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gannett 2Qtranscript03final

  1. 1. GANNETT CO., INC. SECOND QUARTER CONFERENCE CALL AND WEB CAST JULY 15, 2003 PRESENTATION Operator Good morning, and welcome, ladies and gentlemen, to the Gannett second quarter 2003 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. I will now turn the conference over to Gracia Martore, Senior Vice President and Chief Financial Officer. Please go ahead. Gracia Martore - Gannett - Senior Vice President and Chief Financial Officer Thank you very much, and good morning. Welcome to our call and Webcast to review our second quarter results. Hopefully, you have all had a chance to review the press releases we put out this morning both on our earnings, as well as our June lineage. Those press releases can also be found at www.gannett.com. With me today is Douglas McCorkindale, Chairman, President, and CEO of Gannett. We'll keep our prepared remarks brief today, since we saw many of you a few weeks back at the Mid- Year Media Review. As you saw from the release this morning, Gannett earned $1.20 per diluted share this quarter, or a 6% increase over the $1.13 we earned last year in the second quarter. I would like to detail a couple of other areas before I turn it over to Doug. On the newsprint front, reported newsprint expense rose 10%, made up of a 5% increase in both consumption as well as price. However, the reported newsprint numbers include consumption for Scottish Media Group publishing, as well as a 100% of the Texas-New Mexico Newspapers Partnership, which, as you know, we consolidate in our numbers. On a pro forma basis, or assuming that all the properties that we owned at the end of this quarter we also owned for all of last year's second quarter, newsprint expense would have been up a little less than 7% with usage up about a little less than 3%. Usage was up primarily reflecting very robust commercial printing growth. In fact, if you take out the gains from commercial printing, our usage was up less than 1% in the quarter. On the usage price side, the increase reflects the fact that usage prices were falling in the second quarter of 2002, as well as the strength of the pound. For example, in the UK, where prices fell 8% in the quarter in pounds, when they were translated into dollars, they actually were up about 2% because of the strength of the currency. As you know, we began to see higher newsprint prices in June as the $50-per-ton March 1 increase was amended to $35 and June 1 by both Abitibi and Bowater. Other producers chose a lower number at other effective dates, and a spot market redeveloped in June. Several newsprint producers have announced a $50-per-ton price increase for August 1. Historically, August is not a particularly good month to try and raise prices due to the seasonal low consumption in the summer. Again, we're looking at an environment where demand is not rebounding to the extent the pundits thought it might, pushing the need for dramatic reductions in supply to try to support higher
  2. 2. prices. We'll obviously see where this all takes us, but needless to say, this proposed increase is quite premature. Turning quickly to the balance sheet, total debt at quarter end stood at $4.4 billion and cash and marketable securities were $132 million. Our all-in cost of debt is currently approximately 2.95%. With respect to shares outstanding, basic shares at the end of the quarter were $269.4 million. They averaged 268.8 million for the quarter and 268.5 million year-to-date. Finally, before I turn the call over to Doug, our conference call and Webcast today may include forward- looking statements and our actual results may differ. Factors that might cause them to differ are outlined in detail 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, both attached to our earnings release, as well as on the investor relations portion of our Web site. And with all of that, I will turn it over to Doug. Douglas H. McCorkindale - Gannett - Chairman, President and CEO Thanks, Gracia, good morning all. Since we met with most of you about three weeks ago, not a lot has changed either in our outlook or, frankly, in the economy. We continue to expect advertising and the economy to grow this year barring further external factors, but that growth is going to be uneven and the economy remains tentative. As you saw from our press release, net income rose 7% reflecting a solid performance by all of our divisions, despite the effects of the war in April and the sluggish economy that prevailed throughout the quarter. Operating revenues rose 6%, including the results of SMG and 100% of the Texas-New Mexico partnership that Gracia mentioned. Looking at our newspaper segment and assuming we owned the same newspapers this year and last for both quarters, total advertising revenues rose 4%, which I think is probably one of the strongest revenue performances in our industry. On the local front, pro forma local advertising in our newspapers rose 5% in the quarter due to a good performance by our Newsquest properties, strong preprint growth and the benefit of growth in our non-daily publications. In the U.S., the financial, health, telecommunications, and home improvement categories were positive while department stores, consumer electronics and furniture lagged last year's results. Classified revenues in our newspaper segment were up 4% in the quarter. In employment, revenues were down 6% as the upturn we were seeing late last year and into early this year fizzled with the war and the jobless recovery to date. The results in the UK are stronger than what we are seeing here in the states. In the U.S., those regions with the heaviest reliance on manufacturing, mostly the East and the Midwest, have been the hardest hit. The South and the West, which have a greater alliance on construction and the service industries, have fared much better. Also, in a switch from the pattern we had been seeing, employment revenues in our larger markets declined less in the last two months than in our smaller markets. Automotive was up 5% and real estate continues to roll along, up 12% for the quarter. On the national front, advertising was up 4% for the quarter. USA TODAY’s ad results were about flat for the quarter. Strong gains in auto, technology, entertainment, financial/credit cards and telecom helped offset the weakness in the travel category, which was off 27% for the quarter. However, I think it's interesting to note that travel did improve during the quarter. June's travel was down just 6% versus 50-plus percent for the month of April. One area where our newspapers have continued to show strong revenue growth is in the non-daily products and online. The non-daily category, which includes more than 400 weekly shoppers, magazines,
