GateHouse Media Q2 2008 Earnings Call Transcript

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GateHouse Media, Inc. (NYSEARCA:GHS)

Q2 2008 Earnings Call

August 8, 2008 10:00 am ET


Mark Maring - Investor Relations

Michael E. Reed - Chief Executive Officer, Director

Mark R. Thompson - Chief Financial Officer

Scott Tracy Champion - President, Chief Operating Officer


Leland Westerfield - BMO Capital Markets

John Janedis - Wachovia  


Good day and welcome to this conference call with GateHouse Media regarding the company’s second quarter financial results conference call. Just as a reminder, 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, Christina and good morning, everyone. I would like to welcome all of you to the second quarter 2008 earnings call for GateHouse Media. Joining us today are Mike Reed, our Chief Executive Officer, and Mark Thompson, our Chief Financial Officer.

Before I turn the call over to Mike, as Christina 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 results 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 also 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 measure 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 second quarter earnings call. It has been quite a turbulent ride since we last spoke in May and I know many of you have been anxiously awaiting announcement of our financial results and capital management plans.

I hope that when we are done today, you will see that our financial results for Q2, while below our original expectations, are holding up quite well and that our capital actions put us in a position of strength as we move forward.

Let me give you a quick overview of what I want to cover on the call this morning. I will focus my discussion on three areas. First, the financial highlights of the quarter and the key metrics we use to measure our performance; second, I will walk you through our recent capital management initiatives and the impact on shareholders, both in the short and long-term. And lastly, I will touch on our stock price and our focus over the next 12 to 24 months. Mark Thompson will then give you a little more detail on the numbers and discuss the balance sheet and cash flow, and we will then open the call up for questions.

I will begin this morning with the financial highlights and key metrics. As a reminder, because we have been an acquisitive company, we try to give you as clear a picture into our results as possible by reporting on a same-store sale basis as if all the asset we owned in the current quarter were also owned for the same period in the prior year, and on an as adjusted basis, which takes into account non-cash and one-time items primarily associated with permanent cost reduction initiatives and integration of all of our acquisitions.

The second quarter economic environment remained challenging and in many ways was worse than the first quarter. Our business strategy here at GateHouse, which focuses on operating strong local media franchises in smaller markets, remains sound and continues to yield performance significantly better than the newspaper industry at large.

Our same-store revenues in the quarter were down 4.7% versus a public industry peer average decline of over 12%, and our as-adjusted EBITDA was down 16% on a same-store basis versus a public industry peer average decline of more than 30%.

Our online revenue and circulation growth, coupled with our advertising mix, meaning less reliance on classified and national revenue streams, are helping to soften the current economic conditions and the impact they are having on our overall revenue and cash flow.

We have stated that we believe our focus on small local markets makes us less sensitive to economic cycles. However, we also recognize we are not completely immune to these cycles.

Let me walk you through a little more detail on our revenue and talk about what is holding up very well versus what is being impacted the most from the current economic environment.

71% of our revenue is made up of local retail print advertising, paid circulation, and online advertising. Remember, our online business is focused primarily in the small local markets we serve, complementing our print business. When you look at this 71% of our business, 71% of our revenues, these categories were down less than 1% at four-tenths of 1% versus the prior year. They are holding up extremely well in this turbulent environment.

Our biggest challenge remains in the print classified business, particularly help wanted, real estate, and automotive. This category was down 16.6% on a same-store basis and this accounted for 81% of GateHouse's total second quarter revenue decline. Print classified revenue accounts for about 20% of our total revenues in the second quarter. This category is the one that is the most sensitive to the economy and the secular shifts.

Only time will change the economic pressures as the volume of transactions in these sectors increases. This is a major factor in driving classified ad spend. As transaction levels recover, we believe the classified ad spend within our products will increase.

With regard to the secular shift, there is no doubt that newspapers will permanently lose some classified business due to the shifts in spend from print to online. Our challenge, and this is something we are working extremely hard on, is to capture this shift with our local web businesses in our small local markets. Having strong local websites with heavy local audience traffic, combined with strong partnerships, such as our Yahoo! Hotshots relationship, will allow us to be in a great position to capture online local classified advertising in the future.

