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Knight Ridder (KRI)

Q4 2005 Earnings Conference Call

January 31st 2006, 2:00 PM.

Executives:

Polk Laffoon, Vice President Corporate Relations

Tony Ridder, Chairman and Chief Executive Officer

Art Brisbane, Senior Vice President

Hilary Schneider, Senior Vice President

Steve Rossi, Senior Vice President and Chief Financial Officer

Analysts:

Lauren Fine, Merrill Lynch

Alexia Quadrani, Bear Stearns

John Janedis, Banc of America Securities

Craig Huber, Lehman Brothers

Robert Shipman, Credit Suisse

Fred Searby, JP Morgan Chase

Christa Quarles, Thomas Weisel Partners

Paul Ginocchio, Deutsche Bank

Douglas Arthur, Morgan Stanley

Steven Barlow, Prudential Equity Group

Michael Kupinski, AG Edwards

Peter Appert, Goldman Sachs

Ed Atorino, Benchmark Investment Company

Presentation

Operator

Good afternoon. My name is Dennis, and I will be your conference operator today. At this time I would like to welcome everyone to the Knight-Ridder, Incorporated quarter one earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two. I will now turn the call over to Polk Laffoon. Please go ahead.

Polk Laffoon, Vice President Corporate Relations

Good morning all and thank you, morning here afternoon there. Thank you for joining us for the Knight-Ridder fourth quarter conference call. We will have speaking today Tony Ridder, the Chairman and CEO, Steve Rossi, Chief Financial Officer and Senior Vice President, and both Art Brisbane and Hilary Schneider, Senior Vice Presidents. Before we begin, let me say that certain statements that we may say could be forward-looking. They will be based on management's current knowledge of factors affecting our business. Actual results could differ materially from those currently anticipated depending upon but not limited to the effects of interest rate, national and local economies on revenue, the evolution of the Internet, unforseen changes in the price of newsprint, negotiations with labor unions. Here's Tony.

Tony Ridder, Chairman and Chief Executive Officer

Good afternoon, everybody. In getting underway, let me say that we won't be commenting on the process of seeking strategic options currently underway at Knight-Ridder. As you all understand it takes time and, as we have said in the past, we do not intend to talk about either the process or the participants while it is ongoing.

We announced this morning $1.24 per diluted share in the fourth quarter versus $1.38 in the fourth quarter of last year. On an apples-to-apples basis, however, we see the quarter as dead even at $1.16 each year.

So here's how we get there. For 2004 remove $0.13 for discontinued operations in Detroit and Tallahassee, and another $0.09 for the favorable resolution of certain prior year's tax matters, which was an issue in the fourth quarter of 2004 but not in the same period of 2005. So that brings you to $1.16 for 2004. For 2005 take our $1.24 and remove approximately $0.08 for the three quarters we acquired in August, and those papers are in Boise, Olympia, and Bellingham. So you're now at $1.16 for each year. In 2005, working off that $1.16, we had a gain on the Seattle land sale of $0.12, which equaled a one-time expense items, that was severance in San Jose and Philadelphia of approximately 150 people. It was costs from the exploration of our strategic alternatives. That would be legal fees, investment banking fees, and finally, in Kansas City, our contractor went bankrupt after we had given him what was equal to $0.02 that he failed to pay to subcontractors, which we, in turn, then have to paying again. So since we can only capitalize those expenses once, we booked the $0.02 in the fourth quarter. That's how we get to $1.16 each year.

For the year, the GAAP numbers are $6.52 in 2005 versus $4.13 in 2004. But again, we see it differently. When you remove the various gains and the one-time events, the apples-to-apples comparisons are $3.35 for this year versus $3.52 for last year. Steve Rossi later will take you through how we got there the same way I did for the fourth quarter.

As some of our peers have indicated, the quarter was a tough one, with December particularly so. Total ad revenue in the quarter was down 0.2 of 1% with retail down 1.1%, national down 6.8%, and classified up 4.8%. December retail fell 3.5% after a year that was up 2.4% through September, with another 2.5% increase in November. The primary cause of the decline was department stores, which, in the large markets, were down 12.1%. For the year they were down 6.4%. National advertising, which was not much help during the earlier part of the year, was especially soft in the fourth quarter.

That leaves classified, another story you all know well. Help wanted and real estate were consistently strong all year, with the fourth quarter the best. Auto was consistently weak all year, with the fourth quarter the worst. In the quarter help wanted was up 20.9%, real estate was up 13.3%, and auto was down 16.6%. For December alone, help wanted was up 23.5%, real estate was up 13.7%, and auto was down 17.9%.

Including the cost for severance, the evaluation of our strategic alternatives, and the Austin bankruptcy I mentioned earlier in Kansas City, but still pro forma for the acquired newspapers, costs for the quarter were up, this is including those one-time costs, were up 3.3% and for the year 3.5%. When you exclude those three items that I just noted and pro forma for acquired newspapers, costs for the quarter were up 1%, exactly what we predicted on the third quarter earnings call. On the same basis, costs were up 2.6% for the year. We are pleased with this performance.

In recent years many of you have commented favorably on cost control at Knight-Ridder. I believe the record for 2005 is very much in line with that reputation.

