Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The McClatchy Company (NYSE:MNI)

Q1 2007 Earnings Call

April 24, 2007 12:00 pm ET

Executives

Patrick Talamantes - CFO

Gary Pruitt - Chairman, CEO

Frank Whittaker - VP Operations

Christian Hendricks - VP Interactive Media

Analysts

Steven Barlow - Prudential Equity Group, LLC

Craig Huber - Lehman Brothers

Karl Choi - Merrill Lynch

Lisa Monaco - Morgan Stanley

Robert Schiffman - Credit Suisse

John Janedis - Wachovia Securities

Paul Ginocchio - Deutsche Bank

William Bird - Citigroup

Brian Ambrosi - SuttonBrook Capital Management

Peter Appert - Goldman Sachs

TRANSCRIPT SPONSOR
Wall Street Horizon Logo

Operator

I would like to welcome everyone to the McClatchy first quarter 2007 earnings conference call. (Operator Instructions) Mr. Talamantes, you may begin your conference.

Patrick Talamantes

Thank you for joining us today for our first 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 -- and our Vice President of Interactive Media, Chris Hendricks. We are all available for questions at the end of Gary's remarks. Elaine Lintecum, our Treasurer and Investor Relations Officer, is not with us today as she got married last weekend and is now on her honeymoon. I'm sure you will all congratulate her upon her return. I will also be available after the call and can be reached at 916-321-1834.

Our earnings release and statistical report were issued this morning before the market opened. The release includes a summary of unaudited results. The full text of our release and statistical reports are posted on First Call and our website for your convenience. The company's results for continuing operations since the close of the Knight Ridder acquisition and all pro forma amounts 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 which was sold on March 5th.

A reconciliation of pro forma revenues, operating expenses, operating cash flow as defined, and operating income to GAAP reported amounts can be found on the company's website at the investor relations page for all periods discussed on this call.

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 annual report on Form 10-K filed with the SEC. Actual results may differ materially from those described during the call.

Now here is Gary Pruitt, our CEO.

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Gary Pruitt

Thanks, Pat. We reported first quarter earnings from continuing operations of $14.5 million or $0.18 per share compared to earnings from continuing operations of $21.8 million or $0.46 per share in the first quarter of 2006. Our results exclude the operations of the Minneapolis Star Tribune, which was sold on March 5th and is reported as a discontinued operation.

In this challenging revenue environment, we are delivering on the cost side. We reduced cash operating expenses by 6.3% in the quarter on a pro forma basis. In fact, our operating cash flow grew slightly on a pro forma basis, despite the decline in revenues. Few newspaper operations can make that claim.

Our revenues from continuing operations in the first quarter of 2007 were $566.6 million compared to revenues from continuing operations of $194.5 million in 2006. The increase, of course, in revenues reflects the addition of 20 newspapers acquired in the Knight Ridder acquisition on June 27, 2006. On a pro forma basis -- that is including all newspapers as if they had been owned since the beginning of 2006 -- revenues from continuing operations were down 5.0%. Advertising revenues were down 5.3%, and circulation revenues were down 3.6% on a pro forma basis.

Let's look at revenues by category, starting with retail. Retail advertising was up 0.8% on a pro forma basis with decline in print products offset by strong growth in online retail advertising. Online retail advertising was up 85.1% in the quarter.

Classified advertising revenues declined 10.9% on a pro forma basis. Here's a review by category within classifieds:

First, employment. In the first quarter, employment advertising declined 8.0% at our newspapers compared to growth of 14.2% in pro forma in 2006 first quarter revenues. The declines came in both print and online. In particular, employment was affected by our new affiliate agreement with CareerBuilder for online employment advertising. This agreement is helping to grow online employment revenues at the legacy McClatchy papers. However, under the new affiliate agreement selected products are no longer available to be sold by the 20 acquired Knight Ridder newspapers, which is depressing their Internet revenues. We will begin cycling through this change in August 2007. 33% of our first quarter employment revenues came from online.

Second, automotive. Automotive advertising declined 16.1% compared to an 11.8% decline in the first quarter 2006 pro forma advertising.

Third, real estate. Real estate advertising was down 14.1% compared to a 20.5% increase in the 2006 quarter. We have seen dramatic declines in California and Florida, where real estate values, and thus advertising, were exceptionally strong in recent years. We expect declines in this category to continue as the current housing cycle plays out in these two states and to a lesser extent in other regions.

