, during the course of 2008, we intend to provide timely periodic updates of our business results and trends.

Before turning the call over to Sam, I want to remind you that today’s presentation will contain certain forward-looking information. Such information by its nature is based on facts, events, assumptions, and uncertainties that are subject to change. In evaluating such information, you are advised to review the cautionary statements regarding forward-looking information contained in the company’s March 20, 2008 earnings press release and in the company’s SEC filings.

Now I will turn the call over to Sam.

Samuel Zell

Thank you, Gary. And this should come as no surprise to anybody, revenue trends this year to date are significantly worse than we expected. A great deal of this has to do with the erosion of the classified side of the newspaper print business. We expect to have double-digit declines in print this -- print advertising this quarter. In particular, we are seeing the impact of a weak economy on our classified advertising.

Real estate and employment classified ads have declined significantly, more than the overall publishing ad trends. This is consistent with results that are throughout the whole industry.

A weak economy has decreased the volume of advertising by key industries, such as housing, and we continue to see the flight of advertisers to the Internet.

Broadcasting operating results have been notably more stable than print. In fact, our broadcasting is ahead of 2007, ahead of our projections for this year, and is outperforming the industry average. But while our results so far in broadcasting and interactive are promising, we’ve not had time yet to fully realize these gains.

When we originally entered into this transaction, our goal was to keep everything together and to preserve the ownership of all of the assets. The significant erosion in the first quarter has certainly put that plan into some question and we are forced to consider the possible divestiture of some of our assets.

With regard to previously planned dispositions, we continue to have meaningful discussions with the Illinois Sports Facility Authority and to make steady progress on a mutually agreeable transaction. We are at the same time finalizing the books through potential MLB approved buyers so that those books will be going out in the next 10 days and will have in fact an optionality feature, depending on what happens with the Illinois State Facilities.

Turning to changes we are making within the company, we’ve been at it for about 90 days and we have made significant strides in transforming the kind of culture but we certainly have a lot of work left to do. I think we began with the thesis that if we were going to be successful, we needed to change the culture.

As some of you may be aware, we have been traveling around to all of the Tribune properties and delivering this message. We have created direct communication between senior management and employees and along the way have set up a methodology where employees can in fact have direct access to management.

We have received nearly 3,000 e-mails in an account that I opened called talktosam.com, and overwhelmingly they reflect a positive employee base ready to take the company to a new level.

On our internal road show, we visited almost all of the 47 business units and gave employees the opportunity to ask any questions that they thought were relevant. We have raised the bar against which success will be measured and we have redefined the expectations we have of employees.

We’ve opened the floodgates to ideas from employees and we are starting to see a grassroots change take hold. In its first month, our online idea bank received over 2,000 ideas from employees. A very large number of these are giving us insight into opportunities to dramatically improve the company going forward.

Employees are starting to take initiative, something that has never happened before, and to launch revenue generating projects and programs. Randy will talk to you more about what is happening but it is certainly a very changed environment and certainly enormous progress, considering we’ve been at it for the last 90 days.

Further, we are recruiting top talent and more important, not only are they coming but the number who want to come far exceeds our ability to handle all of the demand.

We started with Randy Michaels. Randy Michaels is the former CEO of local TV, now CEO of broadcast and Internet -- and interactive and I’ve worked with Randy extensively in the ‘90s as we consolidated the radio industry and created jcore, which was eventually sold to Clear Channel.

Gerry Spector, who has worked with me since 1971 is the former COO of Equity Residential and is now the Chief Administrative Officer of the company.

Ed Wilson, formerly President of Fox TV Network, now President of Tribune Broadcasting.

Lee Abrams, formerly Chief Executive -- Chief Creative Officer of XM Satellite Radio, now Chief Innovation Officer, a new position we have created.

Gerry [Kerstein], formerly Executive Vice President of Finance at Clear Channel Radio, now is VP in Broadcasting.

Mark Chase, formerly Senior Vice President of Programming at Clear Channel, now President of Interactive.

Sean Compton, formerly Senior Vice President of Programming at Premiere Radio Network, now Senior Vice President of Programming and Development.

And we are promoting quality people from within the company, an obvious example being Chandler Bigelow, who is the new CFO of the company.

I would comment to you in addition that as we have begun to probe the organization, we have to our delight found a significant number of very creative, very focused, and very loyal employees who really want to make this change. In the 3,000 e-mails that I got, all of which I read, all of which I answered, perhaps the most common phrase in those e-mails is “a breath of fresh air.” We believe we are changing the culture, we are changing the environment, and we are changing everybody’s goals. We believe that to be successful, this company needs a new template and we need to think differently. We have to be revenue focused, we have to be more creative, we have to be faster and leaner, greater interaction between product types and across business units, such as content sharing, resource sharing, cross-selling.

We are establishing a 24-7 content and entertainment provider that prints once a day for the record. We are focused on creating a compelling and engaging experience for our readers and viewers that fully leverages the power of our brand and creates a much stronger identity with our customers who are both our advertisers and our readers, and our company going forward.