  3. 3. and specialty publications, is the key element of our revenue growth strategies. For our domestic newspapers, non-daily revenues were up 21% for the quarter, the majority of which has been organic growth. In the past 12 months, we have added over 220 new publications, weekly sections, and ancillary advertising products. We expect this growth to continue as we identify more successes that can be rolled out in other markets. Turning to the UK specifically, Newsquest delivered strong results again this quarter despite a lackluster economy in the UK. Pro forma revenues for Newsquest for the quarter – in pounds – were up 3%. Costs were well controlled and, as a result, Newsquest operating profits, again, in pounds were up about 10%. In television, we achieved an almost 1% increase in revenues as we overcame the impact of the war and lower political spending in the quarter. From a category perspective, retail and telecom were positive in the quarter while auto and corporates trailed last year's results. Looking ahead, our latest pacings for the third quarter in television are slightly positive, just slightly, with July and August slightly behind last year and September positive. As you may recall, we're going up against about $20 million of net political advertising in last year's third quarter, which will impact pacings as the quarter progresses. That's where we stand right at this moment, but we'll keep keep you updated in our monthly report. While we are in this uncertain economic environment, we have been very focused on keeping costs tightly controlled as you might expect from Gannett. Television costs are virtually flat and corporate cash costs are up just slightly. In newspapers, on a pro forma basis excluding newsprint, expenses were up 3%, in part, reflecting higher expenses for the lower-margin commercial printing, the ramp-up of our new non-daily products, which I just mentioned, and strong currency in the UK, which Gracia mentioned in talking about newsprint. This number also includes higher pension, employee benefit and insurance costs. On the Internet side of the business, our revenues are up 40% year-to-date. Our CareerBuilder investment is performing a little bit better than expected. CareerBuilder’s unique visitors in June were up 48% from December of 2002. And just a few days ago, an online recruitment market share scorecard showed that in the top 20 markets, just for the month of June, CareerBuilder achieved the highest online recruitment market share of the four major online players. In that same study, Gannett along with one other newspaper company, achieved the highest overall share of the online recruitment market of the 14 newspaper groups measured. We had a share of just under 53%. All very positive news. Finally, as we mentioned at the Mid-Year Media Review, because of the uncertain and uneven economic times that we are in we have been budgeting on a 6 month basis. We won't have final detailed budgets for the last half of 2003 until later this month. When we complete that process we will update you on our assumptions if there are any changes. Gracia are we turning to the questions? Gracia Martore Yes, we will be happy to take questions now. QUESTION AND ANSWER
  4. 4. Operator Thank you. The question-and-answer session will begin at this time. If you're using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your pushbutton telephone. If you would like to withdraw your question, please press star 2. Your question will be taken in the order that it's received. Please stand by for your first question. The first question comes from Douglas Arthur with Morgan Stanley. Please state your question. Douglas Arthur - Morgan Stanley - Analyst Gracia, at the Mid-Year Media Review you said that foreign currency gains or favorable translation could be 1 to 2 cents in the second quarter. Do you have a more exact figure? And as a follow-up, what percent of revenues is UK, at this point, in the newspaper sector? Thanks. Gracia Martore Doug, with regard to the foreign currency impact from an operating perspective, the pickup from currency was right in the middle of that range between 1 and 2 cents, which is pretty similar to the range that we were seeing on a negative basis a couple of years ago. And with regard to Newsquest, they're about in the low to mid-teens as a percentage of total revenue for the company. Operator The next question comes from Lauren Fine with Merrill Lynch. Please state your question. Lauren Fine - Merrill Lynch Thank you, just a couple of quick ones. I'm wondering if you could comment on where Newsquest margins are at the current time? And what percent of newspaper division revenues are now coming from the non-daily and other types of revenues that you mentioned? And then I'm wondering if you could give us a sense of whether you're seeing an improvement in July newspaper trends to date and, specifically, if you can comment more on retail? Douglas H. McCorkindale That’s a lot of good questions, Lauren. I don't think we told you what Newsquest margins are, but they do reasonably well to say the least. They're right in the range with the Gannett middle-sized newspapers. As you know, the larger papers are not quite as profitable. There is still some upside potential in the UK, especially with that Scottish acquisition, which has margins that are dramatically less than the typical Newsquest margin. But that chart I showed at the Mid-Year meeting which showed our margins, Newsquest is right in that range. Do you know the exact non-daily percentage? Gracia Martore
  5. 5. At this point, it's running about 7% to 8% of ad revenues in the U.S. for the non-daily products. Douglas H. McCorkindale That's in the U.S., Lauren. As you know, in the UK most of the revenue comes from non-daily products. It's a very big piece of the market over there, and that's actually where we make a good deal of our money. As for July results, we're actually going to have a meeting next week here and have all the Gannett managers in. We'll get a little better feel, but so far, in calling around in preparation for this call, we haven't heard anything that would change what we have just said in our prepared statement. Things are moving along a little bit better, but no great positive upticks. As you heard on the television side, they're actually pacing a little bit below last year, but they're going up against those big political numbers from the third quarter of last year. On the retail side, we're not hearing anything more positive or more negative. Some are doing a little bit better than others, and some are struggling. Smaller and medium size retailers seem to be doing better than the larger ones. But July, as you know, is kind of a slow month. So, I am not sure what that trend is telling us either way. Gracia Martore In department stores, Lauren, we're being impacted by, as you know, Dillards announcing that they were going to be cutting back on advertising in the second half of the year. We're being impacted by those cutbacks in varying degrees and various markets that we have. We also have a small regional retailer that impacts some of our Northeast properties – New Jersey, New York and some of those folks – that has cut back on its advertising and other department stores. Whether that trend will hold up and they can go into the fourth quarter with that level of cut, obviously remains to be seen. Lauren Fine Clarification on the TV pacing? When you're quoting us pacing, that is basically versus -- that's adjusted for political or not? Douglas H. McCorkindale No. Not adjusted for political. Lauren Fine - Merrill Lynch Got it. Okay, that makes sense. Douglas H. McCorkindale If we took out political, obviously, the number would be better. But we had what we had last year, a great positive, and we have to deal with what we have this year. Lauren Fine - Merrill Lynch
