Here’s the entire text of the prepared remarks from Knight Ridder's (ticker: KRI) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Good afternoon my name is Paige and I will be your conference facilitator. At this time I would like to welcome everyone to the Knight Ridder Quarterly 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 period. If you would like to ask a question during this time, simply press “*” then the number “1” on your telephone keypad. If you would like to withdraw your question, press “*” then the number “2” on your telephone keypad, thank you. you may begin your conference.
Mr. Polk Laffoon, Vice President
Good afternoon to all of you. Welcome to our call. I am here with Anthony Ridder our Chairman and CEO and Senior Vice-Presidents, Art Brisbane, Hilary Schneider and Steven Rossi, they will begin. Before we go ahead though let me remind you that we are subjected to all of the safe-harbor provisions of these calls as outlined in our 10-K. With that I will turn it over to Tony.
Mr. Anthony Ridder, Chairman, CEO
Okay, good afternoon everybody. Let me start with the statement of the obvious, this is one of the more complex quarters that we have reported. Our GAAP numbers per diluted share for the period is $3.56. That includes a gain of $2.92 per diluted share on the properties we sold in Detroit and Tallahassee. Also $0.2 to discontinued operations. Importantly the number that we are focused on is $0.67 per diluted share. This is a number we arrive it, after you take our EPS from continuing operations, $0.61 add back the $0.8 for severance and then subtract $0.2 for the favorable resolution of prior years tax issues. The $0.67 is the pending of our first consensus. And 18.3% out of the $0.82 on continuing operations last year as detailed in the release.
We would also like to take special notice of the accomplishments of the quarter as they were many. These include the sale of our interest in Detroit, the acquisition of three newspapers in the west, the $400 million general offering, $10 million share repurchase announcement, a significant work reduction, work force reduction in both Philadelphia and San Jose. Additional business with revenues that is exploding, and our targeted publication business just gets bigger and more varied every quarter. I stress them because they are important not only in themselves but for what they say. Basic change in willingness to reallocate growth opportunities. At the same time we are focused on the core business.
Revenue results for the quarter were in line with industry trends, but still disappointing. Even with the September that we are somewhat better than August, +2 was disappointing and not reflective of either our first two quarters or the quarter to come. Some of that is associated with the growth that we are experiencing in non-core businesses, yes some of it is one time and reflective of uniquely unfavorable comparisons. Prior to this quarter both in this year and in recent years cost control has been among the greatest trends. And it will be again in Q4, I assure you.
Some points I would like to make quickly. A number of our large markets had solid revenue from quantum services, Miami, San Jose, Charlotte, Contra Costa and St. Paul all did well as we released details. But in the end they were not enough to offset the results in Philadelphia and Kansas City, 4.8% and 2.9% respectively. Philadelphia is retail national and classified automotive, below stock, in the way they are proportionately on the scale as a whole. In Kansas City, the story was exactly the same but on lesser scale. Recent cost reduction announced for Philadelphia and San Jose were in part recognition. Revenue in those two places is not rebounded from its high in 2000. We have to have a cost structure, those prices that make sense for the market in which we are publishing a newspaper. While the Biloxi hurricane was devastating, if there were a stronger word I will use it, the employees of our Sun Herald newspaper, it was not material to our financial results. Most of the losses will be covered by insurance. Then the stream of the Knight Ridder newspapers Biloxi is relatively small. The sprit of the rebound from Katrina has been really magnificent.
The absorption of the three new newspapers has gone well. Employees and their communities have rolled out the proverbial red carpet for Knight Ridder. We are hearing good things from both advertisers and readers. Business is strong in all the three markets. Finally I shall give you the details on our share buybacks, but let me emphasis this, there will be a lot of buying in the fourth quarter. We will be very aggressive in returning value to our shareholders. Goldman will be buying the shares that they will borrow to effectuate accelerated share buybacks. We have been working on the other 5 million as well. I am sure this is well understood so listen to what Steve has to say.
