Commercial Vehicle Group Inc. F4Q09 (Qtr End 12/27/09) Earnings Call Transcript

| About: Gannett Co., (GCI)

Gannett Co., Inc. (NYSE:GCI)

F4Q09 Earnings Call

February 1, 2010 10:00 am ET


Craig A. Dubow – Chairman of the Board, President, Chief Executive Officer

Gracia C. Martore – President and Chief Operating Officer


Alexia Quadrani - J.P. Morgan

John Janedis - Wells Fargo Securities

Craig Huber – Access 342

Edward Atorino – Benchmark

James Goss - Barrington Research

Michael Kupinski - Noble Financial Group

Scott Merchikitis - Goldman Sachs


Good day everyone and welcome to Gannett's fourth quarter 2009 earnings conference call. Due to the large number of callers, we will limit you to one question or comment. We greatly appreciate your cooperation and courtesy.

Our speakers for today will be Craig Dubow, Chairman, President, and CEO; and Gracia Martore, Executive Vice President and CFO. At this time, I would like to turn the call over to Gracia Martore.

Gracia C. Martore

Thanks, James. Good morning and again, welcome to our conference call and webcast today to review our fourth quarter 2009 results. Hopefully you have had an opportunity to review our press release this morning and it also can be found at

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.

We provided a comprehensive update at the UBS conference in early December so we will keep our comments relatively brief today to allow more time for questions.

Craig will begin by reviewing some of the important initiatives that are underway here. He will also discuss our quarterly results briefly. I will then follow with a more detailed look at the numbers, particularly our business segments and the balance sheet.

Now let me turn it over to Craig.

Craig A. Dubow

Thanks Gracia and good morning to everyone. I’m pleased to be here and to have such good news to share with you this quarter. As you saw from our earnings press release, we had a very good quarter and an even stronger finish to the year. Revenue comparisons improved as the year progressed with fourth quarter comparisons being absolutely the best of the year.

The last couple of weeks of the fourth quarter are important for any year and the momentum we had in early December continued as revenue came in even stronger than we had anticipated. We generated operating cash flow of $363 million for the quarter and $1.1 billion for the year, quite an accomplishment in this troubled economy.

We used the free cash flow to reduce our debt during the quarter by approximately $250 million and by $755 million for the year. Earnings per share were better than anticipated due to improved revenue trends combined with the progress made on our cost structure and efficiency efforts. Of greater importance was our ability to increase income despite lagging revenue. I will go into more detail on that in just a few moments.

To put these results in perspective, it’s important to recall how the year began. At this point in 2009 we knew that the year would have substantial challenges. That certainly was the case. At the same time, however, we knew an unwavering focus on both executing on a strategic plan and fundamentally changing our cost structure were the keys to a stronger and well-positioned Gannett company in the wake of enormous economic uncertainly.

We executed on both of these fronts and ended the year even stronger than when we began. We highlighted several of our strategic and efficiency initiatives in our presentations over the past year. Before we move to our fourth quarter results, I think it’s important to review some of them in the context of content, cost restructuring, and sales. Engaging, relative content is the keystone to successfully positioning the company for the future. An integral part of this has been our Content One initiative.

The focus here is three-fold. Efficient gathering and distribution of engaging content, driving collaboration among our businesses for both content and sales and finally, finding new ways to deliver and monetize content. The content they are helping to create, aggregate, and share is being used by the majority of our sites and many of them have generated several million page views.

At the same time, we are coordinating sales opportunities with potential advertisers. The power of Content One was evident as content around the crisis in Haiti was developed and delivered in just a few hours.

Over the course of 2010 we expect Content One not only to be integrally involved with day-to-day content generation and sharing but also to be the center of our coverage efforts from major sporting events such as the Olympics, NCAA playoffs, and spring training, but also for back to school, the Hollywood awards season, and later on in the year, Halloween, Black Friday, and the holiday shopping season.

Another driver of success has been our efforts to permanently change our cost structure. This, as you can understand, was a huge undertaking and a difficult one that impacts a lot of people, and our employees deserve the credit and the recognition for a success. This is particularly important in our publishing segment.

As we have noted, consolidation of printing operations as well as centralization of some production operations has had a very significant, in fact permanent, impact on our expenses. We will achieve additional efficiencies as we centralize ad production in two centers over the course of this year. While creating greater efficiencies is a key driver of this effort, of equal importance is our focus on raising quality and service for advertisers across all of our markets.