  6. 6. No, that's great. I just want to clarify. Is there a percent? Can you give us a percent of what the domestic newspaper ad revenue growth was in the second quarter? I mean you indicated Newsquest was better. I am just trying to get a sense of how you look domestically to compare you to your peers. Gracia Martore Newspaper advertising in the U.S. newspaper division -- our total revenues were up about 3% and advertising was up about 3%. Operator The next question comes from Steven Barlow with Prudential Securities. Please state your question. Steven Barlow - Prudential Securities Thank you. I guess I want to clarify what Lauren was asking. Can you give us a number on pacings on TV, ex political and how you're looking? Next. Cash costs were up a little over 6%. You have some acquisitions with SMG in there, as well as Tex-Mex? Gracia Martore Right. Steven Barlow - Prudential Securities Is there a way to forecast for the rest of the year whether that 6% rate would be what we should be looking for? Gracia Martore - Gannett - Senior Vice President and Chief Financial Officer With regard to political, I don't have those exact numbers calculated with political out, but just to refresh everyone's memory, political in the third quarter of last year contributed a little over $20 million of net revenues and political ramped-up each month in the quarter, so the impact would be greater, for instance in, September than it was in July. Douglas H. McCorkindale Which is an interesting observation, Steve, because as I said a few moments earlier, we're showing negative pacings for July and August, but positive pacings for September. So we're going up against the bigger comparison in September. Gracia Martore And, Steve, as you rightly point out, the over 6% increase in operating expenses in the newspaper side includes some acquisitions. So, on a pro forma basis, expenses in the newspaper segment would have
  7. 7. been up a little over 3% in the second quarter and then if you pro forma that ex newsprint, they would have been up a little less than 3%. The other thing you have to understand in those expense numbers, as well, is you have UK expenses, which are being translated at a higher exchange rate, and so that clearly impacts those expense numbers. Our expense number ex newsprint pro forma, excluding the currency, would have actually been up much more modestly than that, reflecting, as Doug mentioned, healthcare costs, pension, also some of the revenue growth that we're seeing in preprints and non-daily publications and commercial printing. Those are areas that, right at the moment, would have lower margins than our normal advertising revenue, so the expenses would be a little bit greater in those areas. Steven Barlow - Prudential Securities Thank you. The last question, you mentioned there was a spot market now for newsprint. What would the spot market price be? Douglas H. McCorkindale Lower than the producers would like. Steven Barlow - Prudential Securities That wasn't what I was looking for but okay. Douglas H. McCorkindale I know. We’re not going to tell you that. Gracia Martore A favorable number compared to the pre increase number. Operator The next question comes from Christa Sober with Thomas Weisel Partners. Please state your question. Christa Sober - Thomas Weisel Partners Hi, first on the other income line, could you explain why it was a little bit better than we thought? I think it is probably CareerBuilder, given the comments that you made. And could you expand on CareerBuilder? If you could give us a sense as to what the year-over-year growth was, both with and without your contributions, so we get a sense as to how you’re growing against your other peers there. And then a second question relates to preprint. It looks like we're starting to slow down, perhaps. Maybe I'm wrong, and especially as we go against some tougher comps in the back half of the year, could you give us your outlook for preprint. Thanks. Gracia Martore
  8. 8. Let me start with the other income and the components there, which we tried to highlight in the press release. As you point out, our share of the CareerBuilder losses or gains would be in that net non- operating number. The new components there would be the minority interest expense that we have in the Texas-New Mexico Newspapers Partnership. The offset would be some investments that we carried over that I have mentioned on previous calls. As you know, the market did quite well, thank goodness in the second quarter, so we had positive mark to market gains there, and then we had a little bit of currency there as well. When you put all those pieces together you ended up with the net non-operating income number. And, Doug, do you want to chat about the CareerBuilder outlook? Douglas H. McCorkindale Well, as I was indicating earlier, it's quite positive. The survey that just came out put them obviously in the number one position for June. If you're looking to get to the economics, though, we don't discuss the economics of CareerBuilder. They issue their own releases on whatever they want to come up with, but it's obviously going better than we had hoped. It's going better against the competition, and all the numbers are quite positive. Christa Sober - Thomas Weisel Partners And two quick follow-ups, if I may. Could you tell us what your domestic help wanted revenue, what that was down? And also, you may have said it, but I didn't catch it, what your non-newsprint cash expenses were up? Thanks. Gracia Martore Pro forma newspaper, ex newsprint expense, were up a little less than 3%. I think I also went on to mention that because of the currency, Newsquest expenses were being translated at a higher rate and, therefore, that's less than 3% growth. Douglas H. McCorkindale Help wanted was down 4% on the year-to-date basis and 6% in the quarter. Gracia Martore My recollection is that just domestic was down around 15%. Douglas H. McCorkindale 15%. Yes. 15% in the second quarter and 11% on a year-to-date basis. Gracia Martore Not counting online, of course.
