The McClatchy Company's (MNI) CEO Patrick Talamantes on Q2 2016 Results - Earnings Call Transcript

| About: The McClatchy (MNI)

The McClatchy Company (NYSE:MNI)

Q2 2016 Earnings Conference Call

July 21, 2016 12:00 PM ET

Executives

Stephanie Zarate - IR Manager

Patrick Talamantes - President and CEO

Mark Zieman - VP, Operations

Christian Hendricks - VP, Products, Marketing and Innovation

Elaine Lintecum - VP, Finance and CFO

Analysts

Craig Huber - Huber Research Partners

Michael Kupinski - Noble Financial

Michael Kass - BlueMountain Capital Management

Davis Hebert - Wells Fargo Securities

Patrick Fitzgerald - Robert W. Baird

Operator

[Call Starts Abruptly]

[Operator Instructions]. Thank you. I will now like to turn the call over to Stephanie Zarate, Investor Relations Manager. You may begin your conference.

Stephanie Zarate

Thank you, Mariana, and thank you all for joining us today for our second quarter 2016 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 website. 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.

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 website or in the body of our press release.

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

Patrick Talamantes

Thanks, Stephanie, and thank you all for joining us today for a review of our 2016 second quarter results. Our results demonstrate that we have a strong vision for our digital future and are dedicated to creating and delivering meaningful news and information to our readers, audience, for our advertisers and value for our investors. Our digital innovation sales strategies and cost reduction efforts have led to stability in operating cash flow trends and improving free cash flow.

Despite the second quarter adjusted loss of a $1.5 million, our free cash flows for the trailing 12 months for the second quarter of 2016 was $63.4 million, an improvement over the $56.1 million reported for the trailing 12 months through the first quarter of 2016. We again reported strong digital-only results, achieving 16.1% growth in digital-only advertising revenues and 11.2% growth for digital-only subscriber revenues in the quarter. We are committed to supporting our shareholders.

In May our Board approve a one-for-ten reverse stock split which was effective beginning June 7th. Our share prices responded well and we believe we are attracting a broader investor base. As you know the Board also amended the stock repurchase authorization, adding $5 million to that program.

During the second quarter we have returned $2.7 million to shareholders through share repurchases. For the first six months of 2016 we have returned $6.3 million to shareholders through share repurchases and have $5.8 million available through the end of 2016.

Our efforts to monetize our real estate assets are beginning to show results. We are currently working with perspective buyers on our Sacramento, California; Kansas City, Missouri; and Columbia, South Carolina; main office buildings and printing facilities for lease back transactions. In the meantime, we have outsourced our production operations in Wichita and sold our building and land there, which is expected to close before year-end with after-tax proceeds of $2.1 million. This increases the after-tax proceeds for transactions expected to close in 2016, to more than $20 million.

We have announced the outsourcing of our Fresno and Lexington production operations, saving legacy costs and freeing up additional real estate for potential sales. And several other properties have interested buyers who we are currently working with to determine whether proposed terms are in the best interest of the company and its investors.

Being capital efficient can help the company in the near-term while improving our business fundamentals and accelerating our digital transformation will help secure its future.

Now let’s turn to our results for the second quarter. Focusing first on the summary of our digital results; as I mentioned earlier, our digital-only advertising revenues were up 16.1% compared to the second quarter of 2015. Total digital advertising revenues were up 4.4% to the same period. Digital-only audience revenues were up 11.2% and total digital audience revenues grew 1.5% compared to the second quarter of 2015.

We hit a number of noteworthy milestones this quarter. Digital advertising revenues grew to more than 30% of total advertising revenues. Revenues from non-newspaper advertising grew to more than 70% of total revenues. Average monthly digital audience grew to more than 53 million total unique visitors. Digital-only subscriptions reached just over 80,000, and the average monthly videos produced by our video team exceeded 5,000 videos. This is an impressive result considering the second quarter of 2015 internally produced videos were only 2,700 monthly.

Total revenue trends in the second quarter were in-line with what we saw in the first quarter of 2016, down 7.7% compared to the same quarter in 2015. Advertising revenues were down 11.1% and were negatively impacted by the print revenue declines of 16.6%. Within the advertising categories total retail finished down 11.5% including preprints. But digital-only retail grew 19.4%, driven by display, video, branded content and search engine marketing.

National advertising was down 5.3% for the quarter as the category begins to hit tougher comps and thus greater declines in print national advertising. But total national digital advertising grew 21.7% and digital-only national was up 31.9% compared to the same quarter of 2015 reflecting the strength of our programmatic sales, including native and video advertising.

Total classified advertising finished down 10.2% compared to the second quarter of 2015. We saw an overall decline in digital classified advertising due to continued softness in our employment business, that's bundled with print advertising. But our digital-only classified advertising grew 4.1% in the second quarter compared to the second quarter of 2015. The strongest areas of growth in digital-only classified continue to be automotive, up 9.8% and real estate, up 6.3%.