We also have made good progress on our efforts to transform our approach to advertising, from transactional to solutions based marketing. We know the value of local advertising and are working to capture more of the local ad spend through this approach to marketing. A great example of this is the regional client solutions group we are developing in the US community publishing and will launch this year.

These groups will operate like advertising agencies and create customized marketing solutions and campaigns for our local advertisers. Testing has gone well with positive results in all of the test markets. In the broadcasting segment, we are focused here as well on local coverage and content and generating local sales. This year we are preparing for the winter Olympic games in Vancouver on our NBC stations and we’ll approach our coverage with cross-divisional, cross-platform execution.

Political and issue spending will of course be a tremendous opportunity for us to some degree early in the year but primarily in the latter half. Cross-divisional efforts are also a critical component of the Gannett digital network. We have a unique set of assets across the company that offer a wide reach as well as customized solutions. Bringing the breadth and diversity of all these customers’ touchpoints together to benefit advertisers provides us a potentially significant opportunity as we return to a more stable or growing economic environment.

As is evidenced in our results this quarter, progress made on the cost front both here and in the UK have resulted in a higher level of free cash flow and significant debt reduction. At the UBS conference we told you that we were very comfortable with the high end of consensus estimates and we achieved these results that significantly exceeded those expectations.

So let me briefly cover key results from today’s quarterly announcement and then turn the call over to Gracia.

Earnings per dilutes share on a GAAP basis were $0.56 per share. Earnings per diluted share on a non-GAAP basis which excludes special items were $0.72 per share. Earnings per share for the fourth quarter of 2008 on a comparable non-GAAP basis were $0.85 per share. We generated total revenue in the quarter of $1.5 billion, a decline of approximately 14%; however, this is the best year-over-year comparison quarter in 2009 by a wide margin, almost 9 percentage points better than the third quarter on a pro-forma basis.

Sequential improvement for each month in the quarter resulted in a decline in total revenue in December of just 4% on a pro-forma basis, easily the best comparison month of the year. Comps got a little easier. We are not in positive territory yet but we are absolutely seeing improving trends and firmer advertising demand across our businesses.

In publishing, the strong finish was led by greatly improving trends in national as well as classified advertising. Broadcasting revenue comparisons were hindered by the relative lack of political advertising this quarter. However, excluding political, television revenues were up solidly in the quarter as were captive rates revenues.

Point roll and shop local delivered strong double digit revenue growth in digital. Companywide, our digital metrics were up in December and total digital revenue topped $245 million in the quarter or about 17% of the revenues. Total operating expenses excluding special items declined over 17% reflecting the impact of numerous cost efficiency efforts that were undertaken last year and continue to be a focus.

We benefited from significantly lower newsprint expense in the quarter due to a sharp decline in usage prices combined with lower consumption. As I noted earlier, perhaps the most important outcome for the quarter is the operating leverage we created. Expense reductions outpaced revenue decline in the quarter and as a result are pre-tax income adjusted for special items increased about 1% despite the declines in revenues in substantially lower political related ad demand.

Similarly, in our publishing segment, operating income excluding special items from both quarters was 5.5% higher this year than 2008’s fourth quarter and in broadcasting, operating income excluding special items were just $19 million lower in the quarter despite a decline in politically related ad demand of $47 million.

Our goal was to permanently restructure our costs given the constrained revenue we faced. As our results indicate, we are successfully bringing more revenue to the bottom line and we are a leaner, stronger company as we move into 2010. Gracia will go into our results in some detail, but before I hand the call over to her, I once again would like to thank the outstanding efforts of all of our employees in an extremely challenging year.

With that, I’ll turn the call over to Gracia.

Gracia C. Martore

Thanks, Craig. We’ll provide a little more detail on our operating segments and cover some non-operating and balance sheet items. As Craig noted, we are realizing operating leverage as a result of the cost restructurings we’ve done and ad trend improvements. We are more profitable on a pre-tax basis excluding special items this quarter than we were a year ago, even though revenues were lower, especially political.

In each of our business segments, moderating revenue declines and lower expense levels are favorably impacting the bottom line. There were several special items in both quarters and so assessing the performance excluding those items can be a little bit challenging.

Let me provide some additional detail to make those comparisons easier. As a reminder, all of the revenue categories stats have been included in the release this morning so I’ll focus on the highlights for each of the segments and primarily the changes in year-over-year comparisons quarter to quarter.