I’ll now turn this over to Chandler to review the 2007 financials.

Chandler Bigelow

Thanks, Sam. As you all know, Tribune filed its 2007 10-K and issued a fourth quarter and full year earnings release back on March 20th and I’ll spend a few minutes giving you a general recap of these results.

Please keep in mind that our full year and fourth quarter 2007 fiscal results includes one less week than the comparable period for 2006 and for purposes of this call, I will discuss the pro forma comparable results assuming a 52-week period for 2006. For the full year, the additional week increased ’06 results revenue and expenses by approximately one to two percentage points.

In addition, our 10-K and press release outline $298 million of one-time pretax charges that we recorded in 2007. This amount included $130 million pretax non-cash impairment charge to write-down the company’s masthead intangibles to fair value and when I discuss our cash expenses and operating cash flow today, I will do so on a pro forma basis excluding all of these items.

So for 2007, Tribune generated approximately $5.1 billion of consolidated revenue. This was 5.5% down on a comparable 52-week basis versus ’06. Our cash expenses excluding the one-time items were approximately $3.9 billion, which were down 4% on a comparable basis and our operating cash flow totaled $1.16 billion, net of these one-time charges, which was down 11% year over year on a comparable basis.

Looking more specifically at our publishing results, 2007 publishing revenue totaled $3.7 billion and was down 7% on a comparable basis. Total advertising revenue, which totaled $2.9 billion, was down 9%. Circulation revenue totaled $527 million, was off about 5%.

Other publishing revenue was $277 million and was up 9% in 2007 and the key factor in this growth is our new distribution deal with the Chicago Sun-Times in which we started to deliver their papers in the suburbs of Chicago.

Within the publishing advertising segments, retail and national advertising were both down 4% and classified advertising was down 18%. Within the retail segment, I had mentioned that print newspaper display ads were down 7% while pre-print revenue, which makes up nearly 50% of the retail category, was down 2%.

Within the classified segment, help wanted advertising was down 18%, real estate was down 24, and auto was down 11 and these declines were primarily driven by weak results from our two Florida papers in Orlando and Fort Lauderdale.

Trends in Chicago and Los Angeles, our two largest markets, were about the same as the overall group, down in the high teens and within the classified segment, I had mentioned that print classified was off 23% while online classified was up 9.

As Sam mentioned, our classified results certainly reflect the difficult economic environment so that -- and are highly correlated to the underlying health of the economy. To put this in perspective, classified advertising makes up about a third of our total publishing ad revenue but it contributed to nearly three-quarters of the decline in publishing ad revenue.

And when you drill down even further, classified advertising at our two Florida newspapers represented approximately 6% of total publishing ad revenue in 2007 but decline in our Florida classified accounted for nearly one-third of the publishing ad decline.

Turning to our online results, total online revenue was up 13% in 2007, including classified growth of 9% and non-classified banner advertising up 33%. In 2007, online advertising represented nearly 9% of our total publishing ad revenue, up from about 7% in 2006.

I would also point out that we continue to build a very strong online audience and that in 2007, our newspaper websites averaged over 13 million unique visitors per month, which was up over 17%. And in December of ’07, our total monthly unique visitors reached just over 16 million, which was up 35% year over year.

As for circulation, as I mentioned circulation revenue declined 5.5% in ’07 to $527 million and that amount now represents 14% of our total publishing business. Declines were primarily due to about a 3% decline in volume and continued selected discounting throughout the newspaper group.

In 2007, our total daily circulation declined 3% and Sunday was down about 4, and these trends were marginally better than the industry.

Turning to expense, on the publishing side cash expenses were $2.9 billion, down about 4.5% on a comparable basis. This decline was primarily due to lower compensation and newsprint expense. Total publishing comp was down 5%, primarily due to the reduction of 750 employees in the group in ’07, which was equal to about 4% of the employee base.

And in terms of newsprint, total newsprint expenses were down 16%, which reflected equal parts lower prices and lower consumption. All other publishing expenses were about flat.

So in terms of operating cash flow, publishing operating cash flow in ’07, it was approximately $781 million, which was down 16%.

Broadcasting and entertainment total revenue was approximately $1.4 billion, down less than 1% versus 2006. Cash expenses in the broadcasting group were also down slightly, at approximately $1 billion. 2007 broadcasting operation cash flow was $430 million, which was down 2% versus 2006.

Within the broadcasting group, the television group had revenue of approximately $1.1 billion, which was down about 2%, primarily as a result of going up against difficult political ad revenue comps. Radio and entertainment revenue reached $262 million in 2007, which was up 6% due to the strength from the Chicago Cubs.

I would also point out in 2007 that the television group recorded an additional $23 million of cable copyright royalties related primarily to activity in the 1998-2001 time period. We do receive cable royalties each year. Our expectation is that will obviously continue but that the future payments would not include such a large catch-up component.

In terms of expenses within the group, compensation was up about 1%, which was entirely due to higher Cubs payroll, while broadcast rights were down approximately 2% and all other expenses were flat.

