Gatehouse Media Q3 2007 Earnings Call Transcript

Nov.14.07 | About: REX Gold (GHS)

Gatehouse Media, Inc.(NYSEARCA:GHS)

Q32007 Earnings Call

November 14, 2007 10:00 am ET

Executives

FrancieNagy – Investor Relations

MichaelE. Reed – Chief Executive Officer

MarkR. Thompson – Chief Financial Officer

Analysts

JoeArns, CFA – Bank of America

AlexiaQuadrani – Bear Stearns

PeterAppert – Goldman Sachs

JohnJanedis - Wachovia

Operator

Please standby. We’re about to begin.

Good day,everyone, and welcome to this conference call with Gatehouse Media regardingthe company’s third quarter financial results. Today’s call is being recorded.I would now like to turn the call over to Ms. Francie Nagy. Please go ahead,Ma’am.

Francie Nagy

Thank you,Dana, and good morning, everyone. I would like to welcome all of you to thethird quarter 2007 earnings call for Gatehouse Media. Joining us today are MikeReid, our Chief Executive Officer, and Mark Thompson, our Chief FinancialOfficer.

Before I turnthe call over to Mike, as Dana mentioned, this call is being recorded and thereplay number 888-203-1112 from within the US or 719-457-0820 can be dialledfor the replay. Please reference access code 9055164. This call will also beavailable via webcast and our website is www.gatehousemedia.com.

I would alsolike to point out that statements today which are not historical facts may bedeemed forward-looking statements. Actual results may differ materially fromthe estimates or expectations expect in those statements. Certain of thefactors, there are certain factors that could cause actual results to differmaterially from Gatehouse’s expectations are detailed in our SEC report. Idirect you to Gatehouse’s earnings release for the full forward-lookingstatement legend.

During thiscall we will also use certain non-GAAP financial measures, including EBIDTA, asadjusted EBIDTA, and leverage-free cash flow. These measures should not beconsidered an alternative to any other measure of performance or liquidityderived in accordance with GAAP. A table reconciling that loss/income to thesemeasures, as well as a description of how Gatehouse uses and calculates thesemeasures, immediately follows the financial statements included the pressrelease that Gatehouse filed last night.

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

Michael E. Reed

Thanks,Francie. Good morning and welcome, everyone. Thanks for joining us on our thirdquarter earnings call.

Advertisingmarkets, particularly the classified real estate and automotive categories,were very challenging in the third quarter. Gatehouse, however, showedresiliency and produced overall good results. EBIDTA for Gatehouse in the thirdquarter was $40.1 million, down $500,000 or 1.1% versus the previous year onthe same-store sales basis. However, third quarter EBIDTA excluding corporatecosts was $43.3 million, up 1.4% over the previous year on the same-storebasis.

Totalrevenues for the third quarter were $171.8 million, down only 1.7% from thethird quarter a year ago on the same-store sales basis. For the nine-month endon September 30th, 2007, total revenues were $434.9 million, downonly 9/10th of 1% on a same-store sales basis versus the same periodlast year.

On October 15thwe paid our third quarter dividend of $0.40 per share. And I’m pleased toreport that yesterday our board approved our fourth quarter dividends of $0.40per share, which will be paid on January 15th, 2008.

We are halfway through the fourth quarter now and are experiencing similar stability inboth revenues and cash flows this quarter. It is also important to note thatthe fourth quarter is seasonally much stronger than the third quarter.

Given thenumber of acquisitions that we have completed in the last year it can bedifficult to follow what the company’s true pro forma cash flow generation is.There are a lot of moving parts, but here is a simple way to think about it andthe way I think about it. Pro forma revenues for the full 12-month period endedSeptember 30th, 2007, for all Gatehouse assets, including Morris –which are all the assets supported by our existing capital structure – wouldhave been $765 million for the 12-month period. Assuming an EBIDTA margin,which is very achievable, of 25% results of pro forma EBIDTA of $191 million.Our interest expense, which is fully swapped out at a fixed rate of 6.94% onour $1.195 billion of debt results in interest expense being a little bit lessthan $83 million, but fixed. Capex is about $8 million and Gatehouse is not ataxpayer.