Let me begin with publishing. Revenue trends there were very similar to the total trends Craig covered. Total revenues in publishing lagged last year but were almost 8 percentage points better than the third quarter comparison.

Total advertising revenue was over 10 percentage points better. Ad revenue results in December were the best comparison month of the year, 10% lower. All publishing category comparisons were better in the quarter led by national and classified, both of which improved 15 percentage points against the third quarter comparison.

National advertising had a particularly strong finish and was up in the high single digits in December. I’ll discuss that a little bit more later. The trend of moderating declines occurred both here and in the UK. In the US, ad revenue was down 18% although again 8 percentage points better than the third quarter.

Classified improved 12 percentage points relative to the third quarter comparison as auto and employment declines improved 15 and 17 percentage points respectively. Classified advertising was down 15% in December in the US.

At NewsQuest, similar trends occurred, particularly in classified advertising which although down about 23% in pounds improved 11 percentage points from the third quarter decline. In December, due in part to an absolute increase in real estate of over 4%, classified advertising was 17% lower. Retail and national advertising both improved well over several percentage points relative to the third quarter decline.

As I noted, national advertising for the publishing segment finished the quarter on a strong note, advancing from a mid-20s percentage decline in October to an increase of almost 9% in December. The primary drivers were significant ad growth at USA Weekend as well as positive results for national advertising at US Community publishing sites.

Ad revenue at USA Today was down approximately 22% in the quarter but just 2% lower in December. The slowdown in business travel and the lodging industry has continued to impact USA Today. We did see growth in several categories in the quarter but it was offset by softness in the travel, retail, and financial areas.

Turning to expenses, our efforts to permanently restructure our cost base and create efficiencies have taken hold in a meaningful way. In publishing, pro-forma operating expenses excluding special items in both quarters dropped 18% reflecting the impact of work force restructuring as well as facility consolidations in 2009 and the prior year.

These consolidation efforts still remain a focus as the division presidents indicated at the UBS conference as we move into 2010. The decline also represents significantly lower newsprint expense, down over 50% for the quarter. Sharply lower usage prices as well as lower consumption drove the decline.

Let me just give you a quick update on newsprint given recent pricing trends. For a variety of reasons including exchange rates and pricing below cash flow breakeven levels for producers, producers have made lots of price increase announcements but their price recovery efforts have struggled as these increases have been delayed and altered. Current industry price indexes confirm this trend which is further challenged by regional price fragmentation. We have budgeted conservatively for 2010 in the event that newsprint production is adjusted to keep pace with demand.

In the UK, where fixed prices are negotiated on an annual basis, 2009 represented a bit of an anomaly as prices were adjusted downward at mid-year due t lower usage. NewsQuest prices will decline in the low double digits in 2010.

Publishing operating income was higher in the quarter excluding special items, reflecting the faster pace of expense reductions and moderating revenue declines. Publishing segment operating cash flow was also higher, adjusted for work force restructuring charges of about $43 million last year and over $3 million in the fourth quarter this year.

So despite a revenue decline of over $208 million, adjusted operating income was $11 million higher in the quarter. In our broadcasting segment the challenge again this quarter was overcoming the politically related advertising we so successfully achieved last year, over $58 million.

However, the underlying ad demand for television is encouraging, as core revenues in the quarter, which exclude political, were up about 11%. Double digit growth in the medical and media categories drove much of the improvement. Retail, which has replaced auto as our largest single category, was up a few percentage points.

While the auto category lagged last year, the year-over-year comparison in the quarter improved significantly relative to previous quarters and is pacing up nicely in the first quarter. Higher re-transmission revues totaling $14 million and a 21% increase in revenue growth to captivate partially offset the impact of political advertising.

On the expense side, total expenses in broadcasting declined 9.4%, again excluding special items, reflecting efficiency and cost control efforts. As Craig noted broadcast operating income excluding those special items was down just $19 million despite a decline in revenue of about 14% driven primarily by $47 million lower political revenue.

Looking to the first quarter, we will have the benefit of the Winter Olympic games in Vancouver on our NBC affiliates and overall firming of ad demand. So at this point we expect the percentage increase in the first quarter television revenues to be up in the very, very high single digits, if not touch the double digits.

That’s really in the quarter obviously. One note about first quarter television revenue growth. Six of our CBS affiliates will have ad demand associated with the SuperBowl. However, because we are going up against last year’s Superbowl on our 12 NBC affiliates, we won’t generate as much revenue on that event.

