Pat Talamantes - President and CEO
Elaine Lintecum - VP, Finance and CFO
The McClatchy Company (MNI) UBS Global Media and Communications Conference December 11, 2013 1:30 PM ET
Good afternoon. Welcome to The McClatchy Company presentation. McClatchy is a leading news, advertising and information provider offering a wide range of print and digital products in the market it serves. The presenter today is Pat Talamantes, who is the President of the company. He will also introduce his team.
Thanks Todd [ph], and thank you all for coming to our presentation today. We are looking forward to talking to you about the progress we are making with our digital strategies and how we are doing with our transformation. But before I get into that, let me just first remind you that this presentation includes forward-looking statements that are subject to risks and uncertainties that could cause actual events to differ from what we have said. With me today is our Vice President and Chief Financial Officer, Elaine Lintecum and also in attendance is our Assistant Treasurer and Investor Relations Manager, Ryan Kimball.
The McClatchy is a leading local media company in 29 strong growth markets across the United States, where household growth is 39% faster than the national average. We publish 30 daily newspapers delivered in print, online and on mobile products and every single paper is profitable and has been throughout the downturn and then into the recovery. We have strong direct marketing operations in each market that are growing and have been able to deal effectively with direct marketing competition. We are noted for high-quality journalism. Our papers throughout their histories have won 52 Pulitzer prizes, with 13 of those being the top level public service gold medal.
We have a portfolio of premium digital assets that generate returns, both in terms of cash distributions, as well in terms of strong asset returns. We are in high quality markets across the United States. Although people typically think of us as a western company, the largest concentration of our revenues is in the southeast, and we believe that our geographical diversification helps us to overcome challenges in any one region or market. We also have a mix of large, medium and small size markets and so that helps us win in some of the years where large papers do better and some years when smaller papers are doing better. So we believe that our diversification in our size is a strength of the company.
In terms of size financially, we have revenues over the last 12 months of almost $1.3 billion and cash flow of nearly $300 million on a TTM basis. And excluding unusual items, we remain profitable on the bottomline. So here are list of our strategic goals. I’ll quickly lay them out for you and then I will explore each of them in more detail.
So for McClatchy, our strategy starts with our public service journalism. Our mission is what keeps us relevant in the modern media mix. But distributing that journalism is going to demand wide digital circulation, which means infrastructure investment and it means product innovation. And supporting that content on the Ad side also requires additional product development. So there is a lot more than we can continue to do on our digital transformation, and we will go through that.
The benefit of growing our Ad revenues in digital, and growing our circulations revenues into our direct marketing is greater diversification of our revenue streams, and I will show you what that’s meant for the business in recent years. But getting more diversified, getting more digital requires investment and we’re doing that even though we’re also managing our cost of the legacy business. And finally we’ve done a tremendous job in managing our debt over the last few years and our maturities are now very manageable, but we still like to take debt a bit lower. So let me explore each of these in turn.
Our high-quality journalism is a hallmark of McClatchy and I'm pleased to say that we have been able to continue that in 2013. Just a few examples of that journalism would include the recognition that our foreign bureau, our DC bureaus have earned for their coverage in 2012 of the Syrian conflict. We have had recognition of our photo journalism in our Sacramento Bee Newsroom. Then we’ve also had recognition of our watchdog journalism in our Charlotte Observer and Raleigh News and Observer in these papers. So the product is remaining very strong.
But today extending that tradition of journalism means publishing digitally, and that digital transformation really has to start with technology platforms, not just for a digital publishing system that requires distributing content to any number of outlets, but also in terms of circulation systems and advertising as well.
We are in the middle of a multi-year process launch new systems in these areas across all of our markets through the use of cloud based computing. Every McClatchy paper will be on the same system, which means that every time we want to launch a new product, we only have to do it once; we don’t have to do it in separate instances as newspapers historically have had to do. And using the same systems in each market allows us to maximize our cost efficiencies.
Increasingly readers want to be able to read our news and information in a number of different ways, locations and day parks. So that’s an opportunity for us so we have to be ready with content that meets readers’ needs in each one of those different environments. And the complexity of our distribution requires a subscription program that is as flexible as the reading options. So our Plus program that we launched late last year allows us to have both digital only and bundled subscription alternatives.
