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Friday November 20, 2009
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Friday November 20, 2009
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Gary B. Pruitt, Chairman, President and CEO, The McClatchy Company
May 20, 2009, Sacramento, California
As we meet here today, McClatchy is engaged in a battle on two fronts: We're managing through the deepest and most painful recession in generations, and we're undergoing the unprecedented transformation of the news business brought about by the secular shift to the internet.
We have a serious fight on our hands, but I speak to you this morning with a strong sense of resolve. I am confident McClatchy is up for this fight. Over the past year, we have made tremendous progress in reengineering the company to survive and prosper in this 21st century media landscape -- even if the dismal economy has masked many of our advances.
I’d like to spend some time reviewing our performance and, importantly, looking ahead.
In 2008, McClatchy's revenues declined almost 16 percent with advertising revenues down almost 18 percent. These revenue trends continued -- and worsened -- in the first quarter of this year.
This revenue decline gets a lot of attention. Our critics conflate the secular and the cyclical. This leads to the wrong, but increasingly popular conclusion, that there's no viable future for newspaper companies.
The reality is that McClatchy operates solidly profitable multimedia publishing companies in 29 cities from Miami to Anchorage. Our operating cash flow margin in 2008, excluding unusual charges, was a healthy 21.5 percent.
And as we'll see, McClatchy is well on its way to becoming a successful hybrid print and online news and advertising company -- one fully engaged and vested in digital publishing and digital platforms as we have been historically in print.
Our digital growth has been consistent and impressive. We now lead the industry in online advertising performance, and we operate the leading local internet business in each of our daily newspaper markets. Digital advertising revenues grew 10.6 percent in 2008 and represented 11.6 percent of total advertising revenues compared to 8.6 percent for all of 2007. That double-digit growth was suppressed by the impact the recession is having on hiring. If we exclude employment advertising, which has declined nationally both online and in print, our digital advertising revenues grew by more than 51 percent for all of 2008.
As I speak to you today, more than 15 percent of McClatchy's advertising revenue now comes from the internet, and we expect that percentage to increase as the year continues.
Think about that. McClatchy, a company founded before the advent of electric lights, will generate nearly $200 million dollars in digital revenue this year at a higher profit margin than our print business.
Our digital advertising performance is strengthened by ownership stakes in leading internet businesses such as CareerBuilder, the nation’s largest online job site, cars.com, apartments.com and HomeFinder.com. These best-of-breed businesses advance our strategy of retaining and growing our digital classified revenues. Partnerships with internet companies such as Yahoo and Google advance our retail digital business.
The untapped potential of local digital advertising in each of our markets is why these global internet giants seek partnerships with McClatchy.
McClatchy's digital audience also grew by double digits last year, expanding our total audience in print and online. We certainly are encouraged by this overall growth in audience.
While we saw a mid-single digit decline in print circulation, average monthly unique visitors to our websites grew by more than 33 percent in 2008. Each year, McClatchy continues to extend its reach in our local markets. Research shows that, on average, McClatchy's print and digital products reach more than 70 percent of those in our local communities.
Fueling this audience growth is the high value, premium content developed every day by McClatchy journalists and distributed on many different platforms -- from the daily newspaper, to regional websites, smart phones, Twitter feeds, blogs and niche publications.
Our peers, meanwhile, continue to recognize McClatchy journalism with the highest honors possible.
Last month, The Charlotte Observer won a Robert F. Kennedy journalism award for an investigation into the deplorable working conditions in the poultry industry.
Also in April, Miami Herald photographer Patrick Farrell won the Pulitzer Prize for breaking news photography. He won for a package of black-and-white images documenting victims of the storms that devastated Haiti last year.
It was the 20th Pulitzer Prize won by The Miami Herald and the 52nd Pulitzer Prize won by a McClatchy newspaper.
Today, even after initiatives to reduce staff and restructure costs, McClatchy maintains the largest newsgathering operations by far in each of our markets. No other local media outlet is as well equipped to produce and deliver the kind of unique, premium content that’s growing our total audience in print and online.
The deterioration in revenues and a changing business model required sacrifice. We have taken decisive steps to keep our company safe and permanently reduce our cost structure.
We announced two restructuring plans in 2008 that together save an estimated $200 million annually. Earlier this year, we announced more restructuring designed to save additional expenses during 2009.
These cuts have touched virtually every area of our company and included suspended dividend payments to our shareholders, reduced fees paid to our board of directors, salary reductions for most employees, and a suspension of bonuses for senior officers and managers throughout McClatchy.
Our restructuring is part of a continuing, strategic plan for successful future operations and not just a response to today’s economy. We are transitioning to a new business model that requires our hybrid print and digital company to be smaller, more efficient and built to compete.
We are shedding those legacy, 20th century cost structures that accumulated gradually over the years in an environment where there was much less competition for readers and advertisers. Those legacy costs weigh us down, limit our flexibility and jeopardize our health.
The same technology that challenges us on the revenue side offers savings on the expense side through centralization, collaboration and outsourcing. McClatchy has consolidated or outsourced operations in areas that include production, information technology, accounting and ad services. Our newsrooms are also working together in collaborative efforts not possible before.
Six of our newspapers are now printed at outside facilities with more to come.
We are sharing newspaper delivery with other newspaper companies where geographic efficiencies exist.
This broad range of initiatives has helped preserve cash flow and, coupled with asset sales, allowed us to continue paying down debt. In 2008, we reduced debt by $433 million dollars. This year we continue to focus on reducing debt to strengthen our financial position.
While we expect our restructuring initiatives to reduce our costs in the coming months, we must improve our advertising revenues as well. We launched five specific initiatives May 1st to do just that.
* First, we are intensifying our Yahoo sales effort. Yahoo's behavioral targeting products are delivering results to advertisers that often exceed expectations. We are adding a Yahoo component to sales presentations, dedicating more staff to the sales effort and expanding training to every salesperson throughout McClatchy.
* Second, we are rebuilding our relationships with local advertising agencies. Traditionally, broadcast and other media have paid agencies commissions based on their spending, which prompted agencies to direct their customers to media other than newspapers. We expect to level the playing field by matching this commission structure, and we’re reaching out to these agencies with new incentives and introducing them to our full complement of print and digital advertising products.
* Our third initiative involves employment advertising. Our greatest percentage of advertising decline over the last few years has come from the employment category. Here again, we’re looking to break with tradition. We’re making a strategic shift by selling this category as an online opportunity first, complemented by print advertising. We have powerful digital tools such as CareerBuilder to help employers and job seekers.
* A fourth initiative targets former advertisers, specifically those who have been out of the paper for six months or more. Many of these advertisers only used our print products in the past so a key component will be introducing them to the power of our digital offerings.
* Our fifth initiative provides rate incentives to increase advertising frequency among existing customers. Research consistently shows that frequency is most important in delivering results for advertisers.
I like to think of The McClatchy Company of the future as an athlete -- fit and trim yet muscular where we need to be. We are ensuring strength in our newsrooms and advertising departments -- our two most powerful assets, our core competencies and our social responsibility.
We are empowering our sales staffs to sell our full portfolio of print and digital products, giving them the right tools, the necessary training and new incentives. We’re developing new initiatives to grow revenue. And we’re continuing to provide our communities with high quality, public service journalism, in print and online.
We are positioning McClatchy for a long and prosperous future.
Thank you.
The McClatchy Company