The McClatchy Company (MNI)
Q1 2006 Earnings Conference Call
April 13th 2006, 12:00 PM.
Executives:
Gary Pruitt, Chairman and Chief Executive Officer
Robert J. Weil, VP of Northwest Operation
Frank R. J. Whittaker, VP of California and Carolinas Operation
Patrick Talamantes Vice President and CFO
Chris Hendricks, Vice President of Interactive Media
Elaine Lintecum, Treasurer
Analysts:
John Janedis, Banc of America Securities
Lauren Rich Fine, Merrill Lynch
Peter Appert, Goldman Sachs
Lisa Monaco, Morgan Stanley
Christa Quarles, Thomas Weisel Partners
Craig Huber, Lehman Brothers
Paul Ginocchio, Deutsche Bank
Thomas Russo, Gardner, Russo & Gardner
William Bird, Citigroup
Edward Atorino, Benchmark Company
(indiscernible), Waterstone Capital
Tom Curlin, RBC Capital Markets
Operator
Good afternoon, my name is Ashley, and I will be your conference operator today. At this time I would like to welcome everyone to The McClatchy First Quarter 2006 Earnings 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 “*” then the number “1” on your telephone keypad. If you would like to withdraw your question press the “#” key. I would now like to turn the call over to Elaine Lintecum, Treasurer for The McClatchy Company. Thank you. Ma’am, you may begin your conference.
Elaine Lintecum, Treasurer
Thank you Ashley, and thank you all for joining us today for our first quarter conference call. The call is being webcast at our site: www.mcclatchy.com. The webcast will be archived for future reference. I hope you have been able to review the earnings release, statistical report and supplemental schedule of advertising revenue data by category, which we issued this morning before the market open. The release and statistical report are posted on First Call as well as our website for your convenience. As a reminder this call will contain forward-looking statements that are subject to risks and uncertainties including among others those described in the company’s 2005 annual report on Form 10-K, which will be filed with the SEC. Actual results may differ materially from those described during the call. Also a reconciliation of any non-GAAP terms used in this call is included on our website. Now here is Gary Pruitt, our Chairman and Chief Executive Officer.
Gary Pruitt, Chairman and Chief Executive Officer
Good morning. Joining Elaine and me are Bob Weil and Frank Whittaker, Vice President of Operations; Chris Hendricks, Vice President of Interactive Media; and Pat Talamantes Vice President and CFO. We reported first quarter earnings of $27.7 million or $0.59 per share including the impact of expensing stock option that translates to $0.62 per share excluding stock compensation related expenses compared to first quarter 2005 earnings of $32.3 million or $0.69 per share.
In the first quarter of 2006, we faced our toughest comparison in quarter-over-quarter advertising revenue growth. Real estate, employment and direct marketing advertising grew strongly in the quarter, but national advertising fell and automotive advertising declined reflecting an industry-wide trend. These factors resulted in ad revenue growth of 1.4%. Also we implemented FAS 123R this quarter, which caused us to record stock option expense for the first time. That $0.03 per share expense coupled with increases in pension and medical costs and higher newsprint costs more than offset the increase in revenues and resulted in lower earnings compared to the first quarter of 2005.
Turning back to revenues: total retail advertising declined 1.0%, national advertising was down 5.2%, and total classified advertising increased 3.8%. Within classified, real estate was up 27.1%, employment advertising grew 5.0%, but automotive declined 17.8%.
I’ll now overview our revenues by region beginning with our largest region: California. Our California newspapers generated nearly 39% of our first quarter revenue. Advertising revenues increased 5.9% while total revenues increased 4.3%. Retail advertising decreased 1.6%, national advertising declined 0.6%, and classified increased 12.9%. Within classified, real estate was up 54.7% over last year, and employment advertising increased 8.3%. Automotive declined 13.9% while direct marketing advertising was up 12.0%.
Turning next to the Star Tribune in Minneapolis. The Star Tribune contributed 31% of our first quarter revenues. Advertising revenues increased 2.3% in the quarter. Total revenues were down 2.5%, retail advertising decreased 1.3%, national was down 5.2% and classified declined 3.7%. Within classified, real estate was up 11.4% over last year at the Star Tribune, employment advertising increased 1.9%, and automotive declined 22.4%, direct marketing advertising revenues grew a strong 17.6%.
Turning next for the Carolina newspapers, our Carolina newspapers contributed 16% of our first quarter revenue. Advertising revenues were up 0.3% while total revenues declined 0.2%. Retail advertising grew 3.0%, national advertising decreased 15.6%, and classified was down 0.8%.
Within classified, real estate grew 13.2%, and employment increased 4.9% and automotive advertising was down 25.7%. Direct marketing revenues were up 12.9%. Finally, our Northwest newspapers contributed 14% of first quarter revenues. Ad revenues were down 2.1%, and total revenues declined 2.9%. Retail advertising decreased 3.3%, national was down 13.2%, and classified advertising was flat with 2005. Employment advertising grew 16.2%, real estate advertising declined 1.3%, while automotive was down 11.9%. Direct marketing advertising was up 4.6%. Total direct marketing revenues for the company grew 12.7% in the first quarter to $14.1 million, and were up in all regions.
