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Executives

Ryan Kimball - Assistant Treasurer

Pat Talamantes - President & CEO

Elaine Lintecum - VP, Finance & CFO

Robert J. Weil - VP, Operations

Mark Zieman - VP, Operations

Chris Hendricks - VP, Interactive Media

Analysts

Craig Huber - Huber Research Partners

Avi Steiner - JPMorgan

Andrew Finkelstein - Barclays

Michael Kass - BlueMountain Capital

Lance Vitanza - CRT Group

John Kornreich - JK Media

Jeff Anapolsky - T. Rowe Price

The McClatchy Company (MNI) Q4 2012 Earnings Call February 7, 2013 12:00 PM ET

Operator

Ladies and gentlemen this is the operator. Today’s conference is scheduled to begin momentarily. Until that time your lines will can be placed on music hold. Thank you for your patience.

Good afternoon everyone. My name is Sarah and I’ll be your conference operator today. At this time I would like to welcome you all to the Fourth Quarter 2012 Earnings Conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions). Thank you.

I’d now like to turn the call over to our host Mr. Ryan Kimball. You may begin your conference.

Ryan Kimball

Thank you, Sarah, and thank you all for joining us today for our fourth quarter 2012 earnings call. I’m Ryan Kimball, Assistant Treasurer, and I’ll be available to answer any follow-up questions you may have after our call this morning. My phone number is 916-321-1849, and you can also find my contact information on our website.

This call is being webcast at mcclatchy.com, and will be archived for future reference. Our earnings release was issued this morning before the market opened, and I hope you’ve had a chance to review it. Joining me today is Pat Talamantes, our President and CEO; our Vice Presidents of Operations, Bob Weil and Mark Zieman; our Vice President of Interactive Media, Chris Hendricks; and our Vice President and CFO, Elaine Lintecum.

This conference call will contain forward-looking statements that are subject to risks and uncertainties that are described in our SEC filings. Actual results may differ materially from those described during the call. Also, non-GAAP amounts discussed this morning are reconciled for the most directly comparable GAAP measures and schedules posted on our website.

Now, I’d like to turn the call over to Pat Talamantes.

Pat Talamantes

Thanks Ryan, and thank you all for joining the conference call. Net income for the quarter excluding the impact of the refinancing of our 11.5% notes in other unusual items was $33.8 million. Adjusted for similar items this compares to 2011 fourth quarter net income of $43.2 million which included the benefit of the more favorable effective tax rate.

Like a number of our peers our fiscal 2012 reporting period was a 53-week year versus a 52-week year in 2011 and as a result the fiscal fourth quarter of 2012 includes 14-weeks compared to 13 weeks in 2011. We estimate that net income ex items in 2012 was higher by approximately $4 million because of the additional week that we reported. We will generally limit our discussion to results on a 13-week basis which is comparable to our 2011 quarter.

In the fourth quarter total revenues were an estimated $333 million down 5.3% compared to fourth quarter of 2011. Total advertising revenues from the fourth quarter finished down 6.3% with digital advertising revenues up 3.5. Digital-only advertising revenues were up 14.9% in the quarter marking double-digit growth for every quarter in 2012. Digital advertising represented 20.2% of total advertising revenues in the fourth quarter of 2012 compared to just 18.5% of total advertising revenues in 2011.

Within advertising categories National performed relatively well finishing down 4.2% after being flat in the third quarter. Digital-only advertising revenues in this category were up 45.1% boosted by political ad spending and as in the prior quarter the banking and telecom sectors. Classified advertising finished down 5.7% in Q4 and was helped by continued strength in automotive advertising. Automotive registered a 4.6% gain on a combined print and digital basis and up an even more impressive 21.9% on a digital only basis.

Our cars.com product continue an impressive performance with revenue at $31.3 million for the year up 18.8% compared to 2011.

Real estate and employment remain challenged but we would hope these categories will improve to the extent of the broader economy improves and in any event these categories combined are only about 9% of total ad revenues. On the other hand we continue to see improvement in revenues from our other classified advertising categories which includes legal, remembrance notices and private party advertising and that finished down 2.7% for the quarter.

Total retail advertising our largest category was down 8.8% in Q4 due to a softer than expected holiday season. While the food and drug and office supply categories posted growth for the quarter it wasn’t enough to offset the declines for most of the categories. For the year however retail’s performance did improve finishing down 6.9% compared to a 9.4% decline in 2011. For the quarter direct marketing advertising revenues grew 1.8% and accounted for 15.9% of total advertising revenues. Over the last 11 quarter this category has shown positive growth in all but one quarter.

