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The McClatchy Company (NYSE:MNI)

Q2 2009 Earnings Call

July 21, 2009 11:00 am ET

Executives

Elaine Lintecum - Treasurer

Gary B. Pruitt - Chairman of the Board, President, Chief Executive Officer

Patrick J. Talamantes - Chief Financial Officer, Vice President - Finance

Chris Hendricks - Vice President of Interactive Media

Analysts

Craig Huber - Barclays Capital

Scott Marchakis - Goldman Sachs

Timothy Stabos - Private Investor

Barry Lucas - Gabelli Sons

Ken Silver - Royal Bank of Scotland

Budd Zano - Royce & Associates

Edward Atorino - Benchmark Capital

Jake Newman - Credit Sights

Lee Olive - Citi

Aveya Steiner - J.P. Morgan

Alexia Quadrani - J.P. Morgan

Ander Finkelstein - Barclays Capital

Tom Russo - Gardner Investments

Operator

Good morning. My name is Leslie and I will be your conference operator today. At this time, I would like to welcome everyone to the McClatchy second 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 second quarter conference call. The call is being webcast at mcclatchy.com and the webcast will be archived for future reference.

Joining me today is Gary Pruitt, our Chairman and CEO; our Vice President of Operations, Bob Weil; 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 will be sticking to the one question per participant rule but I will be available after the call for follow-up questions and I can be reached at the following phone number, area code 916-321-1846.

Our earnings release and statistical report were issued this morning before the market opened. The release includes a summary of unaudited results and the full text of our release, and statistical report are posted on First Call and our website for your convenience.

All non-GAAP amounts are reconciled to the most directly comparable GAAP measure in the release and in attached schedule, as well as in schedules posted 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 2008 annual report on Form 10-K filed with the SEC. Actual results may differ materially from those described during this call.

Now here’s Gary Pruitt, our CEO.

Gary B. Pruitt

Thanks, Elaine. Today we reported income from continuing operations of $42 million, or $0.50 per share for our second quarter. Excluding certain unique items detailed in our press release, our adjusted earnings from continuing operations in the second quarter were $25.2 million, or $0.30 per share, up 42.9% from the 2008 second quarter.

Total revenues in the second quarter of 2009 were down 25.4%. Advertising revenues were down 30.2% but circulation revenues were up 5.0%.

While our advertising revenues in the second quarter of 2009 were down in the same range as the first quarter, we saw an improving trend within the quarter. Advertising revenues were down 31.1% in April, 30.7% in May, and 28.3% in June. So far, July’s performance is similar to June’s.

Our second quarter results also reflect our hard work on the expense side. We continue to restructure and permanently reduce expenses to better align our costs with our revenues. We reduced cash expenses in the second quarter by 29.3%, excluding severance and other restructuring charges, resulting in operating cash flow of $92.4 million.

Our operating cash flow margin for the quarter was a healthy 25.3% compared to 21.2% for the 2008 quarter. Our company remains profitable and each of our newspapers is contributing positive cash flow.

Let’s take a look at the details, starting with advertising revenue. Retail advertising was down 23.9% during the quarter. The declines in our newspaper advertising were partially offset by strong growth in digital retail advertising. Online retail was up 48.1%.

Classified revenues declined 40.7%. Here’s a look at how the major categories performed during the quarter.

Employment advertising was down 62.5%, print employment revenues were down 68%, while online revenues were down 54.8%, reflecting both the lack of hiring and the close tie between print and online up-sells in the employment category.

Next, automotive -- automotive advertising was down 34.4%, our print advertising was down 43.9%, and online auto advertising was down only 3.1%.

Finally, real estate -- real estate advertising was down 45.7%, print advertising was down 52.2, and online real estate advertising declined only 2.4% in the second quarter.

Turning next to national advertising, it declined 34.2% in the quarter. Print losses were partially offset by a 26.9% growth in online national advertising.

