gannett 2q2005earn

GANNETT CO., INC.
SECOND QUARTER 2005
CONFERENCE CALL AND WEB CAST
JULY 13, 2005

PRESENTATION

Operator

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.

Gracia Martore - Gannett - SVP, CFO

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 brief. With me
today are 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 costs 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, 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 non-dailies and niche publications which continue
to contribute to our revenue and bottom-line growth. For the quarter, non-daily
revenue, which, again, does not include publications such as Clipper, Nursing
Spectrum, or Army Times, was up 11%. The non-dailies, 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, 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%.

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 build-out. With regard to our shares outstanding, basic shares at
the end of the quarter were 244.3 million, and averaged 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 Web site, and now I'll turn it over to Doug.

Doug McCorkindale - Gannett - Chairman, President, CEO

Thanks, Gracia. Most of you visited with Craig Dubow a few weeks ago. As you know,
he brings a wealth of Gannett experience and great leadership skills to his new job.
Also, as most of you know, I have a very, very large vested interest in this 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 doing more of the work.

But for now, as you have seen from the press release this morning, 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 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 – for
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 the softness they experienced in May
continued in June – again, particularly in the employment category. That's about 40% of
their classified picture in the U.K. 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.
Finally, results for USA Today were choppy. 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, 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 our U.S. and our U.K. community papers, classified
revenues were up 5% for the quarter. On a combined basis, help wanted rose 8%, real
estate was up 6.5%, but auto, as we said just a few weeks ago, 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.

We continue to struggle globally with auto. 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 non-daily and online 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 $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
will recall, we began to see 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 the 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 finales 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. 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
stronger than national at this point. But the pacings continue to be very volatile and are
subject to weekly changes. At this point, that's where we stand. We'll obviously keep
you up to date in our monthly reports as the quarter progresses.

One brief note on acquisitions – we announced during the quarter that we acquired
PointRoll, Inc., a leading provider of rich media marketing services. 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 online 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 online
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 Broadcasting 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 year in the third quarter. Ad revenues on a pro forma basis were
up almost 10%, about 9.6%, 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 online and non-
daily products added 16 percentage points to our reach in Phoenix, and 9 percentage
points to our reach in Brevard. This is on top of 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 there. 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
advertising, 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.

QUESTION AND ANSWER

Jim Goss - Barrington Research - Analyst

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 they’re 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 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. 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. 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.

Jim Goss - Barrington Research - Analyst

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 online contributing positively or negatively
to that? 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
mixed 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, is
doing very, very well, although in a mixed way. It's up about 6% on a year-to-
date basis on the revenue side. A lot of that is coming out of circulation and in
the other categories. So I don't have a comparison versus a couple of years ago.
But USA TODAY's bottom line is up significantly. And usatoday.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--.

Craig Dubow - Gannett - President, CEO designate

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. The next piece is really working
toward the transition and migration, as we like to talk about, more to the digital
side. But we want to keep the core first and foremost at mind.

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

Fred Searby - JP Morgan - Analyst

Couple of 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: We put Wal-Mart and Target and others in the department store
category, although I know some of our peer group companies don't. 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?

Craig Dubow - Gannett - President, CEO

Yes. Fred, just going back to the auto category, and this is in Broadcast
specifically: 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. 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.
That's part of this balance that we were looking for that just did not materialize,
as Doug communicated. It 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.
Twenty-nine percent, 30%, of all of auto is in the Broadcasting side, so 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 good.


One other comment, Fred, on the auto side. At USA TODAY in the second
quarter, we saw a 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.

Fred Searby - JP Morgan - Analyst

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


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

Christa Quarles - Thomas Weisel Partners - Analyst

Couple of questions. First, you've done a pretty good job 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?
Then, circulation volume has been down in daily and Sunday for the past eight
months or so. When do you feel that you'll work through some of the do-not-call
issues?. 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? 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.
non publishing related.


Let me go to circulation and PointRoll, and Craig will jump in on Broadcasting
cost control, of 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 or Gary Watson may
have mentioned it, we've done much better in smaller markets than we have in
larger markets. 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. That’s easier to do with small circulation departments than with large. But
we are beginning to make progress there and compared to some of the earlier
months, our numbers are a little bit better. 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
households, that's what the advertisers are looking for. They want eyeballs. So if
we do that with daily newspaper circulation and non-daily products and on-line
products, they don't really complain if they get the eyeballs. We must cover the
market. You've heard all the numbers about circulation and one number and
readership at another number. That's what we have to do. We have to sell
eyeballs to deliver results for the advertisers. 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 – it’s not good for the industry. If you deliver, the advertisers are
okay.

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. Some of you have
seen them in the elevators of a number of the large office buildings in New York.
PointRoll is a way to enrich online advertising. It's a technology, it works very,
very well. We have a lot of technology related investments in the Gannett
Company that we don't issue a press release about every week. We have a rather
large portfolio of them, to be honest, because we think they make sense. They
allow us to repackage information in a video format or in a digital format. 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, good companies. It was just a question
of price. Craig, do you want to throw in something on broadcasting?

