The McClatchy Company's (MNI) CEO Patrick Talamantes on Q4 2015 Results - Earnings Call Transcript

| About: The McClatchy (MNI)

Start Time: 12:00

End Time: 13:08

The McClatchy Company (NYSE:MNI)

Q4 2015 Earnings Conference Call

February 10, 2016, 12:00 PM ET

Executives

Patrick J. Talamantes - President and CEO

Elaine Lintecum - VP, Finance and CFO

Mark Zieman - VP, Operations

Christian A. Hendricks - VP, Products, Marketing and Innovation

Stephanie Zarate - IR Manager

Analysts

Avi Steiner - JPMorgan

Craig Huber - Huber Research Partners

Michael Kupinski - Noble Financial

David Hebert - Wells Fargo

Barry Lucas - Gabelli & Co.

Brian Denes - CRT Capital

Eric Freeman - Jefferies & Co.

Operator

Good morning. My name is Kyle, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to The McClatchy Company Fourth Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there would be a question-and-answer session. [Operator Instructions]. Thank you. Ms. Zarate, you may begin your conference.

Stephanie Zarate

Thank you, Kyle, and thank you all for joining us today for our fourth quarter 2015 earnings call. I'm Stephanie Zarate, Investor Relations Manager, and I'll be available to answer any follow-up questions you may have after our call this morning. My phone number is 916-321-1931 and you can also find my contact information on our Web site. This call is being webcast at mcclatchy.com and will be archived for future reference. Our earnings release was issued this morning before the market opened, and I hope you've had a chance to review it.

Joining me today is Pat Talamantes, our President and CEO; our Vice President of Operations, Mark Zieman; our Vice President of Products, Marketing and Innovation, Chris Hendricks; and our Vice President and CFO, Elaine Lintecum.

Before we begin the review of our quarter, let me remind you that we moved from gross accounting to net revenue accounting in 2014 relating to some of our digital products and services, primarily Cars.com. This has no impact on the company's operating income, operating cash flows, or earnings. To help investors understand the impact of reporting these revenues net of expense versus at gross as we had historically, we have again provided our revenues on both a gross and net basis in the statistical report attached to our press release.

For purposes of today's call and in order to facilitate apples-to-apples comparisons, the results we are discussing are on a gross revenue basis for 2014 and 2015 which was our historical reporting format. Any figures given on a net revenue basis will be explicitly called out.

This conference call will contain forward-looking statements that are subject to risks and uncertainties that are described in our SEC filings. Actual results may differ materially from those described during the call. Also, non-GAAP amounts discussed this morning are reconciled to the most directly comparable GAAP measures in schedules posted on our Web site or in the body of the press release.

Now, I'd like to turn the call over to Pat Talamantes.

Patrick J. Talamantes

Thanks, Stephanie, and thank you all for joining us today for a review of our fourth quarter earnings and a look into 2016. 2015 was a year of transition and accelerated digital transformation that will continue in 2016. We have significant momentum from our digital surge and cost containment efforts realized in the second half of 2015 and know that there is still room to improve upon what we have implemented thus far.

During the year, we strengthened our balance sheet and returned value to shareholders. We repurchased $95 million of principal debt with $25 million purchased at a discount to par during the fourth quarter of 2015. This reduction, coupled with the debt reduction in the fourth quarter of 2014, enables us to reduce cash interest cost by $40 million in 2015. We grew free cash flow to $63.3 million, up from $53.7 million in 2014.

These proactive debt repurchases were focused on first lien debt as well as our nearest maturities, our bonds due in 2017, which now total only $55 million, a manageable amount given our ability to generate free cash flow. After 2017, we have a substantial runway to 2022 when our first lien bonds come due.

Also during 2015, recognizing how undervalued our stock had become and wanting to invest in the strong digital company, we launched a stock repurchase program which authorized repurchases of up to $15 million of the company’s Class A shares through 2016. As of the end of 2015, we repurchased 6.1 million Class A shares with $7.2 million remaining for share repurchases under our authorization.

We also implemented a reorganization of our company to strengthen our ongoing digital transformation and ensure that initiatives were being led by the right people under the most effective structure. We believe the result of those moves along with other strategic changes are evident in the improvement in many areas in the second half of 2015, and in particular the fourth quarter, in many ways, the best quarter of the year.

For the fourth quarter, we had earnings from continuing operations on an adjusted basis of $15.3 million, up nearly 40% from adjusted earnings of $11 million in Q4 of 2014. Our digital transformation continued its momentum in the fourth quarter with total digital-only ad revenues up 14.3% on a gross basis and up 20.3% on a net basis. Digital advertising revenues now represent 29.3% of total gross advertising revenues. Digital audience revenues were up 10.5% compared to the fourth quarter of 2014.

Total revenues in Q4 finished down 7.8% compared to the same quarter in 2014, and advertising revenues were down 11.7%. Within advertising categories, total retail, which includes ROP, preprint advertising and digital finished down 15.2% but digital-only retail finished up 12.7%. Our in-press local product revenues continued with their strong performance accounting for the majority of the improvement in digital-only retail advertising.

National advertising was up 1.2% for the quarter, as growth in total national digital advertising up 35.9% outpaced the decline in print advertising again this quarter. In fact, digital-only national advertising finished up 48.9% compared to the same quarter last year, reflecting the expansion of our programmatic ad sales including native and video programmatic advertising.

Total classified advertising finished down 9.4% compared to Q4 2014, a consistent trend throughout 2015 reflecting continued declines in print classified advertising. However, we saw growth in improving trends in certain digital-only classified advertising revenue categories in the fourth quarter of 2015. Specifically, employment and real estate digital-only classified advertising grew by 6.1% and 27.2%, respectively.

