The McClatchy Company Q1 2009 Earnings Call Transcript

Apr.23.09 | About: The McClatchy (MNI)

The McClatchy Company (NYSE:MNI)

Q1 2009 Earnings Call

April 23, 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 - JP Morgan

Craig Huber - Barclays Capital

Scott [Marcotikus] – Goldman Sachs

Ken Silver - Royal Bank of Scotland

Jonathan Levine – Jefferies & Co.

Barry Lucas – Gabelli & Co.

Bill Green – [Claren Rogue]

Harold Weber – Smith Barney

Operator

Welcome everyone to The McClatchy first quarter 2009 earnings conference call. (Operator Instructions) Ms. Lintecum you may begin your conference.

Elaine Lintecum

Thank you. Thank you all for joining us today for our first quarter conference call. This call is also being web cast at www.mcclatchy.com and the web cast 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; our Vice President of Interactive Media, Chris Hendricks and our Vice President and CFO, Pat Talamantes.

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 I can be reached 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.

Finally, 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 2008 Annual Report on Form 10K filed with the SEC. Actual results may differ materially from those described during the call.

Now, here is Gary Pruitt, our CEO.

Gary Pruitt

Thanks Elaine. Hello everyone. Today we reported a loss from continuing operations of $37.7 million or $0.45 per share for our first quarter. Excluding certain unique items detailed in our press release, our adjusted loss from continuing operations in the first quarter was $22.9 million or $0.28 per share.

Total revenues in the first quarter of 2009 were down 25.1% from 2008. Advertising revenues were down 29.5% but circulation revenues were up 0.9%. Retail advertising was down 22.5% during the quarter. The declines in print advertising were partially offset by strong growth in digital retail advertising which was up 53.8%.

Classified advertising declined 41.8% as the trends we faced throughout 2008 continued in the first quarter of 2009. I will review the three major categories of classified advertising.

Employment advertising weakened further and was down 63.0% in the first quarter. Print employment revenues were down 67.6% while online revenues were down 55.8% reflecting both the lack of hiring and the close tie between print and online up sells in the employment category.

Automotive advertising was down 32.5%. Our print advertising was down 41.7% and online auto advertising was about flat with the 2008 category. Finally, real estate advertising was down 44.3%. Print advertising was down 50.7% but online real estate advertising grew 6.4% in the first quarter.

Turning next to national advertising, it declined 27.9% in the quarter. Print losses were partially offset by strong growth in online national advertising. While online advertising is included in the results discussed above, we wanted to highlight some important trends in our digital business.

Digital advertising remains the strongest segment in our business and we are among the top of our industry in terms of online advertising revenue performance and online advertising as a percentage of total advertising. The first quarter was another period of strong audience growth with average monthly unique visitors to our websites up 26.7% to 34.5 million. In terms of revenues, the effect of the downturn has largely been limited to print advertising in 2008 at McClatchy but in the first quarter of 2009 it began to have a greater effect on digital advertising as well.

Still, all categories of digital advertising are out performing print advertising. In total, digital advertising decreased 4.7% in the first quarter of 2009. Digital advertising revenues were impacted by employment advertising, the category most affected by the recession, and which is down substantially in print and online. Excluding employment advertising, digital advertising grew 28.7% in the first quarter of 2009. Also, digital advertising represented 15.3% of total advertising up from 11.6% of total advertising for all of 2008.

We have implemented increases in circulation prices at various newspapers resulting in a 0.9% increase in circulation revenues in the quarter. Our strategy is to expand our total audience both in print and online. Daily circulation declined 9% and Sunday declined 6.6% in the first quarter of 2008. These declines reflect in part our efforts to reduce circulation that is less desirable to advertisers such as deliveries outside our primary markets.

Despite these declines we continue to extend our reach. The September 2008 ADC Verified Readership Metrics which generally cover larger markets show that on average we deliver unduplicated reach of print and online readers of more than 71% in our local markets. We will continue to focus on growing this total reach for our advertising customers.

Total cash expenses in the quarter were down 18% excluding the impact of severance and other charges related to our recently announced restructuring plans. Compensation costs were down 24.5% excluding severance expenses related to restructuring. News print costs declined 7.9% primarily from lower usage in the first quarter of 2009 but we have begun to see meaningful newsprint price reductions in 2009 and expect our newsprint costs to continue to decline given the weak newsprint demand globally.