National advertising declined 10.4% on a pro forma basis in the first quarter. Our performance continued to be hurt by losses in the telecommunications and national automotive advertising. These are trends we're seeing industry wide.

Turning next to online, and while online advertising is included in the results discussed above, we wanted to give you a sense of how online advertising is performing specifically. On a pro forma basis, online advertising increased 5.4% compared to first quarter of 2006. As we mentioned in our monthly revenue reports, our growth rate has been stunted in the employment category due to the revised CareerBuilder affiliated agreement, but we continue to see strong growth in the other online advertising categories. Excluding online employment advertising, our online advertising revenue grew 17.0% in the quarter. Online represents 8.6% of total advertising revenues.

Our direct marketing advertising grew 0.3% on a pro forma basis in the quarter, slower than our traditional growth rates as we evaluated and discarded some less profitable niche publications at the acquired newspapers. Direct marketing is also being affected by general advertising trends. Direct marketing represents 7.7% of total advertising revenues.

Turning next to circulation. On a pro forma basis, our daily circulation declined 3.6% and Sunday was down 3.9% in the quarter, as we continue to cull out third-party circulation that is not valuable to our advertisers.

Looking next at expenses. Total cash expenses were down 6.3% on a pro forma basis, as we continue to reduce costs during this tough revenue environment and as we realize synergies from the acquisition. Compensation costs on a pro forma basis were down 8.7%. Salaries declined 8.8%, and employees on a full-time equivalent basis were down 5.6%. Fringe benefit costs declined 8.6%. Newsprint and supplement costs were down 10.5% on a pro forma basis, primarily reflecting lower usage. All other expenses increased 1.3% on a pro forma basis, primarily reflecting the change by former Knight Ridder papers to our more conservative policies for reserving for bad debt expense.

Depreciation and amortization expense decreased $27.9 million as reported, due primarily to the additional fixed assets and purchase price accounting related to the Knight Ridder acquisition. Net interest costs for continuing operations were $53.8 million. The company's net debt balance at the end of the quarter was $2.76 billion.

While we used the proceeds from the Star Tribune sale to reduce debt, we carried interest on this debt for the first two months of the year, which equated to about $5.7 million in interest expense, included in continuing operations. We also began to account for interest on our tax reserve in the interest expense line versus the income tax provision where it has historically been reported, and this change increased interest expense by $1.3 million. So excluding these two items, our interest expense was about $46.8 million. Our effective interest rate in the first quarter was about 6.4%.

Turning next to the equity line, the loss from continuing operations included a loss on unconsolidated companies of $9.7 million compared to income in the first quarter of last year of $0.4 million. This loss was due to the operating results of the company's newsprint investments and to seasonally low profitability at CareerBuilder, Classified Ventures and the Seattle Times Company.

We reported a loss from discontinued operations of $5.5 million, which reflects a better result than we had previously expected. As we foreshadowed in our 10-K, we reported an approximately $40 million tax expense in the first quarter related to the sale of Star Tribune-related intellectual property from the company's intellectual property subsidiary when the transaction closed. But this expense was offset by an additional $41 million tax benefit from updated expenses of our tax base in the Star Tribune. Therefore, the tax refund expected in 2008 is an estimated $2001 million rather than the original estimate of $160 million. So instead of an after-tax benefit of $690 million from the sale of Star Tribune, we now expect to realize approximately $731 million in after-tax proceeds from the sale.

So in the second quarter of 2008, just to be clear, we expect to receive a $201 million in tax refund rather than the $160 million we had originally anticipated, taking the total proceeds after-tax from sale of the Star Tribune to $731 million.

As we stated at the time of the sale of the Star Tribune, that after-tax multiple from the sale is greater than our public trading multiple, greater than we paid for Knight Ridder, and greater than any of the Knight Ridder divestitures. With the additional refund, that multiple is now even higher. The additional $41 million in proceeds will be used to reduce debt.

Looking forward, as we look at the second quarter, we expect continued declines in real estate advertising, particularly in the California and Florida newspapers and do not yet see a significant rebound in the other classified advertising categories. Thus, we expect second quarter advertising results to be similar to the first quarter.

