The McClatchy Company Q4 2006 Earnings Call Transcript

TRANSCRIPT SPONSOR

The McClatchy Company (MNI)
Q4 2006 Earnings Call
February 6, 2007 12:00 pm ET

Executives

Elaine Lintecum - Treasurer
Gary B. Pruitt - Chairman of the Board, President, Chief Executive Officer
Frank Whittaker - Vice President of Operations
Patrick J. Talamantes - Chief Financial Officer, Vice President-Finance
Christian A. Hendricks - Vice President, Interactive Media

Analysts

John Janedis - Banc of America
Debra Schwartz - Credit Suisse
Lisa Monaco - Morgan Stanley
Craig Huber - Lehman Brothers
Paul Ginocchio - Deutsche Bank
Robert Schiffman - Credit Suisse
Thomas Russo - Gardner, Russo & Gardner
Karl Choi - Merrill Lynch
Peter Appert - Goldman Sachs
Christa Sober Quarles - Thomas Weisel Partners
Nichole Black - Wachovia Markets
Steven Barlow - Prudential Equity Group
Joe Voberil - SuttonBrook Capital Management

Presentation

Operator

Good afternoon. My name is Celeste and I will be your conference operator today. At this time, I would like to welcome everyone to the McClatchy fourth quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

Ms. Lintecum, you may begin your conference.

Elaine Lintecum

Thanks, Celeste, and thank you all for joining us today for our fourth quarter conference call. This call is also being webcast at mcclatchy.com and the webcast will be archived for future reference.

Joining me this morning is Gary Pruitt, our Chairman and CEO; our Vice Presidents of Operations, Lynn Dickerson, Bob Weil and Frank Whittaker; our Vice President of Interactive Media, Chris Hendricks; and our CFO, Pat Talamantes. We are all available for questions at the end of Gary’s remarks and I will also be available after the call and can be reached at the following phone number: 916-321-1846.

Our earnings release and statistical report were issued this morning before the market opened. The release includes a summary of unaudited results including reported financial results for the fourth quarter and full year of 2006, and the company’s results from continuing operations since the close of the Knight Ridder acquisition, and all pro forma amounts mentioned include the operations of the 20 retained former Knight Ridder newspapers and all of our previously owned newspaper operations, except for the Minneapolis Star Tribune newspaper.

Because of our agreement to sell the Star Tribune, we are including its results in discontinued operations.

Similarly, our statistical report shows revenues of the new McClatchy Company as if the 20 additional newspapers and our previously owned newspapers, except for the Star Tribune, had been included with our results since the beginning of all periods presented.

The full text of our release and statistical reports are posted on First Call and our website for your convenience, as are reconciliations of the pro forma revenue amounts to our GAAP revenues for each period presented.

As a reminder, this conference call will contain forward-looking statements that are subject to risks and uncertainties, including among others those described in the company’s 2006 interim filings with the SEC. Actual results may differ materially from those described during the call.

Now, here’s Gary Pruitt, our CEO.

TRANSCRIPT SPONSOR

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price? This is exactly what Seeking Alpha is offering with transcript sponsorships. Seven types of companies are sponsoring earnings transcripts on Seeking Alpha: 1. Company sponsors its own earnings call transcript (example). 2. Company sponsors partner's transcript (example). 3. Company sponsors competitor's transcript (example). 4. Issuer-sponsored research firm sponsors client's transcript (example). 5. Investment newsletter sponsors transcripts of successful stock picks (example). 6. IR firm sponsors transcript of micro-cap company (example). 7. Consulting company sponsors company's transcript in sector of interest (example). Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Gary B. Pruitt

Good morning. Now that we have completed the acquisition of Knight Ridder and sold or agreed to sell a total of 13 newspapers, we are ending 2006 and embarking on 2007 with a realigned portfolio of newspapers. We believe the new McClatchy now includes the assets that will best allow us to build a multi-platform 24-7 media enterprise that is responsive to all of our audiences and advertisers, resulting in a news company that will perform well for our communities and shareholders.

We reported fourth quarter 2006 income from continuing operations of $75.5 million, or $0.92 per share. As you know, we are facing a very tough advertising environment for newspapers. We continue to work hard and creatively at meeting our advertisers’ needs and focusing on the top line. We have also focused strongly on cost control and attaining synergies.

Total cash operating expenses in the quarter were down 5.8% on a pro forma basis and down 6.2% excluding stock-related compensation. We will be discussing our costs in more detail in a few moments, but first let me review with you two items affecting our 2006 fourth quarter and full year results.

We are reporting on a 53-week annual basis and a 14-week quarter in 2006, compared to 52 and 13 weeks respectively in 2005. The impact to earnings is about $5.3 million with that extra week. It also affects the comparisons of fourth quarter revenues.

So we will focus on revenue comparisons of estimated 13-week amounts compared to similar pro forma amounts in 2005 in order to help you understand our underlying business trends in the quarter.

Second, in December 2006, we entered into a definitive agreement to sell the Minneapolis Star Tribune newspaper for $530 million in proceeds. We expect to receive an additional approximately $160 million in cash tax benefits related to the sale in 2008. These after-tax proceeds represent a multiple of cash flows greater than the company paid for Knight Ridder. The sale is expected to close in the first quarter of 2007. We recorded a write-down on the Star Tribune’s net assets to fair market value based on the expected sale proceeds in the fourth quarter of 2006 and included this charge in discontinued operations in the fourth quarter.

Now, let’s look at our results. For all of 2006, our pro forma advertising revenues were up 0.5% and we may be one of the few companies to report revenue growth in newspaper advertising on a 52-week basis. We outperformed the industry in advertising revenue growth in 2006 for the sixth consecutive year and that growth was enhanced by additions and realignments in our operating portfolio.