Turning to the digital segment, total revenues were $158 million in the quarter, down about 7%. Strong double digit growth by both point roll and shop local over 40% and 30% respectively partially offset the impact of lower employment ad demand on Career Builders results.

Operating expenses were about 3% lower and excluding special items they were down over 8%. In addition, expenses were impacted by a crude cost for an employee incentive comp plan that is tied to the performance of certain digital businesses over a several year period. Excluding both the special items and the incentive comp plan charge, operating expenses would have been down more than 10%, again outpacing the revenue decline.

So operating income would have been up in the high teens as a percentage and operating cash flow would have increased in the high single digits on a percentage basis. In addition, CareerBuilder is cycling substantial cost reductions down in the fourth quarter of ’08. The adjusted cash flow margin for the digital segment for the fourth quarter was in the mid 20s as a percentage, up several percentage points from a year ago.

Focusing for a second on Career Builder, North American network revenue was about 20% lower in the quarter compared to the fourth quarter a year ago and totaled about $131 million. Career Builders’ own sales efforts represented about 85% of that number and the balance is the revenue from the network of owner-affiliated newspapers.

As we noted earlier, lagging demand from employment advertising had an impact on Career Builders’ revenue results, as did limited upsell opportunities for the publishing affiliates.

As Craig mentioned, digital revenues companywide were approximately $245 million in the quarter and $925 million in ’09. The metrics we track such as unique visitors, page views, and visits, were all up in the month of December, compared to December of 2008 and sequentially month over month to November of this year.

At US Community publishing, online employment was lower in the quarter as we await job stability and growth in the country. Excluding online employment, online at our domestic community publishing sites would have been up in the low single digits. The national, auto, and retail categories, almost 60% of US community publishings are online revenues were all up in the quarter. also turned in a strong performance with revenues up in the high teens. Improved results from certain digital investments in the quarter drove a substantial increase in our equity income. Excluding special items in both years, equity income was actually $8 million this quarter compared to $3.6 million last year.

Then moving quickly to the balance sheet, we reduced long term debt during the quarter $250 million to $3.06 billion. For the year we reduced debt by about $755 million or 20%. Our [all in] cost of debt is about 5% which reflects the change in the mix of debt with the issuance of our new long term bonds in the fourth quarter.

Balances under our revolving credit agreements now total approximately $1.3 billion. We have much more than ample capacity under our revolving credit facilities and a significant amount of free cash to pay our maturities in 2011 and beyond. With a senior leverage ratio of just 2.63 times, we are very well positioned relative to this sole financial covenant which has a ceiling of 3.5 times.

Cash and cash equivalents at year end totaled about $99 million. Finally, capital expenditures for the fourth quarter were $22 million and $68 million for the year, a bit lower than we indicated in early December. As always, Career Builders’ capital expenditures, now that they are consolidated, are included in this number although they are entirely self-funding.

Before I turn the call back to Craig, I always need to throw in my cautions for the upcoming quarter and remind you of several factors will impact it, typically, our smallest quarter of the year. We believe the economy, while on the mend clearly, is still tenuous. We’ve previously announced a furlough for the first quarter. It will affect fewer employees than the first quarter of ’08 so the impact on expenses will be less significant.

I mentioned the SuperBowl and more modest expectations there given our stations’ affiliate weightings. Finally, we are hearing from our folks in the UK that the winter snowy weather there had an impact on commerce and advertising demand in January. That being said, we are very pleased with the momentum we enjoyed coming out of the fourth quarter and with some help from the economy, look forward to it continuing in a meaningful way.

Now I’ll turn the call back to Craig before we take your questions.

Craig A. Dubow

Thanks, Gracia. Before we do the questions, I am absolutely privileged to share some very good news with all of you. Effective today, I am announcing that Gracia is being promoted to President and Chief Operating Officer of the Gannett Company. As all of you know from your experience with her, Gracia is a phenomenal leader who brings not only her tremendous financial skills to this job but her extensive knowledge of our business operations and a very, very passionate support for our company.

Gracia has earned this opportunity and I couldn’t be more pleased than to recognize her talent and commitment in this way. As President and COO, Gracia will continue to report to me and will leave the day to day operations of Gannett. We have started the search for a new CFO and that person will report to Gracia.

Gracia will continue to serve as CFO until we bring on our new CFO. The role of President and COO is a new position for Gannett which will allow me to spend the majority of my time focusing on driving the strategic direction and future of our company. I will continue to work on M&A activity and Gracia and I will work together and continue to meet with the financial community which I look forward to with my continued work with you.