  9. 9. Operator The next question comes from Peter Appert with Goldman Sachs. Please state your question. Peter Appert - Goldman Sachs Hi, good morning, the newspaper margin was flat year-to-year in the second quarter. I'm wondering, you know, as we cycle through these newsprint price increases and see more pressure in the second half, would it be more realistic to assume that the newspaper segment operating margin should be down in the 2nd half on a year-to-year basis? Douglas H. McCorkindale Can you tell us whether revenue is going up, Peter? If revenue improves, the margins will move in the right direction or stay in the right direction. Obviously if the revenue picture continues to move sideways and we get some increases in newsprint expense, we're going to have some margin issues. Another part of that margin issue is benefit costs, and the pension costs, which are -- we don't have as much negotiating room there as we do on the newsprint side, but I think if you see the revenue begin to pick up, you won't have any problems with the margin. Gracia Martore The other thing is, Peter, as we have mentioned, we have ramped up a lot of new non-daily products. Clearly in the first couple of quarters of the ramp-up of those products, you know, you're moving them potentially from a small loss to a positive number in true Gannett fashion. Or maybe they start out profitable, but you're moving up their margin, and I know that Gary Watson is looking to move those products along. So there are a lot of factors that are bouncing around there. It’s probably too premature to say what the impact is, as Doug said, if we get some good revenue growth. Douglas H. McCorkindale We got 21% revenue growth on the non-daily products in the quarter. They're not a huge amount of the revenue picture, but they're very, very positive. We can make some pretty good money in that area, Peter (Appert). But as a follow-on, to your response with regard to the uncertainty on revenues, as I look at the progression through the second quarter, the revenue numbers on a year-to-year basis actually got better each month. Actually, I’m somewhat surprised you're so cautious on the tone of business here for the second half. Well, again, a lot of that is new products -- Gracia Martore Helped by currency. Douglas H. McCorkindale Helped by currency, as Gracia mentioned earlier. We honestly are not seeing any change in the economic outlook from what we saw when we just chatted with you all a couple of weeks ago. It's positive, but there is just a very slight increase in the overall economic picture. There's no part of the U.S. economy
  10. 10. where we're seeing any dramatic pickup, and if you're in the manufacturing sector as I mentioned earlier, you're struggling even more. Operator The next question comes from James Marsh of S.G. Cowen. Please state your question. James Marsh - S.G. Cowen Hi guys, two quick questions. First on the national side for advertising newspapers, it looked like volume was showing some major signs of picking up for the quarter up 9%, in June, up 15%. But revenues were really lagging behind there, I think 4%, 2% respectfully. I just wonder if you could shed a little light on that. Secondly, a question for Doug. Relating to the like kind tax rules, I want to get a sense for whether you thought those would still enable a tax-free exchange for a TV station to TV station in light of dereg. Douglas H. McCorkindale Let me discuss the tax item first, Jim. The bottom line is it's complicated. Would they be permitted? Yes. But our friends at the IRS are not making it easy to do like kind exchanges and they're looking at a lot more minutia – at least from my point of view, minutia – in analyzing these transactions. So yes, it's possible, but it has to be done very carefully. So, I think you're going to need sophisticated advice, such as we have. We have some experience in that area, but I don't think anybody should jump to the conclusion that it's easy. Gracia Martore With regard to national, James, there are several pieces. The volume number that we include in the rev and stat report is U.S. volume on national. In fact, our U.S. national newspaper -- national revenue number in our newspapers is comparable to that volume increase, but where we're seeing some differences, for instance, in Newsquest, where national is trailing last year’s results. As you know, we don't include their volume statistics. Their lineage. We only have them in the revenue side, so that's a piece of it as well. And then, as you know, USA TODAY results are indicated in the press release. James Marsh - S.G. Cowen Great, one quick follow-up on circulation. You didn't talk about it at all, and I thought it might be tracking up, at least on an actual basis with SMG in there? But it looked like it was flatish. Anything going on in particular there? Gracia Martore Well, remember, we pro forma circulation in the rev and stat reports, so we assume that SMG is in both quarters. There is one phenomenon that you probably saw on the rev and stat report, which was that evening circulation was, down about 5% for June. We went back and took a look at that. It’s primarily in Detroit where, if memory serves me correctly, the Red Wings won the Stanley cup last June. So they had a big pickup in single-copy sales and we're comparing against that number. The vagueries of sports.