The additional amount that we charged in connection with our bundled subscription alternative has resulted in incremental expected revenue for 2013 of $27 million to $30 million and that receives very high customer acceptance. So we had very good response from our customers on that and then for those who were not already subscribers, we have had 32,000 digital only subscriptions and together with existing subscription only products, we now have digital only subscriptions totaling 62,000.
And despite of here, perhaps our metered pay wall that we launched at the same time as this initiative would hurt traffic; we just really haven’t seen that. We launched with a threshold of 15 articles per month. You see in the first quarter the average daily unique visitors took a modest dip but then recovered in the back half of this year very nicely. And so in the fourth quarter here, we are testing dropping that threshold lower to see what the impact is on traffic and to see if there is any beneficial impact on digital only subscriptions.
Our track record in recent years on UVs has been pretty steady. We have been consistently at or around 39 million average monthly uniques, over the last several years but clearly on this next chart, you can see that the trend has been more toward mobile devices with mobile UVs in 2013, up 66% and accounting for 35% of all unique visitors. The increased use of mobile devices, particularly in tablets also offers additional benefits for us in terms of reader engagement.
So clearly we have to do a lot to keep up with this growth in mobile. So here late in 2013, we are launching new apps publishing to Android devices for the first time, both smartphone and tablet and we are also coming out with upgrades to our iOS apps for tablet as well as for smartphone. We will have substantial upgrades in the middle of next year and then we will also be coming out with responsive design websites during the middle of the year for those readers who are just coming up to our websites on a one off basis. And then with all of these different developments we are going to be able to improve the advertising environment for advertisers.
McClatchy has been an industry leader in digital advertising as a percentage of total for a number of years and that hasn’t changed in 2013. That figure is up to 24.4% of our total advertising. Digital is growing. Total digital only is up just under 1% in 2013. If you look at the component of digital, that is what we call digital only which is to say that it’s not sold in combination with the print buy. That digital revenue is up 9.1% in 2013.
Where we are seeing the growth is from retail and national display. We are also seeing growth on the auto side of the equation but we are also seeing improving revenues in terms of new products. So one new product, that’s not so new but we are implementing it slightly differently, it’s with audience extension networks. So for those of you who know us well, you know that we have been working with Yahoo! for a number of years functioning essentially along with the rest of the newspaper consortium as their local sales force.
So in that example you can see here, we have sold an ad to a local advertiser in Sacramento on to the Yahoo! Homepage. Yahoo! likes it because they get a higher CPM on the local level even after they split it with us and there are others out there who are interested in doing the same thing. But let me tell you why we go into this audience extension business.
So think of it this way. Audience extension is simply a way of expanding the amount of inventory that we have to sell in a local market. In a typical month McClatchy digital products serve 1.5 billion ad impressions and that sounds like a lot and it is. About half of that though represents truly premium ad inventory. The other half is accounted for by national inventorying, random [ph] inventory as well as promotional inventory. So we have a certain amount of times that we can’t serve an advertiser’s needs just out of our premium inventory effort if we’re sold out. So that’s when we have the opportunity to go to other national websites and so local advertisers on to those sites, with visitors that they have coming from out local markets. So we work with Yahoo! to do that as I showed to you before but then also ad networks that just simplify and central. So that’s a growing piece of the pie for us.
Another product that we have is our impressLOCAL digital marketing solutions where we’re helping small and medium sized advertisers really figure out how to approach the Internet the best way possible for them. We’re able to give them the expertise and access to social media and search engine marketing that they need and through a company and management team that we acquired in 2013 Tru Measure, we’re able to track all of their advertising for them. Very seamlessly they can track their return on investment, quite easily. It makes it pretty easy for local businesses to get on to Internet advertising. This product is launched in 2012 on two markets. In 2013 we’ve rolled it out to the remaining McClatchy markets.
With the growth in digital, we’re also able to diversify our revenue streams. So let me just show you a few things that have gone on over the last five years or so. Here you see on this slide how circulation has become a much larger percentage of our total revenue over time, and that really comes from decline in print advertising but also increasing circulation pricing. So that helped circulation become about 30% of our total revenues. But within that advertising pilots, the remaining two thirds, there is a lot going on there and one of the things going on is our growth in direct marketing.
