Full Transcript of Knight Ridder's 3Q05 Conference Call -- Q&A (KRI)

Here’s the entire text of the Q&A from Knight Ridder's (ticker: KRI) Q3 2005 conference call. The prepared remarks are 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.

[Operator]:

Your first question comes from Douglas Arthur with Morgan Stanley.

Q: Yes Tony you are really showing pretty strong ad revenue growth, from a lot of your key markets right now, even San Jose is turning up pretty nicely, so I guess the question is Philadelphia and Kansas City remain kind of the burdens on the overall portfolio and you’ve mentioned the retail issue with Philadelphia and I am wondering either you or Art can expand on how you are going to turn that. Thanks.

A: I will be happy to tackle that one Doug. You’re correct in pointing to Philadelphia principally and to somewhat lesser extent at Kansas City. Philadelphia the problem is spread across a number of categories, no doubt you are right, departments stores are a significant factor and has been through the year and until we really resolve through the merger itself, it will be difficult to notice the full impact of Federated May merger. Dillard’s has been hit hard also in a number of national categories, harder than other sectors, telecom, airlines, movies, our down performance in the computer categories is the entirety attributable to the share markets and of course National Auto as well. We have made a major effort in Philadelphia to strengthen the advertising sales efforts and I will much happy to be able to report that we are showing the result of that time factors that during the lag as we develop that effort. But we do have out of the top four positions in the advertising position there three are new players. I’ve mentioned it before, I will not go into too much detail. But we are doing a number of other things as well to drive advertising results in Philadelphia. We are focusing on the classified categories adding volume, sales pressure in all three categories, but we are adding parties in our retail advertising category and particularly new zoning efforts and news products to attempt strength, not only the large categories, but also small advertising within the Philadelphia market. We’ve increased our zoning particularly to start as the forecast. One of the important things that we are doing at Philadelphia is that we are trying to build our distribution of advertising throughout the non-subscriber component of the measure area there. We have a very good platform for that, in our trend shopper publication has reached small advertisers and they enable us to deliver free time advertising. Expanding the footprints of trends consistently through this year, and by this time next year we’ll have added almost 200,000 households the footprints which was approximately 800,000 prior to reaching that additional number. We are also investing in capacity and production capacity in Philadelphia to grow these peripheral advertising accounts.

We have invested in equipment, software and in sales pressure, those are the things we trying to do; we do expect to see results but we are facing a fairly tough quarter in Philadelphia principally because last year we earned $2.5 million, Pennsylvania treasury ad spend, it is just not going to recur.

Kansas City just to give them little less than on that; but Kansas City has had something of a perfect storm in that it did enjoy significant ramp up in ’04, in particular with the home furnishing category. Rapid finishing came into the market, this year has been about a shakeout. Nebraska has flattened, number of accounts have gone out of business, actually it is a major factor in shakeout. It had other out of business account so it’s been tough in Kansas City. For reasons that are not entirely clear, the telecom consolidation adversely or disproportionately affected Kansas city. However, we do see that trend turning Kansas City doesn’t stay down long as it is a good solid growth market and we expect to see improvement performance there certainly in the next twelve months.

Q: That’s a great answer and just as a followup I mean all else being equal would you; is it realistic to expect Philadelphia to start showing some positive momentum by the second half of ’06

A: I would say absolutely, yes if we don’t see that I would be deeply disappointed Doug. We have really put a lot of pressure there, the publisher there is under a lot of pressure and Knight Ridder corporate is very actively involved in and we expect to see that turnaround certainly by the half of next year.

Q: How effective, Art sounded as though its early next week.

A: I’m buying a small apartment there Doug.

Q: That’s right, thanks a lot.

[Operator]

Our next question comes from Craig Huber with Lehman brothers.

Q: Good morning, just a few questions, can you just give us the percent change from movie advertising and telecom in the quarter, also your pre-prints, what percent was that up in the quarter, and then lastly, your non-daily revenues what the annual run rate on those right now, please thanks.