Equally deserving of praise is the growth we experienced in both our digital and targeted print operations. Once again, each were strong all year with digital revenue growing at better than 50% for both the quarter and the year. Revenue in target publications is up in the double digits, acquisitions and launches were rapid fire through 2005. Combining the reach of our digital and target products with the reach of our core newspapers, we achieved coverage of between two-thirds and three-quarters of the markets in which we operate. In both digital and target pubs, we have set an ambitious pace for the new year. Hilary will discuss this and elaborate with you.

So looking ahead for the year, we think ad revenue will be up in the 3 to 4% range, but with more growth in the second half than the first. We anticipate profit improvement in the mid to high single digits with tight expense control throughout. And since Lauren Fine will ask this question, let me say now that January ad revenue growth does look better than December. It's back in positive territory. So now let me turn this over to Art.

Art Brisbane, Senior Vice President

Good afternoon. Tony noted that department store decline for both the quarter and the year. Department stores accounted for just over 15% of our retail volume in the quarter and just under 14% for the year. In Philadelphia, where both Federated and May operate under two brand names, Macy's and Strawbridge, Macy's was down 9% for the quarter and 2% for the year. May was down 17% for the quarter and 18% for the year. In Miami, Burdines-Macy's, our largest department store advertiser in that market, was down 11% for the quarter and 8.1% for the year. In Kansas City, the Jones store, owned by May, was down 10% for both the quarter and the year. Also in the quarter, Dillard's, which is in five of our largest markets, was down 34%. It was down 22% for the year.

Moving on to general merchandise, which includes Wal-Mart, Target, and Sears, among others, it was down 1% for the quarter but up 2% for the year in the large markets. With the merger of Sears/K-Mart now complete, it's good to note that Sears' spending was flat for the year and K-Mart was actually up about 2%. We're pleased with this performance and have positive indicators of it continuing. Target, the next biggest player in the category, was up 11% for the quarter and 7% for the year. Meanwhile, Wal-Mart was up more than 20% for the quarter and almost 16% for the year. A very good story, more over, were the small and mid-size retailers that together account for more than 50% of our metro business. This group was up 3% for both the quarter and the year. A gratifying outcome for the considerable focus we've placed on building this business. Home improvement, one of the larger categories, was up 22% in the quarter and 12% for the year. Toys and crafts up 3% for the quarter, 7% for the year. Auto supplies was up 13% for the quarter, 2% for the year. Sporting goods, too, was up modestly for both periods.

Some other categories showed mixed results. Although overall home electronics was down, Circuit City was up 16.8% for the quarter and 10% for the year. Radio Shack was down in the quarter but up 14% plus for the year. BrandsMart in Miami was up slightly for the quarter and slightly down for the year. Other large dealers, Best Buy, DirecTV, Fry's and Ultimate Electronics was soft. Grocery, down 10% for the quarter and 7% for the year, primarily reflected drops in Winn-Dixie in Charlotte, Kroger in Fort Worth, Rainbow Foods in St. Paul, and Albertsons's in Philadelphia. Most foods in Charlotte was a big winner for the year, with spending up 40% in the quarter and up more than 100% to just over 1 million for the year. Now I'm going to turn it over to Hilary.

Hilary Schneider, Senior Vice President

Thanks, Art. In national, as you know, positive stories were scarce, in part because comparisons with 2004 Q4 were particularly tough at up 9.4%. Across our nine largest markets, telecommunications and autos, the two largest categories, were down 15% and 17% respectively for the quarter. Telecom, down 4% for the year, has been down all along but the drop in auto was new. For the year auto was still up 1%. Two bright spots were financials and preprint. Financial in the major markets combined went from 1.2 million to 6.6 million in the quarter. A surge in spending by American Express across several markets underwrote the rise. Financial was up 148% for the year. Pre prints, the other bright spot, were up for the year, 5% in the major markets combined, but they were down 2% in the quarter.

In classified, the patterns didn't change. The degrees of difference intensified. Employment had its best quarter of the year, up 21% with mid-teens the other nine months. The metro market as a group were up 16% and city markets as a group were up 32%. In real-estate, the metro group was up 16% for the quarter, in step all year. The city group was up 4%, about in line with the earlier part of the year. Auto, alas, did not improve. On the third quarter call we had said we were guardedly optimistic, given easing comparisons. In fact, auto was down 17% versus 10% for the year as a whole. In retrospect, we should have been more guarded and less optimistic.

Tony mentioned growth in our targeted publications. In this category we include community newspapers, consumer magazines, and Spanish language publications. In our top nine markets, where we have worked to grow both life style and classified vertical products, revenue for existing and newly launched titles is up about 38% for the year. This includes launches of 18 metro consumer magazine titles, two metro Spanish language titles and two community newspapers. If you add in acquisitions and through the year, we did nine deals with a total of 24 titles. We were up 54% for the year. This would include, by the way, a free daily from the San Francisco bay area. All together, progress is good at every level, launches, acquisitions, and growing the existing core. It's a very strong story.

Now turning to digital. Knight-Ridder's on-line advertising revenue for the fourth quarter of 2005 was 45.5 million, an increase of 16.2 million or 55.4% over the pro forma fourth quarter of 2004, adjusted to include the results of the recent acquisition. Pro forma 2005 advertising revenue was 164.5 million, an increase of 54.5% over 2004 results. The increase in revenue was driven by strong growth across all key revenue categories. Recruitment, our largest revenue category, was particularly strong in the fourth quarter of 2005, with revenue totaling 23.4 million, 76% higher than in the fourth quarter of last year. On the audience front, Knight-Ridder's on-line audience averaged 9.7 million unique visitors in the fourth quarter of 2005, an increase of 22% over fourth quarter of '04, adjusted for recent acquisitions and divestitures.