In total, broadcasting and entertainment operating cash flow was approximately $430 million, down about 2%.

In terms of our corporate expenses, 2007 corporate expense was approximately $51 million, which was down $10 million year over year or about 16%. On the equity income line, we reported $100 million of income from our equity investments, which was up 34% year over year, included strong growth from the Food Network, TV Food Network, Comcast SportsNet stakes, as well as positive income from both CareerBuilder and Classified Ventures.

In terms of cash, we received $85 million of this $100 million in the form of cash dividends from our equity investments with nearly all of these dividends coming from TV Food and Comcast SportsNet.

When you consider these cash dividends, our consolidated operating cash flow plus the cash received from equity investments totaled $1.24 billion in 2007, down about 9%.

Moving down the income statement, our reported gross interest expense for ’07 was $582 million, with our cash interest expense at $512 million. In terms of our interest expense going forward, I would point out that in the 10-K, we disclosed our pro forma interest expense would be approximately $1 billion, assuming all of the new debt related to our go-private deal was on the books for the full year and assuming current LIBOR rate. And I would point out that this $1 billion amount includes approximately $100 million of non-cash interest expense, which is related to the amortization of financing fees, non-cash [inaudible] interest, and the pick on the Zell note.

In terms of capital expenditures, we spent $146 million in ’07. This amount is lower than in recent years, primarily due to the many projects that we had initiated in 2004 and 2006 time frame which are nearing completion. And these are the company wide systems projects that we’ve previously discussed.

In terms of liquidity for 2008, we have debt maturity this year of approximately $1 billion, which includes $650 million of term loan due in December, $263 million of medium-term notes, $76 million of required amortization on our term loan B, and $22 million of property financing obligation.

I would point out that we plan to fund the medium-term note maturities with a delayed draw feature on our existing bank credit facility. And in addition when we purchase our TMPT real estate, which we’ve previously announced, later this month for $175 million, we will extinguish the property financing obligation on our balance sheet.

In addition, I would point out by purchasing the TMPT real estate, we will eliminate $24 million of annual cash lease payments. In addition, we will -- once we close the deal we will own mission critical real estate in Los Angeles, Baltimore, Long Island, and Hartford, and we are purchasing the property at a very attractive price.

We plan to fund the majority of this purchase with the $125 million of proceeds that we generated through the sale of our Hollywood, California studio lot in January and the proceeds that we also expect to receive from the sale of our two pieces of Connecticut real estate in Greenwich and Stanford.

Finally, I’ll conclude my remarks by saying that the company is currently in compliance with its financial covenants and that our liquidity position has not changed much since the end of 2007, specifically our cash balance remains relatively close to the $230 million of cash that we showed on our 2007 10-K and we have not drawn any amounts on our $750 million revolving credit facility.

And now with that I’ll turn it over to Randy.

Randy Michaels

Thank you, Chandler. I am pleased to give you an update on our efforts to far. We haven’t been here a long time but we’ve gotten a lot done. As Sam likes to say, we are taking the Tribune from being a media conglomerate, a holder of various media businesses to a real media company.

And what that means is that we are going from a company that was fairly top down, a lot of corporate input but also fairly silent, so that each of the divisions and within those divisions, each of the business units operated pretty much on instructions from corporate but with not very much cooperation with each other.

We are moving from that model to much more of a mesh, which features both stronger local brands, more local authority and more local accountability but at the same time, more cooperation at the edges.

Simply stated, there’s going to be less reliance on corporate but more reliance on each other. There is going to be less focus internally but more focus externally. These are old line businesses and in the process of reinventing them, we have to get away from the conditions that existed years ago when these were monopolies, or near monopolies. We have to realize that now we are all in a very competitive environment focused on our customers, that would be our readers and our advertisers.

As you may have heard, we are using the six smallest newspapers, what we call the T6 papers, as sort of a laboratory to experiment with doing things differently on the print side. It’s our objective to build what we believe the newspaper should look in 2010, from a visual standpoint, from a sales standpoint, from a cost standpoint, and to get there by the fall of 2008, so that instead of constantly playing defense and catch-up, we buy ourselves a little time.

That involves making a lot of changes very quickly, which is why we started to experiment at the T6 papers and we focused primarily on the sales structure. As you may know, newspaper selling is very, very good in certain ways. An account is either assigned to a category manager -- for instance, someone who specializes in automotive or in retail furniture or in medicine, or it falls into a zone, a defined geographic territory and one sales person is assigned to that zone to call on the various accounts.

There are a lot of advantages to that system and by the way, they are compensated primarily at most papers by salary with some override and bonus opportunity. That is a system that is designed to control costs and when demand was high, when we could sell all the newsprint we wanted, it was a very good system. Today we think it leaves a lot on the table. A zone seller might have 5,000 accounts in a territory and might be able to make budget with 60 of them in the paper. We think that’s sub-optimal.

Secondly, by focusing more on controlling costs we have created a disincentive to sell harder and by using -- sort of arbitrary sales targets for one to make the bonus, the way the system really works is you can’t go very far over budget or we’ll reset it higher next year and then it’s harder to make your mortgage payment.

