Tribune Company (TXA) Q1 2008 Earnings Call June 5, 2008 3:00 PM ET
Good day, ladies and gentlemen, and welcome to the first quarter 2008 Tribune conference call. My name is Jasmine and I will be your operator for today. (Operator Instructions) I would now like to turn this presentation over to your host for today’s call, Mr. Gary Weitman. You may proceed, sir.
Thank you and good afternoon, everybody and thanks for attending the call. I am Gary Weitman, the company’s SVP for Corporate Relations. Joining us for the call are Sam Zell, Tribune's Chairman and CEO; Randy Michaels, our Chief Operating Officer; and Chandler Bigelow, our CFO. As we’ve said before, during the course of 2008 we intend to provide timely periodic updates on our business results and trends. The purpose of this call is to do just that.
Sam will give you an overview of our business, some additional detail regarding our joint venture with Cablevision to operate Newsday, and the latest on the disposition of the Cubs and Wrigley Field. Chandler will then review the company’s Q1 2008 financial results and Randy will talk primarily about changes underway at our newspapers. We will use the remaining time for Q&A.
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 May 8, 2008 earnings press release and in the company’s SEC reports.
And with that, I will turn it over to Sam.
Good afternoon, everybody. Thank you again for joining us. As you know, we had a call about a month ago. This call is really kind of the first of the quarterly calls and we file roughly every 90 days from this point forward. Our goal, however, is once again to disclose as much as possible, be as transparent as possible, and provide you with whatever information is appropriate.
Overall, our results are consistent with what we covered in our April call. Our print declines are on par with the industry and year over year, our broadcasting revenue growth is positive. In March, the publishing industry rate decline in print ad revenue compared to last year accelerated due to the fact that the Easter holiday hit in March rather than in April this year, and advertising is always light in the Easter Sunday papers.
In April, the rate of decline of print revenue came back a little from the March dip and since then has leveled off. Tribune total publishing advertising revenue was down 15% in the first quarter, reflecting the continued decline of classified ads. Our classified advertising business, which represents about one-third of our total publishing ad revenue, contributed to about two-thirds of the advertising decline in the quarter. It’s important to know that classified advertising cannot go below zero and therefore we are getting the front-end of the transfer of classified ads to the Internet.
Furthermore, while print classified advertising represents only about 17% of our total consolidated revenue, it does represent about three-quarters of the decline. Employment and real estate classifieds have been particularly effective by the weak economy, with help wanted ads down 33% and real estate ads down 41%. Our national and regional advertising are faring better than the broader print advertising and trend line and broadcasting results continue to increase moderately, up 3% in the first quarter. We are pleased with the continued progress we are making in this sector.
As you know, we’ve been active on the deal front since our last call. In May, we signed a definitive agreement with Cablevision to form a new partnership which will own and operate Newsday Media Group. The assets in the aggregate include Newsday paper, Newsday Interactive, and New York Star Community Publishing, and Island Publications. The deal’s value to Tribune was $650 million. In addition, Tribune retained ownership of the associated real estate, as well as the long-term lease on that real estate back to Newsday joint venture.
This is a strategic tax efficient deal with a great partner. It gives us immediate liquidity and plays to Cablevision’s strength in the Long Island market. We expect the transaction will close in the third quarter.
We’ve also signed a letter of intent with a large bank to establish an asset-based commercial paper program. We hope to have this program in place within the next few months.
Together, these deals provide us with approximately $900 million of liquidity and satisfy our principal amortization requirements through the year 2008.
That brings us to an update on the disposition of the Cubs and Wrigley Field. We finalized the books for the disposition of the team and Wrigley Field and they are with the MLB for final approval. We expect that they will go out to private buyers some time in the next week. Preliminary bids will be due give or take 30 days thereafter. Meanwhile, we also continue to explore a public sector transaction for the Wrigley Field but we do not do it at the expense of necessarily delaying, or unnecessarily delaying any of our other options.
Regardless of the direction of the deal, we are committed to maximizing the value of the assets. There has never been a better time to market the team or the ballpark. The Cubs are in first place and driving record attendance. To date this year we’ve sold more than 3 million tickets and we are reporting record revenue and ratings on WGN and Comcast are also hitting records.
Stepping back to the big picture, the new leadership team we put in place at the Tribune is driving hard to change us as much as possible and as fast as possible. We continue to hear from employees directly and indirectly and more and more they are developing value-added ideas, and just as importantly, taking the initiative to get them off the ground. We are changing the Tribune from inside out and Randy will provide you with some more color on this in a moment, but first I’ll turn the call over to Chandler to cover our first quarter financials.
