Tegna Inc (TGNA) 2005 Q2 法說會逐字稿

Good day everyone and welcome to the Gannett second quarter earnings conference call. This call is being recorded. Our speakers today will be Mr. Douglas McCorkindale, Chairman, President, Chief Executive Officer; and Gracia Martore, Senior VIce President, Chief Financial Officer. At this time I would like to turn the call over to Gracia Martore. Please go ahead, ma'am.

Thanks and good morning. Welcome to our conference call and Webcast to review Gannett's second quarter 2005 results. We hope you've had a chance to review our press releases from this morning which also can be found at www.Gannett.com. Since we met with many of you just three weeks ago at the mid-year media review and gave you a fairly comprehensive update, we'll keep our comments this morning pretty brief. With me today are, as she said, Doug McCorkindale, Chairman, President, and CEO, and also Craig Dubow, who will take over the President and CEO roles from Doug officially on Friday, and Jeff Heinz, Director of Investor Relations. Very briefly as you saw, we earned $1.37 per diluted share this quarter, a 5.4% year-over-year increase, and in line with what we indicated previously. In the second quarter of 2004 the comparable number was $1.30. I'd like to detail a few other areas before I turn it over to Doug.

Let's start with the newsprint side of things. Gannett maintained fixed newsprint pricing through the first and second quarters with a majority of our newsprint suppliers, resulting in a fairly constant average price through the first half of this year. For the latter half of 2005, we have again successfully secured term price deals for a substantial amount of our newsprint requirements. Our desire, as you know, is to establish longer term price agreements. We believe that represents a healthier, more stable approach to an evolving market.

For the quarter at Gannett, reported newsprint expense was up a little over 7%, which consisted of an almost 10% year-over-year increase in price and about a 2.5% decline in usage. On a constant currency, pro forma basis, newsprint expense was up a little over 6%, with price up approximately 9.3, and usage down almost 3%. In the expense area, we continue to focus on prudent cost control. During the second quarter, for the television segment, which, again, excludes Captivate, cash expenses decreased 1.3%. In the newspaper segment, our reported expenses increased 6.7%. Now, there are several pieces that are impacting this.

First off, acquisitions and newsprint affected that increase, and currency also played a small part. As well as we noted at the mid-year media review, expenses for the quarter include some items associated with the new Detroit press project that will come on-line in the second half of the year and have an attractive ROI. One piece relates to depreciation expense associated with the old Detroit News presses that will be replaced. So adjusting for acquisitions and currency, and excluding newsprint, our pro forma constant currency newspaper segment cash cost rose about 3.25%. Focusing in a little more on that 3.25% cash cost increase, there were some other costs, primarily involving, again, the Detroit press project for severance and other related items.

Helping to mitigate these cost increases, that I've mentioned, as well as certain benefit cost increases and some non repeating positive items from last year, was a benefit from changes in certain retiree benefits in the U.S. As well, the expense increase reflects costs associated with our strategy to start up and develop nondailies and niche publications which continue to contribute to our revenue and bottom line growth. For the quarter, nondaily revenue, which, again, does not include publications such as Clipper, Nursing Spectrum, or Army Times, was up 11%. The nondailies, which are affiliated with the local newspaper, have been successful in adding profitably to our footprint and reach. Doug will touch on that in a little more detail later.

Turning quickly to the balance sheet for a moment, total debt at quarter end stood at $5.2 billion, and cash and marketable securities were 153 million. As many of you are aware, we issued $500 million of three-year bonds with a 4 1/8 coupon during the quarter. The proceeds were used to pay down commercial paper and will give us some additional flexibility. At this point our all-in cost of debt is about 3.9%.

Turning to capital, expenditures for the quarter totaled approximately 55 million. At this point we're on track to spend about 280 million on CapEx for the year, including the ramp-up of Captivate's elevator buildout. With regard to our shares outstanding, basic shares at the end of the quarter were 244.3 million, and average 246.4 million for the quarter. We repurchased 5.3 million shares and year to date we have repurchased 10.7 million shares for a total of about $831 million. We continue to believe at these price levels Gannett is an excellent value and a good investment of our free cash flow.

Finally, before I turn the call over to Doug, our conference call and Webcast today would not be complete unless I told you that it may include forward-looking statements and our actual results may differ. Factors that might cause them to differ are outlined 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 in the press release and on the Investor Relations portion of our website, and now I'll turn it over to Doug.

Thanks, Gracia. I was just telling Craig off-line here how life was simple when Gracia didn't have to read all of these wonderful cover-your-whatever statements, and we used to send out the numbers, and only two or three of you called in. Anyway, life has changed. Most of you visited with Craig a few weeks ago, and as you know, he brings a wealth of Gannett experience and great leadership skills, and also, as most of you know, I have a very, very large vested interest in the Company, so we're here for a very smooth transition. Craig will participate a little bit this morning, but at the next conference call he's going to be taking the laboring more.

But for now, as you have seen from the press release this morning, as Gracia mentioned, earnings per share for the second quarter were $1.37, about 5.5% over the same period last year. Operating revenues increased 3.4% for the quarter, which is just less than 2% on a pro forma constant currency basis. Our second quarter results were led by solid numbers, very solid numbers at our domestic community newspapers, specifically in the employment and real-estate classified categories. Our newspapers did face, though, very tough comps for the second quarter in June with pro forma totals advertising being up 10% last year, those of you who remember that number.

At our domestic community newspapers for both June and the second quarter, the growth rate for employment classified exceeded 17%. That's the domestic. But as I mentioned, the U.K. numbers were softer, and they experienced in May -- the softness they experienced in May continued in June. Again, particularly in the employment category. And that's about 40% of their classified picture in the U.K.. And, on the broadcasting front, continued softness in the core business unfortunately continued through June, and that was, of course, exacerbated by the lack of politically driven advertising, which we had last year. And results for USA Today finally were choppy. Actually in June USA Today's ad revenues lagged last year. So if we step back and take a look at it, local advertising in all of our newspapers rose a little over 2.5% for the quarter.

