GateHouse Media Q1 2008 Earnings Call Transcript

May. 9.08 | About: REX Gold (GHS)

GateHouse Media, Inc. (NYSEARCA:GHS)

Q1 2008 Earnings Call

May 9, 2008 10:00 am ET


Mark Maring - Investor Relations

Michael E. Reed - Chief Executive Officer, Director

Scott Tracy Champion - President, Chief Operating Officer

Mark R. Thompson - Chief Financial Officer


John Janedis - Wachovia  

Leland Westerfield - BMO Capital Markets

Stephanie Withers - Goldman Sachs

Analyst for Alexia Quadrani - Bear Stearns  


Good day, everyone and welcome to today’s GateHouse Media first quarter earnings conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Mark Maring. Please go ahead, sir.

Mark Maring

Thank you, Dana and good morning, everyone. I would like to welcome all of you to the first quarter 2008 earnings call for GateHouse Media. Joining us today, Mike Reed, our Chief Executive, and Mark Thompson, our Chief Financial Officer.

Before I turn the call over to Mike, as Dana mentioned this call is being recorded. The phone numbers and access code to listen to a replay of this call can be found in our earnings release. This call will also be available via webcast on our website, I would also like to point out that statements today which are not historical facts may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that could cause actual result so to differ materially from GateHouse's expectations are detailed in our SEC reports. I direct you to GateHouse's earnings release for the full forward-looking statement legend.

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

A table reconciling net loss or income to these measures, as well as a description of how GateHouse uses and calculates these measures immediately follows the financial statements included with the press release GateHouse filed this morning.

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

Michael E. Reed

Thanks, Mark and welcome, everyone. Thank you for joining us on our first quarter earnings call. Let me start by giving you a quick idea of how the call will flow this morning. I will cover three areas today -- first, the highlights of the quarter; second, the key metrics we use to measure our performance and how we performed against those metrics this quarter; and lastly, a discussion of the current operating environment and what GateHouse is doing to weather the current economic conditions and more importantly, to position itself for growth long-term. Then I’ll turn the call over to Mark Thompson who will give you a little more detail on the numbers and discuss the balance sheet and cash flow. And then we’ll open the call up to questions.

So let me begin with some of the quarter highlights. While the first quarter operating environment remained very challenging, our business strategy remained sound and continues to yield performance significantly better than the newspaper industry at large and it positions us very well for growth with an economic recovery. Our solid, steady performance against the current economic headwinds are results of our focus on operating strong local media franchises in smaller markets, combined with our acquisition strategy. That strategy includes identifying attractively valued assets based on strong local franchises with potential for margin improvement, properties possessing synergies with GateHouse operations or properties that have both characteristics, in fact.

Now let me turn to the metrics of the business and how we performed against them this quarter. The key metrics I want to focus on today are as-adjusted revenues, as-adjusted EBITDA, EBITDA margin, and levered free cash flow per share. It is important to point out that our business is seasonal so our results will not be evenly distributed throughout the year. Furthermore, our first quarter is historically the lowest of the year, given the post-holiday lull.

For purposes of evaluating our performance, our first quarter is generally not representative of what we expect for the remainder of the year.

First quarter as-adjusted revenue of $170.9 million on a same-store sales basis was down 4.2%, considerably better than our peers which in most cases had double-digit declines in the first quarter. Our 2007 acquisitions continue to perform very well and we are realizing the full amount of the synergies and cost saving opportunities we targeted at the time of acquisition. This has been a major contributor to our Q1 EBITDA growth.

In fact, although same-store revenues were down, same-store as-adjusted EBITDA actually increased 1.4% in the quarter to $30.1 million. Excluding corporate overhead, same-store sales as-adjusted EBITDA at our newspaper properties actually increased 2.9%.

Our EBITDA margin was approximately 18% in the quarter.

As many of you know, our long-term target is 26% to 27%. Again, due to the seasonality of our business, we expect first quarter margins to be below that annual target rate. However, we should see significant margin improvement throughout the year as revenues increase and we are able to leverage our relatively fixed cost structure across the quarters.

