Welcome to Gannett's 2017 Third Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. [Operator Instructions] And as a reminder, this conference call is being recorded. I would now like to introduce your host for today, Stacy Cunningham, Vice President, Financial Planning and Analysis with Gannett.

Thank you very much. Good morning, everyone, and welcome to Gannett's third quarter 2017 earnings conference call. As a reminder, this call is being recorded. Joining us today from Gannett are Bob Dickey, President and Chief Executive Officer; Ali Engel, Chief Financial Officer; John Zidich, President of Domestic Publishing; and Sharon Rowlands, Chief Executive Officer of ReachLocal. Before we begin, I would like to call your attention to our Safe Harbor provision for forward-looking statements in our financial results press release. The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the contents of our forward-looking statements. For a more detailed description of the risk factors that may affect our results, please refer to our financial results press release and our SEC filings, including our 2016 Form 10-K. Also, during this call, management's comments are going to include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the tables of our financial results press release, which we have posted to our Investor Relations website at investors.gannett.com. This conference call is being webcast and is also available through the Investor Relations website. With these formalities out of the way, I'd now like to turn the call over to Bob Dickey.

Thanks, Stacy and good morning. Our solid third quarter results demonstrated strong year-over-year improvement in profitability and accelerating digital revenue growth. Our transition from print to digital continues across our organization via compelling digital content initiatives, advertising -- digital advertising growth and digital marketing services growth. ReachLocal had a very strong quarter with top line growth and significant profit improvement, further delivering on our expectations from the acquisition completed one year ago. Print advertising continues to be challenging and was below expectations for the quarter, however, we continue to manage our legacy cost structure aggressively to offset the revenue headwinds. Overall our third quarter results keep us on track to realize our expectations for the full year. During the last earnings call, we outlined our strategic vision for becoming a daily destination for consumers and marketers seeking meaningful connections with their communities across print, digital and other channels. To execute on this vision, we are focused on our B2C initiatives, which include growing and expanding our consumer audience and engagement. We are also making further headway with our B2B offerings, strengthening relationships with our advertising and marketing partners, including building out our digital marketing services as part of ReachLocal. These efforts will be supported by both organic product development as well as acquisitions. And to enable the necessary reinvestment in our digital future, we are maximizing the economic value of our print business. Let me highlight some of the progress we made in executing on our strategy during the quarter. On the consumer side of the business, our audience reached record levels in September at 125 monthly uniques, as measured by comScore. We were the second highest ranked company in comScore's news and information category ahead of Yahoo!, ABC News and NBC News Digital, and only behind CNN. Our strong…

Thank you, Bob. So quarter 3 was an exciting quarter for ReachLocal with continued momentum across the business. Globally, our revenue grew 9% sequentially over 2017 second quarter with notable increases in North America and Asia Pacific. North America, again, had very strong performance with 11% revenue growth over the second quarter, and we saw strong growth from both our direct local and national channels. We did experience some continued pressure in a few international markets and are executing our plans to address performance there. Our first quarter results marked the second consecutive quarter of strong sequential revenue growth. We've continued average revenue per client growth and increased penetration of new solutions into our client base. Our social advertising solution continued its trajectory with 9% unit growth from the second quarter, and our subscription solution saw a 7% unit growth. During the quarter, we completed the migration of the former Journal Media Group property on to the ReachLocal platform. We are now finished with all migration activities and all Gannett clients are able to take advantage of the power of the ReachLocal technology and service model. In total, 3,500 clients campaigns have been migrated. And across these migrated campaigns, we continue to experience significant improvement in quality scores and other key performance metrics on behalf of those clients. In fact, 96% of migrated clients are getting a better cost per click now that they are on the ReachLocal platform. During the quarter, we also completed the primary integration efforts on the SweetIQ acquisition. Recall that the SweetIQ platform offers location and listings management and reputation management services. The business is performing well with a monthly run rate of subscription revenue at the end of quarter three, up 10% over the end of the prior quarter. We added 26 net new…

