USA TODAY Co., Inc. (TDAY) Q3 2005 Earnings Report, Transcript and Summary

CONFERENCE CALL AND WEB CAST OCTOBER 11, 2005

Operator: Good day, everyone, and welcome to Gannett's third 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'd like to turn the call over to Ms. Gracia Martore. Please go ahead, ma'am.

Thanks very much and good morning. Welcome to our call and our Webcast to review our third quarter results. We hope you have 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. As we noted in our press releases, two separate transactions in the quarter had a very significant impact on the reporting of our results. The first was our asset exchange with Knight Ridder, in which Gannett received the Tallahassee (FL) Democrat and cash consideration in exchange for newspapers in Olympia and Bellingham, Washington, and Boise, Idaho. The transaction was accounted for as a sale of discontinued operations and a purchase of the Tallahassee newspaper. The contributions from the former Gannett properties have been reclassified as discontinued operations in our financial statement. The asset exchange resulted in an after-tax gain which is also included in discontinued operations for the third quarter. And we have also gone back and reclassified last year's quarter to reflect the discontinued operations. As you saw this morning Gannett earned $1.14 per diluted share from operations this quarter including $0.01 per share, or approximately $3.6 million of after- tax income from those discontinued operations. Basically, the income from Bellingham, Boise and Olympia for the two months that we owned them in the quarter. The gain associated with the sale of these three properties for accounting purposes was $18.8 million after-tax, or $0.08 per diluted share. That gain is also included in discontinued operations. And during the quarter we also reorganized the Detroit Newspaper Agency. As part of that transaction Knight Ridder sold its newspaper interest in Detroit to Gannett and MediaNews Group. Together we formed the Detroit Newspaper…

Peter, we'll continue to be very focused on the cost side of the equation with ad demand particularly in the U.K. and in the TV side under some stress. Our folks in the U.K., as I said, and Craig has pointed out, have done a wonderful job of having lower year-over-year costs. We've put in conservation measures on the newsprint side. We've taken a look at each and every expenditure in making sure that it is warranted on a product or return on investment equation. So we'll continue to do the best we can. We'll have newsprint going against us again in the fourth quarter. But we will continue to stay very focused. Douglas Arthur - Morgan Stanley -;Analyst : Craig, a great job. I'm wondering, can you just delineate a little bit more clearly the U.S. community newspaper ad trends both for September and the quarter, so excluding the U.K. impact and USA TODAY? And then as a follow-up, the strength in USA TODAY in September, do you see that as sustainable into Q4? Thanks.

Doug, let me start with just the U.S. side of things. If I excluded Newsquest on the ad revenue side, for period nine, on the U.S. side, ad revenues would have been up in the 4% range. And for the quarter, again, excluding Newsquest, advertising would have been up in about the 3% range. USA TODAY did have a good month. They had a little bit easier comparison than they did last year. But what we've heard thus far from Craig Moon, who runs USA TODAY, is he's feeling a little bit better about the fourth quarter and is seeing some opportunities for the fourth quarter. We'll just have to see how that plays out. The numbers are not going to be straight-lined and there'll be some choppiness to them, but I'd say overall on the USA TODAY side, we're feeling cautiously optimistic. Doug McCorkindale - Gannett – Chairman: The big picture is the U. S. domestic newspapers are doing okay. I think a little bit better than maybe some of the others in the industry are seeing. We're getting hurt by the U.K. economy and Broadcasting is disappointing. But if the U.K. and Broadcasting were just flat, we'd be having some big time numbers here. So the U.S. side is doing very nicely. Craig Dubow - Gannett – President and CEO: The only other comment relative to USA TODAY, they have been doing extraordinarily well with auto. And that is contrary to what we have seen in Broadcast and certainly on the newspaper side and our hope is, is that we can see that continue. But that's a big difference in where we are right now. Craig Huber – Lehman Brothers - Analyst : Good morning. Thank you. Gracia, last quarter on your conference call you mentioned about a curtailment of retiree medical and life insurance coverage, which I think when the Q came out it helped by $0.05 to $0.06 in the quarter. I was wondering this time around is there anything of a one-time nature other than what you talked about for the swap in Detroit that either helped or hurt your numbers one-time in nature that we should know about? And then separate from that, I was just curious if you guys are seeing any light at the end of the tunnel at all here on the auto side for TV or for the newspapers? Thank you.