Direct marketing includes direct mail, niche products, our print and deliver service and our Sunday Select pre-print program. Sunday Select as you’ll probably remember delivers the package of advertising pre-prints to households that don’t subscribe to our newspapers but they have specifically asked to receive this Sunday pre-print packet. For the quarter revenue from Sunday Select was up 29.4% and was up 32.7% for the year to $15 million. We also continue to see impressive performance from our digital only advertising initiatives as we mentioned last quarter we've cycled over the launch of Dealsaver our proprietary daily deal service and we are pleased with the results we’re seeing. Our Dealsaver revenues grew 40.2% in the quarter compared to 2011.

In July of last year we launched impressLOCAL a suite of online products designed to offer local businesses a comprehensive digital marketing solution. impressLOCAL provides affordable packages that includes website customization, search engine marketing and optimization, social media presence and marketing services as well as branding opportunities on the web through mobile and email campaign. impressLOCAL debuted at our newspapers in Forth Worth in Kansas City. Early sales efforts have been positive and we’re rolling out the program in several additional markets in 2013.

As you know revenue diversification is a key strategic priority at McClatchy. Digital advertising now makes up 21.8% of total advertising revenues for all of 2012 but that doesn’t tell the whole diversification story. Other non traditional revenues such as direct marketing are also growing in revenue and in importance. Digital advertising and direct marketing together contributed over 36% of our advertising revenues for the year meaning that just 64% of our ad revenues come from the papers themselves.

Looking at our advertising revenue results by region we find that the North West and California continue to improve and outperformed our other regions in the quarter. Florida has been performing quite well over the last year but faced a very difficult some would call it a horrendous comp of down one in the fourth quarter. And then well not faring as well compared to other McClatchy regions Texas showed improvement compared to the third quarter despite more difficult comps.

Turning to circulation revenues decreased 1.9% in the quarter with daily circulation volume down 4.3% and Sunday down 3.9%. We believe that the introduction of our digital subscription initiative which we call the Plus Program will help us drive circulation revenue growth while allowing readers to access our content in multiple ways.

As a refresher and for those of you who weren’t familiar with the program our Plus Program ends free and limited digital access to our newspaper and includes subscription options for combined digital and print bundles and for digital only subscriptions. A meter (inaudible) at each of our daily newspaper website requires users to paper content after accessing a limited number of pages or news articles for free each month. Existing home delivery subscribers are given full access to the digital content and rolled into higher price bundled print and digital subscription when their newspaper subscription renews.

We completed the company wide roll out of the program in the fourth quarter and are pleased with the early results. So far a vast majority of renewing subscribed have accepted the program telling that us print readers value our content and high quality journalism and are willing to pay for it in digital format. Similarly we have added 8400 new digital only subscribers as of year end even though digital only was not our focus out of the gate.

In total the Plus Program contributed $1.2 million in incremental revenues in 2012 which is impressive considering that most of our newspapers launched in the fourth quarter. We expect the new Plus Program to generate more than $20 million of new revenues by the end of the year. We’re also pleased to see that even with the new [indiscernible] in place our digital traffic continues to grow. Our daily average local unique visitors were up 3.4% from the 2011 quarter and unique visitors of our content via mobile devices were up 95% in 2012 compared to the 2011 with mobile page views up 127%. Mobile represented 25% of total daily unique visitors in the fourth quarter of 2012.

As you can see we’re very focused on continuing to grow our digital business in both advertising and audience. We’re also seeing great benefits from our digital equity investments these include classified adventures which operate cars.com [ph] and apartments.com and Career Builders the nation’s number one employment website. For all of 2012 we received $38.6 million in distributions from our equity investments with $18.9 million coming from classified adventures and $15 million coming from Career Builders. These distributions have come as a result of the strong underlying operating performance of these companies which is also reflected in our financials. Our share of income from all equity investment in the fourth quarter was $11.8 million after excluding a non-cash impairment charged equity income of $7 million that was taken by one of our minority investment. Now excluding that charge equity income for all of 2012 was $38.9 million a 40.2% increase compared to 2011.