Our internet revenues continue to grow at rapid pace with online advertising, up 30.1% in the first quarter of 2006 to $16.3 million. While those advertising revenues are included in our regional results, its important to recognize that our internet operations remain the fastest area of revenue growth for the company, and we continue to expand our product offerings and leadership position online in our communities. Internet advertising represented 6.9% of first quarter total advertising revenues compared to 5.3% in 2005 and continues to grow in importance to our company.
For the quarter, our daily circulation declined 2.0% and Sunday was down 4.4%. We believe these trends will improve as the year progresses and allow us to hold our audiences in our local markets better than our competition.
Turning now to expenses, our operating expenses increased 4.0% in the quarter, including $2.3 million in stock compensation expense, and we are up 3.0% excluding stock option cost. Compensation costs were up 4.0% with payroll up 2.9%. Excluding stock option expenses, compensation was up 2.4% and payroll was up 0.8%. Fringe costs were up 8.0% owning mostly to higher retirement expenses, FTEs were down 2.0% for the first quarter of 2005.
We also incurred approximately $1 million in severance expense related to job elimination pursuant to labor agreements in Minneapolis. These expenses will pay for themselves quickly as FTEs decline more rapidly. Newsprint and supplement expense rose 4.9% driven by higher newsprint prices offset by lower usage. Other cash operating expenses increased 5.1%, which includes among other things, higher energy costs, postage, and higher bad debt expenses in California and Minneapolis.
Depreciation and amortization cost declined 2.0%. Amortization expense dropped off much more dramatically going forward. For the year, amortization expense will be down approximately $10 million, but only 544,000 of that decline came in the first quarter. Interest expense for the quarter was $2.1 million, up 4.4% from 2005 and our all an effective interest rate for the quarter was 4.75%, what I think short-term interest rate that caused our effective rate to rise compared to 2005.
Our debt at the end of the quarter was $150.5 million, and includes a $40 million voluntary contribution to our pension plan made earlier in the fiscal year. Capital expenditures totaled $13.6 million in the first quarter. As we look to the second quarter, we expect continued growth in real estate advertising and the other areas with sustained growth in the first quarter, but at this time we do not see indications of a change in automotive advertising trends, and national advertising remains unpredictable. We expect second quarter advertising results to be similar to the first quarter.
Some may see the current slow advertising environment as confirmation and predictions that newspapers and print media are dying. We think that’s wrong. Well, there’s certainly more competition for advertising in all media, McClatchy continues to gain share over other traditional media in our local markets, and our online advertising is growing strongly, up 30.1% in the first quarter. Our portfolio strategy combining the daily newspaper with leading websites, niche publications and direct marketing products provides the best reach and results for local advertisers. This approach makes us the leading local media company in many of the best fastest growing markets in the country, and provides a solid foundation for our future.
We also recognized the sluggish advertising environment is coming at a time when our cost reflect the continuing pressures of higher refinement in newsprint expenses, double ramming on our earnings to be sure. With today’s expense environment, should be put in the context as well. Long-term interest rates are slowly responding to the push on short-term rates, as long terms rate rise, so do the discount rates used to project pension and post retirement expenses, its providing substantial relief in these areas.
We’ll also be in a position to capitalize on the voluntary pension contribution we’ve made, which had taken advantage of the lower interest rate environment and our low debt balances over the last few years. We think all of these factors will provide release and retirement expenses in future years. We also believe that we are nearing the end of a multi-year period of rising newsprint prices coupled with greater color capacity and investments in inserting equipment at some of our larger papers, we are set to reap greater returns on our print and direct mail products going forward.
So while the cost environment has been challenging, we continue to make the kinds of investments that will give lower cost and higher revenues in future years and expect to see the rewards of our strategies as we move forward.
I’d like to give you an update on the progress we’ve made on the acquisition of Knight Ridder. We believe we remain on track for its summer close as we previously announced. On March 27th we made the Hart-Scott-Rodino filings to allow the Justice Department to review the transaction from an antitrust perspective, and that review is underway.
As we have previously said we will be divesting the St. Paul Pioneer Press newspaper, because its market overlaps with ours in Minneapolis. We do not expect significant issues to arise during the course of the antitrust review. We will be filing the registration statement on Form S-4 with the SEC tomorrow to provide details to our shareholders, and as well to Knight Ridder shareholders.
We have met the rating agencies to discuss the transaction on our plans, so that they can rate the $3.75 billion credit facility, which we financed the cash portion of our acquisition. S&P has rated the debt BBB for the stable outlook, and Moody’s has initially rated the debt at Baa3 with a negative outlook until it completes its review. Moody’s is expected to finalize its rating in the next few days. We are pleased to have initial indications of investment grade ratings from both agencies as we had expected, and our proceeding with the syndication of the debt.