Real Cities, the national sales network of local news and information sites we manage, averaged 27.6 million unique visitors, an increase of 20% over Q4 '04. With a 17.4% national reach, Real Cities is the number one network of news information and current events site in the nation. The CareerBuilder network recorded revenue of 133.5 million in the fourth quarter of '05, an increase of 67% over the fourth quarter of '04. For the year, CareerBuilder network revenue totaled 495 million, an increase of 75% over'05. CareerBuilder's traffic averaged 15.3 million unique visitors in Q4 '05, ranking it first in career related traffic, according to Media Metrix. CareerBuilder maintained its leadership over Monster in both audience and job listings in the fourth quarter of '05. Overall, we are very pleased with these results and I will now turn it over to Steve.

Steve Rossi, Senior Vice President and Chief Financial Officer

Thanks, Hilary. As Tony said, I'll just give you a recap on the full numbers on EPS for the year. Starting with 2004, last year we reported GAAP EPS of $4.13. You have to remove from that $0.35 for discontinued operations and $0.26 for the resolution of prior year's tax issues. So that gets to you $3.52. This number agrees with First Call's number, so I don't think there's any confusion there. For 2005, our reported GAAP number was $6.52 per share. You have to remove from that discontinued operations of $0.12 and gain on the sale of Detroit and Tallahassee of $2.87. That brings you to continued operations earnings per share of $3.53. Tony mentioned that we view it as $3.35, so here's how we get from $3.53 down to the $3.35. You remove $0.16 of resolution of prior year's tax issues, which for us occurred in the first three-quarters of this year. There were none in the fourth quarter. The gain on the sale of the Seattle land of $0.11 per share, severance expense, primarily in San Jose and Philadelphia, $0.13 per share, costs for exploration of strategic alternatives $0.04, and again the Austin bankruptcy, $0.02 pre share. That gets you to $3.45. And we had a contribution of earnings from the acquisitions of Boise, Olympia, and Bellingham of $0.10 per share in the full year. So that brings to you $3.35 on an apples-to-apples basis with the $3.52 last year.

I just have a few additional comments about the numbers. I'll start with operating expenses, specifically with wages and benefits. On a pro forma basis, that is assuming the newly acquired Boise, Olympia, and Bellingham properties were included in the fourth quarter results in both years, our wages and benefits, excluding severance in Philadelphia and San Jose, were actually down 0.3 of 1%. Wages were up 0.5% and benefits were down 3.5%. That's really due to the fact that healthcare expenses were down in the quarter, which more than offset an increase in pension expense. Getting to the other major lines of expense for us, newsprint, ink, and supplements increased 4.7% for the quarter. The newsprint price per ton was up about 11.5% and consumption was down 7%. On a pro forma basis, that is assuming Boise, Olympia and Bellingham in both quarters, the increase in the price per ton wouldn't change, it was about 11.5%, but consumption was down 9%.

We reported other operating costs up 8.2% in the quarter. On a pro forma basis we would have been up 5.9%, excluding the one-time items that Tony mentioned, the exploration of strategic alternatives, the Austin bankruptcy, and severance, we were, pardon me, severance is not included there, and the Austin bankruptcy. Other operating costs were only up 2.5%. Our equity line performance includes $8.5 million of after-tax gain from the previously announced sale of land in Seattle. Excluding that gain, losses from equity investments actually increased by $1.6 million for the quarter due to lower earnings from our newsprint mill investments and from shop local. Our tax rate for the quarter was 34.6%, but that was distorted by the gain on the Seattle land on which taxes were paid by Seattle Times Company. So we actually receive a 80% exclusion on that gain and that distorts the tax rate to a lower level. Our weighted average tax rate, excluding any adjustments for the year, was 37.2%. And we expensed stock options, the cost for the quarter would have been $0.05 per share and it would have been $0.21 for the year.

We will begin expensing options in the first quarter of '06 and expect the cost for the whole year to be $0.22 per share. In the third quarter we announced our plans to repurchase 10 million shares of common stock. In the third quarter, approximately 6.5 million shares were repurchased. We repurchased another 893,000 shares in the fourth quarter, but we suspended open market purchases subsequent to our public announcement of exploration of strategic alternatives. So for the full year we repurchased a total of 10.4 million shares. We are still finalizing our CapEx numbers for 2005, but we expect to come in just under $100 million capital expenditures for the year. And we expect to see a reduction of 25 to $30 million in 2006. A large portion of this decline is due to the completion of our new production facility in Kansas City.

Finally, an update on our real-estate transaction in Miami. As you know, we have a signed agreement of sale which should net $125 million after tax. We expect to have final approval for our remediation plan in late February. We expect a complete remediation by the end of the second quarter and close on the sale in the third quarter of this year. Thank you and now back to Tony.

Tony Ridder, Chairman and Chief Executive Officer

Okay, we'd now be happy to take your questions. Are there any questions?

Questions & Answers

Operator

At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question is from the line of Lauren Fine with Merrill Lynch.