So we are shifting to a much more incentive based compensation system. Some of the papers, some of our better run papers have already made that shift but say half way. For instance, if you are starting at one of our larger papers and you are a new salesperson, we think your account list should bill $700,000. We might pay you $35,000 in base and $35,000 in commission.

What we are going to do quite simply is shift that so that we’ll pay you maybe a $35,000 draw and a 10% commission. This does two things. It gives you twice the incentive to make another call at four o’clock. The other thing, and the thing that the publishers have focused on historically, is what happens if you sell $1 million? In scenario A, you only make $15,000 more. In scenario B, you make $30,000 more. And in the past, we’ve been more concerned on saving the $15,000. In the future, we’re going to be more concerned in picking up the 270.

And I think that what this does is that quite simply, we have a revenue problem. I mean, business is off. Sam is the smartest man I’ve ever met. He can’t solve the revenue problem. I can’t solve the revenue problem. The publishers can’t solve the revenue problem. The only people who can solve the revenue problem are the people out on the streets who can decide to make another call at four o’clock or not. So we should give them a greater incentive, shifting the burden of solving our problem to the people who can solve it and creating incentives that align our interests, because if some sales person makes five times as much as we thought they were going to, so do we and everybody ought to be pretty happy.

Now, there are a lot of details, a lot of devilish details to work out but where we’ve done this, Allentown was the first market to 100% commission. I can tell you that our local business within the company is strongest in Allentown. The wheels didn’t come off the train and in fact, one market doesn’t establish a trend but I think as we move to this kind of incentive program, we are going to see our -- particularly our local retail business, the business we can affect the most, increase.

In addition, by breaking up the zone structure, one feature of the zone structure is nobody ever lost an account. If you didn’t call on somebody or if you had a bad relationship, it’s just -- that’s the way it was. So we are shifting accounts. If an account is not in the paper, guess what? Somebody else calls them.

Through account shuffles and new business programs in the T6 papers since January alone we have generated $4.5 million of new incremental business. In some markets, we’ve established a partnership with a TV station, owned or otherwise, which has generated about $1.5 million of new print business.

In the T6 papers, we are now selling spadia, or the page that half-wraps around the front section and goes around the back. Common in Europe, not common in the U.S. We have written about $1.4 million in new spadia business. All of the T6 papers have -- did a program designed to clear remnant inventory and bring in new advertisers called a one-day sale, where instead of hitting the street our sales people came in, participated in an all-day contest calling sponsors and offering them one-time package deals that gave advertisers a great rate but really packaged up inventory we weren’t going to sell, and we generated $4 million on that day.

In a couple of our markets, we’ve cross-trained all of the sellers to also sell interactive and in two markets, we’ve had one day events where we’ve gone back and upsold existing advertisers an interactive component. We generated $700,000 in that day.

So all together, we have generated about $22 million of new business with the experiments in T6. I recognize that doesn’t make up for the shortfall in publishing but it just started working in the last 10 days or so with the three larger papers, so there is none of that in here. And we’ve just started our efforts at T6, so while the overall trends in print are anything but good, what we are showing is that there are things we can do about it, there are things we can control, and when you focus on them, good things tend to happen.

Some others things I’d mention in print that are maybe softer but I think powerful is that again we need to motivate our sales staff and one way you do that is with rewards. That’s what the commission component is designed to do. The other is with recognition. People like to be recognized.

For the same reasons that real estate companies put the picture of the real estate agent on the sign, customers like to do business with someone they know, or at least someone they recognize. So we have started to recognize our top sellers internally, on our websites, in e-mail, and even in our papers. We are also starting to recognize some of our better advertisers. There is no better tool for a new sales person than a testimonial.

So if an advertiser will write us a testimonial letter, you know, “I’m renewing with the Chicago Tribune because I ran the ad and people walked in with it and I sold out of the product” and you get a story like that, get them to write your letter. That’s very helpful for a new sales person to sell another new advertiser, and we are running a picture of that customer who renewed along with the sales person who sold the renewal in the paper. Inexpensive, obvious, powerful, not the kind of self-promotion newspapers are used to.

In fact, the first couple that came out, the ad said “Joe Blow renewed because the paper’s great. It reaches a half a million people and gets passed around in 16 different --“ you know, it was all about us. And we said no, no, no, this is part of changing the focus out. It’s got to be this ad got results for the client. We are focused on not on how great we are but on the benefits to the client. It sounds subtle but it’s -- if we can get the attitude of this company from internal to focusing on our customers, I have tremendous optimism there is a lot of upside.

We’ve done a lot of other things that I think are going to be terrific. One experiment we’ve just tried at the Newport newspaper is the readership surveys tell us people want more local news, but we put Zimbabwe on the front page instead. Again, to be in line with the consumer focus, we’ve redesigned the Newport news newspaper so that the front section is whatever the news is. It might be Zimbabwe, it might be the election, it might be local politics. But the A section is mostly local news, so is the B section. Then there is business. We moved world and national to its own section.