Craig Dubow - Gannett President and CEO designate

Sure. Chris, back to the expense side, absolutely. I think I answered that very
quickly. The answer to that is yes. But let me take it a step further. The other side
to that, and Doug had mentioned this in his prepared comments, is we're going
to make the necessary investments where we see that opportunity. As an
example – and we've talked some on this already, particularly at Mid-Year –
NBC Weather Plus. 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 – if it makes sense for to us pursue, and we will do it.

Christa Quarles - Thomas Weisel Partners – Analyst

Just a quick follow-up. You mentioned selling the whole market. So are you
selling online and off-line, just in terms of your overall reach? Are you doing the
combined packages fairly frequently?


Oh, yes. But it’s not forced in the Gannett market. It's sort of an obvious on the
classified side, but it's also spreading a little bit to the ROP side. It also works
when combined with broadcasting and online results. As Craig mentioned, in

Denver, the station did an all-digital, High Definition news program there, one of
the first in the country. Now we're doing that in Washington and will be in a few
other places, and that has some on-line carry over. Not a big deal, but it's a
question of, again, eyeballs.

Michael Kupinski of A.G. Edwards - Analyst

Thank you very much. You mentioned newspaper expenses would have been
up 3.25% excluding some of these extraordinary items.


No. What I said was that our pro forma, constant currency, 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 had tough quarterly comparisons there as well. I
think ad revenues were up 15.5% year ago quarter, but June had the easiest
comp, 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?

Doug McCorkindale – Gannett Chairman, President & CEO

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 can fill in here, is what we're seeing. When you see swings in
USA TODAY from 4% to 8%, 4% and 5%, 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, 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, it comes
in late, and it can come up with very nice numbers. And June was surprisingly
soft. We didn't expect June to be this soft four weeks ago. The market is bouncing

around. The general picture is positive, but there's a lot of decision making being
made at that last moment. Gracia, do you want to add to that?

Gracia Martore – Gannett SVP and CFO

At Mid-Year Media Review, Craig Moon indicated 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 Mid-Year
that leads him to believe the number will come in differently, and that includes a
month like August of last year when our paid pages were up 19%, in part due to
the Olympics. That’s his latest sense of where things may fall out on the USA
TODAY side, but we'll keep you all posted in our monthly reports on that. On
the expense side, as Doug said, it's a little early. Since we are gathering up the
second six-month budgets, I think that you know, 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 show good promise for us in the
future. On the newsprint side, as I said, we have a substantial portion of our
newsprint tonnage that is now fixed through the end of the year. The year-over-
year comparisons I think we said at Mid-Year 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 did so far this year?


We'll continue 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, with these numbers. If the acquisition
market were to change, as you know, 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.

Doug Arthur - Morgan Stanley – Analyst

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?


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 to
those of us who have been following this closely. He made it clear early on that
he was going to have a notice of rulemaking to get started to see if we could get
back on track. So that's just as proposed, and we have not seen anything yet. As
I've mentioned in the past, we're optimistic that the rulemaking will be positive
from this company's point of view at least. 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 what we saw at the end of
the second quarter and into the third quarter and fourth quarter of last year.
There was a ramp-up in the decline in auto advertising. So you will be going
against a little bit easier comps, and that could be part of it, as well as the GM
and other spending that we're seeing clearly on the USA TODAY side. That
could be helpful as well. We'll just have to see how those all play out. With
regard to your question on the 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
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 from 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.

Paul Ginocchio - Deutsche Bank - Analyst

Looks like USA TODAY's yield is down. Could you 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 unemployment, do you see that as a positive? I would
take that as slightly negative. So maybe some color on that? Finally, it looks like
the margins at your daily U.S. newspapers are roughly flat. Is most of the margin
pressure coming from the launch of niche products?


Yes, Paul. On the yield issue at USA TODAY, I think looking at it it's clearly a
mix of advertising. 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. 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, yeah, 55% is not 100%. On the other hand,
what I meant to say in the comments, if I didn't make it clear, is that we're seeing
some very big gains in some of the larger markets. You may recall that some of
our markets actually didn't go down at all during all the difficulty, along with
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. 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. 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.


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. 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?


Those comments are very helpful. Looking at your margins on the newspaper
side, the mix between daily versus new products? Thanks.


There's a couple of factors there. One, there are start-ups of some new
publications, some young reader publications here and there, that sort of thing.
Also, to the extent 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 of 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. Just taking the daily separately, because we've got 800-plus non-daily
products, that are mixed in here. 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 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. Revenue is
down 2.5%, profits were down 5%, so that's affecting the margins.

