Patrick J. Talamantes, President and CEO, The McClatchy Company
May 16, 2012, Sacramento, California
Thank you, Gary ... Good morning, everyone. Before I start this presentation, let me say that I am honored that the Board of Directors has put its trust in me to lead McClatchy going forward. But, as is often the case, a journey ahead is defined, in part, by the road previously traveled.
And for McClatchy, that road has largely been defined by the leadership of my mentor and friend, Gary Pruitt. Gary is considered one of medias premier leaders for good reason.
Over his 28 years at McClatchy and, particularly, in the last 16 years as chairman and CEO, Gary has led our company both with vision and the fortitude necessary to make tough decisions in difficult times.
Gary has championed our transition to a successful hybrid print and digital media company, one that has led our industry in digital growth, a company that has remained highly profitable even through the worst economic downturn since the Great Depression, and a company that is well-positioned for future success.
Under Gary's leadership, McClatchy never strayed from its 155-year-old mission: to produce high-quality journalism that makes a difference both to our communities and to democracy.
Gary, we appreciate all that you have done for McClatchy over your career, and I especially want to thank you for all the support you've given to me in my new role. We wish you all the best in your adventures ahead at The Associated Press.
Looking Back to 2011
Now, let's look back at McClatchy's performance in 2011and the first quarter of 2012. Our revenues declined 7.7% with advertising revenues down 8.9%. While that revenue decline may be disappointing, as you'll see in a moment we generated strong cash flow and the year was positive in several areas.
We continued to restructure operations and reduce costs. As a result, we generated $352 million in operating cash flow and importantly every paper was profitable, as they were throughout the recession.
As you can see, our ad revenues were down about 10% through the first nine months of 2011, but they have improved significantly to the mid-single digit range over the last six months through March of this year.
Our digital business, the cornerstone of our future success, was affected by a choppy economy. But, importantly, the biggest driver of our digital business, which is digital-only advertising, remained strong. As you can see, digital-only advertising grew impressively in the first quarter of 2012, up 14%, portending a bright future in the digital space.
Total digital advertising was up 2.7% in the first quarter of 2012, representing 22% of our total advertising revenues among the highest percentages in our industry.
Direct marketing, which includes direct mail, niche products and our Sunday Select preprint advertising program, is another increasingly important part of our business. Direct marketing revenues grew 6.2% to more than $128 million in 2011 and were up another 1.5% in the first quarter of 2012.
Direct marketing has seen steady growth in recent years and represented more than 13 percent of total advertising last year.
Financial Stability Required
The road ahead demands financial stability, and we executed several important transactions last year that improved McClatchy's financial position.
We contributed seven properties valued at nearly $50 million to our pension plan in January. This satisfied all of our required contributions for 2011 and reduced taxes by $18 million.
We also sold our real estate in Miami for $236 million, contributing $163 million in proceeds to our pension plan, which helped us save $60 million in taxes. These pension payments will have lasting benefits. They have reduced our near-term required pension contributions by about $45 million annually, which frees up more resources to pay down debt.
We remain steadfast in reducing our debt, which we cut by $140 million in 2011 to $1.634 billion.
Moving McClatchy Forward
Now, let's take a closer look at what we are we doing to move the company forward in the years ahead. You know, Gary may be leaving, but it's still the same management team thats powering this company's strategy, and it's the same playbook that weve been using these past several years. So the following areas of emphasis should be very familiar to you.
McClatchy is intensely focused on:
* Driving new revenues, especially digital and local
* Expanding our audiences, and the platforms through which we reach them
* Producing high-quality journalism
*Permanently reducing costs and
* Continuing to pay down debt
Driving New Revenues, Especially Digital
The modern McClatchy Company is much more than a newspaper company. We are the leading local media company in 29 great markets across the United States. Our focus on diversifying our revenues means that one- third of our ad revenues are now generated outside of the newspaper. Even throughout the recession, McClatchys digital revenues have grown year after year. As we've already seen, digital advertising now accounts for about 22% of McClatchys total ad revenues with margins better than our print products.
Digital classified adverting is where we clearly see the benefits of McClatchys valuable internet investments, particularly CareerBuilder, the nation's No. 1 employment website, and Classified Ventures, a thriving online classifieds company that operates Cars.com and Apartments.com.
Not only do these companies provide leading online products used by each of our newspapers, their strong earnings contribute to our bottom line and their cash flows are providing significant dividends. In the last two fiscal years, Classified Ventures paid McClatchy nearly $42 million in cash dividends, and last year CareerBuilder contributed its first dividend totaling $7.5 million in 2011.
Classified Ventures and CareerBuilder are prime examples of how McClatchy has grown its business through investments and new products. And we continue to pursue and develop new digital products and offerings.
Last August, we completed the launch of dealsaver®, our proprietary daily deals service across all of our markets. Unlike competitors such as Groupon or LivingSocial, dealsaver® benefits from the promotional power of our local papers, their related websites and local sales forces.