I was warned by certain publishers this would cause a revolt and that we’d be changing it back. I don’t know if this sounds like a revolt to you. We had some clients who said gee, I want to be in the world news section, so we moved him to that section. That freed us space in the A section, so our business is up. And we did have six cancellations. That’s not enough from my perspective to change it back.

In Baltimore, we’ve launched a free daily based on our experience in New York and in Chicago. We launched a publication called B. Too early to tell you it’s going to work but it doesn’t cost a lot and the upside is tremendous.

And we have some initiatives going on right now that are just terrific. Lee Abrams, who just joined us as innovation officer, is in Florida where we are integrating the newspaper and the television station. I’ll tell you about that in just a second, and working on how we might redesign the paper to look like it should in 2010. And I’ll tell you the attitude, even from the old printers-ink-in-the-veins people inside the building is pretty good right now. I think there is all of a sudden a lot of realization, a lot of excitement, and a lot of enthusiasm that the newspaper, which looks other than the addition of color kind of like it did in the 1930s. Might want to look different in 2010.

Just moving quickly to broadcasting, with the addition of Ed Wilson from Fox TV and Sean Compton, we’re in terrific shape. We are pacing well above the industry. There is no question that the television industry has started to trend down but we have not. And part of that is we just have a lot of upside. Those TV stations have a lot of upside. The good news is we are achieving and there again the story is very much the same. We are focused on selling.

If you look at Tribune historically, about 95% of our business has come through the agency. That means this is business that somebody has -- some advertising somebody has decided to place on television and we go out and get piece of it. That’s pretty important. That’s 95% of our business. I’m not discounting that but that’s not really selling; that’s getting bought. That’s raising your hand and being the person that gets picked or getting a share of a budget that somebody has already decided to spend.

Historically newspapers have done a better job of going out and creating business than television and the good news is that television can create business and a fair amount of the gap that you are seeing between Tribune and the rest of the industry is that’s in fact what we are doing. We started right away with new business contest, direct business contest. That’s business we can control. We’ve written about $7 million of new direct business. That doesn’t sound like a lot of money but it’s money that the Tribune never would have gotten before. And again, we’re doing pictures of the sales people who win every week on the websites, internally, the memos to the whole sales department, plus cash prizes for people who win in various categories, along with better packaging and better inventory control. Broadcasting in general is in great shape.

We’ve got some really exciting things going on. As you may have read, we were able to grab the Fox affiliation in San Diego. Conservatively, I would say that moving from a CW affiliation to a Fox affiliation increases the intrinsic value of that station by probably $150 million, so that’s a pretty nice hit. And Sam was instrumental in getting that done, thank you very much. We’ll go out and get you the money.

We have a big opportunity with Fox in general. We have five, now six Fox stations and all of them rank in the bottom 20% because we have in the past been afraid to go after the number one position that a Fox station with news can achieve. We tended not to do news in the morning or to do a very inexpensive and not very serious attempt at news. We think there is tremendous upside, particularly in the Fox stations.

I mentioned that we are moving the Miami station into the Sun Sentinel building. We now have the publisher of the Sun Sentinel also running the TV station. And then we have a general manager who is overseeing sales for both.

This fall, we will be debuting news on that station unlike any TV station in the country, where it will be done primarily from the Sun Sentinel website by -- with using a very high-tech, very slick look. Not all that expensive but repurposing the very expensive news gathering that we already have in South Florida for a completely different look and feel. It’s an interesting experiment.

We shuffled Seattle early this year, moved My Network back an hour to put on the first nine o’clock news and to feed our Fox station. That’s the first Fox station that Tribune has that has kind of broken out of the pack with stronger news and winning in prime and I just got the audit report yesterday. For the first time, we are number one in billing in Seattle and you have to go back to when WGN-TV consolidated the Superstation sales to find another time that any Tribune station is the number one in billing in its market. One month. We’ll try and keep it there.

And we are also seeing the barriers, the silos break down. For instance, the Los Angeles Times news bureau in Sacramento now has cameras and is servicing KTLA Los Angeles, KTXL in Sacramento and very soon, KSWB. The Superstation represents one of the greatest upsides in the company.

We tried a completely inexpensive experiment going into baseball season with baseball movies, Bull Durham, Field of Dreams, movies like that, and a countdown clock and generated 250% increase in viewership just by packaging and theming.

The Superstation will be relaunched in May and we think that’s going to be a huge opportunity.

I want to go quickly through interactive. Obviously the bright spot in terms of performance but a huge opportunity in terms of upside. The positive trends relative to the rest of our business continue through the first quarter. Even our classifieds continue to be up. Page views are up 19%. Unique visitors are up another 14% year over year, but the big opportunity there is to really focus on interactive projects that can make us money.

In January, there were over 80 active projects in interactive. In my opinion, most of them were cool or neat or slick but were unlike to ever give cash flow. We’ve cut that back to about 20 projects, all of which should make us money this year and which look beyond simply putting the newspaper online but instead focus on not just ads but referrals and e-commerce and using the technology of the Internet to generate revenue.

