Original Source: FD (FAIR DISCLOSURE) WIRE
. Elaine Lintecum, The McClatchy Company, Treasurer . Gary Pruitt, The McClatchy Company, Chairman, CEO . Alexia Quadrani, Bear Stearns, Analyst . Pat Talamantes, The McClatchy Company, CFO . Craig Huber, Lehman Brothers, Analyst . Karl Choi, Merrill Lynch, Analyst . Peter Appert, Goldman Sachs, Analyst . Frank Whittaker, The McClatchy Company, VP Operations . Paul Ginocchio, Deutsche Bank, Analyst . Thomas Russo, Gardner, Russo, Analyst . Bob Weil, The McClatchy Company, VP - Operations . Trent Spiradellis, Avenue Capital Group, Analyst . Fred Searby, JPMorgan, Analyst . John Janedis, Wachovia, Analyst . Chris Hendricks, The McClatchy Company, VP Interactive Media . Scott Marchakidas, Goldman Sachs, Analyst . Ken Silver, Royal Bank of Scotland, Analyst . John Discher, Pinnacle, Analyst
. Ann Pennet, Deutsche Bank, Analyst . Brian Shipman, Lehman Brothers, Analyst . Bill Greene, Clarion Road Asset, Analyst . Tom Kerr, Reed Conner, Analyst
Co. reported 4Q07 preliminary earnings from continuing operations of $33.2m or $0.40 per share.
A. Key Data From Call 1. 4Q07 preliminary earnings from continuing operations = $33.2m. 2. 4Q07 preliminary EPS from continuing operations = $0.40. 3. 2007-end debt = $2.47b.
S1. 4Q07 Business & Financial Review (G.P.) 1. Details: 1. Reported preliminary earnings from continuing operations of $33.2m or $0.40 per share subject to an anticipated non-cash charge to GAAP earnings for impairment of goodwill and long-lived assets.
1. Preliminary results include income tax expense of $7.5m or
$0.09 per share related to changes in prior-period estimates.
2. Estimates that income from continuing operations was higher by
approx. $5.3m in 2006 because of the additional week reported
last year. 1. For this call, will focus on 13-week comparable trends. 3. Results reflect continuing tough revenue environment and Co.'s continued response to strong cost controls to help offset the revenue decline. 4. Reduced cash opex by 9.1% and will continue to seek ways to reduce them. 5. Advertising revenues from continuing operations were down 9.3% vs. 4Q06.
6. Circulation revenues were down 7.8%. 1. Decline in circulation revenues reflected in part a reclassification of $2m in delivery expense, which reduced both revenues and expenses. 2. Excluding the impact of this reclassification, circulation revenues were down about 5%. 7. Advertising revenues continued to be hurt by downturn of the real-estate market particularly in California and Florida
newspapers. 1. Together, these two regions represented 33% of revenues, but accounted for 58% of ad revenue decline.
2. While improving somewhat from 2Q07 and 3Q07, these regions are still seeing the largest declines in all categories of advertising.
3. Advertising revenues in other regions combined were down 6.2%, slightly worse than the previous two quarters. 2. Revenues by Category: 1. Retail: 1. Retail advertising, down 2.7%. 1. Declines in newspaper advertising were partially offset by strong growth in online retail advertising, which was up 36.6% and to a lesser extent 1.8% growth in preprint advertising.
2. Classified advertising revenues declined 20%: 1. Employment advertising declined 24%. 2. Print employment revenues, down 28.3%. 3. Online revenues were down 15% reflecting the close tie between print and online upsell advertising in the employment category. 4. Automotive advertising, down 13.3%. 5. Print advertising, down 19%. 6. Online auto advertising, up 30.5% reflecting the success
of cars.com product. 3. Real-estate advertising, down 30.9% with 64% of this decline coming from California and Florida. 1. Print advertising, down 32.7%. 2. Online real estate advertising declined 6.5%. 2. National: 1. National advertising declined 6.8% and continued to be hurt mainly by losses in telecommunications.
2. Online advertising increased 5.2% vs. 4Q06. 1. Had inconsistent data in 2H06 due to differences in what Knight Ridder considered online advertising, the way they accounted for Real Cities' ad network revenues sold on behalf of third-parties, and purchase price accounting adjustments for some CareerBuilder revenues. 2. Has attempted to factor out the impact of all these differences. 3. If it did, believes online revenues were up in the mid-single digit range for 2007. 3. Expects to return to historical strong growth rates in online advertising in 2008. 4. Online categories that are less reliant on upsells from print advertising are doing quite well. 1. Online retail advertising was up 52.6% in 2007. 2. Automotive advertising was up 20.1%. 5. Online advertising continues to remain the fastest growing segment and Co. remains among the top of industry in terms of online advertising revenues as a percentage of total advertising at 8.6%. 6. Expects this percentage to continue to grow overtime, and is excited about Internet investments and online business. 3. Circulation: 1. Daily circulation declined 3.5% and Sunday was down 4.0%. 2. This year, Co. made a decision to scale back certain marketing programs that advertisers told MNI did not have much value. 3. Believes these strategic reductions account for approx. a third of declines. 4. As Co. cycles over these decisions, expects circulation declines to lessen in 2H08. 4. Co.'s strategy is to grow and retain quality circulation at its newspapers while rapidly expanding the audience served
online. 1. Most recent ABC Report of audited audience data showed that Co.'s combined but unduplicated reach of print and online in almost all major markets is greater than 70% and that total
audience is growing. 3. Expenses: 1. Total cash expenses decreased $41.3m or 9.1%. 2. Compensation costs were down 4.5%. 3. Salaries declined 5.4%. 4. FTEs were down 7.7%. 5. Newsprint and supplement costs were down 25.2%, reflecting in equal parts lower newsprint prices and lower usage. 6. All other expenses decreased 6.4%.
7. Net interest costs from continuing operations were $46.4m.
8. Effective borrowing rate was about 6.4%. 9. Seeing lower rates on bank debt since the federal reserves actions last month.
1. This impacted about $1b of Co.'s debt. 10. Operations continued to produce significant cash, which Co. is using to pay down debt. 1. Debt was down approx. $805m since the end of 2006 to $2.47b at the end of 2007. 11. Announced the sale of SP Newsprint Company a couple of weeks ago and expects to use after-tax proceeds of about $40m to reduce debt when it closes.
12. Expects to receive roughly $200m of tax refunds related to
the sale of the Minneapolis Star Tribune newspaper. 13. Expects to complete the sale of land in Miami this year with after-tax proceeds of approx. $115m. 1. With these transactions and substantial cash flows, expects debt balance at the end of 2008 to be approx. $2b. 4. Outlook: 1. While Co. did see a slight improvement in advertising in 4Q07 vs. 2Q07 and 3Q07, advertising environment in 2008 does not appear to be improving. 1. In Jan., saw headwinds from a worsening national economy. 2. Now expects advertising to likely be down in the low-double digit range in 1Q08. 3. As the year progresses, expects advertising revenue trends to improve somewhat from 1Q08 but does not have sufficient
visibility to be more specific. 2. This recessionary outlook coupled with the continued decline in stock price since the end of 3Q07 will likely result in an additional impairment charge in 4Q07. 1. This noncash charge does not reflect Co.'s view of the long-term health of the newspaper industry or MNI. 2. If Co. was able to base the valuation on discounted cash flow analysis and recent transactions, current level of goodwill would be sustained.
3. But GAAP requires that Co. reconcile the value indicated by
its publicly …