Thank you, Sharon, and good morning, everyone. Our financial results for the third quarter demonstrated an acceleration of digital revenue trends and profitability from second quarter 2017 results. Consolidated revenues were $744 million compared to $772 million in the 2016 third quarter. This year-over-year performance reflects the challenged print advertising and circulation environment, partially offset by the contribution from acquired properties. On a same-store basis, total revenues declined 9.4% in the third quarter, an improvement compared to the 10.6% decline in the 2017 second quarter. Excluding the year-ago deferred revenue adjustment related to the purchase price accounting for the ReachLocal acquisition of $6.7 million, total same-store revenue declined 10.2%. There was a $1.4 million negative impact in the quarter from hurricanes that impacted our Florida and Texas operation. Total digital revenues of $245 million represented 33% of total revenue in the period and include the contribution from the acquired ReachLocal operations. We completed the acquisition of ReachLocal on August 9, 2016, so there was a partial period contribution from their acquired operations in last year's third quarter. Adjusted EBITDA totaled nearly $74 million from the -- for the quarter, up 27% compared to $58 million from the prior year period. The $16 million year-over-year improvement was driven by profit growth at ReachLocal, partially reflecting the aforementioned year-ago deferred revenue adjustment and a strong cost performance at our publishing operation. Total same-store adjusted operating expenses were down approximately 12% year-over-year as we continue to benefit from synergies related to our 2016 acquisitions of Journal Media Group and North Jersey Media Group, lower newsprint expense and production and distribution savings due to facility consolidations. In the Publishing segment, we saw improved trends on the digital side of the business in the quarter. Same-store digital advertising revenues grew 4% year-over-year in the 2017…

Thanks, Ali. I wanted to take a moment to comment on another announcement we made this morning. John Zidich, President of Domestic Publishing and Publisher at USA TODAY, will be retiring from Gannett effective April 3rd of next year, after more than 40 years with the company. As a colleague and friend, I want to personally thank John for his tireless leadership throughout his career. John has had an esteemed career with Gannett. Since June of 2015, when John was named President of Domestic Publishing and Publisher of USA TODAY, he has had oversight of all domestic publishing business. He formerly was Chief Executive of Republic Media and the Publisher of Arizona Republic and West Group President. Before his time in Phoenix, he served as President and Publisher of the Reno Gazette-Journal, after starting his career in 1977 at The Stockton Record, formerly owned by Gannett. I'm grateful John has agreed to stay on until April to help with the transition, as we seek to better align with our refreshed business strategy. With that, I turn it over to the operator for questions.

Thank you [Operator Instructions]. Our first question comes from the line of Michael Kupinski with NOBLE Capital Markets.

Just a couple of quick questions. The SG&A expenses were a little lower than what it was trending in the first half. Is this a good run rate going forward? Or how should we look at that line item going forward?

Let us pull that up. Just for SG&A specifically I'd say, look, we took some cost actions in the third quarter, so it's probably a reasonable run rate. Although we do have a couple of things in 2018 that will be incremental -- small increases, but typically, I think, those run rates are probably fairly accurate.

And then is there a way to identify the digital revenue growth and make it like relative to the digital uniques? And I know that you grew your digital uniques from 110 million to 125 million. I was just wondering is there any way that you can identify the revenue increase related to the number of uniques that you're getting?

I think that would require us to break out that revenue in more detail than we do because the digital revenue has a lot of different components, some of which is related to traffic, some of which is not. So I think, let Stacy and I take that as a thought starter for future presentations.

So Michael, this is Bob. I think, there's a couple of things just to keep in mind though. Obviously, the traffic is driving the programmatic, direct programmatic growth that we're seeing. The national growth we're seeing, which was 24% and our mobile growth was 42%. So there's definitely a correlation to the growth that we're seeing on the unique set.

And to that end, obviously, there's a company out there that combined the newspaper and its TV businesses. And I was just wondering if you would look at that as a possible strategy of you getting back into TV to possibly have a digital component in those local markets to aggregate additional uniques for your USA Network?

At this point in time, Michael, I think it's a little too early for us to suggest that would be part of our strategy. We consistently -- or we're very focused now on expanding our consumer side of the business through the great job we're doing with our journalism. And through the digital marketing services business led by our ReachLocal franchise. We believe that's the proper focus for us at this time.

And I was just wondering in terms of your M&A activity given the fact that you were looking at the prospect of getting into some newspapers in certain markets that would add to your network, whether or not if those newspapers were not, let's say, of the pricing or available to you, would you consider going in the other direction and maybe getting a TV in the market to maybe have a digital component in that market?

That's certainly a possibility down the road, but it's still early to see where cross-ownership will play. Obviously, that would be us going into broadcast as a standalone. It has its challenges, so I don't see us going -- I think there are other ways we can expand into non-Gannett markets with the USA TODAY NETWORK that would be a far better investment than buying a standalone television station.

And then my final question. Can you give me an update on the legislative prospects regarding shares on Canadian newsprint?

Yes. Hang on, Michael. We're disappointed that a single domestic newsprint manufacturer decided to use a trade case in these circumstances. We, like a broad coalition of U.S. and Canadian paper manufacturers, as well as other U.S. newspaper publishers, believe that the challenges NORPAC faces stem largely from the product that they typically produce and regional buying patterns. Newsprint producers announced price increases last quarter that are being implemented now. And we continue to manage our inventories and purchasing decisions to minimize the impact of our accretive expenses and that's really all we can say on the matter.