A: It’s only due to the telecom and movies and pre-prints, telecom for the quarter was down 2.5%, movies down 68.3%, and then, pre-prints were up 3.2%. I’m sorry what was the second half of the question?

Q: Yeah, your non-daily publication, we have been talking a lot about recently, what’s your annual revenue run rate there please?

A: Our complete pocket of other publication, targeted publishing is at about up $210 million.

Q: Is it fair to say if you do the numbers, if you take out; your internet operations you take out this target publication that your daily newspapers for the quarter were down; half a percent give or take?

A: Ad revenue?

Q: Ad revenues yeah.

A: Yes that would be fair.

Q: Okay and then lastly…

A: That will be down maybe a little more than half percent.

Q: Okay Tony lastly have you given any thought over the years to divesting your Philadelphia newspaper given the big drag it is to earnings and the frustrations that is entailing you and your management?

A: If you ask the question have we thought about divesting? No we have not and would not, we have no intention of doing that, cause we see Philadelphia very different from Detroit where we obviously own 50% and we were not running the business there we think long term Philadelphia is a very good market and we anticipate doing much better in future.

Q: Okay great thank you

[Operator]:

Our next question comes from John Xenedas with Bank of America Securities.

Q: Hi good morning, a couple of questions. First I think you have been seeing some pressure on rates earlier in the year on the print side has not changed much into the third quarter and can you also talk about what of kind of rating prices you are getting on the online side.

A: Let me talk about the online side. In online of the growth that your seeing, I would say that it is very side vertical. I would say about 60% of the recruitment growth is from rate increases and the other categories would be less of a percentage.

Q: And are you increasing rates multiple times a year _____.

A: In general we’ve been doing one rate increase a year, but we opportunistically will take rate increases as we have potential, and we do it on a market-by-market basis

Q: Thanks on the print side

A: On the print side, we certainly plan rate increases on a once a year basis and we expect they should be the same kind of rate increases that we saw in the recent years. So we don’t see any change there. Certainly in the categories where we have seen substantial online growth auto being example, to some extent recruitment, we have seen some slippage on the print rate side, but it has been more than offset where with the performance that were getting on the online side.

Q: Okay and just to wrap up, how do think your papers performed in Philadelphia and Kansas City relative to the overall advertising market there.

A: It’s pretty hard to tell on a run rates, contemporaneous basis. We just do not get quality information on market share, just close to that point in time. However I’ll say this that we know that in Philadelphia, because we have relationships with broadcast units there, they have experiencing significant down performance in their advertising. So I can tell you the Philadelphia the market itself is fairly consistent with what we are seeing in our newspaper

Q: Thanks a lot.

A: Thanks.

[Operator]:

Our next question comes from Lauren Fyne with Merrill Lynch.

Q: Hi there thank you. A couple of quick questions. One, could you just give us sense on what you are seeing in October right now in terms of newspaper ad trends and what you might expected in the fourth quarter relative to the third quarter in terms of rate of growth, and then also I apologize if you already quantified this, but I don’t think you did. Did you quantify the expected cost saving from the lay-off from San Jose?

A: That’s a little difficult to do. The lay-offs are in progress at this time and the period during which _____ buyout has not ended, so a little bit estimated I can tell you our severance cost that we recognized in the third quarter was 8.6 million and we certainly expect to outperform that number substantially next year with the savings in those newspapers, but it is 152 people that is what we are talking about and San Jose and Philadelphia have very high re-scale so. It’s a big number until we now exactly who’s going and if they were lower scale or how senior they were. We will not have the exact number; its a big number how run rate In October I think its really to early to give you exactly.

Q: If it is starting out better than or worse than September, I mean just an early read on it?

A: I think it’s really too early to get the forecast on that, I mean, I have to serialize the quarter, but I think its really too early, anybody want to add something to that.

A: The only thing I would say is that automotive continues to trend it out in the same vicinity of where it has been trending.