While digital advertising is included in the results reported above, we wanted to discuss this important and growing part of our business with you in more detail. McClatchy continues to transition to a successful print and online company. Our digital audience continues to grow impressively. Average monthly unique visitors to our websites were up 30.1% in the second quarter, following 26.7% growth in the first quarter of 2009. Still, the recession is impacting our digital business. Our digital advertising was down 2.9% in the second quarter of 2009, hurt particularly by declining employment advertising.

Excluding employment advertising, which has declined nationally both in print and online, our online revenue grew 24.7% in the second quarter of this year. Our digital performance has been aided by ownership space in CareerBuilder, Cars.com, and Apartments.com, leading companies in the digital classified advertising arena.

And our growth in digital retail advertising is fueled in part by our partnership with Yahoo! and other technology companies.

As we continue our successful migration to a multimedia company, we are less vulnerable to print declines and the secular shifts of advertising to digital media. Digital advertising represented 16.5% of total advertising in the second quarter, up from 11.8% in the second quarter of 2008. In June, digital advertising represented 17.3% of total advertising and importantly, our digital business has higher operating margins than our print business because it is not burdened with printing and distribution costs.

We have implemented increases in circulation prices at most newspapers, resulting in a 5.0% increase in circulation revenues in the quarter. Our strategy is to expand our total audience, both print and online.

Daily circulation declined 12.4% and Sunday declined 8.5% from the second quarter of 2008. These declines reflect in part our efforts to reduce unprofitable circulation that is less desirable to advertisers.

Despite these circulation declines, we believe we continue to extend our total reach in our markets with the combined unduplicated audience of our websites and newspapers.

Turning to expenses, total cash expenses in the second quarter were down 29.3%, excluding the impact of severance and other restructuring charges. Compensation costs were down 33.8% excluding severance.

Newsprint and supplement costs declined 29.1%, reflecting lower usage. We continue to see meaningful newsprint price reductions and expect our newsprint costs to continue to decline, given the weak newsprint demand globally.

All other expenses decreased 21.2%.

We repaid $31 million worth of bonds that matured in April and through the bond exchange completed in June, we retired $102.8 million in unsecured bonds by paying $3.4 million in cash and issuing $24.2 million in new senior notes.

In the first half of the year, we reduced principal on all outstanding debt by $103.9 million.

Our effective interest rate on bank borrowings is about 4.3%. The effective rate on our bond principal, including the new senior notes issued at the end of the quarter, is 6.4%. Our all-in, effective interest rate on outstanding debt is 5.4%.

Capital expenditures in the quarter were $5.6 million and were $8.2 million in the first six months of 2009. We expect to hold capital expenditures to the low $20 million range this year.

We have no other debt maturities until 2011, expect no required pension contributions until 2010, and have suspended cash dividends.

Looking forward, the advertising environment continues to be weak and we expect revenues to continue to be down, although as I mentioned before, we did see some improvement over the course of the quarter.

As we look to the second half, we will remain vigilant in our efforts to become more efficient and permanently reduce costs. We expect cash expenses to be down in the mid-20% range for the remainder of the year.

There has been a steady drum beat in recent media and analyst reports about the prospects of McClatchy violating bank covenants this year. Based on our trailing 12-month cash flow, our leverage ratio as defined under our credit agreement, improved from 5.9 times cash flow in the first quarter to 5.8 times at the end of the second quarter. And our interest coverage ratio held about even at 2.8 times.

Both of these ratios are well within the covenant requirements under our credit agreement of a leverage ratio of less than 7 times and an interest coverage ratio of at least two times.

We think it’s important to note that even if our advertising performance does not improve from its current run-rate for the rest of the year, we would not breach our bank covenants. In the meantime, we will continue to reduce debt.

Now I’ll be happy to take your questions about our second quarter results. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Craig Huber of Barclays Capital.

Craig Huber - Barclays Capital

A couple of things -- talk, if you would, about your advertising rate for your newspapers, what the percent change was there year over year [in the quarter]. Maybe if you want to talk by categories, because there’s always a mix issue there. I would love to hear the particular regional category.

Gary B. Pruitt

Okay. What we have, the rates -- it is a complicated question and we do look at it by category. Advertisers have become more sophisticated in their buys. They are looking at readership, not just circulation. They are looking at total audience with online and print and so we look at it category by category.

