Michael Dickerson - IR Bob Dickey - President & CEO Ali Engel - CFO John Zidich - President of Domestic Publishing

Michael Kupinski - Noble Financial Group Barry Lucas - Gabelli & Company Doug Arthur - Hoover Research

I would like to welcome everyone to Gannett's First Quarter 2016 Earnings Call. This conference call is being recorded at the request of Gannett. [Operator Instructions]. I will now turn the call over to your host, Mr. Michael Dickerson, Vice President of Investor Relations for Gannett . You may begin your conference.

Thank you, Operator. Good afternoon, everyone. Welcome to Gannett's first-quarter 2016 earnings conference call. I'm Mike Dickerson, Vice President of Investor Relations at Gannett . Joining me this afternoon are Bob Dickey, our President and Chief Executive Officer; Ali Engel, our Chief Financial Officer; John Zidich, President of Domestic Publishing; and Barbara Wall, our Chief Legal Officer. Many of you have already seen a copy of our press release from this morning. For those of you who have not, it is available our website at Gannett.com. I want to call your attention to our Safe Harbor provisions for forward-looking statements that can be found at the end of our press release. The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our current annual report Form 10-K and other periodic filings on file with the SEC provide further detail about the risk factors related to our business. During this conference call we may refer to adjusted EBITDA, adjusted earnings per share, and free cash flow. We define adjusted EBITDA as earnings before income taxes, equity income, other non-operating items, which includes interest income and interest expense among other items, severance related charges including early retirement programs, asset impairment charges, depreciation, and amortization. We define adjusted earnings per share as EPS before tax affected severance related charges including early retirement programs, asset impairment charges, acquisition-related expenses, and transformational items. The tax impact on these non-GAAP tax-deductible adjustments is based on the estimated statutory tax rate for the United Kingdom of 20% and the United States of 38.7%. We define free cash flow as cash flow from operating activities less capital expenditures. These non-GAAP Company-defined measures are being provided because Management believes they are useful in analyzing the Company's operating performance and cash flow before the impact of various reorganization and other charges. A reconciliation of adjusted EBITDA to GAAP net income, adjusted EPS to GAAP EPS, and free cash flow to cash flow from operating activities are included in our press release. For any periods prior to the third quarter of 2015, the accompanying results of operations have been derived from the consolidated financial statements and accounting records of the Company's former parent and presented as if the Company were a separate entity. The most significant changes from the publishing segment results reported by the Company's former parent include adjustments for businesses retained by the parent such as Clipper Magazine and Gannett Government Media, and adjustments for corporate allocations related to equity-based compensation, pensions, and other various items. The format for today's call will be as follows. First Bob Dickey will lead us off with a brief discussion of our proposal to acquire Tribune publishing followed by an overview and update of our key strategic priorities. Next Ali Engel will take us through the financial performance for the first quarter and conclude with our outlook for the balance of 2016 followed by a question-and-answer period. With that, I will now turn the call over to Bob Dickey.