  11. 11. Operator The next question comes from Mandana Hormozi with Lazard Freres & Co. LLC. Please state your question. Mandana Hormozi - Lazard Freres & Co. Good morning, I was wondering, on the television pacing side, if you could differentiate between local and national. Gracia Martore Local is clearly stronger and is positive, whereas national is negative. Which in part reflects some of the political that we're starting to cycle against, which would have been more on the national side. Operator The next question comes from Kevin Gruneich with Bear Stearns. Please state your question. Kevin Gruneich - Bear Stearns Thanks, two-parter. You talked at the Mid-Year Media Review and also today about small market help wanted being softer than large market, and outside of the comps being somewhat easier than in the large markets, what does that small market weakness tell you? Douglas H. McCorkindale What it tells me, Kevin, is that the sideward movement of the economy is going to the smaller markets that were a little immune from it for a year and a half or more. Whereas, as you know, most of the employment negative numbers were in the larger markets. The larger the market, the more you got hurt. Actually some of our small and medium-sized markets were not actually down. They were showing flat or up slightly employment numbers. And, as the economy has continued to move sideways now for about three years from our point of view, you remember we started talking about this negative trend in August of 2000. It's beginning to creep down to the smaller markets. Maybe most of the water is out of the larger markets and they just reached the bottom, so they have nowhere to go but up. It hasn't gotten down to all the small markets yet. Bottom line is it's not a very positive sign for the overall economic outlook. It means that things are just moving sideways and actually hurting some folks that thought they were going to escape. Kevin Gruneich - Bear Stearns Could you also just discuss maybe the pluses and negatives of the top five or six categories for USA TODAY? Douglas H. McCorkindale
  12. 12. As I mentioned, the big category is travel and that was down 26%, 27% for the quarter but less negative in June, being down 6%. We are beginning to see a less negative and maybe even a slightly positive improvement in the travel picture. The automobile category for the quarter was up about 15%. Tech was up about 40%, entertainment was up 15% and the financial/credit card area was up about 22%. So as I mentioned earlier, those four categories were doing nicely, but they have been offset by the travel numbers. Operator The next question comes from Brian Shipman with UBS Warburg. Please state your question. Brian Shipman - UBS Warburg Quick question. Following up on Kevin’s request with USA TODAY. It was a little bit choppy month-to- month during the quarter. It was up 11% in May, and down 1% in June. Is there some seasonality within the quarter, maybe, that affected those results? And what are you looking for going forward with USA TODAY. Thanks. Douglas H. McCorkindale Gracia may be able to come up with the answer for month-to-month. What we are seeing at USA TODAY is a slightly better pickup starting in June. We haven't seen their budget yet for the second half of the year, but it's generally more positive than it has been for the last couple of months. We're hoping that the pickup in the national picture is reflected in USA TODAY's result. We’ll grow nicely there, relatively speaking. Again, we're not seeing any great growth anywhere. But as travel gets a little less negative and you get those strong categories I just mentioned in response to Kevin's question, that should begin to bring some very positive revenue to USA TODAY for the rest of the year. That's really early. Look, we're just getting into it. So I hope I'm not being too optimistic. I think I'm more optimistic about USA TODAY's national picture than some of the other parts of the economy. Gracia Martore And Brian, on the monthly variability, I think in part it reflects the numbers from 2002. For instance, in May of last year, advertising revenues were down 18% at USA TODAY and obviously that would have been a better comparison than in June. In June of last year they were only down 5%. Then, you have travel coming back but clearly being a little bit variable. So I think it's those two factors. Brian Shipman - UBS Warburg Okay. Thanks. And also, a clarification, in the month of June. TV down 4% with national down 14%? Does that national category include the political ad dollars? What was it? Roughly $5 million, political ad dollars in June? Gracia Martore For the quarter it was over $6 million, but we had a good chunk in June. And, yes, the political dollars would have been more in the national category.