Within pre-prints, a substantial part of retail, there really hasn’t been rate erosion because that happens naturally because they are priced on a per thousand of distribution. And so as circulation goes down, the price goes down.

We have seen some pre-print advertisers pull back in the size of their pre-prints or in the distribution they want, not wanting some outlying areas. But generally that rate has remained the same.

On the online side, national CPMs, national rates have declined. There’s been a lot of inventory, more coming on and national rates have declined. But most of our revenue comes locally online and there the rates have held up better and they are much higher than the national rates. And in fact, in our behavioral targeting sales, we’ve actually seen rates increase there online.

In the ROP area, we have seen rate erosion. It’s difficult to quantify because of factors like advertisers taking advantage of bundled buys with online and niche products and the paper and our increased dependence on revenue contracts where we are focused on annual spending by the advertisers and rate becomes a less important factor. And in this downturn, in this recession, we have worked with advertisers on frequency programs, so that they get their advertising in the paper more often, their advertising works better, but because of those frequency programs and incentives, it’s at a lower rate.

So we certainly have seen rate erosion at the ROP area in retail and national and -- but it’s a --

Craig Huber - Barclays Capital

Do you have a range, Gary, of what you think that percent decline is? Is it like 4% to 5%? Could you ballpark it for --

Gary B. Pruitt

Yeah, I would say it’s difficult for me to ballpark it but I would say it’s more than that, Craig. But we don’t have a specific number to quantify that but I would in -- just in terms of degree, it’s greater than that.

Craig Huber - Barclays Capital

You think I’m -- I guess I’m nit-picking here -- do you think it’s more than 10% or sort of in that 5% to 10% range, the average rate there that you guys are -- when you are redoing these contracts, et cetera?

Gary B. Pruitt

Yeah, I just can’t quantify it more than that. I think it is complicated. I guess we would say we know what we are doing locally in each of these categories and each of these rates but as it rolls up with the entire company, because of these factors, I can’t give you a more precise number than that but I do think it is at least a little more than that 4% to 5% that you are talking about.

Craig Huber - Barclays Capital

And what about, Gary, on the help wanted side for print? How much would you say the rate is down there also for classified and print as well -- classified auto and print? For rate?

Gary B. Pruitt

I don’t know. I don’t know off the top of my head. You may want to follow-up with Elaine but we definitely know that most of that is volume driven and we can see that sadly by the number of classified pages declining in our papers. So most of that is volume driven.

Elaine Lintecum

And I think it’s volume driven on both online and print, Craig, just the lack of [inaudible] obviously is a big issue and the recession is a big issue as it relates to employment.

Operator

Your next question comes from the line of Scott [Marchakis] of Goldman Sachs.

Scott Marchakis - Goldman Sachs

Thank you very much. I just have two quick questions for you, with regard to the pension deficit -- I know at the end of the first quarter, the number was somewhere around $575 million unfunded status, or under-funded status and you thought you’d estimate contributions somewhere in that 8% to 10% of that total amount. Is that still a figure that we should be using for 2010?

Patrick J. Talamantes

Yeah, that is the number you should be using. We won't have updated numbers until we revalue our pension assets and liabilities at the end of 2009.

Scott Marchakis - Goldman Sachs

Okay. And then with regard to the depreciation online, I know you had some accelerated depreciation in the second quarter this past quarter but should we use somewhere a run-rate somewhere closer to the $35 million, $36 million range for the second half of the year per quarter?

Gary B. Pruitt

Pat is checking on that -- I’ll just mention that acceleration and depreciation, that was mainly related to production equipment, presses, and inserting equipment as we outsourced production to other papers, sometimes within our own company, sometimes outside our company. We accelerated the depreciation in that production equipment as it was no longer being used.

Pat, do you want to speak to the run-rate?

Patrick J. Talamantes

Sure. I think what we saw in this quarter was a confluence of a lot of projects coming together at the same time we felt we needed to get the book value of these production assets down to the salvage value, as we’ve phasing these operations out. So I think we’ll see this sort of thing from time to time in future quarters but we would not look at this as a run-rate for future quarters.