Craig, on the one-time items, yes, we did, as we mentioned on the call last quarter, have a one time benefit on the retiree health side but that quarter was also offset by some one-time items related to Detroit on depreciation of some of our old presses there. In this quarter we did have the remaining tail on the retiree health which was several million dollars. But at the same time we also had some other pieces going the opposite way that would have been one-time items. So net/net a very small contribution from one-time items. Craig Dubow - Gannett – President and CEO: Doug McCorkindale - Gannett – Chairman: And then Craig, you know, autos, well, motors, as it's called, is also very soft in the U.K. so the only positive number we're seeing is, as Craig Dubow mentioned earlier, is at USA TODAY. Steven Barlow – Prudential Equity - Analyst :

Steve, on the U.K. operation, interestingly they have done such a good job year- over-year on the expense control side that their margins actually have not suffered as you would otherwise have expected. As I mentioned earlier, they have lowered year-over-year expenses by a couple percent. That's from a combination of factors. Lower newsprint usage but also they have been looking at headcount and, as appropriate, doing things to right-size where we are not seeing revenue opportunities. We'll just have to see how that all turns out. William Bird –Citigroup Smith Barney - Analyst :

I will start with the buy backs versus acquisitions and then turn it over to Doug and Craig on the acquisition environment. I think our current position remains similar to what it has always been, which is that we will look at acquisitions and we will look at buy back at the same time and do whatever makes the most economic sense for the Gannett company and its shareholders. We have done a fair amount of share repurchases because, frankly, on the acquisition side we haven't seen very many economically attractive opportunities, and our stock represented the best investment for us. That continues to be the case at the moment, but Craig and Doug, if you want to… Doug McCorkindale - Gannett – Chairman: Bill, I think Gracia's put it in focus there. There are some things for sale but at prices that we don't find attractive. As you know, we've been doing this a long time and when the numbers get out of focus as they did in the late ‘80s we stepped out of the marketplace. Right now we're involved in looking at a number of transactions - there are a number of broadcasting stations for sale. There are some print properties for sale. There are a number of technology plays that are on the marketplace. So we're in all of them. But we are not going to chase some of these properties to get to a purchase price that we don't think can make money for Gannett shareholders. Others may see a more optimistic view, but 16 times cash flow for a well-run television station simply doesn't make economic sense to us. It's better for to us buy back Gannett stock. So the marketplace is not overly active, but it's busy and there are a lot of things to look at and we're looking at all of them. Debra Schwartz – Credit Suisse First Boston – Analyst :

Doug McCorkindale - Gannett – Chairman : Craig Dubow - Gannett – President and CEO : And the follow to that would be with respect to the real estate sector itself which at this time last year was in considerably different position. For 3Q it has turned just slightly negative. Doug McCorkindale - Gannett – Chairman: Matthew Gourmand – UBS Warburg – Analyst: Good morning, it's Matthew Gourmand here for Brian. You talked about the U.K. the auto and the employment sectors. Outside of those are there any particular pockets of strength that you're seeing? Any positives at all? And as well, you mentioned you saw hurricane-related expenses in the quarter.

On the hurricane side, as I said, we saw some additional expenses. We had a fair amount of impact, the hurricanes did, on our folks in Hattiesburg, Mississippi, and to a lesser extent, in Jackson, Mississippi. As is typical of Gannett we moved in a lot of supplies, a lot of loaners, a lot of people to keep the Hattiesburg folks up and running and able to put out their newspaper. So clearly there are extra expenses associated with that. Craig Dubow - Gannett – President and CEO: Other than auto and employment. Doug McCorkindale - Gannett – Chairman : Well, as I said earlier, Scotland is doing okay and the North of England is doing okay. But as a general statement, no, we're seeing softness in employment and motors and the real estate is beginning to get a little less robust.

Paul Ginocchio – Deutsche Bank Securities – Analyst : Thank you. I guess this question is for Craig. Your view on dividends, obviously the shares have been under a lot of pressure and the market's got a relatively bearish view on the future newspapers right now. What would it take for you to change your view on being more aggressive on paying out a bigger dividend? Thanks.