In the U.S., across all products, the consumer electronics, health, financial, and telecommunications categories were strong during the quarter, while department stores, particularly some of them, furniture, entertainment, restaurants, and home improvement, trailed last year's results. Now that mix, as you know, has changed a little bit from month to month. Particularly we've seen some pickup here on the consumer electronics side. Turning to classified, in both a combination of U.S. and our U.K. community papers, they were up 5%, classified revenues for the quarter. On a combined basis, help wanted rose 8%, real estate was up 6.5%, but auto, as we mentioned just a few weeks is still soft and was down 5%.

As I mentioned, our employment numbers in the U.S. were a bright spot for the second quarter. In June, about 55% of our domestic newspapers had employment revenues above 2004 and 38%, in fact, almost 40%, as we round them up, including such places as Honolulu, Phoenix, Ft. Myers, and Green Bay, had double-digit gains. The strength varied by region in the quarter. The far west and the south generated double-digit employment advertising growth while the east and parts of the Midwest lagged last year's results.

So turning to auto for a moment, though, we continue to struggle globally, as we mentioned again just a few weeks ago. In fact, across all of our platforms, with the exception of USA Today, the weakness in auto has continued, and I must say the outlook is uncertain. As Gracia mentioned, our nondaily and on-line products continue to add to our revenue growth. On-line revenue for the entire company grew approximately 42% for the quarter, and that was led by a 54% increase at our domestic community newspapers. At this pace, I think we're on track for about a 275 million, or maybe a little bit more, total revenue coming in from our Internet activities this year.

On the on-line and Internet side, we're pleased with the progress at CareerBuilder. Revenue for the CareerBuilder network for the second quarter was up 78% year-over-year, and increased 83% year to date. CareerBuilder network traffic for May was up 47% to approximately 20 million unique visitors, that's compared to last year. As you saw from our report this morning, national advertising was soft and declined slightly for the quarter. USA Today's ad revenues were down 1%, reflecting an uneven ad environment, especially on the national side. To give you an example, USA Today's ad revenues were down 4% in April, up 8% in May, and down 8% in June. That's the up and down market we talked about awhile back. For the second quarter, strength at USA Today was in entertainment, automotive, again, an exception to the regular picture, technology, financial categories, but that was offset by weaknesses in travel, retail, telecom, packaged goods, and the advocacy categories.

Looking overseas, our results did reflect the flagging U.K. economy. As many of you'll recall, we began to see a softness very early this year and it simply has not recovered. Pro forma revenues for Newsquest for the quarter in pounds were down about 2.5% and Newsquest operating profit again, in pounds, declined almost 5%. Our folks over there are taking steps to control expenses, but when you see the softness that they're experiencing, especially in employment and automobile categories, they don't have too much that they can do. And as we've mentioned before, we did not receive nearly the level of positive impact from the exchange rate in this quarter as we experienced in the second quarter of 2004.

Moving over to broadcasting, and as noted in the earnings release, excluding Captivate, television revenues were down 7.9% for the quarter. Ad revenues declined with the relative absence of about 14 million of political advertising, as well as the absence of Friends and Frasier finals that boosted ad spending on our NBC stations last year. Excluding political, the restaurant and packaged goods categories were positive year-over-year while auto, again, retail and telecom, trailed last year's results. Local was flat for the quarter, while national declined almost 19%.

Looking out a little bit to the third quarter, so far our pacings are down in the high teens. Now that reflects roughly 50 million in ad revenues related to the Olympics and political ad spending that benefited the third quarter of 2004. July and September are stronger than August, which obviously included the Olympics last year. Local is is stronger than national at this point. But the pacing's continue to be very volatile and are subject to weekly changes, but at this point that's where we stand. We'll obviously keep you up to date in our monthly reports as the quarter progress.

One brief note on acquisitions, we announced during the quarter that we acquired PointRoll, a leading provider of rich media marketing services. The Company, PointRoll, offers a suite of products and services that substantially enhance the impact of Internet ads and can capture user statistics. PointRoll provides us with an opportunity to participate in the rapidly expanding rich media segment of the fast growing on-line advertising market. In addition to the financial growth opportunities which obviously are there, or we wouldn't have done the transaction, there are potential synergies with our on-line operations, including ad serving and expanding the innovative PointRoll product across a number of our local markets.

Taking a look at the second half for a moment, our folks in the broadcasting segment are not alone in the challenges they face going into the third quarter and the second half of the year. For both ad revenues and total revenues, we're going to face some of the toughest comparisons for the the year in the second quarter. Ad revenues on a pro forma basis were up almost 10%, about 9.5, to be exact, in the third quarter of last year, while total revenues were up about 9%. In addition, with the recent decline in the exchange rate and the developments in the U.K., the exchange rate may subtract from our results.

Finally, as we have pointed out for some time, we are seeing mixed economic indicators which will result, we believe, in growing but uneven ad demand going forward. Those up and down numbers I mentioned for USA Today are a prime example. However, as we noted at the mid-year media review, we will continue to invest prudently in on-line platforms and products related to the daily newspapers that expand our footprint and reach in our community newspapers. The strategy is working, as we've seen in an analysis in a couple of our markets. For example, the combination of on-line and nondaily products added 16 percentage points to our reach in Phoenix, and 9 percentage points to our reach in Brevard. This is on top of an already strong market coverage from the newspapers alone, which range from 60 to 70%. Our total coverage in Phoenix, for example, reached 76%. By the way, that does not include our television station down there. And in Brevard it was up to 81%.