We’ve visited 10 of the 20 newspapers we’ve planned to retain to meet employees and share our vision of the new McClatchy and we will visit the remaining 10 next week. There is a great deal of enthusiasm among employees at these papers, and we greatly appreciate to share its pensive commitment we’ve encountered. These premium growing markets will make McClatchy a stronger company and together we’ll work to make these communities even better.
We are moving quickly to divest the 12 papers identified for sale, partly to focus on integrating the other 20 into the new McClatchy and partly to end on certainty for the employees of those papers. We’ve been gratified by the level of interest in these 12 newspapers we are selling and we still intend to invest some and perhaps all of those papers simultaneously with a closing of the Knight Ridder acquisition this summer. We are not discussing details of the divestitures in progress. But certainly they are well underway and we feel good about our expectation for the proceeds from the sales. We intend to announce deals as we enter into definitive agreement. Thank you and now I will be happy to answer your questions.
Question-and-Answer Session
Operator
Operator Instructions Your first question comes from the line of John Janedis with Banc of America Securities.
Q - John Janedis
Hi, thank you for taking the call. Gary just related to Knight Ridder, how much of the integration process are you able to implement prior to the closing of the deal, if any? And when you say the summer I think initially you are thinking maybe July, does that still hold?
A - Gary Pruitt
Yes, we still expect the deal to close on July 1st, we cannot be sure about because we don’t know what the antitrust review will entail but we don’t anticipate problems there, so we are still anticipating at July 1st, closing. During the pending review of the Hart-Scott-Rodino filings, there can be little to no integration, and we are expecting that and so while we are meeting with employees and visiting the papers, we are not focused or implementing any form of integration, we are making plan and preparing ourselves here at McClatchy, had good relations with Knight Ridder and expect that the integration will ramp up after the Department of Justice has completed its review.
Q - John Janedis
And just separately on Fringe cost growth, its been kind of I guess in the 10% sort of range over the past few years, given your comments how do you think about that line item going forward?
A - Gary Pruitt
We think that that line item going forward will improve and we think it will improve as medical health insurance expenses moderate in future years and as we have made, we have taken steps for that to moderate by entering into a nationwide health insurance plan leveraging the strength of the entire company. And most importantly by retirement by pension expense declining, we have a 5.5% discount rate this year, and we expect that discount rates will increase next year by - we don’t know what would be that annually, but for every quarter point that it goes up, it says its $2.5 million, and those long-term interest rates are now on a level that would, if we were setting today, we’ve got it at 6.25%. I don’t know whether it will go down from there but that would allow us to make substantial savings. Also we have made substantial investments or contributions to our pension plan, and that combination will allow our pension expenses to decline significantly over the future years. So we do think that Fringe benefit line will improve in future years.
Q - John Janedis
Thank you very much.
A - Gary Pruitt
Thank you.
Operator
Your next question comes from the line of Lauren Rich Fine with Merrill Lynch.
Q - Lauren Rich Fine
Hi, thank you very much. I have to presume that your print ad revenues were down given the strength of online, and I guess if you could quantify how much of print ad revenues were down, that would be helpful? And then on the online side, is there a way to quantify how much of the growth came to pricing, because I think you have emphasized in the past that you have been pretty aggressive there, and so how much of that came from pricing? And then I guess I am curious if they were any cost in the quarter that you could identify that had to do with on your bids for Knight Ridder because the cost side was a bit of a negative surprise, and I am wondering if there were some unusual more or less one-time backers in that?
A - Gary Pruitt
Okay, looking at the prints only revenue, prints only ad revenue, it was down 0.3%, so down slightly and Interactive was up 30.1% so in a combined basis that was up 1.4%. And with regard to that 30.1% increase, I will let Chris Hendricks, our VP of Interactive media address the mix of price versus volume.
A – Chris Hendricks
During the quarter the majority of the increase came from online homely products, was with online only direct sales to the web entry products, or our classified products it could be house.com, apartments.com, and that’s what we saw the greatest improvement come from this more customers utilizing those channel as opposed to pricing. Pricing getting more difficult because we believe we are reaching the top end on the up sell number 1 and number 2 we are seeing with the print declines and less customers available to sell those products too.
A – Partrick Talamantes
And Lauren with regard to the cost side, no expenses related to the bid were included in these quarterly expenses, they are all capitalized as part of the deal, but I did review the report before coming on here and I noted that you thought that total operating expenses were about $3.5 million more than you expected, it was 2 million coming from D&A, and I know there was no way to know the timing of this but amortization, the amortization fall off is picked up in the second, third and fourth quarters, and was not dramatic in the first quarter. So while in the first quarter it was a little over 0.5 million, its around 3 million a year in each of the succeeding quarters. So 2 million, you thought 2 million was from D&A, well that probably that 2 million as it picks up by about at least 2.5 million each quarter going forward. And then the severance expense in Minneapolis related to the labor contracts is worth about a $1 million but will partly pay for itself as FTEs down 2% this quarter and expected to be down approximately 3% this quarter, coming in the second quarter. So we think that it be well situated for better expense numbers going forward, and we expect to deliver them.