Our revenues from continuing operations in the fourth quarter of 2006 were $673.6 million. On a 13-week basis, fourth quarter total revenues were $630.7 million, down 3.4% compared to pro forma fourth quarter 2005 revenues of the newly combined company, with advertising and circulation revenues each down 3.1%, so advertising revenues down 3.1% in the fourth quarter.

In general, the overall advertising environment grew more difficult in the fourth quarter. Retail advertising softened and national and classified continued to decline. However, online and direct marketing revenues continued to show strength and their growth helped offset some of the weakness in classified and national advertising.

We made a reclassification in December to convert the accounting for Real Cities online ad network to a more appropriate method, which included an adjustment for prior months of 2006. I will review that accounting in a moment but what is important to understand is that but for the Real Cities reclass, advertising revenue during the quarter would have declined 2.7%, not 3.1%, and for the month of December, revenue would have declined 3.4%, not 5.3%.

So now we are going to look at revenue by category, starting with retail. Retail advertising was down 0.7% on a pro forma basis for the quarter, with strong growth in online retail advertising offset by declines in our print products. We saw retail growth at our newspapers in California and Florida but declines elsewhere. Online retail advertising continued to grow nicely, up 67.4% in the quarter.

Classified advertising saw nominal growth in real estate, offset by poor results in employment advertising. Overall, classified was down 5.5% on a pro forma basis and here’s the review by category.

First, employment: in the fourth quarter, pro forma employment advertising declined 10.5% at our newspapers compared to growth of 21.0% in 2005.

Next, automotive: automotive advertising declined 4.1% compared to a 16.5% decline in the fourth quarter of 2005 pro forma advertising. We are beginning to cycle against periods of greater decline so comparisons are easing in the automotive category. The total decline in auto ads in the first nine months of 2006 was 10.8% compared to 4.1% in the fourth quarter.

Finally, real estate. Real estate advertising was up 0.1% compared to a 16.1% increase in the 2005 quarter, with strength in the Southeast and Northwest newspapers, flat comparisons in California newspapers and declines elsewhere. The fact that we were up at all is surprising, given the dramatic declines we have seen recently in California and Florida, where real estate values and thus advertising were exceptionally strong in 2005. We expect declines in revenues in this category in the short-run because of the difficult trends in California and Florida especially.

National advertising declined 13.0% on a pro forma basis in the fourth quarter. Our performance continued to be hurt by losses in telecommunications and national automotive advertising, trends we are seeing industry-wide. This category was also affected by a change in accounting for Real Cities revenue, which again I will discuss in a minute.

Online advertising is included in the results that we just discussed but we wanted to give you a sense of how our online advertising is performing, but first let me clarify that accounting issue.

We have conformed the accounting for certain Internet revenues for the Real Cities advertising network to our methods of accounting. Knight Ridder accounted for Real Cities revenue at gross and reported the advertising that belonged to its newspaper customers as an expense.

We believe it is appropriate to count the Real Cities ad revenue net of the amounts paid to third party newspaper websites that host the underlying advertising, or on a net basis. This change has no effect on the bottom line but it reduces both revenues and expenses. As a result, it does effect the comparison to the pro forma revenue amount, as did certain accounting issues in the third quarter. We do not have the detail needed to restate pro forma results, so comparisons to pro forma 2005 are not meaningful.

On a pro forma basis, we believe online advertising increased about 10% in the quarter. Pro forma online advertising was up an estimated 25% to 30% for all of 2006 on a comparable basis, reflecting both Real Cities changes and CareerBuilder purchase price adjustments we discussed in the third quarter.

While online advertising is being affected by cyclical trends, we are confident in the future of this business. On a reported basis, online advertising provided 7.7% of total advertising revenues and is growing in importance. We continue to expect interactive revenues in 2007 to be about $200 million, even after selling the Star Tribune.

Our direct marketing advertising revenue grew 7.6% in the quarter, and those revenues were up 13.4% for the full year. They were up in nearly every region in the quarter and as you know, we spend our newspaper franchises by supplementing the mass reach of the newspaper with direct marketing and direct mail products, so that advertisers can both achieve broad appeal and capture targeted audiences with one-stop shopping. Direct marketing advertising revenues are 8.2% of total advertising revenues.

Turning to circulation, on a pro forma basis our daily circulation declined 2.4%, and Sunday was down 3.0% in the quarter. Our strategy is aimed at growing and retaining quality circulation at our newspapers while rapidly expanding the audiences served online. This integrated approach results in growth in our total audience throughout our markets and means we deliver greater reach to serve our advertisers.

Turning now to expenses, total operating expenses increased $371.3 million due to the addition of the newly acquired newspapers, and were down 3.0% on a 13-week pro forma basis. In addition, $2 million was recorded in the fourth quarter related to expensing of stock-related compensation for the first time.

On a pro forma basis, cash expenses declined 5.8%, or 6.2% excluding the stock-related compensation, as we continue to reign in costs during this tough revenue environment and as we realize synergies from the acquisition.

Compensation costs on a pro forma basis were down 5.6%, salaries declined 5.3% and were down 6.2% excluding the impact of stock-related compensation. FTEs were down 4.3%. Fringe benefit costs declined 7.0%, primarily reflecting lower retirement expenses.

Newsprint and supplement costs were down 2.3% on a pro forma basis, reflecting lower usage partially offset by slightly higher per ton prices.

All other expenses fell 8.3% on a pro forma basis, reflecting cost controls and synergies.

On a reported basis, depreciation and amortization expense increased $32.4 million, primarily due to the inclusion of the new newspapers and the write-up of asset values in the purchase price accounting for the acquisition. On a pro forma basis, D&A was up $13.4 million.

Net interest expense for continuing operations in the quarter were $45.5 million.

The company’s net debt balance at the end of the quarter, the end of last year, was $3.3 billion at the end of ’06. When the sale of the Star Tribune closes in the first quarter, we expect to use the proceeds to reduce debt to approximately $2.8 billion.

Our effective interest rate in the fourth quarter was about 6.5%.