Remember, these are unique, unduplicated consumers. The net result is that the newspaper brand, but only in combination with affiliated products, reaches three out of four adults in the markets each week, and we reach them, on average, five times a week. In the communities we serve we are delivering to the consumers the information they need and to the advertisers the eyeballs they want we will continue to strategically invest in a number of products and deliver information, including advertisers to the consumers where they want it, how they want it, and when they want it. Now let me stop and take some questions and Craig and Gracia can jump in also.

[OPERATOR INSTRUCTIONS] And our first question will come from Jim Goss of is Barrington Research.

I wanted to address the automotive issue a little bit more. I'm wondering, Doug, if you could talk about the interplay between the ROP side and the classified side, given that I think the GM promotions have probably pushed the ROP side, as well as the industry response, but the economic factors and the impact on the used car market might be such that that's been part of the problem on the classified side. Then I have a couple of others.

Well, Jim, not really. What you say regarding the used cars is true in classified, but a lot of our local automobile dealers also advertise in classified for new products. So their ROP and classified, actually we categorize most of them in the classified side. The only real big picture ROP advertising from an automobile point of view is the USA Today picture, which has a very small classified section. So it's a softness in both categories. Yes, we saw these new ads, obviously for the employee discount, and that got some inventory off the lot for GM, and now the others have joined in and we've gotten some good advertising there.

Our foreign advertisers, foreign make advertisers, are taking a different track. They've been a little bit more consistent, but the so-called big three in the U.S., they're the ones that have been bouncing around and hurting us, and then in the U.K., where it's more classified than anything else, the motors category as it's called there, is down for all the combined reasons that exist here in the U.S. on all lines of cars. There's a lot of consolidation going there and obviously it was a boom market, and it's just softened across the board. So when you look at it from the a global point of view, as I mentioned, but for -- and it's only really in June that USA Today had very good automobile numbers. Prior to that its numbers, too, were not very good. So across the whole category, television, USA Today, which is national, local ROP, classified, and in the U.K., the numbers are just soft.

The other couple of points I wanted to ask about were, USA Today margin trends, I know they had strengthened quite a bit a couple of years ago, and then more recently had weakened. Are they bouncing back even within the mix environment, and is on-line contributing positively or negatively to that, and then lastly, for Craig, beyond the notion of a smooth transition, which I'm sure would be a goal, are there any specific initiatives you think you would be interested in addressing as you take on this role?

Let me go to USA Today first, then Craig can jump in. The bottom line is that USA Today's bottom line is up dramatically this year, notwithstanding the mix ad picture that we talked about, of course, we're getting a lot of dollars from the circulation price increase, and its ad picture, as a general statement, doing very, very well, although in a mixed way it's up about 6% on a year-to-date basis on the advertising side, but a lot of that is coming -- I mean, not on the advertising. On the revenue side a lot of that is coming out of circulation in the other categories. So I don't have a comparison versus a couple of years ago, a but USA Today's bottom line is up significantly. And USA Today.com is doing very nicely this year.

As you know, it was one of the leaders in the late 90s and year 2000, then after the funny money disappeared, its revenue picture stayed pretty good, but it had some expense increases to keep up with the technology changes. It's come back very, very nicely this year, and is doing fine. So the overall brand USA Today, which includes a number of categories, I think is up in terms of return on sales, but the paper itself is probably up more than any of the other pieces. Craig, you want to--.

Sure. Jim, just to touch on this for a moment on some of the initiatives, first, we're going to further develop our core assets, both on the print and certainly our broadcast side from what we have currently. Second, the next piece is really working toward the transition and migration, as we like to talk about, more along the digital side, but we want to keep the core first and foremost at mind.

The second real big piece here that we'll be doing, and this will start actually tomorrow, where I will be taking to the road, and we're going to spend quite a bit of time going through each of the major properties, and really with the idea to make sure that we can best understand all the issues and opportunities certainly before us so that we can tie certainly the core side along with the expansion into the digital. But those are the first steps that we're going through.

Okay. Thanks very much.

And we'll hear next from Fred Searby of JP Morgan.

Couple questions. One, Doug, notwithstanding the obvious comps issue with political and Olympics, are you seeing signs that generally there's a second-half slowdown? I mean, the June deceleration, part of that looks like some classifieds, but generally on media advertising what are your thoughts for the second half of the year? And I wondered if you could give us some sort of update on the retail sector, the mergers, whether there's any impact there that you've seen, that was still a question mark, and what Wal-Mart has been doing after some initial forays in picking up their marketing spend, or advertising spend with you. Thank you.

Hey, Fred. Gracia may want to jump in here, or Craig, but from a macro point of view, I think what's happening is that core broadcasting advertising is clearly softer this year than we expected, notwithstanding the political and the Olympic categories. If you take them out, our core advertising, the top four, five, six advertisers, top ten, simply have not come back to conventional television in the traditional manner that we had seen in off years from -- compared to political years in the past. For example, when our inventory lightened up and became more easy to handle after November, the automobile folks didn't come back. Traditionally they come back, and this year they didn't. So broadcasting is suffering in the core categories. New business in broadcasting is doing fine, but it's the old line core categories that are not.

Our domestic newspapers, as a general statement, are doing okay. They're bouncing around. You heard the employment numbers, the real estate numbers are okay, most of the retail numbers are okay. There is a little up and down. We'll get to the department store picture in a moment, but they're generally doing okay. They're hurting on the automobile side, and that is hurting a little bit on the bottom line. USA Today, as I mentioned earlier, is up and down. The trend for the year is positive, the bottom line is positive, but when you see swings of up 4%, down 5, 8, up 8, I mean, that's a very strange pattern. People are coming in very late in the advertising commitment period and making the commitments in the last moment.

