Executives
Elaine Lintecum - Treasurer
Gary B. Pruitt - Chairman of the Board, President, ChiefExecutive Officer
Patrick J. Talamantes - Chief Financial Officer, VicePresident, 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
The McClatchy Company (MNI) Q3 2007 Earnings Call October 16, 2007 12:00 PM ET
Operator
Good afternoon. My name is Joy and I will be your conferenceoperator today. At this time, I would like to welcome everyone to the McClatchythird quarter earnings conference call. (Operator Instructions) Ms. Lintecum,you may begin your conference.
Elaine Lintecum
Thank you for joining us today for our third quarterconference call. This call is also being webcast at McClatchy.com and thewebcast will be archived for future reference. Joining me this morning is GaryPruitt, our Chairman and CEO; our Vice President of Operations, Lynn Dickerson;our Vice President of Interactive Media, Chris Hendricks; and our VicePresident and CFO, Pat Talamantes. We will all be available for questions atthe end of Gary’s remarks. I will also be available after the call and can bereached at the following phone number: 916-321-1846.
Our earnings release and statistical report were issued thismorning before the market opened. The release includes the summary of unauditedresults and the full text of our release and statistical reports are posted onFirst Call and our website for your convenience.
The company’s results from continuing operations since theclose of the Knight Ridder acquisition include the operations of the 20retained former Knight Ridder newspapers and all of our previously ownnewspapers except for the Minneapolis Star Tribune newspaper, which was sold onMarch the 5th.
Finally, reconciliations of non-GAAP amounts to GAAPreported amounts can be found on the company’s website at the investorrelations page.
As a reminder, this call will contain forward-lookingstatements that are subject to risks and uncertainties, including among othersthose described in the company’s 2006 annual report on Form 10-K filed with theSEC. Actual results may differ materially from those described during thiscall.
Now here’s Gary Pruitt, our CEO.
Gary B. Pruitt
Thanks, Elaine. Good morning. Today we reported preliminarythird quarter 2007 earnings from continuing operations of $23.5 million, or$0.29 per share, subject to an anticipated, non-cash charge to GAAP earningsfor 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 offsetthe revenue decline. In the third quarter, we reduced cash operating expensesby 8.6% and we will continue to seek ways to reduce them.
Our revenues from continuing operations in the third quarterof 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 thesame percentage as the second quarter, 9.8%, and circulation revenues were down3.7%. Our advertising revenues have continued to be hurt by the downturn of thereal estate market, particularly in our California and Florida newspapers.Together, these two regions represent 33% of our third quarter revenues butaccount for 68% of our ad revenue decline.
Real estate is the significant factor in the economies ofour markets in these two states and the downturn has had a spillover effect inother advertising categories. Meanwhile, advertising revenues at our otherregions combined were down 5.0% in the quarter.
California and Florida are resilient markets and longerterm, we like their prospects. As we’ve said before, they were our bestperformers 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 2006quarter. The declines in our print products were partially offset by stronggrowth in online retail advertising. Online retail advertising was up 41% inthe quarter, driven by banner and display advertisements.
Classified advertising revenue declined 16.0% for thequarter and here’s a review by category.
Employment -- in the third quarter, employment advertisingdeclined 15.3%. Print employment revenues were down 22.4%, while onlinerevenues grew 1.7%. We had struck a new affiliate agreement with CareerBuilderand we expect to begin to see better results from it, particularly at theformer Knight Ridder newspapers, in 2008. We are in the midst of cycling overthe 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 ouronline auto advertising was up 20% in the quarter.
Finally, real estate -- real estate advertising was down26.1%, with 72% of this decline coming from California and Florida. Printadvertising was down 27.4% and online real estate advertising declined 5.8%.National advertising declined 12.3% in the third quarter. Our performancecontinued to be hurt, mainly by losses in telecommunications.