The cyclical downturn in all three major classified categories is exacerbating the impact of structural shifts affecting newspapers. However, we believe our strategic moves in acquiring Knight Ridder and selling the Star Tribune have helped us in this difficult time and made us an even stronger competitor.

For instance, our operating cash flows in the first eight months after the acquisition would have been down 16.3% had we not done the acquisition or sold the Star Tribune. Had we acquired the Knight Ridder newspapers but not sold the Star Tribune, our operating cash flows would have declined 5.2% on a pro forma basis. But by making the acquisition and all of the divestitures to realign our portfolio as we have, our operating cash flows were essentially flat, down 0.3% on a pro forma basis. So our performance was much better for having acquired Knight Ridder and selling the 13 newspapers.

With our portfolio of newspapers and digital assets in growth markets, new alliances with technology companies, and changes we are making in our cost structure, we approach the future with optimism.

On April 16th, we announced that we had joined an important alliance with Yahoo and 11 other newspaper companies. This partnership presents opportunities for McClatchy and other newspaper companies to grow online by boosting traffic, bolstering search efforts, and creating a state-of-the-art online ad network. We examined many alternatives in determining that this represents the right deal with the right partners at the right time. The partnership has emerged as the newspaper industry's preferred solution and as more companies join, we expect that gravitational pull will become even stronger.

We will continue to cut costs. We are reducing staffing through attrition and we expect continued relief in newsprint pricing as the year unfolds. We are scrutinizing all areas of expense and are actively pursuing opportunities to operate our business more efficiently. For those of you who might be concerned that our cost consciousness will impact the quality of our product, I will simply point to McClatchy's Pulitzer prizes won last week by the Miami Herald for local reporting and by the Sacramento Bee for feature photography as evidence that quality and efficiency are not mutually exclusive. Our continued focus on the mission of public service journalism will not falter.

We'll now be happy to take your questions.

Question-and-Answer Session

Operator

Your first question comes from Steven Barlow - Prudential Equity Group.

Steven Barlow - Prudential

Gary, you talked about the Internet side of things with the revenue up. Could you give us an apples to apples including the online employment for the first quarter?

Gary Pruitt

Actually those employment numbers I gave you did include the Internet. We were down 8% for the quarter, that includes both print and online.

Steven Barlow - Prudential

Then in terms of circulation, understand you're trying to cull some of the copies there to third parties. What should we think about circulation going forward, because obviously the decline is a little bit more than you've done historically certainly, when you've had years and years of circulation growth.

Gary Pruitt

In a general sense, you can expect this trend to continue through the year, with some improvement in the second half. Steve, what you can think of is that half of this decrease is dealing with culling the third party effect out of the circulation numbers and half of it is the typical run rate.

Operator

Your next question comes from Craig Huber - Lehman Brothers.

Craig Huber - Lehman Brothers

Speaking about circulation volume, what was the thinking earlier this decade in late 1990s about increasing third-party circulation? What was the strategy back then for yourself and other companies? Why are you reversing that now?

Gary Pruitt

Well, what happened with third party is that the Audit Bureau of Circulations changed the rules to allow more liberal use of third-party circulation, which for those of you don't know is when a third party buys the papers and it's someone different than the ultimate consumer or reader of the paper. So rules were liberalized. McClatchy opposed those rules. We wanted to keep the rules stricter. But anyway, the rules became more liberal and many newspaper companies applying the rules used them to grow circulation.

McClatchy did not rely on third party sales to a great extent. We did to some extent, but not to a great extent. However, the Knight Ridder papers relied on third party growth to a greater extent -- some of them did -- and we are reducing that now because we think it's just not as valuable to advertisers. I wouldn't say it's valueless in the sense that some third party programs are valuable. Some third-party programs, advertisers, wanted to buy to saturate circulation around particular stores, and it was quite valuable; but in some cases, it was not valuable at all. It's those cases that we're eliminating and I think advertisers generally are pulling back from buying third-party circulation.

Craig Huber - Lehman Brothers

The other operating expensing line, you mentioned bad debt hurt the Knight Ridder papers. If you broke that out, what would the percent change be in that line?

Patrick Talamantes

The percentage change would be down a few tenths, instead of up, it would be down about 0.3%.

Craig Huber - Lehman Brothers

Can you break out the performance of your California papers by the major categories, including breaking out costs?