So I think probably closer back to what we’ve seen in the first quarter and the second quarter excluding the $10.5 million pretax accelerated depreciation charge.

Scott Marchakis - Goldman Sachs

Okay, and just a final question with regard to any severance expenses -- is there anything expected in the second half of the year that’s material that we should just be aware of as it relates to severance?

Gary B. Pruitt

At this point, no.

Scott Marchakis - Goldman Sachs

So no cash outflows either from previous cuts that maybe there’s a timing issue?

Gary B. Pruitt

They have virtually all been paid so at this point, we wouldn’t expect any material outflows as a result of severance.

Scott Marchakis - Goldman Sachs

Okay, and then just --

Operator

Thank you. Our next question --

Gary B. Pruitt

Oh, they guy you off. Sorry.

Elaine Lintecum

Go ahead, Leslie.

Operator

Thank you. Our next question comes from the line of Timothy Stabos, a private investor. our line is open.

Timothy Stabos - Private Investor

Good morning, all. Good job on the cost-cutting. I know it’s been a little painful across the company. I certainly want to acknowledge that but you know, we’re trying to save the company here and I think you guys have shown that you are working hard at that.

My question is about newsprint here -- we have seen a $130 per ton decline in just the last two months. One of your competitors, Lee Enterprises, has said that they save about $1 million pretax annually for each $10 decline per ton. Can you guys quantify in some fashion what the savings might be for you? You know, your newspaper size has shrunk, so it’s a little hard to measure. Also, are you FIFO, LIFO -- can you give some color on newsprint and the type of savings we might see in the back half of the year here and how it will phase in?

Gary B. Pruitt

Thank you for the questions. We are FIFO in our accounting method on newsprint and you could figure for McClatchy a little over $2 million in --

Timothy Stabos - Private Investor

Excellent.

Gary B. Pruitt

-- expense savings for every $10 drop in newsprint pricing. And this is a painful transition and we are doing it in public and -- but we are making progress and it is a difficult process but we do think we are taking the right steps, as you said, to keep the company safe.

Timothy Stabos - Private Investor

I’ll say one follow-up, my one follow-up on that, are some of these -- other than the 401K match, and I know I’m getting ahead of myself but I do think the results are impressive and you have evidenced to the street that you are going to be around here for a good long while, the restoration of some of these cuts, is there a sense of you want to provide as good a product as possible to the public and you are not really -- I don’t want to say not satisfied with what you’ve got right now but -- restoration of cost cuts, what might we see in a year or -- other than 401K matches?

Gary B. Pruitt

Sure.

Timothy Stabos - Private Investor

I know I’m getting way ahead of myself.

Gary B. Pruitt

Well, we don’t anticipate -- what we anticipate is that we will consider those issues as part of the 2010 budget process and so you are right, it’s a little ahead of where we are right now. We will be looking at all of those. As we’ve looked at the cost cuts, we’ve made some cuts that are temporary in nature, like a 401K match. The majority have been permanent -- permanent restructuring as we ask ourselves, if we started a local news company today, what would it look like? And we then work towards that.

Timothy Stabos - Private Investor

Interesting.

Gary B. Pruitt

And so we look at the expense cuts in a strategic way, not across the board, as we know that we don’t need to fill every job locally anymore. We can outsource a lot, we can centralize a lot with our computer systems, we can share a lot more content. We try to maintain the sales capability, shifting more assets to online advertising sales, maintaining the quality on the news side. We want quality to remain the cornerstone of McClatchy.

We have had cuts there but I will tell you that our staffing levels overall remain at or above industry standards and benchmarks, and it’s reflected in the awards we win. I know awards aren’t everything but we’ve won the [LOBE] awards, three of those, the top business awards this year. Only The New York Times could match that. The RFK Journalism Award for the outstanding domestic newspaper reporting in the United States, the Pulitzer Prize in Miami -- on and on and on.

So we do feel like we are maintaining quality as best we can in these downturns and making these cuts strategically. Most are permanent, some are temporary and we’ll have to evaluate them as we go through the budget process for 2010.

