Shareholders Day
November 15, 2002
Following are transcripts of the presentations made at The Washington Post Company's Shareholders Day on November 15, 2002. The transcripts have been edited and contain clarifications.
The presentations at this Shareholders Day meeting contain certain forward-looking statements that are based largely on the Company's current expectations. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. For more information about these forward-looking statements and related risks, please link to Risk Factors under Shareholder Information on this website and refer to the section titled "Forward-looking Statements" in Part I of the Company's Annual Report on Form 10-K.
CLOSING QUESTIONS AND ANSWERS
Moderated by Mr. Graham
Participating:
John B. Morse, Jr.
CFO, VP-Finance
The Washington Post CompanyBoisfeuillet Jones, Jr.
Publisher
The Washington PostAlan Frank
President & CEO
Post-Newsweek StationsGerald Rosberg
VP-Planning & Development
The Washington Post Company
Thomas O. Might
President and CEO
Cable ONE
MR. GRAHAM: Thank you for that brilliant presentation. And can I ask Jay Morse, Bo Jones, and Alan Frank to come up, because I have questions for all three of you from our shareholders.
Isn't the failure to achieve meaningful campaign finance reform to some extent attributable to reluctance by the news media to support such change? It probably would result in loss of revenue from the myriad of inane, stupid political spots. Is there some way to accommodate national interest and profit? Well, you could not be more vociferously for real campaign finance reform than The Washington Post editorial page has been for years. It would result in the loss of revenue to the television stations, and The Post editorial page has taken the position, "It's worth it."
If you ask members of Congress why the campaign finance reform bill passed, I think they would give some credit - not necessarily The Post - but the newspaper editorial pages generally, and our very, very insistence that these large contributions have brought discredit to American politics.
And Gerry Rosberg: Would you please review The Post's investments and affiliates and their potential to turn a profit? Jay, will you take the rest of the affiliates? And Gerry, as Chairman of BrassRing, would you take that?
MR. MORSE: We basically have at the current time, three investments. We have the investment in Bowater, which is a paper mill up in Liverpool, Nova Scotia. We have a 49 percent interest in that. That mill generally has been profitable, but with newsprint prices it has certainly varied. We also had the 50 percent stake in IHT, which we have announced, of course, that we are selling. And then we have about a 49 percent investment in BrassRing. IHT, again, as we have said, has been marginally profitable. BrassRing, we have had some losses over the years. Gerry?
MR. ROSBERG: Well, I would just say on the subject of BrassRing, it's a changing investment, because it's really in the recruiting business, and as you've heard several times in these presentations, this has not been a good time for recruiting, especially the component of the BrassRing business, that involves career events and the sourcing of candidates for jobs. But the real centerpiece of BrassRing and its thrust going forward is a software and systems solution to help companies automate the hiring-management process, and we remain optimistic, though not underestimating the changes it's going to have to work through.
MR. GRAHAM: The first three quarters, the losses recorded by BrassRing are way, way down, and that is a big contributor to The Washington Post Company's improved performance in the first three-quarters of this year.
Three questions for you, Alan. Number one, how does an individual TV station like WJXT increase its profit when competing against the networks and all the cable and DBS signals?
MR. FRANK: Ratings, great newscasts, service to the community, good local programs, buying the best programs. And it's reflected in good ratings. And the one thing I didn't mention before, the one part of that equation that we gave up when we left the network, was we picked up a tremendous amount of inventory to sell, up to 74 percent more inventory in certain time period, very important time periods. And so we don't even have to do the rating we were doing to increase revenues.
Do any of The Post Newsweek stations have web sites, and if so, are they profitable or useful?
MR. FRANK: Great question.
We are partners in IBS Internet Broadcast systems, and all of our web sites are part of the IBS network, which now covers 22 of the top 25 markets. Our partners include Hearst-Argyle, ChemWest, McGraw-Hill, and we have managing deals with the NBC stations, as well as Cox stations. They are very successful. They are remarkably successful web sites, under different brands. Detroit's is ClickOnDetroit, Miami's is Click10, Jacksonville's is News4Jacksonville, or you can just punch in the call letters and see our web sites. They've been very successful.
In some of our markets we are higher rated than the newspapers in town, which is a very successful criteria. And they are becoming profitable. The IBS whole system is becoming profitable. So we're very high on our web sites and our business arrangement for that.
MR. GRAHAM: How do you expect media ownership deregulation to impact The Washington Post Company?