Direct marketing ad revenues were down 13.2% compared to the same quarter last year and continued to be impacted by the pull back of large preprint advertisers from our direct mail products. Total audience revenues reported a slight decline in the second quarter of 0.4%, while digital audience revenues were up 1.5% compared to the same period.

I'll now turn the call over to Mark to provide an update on our digital revenue strategies.

Mark Zieman

Thanks, Pat. As Pat mentioned we hit a few milestones in the second quarter in digital revenue, which highlights the continuing realignment of our traditional advertising model. In fact during the last three quarters we have posted the strongest digital-only growth in our company's history. We are accomplishing that growth in many ways, including the ongoing restructuring and reinvention our sales teams across McClatchy. This process is still continuing but we are pleased with the results that we've seen so far.

As a reminder this initiative included increasing the size of our sales staff, doubling the number of digital coaches, assisting our local teams, adding fulfillment positions, new sales tools and focused compensation incentive plans to place more emphasis on local advertisers in digital sales. We have seen consistently higher digital results in markets where the reinvention has taken place, for instance our six largest markets which where the first to adopt sales reinvention contributed two-third of the digital-only advertising growth in the second quarter 2016. In fact those six markets averaged 20% growth in digital-only revenue for the quarter, higher than the company average.

Once again growth in digital-only advertising revenues in the quarter came from across the board. impressLOCAL, our suite of digital marketing products where small and medium-sized businesses grew 25%, video advertising was up more than 300%. Native advertising or branded content had strong growth, up 160% and SEM almost doubled in the quarter.

National digital revenue had another strong showing with digital-only growth of 32% in the quarter. That was driven largely by programmatic revenue as Pat mentioned which accounted for more than half of national digital revenues. Programmatic revenue nearly doubled in the second quarter compared to the same quarter last year.

Also as Pat mentioned we intend to maintain double-digit growth in digital revenue going forward, partly by continuing to improve and expand our digital marketing strategy. We have been selling agency like solutions since 2012 when we introduced impressLOCAL for small and medium-sized businesses. That strategy uses best of breed products and services to provide client focused solutions and was backed by our two major reporting platform. Strategy continues to involve and grow. In addition to an emphasis on small and medium-sized customers we are also now selling six figure deals to large local and regional advertisers, that include agency services such as reputation management, SEL, SCM and Email marketing. This program is being expanded as we move into the second half of the year. Leveraging the digital strategy of our sales reinvention we are determined to keep growing our share of the digital marketing business, both locally and through a nationwide digital agency strategy. So more to come on that in the months ahead.

Meanwhile we continue to invest in innovative partnerships, including being an original partner and leader in Nucleus Marketing Solutions. Nucleus is a marketing solutions network for national advertisers and officially launched on July 1st. Over the last couple of weeks Nucleus added an additional nine affiliates to the original four founding companies including the New York Daily News, The Dallas Morning News, the Atlanta General Constitution and the Denver Post. We’re just getting started but given our size Nucleus would already rank us one of the largest digital U.S. advertising networks and we believe it will quickly gain traction with national advertisers.

We’re very excited that many of our industry peers have signed on to Nucleus and that they share our vision of offering innovation at scale to our largest advertisers. Nucleus is a great example we think of our industries working together to create new business models. McClatchy intends to help lead that process whether it’s through Nucleus or the local media consortium or other investments. So now let me turn it over to Chris to speak to audience trends and other partnerships.

Christian Hendricks

Thanks Mark. As was just mentioned our relationship with the local media consortium or LMC is an important piece of our digital revenue growth strategy and is one factor in our impressive programmatic advertising results. During the quarter we welcomed [indiscernible] and a number of other local media publishers to the LMC. The LMCs member base now includes more than 75 holding companies, representing more than 1700 local media outlets. In May ComScore reported the LMC monthly UB count exceeded more than 150 million.

Through our continued leadership and participation in complementary efforts like Nucleus in the local media consortium we’re confident all our markets, large, mid-sized and small have strong representation with national advertisers, whether directly or indirectly through programmatic channels. The hard work of our video team has also helped organically grow digital revenues. In the second quarter we rolled over a full year of delivering video content on our own player and saw our revenue grow by 308% as video deals grew to more than 17 million in the second quarter of 2016, an increase of more than 600% compared to the second quarter of 2015.

Other key initiatives allowing us to grow digital revenues during the quarter were last year’s re-launch of our mobile and desktop websites, the redesign of our print products, the deployment of new mobile apps and the introduction of new story telling techniques in our newsrooms. The transition to these new platforms has created much better user experiences and new advertising opportunities, provided readers with more up-to-date digital news and information and led to increased page views and revenue opportunities. In the second quarter of 2016 we saw our total average unique visitors grow 31.1% when compared to the same quarter last year and hit a company high of 53.6 million average monthly unique visitors.

