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Gannett Co., Inc. (NYSE:GCI)

Q2 2009 Earnings Call

July 15, 2009 10:00 am ET

Executives

Jeff Heinz - Director, Investor Relations

Gracia C. Martore - Principal Executive Officer, Chief Financial Officer

Robert J. Dickey - President, U.S. Community Publishing

Christopher D. Saridakis - Senior Vice President and Chief Digital Officer

Analysts

Alexia Quadrani - J.P. Morgan

Craig Huber - Barclays Capital

John Janedis - Wells Fargo

Peter Jacobs - Ragen Mackenzie Research

Jim Goss - Barrington Research

Michael Kupinski - Noble Financial Group

Barry Lidvis - Cavelli & Company

Scott Merchikitis - Goldman Sachs

Lee Olive - Citi

Operator

Good day, everyone and welcome to Gannett's second quarter 2009 earnings conference call. (Operator Instructions) Our speakers for today will be Gracia Martore and Jeff Heinz. , Executive Vice President and CFO. At this time, I would like to turn the call over to Mr. Jeff Heinz, Director of Investor Relations. Please go ahead, Sir.

Jeff Heinz

Thanks, Patrick and good morning. Welcome to our conference call and webcast to review Gannett's second quarter 2009 results. Hopefully you have had the opportunity to review our press release this morning. It also can be found at www.gannett.com.

Before we get started, however, I need to remind you that our conference call and webcast today may include forward-looking statements and our actual results may differ. Factors that might cause them to differ are outlined in our SEC filings.

This presentation also includes certain non-GAAP financial measures. We have provided a reconciliation of those measures to the most directly comparable GAAP measures in the press release and on the investor relations portion of our website.

With that, let me turn the call over to Gracia.

Gracia C. Martore

Thanks, Jeff. Before I begin, I want to remind you that Craig Dubow, our Chairman, President, and CEO, is recuperating from back surgery and won’t be joining us today. But I am very pleased to report that Craig is doing well and his recuperation is progressing. We wish Craig a speedy recovery.

But with me today are Bob Dickey, President of U.S. Community Publishing, and Chris Saridakis, Senior Vice President and Chief Digital Officer. They will join me in taking your questions at the end of our prepared remarks.

As you saw from our press release this morning, we had an eventful quarter. I’ll start by giving you an overview of our results and sort through the several special items that impacted the year-over-year comparisons. Additionally, I’ll review all of our businesses and some balance sheet items and then we’ll open up the call for questions.

As you are all well aware, the economic landscape has not changed significantly from the first quarter but we have seen some small encouraging signs. The weakness in the global economy has continued and once again this quarter, all media companies will have endured the impact of very soft advertising demand, and we at Gannett are not immune from that.

However, we are seeing some spots in which ad demand seems to be firming up a bit in some categories and in some geographic locations.

As we manage through the current economic downturn, we are focused on several key priorities to position Gannett to take advantage of any economic rebound.

First, we’ve worked to transform our cost structure to better align with revenue potential. Innovative approaches to production, distribution, printing, as well as content management are key areas of focus and are critical to our success.

In addition to strategic decisions we’ve made as a result of technology enhancements and consolidation of various business processes, we also made some tactical decisions such as our furlough program in the first and second quarter.

Second, we are investing in and continuing to build our digital footprint and properties to be in a better position to capture ad demand when it returns on all platforms, be it print, online, mobile, or whatever combination.

Particularly important to this effort are our online verticals like CareerBuilder and our rich media company, Point Roll, and as well Shop Local.

Finally, with the free cash flow we generate, we will focus on continuing to invest in initiatives that position us strategically for the future, as well as continuing to pay down our debt.

We moved forward on each of these priorities and achieved some significant results in the quarter, though clearly the economy masked some of those achievements.

Now let me quickly highlight some of the results for the quarter. As you saw this morning, earnings per share were $0.30. However, as I noted, several special items in the second quarter this year and last year impacted those comparisons. If you exclude those special items, our earnings per share were $0.46 for the quarter, a good achievement against a difficult economic backdrop.

I would recommend that you review our non-GAAP financial information schedules to more fully understand the impact of the special items on the financial statements, and I think they are the last couple of pages of the press release.

Our operating revenues totaled $1.4 billion and total operating expenses were $1.3 billion. After excluding the special items, company wide operating expenses were down about 11%. But in addition, 100% of CareerBuilder and Shop Local are included in the digital segment in the quarter. So no a pro forma basis, assuming we had consolidated CareerBuilder and Shop Local for both quarters, and again excluding those special items, operating expenses were actually about 20% lower.

Operating cash flow of over $250 million reflects in part our ongoing efforts company-wide to restructure our business model to in part create efficiencies.

