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gannett mea2007

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  • 1. Media and Entertainment Analysts of New York Gannett Co., Inc. Question and Answer session March 15, 2007 (Edited for clarity) Gannett participants: Craig A. Dubow, chairman, president and chief executive officer Gracia Martore, executive vice president and chief financial officer Sue Clark-Johnson, Newspaper Division president Craig Moon, USA TODAY president and publisher Roger Ogden, Broadcasting Division president and CEO Jack Williams, Gannett Digital president. Question: For the community newspapers and for USA TODAY, what did you finally settle on in general for ad rate increases? Craig Moon: USA TODAY is 6%. Sue Clark-Johnson: Most of our ad rate increases are market-by-market. We don't have an overall rate increase and it depends on market conditions. Most of our medium to larger size accounts are in revenue-based contracts, so it's harder to ascribe it a particular ad rate increase. Question: Would you say the average is 3% or 4%? Sue Clark-Johnson: I'd say it was in that range. Question: In all your experience, Sue, and this has always been an argument in newspaper circles, does it really matter all that much what you raise your rates by? The advertiser is going to decide what he wants to do and if you raise your rates 5% and he's in a down mood, he's says fine, I'll buy less. It doesn't matter, this is what I'm going to do. Craig Moon: I think the point that most advertisers look at is the value. And I'm making that determination a whole bunch of different ways. I may be looking for brand awareness; I may be looking for actual sales of units; I may be looking at market share; I may be looking at any of those things. But it really is the value. So if I pay less than what you deliver, that's an appropriate price. 1
  • 2. Sue Clark-Johnson: And I would say for the majority of our advertisers, which are in our local markets, they look at it like this: I'm pricing an ad, 10 people walk in my store; I got results from the ad. It's a return on investment for value. Question: Just a couple of questions on Newsquest. How much of the better results do you feel is really from easier comparisons or how much do you really see a change in the marketplace over there? There was an article today talking about expectations in the UK ad market being much stronger in 2007 and in that healthier backdrop, what should we expect as the normalized growth rate for Newsquest for the year? And -- if you could tell us what the growth was for the non-classified portion of the business. Craig Dubow: Gracia, do you want to start on the UK? Gracia Martore: Sure. On the Newsquest side, we indicated in December when we gave our out assumptions that, in part, Newsquest would benefit from easier comparisons throughout this year. But in our conversations with the management team there, there is a sense that in a number of the markets, as Craig said, outside of Scotland and London, that we are seeing some positive momentum. Our sense is that in March, from the newspaper perspective, we will probably see flattish revenues year-over-year. We don't want to get ahead of ourselves, but I think the market there does seem to be stabilizing, as we've indicated. Craig Dubow: I'd also say additionally, from the online perspective, we're really seeing some very significant results in the 50-plus percent range as we just reported for February. So again, as Gracia suggested, we don't want to get ahead of it, but it is a much better feel than what we have had over the last year here. Question: Putting aside the impact of weather on business, when you look at your community newspapers, are you seeing any signs of stabilization in the rate of decline in print? Craig Dubow: Sue, you want to take it, then I'll come back and talk in general. But go ahead, if you'd like. Sue Clark-Johnson: Well, I think you have to look geographically. As I mentioned, last year our operations in the South and the West were doing very, very well and they were doing very well in print as well as in our non-daily 2
  • 3. products and online. Unfortunately, the vagaries and cyclicality of real estate, and then related to that, employment, has caused some disruption. In the Midwest, we have the concerns still about the ripple-down effect of the automotive industry, but we were starting to see some stability in retail, to some extent, and have had some nice successes. February seemed to be a bit of a blip in what we were seeing. What we're going to see over the course of the next couple of months depends on real estate and automotive. We need to remember that we can talk about what's happening in print, but we have so many different product offerings in each one of our markets now -- or we are in the process of developing multiple platforms and product offerings -- that we're looking more at share and how are we doing with share. Our footprint is substantial. I'm feeling encouraged by all of those indicators. Question: As you look at online, the rate of growth seems to be fading a little bit and the