As we look to 2007, we anticipate advertising revenue on a pro forma basis to be down in the first-half. We do not have enough visibility right now to project revenue trends for the second-half of 2007 with any confidence but we do have confidence in our proven ability to adapt and innovate to meet the challenging conditions and to be an industry leader in performance.

We understand that this environment of sluggish advertising requires vigilance on cost. It demands innovation both in creating advertising solutions and in operating our business as efficiently as possible.

We have shown over the years that our strategies for dealing with downturns are effective and we have continued to outperform in both downturns and recoveries. We will work hard to do that again.

We continue to focus on reducing employee headcount by attrition and are reviewing all costs on a line-by-line basis. We expect to continue to reap benefits from synergies as we further integrate the former Knight Ridder papers and we expect cost-savings from lower newsprint prices and lower retirement costs.

So you can expect us to chart a steady course with an eye on long-term gains that will benefit our company and our shareholders.

Thank you, and I will be happy to take your questions now.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from John Janedis.

John Janedis - Banc of America

Good morning, thank you. Gary, as you pointed out, cash operating expenses were very solid. Is that from incremental upside related to the Knight Ridder assets or your core operations? I guess, assuming it’s a combination; can you separate out the two of them?

Gary B. Pruitt

Well, you are right. It is from both and you can expect to see both going forward, but the majority is from Knight Ridder. If we were to allocate roughly, we would say about a 60-40 split with maybe 60% or two-thirds being -- about 60% being synergy costs from the acquisition and 40% from ongoing operations. We expect expense declines to continue throughout 2007 but perhaps not at the same level of the cash expense declines that we posted in the fourth quarter.

John Janedis - Banc of America

Okay, great, and as it relates to Knight Ridder, does that mean or does this suggest that maybe you are going to get more synergies than you originally planned?

Gary B. Pruitt

Yes.

John Janedis - Banc of America

Okay. By a lot, or -- ?

Gary B. Pruitt

You know, it is hard for me -- I thought about that question last night and I thought about how I was going to answer it and I did not come up with an answer. But here’s what -- it is hard for me to know when synergies drop off and just cost-savings kick in. So I do not know whether you call them synergies or cost-savings or expense control, but they are going to be down and they are going to be down by tens of millions of dollars.

So we have posted synergies of -- we thought synergies would be $60 million, we said they would be 70. It may be a little bit north of that, but at some point, I don’t know where you draw the line between synergies and cost control, so I am a little hesitant to name a figure. Just expect that we will continue to control costs.

John Janedis - Banc of America

Okay, and one last on circulation revenues. Can you just talk about how the Knight Ridder papers are doing versus the prior ownership and what kind of increases have you been pushing through as some of those annual subscriptions run off?

Gary B. Pruitt

Okay, well we are generally not being aggressive on subscription pricing. There were very few if any -- there were limited subscription increases, just a handful within the entire company. But what we are doing is reducing our dependence on discounting somewhat and for that description, I will turn it over to Frank Whittaker, one of our VPs of Operations.

Frank Whittaker

On a pro forma basis in the first quarter of this year, discounting was up about 10.5%. The second quarter, that was down to 9.5%; third quarter, 8.7%; and in the fourth quarter, our best guess on a 13-week basis, so there is a slight estimate in here but I would say was about 4.9% or 5%. So that’s the trend that we have been driving to reduce our dependence on that.

Some small increase in discounting is not all bad because as we are encouraging our papers to make more use of EZ Pay, which is converting customers to pre-authorized credit card payment, one of the inducements we use is to give them a slightly lower rate, so some small increase in discounting is good but we are not using it and will not be using it as much as an inducement for new subscriptions, as we have in the past.

John Janedis - Banc of America

Frank, I might be incorrect but I think Knight Ridder was something in the 20% range for that EZ Pay. Are you ramping that up, or is that accurate?

Frank Whittaker

They were, and as were the -- let’s say the legacy McClatchy papers. Getting to 20% is relatively easy. I just think because of natural demand. Getting over that barrier gets a little tougher all the time. I would say we are probably getting a little closer to the mid-20s now. I’m looking at my colleagues and seeing some nods around the table, so I would say 24%, 25% is probably more where we are now.

John Janedis - Banc of America

Thank you very much.

Operator

Your next question comes from Debra Schwartz with Credit Suisse.

Debra Schwartz - Credit Suisse

Great, thank you. Two quick questions. First, I understand the drivers of the Star Tribune sale, but I was just wondering: are you looking to divest any other papers or assets, or are you comfortable with where the portfolio is now?

Gary B. Pruitt

We have no plans to sell any other newspapers and no plans to sell any other significant assets. Like any company our size, there is a constant re-evaluation going on of assets and there are some assets up for sale, pending sale. There is a land sale in Miami that dates back to a Knight Ridder contract. There is a land sale in San Jose, some property that we picked up as part of the Knight Ridder deal that we owned after selling that newspaper.

So there are some minor asset sales going on, or even significant, the Miami land deal is more significant, but there are no major operating assets that we plan to sell, no.

Debra Schwartz - Credit Suisse

Okay, thanks. Then, along the lines of the Miami land sale, do you still expect it to close in the first-half?

Gary B. Pruitt

We are hopeful that it will close in the first-half. We are hoping to get regulatory clearance from a local environmental department and then close 90 days after that. So if we do close in the first-half, it will be in the second quarter. But it is uncertain as to the exact timing.

Debra Schwartz - Credit Suisse

Okay, great. Thank you.

Operator

Your next question comes from Lisa Monaco.

Lisa Monaco - Morgan Stanley

Good morning. Gary, could you just elaborate on the trends in retail? It softened a little bit in December, and then a little bit more on what you are seeing in early ’07? Then, can you quantify what the real estate performance was in California and Florida in December? Thanks.