As I mentioned, the special items impacted the income statement so I’ll focus on that before I go into our businesses.

Second quarter results this year included costs related to the further restructuring of our work force and facility related consolidations of $16.6 million pretax, or $0.04 per share. Almost the entire work force restructuring costs impacted the publishing segment with a very small piece in broadcasting.

Also included were non-cash impairment charges of $47.4 million, or $0.13 per share, that reduced the book value of certain good will and property, plant, and equipment that are mostly included in our publishing segment.

The charges also included accelerated depreciation expense associated with our initiatives to consolidate facilities.

We also had non-cash asset write-downs totaling $28 million, or $0.10 per share, that you can see in the other non-operating line. That’s related to some small printing assets that are being held for sale. That sale is in process now and we’ll update you when it closes which in all likelihood will be later this quarter.

And finally, the other non-operating line also included an almost $43 million non-cash gain or $0.11 per share relating to our debt exchange in the quarter, and I’ll cover that in a few moments when I update you on our capital structure.

Let me remind you that in addition to our non-cash impairment charges last year, results for last year’s second quarter also included a curtailment gain for our domestic pension plans of about $46.5 million pretax, or $0.13 per share. As well, we had severance expenses related to work force restructuring and also facility consolidations of about $40 million pretax, or $0.12 per share.

Now turning to our segment results, let’s begin with publishing. Revenues there declined 26% in the quarter, as all categories were affected by deep recessions both here and in the U.K. Ad revenues in the quarter were 32% lower. However, the exchange rate for the British Pound averaged only $1.54 this quarter compared to $1.97 last year, a decline of almost 22%. So if you factor that in, ad revenues would actually have been about 29% lower.

We experienced ad revenue declines of roughly 27% for our domestic properties and about 37% in pounds at Newsquest.

Overall for publishing, the major category declines were in the mid- to low-20s for retail and national, with classified about 45% lower. Advertising revenues, though lower, were somewhat stable throughout the quarter -- in fact, trends for some revenue categories improved over the course of it.

Overall, ad revenue declines year over year for the second quarter were less than first quarter year over year declines in both the U.S. and the U.K., and June was our best comparison month so far this year.

Demand for retail advertising was relatively unchanged here in the U.S. across all products, with softness in two important categories, department stores and furniture. In the U.K., results in the retail category in pounds continued to decline, although the year-over-year comparison in the second quarter was better relative to the first quarter.

The trend in national advertising, on the other hand, improved significantly over the course of the quarter in the U.S. June again was the best month for national ads company-wide, about 12% lower in the month compared to declines in the mid-20s in April and May.

At USAToday, ad revenue was down about 26%, better obviously than the first quarter’s decline. There was strength in the telecom and pharmaceutical categories but that was offset by softness in entertainment, travel, and auto.

In addition to strong growth in telecom and pharmaceutical in June, entertainment, the largest category in the month, and the restaurant category were also in positive territory.

Although classified advertising was lower year over year, trends in the quarter showed some improvement as well. The classified real estate revenue comparison trended upward during the quarter and it appears that the other classified categories have stabilized somewhat.

However, employment classified has historically been a lagging indicator, so we’ll be keeping a close eye on that. Company-wide, the declines in classified advertising were about 45%. As I previously noted, results this quarter, much like the first quarter, were impacted negatively by the exchange rate. If you adjust for that, it would pare the declines in each of the classified categories by about four percentage points on average and that ranges from about three in automotive to about 6% in our other revenue classified.

In the U.K., the economy remains weak, although the rate of decline is perhaps moderating and there is a sense that things are at least not getting anymore difficult. In fact, some statistics announced yesterday reinforced that as British retail sales were higher in June, and that the rate of house price declines was at its slowest rate in two years.

Ad revenues there in pounds, however, were about 37% lower. Within classified, the declines for auto, employment, and real estate have moderated similarly to those in the U.S.

On the expense side, excluding special items in both 2009 and 2008, total publishing expenses were down over 20%. As I noted earlier, one of our priorities has been to assess our operations thoroughly and drive efficiencies through the use of technology and other innovation.

For example, we’ve consolidated or in some cases outsourced the printing of a number of our newspapers and the drop in operating expenses reflects the impact of those kinds of efforts. Furloughs and lower newsprint expense also contributed to the decline. A newsprint consumption decline of about 32% partially offset an increase in usage prices and resulted in a 27% drop in newsprint expense.

Speaking of newsprint, as we’ve previously noted, the fundamentals of market supply and demand ultimately dictate all newsprint cycles. Producers announced but very quickly rescinded plans to raise prices August 1st.