This resultsin lever-free cash flow in excess of $100 million versus our current annualdividend of $93 million. And this excludes synergy to approximately $5 millionto $7 million that we expect to realize as part of the acquisition for Morris,Copley, and Gannett. On a per share basis, this results in a lever-free cashflow per share of approximately $1.80 versus our dividend of $1.60.

To put thatin context, at our current stock price of $11.75 we are trading at 13.6%dividend yield or 6.5 times equity value to free cash flow. In my view, giventhe dividend, the dividend growth we have delivered since the IPO of 25%, thisseems very low.

Now let meturn and discuss the third quarter performance in more detail. From an organicstandpoint we continue to make good progress on our revenue growth strategy,some of which includes implementing sales initiatives, contests, and salestraining, launching new niche publications in magazines in the various marketswe serve, and most importantly, growing our on-line business. Since our lastcall we have hired 10 internet-only sales reps who are marketing to majoraccounts in all of our markets and training in-market sales people. We havealso rolled out Yahoo! Hot Jobs in several of our larger markets and anticipatehaving it rolled out in all of our markets by year end.

Early resultsfrom Hot Jobs have been very encouraging, including over $400,000 in newrevenue in October. On-line revenues at those properties owned by GatehouseMedia on January 1st, 2007, are up 42.3% over the same period in2006. We have grown our on-line business from essentially zero a year and ahalf ago to more than $20 million this year through organic methods andacquisition, and we see tremendous potential for future growth in thiscategory.

On the costside, we’ve made good progress in the third quarter integrating theacquisitions we completed earlier this year. We closed six printing facilitiesand merged those operations into six Gatehouse cluster print sites, savingapproximately $2 million in annual operating expenses.

We alsocompleted the outsourcing of printing at our two larger dailies inMassachusetts in October, which will save another $1 million in operatingexpenses. This has also helped us avoid a potentially large capex issue thatexisted up there that we would have had to deal with over the next three tofive years. And it creates more capacity for colour revenue sale opportunitiesfor our sales force in Massachusetts. Finally, it also frees up some valuablereal estate we intend to monetize, proceeds of which could be approximately $15million.

We have a lotof great things going on in Gatehouse right now to help us grow organically andthe cyclical classified trends are masking this. For example, local ad dollars inthe second quarter, third quarter were up over the previous year excludingclassifieds. On-line revenues at the properties we have owned for years I justmentioned were up 42.3%. Circulation revenues on a same-store sales basis wereup 3.8%. Our paid circulation was only down 8/10ths of 1% in Q3. We believe thecyclical declines in classified will eventually turn and the remainder of ourinitiatives will then show nice organic growth for our company.

From anacquisition standpoint in the third quarter, in September we closed on the saleof the Herald Dispatch in Huntington, West Virginia, at a very attractivevaluation and received $77 million in net after-tax proceeds. On October 23rdwe announced a transaction to acquire 37 small daily and weekly publicationsfrom Morris Publishing Company for $115 million. We expect these assets togenerate EBIDTA of $14 million in 2008 and an additional $5 million to $7million of organic cash flow growth exists over the next 24 months as weimprove margins in those businesses and realize synergies. It is very importantto note also that the capital structure we have in place today supports thisacquisition and we do not require any new permanent debtor equity.

Including thepending Morris transaction, which we anticipate closing near the end ofNovember, we will have completed $1.1 billion of acquisitions in 2007, which iswell in excess of our previously discussed annual expectations. Acquisitionsthis year have been extremely productive for us. As mentioned, we have invested$1.1 billion mainly through six larger acquisitions this year at an averageEBIDTA multiple of 10.4 times. And we expect to grow cash flow at theseacquisitions by 14% in the coming year, which equates to an EBIDTA multiple of9.1 times in 2008.

It is alsoimportant to note that we do not need any additional capital, nor do we need tomake any acquisitions to grow cash flow in 2008 because of the aforementioneditems. We have significant synergy and margin improvement opportunities thatexist based on the acquisitions that we have done this year and our near-termfocus is on operational excellence and integration.