Our local unique visitors grew 16.1% compared to the same quarter last year. In general interest in our digital content not only led to growth in our unique visitor count but also brought paid digital subscribers to just over 80,000, up 5.9% when compared to the second quarter of 2015. Our growth in digital subscribers is also attributable to our digital outreach efforts, which as a reminder includes not only marketing our digital products to non-subscribers but reminding current subscribers of the digital benefits available to them.

We also mentioned last quarter we’d initiated an aggressive digital pricing campaign in order to better reflect the value of our digital subscription products. While not fully implemented in all markets the effort led to an 11.2% increase in digital only audience revenues in the second quarter of 2016 compared to the same period last year. We expect all markets to have fully executed our new pricing plan during the second half of this year.

And now I’ll turn it back over to Pat to complete the review on our first quarter results.

Patrick Talamantes

Thank you, Chris. During the second quarter we reduced operating cash expenses excluding severance and certain other charges by 8.1%. Our focus on expense savings has been on legacy costs and we saw a strong reduction in costs this quarter due to rollover impact of 2015 initiatives as well as new cost reduction strategies in 2016. In the quarter we announced the transition of production in Fresno, California to our Sacramento, California facility and from Lexington, Kentucky to a third-party. And we completed the transition of printing operations from Wichita to the Kansas City facility.

Regarding our capital structure, we ended the quarter with cash of $15.9 million and debt of $906.5 million. Our leverage ratio was 4.93 times cash flows as defined in our credit agreement. We have an untapped $65 million revolving credit and the restricted payments basket under our 2022 bond indenture was approximately $704 million at the end of second quarter 2016. As you know we have modest maturity next year and over time we have reduced our next maturity in 2022 by over $400 million to $506 million at the end of the quarter. We remain confident about our ability to manage our debt.

For the remainder of 2016 we reaffirm the guidance provided this past February. Digital-only advertising revenues are expected to grow at a double-digit rate in the second-half of 2016 while we remain committed to communicating the value of print advertising to clients, the declining trends in direct marketing and print advertising are not anticipated to subside in the next two quarters. We expect that print advertising revenues will continue to become a smaller portion of advertising in total revenues.

Audience revenues are expected to be relatively flat for all of 2016. We will be vigilant in reducing legacy costs and finding efficiencies and expect cash expense to decline in the second-half and full year 2016. We’ll also remain focused on growing digital revenues, stabilizing operating cash flows, reducing debt and interest costs and creating shareholder value.

I’d like to thank you all for joining the call today. And we will now open the conference call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Craig Huber from Huber Research Partners. Your line is open.

Craig Huber

Yes, hi. Thanks for taking the questions. So a few housekeeping questions first please. What should we expect CapEx for the full year to be please?

Elaine Lintecum

It's still in the range of $16 million to $19 million, Craig.

Craig Huber

There is no major significant project in that number, but it is more a maintenance type number?

Elaine Lintecum

Yes, although we have as we said outsourced a number of operations are in process. So we will include some capital related to them. But that’s right. It is primarily maintenance.

Craig Huber

Okay. And maybe I missed this, but digital-only subs at the end of the quarter. What was that? I believe it was 78.4 million end of the first quarter.

Patrick Talamantes

It was 80,000.

Craig Huber

Okay. And also Elaine for newsprint, can you give us a sense the percent of change year-over-year for consumption of newsprint and also price?

Elaine Lintecum

Consumption was down in the 13% range and price was down in the 8% range.

Craig Huber

Okay, and then when we look at the classified categories, was any of it impacted by any of the indirect work you guys do with cars.com and Tronc, as some of those numbers show up there on the revenue side with that account for any of the slowness there or sluggishness.

Patrick Talamantes

No, I do not think you can attribute it to those issues in and of themselves. I think if you look at the classified category, advertising for automotive got a little worse overall and employment only slightly. So I do not know that I would read into too much. Elaine do you have anything to add?

Elaine Lintecum

Yeah, I was just going to say that cars.com sales were up double-digit. So certainly it was not related to that.

Craig Huber

Okay, 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. I was wondering if you can discuss the number of FTEs that you had in the quarter versus the prior year. And then if you can possibly break it down between sales FTEs in the quarter and where it was in the prior year period?

Patrick Talamantes

Sure Mike. I mean I think our FTE account, we can talk about the year-over-year change and we're comfortable doing that. That number was down about 8% in the second quarter. You have to keep in mind that that's the number that also includes outsourcing, some things of that nature. And so an 8% figure is something that is a mix of voluntary buyouts and actions like that as well as outsourcing. In terms of the advertising FTEs, that is about a 1,000 people currently.