Timothy Stabos - Private Investor

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Barry Lucas of [Gabelli Sons].

Barry Lucas - Gabelli Sons

Thank you and good morning. I’ll take as many as you let me feed you, Gary. The first area, if there’s some modest improvement sequentially, maybe you can drill down a bit and are you seeing any geographic differences in terms of the rate of improvement?

Gary B. Pruitt

I can tell you that in general the central part of the country is still doing a little better than either coast, East Coast or West Coast. And of course, on the East Coast we’re concentrated in the Southeast and Florida, so we’re still seeing Central do a little better. And by category, generally in that second quarter, we saw improvement in the classified category with, you know, retail had some improvement as well but in classified we saw improvement each of the months sequentially and in retail, we saw some improvement as well, not so in national.

And as I said, July is kind of tracking the same as June. We do have limited visibility. We wanted you to know what we knew but we don’t feel comfortable projecting forward based on the trend but we wanted to report that three- to four-month trend to you.

Barry Lucas - Gabelli Sons

That’s helpful. On the Gannett call, I think Gracia said that they were seeing a little bit more activity, contract activity, some maybe as short as back-to-school, some going through the holiday season and a little bit into 2010. What are you hearing from your advertisers? Is that actually starting to percolate or have you not seen any of that?

Gary B. Pruitt

A little too early for us to speak with confidence to that. We are certainly hopeful about that. We’ve seen some improving trend in the last few months among our major advertisers -- still down quite a bit but a slightly improving trend among the majority of our top 50 advertisers. But too early to call back to school trend and too early for us to even call a third quarter trend.

Operator

Thank you. Our next question comes from the line of Ken Silver of Royal Bank of Scotland.

Ken Silver - Royal Bank of Scotland

Thanks for taking this call. I have a question about expenses. If you look at the second quarter compensation expense and the other operating expenses, are those sort of good run-rates for the back half of the year?

Gary B. Pruitt

Yes, they are.

Ken Silver - Royal Bank of Scotland

Okay, great. And then directionally, do you think newsprint is up or down?

Gary B. Pruitt

Newsprint is down and so that would be the one area of those three major expense categories that would improve over that total dollar amount of expenses in the second quarter, so you can think in general terms those dollar levels are current run-rates, except in newsprint where we should see some improvement in the second half as prices continue to drop and under the accounting method, we get to take more of that.

Elaine Lintecum

Ken, as we said in the press release, we’re looking at cash expenses down in the mid 20s percent range for cash expenses in the second half.

Ken Silver - Royal Bank of Scotland

Okay, great. Thanks.

Operator

Thank you. Our next question comes from the line of Budd [Zano] of [Royce & Associates]. Your line is open.

Budd Zano - Royce & Associates

Thank you. Circulation revenues are up about 5% in the second quarter. How did that come about?

Gary B. Pruitt

We raised prices at 26 of our 30 newspapers, so circulation rates were higher and that led directly to the revenue increase. Also, some of the papers decreased their discounting, which had the effect of raising prices and it also increased revenue.

Budd Zano - Royce & Associates

On a looking forward basis, assuming there was some cyclical recovery in the economy and advertising revenues actually increased, what part of the dollar of increased advertising would drop down to the bottom line, or the pretax line? Or the operating line, actually?

Gary B. Pruitt

It’s a complicated question -- a simple question but a difficult one to answer because it varies so much by where the revenue is coming, which category and --

Budd Zano - Royce & Associates

Let’s say print.

Gary B. Pruitt

In print and again by category, hard to say. And we have some expense restoration efforts but you know, our -- the marginal profit contribution of each incremental dollar of advertising is impressive. It’s a good margin business and so if we can get back to that, to advertising growth, we expect that we would drop a lot to the bottom line. I mean, even in the depths of this recession here in the second quarter, our EBITDA margin was over 25%. So we think we can maintain a good strong margin business and as advertising revenues recover, as the economy inevitably recovers, we would hope that we could drop much of it to the bottom line. We will have some expense issues, newsprint cycles through, et cetera, but we are committed to remaining strongly healthy and profitable.