So now, with a heartfelt congratulations, I’d like to turn the call back over to Gracia for our questions. Congratulations.

Gracia C. Martore

Thank you very much, Craig. I appreciate those kind words. Now James, why don’t we go to questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Alexia Quadrani - J.P. Morgan.

Alexia Quadrani - J.P. Morgan

My question is really on how [inaudible] advertising is trending in January; specifically, has the momentum in the national category that we saw in December continued as well as the improvement in classified and any comments on USA Today in January as well.

Gracia C. Martore

I think we certainly have seen some follow through from the good results we realized towards the end of the fourth quarter. In fact, we were looking at some numbers just in the last couple of days and what we had projected for the first quarter early in December, we’re anticipating that we will exceed those projections on the ad revenue side in our US community publishing side by a couple of percentage points, and it’s still obviously very early in the quarter, similarly with our television side feeling good about again the momentum we saw and looking at even a little bit better results than we were even anticipating in early December.

As I mentioned at NewsQuest, a little bit of bad weather there. I guess it snowed for about 3 weeks standing and so that’s had a little bit of an impact but I know that our management team there feels good about the way we’re going to end the quarter so I think overall we are seeing a continuation of the momentum that we saw in the fourth quarter.

Craig A. Dubow

Also Alexia, with respect to your question on USA Today, we are seeing that as well with some continued ups from December. We’re cautious. Obviously the world changed last January and as I said earlier, we’re very excited about what we are seeing and there is a follow through which we’re very, very pleased with. Again, we’re going to be cautious as we always are, but that’s where we are today.

Alexia Quadrani - J.P. Morgan

On your comments on USA Today, can you also update us I guess how circulation is trending? Any stabilization from the numbers we saw in the decline earlier last year?

Craig A. Dubow

We haven’t seen anything yet. The next set of numbers are not so I don’t have anything really new to add at this point.

Gracia C. Martore

I think that Dave [Hunkey] feels as though, assuming that the travel industry stabilizes here, that the numbers are probably going to be stabilizing from what we saw during the course of 2009. What we’re going to need to see is obviously some help on hotel, occupancy rates, and additional travel to really start moving those numbers upward.

Craig A. Dubow

The critical part was what the hotels from an occupancy standpoint were down and that was in the 50% range during the course of 2009 and as what we’re looking for, if we can certainly find a way that that lessens, we will certainly begin to see further improvement and that’s what we’re hoping for.


Your next question comes from John Janedis - Wells Fargo Securities.

John Janedis - Wells Fargo Securities

On the TV front, there are obviously a lot of moving pieces here with the SuperBowl last year on NBC as you mentioned, the Leno issue this year, some political potentially flowing in the first quarter. I’m assuming Olympics revenue is down versus ’06 but can you help us frame the underlying business or fundamentals, and then on the free cash flow front, can you talk about uses of cast this year? At some point would you reconsider a buy back as the ratio gets closer to around 2 times?

Craig A. Dubow

Let me start off with your question on the SuperBowl. We’re going to be down only because we have 6 versus 12 properties but we are anticipating certainly this could potentially be one of the highest watched games in a long, long time, so we are very positive there, but again, just because of the roughly half of the number of properties that we have, that will be down.

The Leno impact I think it’s obvious what has happened. We’ve talked about this since the show began in the 10:00 time period and I think with the decisions they’re making, we can further improve once the Olympics are over. Again, it’s a piecemeal in how they’re putting that together. They don’t fully have their programming line up put together as you know, and the way that they applied the cash, instead of development, it went to their bottom line or so they say.

When we take a look at political, I have to say this. Although as I commented earlier probably the bulk of this is going to go into the back half but when you take a look at it, we will have issue money going continuously through the year and 15 of the US Senate races will take place in 19 of our markets and when you take a look at the gubernatorial, 18 of our 19 markets will have opportunity so I am very enthusiastic and positive and certainly with the Supreme Court ruling a couple weeks ago now, there could also be some other directions that political or issue does come to the table.

Gracia C. Martore

On the free cash flow front, I think that we’ll continue to be focused on primarily paying down debt, certainly in the short to intermediate term. Also this gives us opportunities to look at additional investments as we did in late 2008 with the addition of the 10% of CareerBuilder and the acquisition of full ownership of Shop Local, both of which have been very strong moves for us on the investments front.