Thanks, Mike. Good afternoon, everyone. Before we get into the details of our first-quarter results, I would like to touch on the announcement we made on Monday. As I'm sure you have seen Gannett made public its compelling proposal to acquire all of the outstanding shares of Tribune Pushing for $12.25 per share in cash. We believe the acquisition of Tribune would deliver significant strategic and financial benefits to the buying company, which include providing Tribune shareholders with immediate liquidity at a significant premium to Tribune's closing share price on April 22, and it provides certain value by eliminating the risk associated with Tribune continuing to operate on a standalone basis as the industry continues to face its challenges. We also plan to deliver synergies that are expected to drive near and long-term growth and value creation at the combined company. And we believe we will quickly complete the transaction without any financing conditions. Equally important, Gannett believes in the continued importance of journalistic excellence, local independence, high standards and integrity. To achieve this, Gannett must remain strong and have the financial flexibility to support investment in critical resources. Our proposal would result in a company that not only enhances our current leading national and local media company, but also strengthens flagship brands in regional and local markets. A combination with Tribune Publishing would advance Gannett's strategy to grow the USA TODAY Network, the largest local to national network of journalists in the country. This would include more local markets and new platforms which we believe will ultimately benefit readers and business partners and result in significant and sustained value creation for Gannett stockholders. As we've indicated, we are eager to negotiate a transaction with Tribune, and believe we can come to an agreement in good faith. With that, today's call is about our financial and operational results for the first quarter and our outlook. I ask that you please keep your questions focused on our first-quarter results. I would like to start today recognizing the outstanding journalism that is taking place every day across Gannett . The USA TODAY Network has had an excellent showing at several prestigious journalism competitions. The USA TODAY Network and the Detroit Free Press were honored with top awards in the Scripps Howard Foundation's national journalism competition. This competition is open to all news organizations based in the US and recognizes outstanding print, broadcast, and online journalism in over 15 categories. The USA TODAY Network's investigation into secretive biodefense laboratories, Bio Labs in Your Backyard, won the Roy W. Howard award for public service. This project is the result of relentless reporting by Alison Young along with Nick Penzenstadler and Tom Vanden Brook and a team of journalists, that is critical to this, a team of journalists across the USA TODAY Network. They use innovative and complex public records techniques to extract hard to get information from secretive labs operated by the government, universities, and private companies. Their tenacity revealed the existence of these high contaminant labs in almost every state. The judges said it best: It would not be an overstatement to say that the pressure for reform from USA TODAY's reporting has significantly reduced the possibility of a public health crisis. Nancy Kaffer of the Detroit Free Press won the Walker Stone award for opinion writing for her reporting on the Flint water crisis. And this has garnered national attention. Meanwhile, sites across the USA TODAY Network dominated the Associated Press' sports editors contest, winning 82 awards across multiple categories. USA TODAY alone was honored seven times, including being named one of the top 10 sports sites in the country. And USA TODAY Network sites large and small were recognized in numerous categories. And you may have seen recently in the wake of USA TODAY Network's 2015 investigation into untested rape kits at least 20 states are pursuing reform with legislatures flooded with about 50 proposed bills. This is the kind of journalism that makes us proud of the work we do each day, and that shows the true power of the USA TODAY Network. Adding to this power going forward, our new colleagues from the Journal Media Group have also won numerous awards among many other honors. The Milwaukee Journal Sentinel won three first place awards, including general excellence, and the recent Society of American Business Editors and Writers awards. The Journal Sentinel's Raquel Rutledge won two first place awards for her series Gasping for Action. The Commercial Appeal in Memphis won first place in explanatory reporting for daily newspapers with a circulation under 150,000. These awards demonstrate Gannett's dedication to delivering high-quality independent journalism on all platforms to diverse communities. Our employees and journalists are our greatest assets, and we believe it is important to have a strong, expansive network of individuals empowered to report the news as they see it, especially as we continue to grow our USA TODAY Network to include more local markets and more new platforms. Our continued investment in our newsrooms and people will ensure that the USA TODAY Network has the scale to preserve the best principled journalism for years to come. As for the first quarter, we are pleased to report that programs put in place to improve revenue trends are beginning to show positive results. These programs have been focused on maximizing viewability and duration of ad play for advertisers and improving circulation retention, as well as a focus on national digital advertising and programmatic ad sales. On the cost side we have been successfully implementing actions to improve efficiency in the distribution system through the consolidation of several distribution centers in multiple cities. The execution of these actions was accelerated into the first quarter, and the financial benefits recognized earlier in the year than were originally contemplated. Overall, revenues adjusted for certain items as you saw in the release and Ali will later describe, were down 4.6%, an improved trend from 2015 and consistent with our outlook for 2016. More importantly, at 11.8% adjusted EBITDA margins are higher than the prior year by 186 basis points. The increased earnings resulted from our success in accelerating cost improvement efforts, improved revenue trends, as I mentioned earlier. One of the things you've heard me say before is that we are leading with digital. As the consumption of news and information continues its migration towards digital, we continue to keep pace through innovative product developments and external investments. I want to talk about both of these. First, we made a minority investment in the digital news outlet called Spirited Media. Spirited Media operates the mobile new site Billy Penn. The investment will allow Spirited Media to expand its mobile first approach outside of the Philadelphia market. Spirited Media plans to leverage its successful business model, which is a blending of original and curated content, a heavy social media presence, an active voice, and a focus on local events in additional local markets. Our USA TODAY Network is an ideal partner to help expand this brand. On the product front, Gannett has been leading the industry. Technologies and delivery systems focused on mobile, video, virtual reality, and others are key target areas for us. These investments continue to be made organically and may be areas of focus for us from an acquisition standpoint in the future. To this end, the Company has been aggressively refreshing its approach to product development and implementation. The first few products resulting from this accelerated efforts are already in the market, and helping our sales force develop and distribute compelling solutions for our advertising partners and improving the experience for our consumers. Last summer we launched Gravity for mobile. Already the product is generating several million dollars of revenue and growing very rapidly. Soon we'll be rolling out Gravity enhancements to support mobile web across all of Gannett , plus adding Gravity capabilities into our local market applications. This is critical and key because this will allow local advertisers who -- to now have the access to add creative solutions that they didn't have before or would have a difficult time creating on their own, enabling us to be better partners and support our local clients. The Highview video player has recently been introduced on the USA TODAY Network desktop article pages. Placing the video in a fixed bar at the top of the page allows the user to continuously view a video embedded on an article page, a unique experience that maximizes both overall video views and play time. Additionally, user experience has improved by providing constant access to video player controls at any point of browsing through the article content. Recirculation of videos is an integral part of the solution, enabling us to expose more video suggestions to our users. Highview was also designed to benefit advertisers by providing better delivery of pre-roll ads to consumers. Since the video player is fixed at the top of the screen as the user scrolls through the page, overall ad views and ad viewability percentages have had dramatic increases since the launch of the player. Local markets have seen an average increase of 17% on daily video views, and have experienced an average of 76% ad viewability on the Highview player. USA TODAY has seen an even larger increase of 42% on daily video views since the launch, with an average 77% ad viewability rating. Prior to the launch, the ratings were approximately 40% on legacy video players for the same article placement. These are just a couple of examples of the new products that improve the user experience, provide better results for advertisers, and improve the overall monetization of our digital product offerings. And if you have not already done so, I would encourage each of you to visit the iTunes store or Android store and download the latest version of the USA TODAY app, which was launched this week. I believe you will agree it is best of class. Now before I turn this over to Ali, I just want to take the opportunity to welcome all of our Journal Media Group colleagues into the USA TODAY Network and Gannett family. I believe that the combination of these two organizations will carry on the tradition of great journalism as we continue our transition towards a digital first organization with outstanding journalistic talent as the cornerstone. Let me now turn this over to Ali.