Michael Kupinski

And what was that maybe a year ago, what number would you think that would be [indiscernible]?

Patrick Talamantes

Right about the same number, and that's the number that's likely to increase actually over the course of the time.

Michael Kupinski

Okay. And then I know that you're indicating that for the full year you're still looking for declines in print advertising and I understand that. But retail showed significant moderation from the first quarter, and I was just wondering do you think that we should see further moderation or how are things progressing as you head into the back-to-school period because I'm sure that retailers are kind of planning that now? Do you have any thoughts in how those trends are looking, maybe if not for the fourth quarter maybe for the third quarter?

Patrick Talamantes

So you're talking - if we look at the retail category overall. The comp gets slightly harder in the third quarter. The comp in the second quarter was down 16.4%. In the third quarter of last year it was down 14.7% and the fourth quarter of last year was 15.1%. So the comps are a little tougher going forward. I think we don't see that much impact from back-to-school any longer. There is back-to-school activity to be sure. It is not as pronounced as it was several years ago. And so that's not a key indicator for us. And what we've seen in recent years is that retailers tend to make a lot of decisions just prior to the fourth quarter holiday season and that tends to be the point at which new retail trends are established.

It remains challenging in the retail world as they continue to come to grips with competition from Amazon and same day delivery. And so our partners in the retail world in some cases are cutting back and we're certainly seeing that with some of the larger department stores chains. Where I think optimistic for success in the future is to take some of that decline in print and move it over to retail digital side. And so we're beginning to have some success there. I would call them green shoots at this point and would look forward to this time next year having much more to tell you about that.

Obviously Mike just to clamp [ph] on to that last thought. We do expect that Nucleus can help us a lot get in front of those advertisers with that transition from print to digital.

Michael Kupinski

Perfect. And have you - do you have any early success that you might be able to identify that might give us some thought in terms of how that transition might look like especially with Nucleus?

Patrick Talamantes

We really wouldn't be prepared to talk about individual advertisers at this point just for competitive reasons. And I'm not sure in all cases that retailers would want us out there talking about this. So on these calls we tend to stay away from talking about individual retailers. And so I really can't share more with you on that.

Nucleus is what 21 days old or something like that. And so it's still fairly early. We think Seth Rogin, are the CEO there is doing a phenomenal job getting in front of people. We do think there is some excitement there. But it's really too early to expect much, as it's I think there is probably more upside there in 2017.

Michael Kupinski

On a more strategic front, Tribune has been or Tronc now has been claiming a lot of early indications about their AI software tools on their digital platform and was wondering if you maybe have reached out to them to see if these - if their tools might have any applications in for your digital operations.

Patrick Talamantes

As you might imagine we partner with lots of companies in the industry and in this case that - it's no different. So we are partnering with Tronc and others on AI like or machine learning like solutions. And I think it's going to be part of an overall toolkit that we are employing in the digital space. And so I don't know that it's groundbreaking but we love the fact that people are experimenting with things and that we all can learn from and partner on. Chris, is there anything you would like to add to that?

Christian Hendricks

No, I think that's right, and I think their joining the local media consortium and also participating in Nucleus is evidence of places where we can share experiences and also solutions.

Michael Kupinski

At this point, Chris the tool set was not included. That wasn't a part of the reason why you had such strong digital numbers in the second quarter. It's not fully implemented yet, am I correct?

Christian Hendricks

That's correct.

Michael Kupinski

Okay, and then on - in terms of another strategic Gannett recently purchased ReachLocal which they say will replace the relationship with GeoDigital. Does the company see any merit in owning digital marketing servicing companies or what are - or is it something that you are just planning on kind of building your own or what are your thoughts on that front?

Patrick Talamantes

I wouldn't rule out the acquisition of digital marketing services assets by McClatchy. Today our preference has been more to grow organically in that area and we have been doing this for long time and we haven't had to replace the functionality due to a spin-off. And so Gannett was in a very difficult place and that was probably a great strategic move by them. Mark, do you want to talk a little bit further about our digital marketing services efforts?

Mark Zieman

Yeah, I think that's right. I mean philosophically what we are doing is similar to what Gannett and others are doing. But in practice we are all different and we all report results a little bit differently. The packages we offer customers are little different. We use different vendors. We may include different services. As Pat said our approach has been a bit more organic, complementing our overall sales reinvention strategy.

So we first built out our digital agency model with the small and medium-sized businesses through impressLOCAL and then we've continued to tweak in our product and service mix to build the right suite of solutions which we're now moving into a larger audience focus. And increasingly we are also acting as a digital provider for local advertising agencies both inside and outside of our markets.