It is also important to note that with our acquisition strategy, we are often buying properties with below average margins, which will initially be a drag on our overall margin. However, as we realize synergies and cost improvement opportunities from these properties, we will move closer to our targeted margins.

As you think about our business and the cash flow it can and will generate, it is more appropriate to look at 12 months of revenue rather than individual quarters and think about EBITDA margins in the 26% to 27% range longer term.

Lastly on our key metrics is our levered free cash flow per share which in the first quarter was $0.05, and as I’ve highlighted, the first quarter is our lightest cash flow quarter by far. This is not indicative of what you should expect to see throughout 2008.

Similar to revenues and margin, we expect to see a considerable increase throughout the course of the year and all of that incremental cash flow drops to the bottom line.

Because we have been an acquisitive company, there are a lot of moving parts in our reported GAAP numbers. We try to give you as clear a picture as we can into our results by reporting on a same-store sales basis as if we owned all the assets for the current period in the same -- in the prior year for the same period of time. And on an as-adjusted basis, taking into account non-cash and one-time items that will not reoccur that result from charges we have taken to implement synergies or cost reduction opportunities.

After managing through these adjustments, I believe you will find that the results I just discussed are actually pretty good given the current economic environment we are operating in.

Now let me take a closer look at our revenues. More than half of the Q1 same-store revenue declines occurred in March, particularly the last two weeks of March. Several factors in the first quarter contributed to our revenue declines, including a weak housing, employment, and automobile sectors in the country, a slow Easter weekend which fell in March this year versus April last year, and an abnormally tough winter weather across -- abnormally tough winter weather across many of our Midwestern properties, which negatively impacted short-term advertising spend.

Revenue declines in the quarter were again primarily driven by the classified category itself, particularly help wanted, real estate, and automotive, which are tied more to the economy. The volume of transactions that occur in those sector is a major factor in driving their classified ad spend. As transaction levels recover, ad spend will increase.

Let me give you a couple of transactions within those sectors in the first quarter. Existing home sales in March in the country were down 19.3% versus prior year. Domestic light auto sales in the U.S. are down 7% year-to-date. Unemployment in March was up about 16% versus the prior year. These numbers show the rather dramatic decline in transactions occurring in each of those sectors. This is cyclical and will improve and we are in an excellent position in our markets to grow revenues when these underlying trends do in fact improve.

Our online strategy continues to deliver strong results and we had another very good quarter in this category. Online revenues increased 28.4% on a same-store sales basis. Page views to our websites grew 30.5% and average daily unique visitors grew 20.1% in the first quarter, compared to the fourth quarter of 2007. In fact, in the first quarter, online revenues surpassed national revenues in the quarter in terms of percent of total revenue.

We will continue to leverage our local franchises to evolve into the dominant local online media business in each market we serve and at the same time, we’ll position our online businesses with products to capture online local search, video, and classified advertising revenues, just to name a few.

And finally, with regard to revenue our circulation revenues remain strong, increasing 1.5% on a same-store sales basis in the first quarter. Both our online revenue growth and our advertising mix, meaning much less reliance on classified and national revenue streams, are helping to soften the impact current economic conditions are having on our overall revenues.

Now let me turn to cash flows, where we were able to mitigate the revenue declines in the first quarter from the realization of synergies and cost reduction opportunities available from our 2007 acquisition and through careful overall general expense controls.

Same-store sales as-adjusted EBITDA of $30.1 million increased 1.4% for the quarter -- no small feat in this current operating environment, particularly given the pricing pressure we are seeing on supplies, delivering costs, including postage and gas, utilities, and insurance.

Looking ahead, we expect our EBITDA and levered free cash flow to increase significantly throughout the year from Q1, as the second through fourth quarters are much stronger from a seasonality perspective.

Before I turn the call over to Mark, let me address the last topic area, namely how we are dealing with the economic climate today and preparing ourselves for the economic turnaround.

In the near-term, there are certain headwinds that exist today with regard to the economy, which are out of our control and are negatively impacting our real estate, help wanted, and automobile revenues. We understand that but we are not sitting around waiting for the tide to turn.