Now lets look at expenses, we continue to be diligent in reviewing and implementing expense reduction initiative plus the same time investing in new products and systems. On a 13 week basis cash expenses excluding restructuring costs were down 1.2% in the quarter as compared to the fourth quarter of 2011. Cash expense included the impact of approximately $2 market in cost related to new initiatives and enterprise wise computer systems in the fourth quarter. We saw another decline in news print expense in the quarter as price was down 1.4% and volume declined 7.6% compared to the 2011 quarter. Coupled with the decline in other all other expenses these lower cost more than offset a slight up tick in compensation that was driven by unfavorable or favorable reversals of fringe benefit expenses in the year ago period.

Now looking at debt on December 18, we achieved $910 million of new 9% senior secured notes that will mature in 2022, so welcome to those new bondholders and on that same date retired $762.4 million of our 11.5% Senior Secured Notes over due to mature in 2017. And that (inaudible) with a balance of $1.712 billion at the end of 2012. The remaining $83.6 million of a 11.5% Note were fully redeemed by January 17th leaving us with a debt balance for the transaction of $1.628 billion. We view the success of the bond offerings of these strong road of confidence in the company’s future prospects, this was the right time to do the transaction given historically attractive market conditions.

Our cash interest savings in 2013 is expected to be about $15 million and that improves our free cash flow and the extended maturity gives us greater flexibility to execute our strategic plans and create value. Our pro forma effective interest free on debt after including the retirement of the remaining 11.5% notes in January of this year is 7.8% down from 9.1% prior to the refinancing.

In addition to the successful bond offering, we were also able to further improve our financial flexibility by increasing our revolving line of credit to $75 million while extending the maturity date of the facility. Our leverage ratio at the end of the fourth quarter as defined in our credit agreement was 4.72 times cash flow and our interest coverage was 2.44 times. Adjusting for completing the retirement of the 11.5% notes in mid January, our pro forma leverage ratio was 4.49 times cash flow.

We ended 2012 with a cash balance of $113.1 million providing the funds for the completion of our debt refinancing. In the fourth quarter we used $16.2 million to fund capital expenditures with $9.3 million relating to the production facility project in Miami. We estimated that total capital expenditures for 2013 will be approximately $33 million with $12 million of that amount going towards final costs for our new Miami facility which is an expected completion date of May 2013. In early 2013 in January we contributed $7.5 million to our pension plan and we expect that there will be no substantial additional cash contributions made for the remainder of the year.

Looking forward, we will continue to focus on our new products and revenue initiatives especially in digital and direct marketing while enhancing our existing products. We expect our new Plus Program will translate in to an improving revenue picture from McClatchy in 2013. Based on preliminary data we estimate that January 2013 advertising revenue were down in the same range as of fourth quarter on a 13-week basis. Given the incremental revenues from our Plus Program we expect a declining total revenues in the first quarter of 2013 to improve somewhat compared to the decline we reported in the fourth quarter of 2012.

And as we mentioned last quarter we expect the impact of the program to grow throughout 2013 as readers renew their subscription. Our discipline approach to expense management remains firmly in place as we continue to balance opportunities to invest in our business. We expect to continue to benefit from stability in newsprint pricing in 2013. And despite additional investments in new revenue initiatives and enterprise-wide computer systems as well as higher pension expense which together are expected to total about $5 million. We expect cash expenses in the first quarter of 2013 to be flat compared to last year.

For full year 2013, we expect investments in new products and systems will total approximately $10 million and that pension expenses could be higher by $10 million to $12 million. Even so, we expect total cash expenses to be flat with 2012 on a 52-week basis.

And with that I’d like to thank you for your time this morning and we’ll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Craig Huber of Huber Research Partners. Your line is now open.

Craig Huber - Huber Research Partners

Can you just speak a little bit more about what would you see in the first quarter for advertising trends by category and what may be different versus we had in the fourth quarter. I have a follow-up too.

Pat Talamantes

Yeah, Craig. We never really give that level of detail in January on the first month of the quarter so I’m not going to go there.

Craig Huber - Huber Research Partners

My other question would be on the circulation front, can you just update us on the pricing for your bundles, what’s that price there versus let’s say a year ago, have it changed how much it changed and why?

Pat Talamantes

So Chris you want to handle that.

Chris Hendricks.

Hi, Craig, yes. So on a digital-only side prices start at $6 at 95% on a monthly basis, and they start at [$69.95] [ph] on an annual basis the customers are offered $0.99 30-day trial. On the bundle side which is a home delivery side we took a pricing roughly 12% to 15% across the board so that will give you an idea on average our monthly home delivery seven days probably about $16.50 so you can work from there it’s really a couple of dollars per month to each household.