In fact, we will be announcing the rollout of another company-wide vertical in the auto category in partnership with a major online classified company in the very near future.

Now let’s take a closer look at EBITDA and EBITDA margin. As-adjusted EBITDA for the quarter was $38 million. This was a 26% improvement over our first quarter results of $30.1 million, which if you’ll recall our first quarter is generally our lowest quarter due to seasonality. However, versus prior, we were down 16% on a same-store basis.

The decline in as-adjusted EBITDA is primarily the result of lower print classified revenue that I just discussed, which is a high margin business, as well as from inflationary pressures on many of our expense categories, particularly on newsprint pricing, delivery costs, healthcare expenses, and costs to operate our facilities.

In the quarter, newsprint prices were up about 18% per metric ton. We were able to mitigate most of that price increase with a reduction in page widths and page counts.

Healthcare costs also increased about 18% in the quarter.

Energy prices are driving up delivery costs, which increased nearly 10% in the quarter. Postal rates, postage costs were up 9% in the quarter, as postal rate increases were driving delivery costs up for our mail products. And our utilities and property taxes were up about 10% in the quarter.

I bring these up because these expense increases have offset many of our targeted cost reductions in the second quarter, resulting in expenses being down only 1.3%, or $2 million on a same-store basis.

We will continue to look for ways to reduce expenses as we go forward without impacting the quality of news and customer service we provide to our readers and advertisers, both protecting and enhancing our local franchises is very important to our long-term future.

As a result of the classified revenue declines and the upward expense pressure, our EBITDA margin came in at 20.6% for the quarter, versus 23.3% last year on a same-store sales basis. This margin, while below our long-term target, is at the high-end of the range for our industry peer group.

Lastly on our key metrics, our levered free cash flow per share was $0.20 versus a reported $0.05 in the first quarter and $0.44 in the prior year. The key point here is that the company continues to generate significant levered free cash flow despite the very challenging environment.

Now let’s switch gears and discuss the capital management initiatives we announced this morning with our press release. First, we will be temporarily suspending payment of a quarterly dividend to common shareholders. Foregoing dividends will allow us to use free cash flow to reduce leverage and increase our liquidity. We believe this is a prudent strategy given the challenging and uncertain times we are in today.

Second, a subsidiary of the company entered into agreement to issue $11.5 million of non-voting, cumulative preferred stock to a private equity fund managed by an affiliate of Fortress Investment Group, GateHouse Media’s largest shareholder.

The proceeds will be used for an equity cure allowable to us under the terms of our credit agreement to ensure the company is in compliance with its credit agreement for this quarter’s filing.

Over the next several months we will pay our revolving credit facility to zero and with the revolving credit facility at zero, we will have no leverage covenant test. With our revolver at zero and all of our term debt hedged, we are in an excellent position to weather a prolonged economic downturn.

Our interest expense is fixed at about $85 million a year and we have no principal payments due on our long-term debt until August of 2014. This puts us in a great position to build cash on the balance sheet or begin to pay down term debt, if we choose. Either way, we will be delevering on a net basis.

Before turning the call over to Mark, I would like to touch on the performance of our stock recently and our plans for GateHouse over the next 12 to 24 months.

We believe our stock price is being impacted by many factors, including the following items: a sector that is out of favor, due to the belief of some that we operate in a business facing overwhelming secular challenges; a highly volatile capital market, compounded by a slowing economy and the perception that we are over-levered and possibly in danger of default.

Let me give you some thoughts on each of these items. First, there is no doubt that the broad media industry is facing secular change. The Internet has altered the playing field. However, the Internet is far more of an opportunity than a threat for us at GateHouse. First, as I have noted many times before, our content is unique to our markets and proprietary to our company. It attracts the audience that our advertisers seek. The current economic climate is affecting all advertising based businesses regardless of media. GateHouse's assets are powerful franchises in their communities because of the quality and type of content, and the reach we provide advertisers in both print and online in each of our respective markets.

