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The McClatchy Company (NYSE:MNI)

Q4 2008 Earnings Call

February 5, 2009 12:00 pm ET

Executives

Elaine Lintecum - Treasurer

Gary Pruitt - Chairman, President and CEO

Pat Talamantes - VP, Finance and CFO

Chris Hendricks - VP, Interactive Media

Analysts

Alexia Quadrani - JPMorgan

Matthew Dundon - Miller Tabak Roberts Securities

John Janedis - Wachovia Securities

Hale Holden - Barclays

Ken Doctor - Outsell

Craig Huber - Barclays Capital

Ken Silver - Royal Bank of Scotland

Operator

At this time, I would like to welcome everyone to The McClatchy fourth quarter 2008 Earnings Call. (Operator Instructions)

Thank you. I will now turn the call over to Ms. Elaine Lintecum. Ma'am, please go ahead.

Elaine Lintecum

Thank you. And thank you all for joining us today for our fourth quarter conference call. This call is also being webcast at mcclatchy.com, and the webcast will be archived for future reference.

Joining me on the call is Gary Pruitt, our Chairman and CEO; our Vice Presidents of Operations, Lynn Dickerson, Bob Weil and Frank Whittaker; and our Vice President and CFO, Pat Talamantes. Our Vice President of Interactive Media, Chris Hendricks, is joining by phone today.

We are all available for questions at the end of Gary's remarks. We'll be sticking to the one-question-per-participant rule, but I'll be available after the call for follow-up questions, and you can reach me at the following phone number, 916-321-1846.

Our earnings release and statistical report were issued this morning before the market opened. This release includes a summary of unaudited results, and the full text of our release and statistical reports are posted on FirstCall and our website for your convenience. Reconciliations of non-GAAP amounts to GAAP reported amounts can be found on the company's website on the Investor Relations page.

As a reminder, this conference call will contain forward-looking statements that are subject to risks and uncertainties, including among others those described in the company's 2007 Annual Report on Form 10-K filed with the SEC. Actual results may differ materially from those described during the call.

Now, here is Gary Pruitt, our CEO.

Gary Pruitt

Thank, Elaine. Today, we reported a loss from continuing operations of $20.4 million or $0.25 per share for our fourth quarter, including a non-cash impairment charge of $59.6 million. Excluding this non-cash charge and other unusual items detailed in our press release, our adjusted earnings from continuing operations in the fourth quarter were $21.8 million or $0.26 per share.

As we have mentioned before, the non-cash impairment charges do not affect our able to generate cash flow nor do they change the way we run our business.

Our results reflect the continuing economic downturn that all businesses are facing. We continue to respond to the recession by reducing costs and intensifying our pursuit of new revenue opportunities. In the fourth quarter, we reduced cash operating expenses by 14.4% excluding severance costs and despite higher newsprint prices. More on these efforts later, but let's first review the fourth quarter.

Total revenues in the fourth quarter of 2008 were down 17.9% from 2007. Advertising revenues were down 20.7%, and circulation revenues were up 1.4%. Retail advertising was down 12.7% during the quarter. Much of the decline continues to come in real estate-related categories like furniture and home furnishing stores and in department store advertising.

The declines in our newspaper advertising were partial offset by a strong growth in online retail advertising. Online retail was up 90.8%, driven primarily by banner and display advertisements.

Classified advertising revenues declined 35.9% as the trends we have faced all year continued into the fourth quarter. I will review the three major categories of classified advertising for you.

Employment advertising was down 50.7% in the fourth quarter as hiring continued to decline. Print employment revenues were down 57%, while online revenues in this category were down 39.8%, reflecting both the lack of hiring and the close tie between print and online up sales.

Next, automotive. Automotive advertising was down 33%. Our print advertising was down 43%, and many of our markets continue to see dealerships closing. Online auto advertising grew 15% in the quarter as dealers shift spending online to our successful cars.com product.

Finally, real estate. Real estate advertising was down 40.7% with nearly half of this decline coming from California and Florida. Print advertising was down 46.2% but online real estate advertising grew 15.3% in the quarter.

Turning next to national advertising. National advertising declined 22.6% in the quarter. Our performance continued to be hurt mainly by losses in telecommunications and the national automotive category. Together, these two categories account for nearly 60% of our fourth quarter decline in national advertising. Print losses were partially offset by strong growth in online national advertising.

Our focus on becoming a hybrid print and online media company has been underway for some time now at McClatchy. So while online advertising is included in the results discussed above, we wanted to highlight some important trends in our digital business.

The fourth quarter was another period of strong audience growth and advertising sales in our digital business. Average monthly unique visitors to our websites were up 25.3% and were up 33.5% for all of 2008.

