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The McClatchy Company (NYSE:MNI)

Q4 2009 Earnings Call

January 27, 2010 11:00 a.m. ET

Executives

Elaine Lintecum - Treasurer

Gary Pruitt - Chairman and CEO

Pat Talamantes - VP and CFO

Analysts

Alexia Quadrani - JPMorgan

Craig Huber - Access 342

Edward Atorino - Benchmark Company

Ken Silver - RBS

Barry Schwartz - Chatham Asset Management

Operator

Good morning. My name is Courtney and I’ll be your conference operator today. At this time I’d like to welcome everyone to the McClatchy Fourth Quarter 2009 Earnings Conference Call. (Operator Instructions). Ms. Elaine Lintecum, you may begin your conference.

Elaine Lintecum

Thanks Courtney and thank you all for joining us this morning for our fourth quarter conference call. The call is also being webcast at mcclatchy.com and that webcast will be archived for future reference. Joining me today is Gary Pruitt, our Chairman and CEO; our Vice President of Operations, 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 will be sticking to the one question per participant rule.

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 our website for your convenience.

All non-GAAP amounts are reconciled to the most directly comparable GAAP measure in the release and attached schedule, as well as schedules posted on the company’s website on our 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 that is filed with the SEC. Actual results may differ materially from those described during this call.

Now here’s Gary Pruitt, our CEO.

Gary Pruitt

Thanks, Elaine. Good morning. Today we reported income from continuing operations of $32.4 million or $0.38 per share for our fourth quarter. Excluding certain unusual items detailed in our press release, our adjusted earnings from continuing operations in the fourth quarter were $49.6 million or $0.59 per share, up strongly from the comparable earnings of $21.8 million or $0.26 per share in the 2008 fourth quarter.

Our adjusted earnings from continuing operations for the year were $0.72 per share compared to $0.67 in 2008. Who would have thought we would have reported earnings growth in such a challenging year. Much of the financial improvement we reported came from improving revenue trends. Total revenues in the fourth quarter of 2009 were down 16.5%, advertising revenues were down 20.5% with improving trends throughout the quarter. Ad revenues which were down 28.1% in the third quarter declined 25.9% in October, 19.6% in November and 14.9% in December. Also circulation revenues were up 6.6% in the quarter. Online advertising revenues grew 14.9% in the fourth quarter of 2009.

We’ve seen some evidence of recovery in improved classified advertising. It’s typically the first area of our business to suffer in a downturn and also the first to rebound when things improve. The improvement in the level of decline is consistent across all regions and categories of classified advertising, in both print and online. In addition to an improving revenue trend, we continued to strategically restructure our business. We reduced cash expenses in the fourth quarter by 28.5%, excluding severance.

We also reported a nice gain in operating cash flow this quarter. Operating cash flow with $139.9 million, up 19.8% and our operating cash flow margin was 35.6%. While revenue trends are encouraging, they were not yet strong enough to turn our revenue declines into growth.

Here are our results by category. Retail advertising was down 20.3% during the quarter. The declines in our newspaper advertising were partially offset by strong growth in digital retail advertising. Online retail was up 48.6%. Classified advertising revenues declined 25%, a 15.2 percentage point improvement from the first nine months of the year.

Here’s a look at how the major categories within classified performed during the quarter. Employment advertising was down 43.6% in the fourth quarter versus 61.9% in the first nine months, an 18.3% percentage point improvement. Print employment revenues were down 51.8%, while online revenues were down 33.3% reflecting the lack of hiring. Automotive advertising was down 20.4%, a 13.2% pickup from September year-to-date. Our print advertising was down 28.2% and online auto advertising was down only 2%.

Real estate advertising was down 35.6%, up 8.7 points from the first nine months. Print advertising was down 41.4% and online retail advertising declined 8.4% in the fourth quarter. Turning next to national advertising, it declined 19.8% in the quarter compared to a 30.1% decline in the first nine months for the year. Print losses were partially offset by a 52.2% 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. Our transition to a successful hybrid print and online company continues to advance. Our online audiences are growing with average monthly unique visitors to our websites, up 18.6% in 2009. Digital advertising grew 14.9% in the fourth quarter and we maybe one of the very few newspaper companies to report digital ad growth for the full year 2009.