So that means we've hired more sales reps and fulfillment teams at the local and corporate level as we move to a true national digital agency model. So but at the end of the day we all, I think have the same goal, which is to leverage our historic position as the dominant media company in our markets into a digital agency for our customers, and we think that's the natural next step for us and it's also the part of our business that is growing the most rapidly.

Patrick Talamantes

Being the leading local media company in our markets now means being the leading digital media company in our markets and we need to be working with these small and medium-sized advertisers because of our earlier conversation about larger advertisers. We just need to do a better job with those small and medium-sized businesses and so we are pretty excited actually about where this can take us and expect to show you continued and strong growth in future quarters.

Michael Kupinski

Great. Thanks for taking all the questions. I appreciate it.

Patrick Talamantes

Thanks Mike.

Operator

Your next question comes from the line of Michael Kass from BlueMountain. Your line is open.

Michael Kass

Hey guys. Thanks for taking the question. I was just wondering if it was possible to bridge the operating cash flow, the 39.3 to the change in net debt which indicates kind of like a negative $1 million. I know it’s a high interest quarter for you guys but was curious kind of what else was reflecting that delta?

Elaine Lintecum

Sure, and Mike this is Elaine. You’re right it was a high interest quarter for us and in addition to that we spent about $5.2 million in CapEx and then also paid some state taxes and that sort of staff although generally tax weren't a big issue. I'm trying to think of any other cash payments that were significant that went out and none are coming to mind. So we can look into that detail for you and get back, but primarily it was a much larger interest payment quarter.

Michael Kass

Well I mean, just looking through the OCF add that’s the, there’s a 10.8 million other payment chains would you know what that is? I know it’s a [indiscernible] question.

Elaine Lintecum

So a lot of that related to restructuring around our co-sourcing with Wipro and some costs associated with outsourcing some of our newspapers. So those are costs that are included in there and then accruals related to some restructuring in office buildings and things of that nature. And I guess the other thing that I would point out is that some of the severance, not all of that was also cash paid out in the quarter, even though it was related to restructuring costs. So I’ll have to look into exactly how much of that was cash versus accrual but those would also have been some of the items.

Michael Kass

Thanks Elaine.

Operator

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

Unidentified Analyst

Hey guys. This is actually Eric Brass [ph] on for Todd Morgan. Thanks for taking my questions. So I just had a first question, just kind of relating to digital advertising versus kind of your - sorry it's your retail versus digital advertising, I was just wondering how much your digital advertising growth, maybe you can just talk like high levels coming from current print advertisers, changing over from being print with you guys to digital? And kind of how does that impact I guess the overall margins of the retail side of things?

Patrick Talamantes

It’s an interesting question. I don’t know that we track it quite that way, I think you’ve got - I think the way I would break it down is this and then I think Mark will chime in as well. Where we’re having the best success in digital is we have local advertisers, local retailers, the automotive segment, real estate, peoples who are very, very local. That’s where we’ve had, I think the best success in digital. And as I mentioned earlier we do think that there’s additional upside there.

But over the course of the last year we started to see greater success on the national side through programmatic. So we’ve made more strides in national with those kinds of advertisers. Where we think we have more room to go is with large advertisers in what we consider to be the retail segment the department stores of the world, especially the retailers, companies like that, where we’re through programmatic means direct selling from our staff into Nucleus, we can make better in-roads.

From a margin perspective, when you give up the incremental margin, the incremental dollar from print that's a significant cash flow loss. The incremental margin on print remains very, very strong. And then when you sell them on the incremental ad buy on digital they're all kinds of different products that we're selling and the margins on those can be all over the place depending on what that product or service was.

So I think it's - we're in this evolutionary phase. Each of the categories is not in the same place with regard to their evolution to digital. For example the auto guys - now that category is two-thirds digital. So they are the furthest evolved in terms of moving to digital. Employment would be next. And on the retail side, if you set aside preprint we made great in-roads and it's about 50-50 between print and digital. But the preprint category still remains a very strong piece of our advertising mix. Mark, is there anything that…?

Mark Zieman

No, that's right, I mean to find the exact margin will be difficult because of all the multiple products that will have different margins on the digital side. But to what Pat said earlier it's true. We first saw this transition in our existing customers on the local and retail side that moved over into the digital world, first actually in the classified areas of employment and auto but now in with retailers we're seeing that. And now we're starting to see that more with the large retailers on the national side and making deals with them. But in second quarter for instance in retail digital we saw good increases in grocery, in [indiscernible] and home improvements. And we're starting to see a lot more of our local advertisers embrace digital and move over to digital. Now we're trying to take that to a national level with our own efforts, but also with Nucleus.