Finally, all other expenses declined 9.9%. Interest costs were $33.9 million in the quarter which was down 19% from first quarter 2008 reflecting both lower interest rates and debt levels. Debt net of cash stands at $2.17 billion compared to $2.32 billion at the end of 2008. Our effective interest rate on bank borrowings is 4.0%. We repaid the remaining $31 million of bonds that matured earlier this month so our effective interest rate is expected to be about 5.2% on outstanding bank debt and bonds in the second quarter.

Capital expenditures in the first quarter were $2.8 million and we expect to hold capital expenditures to the low $20 million range in 2009. We have no other debt maturities until 2011, expect no required pension contributions until 2010 and have suspended cash dividends. We expect to use cash primarily for debt repayment for the remainder of 2009.

Looking ahead, the economic environment is still weak and like everyone else our visibility on advertising trends is limited. So far, April’s revenues are similar to the first quarter. We will remain focused on realigning our cost structure as we continue transitioning our business to a hybrid print and digital media company.

To help offset the impact of declining advertising revenues we have implemented a number of circulation and cost related initiatives. We expect lower expenses and improved circulation revenues to continue to mitigate the impact of advertising revenue declines throughout 2009.

Thank you. Now we will be happy to take your questions about the first quarter.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Alexia Quadrani – JP Morgan.

Alexia Quadrani - JP Morgan

Could you just give us an update on where you are on the Miami land sale?

Gary Pruitt

Sure, I would be happy to. The Miami land sale is in the same position it was last quarter. That is, we hope that it will close in 2009 and if it does not then we will keep the down payment we have received to date and we will remarket the land. But we are hopeful that it will close and the buyer is confident that it will close.

Operator

The next question comes from Craig Huber - Barclays Capital.

Craig Huber - Barclays Capital

Can you just discuss concerning your labor costs how much we have not seen of the cost savings you put in place in the first quarter? How much is left that can help you in the second part of the year? If you could, just talk about the delisting of your stock potentially from NYSE.

Gary Pruitt

Handling the second part of that question first, we have received a notice from the New York Stock Exchange that we have tripped a couple of wires related to their delisting requirements. We do have a cure period of at least six months and we do not expect to be delisted. We expect that we will be able to cure and are working with the New York Stock Exchange in that regard. In any case, no delisting is imminent.

Then as far as the expense cuts go we have had rolling initiatives on costs including the compensation area. Many of those costs have not been fully realized yet but we will be rolling over in the end of the second quarter initiatives that we had initiated last year. So we expect that our expense performance will improve but we don’t have detailed projections we are willing to share today.

Operator

The next question comes from Scott [Marcotikus] – Goldman Sachs.

Scott [Marcotikus] – Goldman Sachs

My first question relates to the bank covenant at seven times. It looks likely to be tripped at some point in the second half of the year. I’m just wondering what measure you can take to perhaps appease the banks to grant a waiver on that facility? You mentioned with regard to the bank debt the average rate on that is around 4%. I am wondering if you are in the midst of renegotiating your credit facility at some point as those interest rates are going to probably be dramatically higher. Can you comment on what you are forecasting for the second half of the year as far as interest expense?

Gary Pruitt

We don’t expect to trip our covenant. We think we will be below seven times and our terms of our leverage covenant and therefore we don’t expect to have to amend our credit agreement to address the leverage covenant.

Operator

The next question comes from Ken Silver - Royal Bank of Scotland.

Ken Silver - Royal Bank of Scotland

I have a question about your pension. You said you don’t expect to make a contribution until 2010. I realize the pension metrics are going to change between now and 2010 but based on the current funded status of the pension what would the required contribution be for 2010?

Gary Pruitt

I’ll turn that over to Pat Talamantes, our CFO.

Pat Talamantes

At the end of the quarter we had an under funded status of about $575 million. That was down from year-end when we were at $611 million. We got a bit of a bump when we froze the pension plan in the first quarter. Of that $575 million we are expecting that in 2010 our required funding needs would be between 8-10% of that $575 million number. Then that is a number that we think would grow in 2011 and 2012 but we don’t have a lot of clarity yet by how much that would incur. I guess the payment would be late in 2010.

Operator

The next question comes from Jonathan Levine – Jefferies & Co.

Jonathan Levine – Jefferies & Co.

What was the severance in the financial statement? What was that in the quarter? If you could just let us know what your cash balance was at the end of the quarter?