Gary Pruitt

If we look at California and the quarterly results in major categories, total advertising in California was down 9.7% on a comp of up 5.9% to last quarter pro forma, first quarter of last year. If you looked at retail in California, they were down 0.5% on a comp of down 1.3% to prior year. National advertising in California was down 18.0% on a comp of down 1.1%. Total classified revenue in California was down 15.7% on a comp of up 12.5%. Within classified, automotive was down 18.7% on a comp of down 13.7%. Real estate advertising within classified was down 16.9% in the first quarter on a comp of plus 49.2%. Finally within classified, employment California was down 17.8% in the first quarter on a comp of plus 8.3%.

Craig Huber - Lehman Brothers

Do you have that for Florida as well?

Gary Pruitt

I could sit here all day with these numbers.

Craig Huber - Lehman Brothers

You're having a lot of fun with this, huh?

Gary Pruitt

Yes, we're doing our best. The Florida numbers in total advertising were down 12.0% on a comp of up 4.7%. Retail, they were up 5.0% in the first quarter on a comp of up 5.5%. I would stop there to say that generally at all of our papers, the territory sales are doing very well. Those are the sales we can affect the most and deal with the local advertisers and reflect the growth in the market. So that's actually doing very well.

National advertising in Florida was down 18.0% in the first quarter on a comp of down 1.1%. Classified advertising overall was down 26.7% on a comp of plus 20%. Within classified, automotive was down 26.5% on a comp of negative 3.1%. Real estate advertising in Florida was down 37.2% on a comp of plus 41.0%. Employment was down 23.4% on a comp of positive 24.8%.

Craig Huber - Lehman Brothers

Great. Thank you very much.

Gary Pruitt

I misspoke the national numbers in Florida. I'm sorry, Craig, I need to correct this. I looked at the wrong line. Florida, national advertising in the first quarter was down 13.8% on a comp of negative 10.8%. I'm sorry for that error.

Operator

Your next question comes from Karl Choi - Merrill Lynch.

Karl Choi - Merrill Lynch

I wonder if you saw any big impact in March from the timing of Easter this year? Some of your peers had mentioned that the Sunday before Easter this year, affected margins as opposed to April of last year, so they saw a little bit of benefit. Just wondering if you saw that as well?

Gary Pruitt

We did see some impact of Easter. Generally, the timing switches with March and April. It helped us in March as we had the lead up into Easter, but without Easter itself, by increasing preprints by about $2.3 million. So we would expect that March was helped a little bit by the swing and April will be hurt a little bit by the swing.

Karl Choi - Merrill Lynch

That's helpful. Second, any outlook for equity income given the negative in the quarter?

Gary Pruitt

Perhaps it would be helpful for Pat to give you a little more detail on that equity income line, because I know it was a disappointing number with a bigger loss than anticipated.

Patrick Talamantes

We're obviously seeing a big swing from fourth quarter where we reported $4.9 million in equity income to this quarter where we're at a $9.7 million loss. The Internet side of things showed some reversal there. We had about $1.5 million of equity income in 2006 fourth quarter. This quarter we're at a $3.1 million loss. A lot of that is seasonal as those investments have some of the same advertising issues that the print business does, as well as there's a great amount of advertising in those equity investments in the first quarter.

Looking out for the balance of the year, we don't expect those losses to continue. We think that for the full year, we'll have income from our equity investments online.

On the newsprint side, that's where we're seeing quite a big switch. Again, I keep using the fourth quarter 2006 as a baseline because we didn't have these investments largely in the prior year-ago period. On newsprint in the fourth quarter last year we had $2.8 million of income. This year, we had a $2.9 million loss. Everyone understands that prices have been weak in the first quarter, plus fiber costs and energy costs have provided the double whammy for our newsprint investments.

Then we have other investments, including the Seattle Times. We had $1.1 million in income in the fourth quarter of last year, a $1.6 million loss in the first quarter of 2007. That piece of it behaves somewhat similarly to our owned business. In the amortization of our purchase price allocations to our equity investments, we had very little in the fourth quarter, only about a $0.5 million because we were truing up our final purchase price accounting. We had already recognized $4 million of amortization in the third quarter.

So in the first quarter of 2007, we're seeing $2.149 million of amortization. That will be the run rate going forward and should not change much, except if we were to make new investments or write off other ones. So that is something that we're going to be living with on an ongoing basis.