Unidentified Analyst

Okay, now that's great color. So I guess just going off of that point. I mean do you guys think I guess going into maybe the next couple of quarters next year seeing a greater shift from the retail and national being kind of moving off of the print going towards digital. Do you think that's going to have an affect or a meaningful effect on the revenue declines as the combined basis?

Mark Zieman

Well the - what I will say - we can't give guidance on print trends other than to say that we continue to expect that they'll be a smaller percentage of our overall advertising revenues and total revenues. And so the goal of course is as that is happening, that category becomes less and less important but still profitable to us. And while that's happening the idea is to grow digital as fast as we can. And so that at some point we get to a place where you get to a crossover and print stops hurting the overall revenue trends as much as it still does. Today, digital becomes bigger and those solid trends continue to help out. And we have seen that for example on the national side where national digital has surpassed print revenue.

That's the sort of the crossover point that we're striving to get to in all advertising categories. Although I'd say that print is still effective and what we do see is that in smaller markets where print advertisers are perhaps a little bit closer to the newspapers, they don't have to be convinced as much as print - about print and print trends to be better than in the larger markets where perhaps advertisers are a bit more removed from the impact of the newspaper in print still has. And so maybe that's a tougher, those are tougher print markets.

The flipside though is that in larger markets digital has been stronger than in the smaller market. And so that shift is not taking place quite so much. So it's a very - it's obviously a very complicated topic. And all we can do is to try to grow the digital side of our business both in advertising and audience as fast as we can. And on the print side continue to try to communicate the value of print to our advertisers and put out the best newspapers that we can.

Unidentified Analyst

Now that's good color. And just my last question, kind of going back maybe to being this year, kind of how you were thinking this year would play out or at least the first couple of quarters. During this quarter, was there any kind of category of advertising that kind of surprised you guys on the upside and conversely may be on the downside?

Patrick Talamantes

You know I would say print trends were a little worse in the second quarter than we expected. And some of that was due to retailers pulling back a little bit more than we had anticipated. That at the margin. We had already planned for strong digital growth and so that was not as much of an upside to us as may be that would otherwise appear. I mean we used to talk about double-digit growth and pat ourselves on the back when we’re up 10%, and now that we’ve don’t think that there is [indiscernible] we need to be growing faster than that and we are planning for that. So no nothing sticks out.

Unidentified Analyst

Okay, awesome. Well, good luck. Thanks, guys.

Patrick Talamantes

Thank you.

Operator

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

Davis Hebert

Hi, everyone, thanks for taking the questions. Just a few from me. The first question is on the video side, just curious in your discovery process, it sounds like you've really expanded the amount of videos you are putting out. Anything you have learned in terms of CPM trends, who you are competing against, any color there would be greatly appreciated?

Patrick Talamantes

I think in video overall what we are learning is that good story telling is overall helpful to traffic and so we are constantly monitoring story level pages for whether they have video or not. That can add to the story, and having both together overall helps the impact of those pages. CPM trends with video continue to be strong and there seems to be an almost insatiable demand for video advertising. Now the way we have video set-up internally is that our efforts are focused primarily on McClatchy generated videos and then to the extent that we don't enough inventory for advertisers we turn to programmatic means and other forms of being able to help serve up video ads for our advertisers.

We also have syndicated content through various providers to provide additional video sources for us. So I think our intent is to try to generate video to help our audience and our advertisers and distribute that video as far and wide as we can. The great thing about video is that given our player, no matter who picks up our videos that advertising revenue still comes back to us, unlike perhaps may be the way that text is either re-written and re-distributed or scraped or other things like that. So that's a very attractive component of our video efforts.

Davis Hebert

Okay. That’s helpful. And since we last spoke on your last earnings call there have been a lot of changes in the market. Your bonds have done really well. I think your secure bonds are now above par, your stock has performed well. So I am just curious how that impacts the pace of buybacks, and either the bonds or the stock and what we might expect going forward there?

Patrick Talamantes

Yeah, thank you for acknowledging all those changes, so we didn’t have to. I would say overall our focus continuous to be on deleveraging the company as regards bonds and so we will do whatever we need to do to make that happen. We have bought back bonds at par. In the past we have bought back bonds at much lower prices and so, we just look for opportunities as best we can, and Elaine does a great job of working with bond holders when they have opportunities and they want them and what that can help us.

As far as the stock goes I think that's a decision that we tend to make over time with the help of the Board and it remains an undervalued story. We think there is a lot of value over time from this digital story that we are putting together and that there continuous to be upside there both from the digital story as well as the deleveraging story. And so over time you will see equity buybacks reflect back. So not too much color as you might expect. But that would be the overall organizing principles.

Davis Hebert

Okay. Then my last question, obviously there has been a lot of chatter around consolidation in the industry, and I know you can't really comment specifically on that, but maybe if you could talk about as the newspaper companies or publishing companies move more towards the digital eccentric model. How does scale impact that? Is it necessary to have larger scale when you look at your current state of operation?