MR. FRANK: As you know, the FCC is considering a number of ownership rules. They're considering all of them at this moment. There are six of them that they're looking into - one to do with radio and the rest to do with television. There's one national one, the cap, retention of the cap, which we have taken a position on that we are in favor of retaining at 35 percent. The others we have not taken a position on, I don't believe. And they are being worked on at this moment through different parts of the Federal Communications Commission.
MR. GRAHAM: We're agnostics on the question of whether owning a newspaper and broadcast station in the same market will boost your profits. There are deep theological believers, like Tribune and Hearst, and there are couple of disbelievers. And we're agnostics, we're open to argument that we could do better. I don't think anybody's actually demonstrating that yet. But certainly if anyone wants to sell us newspapers in the towns where we have TV stations, or vice-versa, we'll consider them as we would any other investment.
Jonathan, there's one question for you, and let me just see if I got the right answer here. Is Kaplan having any difficulty gaining and keeping instructors? And my answer would be, not in this market. It's significantly better than it was. Is that correct?
All right, Bo, many questions about The Washington Post. I'm very concerned about The Post pulling out of The Herald Tribune. Will The Post do something else in conjunction with another newspaper in Europe, so we don't have to depend on The New York Times and The Wall Street Journal for news only?
Wasn't there any way you could have kept The Post's share of the IHT? Many believe The New York Times would not, could not logically have gone ahead with the European version of the times. Why didn't you buy them out?
How would the sale of the IHT impact The Post, its production, and it's financial standing?
BO JONES: I'll start with the last. It won't affect us at all on the latter. The only real cost to The Post was that our reporters on a voluntary basis used to write stories for the IHT six hours before the deadlines of the newspaper, and they loved doing it because it was great paper. And that will stop after the sale goes through, which will probably be at the end of the year or early next year.
In terms of other outlets with existing papers, you know, Don will lead the process of conversations, and everybody will talk to everybody. But there's nothing immediate on the horizon. We're not restrained at all from doing so, so that's among the things we'll look at.
We will also look at other technologies as they develop to find other ways to reach an international audience, for some of the reasons Chris talked about before.
MR. GRAHAM: There's been so much media attention given to the sale of IHT, how do intend to remain competitive with The New York Times as a world class paper?
MR. JONES: We have a terrific national staff, the largest newspaper national staff here in Washington. We have a fine, fine group of reporters overseas at our 21 bureaus. Those will stay and remain. And the reason we're able to support that, and you know, reach the official audience here in the Washington, is we have such a strong, strong local franchise here in Washington. We draw more revenue out of this market, this growing market, than comparable metro papers do out of theirs, probably because we're such a good mass distribution vehicle. And we continue to be that way. And we think we can serve both purposes - continue to reach the Washington area audience locally as it diversifies in so many areas, and at the same time serve this official Washington base as a part of our duty as a newspaper in the nation's capital.
Don, I think I failed to answer the question on could we have kept the IHT interest? First of all, we did offer to buy The Times' share for the price they offered us. They would not sell because they didn't want the IHT as a competitor. Would The New York Times have gone ahead with their international edition if we hadn't acceded? You never know. They had very specific plans. They had been putting branded pages of The Times in Le Monde and other European papers, somewhat to the distress of the IHT management. And we thought they had no reason not to go ahead with their international edition if we didn't comply. So we took it very seriously and didn't want to risk it for the employees and people at the IHT. And it would have been a straight downward spiral for them.
MR. GRAHAM: All right. Now we get to the hard stuff. How many reporters does The Post employ? What's the annual payroll and what's reporter turnover?
MR. JONES: We have very little turnover these days. There was a lot more turnover three or four years ago when there were so many opportunities for reporters in other new media and for all kinds of adventures that we went on at that time. So tenure has not been an issue. The Post, you know, has several hundred reporters among its 850 full-time people in the newsroom. It's a very large staff. Metro is the largest. We've expanded our business section a great deal to cover local business. The Washington area is no longer a government town primarily; it's a business town. And so we've had to expand greatly as well.
Our reporters are well paid. They average about $90,000 apiece. You know, the whole newsroom budget is well over $100 million. It's been relatively flat the last couple of years. They've done a good job of trying to manage their costs, to try to continue to cover these disparate elements, and do it without growing a great deal on that score.
MR. GRAHAM: What's the future of the National Weekly edition of The Post, given that washingtonpost.com is available?