Budd Zano - Royce & Associates

And lastly the property in Miami, is that being actively marketed in the event that your buyer does not fulfill its obligations?

Gary B. Pruitt

No, it’s not -- we’re still hopeful that that transaction goes forward by the end of the year but we are monitoring it.

Operator

Thank you. Our next question comes from the line of Edward Atorino of Benchmark Capital.

Edward Atorino - Benchmark Capital

I don’t usually compliment management but you’ve done a fantastic job. Excuse my voice.

Gary B. Pruitt

No, I appreciate that -- no problem with the voice.

Edward Atorino - Benchmark Capital

It’s really remarkable. Looking at 2010 on the comp line, obviously at some point you’ve got to start hitting bone, I guess. Can you take cost down another 10% if you had to, comp costs?

Gary B. Pruitt

Yeah, we certainly are hopeful that in a recovery, ad revenues do better and we have less pressure on the expense side.

I will tell you we are committed to keeping the company safe and profitable and think we can do that but we have not begun 2010 budgeting or projections and have limited visibility on the revenue side, so I really do not want to speculate as to what we are going to do on the comp side. We don’t have a clear view on that.

Edward Atorino - Benchmark Capital

In terms of interest expense, I guess the first half was pretty good an annual run-rate for the year?

Gary B. Pruitt

On interest expense, did you --

Edward Atorino - Benchmark Capital

Yes.

Gary B. Pruitt

Yes, I would say interest expense in the first half was $33.9 million -- in the quarter, excluding the charge for the bank amendment. That was 7.4% lower than 2008 and we do think that that’s a pretty good run-rate, reflecting lower debt levels and lower interest rates.

Edward Atorino - Benchmark Capital

And you would hope to reduce debt again in 2010 so interest expense would be down again, certainly if the Miami deal closed?

Gary B. Pruitt

We expect to reduce debt whether the Miami deal closes or not.

Operator

Thank you. Our next question comes from the line of Jake [Newman] of Credit Suisse.

Jake Newman - Credit Sights

Sorry, that’s Credit Sights. You mentioned in answer to a question on staffing levels that you thought you were, in terms of quality, I think, better than industry standards and benchmarks. I’m curious as to what the standards and benchmarks that you are looking at are and maybe what specifically quantitatively you are at?

Gary B. Pruitt

What I was referring to was staffing levels, where you can look more quantitatively and in terms of staffing levels, we overall remain staffed at a level above one editorial employee news employee for 1,000 in circulation and McClatchy historically has had a strong and deserved reputation for quality journalism and I think it remains. While awards don’t prove -- while any single award doesn’t prove maybe that fact, the long-term record at McClatchy and carry-through to this year I think reflects McClatchy's commitment to journalistic quality and I think that reputation is deserved and I think it is preserved, even in these difficult times.

All newspaper companies have had to cut back. That’s the reality we face right now but I think we’ve done it in a way to best preserve and in some cases improve our quality.

Jake Newman - Credit Sights

What was the full-time equivalents then at the end of the quarter?

Gary B. Pruitt

In the -- we’ll pull the figure. It was 8,755.

Operator

Thank you. Our next question comes from the line of

Lee Olive - Citi

Good morning. Thank you and this is just a follow-up to some of the compensation expense questions that have been asked already -- was there anything -- I’ll call it unique in the quarter with respect to a change in your pay contracts or accruals, deferrals that would have benefited -- I mean, obviously you had a tremendous acceleration in the ability to cut that line item. Is there anything in there that you can provide color on?

Gary B. Pruitt

Nothing extraordinary. I guess the closest thing to -- we froze the pension plan in the second quarter. There was some benefit to that but mainly it reflects reduced staffing and pay cuts at most -- for most employees, which increased with pay at sort of a progressive rate on pay cut. But FTEs were down over 30% and that drove the overwhelming majority of the compensation decline.

Lee Olive - Citi

Thanks, and then a follow-up -- what are the largest line items in the other operating expense line? What are sort of the largest costs embedded in there?