So I think it will be a balancing of looking at investment opportunities together with focus on paying down debt but we don’t rule anything out and we’ll just have to see how the year unfolds.

Craig A. Dubow

Just to amplify a little on that, I think the fourth quarter $235 million that we paid down, we have a strong commitment there. Yet what Gracia is talking about, we have not in any way slowed up our looking for strategic opportunities that can further enhance any one of our lines of business. Our hope is what we’re able to find will in fact be businesses that will in fact cross the entire company and that’s really the direction that we’re focusing on and I think with the $755 million pay down that we had this year, it does help and put us into a position that we can make other decisions as appropriate as we move forward. So that effort is going to continue at full speed.

John Janedis - Wells Fargo Securities

Is that corporate number a good run rate?

Gracia C. Martore

I’m just trying to think. It’s probably a little higher in the fourth quarter because of awarding stock options and the like so probably a little bit lower than that.


Your next question comes from Craig Huber – Access 342.

Craig Huber – Access 342

A point of clarification. You mentioned newsprint. What was the percent change please for average price in consumption for newsprint? My larger question is, McClatchy mentioned on their conference call last week that their newspaper advertising pricing in the fourth quarter was down they thought an average blend, 8 to 9% year-over-year. I was wondering what you thought yours was in the fourth quarter.

Also, along those lines, what was your circulation daily and Sunday’s circulation, excluding the USA Today in the fourth quarter down year-over-year?

Gracia C. Martore

Let me start with newsprint. The newsprint reduction in expense of over 50% was a combination of about 28% lower usage and about 34% lower pricing in the quarter. With respect to rates and pricing, I think we’ve chatted a bit about this in the past and I think that sort of blending that the folks at McClatchy indicated is probably not too far off the mark, perhaps a little higher than what we’re seeing. I’d say that on the print side, what we’re seeing is a little bit of firming on the rate side. I’d say on the digital side we’re seeing some firming plus maybe better actual rates on the digital side.

But overall I think what we’re trying to do is focus on putting together packages for advertises that really move the needle by utilizing all of our various platforms that we have.

Then on the circulation side, I think we’ll have Jeff get back to you with those specific numbers. I think the trend was a little bit better than the third quarter. I know that Bob Dickey indicated in December at UBS that we were spending additional dollars in that area on start pressure, particularly in those days that matter a great deal to advertisers such as Sunday and I think he reported that there were several newspapers where our Sunday circulation actually was above 2008 circulation, so I feel pretty good about the progress and moving the needle on that circulation side.


Your next question comes from Edward Atorino – Benchmark.

Edward Atorino – Benchmark

On interest expense, a little bit higher than the fourth quarter I thought. I guess that’s seasonal. What’s sort of what the new debt level just multiply the gross by the interest expense, is that where they get it?

Gracia C. Martore

I think there’s a couple of factors. You may recall in the fourth quarter that we did do $500 million of fixed rate financings at the very beginning of the quarter so that would have replaced borrowings under our revolving credit.

Edward Atorino – Benchmark

What were the two interest rates involved? The revolver was low I think, right?

Gracia C. Martore

The revolving credit agreement is in the mid 2% range.

Edward Atorino – Benchmark

New debt is what, 5 and change?

Gracia C. Martore

Our overall cost of debt in the fourth quarter was 5%. [inaudible] fixed as well as the floating components and going forward I think obviously you’re going to have, it’s not a simple question to answer because you’re going to have clearly debt reduction but also part of it’s going to depend on your interest rate view for the remainder of the year, and then there’s also the possibility of future capital market actions, though we don’t have any firm plans right at this moment. So there’s a variety of pieces and we’ll just have to keep updating you as the quarter progresses.


Your next question comes from James Goss - Barrington Research.

James Goss - Barrington Research

One question relates to the charges you took in the fourth quarter. Will that add an upward bias to certain of the margins, in particular the digital area going into the year as sometimes takes place when write downs take place? Will it affect the spread of profitability for digital in particular over the four quarters?

Gracia C. Martore

The only thing it will impact with regard to the digital aspect of it is amortization expense so from a cash flow perspective there won’t be any real difference on the cash flow margins on the digital side of it. Obviously on the income side, amortization expense will be a little bit lower so you would see the benefit of that in the operating income line.

James Goss - Barrington Research

With the e-readers development, I think we’ve talked about it, are you coming up with a business model that you think might work that will involve both subscription fees and advertising or is it going to be heavily weighted toward just subscription fee for the time being and now we have some push back with some of the book sellers as well. How do you think that works out?