Steven Rossi, CFO and Sr. VP
In September when we released our August numbers, I had a statement in the release, and I would like to read it to you. That on a continuing operations basis, excluding the favorable resolution of prior years’ tax issues, including our newly acquired newspapers, earnings per share in the fourth quarter will show growth. I feel very comfortable with that, what that would mean is that we would have to do better than the $1.60 a share, which would be ’04 number. I think that your consensus projection of a $1.25 per share is in the ballpark of where we will end up. Now here is Art.
Art Brisbane, Senior Vice President
Thank you Tony. Good afternoon. Let me start with retails and with retail and with categories. As you said that for the group as a whole excluding the acquired newspapers, retails for the third quarter was up 1%. The Metro group, which includes our 9 largest newspapers, their category was up to 1.1%. We can see the large market dictate the whole. Department stores, which account for 13.5% of our retail business was down 3.9% in the quarter. Federated was down modestly and Dillard’s was down in the double digits. Old and Bloomingdale’s were both up. I know there is particular interest in Federated May. For the quarter ending by the combined retail it was down about 6%. Federated a little less May a little more. As you know the one KR market affected by this merger is Philadelphia. There are 31 Federated May stores in total in the greater Philadelphia region. I don’t know whether some will be closed, or if that occurs what other chains such as _____ might pickup the space. While we expect to lose some advertising in the coming year because of the merger, it’s too soon to know the dimension. Our best estimate that such a loss could amount to be maybe 0.2% of Knight Ridder’s total advertising. Electronics which accounts for 6.3% retail was down in the high single digits, several large accounts contributing; however, Circuit City and Radio Shack were up. Grocery and auto supplies account for approximately 4% of retail were both down. However most other categories were up and that includes general merchandise with increases from K-mart, Sears, Target and Wal-Mart. Also home furnishing, drugstores were healthy 7.7% and home improvement office supplies, sporting goods and apparel.
International, most of the large categories were down. Telecom was down modestly, computers were down more subsequently, auto was off 6.4% primarily driven by 50% drop in business. Gannett was up by 1.1%. Daimler Chrysler and Nissan both showed strong gains, entertainment was down in the mid 2s with many, not all of the movie studios showing decline. Airline advertising continued to reflect the challenges in that industry, one real bright thought is financial adverting, up almost 110%. We then classified real estate and employment both remained strong so I won’t dwell on them, classified auto without the acquired newspapers was down 10.8%; however, comparison is due even in the fourth quarter, was down 6.0% last year. So I am guardedly optimistic for the coming quarter. I want make a comment about our comparison, excluding the newly acquired properties. This is specifically to September performance. This September, Knight Ridder reported a total advertising gain of 5.8%, excluding newly acquired properties, however, that gain was 2.2% total advertising. Retail excluding the new properties 2.0% National was 0.5%, classifieds was 3.1%. Now here is Hillary.
Hilary Schneider, Senior Vice President
Thanks Art. Let me follow up by starting with Digital. Knight Ridder’s online advertising revenue for third quarter of 2005 was $41.3 million, an increase of $14.5 million or 53.8% over the third quarter of 2004. Including the recent acquisition of Boise, Olympia and Bellingham. Growth over the prior third quarter was 51.9%. For the date adverting revenue was $115.3 million, an increase of 54.4 % over the prior year.
The increase in revenue was driven by strong growth across all key revenue categories Our largest revenue category was particularly strong with revenue totaling $22 million in the third quarter, 70% higher than the third quarter of last year. The growth in recruitment was a result of increased sales volume and 30 day job posting and higher average selling prices, testing our efforts to better monetize career builders leadership with online recruitment.
On the audience front, our focus on increasing the level of engagement with our local unique audience those most valued by our local advertisers has resulted in an increase in local unique visitors to our top nine sites of 44% comparing the July to August 2005 average the same period in 2004. Additionally, our overall audience averaged 10.2 million unique visitors in the third quarter of 2005, an increase of 13% over the prior year. Real Cities, the national sales network of local news and information sites we manage averaged 27.5 million unique visitors, an increase of 20% over Q3 2004 with a 19.7% national reach, Real Cities is the number one network for news, information and current events in the nation.