Gary B. Pruitt

There’s no one dominant cost but bad debt is a big slug, especially in a recession. Postage, given our direct mail program; solicitation in the circulation area, solicitation of new subscribers; energy costs, both in terms of gas and electricity are generally the biggest categories there. No one dominates but those are the major ones.

Lee Olive - Citi

Great, that’s helpful. Thanks.

Gary B. Pruitt

Sure.

Operator

Thank you. Our next question comes from the line of [Aveya Steiner] of J.P. Morgan.

Aveya Steiner - J.P. Morgan

Thanks for taking the questions -- real quickly, and if some of this was reviewed, I apologize -- as part of the last amendment you had received the ability to use $60 million on your revolver to buy back debt. I just want to confirm that in light of just using $3.4 million in the exchange that’s still available to buy back the 11s and 14s. I also want to know whether there’s anything preventing you from buying other debt in the open market, and then my follow-up would be whether -- just what your cash balance was at the end of the quarter. Thank you.

Gary B. Pruitt

Okay, you are right -- we can confirm that the remainder of that $60 million, that is $56 million to $57 million remains available to buy back the 11s and the 14s. The cash on the balance sheet at the end of the quarter was $4,765,000. And in terms of looking at other bonds, we certainly look at opportunistically -- opportunistically at opportunities in the bond market to reduce debt.

Operator

Thank you. Our next question comes from the line of Alexia Quadrani of J.P. Morgan.

Alexia Quadrani - J.P. Morgan

Thank you. Just following the recent [inaudible] of several newspapers, do you think there’s been a pick-up in interest in the industry in terms of acquisitions, M&A, which may give you an opportunity to divest some of your un-performing properties, if you chose to do that?

Gary B. Pruitt

Well, I don’t know if there’s been a pick-up or not. I’m not sure. I would just reaffirm what I said in the conference call notes, that each of the papers is producing positive cash flow so while there are better performers and worse performers, all of the papers are producing -- are cash positive, producing cash and while there have been some transactions, I don’t know if there’s a general pick-up or not. We will continue to look for opportunities to sell non-core assets, such as real estate that we don’t need for operations, et cetera, so we are pursuing that and continue to pursue that.

But we haven’t generally seen a broader pick-up -- maybe there will be one, maybe there will be a pick-up but we don’t comment on any activity like that within our own company.

Alexia Quadrani - J.P. Morgan

And then just a follow-up, can you remind us if you get a cash payment if the Miami land deal does not go through by year-end?

Gary B. Pruitt

Yeah, the way it works is we have received a non-refundable $10 million deposit and if the deal does not go forward, if the deal terminates, then we receive $6 million more.

Alexia Quadrani - J.P. Morgan

And is that by year-end?

Gary B. Pruitt

They have until the end of the year to complete the deal.

Alexia Quadrani - J.P. Morgan

Okay. All right, thank you.

Gary B. Pruitt

Sure.

Operator

Thank you. Our next question comes from the line of Ander Finkelstein of Barclays Capital.

Ander Finkelstein - Barclays Capital

A question on circulation -- it looks like the average daily and Sunday, the declines accelerated in the quarter from the first quarter, so the first part of the question is do you expect that to continue into the back half of the year? And are you comfortable watching the circ drop, given obviously if and when advertising rebounds, you will have obviously the smaller audience?

Gary B. Pruitt

Yes, it’s a good question. You’re right -- circulation declined at a steeper rate in the second quarter. Most of that, two-thirds to three-quarters was driven by actions that we took that we feel are generally non-recurring. They include more aggressive pricing -- as I said, 26 of the 30 papers. We felt we should do that. We felt we had the pricing power to do that. Most of it is sticking, as you can see by the revenue growth and we needed the circ revenue numbers, less discounting also caused some of that pricing and that pricing caused greater erosion in circulation.

Also, we eliminated more of the other circulation categories -- other is a term of [ours] that includes hotel sales and third-party programs. We limited some of that. That circulation has far less value to advertisers and we continued to eliminated some outlying advertising, advertising outside the major geographic market for each of our papers.