Last quarter you may recall I reported that there was an east/west regional price variance. That variance has since been replaced by an aggressive price decline initiated by producer efforts to maintain market share. It has been widely reported that excess North American supplies range depending on the forecast you look at anywhere between 1.5 million and 2 million tons. This imbalance has become the leading cause for continued price erosion.

Now historically, offshore markets represented a release valve for that excess inventory. But that is not the case this year with the global economic downturn.

Price declines accelerated recently and we expect more favorable pricing comparisons throughout the remainder of this year and into 2010.

Let me turn to the broadcasting segment for a moment -- revenues there were 21% lower, reflecting again the impact of the weak economy, as well as the relative absence of political ad spend that we had last year. But June year-over-year comparisons in broadcasting also were better than the rest of the quarter. Retransmission revenues tripled compared to the second quarter last year and totaled $14.3 million, virtually all of which flow directly to the bottom line.

We are on a pace to exceed $55 million in retrans fees this year.

However, in addition to lower political spending, ad demand for auto and retail continued to be soft and results overall this quarter lagged last year’s. Looking to the third quarter, we are going to be going against very heavy political spending last year, as well significant Olympic spending due to our NBC footprint. Those revenues together totaled about $50 million last year in the third quarter alone. But based on current trends, we expect the percentage decline in television revenue in the third quarter to be in the mid-20s, but again that’s at this moment in time and we’ll keep you posted if there is a significant change to that.

On the expense side, smart efficiencies were achieved in broadcasting as well, and combined with furloughs and salary adjustments, resulted in a 13% decline in broadcasting segment expenses, excluding special items.

And then finally in our digital segment, revenue was about $142 million, which was significantly higher than the second quarter last year, due mainly to the consolidation of Shop Local and CareerBuilder. But on a pro forma basis, digital segment revenues were actually about 18% lower and that reflects the impact of softer employment on CareerBuilder, which had a revenue decline of about 20%.

But expenses were down substantially, about 25%, driven primarily by cost containment efforts at CareerBuilder. And as a result, operating cash flow was $27 million in the quarter. That’s about a 54% increase or $10 million compared to 2008’s pro forma second quarter.

Operating cash flow margins in the digital segment were about 19% this year, almost double the operating cash flow margin last year on a pro forma basis. Positive results at Shop Local and Point Roll also contributed to the performance in the digital segment.

Focusing quickly on CareerBuilder, the largest component of the digital segment, North American network revenue, which reflects their own sales effort as well as the revenue from the network of owner affiliated newspapers, was down about 31%. The decline, as I mentioned, reflects the employment picture in general and limited up-sell demand at the affiliated newspapers.

As has been the case in more recent quarters, CareerBuilder’s direct revenue was over 80% of North American network revenue.

Finally, it’s important to note that although hindered by the economy, we achieved total online revenue company-wide of over $225 million in the second quarter, and over $450 million year-to-date. As I mentioned, a few special items had an impact on the non-operating section of the income statement. The equity income in unconsolidated investees was $2.8 million in the quarter. If you exclude non-cash impairment charges from both quarters, equity income declined about $5 million.

As I noted earlier, the non-cash gain resulting from our debt exchange offset the non-cash write-down of assets, which were included in the other non-operating line. If you exclude those special items, other non-operating income was actually $1.9 million, a $3.5 million decrease from the second quarter last year.

We continue to improve our balance sheet and capital structure during the quarter, so let me discuss that before we open the call for questions.

As you may recall, last year we had $750 million in bonds that matured in May of this year. Late last year and into this year, through some private transactions and a tender offer, we opportunistically bought back $187 million of bonds at a discount, leaving $563 million outstanding.

In the first quarter, we pre-funded through our revolving credit facilities the $563 million that matured in May and then paid them off. Additionally, we completed a successful private exchange offer for our $500 million 5.75% notes due in 2011 and our $500 million 6-3/8% notes due in 2012. Holders of approximately $67 million of the 11s and about $193 million of the 12s tendered their notes or approximately 26% of the bonds outstanding. And as a result, we issued at face value $67 million of new 10% notes due in 15 and $193 million of new 10% notes due in 16.

In terms of the gain created by the exchange, the new notes were recorded at fair value, which at the time was about 83% of face, while the old notes were removed from the books at historical values, which approximated the full face amounts, so that difference between the two of $43 million was recorded as a non-operating gain and on the balance sheet, this is reflected as a discount against the new bonds. That discount, of course, will be amortized over the life of the new notes.

So at the end of the quarter, we had approximately $433 million in bonds maturing in 11, $307 million in bonds maturing 12. In fact, the bonds maturing in June of 2012 represent our next debt maturity.

At the end of this quarter, our reported total debt was just a shade over $3.5 billion. That’s a decline in the balance of $223 million due to pay-downs from our substantial cash flow and the debt exchange.