Automotive digital-only classified advertising revenues, which have been on an improving trend since the first quarter, were up 3.6% in the fourth quarter of 2015. For all categories, digital-only classified advertising revenues were up 6.4% when compared to the same quarter in 2014.

Direct marketing was down 9.5% compared to the same quarter last year and continued to be impacted by the pullback of large preprint advertisers in our direct mail products. Total audience revenues reported a slight decline in the fourth quarter of 1% but were up 0.3% for all of 2015. As Chris will discuss shortly, we continue to strengthen and grow our digital subscriber base.

To speak to our strategies and the results of our initiatives related to growing our revenues, particularly in digital, I will turn the call over to Mark.

Mark Zieman

Thanks, Pat. I’d like to quickly review our digital advertising results in the fourth quarter as well as our initiatives to grow both digital and other non-traditional advertising revenues in McClatchy. We started 2015 relatively slowly by our standards with growth in digital-only ad revenues in the first half of 4.7% on a gross basis. A good portion of the slower growth was the result of new Cars.com product mixes and higher prices as a result of our new affiliate agreement after Tegna purchased our interest in Cars.com in the fourth quarter of 2014.

Our last transaction was a great deal for McClatchy and it continues to provide strong and effective products to auto dealers at our markets. But the reset in pricing limited our overall digital growth going into last year. However, we worked with our auto dealers to develop the right mix of products to meet their needs and we saw steady improvement in cars, revenue and the entire auto category segment in every quarter of 2015. And at the same time, we saw solid growth in other forms of digital advertising including mobile, native and video, which helped us return to double-digit growth in the second half of last year, up 14.3% in the fourth quarter alone.

We expect that double-digit trend to continue for several reasons. As Pat outlined at the Noble Conference early this month, our digital growth is driven in part by restructuring and reinventing our sales teams across McClatchy, beginning last year with our six largest markets. We have increased the size of our sales staffs, we’ve doubled the number of digital coaches assisting our local teams, added fulfillment positions, rolled out new sales tools and refocused compensation and incentive plans to place more emphasis on digital sales.

We continue to reposition our sales teams to act as true digital agencies for their clients, in many cases extending our sales efforts statewide and across our regions. The changes have resulted in better service for our advertisers that are more engaged, efficient and digitally focused sales force, and also in more revenue. The six markets that launched our sales reinvention efforts last year improved significantly in digital performance in Q4. We are now working to implement the same process across the remainder of our markets in 2016.

Our sales reinvention process is focused on driving local revenue. Local advertisers make up more than two-thirds of our total advertising revenue. We have strong relationships with these advertisers, a broader array of products and services than any other local media company, and the ability to provide the market research and insights they need to gain new customers. We have launched a number of new initiatives, including local events, to bolster our direct marketing category of non-core advertising revenue in 2016 and offer our local clients even more options to reach their customers.

So we know that local businesses are steadily moving more of their marketing dollars to digital, and that’s showing up in our results. In press local, our suite of digital marketing products for small and medium-sized businesses grew nearly 25% in the fourth quarter of 2015. Digital direct marketing, which includes our email marketing products, grew more than 100% last quarter. Video advertising was up 144% in the fourth quarter. And native advertising, which was new to us last year, grew 68% from the third quarter to the fourth quarter.

Our national and large retail advertisers have their own challenges and in 2015, they continued to pull back on print advertising. In response, we are working with them locally and nationally to adjust our insert and direct mail business, including improving our Sunday Select packages that deliver inserts to nonsubscribers who have expressed interest in those ads. But we’re also seeing a strong shift to digital by large retail and national advertisers who need to find ways to reach their customers who are increasingly shopping online.

National digital revenue grew strongly over the course of 2015, down in the single digits in Q1, up in the single digits in Q2 and a solid double-digit growth in the second half and fourth quarter. Our national banner advertising grew 75% in the fourth quarter compared to the same period in 2014. Our programmatic advertising was up 118% in the quarter, fueled in part by our strong relationships with Google and the local media consortium or LMC. And national native and video also showed strong double-digit growth.

As a result, total national advertising revenue for the company began growing again in the second half of last year after several quarters of decline. So, as you can see, the combination of new products, new resources and a new focus from our sales teams improved our digital results significantly, as 2015 unfolded. And we see those trends continuing. Another factor that drove our digital revenue growth was an impressive increase in our digital audience.

So now I’ll turn it over to Chris to speak to our efforts in growing audiences at McClatchy.

Christian A. Hendricks

Thank you, Mark. Continued and expected shifts in how readers consume and get information means we need to make our content available to readers wherever they are 24 hours per day, seven days per week if we expect to grow and expand our reach. Recent audience growth and engagement with our news and information shows we have become more innovative with our media platforms and our providing compelling and valuable products to advertisers and consumers.

As part of our continued innovation efforts in 2015, we successfully re-launched our mobile and desktop Web sites, redesigned print products, introduced new mobile apps and deployed new story-telling techniques to better engage readers in context, meaning quickly reacting and adapting to when, where and how readers interact with our journalism.

Our initial effort launched in March and by the end of 2015, nearly every market had transitioned to our new platforms. We are increasingly providing contextually relevant information to our readers resulting in an expanded ability to sell segmented audiences to advertisers. We also greatly expanded our video efforts to improve and augment our text and still photo-based journalism and generate more advertising revenues.

In September, our news leadership team was bolstered by the addition of Tim Grieve as our Head of New Strategies. Tim was formally President and Editor-in-Chief of the National Journal in Washington DC. In his new role, Tim’s initial focus is to help us grow our digital audience and improve our news products. Since Tim’s addition, his leadership coupled with ongoing readership and audience growth initiatives has had a significant impact.