There are literally thousands of great ideas out there. If you -- we’re pretending in the interactive space that we are people from Mars. If someone gave you a budget and the opportunity to do anything you wanted on the interactive space and oh, by the way you’ve got the most powerful media brands in the world to promote them, what would they look like? They wouldn’t look like what we’ve got but they are going to look like what we are about to have.

Just in summary, what I would like to say is that this is a company that’s been silos within silos -- print, broadcasting, interactive. We are in the process again of sharpening the brands, increasing the focus at the center by creating more fuzz at the edges, more cooperation, instead of being a company that just brings in text and pictures and puts out a newspaper, or brings in network feeds and microwave shots and cameras and connects them to a TV transmitter.

We need to be a company that brings in audio, video, pictures, text, graphics, content, and ingests it, processes it and sends it to a TV transmitter or printing plant, a website, a PDA, a cell phone, a Kindle, whatever is next. And that involves a change in architecture, a change in attitude, but I think it’s pretty clear when you look at it at that level that our success will be determined by our speed, because the quicker we can get there, the sooner we are going to reap the rewards.

So while there is no question that the environment is tough, tougher than I think any of us expected it to be, we have some tremendous advantages. We have great brands, we have great people, and we have Sam Zell’s leadership. I can tell you I don’t think there is anybody else in the universe that could go around the company and change attitudes and get people thinking in a new direction this quickly. It’s a difficult situation but we have the right combination of people and assets to create new success. And frankly, the environment creates the urgency and the opportunity to do it quickly, and so in spite of the trends, I am optimistic that we can do what it takes to end up where we need to be.

Gary Weitman

Great. And with that, I think we are ready to move to the Q&A session, so Operator, I’ll turn it back to you to explain that process to the folks on the call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ken Silver with the Royal Bank of Scotland.

Ken Silver - Royal Bank of Scotland

Two questions -- can you give us a sense for how much you think expenses are going to be, up or down, year over year in the first quarter and maybe the second quarter?

Samuel Zell

Obviously at this juncture we don’t have those numbers done yet but I think it is safe to say that our expenses will be less than they were a year ago and I think you should expect that trend to continue all year long.

Ken Silver - Royal Bank of Scotland

Okay, and then I couldn’t find this number; do you -- could you give us political advertising revenue for 2006 and 2007 in television?

Chandler Bigelow

We don’t disclose those numbers but directionally there was a significant decline, probably like 80% or so, year over year.

Ken Silver - Royal Bank of Scotland

Okay. All right. Thank you.

Operator

Your next question comes from the line of [Hale Oden] with Barclays Capital.

Hale Oden - Barclays Capital

Chandler, I was wondering if you could give us the bank covenant leverage number at the end of the year?

Chandler Bigelow

Why don’t I -- what I should do here is if you want me to work through the building blocks to get you there, I think that might be the easiest. There’s I think some merit in doing that. So what I’ll do is work off the press release that we had put out and we had disclosed operating profit of $633 million. If you add back our masthead of $130 million, the masthead charge, depreciation and amortization, you get an operating cash flow number of roughly $992 million.

And then as we outlined in the press release, there were a number of one-time special items that we identified. We had acceleration of some stock-based compensation of $64 million. We had the charge related to the shut-down of our San Fernando Valley plant out in Los Angeles of $24 million. We had severance of $55 million. We had the $6 million charge for Tribune Entertainment, a smaller news day charge related to the advertiser situation that we had encountered in 2004, and then $16 million for the new equity incentive plan.

And as I mentioned on the call, when you add up all of those numbers, you get $1.16 billion of operating cash flow.

Then, per the terms of the credit agreement, we get the benefit of the $85 million of cash from our equity investments that I mentioned of 85. We get to add back interest income of 21, and then we get the pro forma adjustment from the elimination of our 401K of $60 million.

There are some other adjustments that are made but basically tallying all those numbers up, you get to roughly $1.34 billion of operating cash flow. Our guaranteed leverage at the end of the year was $10.6 billion, and so your covenant calculation on the leverage side was below eight times.

Hale Oden - Barclays Capital

Just if I take your guidance on mid double-digit advertising declines going forward a quarter or two, it seems like you get awful close to nine.

Samuel Zell

I think that the answer is you are going to have to wait and see what those numbers are. I don’t think it is fair to either attempt to extrapolate the first quarter on into the second quarter. There are unique elements of the first quarter that we do not expect will be repeated in the second quarter, so I guess you are just going to have to wait and see.

Hale Oden - Barclays Capital

Okay. Thank you, Sam.

Operator

Your next question comes from the line of Louise Phelps with Phelps, Cutler & Associates.

Louise Phelps - Phelps, Cutler & Associates

Thank you. Is there a planned investment in sales contact management software and more up to date sales support practices for the company? As you know, for example in the company’s units on Long Island, there is little to no cross-selling between Newsday and the 2 million homes that receive your shopper book from your Star Community publications division. If you look at newsday.com, you can’t even find that hardly online there. Is it just not a -- it’s about a 1980 strategy. I wondered if there is any planned capital investment because there is a lot of exciting talk about sales in today’s call.