  13. 13. Operator The next question comes from Kevin Sullivan with Lehman Brothers. Please state your question. Kevin Sullivan - Lehman Brothers All right, great, good morning. A quick question on auto advertising on the TV side. You noted it was down in the quarter. Can you just give us some color on how to trend it throughout the quarter and what your outlook is for the back half of the year? Douglas H. McCorkindale That's actually one of the questions we’re going to be doing a little bit more homework on next week, Kevin. We're getting some mixed messages on the automobile front. The television side, where it's a very big piece of the revenue picture has begun to see some slow down in automotive. Most of that is local dealers but some of it's national. On the other hand, USA TODAY is seeing positive results on the automobile side. Now most of that is national, coming from the manufacturers. The newspaper division, ex USA TODAY, is getting mixed results market-by-market. Maybe they're in the middle. So we're getting some mixed messages out of our friends in Detroit and overseas. We’re trying to analyze that and figure out just what is going to be happening in the automobile category. Gracia Martore To drill a little bit on the quarter, it appears on the automotive side in TV that the decline was led by foreign because, in total, the domestics were up slightly. Although there was variability there. One manufacturer up, one manufacturer down, so to speak. But on the foreign side, we saw a decline, and you know, some of that might be related to specific campaigns that they were doing last year or launches that they were doing last year that didn't repeat in the quarter. My sense is that at the moment we're thinking that auto should be a little bit better in the second half in TV, but obviously that remains to be seen. Douglas H. McCorkindale Especially since they have so many new models coming out. I remember at one point, a month or so ago, we had a count of 25 or 26 new ones coming out. That should be a positive sign, but the message is mixed right now. Operator The next question comes from Fred Serby with J.P. Morgan. Please state your question. Fred Serby - J.P.Morgan Hi, it's Fred Serby. One question, two parts to it. On the telemarketing side, with the do-not-call list. I wondered, how much telemarketing do you do to boost circulation and what you will do? How do you
  14. 14. think the do-not-call list, when it's implemented post-October, will reflect that behavior on your part, your search strategy? The second part would be what do you think, I mean, just looking at it right now, how much money, potentially or some rough estimate could flow with you guys? Is there some cutback on telemarketing from that $100 billion chunk if some of that moves to other media. Douglas H. McCorkindale Well, you hit on both the positives and the negatives. It's not good news from the telephone rooms, obviously, where we do solicit subscriptions for our newspapers. We're going to have to use other methods to attract customers. One of them is our Internet site. We're selling a large number of subscriptions on a growing basis from folks who click on to the local Internet site or the USA TODAY site, and they decide to have a subscription to the newspaper from there. That is a positive that we have. Then, as you said on the other side, some folks that are in that business are going to have to find other messages to reach their customers, and we're hoping they'll use our television stations and our newspapers. Newspapers, in particular, should be useful for getting that message out. It’s a little early to tell, but there are positives there. Obviously, it's going to make us work harder in the circulation side. Fred Serby - J.P.Morgan Just out of curiosity, how much do you spend on telemarketing per year? Douglas H. McCorkindale That's in each of the local budgets and we don't gather that all together. Gracia Martore We have been reading about folks who use the telemarketing side in a much more significant way than we do, needing to seek alternatives and part of that is television or newspapers. So, it will be interesting to see what the positive impact is. But there is clearly no way for us to begin to quantify that at this point. Fred Serby - J.P.Morgan You think it's TV and newspapers even more than E-mail marketing and direct -- Douglas H. McCorkindale I think it's all of the above. But obviously if you have a newspaper that does a good job in the marketplace, it's a way for an advertiser to attract eyeballs. On the television side, as you know, most of our television stations are number one and number two in their markets, so they have very good coverage. You get into the Denver market or the St. Louis market – our television stations have wonderful coverage. If they can't reach them by phone, that is an alternative. We'll obviously have sales staffs out there pushing that, and hopefully it will be a positive to us. I think it's a little early to tell, though, how difficult it's going to be for us on the circulation side and how much revenue we'll get. Together with others. I assume all other alternatives sources of advertising will be looking for more revenue from the telemarketing world.
  15. 15. Operator The next question comes from Mark Hughes with Sun Trust Robinson Humphrey. Please state your uestion. Mark Hughes - Sun Trust Robinson Humphrey Thank you very much. You described how CareerBuilder is doing better than hoped. Can you talk to what extent the volume is taking share from other on-line competitors or borrowing from print classified? Douglas H. McCorkindale We think it's coming from other online folks and we're obviously supporting it on the print side. But, that report I mentioned that just came out, indicated that CareerBuilder – again, it's only for the month of June – but it was the number one site on the employment area. Although the employment advertising on- line is growing nicely on all of our sites, locally as well as on CareerBuilder, to have CareerBuilder do that well, I think they must have taken a little bit from someone else. We don't have the details on that to be able to give you enough background, but I'm sure CareerBuilder will be coming out with information as soon as they have had a chance to analyze it. Gracia Martore In the CareerBuilder presentation that they did at the Mid-Year Media Review, they put a slide up that shows that, from October to May, they had gained about 36% in traffic whereas Monster, for instance, had declined about 22%. And the feeling from them as well as others is that in fact CareerBuilder has taken a couple of points of share at least from Monster. Our feeling is that the share increase that CareerBuilder is seeing, is at the expense of other online folks rather than at the expense of the newspaper side. Mark Hughs - Sun Trust