Patrick Talamantes

Well, we think what we are seeing is that there is long term optimism about the digital companies that news organizations can be in the long term and the value of that the advertisers place on high quality journals and the information at the same time. You are seeing long time owners particularly in private companies opting to sell to avoid the obvious near term pressures of the business while the acquirers can often find synergies that are required to create values for shareholder.

So and you have seen as now we are getting both the pressures of upfront as well as taking advantage of the opportunities that digital presents us. Our portfolio of markets offers us a degree of diversification that is helpful. And it's clear that we are of a size that we can take advantage of economies of scale and digital and be one of the leaders in where industry is headed again just witness the local media consortium and nucleus.

So more directly to your question. We think it's going to continue to be in active M&A environment and while we like our markets we of course have to be open to opportunities and we wouldn't preclude small acquisitions under the right circumstances where we think we can create value and stay within our overall strategy to deleverage.

Davis Hebert

Okay, thank you very much for the color.

Operator

Your last question comes from the line of Patrick Fitzgerald from Baird. Your line is open.

Patrick Fitzgerald

Hi, guys. On the real estate it sounded like in the press release that you have three properties that you are expecting to close to sell and close in 2016 one of those is Wichita, am I reading that correctly?

Elaine Lintecum

You are.

Patrick Fitzgerald

Can you tell me what other markets those are in?

Elaine Lintecum

Sure. In Sacramento here we've sold a partly have a contract to sell a parking garage and we've sold the primary building and related land for Raleigh News Observer in downtown Raleigh. And those are the three properties are expected to close in 2016.

Patrick Fitzgerald

Okay and is there any guidance you can give me on square footage of those properties?

Elaine Lintecum

Not off the top of my head that we can get that information. If you want to give Stephanie a call after this, I'm sure she can get that to you. I don't have it on top of my head. Sorry.

Patrick Fitzgerald

And then how is the sale-leaseback process progressing?

Elaine Lintecum

Well, as we mentioned in the press release we are in the process of talking with potential buyers about those properties. Bids came in, in June and we have been in the process of working with CBRE, our real estate consultant to sort through both the prices of the offerings and the related lease terms. They work hand-in-hand and are still going through that process. But we've received good interest and we will certainly announce when and if a transaction occurs that's material to announce to you all. But working through it and it's moving along.

In addition to that…

Patrick Fitzgerald

That's great to hear.

Elaine Lintecum

In addition to that I would say there are several other smaller properties that we also have interest in buyers at the end, and we are looking at those terms as well.

Patrick Fitzgerald

Okay, all right. Of the $20 million in cost reduction that you did year-over-year in this quarter is there any sense you can give me in terms of how much of that is related to physical distribution of the paper? Of those $20 million in cost saves?

Elaine Lintecum

Yeah, certainly a good portion of it is related to news print expenses, and so that’s helpful. And then we have other cost savings as we've outsourced production. So I’d say a good piece of it relates to production expenses, particularly as we’ve outsourced printing operations that affects both other expenses as well as compensation expenses. And then news trend cost as we mentioned earlier are down. And so a lot of it is kind of legacy cost is related to that.

Patrick Fitzgerald

Okay, another way, I guess I could ask you is how much is related to like editorial or the content in the papers, of the $20 million, would you say?

Elaine Lintecum

I don’t have a specific number for you in terms of editorial. Again a large portion of it tends to be more in the production area.

Patrick Fitzgerald

Okay, great. In terms of direct marketing, what are the - when you’re talking to customers, advertisers what are the key reasons they’ve been giving for the pull back there?

Patrick Talamantes

Mark, do you want to go ahead with that?

Mark Zieman

Yeah, we’re seeing the same trends that we’ve been seeing in previous quarters where a lot of this is caused by the struggles of the advertisers themselves in this current environment. And so what we’re seeing is that they’re cutting back on the footprint of some of the pre-prints in TMC products for instance or they’re cutting back on the page count, or the going dark during certain parts of the year, and then popping back up right before holidays, or right before sales events. And so many of the marketing are completely - they’re just being a lot more particular and targeted on how they’re spending their dollars to save money.

Patrick Fitzgerald

Okay, thank you. And then last question just digital advertising is 31% of advertising revenue now. Is there any way you could break down or give us a sense of how it breaks down in terms of how much is going to the website, how much is mobile, how much is video, any color on that would be helpful?

Patrick Talamantes

Our advertising efforts on digital, because we have responsibly designed websites, it goes to all of those things. So mobile is important. The desktop remains important to us. So banner ads related to those continue to be the most important areas for us, cars.com continues to be very important to us as well.