Randy Michaels

Louise, you hit on a great example exactly what I was discussing. The businesses have been run as if they weren’t co-owned and some of the business units do a wonderful job with metrics with respect to their sales department; most do not. And we’ve just simply focused on budget and that’s a trap. You know, the budget is our plan.

What we want the sales people to focus on is more. I don’t care what the budget is. If we hit budget, we still want more and we don’t want to build in systems that penalize them for getting there. We want to do everything we can to help them get there which includes cross-pollinating leads and pitching what makes sense for an advertiser together.

So are we looking at new software? Yes, I was in a meeting an hour ago on this very subject. This is the kind of thing where while we want to give our business units more autonomy, we are going to push the same software out across so that we have comparable metrics, and so that we know what -- the right hand knows what the left hand is doing. So what you mentioned, while it’s true it’s a great opportunity, that’s a good thing because this is low-hanging fruit. For us to improve our sales accountability, to share leads, to pitch accounts where we could do a better job for a client together, this is pretty obvious stuff and that’s why I’m a little frustrated we haven’t gotten it all done yet but in 60 days, 30, 90 days, whatever it’s been, you don’t get it all done.

But you may be assured that we are aware and the answer to your question is yes, and that excites me because it’s just one opportunity of how much better we can do.

You know, I expect the costs in our company to continue to come down as we eliminate duplication and waste. But that’s not how we win. We win by growing our revenue and there is an awful lot of opportunity to do that inside Tribune.

Louise Phelps - Phelps, Cutler & Associates

Thank you.

Operator

Your next question comes from the line of Adam Spielman with PPM America.

Adam Spielman - PPM America

Thank you. Just two questions; first, on the cost side, can you talk about your expectations for newsprint price increases and then volume trends?

Chandler Bigelow

We clearly acknowledge supplier consolidation and the removal of capacity from the supply side. However, I think it’s important to point out on the volume side that there are many steps that we’ve taken and in an effort to reduce that volume, you’ve had a lot of web width reduction here at the company, for example. We have papers, I think five -- at least four of our papers moving to 46-inch web width. All of our papers have moved down from 54 to 50 and all are now sub-50 on the web width side. We clearly are making strides to make our content production as most efficient as possible. Stock tables have been removed, for example, which also reduces general volume.

Production waste, we continue to make strides there and then you obviously have the general circulation declines and ad revenue declines which put pressure on volume. So the news from Canada with respect to Abitibi-Bowater and their moves with price, we certainly are seeing prices go up. However, it’s hard to tell for the rest of the year how that might translate on a full year basis, given how much we are doing on the volume side. It just wouldn’t be prudent for me to speculate on how that equation plays out over the year.

Adam Spielman - PPM America

You said you were down on volume 8% last year?

Chandler Bigelow

In that range, yes.

Adam Spielman - PPM America

Is there anything vastly different about this year or are you still cycling through some of the web width reductions?

Chandler Bigelow

Well this year we’ll enjoy the benefit of I think four of our papers moving to 46-inch from 48, so that is 4.5% right there on those papers. You have to mention that -- I’d also mention that the 8% volume last year is coming on the heels of 8 to 10 the previous year and so there is just continued volume being taken out of the system from the demand side. And notwithstanding that, it’s clear that there’s been consolidation on the supply side and capacity is being taken out but where from a total equation standpoint that plays out over the year, it’s tough to say.

Adam Spielman - PPM America

Okay. Can you just talk about the -- your two big markets that are kind of non-Florida I guess are -- take Newsday out of the equation for a second but L.A. and Chicago, can you just talk about the top line trends in these big -- those two big markets?

Chandler Bigelow

I would say that generally speaking, those trends are pretty consistent with the overall results that I described.

Adam Spielman - PPM America

Okay, and then final one, can you just remind me, the total amount, when we cut through all of the parts of the -- you know, the take out, what was the equity, total equity investment including the subordinated note?

Chandler Bigelow

The total equity with respect to the ESOP was $250 million and with respect to Sam, Sam’s warrant and subordinated note was $315 million.

Adam Spielman - PPM America

He put in 315? Okay. Thank you.

Operator

Your next question comes from the line of Alex Chavez with CapitalSource Finance.

Alex Chavez - CapitalSource Finance

Chandler, could you go back over the $1 billion or $1.5 billion that you are looking to expire over the course of the year? I didn’t get all the notes.

Chandler Bigelow

Sure. We have $650 million of term loan X that’s due on December 4th of this year. We have $263 million of medium term notes that mature primarily in the fourth quarter of this year, although our credit facility that we put in place last year has a delayed draw mechanism, which we will use to take care of those maturities. The term loan B has a 1% amortization feature and it’s $7.6 billion. That’s roughly $76 million per year. In addition on the books at the end of the year, there was the property financing obligation related to the TMCT which is $22 million this year, although when we purchase that property at the end of this month, that will be extinguished.

So that in total are the cash maturities due in 2008.

