Gannett Q4 2005 Earnings Conference Call Transcript (GCI)

Gannett (GCI)
Q4 2005 Earnings Conference Call
January 27th 2006, 10:00 AM.

Executives:

Gracia C. Martore, Senior Vice President and Chief Financial Officer
Craig A. Dubow, President and Chief Executive Officer

Analysts:

Christa Quarles, Thomas Weisel Partners
Craig Huber, Lehman Brothers
Brian Shipman, UBS
John Janedis, Banc of America Securities
Paul Ginocchio, Deutsche Bank
Frederick Searby, JP Morgan
Douglas Arthur, Morgan Stanley
Lauren Fine, Merrill Lynch
Alexia Quadrani, Bear Stearns
Peter Appert, Goldman Sachs
Steven Barlow, Prudential Equity Group
William Bird, Citigroup
Debra Schwartz, Credit Suisse First Boston
Karl Choi, Merrill Lynch
John Kornreich, Sandler Capital
Dan Jenkins, State of Wisconsin Investment Board
David Winters, Wintergreen Advisors
Mike Foss, Alex Brown

Presentation

Operator

Good day everyone and welcome to Gannett’s Fourth Quarter Earnings Conference Call. Today’s call is being recorded. 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 today will be Mr. Craig Dubow, President and Chief Executive Officer and Gracia Martore, Senior Vice President and Chief Financial Officer. At this time, I would like to turn the call over to Gracia Martore. Please go ahead.

Gracia C. Martore, Senior Vice President and Chief Financial Officer

Thanks very much and good morning. Welcome to our conference call and web cast today to review our fourth quarter and full year 2005 results. Hopefully you’ve had a chance to review our press releases from this morning, which also can be found at www.gannett.com. With me today are Doug McCorkindale, Chairman; Craig Dubow, President and CEO; and Jeff Heinz, Director of Investor Relations.

Not a lot has changed since our presentations at year-end conferences and since many of you heard those, we’ll keep our comments relatively brief to allow time for your questions. As you saw from our press release, for the fourth quarter, we earned $1.44 per diluted share from continuing operations, which is at the high end of the range we provided you in early December. In 2004, we earned $1.44 on a comparable basis for the quarter. Looking at the full year, we earned $4.92 per diluted share, again from continuing operations, versus $4.84 last year.

A number of factors had an impact on our results for the quarter, which we shared with you in early December. However, a strong finish in December by USA Today contributed positively to the quarter. Our broadcasting segment also had a better December than anticipated. However, the challenge of recouping politically-related advertising demand that totaled over $48 million in last year’s fourth quarter was too big a mountain to climb over for the full quarter. Our domestic community newspapers experienced double digit revenue gains in classified employment and real estate, but again auto remained very soft. Our results at Newsquest continued to be impacted by the slowdown in the UK economy.

Craig will discuss our operations in more detail in a few moments. Also impacting the quarter was our reorganization of the Detroit Newspapers Partnership that we completed in August. The full consolidation of 100% of Detroit’s results had an impact on both revenues and expenses for the full quarter and our margin for the newspaper segment. However, when we completed the Detroit transaction, we shared with you that it would have a negative impact on our margins in the near-term. But we see opportunity to expand them over the intermediate to long-term.

Just to note on one change you heard about in the fourth quarter. On December 25th, the last day of our fiscal year, we completed the expansion and reorganization of the Texas-New Mexico Newspapers Partnership with MediaNews Group. We contributed one newspaper for which we recognized a minor non-monetary, non-operating gain in the quarter and MediaNews contributed three Pennsylvania newspapers. As a result, our interest in the partnership is now approximately 41% and MediaNews Group has become the managing partner. This change does not impact operating results for the quarter, but will result in a change in our accounting presentation. Going forward, our percentage of the net results of the partnership will be included in other operating revenues, similar to the California Newspapers Partnership.

Turning back to our results for the quarter, our reported expenses for the newspaper segment increased 12%. However, Detroit and some other smaller acquisitions completed this year had a big impact on that number. On a pro forma basis, assuming we owned 100% of Detroit and the same complement of properties in the fourth quarter of ‘05 and ‘04, newspaper expenses would have been up less than a half a percent. Reported newsprint expense increased 14.9% in the quarter, comprised of a less than 10% increase in prices and 4% greater usage. Again, Detroit in those acquisitions had an impact on those numbers as well. On a pro forma basis, newsprint expense was up 4.7%, with usage down almost 4.5% and prices up 9.5%. Finally, pro forma cash costs, excluding newsprint, were down about 1% for the quarter.