I want toshare a few thoughts I have with you on the advertising market and thenewspaper industry in general, and why I believe Gatehouse is outperforming inthe industry and will continue to outperform.

Over the last12 months the broader newspaper industry has posted revenue and cash flowdecline sometimes exceeding 5% in each quarter. Often this has been related togeographic exposure to some of the more challenged real estate markets, such asCalifornia, Florida, Nevada, and Arizona, as well as exposure to the nationaland classified categories. I believe that there are two main reasons forGatehouse’s overall good performance in the third quarter despite thechallenging advertising climate.

First of all,Gatehouse has less exposure to classified advertising as a percentage of totalrevenue when compared to the larger market newspapers. In the third quarter,23.5% of Gatehouse’s revenues were generated by classified ads, as compared to30+% for the larger market newspaper companies. It’s also worthy to note,national revenues make up less than 5%, only about 4% of Gatehouse’s revenuesversus in the teens or higher for the industry at large.

I alsobelieve that the current classified weakness is cyclical not secular, and thatis a function of local economies. It is not that our audience is declining;readers and advertisers are still using our newspapers.

The secondreason, Gatehouse’s portfolio of 475 publications serving hundreds of thousandsof local advertisers and 335 markets across 19 states lends to tremendousstability, both in terms of diversity as well as geography. We do not havesignificant exposure to any one market or any one advertiser. Also, our contentis truly unique, generating an engaged audience and providing a compellingproposition for advertisers who seek local consumers.

I’d like toconclude, before I turn it over to our CFO Mark Thompson, with these thoughts.Advertising markets overall are very challenging. However, Gatehouse’s locallyoriented diverse business model shields us from many of those challenges andpositions us to grow in the future.

I believethat the current revenue weaknesses I just mentioned, particularly inclassifieds, is cyclical in nature and when the real estate and automotivecategories improve we are well positioned to recapture those revenues in ourmarkets.

We havestrong local franchises with high audience penetration rates and audiencenumbers that are growing due to our new product launches and our on-lineproducts. We serve those markets with a combination of good print and on-lineproducts which deliver superior results for our local advertisers.

It’s both anexciting and challenging time for our business and I am very enthusiastic aboutthe future prospects for Gatehouse.

With that, Iwill turn things over to Mark for a detailed review of our financials. Mark?

Mark R. Thompson

Thanks, Mike.Third quarter total ads adjusted revenues were $171.8 million, down 1.7% on asame-store sales basis from the third quarter of 2006. We have provided a tablein our press release which shows how we arrive at total as-adjusted revenue,which is top line $163.4 million, Huntington $4.3 million, and SureWest of $4.1million. This was generated by our capital structure and expense structureexisting during the quarter. Thinking ahead, we anticipate revenue from theproperties we’re acquiring from Morris will more than replace those from theHuntington disposition.

Third quarteras-adjusted advertising revenues were $123.5 million. Local revenues on asame-store sales basis were up $150,000 or 0.2% in the third quarter, whileclassifieds were down $3.6 million or 8.4%.

Within theclassified category weakness was primarily related to the auto category acrossthe entire company and real estate in certain markets, such as Massachusetts.

Nationaladvertising, a very small category for us, was down $700,000 or 14.1%.

Total on-linerevenues, which are included in advertising revenues, were $4.4 million for Q32007, up 20.3% on a same-store sales basis, excluding the on-line revenues fromour recently acquired properties from Gannett and Copley. As we aretransitioning them off of their current platforms onto ours, our on-line salesrevenues were up 42.3%.

Third quartercirculation revenues were $34.9 million, up $1.3 million or 3.8% on asame-store sales basis. Our circulation revenues same-store gains are comingfrom price increases. We’ve put in price increases both in home delivery aswell as on some single-copy rack prices.

Paidcirculation volumes continue to trend down slightly. Company-wide, we are down0.8% at September 30th, 2007, versus 2006.

Interestexpense for the quarter was $22.3 million, which is up $9.1 million from thecomparable period. This increase results from our increased borrowingsprimarily to fund our $1 billion of acquisitions uncompleted and to becompleted this year.