In fact, we continue to look at short and long-term cost measures we can implement to help us navigate through these current choppy waters. We also continue to invest in our online business and our sales operations. And most importantly, we recognize that fundamental to our strategy is to be the dominant source for local news and information in the markets we serve. This concept is part of every decision we make. Our high penetration rates and giving advertisers the best ROI for their ad dollars result from this core fundamental.

Continuing to improve on this dominant position in each of our markets is one of our top priorities and we are doing this through an expanded portfolio of products, both print and online, in order to better serve our readers and advertisers through an emphasis on always improving quality so we retain our audience and our advertisers, through improvements in the quality of our employees, particularly the sales staff, through training, tools, and technology and finally encouragement of creative and entrepreneurial thinking in each of our markets, making that part of the GateHouse culture.

All of these initiatives are helping GateHouse through this cyclical downturn but more importantly are further enhancing our local position in each market so that we can continue to grow over the longer term.

And speaking of the longer term, I am very confident we will see a turnaround in advertising spend. Extensive conversations with our leading advertisers support our belief that almost all of the slowdown in ad spend is related to the current economic environment and that it will return when economic conditions improve.

Advertisers continually tell us that print advertising works for them. In addition, our audiences are growing as we expand products in both print and online, making our local media franchises stronger than ever and in a great position to capture growth over the longer term.

We are confident that revenues will grow and that our strategy with regard to dominant, small market media businesses paves the way for that growth.

Now for a more detailed financial discussion, let me turn things over to Mark.

Mark R. Thompson

Thanks, Mike. Let’s start with our revenues -- first quarter as-adjusted revenues were $170.9 million, down 4.2% on a same-store sales basis from the first quarter 2007. First quarter as-adjusted advertising revenues were $123.7 million, down 5.2% on a same-store basis. Local advertising, which is our largest advertising category and accounts for about 60% of all ad dollars, continues to hold up very well, down only 2.6% in the quarter. The primary driver of our advertising decline continues to be the classified category. Classified revenues were down 12.8% for the first quarter. Within the classified category, real estate, help wanted, and auto continue to drive the decrease. As Mike mentioned, our revenues in these categories are driven primarily by the volume of transactions that occur in those industries. When transactions are down, our revenue will be down. When transactions increase, we will see this category grow.

Total online revenues, which are included in advertising revenues, surpassed the $6 million mark in the quarter for the first time, and growth in this category remained robust. On a same-store basis, online revenues grew $1.4 million, a 28.4% increase over the first quarter of 2007 and an 18.7% increase over the fourth quarter of 2007. Online revenues are now 5.1% of total advertising and 3.7% of total revenues.

National advertising is now our smallest single category due to the growth of our online business and it was down $900,000, or 14.9% for the quarter. National revenue is only 3% of total revenue.

First quarter circulation revenues also continue to be robust. They were $36.5 million, up $550,000, or 1.5% on a same-store basis. Our circulation same-store gains came primarily from modest price increases partially offset by slight declines in circulation volume.

Lastly, with regard to revenue, commercial printing, which represents about 6% of total revenues, was down 10.5%, which is typical in a slow economy as commercial print customers adjust their own volumes and page counts.

Now let’s turn to operating expenses. First quarter total operating expenses were $140.8 million. While total operating expenses increased due to acquisitions, our same-store operating expenses were actually down year over year. Operating expenses, excluding one-time charges, decreased by 5.3% despite high-single-digit increases in delivery costs and utilities, which have been driven up by higher energy prices, fuel costs, and postage rates.

The lower overall operating expense resulted from the realization of synergies obtained from our 2007 acquisition and prudent cost management controls implemented during this difficult economic climate.

One-time or non-recurring expenses were incurred in the quarter for implementation of cost reductions from the Morris acquisitions completed in October, along with additional headcount reductions we have taken around the country due to the economic conditions.

Non-cash compensation expense for the quarter was $1.1 million.

As-adjusted EBITDA was $31.1 million on a same-store basis for the first quarter, an increase of 1.4% as lower operating expenses offset the decline in revenues. Excluding our corporate costs, as-adjusted EBITDA for the quarter was actually up 2.9% on a same-store basis, [evidenced in] solid cash flow performance of our newspaper operations.

