Gannett Company, Inc. Q1 2006 Earnings Conference Call Transcript (GCI)

Gannett Company, Inc. (GCI)
Q1 2006 Earnings Conference Call
April 12, 2006, 10:00 a.m. EST

Executives:

Douglas H. McCorkindale, Chairman
Craig A. Dubow, President and CEO
Gracia Martore, Senior Vice President and CFO
Jeff Heinz, Director, Investor Relations

Analysts:

Lauren Fine, Merrill Lynch
Craig Huber, Lehman Brothers
John Janedis, Bank of America
Alexia Quadrani, Bear Stearns
Brian Shipman, UBS
William Bird, Citigroup
Debra Schwartz, Credit Suisse
Fred Searby, JP Morgan
Christa Quarles, Thomas Weisel Partners
Paul Ginocchio, Deutsche Bank
James Goss, Barrington Research
Edward Atorino, Benchmark Co
Lisa Monica, Morgan Stanley
Peter Appert, Goldman Sachs
Robert Shipman, Credit Suisse
Thomas Russo, Gartner Russo Gartner
Dan Jenkins, State of Wisconsin Investment Board

Presentation

Operator

Please stand by and we’re about to begin. Good day everyone and welcome to Gannett’s First 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. At this time, for open remarks and introductions, I would like to turn the call over to Ms. Gracia Martore, Chief Financial Officer. Please go ahead mam.

Gracia Martore, Senior Vice President and CFO

Thanks very much and good morning. Welcome again to our conference call and webcast today to review Gannett’s first quarter results. We hope you’ve had a chance to review the press releases we issued this morning, which also can be found at www.gannett.com. With me today are Doug McCorkindale, our Chairman; Craig Dubow, our President and CEO; and Jeff Heinz, Director of Investor Relations.

Since many of you heard our presentation at the mini-luncheon just a few weeks ago, we’ll keep our comments this morning relatively brief. As you saw in the press release this morning, Gannett earned $0.99 per diluted share this quarter compared to a $1.03 per share for the first quarter of 2005 on a continuing operations basis and consistent with late March. I’d like to briefly detail a few areas before I turn it over to Craig.

The trends we discussed in late March with you all held for the balance of the quarter. Overall, our results reflected ad demand growth at both our domestic community newspapers, particularly in classified real estate and employment. This growth was offset by results in the UK, where ad demand has continued to be very soft. Our broadcasting segments generated record revenues benefitting from ad demand related to the Winter Olympics on our NBC affiliates. Craig will discuss our operations in more detail in a few moments.

Several additional factors had an impact on our reported results this quarter, so let me give you a few of those details. Firstly, we began expensing stock-based compensation. The non-cash, pre-tax cost was approximately $11.2 million. About $6 million of that was attributable to the newspaper segment, while roughly $1 million was allocated to broadcasting and $3.6 million to corporate. After tax, the charge was approximately $7 million or $0.03 per share. We completed the expansion and reorganization of our Texas and Mexico newspapers partnership with Media News Group on the last day of our 2005 fiscal year. As you may recall, we contributed one Pennsylvania newspaper and Media News Group contributed three. As a result, our interest in the partnership is now a little less than 41% and Media News Group has become the managing partner. Our percentage of the net results of the partnership is included in other operating revenues rather than fully consolidated in the financial statements. And this treatment is similar to our California newspapers partnership investment as well.

And as we’ve discussed previously, also affecting our reported results in the quarter was the reorganization of the Detroit Newspaper partnership that we completed in August. The full consolidation of 100% of Detroit’s result had an impact on both revenues and expenses for the full quarter and our margin for the newspaper segment as we’ve explained previously.