And then, of course, in the U.K. we're simply suffering after five years of wonderful results, and the U.K. economy that we thought might come back after a little softness in January and February, simply is not coming back, and U.K. is a rather homogeneous group, and there's a lot of comparing of notes, so everyone is experiencing the same results over there. I think if you step back and say if broadcasting had just done the normal rebound and the U.K. had just been okay, our numbers would actually have been much, much better. We're being hurt by those two categories more than anything else. And the rest of the picture is up and down, but really not as bad as some of the doom and gloom that you read in our own newspapers and see on some of the talk shows. As to the department store picture, we haven't yet gotten any answers from the proposed mergers and putting together of some of the pieces. Gracia, do you have any detail on that?

Yes, as Gary Watson said at the mid-year media review, the Federated-May is just going to be closing here today or in the next few days, so it's still a little early for us to know what direction they're going to take. But as to your question about Wal-Mart, actually on -- we put Wal-Mart and Target and others in the department store category. I know some of our peer group companies don't, but Wal-Mart, actually, on a percentage basis, was our leading growth engine in the second quarter on the department store side, but again, it's not a lot of dollars. It's a combination of ROP and pre print, but they were up very nicely in the second quarter. So we're seeing that follow-through from them.

Craig, you want to add anything?

Yes, Fred, just going back to the auto category, and this is in broadcast specifically, and we had mentioned this at the mid-year, but the specific auto that is still showing the most up for the division still falls within the Toyota, Lexus, and Hyundai arena. And again that is really a departure from where we had been, as you're well aware, from the domestics that had been there in previous years. But that's part of this balance that we were looking for that just did not materialize, as Doug communicated, is being partially made up there, but obviously not to the extent that we had all hoped. And that's the shortfall.

The foreign advertisers in auto, Fred, have a different strategy than the domestics, and the domestics have been a very big piece of our package there, 29, 30%, of all of auto is, in the newspaper -- in the broadcasting side, so when they -- when they cut back, it's very noticeable, but if broadcasting had just been okay, and Newsquest had just been okay, not strong, these numbers would be pretty (Expletive) good.

One other comment, Fred, on the auto side. At USA Today in the second quarter, we saw very, very nice pickup from some of the domestics, like GM particularly, and in June, pretty much across the board we saw pickups from Ford, GM, and others. So a mixed picture across the platforms.

Thank you very much, and good luck in your future endeavors, Doug.

Thanks. I'll be here for a while, Fred.

We'll hear next from Christa Quarles of Thomas Weisel Partners.

Couple questions. First, you've done a pretty good job obviously of maintaining your cash expenses in the broadcasting division given the tough comps in the back half of the year, I was wondering if you anticipate similar cost control there? And then circulation volume has been down in daily and Sunday for the past eight months or so, and sort of when do you feel that you'll work through some of the do not call issues, and are your advertisers starting to squawk a bit as it's continued to be fairly muted, I guess, in terms of the growth, or the lack there of? And then the final question just comes in the terms of PointRoll. It's a little bit different than some of the other acquisitions we've seen from your newspaper peers in terms of this is not a newspaper publisher, just maybe express a little bit more about why -- or what types of Internet-type acquisitions you'd be comfortable doing going forward, i.e. nonpublishing related.

Let me go to circulation and PointRoll, and Craig will jump in on broadcasting cost control, which yes is the answer. But on circulation, you're clearly right, it's down a little bit. We're beginning to overcome the problems we have with the do not call, but, as I think I mentioned a few weeks ago, Gary Watson may have mentioned it, we've done much better in smaller markets than we have in larger markets. I think as a general statement the industry has done too many things in a traditional manner too long, and we've had to get people thinking in new ways, and that's easier to do with small circulation departments than it is with large. But we are beginning to make progress there, and I think compared to some of the earlier months, our numbers are a little bit better.

But to go back to the heart of your question, we're not getting a lot of push-back from advertisers on this. When you get the market coverage that I mentioned earlier with 76 and 81% of the coverages in the households, that's what the advertisers are looking for. They want eyeballs. So if we do that with daily newspaper circulation and nondaily products and on-line products, they don't really complain if they get the eyeballs. So we must cover the market. And you've heard all the numbers about circulation at one number and readership at another number. That's what we have to do. We have to sell eyeballs, we have to deliver results for the advertisers, and as long as we continue to do that, we're not getting push-back. Now, we haven't had some of the circulation challenges that a few of our friends have had, and hopefully there will be no more of those, which is not good for the industry, but if you deliver the advertisers are okay.

And as to the new Internet investments we've had, Captivate was not a newspaper group type activity, but it's a video Internet related activity if you've seen them in the elevators and a number of the large office buildings in New York. PointRoll is a way to enrich on-line advertising. It's a technology, it works very, very well. We have a lot of investments in the Gannett Company that we don't issue a press release about every week that are technology related. We have a rather large portfolio of them, to be honest with you, but if we think they make sense, and they fit with what we're doing, or they allow us to repackage information in a video format or in a digital format, which may also be video, obviously, that's what we're interested in doing, is just expanding the whole footprint of news, information, advertising, and entertainment, and anything in that category that makes sense. We looked at some of the acquisitions that some of our friends made, and they're all good transactions, and good companies. It was just a question of price. Craig, do you want to throw in something on broadcasting?

Sure. Chris, back to the expense side, absolutely, I think that answered that very quickly. The answer is yes. But let me take it a step further. The other side to that, and Doug had mentioned this in his prepared comment, and that is we're going to make the necessary investments where we see that opportunity, and as an example, we've talked some on this already, particularly at midyear, about the NBC Weather Plus, and we will be bringing those up through the course of the back half of the year, thus far in this multicast environment with this product we've had tremendous success in Denver, in Cleveland, and in St. Louis, and we are anticipating this kind of investment is something we're going to look a lot more toward as we go into the future. Obviously when we can see virtually instant ROIs out of these it makes sense for us to pursue, and we will do it.