Since year-end, our debt balance has declined approximately $308 million, and our all-in cost of debt right now is about 3.8%.

As I noted, we have no maturities for the remainder of this year, none for all of 2010 and none for the first half of 2011, almost two years from now when we have a $280 million term loan and roughly $433 million in bonds maturing.

We have generated significant operating cash flow, $252 million in this quarter alone and $482 million year-to-date, despite the worst economy in 80 years. And we will meet those obligations through cash flow or other borrowings between now and when they are due. In addition, we have ample capacity under our revolving credit agreements.

But in the interim, as we always do, we are looking at ways to continue to opportunistically diversify our debt as the credit markets have begun to thaw a bit.

Finally, we continue to invest in our businesses as well, and CapEx for the second quarter was $14.3 million and $33.2 million year-to-date.

With that, I’ll stop and all of us will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Alexia Quadrani with J.P. Morgan Chase.

Alexia Quadrani - J.P. Morgan

Thank you. Gracia, I think you gave us the number for the June ad revenue declines for national. If you could give it to us for total June advertising revenues and the other major components, and also give us some color on how July is trending?

Gracia C. Martore

Sure. Why don’t I ask Bob to comment on U.S. publishing while we pull out those June numbers?

Robert J. Dickey

Certainly. At this point in time, through the first couple of weeks of July, we are encouraged that across all of our segments, they are responding very similar to our June and second quarter performance. We take that as an encouraging note, since we, as reported earlier, had our strongest month of the year in June.

Gracia C. Martore

Alexia, on a reported basis in June, total advertising I said was down about 29% and retail was down in the low 20s, national down about 12, and classified down about 43%. And then on the domestic side, if you exclude Newsquest, total advertising was down about 24%, about 20% in retail, 10% in national, and 37% in classified.

Alexia Quadrani - J.P. Morgan

Okay, thank you. And just a follow-up on USAToday, can you give us some comment on the circulation revenues there? Any new successes in signing a new hotel chain? I think you alluded to that in the last call.

Gracia C. Martore

Yeah, we did sign that chain but obviously circulation numbers are going to continue to be under pressure given the business and consumer travel market. I think I recently saw some hotel occupancy rates that were in the mid 20s for the U.S., with drops in the high single digits.

You are alluding to obviously Marriott -- they’ve been rolling out their choice program and we continue to work with them on surveys and analytics. We’re in close discussion with them as they begin to analyze their findings and we’ll have more concrete information on that for you.

We’ll see but all indications are at this point that USAToday will continue to be far and away the preferred newspaper of travelers. So we’ve got two things there -- travel being down considerably, which is important to USAToday, and then we’ll see how the results of these other factors play out?

Alexia Quadrani - J.P. Morgan

Okay. Thank you very much.

Operator

We’ll take our next question from Craig Huber with Barclays Capital.

Craig Huber - Barclays Capital

Good morning, Gracia, a two-part question -- your circulation volume declines daily and Sunday in the quarter -- what were those? I think they were down 10% and 5% in the first quarter year over year. What were they in the second quarter?

And then also, can you just talk a little bit about your bank line? How concerned are you that you could potentially trip your 3.5 debt-to-EBITDA test here by the end of the year? Are you trying to redo that bank line in the coming weeks and months? Thanks.

Gracia C. Martore

Sure. I’ll start with your first question on circulation. Morning -- well, a daily circulation for the quarter was down in the 13% to 14% range and Sunday in the 7% to 8% range, but Bob, do you want to comment on the actions you’ve taken there?

Robert J. Dickey

Sure. Overall, the Sunday volume decline is right at our overall budgeted projections for the quarter. We’ve had some aggressive price increases and our daily volumes are about three percentage points softer than we’d like to see. The positive side is our revenues year over year remain almost flat, so the price increases are certainly sticking. Our projected losses include in the second quarter some impact from the closing of the Tucson Citizen. We certainly are addressing the ABC changes. We aggressively went after unprofitable routes and extended circulation routes in outer parts of some of our larger newspapers which were not supported by our advertisers and, as I mentioned, the price increases.

We have a very aggressive plan to work with our top 30 newspapers the second half of the year and we’ll be investing several million dollars to drive some volume changes and we’re confident we can do that, since most of these impacts have been the result of things that we had anticipated and planned for.

Gracia C. Martore

Craig, with regard to your question on our revolving credit agreement and our debt covenant, our revolving credit agreements don’t mature until 2012. With regard to the covenant itself, it’s a 3.5 times and as we said in our 10-Q last quarter, we -- you know, assuming no obviously extraordinary further event in the economy, we anticipate that we will be well within that 3.5 times covenant. I think at the end of the second quarter, we’ll be right around three times.

Craig Huber - Barclays Capital

Thank you, Gracia.