Online advertising revenues grew 10.3% in the fourth quarter, and were up 10.6% for the full year. Online advertising represented 11.6% of total advertising revenues in 2008 compared to 8.6% in 2007.

Excluding employment advertising, which has declined nationally both online and in print; our online advertising grew 47.3% in the fourth quarter, and was up 51.6% for all of 2008.

Online advertising remains the fastest growing segment of our business and we are among the top of our industry in terms of online advertising revenue growth and online advertising as a percentage of total advertising.

Our strategy is to expand our total audiences in print and online. So, despite 2008 declines in daily circulation of 5.3%, and Sunday circulation of 4.8%, we continue to extend our reach in our local markets.

The unduplicated local penetration of our online and print products is now more than 70% in most of our markets. We will continue to focus on growing this total reach for our advertising customers.

Turning to expenses. Total cash expenses in the fourth quarter were down 14.4%, excluding the impact of severance and other charges related to our recently announced restructuring plans.

Compensation costs were down 22.3% excluding severance expenses. Newsprint costs were up 1.6%. While newsprint prices were higher, the impact of costs was nearly offset with lower usage. Newsprint prices peaked during the quarter, and we have already begun to see meaningful newsprint price reductions in 2009. All other expenses decreased by 7.8%.

Interest costs were $41.2 million, down 11.1% from the fourth quarter of 2007, reflecting an average effective interest rate of 5.7% in the quarter on lower debt balances. Debt stands at $2.038 billion or $2,038,000,000, which is down $433 million from the end of 2007. Capital expenditures in 2008 totaled about $21.9 million, and we expect 2009 expenditures to be in about that same range.

Looking forward, the advertising environment continues to be weak, and we expect print advertising revenues to continue to be down. While we don't have final advertising revenue results for January, we know that the month was slower than the fourth quarter. We don't have any better sense than other market observers as to how long the current recession will last. And we don't yet have visibility on our revenue trends.

So we're focused on permanently reducing our cost structure. About $60 million of our savings in 2008 came from two restructuring plans we implemented which are expected to save a total of $200 million in expenses. We've recognized $44.7 million has of severance costs associated with those programs in 2008 and expect the remaining savings of $140 million to flow through in 2009.

We're developing a plan to further reduce costs by $100 million to $110 million or approximately 7% of 2008 cash expenses over the next 12 months beginning later in the first quarter of 2009. Details of the plan have not yet been finalized. And as a result, costs to complete the plan are not yet known.

We've made some very difficult decisions in responding to the current economic downturn, including freezing our pension plans and temporarily suspending the company's match to the 401(k) plan as of March 31, 2009. The company previously announced that it had implemented a company-wide salary freeze from September 2008 through September 2009.

We will extend the salary freeze for senior executives in 2009 that was implemented in 2007. And I have declined any bonus for 2008 and 2009. In addition, other senior executives will not receive bonuses for 2008. These moves combined with our 2008 efforts are designed save more than $300 million annually before severance costs. We're also suspending the quarterly dividend after paying the first quarter 2009 dividend in order to preserve cash for debt repayment.

We are focused on operating through this tough environment and coming out of it as a stronger, more efficient company. We continue to direct our efforts in five key areas: first, improving revenue performance with a particular emphasis on internet advertising; second, restructuring and reducing our costs; third, continuing to provide high-quality journalism in print and online; fourth, growing total audience based on the unduplicated reach of our print and online products; and fifth, as a result of these efforts, we expect to continue to pay down debt and take steps to improve our financial position.

I am confident that The McClatchy team is up to this challenge and we will see brighter days when the economy finally turns.

Thank you. And now, we'll be happy to take your questions concerning the fourth quarter.

Elaine Lintecum

Rebecca?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Alexia Quadrani. You have the floor, ma'am.

Alexia Quadrani - JPMorgan

Thank you. A question on your comments on the January revenue trends. Is it really just the classified that continues to deteriorate or is it across the board? Then second question is, could you give us your thought process on any potential strategic options to help pay down the debt, potentially sale of some properties? Thank you.

Gary Pruitt

Okay. In January, we have seen further weakness in employment and retail. Those are the two categories where we have seen weakness increase. The other categories more or less were to their current trend. We have sold non-core assets in the past year, including real estate and other non-core businesses, a newsprint company. We will continue to look at that and evaluate that.

The market for the sale of many assets is weak. So we need to keep that in mind as we evaluate steps we take as well. So we continue to look at that and evaluate that as a possible step in strengthening our financial position. So we will continue to do that.

Operator

Your next question comes from the line of Matthew Dundon with Miller Tabak Roberts Securities. You have the floor, sir.