Operator

Your next question comes from Avi Steiner of JPMorgan. Your line is now open.

Avi Steiner - JPMorgan

Thank you. I’ve got a couple here just on the expense guidance for ’13, can you give us a little more color on what’s the most investments are and related to this if the top line doesn’t turn out as you expect curious if you still have flexibility to cut cost, or are we closer to the bone there. And then I’ve got a follow-up. Thank you.

Pat Talamantes

Avi, I would say what we’re trying to do is really to manage the company for the long term. So with revenue trends slowly getting better in 2012 with the subscription initiative revenue on the way it makes sense to us to go a little easier on the expense line certainly in the second half and then as you saw going forward in to 2013. Keep in mind we’re trying to make investments for the future in different products in different systems capabilities.

And so what we’re trying to do is change the curve of the business to try to position us better for growth in the long term and we can manage to do that we think as long as revenues are stabilizing and within expected ranges.

To the extent that we came upon – quarter came upon an economic environment that was different than we were all expecting then we are just as dedicated to managing our expenses in line with revenues as we’ve been in the past. But given the improving revenue trends, given the additional revenues coming from our subscription initiative we want to take advantage of that to help grow the business, help grow revenues and help secure the franchise and position us for improvement in the future.

Avi Steiner – JPMorgan

And then on the sub conversion, the Plus Program, I know your home delivery subs are I guess on different lengths of contracts for lack of a better description but how do we think about the 20 million as it could roll through the year maybe on a timing basis…

Pat Talamantes

I don’t think we – I don’t know that we have the dollars by quarter but I think generally speaking you will see some improvement in the first quarter a little bit more improvement in the second quarter and then the maximum benefit will be in third and fourth quarters.

Avi Steiner - JPMorgan

And then very last one from me and then I’ll get back in queue, but any benefit at all to the newspaper industry or (inaudible).

Pat Talamantes

You’re talking about the proposals that the postal service made yesterday to eliminate Saturday Delivery, yeah I don’t know if we want to jump in to that because I know that was controversial with Congress yesterday. We think that it possibly could be – there possibly could be some upside there but no negative impact to us in terms of how we carry out our business, our shared mail packages, our mid week packages so that it doesn’t effect Saturday at all. There are some solo mailers that do use Saturday; they will have to move away from that to the extent of that happens and then I think if that happens the gravity of our Sunday marketplace in our newspaper inserts certainly could help us but we’re not necessarily counting on any of that. So in short perhaps some (mild positive) [ph] remains to be seen whether actually it will in fact happen and we’ll just have to wait and see.

Operator

Your next question comes from Andrew Finkelstein of Barclays. Your line is now open.

Andrew Finkelstein - Barclays

A couple of things from me. First, Pat, I was wondering if you could talk about the direct mail side, you listed a couple of things in there that were growing real fast but the total number we’re seeing it has slower growth I think. Can you maybe give us some buckets of the moving - of the different moving pieces there?

Pat Talamantes

Sure. So there is a variety of products in there, shared mail products, niche products and the Sunday Select product, the print and deliver product which is aimed at smaller retailers. But what I’m going to do is I’m going to turn that question over to Bob Weil who can go through it in more detail.

Bob Weil

Yeah, thank you. The – as you know our direct marketing for the quarter was up 1.8% and that is a consistent consecutive growth maybe 10 out of 11 quarters. So we had very strong direct marketing performance. What’s driving that is our Sunday Select product which is as Pat described earlier in an opt-in program for non subscribers on Sunday who want to receive our circulars that are in the daily paper, it’s very attractive to advertisers as well accepted by consumers who don’t subscribe and is a big revenue push for us, it’s about little over $15 million a year in 2012.

Other components of direct marketing are the print and deliver which is a program we launched a year and a half ago aimed at small advertisers or small business looking to reach customers immediately around their store with those single sheet print of their – for them then distributed either through the paper, through our TMC program or direct mail.

Then we also have niche products real estate automotives lifestyle magazines which is a little of our total and then finally TMC which is delivery – to non-subscribers. Which has become a lot more sophisticated in the last several months as we targeted to improve TMC programs to include more editorial content to make that more desirable to consumers.