While online advertising is included in the resultsdiscussed above, we wanted to give you a sense of how our online advertising isperforming. Online advertising increased 1.4% compared to the third quarter of2006. We had inconsistent data in the second half of 2006 due to differences inwhat Knight Ridder considered online advertising and also differences in theway they accounted for the Real Cities ad network revenue sold on behalf ofthird parties, and differences related to purchase price accounting adjustmentsfor some CareerBuilder revenues.
We’ve attempted to factor out the impact of thesedifferences and we believe our online revenues were up in the mid single digitrange when we did that. We expect to return to our historical growth rates ofdouble-digit gains in online advertising next year.
Those online categories that are less reliant on up-sellsfor print advertising are doing quite well. For instance, online retailadvertising is up 59.7% through the first nine months and auto advertisingonline is up 16.7%, evidence of the strength of our cars.com products.
Online advertising continues to remain the fastest growingsegment of our business and we remain among the top of our industry in terms ofonline revenues as a percentage of advertising at 9%. We expect that percentageto continue to grow over time and we feel good about our Internet investmentsand online businesses.
In the third quarter, daily circulation declined 3.1% andSunday was down 3.6%. As we have mentioned during the last couple of earningscalls, this year we made a decision to scale back some marketing programs whichadvertisers told us did not have much value. We believe that these strategicreductions account for approximately 40% of our daily decline and approximately30% of our Sunday. As we cycle these decisions in early 2008, we would expectthat circulation declines will lessen.
Our strategy is to grow and retain quality circulation atour newspapers while rapidly expanding the audience we serve online, so we arepleased to note that the new Audit Bureau of Circulation’s report on auditedaudience data will show that the combined but unduplicated reach of print andonline in almost all of our major markets is greater than 65%, and that ourtotal audience is growing.
We will continue to focus on growing this reach for ouradvertising customers.
Turning to expenses, total cash expenses decreased $38.4million, or 8.6%, as we continue to reign in costs during this tough revenueenvironment. Compensation costs were down 3.6%, salaries declined 5.1%, andFTEs were down 6.6%. Newsprint and supplement costs were down 23.5%, reflectingin equal parts lower newsprint prices and lower usage. Finally, all otherexpenses decreased 8.2%.
Net interest costs for continuing operations were $48.3million. Our effective borrowing rate in the third quarter was about 6.5%.
Our operations continue to produce significant cash, whichwe are using to pay down debt. In addition, we completed the sale of land inSan Jose, California and the sale of several smaller assets during the quarterand used the proceeds to reduce debt. Debt was down approximately $98 millionsince the end of the first quarter, to $2.58 billion at the end of the thirdquarter. We expect debt to be approximately $2.5 billion at the end of 2007 andwe expect our debt balance at the end of 2008 to be approximately $2 billion.
As we mentioned, we are testing for impairment of good willand other long-lived assets in the third quarter. While we are early in ouranalysis, we expect the real estate downturn and its intended effects on thelocal economies in which we operate together with the additional amount of goodwill recorded under the accounting rules in the Knight Ridder acquisition willresult in an impairment charge. We will conclude our analysis and book thischarge in our Form 10-Q.
We recognize that newspaper revenues have declined and thatvalues have dropped but McClatchy is a solidly profitable company that israpidly paying down debt and reengineering its operations to navigate through achanging media environment.
The impairment at issue involves only non-cash accountingcharges and the simplest way to put that into perspective is to remember thatnothing about it changes our operations or our ability to reduce debt.
Our outlook for the fourth quarter has been tempered by thecontinuing adverse effect of the real estate downturn and its impact on theeconomies in our local markets, particularly in California and Florida. It isclear 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 monthsago.
So we expect the advertising revenue decline in the fourthquarter to be similar to that in the second and third quarters. We do not knowwhen the downturn will end and do not currently have visibility beyond thefourth quarter.
By the way, we do plan to offer our first read on 2008 atour Media Week presentation in early December, but in any case, we believe thatcyclical factors represent a significant portion of the current advertisingdownturn, as evidenced by our operations in California and Florida regions.
