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Media Contact:
Gary Weitman
gweitman@tribune.com
312/222-3394

   
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Investor Contact:
Ruthellyn Musil
rmusil@tribune.com
312/222-3787


Conference Call Regarding "The CW"
January 24, 2006

 

Ruthellyn Musil, SVP/Corporate Relations

Thanks very much and welcome, everyone.  We are pleased that you could join us for this conference call to discuss the announcement that was made this morning about the new network.  Our speakers on the call this morning will be Dennis FitzSimons and John Reardon.  They are joining us from our offices at WPIX in New York.  And I’m here in Chicago.  Don Grenesko, our CFO, and a few other folks are with us as well.

I know it is a busy day for everyone, so we are going to try to keep this call to about a half hour.  Dennis will start with some brief opening remarks, and then we will get quickly to your questions and answers.

So without further ado, Dennis?

Dennis FitzSimons, Tribune - Chairman, President and CEO

Thanks, Ruthellyn, and good afternoon, everybody.  We just came from the press conference, and let me just give you some details from that.  Warner Bros. and CBS, along with Tribune as the distribution entity, will launch a new fifth network in the fall called The CW.  The new broadcasting network will be a 50/50 joint venture between Warner Bros. and CBS.

Tribune Broadcasting has entered into 10-year affiliation agreements with the new network for 16 of our 19 WB stations.  The WB and UPN will continue to operate until the fall, then those networks will cease operations and there will be a transition to the new network.

The new network will have the best programming, best distribution and management of each of the former networks.  The daypart footprint on each of the affiliate stations will be the same.  So there will be 13 hours of prime time, going Monday through Friday and Sunday; Sunday early fringe; Monday through Friday, 3 to 5 PM for first-run and off-network programming; and a five-hour Saturday morning block.

Some of the most popular WB shows — Smallville, Gilmore Girls, Supernatural — and shows from UPN, such as Veronica Mars, will be on the new network.  Reality series such as America’s Next Top Model and The WB’s Beauty and the Geek, as well as comedies from both networks — Everybody Hates Chris and Girlfriends from UPN, and Reba from The WB.

So the network will launch with our 16 major market stations and 12 CBS-owned former UPN major market affiliates, and will immediately have 48% coverage of the U.S.

I mentioned the 10-year affiliation agreements, and we think that the overall national lineup will be stronger, which will lead to national ratings that are better and will enable the network to provide, over the long term, better programming.

Now, there were eight instances where Tribune and CBS overlapped their respective WB and UPN affiliates.  Tribune will have affiliation with the new network in Los Angeles, Boston, Dallas, Miami and New Orleans of the overlap markets.  Our stations in Philadelphia, Atlanta and Seattle will become independent stations at this point.

Now, we see lots of advantages to this.  As all of you who have been following the company for a long time know, we launched The WB 11 years ago with Warner Bros. as a vehicle to supply ourselves with competitive, first-run prime-time programming.  It has been a very successful strategy for us.

There have been costs.  As an owner, we were given the immediate competition with UPN and forced to fund start-up losses.  But our programming expenses at the station went down, our margins went up and this has been a very positive experience for us.

In the new network, we will not have equity participation.  This will insulate us from all of the network losses and we will not have to absorb any of the shutdown costs that will be created by the ending of WB.

So we think this is a great day for us.  We wanted to go through some of the details of the new network and then really answer any questions that you may have.

 

Questions and Answers

Frederick Searby, JP Morgan

I had a couple questions.  One is the demographic focus of The WB was very distinct, and I’m just trying to figure out what you envision.  I know you’re kind of merging in the best of both.  But one was more focused on it seems like minorities, and one was more focused on the young female demo.  So it is there a vision for where the demographic will go in the new combined entity?

And then secondly, how is this going to affect this year your TV numbers?  I mean, are advertisers now going to become a little bit gun-shy now that The WB is essentially a lame duck or defunct?  And where do you think that’s going?  And the three independents, you’re going to build your own content.  What are those costs going to look like?

Dennis FitzSimons

The focus of the new network will still be young.  Certainly, there are a couple of nights with some of the sitcoms that are more ethnically focused that will be different from The WB.  But shows like Everybody Hates Chris have done real well for UPN.