We have provided a table in the press release which shows how we arrive at as-adjusted EBITDA.

Now let’s turn to the balance sheet and capital items. We were able to make a small accretive acquisition in February which accounted for the additional $20 million in short-term debt at quarter end. This was the acquisition of a group of weeklies in Delaware. The purchase price reflected a multiple of five times our first year expected EBITDA. At quarter end, we had $21.5 million outstanding on our revolver.

Interest expense for the quarter was $24.4 million, which is up $14.2 million from the comparable 2007 period. This increase in interest expense resulted primarily from our increased borrowing fund to $1 billion of acquisitions we completed in 2007 and short-term debt.

With the current asset sales we have underway, including real estate, we anticipate paying down our short-term debt and our revolver by the end of the third quarter.

All of our debt of $1.195 billion is hedged at a blended interest rate of slightly less than 7% and makes our ongoing permanent quarterly interest cost about $21 million a quarter, or $84 million annually.

During the quarter, we did not repurchase any shares in our share buy-back program, primarily as a result of the company bumping up against its quiet period. Additionally, we are currently using our cash to build more immediate liquidity and pay down our short-term debt and revolver.

During the quarter, we sold non-strategic assets for $9.5 million. At quarter end, we had $10.6 million of cash on our balance sheet and $58 million net shares outstanding, of which about $1.1 million were restricted stock grants.

Capital expenditures for the quarter were $2.6 million as we made investments in our infrastructure. We expect this to be lower in the coming quarters and we continue to expect capital expenditures and cash taxes to total approximately $9 million for the full year.

We are improving our liquidity position with strategic moves we made a couple of months ago and we discussed on our last call. We feel good that we are weathering the current economic downturn with no major impacts on our debt structure, nor do we anticipate any.

We continue to evaluate our best alternatives for our internally generated cash flow in order to provide the greatest long-term return for shareholders.

With that, Mike and I would be happy to take your questions. Operator, we are ready for questions.

Question-and-Answer Session


(Operator Instructions) We’ll go first today to John Janedis of Wachovia.

John Janedis - Wachovia

Thank you. Mike, can you give more color on maybe some of the more regional trends and what you are seeing at the acquired properties like Morris, Copley, Gannett, and even looking further back, Boston?

Michael E. Reed

Sure, John. We are seeing trends pretty much in line with what you are seeing with the overall company in terms of revenue. The Copley, Gannett, and Morris properties performing better than, a little bit better than our overall trends and Massachusetts continuing to perform a little bit worse than our overall trends, pretty consistent with prior quarters.

What we are seeing though with the Gannett, Copley, and Morris acquisitions is tremendous cash flow growth as we realize the synergies that we anticipated going into those acquisitions and the cash flow improvement opportunities we had available to us with the lower margin properties we got from Morris and Copley. So from a cash flow perspective, those 2007 acquisitions are proving to be very successful and valuable for GateHouse.

John Janedis - Wachovia

And on Boston, I know we’ve talked about this before on calls but do you think we are near bottom yet? Or how do you think that is shaping up? Obviously the economy is still soft there.

Michael E. Reed

John, I can’t predict when the economy will bottom or trough but what I can tell you is two things; first, we fully expect much better results the remainder of this year as Q1 is our slowest and weakest quarter, and in addition to that in Boston, we are executing on initiatives internally that will both drive incremental new revenues and reduced expenses, so we are doing everything inside the company to improve performance.

John Janedis - Wachovia

Okay and just separately, Mike, given the weakness in the local ad environment broadly across all media, can you talk about the M&A market? And if you look at this as an opportunity to maybe get bigger on the cheap or do you wait until the economy improves?

Michael E. Reed

Certainly the capital markets right now are tight and liquidity is important in this environment, so we are very prudent with regard to how we invest our cash flows, internally generated cash flows and how we access the capital markets and debt markets.

Having said that, my belief is that the valuation declines we’ve seen in the general newspaper sector over the last year have spilled too far into the small market newspaper industry and that in fact small market newspapers right now have been hit too hard with regard to valuation declines.