Focusing on newsprint specifically, throughout 2005, Gannett benefited from fixed price newsprint agreements, covering a substantial amount of our requirements. As I mentioned, pro forma consumption in 2005 trailed the prior year. Conservation measures will continue throughout 2006, including additional web width reduction and expanded trials of lightweight newsprints. For the first half of 2006, we have again secured stable price arrangements covering a vast majority of our paper usage.

Moving to the balance sheet items, total debt at year-end stood at $5.4 billion, and cash and marketables were about 167 million. Our all-in cost of debt currently is 4.7%, with commercial paper at about 4.4%. Interest expense in the quarter, as you saw, was $62 million compared with 41 million in the same quarter last year. The increase is attributable to both higher short-term interest rates and debt outstanding related to share repurchase activity and acquisitions.

With respect to shares outstanding, basic shares at the end of the quarter were 237.8 million and averaged 238.5 million in the quarter and 245 million for the full year. We repurchased approximately 3.2 million shares during the quarter and approximately 17.5 million shares for the full year. Capital expenditures in the fourth quarter were a little over $101 million and for the full year they totaled about 263 million.

I also want to note some other items that will have an impact on our results in 2006 and should be considered as you think about quarterly results. The first is the exchange rate. During the fourth quarter, the exchange rate averaged 1.75 versus 1.84 in the previous year, creating a headwind for us in the quarter. We expect that trend to continue in 2006, with the first quarter representing our toughest comparison as the pound averaged 1.89 in 2005’s first quarter. The second factor is the expensing of options. As we noted at the year-end conferences, we will begin expensing options this year and expect the impact will be approximately $45 million of pre-tax expense in the year, spread evenly over the quarters.

One comment on a transaction, that took place after the close of the quarter. On January 17th, we announced a minority investment in 4INFO, as well as a marketing and distribution agreement. By investing in 4INFO, Gannett readers and viewers benefit by gaining access to free, accurate and thorough information on a number of relevant topics that will add depth and timeliness to USA Today and other media that Gannett owns.

And then finally, before I turn the call over to Craig, our conference call and web cast 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 and 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.

Sorry, I couldn’t come up with a better introduction for Craig, but here’s Craig Dubow.

Craig A. Dubow, President and Chief Executive Officer

Thanks Gracia and good morning to everyone. In December, we told you that 2005 looked like it would be a record year in terms of revenues. Our release this morning confirmed those results and I’m pleased to say total operating revenues reached 7.6 billion for the year. It’s particularly pleasing because we achieved these record results in an advertising environment that has both been challenging and choppy. Our 2005 results reflect solid ad demand in classified employment and real estate at our domestic community newspapers on top of a tough 2004 comparison. Growth in local advertising was boosted by revenue growth from our non-dailies and mixed publications.

Our newspaper segment results were tempered by the UK economy’s impact on Newsquest. And auto advertising was soft throughout the year in both the UK and US Our broadcasting segment saw soft auto advertising and faced comparisons to a record level of political and Olympic ad revenues that contributed to results in 2004. But the year ended strongly for broadcasting and for USA Today with both posting good results in December.

As you saw from our press release, operating revenues from continuing operations advanced over 6% to approximately 2.1 billion in the quarter and increased over 4% for the year. Let me give you some additional details on our results starting with our newspaper segment.

Newspaper operating revenues advanced almost 9% for the quarter and over 6% for the year. This includes a result for the full consolidation in the third quarter of Detroit after the JOA was reorganized and for Tallahassee, which we acquired in an asset swap with Knight Ridder. Assuming that we owned the same newspapers in both years, total advertising revenues in newspaper segment declined 1% for the quarter and rose 1.6% for the year. Overall our results in the US were better than those in the UK, with US ad revenue for the quarter increasing over 1%.

Pro forma local advertising in the newspaper segment declined slightly over 1% in the quarter. In the US, local advertising was down slightly across all products. Health, financial, and home improvement categories gained and helped offset the lagging results from department stores, furniture, grocery results, restaurants, and telecommunications.

Trends that we have seen all year in classified advertising continued in the fourth quarter. Employment advertising for the company as a whole increased slightly for the quarter, on top of an increase of more than 18% in 2004. Domestic classified employment results were significantly better than our results in the UK. In the US, community newspaper classified employment increased almost 14% for the quarter. The strength came primarily from our Pacific and South groups, both generating double digit gains in employment.