Karl Choi - Merrill Lynch

As far as the interest expense related to the tax reserve, could you remind us when you expect to pay the taxes this year? I know you're going to get the refund back and I guess how much of that interest line will still impact you, if at all, in the second quarter?

Patrick Talamantes

Solely from the sale of the Star Tribune you mean?

Karl Choi - Merrill Lynch

Yes.

Patrick Talamantes

Well, previously we had expected to pay out $40 million in 2007 and to get back $200 million in the second quarter of 2008. Our position now is that those two numbers should be netted and result in a refund in 2008. So that's one change in terms of the timing. There won't be anything out of pocket this year related to taxes in Star Tribune. So that's the first change.

The second change is the increase in our estimates of the tax refund because of our increasing basis estimate. So from $160 million next year to $201 million next year. So $201 million we expect we'll get in second quarter of next year, nothing out this year.

Karl Choi - Merrill Lynch

It sounds like there was a change in accounting where interest expense on the tax reserve was recorded in the first quarter. I thought it was related to Star Tribune.

Patrick Talamantes

No. The $1.3 million is related both to purchase price accounting for our tax reserves largely for the Knight Ridder positions, as well as our adoption of FIN 48 in the first quarter. So we're still finalizing our tax reserves, but that $1.3 million is interest on tax reserves of at least $54 million that is largely resulting from positions we are inheriting from Knight Ridder.

Karl Choi - Merrill Lynch

Do you expect that to continue in the second quarter and beyond?

Patrick Talamantes

That item would be a recurring number going forward.

Gary Pruitt

It would change as the tax reserve changes and as interest rates change.

Patrick Talamantes

Correct.

Operator

Your next question comes from Lisa Monaco - Morgan Stanley.

Lisa Monaco - Morgan Stanley

Gary, could you just elaborate on the auto classified category and where you think we are in the cycle? March was while still down double-digits, a little bit better than what we've seen. Are we starting to see a trough there? What are you hearing from the dealers? Thanks.

Gary Pruitt

I would elaborate by saying “ugh” because the auto category continues to be a difficult one. While we did see a positive trend through the quarter, and so I'm hopeful that that will have carry through, but we've seen this false start before over the past 18 months only to see our hopes dashed. So I don't have a lot of confidence in telling you that we're through it. We don't see enough of a definitive pattern there.

So we expect automotive to remain negative this year, but it may get better, but I don't have a clear sense. We do know that sales remain weak and that national automotive advertising remains weak, especially in the domestic dealers. We are seeing consolidation of dealerships locally, which has affected automotive advertising, and that generally many of the manufacturers believe that the country has too many dealerships, and we may see some consolidation there. Manufacturers have reduced their co-op dollars, which has reduced some of that advertising locally, as well.

We're doing well online. We have two classified ventures: we own 25% of cars.com, and automotive online advertising is up 17% and is now about 13.4% of total auto revenue. So we're starting to get more traction online as it grows. It's not nearly as much as employment online, but it's more than the real estate market online.

I hesitate at this point, Lisa, to say that though there is a trend of improvement through the first quarter, we'll wait to see in the second quarter to let you know.

Operator

Your next question comes from Robert Schiffman -Credit Suisse.

Robert Schiffman - Credit Suisse

Gary, I'm sure you remain pretty frustrated with stock price performance. You've been very straightforward with the marketplace with regards to the potential for a longer-term privatization. I was wondering, with your debt reduction looking like it's ahead of schedule, whether or not the long term is starting to look a little bit closer to the short term? With this sort of unique structure that Zell came up with that is extremely tax efficient and enables Tribune to layer on much more leverage than anyone would have anticipated, if you've taken a look at that structure or if you're currently looking at any other strategic alternatives? Thanks.

Gary Pruitt

Thanks. We are focused on debt reduction and plan to use all free cash flow this year to reduce debt. We're generally a pretty conservative company when it comes to debt, and want to pay down the debt quickly and believe that that will benefit shareholders as we do that. We, of course, will continue to evaluate the situation based upon our debt level and interest rates and the stock price and will look advantageously at opportunities to balance debt repayment with share repurchase as we become more comfortable and flexible after paying down debt. That's where we are focused in the near and intermediate term.

Looking long term, we think we've got great use of our cash. Between paying down debt and buying back stock, we think we can build substantial equity value. We've done a major acquisition, we know it hit the stock price, we are frustrated by the stock price, but we're committed to doing better and showing the performance results to prove that.