This downturn is unlike any other that I have experienced over the last 20 years in the media business. Our advertising customers are not spending their dollars on other media -- they are simply advertising less right now. The downturn in real estate, automotive, and help wanted advertising are tied far more to the cycle than any massive secular shift.

It is critical that we not panic and lose confidence in our assets; rather, we need to weather the economic storm and make sure we have dominant, local franchises in our markets positioned to grow when the cycle does turn.

We believe that the capital markets, and specifically the credit markets, will return to some level of normalcy and that this current cycle we are in will turn. Given that our long-term debt is not due until 2014 and that it is hedged with a blended rate of just under 7%, we have ample time to operate through the current environment. In the meantime, we generate significantly more than enough cash to cover interest costs, invest in our operations, and pay down debt with excess cash flow payments.

Although we have incurred a significant amount of debt with our acquisitions, I believe that we have assembled a high quality array of assets that will continue to generate strong cash flows and grow once the economy recovers. We believe our debt is manageable because of its structure and its maturity schedule. Operating this company without the prospect of a covenant breach is highly advantageous to all stakeholders, since we can focus on managing the business. GateHouse's customers, employees, creditors, and shareholders are best served by having management focus on the business and its assets, rather than potential covenant breaches. The business generates cash flow far in excess of its interest expense and we are highly focused on reducing leverage.

As we look ahead over the next 12 to 24 months, our focus will be on strengthening our balance sheet and managing our operation. Unlike the economy or capital markets, these are things that are under our control.

From an operations standpoint we will continue to invest in our online businesses, which is our fastest growing segment. We will also continue to aggressively pursue cost reductions on our controllable expenses and look for ways to manage inflationary pressures and to become more efficient.

We would expect to continue to post industry-leading results.

Longer term, I remain confident we will see stronger advertising spend in our markets as the economy strengthens. Our advertisers continually tell us that our products work for them. In addition, expanding our product offerings online will make our local media franchises even stronger. Our online audience continues to grow at a fast clip. Our page views in Q2 were up 15.6% over Q1 and Q1 was up 30.5% over Q4.

My view is that the next several quarters will be extremely challenging and that we most likely have not yet seen the bottom. However, with our total audience continuing to grow, we believe we are positioning ourselves in each of our respective markets for growth over the longer term as the economic outlook improves.

Now let me turn the call over to Mark Thompson for more detail on the numbers.

Mark R. Thompson

Thanks, Mike. Let’s start with our revenues. Second quarter as-adjusted revenues were $184.4 million, down 4.7% on a same-store basis from the second quarter of 2007. As-adjusted advertising revenues for the quarter were $136.1 million, down 6.3% on a same-store basis. Local advertising, which is our largest advertising category accounting for about 63% of all advertising dollars, continues to hold up very well, down only 3.2% in the quarter. Total online revenues, which are included in advertising revenues, were up 34.8% to $7.2 million in the quarter. Growth actually exceeded that of the first quarter, which was 28.4 on a same-store basis.

The driver of our total advertising decline continues to be the classified category, which was down 16.6 in the second quarter. This is primarily real estate, help wanted, and auto. Those sectors continue to struggle in this economy and the lower transaction volumes within those sectors continued to negatively impact our revenues.

National advertising, while down 10.8%, did not materially impact revenues as it continues to be our smallest advertising category, representing 3.2% of our total revenue. Second quarter circulation revenues also continued to hold up very well. They were $37.5 million, up 1.1% on a same-store basis.

Lastly with regard to revenue, commercial printing, which represents about 5.8% of our total revenues, was down 4.2%, which is typical in a sluggish economy as commercial print customers adjust their own volume from page count.

In wrapping up revenue, I want to point out that 89% of our total second quarter revenue decline is attributable to classified and national advertising, the categories mostly tied to the health of the economy. The remainder of our revenues continued to show more stability.

Before talking about as-adjusted EBITDA, let me briefly touch on the impairment charge -- the company recognized a non-cash impairment charge of approximately $440 million in the second quarter due to impairment testing completed at the end of the quarter. The testing and resulted charge was triggered primarily by the decline in our share price during the quarter and the sluggish economy. Impairment rules dictate that we reconcile our book carrying values to our public market value and consider the current economic environment. This was a non-cash charge.