Craig and I have chatted about this a lot and I think our feeling is that at the moment we're returning value to our shareholders through a share repurchase program, a very significant share repurchase program both last year and this year. And there really hasn't been a lot of call for us to increase our dividend in a significantly more meaningful way. Every year we've increased our dividend. In July, we announced a $0.02 increase. I think we want to continue to maintain the flexibility we have on the share repurchase side as we look at the potential for acquisition opportunities down the road, should the FCC ever get to a point where they change the rules that have been, I think, tempering acquisition opportunities for the last couple of years. So I think we'll stay the course on the share repurchase front unless something were to change dramatically and we would react to that. Ed Atorino – Benchmark Capital – Analyst :

In 2002, Ed, we had about, call it $80 million, a little over $80 million of political and almost $24 million of Olympics. So it was a significant year in '02. Doug McCorkindale - Gannett – Chairman : But we're looking forward to some pretty good numbers in '06, Ed, looking at that as a frame of reference. It won't be as great as in '04 but it should be pretty good numbers because our ratings on our television stations are still excellent. Jim Goss – Barrington Research Associates – Analyst : I was thinking along the same lines with the political and Olympic issues. Have you looked at the races in the local markets that you're affected by in terms of broadcasting? And in terms of Olympics, it seems you've been stepping up your activity with USA TODAY with special sections and getting more like a broadcaster in that way in that vein and the Olympics hit in the first quarter this year, maybe you can comment on that a little bit since it's a near-term event. Craig Dubow - Gannett – President and CEO: Sure. With respect to the Olympics USA TODAY will continue its participation as it has. It's a big focus for what Craig Moon and his group are doing. And we look forward to certainly all Torino has to bring from that aspect. Doug McCorkindale - Gannett – Chairman: Every year it gets a little better, Jim, you know, we've, USA TODAY being the nation's newspaper gets a lot of play, we have a very good working relationship with the Olympic folks. You'll see us take advantage of that and being part and parcel of it as much as we can. And Craig may comment on [any] local races we have. It's not something we…

Crista Quarles – Thomas Weisel & Partners – Analyst: You mentioned that you were cautiously optimistic on USA TODAY and I was wondering, obviously they have some pretty easy comps in Q4 so I was wondering if that's what's giving some of the optimism? You also mentioned auto at USA TODAY is actually an area of strength, if you could highlight some of the other categories? And then, you mentioned that your non-traditionals are up sort of mid-teens. I was wondering where on a run rate you think that will come out for the year? Thanks.

On the USA TODAY side you're quite right. As we said, we have easier comps in the fourth quarter, but I think it's more than that that makes us cautiously optimistic on the USA TODAY side. Craig has shared with us that a number of advertisers are looking at opportunities to advertise with us, some new advertisers that we haven't seen before, as well as others that perhaps haven't been in the paper for a little bit of time. And on the auto side, the fourth quarter usually turns into a pretty good quarter for us. So given what they've done thus far this year on top of what they've done in previous years on the auto side that gives us confidence in what they can accomplish there. Crista Quarles – Thomas Weisel & Partners – Analyst: Is it fair to say the visibility will be increasing then?

Fred Searby – JP Morgan Chase & Company – Analyst: Craig Dubow - Gannett – President and CEO: I think as we had mentioned before we are impacted in 12 of our Gannett newspaper markets as we go forward. Overall it is a fairly significant number but certainly the group is working very hard to figure out any of the other opportunities we have from an overlap standpoint in how we can move forward. But Gracia, you may want to fill in a little bit here on some of the other information that we've come in with just recently?