Conventional thinking holds that newspapers are being left behind as advertising migrates from print to the internet. But that’s not true at McClatchy. About a third of our classified advertising now takes place on our websites, more than half of the employment category, one third of automotive and a quarter of real estate advertising is digital.

McClatchy is the only newspaper company to offer CareerBuilder, cars.com, Apartments.com, HomeFinder, and to be in the Yahoo-Newspaper Consortium. Others have some of these products, but no other newspaper company has all of them. This successful combination of superior products has been key to our success and importantly we own a portion of several of these best-of-read digital classified businesses, including CareerBuilder, the nation’s number one jobsite and cars.com, the number two auto site.

As we continue our successful migration to a multimedia company, we are less vulnerable to print declines and the secular shift of advertising to digital media. Digital advertising represented 16.2% of total advertising in 2009, up from 11.6% in 2008 and importantly, our digital business has a higher profit margin than our print business because it’s not burdened with printing and distribution costs.

We have implemented increases in circulation prices at most newspapers, resulting in a 6.6% increase in circulation revenues in the quarter. Our strategy is to expand our total audience, both in print and online. While circulation has declined, these declines reflect in part our efforts to reduce unprofitable circulation that is less desirable to advertisers.

Turning to expenses, as I mentioned, total cash expenses in the fourth quarter were down, 28.5% excluding the impact of severance. Compensation costs were down 27.5%, excluding severance, newsprint and supplement costs declined 48.6% reflecting lower prices and lower usage. Prices were down 36% and usage was down nearly 30%. All other cash expenses decreased 18.4%, interest costs were down $16.7 million from the 2008 quarter, interest on debt was down $4.7 million primarily due to lower debt balances, interest on taxes was down $12 million largely reflecting the reversal of accrued interest on certain state tax reserves which were paid in the fourth quarter, and therefore are no longer payable. They were settled in the fourth quarter rather and therefore are no longer payable.

Capital expenditures in the quarter were $2.3 million and were only $13.6 million in all of 2009. We expect to hold capital expenditures to about $20 million in 2010. We also expect to make pension contributions in the $22 million range in 2010 and to continue our focus on repaying debt. Based on the first few weeks of January, ad revenues are down in the low to mid-teens percentage range and that’s consistent with what we expect to see ad revenues, where we expect to see ad revenues in the first quarter of 2010. We also expect cash expenses to be down in the low 20% range in the first quarter. As a result, we expect to see strong double digit growth in operating cash flow which will enable us to continue to improver our leverage ratio.

Our debt at the end of 2009 was 5.26 times cash flow as defined under our credit agreement and we expect it to decline to approximately 5.0 times by the end of the first quarter. While we are seeing improving advertising trends, we still have a lot of hard work ahead of us, as we weather the current economic environment. We will remain vigilant in realigning our cost, to focus on our core competencies of quality journalism, advertising sales and digital media.

We completed the quarter with debt outstanding of $1.95 billion, down more than $174 million from the end of 2008. As I mentioned before based on our trailing 12 months of cash flow, our leverage ratio as defined under our credit agreement improved for the third consecutive quarter to 5.26 times at the end of the fourth quarter and our interest coverage ratio was 3.08 times. Both of these ratios are well within the covenant requirements under our current credit agreement of a leverage ratio of less than 7 times and an interest coverage ratio of greater than two times.

We are pleased to report that our pension plan had strong returns in 2009 and based on preliminary results, the unfunded status of the company’s pension plans improved by approximately $114 million from the end of 2008.

Thank you very much and now I’ll be happy to answer your questions about our fourth quarter results.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Alexia Quadrani from JPMorgan. Your line is open.

Alexia Quadrani - JPMorgan

My question is really in the pickup and classified revenue that you saw to a certain degree in the fourth quarter, but you also obviously seeing in January as well, is it really predominantly in the auto category or are you seeing it a bit also in real estate?

Gary Pruitt

We are seeing it in all three major classified categories, automotive, real estate, and employment. But we are seeing it in the fourth quarter, we saw it to the least extent in real estate and then automotive and employment, both improved by kind of mid-teems percentage points compared to the first nine months. So I guess I would say that employment was down the most, so we have probably seen the sharpest increase in automotive. Increase is the wrong word, the best improving trend in automotive.

Alexia Quadrani - JPMorgan

And I would assume that this is sort of early stage in the recovery, the improvements that you are seeing in these classified businesses is obviously is all volume at this point and not price.