Gary B. Pruitt

Okay. I don’t know if I can remember all of that, but let’s start with retail. The retail trends for the company on a pro forma basis have been relatively stable with I guess some weakening but it was hard to discern a real pattern. They were all in a very narrow range throughout the entire year. First quarter was down 2.5, second quarter was up 0.5, third quarter was up 1.9, fourth quarter was down 0.7.

The trend there is that it is flattish and we are generally expecting that kind of trend going forward. There are markets that are showing decent growth in retail and have new retailers coming in. Then there are other markets that are getting hit by some consolidation but in general, this is the category where we have more impact than we do in some of the cyclical classified categories or national, and we are doing a better job getting the smaller local retailers in the paper as the dependence on larger department stores declines somewhat.

So we are not seeing -- we do not expect to see a dramatic trend in retail, up or down. We would expect generally that we could be about where we are. Of course, with a little bit stronger growth in preprints than print, but hanging pretty close to flat. Online continues to be a big shot in the arm there. Print retail is down a little bit but retail is actually our fastest growing category online. You know, it took starting from a small base but getting traction now and growing, as I reported, between 60% and 70% for the quarter. We are also seeing good traction in sub zip zoning, which helps on the preprint side.

We are working hard in this category. We think it will be in that flattish range.

With regard to real estate, I can give you some trends. Lisa, did you want to know how California is tracking?

Lisa Monaco - Morgan Stanley

Yes, in December.

Gary B. Pruitt

And Florida?

Lisa Monaco - Morgan Stanley

Yes, California and Florida.

Gary B. Pruitt

Badly. You want anymore color on that? So here’s how California is doing in real estate classified: in the first quarter, they were up 49% and that was on top of a positive 21% from the prior year. The second quarter they were up 46%, rolling over a 26% gain. Third quarter, up 25%, rolling over a 41% gain. And then finally in the fourth quarter, they go from up 25 to down 0.1, rolling over a 43% comparison. So the fall-off has been generally, if you wanted to call it, 50% to 25% to flat. We would expect it to be down in the first-half as we roll over those numbers, and December was in fact down high single digits in California for real estate.

In Miami, they had similar trends for the year. The first quarter was up over 40%: second quarter, 20%-plus; third quarter, 6.4%; fourth quarter, down 19%. Real estate has declined dramatically in Miami after several big years.

Now, the Northwest is still positive. It is up about 25%, so there are regions that are doing well in real estate. Midwest did not have as big a run-off. It declined somewhat but it is still in the single digits.

It is California and Miami that are having the big swings and still have some tough real estate comps to overcome, which is one of the reasons we feel unfortunately so confident in our projection that revenues will be down in the first-half.

Lisa Monaco - Morgan Stanley

Great, thanks.

Operator

Your next question comes from Craig Huber with Lehman Brothers.

Craig Huber - Lehman Brothers

Thank you. Gary, this $3.3 billion in debt you talked about at year-end, can you just update us on the tax payments that you have made, or what is left to do? And also, the timing again on the tax benefit for Minneapolis, please?

Gary B. Pruitt

Sure. Well, I will turn it over to Pat to address the more general question perhaps, Craig, but I will address the Minneapolis question and you can let us know if that is sufficient for what you are getting at.

We sold the Star Tribune for $530 million in cash. We get that and we will pay debt down on all of it. We expect that we will be paying taxes of approximately $40 million related to some structures, intellectual property structures, $40 million in ’07 and then in ’08, in the first-half of ’08, we will receive an approximately $200 million tax refund. So that will net to that $160 million in tax benefits.

Now, did you have broader questions about the debt and tax situation, Craig?

Craig Huber - Lehman Brothers

Yes, having to do with the tax payments related to the Knight Ridder sales, please. How much of that is in the $3.3 billion already?

Gary B. Pruitt

Oh, okay. All of it.

Patrick J. Talamantes

All of it is in the $3.3 billion number, Craig, but what is not taken into account is the fact that we made state tax payments on December 15th that are actually deductible for federal purposes. The savings from that will be approximately $55 million that we will see over the course of 2007.

So you do not get to tax it back your state tax payments. When you make the estimated payments, you have to wait until 2007 to be able to claim those deductions.

Craig Huber - Lehman Brothers

Okay, and just jumping over the operations for a second. Could you just quantify, if you would, how the month of January went? Was it better or worse than December, or kind of in line?

Gary B. Pruitt

We do plan on releasing January revenue results and you will get to see the details there. We would prefer to wait for that and just speak generally as to the trends. As we said, we expect to be down in the first-half, and the first two quarters of last year were each up 2.4% in ad revenue and January was up 5.2% in ad revenue last year, so it represents the toughest comparison we faced this year. So we expect a weak start to the year and we are hopeful that we see strength in the second-half, but not enough visibility yet to speak to that.

Craig Huber - Lehman Brothers

Lastly, if I may, just so we are all on the same page, the sale of Minneapolis at year-end, what were your thoughts? You obviously were very familiar with the performance there in the last few years. Just what were your thoughts, or why sell it then as opposed to waiting a couple of years? It is my understanding with the tax benefits, you guys had a total of three years you could have used tax benefits retroactively for the Knight Ridder sale.

Gary B. Pruitt

Sure, I would be happy to go through it with you. You are right. The Star Tribune had been lagging in performance for a sustained period of time, for several years -- not a short-term effect, but a long-term effect. We expected that it would likely under-perform going forward, at least for some time.

It was our worst-performing paper together with the paper that was the only paper that we could sell at a tax loss. All the other papers would be sold at a gain. It would be sold at a tax loss. We had a window to capture that tax loss offsetting the gains from the sale of the Knight Ridder papers of two years. So we had a two-year window, but we felt, as we make all these decisions, we base it on what we believe would be in the best long-term interest of the company.

We felt that it was in the best long-term interest of the company, not short-term interest necessarily but long-term interest of the company, to sell the paper, to use the proceeds and the tax benefit to pay down debt and that that would strengthen the overall company, and that with the tax proceeds, the multiple we receive was higher than we paid, a higher multiple than we paid for Knight Ridder and a higher multiple than we are currently trading on the New York Stock Exchange.