One other thing -- just a quick follow-up. Doug, that you mentioned is selling the whole market. So are you selling on-line and off-line, just in terms of your overall reach? Are you doing the combined packages fairly frequently?

Oh, yes, but not forced in the Gannett markets. It's sort of an obvious on the classified side, but it's also spreading a little bit to the ROP side, and, of course, it also works on combined with broadcasting and their on-line results, as Craig mentioned in Denver, the Denver station did an all-digital high-definition news program there, it was one of the first in the country. Now we're going to do that in Washington and a few other places, and it has some on-line carry over. Not a big deal, but it's a question of, again, eyeballs.

Got you. Thanks.

Michael Kupinski of A.G. Edwards has our next question.

Thank you very much for taking the question. Gracia, you mentioned that newspaper expenses would have been up 3.25% exclude some of these extraordinary items.

No. No, no, no, no. What I said was that our pro forma constant currency cash costs, cash costs, in the newspaper segment would have been up 3.25%. Obviously that would exclude the depreciation expense related to Detroit, but it doesn't exclude the severance and some other items.

Okay. I see. What do you anticipate newspaper expenses to be up in the third and fourth quarters? And if you can, talk a little bit about newsprint expense assumptions as well. Then my second question is about the choppiness at USA Today. Obviously you had tough quarterly comparisons there as well. I think ad revenues were up 15.5% year ago quarter, but June had the easiest comp, or if I recall,, and June was kind of your weakest month this quarter, I was just wondering if that's a worrisome trend or do you still see that it's going to be kind of choppy as you have a little bit of a view into the third quarter here?

Mike, you're a little ahead of us. We're just getting into the third and fourth quarter, and we'll get you some numbers to the extent they change, what we said earlier, and Gracia a can fill in here, but what I said earlier is what we're seeing. When you see swings in USA Today from 4 to 8, 4 and 5, and up and down like this, that's very uncharacteristic of the typical advertising market. So USA Today is getting the dollars. There's no doubt about that. And the comps will be difficult.

On the other hand, I mean, if they bounce up 8% and down 4, it's going to be kind of silly to even look against the comps because we didn't see that much of a variation in the advertising flow last year. So it's a little hard to answer. We're just getting into a relook at the second half. I'd say at this point it still is choppy, though, but it comes in late, and it can come up with very nice numbers and then June was obviously surprisingly soft. We didn't expect June to be this soft two and a half weeks ago. Or whatever, we're into July now, say four weeks ago. The market is bouncing around. The general picture is positive, but there's a lot of decision making being made at the last moment. Gracia, do you want to add to that?

I was just going to say, on USA Today at mid-year media review Craig Moon indicated that he thought ad revenues would be up in the back half of the year in the 6 to 7% range. I think he still is focused in on that. There hasn't been anything that has happened since midyear that leads him to believe that number will come in differently, and that obviously includes a month like August of last year when our paid pages were up 19%, in part due to the Olympics. So that's his latest sense of where things may fall out on the USA Today side, but obviously we'll keep you all posted in our monthly reports on that.

On the expense side, as Doug said, it's a little early, but since we are gathering up the second six-month budgets, but I think that we will continue to be focused on maintaining strong cost controls across all of our platforms while at the same time investing in those initiatives we think will bear good promise for us in the future. And on the newsprint side, as I said, about -- we have a substantial portion of our newsprint tonnage that is now fixed through the end of the year. The comps, the year-over-year comparisons I think we said at midyear media review we're expecting newsprint for the full year to be up in that 10% range.

Mike, these Detroit numbers did make it a little confusing in the second quarter. That will all be behind us now. We took care of all of those bits and pieces, and that should clear the deck for the rest of the year.

In terms of the share repurchases, you bought back pretty much of an equal amount in the first and second quarters. Do you see yourself continuing buying back on the pace of what you had so far this year?

We'll continue obviously Mike to balance that with other investment opportunities on the acquisition side. We have no set number that we're looking or targeting to do, but we'll just balance that with what other opportunities are out there.

The math makes good sense, Mike, at these numbers obviously. If the acquisition market were to change, as you know, in the past we'll change on the dime, and go the other way. We certainly have enough cash flow to do everything at the same time, unless a huge transaction were to come down the pike, and that's not very likely.

Great. Thank you.

Thanks, Mike.

From Morgan Stanley, Doug Arthur, has our next question.

Yes, three quick questions. In terms of June newspaper advertising being up 0.8, can you just -- you broke out some of the categories, but what was the U.S. community papers up in June? That's question number one. Question number two, Media General said yesterday they're seeing a pickup in the third quarter in local auto. That's the first company I've heard say that in awhile. Are you seeing that? Then I think yesterday USA Today reported that Kevin Martin is going to start looking at the cross-ownership issues in detail next week. Any updated thoughts there?

Doug, I thought I'd gather together the June notes -- yes, I'll go to the FCC first while Gracia looks up some of the other numbers. What was announced from the Chairman of the FCC I think is not anything new for those of us who have been following this closely. He made it clear early on that he was going to have a notice of rule making to get started to see if we could get back on track. So that's just as proposed, and we haven't seen anything yet, but as I've mentioned in the past, we're optimistic that the rule making will be positive from this company's point of view at least, and I saw Media General's numbers, too. I think it's a little early for us to say that we're seeing that sort of an auto result in talking to our folks we haven't seen indications that would be as positive as Media General suggested. Gracia, do you have the numbers on June?