Looking longer term, we’re confident that these two regionswill have a bright future. We’re determined to continue to reduce costs anddrive efficiencies to protect cash flows as we weather this downturn.
Now we’ll be happy to answer your questions.
Elaine Lintecum
Joy.
Question-and-AnswerSession
Operator
(Operator Instructions) Your first question comes from the line ofJohn Janedis.
John Janedis -Wachovia
Good morning. Thank you. Gary or Chris, first, you commentedon up-sells for online. Is there some reason why that’s slowing? Is itpenetration related or something else?
Gary B. Pruitt
Up-sells are -- there are fewer print ads in classified sothere 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 bitmore cautious on your outlook. Can you talk about -- I’m not sure how specificyou can get but how much of that is related to California and Florida versusthe rest of the portfolio? I’m just trying to understand your broader outlookof the business and again, if you could provide specificity by category, thatwould be helpful. Thanks.
Gary B. Pruitt
We see certainly again a disproportionate amount of thedecline coming from California and Florida. As we’ve said, it’s about 70% inthe third quarter. We think it will be about that same amount in the fourthquarter. We think that the rest of the papers will perform perhaps in line,maybe slightly better than they have recently, but again the biggest declineswill continue to be from Florida and California in that 70% range, of our totaldecline.
John Janedis -Wachovia
Thank you.
Operator
Your next question comes from the line of Karl Choi.
Karl Choi - MerrillLynch
A couple of questions; one, first a simple one just toclarify -- your fourth quarter outlook from advertising revenues, that is on anapples-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 - MerrillLynch
And retail was particularly soft in September. Gary, Iwonder if you can drill down a little bit deeper in what happened. Also, wasthe softness also confined to California and Florida?
Gary B. Pruitt
In retail for the quarter, we don’t want to read too muchinto any one month. You are right that September’s retail numbers were weakerthan August and September’s, but for the quarter, retail was down 3.1%. Thequarter before, it was down 6.2% and our comparison was actually tougher thisquarter.
So we don’t regard the retail -- we don’t regard Septemberas a trend, necessarily. As we look quarter to quarter, it actuallystrengthened somewhat and in terms of particular regions, we did have the muchmore weakness in California and Florida.For instance, retail in those two regions was down 14% and the other regionscombined were down 2.7%.
Karl Choi - MerrillLynch
This is for the quarter, right?
Gary B. Pruitt
In September, and so we are seeing that spillover effectinto other categories that we talked about. And California is particularly weakin the retail area but again, it is definitely a California and Florida effectthere as well.
Karl Choi - MerrillLynch
Was the weakness pretty broad-based in California or is itmore concentrated in, for example the [inaudible]?
Gary B. Pruitt
In California, the weakness was broad-based.
Karl Choi - MerrillLynch
Lastly, can you talk about the $0.03 charge in the quarterregarding 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 youmight 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 certaintax positions we took during the quarter.
We do expect to see a return to the 40% level for aneffective tax rate for the fourth quarter.
Karl Choi - MerrillLynch
Lastly, any outlook for equity income in the fourth quarter?
Patrick J. Talamantes
Karl, I think it’s probably worth going through a little bitof 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 wasunprofitable, as you might imagine, $6.374 million; the other investments,which would have included The Seattle Times, were unprofitable at $906,000; andof course, there’s depreciation and amortization charges of $2.149 million, sofor a total equity loss of $7.654 million.
We see primarily because of newsprint getting a little bitworse than the fourth quarter, we see that number of the equity loss getting alittle bit worse in the fourth quarter.
Gary B. Pruitt
And of course we are still pursuing the sale of SP newsprintto try to reduce those losses in the future.