Matthew Dundon - Miller Tabak Roberts Securities

Thanks. Two related questions. The first is, what do you think you are doing right online and potentially what are other newspapers doing wrong? What do they have to learn from you? Secondly, we talked about auto dealerships and so forth; you say you do not have visibility. However, if you do not see the major trends, what are people telling their sales force about just the near-term? Aare you thinking about changing sales force headcount, outsourcing sales, doing anything to maybe shakeup the approach to advertising revenues instead of just waiting for the economy to raise all boats?

Gary Pruitt

Okay. Thank you. Well, first of all, I do not want to speak about other companies and their efforts online. I can speak to McClatchy. At McClatchy, we do recognize that our future is with a hybrid company, print and online, and we have more opportunity for growth online than we do in print.

So we have put a great deal of emphasis there in terms of training the sales force across the company, in terms of changing the incentive structure, in terms of allocating resources there, and in terms of partnerships with other internet companies. We have an ownership stake in cars.com. We own a quarter of that company in apartments.com, and our approximately 14% stake in CareerBuilder. So, we feel we have best of breed classified products.

Our Yahoo! partnership will help us especially in the online retail area. So, we feel that combination of focus and training, resources and partnerships has made a difference. Now, we are facing a stiff headwind in the employment category where so much of the advertising is tied to print, so we have seen declines there. With the recent declines in employment we will see more online weakness there as well. So, we will continue that emphasis online.

As far as the auto business goes, we expect it to continue to be permanently reduced in terms of numbers of dealerships. The Sacramento region has lost between 15 and 20 dealerships in the past year or so. So, that just really hammers our advertising.

Other markets are seeing similar declines in the number of dealerships. We think that is a permanent decline that we are suffering through right now and adjusting to. We are looking at adjusting our sales forces appropriately to the new advertising conditions. So the number of online sales people and especially the effectiveness of our sales force and selling online are improving. We have added a corporate sales staff to handle our largest customers for group buys at all of our papers.

We are looking at various shifts of resources among our sales force in emerging categories where we see more opportunities for growth and cutting in those categories where we are seeing what we think will be permanent reductions. So, it is a constant judgment call in terms of allocating resources.

In all of our cuts, we have generally maintained or improved our ad sales firepower because even in this downturn we understand the importance of just marginally improving our revenue performance. So, we have kept that in mind as we have made cuts throughout the company.

Operator

Your next question comes from the line of John Janedis with Wachovia Securities. You have the floor, sir.

John Janedis - Wachovia Securities

Hi, Gary. You talked about extending reach and penetration. Can you talk more about some of the things you are doing to narrow the GAAP between what we have called our perceived value of a print versus online on behalf of advertisers?

Gary Pruitt

John, I did not catch the tail end of your question. I am sorry. The perceived gap in what? Have we lost you? John if you can come back on, but I did not catch all of your question. I am sorry.

John Janedis - Wachovia Securities

Am I back on?

Gary Pruitt

Yes.

John Janedis - Wachovia Securities

Thanks. What I was saying is, what are some of the things you are doing to narrow the gap between the perceived value of print versus online sub-advertisers? Maybe, how much has the gap changed over the past year?

Gary Pruitt

Okay. Again I am not quite sure, you said sub-advertisers.

John Janedis - Wachovia Securities

Subscribers just, says, in terms of (inaudible) basically.

Gary Pruitt

Okay. I am sorry. I thought you were talking about advertising. Yes, the value proposition is a complicated one. Print subscribers pay a relatively nominal amount of money to have a complete product delivered to their doorstep each morning. What they pay us basically covers the cost of production and delivery. So while they are paying for that, it is just barely covering our cost. So we are relying on advertising for our profits and for the overwhelming majority of our revenue.

Online, the model, of course, generally online is free content paid for by advertising, much like the broadcast television model. There, our costs of delivery and production are lower. So when people talk about print is pay and online is free, the distinction may not be as great as most people think, because we are covering our cost in both cases and relying on advertising for the bulk of our revenue and profit. We will see that continue.

We may experiment and have been experimenting with some paid content online. We think we will continue to experiment there and test the model. It is one of the advantages of having 29 or 30 papers to test it out. It is very difficult and most experiments have shown that you lose more advertising revenue than you gain in online revenue. We are in online circulation revenue or subscription revenue. We are looking at that and will continue to adjust as we think it makes sense.

In terms of how much revenue we get in advertising per subscriber, that gap will continue to close. Print still has a wide lead at this point. As much as people think the newspapers are going out of style, they are still read by half of the adults in our markets and are still profitable strong vehicles. Our cash flow margin last year was over 20%.

Operator

Your next question comes from the line of Marc Bromberg with Barclays. You have the floor, sir.

Hale Holden - Barclays

Hi. It is actually Hale Holden from Barclays. Gary, I wonder if you would talk about some other paths to deleveraging other than asset sales, whether you would consider going to the bank group and asking for amendment to do sub-par tenders or potentially doing an exchange as allowed on your bank (inaudible) out? Thanks.