Robinson Humphrey Right. One other question. You mentioned that retail was up in TV, department store down in newspapers. I understand those are different categories, but any relationship there as the spending shifted between the media? You had, over time, suggested more advertising coming from smaller customers. Is that also an issue of maybe a shift in media or is it just overall spending patterns? Thanks. Douglas H. McCorkindale I think it's just a matter of minor degrees. As I indicated in the automobile category, the television folks are seeing a little bit more softness than we are in print. Whereas on the retail side, they're seeing a little bit more positive than we are on the print side. So we have the wonderful ability in this company to look at both of these pieces and see where the trends are. We have meetings on it on a regular basis to discuss the big picture trends, but the order of magnitude is not great enough yet to be able to tell you it's going one way or another. The small or medium-sized advertisers – to go to the latter part of your question – they have been more positive than the large ones for sometime. And we have been emphasizing that, as I think others in the industry have. We can deliver their message. It's not one location making a decision that changes from television to direct mail to print and back and
  16. 16. forth trying to reach the retailing customers. The small- and medium-sized advertisers tend to be more consistent, getting their message out and they’re getting results. That's been a positive trend for a number of years, both in good times and in bad times. Gracia Martore The only other add-on, Mark, would be related to the couple of department stores I mentioned earlier that have announced plans to cut back. What we're not hearing from them is that they're shifting that money to TV. What we're hearing is that they're keeping it in their own coffers. Now, obviously on the preprint side, we're seeing more traction. But we're not seeing Dillard's going from local, from ROP to preprint. We're just seeing them keeping that money. We have seen some shifts in categories like consumer electronics and a few others where some of that money has moved from ROP into preprint. But not a transition to TV at this point. Operator The next question comes from Jim Goss with Barrington Research Associates. Please state your question. Jim Goss - Barrington Research Associates A couple of questions. One, not to beat a dead horse with the travel category at USA TODAY: Do you recall what it represented at its peak and how much a rebound opportunity that might be? Separately, UK, I think, is now collectively bigger than USA TODAY? And I'm just wondering, as we have turned increasing attention to that, are the greatest opportunities, the improvement in the margins with SMG? Or are there any key categories we ought to be keeping an eye on there, that you think are particularly relevant that we ought to be looking at? And thirdly, any comments you might have on the FCC rules and the Senate Commerce Committee issue and any impact that has in the timing and amount of deal flow. Douglas H. McCorkindale A lot of good questions, Jim. I don't know how big travel was at USA TODAY at its peak. But, it was 20% of the revenue picture. So, yes, if it comes back, it will be a very, very positive factor for USA TODAY. Especially since, as I mentioned earlier, a number of the other categories are moving very nicely. So, there is a lot of money moving around on the travel side, and if it begins to move, you're going to see some very positive results at USA TODAY because all the other pieces are in place and doing very, very nicely. You are right in your observation about the UK being larger than USA TODAY. I think it passed USA TODAY awhile back, especially as we have been making these acquisitions. And there are a number of opportunities in the UK. We're large and under the UK equivalent of the antitrust rules, you can only get so big. There are a number of opportunities over there, and our team in the UK is a very good management group. The Scottish properties will show some definite upside, both on the expense control side but also on the revenue side. A little bit like our Multimedia acquisition of a number of years ago. When we went in there, we thought they had done a very good job, but we found a good opportunity in classified, for example. We’re finding some opportunities in Scotland on the revenue side. We’re in discussion on a few other transactions over there that will give us some room. That's what you need to look for. What you don't need to look at is the national economy in the UK. What the national papers are doing. That's what gets most of the attention. But as you know, we're all regional, and we live in a slightly different world. Therefore, our numbers have been better than what you have been reading about the UK economy.
  17. 17. As to the FCC, I don't know. I mean -- we have only been talking about this for -- I don't know, for 30 years? Twenty-nine years, at least. I thought it was pretty well set, and I thought the FCC did a fine job in explaining their position on the rule changes. Everybody didn't get everything they wanted, but now it's become an object of some attention on the hill and I just don't know which way it's going to go at this point. Operator The next question comes from William Drewry with Credit Suisse First Boston. Please state your question. William Drewry - Credit Suisse First Boston Thanks. A couple of quick ones. Any update on the full-year impact from the SMG acquisition? Number two: Core labor expense year to date, Gracia ex benefit? And then three: Doug, on the TV pacing positive territory for Q3. You know, Craig Dubow said back in December that he thought negative TV revenue in the second half and you run tight on the cost side and try to keep cash flow to a low single digit negative type of number. Is that guidance still good or is that in flux, given that revenue might turn out to be positive for Q3. Douglas H. McCorkindale Craig is working real hard, but I think it would be very, very hard for him to overcome last year's total of a $100 million dollars. It’s only up very slightly, Bill, for the third quarter. He's done very well in bringing in new business – he and his team – but it's just big, big comparisons. Especially when we get to the fourth quarter. So I think if he does as well as he said he was going to do, and maybe does a little bit better with some help from us by beating up on him, and he understands the big picture, you know, that's as good as we're going to expect from television this year. Unless the economy really picks up and he starts getting significant automobile business and a bunch of other things. But we can't plan on that sort of an approach to the, economy. Gracia Martore With regard to labor, just pure labor, Bill, payroll costs are probably up in that 3% to 4% range, impacted a little bit again by the currency. Newsquest is doing a very good job on the payroll side, but clearly because of the exchange rate, that is a higher number. So that would push it closer to 4%, whereas, I think if you took the currency out, you know, you would have a little bit better number. Douglas H. McCorkindale SMG. Yes, it will be positive, Bill. That's why we do acquisitions. Gracia Martore