In November of 2015, our unique visitor account hit an all-time high of 52.8 million and ended the year at 50.6 million. For the fourth quarter, total company unique visitors grew 16.8% compared to the same quarter in 2014. Mobile advertising remains an important and growing part of our advertising revenue and audience demographic.

During the fourth quarter of 2015, mobile visitors made up 56.6% of our total digital audience. As digital consumption trends continue to shift to mobile, we’ve worked hard to design and improve our mobile Web and application experiences to make sure both exceed readers’ expectations and delight. Our digital subscription efforts also benefitted from audience growth in 2015.

During the fourth quarter, our paid digital-only subscriber account increased 11.3% to 79,300 compared to the same quarter last year. Further, our digital-only audience revenues increased 33.9% in the fourth quarter. Video also remains a key focus in our markets. As consumers watch more short and long-form video news and information, our news aggregator and local media sites and advertisers spend on video increases, we have expanded our video-related efforts in our newsrooms and sales channels.

Our video efforts were advanced greatly in the second quarter of 2015 when we deployed our own video player and expanded our efforts to create more video content. The impact of this effort is clear. During the last half of 2015, we saw a 260% increase in video views and in December, video views jumped more than 450% on a year-over-year basis.

Lastly, we continue to build relationships with strategic partners either in investment capacities or through partnerships to advance our digital transformation. For example and as mentioned during previous calls, we have teamed up with the local media consortium also known as the LMC and it’s more than 70 holding company members representing 1,600 plus local media outlets to increase demand for our digital ad inventory. The LMC maintains a private ad exchange allowing advertisers easy access to members’ ad inventory at scale.

During December of 2015, the LMC tallied more than 138 million unique visitors to its members’ digital properties and served more than 10 billion ad impressions. That’s an impressive result for sure placing the LMC in a comScore audience class reached by few. For us, the LMC ad exchange partnership was also a key contributor to our 77.6% growth in programmatic digital advertising revenue in 2015, and as Mark mentioned, the 118% increase achieved in Q4. The LMC partnership not only increased demand against our inventory, it also increased digital advertising revenue, it also created upward pressure on programmatic CPMs during the quarter.

Now I’ll turn it back over to Pat to speak of other initiatives in 2015.

Patrick J. Talamantes

Thanks, Chris. We spoke about some of our initiatives on the cost side of the equation to reengineer our operations and reduce our legacy costs. In fact, we mentioned last quarter that we expected to achieve the upper end of our cost savings guidance from these legacy cost teams for full year 2015, and we did.

During 2015, we achieved approximately $32 million of cost savings from the specific initiatives that we put in place while still investing in digital infrastructure and product. And additional cost efforts at our markets resulted in total savings of $57.9 million in cash cost in 2015. We were able to achieve these cost savings in spite of $5.4 million invested in related growth initiatives in digital infrastructure.

During the fourth quarter, we reduced operating cash expenses, excluding severance and certain other charges, by 9.4%. The majority of cost savings was attributable to compensation and newsprint costs and couldn’t have been achieved without creative and collaborative efforts from areas across the operation.

In terms of our capital structure, we ended the year with cash of $9.3 million and net debt of $927.9 million. Our leverage ratio was 4.77 times cash flow, as defined in our credit agreement. We have $65 million available under our revolving credit agreement and the restricted payments basket under our 2022 bond indenture was 714.2 million at the end of 2015.

On the pension front, the discount rate used to value our pension obligation increased from the end of 2014, a positive impact on the pension obligation but the impact was more than offset by weak performance in the capital markets that hit late in the year and hurt the value of planned assets. Something I’m sure that each of our investors felt themselves. As a result, the unfunded pension obligation as measured by GAAP increased $21 million from the end of 2014 to $465 million at the end of 2015.

Our funding for IRS measurements, which dictates required contributions to the plan, was approximately 92% reflecting an unfunded obligation of $128 million and we do not expect to make a cash contribution to the company’s defined benefit pension plan during 2016. However, we have decided to make a real estate contribution to the pension plan and I will discuss that with you in a moment.

First, recall that late last year, we launched a review of how to best monetize our real estate assets. If the transactions make economic sense, we may enter into sale-leaseback opportunities in cases where there’s a necessity to remain in facilities. We may also pursue outright sales of properties where we have already outsourced production.

In fact, we have entered into contracts to sell our downtown facilities in Raleigh, North Carolina and a parking structure in Sacramento recently, both of which are expected to close in 2016. The gross sales price for the two properties is expected to be approximately $25 million with net after-tax proceeds of approximately $19 million.

Real estate transactions take time to evaluate and to complete. Selling real estate requires due diligence by both buyer and seller and involves legalities with various state and local regulatory entities. We remain diligent and focused on this process and we believe there is value to be gained as we move forward.

In fact, as we continue to look at these opportunities, we plan to contribute approximately $47 million of certain real estate assets to our defined benefit pension plan in the coming days. We believe this contribution will allow us to improve the funding of the plan and the financial position of the company by reducing pension obligations without using cash that could otherwise be applied to reducing debt. Pro forma for the contribution, the GAAP underfunded pension obligation would be approximately $418 million at the end of 2015 versus the $465 million reported at year end.

For pension expense, the plan realizes income from an assumed return on assets and pays lower regulatory fees that are based on the plan’s underfunded amount. Consequently, we expect the real estate contribution to allow the company to realize a tax deduction while also reducing pension expense on an annualized basis of approximately $5 million from where it would otherwise be.

Now let’s look at 2016. We plan to continue the rapid and innovative transition required of a digital company in evolving media landscape. We are focused on driving nontraditional revenues and concentrating on local advertising customers as large retailers and national accounts gradually become a smaller portion of our advertising revenues.