So our stations, particularly in the top three, are delighted to be getting those shows. It will still be 18- to 34-focused, but there are also some shows like Veronica Mars that really go well with Gilmore Girls.  So we think a good schedule will come out of this that will immediately benefit our stations.

Here at Channel 11 in New York, we can’t tell you how excited they are, because this gives them a leg up on a competitor, like Channel 9 (WWOR) here, which has been doing better.  But with the loss of some of these shows as lead-ins to their 10 o’clock news, our station is going to be much more strongly positioned.  And that is true across our lineup.

Now as far as the third part of your question, what we will be doing in Philadelphia, Atlanta and Seattle.  Right now, the NATPE convention is going on.  And believe me, this is generating a lot of buzz out there, and there’s going to be a lot of interest as time periods have opened up on a lot of stations around the country, including nine Fox-owned stations that were former UPN affiliates.

So there is going to be supply created, we feel, for stations in prime time.  We feel, given the scale of our group, we’ll still be able to effectively program those stations.  We’d rather have a network on those stations, but it should still be good.

Frederick Searby, JP Morgan

This deal, is it going to affect you in scatter, or is it going to make advertisers somewhat gun-shy to advertise on kind of a lame duck station?

Dennis FitzSimons, Tribune - Chairman, President and CEO

No, we don’t think so at all, because we really have some pluses coming out of this because The WB will be shut down.  There were some episodes that were going to be saved.  So we’re now going to see more first-run episodes run off by the end of this year that will give us more to sell to advertisers on a local basis, and also the network.  Not that that is Warner Bros. concern at this point, because we are not going to have to deal with the shutdown costs.

But we expect no downturn from advertisers or no loss of enthusiasm from advertisers, and we think our upfront presentation that Bill Morningstar of The WB will handle for the new network is going to be really strong.

John Janedis, Banc of America

A couple more questions related to the independent markets.  First, I just wanted to ask how different do you think the margins will look here over time relative to the current WB affiliations?  What percentage of your revenue on the TV side did they represent?

And you kind of touched on it, but what kind of programming are you looking at?  It’s only eight months away or so.  What is available out there, and do you think that actually tightens up the overall programming market to the extent that it actually increases rates for that type of programming?

Dennis FitzSimons

Well, first of all, if you remember, we told you that WB prime time usually represents about 15 to 17% of our WB affiliate revenue.  So let’s just take Atlanta for example.  That station, WATL, gets 15 to 17% of its total revenue from WB prime time.  Now, that will be substituted with programming that has more local inventory, but there’s going to be more costs associated with that.  It is yet to be determined what will run in those time periods, whether it’s talk shows.  That will be on a local basis determining what is best there.

But overall, prime time in those three markets represents just about 1% of overall Tribune television revenue.  So it is not that significant.  And it will be replaced with revenue, just from a different programming source that those stations will air in prime time.  More costs, but more revenue, because there are more spots to be sold.

John Janedis, Banc of America

And just in terms of the margin impact, do you think over time that they can get to the levels where they are currently, assuming that they’re somewhat close to your current portfolio?

Dennis FitzSimons

You know, we think so, but it all depends on what programming we put in those time periods and how well it does.  But again, in terms of the total picture, it’s not going to be a big drag.  We don’t think it’s going to be a drag at all.

John Janedis, Banc of America

And just related to the 10-year deal, if you will, are there any kinds of clauses, for example, that if this ends up not working out for some reason that they could actually shut it down?  Or is there a firm commitment for 10 years?

Dennis FitzSimons

Well, here is what we believe is our insurance policy.  CBS has 12 affiliates of the new network.  And they need to generate programming for that group of affiliates.  So this is what we really like about this deal and we think it’s also good for Tribune.

So we have Warner Bros. and their program production capabilities.  Now we have added CBS studio production to that.  We have added CBS as the infrastructure partner.  So this network is going to be a lot more efficient.  You will have two networks running off one infrastructure.  And that leaves more money for program production.

So you add the fact that CBS also owns stations and wants to make sure those stations have good programming, you’ve got the incentives right.  So we are really enthused about what’s going to happen, both short term, because we’ll get the best of both networks, and then longer term, because we will have one of the partners with station interests of their own.

Paul Ginocchio, Deutsche Bank

Just a couple of quick questions. Can you talk about maybe what you were funding to The WB in ‘05 and how much goes away into ‘06?

Second, is there any change in incremental reverse comp to the network?  Maybe you can put a size on that if there is.