Thank you, Bob. Good afternoon, everyone. Let me begin by reminding you of an accounting item that came up in the period post spin. Beginning with the period post spin from the Company's former parent and in conjunction with the execution of new agreements, we began reporting wholesale fees associated with sales of certain third-party digital advertising products and services on a net basis as a reduction of the associated digital advertising revenues rather than in operating expenses in our consolidated statement of operations. This change has no impact on reported operating income, operating cash flows, net income, or earnings per share. Operating revenues for the quarter were $659.4 million compared to $717.4 million in the prior year, a decrease of $58 million or 8.1%. This decline is partially due to approximately $14.6 million related to the reporting of sales of certain third-party, principally Cars.com and CareerBuilder, digital advertising products on a net basis, as I just discussed above, $5.4 million of unfavorable foreign currency exchange rate changes, and $5.4 million of selected exited operations and other items. Excluding these items, revenues declined $32.7 million, or 4.6%, compared to the first quarter of 2015, representing a sequential improvement from the 4.9% decline on the same basis in the fourth quarter of 2015 compared to the fourth quarter of 2014. This decline was primarily attributable to ongoing advertiser demand shifts and the impact of unfavorable affiliate agreement changes with CareerBuilder and its negative impact on classified employment revenues. These declines were partially offset by positive revenue trends in Gannett's digital products, particularly national digital advertising which increased 17.5%, as well as approximately $23.8 million of revenues from acquired businesses. Adjusted EBITDA for the quarter was $77.6 million compared to $71.1 million in the prior year, an increase of $6.5 million or 9.1%. The increase in the first-quarter adjusted EBITDA was due principally to ongoing cost reductions and efficiency gains in operating expenses, increases in digital revenues, and operating results from businesses acquired during the second quarter of 2015, partially offset by $7.3 million of reduced EBITDA contribution resulting from changes to the CareerBuilder affiliate agreement in August 2015, $2.9 million of incremental pension costs, $1.3 million in unfavorable foreign exchange rate changes, and overall declines in print advertising revenues. The resulting adjusted EBITDA margin of 11.8% increased over the prior first-quarter period by 186 basis points. Net cash flow from operating activities was $15.8 million in the first quarter. Capital expenditures in the first quarter were $10.2 million. Historically the Company experiences a use of cash in the first quarter, as it's generally the lowest revenue quarter of the year and incentive compensation payouts from the prior year are made. In addition, in the first quarter of 2016 the Company made its 2016 contribution to the Gannett retirement plan of $25 million. The Company does not expect to make any additional contributions to the Gannett retirement plan during 2016. At the end of the first quarter of 2016 the underfunded pension liability was $549.8 million, compared to $612.4 million as of December 27, 2015, a reduction of $62.6 million or 10.2%. The significant reduction in this liability is primarily a result of the contribution of $25 million made during the first quarter as well as some currency benefit on our international plans. Let me provide a few thoughts on guidance for 2016. Without taking into consideration the impact of the JMG acquisition, we continue to expect revenue trends to improve over 2015 driven largely by growth in digital. We expect advertising revenues to decline in the 5% to 7% range, and circulation revenues to decline in the 2% to 4% range. EBITDA margins will likely stay under pressure in the short term as we continue to offset incremental public company cost, the earnings impact of declining revenues, higher recurring non-cash pension expense, and lower contributions from CareerBuilder partially offset by ongoing cost efficiency programs. Additionally, for the full year 2016 without the impact of the acquisition of JMG, the Company expects capital expenditures of $50 million to $60 million not including real estate transactions, depreciation and amortization of approximately $110 million, and an effective tax rate of 31% to 33%. And lastly, we expect that non-recurring pension -- that recurring non-cash pension expense will increase in 2016 by approximately $12 million. During our second-quarter reporting period we expect to update our 2016 guidance for the impact of the JMG acquisition. Now I will turn the call back over to Operator who will assist us in taking some questions. Operator?