Karl Choi - MerrillLynch
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 costsin the context of this difficult environment, so I guess the question thatalways comes up is just how much more can you do in the context of all you’vedone already, particularly as you’ve cycled through the -- I guess some of theoriginal benefits from the Knight Ridder transaction, so is it possible to talkspecifically about where you can focus from a cost perspective and how muchflexibility there is left?
Gary B. Pruitt
Sure. I’ll give it a shot. We are in the midst of budgetingright now but we would expect that we can continue to post mid-single digitdeclines in the fourth quarter. You are right. We’ve rolled over the synergiesfrom the Knight Ridder deal so it becomes a little bit more challenging but wehave looked at -- we are taking advantage of technology in terms ofcentralizing some functions which allows us to reduce staffing at variouspapers. It allows us to be less vertically integrated at each paper and allowsus to operate more efficiently, better and cheaper. And the cuts we are makingin FTEs are generally permanent and we think there are more opportunities to begained.
So while we don’t see the declines perhaps at the same levelthat we’ve been posting them year-to-date, we do think we can keep in themid-single digit range in the fourth quarter and that that there are moredeclines 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 willhave expense declines in ’08 but we are unwilling to be more specific than thatyet as we’re just going through budgeting and we’ll have more to say to that inearly December at Media Week.
Peter Appert -Goldman Sachs
Sure, okay. Thank you. And then, just one other item, thenewsprint sale that you mentioned, any update in terms of status or when youthink that could close?
Gary B. Pruitt
Well, I’ll turn it over to Pat. He’s been the one mostengaged in that process.
Patrick J. Talamantes
Peter, we are in the process of wrapping that up. We expectthat in the fourth quarter we’ll have an announcement on what we’re doingthere.
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 withYahoo!. Is that in place now and are you picking up any additional traffic?
Second, for Chris again, could you talk about maybe -- usethis opportunity to talk about why you stayed in CareerBuilder and what some ofthe opportunities area and how we should think about the opportunities wegained with staying with CareerBuilder and getting I guess the products?Thanks.
Christian A.Hendricks
On the first part, the Yahoo! content deal, portions of ithave been rolled out, primarily just in the news area. We have not seen thetraffic 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, thefinance area, the sports area and other areas, and we expect to see sometraffic gains from that standpoint.
As far as the revenue side of the Yahoo! deal, we are in atest phase one with Fort Worth right now. No real results and it just launchedwithin the last two weeks.
Gary B. Pruitt
Chris, why don’t you briefly explain what the contentportion of the Yahoo! deal is.
Christian A.Hendricks
The Yahoo! content deal is simply where they take ourheadlines and they link back to our sites. They integrate those headlinesdeeper into their sites than they have historically done, given us also localprominence when they can determine where the user is coming from, the locationof that user. So if you are on the front page and they know you are inSacramento, you will see our headlines from the Sacramento Bee in a local boxon the site and you can back to our site. We are not sharing anymore contentwith them then simply a headline and the link back to our site.
Now on CareerBuilder, we believe it is a strong position tobe partnered with the number one employment site in the U.S. and also inexpanding international. They have the number one in listings, number one intraffic, and number one in revenue. We’ve been a strong partner and committedto being a partner with them.
The new products will add to our portfolio and we expect tosee 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 waspretty significant over the last 12 months. I guess you are saying it kicks inin 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 isnot all going to come back because there are still other products that we donot sell in those marketplaces. Plus also, you have the fact that the economyis not helping us down in Florida and in California on the employment side, sodon’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 getfrom any of the providers and better than we could get from other providers, sowe feel good about staying with CareerBuilder and it allowed us to maintain ourequity position, owning 14.4% of the leading online employment solution. Wefelt good about that.
And then, as to traffic in terms of the growth we weretalking about, we have shown -- while we haven’t -- well, the content piecethat Yahoo! is just beginning to be rolled out, we have seen good growth inunique visitors throughout the year and the average monthly growth in uniquevisitors this year is 15.4%, so strong double-digit growth in unique visitorswhich has led to that growth in audience I referred to earlier in my conferencecall 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 questionon the cost side; can you tell us specifically which areas you can perhapsoutsource overseas? I noted that some months you outsourced some ad productionwork at the Fresno Bee.