And then finally, just looking at that prime time, I think that we are calculating that ratings of the new lineup would be about 20% higher than the current WB ratings with the new list.  Is that right?

And then maybe the final question—approximately 75% of your TV revenues are now switching from The WB to CW, and 10% are going from WB to independents.  Is that roughly correct? Thanks.

Dennis FitzSimons

Just the last question, that sounds about right.  It would be about 15% of total revenue.  But remember, of that 15%, only 15% is prime-time revenue from The WB.

Now, you had so many questions there, Paul, I’m going to need to ask you to go back to the first one.

Paul Ginocchio, Deutsche Bank

Sure.  Could you size the funding that you put into The WB network last year?  Obviously that goes away now.

Dennis FitzSimons

We have not normally given out specifics on that.  But to give you a sense of how good a deal we feel this is for us, go back to the beginning, when we wanted to get a source of prime-time programming and we were willing to pay for it.  Original prime-time programming that would make our stations competitive in prime.  We agreed to pay reverse comp and also we funded about $140 million of losses over the 11 years of the network.

We are no longer going to be responsible for that.  And by the way, Time Warner—again, a great partner—funded somewhere over $600 million in losses.  But really, that was a way to get prime-time programming.

Now we will not be faced with the losses.  And we’re hoping this new network is profitable because if it is profitable, that means the programming will be better for our stations.  So that’s really the situation if you look at it on a long-term basis.

We were a payer of reverse comp, a funder of a percentage of the losses of the network.  Now we will continue to pay reverse comp, slightly less than what we have paid before, and we think we are going to have a stronger network with no responsibility for losses.

Paul Ginocchio, Deutsche Bank

Perfect. And then finally, just on the rating, what do you think the the variation of the prime-time rating now with this sort of pro forma new lineup?  Is it about 20% higher than the current WB rating?

John Reardon, Tribune - President, Tribune Broadcasting

That’s a good estimate right now.  With the combination of the two networks, it’s really going to be very, very strong.  We are very excited.

Lee Westerfield, Harris Nesbitt

Dennis, congratulations on finally putting the questions of The WB network to rest, and it is exciting news.  The question here—I’ve basically three, and hopefully straightforward ones.

First, if you can help us understand from here over the 10-year life of the contract how your reverse comp will look?  Will it be similar to what you’ve been doing recently with The WB network, or is there some change in that arrangement with the new CW?

Secondly, The CW is 50/50 from a management standpoint; therefore, if you can give us your understanding about who is the final arbiter of management decisions overseeing Dawn Ostroff?

And then finally, CBS had been doing some joint sales, and there were some efforts to try to integrate local and national sales as well. So I wonder if you can give me some understanding about how The CW network sales activity will be proceeding from your point of view?

Dennis FitzSimons

On the reverse comp front, we will be paying less to the network.  We will see maximum low-single-digit increases in that.  As you may know, reverse comp is a fairly small percentage of our total cash programming costs.  So again, we will be paying reverse comp, slightly less.

Management decisions on the network—I think you’ve probably heard the lineup from the press conference.  Dawn Ostroff will be the president of the network.  John Maatta from The WB will be chief operating officer.  And there is a four-person board, two from each side.

But what was stated at the press conference this morning, and one of the things that we are very happy about, is there is a belief that you pick the best programs.  And again, with CBS to some degree hedged, having both network interest and station interest, we think there will be definitely an incentive to put the best lineup on as possible.

In terms of joint sales, this will be, as I understand it, a separate sales operation.  Bill Morningstar from The WB will head The CW sales operation.  But it will make use of the CBS network’s back office.  So there are significant savings there.  But you have to have a separate entity selling; otherwise, you lose aggregate market share.

Alexia Quadrani, Bear Stearns

With regards to Atlanta, Seattle and Philly, would you consider a sale of those affiliates at this time?

And my second question is your Fox affiliates—are they in the same markets where there will be a new CW affiliate now?  And if so, do you think there will be any impact from the stronger networks to your Fox affiliates in those markets?

Dennis FitzSimons

First, we have no plans on selling Atlanta, Seattle or Philadelphia.  We think there’s a lot that’s going to happen in the market in terms of possible creation of new programming.  And we think those are valuable assets for us and continue to be. We think, given the size of our group, we can still do a good job in being able to purchase programming for those stations.