So we felt that on balance then, that made sense for the company and strengthened the company overall and the other papers. Not an easy decision but we felt the right decision for the long-term interest of the company.

Craig Huber - Lehman Brothers

Thank you, Gary.

Operator

Your next question comes from Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank

I guess either for Gary or for Chris. I am just wondering, I just want more clarification on why you theoretically want to build a new ad platform with Gannett and Tribune instead of already going on Yahoo!’s existing ad platform that is already built.

Gary B. Pruitt

Well, we do think that national advertising on our websites is one of our top priorities and we think being part of an ad network or creating an ad network is an effective way of doing that.

It is true we are talking to Gannett and Tribune about the merits of creating that online ad network, but we are also talking to others about the merits of partnering with existing national networks. We have not made a decision as to which way we will go and we are working and moving quickly on that front. So we are talking broadly.

Paul Ginocchio - Deutsche Bank

Perfect. Thank you very much.

Operator

Your next question comes from Robert Schiffman with Credit Suisse.

Robert Schiffman - Credit Suisse

Good morning, Gary. I know I caused a little bit of a firestorm for you a couple of quarters ago when we asked the private versus public question and I do not want to rehash that, but I do want to get a better sense of what you meant in this debt reduction paragraph. I see a conflicting statement when talking about debt reduction, yet building leveraged equity returns. Could you just explain that a bit more for us? Thank you.

Gary B. Pruitt

Sure, and I hope I am using the leveraged equity return accurately. I am not sure that it is, but first of all, you did not create a firestorm. That’s okay. We have seen firestorms before. That was not a firestorm. But you know, everyone does parse every word we say on that topic very carefully but we have tried to be very consistent. Our position is not very complicated here on the public versus private, so I will just reiterate it quickly and then talk about the debt.

We have no plans to go private. We do believe it is a long-term option for the company as debt is reduced and stock is bought back, that it is an option the company will have, but that is years down the road and something that the company may look at that time. That has been our consistent position and if I have misstated it in the past, I’m sorry but that’s where we are on that, and happy to update it always for people.

As far as debt reduction goes, what we in past acquisitions and in this Knight Ridder acquisition, we believe we have built shareholder value in the past by taking on debt and executing and integrating successfully on acquisitions. Occasionally, Wall Street has been skeptical about our ability to do it, as maybe they are now, or just bad timing with the downturn in completing the Knight Ridder acquisition. But we believe that we have a proven record on execution and a proven strategy here and that taking on debt and then executing on the deal and paying down that debt will pay benefits to the shareholders. That is what we meant by the leveraged equity returns that paying down that debt will build equity value quickly over time with the accelerated debt repayment.

So we did not mean for it to be conflicting because our strategy very much is paying down debt, not building up debt. And we do not even have a specific target in mind, but to pay down debt.

Then, once we feel debt is paid down more after the next few years, we will look at the prospect of balancing debt repayment with stock buy-backs, depending on interest rates and stock price, operating conditions, et cetera. But in the short-run, in the next few years, you can expect that we will be paying down debt.

Robert Schiffman - Credit Suisse

Is there a stock price where that concept changes? You must be personally extremely frustrated after managing this business so well, doing acquisitions that make a lot of sense, selling companies for values higher than what you bought them for. How or what changes that multiple years out to I know this company is worth meaningfully more than what it is being priced at now, I’m going to take advantage of that sooner rather than later? Thanks.

Gary B. Pruitt

You are right. It is frustrating. But we do take a long-term view of these things. Obviously the timing on the Knight Ridder deal was bad in the sense that right after it closed, the advertising started to decline, or at least flatten and then decline. But you know, it would have been declining even more if we had kept our original portfolio of papers. We would not have escaped the downturn. Our performance would have been worse, in fact, by one to two percentage points, which may sound like a small amount but it is tens of millions of dollars.

So we were better off in terms of advertising performance having done the deal and we feel we are better off in terms of our array of Internet assets and our ability to execute on a national advertising and online basis, and the company’s got better markets overall in more diverse geographies, and bigger.

So we feel the company is better off and we think that will pay dividends long-term. I think the market will value it appropriately long-term.

I understand the concern with advertising performance short-term. We hope that improves by the second-half. All we can do is continue to execute as best we can. We plan on doing that and we are in no way deflated or defeated by the current circumstances. We are challenged by it and we have a good team. I think that we will execute and I think it will pay off long-term.

If the stock price continues to decline, or if the stock price declines and debt is paid down more, we will take advantage of the stock buy-back if we feel that that is the best way to enhance value for shareholders and the best use of our cash, as I said, looking at the stock price, interest rates, et cetera.

In the short-term, we think it is paying down debt. We are a conservative company in that regard. We just celebrated our 150th anniversary, so we probably err on the side of conservatism. Once we get the debt down more, we will be looking at that balanced buy-back and debt repayment.

So I think McClatchy had this big acquisition. You can expect that we will not have major acquisitions in the near-term -- smaller Internet investments, but the use of cash for the most part is going to be paying down debt exclusively in the short-term and then a balance of buying back stock and paying down debt more, and executing on a big acquisition and delivering for shareholders.

I know the stock price declined last year and that has been disappointing for a lot of people, including me, but I am confident long-term we can do well. I am not sure if that is fully responsive to the question, but you can call me back later if it isn’t.

Robert Schiffman - Credit Suisse

Thank you very much.

Operator

Your next question comes from Thomas Russo with Gardner Russo.

Thomas Russo - Gardner, Russo & Gardner

A couple of quick questions. You had made a comment about online this year likely still coming in at around $200 million despite the sale of the Minneapolis Star Tribune. It would suggest that the sale will not have much of an impact, which might suggest that the Minneapolis Star Tribune might not have had much online revenue. It raises a question, in what ways can you share with us that the difficulties at Minneapolis sort of were expressed specifically in the inability to grow online or in other ways that you would have preferred Minneapolis to grow over time, where you were blocked or it wasn’t able to grow?

