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Executives

Mike Reed - Chief Executive Officer

Mark Maring - Chief Financial Officer

GateHouse Media Inc. (GHS) Q3 2008 Earnings Call November 7, 2008 10:00 AM ET

Operator

Good day everyone and welcome to the conference call with GateHouse Media regarding the company’s third quarter financial results. Today’s call is being recorded. I would now turn the conference over to Mark Maring, Interim CFO; please go ahead, sir.

Mark Maring

Thank you, [Audrey] and good morning everyone. I’d like to welcome all of you to the third quarter 2008 earnings call for GateHouse Media. Joining me today is Mike Reed, our Chief Executive Officer. Before I turn the call over to Mike, as Audrey mentioned this call is being recorded. The phone numbers and access code to listen to a replay of this call can be found in our earnings release. This call will also be available via webcast on our website, www.gatehousemedia.com.

I would also like to point out that statements today, which are not historical facts, may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that could cause actual results to differ materially from GateHouse’s expectations are detailed in our SEC reports. I direct you to GateHouse’s earnings release for the full forward-looking statement legend.

During this call, we will also use certain non-GAAP financial measures, including EBITDA, as adjusted EBITDA, and levered free cash flow. These measures should not be considered an alternative to any other measure of performance or liquidity derived in accordance with GAAP.

A table reconciling net loss on income to these measures, as well as a description of how GateHouse uses and calculates these measures, immediately follows the financial statements included with the press release GateHouse filed this morning. We will not be taking questions today. If any of you have any questions after the call is over as always, please do not hesitate to call me.

Now I’d like to turn the call over to Mike Reed. Mike.

Mike Reed

Thanks Mark. Welcome, everyone and thank you for joining us on our third quarter earnings call. On our last call in August, I discussed the economy and where it was negatively impacting our business. Unfortunately as you all know the economy has gotten much worse since we last spoke. This is the most challenging, advertising environment I have ever experienced in my 20 plus years in the business and the challenges are impacting the broader media sector including newspapers.

Despite these economy challenges, you will hear today how GateHouse continues to successfully navigate through the environment producing industry leading results and importantly positioning ourselves to whether a prolong downturn.

Consistent with prior calls, I want to focus my discussion today on three topic areas. First, the financial highlights of the quarter and the key metrics we use to measure our performance. Second, on update our capital management initiatives, and lastly, I will touch on our focus over the next 12 to 24 months. Mark will then give you a little more detail on the numbers and discuss the balance sheet and cash flows.

I will begin with the financial highlights and key metrics and in particular revenue and as adjusted EBITDA performance and levered free cash and level free cash flow per share. The economic environment has gotten progressively worse each quarter this year and the drop off from the first quarter until now has been pretty dramatic and certainly much worse that most anticipated.

While our revenues have declined, they have not declined nearly as much as our peers. This is a testament to our focus on operating strong local media franchises in smaller markets where the local content is both valuable and unique.

Our same-store revenues of $174.6 million in the third quarter were down 5.1% on the same-store basis versus a public industry peer average decline of over 14%. Our decline was just slightly worse than our second quarter decline of 4.7%. The primary cost of the revenue decline remains the same, and that is print classified revenue.

Print classified revenue which accounts for approximately 20% of our total revenue, actually a little bit less than that in the third quarter declined 21% in the quarter. 97% of our third quarter revenue declines came from the print classified category. The big three classified categories Help Wanted, Real Estate and Automotive each experienced larger quarterly declines this quarter.

Real estate declines were pretty consistent however with prior quarters, but help wanted, and automotive declines accelerated from prior quarters. This had a greater impact on GateHouse this quarter, as our small more rural markets are more acceptable to changes in help wanted and automotive then they are to real estate.

We continue to believe that the majority of these declines are cyclical and when the economy turns the volume of transactions that occurred in those sectors will increase and result in the improved revenues for GateHouse. Our local businesses are not spending their ad dollars else where, they are just spending loss rate now.

When you look at the core revenues of our local media strategy, that is our local retail print advertising revenues, including our inserts, our paid circulation and our local online advertising revenues; these collectively account for 70% of our total business or our total revenues and these revenues actually increased slightly on the same-store basis the third quarter up three tenths of 1%.

The increase was driven by our online revenues, which grew 34% and our circulation revenues which grew 4% and importantly our local print advertising revenues, which excluding Classified, were only down 1%. We are particularly pleased that our online audience and revenues continue to grow at a fast clip. As mentioned our revenues were up 34% over prior year.

In addition in the third quarter, we averaged just over $6 million in monthly unique, which was an increase of 22% over the second quarter and we averaged just over $83 million page views per month, which was an increase of 14% over the second quarter.

We continue to execute on our strategy and are pleased with the growth in terms of audience as well as revenues. It is this stability in our core franchises as well as our online growth that gives me confidence that we will experience overall revenue and EBITDA growth when the economy strengthens.

Now lets take a closer look at EBITDA and EBITDA margin. Adjusted EBITDA in the third quarter of $32.7 million was down 20.8% on a same-store basis, while the public industry peer averages declined more than 40%. We were disappointed in the EBITDA decline at this quarter saw more of our revenue decline dropped to the bottom line due to just slightly reduced expenses.