Included inthe Q3 interest expense is $1.3 million related to the bridge loan, which waspaid off in July and is not an ongoing part of our interest costs. All of ourdebt of $1.195 billion is hedged and therefore ongoing interest costsassociated with this debt are fixed. Our blended interest rate is 6.937%, makingour ongoing permanent quarterly interest costs about $20.7 million.

As-adjustedEBIDTA was $40.1 million for the quarter. We have provided a table in our pressrelease that shows how we arrived at as-adjusted EBIDTA which reconciles twonumbers of $5.9 million. Within that $5.9 million of non-cash comp andreorganization, integration and reorganization costs is $1 million of 123Rexpense and the balance being primarily press plant closing costs and severancecosts associated with that.

On thesame-store basis, as-adjusted EBIDTA of $40.1 million was down $0.5 milliondriven by $1 million increase in corporate costs. As-adjusted EBIDTA excludingcorporate costs was $43.3 million and this was up 1.4% on a same-store salesbasis over the previous year.

We ended thequarter with $1.2 billion of debt. Net capital expenditures for the quarterwere $2 million. In the third quarter we also completed our follow-on offeringof 18.7 million shares for net proceeds of approximately $330 million. We used$300 million of these proceeds to extinguish a bridge facility we incurred toconsummate the Gannett and Copley transactions and to bring our long-term debtto its current level. We currently have no barrings under our $30 millionrevolver and cash on the balance sheet at September 30th was $109million.

At the end ofthe third quarter we had 57.873 million shares outstanding, of which 1.073million were restricted stock grants.

With that,I’d like to open up the line for questions.

Question-and-Answer Session

Operator

Thank you,Sir. Today’s question and answer session will be conducted electronically.(Operator Instructions). And we’ll take our first question from John Janedis ofWachovia.

John Janedis – Wachovia

Hi. Thankyou. Good morning.

Michael E. Reed

Morning,John.

John Janedis – Wachovia

Morning,Mike. Two questions for you. One, can you just start talking about the Bostonmarket? It’s clearly been weak for more than a year now and as you talk toadvertisers heading into ’08 is there any reason to feel more positive giventhe foreclosure shatter of that market and what kind of ripple effect are youseeing at this point? And then I’ve got a follow up. Thanks.

Michael E. Reed

John, noquestion Boston has been our weakest market this year and it’s primarily drivenby the downturn in the housing environment and the ancillary effects thatthat’s had. However, I think there’s a couple encouraging signs in Boston.Number one is, real estate revenues have not weakened in the last severalmonths versus where they were in the second quarter and the first quarter wherewe saw continuing weakening trends. So from that standpoint, real estaterevenues, although they’re down, are not continuing to worsen.

I think asecond thing that gives us a lot of good thoughts about the future is we havecompletely right-sized the cost basis in the Boston and Massachusetts clusterin general by merging those businesses all together. We believe the revenue,classified revenue declines, as I mentioned in my remarks, are cyclical innature and those will return. And when they do return we’re going to havetremendous growth in Boston because the cost basis is so much different theretoday and so much lower.

So the trendsseem to have stabilized. They haven’t worsened in recent months and we havegreat prospects for cash flow growth when those classified revenues returnbecause of the reduced cost structure of the businesses.

John Janedis – Wachovia

On the costside, is there more to do now or do you feel as though you’ve done all that youcan do given the revenue base you’re expecting.

Michael E. Reed

No, John, Ithink there is more to do. I think the outsourcing of the projects we justcompleted in October results in another million dollars of expense savings andthat’s yet to be realized because it’s just completed. We also will have, wealso have just recently announced the change in some distribution from internalindependent contractors to a third party company that will be able to do itcheaper that will result in several hundred thousand dollars of savings.

So we arecontinuing to look at how we can do things more efficiently in that cluster,taking advantage of our size and scale and third party partnershippossibilities in the market. So we have some more synergies coming on the tablein the fourth quarter that will be realized over the next year and we continueto look for others.

John Janedis – Wachovia

Okay. Andjust going to back to the real estate comment and advertisers. When you talk tothem, are they, do they sound more positive? Is there any kind of lag effectmeaning as real estates start to flatten, if you will, then other categorieswill weaken before they get better? Can you give us an idea of how you thinkabout it?