Operator

We’ll take our next question from John Janedis with Wells Fargo Securities.

John Janedis - Wells Fargo

Good morning. Thank you. Gracia, on the TV side, is the $9 million or so of incremental revenue from retrans a good run-rate for the third quarter? Does that imply an ad revenue decline in the low 30s? And can you give us a sense of how auto and retail look as we head toward the back-end of the year? Thanks.

Gracia C. Martore

Okay, on retrans, as I said our annualized run-rate is about $55 million, so I think if you roughly ballpark it and divide it by four, that probably gets you pretty close to what the number will be for the third quarter.

I guess there was another question vis-à-vis categories -- you know, clearly on a preliminary look at July, again on the TV side we think that’s going to be a bit better than June, which in turn was a bit better than May for us. It appears to us that some of the advertisers that have been sitting on the sidelines are starting to dip their toes back into the waters and auto is showing a little bit of a sign of life. But clearly in the second quarter, with the GM and Chrysler bankruptcies and the uncertainty around the dealerships, that was a tough category for TV, for USAToday and for virtually anybody in the media space. And on the retail side, you know, that continues to reflect the lack of consumer spending that we see reported in the numbers.

But we feel I think a little bit better about what we are seeing on the TV side. When we look at that, you know, pacings or whatever of you know, sort of revenue down mid-20s, if you extract out what we call the incremental benefit from Olympics, because not all of that Olympics money is additive, and then you strip out political, that mid-20s number probably is 9% or 10% better than that if you extract out those two big numbers.

Obviously Dave Lougee and his folks are looking forward to February and beyond next year when they will have the benefit of those numbers and not the curse of having to compare against them as we are this year.

John Janedis - Wells Fargo

Thanks. And just one follow-up, and Gracia, I appreciate it -- on the CPM front, are you seeing an improvement there year over year or do you think we have to get through the political comps to kind of see some of that?

Gracia C. Martore

You know, on the CPM side, looking at the up-front, it looks like that the pricing there, the CPMs there for the networks seem to be coming under some of the price pressure that our local stations have already experienced earlier in the cycle. So I think our feeling on CPMs is that at worst, it’s probably going to be neutral on the TV side and there may be an opportunity for a little bit of a positive if dollars shift back into the local stations and create more underlying core demand.

John Janedis - Wells Fargo

Thank you very much.

Operator

We’ll take our next question from Peter Jacobs with Ragen Mackenzie Research.

Peter Jacobs - Ragen Mackenzie Research

Good morning. Gracia, could you please go over the comments on newsprint pricing again? I’m just trying to get a better sense of where newsprint is running in terms of percentage of your operating costs and what kind of decline, if you could quantify that, that we might see from now until the end of the year.

Gracia C. Martore

Yeah, as a percentage of our operating costs, traditionally newsprint -- Bob, correct me if I’m wrong -- you know, depending on where we are in the newsprint cycle, it’s been anywhere from 15% to 20% of our operating costs in the newspaper side.

As I said, newsprint prices, the declines in prices have accelerated fairly dramatically over the last couple of months and in fact, prices towards the end of the second quarter were lower than what we saw in the year earlier. So we anticipate we are going to see some very good follow-through on the newsprint expense side as each quarter unfolds and it’s hard for me to give any projections other than to say that in the third and fourth quarters, newsprint prices, unlike in the first and second quarters, will be below last year in addition to the consumption reductions that are already in place.

Peter Jacobs - Ragen Mackenzie Research

Thank you.

Operator

We’ll take our next question from Jim Goss with Barrington Research.

Jim Goss - Barrington Research

Good morning. One thing I wanted to ask about was the seasonality of the digital businesses as currently constituted, in terms of both the revenue and operating earnings lines, partly with regard to CareerBuilder -- you know, perhaps that has more of a cyclical than seasonal nature. Maybe tackle that first.

Gracia C. Martore

Sure, Jim. On CareerBuilder, it’s I think more focused on the expense side of it. As we’ve said previously, typically their heavy promotion and heavy marketing dollars are spent earlier in the year, in the first quarter, including the ads that they do on the Super Bowl and other things like that. And then obviously there is some seasonality to when folks are looking for new jobs. I think the summer tends to be a quieter time of the year for that kind of activity. Around holidays, there typically isn’t a lot of folks that are looking to get new jobs. So I think it’s more on the expense side that we see the more dramatic differences as the year progresses with less promotion and less marketing dollars being spent than really on the top line side, other than the normal characteristics you’d see, Bob, on the print side.

Robert J. Dickey

I would say the same thing, particularly going through the summer. We see that historically --

Jim Goss - Barrington Research

Okay.

Robert J. Dickey

And fall rolls around.