MR. JONES: It's proved not to be a terrific source of advertising, but it's got a solid, solid base of loyal readers. And what we basically did is priced it so that it would break even, or make just a nickel, based on circulation prices. And that has worked. We've got about 50,000 subscribers today, and they seem to be quite local to it, and the retention rate is very high. It's an alternative medium. Some people just like to read The Post. And some people like to read it daily; some people like to read it on the web. Some people like to see a weekly version where you just simply recycle your national and foreign news.
MR. GRAHAM: Two questions related to bulk sales distribution of The Post. At the Silver Spring YWCA, there are free copies of USA Today for anyone to pick up. Where's The Washington Post? And another question that relates the same thing to Amtrak trains, where The New York Times hands out free copies in first class, and the New York and Boston terminals of the shuttles.
MR. JONES: At that Silver Spring rack, I hope there's a paid rack there for The Post. I'm sure there is. We don't need to give away The Washington Post to reach our circulation base here in the Washington area. This year we shocked the industry by raising the price of the single copy daily paper. You know, we lost a little circulation on that, but we don't feel we need to give it away. Some Post papers are given away on the shuttle. We don't do it on the trains and other services. We keep a limited presence in New York through wholesalers, and in other major cities. But we really don't subsidize that circulation. We just don't need to. Again, our revenue model is based on the Greater Washington area. That's what our advertisers pay for and that's what they get. They don't really want to pay for outside circulation.
MR. GRAHAM: Jay, for you, please describe the changes in contribution from pension income in this and future years. And does Newsweek really lose cash money once the pension credit is taken out?
MR. MORSE: I think it's fair to say that we expect to have a substantial pension credit going forward. Of course, there are always fluctuations in the rate of return, but I would envision that we will have a substantial credit.
MR. GRAHAM: Would you talk about the actual return on our pension fund in 2001 and 2002?
MR. MORSE: In 2001 we actually made about 13 percent on our pension assets. In 2002 I think we're down about 4.5 or 5 percent at the third quarter. In October we recovered a bit of that. So we're down slightly this year.
MR. GRAHAM: Take a bow, pension fund managers.
MR. MORSE: Over ten years, we've actually averaged 14.5 percent return on the pension plan assets. We have approximately $1.4 billion with an accumulated benefit obligation, I think, of about $400 million. So we are about 3-1/2 times over-funded.
MR. GRAHAM: In answer to the Newsweek question, yes in a year when $16 million is plowed into early retirement plans, Newsweek will not be a cash contributor to the company this year. I would say that Newsweek has been a cash contributor to the company more than 9 out of 10 years since I've around.
MR. MORSE: And also with Newsweek, remember those subscriptions are generally paid a year in advance. So we have about $90 million that is always there providing cash from Newsweek advanced subscriptions.
MR. GRAHAM: Why does The Post care about the multiples of public stock price to set Kaplan's value? The markets are notoriously inefficient.
Well, we're great subscribers to the latter point, but we set out in this comp agreement, decided on in 1997, to try to value Kaplan as if it were a public company, which seemed like a fair thing to do, to us, and to the shareholders and the Kaplan management. So that's why we pay attention to the multiples of other publicly traded education companies.
Please describe the future impact of Kaplan's incentive comp program.
MR. MORSE: I think it's fair to say that typically the evaluation's tied to performance. So as the performance improves, the accrual that we're making in cost, net we come out ahead, and you shareholders come out ahead. We are accruing this money. We have not paid out but a small amount at this point, and the first payments in cash could start next year, but we're hoping the Kaplan employees hold on for even longer.
MR. GRAHAM: To go back to what I said in my initial remarks, we are accruing money, and this affects the operating statements every quarter for future payments under the Kaplan comp plan. We are not paying those out in cash. Those are no-cash charges today. They represent cash that will be paid out someday, we don't know when. And so once these payments begin, we'll have funds accrued to do that. There will be a cash payout sometime between now and 2007 and we are conservatively accruing funds, so that we'll be ready for that.
MR. GRAHAM: Let me ask Tom Might to come back up for three or four quick questions.
Why do you believe that the annual contribution from cable modem customers will remain constant? What will prevent price cutting?
MR. MIGHT: The only meaningful competitor for high-speed access, en mass, is a DSL product from the telephone company. And they invested a lot of a couple of years ago, but they have pulled back their economics. They claim their rate is higher than ours. They charge generally $50 and they claim they lose money at $50. There may be a little jawboning in that. But we make a ton of money at $35 and $50, our two rates.
