Klingensmith, Part II: Star Tribune CEO talks finances, Vikings stadium and who’s running things

Second of two articles

New Star Tribune CEO/publisher Mike Klingensmith sat down Friday to talk about a variety of subjects involving the newly un-bankrupt paper. The first part of the interview, covering digital strategy and his career, is here. In the second part, we talked about:

• Whether the Twin Cities will be a one-newspaper town
• Who owns and really runs the paper
• How he influences news and editorial coverage
• The organization’s interests in Vikings stadium
• The Strib’s financial numbers

How many local newspapers?
David Brauer: Is this going to a one-newspaper town? Does it have to be a one-newspaper town for the Star Tribune to do what you want to do?

Mike Klingensmith: It does not have to be a one-newspaper town for the Star Tribune to do what we have to do. But we also want to grow our business — and I think one of the sources of growth for us is consider the whole metropolitan area, not just half of it.

As for what will happen, I’m not really in the prediction business. It’s probably going to be industry-wide issues, and economics that determine whether there remain any two-newspaper towns, not our particular situation here.

DB: Last year, there was a lot of talk — frankly, from me — about combining print operations with the Pioneer Press, because there had been certain distribution operations that the two papers had combined. Are you in discussions at all with the Pioneer Press in terms of combining any more operations?

MK: No.

DB: Do you, given your brief time in the mergers-and-acquisitions business, could you see acquiring some kind of existing media properties in the Twin Cities?

MK: Yes. I wouldn’t rule out … but we’d have to have the financial wherewithal to do so. But our goal is to be a more important media player in the Twin Cities. If there was property that was a great strategic fit and we had the financial wherewithal, I’d have interest in that.

What I’ve also learned, though — first-hand, living through Time-Warner in its many incarnations, is you have to beware of false synergies. And to that end, I recommend reading “Curse of the Moguls,” because there’s a lot of wisdom in that book. There’s no point in trying to latch things on just for the sake of being bigger.

DB: One of the key messages of that book was profitability over size, so margins are kind of important.

MK: Exactly.

DB: Any sort of media properties you think are exciting? You don’t have to name the ones but …

MK: I’m going to take the Fifth on that.

DB: Have you met Pioneer Press publisher Guy Gilmore?

MK: I have not; I look forward to it. Our paths haven’t crossed.

The owners and the board
DB: Who’s in charge? Your board or your owners?

MK: Our board is definitely in charge. I very rarely hear from our owners; very rarely. The best thing they did here was put together a great board. We really have an outstanding board.

DB: It’s hard for people to believe that there are hands-off owners. Are you saying that’s what you have?

MK: Our ownership group is responsive, and responsible, but it is not involved in day-to-day operations. They really are hands-off. They picked a board they have confidence in. They stay informed, but Mike Sweeney is chairing, and I’m operating daily.

DB: Is Angelo, Gordon & Co., a creditor-turned-owner often mentioned during bankruptcy, driving the ownership group?

MK: Not in any explicit way. Our owners have observation rights for our board meetings, and a handful of people show up.

DB: Is Alden Global Capital involved? I hadn’t heard of them before the Philadelphia newspapers’ auction last week.

MK: You know, we don’t actually know who all our owners are. We knew who our owners were when we emerged, but there’s no owners committee today. The owners clearly elected the board, they constituted the board, and I later joined the board.

The CEO’s news role
DB: Let’s shift gears and talk about news and editorial. I happened to be talking to somebody who was in a big staff meeting with you and you had said something to the effect of, “I’m here to be the sales guy, I’m not here to be the editorial guy.” Am I characterizing that right?

MK: It would really be wrong to say I’m here as the sales guy. There are a lot of things I’ve been in my life, but a great salesman is probably not one of them. It would be more likely that I said, “I consider my most important contribution to be on the business side of the newspaper, rebuilding business models, reformulating business strategy.” As opposed to being down in the weeds in editorial.

My experience base is clearly from the business side of publishing and not from the editorial side. My only experience is being sports editor of the University of Chicago Maroon newspaper, and I don’t think that qualifies me to be the principal journalistic officer.

DB: Are you a member of the editorial board?

MK: Yes, I am.