Gary Pruitt

Okay. Thank you very much. I will turn that question over to Pat Talamantes, our Chief Financial Officer.

Pat Talamantes

Thanks for the question. We look at opportunities for exchange offers and other things that are going on in the capital markets all the time. I think the issue with a bank amendment for a sub-par tender for bank debt is the fact that under our credit agreement, that is 100% issue, which would make that pretty difficult. We are looking at different alternatives all the time. As you know, the technology is changing on this front on a weekly basis.

Operator

Your next question comes from the line of Bill Greene with (inaudible) Management. You have the floor, sir.

Unidentified Analyst

Hey, folks. I just want to go back to the earlier question. I did not understand the comment that it was 100% amendment on your bank facility. Broader picture, I just wanted to understand how you were thinking about your capital structure at large with a little over 50% of your debt coming due in the next 29 months and clearly free cash flow is not going be sufficient to repay 1 billion that is coming due.

Gary Pruitt

Thanks. Pat?

Pat Talamantes

Okay. So the attempt to get banks to take less than 100% par in lieu of payment, we have to get 100% of the banks to go along with that. So under our credit agreement, it is a 100% required bank issue to be able to pay out banks at sub-par to do a Dutch auction or any of those other things. So that is what I was talking about on that.

In terms of other bonds or that thing, that is a different story. As it regards tenders for bank debt, it is a 100% required bank issue. In terms of our capital structure, we really like the fact that we are very balanced between senior bank debt and bonds. That gives us a lot of comfort. I think it gives our banks a lot of comfort, certainly did last September when we amended our covenants.

So, going forward, we do not have any meaningful maturities until June of 2011. June of 2011 in this market is a long way away. So, compared to other companies that are out there dealing with maturities in 2009, we are feeling pretty good about that, and we are working hard as we can to see if we can not reduce the amount that matures in 2011.

Operator

Your next question comes from the line of Ken Doctor with Outsell. You have the floor, sir.

Ken Doctor - Outsell

Thanks. Gary, I am not sure if I heard the percentage of online advertising that is online-only. I know you have been reporting that recently. Just wondering on Yahoo!, whether you or some of the companies that are doing able to sell ads even before you are up on the platform.

Gary Pruitt

Yes, okay. As far as online-only, for the fourth quarter, that was just over 50%. So, just over half of our online advertising came from advertising that was placed online-only, which we feel good about. It shows an independent stream of business that is not dependent on print up-sells. That is been increasing over time.

For the full year, it was right around 50%. I do not know the exact figure. It might have been a little below, little above. Right around 50%, a little over 50% for the fourth quarter.

As far as Yahoo! Goes, we are able to sell the Yahoo! inventory before the APT product comes up. Six papers at McClatchy were in the Phase I Yahoo project, and we expect all of the papers to be up on Yahoo!, certainly this year, to be up and running on the APT Yahoo! platform.

Operator

(Operator Instructions) Your next question comes from the line of Craig Huber with Barclays Capital.

Craig Huber - Barclays Capital

Thank you. Hi, Gary.

Gary Pruitt

Hi.

Craig Huber - Barclays Capital

Can you give us some detail if you would, on online Help-Wanted, real estate and auto classified in the month of December year-over-year? Percentage changes worth if you would please for online?

Gary Pruitt

I may have to turn to you, Chris. Chris is calling in from Raleigh..

Chris Hendricks

I do have period 12 data, Gary.

Gary Pruitt

Okay. So, I will turn it over to you in just one second, Chris. So in other words, what we have seen and you will see in December is online growth in automotive and real estate but decline in employment. Chris, do you have the details.

Chris Hendricks

Yes, I do. Employment for P-12 was down 44.2% year-over-year. In December, automotive was up 8.3%., real estate was up 9.2%, and the retail category was up 93.7%. National was up 30.3% for a total interactive advertising revenue growth of 10.8% for the period.

Gary Pruitt

Thanks, Chris.

Operator

Your next question comes from the line of Ken Silver with Royal Bank of Scotland.

Ken Silver - Royal Bank of Scotland

Hi. Thanks for taking the call. Can you just comment about how your newspaper websites are competing or performing versus local television station websites? Do you have a sense for that?

Gary Pruitt

Yes. We are the local leader in virtually every one of our markets in terms of audience and revenue, but the television websites in several marks are competing more aggressively. So, we are keenly aware of the competitive battle and want to remain in a position of being the leading local internet business in each of our markets. We think it will be a strong place with good growth long-term.

Operator

At this time, there are no further questions in queue. Please proceed with your closing remarks.

Gary Pruitt

Okay. I wanted to thank everyone for participating in the call and your questions. It is a tough environment. We are working hard to turn the revenue trends, and in the meantime, we are going to be cutting costs to keep the company strong. So thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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