Q - Lauren Fine

I guess I should say I don't have any questions, since you answered it, but you didn't mention when you went through some of the big markets in the release, you didn't talk about how Miami performed in the quarter. And so I'm wondering, it had been pacing up 4 to 5%, so could you tell us how it did in the fourth quarter and how much of a hurricane impact you thought you had? Steve, I didn't know if you could give us some sense of what the tax rate might be for 2006. Then last question, the detail you gave on the department stores in some of the large markets was really helpful. What would you expect to see in 2006 among those large markets as well in terms of any changes you're seeing from Federated, Mays or any other of the department stores.

A - Tony Ridder

So why don't we do Miami first.

A - Hilary Schneider

Yes, why don't we start with Miami. Lauren, Miami in the fourth quarter had mixed results during the quarter but for the quarter it was down 3.5%. And the primary drivers of that decline year-over-year versus kind of the strength they had been seeing was really multiple. One was '04 of the previous year was exceptionally strong. It was up 12.6% in '04, and this is for December, for example. And what you had there was one-time events like store openings for Nordstrom's, then there was a casino that had opened. Also in December for Miami you had a shift of $2 million of custom publishing revenue that moved into '06 out of '05. The other thing that when you look at the overall revenue for Miami in that quarter, if you look at the impact of the hurricane, that was about 2.4 million on the quarter. And the last thing I would just point out, in terms of all the impacts in Miami in Q4, was in '04 you had a really strong political campaign because of how tight the presidential race was, and that's about another 1 million they were cycling.

A - Tony Ridder

Do you want to do department stores first?

A - Art Brisbane

Sure. As we mentioned, the fourth quarter was pretty tough for the department stores. Looking ahead, it's a little tough to get visibility over all on the category. We do know specifically, though, that with respect to the Federated-May merger, the impact is confined to our Philadelphia market and we see about 6.25 million worth of exposure in Philadelphia. In my remarks I did mention that Dillard's was down a fairly significant percentage in the fourth quarter and that's, no question about it, a real set-back. Part of what contributed there, though, was that the fourth quarter of '04, Dillard's outspent its prior year by a significant amount in a couple of our markets trying to make good on contracts, particularly in Fort Worth and, I believe, Kansas City as well. So we hope to see that even out some.

A - Tony Ridder

Steve, do you want to do the tax rate?

A - Steve Rossi

On the tax rate, Lauren, I think will be between 37 and 38, excluding any resolution of prior year's tax issues, which we would always single out anyway. But I think splitting the difference between 37 and 38 is probably a reasonable assumption.

Q - Lauren Fine

Great. Thanks. I guess I'll sneak in one last one. You said January was doing better than December. In which categories are you seeing the improvements?

A - Hilary Schneider

We're seeing……

A - Art Brisbane

I've got something on that.

A - Hilary Schneider

We've got retail that's ticking up nicely. I would say when you look at national, it's lackluster. Employment and real estate are both up very strong. What I would say about automotive is that, while it's still in the negative territory, it is materially better than the decline we saw in December. Great, thank you.

Operator

Your next question comes from the line of Alexia Quadrani with Bear Stearns.

Q - Alexia Quadrani

You mentioned a few reasons that we might see a pickup in advertising revenue growth in the second half of '06. If there's anything else that you haven't mentioned, if you could highlight what that might be just to see a nice pickup. Also, if you could talk about what type of ad rate hikes you're expecting in 2006 as well. And then specifically talking about Philadelphia, when you talk about a rebound in '06 in general performance, do you expect to see a better performance from Philadelphia as well and what would be driving that?

A - Art Brisbane

Let me start with Philadelphia, Alexia. I think on our last call we talked about a lot of the things that were happen in Philadelphia about which we feel quite good. But I think we were also careful to not predict an instant turn around in Philadelphia. We have substantially enhanced our advertising department there and we have a lot of new programs there, but I wouldn't look for an immediate turn around. We do see some positive things happening on the retail side, we believe, and principally we expect to see some growth in our small and mid-size accounts to offset what I mentioned earlier, which was the department store hit we will take. We looked at the national moderate. National was really a tough year in Philadelphia in '05. I honestly can't say that we saw that moderating taking place in January yet, so that remains to be seen. So we do have some very, very strong growth in real estate there and I think that we will see a moderating effect in auto. So those, I think, are the primary things that are driving what we hope to be a better performing year for Philly.

A - Hilary Schneider

In terms of the overall revenue trends rates in the back half of the year versus the first part of the year, the two primary differences that really in retail were cycling in first quarter, for example, the strongest ad revenues growth we had. Then the comps, again, and so it gives us more leeway. And then also reflects that in some of our markets we believe, take Miami for example, much of the consolidation is behind us. In automotive what we assume is that once again it's the comps that we're going against are much worse in the back half of the year, that we're able to show stronger performance.

Q - Alexia Quadrani

And on the advertising rate hikes?

A - Art Brisbane

Traditionally we try to take 3 to 4% ad rate hikes, but as you look at the complexity of the business as it's taken shape between the core product targeted on line, you see lot of mixing and matching on rate. In the course of '05, we saw total ROP staying very close to flat for the quarter. And for the year even slightly better than that, just 0.1% down. There's a lot of movement across the categories on that, retail being flattish, national as well. In the classified categories, while we saw rate erosion in auto and employment, we did see relatively strong on-line component there that are driving revenues.