Gary Pruitt

The severance in the first quarter was $19.7 million that we recognized in the financial statements. Not all of that was actually paid in the quarter but fairly shortly thereafter. In terms of our cash balance at the end of the quarter we have cash of $36 million at the end of the quarter.

Operator

We have a follow-up question from Craig Huber - Barclays Capital.

Craig Huber - Barclays Capital

Back on this delisting issue, what is the potential plan for you to avoid a problem with NYSE?

Gary Pruitt

We haven’t submitted a plan yet. We are required to in the next 45 days from the most recent notice we have received. It involves, as you might expect, operational plans that we think will show improvement for the company over time. We are not going to share the details of that plan but we believe it will avoid delisting of the company. As I said, none of that is imminent given the suspension of some of those delisting rules by the NYSE.

Operator

The next question comes from Barry Lucas – Gabelli & Co.

Barry Lucas – Gabelli & Co.

Does the severance payment go into the leverage calculation or is that an add-back for the calculations for the banks? What, if anything, do you have in restricted payments basket that you could go out and maybe buy some of the longer dated paper and knock some of that out?

Gary Pruitt

With regard to the first one, the severance payments aren’t part of the calculation for leverage ratio. With regard to the baskets, do you want to speak to that Pat?

Pat Talamantes

Sure. We don’t have the ability really to take cash and use it under the credit agreement to take cash and use it buy back bonds. As you are probably aware, in the third quarter we have other means of doing that, of going after longer dated bonds but the issue there is you have to issue the debt to be able to reuse it. Otherwise, we don’t really have access to cash to be able to buy back bonds with.

Operator

The next question comes from Bill Green – [Claren Rogue].

Bill Green – [Claren Rogue]

I just wanted to know whether you expect to be free cash flow positive for the full year 2009. Using $20 million of CapEx, what looks like $110 million of cash interest and $50 odd million in severance charges. Is that a good number? Then when do you expect to be in a position to make cash contributions to your pension plan in full year 2010 from cash from operations?

Gary Pruitt

We haven’t given and won’t give full year cash flow projections or free cash flow projections. I can tell you that we do expect to be free cash flow positive. We do not have a severance number projection. The severance number, as Pat mentioned, we just a shade under $20 million in the first quarter and we don’t have any projection or update on that. We are confident we can make the pension contributions in 2010.

Operator

The next question comes from Scott [Marcotikus] – Goldman Sachs.

Scott [Marcotikus] – Goldman Sachs

With regard to, we have seen a number of debt exchanges recently by companies including some of your peers, Gannett. Can you talk about pros and cons from your point of view of doing a potential debt exchange?

Gary Pruitt

We certainly did see Gannett’s debt exchange and really all we can say to that is that we look at everything and evaluate everything and essentially the term is what would be in the company’s best interest. We really don’t want to speak specifically to any particular option. We are looking at everything as we always do.

Operator

The next question comes from Harold Weber – Smith Barney.

Harold Weber – Smith Barney

Can you use proceeds from any of your asset sales to purchase back debt?

Gary Pruitt

No we can’t.

Operator

We have a follow-up question from Craig Huber - Barclays Capital.

Craig Huber - Barclays Capital

Can you break apart if you would the newsprint consumption percent change and the average price percent change? Secondly, can you just break apart as you have done in the past how the equity losses were? $3.1 million how does that break out?

Pat Talamantes

On the newsprint side, newsprint expense was down 7.9%. That breaks down between a decrease in usage of 28.2% and coincidentally an increase in price of 28.2%. Then supplement expense was down 22.5% so on that newsprint and supplements line item the expense is down 10.1. On the equity line, we had $2.4 million of non-cash charges, D&A largely running through the equity income in the quarter. Excluding that we had a loss on the equity line of $719,000. The good news here is that as you know seasonally our Internet investments have a tougher time in the first quarter because we are spending money promoting the site. But we have had a sharp reduction year-over-year. Internet investments had a loss of $1.154 million. That compares to prior year of $4.905 million. So that was a good news story. Our remaining investments include the Seattle Times company and the Ponderay News Print company. Another good news story here. Those investments actually made $434,000 which is an improvement from $6.928 million a year ago when newsprint investments were doing so poorly. In addition, we no longer recognize losses from Seattle because the book balance of that investment fell to zero at the end of 2008.

Operator

We have no further questions in queue.

Gary Pruitt

Thank you all for participating in the call today. We look forward to better quarters ahead. Thank you very much.

Operator

This concludes today’s conference. You may now disconnect.

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