Jim Goss - Barrington Research

And I was also wondering, Gannett typically with its national breadth of operations has a pretty good fix on the economy from more of a grass roots level and I’m wondering what your feelings are about ad spending in a macro sense as we move into the balance of this year and into 2010. There’s already been one forecast you’re talking about a lower number for 2010, which seems a little bit extreme but I’m wondering what your viewpoint is in that regard as it affects you.

Gracia C. Martore

Well, you know, I know that there are some media folks out there who in the last few weeks have called a bottom to the recession. We will leave it to everybody else to call the bottom.

I think that as a company and in talking with folks like Bob and Chris and Dave and Dave, there was a sense that in June and as the second quarter progressed, that number one, we felt a little bit more comfortable with the estimates that we were doing, which frankly hadn’t been the case for a little bit of time. And secondly, that we were seeing some brighter spots than we had been seeing. I think the when the year started out in the first few weeks of January, there was a lot of gloom and doom and advertisers were just -- had just totally pulled back. And I think that we’ve seen incrementally, particularly here in the second quarter, that advertisers are willing to look at some things and Bob and Chris, you might want to comment in your own respective areas. I know, Chris, you’ve talked to a number of advertisers as you talk with the Point Roll folks and the rest.

Christopher D. Saridakis

Yeah, we are seeing -- brand managers can’t go a full year without marketing their brand, so we are seeing a lot more interest in the second half of planning and budgets, and that’s encouraging for us. We see it across from the retailers, even automotive to some extent, the telecom and the pharmaceutical companies. So we have a positive outlook today looking at the next two quarters versus what we looked at the beginning of the year which, as Gracia mentioned, was pretty tough and unpredictable. But we are generally encouraged and we do cut across all industries and from a national footprint, feel fairly positive that budgets have started to get coalesced and put to good use.

Robert J. Dickey

At the community publishing side, what we’ve seen in the last four to six weeks at the major retail, national retailers level is a willingness to commit to contracts and it took us most of the year to get to that point, so we take that as very favorable, as they are willing to commit to dollars and the negotiations have been going very well.

At the local level, we are seeing a slight up-tick in what we refer to as our local territory sales, working with those individual business owners at the local level. And when we bring them sales promotion ideas, they are starting to find dollars to support those. We had a major undertaking in June that resulted in about $3 million worth of incremental sales and the only downside to it is that it comes at the last minute. We are still booking a lot of business in the last few days of the month or towards the end of the week for the weekend, depending on how the retailer feels at that given time.

Gracia C. Martore

But obviously, Jim, a lot is going to depend on where the economy takes us, whether it’s a V, a U, an L, a W -- whatever letter it ends up following, that’s going to have an impact.

I think what we’ve seen, both in the U.K. as well as in the U.S., is that there is no one monolithic U.S. economy. Every state, every locality, and even within states, you can have two very different economic outlooks based on what they experienced over the last couple of years, so some encouraging signs but we are continuing to just remain very focused and do the job we need to continue doing.

Jim Goss - Barrington Research

Okay. And if I might, just one other unrelated thing, in broadcasting -- any thought on the impact of NBC’s decision in its last hour of primetime programming with Jay Leno as the impact on a station group operator like yourself who is heavily into NBC affiliates?

Gracia C. Martore

You know, I was talking to Dave Lougee about that the other day and I think we’ve gotten even more optimistic about what that actually can deliver to the local affiliates then when it was initially announced. So I think that we are cautiously optimistic that that’s actually going to be a positive for the affiliates.

Jim Goss - Barrington Research

All right. Well, thanks very much.

Gracia C. Martore

Thanks, Jim.

Operator

We’ll take our next question from Michael Kupinski with Noble Financial.

Michael Kupinski - Noble Financial Group

I was just wondering, since you are seeing retailers willing to negotiate contracts, I was just wondering, is that just for back-to-school or are you seeing longer term negotiation contracts through the holidays, for instance? And if you can just give us some thoughts about the length of the contracts that you were talking about?

Robert J. Dickey

It’s a mix at this time. We’ve signed a number of annual contracts that will run through the first quarter of next year. We’ve signed a number that are just to get us through the rest of this year because they are more comfortable now with some idea of where they think business is headed. And then we have a number of quarterly -- I guess we could call them quarterly contracts, shorter term contracts, that tie to specific programs that the retailers are putting together and you’re right, some of those are tied to back-to-school.

Michael Kupinski - Noble Financial Group

Okay. And then you guys have had amazing ability to manage your costs. The SG&A expenses was much lower than I expected, even down below the first quarter. Can you give us your thoughts on that line item for the second half? You know, was the second quarter a good run-rate?

Gracia C. Martore

You know, we’ve obviously all had to make some very difficult decisions, and we’ve taken some actions in the last couple of months on the U.S. community publishing side and broadcast and the like, because we don’t know whether the economy is going to be a W, a V, or a long extended L.