Q - Lauren Rich Fine
Great that’s very helpful, thank you.
A – Partrick Talamantes
Thank you.
Operator
Our next question comes from the line of Peter Appert with Goldman Sachs.
Q - Peter Appert
Gary, there is a follow on to what you are just saying, is the reason well to assume then that given the headcount reductions and the impact of the amortization that perhaps operating margins could be roughly flat over the dollar for the year on year-to-year basis?
A – Gary Pruitt
Well, we haven’t given that sort of prediction, so I am hesitant to say but I do think we would expect that we would show revenue growth over the rest of the year.
Q - Peter Appert
What sort of falling cost increases you think are reasonable over the balance of the year?
A – Gary Pruitt
We don’t want to give that sort of guidance, I would say that we would expect revenue to grow about the same level in the second quarter. We think it will actually do a little better in the second half, comps are a little easier, we think the revenue will do a little better. We think the expense environment will improve for us over the balance of the year as well, but we are not in a position to give you specific percentage guidance on that but we do think FTEs will be down more in the 3% range and the 2% range in this quarter, and we will see improvements, dramatic improvements in the amortization line as well, I know that’s not affecting the cash line or the cash operating percentage but we are focused on that expense control as revenue disappoints our earlier expectations.
Q - Peter Appert
Okay, fair enough, and Gary, it feels like for you guys and some others in the industry, they hope wanted numbers so that we can built better in recent periods since, is your sense that maybe we have seen the best of the cycle that the hope on is perhaps rolling over at this point?
A – Gary Pruitt
Yeah, I don’t know, I guess it’s the short answer because we have seen results that are kind of up and down by market, and by, and so we still think we will see more growth there in employment, its up 5%, that’s in this quarter. And going forward the comps are kind of in that same thing range 13%, 14% 11%. I think we should continue to see growth in that range but I don’t think we are going to see double-digit growth. I think we may see that kind of mid single growth.
Q - Peter Appert
Okay, and last thing and then I will shut up, the CareerBuilder situation, any update in terms of how the negotiations around that are proceeding?
A – Gary Pruitt
No real update that I can discuss on this call. I would affirm that McClatchy would prefer to remain in CareerBuilder, we are doing background work, learning more about CareerBuilder and the relationships with Tribune and Gwinnett. Information that we didn’t have access to, and doing due diligence on the Knight Ridder deal. We continue that good relationship with Tribune and Gwinnett, but don’t know the final outcome of those conversations, expect to be able to report on that considerably in next quarter’s conference call, if not support.
Q - Peter Appert
Great, thanks Gary.
A – Gary Pruitt
Sure.
Operator
Your next question comes from the line of Lisa Monaco with Morgan Stanley.
Q - Lisa Monaco
Hi, Gary, can you just give us your expectations of what you, how you think daily and Sunday circulations roll in the year? Thanks.
A – Gary Pruitt
I don’t know where they are going to be in the year, I think we’ll probably have daily circulation down around 2% or so, would be my guess, and Sunday would be little weaker than that. What we are doing right now, I don’t think that’s going to be the long-term trend, I think the year, this year from McClatchy’s point it being weaker than the long-term trend because we are coming off some programs where there was some third party sales or third party sponsorships by advertisers in a few market that are peeling of, and that takes daily and Sunday circulation lower. And we are focusing much more on kind of a core circulation and discounting is down as a company as well. So we are making sure that this is solid good circulation, but it probably is worse than the long-term trend is going to be, this year’s result are worse than the long-term trend. I think the long-term trend will be closer to kind of a 1% decline, but it will be about double of that this year.
Q - Lisa Monaco
Great, thank you.
Operator
Your next question comes from the line of Christa Quarles with Thomas Weisel Partners.
Q - Christa Quarles
Thanks, when you described second quarter results looking kind of like first quarter, are you taking - how much did Easter have an affect on that specifically if you could? And then Minneapolis was weak, again, I guess it had an easier comp than we see for the next two quarters, I am just wondering if you could just talk about, what are you doing to reintegrate growth there as a new owner, the Pioneer Press might be good or bad relative to your perspective? And then a quick question if the tax rate is expected to stay at 38.6? Thanks.
A – Gary Pruitt
Okay, we got a lot in. With regard to Easter coming up this Sunday, we don’t know what the exact effect will be, we do know that what we generally see is that in large markets Easter has a negative impact because classified declines more than retail goes up. In the smaller markets retail often will go less more than classified declines or at least they will offset in one other much more closely. So we expect this week to be down, and we factored that into our estimates when we said we expect advertising growth to be in the same range in the second quarter as we saw in the first quarter. So we factored in a negative week for Easter this third week. With regard to the Star Tribune, the comps get slightly upper I guess in the next couple of quarters, I mean it remained right around flat for the first three quarters and then down about 2% in the fourth quarter, that was their last year performance. And they were down about 2.3% in the first quarter so I’ll let Bob Weil who will receive from Minneapolis speak to their performance. I would say with regard to St. Paul, we don’t know who is going to end up buying St. Paul, and we don’t want to speculate as to what they may or may not do, they are competitively, that regard was that who owns it, we think we are in a very strong position in that market to do well in long-term. And so we are not worried about who owns that paper, but we expect Star Tribune’s performance to improve but I will let Bob speak to that.