We expect to continue to reduce legacy costs, as we reengineer the way we operate our business. And importantly, our commitment to reducing debt and interest costs remain priorities for creating shareholder value. We expect digital-only advertising revenues to continue the trend from the fourth quarter of 2015 and grow in the double-digit percentage range in 2016, while print advertising revenues, which remain volatile, are expected to be a smaller percent of total revenues.

Direct marketing revenues are expected to benefit from the introduction of new products and events, but our direct mail programs will continue to be impacted by the pullback of large advertisers. Audience revenues are expected to continue to be stable. We expect our legacy costs to decline in 2016. We will benefit from the rollover impact from our 2015 initiatives, which will help offset higher pension expense. And we have additional initiatives for 2016, which will also reduce cash expenses.

As I mentioned, we also plan to use cash from operations and proceeds resulting from monetizing real estate assets to strengthen the company’s financial position, including debt reductions. Cash will also be used to fund capital expenditures of $16 million to $20 million in 2016.

I’d like to thank you all for joining the call today and we’ll now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Avi Steiner from JPMorgan. Your line is open.

Avi Steiner

Thanks for taking the questions. I’ve got several here. I just want to start asking on the retail environment and specifically large retail advertisers, and you talk about I think a small portion going forward. It sounds like there’s a permanent shift in their ad spend. I’m trying to figure out how much of that is coming back in digital, and is there any of it that may come back and is a function today of the tough retail environment?

Patrick J. Talamantes

With large advertisers, Avi, we’re doing a lot of work with them to explore other opportunities for their advertising spend. Beyond just preprint, at the same time, we are doing and the industry I think is doing very good work to demonstrate to these advertisers how effective preprint advertising still can be. We’ve seen over the course of the last half of 2015 how important digital can be in recovering some of those lost print revenues and I think that’s encouraging for the future, nevertheless we continue to expect headwinds on print largely coming from these larger advertisers. Mark, is there anything you’d like to add to that?

Mark Zieman

I think that’s right. You can tell from our gross in national ad revenues this past quarter that this isn’t a business we are giving up on. We think there are a lot of opportunities for success in the future, whether that’s working with our peers or by ourselves. We’re also offering more integrated solutions to our advertising partners on national than we’ve ever done before from print to native to other digital campaigns to even local events. So, this is something – they’re struggling but we’re trying to work with them on solutions to help grow their business.

Patrick J. Talamantes

Avi, I would just add that our retailer clients are dealing with a lot in terms of digital shift on their sides and that has an impact on us that goes beyond just what our business is like. They’re struggling a lot and we’re working with them to try to help them.

Avi Steiner

Perfect. And then you talked about revamping a sales force in your six largest markets. And if you gave this in the prepared remarks and I missed it, I apologize, but can you flesh out maybe how those markets performed relative to the rest of the portfolio, differentiating digital growth, et cetera?

Patrick J. Talamantes

Because of their largest markets, it’s actually I think better to compare them to themselves versus to the other markets. And certainly as I think I mentioned on the remarks, after we launched Miami and Kansas City midyear, then Fort Worth, Sacramento, Raleigh and Charlotte in the third quarter and as the year went on and as we got into the fourth quarter, we were seeing some of the best results, in fact the best results collectively from those markets in digital that we saw all year, a lot of that directly tied to the changes we put in place. So, still a lot of work to be done. It will take a bit of time before all of our employees are comfortable in their new roles and all the tools are used to their full potential. But that said, we’re clearly seeing the results we are hoping for in the markets that launched this process and so that’s why we’re moving forward to roll this out to all the remaining markets over the course of this year.

Avi Steiner

Okay. And then a couple around the real estate contribution, if I can. I want to be clear or make sure I understand this. It wasn’t meant to I guess shield any required payments in '16, because I think you had already guided that to a zero. But then ultimately it will benefit contributions going forward, '17 and beyond. And then relatedly, does the property contribution require a debt repayment under any of your indentures? I know or I believe there’s a carve-out on the secured side, but if you could just talk about the unsecured legacy notes that would be great.

Elaine Lintecum

Sure. Avi, it’s Elaine. So our bond indenture and the 2022 bond indenture as well as the credit agreement under which we have our revolving line of credit has a carve-out of $100 million of assets that can be contributed to our pension plan carved out from the asset and from the definition of an asset sale. And you may recall that we contributed seven properties valued at $49.6 million in 2011. And given the estimate that we’ve given today of $47 million on the contribution that we’re expecting to make in the next several days, we’ve largely used up that basket. But that does mean that this $47 million doesn’t require any sort of pay down or offer to any of the secured debt. It is we think a smart thing to do for reasons that you noted, which is that it does help the funding of the plan and helps future required contributions to the plan. It also has a positive impact on EBITDA and that this extension that has allowed us to kind of defer payments in the future comes with it higher PBGC payments. And so the better funded the plan, the less the PBGC payment. So it shields the plan from some of those payments that reduces assets and hits directly our EBITDA. It also allows us to have a return on those assets for GAAP purposes. And as a result of that, it reduces pension expense that’s included in EBITDA by roughly $5 million annually. So we think that it makes a lot of sense. I think as we move forward, the pension plan may benefit from improvements in the asset values and it will be able to take advantage of those on a tax-free basis where we would not be able to do, and that will also help reduce future contribution. So for all of those reasons, we think that the property contribution makes sense.

Avi Steiner

Understood. And then just by way of inferral, there’s no similar that I can recall carve-out on the unsecured notes? Is that correct?