Advertisers have been concerned for sometime about close to delivery and its not as perfect as it use to be for all the obvious reasons from the budget point of view and so the result we’re now getting more interest from advertisers who want to test a delivery to a non-subscriber by our career force.

Pat Talamantes

So, just a follow-up to Bob’s comment. I think with digital only we are, we can reasonably target and guide the business towards double-digit growth there is our goal and the direct marketing side given as largely being print based you know growing in the low single-digits is actually a win.

So that’s a good place for us to be product development will continue to be key here as we look forward to continue that growth. And well it’s a very nice complement and because of this retail base its interesting we focus a lot of what’s going on in the retail side of our business the advertising side just because we break this up separately people tend to miss its being a retail advertising business. So anyway just some more thoughts for you on that.

Andrew Finkelstein - Barclays

So it’s the direct mail side that that is offsetting the growth from Sunday Select and some of the other is that…

Pat Talamantes

I think it’s really niche of the niche business where we pulled back on some products that weren’t working that were particularly expensive. We’re always looking at that portfolio products we also have been introducing new products there too that’s largely I think niche with what’s held us back to some degree.

Andrew Finkelstein - Barclays

And that would keep you going forward a little bit a few more quarters that pull back?

Pat Talamantes

Yeah, yeah.

Andrew Finkelstein - Barclays

And then looking just at retail line and the classified line, I think the trends definitely got a little tougher from the declines increased a little bit from the last two quarters. So I was wondering if you could talk generally and then some of the digital only categories and the classifieds editing national is really good. But, some of the other digital categories looked a little soft to us I mean can you give a color there? Thanks.

Pat Talamantes

Okay. Yeah, on retail. Yeah, I take the point that retail was a little softer in the fourth quarter than it was in the quarters leading up to. And I tend to think of the fourth quarters been a year in and of itself decisions are made around the fourth quarter in ways that are not (inaudible) trend from previous quarters.

I would point out to you that we had a particularly strong quarter at a year ago. It was the strongest quarter of 2011. And so to a large degree, what I think we’re seeing here is comp, comp adjusted it was actually a fairly good quarter from that perspective. And obviously, December was weaker than we would have hoped for and weaker than we had seen in October and November. And then I think your other point was on the offset side is that right?

Andrew Finkelstein - Barclays

(inaudible)

Pat Talamantes

It was a little bit softer again comp adjusted. It was stronger from that perspective. It had almost a two point tougher comp in the fourth quarter than in third quarter, particularly noteworthy was the improvement in auto advertising, which was up 4.6%, compared to just up 2.4% in the third quarter. So that was good to see.

I think what we really saw the weaker results were in the employment category within the classified and that is a tough category for us. And I think that’s largely a story of digital now. Digital is more than 50% of our total employment revenues. We are having very good results with our 30 day up sells from print into digital. But, we are getting less traffic through our websites for employment going on that to CareerBuilder more traffic going directly to CareerBuilder and so there is some profit opportunities that we miss when that happen.

Now the flip side of that is that you see the results of CareerBuilder and the fact that the cash dividend doubled from $7.5 million to $15 million in 2012. And so we are capturing the improving digital trends at CareerBuilder. So that is us now we have CareerBuilder reps selling in our markets or inside our own markets are our own reps rather and so it doesn’t – their results don’t show up on the employment ones but we are capturing employment revenues there. And missing a question I think, is there one more.

Operator

(Operator Instructions) Your next question comes from Michael Kass of Blue Mountain Capital. Your line is now open.

Michael Kass - Blue Mountain Capital

With regards to CareerBuilder and Classified Ventures I was wondering if you could just kindly give an update on your thinking of monetization opportunities on that. I think you mentioned in the press release there reiterate that it’s strategically important but how do you balance that versus the valuation you can get for these assets?

Pat Talamantes

Yeah, thanks Mike, how are you doing? Let’s see on Classified Ventures and CareerBuilder, I mean, I don’t know that anything has really changed too much there only that they’ve become more valuable to us in the last year than they’ve even more before. So, I just talked about how important CareerBuilder is to a strategically on the employment side in terms of the auto category for us we are performing my sense is better than other newspaper groups on the auto side by virtue of our investments in affiliation with Cars.com where Apartments.com is growing nicely even though it’s not an particularly large business for us but our revenues from that product are growing. And so I would say it is helping us and stabilize revenues improving that in all of that.