Since late 2010, McClatchy has been rolling out Find n Save across our markets. Find n Save is a digital shopping portal that provides advertisers with a common platform to reach online audiences with digital circulars, coupons and display advertising. Find n Save has been well-received by both consumers and advertisers so much so that McClatchy reached out to several other leading media and publishing companies to join forces and create a new company to support it. This industry-wide effort provides Find n Save with significant scale and we expect it to be in place at an estimated 250 newspaper websites around our industry by the end of 2012.
In both online and in print, were pursuing local revenue opportunities. Most of our ad revenue decline right now is coming from large advertisers, so were working to offset that decline with small and midsized retailers, who have often been priced out and underserved by daily newspaper advertising in the past.
Our Print & Deliver program, launched in 2010, offers neighborhood retailers and other nontraditional advertisers the ability to distribute preprinted circulars in their immediate vicinity where they can do the most good. We distributed about 525 million circulars for our advertisers in 2011 under this popular program.
Our Sunday Select product has continued to grow at a double-digit clip since its introduction a couple of years ago. You may recall that Sunday Select is a package of preprints delivered to non-newspaper subscribers upon request.
We continue to experiment with paid online content, rolling out different models in different markets.
We have begun charging for online content with a metered paywall at our newspaper website in Modesto. Online users are asked to pay after accessing a limited amount of content for free. Our newspaper website in Columbia, South Carolina, charges online subscriptions to access deep, original college sports content. And other of our South Carolina papers in Hilton Head Island and Beaufort recently began charging out-of-market users to access their websites. We'll continue with these and other initiatives in an ongoing search for that sweet spot trying to capture additional subscription revenues without harming traffic or advertising revenues.
Continuing Audience Focus
Audience is another area of unrelenting focus.
We reported growth in Sunday circulation in 2011 and lower declines in daily circulation than we had seen in years.
In the most recent Audit Bureau of Circulations report for the six-month period ending in March, we showed daily volumes down 3.6%, but Sunday was up 0.7%. These numbers, of course, primarily reflect our print audience, but McClatchy also reaches millions of readers digitally.
While our online growth is solid, its important to note that not all internet traffic is equal. We get higher ad rates and better results for advertisers from local audiences. Local unique visitors to our websites grew in the first quarter of 2012 on top of 6.1% growth last year.
Our mobile traffic is growing exponentially, up 139% in the first quarter. Mobile traffic now represents 21% of our total unique visitors and McClatchy content is now available on virtually every mobile platform.
Producing High-Quality Journalism
Despite expense pressures, high-quality journalism remains a hallmark of McClatchy. Quality journalism is critical in retaining and growing our audiences and it distinguishes McClatchy from proliferating new media competitors.
McClatchy journalism is continually recognized as some of the best in the business. Tom Lasseter, McClatchys Beijing bureau chief, was honored last month with the top foreign reporting award from the Society of Professional Journalists for his 2011 coverage of human rights abuses by the Chinese government. He followed up that accomplishment this month by winning the 2012 Robert F. Kennedy Journalism Award for foreign reporting. The RFK Award, one of the top prizes in all of journalism, salutes outstanding reporting on human rights and social justice. McClatchy has won an RFK Award each of the past four years and five out of the past six years.
Closer to home, Jamie Lucke of the Lexington Herald-Leader received a coveted Scripps Howard Award for editorial writing. She took on Kentuckys powerful coal mining industry while speaking for the voiceless and powerless in Appalachia.
And The Miami Herald missed out on the most prestigious journalism award of them all the Pulitzer Prize Gold Medal for Public Service. Last month, The Miami Herald was named one of three finalists for the prize for its series Neglected to Death, which revealed deplorable conditions in Floridas assisted living facilities extraordinary journalism that helped changed state law and literally saved lives. Since 2006, in fact, The Miami Herald has been named a Pulitzer Prize finalist five times, winning twice.
Permanently Reducing Costs
We continue to permanently realign and reduce expenses but we do so strategically, ensuring strength in our newsrooms, digital operations and advertising sales the drivers of our business.
Much of this work is made possible by technology. We are sharing resources and content among papers as never before and centralizing and standardizing computer systems across the company. More than a third of our newspapers are now printed by others either another McClatchy paper or an outside party. And many of our papers that have not outsourced their printing now have excess capacity to take on additional work and generate greater revenues.
Continuing to Pay Down Debt
As always, we are focused on reducing debt and improving our financial position at every opportunity.
We paid off another $70.5 million in debt thus far in 2012 to reduce our overall debt to $1.56 billion.
As we look to improve our balance sheet further, well focus bond buybacks on near- and medium-term maturities. And were in good shape with our pension obligations. In fact, we made a $40 million contribution to our pension plan in January that more than covered our 2012 requirements.
Id like to assure you as the former CFO and as the new CEO that The McClatchy Company is in strong financial shape and getting stronger. We are poised to benefit from improvement in the economy and we will continue to work and reorganize our operations for the demands and opportunities of the digital age.
The road ahead is an exciting one thanks to the foundation put in place under Gary Pruitts leadership and to the hard work being carried out each day by our employees, in my opinion the most dedicated, enterprising, and resourceful in our industry. Together, we are successfully navigating a difficult economy and reshaping the company for a prosperous and vibrant future a future where our communities, our country and our democracy will continue to benefit from McClatchy journalism.