Elaine Lintecum

That’s correct. The unsecured notes are guided by a 1997 indenture and that indenture doesn’t use property as a collateral. It does have some rules around sales leaseback but this contribution is not accounted for as a sales leaseback, so it isn’t inhibited by any of the indenture issues for the unsecured notes.

Avi Steiner

Okay, thank you. I’ll move away from that debt-related stuff, very helpful. Two others and I really appreciate the time. The first is, I think historically you’ve been maybe a little more granular on the expense side and I don’t want to push too much, but you started I guess a more aggressive cost reduction and reallocation plan second half of last year. And if I’m thinking about the cash expense side for this year, is the second half of last year a decent run rate, something lower than that? Just any more granularity you can provide around cash expenses would be terrific.

Patrick J. Talamantes

So, you’ve got rollover impact from actions taken that were largely put in place the middle of 2015. We are seeing higher pension expense as we move into 2016. Those are, I would say, the bigger pieces. And then what our goal is, as it always is, is to adjust to market conditions in terms of revenues and do the best that we can to be as profitable as we think it’s reasonably in the best interest of the company for the long term. And at the same time, we’re making investments for the future in video and digital marketing services and technology. And so it’s the usual balancing act that you would expect from us and we’re determined to remain as profitable as we can be. But we also sure like the growth that we’re seeing on the digital side and we need to keep that going as well.

Avi Steiner

Okay, great. I will actually stop there and turn it over. Thanks for the time.

Patrick J. Talamantes

Thank you.

Operator

Your next question comes from the line of Craig Huber from Huber Research Partners. Your line open.

Craig Huber

Yes, hi. Thanks for taking the questions. A couple housekeeping things first. At the end of the quarter, what was the digital-only sub count number please?

Elaine Lintecum

79,300 I think as what Chris said in his comments.

Craig Huber

What was that a year ago if you could remind us please? Do you have that?

Christian A. Hendricks

It grew 11%.

Elaine Lintecum

It grew 11%, so you can probably crack into the math.

Craig Huber

Okay. On the newsprint side, Elaine, just curious the percent change there in the quarter for consumption and average price, if you could help us with that.

Elaine Lintecum

Sure. Times were down around 16% and average price was down around 14%.

Craig Huber

What is your guys outlook for newsprint for this new year? Do you have one that you could share with us?

Elaine Lintecum

We have seen a price increase that’s come through in January and there has been an announced price increase in February, although I’m not sure that that’s sticking. But keep in mind if prices fell throughout 2015, so even with those we will still have lower prices than we ended the year. And so we don’t expect that we will have headwinds necessarily on newsprint pricing going forward. And we think that usage obviously will depend upon print advertising and circulation and some of our other strategies, but generally speaking we expect that to have continued savings in newsprint expense.

Craig Huber

Okay. And then also, historically, you guys have given your investors an outlook for cash costs for the new year. I sense there’s a hesitation to do that this time. But is there any sense you can give us ballpark how much you think cash costs could be down this new year, or if not I'm just curious why not? What’s different?

Patrick J. Talamantes

What we said is we expect to be down that will adjust where we are based on what the revenue outlook looks like. In the past, we’ve provided more specificity only defined that investors and analysts were overly focused on, on that number and didn’t give us credit for being able to manage the business during the course of the year. And so we know it’s down. You know what the rollout benefit looks like. I think you all can model it pretty well. And then from there we’ll just have to react to market conditions during 2016.

Craig Huber

And my last question please. National advertising, what subcategories within that help it to be up 1% or 2% this last quarter. Was it a comparison issue? Was there one category or two categories in particular that helped drive that?

Elaine Lintecum

This is Elaine. Telecommunications performed somewhat better and I think that was one of the bigger categories. In general, I think the programmatic advertising in various areas.

Patrick J. Talamantes

The strength in digital national comes from a large number of different areas. It’s sometimes hard for us once you’re starting to get into programmatic for us to be able to track these numbers by segment as well and precisely as we might like to share with you. That’s something I think we’re going to continue to work on.

Craig Huber

Great. Thank you.

Operator

Your next question comes from the line of Michael Kupinski from Noble Financial. Your line is open.

Michael Kupinski

Thank you. Thanks for taking the question. What is the book value of the real estate that will be left on the books following the contribution in the quarter? Is it completely reduced by the 47 million or is there some other number there?

Elaine Lintecum

Michael, the one thing I’ve learned about real estate transactions is they’re not final until they’re final. And so we’re still working on exactly which properties go in. And so the $47 million is an estimate and it would reduce the amount that we had previously given. But that is based on an estimate of fair values of properties that we expect to put in. And so we’ll have to wait until the transaction is completed to kind of get back to you.

Michael Kupinski

Okay. So it’s possible at this point then – I think you had on the books, what, 353 or 352 last quarter?

Elaine Lintecum

Yes, roughly 350.

Michael Kupinski

And so you’re saying that it may not be reduced completely by the 47 million. It might be some value that’s there. Okay.

Elaine Lintecum

Or it might be reduced by a little more, we just can’t comment until we’ve finished the transaction.

Michael Kupinski

Okay, got you. In terms of the retail, obviously, you guys are doing such great work on the other areas of the business, and in retail if it could just show a little bit of moderating trends, you guys would be hitting homeruns. I was just wondering if we could talk a little bit about retail ROP versus preprints. And what you are doing to mitigate not only the ROP retail but also the preprints in term of the decline? What strategies are you looking at? Whatever you can talk about because you’ve had such great success on the national advertising front. I was wondering if you can replicate some of that, particularly on retail ROP and the combinations of what you’re seeing with digital there, and/or with preprints. What are you guys doing to try to mitigate the level of declines?