So strategically they’re very important to us but the value the valuations are very good as well. And so what we have to wait is the strategic nature of the investments that if the cash that is being thrown off by those investments we have the opportunity to potentially monetize those investments down the line. And valuations multiples are attractive particularly in the case of Classified Ventures. And so it’s just something that we got to with a way and see if a transaction can develop that would pay us for the other – pay us for the upside but I’ll tell you that over the course of the next year outside over the quite last year between the increase in dividends between the obviously stronger benefits of those products to our revenues and I would say are desire to get extremely good price for those assets is only gone up.

Michael Kass - Blue Mountain Capital

And then somebody asked before regarding kind of your – kind of a strategy around expense management and I guess maybe the hovering in a little bit if I take your kind of current run rate of advertising and circulation layer in the 20 million or so from the payroll it still looks like you’re going to comp negative next year that might something changes, is it that you’re more optimistic on that in keeping expense line flat or if it’s a net investment pieces how long does that net investment pieces how long is that are you giving that to play out?

Pat Talamantes

Yeah. Yeah, I think that’s a really good question. I think there is no doubt that as a company in the industry frankly that we continue to have to look at ways of doing things more efficiently whether it’s through the new computer systems that we talked about. Whether it’s through process improvements regional centralization additional outsourcing opportunities that are still out there. Given this transition from print in to digital over time we continue to have to be more efficient over time.

So almost this is upper product our team is always looking at ways to make the company more efficient. And so that will tend to be a tailwind over time as we go in to the future. I would say the desire to continue to grow our products suite is not something that’s a this year in that – last year and this year issue I think that’s it forever issue. We’re going to have to be in the product development business for a long time to come.

Although I’m hopeful on the computer system investments that those investments over the course of the next probably two to three years can pay big dividends for us. In terms of how they improve our management of the business. And at the same time with those investments left and that is to say that, that they’re not going to necessarily increase year-over-year with that drag on the income statement, we’ll start to lessen.

The issue, one of the issues for 2013 that we called out is the increase in pension expense for the year $10 million to $12 million. We don’t anticipate that that’s forever issue either, so hopefully we can get through the course of this year and that kind of an increase won’t continue to [dogged] but it is pension accounting, pension accounting is not the greatest area, I would say.

So one way of saying that I do think we are in a balancing act for well, we are optimistic about our ability to stabilize the business and to start to focus on growth. We are not interested in managing the continual decline of this business. We are interested in turning it around and to do that we have make to judgments about balancing expense reduction in any given quarter, and hopefully we can – we will do that right, but as I said earlier to the extent if something surprises us, to the extent we have a bad economic climate, some other change in the way technology is employed who are really in content, any of those sort of issues that we are advertising that and it gets away from us a little bit, we will right back at the tougher decisions that we’ve always made.

Operator

You have a follow-up question from Craig Huber of Huber Research Partners. Your line is now open.

Craig Huber - Huber Research

Yes, I was wondering what was underfunded status of the pension at the end of the year please?

Pat Talamantes

Craig I am happy, more than happy to turn that one over to Elaine.

Elaine Lintecum

Hey Craig.

Craig Huber - Huber Research

Hi.

Elaine Lintecum

On the [overwrite] spending basis we were about – we have funded about 90%, the unfunded amount was about $153 million, now that’s different of them and that’s what drives our contributions. That’s different than GAAP. GAAP last year was underfunded about $422 million and that number is likely to rise given that discount rates have fallen about 100 bps, although we don’t have those exact numbers yet and we will have them in time to put in our Form 10-K, which we expect to file in early March.

But for our funding purposes about 90% funded in the $153 million.

Operator

Your next question comes from [Ken Silver] of [Lucidus Capital]. Your line is now open.

Unidentified Analyst

Hi, which entity that is minority owned is taking that write down?

Elaine Lintecum

Ken, our equity investments are privately owned companies, and we don’t disclose their results and so we can’t disclose that to you, I am sorry.

Unidentified Analyst

Let me just ask you, is it possible to confirm that its not Carrier Builder and not Classified Ventures?

Elaine Lintecum

It’s possible to confirm that it is an impairment related to a smaller investment made by one of our equity investees.

Operator

Your next question comes from Lance Vitanza of CRT Capital Group. Your line is now open.

Lance Vitanza - CRT Group

Hi thanks. All of my questions have been answered. Thank you.

Pat Talamantes

Great, thanks, Lance.

Operator

Your next question comes from John Kornreich of JK Media. Your line is now open.