Our assets continue to generate strong cash flows and this impairment primarily reflects the difference in our market capitalization and book values and the sluggish economy.

Second quarter total operating expenses excluding one-time charges and non-cash expenses declined $2 million to $146.4 million on a same-store basis. As Mike has already discussed in some detail, our targeted cost reductions and synergies from prior acquisitions were offset by pricing pressure on newsprint and ink, delivery costs and utilities, which have been driven up by higher energy prices, fuel costs, postage rates, and healthcare costs.

One-time or non-recurring expenses were incurred in the quarter for the implementation of synergy cost reductions from prior acquisition, along with additional reductions in force we have taken around the country due to the current economic conditions. Non-cash compensation expense for the quarter was $1 million.

As-adjusted EBITDA was $38 million for the quarter and on a same-store basis was down $7.2 million, or 16%. We have provided a table in our press release that shows how we arrived at as-adjusted EBITDA.

Now let’s turn to the balance sheet and capital items. We ended the quarter with $1.25 billion of total debt. We had $1.195 billion in term debt and 28.7 outstanding on our revolver. We also had $12.8 million of cash at the end of the quarter. Capital expenditures for the quarter were $3.2 million. We still anticipate capital expenditures for the full year to be around $10 million. At the end of the second quarter, we had 58,129,000 shares outstanding, of which about 1 million shares were restricted stock grants.

Interest expense for the quarter was $23.2 million, about $1.2 million lower than our first quarter, and levered free cash flow for the quarter was $0.20.

We announced we will be suspending any quarterly dividends on our common stock. Any future determination to pay dividends will be at the discretion of the board of directors and will depend upon, among other things, the company’s results of operations, cash requirements, financial conditions, contractual restrictions and other factors the board might deem relevant.

As Mike mentioned, given the current economic conditions, we feel it is prudent for the company to use the cash flow to pay off our revolver, build liquidity, and deliver.

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

Question-and-Answer Session


(Operator Instructions) And our first question will come from Lee Westerfield with BMO Capital Markets.

Leland Westerfield - BMO Capital Markets

Thank you. Good morning, gentlemen. Two questions, if I may; first, if you can add some color as to the business conditions in Massachusetts vis-à-vis contrasting Massachusetts with your Midwest markets. That’s an operational question.

And then secondly, if you can elaborate on the differences between the leverage test and the incurrence test with regard to whether and when a dividend might be potentially reinstated.

Michael E. Reed

Thank you, Lee. Business conditions in Massachusetts, and let me start first by saying Massachusetts only represents about 20%, 21% of our business, so the geographic diversity is still an instrumental part of GateHouse and obviously a bit part of the reason why GateHouse continues to outperform the industry.

Having said that, business conditions on the top line in Massachusetts improved in the second quarter. In the first quarter, Massachusetts revenues were down a little bit over 9%. In the second quarter, our revenues in Massachusetts were down 8.1%. We seem to have seen a slight improvement in trends in that area of the country, especially with regard to real estate classifieds, so we are presently pleased with that for the second quarter.

With regard to the dividend, the future payment of the dividend, that depends on many, many factors, many of which are out of our control. The current economic condition that we are operating in today requires us to be as prudent as we can to protect the long-term opportunities for the company, and with the economic conditions being as slow as they are, the chances that things could get worse before they get better for the long-term stake of the company and its shareholders, it makes a tremendous amount of sense to pay down some debt and to actually put a bunch of cash on the balance sheet to make sure we can weather any current unforeseen worsening in the economy today.

So the long-term view of returning strong, stable cash flows to shareholders hasn’t changed but the economic environment we operate in today has made it very prudent to do what we have announced this morning.

Leland Westerfield - BMO Capital Markets

I guess, Mike, sorry to elaborate on this one, but briefly I really wanted to delve into the differences between the incurrence test and the leverage test.

