McClatchy CEO On Knight-Ridder Acquisition and Advertising

On The McClatchy Company's (MNI) Q2 conference call, CEO Gary Pruitt discussed the effect of the Knight-Ridder acquisition on advertising sales:

Gary Pruitt, President and CEO

... In the second quarter of 2006, retail and direct marketing advertising were up, but national advertising fell. Within Classifieds, real estate was strong despite difficult comparisons, while employment and automotive advertising declined, the latter reflecting the continuing industry-wide trend. Employment advertising slowed in our largest markets, reflecting in part tougher comparisons to last year when this category was in recovery.

Retail advertising grew 2.7%, with strong growth in online retail advertising. National advertising was down 3.5%, and Classifieds advertising declined 1.2%. Within Classifieds, real estate was up 19.9%. Employment advertising declined 1.8%, and automotive was down 18.7%. Direct marketing advertising grew 18.4% in the quarter. Interactive advertising, which is included in those figures I just gave you, rose 27.9%....

...As we look to the third quarter of 2006, we see overall advertising results similar to the first half for both our existing papers and the 20 newspapers joining us from Knight-Ridder, with some differences in various advertising categories.

We are encouraged by the rebound in retail advertising and while our comparisons get a little easier in the area of automotive advertising, they are tougher in the real estate category, where we've had a strong run of advertising growth. And employment shows some signs of weakening. Finally, we expect continued strong growth in online and direct marketing advertising.

Looking at fourth quarter, we see some improvement in advertising revenue, as comparisons to 2005 ease. We are confident that the addition of the 20 newspapers in premium markets will solidify our position as an industry leader in advertising growth, and we look forward to a bright future despite the sluggish advertising environment that all traditional media have faced in 2006...

Steven Barlow - Prudential Equity

... on national ad sales, you obviously have a much bigger platform now. Can you talk about a little bit how you are positioning yourself in your discussions with ad agencies, but also at the same time you do have this interest in newspapers first, which is what Knight-Ridder used? How will that relationship change as you look ahead?

Gary Pruitt

...On the national advertising side, Steve, we are now beginning talks with newspapers first and plan to maintain that relationship. We're working more extensively with NNN, the National Newspaper Sales Network provided by NAA, and through our regional representation, we expect greater reach with national advertisers and greater access and we will be working to do that. But all of those are just in process right now.

Steven Barlow - Prudential Equity

Are you encouraged by anything you've seen? Now that you do have a bigger platform, or you think you can get a bigger share of wallet than you have in the past on a property-by-property basis?

Gary Pruitt

I am hopeful that we will be able to do that, especially in a regional approach say in the Carolinas where the smaller papers may been an afterthought before, there's greater access and regional buying from national advertisers, and seeking to make it a little easier buy the those national advertisers. So I expect, over time, we will see national provide a bigger share of advertising for McClatchy as a result of the Knight-Ridder deal...

Debra Schwartz - Credit Suisse First Boston

... I think you said that Online was about 7% of your advertising revenue in the former McClatchy markets. Do you have a sense of what that was for the quarter in the Knight-Ridder markets? Then either Gary or Chris, can you just talk about whether or not the online strategy in the Knight-Ridder markets needs to change at all?

Gary Pruitt

Well, with regard to the 20 Knight-Ridder papers we are keeping, while it's difficult to sort out the exact number as we had calculated at McClatchy, we do know that their Internet share of revenue is higher than that 7%, not dramatically but it is higher. So as a result, it will be greater percentages of ours going forward as well.

They did a good job on national Internet sales, and I also think CareerBuilder helped them on the employment side. So as a result, their percentage of online advertising was greater than our 7%. We would expect, in the new Company, the new McClatchy, that in the first year, pro forma Internet revenues would exceed $200 million with strong growth.

With regard to a change in strategy, I would say that McClatchy has done a good job, perhaps even a better job than Knight-Ridder, in driving some of the local revenue categories, but Knight-Ridder has done a superior job to us in the national Internet sales category. And, as I mentioned, in the employment category. So we think it's a nice congruent fit where we can help each other out, sharing best practices from both sides.

Strategically, in terms of the local web sites, McClatchy, while it does provide centralized Web-publishing tools and hosting, we provide greater flexibility for the local papers to produce their own look and feel to their web sites. That would probably be a strategic difference, at least for the users and readers of those web sites locally. We will be transitioning that over the course of the first year of our ownership of Knight-Ridder.