John Kornreich - JK Media

Yes, hi Elaine just, I am a little confused, the unfunded pension liability is 150 or is it 400?

Elaine Lintecum

It’s 153 for IRS purposes

John Kornreich - JK Media

Okay.

Elaine Lintecum

Which is very indifferent, I would say that pension unfunded balance is bit of an arguer, it’s very different and very weird accounting as you compare accounting versus IRS rules. There was legislation that was passed in mid last year that allows us to look at long-term interest rate over a historical period for purposes of funding and so for funding it is a much smaller amount than it is for GAAP, which doesn’t allow us to use that accounting and so for GAAP its more of a snapshot at the end of the year and so what’s in our financial statements will be higher than what is required for IRS funding.

John Kornreich - JK Media

Okay. Elaine, the other question is just a numbers question, on the last page of the press release, there is a line for the year that says operating cash flow $321 million, but if I took your adjusted debt balance of $1628 and divide it by the adjusted 4.49x leverage, you get a much higher, I get $362 million?

Elaine Lintecum

That’s right. The cash flow for the debt covenants are defined by the bank and one of the largest differences there is that we add back things like the non-cash income from the equity investments, that the most important thing is that we are able to include the distributions and so this year we received about $38 million in distributions from our equity investments, and so that added back and that gives you an EBITDA of about $363 million.

John Kornreich - JK Media

321 is the….

Elaine Lintecum

Yeah that may – comp is also added back.

John Kornreich - JK Media

The 321 is a pure operating number and the bank number

Elaine Lintecum

(Inaudible).

John Kornreich - JK Media

What was that?

Elaine Lintecum

Yeah it’s a pure operating number, it’s not an EBITDA.

John Kornreich - JK Media

Right. So the EBITDA number, so last year including the $38 million was about 360?

Elaine Lintecum

That’s right.

John Kornreich - JK Media

Okay, Elaine thank you.

Elaine Lintecum

And when you add back stock based comp which brings that a little high.

John Kornreich - JK Media

Your stock base comp was what, five?

Elaine Lintecum

Ryan do you have that number?

Ryan Kimball

For the year 3.5?

Elaine Lintecum

3.5 for the year.

John Kornreich - JK Media

Okay. That gives the number. Thank you

Operator

Your next question comes from Michael Kass with Blue Mountain Capital. Your line is now open.

Michael Kass - Blue Mountain Capital

Yeah, I guess just as a follow-up to that, I was just wondering if you guys might be able to bridge the cash flow a little bit in the quarter, I know you will in the K, but just trying to reconcile the OCF to your cash balance at the end of the quarter?

Elaine Lintecum

You are right, we will do that in the K and you can follow-up with Ryan with more detail.

Ryan Kimball

Yeah, I think maybe, Michael, it will be easier for your own to go through with some of the major cash uses in the fourth quarter, as always we will have a full cash flow statement for you.

Michael Kass - Blue Mountain Capital

Okay.

Ryan Kimball

It was little bit of its range, [based] on the fourth quarter because the refinancing in the middle of it and it makes it a little hard to track this time.

Operator

(Operator Instructions) Your next question comes from Andrew Finkelstein, Barclays. Your line is now open.

Andrew Finkelstein – Barclays

I don’t know if I heard it, but did you guys give what the compensation expense was up on a 13 week basis in the fourth quarter?

Unidentified Company Speaker

No we…

Unidentified Company Speaker

I don’t know that we did. So comp…

Unidentified Company Speaker

Yeah.

Unidentified Company Speaker

It is dangerous for me to (open) it. I have got 1.1.

Unidentified Company Speaker

(Inaudible) with that number.

Unidentified Company Speaker

Well I am – its 1.1% (inaudible) which is a long run.

Andrew Finkelstein – Barclays

All right I can follow-up. And one more I had.

Unidentified Company Speaker

Yeah its right – I feel pretty good about that number, Andrew.

Unidentified Company Speaker

Yeah.

Unidentified Company Speaker

But you can check with the guys afterwards.

Andrew Finkelstein – Barclays

Okay.

Unidentified Company Speaker

Just to point out - I should point out the compensation was up, seems odd that our compensation expense would be up. Total payroll was actually down 3.4%. We had some issues where some unfavorable increases in health expense compared to prior year because we had favorable reversals in 2011 and so we’re running up against that unfavorable comp this year. And so that was a really big component of the increase in printers which caused the overall compensation increase for the company.