Q: Okay, retail in particular was what I was wondering about. One of your peers had indicated they had seen little bit better September numbers and then it again weakened again going into October and I didn’t know if you have experienced anything like that?

A: I have been getting mixed results across the market and one of the thing that makes it difficult to _____.

Q: Okay, Thank you.

A: I don’t know how helpful we were, or weren’t.

Q: You did something, thanks.

[Operator]:

Your next question comes from Paul Ginochia with Duestche Bank.

Q: Hi, thank you, just two quick questions. When do you cycle through the lightweight newsprint benefits? How many more quarters of that we are going to see, and in second the papers you picked up in the Northwest, are you feeling better about what’s going to happen in Seattle, I know that your partner there has _____. What do you think your end game is there? Thank you.

A: I think on Newsprint Paul that we cycle through most of the lightweight conversion, so I don’t think you’ll see much going into the fourth quarter in the next year. We will have further savings as the Kansas City plan comes up, because they are going to be on a different web with a different cutoff so there will be more savings there, but there, as I’m on and on further out of the future Port Wayne will be converting over, there is a new press operations coming up there, but on the other properties most of the newsprint savings has been achieved with respect to lightweight.

A: What we are looking is 48 inch and as a matter of fact we are going to get 48 inch with _____ for port Wayne. So we are looking at that issue.

A: And the Seattle question, the end game, I don’t know, Seattle is showing some improvement this year, over the last year, but I expect that all of the lawsuits will get settled. I think we would see settlement of that, you never know in Seattle, there are a lot of lawsuits and there are a lot of moving pieces. We have a Seattle Times court hearing coming up next week, as a matter of fact we will learn a lot more out of that, what’s going on, and the status of the lawsuits and the status of all the legal action.

Q: Okay, thanks.

[Operator]:

Your next question comes from Brian Shipman with EDS.

Q: Thanks, wondering if you could discuss your expectations for circulation in the upcoming AVC audit, and related with the decline you’ve reported for circulation revenues is in the quarter, how much of that is volume driven versus discounting, and where do you expect circulation revenues to go in the fourth quarter? Thank you.

A: Let me tee that one up Brain. Circulation revenue excluding our newly acquired newspapers, we expect to complete the year down in this mid two’s somewhere between the 2.3 and 2.8, as far as the impact of discounting and volume reduction it spread across the two certainly we’re seeing some fairly significant increases in discounting. So that is definitely a part of the equation, part of what we’re facing on circulation revenues.

Q: Any markets of particular note that you are having a little more difficulty with?

A: Well saying in general, we face more pressure in the larger Metro market, as a general statement, that would be what you see in discounting numbers if you look market to market. As far as the publishers statement the numbers will be very close to what our Q3 numbers are, we expect to end Q3 down 3.2% daily, and Sunday down 3.4%.

A: We think circulation revenue will be flat for the quarter and the fourth quarter something like that.

A: Yeah it will be flattish including our new acquisitions.

Q: Okay, thank you.

A: I am trying to indicate that at the beginning, excluding the new properties Brian we’re looking at circulation revenues in the year to be down between 2.3% and 2.8% a year.

[Operator]:

Your next question comes from Fredrick Serby with with JP Morgan.

Q: Thanks, Tony I wondered with all of the talk about the share shifts out of print on the Auto side and the real weakness we are seeing the numbers, can you try and just aggregate in your sense of how much of this is just weakening macro trend with automotive or a longer term shift out of interactive and on a segway related questions Cars.com, your property, what are they seeing in terms of that, the dealers who are only going with interactive now and completely showing trends, and what kind of growth you are getting there? Thank you.

A: Let me start with the online side, we seeing nice growth in automotive but in no way are automotive dealers spending anywhere close to a significant portion of their total media spend in online, its still in the very low percentages, overall growing nicely, but I think there is bigger indicator in terms of what happening, its really a function of what’s happening to those on the market place, our unit sales could have been lackluster, you’ve got increasing competition with the consolidation, and I think what you are seeing here at least is to some extent cyclical, to a much lesser percent than an explanation that says that the share shifted online..