Thanks, Sam and good afternoon. As you know, Tribune filed its first quarter 10-Q and issued an earnings release back on May 8th. I don’t plan to review these results in too much detail but rather summarize key points and give you an update on our financial covenant compliance and our current liquidity position.
For the quarter, consolidated revenue was down 8%, or about $95 million year over year. Publishing total revenue was off 11 and as Sam mentioned, broadcasting and entertainment revenue was up 3.
Cash operating expenses before special items that are noted in our press release were down 3% or $25 million in the quarter. Publishing cash expenses were down 4%, or about $33 million, primarily due to lower compensation and lower newsprint costs.
Total publishing comp was down 4% due to a reduction of approximately 860 full-time employee equivalents year over year, or about 5% of the publishing workforce. In terms of newsprint, total expense was down 18%, reflecting mid-teen declines in consumption and slightly lower pricing year over year.
That said, prices are up on a sequential quarterly basis and we’d expect that for the full year, prices would be up in the mid-teen range, but that our consumption would continue to decline and therefore mitigate those increases.
The consumption declines are due in part to lower advertising demand and lower circulation but also a number of strategic initiatives, including web width reduction and the use of lighter weight paper.
Broadcasting and entertainment cash expenses were up $10 million, primarily from higher rights fees due to our new syndicated programming, which has performed well. So in total, consolidated operating cash flow before special items was $189 million, down 27%.
I would point out a couple of things, though -- one, in the first quarter and on a go-forward basis, our operating expenses include non-cash ESOP retirement expense, which totaled about $11 million on a consolidated basis in the quarter. Also, on the equity income line we reported $17 million of equity income, which is up over 30% year over year but more importantly, we received $59 million in cash in the form of dividends from our equity investments in the quarter, which is also up over 30%. The first quarter is our strongest quarter from a cash flow perspective for these investments, as we get the majority of our previous year’s income from our TV Food Network stake in the first quarter.
So when you consider the cash dividends as well as the $11 million of non-cash ESOP retirement expense that is embedded in our operating expenses, our consolidated operating cash flow plus these two items totaled approximately $258 million in the quarter, which was down about 15% year over year.
Turning to interest expense in the quarter, we had $263 million of bookings interest expense but our cash interest expense in the quarter for covenant purposes was $242 million. In terms of capital expenditures, that totaled $23 million in the quarter and for the full year, we’d expect that that run-rate would be representative throughout the remaining three quarters.
I’d also mention that since we last spoke, we did complete the purchase of the TMCT real estate portfolio for $175 million. Importantly, we funded the majority of this purchase with approximately $155 million of cash proceeds from the sale of our Hollywood, California studio lot as well as property we owned in Greenwich and Stanford, Connecticut. This transaction gives us ownership of important and strategic and valuable properties in Los Angeles, Baltimore, Long Island, and Hartford and was structured through a like kind exchange which allowed us to defer capital gains on the transaction.
In addition, since we had been leasing these properties from TMCT, we eliminated $24 million of annual cash payments to TMCT now that we owned the property.
Turning to our bank covenant adjusted EBITDA calculation, let me spend a moment to just give you the key components in the first quarter. As I mentioned, our consolidated operating cash flow for the quarter before special items was $189 million. If you add the $59 million of cash dividends we received from our equity investments, the $11 million of non-cash ESOP retirement expense, about $4 million of interest income we booked in the quarter and a couple of smaller adjustments, our adjusted EBITDA in the quarter totaled approximately $265 million.
For the trailing 12-month period ended March, our adjusted EBITDA stood at approximately $1.3 billion and at the end of March, our guaranteed debt was $10.6 billion; leverage ratio was approximately 8.1 times, interest coverage ratio was approximately 1.9 times, both of which are in compliance with our covenants.
Finally, in terms of liquidity, we ended the first quarter with about $250 million of cash on the balance sheet and today that amount is up somewhat. In addition, the announced Newsday transaction, the progress we are making on our asset-backed BP program, the delay draw featuring our credit facility -- all of those things provide us with the necessary liquidity to satisfy our 2008 maturities. And in addition I’d note that we have not accessed our $750 million revolving credit facility.
And with that, I would turn it over to Randy.
Chandler, thank you. Let me give you some color on some of the things that have been occurring since the last time we spoke and some of the initiatives we have underway to address, you know, a financial situation that is probably a little tougher than we expected when we got into this but we think that the opportunities that we saw are still there and frankly this environment gives us every incentive to speed up the process a little bit and get where we need to be a little bit quicker. And so we think we are moving quickly and we think that so far the results are good but let me describe to you some of the things that are underway.