A - Robert Weil
Star Tribune ad revenue were down 2.3% first quarter, virtually all of that loss against prior year was automotive, which was down about 22%. We don’t see automotive being positive this year, but we do see an improving trend, we really believe it’s a cyclical trend because from 2000 to 2004 auto revenues were up 25%, and they’ve since declined the latest data on new car registration, shows the Twin Cities down 9.2% compared to a national average of 1.9. So they were last year in terms of showing a decline, I think it will take longer for them to come out. And so as a result we see automotive getting slightly better but not positive for the year. Retail is an area where we’re really focused in driving new business. We are down only about 1.3% for the quarter. We have some new niche offerings coming down the line in second quarter, we are also working closely with Federated and other major accounts, trying to provide new incentive for them to increase business, and we are pretty confident that we can do that. And so on balance, and I guess last piece is in the direct marketing side. We went to a restructure last year, and that restructure is really now starting to payoff. Our direct marketing revenues were up over 17.5% first quarter and we expect that trend to continue.
A – Gary Pruitt
And with regard to tax rate, I will turn it over to Patrick Talamantes, who is our Chief Financial Officer.
A - Patrick Talamantes
The decrease in the effective tax rate for the year from our prior expectation of 39 page, down to 39 six now as far as we do to enhance advantages from the qualified production activities deduction, and then that is a way that we are going to expect to see for the balance of the year. Now obviously when we close in that later, we will see some fluctuations in that rate, but on the partially seasonal basis, that would be the rate for the year.
Q - Christa Quarles
Great, thank you.
A – Gary Pruitt
Thank you.
Operator
Your next question comes from the line of Craig Huber with Lehman Brothers.
Q - Craig Huber
Question, is that to say that you are expecting it to come down so much a close on that regard going forward, this is my first question?
A – Gary Pruitt
Craig, this is Gary, we couldn’t hear the first part of your question, it was clipped, so I missed the first part, I am sorry.
Q - Craig Huber
As a follow-up to last question on the tax rate, should we expect then you are saying your rate once you close on that regard will come down some?
A – Patrick Talamantes
No, I don’t expect that, I think we’ll have a different situation with, we might later we’ll have 20 of their papers, we won’t have all of their papers, and so our expectations currently might be just see this reflected in the S4 is a tax rate that looks like current tax rate.
Q - Craig Huber
Okay, and then, given Gary, you have taken on 20 newspapers here supposedly brought the Minneapolis and Raleigh just one of the newspapers, you have a very top notch executives of your company but there’s not a lot of you guys, I mean I am just curious, I mean how concerned are you taking on 20 newspapers, you start to integrate these, what wanted you to get down that path or how long do you think it will take to get the things first kind of running from the classy way to - how concerned are you, do you have enough personnel to actually run 20 papers?
A - Gary Pruitt
Yes, we take that very seriously, and we first want to make a point that these are 20 well run newspapers, and they are doing very well with margins and growth rate, very similar to McClatchy’s current papers. And so we feel that we are acquiring top-notch properties that are already doing well. Of course we will strive to do better as we are and our current papers striving to do better, and so that does mean we will be adding some people. We have promoted Lynn Dickerson to be our publisher at Modesto and Neil Starr to be a new Vice President of operation joining Robert J. Weil and Frank Whittaker. And each of them will oversee approximately 10 newspapers as we go forward, and we feel that will be a strong operational lineup, we’ll be adding 30 to 40 people in corporate and finance and human resources and legal and operation. So that we can operate the larger company, and its important to realize that each of these papers is a largely independent business and is within the classes they operate with, a great deal of economy with regard to advertising and editorial decision. We are also able to take advantages of consolidated call centers and outsourcing, and procurement opportunities, which I think will allow us to be more efficient. So well I don’t think prospect to be sure, we think then year before, we done it before, and we think we have the people in place to execute on it, and are confident will be able to do it well, not overconfident mind you, as we know it’s a big job so we think we’ve got the capacity to do it well.
Q - Craig Huber
I know that you are making news, but having settled that, the executives have to run these 20 papers in I guess on plan, keeping most of them intact through the transition period and all that?
A – Gary Pruitt
I don’t know if that’s newsmaking or not, but we would like to keep all of those people running those papers. There are few open positions that are key fills and then we are working with Knight Ridder on that right now, but yes we think the leadership on the news and business side of these papers is very strong and we would like keep those people.
Q - Craig Huber
And I guess lastly you touched on cost savings, you talked about $60 million of cost savings from Knight Ridder, did you still only about 5 million actually from the newspapers that you think, if you think it’s a pretty low number you are feeling much better about that number in coming, significantly higher as time goes on?