And so I would say that those would be the primary drivers in terms of total dollars, in terms of our ability to get to these rates of growth that we’re seeing, it’s all those areas that Mark talked about earlier. So those big percentage gains in smaller categories, those are the areas that are actually driving the incremental growth. So in press local, video advertising, native and national digital, those are all helping to drive growth as well. And I think it’s important to remember that our advertising teams are not restricted to only selling our own sites. So they sell advertising on to other publisher's websites as well, even nationally oriented websites through programmatic.

So programmatic really opens things up for someone like us to be able to drive revenue on to other's digital products and to drive also revenue and audience to our sites as well. There is just a lot of demand for digital, and so where we can fill it, or we can find even better places to fill that, we'll fill it through what we call audience extension project of products or you might think of it as programmatic.

Mark anything else to add there?

Mark Zieman

Yeah, I would just second that. A lot of our growth really isn't through our own website. We certainly sale through our own website and try to maximize the CPMs on that. But [indiscernible] extension is a large part of our growth, that's growing in high double digit numbers. And the web services that we talked about that more and more we get into with our digital agency strategy, whether it's reputation management or SEM or things like that which really have nothing to do with our own website, that's a big part of our growth as well.

Patrick Fitzgerald

All right thank you.

Operator

And pardon me, presenters we do have one last question from the line of Lance Vitanza from Cowen Group. Your line is open.

Unidentified Analyst

Hey guys, thanks for the questions. It's actually Brian Dennis [ph] filling in for Lance. First thing, how should we look at other charges going forward? They are edging [ph] back to upper end of free cash flow? It seems much higher than what you guys typically report.

Elaine Lintecum

Could you explain a bit more, you meant the other expense line is that what you're talking about?

Unidentified Analyst

The other charges that you added back to operating and free cash flow in the quarter, it's like a $11 million or so. It's much higher than what you guys typically report. How should we look at that going forward?

Elaine Lintecum

I would say that the second quarter was likely be the largest quarter for that. There again was two significant items in that, one was charges we have taken related to some co-sourcing that we have done in the IT area. And the other is significant downsizing of our operations at one building in Washington DC. And those kind of are the kind of two big charges that are in that and both are kind of one-time events or at least the major impact would be in the second quarter.

So I think the second quarter of this year will be larger than what you should expect in the third and fourth quarter unless we enter into a transaction that just hasn't occurred yet in terms of another large outsourcing or something like that. But I really think that this quarter will be larger than what you can expect to see in the second half.

Unidentified Analyst

Okay, thanks. And next on the real estate, can you help us quantify how much of your portfolio you can realistically sell? Obviously you can't sale all of it. So I was wondering what you're thinking is there.

Elaine Lintecum

Our thought process is that we actually have, if you count the three large properties that we are looking to sell leaseback. And the properties that we contributed to our pension plan in early February, along with the things are expected to close in 2016, that is a large part of the kind of the remaining property that we own. Recall that we sold our Miami building back in 2011 for $230 million. And that was a big piece of what we have done. There are some additional properties that are not huge but collectively add up. But I think we will have made a lot of headway once we're able to complete the sale and leaseback of the three larger buildings and close what we've done in 2016.

There will be some additional things that can be sold and that we are negotiating about now, so that can close in 2017 potentially. And once we get down the road and we've summarized this, we can go back and kind of do a full accounting of where we're at. But I think this is the largest parts of our portfolio.

Patrick Talamantes

The overall goal is to make sure that for every piece of real estate we own, we know why we own it or we sold it, or we've done some sort of sale leaseback on it. But we've done a complete portfolio review and we've make sure that where we needed to continue to have the capital employed in that asset that we know why we're doing that. And if not then we're trying to get capital out of it.

Unidentified Analyst

Okay thanks, and just my last question on the capital structure, now that the balance of the [indiscernible] is pretty low. Do you put more emphasis on reducing interest or shifting away that inside maturity?

Elaine Lintecum

I would say that you hit the nail on the head when you said it was pretty low. And it also carries a not unattractive interest rate. So it is a near term maturity, if we got a reasonably good offer to sale it back to us we would certainly look at that. But I think when it comes selling and leasing back the large three assets that we're currently working on that is defined as an asset sale. And so as a result of that our responsibility would be to offer the proceeds of that to our 9% whole for that part. We also have an obligation though to pay down attributable debt related to the leases, because it is a sales leaseback. And so if the 9% whole don't expect that part offering, we will look across our whole bond portfolio to meet that requirement and pay down sufficient debt. And so we will be looking at everything. But as $35 million we are not concerned about our ability to pay off the 5.75 quarter bonds. If we don't get an [indiscernible] offer on it we know we can paid of it part in September of 2017.

Unidentified Analyst

Okay thank you.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Patrick Talamantes

Thank you very much for participating on the call today. And we look forward to talking to you again next quarter.

Operator

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

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