I think that you will see that we’ll continue to do the kind of job that we’ve done as we’ve restructured our business model in that area but obviously we all want to root for some additional revenue.

Michael Kupinski - Noble Financial Group

And Gracia, just a couple of quick, minor detail things -- given the newspaper facility consolidation and outsourcing you were talking about, do you have any thoughts on the depreciation expense line item for the upcoming quarter, for the year? And then also if there are any updates on the capital expenditures for the year as well.

Gracia C. Martore

Yeah, on the CapEx side, the budget for this year I think was in the $140 million range. That included CareerBuilder I think around the $11 million range. At this point, you know, given how the economy started out back in January, we’ve taken another careful look at capital spending and so now I think we’re projecting its probably going to come in that $100 million range. That’s more than sufficient to allow us to do all of the projects that will provide us with strong ROIs and to do the necessary maintenance that we need to do. But I think it’s going to be in that $100 million range.

You know, I am going to have to have Jeff get back to you on the run-rate on depreciation because there’s a bunch of ins and outs that we’ve got to make sure that we take into account before we throw that number out.

Michael Kupinski - Noble Financial Group

Okay, fair enough. Thank you very much.

Operator

We’ll take our next question from Barry [Lidvis] with Cavelli & Company.

Barry Lidvis - Cavelli & Company

Thanks very much. Gracia, you’ve been very good about providing some color on categories that are showing a little bit of life. Could you extend that discussion to specific geographies and what may be happening in California and Florida and Nevada and Arizona?

Gracia C. Martore

I’ll ask Bob to. He’s very close to those communities.

Robert J. Dickey

I’ll look at it from how we are -- how we are structured in the division, and I would tell you that our interstate group, which is Indianapolis, Midwest portion of the country, right now is our strongest performer. That’s followed very closely by our Western region, west and southern region. And in the south, that includes some difficult markets in Florida, like Fort Myers, and at this point in time, I would say our Eastern group has seen the toughest challenges on the advertising front.

Barry Lidvis - Cavelli & Company

Great. Thank you. One more quickie, if I can squeeze it in -- Gracia, when might you consider or what would cause you to reconsider releasing monthly statistics again?

Gracia C. Martore

You know, I think that given the conversations we have and the conferences that we go to, that the monthly data is perhaps a little bit less relevant now. The rest of the industry obviously has gone to just quarterly data, so I think there’s -- I don’t anticipate changing that for the foreseeable future.

Barry Lidvis - Cavelli & Company

Okay. Thank you.

Operator

We’ll take our next question from Scott [Merchikitis] with Goldman Sachs.

Scott Merchikitis - Goldman Sachs

I just have a quick question here -- I know you highlighted this in your press release and your comments with regard to the maturities in the 11 and 12 timeframe, but could you get a little bit more specific? Have you given any thought to raising, taking action to raise capital -- the equity [convert] market or are there any assets, non-core assets that could be disposed to raise cash to help reduce the debt levels?

Gracia C. Martore

You know, Scott, I think that we’ve probably demonstrated over the years and certainly within the last six months that we are always opportunistically looking at things and certainly we continue to focus on the debt markets and how they are performing and we are exploring a number of things, as we did with the debt extension that we did and the debt tender that we did last December.

So absolutely, we continue to look at a variety of things and if appropriate, we will act on those things if it’s the right market and right conditions.

As to non-core assets, we are constantly looking at our portfolio but fortunately at Gannett, we are blessed with the fact that virtually all of our properties have done and continue to do a good job delivering a strong bottom line.

So as I mentioned, we have some small publishing assets that in the non-operating line that we are going to be disposing of this quarter but nothing specific at this moment that we would comment on.

Scott Merchikitis - Goldman Sachs

Okay, and just one other quick follow-up -- you haven’t provided a balance sheet yet. I imagine that will come with the Q. Could you just give us an idea of the net debt position at the end of the second quarter?

Gracia C. Martore

Yeah, as I mentioned, long-term debt was a little over $3.4 billion at the end of the quarter and I suspect that cash and cash equivalents are probably in the $100 million to $105 million range.

Scott Merchikitis - Goldman Sachs

Okay, that’s great. Thank you very much.

Operator

We’ll take our next question from Lee [Olive] with Citi.

Lee Olive - Citi

Good morning and thanks for taking the questions. Most of my questions have been answered but just one on the covenant and then one quickly on the bond indentures. With respect to your covenant leverage, I think you mentioned it was around three times at the end of the second quarter. How much of the -- how much is in the denominator with respect to add backs for severance payments?