Gary B. Pruitt
We are experimenting with ad production and outsourcing andevaluating other possible efforts but as yet have not made final decisionsexcept in the classified -- except in the circulation call center area, wherewe have consolidated some historically and outsourced some as well. So we’ll belooking at other possibilities in the coming months.
Operator
Your next question comes from the line of Lisa Monaco.
Lisa Monaco - MorganStanley
Good morning. Two questions; one, Gary, could you give us alittle color on what you are seeing on the newsprint pricing front? Andsecondly, kind of a bigger picture question, how are you thinking about onlinegoing forward and as you evaluate your cost structure, is one of thepossibilities significantly scaling back the print side of the business?Thanks.
Gary B. Pruitt
Pat handles newsprint so I will turn the first question overto him.
Patrick J. Talamantes
Just to say, the newsprint suppliers are trying to get priceincreases 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 inSeptember, as you know. The Canadian dollar is up, newsprint producers arelosing money and the Abitibi Bowater approval from the DOJ is expected soon.
But consumption is obviously very weak in our industrycurrently and a number of the newspapers are reducing web widths to 48-inch and46-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 inwhich to raise prices.
Gary B. Pruitt
Lisa, to your point about cost structures and shifting coststructures, we have no plans to significantly downscale our print operation. Wedo recognize that -- we think, in fact, it will be quite profitable for us tobe the only daily newspaper in each of our markets and be that last massmedium. But we do recognize that over time, print circulation will likelydecline. It will be a slow and gradual process and at the same time, our onlinebusiness and audience and revenues will grow.
That evolutionary change will allow us to be more efficientover time because the online business is a higher margin business. So while Idon’t think you’ll see a dramatic shift in any one year, I think you will seethat transition continue as we become much more of a hybrid company, print andonline, with the growing area being in the more efficient and higher marginarea of online.
Lisa Monaco - MorganStanley
Thank you.
Operator
Your next question comes from the line of Craig Huber.
Craig Huber - LehmanBrothers
Thank you. First question, just looking for six numbers, forFlorida and California, can you give us the percentage change in the quarterfor 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 ofthose --
Craig Huber - LehmanBrothers
Yes, for the quarter for each of those, yes.
Gary B. Pruitt
In each of the classified categories, so I’ll start withautomotive in California for the quarter, it was down 21.0% and in Florida, itwas 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, Californiawas down 29.5% and Florida was down 29.9%. They have a very vicious race goingon for last place.
Craig Huber - LehmanBrothers
Also, could I get those two numbers for retail as well forboth markets?
Gary B. Pruitt
Yes, for retail, the California number for the quarter inretail was down 11.2% and Florida was down 0.5%.
Craig Huber - LehmanBrothers
Okay, and then also along these lines, a little more broadquestion but can you just compare and contrast the secular versus the cyclicalnature of your auto, classified versus your real estate classified? Secularversus the cyclical, just compare and contrast, if you would.
Gary B. Pruitt
We certainly see both structural and cyclical declinescurrently and the auto -- I guess as I think about it, we see -- we’ve seen alonger decline in automotive, as it was declining when real estate bubble wasstill growing, but we’ve seen more of an -- I think we’ve seen more structuralchange and migration in auto than we have in real estate. Our percentage ofonline auto advertising is greater and the online auto market is more matureand more competitive with more competing online products nationally andlocally. 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 greaterplays in the future and it’s much more of a cyclical impact now, although ofcourse there is structural forces -- there are structural forces as well.
Craig Huber - LehmanBrothers
And another broad question; can you just talk about, overthe last year or so as you think about how you price your various newspaperprint ad categories, have you put in place any discounts for your print ads byany categories in the various markets where the net result is volume hasactually outstripped the discounts you’ve put in place, where it’s actuallybeen successful on a net-net basis?