A – Peter Talamantes
Well we felt that the $60 million figure wouldn’t be the conservative number, and but why I am sure of that came from corporate just on the elimination of redundant jobs and so we were confident of that and same on the centralized internet operations, the elimination of redundant jobs. So we felt though - we were very confident of that $60 million and we were very confident of that coming Day 1, down as we go forward, we think there will likely be more cost savings and some revenue enhancements as we work together, well we haven’t quantify those yet, but we were certainly expecting and optimistic of those but we haven’t quantified them.
Q - Craig Huber
Great, thank you.
A – Peter Talamantes
Thank you.
Operator
Your next question comes from line of Paul Ginocchio with Deutsche Bank.
Q - Paul Ginocchio
Hi there, maybe just give some more color on retail obviously lastly I guess, three quarter now, its been a little bit soft and may just a little more color where’s the big your advertising or categories within retail upgrading, it will just go back? Thanks.
A – Peter Talamantes
Okay, we are certainly right that retail has been a relatively anemic, if you look at the past five quarters, we are rolling over 2.3% gains in the first quarter of last year in retail, and then it was 1.4, then it was down about 1% and down 2.2%, now down 1%. So, it was down less then in the fourth quarter and against its toughest comp of the year. So it’s not dreadful but it’s not strong either and I think probably the best way to get a perspective on that is to hear from the operating executives working directly with our papers. So first let me turn me over to Frank Whittaker who well received our papers in California and the Carolinas, and the next will be Bob Weil overseeing Minneapolis in the Northwest, but first Frank.
A - Frank Whittaker
Good morning Bob, let me start with Carolinas, which actually are bucking the trend. Carolina for the quarter the retail revenue is up 3%, and that’s coming up account from last year 4.7%. I think what we can take away from that is that for the most part there are individual exceptions, but for the most part I think we’ve rolled over the worst of the department store cutbacks, which came as a result with some consolidations. We are also seeing a lot of success in our local territory sales, and particularly in Raleigh we had some success in converting major accounts from our competitor in Durham, last year we probably saw we had great success in our direct marketing programs which grew over 100%, what we really did was rollout a lot of our TMC direct mail programs into Durham, and we were successful in shifting some of that business. California is down slightly on retail revenues, for the quarter they are down 1.6% with the preprints being up slightly and retail are appeasing down. There what we are saying I think it’s a continuation of some of the same trends from last year, some of our larger gross restores are stalling back, they are becoming little more selective in how they zone their preprint advertising and then in Sacramento, in February we have heard that the Kroger division of Ralphs was closing its eight stores. And so we saw the effect of that in the second half of the first quarter, and of course well, it will take a full year before we cycle through that. Also in California, like the Carolinas, very strong growth in retail sales, very strong growth in our Spanish language paper Vida en el Valle, which we have expand in another five markets, which is also what’s driving that strong direct mail growth in California. That’s the high level Paul, if they are any more specific questions, I’d be happy to go a little over.
A - Gary Pruitt
And then Bob?
A - Robert Weil
Now, let me - starting with Minneapolis, for the last five years, Minneapolis have shown a retail gain, which is really bucking the trend for most major newspapers, from the first quarter this year for example are down 1.3%. We really don’t see that as a trend going forward, we think we can be positive for this year as well, the struggle this year have been so far the food and drug category primarily but also some furniture and home furnishings. The new restructured direct marketing program that we organized last year is really going to help us as well moving forward, we are up over 17.5% first quarter, we think you can build on that success. Then finally on the retail side, Minneapolis the Federated merger that will convert the Marshall Field’s stores to Macy’s in the late third quarter early fourth quarter this year, will help us as well, because we believe as they are going to have to brand change, and we’ll benefit from that. And our Federated business even in the first quarter was out there, it was only down 1% against a positive increase last year. Moving to the Northwest, their retail picture is a little weaker, they were down 3.3% for the first quarter this year, hurt primarily by department store general merchandise category, they are going against tough comps though, and that next the important thing to know, last year in the first quarter they are up 6.7%, and so they are going to have tough comps going through most of the year, although they ease a little bit as we get to the fourth quarter. Its really a mix bag in terms of categories, the home furnishing segments were down, department store is down now, but we think we can cycle through some of that to get to the third and fourth quarter and we have got new initiatives that will help build retail revenue this year.
A – Frank Whittaker
And Paul just to give you a sense, I want to give you a couple of ideas on retail by category, Food and Drug is down, Consumer Electronics is down, Entertainment is down, Restaurants are down, and reduction in the payroll in general department store, general merchandise, what’s up its home furniture, home building and home centres, office supplies and the miscellaneous category. That generally gives you a sense by category and then importantly, I think the overall trend remained that large department store advertising is declining although, I think we have seen most of that decline which means the gains or coming from smaller regional and local advertisers, and which are more labor intensive but frankly say a higher rate and were less dependent on a single advertiser. And importantly, the trends going forward will be online, where retail is starting to get traction, slow to come but now really getting traction, retail revenue online in the first quarter was up 117%. Now that’s a small number but its still a gain of $1.4 million. And it has an impact, because print only retail is down 2.6%. But when you combine it with the online number of up a 117%, retail’s only down 1%. And we think that we are going to see good retail traction online going forward in part because of our local search strategy and retail starting to gain. So we are seeing stronger gains in retail online than in any other category, and we think that will continue going forward.