MR. GRAHAM: Yes. And you can get a PC connection through dial-up, through DSL, or through satellite, but he's got by far the best product, by far. And the telephone company's having a lot of trouble with theirs.
Please describe the economic costs and benefits of increasing your average head-end size from $7 to $17 thousand?
MR. MIGHT: The cost over time for a cable head-end the way we do with a lot of quality is well over $1 million, and there's a replacement cycle as things get and old and wear out or technology changes, replenishing that $1 million over a year. So by cutting the head-ends down substantially, you're allowed to offer very top-flight quality services - cable modem, digital cable, on an affordable basis.
MR. GRAHAM: Do you envision the need to provide more bandwidth as products more speed and power?
MR. MIGHT: Well, we'll provide what the market demands and will pay for. We offer at least three levels of service bandwidth right now at three different price points, and we can offer much higher bandwidth as people are willing to pay for it. The cable plan has the capacity to do that. And the cost that we pay to buy the bandwidth to get to the Internet fortunately is very competitive. So our prices are going down. Our costs are going down to buy bandwidth to provide our customers.
MR. GRAHAM: Please discuss steps to reduce digital churn. How do you regard the cost of digital churn?
MR. MIGHT: Well, right now we're in an odd period, because every month 12 of our customers from a few year to paying. So we don't know what "churn" will be when that period is over. We know we're selling it at a high enough rate to replace almost all the churn we have, so far. We really don't have a crisp answer to how I price the cost of churn.
MR. GRAHAM: The Post has purchased numbers of community papers in Maryland. Is it your long-term goal to ward off a competitor?
No. We bought the Gazette Newspapers in Maryland for $12 million, as I recall, in 1991, at the time of the last newspaper advertising recession, when the paper, which had been very managed by its previous owner, Davis Kennedy, was experiencing advertising difficulties. We bought it for financial reasons, and it has turned out to be one of the best investment decisions we ever made. Chuck Lyons is now the manager of those newspapers. And because we think Chuck is a very exceptional manager, we then bought another group of community newspapers in Southern Maryland, and he is also managing them very profitably and very well. You should be well pleased that we are in the community newspaper business.
Finally, three questions for me.
Could you discuss how capital allocation decisions are made? Yes, that is fundamentally my job, and I'm luck to have very expert advice. We have and have had on the board and in easy reach of my telephone, some of the best capital allocators in the history business.
And when business decisions come up, you know, when Alan Frank came to me and said, "I think we ought to consider operating a television station independent of the networks." That isn't a capital allocation decision, but I was able to talk to three people who have owned or operated networks, all of whom are on our board: Warren Buffet, Dan Burke, and Barry Diller. That's pretty good for openers.
When Jonathan and Gary Kerber were negotiating for the purchase of Quest, we were able to get board response in time measured in minutes. So it helps to have experts at capital allocation available to this company, and as a sane person, I make extensive use of that.
You mentioned the six businesses you are in. There are other businesses that you aren't in now, that you would like to get in at the right price. What else do you look at? We look at anything people bring us. Gerry Rosberg, whom you met earlier, runs what Alan Spoon used to call "the corporate inbox," and Kaplan obviously was our last expansion to a completely unrelated business. Actually I regard community newspapers as a largely unrelated business that we got into in 1991, and come to think of it, we got into trade publishing, or Post Newsweek Tech Media's products, what Jay, 1995 maybe?
MR. MORSE: 1997.
MR. GRAHAM: 1997 says Jay.
So, we are looking at other possible businesses all the time. We really like the businesses we're in, and in those we know that any education we can buy - Jonathan's got a management team that's capable of running that business - that's one of the sensational things that Kaplan has today. We know that we have demonstrated in cable, in television, in magazines with Arthur Frommer, that we got the ability to take on other businesses in those areas.
Finally, you are central to the continued success of this company. Ha.
Who is your successor? Although I am 57 years old, you know, I've discussed
succession with our lead director and other key members of the board.
And their reaction was actually very irritating.
[Laughter.]
MR. GRAHAM: Several of them said that in the event of succession being
required by some accident to me, that certain aspects of decision-making
would improve quite a lot.
[Laughter.]
MR. GRAHAM: So, I'm damn well not going to discuss that.
# # #