Gary B. Pruitt
I think it’s more of a market-by-market effect and therecertainly have been, especially volume contracts with larger advertisers wherethey are not paying necessarily off the rate card but striking a deal to saverates or even reduce rates with volumes growing. That’s not a new phenomenonbut it goes on market-by-market and contract-by-contract, and typically inlarge advertiser category in retail or large classified advertiser.
Craig Huber - LehmanBrothers
But Gary, are you doing that any more now say over the lastyear 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 closerto the operations than I.
G. Lynn Dickerson
It’s kind of a complicated answer, Craig, because there areso many different kinds of customers that we deal with. I would say that one ofthe areas where we are experiencing success is with smaller advertise -- smallto medium-sized advertisers where we have much more control and we’re able tosee the decision makers.
Many of our losses have come from bigger advertisers, so wehave created programs and short-term contracts and special campaigns, if youwill, that appeal to smaller and mid-sized advertisers, and sometimes there arerating 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 arewe doing it more now, would be yes.
Craig Huber - LehmanBrothers
But do you think it’s successful from the [bowing] you mightbe 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 dothink 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 advertisingpurchases or rate card purchases, so I think it has grown but -- and I wouldoverall think it is successful.
Craig Huber - LehmanBrothers
My last question, if I could, you’ve been very tight oncosts as you’ve been obviously 10 plus years here, could -- something dear toyour heart, Gary, but the quality of your papers has always been significantlyhigher than most of your peers out there. With these big cost cuts you areputting in place now, what are you guys doing to the editorial quality orcontent of your various papers right now?
Gary B. Pruitt
I think we’re improving the editorial quality and content ofthe papers. We’ve been very cautious about making any cuts that go to thequality of the paper, so in terms of the news holes remain large, thepercentage of space allocated to news compared to advertising is actually at arecord level, and while there have been some staffing declines throughattrition, they have been slight. The number of editorial FTEs in the companyis 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 willcontinue to help us grow audiences and we can leverage that into advertisingsales. We do try to operate efficiently. We are very proud of operatingefficiently with high margins but we try to maintain the areas that drivequality and revenue, and we’ll be evaluating each of those and seeking tostrike that balance as we’re right in the midst of budgeting.
Craig Huber - LehmanBrothers
What is that percentage, Gary, right now on average for yourpapers, editorial content versus the advertising volume in your papers?
Gary B. Pruitt
Fifty-two percent is the amount of news space compared tototal.
Craig Huber - LehmanBrothers
Historically, you generally run about 50-50, right?
Gary B. Pruitt
Yes, it’s usually around 50-50 and of course, the decline inadvertising lineage helps that percentage go up, so you can get there a coupleof different ways.
Craig Huber - LehmanBrothers
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 thatyou expected to reduce debt by I think almost $600 million between the end ofthe third quarter of this year and the end of next year. Is that all frominternal cash flow?
Gary B. Pruitt
It is from internal cash flow but we also -- and we expectto receive a substantial tax refund related to the sale of the Star Tribune ofa little over $200 million in the second quarter of ’08, and we expect to closeon the sale of some land at the -- near the Miami Herald in Florida, which willbe 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 - TheBenchmark Company
Did you mention you are still pursuing the sale of thenewsprint operations and if so, is the environment conducive for that to happensoon?
Gary B. Pruitt
We are still pursuing it and we expect an announcement inthe fourth quarter, so we expect it in the next couple of months here. Weexpect to make an announcement on the sale. We expect it to be successful butwe’ll have to wait and see. And the environment is challenging but we also knowthat strategic buyers tend to look through cycles and downturns and buy basedupon the long-term outlook and quality of the assets. And on that score, SPNewsprint is among the very best.
Edward Atorino - TheBenchmark Company
You wouldn’t want to give us a heads up on what the numbermight be?