I was just going to say, on auto, I think in part what we'll all be looking at for the last six months of the year on the newspaper side is in the second quarter -- in second quarter at the end of the second quarter and into the third quarter and fourth quarter, there was a ramp-up in the decline in auto advertising. So you'll -- you will you be going against a little bit easier comps, and that could be part of it, as well as obviously the GM and other spending that we're seeing clearly on the USA Today side. That could be helpful as well. We'll just to have see how those all play out. With regard to your question on the U S alone, U S alone on the advertising side in June advertising was up about 2.5%. Classified was up several percent, local 1.5 to 2%, but national was down close to 5%, a combination of USA Today as well as lower -- some lower national advertising at the local newspaper.

Employment was pretty good, Doug, in June. Real estate was pretty good, especially on the resale, which is interestingly different than what we saw in the U.K.. In the U.K. it's the developers that are having to advertise. They're not moving the houses and the resale numbers are a little bit softer. Automobile was down about 5%, though, and rest of the picture was okay. So it was an okay month, not strong, not weak in the U.S. The U.S. side did better than anyplace else.

Great. Thanks.

We'll hear next from Paul Ginocchio of Deutsche Bank.

Good afternoon, thank you. First, it looks like USA Today's yield is down. Could you just comment on that? I think it's the first time in six quarters it's been negative. Second, is 55% of your newspapers being up in employment, do you see that as positive? I would take that as slightly negative. So maybe some color on that. Finally, if you look to the data and based on your comments, it looks like your daily U.S. newspapers are actually the margins are roughly flat. Is most of the margin pressure coming from the launch of niche products? Thanks.

Yes, Paul, on the yield issue at USA Today, I think looking at it it's clearly a mix of advertising. We had the mix between color and black and white was a little different. There was a little bit more black and white that we saw versus color on those numbers, and just a mix of the advertising there. So I think that Craig's thoughts for the second half of the year would indicate that the yield will be back.

On the employment numbers, Paul, yes, 55 is not 100, but, on the other hand what I meant to say in the comments, if I didn't make it clear is is that we're seeing some very big gains in some of the larger markets, and you may recall that some of our markets actually didn't go down at all during all the difficulty, and some of the smaller markets, so they're going against different comps, and they're doing okay, but they're not up in the same percentages, but with the good numbers in the Ft. Myers and Phoenix areas and a few others up there in double-digit gains, that's what I was trying to emphasize. Having said that, some of the manufacturing areas in the Midwest are clearly still suffering, and they are not coming back in any sort of order of magnitude that one would want to brag about.

And also, the Rochester newspaper has been struggling on the employment side. The economy has gone down.

Yes. Some of the companies in Rochester have been cutting back. Anything that has been automotive related in the local economy has been hurting us. There's no doubt about that. So it's not just the advertising. It's the whole automobile product flow and supply flow that comes out of a lot of the midwestern communities, and those folks are simply not hiring. Did you have something else, Paul?

Just trying to -- yes, those comments are very helpful. Thanks. Just looking at your margin on the newspaper side, the mix between daily versus new products. Thanks.

Yes, I think, there's a couple of factors there. One, there's obviously start-ups of some new publications, some young reader publication here and there, that sort of thing, and then also to the extent that there's good growth, for instance, coming out of a Clipper, I think their revenues were up 20% plus in the quarter, as we've said previously, their margins are not going to get to the 30% kind of margins at our local newspapers. They're going to continue to have direct mail kind of margins which are in the 15 to 20% range. So to the extent that you're getting more growth out of that side of it, that's going to have an impact as well.

So are your daily newspaper margins relatively stable?

Yes. Yes, just taking the daily separate because we mix -- we've got 800 plus non daily products that are mixed in here, but if you go back to the P&Ls locally, the answer is yes, with some exceptions. We're hurting a little in Rochester, we're hurting a little in Detroit, some of the Midwest markets I mentioned on the employment numbers are not doing as well. On the other hand, the south and the west and some of the others are doing fine. Our margins are down a little bit in the U.K.. As I said, revenue was down 2.5%, profits were down 5, so that's obviously affecting the margins.

Thanks very much.

We'll hear now from Lauren Fine of Merrill Lynch.

Just a couple of quick questions. Going back to Doug's question about the domestic papers, I'm wondering, Gracia, if you can exclude USA Today and just give us a sense of more just the community papers performance in June in the quarter. Then I'm wondering, pre print volume has turned a bit negative just for one month, and I didn't know if that was something that was likely to turn into a trend. Third, at the risk of starting to annoy you that I keep asking the same question and you don't have an answer is there any way to gauge just anecdotally how the nondaily properties are performing after they've been out there for a year in terms of their ultimate growth rate top line?

Let me start -- I think on -- with regard to pre print it's way too early to say whether one month is a trend or not. We've seen some ups and downs on the pre print side of the business, so I think it's a little early to declare whether that's a trend or not. With regard to excluding USA Today, out of the numbers, obviously the local number would not be impacted by USA Today, nor would the classified number, so it's really just the national number. You see the national numbers down, as I said, close to 5%, so , I think that's -- we can get you a number that excludes USA Today but really it's the national category that's going to have the impact from USA Today.

Lauren, this might be helpful, we do run some numbers where we add all the pieces together, local, classified, preprints, and on-line, at our local newspapers, and what we saw in June was department stores were somewhat positive, up about a percentage point, furniture was soft, consumer electronics, as I mentioned earlier, came back and is much stronger in June than it was year to date. Entertainment was soft, a little bit soft, groceries are doing a little bit better. It's a category by category break-down, and as I mentioned with USA Today, they're seeing some softness in travel and some of the categories that are big for them. On the other hand, they saw some positive numbers on the automobile side. So it's a very interesting and mixed bag that seems to be changing on monthly basis. Gracia, do you want to add anything else?