And our next question comes from the line of John Janedis with Jefferies.

Can you talk a little bit more about circulation revenue trends? Is that down 7 or so the new normal in the context of the price increase? And so given your position as a local market pre-monopoly in many cases, what alternatives are people using in local markets for news?

I'll let John speak to the circulation.

So John, with the pricing we've implemented in the fourth quarter -- in the third quarter, especially in September, we believe that the trends in local markets will improve into the fourth quarter and into next year.

As to the news question, John. On a print basis, we do not see -- we're not losing customers to other competitors on the digital side. Our -- we're very proud of the fact that, in our local markets, we are predominantly their number one or number two in the news category with our local digital presence. So I think it's still just a question of the consumer behavior continuing to transition from print to digital. But at the same time, as we've mentioned before, we have an incredibly loyal print readership, over 70% of them are seven-day. And to John's point, our pricing actions are off to a great start. And we believe that in 2018, we can see home delivery revenues be pretty much flat year-over-year. That's our goal.

And then maybe separately, just on the cost front, you noted the synergies from last year's local market acquisitions. Are you in a point now where those are largely completed in terms of recognizing them or is there more to come? Like can you give a little bit more granularity on the sources of savings from the legacy portfolio?

Well, first, we're not -- we have still a very robust pipeline that we just reviewed a few weeks ago, as we do regularly for 2018. Some of the cost savings were through initiatives that started to roll out this year, late into this year. We'll benefit from '18. We have a number of consolidations that have been planned for a while, as you know these take a few months to get orchestrated. Most of our savings continue to be focused around our printing and distribution side of the business, that's where the large savings continue. We've also seen some additional synergies in our sales and news areas. Those are smaller. We haven't really focused on that. As we've said in the past, we are doing everything to preserve our local sales and local reporting resources, but the network has allowed us some efficiencies. John, anything you want to add?

I think those are the key pieces, Bob. We've done a really good job of actually outperforming on our synergies with the acquisitions, as Bob stated, and we'll still have process against mostly production and distribution that I think will continue into next year.

There are some things on the side, also, that are new that we're examining. John made reference to a bit specifically around USA TODAY printing and distribution that, we believe, we can investigate further and maybe rollout in '18.

Thank you. And our next question comes from the line of Kyle Evans with Stephens. Your line is now open.

This is Daniel, on for Kyle. We've talked a little bit about those pricing plans implemented in September. And I was kind of just wondering long term what those pricing plans are going forward? And more strategic view of that circulation revenue overall, maybe a little bit past '18? And then how far out into the future could this revenue line be seen as a stabilizer of overall revenue?

Daniel, let me take the pricing strategy that we've rolled out. We've taken a real different look at the components of our business from a pricing standpoint. And in the quarter, we tested 15 markets, focused on both new and infrequent advertisers and put together plans to improve the ROI that they should expect from doing more business with us. In those tests, we saw double-digit increases in the revenue performance per account. Since that, we've rolled out another 25 markets in the quarter and we will rollout the remainder of our markets throughout all of Q4. So we see that this is a -- two things, a way to improve the trends we see with our print advertisers, but as Bob mentioned, too, that as we begin to look at this book of business, thousands of accounts that run primarily print with us and a percentage of digital, it's the best lead source we have to grow our ReachLocal DMS-type businesses. So it's a combined strategy improving the print trend, but really looking at the future as we convert dollars to digital as well.

So Daniel, we do believe that on the print pricing frequency program, that this has legs over the next couple of years. As John pointed out, a number of those clients are very loyal to us and with this increased frequency, are seeing even better results. On the circulation side, we believe that over the next two to three years after we go through this initial pricing, we will continue to move our pricing up. And so circulation revenue will continue to be part of our strategy going forward.

That was very helpful. Another question on ReachLocal. So you posted solid sequential margin expansion there and mentioned that in the remarks and more flow through to margin in 4Q, I believe, is what you said. What is the long-term margin target there for that business?

Well, Sharon and I -- are very focused on really top line growth right now. Our future digital strategy rests very firmly on our performance in this key category led by ReachLocal and the team. But we've said in the past, we believe that it's a double-digit margin down the road. So I think you'll see us continuing to move in that direction. We did a nice job jumping from 1.4% to 5.6% in Q2 to Q3. But we're not chasing margin. We needed to be a good contributor. It's really about client acquisition, product development and top line revenue growth. But I think we can sit right around the lower double digit margin over the next year. Sharon, anything to add?

No. I think you summed it up very well, Bob.

[Operator Instructions] Our next question comes from the line of Barry Lucas with Gabelli & Company. Your line is now open.