In terms of the Fox affiliates and the competition, there’s going to be competition, but remember, one station in the market is not going to have, at least in the short term, a prime-time lineup.  So in our six Fox affiliate markets one station will get a little bit stronger, but one station in the short term is going to have to deal with not having a prime-time schedule.

John Reardon

I think that you’re right, that it will create a stronger competitor.  With American Idol and the sports franchises, our Fox affiliates are doing well and are well-programmed.

Brian Shipman, UBS

Quick question—how do you plan to account for the loss of your minority stake in The WB?  Should we expect to see a charge, and if so, when would you book the charge and what might the size be?

Tom Leach, Tribune - SVP/Development

We currently do not have anything on our balance sheet in terms of investment in the network itself.  That’s been amortized over the life of the network.  As we have recorded our share of network losses, we ultimately amortized everything on our balance sheet.  We had a funding cap. So there will not be a charge related to the network.  We’re not responsible for any shutdown costs.

We do have some intangibles at our stations that are losing the network affiliation.  Going back to acquisition accounting, where we put a value on the network affiliation, we are looking at that. There could be a modest charge in 2006 to write off some amounts there.  But it would be modest.

Craig Huber, Lehman Brothers

My first question is real simple.  I’m just curious how many quarters The UPN and WB have been talking about this behind the scenes?

Dennis FitzSimons

Well, I think probably periodic conversations have happened on this front over time, given the two networks started at the same point.  There were discussions going way back because it was so difficult for both new networks during the startup phase.

But I would say this came about quickly—these negotiations that included us—I would say over the last two weeks.  So this happened quickly, and it was the right time, made sense, and as we analyzed it from Tribune’s point of view and our shareholders’ point of view, this was the right move for us at the right time.

Craig Huber, Lehman Brothers

Then just as a follow-up, if I could, your 22% stake in The WB—are you not getting any compensation from that?

Dennis FitzSimons

In the overall negotiation going forward, there’s no responsibility on our part for shutdown costs, which are going to be significant, and again, in terms of getting this deal done and what it gives to our stations.  We lose the responsibility for losses.  But our equity piece goes with that.  And we are comfortable with that trade.

Craig Huber, Lehman Brothers

I did want to just to sum up your comments—you’re positive on the revenue outlook from your standpoint, as well as the margin outlook for Tribune stations?  Just if you could sum up what you’re saying here, please. Thanks.

Dennis FitzSimons

Okay. So our projection or what we would say about the margin improvement?  First of all, I think starting in September, we are going to have better prime-time lineups in 16 of the 19 WB markets.  We will have additional costs in those three markets for the 15% of those stations’ revenue that comes from prime time.

So we are going to have a reduction in margins, not necessarily that much in revenue, but we are going to have more programming costs in those three markets, depending on what happens.  All right?  Because if Fox decides to do something in terms of a national service, we may be able to affiliate with that national service that Fox uses to program its nine former UPN affiliates.

So it is really difficult to project that because this is a highly leveraged daypart, and with the the two coming together, you’re going to see a big shift in revenue. It will adjust.

So Craig, it’s really hard to answer your question right now, because we’re not sure what shape the programming in those markets will take, because there are a lot of unanswered questions.  But what we can tell you is what’s really at stake is the 15% of revenue of 15% of total Tribune television revenue.  And that is about 1% of overall Tribune television revenue.

Karl Choi, Merrill Lynch

A quick one here.  Just wonder how today’s announcement will impact your acquisition strategy in the TV business, both in terms of appetite and the type of stations that you go after?

Dennis FitzSimons

We will again look at, as we have been, station acquisitions from a very disciplined financial standpoint.  And if the right market comes available, we will look at it.  But right now, we are concentrating and John Reardon and his managers are concentrating on improving the performance of our existing group.

Douglas Arthur, Morgan Stanley

Yes, Dennis, with your stations and CBS’s 12, UPN, you’ve got 48% of the country.  You talked about potentially seeing 95% of the country.  So I guess the question is how quickly do you think some of the other major UPN and WB stations will sign on here?

Dennis FitzSimons

I would think pretty quickly.  I think this is going to be an awfully attractive package.  And I think that Warner and the affiliate relations group will get out into the market quickly, and I think they will have these conversations.  And I think this lineup will take shape pretty quickly.