Gracia C. Martore

I think we mentioned that we had I think $16.6 million for severance payments and as our covenant, as I’m sure you’ve read in our revolving credit agreement indicates, that if it’s a non-cash charge, we can add it back as well on charges like severance costs. We add them into the denominator as we pay them in cash.

So at any given moment in time, given the actions that we’ve taken, that will fluctuate. I will tell you that in the fourth quarter of last year, we had about $55 million of severance expense, which we went ahead and treated as if it was all cash in that quarter. So in the fourth quarter of this year, that $55 million will fall away.

Lee Olive - Citi

Right, so if I simply just did the $3.5 billion on your balance sheet, divided by three, that’s roughly the EBITDA that you are using for your leverage --

Gracia C. Martore

No, because there are other factors and I think the best thing that you can probably do is to reacquaint yourself with our revolving credit agreement where it -- it’s a publicly filed document and very specifically itemizes those numbers.

Lee Olive - Citi

Okay, well, thank you very much. And then my second quick question is to the extent you do have to negotiate with your banks at some point in the future with respect to the covenant, what is the amount or how much security can you grant those banks with respect to your existing bond indentures?

Gracia C. Martore

We typically don’t negotiate nor speculate on bank transactions on a public call, so I don’t think we would chat about that at this point but thanks for the question.

I think we’ve got time for one more question.

Operator

We’ll take our next question from Craig Huber with Barclays Capital.

Craig Huber - Barclays Capital

Gracia, just a follow-up here -- that down 13% to 14% daily volume number for your newspapers, can you just talk, if you would, about what you guys are able to -- what you do on the ad rate side this year? I think you’ve talked in the past of flattish, a little bit down in some areas around the country, some categories. But how are you able to maintain, if that’s still the case, flat ad rates? And then how concerned are you, more importantly, as you go into 2010 when you do these negotiations, particularly in the fourth quarter of 2010, assuming these declines continue in the circulation volume front? Thanks.

Gracia C. Martore

Bob, do you want to --

Robert J. Dickey

Sure. Our rate structure, everything -- a number of issues come into that, or that impact it. The geography, the type of customer and such, and it’s a mix across the board. We are seeing with the national retailers some erosion in our pre-print revenue per thousand that’s tied to the circulation loss but we’ve minimized that because most of the loss is not in the areas in which these advertisers are interested in reaching. Our actual costs per thousand that we are charging the customer is remaining flat.

On the ROP side, in the second quarter we did see some rate reductions but that was because of some aggressive local promotions we put together. As I mentioned earlier, we generated about $3 million incremental as a result, and we went back into the markets with those attractive pricing programs to help the retailers move product and they responded to it, so it was a grow on the volume side and give back slightly on the rate.

Other than that, our recruitment rates tend to hold and where we are seeing rate reductions, it really ties to individual negotiations in the total spend, so in some cases we are able to hold a customer’s spend but we have had to adjust accordingly.

Craig Huber - Barclays Capital

But what about your outlook here for 2010? I mean, assuming these declines continue on the volume front?

Gracia C. Martore

You know, Craig, we haven’t even begun the budgeting process for 2010. I think when we get to that point and when we do a deep dive with each of our properties and we know what the economic conditions are and the like, then I think we’ll be better able to comment on that.

Craig Huber - Barclays Capital

Let me think to ask it a little bit different way here -- in U.S. publishing, down 27% in the second quarter year over year; how much of that would you ballpark was volume declines as opposed to pricing?

Gracia C. Martore

My guess is that the vast majority of it is volume declines.

Robert J. Dickey

I would say about 80% [off the top] look at it.

Craig Huber - Barclays Capital

You’re inferring roughly 5% erosion on pricing in the quarter?

Robert J. Dickey

It’s a mix, so it’s hard --

Gracia C. Martore

As we’ve always said, Craig, unlike some companies that just have one or two newspapers in their newspaper division, large newspapers, we have 80-plus newspapers. Each one of them has a different mix of advertising at a moment in time, each one has to deal with the conditions of that local market. So just as we don’t like to talk about a monolithic U.S. economy, we don’t like to talk about monolithic ad rates.

But I appreciate your question and I think --

Craig Huber - Barclays Capital

Can I ask, Gracia, maybe what the range would be then across your 80 papers, as a decline in ad rate then?

Gracia C. Martore

You know, Craig, I’m not sure that that’s going to be helpful as much as the numbers that we’ve already provided you. Appreciate the question.

Craig Huber - Barclays Capital

Okay. Thanks, Gracia.

Gracia C. Martore

Thanks a lot, Craig. I think our time has run out and appreciate all of you joining us today and if you have any additional specific questions, please call Jeff Heinz at 703-854-6917 or me at 6918. Have a great day.

Operator

That concludes today’s conference. We thank everyone for their participation.

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