A - Tony Ridder

But it's a change of mix and we're raising ad rates. It's not as if we're staying flat with ad rates. So they would typically be going up 3 to 4%, in that range somewhere.

Q - Alexia Quadrani

And just one last question on the auto classified. It's been a very weak area for the whole industry, obviously, and you did mention you're seeing a bit of a bounce back up in January, which is encouraging. But do you see those dollars really just reflective of the weakness in the dealership, or is it maybe some of those dollars are just moving to different mediums, maybe away from print, and that's what's causing some of this continual softness.

A - Hilary Schneider

I don't think there's any ambiguity in my mind that truly reflects the weakness that you are seeing in that category have across the country. J.D. Powers came out with numbers for the first two weeks of January which talked about the fact that the malaise continues in terms of units that are actually trading. The other thing is domestic dealers are clearly under pressure. When you look at media mix, I think it's a pretty interesting question. Even for the largest of the large, of the most consolidated automotive advertisers, the percent of their revenue which they're spending on Internet, which would be the newest entrant in that arena, is still in the single digits. So I think what you're seeing is just a cut in overall spending and you see that reflected in the national advertising that's happening across media as well as in what we see locally.

Q - Alexia Quadrani

Thank you very much.

Operator

Your next question is from the line of John Janedis with Banc of America Securities.

Q - John Janedis

One, can you expand a bit more on the rate issue? I know in the past you've talked about full run rates declining across all categories in '05, anywhere between, I think, maybe flat to maybe 3 or 4%. Can you give us the average full run rate for the fourth quarter and how that would relate to '06? And then quickly on EBITDA margins, I think your expenses, as you said, were up slightly on slightly lower revenues but your margins were down about 200 basis points. Is that because of Detroit coming out or is there something else there that I might be missing? Thank you.

A - Tony Ridder

We booked Detroit as, in affect it was 100% against our share of the operating profit in Detroit. But it is treated as other income, so we took it out of other income.

A - Steve Rossi

It affected the market.

A - Art Brisbane

With respect to full run rates for the quarter, in retail, rate was down 1.3%, full run. In national rate was up 1.9%, full run.

Q - John Janedis

Would you expect that to be similar in '06, then?

A - Art Brisbane

I would look for it to be similar, similar pattern.

A - Hilary Schneider

And, once again, that will vary by market, depending on the opportunities they have.

Q - John Janedis

Thank you.

Operator

The next question comes from the line of Craig Huber with Lehman Brothers.

Q - Craig Huber

Great, thanks for taking my questions. Can you talk briefly, if you would, why your circulation volume numbers we've seen in December statistics gotten worse here in the last couple of months versus the year-to-date numbers? And then also, your ad revenue growth for this last year was pro forma up 1.7%. I was wondering, roughly 15, 16 months ago, as you were looking into 2005, what your ad revenue assumptions were, what you were budgeting going into 2005? I'm sure it was up better than 1.7% pro forma. What category specifically was the shortfall? Thanks.

A - Art Brisbane

Let me start in with the circulation while the troops think about your question going back 16 months. It seems like a lifetime. Circulation Q4 copies were down more steeply versus the year trend, specifically daily copies down 4.2 and Sunday copies down 4.4. Various things contributing there were a steeper decline percentage-wise in NIE and other copies in the daily category. And a steeper decline in other in the Sunday category. So it reflects, on the one hand, the fact that we are focusing on the core circulation channels of home delivery and single copy. But an important factor in driving down even those core categories of home delivery and single copy, were selected price increases that we took in certain markets during the year. So those will drive volume down some. We try to be very judicious about it but there's no question that there is an impact on copies coming out of the pricing.

A - Hilary Schneider

And relative to the overall rate expectation 16 months ago, let me echo what Art said, which is that that really seems like a long time ago. I would say the two biggest things that happened in '05 that we did not anticipate, number one was national deterioration. If you went back to January and February, we were running up about 6% year-over-year, then the overall impact of telecom and automotive, that we talked about, really kicked in and we didn't even anticipate that. The second would really be, and the biggest, would be the downturn in automotive. And by frame of reference, in the first quarter we were running down mid-single digits in our automotive revenue. And that, as we mentioned, by the time we got to the fourth quarter, that was down 16.6%.

Q - Craig Huber

I'm sorry, I guess my point though is, in '06 you're looking for ad revenues up 3 to 4% pro forma. I've got to think, you're absolutely right, a lot has changed the last 16 months, but going into 2005 I would think you probably were budgeting higher than up 3 to 4%. What gives you confidence in those six things?

A - Tony Ridder

That's about what we were budgeting last year. That's not…….

Q - Craig Huber

It is what you were budgeting?

A - Hilary Schneider

Yes.

Q - Craig Huber

Okay. Then, okay. My last question, please. The reports we got a handful of months ago, the editorial staff reductions in San Jose and Philadelphia, you were going to take out 20 to 25% of those staffs, is that correct? And if so, is it already behind us? Will we see that benefit this new year on the cost front? Do you expect any hit on the circulation front/advertising front, if it's all true?