Michael E. Reed

We don’t,well, we think about it from this standpoint. We just need houses to sell. Itdoesn’t matter where properties price, transaction-based business. Wheninventories start to come down and houses are moving and transactions areoccurring, our revenues will recover. That’s the way we think about it upthere.

Right now, weare not seeing inventories worsen, per se, but we’re not seeing them come down.So it’s really hard to kind of project when the revenue cycle will start torecover or come back on the upswing. But as I said, we’re not seeing furtherdeclines and inventories seem to be somewhat stable over the last couplemonths.

John Janedis – Wachovia

And this is,thanks, Mike. Can you tell us how you think about Yahoo! and Google given thereference to expand and compete in the local marketplace, and under whatcircumstances do you or maybe the industry even view them as competitors?

Michael E. Reed

Sure. John, Iget that question a lot. Especially as it pertains to Google and Yahoo!. Wedon’t do them as competitors. We do them as partners. And here’s actually alittle, here’s how I think about it. Over the years, when I think about ourlocal markets, we’ve built strong relationships with the local advertisers andthose relationships have been building for decades and a century, in manycases. They’re advertising messages, you know, historically have alwaysappeared in our printed products. And we’re now leveraging that relationshipand delivering that message to our readers both in print and on-line,delivering, making a stronger platform available for our advertisers.

We havecoveted feet on the street, sales forces in each of our small markets. And theymaintain these strong relationships with our customers. That’s something theseother companies don’t have. In most cases our sales force is the mostrecognized and well-known in the small market. ‘

As I said, Ireally think about Google and Yahoo! as partners with technology and expertisethat we could never develop internally here at Gatehouse. So working with thesecompanies to leverage their technology and some of their products can onlystrengthen our local franchises by giving our businesses and, more importantly,our sales reps more products to sell and better technology to utilize. This, Ithink, will allow us to do a better job of meeting the needs of our local advertisersand no questions what a rapidly, well, it’s a rapidly changing world. Makingtheir businesses stronger are advertisers. That will only strengthen ourrelationship.

So I thinkour partnerships with Google and Yahoo! will actually strengthen us in oursmall markets. The real overall key to me is we have unique valuable localcontent that nobody else has. We deliver a very defined, mass, local audiencethat nobody else delivers. And we have vibrant local sales forces with strongrelationships with these local advertisers. If we protect and improve on thiswe’ll continue to be the local advertiser’s choice to get their messages out.

John Janedis – Wachovia

Okay, Mike,just to follow up. Sorry to take so much time. But over time, do you think thatthe Yahoo!s and the Googles of the world are looking to disenfranchise you guysin terms of having an e-com channel and just going direct?

Michael E. Reed

John, that’sa good question. You know, there’s no question that they would like to gainmore share of the local ad dollars. And they don’t have what we have in thesmall markets and the barriers to entry remain extremely strong. So I believeour business continues to be strong and actually grows as long as those, wekeep those barriers to entry high and we continue to put out a very compelling,unique product, both print and on-line. And as long as we continue to serve ourlocal advertisers needs with our local sales force we’ll be the premier choicefor advertisers in those markets.

John Janedis – Wachovia

Okay. Thankyou.

Operator

And we’lltake our next question from Joe Arns of Bank of America.

Joe Arns, CFA – Bank of America

Good morning.You mentioned printing and distribution outsourcing and consolidation. Arethere other functions you could look at to outsource or consolidate in aproduction arena, such as ad production or layout or copy editing?

Next questionis, will the recent shut down of some of the plants have a negative impact oncommercial printing revenues?

And thenfinally, what was the growth of the portfolio if you exclude Massachusetts inthe third quarter? Thanks.

Michael E. Reed

Okay. Thanks,Joe. First question ... Let me take the third one first.

Joe Arns, CFA – Bank of America

Okay.

Michael E. Reed

That’s thebest one. Actually, the Massachusetts portfolio we had flat growth. Our overalltotal revenues were down $3 million for the quarter and $2.8 million of thatwas tied to Massachusetts. So the small market thesis, which we believe veryheavily in, showed very good and promising signs in the third quarter with no,really no revenue declines across the portfolio.