Let me add one more thing on the preprint. Last year in June preprint distribution was up almost 9.5%, which was our strongest month of the entire year for comparison purposes. The month before preprint distribution was down 0.8%, and the month after it was up 5.4. So I think you've got a tough comp comparison in June that obviously we had to deal with, and I think you saw choppiness on the preprint side last year, and we've seen it again this year as well.

On the non daily products, I think Gary tried to answer the question a couple of weeks ago, and the bottom line is if they're working, they're working well. Most of them are coming on line quicker than our plans, especially in the young people publications and some of the unique specialty publications. On the other hand, if some of them don't work, we just kill them. With over 800 of them at a time, we can move in all directions. If they're simply not making what we expect them to make, we don't continue them. But they are working. I mean, they are not 40% return on revenue products, but they're in the 15 to 20 category when they begin to move, actually in the U.K. there are higher margins than that and maybe that will happen in the U.S. also. They're going along fine. How long it takes, some of them are coming on in six weeks, some of them are coming on in three months, but they are moving positively, and if they don't work we just simply do away with them.

And there's a mix of margins in there. We have some little products like something called post-it notes that can have 60, 70% margins. A young reader publication isn't going to have a 60 or 70% margin. It's going to have -- it's going to ramp up on a slower pace, and it's not going to get probably to a 60 or 70% margin. Then you have classified publications, auto publications and that sort of thing that can range anywhere, depending on their lifecycle, to 5% margins to 20, 30% margins. So there's not a simple, easy answer, I guess, to identifying one blended answer.

Our game plan is to simply capture the revenue and provide the market coverage, which I mentioned earlier, and if we cover it in every way we can, we'll deliver the eyeballs to the advertisers and get the revenue that's coming into our local markets.

Great. That's very helpful. Thank you.

Thanks Lauren.

Your next question will come from William bird of Citigroup Smith Barney knew.

You seem to be having some success in stabilizing circulation at the Arizona Republic. Was just wondering if you would talk about what you're doing specifically, is it sustainable, and can it be applied to other markets? Also just was wondering what quarterly D&A should look like going forward. Thanks.

Bill, on Phoenix, as I think we mentioned a number of meetings ago, bluntly, I think they got started a little slow in responding to the new rules and in taking advantage of their marketing possibilities, and they've just turned it around. They just needed to focus better, and they're doing exactly that. It's a wonderful market. We've got, as I mentioned earlier, 76% coverage in the market with not as many nondaily products as we may have there eventually, and, of course, a very good on-line site, and that's not even counting our television coverage. So we're doing well in Phoenix, but bluntly they just didn't do as well as they should have in circulation early on.

Bill, on the D&A side, I think at mid-year media review we said amortization expense would be in the $17 million range or so. That's obviously going to depend on what other little pieces we add to -- in terms of acquisitions in the second half of the year. And then on the depreciation side, I think we talked about a number in the 270 to $280 million range. But, again that will be subject to any changes we do in the portfolio or any acquisitions going forward.

That shouldn't change too much unless you see some announcements. These small acquisitions don't add very much to those numbers, but we have some things we're working on that may give Gracia some reason to write a note or two. We'll have some fun.

Along those lines I was wondering if you could talk a little bit about the M&A environment.

It's soft, as a general statement, Bill, but maybe that's because we don't believe in making some people rich for efforts that we're going to have to put into the new products. There are, as you know, there are a number of broadcasting stations officially or unofficially on the market, at a price they make sense to us, chasing them doesn't make sense to us. We'd rather let other folks do that, and then they sometimes come back and sell them to us a few years later when they have a little trouble with the arithmetic.

The print side is generally quiet. There's a few things available in the U.K., there are a few things available here, but nothing big that we are aware of, a number of folks are waiting for the FCC results to come down, which, I think, Doug Arthur mentioned earlier, it's going to take some time. As I said from the podium up there, I said 18 months X number of months ago, and I still think that's pretty good, so we're talking about sometime early or mid 2006, I think, before that settles down, and there are a number of public and private companies in print and broadcasting that are sort of waiting for the answer, because they think they'll have a clearer regulatory environment in which to sell their companies.

Thank you.

Thanks, Bill. We've got time for a couple more questions.

We'll now move on to William Drewry of Credit Suisse First Boston.

Gracia, I was just wondering how much of the 3, 3.25% of the cash costs being up is investment-type spending, or another way to ask, I guess is, is the investment spending still growing year-over-year? And then also, on the nondaily revenue, I think you guys mentioned it was up 11%, and just wondering if that's a pro forma number?

On the 11% rate, that is a pro forma number, and, yes, we are continuing to ramp up investment dollars on the nondaily side. We, a few months ago, started up a young reader publication in Des Moines, and I know our folks have started up other publications, so we continue to be focused on that area as an area of growth, and so we'll continue, as we said earlier, to invest in there just as Craig has indicated on the broadcast side that we'll continue to invest in initiatives that we think give us good opportunities for future growth.

There are a number of nondaily products still in the pipeline, Bill. Gary's group has a whole slew of possibilities. We have a lot of activity, as you know, we went from about 250 nondailies to over 800. So I don't think it will be as aggressive in the upcoming 12, 15 months, but there are still a number of them that they are rolling out, then if it works in market A, they move it over to market B, it's not exactly a cookie cutter, but it's conceptually the same, and they'll move it around. In certain markets you need a base to decide whether there are enough people in the niche category to justify the publication. So we started them in some of the markets where that answer was obvious, and now we're investigating whether it makes sense in some of the other markets.