Q - Paul Ginocchio
I appreciate the detail, and if I could just a quick follow-up about the smaller accounts, are you adding sales people and how long it will take for them to become profitable? Thanks.
A – Gary Pruitt
Yeah, generally it’s a reallocation, the number of ad sales people overtime have gone up somewhat, and we think that - when we add them we think that people themselves write off the back.
Q - Paul Ginocchio
And that’s sort of increasing advertising accounts?
A – Gary Pruitt
Yes, yes, ad counts going up, number of accounts that they are certainly going up.
Q - Paul Ginocchio
Thank you.
A – Gary Pruitt
Thank you.
Operator
Your next question comes from the line of Thomas Russo with Gardner, Russo & Gardner.
Q – Thomas Russo
Hi Gary, question on the circulation numbers, we have grown over 20 years comfortable with yearly increases in circulation last year, and then again forecast for this year we see slight declines. And can you just observe the factors of that lead you - continued thoughts of decline and how you are rethinking circulation as you represent a 3-year advertisers inline with what’s going on, and the factors that are causing this long standing growth prospect to modify?
A – Gary Pruitt
Sure, it’s a complicated question. I think most people look at circulation numbers and think that any circulation decline means failure, but the truth is that a slight circulation decline is actually better than our competitors who are experiencing locally as they face more direct more competition within their particular medium or TV station and cable stations and radio stations and all that. And so our competitors, that mean I guess the imperative of this model media mix is that everyone’s losing share. And people tend to look at television as a media, and I suppose individual channels, locally we are competing against individual channels, and they are losing audience precipitately as they pay for that direct competition and fragmentation. So our story is actually a successful one as we hold-on to our audience better than our competitors, obvious with slow circulation decline. Circulation will always be important of course because advertisers especially preprint advertisers will look at it, and it determines how many preprints we have. We would like to continue to argue in favor of looking at audience as opposed to just circulation as a more comparable measure to electronic broadcast media. They are looking at viewers on television and selling listeners to radio.
We would like to sell readers to our advertiser customer because these papers are read by a little under three people and so it’s that audience rather than the exact circulation number that’s important. And what that means is that well circulation is indicative at where your print audience is, it’s not necessarily exactly the same. And when you combine it with our online reach even on an unduplicated basis. Our audience is growing and so the operating and each of our markets with prints and online together, that the growing audience, and I – very few with any of our competitors can make that claim. So that push, that advertising hitch works, and I guess ultimately no matter what we say to the advertisers, its going to be what makes their cash register swing. And what we are finding is that you know the best way to reach the audience especially the high demographic audience that most of them want to reach either online or in print. So we don’t think that this will necessarily mean we can’t move forward with rate increases. Television has been moving forward as rate increases with declining audiences for years, they’ve blazed that trail for us. They are going to fight for our circulation increases going forward, but realistically we think we will see small decline, but again we don’t see that as failure, we view that as still doing better than our competitors, just everyone has a lot more choices and still the same amount of time.
Q – Thomas Russo
Yeah thank you Gary.
A – Gary Pruitt
Thank you.
Q – Thomas Russo
Second, on the classified, the one story that seems strong at present is real estate and then in some ways it maybe a shallow prospects because greater advertising as houses linger longer on the market, lookout you’ve gone through real estate before, how does this story play out? With real estate being the historical such strength in this quarter end across the industry?
A – Gary Pruitt
Yeah, we are seeing incredibly stronger with big numbers. And three years ago, we thought they would weaken and then last year we thought they were weaken, and so we kept on being a wrong about that. So we just shutout and they have strengthened, good thing we did, so we went up 27% this quarter on a 12% comparison. We think they will remain strong this year and they do, our markets I think are going to remain strong. We don’t believe we are in a bubble market that will plummet. We haven’t seen a lot of the same coastal affect in California. So while California is very strong or hopeful that it’s not going to plummet, we think that we will be able to be a little more resilient than some markets, but we see real estate remaining strong this year, perhaps not as strong if it has been year-to-date, I don’t know if we can count on 20% or 30% gain going forward, but we are at a point, point where people need the advertisers to sell their house, when they do advertise the markets are still moving, it’s the sweet spot for newspapers. We have been there for a couple of years now, it’s probably won’t last forever but I don’t know when it’s going to end, and we do think that automotive will strife through most of this decline. And we won’t perhaps be facing those declines maybe when real estate starts to slow, but you’ll have to wait and see and keep you posted. Right now we don’t see signs overall of real estate weakening. There are places where it is weakening, there are places other places where it is strengthening and overall the balance is still showing advertising and real estate getting stronger, not weaker.
Q – Thomas Russo
Thank you Gary. The last question, are there any prospects of you being able to engage in share repurchases in light of the release of quarterly numbers, but in the face of your activities with Knight Ridder. Are you able to do any?