Now, back tothe part of your question regarding outsourcing in Massachusetts. Yes, thereare other opportunities we can look at and you named some of them. Composingand copy editing and call centers and things of that nature. And those arethings that we’re reviewing and paying very close attention to. And there arethings that other businesses are starting to look at and starting to do aswell. So we’re watching how that’s working for other businesses that are doingit, as well as evaluating those possibilities internally.

And then, onthe commercial printing question, Joe, we were very careful to select how weaddressed the print plant closures and how it impacted commercial printing. Thecommercial printing, there’s no negative impact on commercial printing becauseof the press closures. We were able to move the commercial print to what isalways a better print site at the cluster sites or there was virtually noprinting, commercial printing at the site we shut down.

Joe Arns, CFA – Bank of America

Great. Thanksso much.

Michael E. Reed

Thank you.

Operator

And onceagain, if you’d like to signal to ask a question, please press *1. We’ll gonext to Alexia Quadrani of Bear Stearns.

Alexia Quadrani – Bear Stearns

Thank you. Acouple of questions. First, I apologize if I missed this, but could you give usthe pro forma growth in classified by segment, help wanted, auto, and realestate?

And thensecond question is, I know you mentioned that the local business was healthy inthe quarter. Was it positive or was it negative in the regions where you sawparticular weakness in classifieds, such as Massachusetts?

Michael E. Reed

I’ll take thesecond part of that. Well, the first part of that, Alexia, is that we don’t,you didn’t miss it, we do not release the detailed revenue lines within theclassified category. We have several very small rural market newspapers, whichis a chunk of our portfolio that historically have never tracked the individualclassified categories and only track classified in total. So we do not releasethe real estate, automotive, and help wanted categories company wideindividually.

Alexia Quadrani – Bear Stearns

Could yougive us any colour just on help wanted in general? I think you mentioned autoand real estate, but I didn’t hear anything on help wanted.

Michael E. Reed

Yeah, helpwanted, auto was kind of the weakest category or weakest trend we had when youlook at the entire company across the country. Real estate, outside of ourMassachusetts marketplace and a couple other spotty places, was relativelystable in the third quarter. Obviously weak in Massachusetts. Automotive wasweak, as I said, across the country. And then help wanted was relatively stable,as well, outside of a few marketplaces like Massachusetts. So we saw quite abit of stability in help wanted as well.

The areaswhere we had the biggest classified declines, the second part of your question,Massachusetts and Chicago in particular, we did see slight local revenuedeclines in those markets as well. A by-product of some of the housing slowdown and some pull back in some of the other advertising categories. Butoverall, across the company, our local revenues were up 2/10ths of 1%. So thedeclines we saw in those markets were relatively small and they were more thanoffset by the gains we had in the rest of the gatehouse portfolio.

Alexia Quadrani – Bear Stearns

And anycolour on how, any colour on how October has tracked following the third quarter?

Michael E. Reed

October sawtracks pretty similar to Q3. Very stable revenues, very stable cash flows. Andas I mentioned in my remarks, Q4 is seasonally a much stronger quarter than Q3,so we would expect higher revenue in EBIDTA numbers in Q4.

Alexia Quadrani – Bear Stearns

Okay. Thankyou.

Michael E. Reed

Thank you,Alexia.

Operator

And we’lltake our final question today from Peter Appert of Goldman Sachs.

Peter Appert – Goldman Sachs

Hey, Mike,just additionally on the revenue side. Beyond Massachusetts, do you see muchvariance in terms of the revenue performance in your different geographies?

Michael E. Reed

We don’t,Peter. It’s pretty much outside of Boston. We have a few weeklies in thesuburbs of Chicago, but getting outside of that we’re pretty much ruralAmerica, whether it’s upstate New York, central Illinois, western Michigan, youknow, Missouri. And we see pretty much similar results. Lots of stability,small cash, small revenue gains.

Peter Appert – Goldman Sachs

Okay. So evenon the retail side you’re right, despite variances I think we see in retailrevenue trends for the retailers, you don’t see that in terms of your numbers.