Patrick J. Talamantes

In terms of retail ROP versus preprints, the results are fairly similar. In terms of the total decline, the issues are very different. And so with preprint, that’s much more of a situation where it’s easy for an advertiser to look at pulling back kind of distribution as well as shrinking the size of the inserts to save money. ROP much more of a branding exercise. So they’re very different strategies that advertisers are employing in those environments. So, there’s not like a one size fits all strategy that we can deploy in this category on our own that helps mitigate this trend significantly. We do think that over time there are opportunities to work with our industry to get on top of these trends and basically provide better service to larger advertisers who these days are very interested in buying advertising at scale. And when they work with other media, they’re able to get to scale much faster than they are with newspapers. The LMC is a good example of how we’re helping – working with the industry on that score. We think that there might be other areas as well. Mark, is there anything more specific that you think might illuminate this?

Mark Zieman

No, not more specific. I’d just add to that that more and more it’s about an integrated buy and what works best for them to drive their business. And so it’s not so much focusing on retail or preprints or one thing, it’s focusing on a variety of things to drive the business.

Patrick J. Talamantes

Yes, we’re focused on trying to get more people into their stores now rather than making our preprint number look better. If you work on the solutions, McClatchy ends up faring better and that’s one of the adjustments we’ve had to make with our sales teams.

Michael Kupinski

And in terms of just preprints then, your opinion is that if the retailing environment improved then preprints would show improvement? Is that what you’re saying, because it sounds like the two different things that you were referring to is that the preprint environment is more related towards the actual – what the retailers are doing in terms of the business environment they’re seeing. Is that fair?

Patrick J. Talamantes

Let me maybe restate it. Our view is that if we can help retailers compete in this difficult environment that they’re dealing with, that will help our numbers on the revenue side.

Michael Kupinski

Okay, all right. That’s all I have for now. Thank you.

Patrick J. Talamantes

Thanks, Mike.

Operator

Your next question comes from the line of David Hebert from Wells Fargo. Your line is open.

David Hebert

Hello, everyone. Thanks for taking the questions. I wanted to focus on digital just for a second and come back to that. Your digital revenues really picked up and seems like that has dovetailed with the rebuild of your mobile strategy. And so I wonder if you could share, is there any sort of breakout between what percentage of digital revenue that’s driven by mobile, is the traffic percentage a useful metric from that perspective?

Christian A. Hendricks

This is Chris. I can tell you that tracking it is difficult because what we have is a case where 95% plus of our total audience is on the desktop Web site or responsive Web site as opposed to the apps themselves. So that shifts. Right now, it’s at 56.6% roughly of the audience being mobile but it does shift and it is gaining steam and we don’t necessarily break the two out at this point.

David Hebert

Okay.

Patrick J. Talamantes

So what mobile does do is it helps us with our overall traffic figures. And so by having a robust mobile solution, we’re able to as you saw maintain traffic growth that otherwise might not be there if we weren’t on our game on mobile. But we don’t think that it’s a separate mobile monetization, except in rare cases where somebody is looking only to advertise perhaps on an app or selectively in some way in mobile. It largely is a broader focus that advertisers would have.

David Hebert

Okay. And just a follow up on that. Are you fairly indifferent just thinking about mobile, if a user finds their way to your Web site through The Charlotte Observer app or through like a social network like Twitter?

Patrick J. Talamantes

These days, publishers are much more in a distributed environment than ever before and so we’ve got to be there for them in whatever way they want to engage with us. So if that means they have a daily reading habit on The Charlotte Observer phone app or on the desktop on our homepage, if that’s what they want to do, great. There’s a significant percentage of audience that doesn’t want to engage with us in that way and that’s when we’re reaching out to them through search and Facebook and Twitter and other social networks. And so we’ve got to be focused on not just expecting everybody to come to us, and a lot of the improvement of what you saw in the fourth quarter and what we’re continuing to see is our being much more engaging in a distributed environment.

David Hebert

Okay, that’s really helpful. And then, obviously, it’s not reflected in the growth you’re seeing in digital, but do you or your clients have any concerns around bot traffic or ad blocking, or do you think that’s something the media has kind of jumped on and has mischaracterized?

Christian A. Hendricks

This is Chris. We’ve been watching ad blocking for well over a year and monitoring it and looking at ways to mitigate it. We have not adopted a strategy where we interfere with the readers as they come in, if they are using ad blocking but we know the amount – the numbers of people who are doing it and its effect on our overall audience. It has not reached a point where the sirens or bells and whistles are going off about it, it’s less than 10% of our traffic. In fact, it’s somewhere in the 5% to 7.5% range that are using ad blocking software when they’re coming in, but it monitor it quite diligently.

Patrick J. Talamantes

And if we ever felt like we needed to modify our strategies, we could do it but it is nice to see that – so far it is not the issue that we expected it to be after all of the hype came up around ad blocking in the fall.

David Hebert

Okay. And then just one quick one on housekeeping. I found it somewhat difficult to model your cash taxes and I think some of the transactions, the sale transactions have been part of that. But maybe if you could help us with how we should think about 2016 cash taxes?

Elaine Lintecum

Sure. I have a pretty standard way of estimating cash taxes from most people and that is in your model, you develop an estimated earnings before taxes. From that, I would take out about $30 million of amortization that is not tax deductible, which would increase EBITDA. And then I would subtract out any pension contributions and that net number generally you would use, a 35% fed rate and about a 5% to 6% state rate. And that should get you to a cash tax number on underlying operations. I think you are correct that the transactions that we’ve done over 2014 and a little bit in 2015, some of the cash proceeds coming in made it difficult to model cash taxes. But that’s generally how it’s done. And I would say that generally we pay more of the cash taxes in the latter part of the year just based on the fact that our fourth quarter is the largest quarter for advertising revenues and for operating cash flow and net income. I hope that’s helpful.