comments earlier suggest that growth in streaming video is quite high, which might imply that flat content is really not growing as quickly. Are you seeing this kind of bifurcation in the online market? Sue Clark-Johnson: Actually, we're seeing some very nice growth in retail. With all of the initiatives we have in place, we're now able to go to an advertiser and say: “what audiences are you trying to reach?” Let’s say the advertiser tells us they want to reach mothers 25 to 40, we can put together a package for them that may include three different platforms, may include a magazine, the Sunday newspaper and an online venue. And as a result, very preliminarily, we're seeing a good responsiveness. Our retail has been up very nicely in double digits just in the last couple of months. Gracia Martore: But as you know, the preponderance of our online revenue continues to be from employment up-sells and classified vertical up sells. Jack, correct me if I'm wrong, with employment slowing, as Sue indicated, we're seeing some slowing in that category. But again, in the retail side and in other areas we're actually seeing some pretty good increases. Question: Thank you. Can you just talk a little bit about what you're seeing, you alluded to -- in help wanted and real estate? Do you think you're maintaining your share there? There was some sequential weakness in February and I'm wondering if that's a blip or potentially signaling a slowing in the overall economy? 3
  • 4. Gracia Martore: Well, as Sue said, the economies that are construction-based and real estate-based are beginning to, we think, suffer from the slowdown in housing permits and all the rest, which has an impact on employment as well. We saw it in some of the job numbers in the last couple of go-rounds. We are seeing some slowing in those markets. But then Des Moines is having a perfectly good time about it. So it very much is, as Sue says, a market-by-market driven issue. Question: Do you think you're maintaining share in the markets? Sue Clark-Johnson: Yes. Question: Your online and print combined? Sue Clark-Johnson: There isn't a better example than employment. When you look at the strong -- we still have a tremendous amount of revenue in our newspapers in print. We are doing very well with our CareerBuilder opportunities. If I take a market -- and I'm going to use Indianapolis as an example -- that is not exactly a robust employment market, and yet in employment last year, because of the strength of the print product, the strength of our online product, the outbound calling capability that I talked about, we had some nice gains in Indianapolis last year. When you look across all our verticals, we are so well positioned in the classified verticals with the offerings we have that maintaining share is certainly something we expect to do. And remember, too, that we have a lot of other products in our markets. We don't just have one print product and one online product. In our good-sized properties, we also offer magazines, we've got zoned content sections, we've got about two dozen Hispanic publications that do very well across the country. We're able to have a very substantial footprint in the market in terms of share. I don't know, Jack, you may want to comment on the classified vertical. Jack Williams: That's absolutely true. When you add the products together in a lot of these categories, we've actually gained share in a lot of these categories. When you add the sales we're making in our newspapers for online, the sales we're still making in paper, the sales CareerBuilder is making, the penetration we 4
  • 5. have, 70%, 80%, of cars.com in a lot of markets, on top of the auto, I think we're actually gaining share in a lot of these markets. Craig Dubow: This is where our training efforts come in, in a very, very significant way: The way we're able to deal in these multi-product environments and what we can, in fact, sell. That has been a very major effort and is also having some very positive impact for us. Question: Wondering if you can talk a little bit about Detroit: where the margins started when you took over, where they are as the goal for '07 and then what the final goal is for 2010 or whenever the right year is? And will that be up to the group average? Then, on a similar basis, since you have this Tex-Mex, Pennsylvania, and then the California partnerships, we haven't been able to see the numbers from those since they're just the number in the revenue side. Are those properties all together doing better or worse than the group average? Gracia Martore: As we've talked about in the past, our margins in Detroit when, shall we say, we started the process, were quite substandard to the Gannett margins. The folks in Detroit have accomplished all of the expense savings and then some. They continue to do what we had hoped for vis-à-vis the new production facility. And we now have the ability to do things in a more unfettered way now that we have a majority ownership. The headwind has been the revenue environment there, based on what is happening with the domestic auto manufacturers. That has muted a lot of