Gary Pruitt

Right. And it is both print and online.

Alexia Quadrani - JPMorgan

And if you don’t mind if I can ask the question, your digital business. If you can just give us some color I guess on the pricing environment of the online retail advertising, I guess how does it compare generally to your print retail and how does it compare to sort of where online retail was about a year ago?

Gary Pruitt

Well it’s a complex question. There are buys that local retailers make, that are both print and online, sort of package buys between the two. And in those cases rates on average are down in the single-digit range. Online we have seen actually rates hold, local retail rates are much higher than national online rates, and we’ve had the advantage of partnering with Yahoo to use their behavioral targeting technology which has allowed us to maintain or increase CPMs as advertisers are able to target more accurately, prospective customers so that has really helped us on the retail online rate side.

And that business, of our online business about 44% of it in 2009 was online only. So that was important for us, our online revenues were a $188 million for all of 2009. Almost 44% of that was online only, meaning it wasn’t tied up to any other bundled print buy at all. It was just purely online business, so we think that bodes well and it shows an independent business stream and revenue that is online only and no way tied to print.

Operator

Your next question comes from the line Craig Huber from Access 342, your line is open.

Craig Huber - Access 342

Hi good morning Garry, Craig Huber. I have a two part question if I could. Your retail ROP advertising volume, how much was that down in the quarter if you want to compare that to the advertising revenues and then can you also speak about overall advertising pricing for newspapers, how much of the advertising rates were down in the quarter.

If I could sneak in another question about the costs, as you look out for costs here for 2010, you’ve done a Herculean job as others in the industry have, nobody has done a better job than you guys on the cost front in 2009. If things don’t play like it you are hoping they do in 2010 with the economy and advertising revenues, do you think you could take out another 10% out of your non-used print cash costs in the fourth quarter run rate you are running at right now, actually going into 2010 full for year?

Gary Pruitt

Okay, well as far as lineage goes, volume goes, full run ROP lineage and the overwhelming majority of that being retail is down in the fourth quarter, was down 16.7%. And retail advertising was down 20.3%, but a big chunk of retail advertising now is preprint. So preprints were part of that and they were down 14.4% in terms of millions distributed.

Rates were down probably on average in the high single digit range. And that is a very hard number to be precise about and varies from paper to paper and market to market, but in general in that area. As far as expenses go, we are able to give good guidance for the first quarter of 2010 as we said in the low 20% range. We have more work to do on expenses as revenues are down we know that, there won’t be a choice and we can do more, but we are not giving any projections right now as to how much and what we can do like, we just say that we understand with revenues down expenses will also have to be down.

Operator

Your next question comes from the line of Edward Atorino from Benchmark Company. Your line is open.

Edward Atorino - Benchmark Company

I sort of have that cost question. On the interest line, just run out the first quarter number for balance of the year, sort of a run rate or should we figure in some debt reduction in there?

Gary Pruitt

Okay, well as far as the costs go, I guess we did address it.

Edward Atorino - Benchmark Company

I’m just curious how you look at interest expense going forward?

Gary Pruitt

The interest expense going forward may change and so it’s difficult to give you a projection at this time. On the cost front, we are focused on restructuring that is strategic, not just across the board focusing on our core of news advertising and digital, but we don’t have a projection on the interest expense line, I’m sorry.

Edward Atorino - Benchmark Company

Okay. One other question, could you talk about some ad categories where you are seeing plusses and less declines, is this sort of traditional retailers, any new stuff little guys, big guys?

Gary Pruitt

Yes, in the fourth quarter we saw nice pickup in national advertising as well those were large national advertisers. We don’t put as much stock in the trends there because national advertising can be volatile, but the food and drug area actually saw a growth in the fourth quarter which was a nice change. On the retail categories, we did see retailers make a nice push in the holiday season, both large and small but in general we are doing better with the smaller local retailers than we are with the larger national retailers and that trend has been consistent throughout the year and it is the case today as well.

That plays out in classified as those decisions are largely local, so if we are seeing improving trend there, we are seeing local decision makers, auto dealers or real estate brokers, some companies or agencies doing hiring, doing a little more advertising than they had and so the declines are less then they have been in the past. So it’s a generalized improvement in trend.