  18. 18. But I would suggest, Bill, that's already factored into the earnings estimates out there. William Drewry - Credit Suisse First Boston Understood. Thanks a lot. Operator The next question comes from Marie [ Indiscernible ] Please state your question. Marie - Pain Anderson Hi, with the tax plan changes, has it impacted your thinking about expectations for dividend growth? Douglas H. McCorkindale No, it hasn't impacted our thinking. We have enough money to increase the dividend if there is a real reason to do that, but with all the acquisition possibilities on the horizon, we're sort of keeping our powder dry. But if there is demand for dividend improvement with a couple of billion dollars of cash to begin the year, we can move it around as is necessary. Gracia Martore As a further corollary for companies like Gannett who have been extremely good redeployers of the cash flow they generate, I think that our ability to improve shareholder value by redeploying that into acquisitions – good acquisitions as Doug says – probably is ultimately better for our shareholders than just increasing the dividend because of the tax law change. But that being said, we're constantly looking at that. Operator The next question comes from William Bird with Solomon Smith Barney. Please state your question. William Bird - Solomon Smith Barney Could you talk a little about the acquisition climate overall coming off the FCC rule change? Are you seeing an up tick in interest in M&A possibilities. And secondly, I was curious what your preliminary thoughts are for next year on Olympic and political advertising. Thanks. Douglas H. McCorkindale We'll go to the second one first: I haven't the slightest idea. We are hearing that a ton of money is being generated on the political front and under the new rules, it will have to be spread out a little bit, which will be good from an inventory-control point of view on the television side. Where that's going to come in, I don't know, but we are hearing there is a lot of money. Now, keep in mind for 2002, we had more
  19. 19. political advertising than we did during a presidential election year, so that would suggest the next time around, you know, being a presidential election year, the numbers should even be more positive. We're optimistic about it, but we don't really know what the numbers are going to be yet. On the acquisition front, I think it's a slight pickup. As I said more than once publicly, I don't think the rule changes are going to result in a lot of folks doing transactions. If they don't make economic sense and – cross ownership makes sense under certain conditions and certain prices and duopoly makes even more sense because the economics are easier to analyze. We are having a series of discussions with folks that are all friends of ours. It's about whether two and two can equal five, and should some pieces be moved around, but there is nothing current going on that would result in the transaction coming about in the near future. Gracia Martore I know that you have a number of calls to listen to today. So we probably have time for one more question. Operator The final question comes from John Kornreich with Sandler Capital. Please state your question. John Kornreich - Sandler Capital Lucky me. Doug, there have been a lot of questions about the very near-term and short-term and next month and how are pacings in July and so on. I want to step back and take a longer-term view and get your reaction to a thesis. Now, we on Wall Street look at the numbers that are coming out from media companies and we see up 2%, up 3%, and I'm 3 ½%, even 4%, and we're looking for better numbers ahead and so on. Maybe we shouldn't expect better numbers. Maybe in a world in which the inflation rate is 1% or 2% and real GNP is 1% or 2% going forward, and nominal GNP is 3% and 4%. Why should we expect the newspaper advertising to be anything more than 3% or 4% in the long-term? Douglas H. McCorkindale Well, John, I understand what you're saying. What we're hearing from the advertisers on the print and broadcasting side is that they do have money to spend on advertising, but they're very reluctant to write the check until they get a better feel for the economy. Now, if the economy moves sideways, at some point they're either going to have to make some decisions to spend money on advertising to improve their market share or they're going to have to put the money to use someplace else. We're just hearing a reluctance to make a decision because of the uncertainty and the present outlook. Not that they don't have the money. In fact, we have had a few of them sign up on contracts that sound like they're going to spend some money in the second half. But, they're being very open and direct with us, saying they would like some positives from the economy. So, you know, the employment picture will lag as it traditionally lags. As you know, you followed us forever. If that employment picture starts picking up, I think a lot of the other pieces will fall in place. I'm not hearing if people are just going to cut their ad budgets and sit on it. We're hearing more positive news. That's why we're more positive and with everything in place, if that ad picture does pick up, you're going to see a good deal of that revenue come to the bottom line at the Gannett company. John Kornreich – Sandler Capital
  20. 20. My own view for what it's worth, is that media companies where cost control is a culture and not a reaction is where you ought to be and obviously Gannett has shown over the last few decades that cost control is a culture. Douglas H. McCorkindale I thought you just took that out of our public relations statement. John Kornreich – Sandler Capital No. [ Laughter ] Gracia Martore On that happy note: If anyone has any further questions, I'm available to take them at 703-854-6918. Have a great day and happy listening. Douglas H. McCorkindale Thanks, all. Operator Analysts with additional questions should contact Gracia Martore at 703-854-6918 or by E-mail at gmartore@gannett.com. Members of the media with questions should call Tara Connell at 703-854-6049 or by E-mail at tjconnel@gannett.com. Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 297869. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect. 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.

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