Unidentified Company Speaker

And I can’t confirm that 1.1 was right.

Unidentified Company Speaker

I haven’t lost my touch.

Unidentified Company Speaker

Yeah.

Andrew Finkelstein – Barclays

Alright. And I guess do you expect it to be down in the first quarter and it’s offset by the investments is that the right way to think about it in the expense mix?

Unidentified Company Speaker

Yeah, I think we’re going to bring off that question and just focus on…

Andrew Finkelstein – Barclays

Okay.

Unidentified Company Speaker

The guidance that we gave which is we expect slight expenses in the first quarter with expense categories some of the expense categories down to offset the investments in new products and systems and the additional pension expense.

Andrew Finkelstein – Barclays

Okay.

Unidentified Company Speaker

Just speak right at the additional printing expense to offset the comp lines.

Andrew Finkelstein – Barclays

Yeah. And then the circulation as you rollout the higher expenses, do you expect serve the churn or the sublock that the circ losses to pick up on a copy basis?

Unidentified Company Speaker

No, I think – I think not because we obviously don’t expect that we haven’t seen it to-date what we’ve seen is really a vast majority of subscribers buying in to this. To the extent a subscriber really has an issue with it I won’t for example they don’t even own a computer. We have tended to work with that subscriber to keep them as a print only subscriber so then you’ll be facing future I think this is just for print. But what we try to do is to not lose that 14 15 year subscriber over this program. And so we’ve done a good job to-date hanging on to people and so well it’s not it won’t necessarily help our circulation volume trends, we don’t see a very significant impact from that at all.

Andrew Finkelstein – Barclays

Okay. And the 20 million that’s going to come from this I guess that sort of net of – if they were natural kind of declines or is the declines that we were seeing sort of on the circulations might in the past which were 2% or whatever, is that sort of where we comp?

Unidentified Company Speaker

Yes. Circulation trends volume trends going in to this would be a separate matter and we’re not forecasting lesser revenue impact from those trends, what we’re saying is had we not comparing to had we not done this move with the payrolls that’s the way to look at it. So by virtue of this initiative we’re expecting more than $20 million in 2013 than we would otherwise get.

Andrew Finkelstein – Barclays

Got it. Thanks.

Unidentified Company Speaker

Based on our expectations subscriber acceptance are raising so that is our worked in to it but it’s more than we would have otherwise expected.

Operator

And your last question comes from Jeff Anapolsky of T. Rowe Price. Your line is now open.

Jeff Anapolsky - T. Rowe Price

Hi, thanks for taking the question. Can you provide any insight in to the magnitude in the category the synergies between a hypothetical merger of McClatchy and The Tribune Publishing assets, hypothetic?

Pat Talamantes

Oh, Jeff.

Unidentified Company Speaker

Ultimately.

Pat Talamantes

Jeff oh Jeff congratulations on your super bowling by the way.

Jeff Anapolsky - T. Rowe Price

We are enjoying it.

Pat Talamantes

So, no. We don’t comment on potential for a mergers or acquisitions or those sorts of things.

Jeff Anapolsky - T. Rowe Price

I wouldn’t ask you too just that if somebody else…

Pat Talamantes

Yeah

Jeff Anapolsky - T. Rowe Price

That was a great idea, how robust would the synergies be between the companies.

Pat Talamantes

Yeah, I – we don’t deal an hypothetical.

Jeff Anapolsky - T. Rowe Price

Okay. Any other color you want to provide on that topic.

Pat Talamantes

No, we like our portfolio – we like that our portfolio of assets and newspapers. And our real focus Jeff as you know is reducing our debt over time working on leverage ratio down positioning us for a digital feature. And we’ve got 30 page newspapers and we’ve got based on activity around here more than enough to do every day so in size…

Jeff Anapolsky - T. Rowe Price

So main focus on debt reduction, leverage ratio reduction is the main thing.

Unidentified Company Speaker

Yeah.

Unidentified Company Speaker

That’s the main thing, we made you small internet investments to the extent that those can help us grow our business but that’s really our focus.

Operator

There are no further questions at queue at this time, turn the call back over to presenters.

Pat Talamantes

Thank you all for joining our call and for following along and again I want to extend our thanks to our new 2020 new bond holders. Thanks a lot. Have a nice day.

Operator

This concludes today’s conference call. And you may now disconnect.

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