I think of the comment about online as maybe a launch point, but there may be other things you can share with investors as to how your thoughts developed on the sale of Minneapolis as related to the operating performance.

Gary B. Pruitt

Sure. Well, they actually did well online. They had a strong base of online advertising and had good, strong online products. And that is not terribly surprising in the sense that larger papers have done better than the smaller papers in online. They have the traction sooner and they have done -- so I would not point to online as part of their underperformance, although the rate of growth had certainly slowed. But the chunk of online advertising was solid from their online portion, but the rate of growth had slowed considerably.

A couple of things dealing with performance. Star Tribune was outperforming many metro papers around the country in terms of its profitability, but its revenue performance had been dragged down in part because of its heavy dependence on classified advertising, as many metro papers have more dependence than smaller papers, and those categories had been challenged in recent years, in employment and now real estate.

Long-term, those trends in national advertising, a quasi-competitive market perhaps had an impact, higher cost structures in the metro area had an impact, and so we thought that it was, as I said, we thought better than for the company to -- as we evaluated the Knight Ridder papers, we looked and applied the same evaluation to the existing McClatchy papers and felt that long-term interest would be served by also selling the Star Tribune and moving quickly to do so.

Thomas Russo - Gardner, Russo & Gardner

So the notion that the online will still be up over $200 million even with the absence of Star Tribune’s contribution does not suggest that their online is all and some made up by other papers, it was just that it was going to be substantially over 200 and the absence of the Minneapolis Star Tribune keeps it still over 200?

Gary B. Pruitt

Yes, that is exactly right.

Thomas Russo - Gardner, Russo & Gardner

Okay. Then I wondered if you could describe a little bit the business underway at the direct marketing area, which is now up 7.6% and a meaningful part of the company. How linked is that business to the newspaper line of business and how independent does it operate? What type of valuation would a business like your direct marketing business have if you were to compare it against other businesses, or is it integrated completely into the newspaper organization?

Gary B. Pruitt

The majority is tightly linked in the sense that it is direct mail advertisers buying ads in the newspaper for subscribers and then mailing to non-subscribers either to get a mass reach or to hit a targeted zip or sub zip.

Thomas Russo - Gardner, Russo & Gardner

It remains largely PNP.

Gary B. Pruitt

The majority is, but it also includes niche products which are less linked to the paper and so while the majority is that direct mail tight connection, the niche products, while we leverage them efficiently from our core newspaper, are independent -- independently distributed, often independently sold. But that is the minority of that revenue, which I think, as I stated, between 8% and 9% of total revenue.

Thomas Russo - Gardner, Russo & Gardner

Okay. Last question, maybe for you or for Chris: with employment down 13% and I think national may have been down 13% as well --

Gary B. Pruitt

Yes, national was down 13.

Thomas Russo - Gardner, Russo & Gardner

I understood that towards year-end, I think you were starting to receive some Google placement for national advertising at the end of the year, maybe some other online source national. Certainly with employment, online in theory continued to grow. Can you just sort of describe the balance between the print and then the online in both those two categories, if you could?

Gary B. Pruitt

In employment and national?

Thomas Russo - Gardner, Russo & Gardner

Yes. National might be quite small, but I did remember hearing something about your receipt of first-time ever placement through possibly Google.

Gary B. Pruitt

Yes, it was Google. Chris, why don’t you --

Christian A. Hendricks

As to Google, we are in an alpha test with them right now to place print advertisement through their purchasing. It is in a bid-as kind of a situation. Right now, we are seeing advertisers who are non-traditional newspaper advertisers purchase print advertisements through this system. Again, it’s an alpha where the number of newspapers participating is constrained, as is the number of advertisers, but the intent is to watch this closely with Google and right now, the plan is to keep rolling forward into a beta during the next quarter.

We are very positive in what we have seen so far through the Google ad placements. It had done about 150K in the first month or so, from the test that came in, again from non-traditional advertisers. We always have the right to refuse an advertiser who may come in from this system if they are a current advertiser, if we elect to.

Thomas Russo - Gardner, Russo & Gardner

Thank you, so it is relatively small and it is still beta?

Christian A. Hendricks

Correct. It is alpha. It hasn’t gone into beta yet. As far as the employment, the relationship of the online employment to print, currently about 30% to 35% of the employment franchise is online, so $0.30 to $0.35 on the dollar is the online piece of the business.

Gary B. Pruitt

The online growth rate has slowed in large part because as the number of employment ads declines in print, there are fewer opportunities for the up-sell to online, and with 80% or 90% of print employment advertisers taking the up-sell, there are fewer opportunities for that up-sell, it stunts the growth rate of online as well.

Thomas Russo - Gardner, Russo & Gardner

Thank you. Gary, last question for you, across your portfolio, to what extent are you seeing, except for the well-known search dollars lost to advertising, just increased local competitors gaining share at the expense of newspapers in any meaningful category, be it cable locally placed, be it billboards, alternative newspapers. Is there anything going on across the portfolio that is significant in terms of market share loss up against the newspaper franchise locally?

Gary B. Pruitt

No, we don’t see anything significant there. And it is always competitive. There are always products coming and going and we are all in the mix there competing but no significant change on that front, no new competitor taking share in the local mix.

Thomas Russo - Gardner, Russo & Gardner

Thank you very much.

Operator

Your next question comes from Karl Choi with Merrill Lynch.

Karl Choi - Merrill Lynch

Gary, I just want to clarify the restatement at Real Cities in terms of national advertising. Was that in December or will that continue to impact results in 2007, or you are done with the restatement?

Gary B. Pruitt

Yes, we are done with that restatement. The reason why it affected us in 2006 is that we didn’t have the detail to tease out the numbers between net and gross in 2005, so it hurt comparisons. So now that we are into 2007, we will be able to give the accurate numbers because we can have comparisons to 2006, where we have adequate details to sort out net versus gross.