Michael E. Reed

The leverage test, and I’ll answer that question and then obviously, the credit agreement we have is very complex, very detailed and there are lots of nuances to it, and I would be happy to have a very detailed discussion with you offline but the leverage test the company has is a covenant that exists on the revolving credit facility only. And that is a 6.5 times leverage test on the revolving credit facility. If the company’s revolving credit facility is paid to zero, the leverage test does not exist.

The incurrence test is simply a leverage test on the company when it would make a dividend payment. So if the company were to make the dividend payment, it would have to be in compliance with its incurrence test, which is the 6.5 times test. Completely different, no covenant tied to the incurrence test or anything of that nature.


Our next question will come from Wachovia; we’ll hear from John Janedis.

John Janedis - Wachovia  

Thank you. A couple of questions; first, I’m just trying to get a better understanding of your costs and of course, related to EBITDA impact going forward. So you referenced newsprint delivery, healthcare, et cetera. But assuming newsprint prices peak in 3Q, should we expect to see similar expense declines on a same-store basis?

Michael E. Reed

In that category, John, or overall?

John Janedis - Wachovia  

Overall, so meaning the down 1.3 in 2Q, I’m just trying to get an idea of is there more than you are looking at in terms of cutting, so going forward that number looks a little bit better? Or there are things that mitigate that potential?

Michael E. Reed

The number looks a little bit better. There are more initiatives we’ve taken on in the third quarter based on how the second quarter played out, so newsprint prices, you know, we think will peak some time at the end of the third quarter and the other initiatives that we have undertaken should put us in a position to post better expense numbers over the second half of the year.

John Janedis - Wachovia  

Okay, so if you put up -- you mentioned obviously the business doesn’t seem like it’s improving much. If revenue is kind of similar in the third quarter, for example, does that mean the EBITDA decline should improve a little bit, all things equal?

Michael E. Reed


John Janedis - Wachovia  

Okay. And just going back to Lee’s question, can you talk more about real estate classifieds in Boston? I think the category had been weak now since ’06 and I’m wondering, do you think the improvement here is due to easy comps or is there any kind of improvement in the economy?

Michael E. Reed

Easy comps is certainly playing some part of that. I don’t think there’s an improvement in the economy. I think it’s more of we are starting to see some stability, maybe we’re starting to see some kind of bottom in the real estate market in that particular part of the country. So instead of trends continually getting worse and worse, we are seeing some level of stability and then we are going against easier comps.

John Janedis - Wachovia  

Okay, and just on the expense side, what percentage of total expense is deliver costs?

Michael E. Reed

Delivery costs are about 7% of revenues.

John Janedis - Wachovia  

Okay, and sorry, one quick last one, Mike -- can you give us more detail on a regional basis outside of Boston?

Michael E. Reed

Say that again, John? Sorry.

John Janedis - Wachovia  

I’m sorry. Can you give us a bit more detail on the portfolio outside of Boston?

Michael E. Reed

In terms of?

John Janedis - Wachovia  

Just how the markets are looking -- so meaning, how is Ohio or other large markets, Illinois, et cetera?

Michael E. Reed

John, we see pretty similar results across the country. The coasts, the Northeast and the California coast continue to be the weaker spots. We have -- inside the coasts when you get into the middle of the country, we see very similar results. Revenues are a little bit soft. They were a little softer in Q2 than Q1. Primarily all classified related but much steadier than what we see on the coasts.

And California obviously is a very, very small percentage of our revenue at a couple of percent. And in the Northeast, the Massachusetts cluster is just slightly over 20%. So setting aside those and just focusing on the rest of the portfolio across Ohio, Illinois, Iowa, Missouri, Kansas, et cetera, the revenue declines are much, much smaller, and on the other side of our overall 4.7 decline, so inside of that.

John Janedis - Wachovia  

Thank you very much.


At this time, there appear to be no further questions in the queue. I would like to turn the conference back over to Mr. Maring for any closing remarks.

Mark Maring

Thank you. That concludes our second quarter call. Thank you all for joining us this morning. We look forward to speaking with you next quarter.


That does conclude our teleconference for today. We would like to thank everyone for your participation and have a wonderful day.

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