DB: And are you an active participant, are you sort of sitting back and waiting for local experience to accrue? How does it work?

MK: I would say I’m a thoughtful participant. I’m not trying to drive that boat. [Editorial page editor] Scott [Gillespie] is a very capable and experienced executive in editorial, and [Editor] Nancy [Barnes] is a thoughtful and capable executive in news, and I have full confidence in both of them. Obviously, I want to stay involved and informed, but it would be wrong to characterize me as someone who is going to be pulling a lot of levers.

DB: It’s early, but have you been in a situation yet where you’ve had to say to Scott, “Nah, you can’t run that editorial” or “That editorial has to change?”

MK: The answer is no. Although we’ve had lots of really interesting discussions about editorial subjects.

DB: The reason I ask is that under your predecessor Chris Harte, there were lots of stories, and I think they were accurate, of a very conscious effort to take the paper away from what had been perceived as a pretty liberal editorial page, back to the middle, in part because of business reasons — that the politically purple, or even red, zones of the Twin Cities happened to be the growth zones. Is that a philosophy you agree with? Are you looking for the paper to have a certain political position, or not have a certain political position?

MK: It’s certainly not my goal to have the paper be considered either liberal or conservative. I think it’s our responsibility to do thoughtful analysis on an issue-by-issue basis and come to a point of view on that issue that we believe in.

DB: And, for people who don’t know you, I’ve written about your political contributions. [Klingensmith gave mostly to Republicans when they controlled Congress and then mostly to Democrats when they did, both times skewing toward moderates. In 2008, he first supported Joe Biden’s presidential bid, then Barack Obama’s.] How do you see yourself politically?

MK: I’m a staunch moderate. I’ve voted for candidates of both parties and given money to candidates of both parties. I have to say, if you wanted to characterize me, you could characterize me as somewhat conservative fiscally and somewhat more liberal on social issues.

The Vikings
DB [Pointing a block or two east]: You want a Vikings stadium over there?

MK: I want a Vikings stadium there personally. And I think it would be a good thing for the city of Minneapolis. But that’s a separate matter from taking an editorial position.

DB: Is that necessary for your business to have its land sold for a stadium?

MK: It would be helpful for our capital structure, but not essential.

Revenues and who will pay the bills
DB: Moody’s projects revenues for the newspaper industry down by single digits this year and basically flat for ’11. Is that how you see the Star Tribune’s revenue track?

MK: That is pretty close to what we’d expect to see for ourselves, absolutely. We’re hoping as we get to the end of this year and into the beginning of next year, the revenue decline on the advertising side will finally abate.

DB: In bankruptcy last year, the Strib only ascribed about 7 or 8 percent of its revenues to the digital side. Where do you think that ends up in at the end of ’10, the end of ’11?

MK: We’re well above that [7 percent] number today. And I wouldn’t put a timeframe on it, but down the road a bit, we should approach 20 percent of our revenue from digital. It would be aggressive to get there by ’11, probably. I’d like to try to head toward that direction.

DB: Related question on revenues. The bankruptcy docs had it 80 percent from advertisers in ’08, and 20 percent from readers. It was 75/25 last year. Where’s it going to end up? 60/40?

MK: Just to put a little color on those numbers: when those were reported, we net our distribution and carrier costs against circulation revenues. So when you look at what proportion of our revenues being generated from advertisers as opposed to readers, already today 60 percent of the checks written to us are written by advertisers, and 40 percent are from consumers.

Ideally for me, we’d have equal contribution from advertisers and consumers in the long run. Again, that will be a process.

DB: Should I presume that if that number becomes even, consumers will pay more even if your proceeds from advertising are going down?

MK: Unfortunately, the way we’ve gotten to 60/40 is not the way you’d prefer to get there, with advertising revenue falling faster than circulation revenue. That’s not a trend I want to see continue. We need to create more consumer revenue. And more advertising revenue — but I’d like to create more consumer revenue faster.

The reason I’d like to have a better balance is because advertising is more susceptible to economic ups and downs, and consumer revenue has been historically more resilient in the face of downturns.

[Note: Wednesday, the Strib confirmed it was raising weekday metro single-copy prices from 50 cents to 75 cents.]