David Hebert

Okay, great. Yes, very helpful. Thank you so much.

Operator

Your next question comes from the line of Barry Lucas from Gabelli & Co. Your line is open.

Barry Lucas

Thank you and good morning. Just a couple of items here. On the housekeeping side, do we have an actual share count at year end?

Elaine Lintecum

We do. Let me just page through to find that for you since we have been buying back shares. I understand, Barry, the challenge of coming up with that number.

Barry Lucas

Thank you.

Elaine Lintecum

So give me a moment while I find it. So we have issued an outstanding about – I’m going to say about 57 million of Class A and Class B we’re about 24.4 million. So you can put those two together.

Barry Lucas

Great. Thanks.

Elaine Lintecum

Now, keep in mind that the Class A are what’s traded publicly.

Barry Lucas

Okay. And just coming back to the real estate, Elaine, so we talked about a rough number 350 million book value, 47 million slug that gets contributed to the pension plan and 25 million of other, the two parcels you mentioned in Sacramento and Raleigh or Charlotte?

Elaine Lintecum

Charlotte.

Barry Lucas

Okay. So is there a target figure of what you would like to monetize or how is that driven? Is it opportunistic, serendipitous, or how do you think about that remaining real estate asset?

Elaine Lintecum

I think it’s opportunistic. It’s clear that in that our properties that are probably just too small, offices down in California kind of thing that you’re not going to be able to monetize. But we are wide-ranging in our review and we will look at all of it. And I would say the term opportunistic is the appropriate word to apply. I wouldn’t represent that we’d be able to sell every piece of property that we own or that it would be wise for us to do so. But as Pat mentioned, we will look at some of our larger properties and see whether or not it makes sense for those that we need to stay in to do a sales leaseback. We have a number of properties where we’ve already outsourced where we would look to do direct sales. I would also caution though that there is a fair amount of due diligence and a time that it takes to do any real estate transaction, whether you’re doing it one-off sale or doing any kind of group sale. So it takes time. And so I don’t expect that we would have any large announcement that comes out as a result of the whole process. If there is a large transaction that we can announce, we will surely let shareholders know as quickly as we can. But just given the nature of real estate, it takes time and it’s a process.

Patrick J. Talamantes

I would say, Barry, that we do have a sense of urgency about it.

Elaine Lintecum

Absolutely.

Patrick J. Talamantes

This is not a casual process that you put out in a press release to hope to deflect attention from shareholders. We’re focused on it. But as Elaine said, it does take an extraordinary amount of time to pull these things off, and we’re focused on it.

Barry Lucas

Great. Thanks for expanding on it. Last one, and I feel like we’re beating a dead horse here but as you look at the digital side on national and I know you had said there was a little bit of an issue tracking categories. Can you track advertisers? And is there a sense that some of your bigger advertisers are trading down and just saving money that way, I won’t say at your expense, but is it a dollar for dime shift or how do you look at that?

Patrick J. Talamantes

There are all sorts of flavors. So within our largest advertisers, there are all sorts of flavors of how they’re engaging with us. So, you’re right. There are some advertisers who treat newspaper and digital advertising spending like it’s an opportunity for strategic sourcing cost reduction initiative. And so their revenue cuts sort of reflect that. There are other advertisers where the decline in advertising is much more modest and looks more like what you might expect to see relative to print volume declines. And then there are others that are growing with us reflecting, what Mark said earlier in terms of our trying to provide integrated solutions for those advertisers, they’re finding the solutions compelling and they’re increasing their advertising with us. So, the issue is that it seems like all these advertisers must be down, that’s not actually the case. There’s a wide range of experiences that we’re having with these advertisers and we have to work with them on a case-by-case basis.

Elaine Lintecum

I guess I would add to that, Barry, that in terms of the national category itself we’ve seen that digital advertising has surpassed the loss in print and that’s how we grew in national both in the third and fourth quarter. Obviously, we’re not there in the large retail category but we certainly want to get there. And so I don’t want that to be lost on anyone.

Barry Lucas

All right, which is a good segue for me, Elaine. If you dust off the old crystal ball and you see these trends continue on the digital front, is there a – do you have a sense of when you could reach an inflection point at which point your increases in digital advertising exceed the losses in print?

Patrick J. Talamantes

You mean the Holy Grail, right?

Barry Lucas

Yes.

Patrick J. Talamantes

Yes, I think we’d be hesitant to predict when that might occur. Print advertising as a percentage of our total revenues is down to a third. And so the smaller that gets, the less likely that print advertising can be as much of a headwind for us in the other areas. Now that does mean that in areas that have been difficult, like direct marketing, we’ve got to turn those areas around to help contribute to growth. So our focus is to push forward on the areas that we have more control, grow as fast as we can on digital, do as much as we can to generate audience revenues, come up with additional niche products on the direct marketing side to help with that category, and to try to grow that two-thirds of our revenue as that print advertising number over time becomes a smaller portion of the company. But in terms of when you get that inflection or what the profitability looks like in each of those categories at the time of that switch, I think we’d be hesitant to jump in on that.

Barry Lucas

Thanks for that, Pat. I appreciate it.

Operator

Your next question comes from the line of Brian Denes from CRT Capital. Your line is open.

Brian Denes

Hi, guys. Thanks for taking the questions. Just firstly, overall revenue declines have decelerated a bit in the quarter but within consolidated advertising, it did not. How would you characterize the pace within advertising today and what do you guys expect going forward? So further, should we be worried about newspaper’s exposure to department store advertising? The sense that we’re getting is that bricks and mortar retailers are still not participating in today’s favorable consumer spending trends.