That issue is done but it did effect us throughout 2006 on the pro forma comparisons.

Karl Choi - Merrill Lynch

Okay, that is helpful. As far as pension costs are concerned, you mentioned that pensions should be down year over year in 2007. I am just wondering if you can quantify that.

Gary B. Pruitt

Pat, do you want to speak to that?

Patrick J. Talamantes

We do see those trends but we at this point would hesitate to be more specific about that at this point, Karl.

Karl Choi - Merrill Lynch

Okay, just a couple of more housekeeping items then. Pat, any expectations for D&A for 2007 now that Minneapolis is out completely?

Patrick J. Talamantes

You can take your fourth quarter report there on a continuing basis and roll forward with that, as the best estimate of D&A going forward.

Karl Choi - Merrill Lynch

Okay, and can I have the composition of online advertising revenues in 2006 between the major categories as well?

Christian A. Hendricks

Certainly. It was about 55% employment, 15% automotive, 10% to 11% real estate. The rest would be retail and miscellaneous, other retail -- national is a small piece of the business, probably about 5%, and the rest would be retail and miscellaneous other.

Karl Choi - Merrill Lynch

Thank you.

Operator

Your next question comes from Peter Appert with Goldman Sachs.

Peter Appert - Goldman Sachs

Gary, I am trying to better understand the dynamic in terms of the help wanted ad revenues. So the Real Cities revenue is all in the national category, correct?

Gary B. Pruitt

Yes.

Peter Appert - Goldman Sachs

Okay, so and you addressed this already, but it looks like, for example, in the fourth quarter, pro forma, blah de blah de blah, the employment online was down about 4%. That seems like a real disconnect from what we are hearing from Monster and CareerBuilder, et cetera. So what is the story?

Gary B. Pruitt

Chris, do you want to speak to that?

Christian A. Hendricks

Certainly. What you have is a case where some of this is associated with adjustments being made to the CareerBuilder deal that we have, the affiliate agreement that impacted the economic slow even more back to CareerBuilder than to the newspapers, so that hit the Knight Ridder papers a little hard during the third and fourth quarter. We will roll over that affiliate agreement in June of the upcoming year.

Fundamentally underneath that, what disappeared were several segments of the business line that were contributing to those papers, different products, e-commerce co-branded revenue and a multimedia sales group that sold both print and online. Those lines of business were eliminated and that revenue flowed back to CareerBuilder, so that took down somewhat the revenue.

Also, within the context of that also is again, the lines on that category in Knight Ridder was more so, that 55% of revenue was more towards the 65%, 70% in Knight Ridder, so as we see the cyclical downturn, the impact of less advertisers has also affected our ability to sell online products to them.

Those two things were primarily the biggest factor in that.

Peter Appert - Goldman Sachs

Extrapolating from that, it might imply that virtually all of the online revenue in your classified categories is up-sell as opposed to online only. Is that a fair statement?

Christian A. Hendricks

That is a fair statement. Online is -- actually, not totally. What it is is 32% of our business is online only. 32% of the online revenue is online only, and the employment category, it is more geared towards an up-sell situation than it is in the other categories. So in a sense, it would impact us a little bit more.

Peter Appert - Goldman Sachs

Okay. And then in the other classified categories, auto and real estate likewise, pretty modest growth in the online component. That is not related to -- is that also related to some issues surrounding the Knight Ridder transaction?

Christian A. Hendricks

No, actually, automotive was up 22%, real estate, 17.3% on the year. Employment was up 21.2% on the year.

Peter Appert - Goldman Sachs

I was actually focused on the fourth quarter, to try to get a sense of more the momentum in the business.

Christian A. Hendricks

Right, automotive you are seeing is a 15.1% gain in the fourth quarter, down a bit but that would be, you know, the base keeps growing and the same-store sales are still there, so there isn’t much of a fundamental change there. In fact, in the cars.com category, we have continued to grow our relationships with the automotive dealers well above 50% of the automotive dealers in our marketplaces, and in some markets above 80% take those products.

So what you are seeing, yes, there is some bit of a cyclical nature to it, and also the fact that again customers may be leaving and that does impact, and that is in the automotive.

Real estate is also cyclical too, so any time there is an up-sell piece of the business, it suffers some of the cyclical nature or even some of the secular nature of the change.

But if you look at the online only, the upside is if you look at online only, it is the fastest growing category we have. In fact, in employment this year, online only grew 284%; automotive, 30%; real estate, 24%; and the retail side of the online only was up 99%. So we are aggressively pursuing that business as the needle moves up from 30% to 35%.

Peter Appert - Goldman Sachs

Thank you. Gary, unrelated item, can you just tell me what you did broadly in terms of ad pricing in January?

Gary B. Pruitt

In general, low- to mid-single digit increases with slightly lower increases in preprints, a little bit higher in national, but in the 2% to 5% range.

Peter Appert - Goldman Sachs

Thank you.

Operator

Your next question comes from Christa Quarles with Thomas Weisel.

Christa Sober Quarles - Thomas Weisel Partners

Just a follow-up on the online side. I was wondering if you could, the $200 million in 2007, I was just wondering what growth rate then you would be assuming if 2006 were normalized for Real Cities.

Then, I was also wondering if you guys could extrapolate on your relationship with Quigo and any improvements in terms of your ability to conduct ad sales through them. Thanks.

Gary B. Pruitt

Sure. With regard to increase, it would be between 15% and 20% we would expect in ’07 on the online side. We expect we would be around $200 million, which would be in that 15% to 20% range of online growth.

Christian A. Hendricks

We are interested in expanding our relationship with Quigo. We are currently in discussions with them but Quigo as a key-word search type of ads, it is the Google adsense type of program, which are the little strip ads that you see on many websites down the right side. We receive money for placing those ads on our sites from Google right now. We are interested in expanding the relationship with Quigo but we also continue to discuss the adsense program of Google. We hope to make a decision in the near-term as to whether we will just engage Quigo or continue with Google or use both.