Elaine Lintecum

I guess, I would add to that we are seeing a little bit less in terms of out of business kinds of things in retail and last year’s first quarter, there was a significant amount of out of business that we rolled over that we think we are not seeing so much in the fourth quarter of this year.

Operator

Your next question comes from the line of [Scott Whistleman] at Goldman Sachs, your line is open.

Unidentified Analyst

Yes, good morning, thanks for taking the question. Just two house keeping items. First, can you tell me how much bank debt you had outstanding on the term loan and revolver at the end of the year.

Gary Pruitt

Sure Pat, is looking that number up.

Unidentified Analyst

And then another housekeeping item while you are looking, the pension amount, you said that they improved a $114 million, I have in my notes I think their under funded status was 718 as of the end of ‘08, so is 604 the new under funded amount?

Pat Talamantes

Well, for both qualified and unqualified plans. In the qualified plan, it was about 611 or so at the end of ‘08, at the end of ’07, it was slightly under funded. The qualified plan ‘08 a terrible market year, we went to about 611 under funded and now at the end of ‘09 it was about 494 under funded. And then the unqualified, the supplemental plans were about $100 million that are not prefunded, but sort of pay as you go, pension fund is frozen as are all of the supplemental pension plans.

Elaine Lintecum

Scott, the total bank debt outstanding at the end of the year was about $878 million and of that about $330 million was revolver.

Operator

Your next question comes from the line of Ken Silver from RBS. Your line is open.

Ken Silver - RBS

Just sticking with the pension for a minute, you said you were going to make a contribution in 2010 I think of $22 million, was that right.

Gary Pruitt

That’s right.

Ken Silver - RBS

What was the contribution in ‘09?

Gary Pruitt

There was no contribution in ‘09. There was no required contribution, funding credits from before.

Ken Silver

So did that number hit the P&L or the cash flow statement?

Elaine Lintecum

Are you talking about ‘09?

Ken Silver - RBS

No, the $22 million.

Pat Talamantes

No, that will eventually hit the cash flow statement.

Ken Silver - RBS

So if not in cost of goods sold, it’s pension expense.

Elaine Lintecum

Correct.

Pat Talamantes

It is not in pension expense, no.

Operator

Your next question comes from the line of [Tim Dalet] at Citi. Your line is open.

Unidentified Analyst

Hi, what was the cash balance at the end of the quarter. I was wondering if you guys have thought about putting on a pay model for your website similar to that of The New York Times?

Elaine Lintecum

Cash balance was about $4 million or $5 million, it’s relatively low as it typically is.

Gary Pruitt

And then as far as a paid model for our website, we are not ideological about this and we are willing to experiment and try various models. We tend to believe that the overwhelming majority model on the internet will be free ad supported model and in fact that has proven to be very profitable for us with nearly $200 million in ad revenue from the internet at a higher profit rate than our print model.

So we feel that the model isn’t broken. On the other hand, we are willing to experiment and see what works. So we are going to experiment with the paid model at one of our websites as people go deeper into our website, they will eventually hit a pay wall, but our subscribers will have free access. We wanted to experiment with this and see if it works, we have some paid products online and have had for many years, specialty niche products with deep rich information related to a certain category where people are willing to pay such as political or legislative information in a particular state.

So, while we believe it will be a mixed model and we are going to learn from everybody out there. We do believe that advertising will be the majority business model and the overwhelming majority of our revenue going forward. But we’ll learn from everyone, we wish them all luck. Somebody cracks the code, we’ll copy it.

Operator

Your next question comes from the line of Barry Schwartz from Chatham Asset Management. Your line is open.

Barry Schwartz - Chatham Asset Management

Hi, thanks. One housekeeping item, can you tell me what cash taxes were for the quarter and then I have a follow up.

Pat Talamantes

Unfortunately, Barry, our audit is not completed and our K is not ready to be filed and we don’t have the cash tax number at hand.

Barry Schwartz - Chatham Asset Management

Okay so based on the debt balances, it looks like you paid down about $39 million in bank debt in the fourth quarter? Is that about right?

Pat Talamantes

Yes, that sounds about right.

Barry Schwartz - Chatham Asset Management

You indicate that $614 million of proceeds from the anticipated debt deal will be used to pay down bank debt? Is that correct?