Finally, the exchange rate, as we mentioned in March, created a headwind for us as it averaged 175 this quarter versus 189 a year ago. So the decline had a negative impact equal to roughly $0.02 per share. Since these items had a significant impact on our expenses this quarter, let me sort out some of the comparisons to give you a clearer picture. As you saw in the press release, overall, our reported expenses were up 10.8%. However, excluding stock-based compensation expense and on a pro forma basis, costs for the companies were held to an increase of only 6/10 of 1%. Drilling down a little bit in the segment, on the newspaper side our reported expenses increased about 11%, again on a pro forma basis, and that is assuming we owned 100% of Detroit and the other newspapers or the same complement of properties in the first quarter of 2006 and 2005, newspaper expenses would have been less than 1% higher. However, excluding stock option expense, newspapers segment expenses were up very modestly only 3/10 of 1%, and that includes a significant increase in pro forma newsprint expense.

The reported increase in newsprint expense was almost 14% in the quarter, comprised of a price increase of 9.6% and almost 4% greater usage. Detroit and the other acquisitions again had an impact on this area as well. So, on a pro forma basis, newsprint expense was up about 6% with usage down 3.6% and prices up about 10%.

Turning to the broadcasting segment, operating expenses were up 4.6% on a reported basis. Excluding stock-based compensation expense, our costs increased only 3.4%.

And the last piece, corporate reported expenses were $3.7 million higher due almost entirely to stock option expense. If you exclude those costs, corporate expense would have increased only about $169,000.

Before I move to the balance sheet, let me provide a quick update on newsprint. We have term fixed price arrangements covering a majority of our newsprint requirements, as you know. This resulted in stable pricings for Gannett through the first quarter despite an announced February price increase. General market prices in North America did not rise in February as planned by the producers. Throughout March, that announced increase also continued to struggle to gain traction as publishers stayed focus on conservation efforts such as web link reductions, conversions to lighter weight newsprint, and we also saw a decline in exports.

Now, turning to the balance sheet, total debt at quarter end was $5.2 billion and cash and marketable securities were $66 million. At this point, our own cost of debt is 4.9% with commercial paper at 4.75%. With respect to shares outstanding, basic shares at the end of the quarter and the quarterly average were both 237.8 million shares. On the capital expenditure side, we had approximately $41.2 million of expenditure in the quarter. At this point, we are still on track to spend about $240 million on CapEx for the year.

During the quarter, we also announced that we made a minority investment in 4INFO, a company that offers a comprehensive suite of mobile search services, and we also entered into a marketing and distribution agreement with them for the entire company.

Finally, I need to remind you that our conference call and webcast today may include forward-looking statements and our actually results may differ. Factors that might cause that to happen 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. And with that introduction, I’ll turn it over to Craig.

Craig A. Dubow, President and CEO

Thanks Gracia and good morning to everyone. At the mini-meeting in late March and as Gracia summarized, we told many of you that results for the quarter to the domestic community newspaper were positive, although we were seeing some significant geographical divergence and auto remain challenging. At USA TODAY, results were choppy, while the ad environment in the UK continued to be very soft and ad demand for the Olympics and Captivate were continuing to contribute to positive results at our broadcasting segment. Now that the quarter is complete, let me fill you in on some details on our results starting with our newspaper segment.

Reported newspaper operating revenues advanced 6% for the quarter and includes the full consolidation of Detroit and Tallahassee, which we acquired in an asset swap with Knight Ridder. Assuming we own the same newspapers in both years, total advertising revenues in the newspaper segment declined to almost 2% for the quarter. The exchange rate also had an impact on the revenue side. On a constant currency basis, ad revenues would have been down only slightly. Our results in the US were significantly better than those in the UK with US ad revenues up 1.5%.

Let me review some of our category results. One caution first, Easter is later this year and that has had some impact on how individual categories fared. As in the past, we suggest you combine March and April results for comparison purposes. Although classified advertising company wide was down close to 2%, domestic classified advertising advanced over 4.5%. Real estate advertising for the entire company increased 12% in the quarter. Real estate ad demand grew progressively through the quarter with March finishing up over 15%. Again, US results in real estate were stronger than the UK. For the US community newspapers, real estate increased over 22% for the quarter and also finished strongly in March with an increase of over 31%. Positive results were posted in most of the regions, although as Sue Clark-Johnson noted in our mini-presentation “Strength came from the South and West groups.