We don't have any plans to go private. It remains a long-term option for the company, but nothing has changed that as a result of seeing the Tribune deal carried out.

Operator

Your next question comes from John Janedis - Wachovia.

John Janedis - Wachovia Securities

Gary, assuming a constant rate of pro forma revenue growth not only in Q2 and beyond, what kind of pro forma expense decline should we expect for the balance of the year and where are you on cost savings assumptions related to Knight Ridder?

Gary Pruitt

We had originally said we had $60 million in synergies as a result of the Knight Ridder deal then we upped that to $70 million. I can tell you that we at least have that; perhaps more. We're getting far enough away from the acquisition that it becomes increasingly difficult for us to discern between synergies and general cost savings.

We do plan to continue to deliver on cost savings, so you can expect similar reductions in the second quarter that you saw in the first quarter. By the end of the second quarter, we will anniversary on the closing of the Knight Ridder deal and therefore roll over the synergies so in the second half of the year we won't have that same level of synergies. We'll have cost reductions, but not at the same level as we had in the first half. A little over half of the cost reductions we're seeing now are related to the synergies. Maybe 60% related to synergies and 40% related to operations. So while we expect reductions in the second half, they won't be at quite the level that we've seen in the first half.

As far as revenues go, we don't have a projection for the second half yet. We do see the second quarter similar to the first quarter and we have the total advertising comps for the second quarter for the company on a pro forma basis are up 2.4%. That's exactly the same comp we faced in the first quarter, but then comps eased a little bit in the second half. Third quarter is up 0.5%, fourth quarter is down 3.1%.

We're hopeful that revenues will improve in the second half, not just from easier comps, but as we play out some of these other cycles and structural changes, we will give an update forecast on that at our mid-year media presentation in June, or in our quarterly conference call in July, what we think about for the second half.

Long term, of course, we understand that there are structural changes going on in the newspaper business that affect the revenue and they necessitate structural changes in the cost side as well. Those are long-term changes and we're endeavoring to do that. So our cost efforts are long term.

John Janedis - Wachovia Securities

You mentioned the softness in classified. As you look out across the three major categories that you referenced, do you see those turning maybe in tandem, or is this the kind of thing where it could take a couple of years for it to shake out in terms of improving to growth as opposed to declines?

Gary Pruitt

Yes. I think the three categories are largely independent of one another in the sense that we often see one up and the other down or the other two down and vice versa. They all happen to be down at the same time now. Some of that is structural, some of that is cyclical. I don't know if they will turn in tandem. Early in the decade, automotive was extremely strong and employment was extremely weak, and then we saw real estate become extremely strong for a long period of time while auto was weak. So I don't think they'll necessarily turn in tandem.

The real estate numbers are more cyclical in nature. Employment is more structural in change than the other two. Auto in between. In that case, I think you'll see a more classic cyclical pattern in real estate, and so we're seeing steep declines now and I think we'll see good gains later.

John Janedis - Wachovia Securities

Can you give us just for newsprint, price versus volume?

Patrick Talamantes

Sure. Newsprint price on a 30-pound basis was down 0.8% which means that when you do the math that our usage was down 7.3%.

Operator

Your next question comes from Paul Ginocchio – Deutsche Bank.

Paul Ginocchio - Deutsche Bank

It looks like CareerBuilder, the restructuring of that relationship has hurt you both on the equity line and the revenue line. How could that be? I thought if it would hurt you on the revenue line, it would help you on the revenue line?

Second, on the Seattle JOA are you going to have to make any cash payments related to the new relationship between Hearst and the Black family?

Finally, when do you think 80% of your online revenues will be on the Yahoo ad platform? Which quarter will that be? Thanks.

Gary Pruitt

As far as the JOA settlement, we will not be making any cash payments related to that so that won't affect our cash situation at all.

In CareerBuilder, as Pat mentioned, some of that is seasonal. So CareerBuilder in terms of the equity line effect, will improve as the course of the year goes on. CareerBuilder is a very successful company and we expect it to be a contributor on the equity line.

As far as the affiliate agreement goes, it is hurting the former Knight Ridder papers as they did have products they could sell before that they can't sell now. We're looking at our alternatives there to try to improve that situation. We can and we will, but we expect on the equity line that things will improve.