A - Hilary Schneider

So the total number of bodies that we took out in the fourth quarter were 150, as Tony mentioned, about 100 of that was in Philadelphia, 50 of it was in San Jose. I'll let Art talk about the Philadelphia piece. In San Jose we feel very comfortable that the majority of those were in the newsrooms and it really reflected a change of strategy. We eliminated Nuevo Mundo and we've moved to, as opposed to part one neighborhood section, the community newspaper strategy. And that's really where we took out the reporters and the news staff, so we're reflecting that change of strategy.

A - Art Brisbane

Then in Philadelphia, with the total of 100, all of those came out of the news operation. And, of course, we do have two newspapers there. We have the Inquirer and the Philadelphia Daily News, so 25 came out of the Daily News, 75 out of the Inquirer. I will say that even after the reduction of 100, we have 425 in those newsrooms and we feel that that's going to be…..

A - Tony Ridder

125 in the Inquirer, plus……

A - Art Brisbane

Plus 100 in the Daily News, thanks for catching that.

A - Tony Ridder

I think it's 125.

A - Art Brisbane

I think we came down. But we feel those are more than adequate numbers to perform the mission for us there in Philly, so we don't see the impact that you described.

A - Steve Rossi

And there are no further costs associated with those terminations. They're all booked in the fourth quarter and the third quarter of '05.

A - Tony Ridder

And the people are already left.

Q - Craig Huber

Great. Thank you very much.

Operator

Next question comes from the line of Robert Shipman with Credit Suisse.

Q - Robert Shipman

Good afternoon. When you guys announced in November the strategic alternative plans, it was clearly a focus on equity shareholder value. And since then, bonds have widened dramatically. Maybe you could just talk a little bit about how you see the balance sheet moving throughout this process, what sort of advice would you give to bond holders today. Thanks.

A - Steve Rossi

We're going to continue to operate as we are right now, so I don't see any major change in the significant change in our debt balance one way or the other. And obviously, a lot of this hinges on the outcome of the exploration of strategic alternatives, which we really can't comment on.

Q - Robert Shipman

Okay. Thank you.

Operator

Your next question comes from the line of Fred Searby with JP Morgan Chase.

Q - Fred Searby

Okay, thank you. I haven't spoken to you in a while. Couple questions. One, you've obviously been an aggressive buyer of your shares. As you consider your strategic alternatives, should we expect that you'll use free cash flow or continue to buy back shares aggressively? You made some small acquisitions, I think, roughly 24 small acquisitions last year. Is that something that's on hold as this process is ongoing? And then secondly, at San Jose, you saw a nice pickup. Are you seeing tech advertising? Is that what's driving it? Or is it just generically more on the classified side? Then finally, just a clarification, the auto pickup you're foreseeing, were you talking about national or classified or both? Thank you.

A - Steve Rossi

On share repurchases, as I said in my opening remarks, we suspended our open market purchases right after the announcement in November. It's not appropriate for us to be in the open market given what's going on. So any decision on that will have to be made after we know where we're headed. So we really can't predict on share repurchases.

A - Hilary Schneider

Let me pick up the San Jose question.

Q - Fred Searby

That's not baked into your guidance then, share repurchase. I think you guided for mid-single digit earnings per share growth in 2006.

A - Tony Ridder

What I said was mid to high single operating profit growth. I didn't give a number for EPS growth.

A - Hilary Schneider

For San Jose, they had a very strong quarter and that was really driven by retail, which was up 12.5%. That represents, let me do this on-line, add them. That represents both the acquisitions we made, which is the Daily News Group, as well as in the fourth quarter we acquired silicon valley newspapers which bolstered that number. In addition, in San Jose, they've seen really nice rate increases as they've gone through the year, full run rate in retail for the quarter were up 3.5%. And that was their lowest quarter. For the year they were actually up closer to 10% on rate. The other big categories of growth have been employment. And those would be the two single biggest drivers of their overall results. And on acquisitions did you answer the question that we have not, we have put a hold on acquisitions as we go through this analysis of our strategic alternative.

Q - Fred Searby

Similarly for launching weeklies, is that kind of on hold as well?

A - Hilary Schneider

We do have launches that are what we categorize as organic growth that will continue in '06. But acquisitions………

A - Tony Ridder

Launches, yes. Acquisitions, no.

Q - Fred Searby

Okay, thank you.

Operator

Your next question comes from the line of Christa Quarles with Thomas Weisel Partners.

Q - Christa Quarles

Hi, just two quick questions. One, on the Seattle land, I think you mentioned it was $0.11 for the year but just clarifying that it was $0.12 for the quarter. The second question is on the help wanted side, with on-line up roughly 76%, and this obviously doesn't even include CareerBuilder, what percentage of on-line can you see it being of your total at some point three, four, five years down the road? Can you see on-line being the majority of your help wanted revenues in sort of a three to five-year time frame?

A - Steve Rossi

I'll take the easy one while they're thinking about the tougher question. The Seattle land, it was $0.12 in the quarter, but that is because we had a lower weighted average share count in the fourth quarter than we had for the full year. So it's just the math on full year EPS calculation versus one quarter.

Q - Christa Quarles

Okay. That makes sense.

A - Hilary Schneider

Relative to on-line, for fourth quarter, for example, we saw growth both in our print revenue, which was up almost 6%, at the same time that we had our on-line revenue growing at the healthy 74%. When we look at total composition of on-line as a portion of total help wanted, in '05 that number was about 31%. In Q4 and for the year '06, we had that growing to about 33%. So we see it continuing to accrete at a couple percentage points a year.