A: We’ve typically done better with domestic automotive dealers than we have with the imported dealers and they are struggling, and so, that’s a factor and their business is just not very good. There are some signs that next year could be better year for us in that regard, but I think its still early to count on that.

Q: One follow on question from the big picture prospective, sometimes you are caught in the details, but a lot of concern or noise was made about the fact that you and one of your competitors as well up in the peer group had decided to cut the editorial staff, do you think there is a re-think in terms of the newspaper model that will continue, and how much you really can support at this point from an editorial prospective?

A: Well, I think that after we have these staff reduction, I think we will still be generously staffed, so Philadelphia Inquirer will have 425 people in their newsroom, and the Philadelphia Daily News will have 100 to 110 something like that. So between then we will have 535 right, I think that’s still a great generous newsroom staff, and San Jose is to wind up about 280 and I think now that’s a little more than one per thousand so, I think that we were overstaffed in those two places, and I think this is just a bringing them back into line.

Q: Well Thank you.

[Operator]:

Your next question comes from Michael Kopinsky with AG Edwards & Son.

Q: Thanks, and I was wondering, you may have already addressed this, but I was wondering if you have any thoughts about the outlook financial advertising in the fourth quarter, any particular categories that appear promising. Secondly is there anything unique about the competitive marketplace in Philadelphia and even possibly Kansas City for that matter that would account for the weakness there, and in particular you had bought a few suburban publications to possibly flank your papers in Philadelphia and it seems that maybe further acquisitions there might be a little tough. Can you talk about what are your other options that you have to support your paper there, and possibly improve its competitive position, and any feeling on how the suburban Philadelphia papers are doing?

A: Philadelphia is unique among our markets, in the competitive landscape and there are challenges there that are different than we faced in some of our other markets. Just a brief snapshot, the biggest difference is that this prime area has been largest, incorporating a number of daily competitors strung around the metro in the suburban communities. Our strategy for addressing that has really been a combination of trying to tailor our editorial strategy to cover to the local communities and then marry that with strong advertising programs in the smaller advertising. There is a similar strategy and it’s been tough _____. The key things for us it its new and I think helps us gain market share, is what I mentioned there when I responded earlier, and that is in the expansion of our shopper network into those communities. The matter displaced where we are making a substantial investment at this time, that shopper network incorporates some of those acquisitions you were referring to. Essentially that’s the tool that we are looking to grow market share to stamp our footprint to counter the existing growth in competition. So in my respect Philadelphia is more challenging, more complex, as it has an entirely different competitive landscape.

Kansas City, I believe is different, our competitive position there is extremely strong. There are not competitive dailies, we own a number of the suburban weeklies and one suburban daily there. So what we are experiencing in Kansas city I think it’s mostly attributable to the cost in the economic progresses of that metro. And I would associate some of that with the sequence of the events of experience, where we saw sprint again a major reduction, it’s a large component community, major reduction following the WorldCom merger. And now with the merger a lot of them certainly in further reduction and _____.

Q: On the national advertising outlook for Q4, I think what we would say is you’ve very little visibility. A couple of things I would just like to know, I remember Art mentioned when he talked about Philadelphia that we had a $2.5 million spend from the Philadelphia Treasury last year, but it’s not going to repeat. I think in automotives it is too early to tell, automotive inventories are low averages but that’s because of the employee incentive programs but that’s not true for all the manufacturers, its extensive for manufactures, need to bringing down their inventories to meet the spend in the fourth quarter, but once again we are not here to predict that, I think in telecom, it continues to lag due to the industry consolidation, we’ve seen combined signals from those that remain out there competing, but hard to know whether those trends will begin in Q4 are lag in Q1.

Q: Great thank you for the color, I really appreciate that.

[Operator]:

At this time I would like to remind everyone, if you would like to ask a question press “*