As far as Yahoo goes, I don't have the precise quarter to give you, Paul, as to when we may see ad revenues switch over, but the ad platform, while testing will begin this year, it will not be up until mid to late 2008 and so it would be in that timeframe that you would see most or all of our ad sales moving to that platform.

Operator

Your next question comes from William Bird – Citigroup.

William Bird - Citigroup

Gary, could you talk just a little bit about any strategies that you might have for stabilizing circulation? On expenses, you alluded to kind of taking a look at everything really, including reengineering. I'm just curious if you see any opportunities in doing things differently in terms of possibly outsourcing printing or things of that nature? Thank you.

Gary Pruitt

Bill, in terms of circulation, I thought I would turn it over to Frank Whittaker, one of our VPs of Operations, to speak broadly to that.

Frank Whittaker

Bill, good morning, and it will be broad. As you know, circulation is kind of the nitty-gritty side of our business and it really is one order at a time. I would say on the single copy side, there never has been a time when we are in as many retail outlets as we are right now, and it's unfortunate that the overall declines mask a lot of good efforts on all of our papers, all the way from coffee shops to major grocery stores.

On the home delivery side, I would say that there the emphasis is in two key areas. One is in trying to develop a higher quality of start, and there we're using everything from regression analysis to new types of sales methods. It's the age-old struggle of trying to replace the large volumes that we lost with the introduction of the do not call list.

The second emphasis and I think this is the one where we feel that over time -- not immediately, but over time -- we will see a good return, is the variety of efforts directed at higher retention. There in particular we are creating membership clubs where we are attaching a lot of other goods and services to a newspaper subscription, so that the subscriber will see a lot higher value along with it.

The third area of course will be an ongoing effort always to make our papers more relevant, more useful and easier to navigate. So that's at a very high level. Happy to add to it if there's anything more specific.

William Bird - Citigroup

Yes, that's helpful.

Gary Pruitt

Bill, with regard to restructuring, we do see restructuring as a long-term goal and an important part of what we will be doing as a company going forward. It will rely on improved technology, which increases efficiency, reorganization, which together with technology will allow us to centralize certain back office function, payroll and benefits and other shared services functions, and including outsourcing broadly. I think long term that the newspaper industry isn't going to be quite as vertically integrated as it has been in the past, but will remain a strong and successful business. Of course, the restructuring will be allowing us to be online in bigger numbers, which is a higher margin business as well.

Operator

Your next question comes from Brian Ambrosi - SuttonBrook.

Brian Ambrosi - SuttonBrook Capital Management

I listened to the question on strategic alternatives and delevering. What is your target or sustainable leverage ratio for the company? At what point given the share price do you guys abandon delevering and start to buy back stock?

Gary Pruitt

We're not the kind of company that has a specific target in terms of debt-to-cash flow ratio when we will say stop and sustain it at that level. We will be paying down debt and I think you can generally expect that we'll continue to absent extraordinary circumstances, we'll be paying down debt exclusively until debt-to-cash flow is below three times. After that, we will look at whether we want to balance debt repayment and stock repurchase based on interest rates and stock price.

We don't have a specific stock price target where stock repurchase is going to kick in, nor do we have a specific debt target where stock repurchase will kick in. We are going to try to make intelligent decisions on both of those based on all the factors that are out there.

Absent extraordinary swings, which might be happening right now as we speak, I don't know, we are going to use all free cash flow to pay down debt this year and I think probably next year as well. We will continue to give you updates, but, I'm sorry, I can't give you a specific target. We just don't have one that we keep in mind, no hard and fast rules. We do plan to use all free cash flow for debt and share repurchase long term for this company. We've done a major acquisition and we think we can build value long term by using cash in that way.

Operator

Your next question comes from Peter Appert - Goldman Sachs.

Peter Appert - Goldman Sachs

Gary, you've acknowledged that obviously there are cyclical and secular forces at work in the classified market. I'm wondering, just looking at the auto category, the fact that you're seeing declines on declines, I wonder if that's a precursor to the structural changes in the growth rate outlook for classified? I'm wondering what you hear back specifically from your classified managers in terms of what they're hearing in the marketplace. Specifically, the thesis is maybe there'll never be a recovery in auto, and I'm wondering what you think of that.