We didn’t talk about interactive much last time. You should know we are spending a lot of time here. We believe that much of our future depends on our ability to develop online businesses. If you want to take a peak at the future, we have a new platform up. You won’t see all of its functionality. We don’t have the e-commerce and the linking and so forth turned on but we are beating on what is a brand new platform and so far, we haven’t been able to break it. It’s up at KPLR in St. Louis, which is CW11tv.com, and this probably has the simplest to use back-end of any platform we’ve seen. Without much training, anyone can get in and customize the look and feel, and it’s an extraordinarily flexible platform that we think, and I’ll get into this in another call, maybe particularly after we’ve done it and you still allow us to make a lot of money.
We are also gearing up hiring some local sellers who will go after not advertising dollars but promotion money, event money, and use the interactive space in a way that’s very different than we use print or broadcast media.
We in the broadcast side sell time; in the print side, we sell space. That’s what we’ve typically done on the web. That’s not where the big money is. We are gearing up hiring the staff to go out and find that money to put a little more pressure on developing the functionality.
You know, television, if you follow the media sector, you know TV is tough. If you have looked at Tribune, you wouldn’t be quite as aware of it. We think with all the publicly available numbers we are leading the TV industry. That said, we are not starting from a great place but that’s okay. We’re up and that’s due in part to some syndicated programming -- it is due to a very strong emphasis on local direct selling and we are seeing some very gratifying improvement even in the May sweeps.
What we discovered when we got here was that there was most of our promotional time was being spent promoting low-rated shows in the hopes of getting the ratings up. We are now spending our promotional time promoting high-rated shows that make us some money and our news, and our May sweeps are being very good to us. In fact, the number one news station in the morning, in the top three markets, network or not, is WGN in Chicago. And so there’s some really good ratings coming out for Tribune Company and obviously that will turn into money. You know we have Fox coming in San Diego on August 1st and you may have noticed, and if not I call your attention to what used to be called the Superstation and is now WGN America, our cable station that’s on in 72 million homes. Ed Wilson, Sean Compton, Lee Abrams, Bill Shaw, and Cary King, the creative director there who turns out to be just a genius have done a brilliant job in re-imaging that station. They spent a lot of time, came up with a plan to execute by August 1st. Since we are operating in a purposely unreasonable timeframe, we said that’s great but do it Memorial Day, and they did. And with very little other than re-imaging and repackaging what’s in our library, we are already seeing some real nice ratings gains.
We started the Memorial weekend by packaging all the Rocky movies and had a couple hundred percent increase in ratings. This week, we are doing some retro shows that in and of themselves wouldn’t make very good shows but [inaudible] -- we got a Barney Miller because you haven’t seen it for a long time. Sunday night we start Put Your Mind on Rewind retro Sunday night shows. These are classic shows, cult shows that have been rested for 10 or 20 years and they’ll be good for a minute before you say oh, gosh. This Sunday night you’ll see Newhart, the 70s version, WKRP in Cincinnati and the Honeymooners, none of which have been on cable for a while.
And you know, those are the kinds of shows that are oh, wow. If we left them on long, that might turn to oh, shit but we’ll put something else on next Sunday, so -- just those kinds of tricks I think are going to increase our ratings. You know, when I can make Sam grimace, I realize I’ve done it.
On to print -- we are actively pursuing a program to right-size our newspaper. You know, it occurs that only 12% of our business is gathering the news. 88% of our costs is in production -- printing, distribution, and so forth. And so we said how do we get those costs under control without hurting ourselves and so we came at the metrics a lot of different ways and when you look at the number of ads in the newspaper, on Sundays the paper is two-thirds ads. But other days, the number of ads is a lot less. And we decided just as a sort of an arbitrary starting point that a paper looks pretty good at about 50% advertising, and that’s ignoring the classifieds or the all ad sections. And if you had said there was a minimum number of editorial pages that each of our papers needs to give the consumers what they want and use that as sort of a floor, and then targeted producing 50% editorial content, sitting on a base of the advertising we have now, what you’d find out is that we could take about 500 pages a week -- 500 editorial pages a week -- out of our newspapers and get a 50-50 ad to content ratio.
That means, by the way, that we are still putting out pretty big papers. The Chicago Tribune is typically an 80-page newspaper. The days that we’re 80 pages, the Wall Street Journal is typically 48 pages. Nobody picks up the Wall Street Journal and says wow, what a lousy paper. I’ve been ripped off.