Direct marketing for us includes direct mail, niche products, as well as our Sunday Select pre-print advertising program, where we’re dropping inserts to households that are not subscribers but have asked to get that product, because they see value in the advertising that’s associated with it. That 675,000 households that offset some of the decline that we’ve seen in Sunday over a number of years. And with direct marketing we’ve had five consecutive years of growth. And in 2013 we’ve seen growth of 2.2% in this category. And these products really help us both target for advertisers as well as allow us to blanket the last aspect of the market that we don’t reach with print and with digital.
So when you look at those two together, so direct marketing and digital, you see that over the last five years or so, those what we call non-traditional revenues, are really now 40% of our total advertising base. Only 60% is which we call the traditional print advertising, that comes in the paper. And when you marry that up with the first chart that I showed you, and we combine them, it’s easy to see the traditional print advertising in the newspaper now only accounts for 40% of our total revenues, but it’s a very profitable 40% of course. But it helps us in the sense that we’ve got 60% of the revenue base that’s, improving 40% in print, we’re still cycling through and even though that 40% may stabilize at some point, we’re not waiting for that to happen we’re going out and trying to grow these other revenue streams to hasten the day when overall company revenues will start increasing again.
But to diversify our revenues and to be able to continue our digital transformation and that requires investment and so even while we’re focusing on cost efficiencies, we’re focusing on investing in the business. In 2013 our spending has primarily centered on technology platforms and the cost associated with new digital products like impressLOCAL and like our deal saver which is our daily deals product. And in the first nine months of 2013, that investment spending has accounted for about $7 million.
Most of you know that we’ve been consistently focused and disciplined over the years on maintaining and reducing our cost. The areas that we’re looking to maintain our capabilities are really our core, our news, ad sales and digital efforts, that’s where we create the most value, and we look for ways to be more efficient in all other areas. We’re continuing to reduce costs through optimizing technology, regionalizing and centralizing wherever we can, taking advantage of the scale of McClatchy.
We’re also continuing to do production consolidation efforts. We just announced – made announcements in Fort Worth and Charlotte in that regard. And even where we can’t outsource, we look to bring other printing from other parties into our plants to make them more efficient. So even with the investment that I mentioned to you before, costs for 2013 are down 1.7% or $12 million in the first nine months.
And lastly we’re looking to pay down debt. So through the first nine months of 2013, our net debt has declined to $1.510 billion, continuing a long string of years where we’ve been able to use our free cash flow to pay down debt. And we completed a debt refinancing at the beginning of this year, which has left to our debt maturities very manageable. You see that we’ve got $45 million in cash on our balance sheet. So our 2014 debt maturity is in the bag. 2017, given our free cash flow really we don’t think is an issue. So for the first time in a long time, we’re looking out almost a decade in terms of a runway for our business, which is a great position for us to be in.
So just take a look at our outlook for 2014. Visibility on advertising continues to be pretty murky but there are some things that we can say about 2014. On the strategy side we have a number of digital priorities that we’ll be looking at for ’14. First is building a programmatic team to optimize the sale of our advertising inventory and taking advantage of the ability to go into ad exchanges and cut out middlemen.
We’re also going to be using that programmatic team, as I showed you earlier to increase the number of revenue opportunities that we have with audience extension partners. I mentioned before our focus on mobile and we’re leasing next generation mobile apps. Again that’s for readers but that’s also to give the advertisers better opportunities to advertise their products and services.
Video as you know is exploiting on the Internet, particularly with local media. So this year we’ll be expanding the use of our video in all of our digital products to both enhance the content that we bring to readers and viewers and also compete for a growing advertising stream. And then we’ll also be looking to develop a core competency in the use of social networks and related data to improve the user experience, traffic and advertising yield. So there is a lot to do this year in terms of digital to improve our operations and expand our content offerings further.
Financially we’ve given 2014 guidance yesterday morning as well. In terms of overall, total revenue trends, we did not give guidance on print; print remains challenging and we don’t have a lot of visibility for 2014. But we do expect that in terms of digital only advertising, we expect that to grow in the double digits and we expect direct marketing and circulation revenues to be up in the low single digits. So most of our revenue pie, if you look at it and think back to that earlier chart, is in the position now to begin growing.