Lauren Fine - Merrill Lynch - Analyst

Just a couple of quick questions. Going back to Doug's question about the
domestic papers, I'm wondering if you can exclude USA TODAY and give us a
sense of more of the community papers’ performance in June in the quarter?
Then I'm wondering, preprint has turned a bit negative, 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, I keep asking the same question and you don't have an answer. Is
there any way to gauge just anecdotally how the non-daily properties are
performing after they've been out there for a year, in terms of their ultimate
growth rate top line?


With regard to preprint, it's way too early to say whether one month is a trend
or not. We've seen some ups and downs on the preprint 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, 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
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, on-line, at our local newspapers. 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. 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. It's a very
interesting and a 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 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 .8%,
and the month after it was up 5.45. I think you've got a tough comparison in June

that we had to deal with. You saw choppiness on the preprint side last year, and
we've seen it again this year as well.


On the non-daily product, Gary tried to answer the question a couple of weeks
ago. 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 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. They are not 40% return on revenue
products, but they're in the 15% to 20% category when they begin to move. 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 are coming on in three months, but they are moving positively.
And if they don't work, we just simply do away with them.


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 ramp up at a slower pace,
and it's probably not going to get 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: 5% margins to 20%, 30% margins. So
there's not a simple, easy answer.


Our game plan is to simply capture the revenue and provide the market
coverage. 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.

Lauren Fine - Merrill Lynch - Analyst

Great. That's very helpful. Thank you.

William Bird - Citigroup Smith Barney - Analyst
You seem to be having some success in stabilizing circulation at the Arizona
Republic. I was just wondering if you would talk about what you're doing
specifically. Is it sustainable? Can it be applied to other market? Also, I just was
wondering what quarterly D&A should look like going forward.


On Phoenix, as 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
the 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 non-daily
products as we may have there eventually. And, it’s got 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.


At mid-year media review, we said amortization expense would be in the $17
million range or. That’s going to depend on what other little pieces we add in
terms of acquisitions in the second half of the year. On the depreciation and
amortization combined, we talked about a number in the $270 to $280 million
range. 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 a reason to write a note or two.
We'll have some fun.

William Bird - Citigroup Smith Barney - Analyst

I was wondering if you could talk a little about 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, a number of broadcasting stations officially or
unofficially on the market, at a price they may make sense to us, chasing them
doesn't make sense to us. We'd rather let other folks do that, and 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 before that settles down. 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.

William Drewry - Credit Swiss First Boston - Analyst

Gracia, I was wondering how much of the 3%- 3.25% of the cash costs being is
investment-type spending? Or another way to ask, is the investment spending
still growing year-over-year? Also, on the non-daily 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 non-daily side. A few months ago, we started
up a young reader publication in Des Moines, and I know our folks have started
up other publications. We continue to be focused on that as an area of growth,
and so we'll continue, as we said earlier, to invest in these 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 non-daily 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 non-dailies to over 800. 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. 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. 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.

William Drewry - Credit Swiss First Boston – Analyst

Okay. Just one more, if I could. I know it's early, and you've always 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 you see is coming out of the U.K., which had done so well
for five years. The newspaper division, and as I mentioned earlier USA TODAY,
the June numbers were a little softer than we expected. But the Newspaper
Division, as a general statement, is doing okay, is doing OK -- is it doing
robustly? No. But it's doing okay, and USA TODAY has been bringing in 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.

Alexia Quadrani - Bear Stearns – Analyst

Just some follow-up on the Newsquest operations. Is the softness still isolated to
the southern part of England or has it migrated to the north? And was there
significantly worse performance in June than the previous two months of the
quarter? Then following up 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 comes from usatoday.com?


I'm sure we can. I'm not sure we will. But 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 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 in
most categories. But generally speaking, all of the U.K. 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 at Newsquest …


They got worse in June, which is not a positive sign for the U.K. economy.


Then with regard to the Internet revenues, while USA TODAY in the early years
was, you know, half or more of our revenue picture, on the online side, since
then both, as Gary has alluded to, with growth on the online side in the
community newspapers of, you know, 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 usatoday.com has done a very
nice job.


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

Alexia Quadrani - Bear Stearns – Analyst

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


On day one. Those folks reacted right away. They began to see some signals, and
reacted 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, that's 40% of the classified picture in the U.K.,
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 resale is positive. But the new
homes are where we're getting most of the action. Though the 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. They've already taken out all of the redundancies and are making
all the right moves. It's not a lag factor here.


Just to be clear, Alexia, their operating expenses year-over-year year to date are
down, even with a several percent newsprint price increase. In June, their
expenses were down 3% or 4%. They have been doing it. They are realizing it is
just as Doug has said. Just as 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, and automotive was also down double digit
there in June.

Steven Barlow – Prudential – Analyst

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 full-page, single copy sales were down 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 would expect with the
price increase. Just talk about 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 Mid-Year that
he was assuming on a present trend basis that the September number would
show a down number: a little single-digit, 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 that it depends on what the news is
and all the rest, which drives single copy sales. To the extent that, you know,
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 a lot, but
they would have.


Yeah, they would have been down a little bit.

Operator

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.

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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