And so those are more or less one-time events and so while we think you will see that run-rate in circulation through the end of the year, we will roll over them next year. We don’t think that’s the current run-rate.

If you look at the year-to-date numbers excluding Miami, we’re down about 8.8% daily and 6.9 on Sunday. That we think is an acceptable level and I would stress -- and Miami lost so much because they had more hotel additions and more international additions which were cut back.

But when we look -- what we are basing sales on now more than circulation is readership and audience and our syndicated research indicates that our readership decline of our print product is much smaller than the circulation decline and that’s what’s important to advertisers. This circulation is just not as valuable to advertisers.

So while the drop can seem more dramatic, the readership decline is a fraction of the circulation decline and then when you look at total audience with online, it’s actually growing based upon the research we had in the majority of our large markets, reaching about 70% of the adults in our markets.

So our reach is impressive, continues to grow even with a small decline in print readership. And it’s still the biggest audience out there, still the biggest audience in each of our markets.

Ander Finkelstein - Barclays Capital

Okay, and just as a follow-up, is there traction with -- particularly I guess the large advertisers you are talking to when you shift to more of a readership focus?

Gary B. Pruitt

Yeah, I mean, the advertisers are becoming more sophisticated on this as well and they are used to audience buys, because that’s how they buy broadcasts. That’s how they buy other media. It was newspapers that were kind of behind the curve in selling circulation. It’s really the audience that we are selling. And our audience for each printed product is about 2.5 to 3 times the circulation.

Ander Finkelstein - Barclays Capital

Thanks.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Tom Russo of Gardner Investments.

Tom Russo - Gardner Investments

I may get cut off here but I have two quick questions, you may have touched on them already -- the first was the Florida real estate sale progress and the second one was progress underway with the Yahoo! consortium. If you’ve addressed them, I’ll pick them up on the transcript.

Gary B. Pruitt

We haven’t -- we’ve addressed the Florida land, not Yahoo! consortium. Florida land, still scheduled to close by the end of the year. We’re hopeful that it does close. We’re monitoring that situation. We’re not marketing the property. We -- and if it doesn’t close, we collect -- we have a guarantee to collect an additional $6 million on that deal.

The Yahoo! consortium, I’ll turn it over to Chris to give you more details. We remain very pleased with the Yahoo! consortium and believe it is helping to grow our retail online numbers at a substantial double-digit clip, 50% in the first half -- that’s one of the factors helping to grow that number. And it’s helping maintain our rates with behavioral targeting, but I’ll turn it over to Chris.

Chris Hendricks

The consortium now overall has about 40 major companies it in. It’s comprised of more than 800 daily newspapers. McClatchy is the largest participating company in the consortium. We lead the consortium in sales overall since inception and in 2009. Ninety-percent of our sales were coming from behavioral targeting, selling behavioral targeting as opposed to section-based on our sites and on Yahoo! sites. We have 16 papers launched on the Yahoo! advertising platform known as Apps. We have 19 newspapers selling Yahoo! inventory and we continue to roll out our papers.

As Gary said earlier, the CPMs that we are experiencing in selling Yahoo!’s inventory are high and they continue to increase on the BT side. They area actually above $20 a CPM, the average CPM, and of the book that we are selling right now, approximately 30% to 40% are new customers, net new to us, not reactivated people who we’ve never sold before. Large categories include automotive, the number one, retail, local merchants as number two and real estate number three. Then it goes on to telecom, travel, entertainment, finance, healthcare.

But we are very pleased so far with what we’ve done and we continue to see positive results and they are making a difference.

Gary B. Pruitt

It’s making a material difference in our online results. It’s obviously less material than the overall company’s revenue but it is helping us on the online side quite a bit.

Operator

Thank you. At this time, there are no additional questions. I would like to turn it over to the speakers for any additional or closing remarks.

Gary B. Pruitt

Thank you very much. I appreciate you calling in, listening and your questions. We look forward to improving results going forward. Thank you very much. Goodbye.

Operator

Thank you and this concludes today’s conference call. You may now disconnect.

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Source: The McClatchy Company Q2 2009 Earnings Call Transcript
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