Gary Pruitt

I think the revenue trends we're seeing in auto is not just a precursor of structural trends, it's evidence of structural change. But it doesn't mean that the cyclical pattern within automotive has been snuffed out; I think far from it. I think automotive will still have cyclical trends to it. I do think automotive will have gains, but I also think we're looking at a reset in classified advertising not just in auto, but in other categories as well, because the Internet does take classified share and it is a strong competitor. While we are leading in our local markets online in the online classified categories, there is more competition there and we won't have the same share of market that we have online that we have in print.

So yes, I do think there will be a structural reset in classified advertising that necessitates a restructuring on the cost side, but there will still be automotive growth long term. As I pointed out before, we're seeing domestic auto sales very low and the domestic car companies suffering. We're seeing dealership consolidation, so we're seeing a confluence of many factors as well as the structural factors that are driving automotive revenues down.

Don't mistake that for a death spiral. There will be a cyclical recovery as well, even in the face of restructuring.

Peter Appert - Goldman Sachs

Do you have a sense, Gary, that the price realizations in terms of some measure of unit volume for what the online advertising dealers do versus what they previously would have been spending in print? In other words, how many dollars leave the market as they migrate online?

Christian Hendricks

Very difficult to do, they're entirely different products. One is a dealer inventory management system that we primarily sell online versus a print ad that does an entirely different job for the advertisers, so I don't think there would be an answer to that question. It would be very difficult to get at.

Peter Appert - Goldman Sachs

How about in the help wanted category, could you see it there?

Christian Hendricks

On the transient ads, we're seeing about the same now, they're closing in on the same dollars, but when you look at the ROP ads obviously there's a big disparity between the two. So the transient small liner ads, they're certainly close dollar for dollar, but on the large ROP ads no, that's just not going to happen. It will be a small percentage of large ROP ads.

Peter Appert - Goldman Sachs

The Real Cities network, does that continue to exist on a go-forward basis?

Christian Hendricks

Yes, it does and we're looking at ways to actually enhance it through the Abu deal. The Abu deal will allow us to put an infrastructure underneath Real Cities and also utilize that infrastructure to sell across the multiple partners in that newspaper consortium. So we believe there's a brighter future, even more so for Real Cities.

Peter Appert - Goldman Sachs

How is it different from the Yahoo deal?

Gary Pruitt

In the Yahoo deal, the Yahoo national sales force, that's where they have salespeople, they will not be selling newspaper brands, per se. They will be selling audience demographics, behavior and their ad platform will optimize the placement of those ads in various websites, including newspaper websites and Yahoo websites, but they will not be selling the newspaper brands and newspaper websites exclusively. That leaves to the newspapers to have their own network, where our salespeople, newspaper industry salespeople, will be selling a newspaper-only ad network using Yahoo technology.

Locally, our salespeople at our newspapers will be selling into our websites, using Yahoo technology, and they will also be selling the local inventory of ads on local Yahoo pages, something we hadn't been able to do before, and we'll be sharing that revenue with Yahoo on a revenue split, just as Yahoo splits the revenue of their national sales force into our websites as well.

Operator

Your next question comes from John Janedis -Wachovia.

John Janedis - Wachovia Securities

A quick follow up. Chris, as you look longer term to your online platform, where do you see the greatest revenue opportunity? Is it from the national network, is it classifieds, the local channel, or maybe something else?

Christian Hendricks

It's the display side, which is your retail banner sponsorship. That's right now is a smaller part of our business, but it is the fastest growing part of our business and that would lend itself to our ability to sell into Yahoo also. The platform itself will also allow us to optimize the revenue, as Gary said, and utilize their targeting system to actually drive CPMs up.

So we believe that the blend right now is about 80/20, where 80% of the online advertising revenue is coming from classified. We see the opportunity to drive that 20% up, that is retail, drive that up during the coming of years.

John Janedis - Wachovia Securities

Does that mean retail above 50%? Maybe you don't project it, but you're saying significant higher?

Gary Pruitt

Yes. Significant higher, yes. We don't have projections, John, but we do think it should be faster growing and while maybe it doesn't equal classified as say it is in print, it will certainly be a lot closer.

Operator

There are no further questions at this time.

Gary Pruitt

Thank you very much for your participation and interest, and we look forward to a better future here in the rest of '07. Thank you very much. Good bye.

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of 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.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The McClatchy Company Q1 2007 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts