The McClatchy Company Q3 2007 Earnings Call Transcript

The McClatchy Company (MNI)

Q3 2007 Earnings Call

October 16, 2007 12:00 pm ET

Executives

Elaine Lintecum - Treasurer

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

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

Christian A. Hendricks - Vice President, Interactive Media

G. Lynn Dickerson - Vice President, Operations

Analysts

John Janedis - Wachovia

Karl Choi - Merrill Lynch

Peter Appert - Goldman Sachs

Paul Ginocchio - Deutsche Bank

Bill On

Lisa Monaco - Morgan Stanley

Craig Huber - Lehman Brothers

Ken Silver

Edward Atorino - The Benchmark Company

Bill Green

Presentation

Operator

Good afternoon. My name is Joy and I will be your conference operator today. At this time, I would like to welcome everyone to the McClatchy third quarter earnings conference call. (Operator Instructions) Ms. Lintecum, you may begin your conference.

Elaine Lintecum

Thank you for joining us today for our third quarter conference call. This call is also being webcast at McClatchy.com and the webcast will be archived for future reference. Joining me this morning is Gary Pruitt, our Chairman and CEO; our Vice President of Operations, Lynn Dickerson; our Vice President of Interactive Media, Chris Hendricks; and our Vice President and CFO, Pat Talamantes. We will all be available for questions at the end of Gary’s remarks. I will also be available after the call and can be reached at the following phone number: 916-321-1846.

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

The company’s results from continuing operations since the close of the Knight Ridder acquisition include the operations of the 20 retained former Knight Ridder newspapers and all of our previously own newspapers except for the Minneapolis Star Tribune newspaper, which was sold on March the 5th.

Finally, reconciliations of non-GAAP amounts to GAAP reported amounts can be found on the company’s website at the investor relations page.

As a reminder, this call will contain forward-looking statements that are subject to risks and uncertainties, including among others those described in the company’s 2006 annual report on Form 10-K filed with the SEC. Actual results may differ materially from those described during this call.

Now here’s Gary Pruitt, our CEO.

Gary B. Pruitt

Thanks, Elaine. Good morning. Today we reported preliminary third quarter 2007 earnings from continuing operations of $23.5 million, or $0.29 per share, subject to an anticipated, non-cash charge to GAAP earnings for impairment of good will and long-lived assets.

Our results reflect the continued tough revenue environment. They also reflect our continued response of strong cost controls to help offset the revenue decline. In the third quarter, we reduced cash operating expenses by 8.6% and we will continue to seek ways to reduce them.

Our revenues from continuing operations in the third quarter of 2007 were $540.3 million, compared to revenues from continuing operations of $595.1 million in 2006.

Advertising revenues were down in the third quarter by the same percentage as the second quarter, 9.8%, and circulation revenues were down 3.7%. Our advertising revenues have continued to be hurt by the downturn of the real estate market, particularly in our California and Florida newspapers. Together, these two regions represent 33% of our third quarter revenues but account for 68% of our ad revenue decline.

Real estate is the significant factor in the economies of our markets in these two states and the downturn has had a spillover effect in other advertising categories. Meanwhile, advertising revenues at our other regions combined were down 5.0% in the quarter.

California and Florida are resilient markets and longer term, we like their prospects. As we’ve said before, they were our best performers in the recent past and we expect them to be there again.

Let’s look at revenues by category, starting with retail. Retail advertising was down 3.1% compared to growth of 2.2% in the 2006 quarter. The declines in our print products were partially offset by strong growth in online retail advertising. Online retail advertising was up 41% in the quarter, driven by banner and display advertisements.

Classified advertising revenue declined 16.0% for the quarter and here’s a review by category.

Employment -- in the third quarter, employment advertising declined 15.3%. Print employment revenues were down 22.4%, while online revenues grew 1.7%. We had struck a new affiliate agreement with CareerBuilder and we expect to begin to see better results from it, particularly at the former Knight Ridder newspapers, in 2008. We are in the midst of cycling over the positive impact of using CareerBuilder at our legacy newspapers.

Next, automotive -- automotive advertising continued to struggle, with advertising down 14.9%. Our print advertising was down 19.2%, while our online auto advertising was up 20% in the quarter.

Finally, real estate -- real estate advertising was down 26.1%, with 72% of this decline coming from California and Florida. Print advertising was down 27.4% and online real estate advertising declined 5.8%. National advertising declined 12.3% in the third quarter. Our performance continued to be hurt, mainly by losses in telecommunications.

While online advertising is included in the results discussed above, we wanted to give you a sense of how our online advertising is performing. Online advertising increased 1.4% compared to the third quarter of 2006. We had inconsistent data in the second half of 2006 due to differences in what Knight Ridder considered online advertising and also differences in the way they accounted for the Real Cities ad network revenue sold on behalf of third parties, and differences related to purchase price accounting adjustments for some CareerBuilder revenues.

We’ve attempted to factor out the impact of these differences and we believe our online revenues were up in the mid single digit range when we did that. We expect to return to our historical growth rates of double-digit gains in online advertising next year.

Those online categories that are less reliant on up-sells for print advertising are doing quite well. For instance, online retail advertising is up 59.7% through the first nine months and auto advertising online is up 16.7%, evidence of the strength of our cars.com products.

Online advertising continues to remain the fastest growing segment of our business and we remain among the top of our industry in terms of online revenues as a percentage of advertising at 9%. We expect that percentage to continue to grow over time and we feel good about our Internet investments and online businesses.

In the third quarter, daily circulation declined 3.1% and Sunday was down 3.6%. As we have mentioned during the last couple of earnings calls, this year we made a decision to scale back some marketing programs which advertisers told us did not have much value. We believe that these strategic reductions account for approximately 40% of our daily decline and approximately 30% of our Sunday. As we cycle these decisions in early 2008, we would expect that circulation declines will lessen.

Our strategy is to grow and retain quality circulation at our newspapers while rapidly expanding the audience we serve online, so we are pleased to note that the new Audit Bureau of Circulation’s report on audited audience data will show that the combined but unduplicated reach of print and online in almost all of our major markets is greater than 65%, and that our total audience is growing.

We will continue to focus on growing this reach for our advertising customers.

Turning to expenses, total cash expenses decreased $38.4 million, or 8.6%, as we continue to reign in costs during this tough revenue environment. Compensation costs were down 3.6%, salaries declined 5.1%, and FTEs were down 6.6%. Newsprint and supplement costs were down 23.5%, reflecting in equal parts lower newsprint prices and lower usage. Finally, all other expenses decreased 8.2%.

Net interest costs for continuing operations were $48.3 million. Our effective borrowing rate in the third quarter was about 6.5%.

Our operations continue to produce significant cash, which we are using to pay down debt. In addition, we completed the sale of land in San Jose, California and the sale of several smaller assets during the quarter and used the proceeds to reduce debt. Debt was down approximately $98 million since the end of the first quarter, to $2.58 billion at the end of the third quarter. We expect debt to be approximately $2.5 billion at the end of 2007 and we expect our debt balance at the end of 2008 to be approximately $2 billion.

As we mentioned, we are testing for impairment of good will and other long-lived assets in the third quarter. While we are early in our analysis, we expect the real estate downturn and its intended effects on the local economies in which we operate together with the additional amount of good will recorded under the accounting rules in the Knight Ridder acquisition will result in an impairment charge. We will conclude our analysis and book this charge in our Form 10-Q.

We recognize that newspaper revenues have declined and that values have dropped but McClatchy is a solidly profitable company that is rapidly paying down debt and reengineering its operations to navigate through a changing media environment.

The impairment at issue involves only non-cash accounting charges and the simplest way to put that into perspective is to remember that nothing about it changes our operations or our ability to reduce debt.

Our outlook for the fourth quarter has been tempered by the continuing adverse effect of the real estate downturn and its impact on the economies in our local markets, particularly in California and Florida. It is clear the economies of these two states, and perhaps the country as a whole, are experiencing a greater slowdown than many had anticipated just a few months ago.

So we expect the advertising revenue decline in the fourth quarter to be similar to that in the second and third quarters. We do not know when the downturn will end and do not currently have visibility beyond the fourth quarter.

By the way, we do plan to offer our first read on 2008 at our Media Week presentation in early December, but in any case, we believe that cyclical factors represent a significant portion of the current advertising downturn, as evidenced by our operations in California and Florida regions.

Looking longer term, we’re confident that these two regions will have a bright future. We’re determined to continue to reduce costs and drive efficiencies to protect cash flows as we weather this downturn.

Now we’ll be happy to answer your questions.

Elaine Lintecum

Joy.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Janedis.

John Janedis - Wachovia

Good morning. Thank you. Gary or Chris, first, you commented on up-sells for online. Is there some reason why that’s slowing? Is it penetration related or something else?

Gary B. Pruitt

Up-sells are -- there are fewer print ads in classified so there are fewer opportunities to up-sell to online.

John Janedis - Wachovia

It’s just that simple?

Gary B. Pruitt

Yeah.

John Janedis - Wachovia

Okay, and then as you mentioned, you are obviously a bit more cautious on your outlook. Can you talk about -- I’m not sure how specific you can get but how much of that is related to California and Florida versus the rest of the portfolio? I’m just trying to understand your broader outlook of the business and again, if you could provide specificity by category, that would be helpful. Thanks.

Gary B. Pruitt

We see certainly again a disproportionate amount of the decline coming from California and Florida. As we’ve said, it’s about 70% in the third quarter. We think it will be about that same amount in the fourth quarter. We think that the rest of the papers will perform perhaps in line, maybe slightly better than they have recently, but again the biggest declines will continue to be from Florida and California in that 70% range, of our total decline.

John Janedis - Wachovia

Thank you.

Operator

Your next question comes from the line of Karl Choi.

Karl Choi - Merrill Lynch

A couple of questions; one, first a simple one just to clarify -- your fourth quarter outlook from advertising revenues, that is on an apples-to-apples basis, including the extra week in the year ago, right?

Gary B. Pruitt

Yes, that’s -- it’s 52 week to 52 week, yes.

Karl Choi - Merrill Lynch

And retail was particularly soft in September. Gary, I wonder if you can drill down a little bit deeper in what happened. Also, was the softness also confined to California and Florida?

Gary B. Pruitt

In retail for the quarter, we don’t want to read too much into any one month. You are right that September’s retail numbers were weaker than August and September’s, but for the quarter, retail was down 3.1%. The quarter before, it was down 6.2% and our comparison was actually tougher this quarter.

So we don’t regard the retail -- we don’t regard September as a trend, necessarily. As we look quarter to quarter, it actually strengthened somewhat and in terms of particular regions, we did have the much more weakness in California and Florida. For instance, retail in those two regions was down 14% and the other regions combined were down 2.7%.

Karl Choi - Merrill Lynch

This is for the quarter, right?

Gary B. Pruitt

In September, and so we are seeing that spillover effect into other categories that we talked about. And California is particularly weak in the retail area but again, it is definitely a California and Florida effect there as well.

Karl Choi - Merrill Lynch

Was the weakness pretty broad-based in California or is it more concentrated in, for example the [inaudible]?

Gary B. Pruitt

In California, the weakness was broad-based.

Karl Choi - Merrill Lynch

Lastly, can you talk about the $0.03 charge in the quarter regarding tax provision? What exactly was that? That would be helpful. Thanks.

Gary B. Pruitt

Okay.

Patrick J. Talamantes

I don’t want to get into too much detail on that, as you might imagine. Our tax rate was 44.8% for the quarter and 41.4% year-to-date, and the change in the rate is due to the reserves we booked relating to certain tax positions we took during the quarter.

We do expect to see a return to the 40% level for an effective tax rate for the fourth quarter.

Karl Choi - Merrill Lynch

Lastly, any outlook for equity income in the fourth quarter?

Patrick J. Talamantes

Karl, I think it’s probably worth going through a little bit of what happened in this quarter to save a future question. In this quarter, Internet was profitable at $1.775 million; newsprint in the third quarter was unprofitable, as you might imagine, $6.374 million; the other investments, which would have included The Seattle Times, were unprofitable at $906,000; and of course, there’s depreciation and amortization charges of $2.149 million, so for a total equity loss of $7.654 million.

We see primarily because of newsprint getting a little bit worse than the fourth quarter, we see that number of the equity loss getting a little bit worse in the fourth quarter.

Gary B. Pruitt

And of course we are still pursuing the sale of SP newsprint to try to reduce those losses in the future.

Karl Choi - Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Peter Appert.

Peter Appert - Goldman Sachs

Gary, you guys have done yeoman like work in managing costs in the context of this difficult environment, so I guess the question that always comes up is just how much more can you do in the context of all you’ve done already, particularly as you’ve cycled through the -- I guess some of the original benefits from the Knight Ridder transaction, so is it possible to talk specifically about where you can focus from a cost perspective and how much flexibility there is left?

Gary B. Pruitt

Sure. I’ll give it a shot. We are in the midst of budgeting right now but we would expect that we can continue to post mid-single digit declines in the fourth quarter. You are right. We’ve rolled over the synergies from the Knight Ridder deal so it becomes a little bit more challenging but we have looked at -- we are taking advantage of technology in terms of centralizing some functions which allows us to reduce staffing at various papers. It allows us to be less vertically integrated at each paper and allows us to operate more efficiently, better and cheaper. And the cuts we are making in FTEs are generally permanent and we think there are more opportunities to be gained.

So while we don’t see the declines perhaps at the same level that we’ve been posting them year-to-date, we do think we can keep in the mid-single digit range in the fourth quarter and that that there are more declines to come next year.

Peter Appert - Goldman Sachs

But is mid-single digit possible you think in ’08?

Gary B. Pruitt

We’re really not speaking to ’08 yet. We do think we will have expense declines in ’08 but we are unwilling to be more specific than that yet as we’re just going through budgeting and we’ll have more to say to that in early December at Media Week.

Peter Appert - Goldman Sachs

Sure, okay. Thank you. And then, just one other item, the newsprint sale that you mentioned, any update in terms of status or when you think that could close?

Gary B. Pruitt

Well, I’ll turn it over to Pat. He’s been the one most engaged in that process.

Patrick J. Talamantes

Peter, we are in the process of wrapping that up. We expect that in the fourth quarter we’ll have an announcement on what we’re doing there.

Peter Appert - Goldman Sachs

Okay, great. Thank you.

Operator

Your next question comes from the line of Paul Ginocchio.

Paul Ginocchio - Deutsche Bank

Thanks. Just a quick question about the concept deal with Yahoo!. Is that in place now and are you picking up any additional traffic?

Second, for Chris again, could you talk about maybe -- use this opportunity to talk about why you stayed in CareerBuilder and what some of the opportunities area and how we should think about the opportunities we gained with staying with CareerBuilder and getting I guess the products? Thanks.

Christian A. Hendricks

On the first part, the Yahoo! content deal, portions of it have been rolled out, primarily just in the news area. We have not seen the traffic lift there because we already were engaged in that prior to the Yahoo! deal. During this quarter, it will expand into other areas of the site, the finance area, the sports area and other areas, and we expect to see some traffic gains from that standpoint.

As far as the revenue side of the Yahoo! deal, we are in a test phase one with Fort Worth right now. No real results and it just launched within the last two weeks.

Gary B. Pruitt

Chris, why don’t you briefly explain what the content portion of the Yahoo! deal is.

Christian A. Hendricks

The Yahoo! content deal is simply where they take our headlines and they link back to our sites. They integrate those headlines deeper into their sites than they have historically done, given us also local prominence when they can determine where the user is coming from, the location of that user. So if you are on the front page and they know you are in Sacramento, you will see our headlines from the Sacramento Bee in a local box on the site and you can back to our site. We are not sharing anymore content with them then simply a headline and the link back to our site.

Now on CareerBuilder, we believe it is a strong position to be partnered with the number one employment site in the U.S. and also in expanding international. They have the number one in listings, number one in traffic, and number one in revenue. We’ve been a strong partner and committed to being a partner with them.

The new products will add to our portfolio and we expect to see the revenue from that new product line coming in in the ’08 timeframe, which we should see some results from that.

Paul Ginocchio - Deutsche Bank

Chris, any way to sort of size it? I think your hit was pretty significant over the last 12 months. I guess you are saying it kicks in in the first quarter of ’08, or is that one of the new projects that --

Christian A. Hendricks

I didn’t put a number to it but I will tell you that it is not all going to come back because there are still other products that we do not sell in those marketplaces. Plus also, you have the fact that the economy is not helping us down in Florida and in California on the employment side, so don’t look for the gains to the point where we were historically.

Gary B. Pruitt

I would say that we were pleased to stay with CareerBuilder, as Chris said. We feel we got an affiliate deal that was the best we could get from any of the providers and better than we could get from other providers, so we feel good about staying with CareerBuilder and it allowed us to maintain our equity position, owning 14.4% of the leading online employment solution. We felt good about that.

And then, as to traffic in terms of the growth we were talking about, we have shown -- while we haven’t -- well, the content piece that Yahoo! is just beginning to be rolled out, we have seen good growth in unique visitors throughout the year and the average monthly growth in unique visitors this year is 15.4%, so strong double-digit growth in unique visitors which has led to that growth in audience I referred to earlier in my conference call notes.

Paul Ginocchio - Deutsche Bank

Thanks very much.

Operator

Your next question comes from the line of [Bill On].

Bill On

Good morning. Just a quick follow-up on the earlier question on the cost side; can you tell us specifically which areas you can perhaps outsource overseas? I noted that some months you outsourced some ad production work at the Fresno Bee.

Gary B. Pruitt

We are experimenting with ad production and outsourcing and evaluating other possible efforts but as yet have not made final decisions except in the classified -- except in the circulation call center area, where we have consolidated some historically and outsourced some as well. So we’ll be looking at other possibilities in the coming months.

Operator

Your next question comes from the line of Lisa Monaco.

Lisa Monaco - Morgan Stanley

Good morning. Two questions; one, Gary, could you give us a little color on what you are seeing on the newsprint pricing front? And secondly, kind of a bigger picture question, how are you thinking about online going forward and as you evaluate your cost structure, is one of the possibilities significantly scaling back the print side of the business? Thanks.

Gary B. Pruitt

Pat handles newsprint so I will turn the first question over to him.

Patrick J. Talamantes

Just to say, the newsprint suppliers are trying to get price increases but can’t. That’s the short answer.

So to give you the longer version of that same answer, producers are trying to raise prices in the fourth quarter after failing in September, as you know. The Canadian dollar is up, newsprint producers are losing money and the Abitibi Bowater approval from the DOJ is expected soon.

But consumption is obviously very weak in our industry currently and a number of the newspapers are reducing web widths to 48-inch and 46-inch web widths. All but seven of our papers have reduced web widths to 48. So in the near-term, it is going to still be a very difficult environment in which to raise prices.

Gary B. Pruitt

Lisa, to your point about cost structures and shifting cost structures, we have no plans to significantly downscale our print operation. We do recognize that -- we think, in fact, it will be quite profitable for us to be the only daily newspaper in each of our markets and be that last mass medium. But we do recognize that over time, print circulation will likely decline. It will be a slow and gradual process and at the same time, our online business and audience and revenues will grow.

That evolutionary change will allow us to be more efficient over time because the online business is a higher margin business. So while I don’t think you’ll see a dramatic shift in any one year, I think you will see that transition continue as we become much more of a hybrid company, print and online, with the growing area being in the more efficient and higher margin area of online.

Lisa Monaco - Morgan Stanley

Thank you.

Operator

Your next question comes from the line of Craig Huber.

Craig Huber - Lehman Brothers

Thank you. First question, just looking for six numbers, for Florida and California, can you give us the percentage change in the quarter for real estate, auto, classified and help wanted? And I have some follow-ons. Thank you.

Gary B. Pruitt

Sure. Were you looking for the quarterly number for each of those --

Craig Huber - Lehman Brothers

Yes, for the quarter for each of those, yes.

Gary B. Pruitt

In each of the classified categories, so I’ll start with automotive in California for the quarter, it was down 21.0% and in Florida, it was down 30.8%. Turning next to real estate, in California it was down 40.5% and in Florida, it was down 40.3%, and then finally in employment, California was down 29.5% and Florida was down 29.9%. They have a very vicious race going on for last place.

Craig Huber - Lehman Brothers

Also, could I get those two numbers for retail as well for both markets?

Gary B. Pruitt

Yes, for retail, the California number for the quarter in retail was down 11.2% and Florida was down 0.5%.

Craig Huber - Lehman Brothers

Okay, and then also along these lines, a little more broad question but can you just compare and contrast the secular versus the cyclical nature of your auto, classified versus your real estate classified? Secular versus the cyclical, just compare and contrast, if you would.

Gary B. Pruitt

We certainly see both structural and cyclical declines currently and the auto -- I guess as I think about it, we see -- we’ve seen a longer decline in automotive, as it was declining when real estate bubble was still growing, but we’ve seen more of an -- I think we’ve seen more structural change and migration in auto than we have in real estate. Our percentage of online auto advertising is greater and the online auto market is more mature and more competitive with more competing online products nationally and locally. And so I think that there’s been a bigger structural shift there.

With real estate, the online plays haven’t been quite as, for various reasons, haven’t been quite as successful. I think there will be greater plays in the future and it’s much more of a cyclical impact now, although of course there is structural forces -- there are structural forces as well.

Craig Huber - Lehman Brothers

And another broad question; can you just talk about, over the last year or so as you think about how you price your various newspaper print ad categories, have you put in place any discounts for your print ads by any categories in the various markets where the net result is volume has actually outstripped the discounts you’ve put in place, where it’s actually been successful on a net-net basis?

Gary B. Pruitt

I think it’s more of a market-by-market effect and there certainly have been, especially volume contracts with larger advertisers where they are not paying necessarily off the rate card but striking a deal to save rates or even reduce rates with volumes growing. That’s not a new phenomenon but it goes on market-by-market and contract-by-contract, and typically in large advertiser category in retail or large classified advertiser.

Craig Huber - Lehman Brothers

But Gary, are you doing that any more now say over the last year than you have in the past? I guess I’m trying to figure out --

Gary B. Pruitt

I’ll turn it over to Lynn Dickerson. She’s a little closer to the operations than I.

G. Lynn Dickerson

It’s kind of a complicated answer, Craig, because there are so many different kinds of customers that we deal with. I would say that one of the areas where we are experiencing success is with smaller advertise -- small to medium-sized advertisers where we have much more control and we’re able to see the decision makers.

Many of our losses have come from bigger advertisers, so we have created programs and short-term contracts and special campaigns, if you will, that appeal to smaller and mid-sized advertisers, and sometimes there are rating situations there that allow us to push that kind of business.

Gary B. Pruitt

So I guess, Craig, the short answer to your question is are we doing it more now, would be yes.

Craig Huber - Lehman Brothers

But do you think it’s successful from the [bowing] you might be gaining from doing that? And is it a good strategy for the long term?

Gary B. Pruitt

It’s been a trend that has begun even before this downturn, so it had been a trend in the industry already and we do think it is -- we do think it has been successful. I don’t see it abating soon. I don’t see it -- nor do I see it though as a tidal wave that washes over all advertising purchases or rate card purchases, so I think it has grown but -- and I would overall think it is successful.

Craig Huber - Lehman Brothers

My last question, if I could, you’ve been very tight on costs as you’ve been obviously 10 plus years here, could -- something dear to your heart, Gary, but the quality of your papers has always been significantly higher than most of your peers out there. With these big cost cuts you are putting in place now, what are you guys doing to the editorial quality or content of your various papers right now?

Gary B. Pruitt

I think we’re improving the editorial quality and content of the papers. We’ve been very cautious about making any cuts that go to the quality of the paper, so in terms of the news holes remain large, the percentage of space allocated to news compared to advertising is actually at a record level, and while there have been some staffing declines through attrition, they have been slight. The number of editorial FTEs in the company is over 4,00 and the decline in editorial FTEs has been a few percent.

So we have continued to maintain the quality of the papers. We are proud of that and we are committed to that long term. We think that will continue to help us grow audiences and we can leverage that into advertising sales. We do try to operate efficiently. We are very proud of operating efficiently with high margins but we try to maintain the areas that drive quality and revenue, and we’ll be evaluating each of those and seeking to strike that balance as we’re right in the midst of budgeting.

Craig Huber - Lehman Brothers

What is that percentage, Gary, right now on average for your papers, editorial content versus the advertising volume in your papers?

Gary B. Pruitt

Fifty-two percent is the amount of news space compared to total.

Craig Huber - Lehman Brothers

Historically, you generally run about 50-50, right?

Gary B. Pruitt

Yes, it’s usually around 50-50 and of course, the decline in advertising lineage helps that percentage go up, so you can get there a couple of different ways.

Craig Huber - Lehman Brothers

Understood. Thanks a lot.

Operator

Your next question comes from the line of Ken Silver.

Ken Silver

Good afternoon. You mentioned in your prepared remarks that you expected to reduce debt by I think almost $600 million between the end of the third quarter of this year and the end of next year. Is that all from internal cash flow?

Gary B. Pruitt

It is from internal cash flow but we also -- and we expect to receive a substantial tax refund related to the sale of the Star Tribune of a little over $200 million in the second quarter of ’08, and we expect to close on the sale of some land at the -- near the Miami Herald in Florida, which will be after tax, in the neighborhood of $110 million to $120 million.

Ken Silver

Okay. Thank you very much.

Operator

Your next question comes from the line of Ed Atorino.

Edward Atorino - The Benchmark Company

Did you mention you are still pursuing the sale of the newsprint operations and if so, is the environment conducive for that to happen soon?

Gary B. Pruitt

We are still pursuing it and we expect an announcement in the fourth quarter, so we expect it in the next couple of months here. We expect to make an announcement on the sale. We expect it to be successful but we’ll have to wait and see. And the environment is challenging but we also know that strategic buyers tend to look through cycles and downturns and buy based upon the long-term outlook and quality of the assets. And on that score, SP Newsprint is among the very best.

Edward Atorino - The Benchmark Company

You wouldn’t want to give us a heads up on what the number might be?

Gary B. Pruitt

No. I would like that same heads up, actually, so I don’t know what it is but we do have a competitive bid process.

Edward Atorino - The Benchmark Company

That’s pretty good. Okay, thanks.

Operator

(Operator Instructions) Your next question comes from the line of Bill Green.

Bill Green

I wonder if you could talk a little bit about how you view your capital structure. Obviously you’ve made some good headwind in repaying debt but in tandem, the stock performance has been less than stellar. I wonder, is there a point at which you will divert some of your cash flow towards perhaps buying back some stock? Or is there some target level of debt that you have?