Gary B. Pruitt
No. I would like that same heads up, actually, so I don’tknow what it is but we do have a competitive bid process.
Edward Atorino - TheBenchmark Company
That’s pretty good. Okay, thanks.
Operator
(Operator Instructions) Your next question comes from theline of Bill Green.
Bill Green
I wonder if you could talk a little bit about how you viewyour capital structure. Obviously you’ve made some good headwind in repayingdebt 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 towardsperhaps buying back some stock? Or is there some target level of debt that youhave?
Gary B. Pruitt
We do not have a target level for debt. So as a result, wedo look at all options in evaluating returning value to shareholders. While ourprimary focus has been and will remain in the near-term, debt repayment, we areopen to looking at other options, including share repurchase. Depending uponfactors, not just share price performance, although that’s an important factor,our operating performance and interest rates and various ratios that we lookat.
We’ve been in general more conservative in terms of makingsure that we’re comfortable with our debt level in a challenging operatingenvironment 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 arerepaying, obviously it’s a very low cost of capital. There’s very low interestrate on the debt. In terms of making the internal [ROI] decision versus yourequity, which is down 55% year-to-date, I’m just wondering, is there a point atwhich -- you know, why -- some of the free cash flow that you are generating orsome of the asset sale proceeds, that you wouldn’t be more active in thesethings? If you look at people like Belo or Tribune or even E.W. Scripps, allhave done things which are very shareholder friendly.
Gary B. Pruitt
We will -- we are and will continue to do those calculationsand we are aware of the competing returns of them, and so we have continued todo them and will continue to look at them and we’ll continue to give updates onthem and our plans. I certainly understand your point and we are factoring inthe operating conditions and the share price and like I said, interest ratesand looking at all of that to try to figure out what is best, in the bestinterest for the shareholders, for the company and we are not ideologicallywedded to just repaying debt. And the McClatchy family is also interested inbuying back the stock and having the company buy back stock; in particular, the35 million shares we issued to acquire Knight Ridder.
I think it’s a question of when and not whether. And Iunderstand that when can be a controversial issue and people can differ on thatbut we are looking at those very trade-offs.
Bill Green
Can you perhaps quantify some of the metrics that would giveyou the when? I mean, I appreciate that you guys are saying that you would liketo do it but you know, it seems like the stock is -- certainly the stock isunderperforming its peers here. I would have thought it would seem cheap to youguys as management.
So what are the triggers for which we think you guys couldstep in here and begin to return value to shareholders?
Gary B. Pruitt
We are certainly disappointed in the share price. There’sjust no doubt about it. I know that the shareholders are very disappointed andI’m sorry we haven’t done better in terms of our stock performance.
But at this point, we don’t want to provide any clearnumerical guidance as to what we would be looking at as factors. We do think itmakes 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 whatthat crossover point looks like to us.
Bill Green
And just a final question; have you guys given any thoughtto monetizing some of your investments, your off balance sheet investments?
Gary B. Pruitt
Yes, and have and we’ll continue to evaluate opportunitiesto 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 assetsdon’t make sense and how we can sell them and pay down debt.
We’ve also made tough decisions with regard to which paperswhen we acquired we would keep and which ones we would sell, and sold theKnight Ridder papers we felt didn’t meet our criteria and applied that sameexacting criteria to the legacy McClatchy papers and sold the Star Tribune inMinneapolis, a sale that was controversial for many but we think clearly in thebest 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 themoment?
Gary B. Pruitt
Watch this space? We’re doing everything we canoperationally to improve our performance and expect that to be reflected in theshare price eventually. Paying down the debt should also build equity value andwe’ll be evaluating when is an appropriate time for us to enter the market andbuy back shares as well. So we think there is potent use for our cash flow longterm 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 aregoing to be working hard to improve results as we go forward and in the fourthquarter and beyond. Thank you very much.
Operator
Thank you for participating in today’s conference call. Youmay now disconnect.
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