On the expense side, we’ll remain disciplined in our approach to cost efficiencies. We expect expenses to be down in the low single digits. That excludes a change in how we account for circulation to match the underlying distribution contracts. We will now, in markets that are using a fee for service model on distributing papers will be on a growth method for circulation revenues rather than our historical net method. That has the impact of increasing revenues but also increasing expenses.
If you just kind of look through that and just attribute that as geography on the balance sheet, means it has no impact on cash flow, then you see that expenses will be down low single digits. That’s coming from lower compensation cost, it’s coming from stable newsprint cost and it’s occurring, even though we’ll be -- our total investment spending in digital initiatives will be $13 million in 2014, that’s not incremental that’s the total amount of spending in ’14. So we’re continuing to look to try to save money to be able to plow it back in to digital initiatives.
We’ll also make pension contributions of $25 million next year. It’s great that long term interest rates are going up. It should help our GAAP unfunded numbers. But the way that the IRS rules for how long term discount rates work, they look back 25 years. And so the improvement in any one year doesn’t help us much, but we’ve certainly had a very good benefit from that long term look back over the last few years, as we only had $7.6 million in required contributions in 2013.
And again, in terms of debt reduction, we have very manageable near term maturities. We will take of the $29 million due in November and then the next maturities don’t come due until 2017. So from a debt perspective we will look to buyback bonds in the market as we see opportunities to do so and that’s what we have been doing over the last few years.
So we believe we have both the quality of journalism and the right digital strategies and operations to be able to take advantage of the runway that McClatchy now has. So thank you for your time today. I think we have some time for questions, if anybody has them.
Sure. So at the end of 2012 our unfunded amount for GAAP was $588 million. The GAAP sensitivity to a 1% increase in long term rates is about $225 million. So if you want to do a calculation of how much you think long term rates have gone up over the course of 2013, you can do that calculation. The IRSN funded balance was $153 million and as I mentioned that’s not going to respond quite as much to that increase in rates, although overtime that certainly helps us. The only guidance we have given on required contributions has really been around this 24 guidance we gave today. We have not given any guidance out for ’15, ’16, and ’17 and we will do that as we get more visibility on it. Yes?
Are you going to provide any guidance on the lines of more specifically the different expense items like how well, whether in normal terms or as a percentage of revenues [indiscernible] newsprints to more digital, and then the other OpEx the [indiscernible]?
Yes. So we just said on the compensation line we expect it to be lower. In part that is coming from our Fort Worth outsourcing agreement, where we are looking to move production to the Dallas morning news. That has the benefit of taking labor costs and weather cost, ink plates et cetera and moving them to the news print line. So the news print line we said is stable. In part it’s stable because we’ve got all these other costs in Fort Worth moving to that line.
News print expense itself, news print of volumes or usage is actually coming down pretty significantly. All other overtime is a bit challenged, because as we outsource other source of operations that we have, that is an expensive lens in all other and a lot of our investment on the digital side systems, those sorts of things also land in that all other bucket. But overall we expect expenses to be down in the low single digit range. Yes?
Couple of questions. One, what is the cost of thousand [indiscernible]. Second, how much of your advertising relates to the [indiscernible] relates to the advertising very aggressively across all [indiscernible]. And third [indiscernible] how has classified [indiscernible]?
Sure. So in terms of CPMs, on the digital side our CPMs on the local level are much higher than national CPMs. It is the reverse in print, but locally our national -- our local CPMs are say around the $8 range or so. We think that those should be fairly steady. There are reasons to think that they might decline a little bit because of the advent of ad exchanges. Ad exchanges also give us the ability to monetize our inventory more effectively and that has the impact of going the other way. And certainly as we get more into video, video CPMs at the local level are three times what they are in display and so that certainly helps us on outside.
Do you want to do the auto?
Sure. In terms of overall classified, in total it was about 28% of our total revenue and it has been holding steady there over the last several years. And auto is roughly 10% total advertising revenues.
And I’m sorry we missed your second question I think.
Okay great. All right, anything else? Any of the lead entrants, next speakers want to ask a question? All right, great. Thanks very much everybody.
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