So what that means is there’s a fantastic buying opportunity in that space, so we will continue to evaluate the opportunities that are out there because valuation has been hit harder than it should be and if we can find the right acquisitions at the right price in this market that will be very accretive and great for shareholders in the long-term, we would hope to execute on those.

John Janedis - Wachovia

As a follow-up, Mike, in this environment, does that mean you are seeing more things out there on the market or are you seeing fewer because of that compression in multiples?

Michael E. Reed

John, I don’t think we’re seeing more or fewer. I think we are seeing a consistent flow of, a deal flow out there consistent with what we’ve seen over the last decade. There’s been a consistent opportunity to buy community newspapers year-in and year-out and we are seeing that again this year. What we are seeing is better value right now in that deal flow.

John Janedis - Wachovia

Okay, great. Thank you very much.


We’ll take our next question from Leland Westerfield of BMO Capital Markets.

Leland Westerfield - BMO Capital Markets

Thanks, gentlemen, good morning. Three questions, if I may; the first is Mike, if you can elaborate a bit on the circulation trends you mentioned, or you mentioned a [commentary on the market] that circulation volumes were slightly down but that would be presumably stronger than ABC had reported for the vast majority of the newspaper sector. But if you can go into that in greater color as to either regionally or in terms of weeklies versus dailies and where the circulation trends sit, with more color.

Second, on your leverage at the end of first quarter for bank calculation purposes, where your leverage ratio stood. And then thirdly, Mike, in the past you all have articulated -- and you did here today again, margin objectives in the 26% to 27% range. I think in the past you’ve mentioned that something, a couple of percentage points or so lower than that would be doable this year if revenue were down by less than 1.5%. The trends here in the first quarter are better than peers but less significantly below 1.5%, so if that were to persist in the year, where would your objectives be in terms EBITDA margins for this year?

Michael E. Reed

With regard to the first question, circulation trends, we continue to see better trends than what you see reported across the industry, and especially in larger markets. Our Q4, as we reported our circulation, paid circulation was down eight-tenths of 1% and we saw similar results in Q1. Our paid circulation was down about 1%, and we continue to grow circulation revenues through modest price increases, either in home delivery and/or single copy end markets where we have the opportunity to increase those prices.

Regionally or geographically, we see a little larger circulation declines in the Northeast, in the Massachusetts markets in the larger markets, and then in our more rural, smaller, isolated markets we see much better circulation results than in those kind of more suburban or larger markets. But even in the worst of our declines, it’s 2.5% to 3% versus the much larger declines you see in metro type market newspapers.

And then in many cases in our small market newspapers and our focus -- with our focus on local news, being the dominant provider of that, we see small circulation gains and we are very pleased with that.

So from an overall perspective, very pleased with circulation trends, both in terms of volume and revenue.

With regard to leverage at the end of the first quarter, our compliance with the bank is about 6.3 times.

And with regard to margin objectives in 2008, you’re right. It’s a little bit softer than our normalized, more normalized annual long-term objectives of 26%, 27% because of the current environment with softer revenues. But we still do fully expect to get to about 24% this year, 23.5% to 24.5% this year. We are more aggressive with cost reductions because of first quarter trends. We took some substantial cost initiatives in the first quarter and again here at the beginning of the second quarter to combat the revenue environment that existed in Q1 in the event that it does persist for a while. So we don’t see any real big material changes from overall margin objectives and would think that 23.5% to 24.5% is very achievable this year.

Leland Westerfield - BMO Capital Markets

Gentlemen, thank you very much.


And we’ll take our next question from Stephanie Withers with Goldman Sachs.

Stephanie Withers - Goldman Sachs

Can you give us an idea of how April and the very beginning of May here are trending? Are you seeing a continuation of March’s deterioration?

Michael E. Reed

We are not seeing a continuation of March’s deterioration. In fact, we think the last couple of weeks of March was more of an anomaly. We have not closed the books on April yet, so I can’t give you any guidance on exactly where April came out. But I can tell you that we are not seeing trends in the beginning of this quarter similar to that of March.

Stephanie Withers - Goldman Sachs

And what should we expect for -- should we expect share repurchases for the balance of ’08?