Craig A. Dubow

Jack Williams on our team from the digital side is working and really taking some hard looks. I think it’s a little early yet. I understand some of the changes in the book pricing this morning. There’s quite a bit of volatility in that area. But we are continuing to study this and I think at a point here the market place itself will decide and it will settle down but our goal as we have said on numerous occasions, we want to be agnostic and we’re going to move to the kind of platforms that are going to most be desired by the consumer.

So we’re trying to tie the research right now to then what we see from the developments and again, the goal is to be across all platforms at the appropriate point.

Gracia C. Martore

The benefit of the breadth of Gannett’s portfolio of properties is that we can do some experimenting and some piloting of various business models without interrupting the entire business, so I think what you’re going to see us do over the next few quarters is to try a few different business models out and see what the consumer tells us that they want to do or not do as the case may be and then we’ll form our thought process as Craig said on this area from what we hear from the consumers and the results of those pilots.

Craig A. Dubow

It’s a particularly large area of interest for us. I think with the take up certainly from the Kindle and what we’ve seen there, the opportunity for some of the other e-readers and now with the new iPad that just came out, we’re going to watch it very closely and really determine the exposure that we will have based on the take up rate on this new device and that really beginning in March and April so there’s a little bit of room in here yet but as Gracia said, the real opportunity we have is just the amount of testing that we have going on so that we can best read what the consumer appetite is and build hopefully the most appropriate business model that will allow us to do what we need to do plus provide the consumer to serve that appetite in the best way possible.

James Goss - Barrington Research

Is the iPad a game changer, especially starting at a $500 price point, in a positive direction or does the Apple close guard and their method of doing business a potential negative for you?

Craig A. Dubow

I probably argue the closed garden because I think in particular as you look at the book side, and I only know what Jobs has announced, and that would be that’s going to be an open opportunity for pricing by the publisher, and I think that’s what this weekend is really caused the big consternation if you will with what’s going on with Amazon. I think it’s too early to tell yet. The device itself, I have not seen it, but from what I have read and understand, is again, another beautiful device. It’s just somewhere between that smartphone and a full computer and when you have that, again it’s going to be the marketplace that decides.

I think that the big surprise, if you will, the low end of this thing being I that $499 or less range, was quite a surprise. Typically what we can look at from history is after the first six months there will be another price decline. I don’t know if that’s going to be the case but if it is, I think it would then certainly become a more main line opportunity and certainly as you get into that kind of situation, I think we’re going to very quickly know what direction that can point us and I think at this point, because all of the old apps – I shouldn’t say old, the previously written ones – for the iPhone itself will certainly work on this but I think a lot of format changes will help make it a far better user experience as they reformat them for the new device.

So we’re taking a very, very close look at this and you never want to suggest or rule out anything that Apple would put out and again it’s going to be the marketplace that decides and as I said, we will be agnostic to the platform but when it comes we’ll be ready.


Your next question comes from Michael Kupinski - Noble Financial Group.

Michael Kupinski - Noble Financial Group

Can you give us an idea on the amount of permanent costs that you’ve taken out of the business in 2009 and how they sell in the quarters throughout the year, if you could possibly do that. When will you begin cycling the majority of those cost cuts?

Gracia C. Martore

Obviously in the first and second and third quarters we would have realized more of a benefit from the actions that we took from mid-2008 to the end of 2008 so by the fourth quarter we would obviously have cycled some of those activities. We also had as you may recall furloughs in both the first and second quarters of last year. We announced furloughs for the first quarter this year in some areas so the impact will be a smaller impact in the first quarter of 2010 then it was in the first quarter of 2009.

With regard to future furloughs, again, those are not things that you want to do, we’ll just have to see how the economy is faring and what business conditions are as we get closer to the second quarter.

On the newsprint side, we would have gotten more benefit from newsprint in the third and fourth quarters then we got in the first and second quarters. We expect to continue to have favorable newsprint comparisons in both the first and the second quarters at least of 2010.

So there’s a variety of pieces at work here that go in a variety of different directions and then of course at Career Builders as we mentioned earlier, they took a number of actions in the fourth quarter of 2008 that we would have cycled in part in 2009 but I think as a general philosophical statement, we are committed here at Gannett as we have said for the last few years of making sure that we continue to size our business appropriately both from an expense and looking at where the revenue opportunity is, so we’ll continue to do that.