You've held the guidance for the year despite the shortfall in print in the third quarter. So I was hoping, Bob, you can maybe point to some bright lights that are giving you the confidence that you can still hit those numbers.

Sure, Barry. We will continue, on the cost side, the initiatives we put in place in the third quarter will certainly be fully ramped up this quarter. And so we're -- we know those results and very confident. On the print side, we anticipate that we're seeing, as we just noted, the print pricing program is gaining traction. And we are very optimistic that we'll see a slight improvement from current trends. We're not being overly unrealistic there. Our digital business, both locally and national, remains very positive for us and true to -- due to the fact that our audience growth is very positive. And then when you look at the integration of ReachLocal and our local sales opportunity -- the sales teams, both Sharon and John and I are very optimistic that you'll continue to see our digital marketing services growth in the fourth quarter continue on a very positive trend. So I think, that, and then we will see full benefit of the circulation pricing that was launched in September and we continue to launch others. So I think the combination of those factors gives us a lot of confidence that unless something unforeseen happens, we can meet that guidance.

Is there any evidence that the trend in print advertising is, I would say moderating, but it accelerated on the downside? So what are you seeing there?

We don't see anything significantly different because our national major retailers trends are -- they are what they are. What we're going to see -- the small uptick that we expect is in our local markets where the pricing program is definitely showing some positive movement on the trends, but it's really in the other areas that we'll need to continue to execute against.

Bob, you mentioned just a moment ago that there were some other cost initiatives that took place in the third quarter. Was that -- were those planned? Or that was more in response to the weakness that became evident in the quarter?

What I would say, as we've been -- as you know as well, Barry, we are always knocking where the revenues are moving and making adjustments. I would say that, at Gannett, about three quarters of our cost initiatives are well planned out in advance. We have constant commitment to that since the spin and then we adjust accordingly to the trends of the business. But typically, we don't have to do a mad scramble because John and the team do a great job of having the pipeline of projects. As we just discussed, we have reviewed them just the other day for 2018 since the roll out takes some amount of time. So that's just been pretty consistent, standard operating procedure for us. So in the third quarter there were some that are always on the list of potentials that we had to execute against because the trends were a little softer than we had hoped for.

Okay, and last one for me. The 2 million shares of [indiscernible] you purchased in the quarter -- the driver of the pricing of stock? Or anything else that you can share.

We just had an open window and it was a good opportunity to take advantage of it, Barry.

As you know, Barry, we continue to believe that Gannett is great value and we have a terrific dividend that we're committed to, and at the current price that we saw a real opportunity for us to get into the market. And as Ali pointed out, we've been very active with acquisitions which knocks us out of the market at given times. So it was a window that made sense and we executed against it.

And our final question comes from the line of Doug Arthur with Huber Research.

A couple of number questions. Ali, on Table 4 in the press release, you break down digital advertising between external and interest driven. So external digital was down 5.9%, but including intersegment you were up 4.1%. Does the intersegment -- I mean, what is the intersegment? Is that ReachLocal into the newspapers or...

Yes, it's ReachLocal. I think we talked about it last quarter where we're showing ReachLocal in the local segment, the digital segment and the Publishing segment and then we eliminated in that line item.

So the underlying digital momentum of the publishing group is sort of a mixed bag. I mean, it's down to outside customers. But internally, if you include that, it's up overall. Is that a fair way to look at it?

Doug, this is Stacy. So the way to look at that if you look at the $98.8 million that was in '16, that included the DMS revenue that we had in -- the digital marketing services revenue that we had on the old G/O Digital platform. So that now is shifting down to the intersegment sales, but you can't look at it that way because some of that $9.9 million is the digital marketing services revenue that we had internally last year.

Okay, and then when you add back facility content consolidation asset impairments to EBITDA, it's $2.2 million. On Table 6, it's $17.1 million. Is that the difference between the cash and noncash portion?

Hang on, I'm looking at it.

I mean, Table 6 has got a $17.1 million facilities charge. I'm assuming that's just the GAAP charge, it's not the cash add back. Is that a way to look at that?

That's correct. That is the GAAP number.

And then, finally, is there any updated number on the underfunded pension?

Yes. I've got it right here, $678 million. That's down about a little over $30 million just from contributions. It hasn't been -- the valuation hasn't been updated, we do that in the fourth quarter.

Because I know currency had been an issue in terms of increasing the liability, was that neutral on the quarter?

Yes, the currency was fairly neutral this quarter for that. Really, the liability increase has been driven by declines in the discount rate more than currency. But yes, currency is not an effect in the quarter.

And this does conclude today's Q&A session. Ladies and gentlemen, thank you for participating in today's call. This does conclude the program and you may all disconnect. Everyone, have a great day.