Gary B. Pruitt

We do not have a target level for debt. So as a result, we do look at all options in evaluating returning value to shareholders. While our primary focus has been and will remain in the near-term, debt repayment, we are open to looking at other options, including share repurchase. Depending upon factors, not just share price performance, although that’s an important factor, our operating performance and interest rates and various ratios that we look at.

We’ve been in general more conservative in terms of making sure that we’re comfortable with our debt level in a challenging operating environment but we do also expect that we will participate in share repurchase, but we don’t have a specific timeframe or balance in mind.

Bill Green

Can I just ask a follow-up? In terms of the debt you are repaying, obviously it’s a very low cost of capital. There’s very low interest rate on the debt. In terms of making the internal [ROI] decision versus your equity, which is down 55% year-to-date, I’m just wondering, is there a point at which -- you know, why -- some of the free cash flow that you are generating or some of the asset sale proceeds, that you wouldn’t be more active in these things? If you look at people like Belo or Tribune or even E.W. Scripps, all have done things which are very shareholder friendly.

Gary B. Pruitt

We will -- we are and will continue to do those calculations and we are aware of the competing returns of them, and so we have continued to do them and will continue to look at them and we’ll continue to give updates on them and our plans. I certainly understand your point and we are factoring in the operating conditions and the share price and like I said, interest rates and looking at all of that to try to figure out what is best, in the best interest for the shareholders, for the company and we are not ideologically wedded to just repaying debt. And the McClatchy family is also interested in buying back the stock and having the company buy back stock; in particular, the 35 million shares we issued to acquire Knight Ridder.

I think it’s a question of when and not whether. And I understand that when can be a controversial issue and people can differ on that but we are looking at those very trade-offs.

Bill Green

Can you perhaps quantify some of the metrics that would give you the when? I mean, I appreciate that you guys are saying that you would like to do it but you know, it seems like the stock is -- certainly the stock is underperforming its peers here. I would have thought it would seem cheap to you guys as management.

So what are the triggers for which we think you guys could step in here and begin to return value to shareholders?

Gary B. Pruitt

We are certainly disappointed in the share price. There’s just no doubt about it. I know that the shareholders are very disappointed and I’m sorry we haven’t done better in terms of our stock performance.

But at this point, we don’t want to provide any clear numerical guidance as to what we would be looking at as factors. We do think it makes sense to continue to evaluate it and make decisions but not to make -- not to disclose what we are looking at in terms of factors or numerically what that crossover point looks like to us.

Bill Green

And just a final question; have you guys given any thought to monetizing some of your investments, your off balance sheet investments?

Gary B. Pruitt

Yes, and have and we’ll continue to evaluate opportunities to do so. We sold -- we ended up selling over half of the CareerBuilder asset. We have sold -- we are in the process of selling our interest in SP Newsprint. We sold the land in Miami and in San Jose, and we sold the Knight Ridder plane, the jet. So we are continuing to evaluate which assets make sense, which assets don’t make sense and how we can sell them and pay down debt.

We’ve also made tough decisions with regard to which papers when we acquired we would keep and which ones we would sell, and sold the Knight Ridder papers we felt didn’t meet our criteria and applied that same exacting criteria to the legacy McClatchy papers and sold the Star Tribune in Minneapolis, a sale that was controversial for many but we think clearly in the best long-term interest of the company.

Bill Green

So the stock price is a watch-this-space for now?

Gary B. Pruitt

I’m sorry, the stock price is what?

Bill Green

Your actions toward the stock are a watch-this-space for the moment?

Gary B. Pruitt

Watch this space? We’re doing everything we can operationally to improve our performance and expect that to be reflected in the share price eventually. Paying down the debt should also build equity value and we’ll be evaluating when is an appropriate time for us to enter the market and buy back shares as well. So we think there is potent use for our cash flow long term to improve shareholder value and look forward to doing it.

Bill Green

Thank you very much for your time.

Operator

There are no further questions at this time.

Gary B. Pruitt

Thank you very much for your time and attention and we are going to be working hard to improve results as we go forward and in the fourth quarter and beyond. Thank you very much.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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