A – Patrick Talamantes
Yes, we are, we had on an authorized buyback program of $200 million, and we are not anticipating executing on that program. Now what we are expecting to do is close the deal, use all the proceeds during the sale of the 12 papers to reduced debt. And to focus on debt repayment for at least the first few years here and getting the debt down a little bit, but then to balance debt repayment and share repurchase and reevaluate that on an ongoing basis. And obviously turning on the issues of interest expense and share price etc., and looking to build value now with leveraged equity returns and but longer term looking at a balance of both of those items.
A – Gary Pruitt
I do see one thing Tom, I just want to mentioned one thing, the one category where we are actually showing faster growth in print than online is real estate in this past quarter where print real estate outpaced online real estate growth amazingly. I don’t think that will fall, but its close, its close print is doing well. So we will see how that tracks going forward. So I guess share repurchase is there in the offering, but not immediately.
Q – Thomas Russo
Okay, thank you.
A – Gary Pruitt
Sure.
Operator
Your next question comes form the line of William Bird with Citigroup
Q - William Bird
Hi Gary, are there any new insights gain coming off your visit with 10 to 20 papers and also I was wondering if could remind us what new co. D&A and CapEx will look like as you look beyond ’06, ’07 or so? Thanks.
A – Gary Pruitt
Okay, with regard to I think your question was any insights coming from visiting this 10 to 20 papers. Those visits are relatively brief and more kind of in the meeting brief of variety rather than any sort of in-depth operational view. As we’ve mentioned that’s all being held off during the pending Hart-Scott-Rodino review. I would just say that they will enthusiastic trips – I mean the employees enthusiastic, I am enthusiastic, I think we are both looking forward to get the deal closed and moving forward, I got to tell you I’m very much ready to get this deal closed and get the 12 papers sold and focus on performance and delivering going forward, and I get the impression that that’s the way those papers deals go. I think those employes feel very good about McClatchy acquiring them, and we feel just this great about it, and I think that we can deliver long-term there, I think and the only impact I would say from the employees is that greater enthusiasm than even I anticipated and good optimism about the future growth for those markets and those papers. With regard to D&A and CapEx, I will turn it over to Pat to speak for that.
A - Patrick Talamantes
I think, the D&A and other purchase price accounting, they will all be reflected in the pro forma that you will see in the S-4, which will be released tomorrow. But I would encourage you to take a look at that. We won’t see there as obviously what we think, capital expenditures would be going forward. We expect to be in the $100 to $110 million range, going forward from the next few years, I mean that should easily satisfy our needs for both the old methodology as well as the new papers.
Q - William Bird
And by the way, will the papers that are going to be divested, will they just be treated as a discontinued operations upon closure?
A - Patrick Talamantes
That’s correct, we will use discontinued operations accounting for the papers that we are divesting and so we ought to have a pretty clean income statement for you, you know in the box.
Q - William Bird
Okay, thank you.
Operator
Your next question comes from the line of Edward Atorino with Benchmark Company.
Q - Edward Atorino
Hi, my question has been answered, thank you very much.
A – Gary Pruitt
Those are my favorite.
Operator
Your next question comes from the line of (indiscernible) with Waterstone Capital.
Q - Robidoux Howdrix
Not right after the acquisition closes but little longer term, do you want to stay, will BBB or you are headed more towards little bit more contributed capital structure, what’s your objective?
A – Gary Pruitt
We don’t really have necessarily a specific target in mind, we do think that we want to do better than that kind of low BBB rating long-term, so we will be focused on paying down debt, giving a much closer to two times cash flow than three or four times cash flow and then looking at the share repurchase balancing with every payment.
Q - Robidoux Howdrix
How long you think that’s going to take to get there?
A – Gary Pruitt
We haven’t given a projection on that and I guess I am hesitant to speak to that based on our models, but I would say in general terms absence of extraordinary circumstances, we are going to focus on debt repayments for the first couple or few years exclusively.
Q - Robidoux Howdrix
Thank you.
Operator
Sir, next question comes from the line of Tom Curlin with RBC Capital Markets.
Q - Tom Curlin
Hi, I was curious with the closing of the Knight Ridder acquisition is contingent upon divestitures, is that’s more of a streamlining move banking?
A – Gary Pruitt
Its not contingent on those divestitures, that would migrate overall probably we’d prefer that’s not to make those divestitures, but it does reflect a conscious decision made by McClatchy to stick for longstanding acquisition strategy, and those markets just didn’t meet that strategy, and generally reflecting slower growth but not that exclusively. And as a result we felt that to maintain the growth profile of the company forward, we would sell those 12 newspapers and the network with our financial models as well.
Q - Tom Curlin
Got it, thank you.
A – Gary Pruitt
Thank you.
Operator
At this time you have no further questions from the phone line.
Gary Pruitt, Chairman and Chief Executive Officer
Great, well thank you all very much, I appreciate your interest in McClatchy, we look forward to better things going forward. I appreciate it, good-bye.
Operator
This does conclude today’s conference, you may now disconnect.
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!