the good work they have done on the expense side. The margins still are nowhere near what our typical Gannett property would be. With some help from that economy down the road -- and we don’t think that's going to be a short-term fix because the auto manufacturers are going to have to work out whatever they do -- then we will be very well positioned in that market to capture more than our fair share of the advertising dollars. Craig Moon: I'm going to talk a little bit about the advertising results, which ultimately would drive the profitability. In February, in the employment category in Detroit, if you combined online and print, revenue was actually up year-over-year, which I think in that economy is very good. The help category, which is a substantial category for Detroit, was up for the fifth consecutive month. 5
  • 6. There are some aspects of that but, as Gracia said, that is a tough economy. It has greater unemployment figures than most of the nation. But they're working very diligently and I think we're well positioned. Craig Dubow: I would just say this, the team that we have in place there has taken this directly head-on. We know the obstacles that are there. We know the difficulty. If we can get just a bit of economic help out of the market, the positioning that's been already put in place will serve us very well. But it's not a short-term proposition for us at this point. Do we want to talk a little on California? Gracia Martore: The Texas, New Mexico and Pennsylvania partnership is doing just fine. We're very comfortable with the progress that's been made there. On the California newspaper side, it has seen some of the same challenges that a lot of properties are seeing in the Western part of the country. So it’s a little tougher road. I would also say that accounting rules do not allow us to fully consolidate California and Texas-New Mexico. We don't think it's in the best interests of investors that we're not allowed to, but it is what it is and so we'll do the one line treatment that we're required to do. Question: This is sort of a long-term strategic question. Rather than focus on auto, which is bad, pharmaceutical advertising, which is less, or the general whatever, I'm more interested in looking forward, say, five years. We know that based on recent deals that several papers have been bought and within a year had to be written down substantially. Do you see a situation where you will have to revalue your own properties downward, number one? Number two. There was the Ratner op-ed piece. Do you think that if we look forward several years that you're fighting just an absolutely losing battle or do you think that there is potential for the newspaper to continue its vital role in our democracy? Craig Dubow: Well, let me start with the backend of the question. As a media company, we will continue to take on that vital role, regardless of platform. Our longer-range strategy and where we're trying to go, very clearly, is to further enhance our core business on the local side. We are all about local. We know what we have been able to do best for years and we also recognize what some of those changes are. So we'll serve the core side. 6
  • 7. We have also, as Sue has talked about here, really addressed the niche audience. When you get into the non-daily type products that we have, we are serving very specific audiences as we move into that realm. Then, on the other side, what we're working very hard on is digital – what Jack’s group is working on. Our goal there is really taking advantage of all the change within our newsrooms to the Information Center and to be able to serve a multi-platform environment. That’s what our strategic plan is all about. That's going to be different demographics, that's going to be different lifestyles, etc., etc. Our view is that we have a huge responsibility, it’s number one, from a First Amendment standpoint. More importantly, from a local community aspect, it’s important how we can serve that community. Gracia, do you want to take a shot at the first part of the question with regard to any write-downs? Gracia Martore: If we continue to succeed on the initiatives that all of these folks have articulated today, we think we will have a very good multi-platform company. We are not anticipating the need to do any kind of write-offs now or in the future. Craig Dubow: We are pressing very, very hard to be able to serve the local consumer. What we are talking about, our phrase is consumer centricity. We recognize clearly there are going to be differences in what our typical ink and paper user will be, versus that of someone in the pure digital environment. What we have found is that if we can provide a differentiated value proposition on a platform chosen by the consumer, we have a tremendous, tremendous future. From each of the individual success stories you're hearing is what's giving us confidence in where this is heading. Yes, there are big changes in the marketplace and the way people consume media, but the fact remains that consumption continues to grow in a very big way. What we are doing is addressing those needs in ways that become very specific, that go far beyond a mass audience into very individual cases. We can personalize and customize to the actual needs of that consumer. We’re feeling real good about where this is going and the way that we're able to drive the business as we go into the future. Question: Do you think you can get people to pay online? 7