[Operator Instructions]. Our first question comes from Michael Kupinski with Noble Financial.

Thank you and good afternoon. I was a little surprised about how much cost was taken out of the business, and I know there was a little shift in some of the cost there, but it seems like you have taken out some production facilities. I was wondering if you can give us year over year how many facilities you have now versus last year? Maybe give us some color on what your thoughts are on your production and distribution facilities going forward, and are there further opportunities to consolidate there?

Michael, this is Bob. I will turn it over to John and let him give you some -- we don't have the actual number of distribution centers. We could certainly track that down. But this is a project that has been in the works for a number of months, and the team is just done a terrific job of hitting the ground much faster than we had anticipated. But I will let John give you some more color on it.

Some of the production cost reductions come from closing some of our offset presses. And we have had a major effort looking at all of the production and distribution costs throughout our Company to find greater efficiencies in each of those areas, and been very successful at implementing those to a degree that was greater than we thought initially. We've got a lot to look at in that area, and as we bring JMG into the process, we're certainly going to look at what other synergies we have from a production standpoint as well.

But this project is ongoing and it is part of our 2016 outlook. We just happened to capture about $3.5 million worth of expenses earlier in the cycle that we had projected.

I see. And then we saw obviously some improvement in the revenue trends in the first quarter. But there are other publishers that have indicated a little caution still about retail ad trends going forward. Can you talk about the prospects for further moderating revenue trends, particularly as it relates to the retail category?

I don't think we see any changes in what the retail trends have been. That segment of business has been under pressure in for some time. It continues to be. We don't see that is going to change in any short term. So the way we view that segment is much as we have over the last few quarters, that it's going to be a declining trend.

And in terms of your guidance then looking at ad revenues being down in the 5% to 7% range, what are the categories that you are looking for to moderate more fully than -- to offset what declines you might get in the retail segment?

I think most of the -- pardon me?

I'm sorry, go ahead.

Our focus really is on building through our digital network. We see that we have a lot of opportunity through segments of business that are driving our national revenue increases, which was about 17.5% this quarter. We look at segments of the business like automotive that we have put a lot of effort into improving the way we go to market. And in the first quarter, from an automotive standpoint, we saw the trends improved about 4 to 5 percentage points. Being a major segment of our revenue, we are really pleased to see that. In the event business we've put a lot of effort at looking at event growth that we can leverage this year. We've got a large Q2 effort around sporting events in about 30 of our markets. That opened up a new revenue stream, and we see a much different client that gets engaged in that business as well.

Michael, we continue to see growth in the digital marketing services at the local level. Healthcare is another good segment for us as well.

Perfect. Thank you so much, I appreciate it.

Barry Lucas with Gabelli & Company.

Thank you and good afternoon. I would like to stick with the cost theme, Bob, if we could and if possible identifying expense line items that are coming down. How much was resulted from newsprint, and how sustainable are these reductions and what do the opportunities look like going forward?

Well Barry, I will let Ali add some color to it. But I think we were up front with the fact that we were putting together a $67 million cost reduction program, and then we announced that we actually felt that we would come in at a higher level. We have proven that to be true. So we are looking at -- as a new integrated company, we found that we've been able to eliminate some duplication of efforts. John Zidich and his team have done a wonderful job of integrating USA TODAY with our local sites, is one example. Newsprint continues to be an area that we are managing very, very efficiently, and we did have -- we still are benefiting from an ERAP that took place the end of last year. At this point we are very comfortable that we'll continue to manage our expenses along the line of what you see today. But Ali, is there anything more you want to add?