If we take, for instance, the Los Angeles Times to a 50-50 ratio, we will be eliminating about 82 pages a week and we will still have -- the smallest paper would be Monday and Tuesday would be 56 pages. That would be substantially larger than that day’s Wall Street Journal.
We don’t think that’s a bad value to the consumer and we think that by doing that, and then by being able to produce less editorial content that we can take very substantial, and I think somebody here is going to blurt out a number -- no? Very substantial money out of the -- we can save a lot of money by producing the right size newspaper.
We’ve also done something that I guess is new, which is that we’ve looked at the productivity of each of our journalists, and this I guess is a new thing. We always look at the productivity of our sales people but nobody’s ever said how many column inches does a journalist write? And as it turns out, the variability is pretty great and there’s a reason for some of that. It takes longer to do an investigative report, for instance, than to rewriting copy or write-up an obituary. But the -- across our papers, for instance, the average journalist in Los Angeles does about 51 pages a year. But the average journalist in Hartford or Baltimore does over 300 pages a year.
And then when you get into the individuals, you find out that you can eliminate a fair amount -- a fair number of people while eliminating not very much content. And so for the first time, and I understand that there are -- there are extenuating circumstances and other factors that have to be taken into account but we believe that we can save a lot of money and not lose a lot of productivity.
And so all I would say is if you work hard or you are producing a lot of output for us, everything is great. But we think we have a way to right-size the paper and significantly reduce our costs. This is going to happen quickly. At the same time, we roll out the new size paper, we are going to roll out a different look and feel in each market, emphasizing what people are telling us they want in the research charts, graphs, maps, lists. The first paper is the Orlando Sentinel on June 22nd. All will be rolled out by the end of September.
Thank you, Randy. In closing, as you can tell by listening to Randy and I promise you he’s underestimating the level of aggressiveness with which we are attacking this whole challenge. We intend to fully develop all of the Tribune business opportunities and to execute on programs and processes that will for sure move the needle. It’s been five months and the deeper we go, the more opportunity we see and the more look of awe we see on the people who can’t believe how much has been attacked within a relatively short period of time.
We don’t intend to reduce the pace -- if anything, we are going to accelerate it. We are feeling support from the vast majority of our employees and they are demonstrating a real eagerness to be part of the transformation. They are attached to these various companies. There is great loyalty to them and part of our challenge is to take advantage of that.
The Newsday partnership and asset-backed [CP] facility have generated the liquidity we need for 2008 and it relieved the financial pressure on the company. Obviously we are very aware of all of our marks in terms of what we have to hit financially. We are comfortable that we are in good shape and we are pretty comfortable that we are kind of on target to what we assumed when we started this.
We will continue to provide you with progress updates and look forward to speaking with you in the interim. Thanks again for joining us today for this update, and now I’ll flip it over to Gary for questions. Thank you.
Operator, we’ll turn it over to you for Q&A at this point, and we’ll give everybody a minute to punch in if they are looking to ask a question.
(Operator Instructions) Your first question comes from Joe [Gazaneto]. Please proceed.
Sam, yesterday there were headlines about the Food Network, how talks were intensifying. Can you give us an update on that?
I think the answer is that the Food Network is for sure an asset, and a very, very valuable asset of the company. Under the right terms and conditions, it might in effect be part of our overall plans. We have no definitive offer. There have been conversations with a number of people with reference to it and rest assured we’ll let you know as soon as there is something to report. Is that enough of a bullshit answer so we’ll [inaudible] answer your question?
I figured it had to be asked.
Okay, well, I just wanted to make sure you got an answer that was appropriate to your question.
Your next question comes from Dan Harr.
Dan Harr - The Hartford Current
A question for Randy -- you said we’ve looked at the productivity of each of our journalists. I wanted to know how much detail you’ve looked at. Are you looking person to person? And does that mean that either you in Chicago or we in the various places -- in Hartford, I’m an editor here -- will be responsible for enforcing a certain level of productivity among our reporters? How much granularity and detail did it get to?
It’s granular to the individual -- however, by job description. The decisions about individuals are not going to be made in Chicago but we think it’s helpful data for each of our publishers and every one of our managers to have as we make decisions about how to right-size the paper.
Dan Harr - The Hartford Current
Your next question comes from Alex Chipper.
Alex Clipper - Banc of America Securities
It’s Alex Clipper at Banc of America Securities. In terms of the CW and your affiliation with it, can you tell us what percent of your broadcast revenues come from the CW and --
We’re having trouble hearing you -- could you get either closer to the phone or scream a little?
Alex Clipper - Banc of America Securities
Sure. Can you hear me now?