Career Builder Network reported revenue of $133.2 million in the third quarter of 2005, an increase of 72% over the third quarter of 2004. Career Builder’s traffic averaged 51.1 million unique, an increase of 20% over Q3 of ’04 making a first in Career Related traffic according to Media Metric. Career Builder maintained its leadership over Monster in job listings in the third quarter of 2005. Overall, we are very pleased with Knight Ridder’s online results. And if I might add just a few words about our targeted publications effort. These use of the term targeted publications, covers a broad range of products.
Outside vertical publication, employment, real estate and cars categories and lifestyle magazines. Free newspapers suburban and weekly newspapers and shoppers. This year we have launched 50 new titles to make three acquisition, we will announce another latest today and one more is pending. Classified vertical pubs lifestyle magazine taken together are growing at a rate in excess of 40%. The daily news groups or three newspapers in the bay area are growing at a 10% on the proforma basis. We are very pleased with our progress in this arena. Let me remind you these targeted publications and our unduplicated reach in our market, means of portfolio products we can effectively sell. I will now turn it over to Steve.
Steven Rossi, CFO and Sr. VP
Thanks Hilary and good afternoon. I have just a few additional comments about the numbers. Capital expenditures in the third quarter were about $25.7 million, total capital spending in 2005 is expected to drop from $150 million last year to about $111 million this year. As you know, we are building a news production facility in Kansas City, much of the cost of that project fell into 2004. On the cost side excluding our acquired newspapers and severance expense in Philadelphia and San Jose, wages and benefits were up by 4.9% of which wages were up about 2.2% and benefits were up 15.8%.
Increased pension expense represents about two thirds of that variance, healthcare is responsible for the other third. Healthcare was up about $2.2 million this quarter, entirely due to last years recognition of favorable healthcare cost trends in the third quarter. Last year we had better than expected plan results up to that point. We will be going against a more normal level of expense in the fourth quarter. And excluding our three acquired newspapers, we expect wages and benefits to be up less than 2% in the fourth quarter. Our equity line performance was about $3.7 million better than last year, principally as a result of improved earnings at carrier builder, Seattle Times and at our news print mills. At the expense stock options the cost would have been $0.5 per share for the quarter. And we will begin expensing options in 2006. The continuing operations raises our tax rate for the quarter at 36.4%. We benefited from the favorable resolution of prior year tax issues, which reduced tax expense by $1.2 million excluding any adjustments we would expect our weighted average tax rate be 37.6%. On an update on our real estate transaction, as you know we have signed an agreement of sale in Miami which should net about $125 million in after-tax proceeds. Environmental testing has been completed and an environmental remediation plan has been approved. We expect closing on the transaction to occur in the first half of 2006.
During the quarter we announced our plans to repurchase 10 million shares over a 6 to 9 month time frame. In the third quarter we repurchased approximately 1.5 million shares in the open market and we repurchased 5 million shares in an accelerated share buyback agreement with Goldman Sachs. The agreement allowed us to repurchase the shares immediately from Goldman Sachs. If Goldman purchasing the shares in the open market over the next several months, they began purchasing the shares in late September, we expect them to be completed by year end, as we said in the release, the average price per share at which we settle with Goldman Sachs for the 5 million share repurchase, is the ultimate average cost to us to buy back the shares will be the approximate average share price for the period over which the repurchases take place. Based on where our stock has been trading over the past months we would have a significant refund from Goldman Sachs. In addition we continue to buyback shares in the open market. We expect the open market portion of our announced share buyback, that is the other 5 million shares to be completed in the first quarter of 2006, now back to Tony.
Tony: Okay, now we are ready for your questions.
On to Q&A.
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