Okay. Just one more, if I could. I know it's early, and you've already said that you don't have visibility on those things, including maybe even where exactly the costs are going to be in the second half, but given the surprise in June, if you continue to see that sort of level of growth, or even better than that, but worse than what you were doing in prior months, through the second half, given the run rate on the cost side, it's kind of hard to see where you're going to have any growth in newspaper profits in the second half. Obviously broadcast is going to be down, but on the newspaper side it looks like it could be pretty tough sledding, even versus what you were able to do in the first half. Is that an incorrect assumption?

I think that's a little incorrect, Bill. Some of the softness we've gotten, and the big newspaper number that you see is obviously coming out of the U.K., which had done so well for five years. The newspaper division, and as I mentioned earlier, USA Today, their -- the June numbers were a little softer than we expected, but the newspaper division, as a general statement, is doing okay, is it doing robustly? No. But it's doing okay, and USA Today has been bringing a good deal of money to the bottom line. But you're absolutely right, if the advertising picture is as soft as it was in June, we will to have concentrate more on the expense side, and obviously we will.

Great. Thank you very much.

Alexia Quadrani of Bear Stearns has our next question.

Just some follow-up questions on the Newsquest operations. Is the softness still isolated to the southern part of England or has it migrated to the north? And then was there a significantly, I guess, worse performance in June than the previous two months of the quarter? Then a second question, just following up on your comments on the Internet side, the 275 million I guess Internet contribution that you mentioned, is there a way you can ballpark, I guess, what percentage of that comes from USA Today.com?

I'm sure we can. I'm not sure we will. But it's -- it's in excess of 20 million. I don't have the exact number. Looking at Newsquest, I don't think it's any worse in June. As I mentioned earlier, the trends were hopefully going to pick up after the first quarter. They did not. It is not the south moving to the north. It's across the whole United Kingdom, but the south, which as you know is the growth area of the United Kingdom, or mostly -- used to be, at least, simply is not as positive as it was. The bright spot in the U.K. is Scotland. So if you want to go far enough north, where you can wear a few sweaters from time to time, the numbers are pretty good. Our property in Glasgow is actually bucking the trend and doing well inmost categories. But generally speaking, all of the UK is soft. Earlier in the year it was a market by market result, some being up and some being down, but right now they're all basically soft with the exception of Scotland.

Just a slight clarification. In June, the employment number--.

Oh, yes.

At Newsquest were--.

They got worse. Yes, I'm sorry. They actually got worse in June, which is not a positive sign for the UK economy.

And then with regard to the Internet revenues, while USA Today in the early years was half or more of our revenue picture, on the on-line side, since then both -- as Gary has alluded to with growth on the on-line side in the community newspapers of 50% plus, USA Today has had healthy increases in the 20% plus range, but the community newspaper side is clearly the predominant part of the picture now, although USA Today.com has done a very nice job.

I think it will probably be end up less than 10% of our total revenue picture.

Okay. And just circling back to your comments on Newsquest again, you had mentioned earlier that you had initiated some cost cutting efforts there. That, I assume, has already started. When do you think you will start seeing the impact of that?

Well, on day one. Those folks reacted right away. They began to see some signals, and they react very quickly. It's a wonderful management team that stays on top of these things, but when you see the employment classified numbers go down as much as Gracia just mentioned, and we mentioned earlier, that's 40% of the classified picture in the UK, and very profitable, by the way, so that has a pretty big bottom line impact.

Then the motors category, which has been soft for sometime there, the only thing that's positive over there right now is the real estate picture, and it's from the new home development, not from the resale, although the resale is positive, but the new homes is where we're getting most of the action. Though local revenue picture was so-so, the national, which is not a big deal over there, was very soft. They reacted on day one. When they cut back people, they talk about redundancies, which is a wonderful word, and they've already taken out all of the redundancies and are making all the right moves. So it's not a lag factor here.

Yes, just to be clear, Alexia, their operating expenses year-over-year, year to date are down even with several percent newsprint price increase, and in June, their expenses were down 3 or 4%. So they have been doing it. They are realizing it is just as Doug has said that when you have employment down double digits, and that's an incredibly lucrative category for them, you can't move the expenses down fast enough to cover that kind, and automotive also down double digit there in June.

Thank you.

Ladies and gentlemen, at this time we do have time for one more question, and our next question will come from Steven Barlow of Prudential.

Thank you. Your circulation revenue was up, if you take out HomeTown, which you bought in March, and USA Today, would you end up with up circulation revenue for the quarter? And then related to USA Today, if you look at the publisher's statements that you guys filed your single -- full-page single copy sales were down 17% year-over-year, in the past you've sort of indicated that was doing better than you had expected with the price increase. Just talk about sort of trends there and is that what we're going to see in the next reporting statement?

Steve, on USA Today, Gracia can get to the circulation numbers. On USA Today's circulation numbers, I think Craig Moon mentioned at midyear that he was assuming on present trend basis that the September number would show a down number. I forget what he said. A little single-digit, a percentage point or so, so, yes, we are seeing some softness in some of the circulation numbers in USA Today after those numbers were moving pretty good after the price increase in the fall and into the first month of this year, but in the last X number of months, they've bounced around, but they are trending a little bit, just a tiny bit lower.

Yes, Steven, and you've got to also focus on -- it depends on what the news is and all the rest, which drives single copy sales, and to the extent that there's not a lot of news that sells USA Today that can have an impact as well. Turning to the circulation side, would our circulation revenues have been down excluding USA Today, yes, they would have. For the quarter.

Not --.

Not a lot, but they would have.

Yes, they would have been down a little bit.

Thanks.

That does conclude the question-and-answer session today, and I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thanks very much for joining us this morning. If you have any additional questions, feel free to call Jeff at 703-854-6917, or me at 6918. Have a great day.

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