For the entire company, real estate was fairly strong throughout the quarter. For the US community newspapers, real estate increased almost 14% for the quarter. Again, US results in real estate were stronger than the UK although the UK’s results were positive.

Automotive, as we’ve been saying for quite some time remains soft in both our domestic community and UK newspapers in the quarter decreasing over 16%. In our US community newspapers, in the quarter, the automotive category was down more than 15%, reflecting declines in all regions but most heavily in the Atlantic Coast and Interstate groups.

National advertising revenue was down slightly for the quarter as decreases from the community newspapers were offset in part by growth at USA Today, where ad revenues were up over 2% for quarter. During the quarter, the technology, auto, and advocacy categories at USA Today were very strong, while travel, retail, and pharmaceutical lagged last year’s results. As we noted, USA Today had a robust finish to the year with ad revenues up 13% for December.

Before I turn to our online revenues, let me talk for a minute about the extent of our reach when you combine our print products with online in any one community.

Together, our daily newspapers, our non-daily, and mixed publication, and our online products achieve a high level of audience aggregation and reach, in many cases, in excess of 75%. The success of our focus on this aggregation strategy is reflected in the revenue growth from our non-daily products and online. Revenues for our local non-daily products, which does not include the Army Times, Nursing Spectrum, or Clipper Magazine, increased over 10% in the fourth quarter and almost 13% for the year.

Turning to the Internet side of the business, our online revenues for the total company, including PointRoll, were more than 300 million for the year. That’s an increase of 49% for the year and 59% for the quarter. Growth in online revenues was driven by our community, our domestic community newspapers, which had growth rates of 47% for the quarter and more than 50% for the year.

Our latest monthly numbers, which are for December, show our domestic websites had about 21 million unique users and reached 13.5% of the Internet audience. In the UK, Newsquest’s online audience totaled 2.7 million unique visitors with 31.1 million page impressions.

CareerBuilder also continues to perform well for us. Overall, in 2005 compared with 2004, CareerBuilder experienced a 20% increase in unique visitors. For the fourth quarter, revenues grew 67% compared to the same quarter last year.

Focusing on the UK briefly, Newsquest, as we have been noting, has felt the impact of the changes in the UK economy particularly in automobile and employment. Revenues for Newsquest in pounds were down almost 6% in the quarter and about 4% for the year. Newsquest’s operating profit, again in pounds, was 16% lower for the quarter, and over 8% for the year. In response, expenses were tightly controlled and were lower year-over-year. These down cycles typically last 18 to 24 months, so we believe that we are about halfway through this. We expect to see modest ad revenue growth in the latter half of this year.

Moving to broadcast; total revenues for the broadcast division, including Captivate, declined 11% for the quarter. At our TV stations, total revenues were approximately 12% lower compared to the last year. Local ad revenues increased 1%, while national decreased 28%. This decrease reflects the lack of more than 48 million in advertising demand related to the elections in fourth quarter of 2004. However, several advertising categories firmed up in December led by auto, retail, banking, and finance. This resulted in revenue growth of over 5% for the month.

Looking ahead, our latest pacings for first quarter overall are up in the high single digits, compared to last year’s first quarter. January is down in the very low single digits and February is up over 30%. Local is stronger than national at this point.

These pacings reflect the ad demand associated with the Winter Olympic Games in Turin that will be broadcast on our NBC station in February. Again, though I want to caution you that the pacings are very volatile and reflect where we are right at this moment, we’ll keep you updated on our monthly reports as the quarter progresses. Before we go to questions, let me provide a few words about 2006. We are enthusiastic about the possibilities and opportunities we see in our market as more consumers access our content in even more ways. Our investment in 4INFO is just one small but interesting example of our efforts to deliver content in ways consumers want it.

In 2006, our domestic community newspapers will take advantage of their market coverage and an array of products to generate positive revenue growth. USA Today will benefit from the value of its brand as we find more ways to deliver its content. And there will be an advertising rate increase. In broadcasting the Olympic Games and politically-driven ad demand, in addition to new business initiatives are expected to contribute significantly to revenue growth as we take advantage of our strong local news rating. For Newsquest, we expect and anticipate some stabilization in revenues in the first half, and revenue growth in the second half.

Overall, Gannett is committed to our focus on local coverage and local content. Delivering that content wherever, however the customer wants it is our mission and we will drive to that for our results.

Now we’d be happy to stop and take your questions.

Questions & Answers

Operator

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question please do so by pressing the “*