Cash flow and cash in the bank
DB: One of these days, you’re going to report some sort of first-quarter numbers, right? At least that’s what [board chair] Mike Sweeney promises. I think it’s important for people to have a sense of how healthy the paper is or isn’t at the moment.

MK: I’m just curious — why do you think it’s important for people to know?

DB: Well, I think there are a lot of people who think the paper is going down the tubes.

MK: So it’s a marketing question.

DB: Yeah, on some level.

MK: I’m very happy to tell people we’re here to stay.

DB: So help convince me with numbers. I wrote $20 million to $30 million in cash flow this year — that’s good when you have [$100 million in] debt like you guys have — and sitting on $40 million in the bank. Am I right? Is that close?

MK: You’re in the ballpark. Understand that [with cash flow] we’re talking EBITDA — earnings before interest, taxes, depreciation and amortization — which is not the same as piles of cash. Because, for example, we’re still making cash severance payments this year, unfortunately. There are other lingering one-time cash effects from [bankruptcy] restructuring. But as an EBITDA matter, our earnings will fall somewhere in that range, if things will go as they’ve started to go this year.

DB: Right, so cash flow isn’t necessarily cash going to savings or investments. For example, even though depreciation is a paper item, it reflects something real — equipment wearing out. So you theoretically have to spend cash on that — capital expenditures that wouldn’t be reflected in EBITDA.

MK: [Laughs] EBITDA is a term I believe Time-Warner actually coined as a way to portray things as going well when things weren’t going so well. [Klingensmith is a former Time executive.] Depreciation is not a cash item, but you have capital expenditures that have to be made to keep the business in good running order. And frankly, they have been expending the minimum amount of capital expenditures over the last couple of years, as you might imagine. So we do have some catching-up to do in capital expenditures.

DB: Are you talking printing presses or something more 21^st-century?

MK: The catching-up is in our historical plant, but then the other piece of capital expenditure is software, technology. There are a lot of needs that have to be funded from any cash we have.

DB: But I think the concern is that your revenues are going to continue to go down for awhile. If you don’t have cash, and you’ve got debt, you’ve got trouble. So, I mean, you’re a finance guy — does this paper have enough cash and enough profit to pay its debt indefinitely?

MK: If we’re in equilibrium with this year’s numbers, we would have sufficient resources to pay our debt and run our business. That’s if we’re in equilibrium with this year’s numbers, and no one knows the answer to that, precisely.

DB: Do you anticipate having to reopen any of the labor contracts that were negotiated last year in bankruptcy?

MK: The labor contracts all have expiration dates, and they’ll all be negotiated at their expiration. We’re not reopening them.

Other changes at the top
DB: One thing I have noticed is that there have not been anything close to wholesale changes at the executive level. You have a new sales manager …

MK: A new chief revenue officer; it’s the contemporary title.

DB: Are there other changes?

MK: Our h.r. director, to our great chagrin, resigned earlier this week because she’s from California, she’s a McClatchy executive, and got a terrific new job as an h.r. v.p. at a major health care company. Helen Wainwright, a really wonderful person and she’s done a great job here at a very difficult time. She’s going back home, 1000 percent of her own volition and a great opportunity.

The advertising-sales changes were by far the most significant changes, and that is a significant change because you referred to what percentage of our revenues come from there. And our new advertising CRO [Jeff Griffing] brings a lot of experience to us, not only has he worked in this marketplace, but aspires to work in this marketplace for a long time to come, but he’s worked in magazines, newspapers, digital. He’s worked on national, local and regional platforms. So he’s really got a broad base of experience that’s going to be useful to us here. A great sales executive.

DB: One advertising deal that preceded you: CarSoup. This was the Star Tribune saying, “You know, we got dumped by one partner we had before, we tried to do our own thing and that didn’t go so great, so we signed a deal with someone else,” and, I was told, some revenue fell to the bottom line. Is that the sort of classified play, web play, we should expect some more of?

MK: With this digital platform that we’re trying to create, part of the objective there is to regain a piece of that classified business that we’ve lost. That may well involve some partnerships, but those are not yet conceived or formulated.

DB: Do you anticipate to get back some of that classified business that the consumer price is going to be zero?

MK: That’s one of the possibilities that we’ll consider, in digital.