Douglas Arthur, Morgan Stanley

You’re relatively confident that Fox or News Corp. will sign on?

Dennis FitzSimons

No, I would not think so.  I don’t know and I can’t speak for them.  But because they are going to not be involved in this network in New York, L.A. and Chicago, I would be surprised if they contributed stations in their other former UPN markets, again, where they own UPN stations.

But we don’t know—have no idea.  And Doug, as you know, we have multiple relationships with Fox, too.  We have six Fox affiliates.  We buy programming from Fox.  They buy advertising for Fox movies on our stations and in our newspapers.  So we have a good relationship with Fox and look to retain that relationship.

Jim Goss, Barrington Research

A couple of questions.  One, I’m wondering how did the Fox stations’ extrication work?  Was it nearing the end of some of their relationships, or how did they back out?  How are you going to handle the branding of the new network in this transitional period?  And can I presume that there are no regulatory issues or any impact on the Superstation from the transition?  And I’ll let it go at that.

Dennis FitzSimons

The Fox agreements—they really had a similar relationship with UPN that we did with WB.  We were, as you know, on a one-year renewal, which ends in the fall of ‘06.  And my understanding is that Fox affiliation agreement was also ending in the fall of ‘06.

So when Warner Bros. talked to us about this possibility and it seemed certainly to be a good idea from our perspective and we could cover 16 of our 19 stations—again, we’re not looking to disadvantage anybody, but we are looking to advantage ourselves.  And we were not worried about anybody except ourselves.

Now as far as regulatory issues, certainly, the two equity partners in the network are most impacted by those.  We don’t think there are any regulatory issues.  And as far as the Superstation, the Superstation will not be part of the network, just as the Superstation does not carry The WB network.

Branding—I would say that we will handle this in the most efficient way possible.  And what we will do is centrally create graphics packages that will enable each of our stations to have excellent graphics packages that also incorporate the new logo.  John, I think that was sort of a stand-in logo we saw today?

John Reardon

Yes, it was a stand-in logo.  So there will be lot of emphasis behind the new branding campaign.  It should be terrific.

Dennis FitzSimons

Yes, and we’ll just put a lot of emphasis to let people know, come the summer and fall, where these shows from UPN and how they are going to reside now on a new station.  But ultimately, people—we’ve covered this at the press conference—people are not watching networks, they are watching programs.  So the stronger the programming is on this network, that’s the better off our stations are going to be, the more valuable they are going to be.

Victor Miller, Bear Stearns

A couple of questions.  In terms of the dayparts, as you see the new programming evolving, which dayparts do you think offer the most upside?  Is it prime time, which now has more programming hours and higher ratings, or some of these other dayparts where you expect to build out new programming blocks that didn’t exist?

Secondly, as they build out the new network, does The WB affiliate in a market in which CBS and Tribune does not own a station have the upper hand?  Or does the UPN affiliate have the upper hand?  Or is that going to be just thrown into the mix overall?

And lastly, what do you think will happen with pricing now that we pulled out 7500 to 10,000 units out of the broadcast prime-time supply of advertising?

Dennis FitzSimons

If I can speculate on the dayparts, I would say I think that the most upside is in prime time.  And again, combining the best shows of each network immediately will have the best possibility of better rates.

In terms of the network economy, it’s difficult to speculate on this.  But it would seem if there are five networks as opposed to six, then this would be a real positive for the new network sales force.

Just using an analogy from the local station business, if you’ve got six stations or seven stations in a market, the last two usually get pitted against each other for advertisers to lower their cost per thousands.  So part of this depends, though, on what happens—is there another programming service that comes into the market?

But with the strength of the distribution that this network is going to have, with the immediate program lineup that’s going to happen, this is going to be a strong sales vehicle.  Also going to 3 pm-5 pm, we think it’s already a better daypart than when we had kids in there.  As you know, there’s no kids market—growing adults for our station has been a positive.  We expect that to continue to be the case.

Victor Miller, Bear Stearns

And what about as you build out—if the market has no CBS or Tribune affiliate—does the existing WB affiliate get the first look? Or how does that work, do you think?

Dennis FitzSimons

Well, that will be handled by the new network and their affiliation for affiliate relations staff.  But there is no guarantee that either station would be advantaged or disadvantaged.  And it will be a case of the network looking at the strongest station that is going to add the most to the lineup.

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