Sure. Fred, we have seen a little bit of a pull back on a combined basis from Federated and May as frankly we've been expecting. We have said we fully expect that Macy's is going to reduce their spending over time because of the overlap in those 12 markets. But at the same time, interestingly enough, we are seeing some increased spending from the Wal-Marts and the Targets and frankly the K-Mart/Sears combination. So while we've seen some pull back there, we are seeing some positives out of some others. We continue, as you know, to focus on those small to medium-size advertisers and on the non-daily side. Also in response to Crista's question on the non-daily side, we are continuing to see good follow-through as we concentrate on those small to medium-size advertisers and provide them with those additional products that are perhaps at better price points for some of those smaller advertisers. We would anticipate that on the non-daily side we'll continue to see good follow-through for the remainder of the year. Doug McCorkindale - Gannett – Chairman: Fred, also on the Federated/May pieces where they have overlaps and they have to sell some of the stores, as you know, they're being asked to sell to competing department stores. From what we understand that is going very well and there will be competing brands in those markets which will obviously be more positive to us than otherwise. Brad Dyland –Deutsche Asset Management – Analyst: Good morning. At what point with your stock at the level it's at, would you look to utilize your balance sheet more to be more aggressive in buy backs? And along those lines, how important you is your single "A" credit rating? And then my last question is, if it's possible to include more balance sheet and cash flow statement information in the quarterly press releases.

Taking that last question first, in very short order, we will be filing our 10-Q and that will have a very complete and thorough reporting on all of our cash flow statistics. We'll have our 10-Q out by the end of the month. Vis-a-vis using our balance sheet further on share repurchases, as I said earlier, we are constantly balancing leveraging up the balance sheet on share repurchases with the potential for acquisition opportunities. I think as long as we are in that mode in the short-term to intermediate-term we'll continue to balance that equation carefully. If we were to find down the road that we needed to go in a different direction we certainly would do that. We have said in the past that we very much like having a solid investment grade credit rating. But at the same time if the right opportunity came along we would stretch our balance sheet for that opportunity, but as we have in the past, then we would quickly look to focus on bringing the balance sheet back so that we have the flexibility and ability to respond to additional opportunities as they come down the pike. James Peters – S&P Equity Research – Analyst: Yes, good morning. You talked about margins being adversely affected by Detroit in the near-term and seeing opportunities in the medium-term. If you could just remind me what you're defining as the near and medium-term and also in the medium-term if what you're saying is that the margins for the company overall will return to sort of pre-Detroit levels? Thank you.

Well, the impact on the margin comes about in part because previously we had been including the net of Detroit's results, 50% of the net of Detroit's results as a one line item in other operating revenue. Which means there was very little expense that offset that line. Now we are fully consolidating Detroit into all of our numbers, and as we have said, the margin in Detroit is not where we want it to be either in the short, intermediate or long-term. That's the opportunity in Detroit. And so while there may be some margin pressure from Detroit in the very short-term, and by short-term I mean over the next year, we certainly are looking at opportunities to improve Detroit's performance when the new press project comes on board later this fall, when we go to the A.M. conversion we will do in early next year, and then as we continue to look at opportunities to improve operations over the next two to three years in Detroit. So we understand that Detroit has that impact but our management team there understands the need for us to move in a very positive direction in Detroit very quickly. Dan Jenkins – State of Wisconsin Investment Board : Good morning. I was wondering if you could give me what your debt to capital is at the end of this quarter versus at the end of the third quarter last year or maybe at the end of the year last year? And then kind of reiterating what the earlier caller said, it would be nice if we could get a balance sheet with the release. And then how far are you planning to push that for further share repurchases, that leverage? Are you intending to add more leverage from where you're at now or are you just going to use free cash flow for that going forward?

As I mentioned previously, you will have a full balance sheet by the end of the month. I did provide some guidance that we had about $5.4 billion of debt at quarter end. I don't have last year’s quarter end but you can go to our Web site, www.gannett.com and our financials are available there. We'll continue to look at the deployment of free cash flow, whether it be share repurchase or whether it be acquisition and are continuously evaluating that. And we'll do what is right and we'll do what adds the most value to our shareholders on an intermediate to long-term basis.

It appears there are no further questions at this time. Ms. Martore I'd like to turn the conference back over to you for any additional or closing comments.

Thanks very much for joining us this morning. If you have any additional questions please call either Jeff Heinz at 703-854-6917 or me at 703-854-6918. We'll both be here for the rest of the day to answer any other questions you may have. Thanks again for joining us.

That does conclude today's teleconference. Thank you for your participation and have a great day.