Christa Sober Quarles - Thomas Weisel Partners

Okay, thanks.

Operator

Your next question comes from Nichole Black with Wachovia Markets.

Nichole Black - Wachovia Markets

Hi, thanks for taking the question. Just curious if you could comment on your level of capital expenditures in ’06, kind of on a pro forma basis as best you can. Then, how you think that line item moves around in ’07. Thanks.

Gary B. Pruitt

I missed the last part, Nichole.

Nichole Black - Wachovia Markets

Just your outlook for ’07.

Gary B. Pruitt

On CapEx?

Nichole Black - Wachovia Markets

Yes.

Gary B. Pruitt

Okay. Pat, do you want to handle both?

Patrick J. Talamantes

Sure. Capital for 2006 was $73.7 million. That includes Star Tribune. As we go forward into 2007, we expect capital to be in the high-60s to maybe low-70s. That would be obviously exclusive of Star Tribune.

Nichole Black - Wachovia Markets

Great. Thank you.

Operator

(Operator Instructions)

Your next question comes from Steven Barlow.

Steven Barlow - Prudential Equity Group

Pat, could you give us an outlook here on your equity numbers as well for 2007, and whether or not you are going to have a cash pension contribution, I guess for the whole company but normally you’ve always had one from the M&I side. Thanks.

Patrick J. Talamantes

Steve, I think on the equity line, we did reasonably well with $5 million in the fourth quarter. A lot of that, almost half of that came from newsprint equity incomes. You have seen what is happening with the trends in that business in 2007. I would hesitate to give you more of a forecast on the equity income line than that, but that should help you a little bit with your model.

In terms of pension contributions, looking at the Knight Ridder plan and the McClatchy plan together, we are reasonably well-funded. So for 2007, we do not at this time expect to make any pension contributions, voluntary or otherwise this year.

Steven Barlow - Prudential Equity Group

Okay, then lastly, if you could give us your outlook as the firm on newsprint prices, awfully big on larger buyers these days. Thanks.

Patrick J. Talamantes

Well, obviously the big event in the business this week or last week was the Abitibi-Bowater merger. As far as how that will impact prices, we are actually seeing this is helping to keep pricing pressures at bay for the balance of the year, as we expect suppliers will be minding their manners as the deal sorts out the regulatory process.

As you know, there continues to be excess demand in the market and this deal will not impact that issue in the near-term, so we see a, from wearing our newspaper hat, a fairly favorable trend for 2007.

Steven Barlow - Prudential Equity Group

And then usage, how does that look for you as you are looking at all these synergies?

Patrick J. Talamantes

We expect usage to continue to be down, primarily from the advertising trends that we see in the business, as well as we have a number of web-width reduction projects going on in the company, taking us from 50-inch web to 48-inch, and that will also contribute to reductions in newsprint usage this year.

Steven Barlow - Prudential Equity Group

So then can we get more than a 5% decline in newsprint expense in ’07?

Gary B. Pruitt

That depends on pricing, I guess.

Patrick J. Talamantes

Yes.

Steven Barlow - Prudential Equity Group

Well exactly, but you are budgeting something.

Gary B. Pruitt

We are budgeting something. We indeed are. But we do not want to give specific projections on what we are budgeting with newsprint, but we expect newsprint prices to be down and to be down measurably.

Steven Barlow - Prudential Equity Group

Fair enough, Gary.

Operator

Your next question comes from Joe Voberil with SuttonBrook.

Joe Voberil - SuttonBrook Capital Management

Thanks. Just a quick follow-up on the capital structure questions that were asked earlier. What is the debt-to-EBITDA threshold that you need to reach before you will reevaluate use of capital in terms of buy-backs versus further debt pay down?

Gary B. Pruitt

There isn’t a specific target. I know that that could be frustrating, but in our minds, that would fluctuate depending upon interest rates and share price and operating performance. There are a lot of variables so it is not going to be key to any particular debt-to-cash flow ratio when a buy-back would kick in, but one that we would just continue to evaluate.

But at least in the short-run, it is going to be debt repayment, and we are using all the proceeds from Star Tribune for debt repayment and our cash flow this year for debt repayment. The Miami land sale, which will go to debt repayment. After tax proceeds could be $125 million.

Joe Voberil - SuttonBrook Capital Management

And by short-term, is it fair to say that is like a six- to twelve-month window? When you say short-term, that is what you mean?

Gary B. Pruitt

I mean longer. I guess when I am saying short-term, I’m thinking -- depending upon performance and all of that, I would say that we are looking at least through ’08, at least two more years. That is reflecting -- again, I know there is this constant tension but we are sort of debt hawks and conservative on that, so we would focus exclusively on debt repayment at least through ’08, absent the extraordinary other circumstances.

I hesitate to be absolutist on any of this because we are going to look at all factors, but you can expect debt to be our focus for ’07 and ’08.

Joe Voberil - SuttonBrook Capital Management

Thank you.

Operator

There are no further questions.

Gary B. Pruitt

Great. Thank you all for participating and your interest and support and we look forward to delivering in ’07. Thank you very much. Good-bye.

Operator

This concludes the McClatchy fourth quarter 2006 earnings conference call. You may now disconnect.

TRANSCRIPT SPONSOR What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price? This is exactly what Seeking Alpha is offering with transcript sponsorships. Six types of companies are sponsoring earnings transcripts on Seeking Alpha: 1. Company sponsors its own earnings call transcript (example). 2. Company sponsors partner's transcript (example). 3. Company sponsors competitor's transcript (example). 4. Issuer-sponsored research firm sponsors client's transcript (example). 5. Investment newsletter sponsors transcripts of successful stock picks (example). 6. IR firm sponsors transcript of micro-cap company (example). 7. Consulting company sponsors company's transcript in sector of interest (example). Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.