I would just say that really when you look at the P&L, we see declines in almost every line item except payroll, newsprint was down about 30% and that was about half price half volume. We are seeing increases in certain things related to corporate expenses as we continue to absorb the lease cost here, build up our corporate infrastructure for things like SEC reporting, taxes, and the like. And we do see a little bit of increase in technology. We're moving things into the cloud which we can no longer capitalize under the accounting standards. That's got to go through the P&L. We are making some investments there in some systems and things like that. But in general we see very good cost-cutting across the board. And in my opinion it's all sustainable and manageable as we are doing it right now.

Thanks. And if I could sneak in one or two others. Since closing JMG maybe you could talk a little bit about surprises, pluses, minuses that you found. I know we're certainly glad to see that you affirmed the numbers that you put out previously. But what have you found as you really got into the weeds?

I will let Ali give some more color, but I think the thing that we found not surprising because we had done site visits, but the enthusiasm of the employees to join the Gannett Company, their eagerness to learn at a very fast pace how to utilize the tools that are available to them has been really, really nice to see. We have a lot of respect for those employees and that enthusiasm will pay off. Operationally there haven't been any real surprises. I don't think anybody expected any. The team at Journal Media Group ran a very good company. But I will let Ali add if she has anything more.

I think it's a really good question, and unfortunately because of the timing we've had 19 days since we've owned it. We have gotten their reforecasts and a lot of the data is coming in, we just haven't had the time with Q1 and some other projects we've been working on to final run that through our numbers and really look at it. I would say that there really haven't been any surprises, that their trends are fairly consistent with ours. The opportunities that we think are there in digital and some other areas will be there. The cost opportunities that we think will be there are going to be there. I think it hasn't been a surprise. I think it's been a very positive experience. We really enjoy working with the teams and we've got detailed integration plans that we are beginning to execute on. And we look forward to giving you the new guidance in a couple of months.

Barry, I think the one thing that I just want to shout out and give kudos to my USA TODAY Network team. On day one we had reporters from the Milwaukee Journal Sentinel appearing on the front page of USA TODAY. And so that just shows that everybody was eager to get started, and that makes us -- that is going to improve our products across the network. That was great to see.

Great. Thanks, Bob. I'm going to push one in on the big picture, and not necessarily Tribune. When you look across the landscape, and you've been very forward in articulating a consolidation strategy, how big is big? Is there a right size for Gannett , and how you think of the future, not just for Gannett but the industry?

That is a good question. We've been really upfront about we're focused on creating a USA TODAY Network with the goal being the number one digital news network in the country based on comm score. As we look at that strategy, Barry, we think consolidation now is really centered around a number of key markets. And we are not looking at this as, we're going to be 200 markets. I think somewhere in the 125 to 140 is probably the number if everything was to play out according to plan. We have an idea of the type of -- where we want to be in terms of our digital audience, and we believe the number of markets, because the network -- it's a national to local network and we need to have both. We need to have enough of the geography with our local operations and then supported by the USA TODAY brand.

Great. Thanks very much for that, Bob. Appreciate it.

I would just add, Barry, this is Ali, I do think we can accomplish that while keeping our balance sheet at a very reasonable leverage ratio, and that we are very comfortable that we have the capacity to do that while continuing to organically invest in growing through digital products and services as well as potentially do some other small investments on that side.

Thank you.

[Operator Instructions]. Doug Arthur with Hoover Research.

Yes, couple of questions. Unless I missed it, you typically give out a digital only revenue number. I think in the fourth quarter it was $165 million. Any update on that?

Hang on we will find it for you, Doug. Why don't you move on to your next question.

The 4.6% pro forma just to understand, that includes $24 million from acquisitions. So the number would be a little lower without that. Is that fair?

Yes.

Total digital revenues, which include advertising, circulation, and other, were $152.6 million in the quarter.

Any sense of a comp year over year?

Hang on. It was $174 million in the same period last year. And the decline is the $14.6 million I previously mentioned around the reporting going from gross to net. And about $7.3 million related to the unfavorable CareerBuilder contract.

Okay, great. And then you did call out the growth in digital subs of 37%. Bob, can you size that for us where you are now on total digital subs in terms of a hard number?

We are right around 135,000.

Okay. And then I know there were a bunch of -- obviously the cost performance in the quarter was terrific. Any granularity in terms of year-over-year change in FTE count?

I don't have the headcount in front of me. Doug, we can definitely get back to you on that.

Doug, I will follow up with you on headcount.

Okay, super. Thank you very much.

And I'm currently showing no further questions. I will now turn the call back over to Michael Dickerson for closing remarks.

Thank you all for joining us today. That concludes today's call. If you have any further questions you can reach me at 703-854-6185. Everyone have a nice day.

Thank you.