Q - Christa Quarles

Great. That's helpful. Thanks.

Operator

The next question comes from the line of Paul Ginocchio with Deutsche Bank.

Q - Paul Ginocchio

Thanks for taking my question. First, sorry Hilary, some of your comments were, couldn't hear with the technical difficulties. Did you say you were cycling Telco in the fourth quarter? And have we sort of cycled the AT&T merger? What's the outlook for that in '06 versus '05? Could we get an update on the run rate of niche products now on a revenue basis? I guess I've read you've lost a couple of senior managers. I think there has been two, somebody out of Fort Wayne and I think there was another person who has left already.. How many senior managers have you lost in the fourth quarter? Thanks.

A - Tony Ridder

We lost a publisher in Fort Wayne who has gone to Boston to be the general manager. Oh, we lost an assistant, the head of our tax department, who is an assistant vice president. I think those are the only two either publishers or officers that have left the Company.

Q - Paul Ginocchio

Okay, perfect. Thank you.

A - Hilary Schneider

On the cycling of telecom, I think you'll see, at least what we expect is, that at the end Q1 we will have cycled through the consolidations that were announced in '05.

Q - Paul Ginocchio

Then just finally, a revenue run rate of the niche products including the acquisitions?

A - Hilary Schneider

Hold on one second. You know, I don't have the specifics, but I think it's roughly 200 million.

Q - Paul Ginocchio

Thank you.

Operator

Your next question is from the line of Douglas Arthur with Morgan Stanley.

Q - Douglas Arthur

Yes, Steve, the press release says the FTEs were up 3.7% due to acquisitions and expansion, I guess, in the niche products. Can you pro forma that number somehow in terms of sort of the underlying, obviously you took some people out in the fourth quarter. What's sort of the underlying growth rate in FTEs? Then follow-up, I'm wondering if Art could update us on potential trends in Kansas City, which has been a weak market. Thanks.

A - Steve Rossi

I'm going to try to answer that, although I think what you're referring to, Doug, is with the acquisition of Boise, Olympia, and Bellingham, so that was not in the prior year's numbers. So we picked up about 700 employees, a little under 700 employees with those acquisitions.

A - Tony Ridder

We didn't count FTEs in Detroit. Isn't that correct?

A - Steve Rossi

Well, Detroit's out of both your comparison. So we would have actually been down in FTEs for the year if it hadn't been for the three new properties that we picked up. But we're sitting now at about 18,500 employees, roughly, at a FTE count. And next year I think budgeted down a little bit as a result of some of the headcount reductions we did. And no new acquisitions, as Hilary said, planned right now. Just a few rollouts of some new niche publications. So that would add a little bit back. So we see some headcount reductions offset by some growth in targeted publications and maybe a little bit in the digital side. I think a good headcount level, or FTE count, is about 18,500.

A - Art Brisbane

Doug to your question about Kansas City, let me try to describe it this way. I guess the bad news, particularly, was that the categories in Kansas City worsened in Q4 as opposed to run rate earlier in the year. We saw some decline in retail. Department stores was a big factor there. National was very tough in the fourth quarter and auto was like our other harder hit market. Although there's some good categories in Kansas City through '05. I'm talking about real estate is a particularly strong one up. As we turn the corner into '06, when we see some better numbers, so our January numbers, while not final, are decidedly better than Q4. As you look out at the 2006 year, there are a couple of things that are coming into play, some plus, some not.

The new press comes on line a little before the end of the first half, so we see going forward from there some positive revenue impacts from new color advertising we'll be able to sell, some increase in zoning that will drive revenues. We'll see some labor savings and see some newsprint savings from the new press. In terms of the actual marketplace, there's still some bad news in the marketplace. So it's hard to get too excited about the up side in advertising, although I think it will be certainly better than what we've experienced. The Albertsons' deal is probably going to impact one of our drugstore advertisers in the market certainly by the fourth quarter, which is Osco and that's an Albertsons unit. So we look for a better performance in '06. We see stronger retail, heavily driven by the new press, moderating national, moderating auto, and then we expect continued strength on those other categories that were strong in '05.

Q - Douglas Arthur

Great. Thank you.

Operator

Your next question is from the line of Ed Atorino with Benchmark Investment Company.

Q - Ed Atorino

Mine has been answered. Thank you very much. Let's move on.

Operator

You next question is from the line of Steven Barlow with Prudential Equity Group.

Q - Steven Barlow

I'll go back to Fred's question on auto and your thoughts on '06 that are on the classified side, the national, if you think things are going to improve. And then related to that is a more domestic or foreign. Then the second question, there's been some press reports that there's about $150 million in savings that are being discussed in these presentations. If that's true, in what areas?

A - Tony Ridder

Let me take the last one. I said that, I talked about ad revenue and I talked about our, what we're expecting in the way of profit. That, those are the numbers you should look to. You should not get carried away with rumors that appear in non-Knight-Ridder newspapers.