Michael E. Reed

We will continually evaluate what the best investment options are for the internally generated cash flow and that is certainly one of the top investment alternatives available to us right now. Each time we make that decision on where to invest internally generated cash flow, we will pick the investment option that is the best at that time. So it is really hard for me to say specifically what exactly will happen but buying back shares throughout the remainder of the year is extremely high on the list of good alternatives for us, good options for us.

Stephanie Withers - Goldman Sachs

Okay and what about the -- the growth online actually looks like the bright spot in results here and it is actually growing pretty quickly to turn into a decent category for you guys. What percentage of that is classified advertising?

Michael E. Reed

Right now it’s about 65% to 70% is classified advertising and about 35% is video, banner advertising, and search.

Stephanie Withers - Goldman Sachs

Okay. Thanks very much, guys.


We’ll take our next question from Alexia Quadrani of Bear Stearns.

Analyst for Alexia Quadrani - Bear Stearns  

Actually, this is Sylvia in for Alexia; just a few quick questions. In the press release, you guys mention that you identified roughly $35 million in non-strategic properties. I was wondering if you could maybe talk a little bit more about that in terms of if you are willing to say which properties you are looking to sell, how much of that is real estate versus actual newspapers, and in terms of timing, how close are these transactions to coming to fruition?

Michael E. Reed

Well, we won’t comment on the specific properties, newspapers that we are contemplating selling because of confidentiality agreements and ongoing discussions. What I will tell you is that about one-third of the $35 million are real estate sales and then about two-thirds are some very small newspapers that don’t fit strategically for us in the long-term. We would expect the $35 million in strategic asset sales to have taken place by the end of the third quarter.

Analyst for Alexia Quadrani - Bear Stearns  

Okay, and I’m assuming -- are you going to be using those proceeds to pay down some of your short-term debt?

Michael E. Reed

We will certainly pay down revolver. We will pay down some short-term debt and we will also look at what other good investment options are out there for us in redeploying that capital.

Analyst for Alexia Quadrani - Bear Stearns  

Okay. And then if I could just ask one more -- regarding synergy realizations now that most of your acquisitions have kind of anniversaried, how much longer do you guys expect to reap benefits from continued synergies?

Michael E. Reed

We will synergy realization throughout all of calendar 2008 because the Morris transaction actually closed in December and we are getting those synergies in place throughout the first quarter of this year. So we will see that throughout the remainder of this year.

In addition, even though it is a little bit of a smaller scale, the Dover acquisition we made in February had some decent synergies and we’ll see those realized throughout the remainder of this year.

On top of the synergies, we have the expense initiatives we’ve taken inside of GateHouse in the first quarter to combat the softer revenue environment and we will see those initiatives fall through to cash flow growth throughout the remainder of this year. So we are very confident about our ability to reduce costs in this environment throughout the remainder of this year.

Analyst for Alexia Quadrani - Bear Stearns  

And the $8.7 million that was mentioned regarding one-time costs that hit this quarter, is something similar expected for next quarter? Maybe if you could give some more detail in terms of the breakout of those costs.

Michael E. Reed

I can’t predict exactly what will unfold throughout the second quarter. The detail of those costs is predominantly two things; one, severance payments related to downsizing in the workforce in several of our more underperforming properties where we took headcount reductions and did [rips] that are then permanent payroll reductions for the company. And then secondly, in the realization of synergies from the Morris acquisition, we had the ability to shut down print plans and merge them into existing GateHouse plants, accounting offices and some other back shop things. And so we had fees and one-time charges in association with executing on putting the back-shop and press plants together.

So that’s where those things came from in the first quarter and it’s hard to tell throughout the remainder of the year where those items might pop up, depending on how the year goes.

Analyst for Alexia Quadrani - Bear Stearns  

Okay, great. Thank you very much.


Mr. Maring, at this point I would like to turn the call back over to you for any additional or closing remarks, sir.

Mark Maring

Thank you, Dana. That concludes our first quarter call. Thank you all for joining us this morning and we look forward to speaking with you next quarter. Bye.


And that does conclude today’s conference call. Thank you for your participation. You may disconnect at this time.

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