Patrick J. Talamantes

Look, a couple of things. What I would say is that we’re not going to give any guidance about what we’re seeing in 2016 so far or what we expect for 2016 ad revenues. So the ad revenue trends are not very different in the fourth quarter compared to the third quarter and we’re just not going to extend that kind of outlook for you in 2016. We’d love to, it’s just that the print advertising categories tend to be very volatile and we don’t have a lot of visibility on them. So we’re going to refrain from doing that. We’ve already been seeing headwinds coming from department stores. I don’t think that what you might be anticipating in 2016 is anything new. But as Mark brought up before, it does create more of an imperative to create integrated solutions for those retailers to help them, to take their focus and place it on other categories that can actually help drive traffic to the extent they’re not seeing what they want to see now.

Brian Denes

Okay, great. Thanks. Just moving on, as we know, cash costs fell pretty dramatically in the quarter, notably within compensation and newsprint. Going forward, which buckets do you see room for further cost reduction? And then taking a step further, do you have any – I know you don’t want to guide to 2016, but would you say '16 cash expense reductions will be significantly less or probably in line with the 58 million that you took out of the business in '15?

Elaine Lintecum

Asked just a different way.

Patrick J. Talamantes

Your guys are indomitable. I applaud you all as a team, well done. So we’re not going to give more guidance in terms of the number. There are still other areas that we can continue to work on. There’s still production opportunities that we can work on to save money. There are still distribution opportunities that we can find to save money. And also there are regional opportunities and consolidations that we’re looking at that can help save as well. So we’re exploring all those opportunities. We’re by no means done with new ideas that we can bring to the cost side of the equation. And again, we’re focusing on reducing the legacy costs to have that decline hand-in-hand with print and try to focus our resources on advertising, news and digital as much as we can.

Elaine Lintecum

Kyle, I think we have time for one more question and then we’re going to need to kind of cut this off.

Brian Denes

Sorry, just one more.

Elaine Lintecum

Okay.

Brian Denes

Just on your restricted payment basket, could you give us an update on the availability as of year end? And then just going into that, there’s some thought that you guys might be able to contribute assets into an unrestricted sub and then issue debt on a secured basis. Is this permissible under your various debt agreements, and have you guys entertained that idea?

Elaine Lintecum

So first, the basket is 714 million. And secondly, there is the technical ability to transfer assets into an unrestricted sub. There are a lot of limitations in terms of doing that, and we haven’t made any decisions about that. But that’s spelled up [ph] pretty well in our bond indentures and it’s a very complicated subject, and I would suggest that you review the bond indentures. And then if you have any specific questions, you can give me a call later.

Brian Denes

Great. Thank you.

Operator

Your final question comes from the line of Todd Morgan from Jefferies. Your line is open.

Eric Freeman

Thank you. This is actually Eric for Todd. Thanks for taking my call. So just the first question is direct marketing was off roughly 10%. I was wondering if you could comment on that, and maybe let us know how much of that is due to product changes that you had implemented.

Elaine Lintecum

So, it was off about 9.5% and most of that, as we mentioned earlier, was related to the pullback from large advertisers in our direct mail business. We did discontinue some niche products in 2014 and have continued to examine those, but most of the fall was in the direct mail program.

Eric Freeman

Perfect. Thank you. Then looking at the preprint volumes, they’re I think off around 22%. What was behind that? And can you comment on why it was much weaker than the previous quarters of this year?

Elaine Lintecum

Well, again, that’s similar to what we saw in the direct mail programs, although the preprints reported there are in newspaper mail and that’s the same issue that we have seen and talked about with large advertisers either reducing the areas that they cover or reducing the number of pages in the preprint. And it is the same phenomenon that we have seen going throughout. I think clearly as we look at the fourth quarter, the whole quarter itself was somewhat disappointing in terms of GDP growth and retailers, and I think – we’ve all heard about retailers having to close stores and that sort of stuff. And I think that’s reflected in the preprint volumes that you saw.

Patrick J. Talamantes

You really have to look at the fourth quarter and in particular, the last two months of the year, as its own thing. So the trends leading into the fourth quarter don’t always matter much in terms of what the ultimate results would be for the fourth quarter particularly in preprints. And you have to take as its own period really. And as a result of the factors that Elaine mentioned, it sure feels like advertisers pulled back in that quarter to respond to profit pressures that they may have been having.

Eric Freeman

Thanks for the additional color. And just on my last question, this is back to the real estate transfer transaction. You guys occupy these properties that you’re planning on giving to the pension or are these like unoccupied properties?

Elaine Lintecum

Again, we haven’t concluded those transactions but generally speaking, we occupy transactions and then lease the properties back from the pension plan. And when you contribute to a pension plan under ERISA [ph], you’re required to lease those properties back for a specific period of time. So it wouldn’t make sense to contribute properties that were unoccupied. It would make more sense to sell those directly.

Eric Freeman

Okay. Then will we see any kind of high occupancy expense going forward related to this transaction?

Elaine Lintecum

This transaction should have no impact on our operations whatsoever. The transaction is accounted for as a financing obligation, so there will be an obligation on the books. The rent expense would be a reduction of that obligation and some small portion going to interest expense. So as we did in 2011, they tend to be triple net leases. Our newspapers and operations already pay for things like property insurance and taxes and upkeep of facilities, so that doesn’t change for them. So it really doesn’t have an impact on our operations.

Eric Freeman

Okay. Perfect. Thank you very much.

Elaine Lintecum

You’re welcome.

Elaine Lintecum

So, Kyle, I think that wraps things up.

Operator

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

Patrick J. Talamantes

Thank you, everybody.

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