Alex Chavez - CapitalSource Finance

Thank you, sir.

Gary Weitman

We’ve got time for really just a couple more questions before we’ll turn it over to Sam to wrap up.

Operator

Your next question comes from the line of Stuart Rossmiller with Members Capital.

Stuart Rossmiller - Members Capital

Thanks. You guys inherited a number of --

Samuel Zell

I’m sorry. We can’t hear you.

Stuart Rossmiller - Members Capital

Hang on a second. Is that better?

Samuel Zell

Much.

Stuart Rossmiller - Members Capital

Great. You guys inherited a bunch of web-based assets when you closed on the Tribune deal. How do you see those web-based asset fitting into the core content properties or are they kind of run succinctly from it?

Samuel Zell

I don’t think -- I think you need to expand on the definition of web-based assets.

Stuart Rossmiller - Members Capital

CareerBuilder and the like.

Samuel Zell

Okay, we thought you were talking about -- Randy.

Randy Michaels

Well, you are talking about the joint venture, the assets?

Stuart Rossmiller - Members Capital

Yes.

Randy Michaels

Okay, because obviously our web assets are central to our growth strategy and all of those online businesses that are in the joint venture are very profitable and very successful. In fact, cars.com, clearly CareerBuilder is probably facing some choppy waters with the employment. The good news is we are not in a real estate joint venture yet but cars.com I think is up 21% this quarter. Those are very good investments and serve our papers very well.

Stuart Rossmiller - Members Capital

Do you envision more cross-pollination as you go forward?

Randy Michaels

Yes, we do. We might structure them a little differently but yes.

Stuart Rossmiller - Members Capital

Okay. Thank you.

Gary Weitman

Why don’t we take one more question and then we’ll turn it back to Sam to close?

Operator

Your next question comes from the line of Vic Marvin with TCW.

Vic Marvin - TCW

Thanks. Just in terms of your liquidity situation, can you talk a little bit about where you see the payments for the amortization [inaudible] this year, as well as mid next year? And if you could comment on the recent news about the Newsday sale and just an update on the Cubs, a little bit more detail would be helpful.

Samuel Zell

Let’s get them one at a time. As far as the Cubs are concerned, you ought to read the latest newspaper because it’s all out there. The answer is we are trying to do what we think is the optimum transaction with the Illinois Sports Authority. We are simultaneously running with a book on the Cubs going both ways, with or without the Sports Authority. As I said earlier, we expect that process to actually begin in about 10 days to 2.5 weeks or something like that, and we would expect and look forward to a Cubs transaction some time this year.

As far as Newsday is concerned, as we previously acknowledged we have been approached by a number of parties who have a keen interest in acquiring Newsday. We have reached no conclusions with anybody at this juncture and we are discussing whether or not that does or doesn’t make sense for us and for the Tribune Company going forward.

I believe I answered the two issues you raised. Was there a third one?

Vic Marvin - TCW

Just in terms of the liquidity, given the payments that are due this year later and mid next year as well.

Samuel Zell

From where we sit right now, it does not appear that we will have difficult meeting our commitments going forward.

Vic Marvin - TCW

Okay. Thank you.

Samuel Zell

In conclusion, first and foremost, we continue to believe that Tribune has tremendous opportunities over the long-term. Whatever thoughts we had about the quality of the assets and the opportunity in these assets has only been reinforced by our 90-day experience. The company’s local brands give it a significant advantage in becoming the content provider or source across all channels of delivery. We don’t think we’ve taken advantage -- we don’t think the company has taken advantage of that in the past. We see the things that we are able to do and we are very excited about the prospects.

We have put key leadership in place that can execute our strategy. We’ve also eliminated most of the previous leadership, so as to create an entire new environment and an aligned management to make it happen.

We’ve made a visible shift in the company’s culture and I would say it’s a visible shift but we are not there yet. And the vast majority of the employees are eager for change.

I’ve talked to hundreds of employees. This company has enormous loyalty from its employee base. These people really want this to work. If you sat on my shoulder over the last three months reading these e-mails, late into the night, I might add, you come away and you say these people care, these people have a vested interest in making this company work and making their various divisions leaders once again.

There’s a great sense of this company once was truly great, once was truly the leader in its industry and everybody, including yours truly and Randy and everybody sitting around this table, very much wants that to be the case once again.

Our challenge continues to be short-term issues, cash flow, and obviously a tough environment in a weak economy. That’s basically only made us all work significantly harder to achieve the objectives.

Senior management going forward will continue to provide you with periodic updates on our progress and we believe that in the future, we need to have the same kind of open and transparent relationship with our lenders as we currently are trying to create with our employees.

We expect to announce quarterly results with the filing of our 10-K at the end of May. Once again, I thank you all for participating in this call today. We view this call as just kind of a stepping stone to make sure you knew we were alive and well and working very hard, that for anybody who doesn’t watch YouTube, and we have a lot of confidence and we have a lot of commitment of everybody running this company today and we hope to produce very positive results in the future. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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Source: Tribune Q4 2007 Earnings Call Transcript
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