  • 8. Craig Dubow: That hasn't been the model to date that has had extreme success, but our view at this point, because -- Jack, correct me a little bit -- but we'll have exceeded $400 million in total online revenues as we come into this year. Our belief is that there is an ad market, again, that we can serve in a very specific way that others can't. Let me dive into this just for a second. Part of what we're working toward is to create a very hyper local environment. And, as Sue mentioned, what we're having great success on right now is our ability to attract new advertisers that heretofore could not afford the CPMs in print or on our broadcast properties. What we're finding is that hyper local is a unique opportunity. If you are in one school district of whatever city out in the USA, we can now begin to target into that and that pizza parlor or other advertiser who has not been able to utilize this can find a way into the multiple platforms we're now serving. Our belief as we go forward is that local consumer centricity is where there is a huge opportunity. We are really pushing in that direction because we're uncovering day in and day out new advertising possibilities that heretofore just have not been possible. It's a positive for us. Question: First question, Gracia. Back in early December when you put out your advertising revenue forecast for newspapers of low single digits for this year, I was curious back then what were you thinking your real estate advertising revenues would be up this year in your newspapers and has that changed? Going to fast-forward here, given all the concern out there in recent times about sub-prime loans and weakness of the real estate market, have your thoughts changed only in real estate ads? Gracia Martore: When we put out our assumptions, as I recall, we were anticipating that real estate would slow considerably this year. We were starting to see some of those signs. Obviously it's slowed in these first couple of months a little bit more than what we had anticipated. Also, when we gave you the assumptions back in December we indicated that the first six months of the year would be the toughest period in terms of comparisons, as well as what we were seeing in the environment. We thought it would be toward the latter half of the year that we would see the numbers that would get us to those assumptions that we had provided. 8
  • 9. Question: Another follow-on, if I could. On retransmission fees: Could you just quantify them for us? What are your retransmission fees as a percent of your whole TV station group? More importantly, as some of these contract screens come up for renewal over the coming few years, where can it be as a percent of the total revenues? Craig Dubow: Go ahead, Roger, and then I'll follow. Roger Ogden: The fees are modest as compared to the total revenue; certainly in the low single digits. We do see, however, enormous opportunity here. You heard many in our industry talking about that opportunity. Our approach has been to come at it a little differently. We've had many negotiations over the course of the last three or four years, and successful negotiations as far as we're concerned, in creating a revenue stream. We have more coming up this year and we'll take the same approach. I do think that the entire industry is more focused on developing that revenue stream now because the perception is the value that's being transferred there has not been recognized. The time has come to recognize it and we agree with that notion. So we will be pursuing it, but hopefully pursuing it more along the lines of what we've historically done as opposed to doing it in a real public way. Question: Is there a way, though, that you could just quantify it? Is it 1% to 2% right now of your TV station revenues? Can it be 5%, 6% maybe in three years from now? Can you just get a little more specific? Roger Ogden: Your assessment of the current rate would be in that 1% or 2% range. I would hesitate to give you a figure. I think that there has to be a breakthrough with the larger cable operators in order for that to grow dramatically. I do see the potential of that occurring and if it does, I think it can be a fairly significant revenue stream for us. But we're not there yet and we have to work our way through that. Craig Dubow: I would just say additionally, on top of that, one of the advantages we have in those discussions would be the ratings posture that most all of our stations have being in a number one or number two position. It will certainly help as we move forward into these discussions. 9