Much better, yeah.
Alex Clipper - Banc of America Securities
Okay, apologies. Alex Clipper from Banc of America Securities -- you guys are affiliated a number of your stations with the CW and I wanted to understand a little bit better what percent of your broadcast revenues came from the CW and to what extent you guys might be hurt by the CW potentially disbanding. And if you could comment in general on the prospects for converting to other networks, particularly given your recent success with the Fox affiliate in the San Diego.
Let me start with the last. I think the recent conversion to Fox was a one-off opportunity and I don’t see us converting networks on a wholesale basis. On the other hand, [little] of our revenue comes from the CW, frustratingly little. If they had better programming, that would certainly help us. You should know that we are taking a proactive role in that. Two weeks ago, Ed Wilson and in fact [Niles Larson] and I met with Les Moonves at CBS to talk about this. We got Les’ personal commitment to work on this. He asked for our input and we gave him a number of suggestions, which we hope they will act on. We are going to give him more. For instance, when CBS has a ball game that they can’t run, instead of auctioning it off, why don’t we put it on the CW and help the network that needs some help. We hope he does that. We hope he does a number of things.
We are going to take a more active role in the CW and while we believe that given the commitment that we hear Les has that the CW will continue, one of the many reasons we have Ed Wilson on board, who as you may know has a very deep background in television programming, is that in the event we need to find alternatives, we believe that we can put together stronger alternatives, but we are certainly prepared for that either way it goes, either to make the CW better or to help participate in the next option.
Alex Clipper - Banc of America Securities
And one follow-up, somewhat unrelated -- in terms of your real estate, obviously there’s a fair amount of real estate value here but to what extent does the downsizing of the publishing business in general free up some of your ability to actually monetize that real estate?
I’m sorry, could you repeat that one more time?
Alex Clipper - Banc of America Securities
Sure. Can you hear me better?
Much better, yeah, thank you.
Alex Clipper - Banc of America Securities
Okay. In terms of your real estate value, to what extent does the fact that your downsizing the publishing business, is there any sense that you are freeing up some of your real estate to actually be monetized, or is that not a factor?
I think the answer is we are a media company. We are not a real estate company. We view all of our real estate to be assets that if better deployable, we should deploy accordingly. We have initiatives going on in Baltimore, Orlando, Chicago, Los Angeles where we have very significant real estate holdings of measurable value, and we are working on and addressing the question of how we maximize those values.
I have no qualms about moving units. We just recently moved our TV station into our newspaper in Fort Lauderdale. We discussed the possibility of moving various pieces in Los Angeles, other places -- this is not a real estate company. In the end, we should have very little of our assets devoted to real estate.
Alex Clipper - Banc of America Securities
We are just about out of time so I think we will take one more question, and then wrap up.
Your next question comes from Hale Oden.
Hale Oden - Barclays Capital
I just had two questions; the first one for Sam -- can you talk a little bit about the potential to tax shelter some of the Cubs proceeds from the sale?
And the second one for Randy -- the broadcast revenue increase was notable, given the declines that most of your peers came out. Was that basically solely due to gains at WGN or was there other stuff going on there?
I’ll answer your question. As I said when I discussed the Newsday transaction, we have structured that as a partnership. It is tax efficient and I think that we expect very little tax leakage in any other contemplated transactions going forward. We recognize the cost of [inaudible] gains prematurely and we will continue to structure the transactions to be tax effective, and you could assume that would also apply to the Cubs. Randy.
No, it’s not primarily WGN. As you know, the big -- three of the big four networks have been hurt pretty badly by the writers’ strike. Fox is getting some benefit and we have six of those stations, so we are picking up some of that.
At the same time, while we are affiliated with CW, the one thing I want to keep reminding you is that CW is only a couple of hours a night. We have 22 hours a day that we are responsible for and our programming in those 22 hours is actually up and our efforts to sell local time and in particular, local direct time, which doesn’t come through an agency, is something we are emphasizing very heavily. I think I shared with you last time, we had a couple of the winners for the first quarter in, they had dinner with the managers, met Sam. We are really making a big deal of actually going out and creating our own luck and it’s working.
Hale Oden - Barclays Capital
I appreciate you taking the question. Thank you.
I want to take this opportunity to thank everybody once again. If you didn’t get the message, this is still very much a work in process. We believe that we are headed in the right direction. We are very, very focused. Everybody is deeply involved on a daily basis. Our goals are to win and we are going to accept nothing less. Thank you very much.
Thank you for attending today’s conference. This concludes your presentation and you may now disconnect. Good day.
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