We’re pleased though that the momentum that we got out of the fourth quarter was very much on the revenue side and that’s really the most important thing that we’re going to be focused on in 2010 while never losing sight of what we need to do on the expense side.

Michael Kupinski - Noble Financial Group

As a follow up, if you stripped out just the permanent cost in the newspaper side, I mean what was the dollar amount that you stripped out from 2008 to 2009? Just the permanent cost, not the furloughs and so forth, just the permanent cost.

Gracia C. Martore

Obviously you can see our publishing segment numbers from quarter to quarter if we had $45 million in total of furloughs in the first half of 2009, most of that would have been in the publishing segment, so those would not be permanent reductions. On the newsprint side, clearly some of that is permanent vis a vi the efficiency efforts and other things that we have done. But some of that reflects ad revenues and circulation trends and as those continue to improve over the course of 2010, those numbers will adjust a little bit as well and then we’ll have to see how pricing goes, but what I would say to you is the vast majority of our expense reductions are of a permanent nature and we will continue to look at opportunities to further consolidate and restructure in an appropriate, strategic way while maintaining the quality of our operations.

Michael Kupinski - Noble Financial Group

Obviously there are others in discussions with Google about getting paid for featuring news on their platform and so forth. I was just wondering if you can just get us up to speed on what Gannett is exploring, if you are exploring anything with Google or in discussions with them, and what might be some revenue implications for the company.

Craig A. Dubow

As always, we are always in discussions across the board. We have not come to any final conclusions. As I mentioned earlier, we want to remain as agnostic as possible but those conversations are going on as well across the board so it’s hard for me to say at this point anything specific with respect to that but just know that part of the strategy that we have and you know it very well is that we are going to look across each opportunity that’s out there, be it any of the portals or certainly from e-books and any other tethered or untethered opportunity as well. So it’s too early yet for us to share that at this point.


Your next question comes from Scott Merchikitis - Goldman Sachs.

Scott Merchikitis - Goldman Sachs

The first question is mechanical in nature. You said you have a leverage ratio of 2.63 times? I’m using a debt figure of $3.06 billion that you gave and it gives me an EBITDA of somewhere around $1.163 billion? That’s different from the $1.1 billion in your press release. I’m just trying to figure out what am I missing here, the $60 odd million?

Gracia C. Martore

There’s several adjustments that we make under the terms of our revolving credit agreements. One of the things you might be missing would be stock compensation expense which would be, we would add back pension… Actually pension expense which we only are required to deduct actual cash pension contributions rather than just the non-cash expense, so there would be an add back of pension expense and there’s a couple of other items like that, that are add backs, that are non-cash items that wouldn’t necessarily appear in the operating cash flow line but would be add backs.

Scott Merchikitis - Goldman Sachs

With regards to the bond markets, you touched on this very briefly. Yields have improved since you did your last deal and you still have a considerable amount of debt coming due in 2011. Can you just give us your view on what you think about the current yields as they exist today and the prospects of terming out some of your bank debt?

Gracia C. Martore

I think that what we proved back in September and with the continued improvement in the debt markets is that we have free access to that as a place to go and obtain additional liquidity. That being said it’s something that we carefully look at and obviously our rates have improved even since then so it is something that’s on our radar screen potentially accessing a little bit more in those markets, but it’s something that we’re going to continue to look at and weigh within the other things that are going on that front.

Scott Merchikitis - Goldman Sachs

You mentioned the pension expense in that other answer, what about the pension deficit? Do you have an update on where that stands and any planned contributions for 2010?

Gracia C. Martore

We had a very, very strong investment return in our pension plan in 2009. The discount rate was I guess, will be a little bit lower which goes a little bit in the opposite direction but some preliminary looks at, just looking at our US funding, we saw a very strong improvement over year end 2008. I think our funding in our main pension plans increased or got better by about $150 million. We have a [SURP] that was in that entire number last year. Again, that’s an unfunded plan, it’s kind of a pay as you go plan.

But overall on the domestic side, improvement of around $150 million in our funding status. We have no mandatory contributions for 2010 except some small ones in the UK. We may look at doing something on the voluntary side but it would not be of a significant scope.

Gracia C. Martore

I think we’re all set. We appreciate all of you joining us this morning and if you have any additional questions, please feel free to give either Jeff a call at 703-854-6917 or me at 6918.

Thank you very much for joining us. Have a great day.


That concludes today’s conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!