We actually took about $8 million of expenses out of the business during the quarter, in part by reducing compensation expense as well as achieving greater efficiencies surrounding newsprint consumption and reduced third-party editorial cost. However, these reductions were offset by increased newsprint pricing, higher delivery costs, higher healthcare costs and increase bad debt expense.

On average during the quarter newsprint prices per metric ton increased 32% compared to last year. However, our newsprint expense was up only 6.3% as a result of consumption control. For the fourth quarter we expect a 42% increase over the prior year in newsprint pricing.

Looking ahead to 2009 we do expect newsprint prices to stabilize and potentially declined later in the year, but from a comparison standpoint prices and expense will be up substantially for the first half of the year versus prior year.

The combination of the decline in revenues and marginally reduced expenses resulted in our third quarter as adjusted EBITDA margin declining to 18.7% from 22.4% last year and while this is still a pretty respectable margin by most industry standards, the 370-basis point decline equals $6.3 million of EBITDA. Lastly, on our key metrics, our levered free cash flow was $9.8 million in the quarter or $0.17 per share, bringing our year-to-date levered free cash flow per share to $0.42.

Now let’s move to the capital management initiatives. We paid our revolving credit facility down to zero during the quarter and as a result of that we are not subject to any leverage covenant tests under our long-term credit facility. With our revolver at zero and no amortization on our long-term credit facility until it matures in 2014, our focus now is on strengthening the balance sheet, building liquidity and putting ourselves in a position to potentially take advantage of the dislocation in the markets especially with regards to evaluations.

As we look ahead over the next 12 to 24 months our primary focus will be on managing the operations. We will continue to invest in our online business, which is our fastest growing segment. We will also invest in our sales tax in order to capture new or additional revenues or market share and we will also continue to aggressively pursue cost reductions and our controllable expenses, finding ways to become more efficient.

I’m proud of the efforts and dedication our GateHouse employees had shown during this very challenging year and I’m confident we will be a stronger company when the economy strengthens. Now let me turn the call over to Mark Maring to more details on the financials.

Mark Maring

Thanks, Mike. Lets start with our revenues. Third quarter as adjusted revenues were $174.6 million down 5.1% on a same-store basis from the third quarter 2007. As adjusted advertising revenues for the quarter were $126.1 million down 6% on a same-store basis. Local advertising, excluding classified and online is our largest advertising category accounting for about 63% of all advertising dollars. This category continues to hold up very well down only 1.1% in the quarter.

Total online revenues, which are included in advertising revenues were up 34% to $7 million in the quarter. As Mike discussed in detail, the driver of our total advertising declines continues to be the classified category which was down 21% in the third quarter.

National advertising actually showed improvement year-over-year increasing 3.5%. Third quarter circulation revenues also continued to hold up very well; they was $38.4 million up 4% on a same-store basis.

Lastly with regard to revenue; commercial printing, which represents about 5.8% of our total revenues, was down 21.6% which is typical in the sluggish economy as commercial print customers adjusted their own volumes and page counts.

Third quarter total operating expenses excluding one-time charges and non-cash expenses decline $700,000 to a $141.9 million on a same-store basis. We realized cost reductions of about $8 million; however, they were offset by pricing pressure on newsprint and ink, delivery cost, health insurance and bad debt expense.

Non-cash compensation expense related to restricted stock grants was about 800,000 for the quarter. As adjusted EBITDA was $32.7 million for the quarter and on a same-store sales basis was down 20.8%. We have provided the table in our press release that shows how we write at as adjusted EBITDA. Interest expense for the quarter was $21.5 million and levered free cash flow for the quarter was $9.8 million or $0.17 per share.

Now, let’s turn to the balance sheet and capital items. We ended the quarter with $1.23 billion of total debt, which included $1.195 billion in long-term debt. We also had $12.4 million in cash at the end of the quarter.

During the quarter were forced to terminate two hedge agreements on $570 million of debt. This resulted in GateHouse incurring $19.8 million obligation of which we paid $16.5 million during the third quarter. Thus for in the fourth quarter we’ve paid $3 million. So, we only have about $3,000 remaining, but this was unfortunate in the short-term from a cash perspective.

Going forward based current LIBOR rates our cash interest cost will be reduce substantially; potentially by as much as $17 million over the next year. We remain 52% hedged and will review further hedge or interest rate power opportunities over the coming months.

Capital expenditures for the quarter were $1.6 million. We were de-listed from the New York Stock Exchange in October, as we did not meet the minimum market cap requirements; however, our stock does continue to trade actively in the over the counter market and our new ticker symbol is now GHSV. At this point our plan is to continue to have quarterly earnings calls.

With that let me turn it back over to Mike for some closing comments.

Michael Reed

Thanks Mark. I would like to summarize by saying we are operating in very difficult markets right now and no question the next couple of quarters will be tough, but our core local franchises as you heard today and as evidenced in our numbers are holding up well.

Despite fighting unprecedented economic headwinds and pricing pressure on costs we continue to be a very profitable cash flowing company. We will continue to focus on strengthening our balance sheet, improving liquidity and putting ourselves in a position to be a stronger company when the economic environment improves.

As Mark mentioned, if anybody has any questions please feel free to call myself or Mark Maring. That concludes our third quarter call and I thank you all for joining us this morning.

Operator

Thank you and again that does conclude today’s conference call. Thank you for your participation. You may now disconnect.

Question-and-Answer Session

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