A - Hilary Schneider

On automotive, let me follow-up and, once again, try to give you the best of our outlook. As we look at what happened in Q5, we had a decline that we talked about that went from the first quarter was down 6%, the fourth quarter was down 16.6. As we look into '06 we expect the trend line to go the opposite way as we go against what we were cycling the previous year. So in the first half we expect to continue to show losses but we expect those losses to abate versus what we saw in the fourth quarter. We're optimistic by the time we get to Q4 that we're in the positive territory. And that's strictly on the classified component. When we look at the national component of automotive, once again, hard to have any clear visibility. You've seen early announcements that Mercedes is heavily going into print to rebuild their image around safety of their vehicles. When this same fact set has, that you're seeing in terms of just weakness in automotive has been true in January of '04 and January of '05, what you did see was that the big players, both domestic and some foreign, coming in with major spends against pricing campaigns, everyday low prices, friend referrals, et cetera. We have not seen that. We have not seen announcements of that to date. We would not be surprised to see that in the upcoming months. Thanks very much.

Q - Steven Barlow

Your final question comes from the line of Michael Kupinski with A.G. Edwards.

Q - Michael Kupinski

Wow, it must be good. I was just wondering if you can talk a little bit about the pace of help wanted advertising so far in the first quarter, particularly in Miami, which I think was up over 16% in the first quarter. And in fact I believe that most of your markets were up double-digits in the first quarter, so if you can talk a little bit about that. Then I was wondering if you can update me on the expense guidance for '06, particularly if you have any thoughts on the equity line. And then I just have one quick follow-up question.

A - Hilary Schneider

What I would say is we're continuing to see strong growth in the double-digits as we look at our early forecast in January, less about Miami and specifics. It is up in very high double-digits as we look at the first month of the year.

Q - Michael Kupinski

Great. And the expense guidance for '06?

A - Steve Rossi

For the equity line, we had the benefit of the Seattle Times land sale in '05. So excluding that you would see about a $3 million improvement on the equity line we're predicting this year. But then again, that's excluding the land sale gain.

A - Tony Ridder

Let me give you the breakdown on the costs. Labor and benefits I'd say low-single digits. Newsprint, mid-single digits. Other operating costs, flat to down slightly.

Q - Michael Kupinski

Okay. Tony, I was just wondering what do you think that newspapers need to do to regain pricing power in the market? Do you think that the pricing power hinges on the stabilization and circulation or even the prospect of growth there? Or is there anything that newspapers can do to help regain pricing power?

A - Tony Ridder

Newspapers have been moving more and more to revenue kind of contracts, which affects the average rate. Because what we try to do is to build in additional revenue, so that is having an impact on that. It used to just be strictly so much an inch, you raised it up every year, but we moved more and more to revenue. I don't know what the rest of you want to add to that.

A - Hilary Schneider

Ultimately, what you see is different strategies in terms of go to market around pricing. Ultimately we have a portfolio strategy. We look at the reach that we are able to get to in our market, through our targeted publications since we are on-line. Really what we're gearing towards is building share. It's audience share, which translates in our minds to ad share, which helps us take more dollars that are available off the table.

Q - Michael Kupinski

How much of your business right now is annual business, then, in these contracted rate type increases?

A - Hilary Schneider

I would say that I don't have an exact number for you, but there's a two-part answer, which is that all of the large advertisers that make up significant portion of the volume would be on annual contract. At the same time, we've had a very aggressive movement to put more sales people on the street, to really focus on small to mid-size business. Many of those would be in the, could be transient or just coming up to being able to come on to a revenue contract. When we look at that part of our business, of total retail, about 50% of our business falls into that category that would be small to mid-size. That's a category that's growing nicely for us.

A - Tony Ridder

That would not be revenue contract business, that would be so much an inch. So that should help on the average rate.

A - Hilary Schneider

Say you've got a mix in terms of the way we go to market.

Q - Michael Kupinski

Okay. Thank you very much.

A - Tony Ridder

Are there any other questions?

Operator

Yes, sir, there is one final question from the line of Peter Appert with Goldman Sachs.

A - Tony Ridder

We thought Peter was not here.

Q - Peter Appert

Oh, no, paying careful attention. Hilary, can you give us any insights or further insights into the progress towards profitability at CareerBuilder, how much was lost in '05, when you think it could get to profitability? And then related to that, there's been some discussion about international expansion at CareerBuilder. Can you talk a little bit about that?

A - Hilary Schneider

Sure. Peter, Peter, Peter, you know that we do not disclose the CareerBuilder financials on a GAAP basis or even market view. What I was saying is we're very happy with the results that we're seeing at CareerBuilder and that the top-line improvement is translating to the overall P&L.

A - Tony Ridder

And the prospects for the future.

A - Hilary Schneider

As well. Relative to international expansion, we are looking at expanding the top country's offer, English speaking, is Canada, United Kingdom and it's India.

Q - Peter Appert

Would that imply that the losses for CareerBuilder would take a step up, then, in '06?

A - Hilary Schneider

I wouldn't assume that.

Q - Peter Appert

Okay. Great. Thanks.

A - Tony Ridder

Okay, operator, are there any more questions?

Operator

No, sir, at this time, there are no further questions.

A - Tony Ridder

Okay. Well, thank you all very much. So we'll be talking to you, I guess, at the end of the first quarter, so sometime in April. So thanks very much for joining us today.

Operator

This concludes today's Knight-Ridder Incorporated quarter one earnings release conference call. You may now disconnect.

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Source: Knight Ridder Q4 2005 Earnings Conference Call Transcript (KRI)
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