  • 10. Question: Roger, a question on Captivate. What's the gating factor in deploying these units and these screens faster? I mean at the current run rate you're doing about two per day? Is that the projection for 2007? Why can't you get it out that much faster? What's holding it back? Does it have the opportunity to be an enormous business for you, even from here? Roger Ogden: We have a very large footprint already with the 7,600 screens that are out there. There are two factors that limit it. One is just the contractual relationships with buildings. We still have some headroom there, but we still have some limitations as to what that represents. Secondly, it's just the physical capability of the crews we have. It doesn't make sense for us to ramp up dramatically those crews in order to put more screens in relative to the business because we can offer currently a nationwide distribution scheme that seems to be attractive. We have customers signing up with some frequency now who think that that national footprint that we have is adequate. We're going to grow it at a rate that makes sense to us and we will continue to grow it, both here and in Canada. We may even grow it outside of some of the buildings we're in at some point in time. But we want to be consistent with the growth of the revenue stream and the resources we have in place. Craig Dubow: Okay, looking at the clock we've got time just for one or two more questions. Question: In the past, you have made large acquisitions levering up and, over time, paying down debt, reaching a very strong balance sheet, as you do right now. How has this need to maintain a strong balance sheet changed over time and are you willing to increase the normalized level of leverage to return value to shareholders? Craig Dubow: Well, from an acquisition standpoint we are looking constantly at what we can do. There have been a number of things we've been involved in that we have chosen to pull back from for what we consider to be right reasons. But as far as by platform, we don't have any restrictions whatsoever. Depending where the opportunity is, is what we'll pursue. On the traditional side, you can see what we just did just the last two weeks here with two other newspapers. We're going to continue to look at those. Where the opportunities are right, we're going to move forward. 10
  • 11. Gracia, do you want to go with the latter part of the question? Gracia Martore: Since our rating agency friends are sitting in the room, I'll have to be careful. But clearly we have demonstrated in the past that if it is the right opportunity -- whether it's share repurchases or acquisitions or whatever -- and we think it will deliver the most shareholder value, then we're willing to ramp up our balance sheet in a little bit more meaningful way in order to capture that opportunity and deliver that value to the shareholders. But we're also mindful of the fact that credit markets are now always Goldilocks credit markets, as we are seeing right now. So we are always mindful of liquidity and our balance sheet and always weighing that against what those opportunities are. Craig Dubow: Okay. One last question? Yes? Question: Getting back to broadcasting, can you talk about your digital strategy and down the road the phone strategy? Are these two potential new revenue streams of any consequence? Craig Dubow: I'm sorry, did you say phone strategy? Question: We're all going to -- not me, but some people will -- be watching television on their phones. It seems to me maybe the phone companies are going to have to pay for it. Roger Ogden: We know that the digital spectrum we have will likely have value beyond current uses. Right now the one that makes the most sense is the creation of the second digital channels, the weather channels and so forth, and we're doing quite nicely. The cost base of launching them is relatively modest. There are experiments going on in the industry in terms of other uses of that spectrum, including using it for mobile devices. We're interested in how that comes out and we'll be following that closely and participating in it in some small way. We don't know the answers to those questions other than the fact that there are opportunities with that spectrum that we want to pursue and stay very close to as we go forward. Craig Dubow: Okay. Thank you all very, very much. We appreciate your coming. Have a good day. ---------------------------------------------- 11
  • 12. Certain statements in this transcript may be forward looking in nature or “forward looking statements” as defined in the Private Securities Litigation Reform Act of 1995. The forward looking statements contained in this transcript are subject to a number of risks, trends and uncertainties that could cause actual performance to differ materially from these forward looking statements. A number of those risks, trends and uncertainties are discussed in the company’s SEC reports, including the company’s annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward looking statements in this transcript should be evaluated in light of these important risk factors. Gannett Co., Inc. is not responsible for updating the information contained in this transcript beyond the published date, or for changes made to this document by wire services or Internet service providers. 12