Michael E. Reed

No, we don’t.

Peter Appert – Goldman Sachs

Yeah. Howabout on the Hot Jobs thing, Mike, can you quantify how big you think that couldbe next year?

Michael E. Reed

Yes. Yes,Peter. We think, we think $8 million to $10 million in on-line revenue from HotJobs.

Peter Appert – Goldman Sachs

Okay. Andhow, can you give me a base of roughly what your total help wanted revenueslook like?

Michael E. Reed

Yeah, thatwould be gains of approximately 100% to 110%. So our help wanted base right nowon-line is a little bit, in the $4 million-ish type range, $4.5 million.

Peter Appert – Goldman Sachs

Okay. Andthen, I’m not sure if you addressed this when you were talking to JohnnyJanedis’ question, but on the plant consolidation issue, do you think there’smore to come on that front? There are additional plant consolidations you guyscould do over the next year?

Michael E. Reed

Yes, we do.There are still press plant consolidations we have in the works resulting fromthe acquisitions we did with Copley and Gannett and merging them with LegacyGatehouse properties, and then after we acquire Morris there will be additionalpress consolidation projects that we’ll have an opportunity to take advantageof.

Peter Appert – Goldman Sachs

And then lastthing, the, you know, Gannett has a reputation for running real tightoperations. What have you found in terms of your ability to actually squeezeincremental margin out of those properties specifically?

Michael E. Reed

Well, thethree properties we’ve kept from Gannett, each have unique characteristics. TheNorwich actually didn’t run with extremely high margins. Norwich ran with 20%margins. And we’ve been able to increase those margins. But more importantly,Norwich is in a fantastic market where the two large casinos there, the MohicanSun and Foxwoods, are growing like wildfire and that’s resulting in above-industryaverage top and bottom line growth in the Norwich cluster. So we still have, wehave room to improve margins there and also in a paper that’s grown, really, atfar above industry norms right now.

In the Uticamarketplace the EBIDTA didn’t, the EBIDTA margins didn’t have upside, you’reright. Gannett ran that pretty tightly. But what we have found is there was alack of focus on revenue, a lack of focus on new niche products to beimplemented. Maybe the market was too small for them to pay attention to. Butwe’ve taken a market in Utica that had a few years of revenue and cash flowdeclines and have now turned that positive where we’re seeing in Utica for thelast several months revenue and EBIDTA increases. And in fact, talking to thepublisher there yesterday, October was their strongest month of the year withgood gains over the previous years. So we haven’t changed the margin structurein Utica, but we’ve applied revenue strategies inside Gatehouse and turned adeclining property into a slightly growing property.

And finally,in Rockford the margins there are also extremely high. We had a newspaper rightdown the road about 30 miles west ofRockford where we folded the printing plant into Rockford and the real upsidefor Gatehouse in that particular part of the acquisition comes from the mergerof the press plant down the road in Freeport in the Rockford. In addition, theRockford facility had just had completed in the fourth quarter of ’06 a $27million press project completed by Gannett. So a brand new press and expandedbuilding that we’re now taking advantage of to grow commercial printing, whichis helping to grow the commercial printing line, which is showing organicgrowth this year in every quarter.

So each ofthose assets, while we’re not necessarily improving margins because they weretightly rung, all have great features that will add to Gatehouse’s cash flowsin the coming year.

Peter Appert – Goldman Sachs

Great.Thanks, Mike.

Mark R. Thompson

Peter, youmight remember from the last call, between Copley and Gannett they spent $65million in capex over three years. The facilities we acquired are very good.

Peter Appert – Goldman Sachs

Right.

Mark R. Thompson

And we’llbenefit from that.

Peter Appert – Goldman Sachs

Thank you,gentlemen.

Michael E. Reed

Thanks,Peter.

Operator

And that concludesour question and answer session. I’d like to turn the call back over to FrancieNagy.

Francie Nagy

Great. Thankyou all for dialling in this morning. We look forward to speaking with you nextquarter.

Operator

And that doesconclude today’s conference call. Thank you for your participation. You maydisconnect at this time.

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