Gary Pruitt

McClatchy did issue separately some other press releases today that related to financing, but we cannot speak to those and I know that it maybe frustrating to you and awkward for me, but I could only refer you to those press releases and look forward to speaking to you about them when able.

Barry Schwartz - Chatham Asset Management

This is all publicly in the press release, it’s specifically said that $614 million would be for bank debt pay down? That was in the press release.

Gary Pruitt

Right

Barry Schwartz - Chatham Asset Management

So my question is, specifically the covenants of the bank debt, does the bank debt pay down have to be pro rata or can you guys determine which way you want to apply that money?

Gary Pruitt

I am sorry but we are just going to let the press release speak for itself, I want to be cautious about that and not speak to that. I can only refer you to the press release. I am sorry.

Operator

(Operator instructions). Your next question comes from the line of [Randy Baron] from SM Investors. Your line is open.

Unidentified Analyst

Hi, I just have a quick question on the Miami land sale, so can you give us an update on cash received so far, if and when you are expected to close and what if the delay incurs?

Gary Pruitt

Sure. We have received $16 million in non-refundable deposit for the deal. It’s a $190 million land deal, so we perceive $16 million. The closing deadline is January 31, 2011 a year from now. And if the deal does not close at that time, we are entitled to a $7 million termination fee. We are certainly hopeful that the deal closes and the buyer assures us that they will close, but we can’t be certain of that, but they do have now a year to get the deal closed.

Operator

Your next question comes from the line of Harry [deMott] from Knighthead Capital. Your line is open.

Unidentified Analyst

Just getting back on the cost side, obviously in the first quarter, costs will come down as you really started the big restructuring at the end of the first quarter last year, is that correct.

Gary Pruitt

That’s right.

Unidentified Analyst

As you get into this second quarter, how much leeway will you have as you start to anniversary the big cost cutting, obviously you continue to do that throughout the year, but I’m just wondering how much more leeway you feel you have? You have been pretty clear that you think EBITDA will be no less than it was this year in the past year?

Gary Pruitt

You are exactly right, we anniversaried the large expense cuts at the end of the first quarter and we have done smaller incremental efforts in plans, programs and cuts throughout 2009. So, we will benefit from those throughout 2010, the largest benefit comes in the first quarter.

So, we don’t have cost projections for beyond the first quarter and I would say much of our decisions and actions and steps we take on the cost side will turn on the revenue trends and what we see. So, we don’t have a projection on costs yet. In part we will react and adjust based upon improving ad revenue trends.

Unidentified Analyst

Okay and if I can follow-up with one other topic. Others who are smarter than me on this will no doubt have the answer to this, but you guys probably know it offhand. If you take a look at your newsprint costs last year and the news print and supplement line which went quickly 252 to 167. How much of that would you say was attributable to lower circulation, how much of that decline is attributable to sort of record low newsprint prices? And if you could then just sort of comment on the ongoing attempt by that industry to either take out capacity and/or charge you guys more or seemingly still too much capacity?

Pat Talamantes

We just need to triangulate in on that theory. In terms of news print consumption obviously, the declining circulation certainly helps with that in terms of our usage. During the quarter usage was down 29.4%. So obviously it’s coming more than just from the circulation side. I will also note that in terms of our pickup and margins in the quarter, we got some help from news prints, certainly not all, approximately 5 points of the pick up in margin came from news print.

I would say that that number that we saw there is probably more like kind of 50-50 in terms of usage and price. Obviously we had below trend or below historical trend in newsprint in the fourth quarter and I would say probably a half of that pick up that we are seeing is due to below trend newsprint.

Currently prices are starting to move up, but only modestly in fits and starts because of the over capacity, particularly on the west coast and so we are going to start getting closer to trend, but we don’t anticipate kind of above trend pricing for sometime yet. So that impact on our margins will normalize. We’ll still see decline newsprint prices in the first half on a year-over-year basis however.

Gary Pruitt

So I think Pat’s right, but it’s generally kind of 50-50 in terms of the volume and the price effect on the expense line decline and volume, both circulation and advertising revenue declines.

Operator

There are no further questions at this time.

Gary Pruitt

Great, well I want to thank everyone for their interest in the company and look forward to another good quarter in the first quarter of 2010. Thank you very much.

Operator

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

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Source: The McClatchy Company. Q4 2009 Earnings Call Transcript
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